-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wk4/EG/JWfLPnE9xDCBJh8uwhLYin9SrxueE1mMtgB7OgHJb5U8f9JSbGAGxc3QO NyeJCQtAzdWMYOY6pTQ3Kg== 0000931731-98-000308.txt : 19981015 0000931731-98-000308.hdr.sgml : 19981015 ACCESSION NUMBER: 0000931731-98-000308 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981014 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL COURIER TECHNOLOGIES INC CENTRAL INDEX KEY: 0000774055 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 870461856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-20771 FILM NUMBER: 98725451 BUSINESS ADDRESS: STREET 1: 136 HEBER AVE STREET 2: SUITE 204 CITY: PARK CITY STATE: UT ZIP: 84060 BUSINESS PHONE: 8012682202 MAIL ADDRESS: STREET 1: 136 HEBER AVE STREET 2: SUITE 204 CITY: PARK CITY STATE: UT ZIP: 84060 FORMER COMPANY: FORMER CONFORMED NAME: DATAMARK HOLDING INC DATE OF NAME CHANGE: 19950124 FORMER COMPANY: FORMER CONFORMED NAME: EXCHEQUER INC /DE/ DATE OF NAME CHANGE: 19950111 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K/A ----------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 ------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________to___________ Commission File Number 0-20771 DIGITAL COURIER TECHNOLOGIES, INC. (Previous Name of Registrant: DataMark Holding, Inc.) (exact name of registrant as specified in its charter) Delaware 87-0461856 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 136 Heber Avenue, Suite 204 P. O. Box 8000 Park City, Utah 84060 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (435) 655-3617 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --------- --------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of October 7, 1998, 13,099,210 of the Registrant's Common Shares were outstanding. As of October 7, 1998, the aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $22,903,028 based on the average of the closing bid and asked prices for the Registrant's Common Shares as quoted by the NASDAQ National Market. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders are incorporated herein by reference, as indicated herein. PART I ITEM 1. BUSINESS - ---- SUMMARY Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc. and referred to herein as "DCTI" or the "Company") develops and markets proprietary electronic commerce software and technologies and online information services for a variety of computer platforms and hand-held computing devices connected to the Internet. The core technology is organized into three product groups which include: a suite of electronic commerce tools for building Internet storefronts designed for retailing a wide variety of consumer and business products; a distributed content publishing software suite that allows businesses to creatively deliver information services across the Internet as well as wireless networks; and a transaction software suite that incorporates a complete Internet payment processing system to streamline credit card transactions over the Internet. The Company utilizes its software suites to host and deliver information services and e-commerce tools to major businesses, Internet portals, and financial institutions on the Internet. The Company also licenses the software. The Company's sophisticated software and technology is currently used by major portals such as Excite, Netscape and America Online, as well as by the Company's own prominent group of Web-sites including www.weatherlabs.com and www.videosnow.com. The Company's four operating divisions include netClearing(TM), WeatherLabs(TM), Videos Now(TM), and Books Now(TM). The netClearing division utilizes both the e-commerce tools and the transaction software suite to provide a complete electronic commerce package for conducting business and facilitating credit card payment processing over the Internet. The WeatherLabs division supplies proprietary real-time weather information to online business throughout the world, and hosts its own web site for consumers and business customers. Videos Now and Books Now utilize the Company's software suites to operate e-commerce web sites that sell media products such as videos, movies, LaserDiscs, DVDs, and books to consumers and online businesses. The Company's content and commerce software is designed to be co-branded or private labeled by its customers. This approach enables the Company's customers and partners to brand their own sites and products and build additional value into their online presence with the use of the Company's technology. The Company believes that significant revenue opportunities exist for all its divisions in the rapidly expanding e-commerce sector of the Internet industry. The Company believes that its combined strengths in information technology, software development and electronic commerce for the Internet equate to a powerful business model that can yield significant per-transaction based revenue streams at a comparatively low cost to the Company. The Company believes that this model for growth is sustainable in the rapidly expanding market for Internet commerce. INTERNET STRATEGY General The Company develops sophisticated e-commerce software and information services for the Internet. The Company has created unique e-commerce, content publishing, and payment processing software suites that are marketed and licensed to online businesses including: Internet portals, web sites and financial institutions. Its principal divisions are netClearing, WeatherLabs, Videos Now and Books Now. The Company recently acquired Digital Courier International, Inc., an Internet software development company, that specializes in electronic commerce. This acquisition is expected to give the Company a competitive advantage in the fast-paced Internet commerce industry. netClearing: E-Commerce Payment Processing - ------------------------------------------ Independent research organizations report that online commerce is growing at a rapid pace. Forrester Research projects that some 380,000 merchants 2 will be online and selling by the year 2000, while International Data Corp. forecasts that the total volume of e-commerce will surpass $220 billion by 2001. Beyond simply opening a new consumer sales channel, the Internet enables the creation of an automated system for online ordering and distribution that can boost sales volume while lowering costs, thereby increasing the profit margin of every transaction. General The Company's recently launched netClearing technology is a complete line of payment processing services which can be tailored to fit the needs of any merchant, from an e-commerce startup to an online retailing giant to a financial institution such as a merchant bank. For all customers, netClearing can provide comprehensive transaction services including reporting transaction activity; handling chargebacks; conducting ongoing fraud detection; and performing highly efficient authorization, capture, settlement and reconciliation. netClearing's gateway payment technology, derived from point-of-sale leader VeriFone Inc., enables merchants to seamlessly integrate Internet transactions with legacy financial networks, allowing full leverage of existing infrastructure. netClearing provides fast and efficient processing at a low transaction fee by utilizing state-of-the-art technologies. All netClearing solutions can be easily implemented at a low setup cost, and are highly scalable for future expansion and increased performance requirements. The software is developed with open standards technology for full interoperability with existing merchant systems and Web sites, and is designed for parallel payment processing, for efficient and robust performance. Moreover, netClearing is highly secure through support for both SET and SSL; additional security in the form of digital certificates is provided through VeriFone Inc.'s partner VeriSign. netClearing Internet Payment Processing Fast and Secure Authorization and Capture. With netClearing technology, a merchant collects credit card transaction data sent to its e-commerce site in a standard message format and sends it to netClearing's secure server through a secure Web page or electronic form. netClearing's authorization and capture process allows for both real-time and delayed capture for transactions requiring synchronized fulfillment and shipment. netClearing's delayed capture feature protects the consumer from being charged for an order until the goods are shipped. Once a merchant fulfills authorized purchases, netClearing forwards settlement files to the appropriate back-end processor. With no payment server required, this solution is extremely simple to implement and inexpensive to maintain. Complete transaction reports are sent to merchants as each transaction batch is processed, or reports are made available online through netClearing's merchant administration site. Fully Outsourced Payment Processing. Designed for both financial institutions and the online merchant who wants to establish real-time private label e-commerce functionality with minimal overhead, this option provides complete payment processing with no need for a payment server on the merchant's side. The e-commerce site's payment page, hosted on a secure payment server at netClearing's datacenter, is designed by netClearing to appear to be a part of the merchant's own site. Payment information is authorized and captured in real-time to enable fast and efficient live transaction processing; delayed capture can also be specified by the merchant. Real-time reports generated according to merchant-defined parameters can be printed directly from the merchant's browser. API-Level Payment Processing Integration. Established online merchants already deploying an e-commerce publishing solution can implement netClearing's leading-edge payment processing technology within their Web site through tight API-level (application programming interface-level) integration. The merchant can retain full control of a payment page hosted on their own secure server, while establishing close interoperability with existing merchant-side accounting and order-tracking modules for complete leverage of existing investments. netClearing supports both SET and SSL to guarantee the security of encrypted payment information transmitted to netClearing, and accepts transactions from all commercial payment servers. 3 Additional Services To Be Provided Virtual Merchant Accounts. netClearing anticipates providing "virtual banking services" that will be fully integrated with netClearing's transaction processing system. These services will be accessible and customizable online for truly virtual merchant banking. netClearing's Virtual Merchant Accounts will interface with a merchant bank to give merchants a turnkey e-commerce platform from which to conduct business on the Internet. Insurance against Fraudulent Transactions. NetClearing is also developing a robust e-commerce insurance package with the goal of guaranteeing risk-free online payments. Typical credit card issuers insure against fraudulent transactions, but require consumers to assume a deductible. netClearing's products are anticipated to cover this deductible in full, making e-commerce even safer for the customer than brick-and-mortar transactions. Sophisticated Fraud Detection Software. Both customers and merchants are protected by netClearing's extensive matrix of fraud detection schemes, which constantly monitor account activity for suspicious transactions. Merchants and consumers are instantly alerted to evidence of the misuse of credit card information online, detected by such metrics as the verification of bill to/ship to addresses, velocity of purchase, and bad card histories cross-referenced in industry fraud databases. Full-Service Transaction Reporting. netClearing will enable businesses to track sales, credits, transactions, and chargebacks through easily-customized reports viewed with their Web browsers, available 24 hours a day for the merchant's convenience. Detailed real-time information helps merchants track purchasing trends across a variety of hourly, daily, and seasonal timelines for precise planning. Payment information can be easily imported into existing accounting systems for streamlined financial control. Security. netClearing has adopted both SSL and SET 1.0/2.0 protocol standards for consumer-to-merchant authentication and encryption, ensuring the highest level of security and transactional integrity for electronic commerce. At the netClearing payment processing facility, merchants are protected by unmatched network security guarding Virtual Merchant Account servers, account information, and transaction reports. Extensive firewall protection and secure merchant data controls prevent intruders from compromising merchants' online businesses 24 hours a day, seven days a week. WeatherLabs - ----------- In May 1998, the Company purchased WeatherLabs, Inc., one of the leading online providers of weather and weather-related information. WeatherLabs utilizes the Company's sophisticated distributed content publishing software to deliver weather-related products and services over the Internet. General WeatherLabs has provided its clients commercially-focused, weather-related products and services that enhance the value of web sites and online services since 1990. From site planning and marketing development, to custom application design and deployment, the meteorologists, engineers and creative designers at WeatherLabs offer comprehensive meteorological data available on the Internet to any business affected by the weather. Clients include Excite Inc, @Home, Netscape, Conde Nast, SkyTel, Nokia, Philips Multimedia, and Preview Travel. Technology As a pioneer in object-oriented software development, WeatherLabs encapsulates meteorological and atmospheric science into portable Java objects in component form that accurately represent the attributes of meteorological conditions. With this solid technology foundation and the most advanced tools from JavaSoft, Sun Microsystems, Visigenic and Netscape Communications, the WeatherLabs development team can continuously and easily enhance the accuracy of forecasting and analytic engines on the fly without interrupting the production process. 4 The STORM Software Framework. To ensure that weather data and meteorological measurements are collected and processed efficiently, WeatherLabs relies upon STORM, the Company's proprietary Java-based and object-oriented system architecture. STORM permeates every aspect of WeatherLabs and is responsible for numerical analysis, meteorological science and forecasting algorithms--as well as the processing and packaging of the data as varied as ski reports, airport delay forecasts, and editorial content. As a server side architecture which places the bulk of weather data and algorithmic processing on the Company's highly specialized computing facilities, STORM enables easy integration of the entire WeatherLabs product line through a lightweight client side connection. Distribution: Taking a Ride on the WeatherBus. Before critical weather information reaches clients, data speeds through the CORBA/IIOP-based WeatherBus pipeline to the WeatherFactory research and development facility. After thorough information analysis and processing with STORM, the WeatherBus automatically delivers weather products to WeatherLabs' clients in any electronic format. In this process, built-in load balancing allows STORM to maximize the delivery performance of information through the WeatherBus from source to final destination. Security and Seamless Integration. WeatherLabs products are seamlessly integrated into proprietary systems with maximum reliability and security through the Company's real-time encoding system which employs point-to-point encryption, digital signatures, and dual firewall gateways. Continuous Weather Information 24 hours a day, 7 days a week. WeatherLabs ensures the constant flow of weather information to its clients by leveraging system redundancy in each of its technology centers. Satellite dishes in San Francisco, London, St. Kitts and Salt Lake City work around the clock to provide constant--and identical--data to all three WeatherLabs weather centers which house redundant servers and multiple T1 connections for uninterrupted weather reporting 24 hours a day, seven days a week. As STORM assimilates volumes of weather information around the clock, innovative WeatherLabs products from historical analytics to detailed forecasts will eventually be available for any geocode on the planet -- down to any street address in the world. Videos Now - ---------- The Company's electronic commerce software suites are all applied to create retail storefronts with sophisticated search, database and transaction processing capabilities. The Company has incorporated all of its technologies into a robust and scalable retail engine to be initially launched on America Online as a new video site, Videos Now. Videos Now will be the "Premier Video Partner" throughout the AOL online service, Digital City, and AOL.com. Videos Now is a comprehensive online video retailer that will enable businesses to create customized and effective virtual video storefronts. The powerful content and commerce engines from Digital Courier give extensive flexibility to businesses looking to seamlessly integrate a virtual video store into their Web sites, cellular phones, kiosks or wireless PDA services. Videos Now, under development for the past nine months, is anticipated to go online in October 1998 and begin accepting and processing orders for video product purchases. Among the features of the Videos Now site are a library of over 100,000 videos, a broad range of movie categories, DVD and Laserdisc inventory, streaming video previews, major discounts on selected titles, and monthly specials. The Company is also enabling its technology to deliver video-on-demand for its customers. Videos Now offers highly customized, pre-indexed video libraries for niche-oriented channels on major portals or niche-oriented businesses and special interest Web sites, such as health care, home cooking, skiing or biotechnology. The Videos Now library can be tailored to the specific needs of the channel, site or business customer. For example, a sports-oriented site may 5 wish to offer only sports related videos through its virtual video store, keeping a focus to its overall site. Videos Now business customers can define and purchase their own video libraries online, and automatically receive the updates to their video storefront the same day. The search capabilities of Videos Now offer robust navigation through thousands of video titles. Moreover, Videos Now is fully integrated with the entire range of online products from the Company. This integration with the Company's content offerings provides relevant video title suggestions when cross referenced by a weather-related media search or a book search. The use of netClearing technology provides seamless and efficient payment processing and credit card authorizations. By securely storing purchasing information such as billing and shipping information for each retail customer, Videos Now offers its customers easy-to-use, one-button, one-touch shopping. Customers can keep track of their video title purchases and request to be notified when titles of a particular subject matter or authorship are added to the library. In addition, customers can be notified when particular titles are marked down by a given price percentage, keeping them abreast of the best buys on the Internet. Books Now - --------- In January 1998, the Company purchased Books Now, Inc., which sells books over the Internet through its strategic relations with certain magazine distribution companies. Books Now has entered into agreements with over 200 magazine companies and online entities. Books Now provides book ordering fulfillment services in correlation to certain magazine book reviews, book mentions and advertisements. Among the magazines with which Books Now has contracts are Cosmopolitan, Science News, Southern Living and Field & Stream. Through its "Virtual Bookstore" program, Books Now develops, builds and maintains a bookstore branded with the look, feel and navigational tools of the partnering website. This Virtual Bookstore is linked from the partner's websites home page and other integral locations. Visitors to the magazine's web site are thus given the opportunity to purchase books which are thematically related to the content and subject of the magazine. For example, a visitor to the Science News website can, through the Books Now "Virtual Bookstore" (branded as the Science News Bookstore), see specially-indexed science-related books available for sale. Similarly, "Virtual Bookstores" on other partner websites can be targeted and highlighted with sport books, design books, health books, etc. Books Now does not attempt to compete with the major destination booksellers on the Internet, such as Amazon and Barnes & Noble. Books Now does not attempt to divert Internet traffic to its destination website. Rather, it enables existing websites to share in book sales revenue while keeping visitors within their site and brand. Participating websites - which at this time primarily consist of magazine websites - are able to brand the Company's technology and e-commerce capabilities with their own interface and logo in the form of a virtual bookstore. Revenue from purchases made over the Internet from such websites are shared between Books Now and the website. The Company intends to incorporate the sophisticated technology developed for the Videos Now retail engine into the Books Now virtual bookstores. Industry partnerships Through alliances with leaders in the technology industry, Digital Courier has become a leading developer of technology-driven products. These partnerships bolster the extensibility and portability of its products. Netscape Communications. Digital Courier worked with Netscape's engineering team on the flagship Enterprise Server 3.0. This product offers groundbreaking integration of CORBA ORB technology directly into the Enterprise Web Server, enabling server-side Java applications to be more extensible, easily distributed, and infinitely portable. Digital Courier was among the first companies to deploy this technology and worked closely with Netscape's Engineering and QA groups on the final product. All of Digital Courier's server-based Web applications use the latest versions of this technology today. 6 Sun Microsystems. Digital Courier continues to build on a relationship encompassing the Sun Solaris Operating System group up to the Starfire Enterprise 10000 super-scalar server technology. The Sun platform comprises over 75% of Digital Courier's production engine and technology center systems. JavaSoft. Digital Courier is a premier developer partner with JavaSoft. The company is currently working with several alpha and beta products from JavaSoft to ensure their suitability for commercial applications. Software applications developed by Digital Courier were showcased, demonstrated, and endorsed at JavaSoft's JavaOne conference in the keynote address delivered by Java's creator James Gosling. Visigenic. The leader in CORBA technologies for Java, the Visigenic ORB is a key component to the Digital Courier technology framework. Because this technology is directly integrated into Netscape's flagship product, Enterprise Server 3.x, Digital Courier has worked closely with both firms simultaneously to build tools for the most sophisticated online applications available today. Symbol Technologies. Digital Courier is working closely with Symbol Technologies, a leading hand-held device manufacturer, to develop the next generation of online applications suitable for hand-held devices equipped with wireless communication capabilities. Nokia. Nokia is a leading developer of cellular phone technology including the new generation of Nokia Communicator products. Digital Courier has developed custom software applications for delivery of weather and financial information to these cellular phones. GeoWorks. GeoWorks develops real-time operating systems for third-generation cellular phones and personal digital assistants. Digital Courier is developing information products that can be deployed across any device that support the GeoWorks operating system. Apple Computer. Digital Courier continues to expand its developer relationship with Apple Computer's Enterprise Software Division (formerly NeXT Computer, Inc.). This group develops industry-leading object-oriented technologies that integrate directly into Web applications and the Java programming language. Marketing Each division of the Company has its own specialized marketing staff to promote and sell the Company's virtual commerce products to websites, online services and other Internet businesses. Prominent positioning on major portals to increase visibility has been a primary marketing goal. For example, the prominence of the WeatherLabs weather service on major sites such as Excite has led to numerous "inbound" requests to license the service on other websites. The marketing staff continues to develop relationships with major Internet companies and websites, and will attempt to position the Company's virtual commerce products and processing and clearing technology for greater visibility and market recognition. The WeatherLabs and netclearing marketing department works out of the Company's San Francisco offices, and the Books Now and Videos Now departments work out of the Company's Salt Lake City offices. Significant Customers The Company is not dependent upon a single customer. Videos Now, when launched in October 1998, is expected to initially derive most of its revenue from its presence on the America Online network and on AOL.com. The Company's three-year agreement with America Online gives Videos Now "premier anchor tenancy" on key channels of the America Online service. Loss of America Online as a customer would have a material adverse affect on Videos Now and on the Company. The Company is currently in negotiations with other major portals and Web sites, and consummation of any such prospective transactions would lessen the dependence of Videos Now on America Online members and visitors. Although 7 the WeatherLabs business model has benefited from its high profile on the Excite and Netscape search engines, its major sources of revenue are expected to increasingly come from licensing the technology and services to additional websites, both large and small, and from advertising revenue sharing arrangements. Moreover, WeatherLabs has recently entered into agreements with such major Internet companies as @Home, Preview Travel, and the Travel Channel on the AOL Network. Books Now derives its sales from its virtual bookstores and its relationships with over 200 magazines. The Technology The Company's computer facility is a state-of-the-art data center which supports the products and services offered by the Company over the Internet. It has redundant systems in place for power, network, environmental, and fire suppression. Located in Salt Lake City, the technology center guarantees consistently optimal performance through state-of-the-art system scalability and reliability. Features of the facility include: A redundant OC-12 655Mbps fiber optic data connection into the technology center yields high bandwith throughput for e-commerce customers. Switched 155 Mbps asynchronous transfer mode (ATM) backbones to each of the primary data server providing the bandwidth to handle thousands of simultaneous transactions. Powered by a series of HP 9000 multiprocessor servers and Sun Microsystems Enterprise servers, the super- scalar processing architecture manages the Company's service components including simultaneous payment processing, real-time report generation, merchant accounting, and proprietary content creation, management, and distribution for its web sites. An expandable 1-Terabyte fully redundant data storage system ensures high performance and fault tolerant access to critical transactional data. To ensure that production systems remain up and running around the clock, seven days a week, the facility exploits modern fire retardant systems, quad-power conditioners, industrial battery backup arrays as well as an 8- day backup diesel generator to guarantee a continuous power supply. Research and Development The Company has invested significant resources in research and development over the last three years. During the fiscal years ended June 30, 1998, 1997 and 1996, the Company has spent $1,432,006, $3,966,185 and $1,478,890, respectively, on research and development. Although the Company's Books Now and WeatherLabs divisions have current revenues from a variety of sources, the Videos Now division is still largely in development. It is anticipated that this division will begin to generate revenue during the next fiscal year, and that the Company's expenditures on research and development will correspondingly decrease. Seasonality To date the Company has not experienced any significant seasonal pattern to its business. It is anticipated, however, that as the Company's virtual commerce sites begin to generate increased revenue, the second quarter of the Company's fiscal year (October through December) will be responsible for a disproportionate share of the Company's revenue. This corresponds to the increased "holiday" shopping on the Internet. Development of Company The Company was incorporated under the laws of the State of Delaware on May 16, 1985. It was formed as a national direct marketing company, and began incorporating online business strategies in fiscal 1994 with the objective of becoming a national leader in the interactive online direct marketing industry. 8 The Company recruited an experienced management and technical team to design and implement a high-end Internet services business model. In addition to engineering and constructing a state-of-the-art computer and data facility in Salt Lake City, the Company acquired an Internet access business and entered into strategic alliances with companies in the electronic mail ("e-mail") business. The Company formed a division to create a network of interconnected Web communities to be promoted by local television station affiliates. The Company divested its direct marketing, internet access, and television website hosting businesses in fiscal 1998. In March 1998, the Company signed an agreement to acquire Digital Courier International, Inc., a private Internet software development company. The acquisition was consummated in September, 1998, and the Company formally changed its name to Digital Courier Technologies, Inc. COMPETITION The market for Internet products and services is highly competitive and competition is expected to continue to increase significantly. In addition, the Company expects the market for Internet-based commerce and advertising, to the extent it continues to develop, to be intensely competitive. There are no substantial barriers to entry in these markets, and the Company expects that competition will continue to intensify. Although the Company believes that the diverse segments of the Internet market will provide opportunities for more than one supplier of products and services similar to those of the Company, it is possible that a single supplier may dominate one or more market segments. The Company has a number of competitors that provide software to merchants and financial institutions for processing payment card transactions over the Internet. They include VeriFone, Inc., IBM Corporation, and AT&T Corporation. Several other competitors, including CyberCash, Inc. and ClearCommerce Corporation, offer software that enables Internet merchants to obtain credit card authorizations through one of a variety of communications links with credit card processors. Open Market, Inc., among others, provides electronic commerce software that includes payment components designed to facilitate on-line credit card transactions. Several of these competitors are developing software to process transactions in compliance with the SET standard, including VeriFone, IBM, and Trintech. All of these companies are providers of software, rather than complete payment services, but their software does provide merchants and financial institutions an alternative to the Company's service. Additional competition could come from Web browser companies and software and hardware vendors that incorporate Internet payment capabilities into their products. Further, because of the rapidly evolving nature of the industry, many of the Company's collaborative partners are current or potential competitors. In particular, the Company believes that Microsoft intends to actively compete in all areas of Internet and online commerce. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources than the Company. In addition, many of the Company's current or potential competitors, such as Microsoft, have broad distribution channels that may be used to bundle competing products directly to end-users or purchasers. If such competitors were to bundle competing products for their customers, the demand for the Company's services may be substantially reduced, and the ability of the Company to successfully effect the distribution of its products and the utilization of its services would be substantially diminished. There can be no assurance that the Company will be able to compete effectively with current or future competitors or that the competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition or operating results. The Company also competes with many other e- providers of online content. Companies such as Reel.com, Amazon, Barnes & Noble, CD Universe and others sell books and videos on the Internet, directly competing with the Company's Books Now and Videos Now divisions. These companies have far greater financial resources than the Company. The Company also competes with The Weather Channel, Accu-Weather, and other major providers of weather information on the Internet. Many of the Company's existing competitors, as well as a number of potential new competitors, have significantly greater financial, technical and 9 marketing resources than the Company. In addition, providers of content and advertising on the Internet may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies, such as Microsoft or Netscape. In the future, the Company expects to face competition in the various demographic and geographic markets addressed by the Company. This competition may include companies that are larger and better capitalized than the Company and that have expertise and established brand recognition in these markets. There can be no assurance that the Company's competitors will not develop Internet products and services that are superior to those of the Company or that achieve greater market acceptance than the Company's offerings. Moreover, a number of the Company's current customers, licensees and partners have also established relationships with certain of the Company's competitors, and future advertising customers, licensees and partners may establish similar relationships. The Company also competes with online services and other Web site operators, as well as traditional offline media such as television, radio and print for a share of consumers' Internet purchases and advertisers' total advertising budgets. The Company believes that the number of companies selling Web-based advertising and the available inventory of advertising space have increased substantially during the past year. Accordingly, the Company may face increased pricing pressure for the sale of advertisements. There can be no assurance that the Company will be able to compete successfully against its current or future competitors or that competition will not have a material adverse effect on the Company's business, operating results and financial condition. PROPRIETARY RIGHTS The Company regards its patents, copyrights, trademarks, trade dress, trade secrets and similar intellectual property \ as critical to its success, and the Company relies upon trademark and copyright law, trade secret protection and confidentiality and/or license agreements with its employees, customers, partners and others to protect its proprietary rights. The Company pursues the registration of its trademarks in the United States, and has obtained the registration of a number of its trademarks. Substantially all national content appearing in the Company's online properties is licensed from third parties under short-term agreements. GOVERNMENT REGULATION State Sales and Use Tax Laws. While most online companies have adopted "mail order" policies with respect to the payment of sales and other taxes, many states are aggressively attempting to capture new tax revenues from online transactions. The Company believes that several states are moving aggressively to tax online retailers and service providers even when they have no physical presence within the state. The Company currently charges sales tax only for goods sold over the Internet to customers in the states in which the Company has operations - California and Utah. If other states assert tax claims for products sold by the Company over the Internet, compliance could be burdensome and costly and require reporting that could adversely affect the Company's financial performance. Federal Money Transmitter Regulation. Recent federal legislation imposes a record-keeping requirement on all persons performing wire transfers of funds. Records of all transactions over $3,000 must be kept in a form accessible to subpoena for five years. Although this regulation does not currently apply to the Company's netClearing services, it may be applicable to future phases of netClearing currently under development. The Company's netClearing services are being designed to be able to comply with such legislation if required to do so. State Money Transmitter Regulations. Several states currently have regulations requiring registration and bonding for "money transmitters." Although the Company does not believe that these regulations are currently applicable to it, a significant risk exists that regulators will take the position that such regulations are applicable to the Company's future phases of netClearing. While the Company is prepared to fully comply with these regulations to the extent that they are applicable and does not believe that compliance will impose a material burden on the Company's operations, there is a risk that expanding developments in this area of regulation may expose the Company to greater regulatory burdens in the future. 10 Regulation E. Regulation E has been promulgated by the Federal Reserve Board under authority of the Electronic Funds Transfer Act. It applies to entities that issue "access devices" to "consumer asset accounts." The regulation requires written disclosures at the time an access device is issued, written receipts for transactions, periodic statements, and error resolutions procedures. While there is some uncertainty, the Company believes that some aspects of Regulation E may apply to certain of its netClearing services currently in development. Because Regulation E was issued at a time when no Internet services like those of the Company existed, its application to the Company's services involves numerous uncertainties and ambiguities. The Company believes that it is designing and is operating its services in a manner that fully complies with the intention of Regulation E. There remains the possibility that the Federal Reserve Board, and the other agencies that interpret and apply the regulation may in the future challenge the Company's services on the ground that they do not comply with Regulation E. The costs of responding to such a challenge could result in significant drains on the Company's financial and management resources, which could have a material adverse effect on the Company's business, financial condition or operating results. EMPLOYEES As of June 30, 1998, the Company had 31 full-time employees. The Company's future success is substantially dependent on the performance of its management, sales force, key technical personnel, and its continuing ability to attract and retain highly qualified technical, sales and managerial personnel. 11 RISK FACTORS Risk Factors Regarding the Acquisition Uncertainty Relating to Integration. The acquisition of Digital Courier International, Inc. in September 1998 (the "DCII Acquisition") involves the integration of two companies that have previously operated independently. The successful combination of the two companies will require significant effort from each company, including the coordination of their research and development, utilization and successful commercialization of in-process research and development, integration of the companies' product offerings, coordination of their sales and marketing efforts and business development efforts. In order to reach profitability, DCTI will need to integrate and streamline overlapping functions successfully. Costs generally associated with this type of integration that may be incurred by DCTI include the integration of product lines, sales force cross-training and market positioning of products. While these costs have not been currently identified, any such costs may have an adverse effect on operating results in the periods in which they are incurred. Each of DCTI and Digital Courier International, Inc. has different systems and procedures in many operational areas that must be rationalized and integrated. There may be substantial difficulties associated with integrating two separate companies, and there can be no assurance that such integration will be accomplished smoothly, expeditiously or successfully. The integration of certain operations following the DCII Acquisition will require management resources that may distract attention from normal operations. The business of DCTI may also be disrupted by employee uncertainty and lack of focus during such integration. Failure to quickly and effectively accomplish the integration of the operations of DCTI and Digital Courier International, Inc. could have a material adverse effect on the consolidated business, financial condition and results of operations of DCTI. Moreover, uncertainty in the marketplace or customer concern regarding the impact of the DCII Acquisition and related transactions could have a material adverse effect on the consolidated business, financial condition and results of operations of DCTI. Retention of Employees. The success of the Company will be dependent in part on the retention and integration of management, technical, marketing, sales and customer support personnel. There can be no assurance that the Company will be able to retain such personnel or that the companies will be able to attract, hire and retain replacements for employees that leave following consummation of the DCII Acquisition. The failure to attract, hire, retain and integrate such skilled employees could have a material adverse effect on the business, operating results and financial condition of the Company. Potential Dilutive Effect to Stockholders. Although the companies believe that beneficial synergies will result from the DCII Acquisition, there can be no assurance that the combining of the two companies' businesses, even if achieved in an efficient, effective and timely manner, will result in combined results of operations and financial condition superior to what would have been achieved by each company independently, or as to the period of time required to achieve such result. The issuance of DCTI Common Stock in connection with the DCII Acquisition could reduce the market price of the DCTI Common Stock unless revenue growth or cost savings and other business synergies sufficient to offset the effect of such issuance can be achieved. Liquidity. Management projects that there will not be sufficient cash flows from operating activities during the next twelve months to provide capital for the Company to implement its marketing strategy for its divisions. As of June 30, 1998, the Company had $3,211,724 of cash. The Company is currently attempting to obtain additional debt or equity funding. If adequate funding is not available, the Company may be required to revise its plans and reduce future expenditures. As reflected in the accompanying consolidated financial statements, the Company has incurred losses from continuing operations of $6,264,265, $7,158,851 and $3,586,413 and the Company's operating activities have used $6,752,970, $6,334,660 and $1,385,567 of cash during the years ended June 30, 1998, 1997 and 1996, respectively. As of June 30, 1998, the Company has a tangible working capital deficit of $272,968 and is scheduled to make substantial payments to AOL. None of the Company's continuing operations are generating positive cash flows. Additional funding will be required before the Company's continuing operations will achieve and sustain profitability, if at all. There can be no assurance that the additional funding will be available or, if available, that it will be available on acceptable terms or in required amounts. 12 Management's plans in regard to these matters include pursuing various potential funding sources. The Company is currently in negotiations with two firms to obtain additional working capital through a private placement of the Company's equity securities. The Company is attempting to accelerate payments that are due to the Company in the future totaling approximately $1,200,000. The Company has contacted the entities owing these amounts to negotiate the acceleration of these payments. The Company is negotiating with a lender to obtain working capital of $1,200,000 against which loan those receivables would be pledged. Certain directors of the Company have made oral commitments to make loans to and additional investments in the Company. Management is actively pursuing these alternatives until such time as market conditions are more favorable to obtaining additional equity financing. There can be no assurance that additional funding will be available or, if available, that it will be available on acceptable terms or in required amounts. Management projects that there will not be sufficient cash flows from operating activities during the next twelve months to provide capital for the Company to sustain its operations. Limited Operating History; Anticipated Losses. The Company did not commence generating revenues from its current operations until January 1998. Accordingly, the Company has a limited operating history upon which an evaluation of the Company can be based, and its prospects are subject to the risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for Internet products and services, including the Web-based advertising market. Specifically, such risks include, without limitation, the rejection of the Company's services by Web consumers and/or advertisers, the inability of the Company to maintain and increase the levels of traffic on its websites, the development of equal or superior services or products by competitors, the failure of the market to adopt the Web as an advertising medium, the failure to successfully sell Web-based advertising through the Company's recently developed internal sales force, potential reductions in market prices for Web-based advertising, the inability of the Company to effectively integrate the technology and operations of any other acquired businesses or technologies with its operations, and the inability to identify, attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks. As of June 30, 1998, the Company had an accumulated deficit of $14,680,073. For the year ended June 30, 1998 and 1997, the Company incurred a loss of $1,790,934 and $9,340,816. The limited operating history of the Company and the uncertain nature of the markets addressed by the Company make the prediction of future results of operations difficult or impossible. The Company believes that period to period comparisons of its operating results are not meaningful and that the results for any period should not be relied upon as an indication of future performance. As a result of these factors, there can be no assurance that the Company will not incur significant losses on a quarterly and annual basis for the foreseeable future. Fluctuations In Quarterly Operating Results. As a result of the Company's limited operating history, the Company does not have historical financial data for a significant number of periods on which to base planned operating expenses. Although the Company expects that advertising revenue on its websites will eventually be greater than revenue from direct mail, there can be no assurance in this regard. Moreover, the sale of advertisements on the Web is an emerging market that is difficult to forecast accurately. The Company's expense levels are based in part on its expectations concerning future revenue and to a large extent are fixed. Quarterly revenues and operating results will depend substantially upon the advertising revenues received within the quarter, which are difficult to forecast accurately. Accordingly, the cancellation or deferral of even a small number of advertising contracts, could have a material adverse effect on the Company's business, results of operations and financial condition. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenue in relation to the Company's expectations would have an immediate adverse effect on the Company's business, operating results and financial condition. The Company has high fixed costs and expenses relating to the development of the Websites. To the extent that such expenses are not subsequently followed by increased revenues, the Company's business, operating results and financial condition will be materially and adversely affected. The Company's operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. These factors include the level of usage of the Internet, demand for Internet advertising, seasonal trends in Internet usage and 13 advertising placements, the level of user traffic on the Company's websites, the advertising budgeting cycles of individual advertisers, the amount and timing of capital expenditures and other costs relating to the expansion of the Company's operations, the introduction of new products or services by the Company or its competitors, pricing changes for Web-based advertising, technical difficulties with respect to the use of the Company's websites or other media properties developed by the Company, incurrence of costs relating to acquisitions, general economic conditions and economic conditions specific to the Internet and online media. As a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions or business combinations that could have a material adverse effect on the Company's business, results of operations and financial condition. The Company also expects to experience seasonality in its business, with user traffic on the Company's websites being lower during the summer and year-end vacation and holiday periods, when usage of the Web and the Company's services typically decline. Additionally, seasonality may affect the amount of customer advertising dollars placed with the Company in the first and third calendar quarters as advertisers historically spend less during these quarters. Due to all of the foregoing factors, in future quarters the Company's operating results may fall below the expectations of securities analysts and investors. In such event, the trading price of the Company's Common Stock would likely be materially and adversely affected. Dependence On Continued Growth In Use Of The Internet. The Company's future success is substantially dependent upon continued growth in the use of the Internet and the Web in order to support virtual commerce and the sale of advertising on the Company's websites. Rapid growth in the use of and interest in the Internet and the Web is a recent phenomenon. There can be no assurance that communication or commerce over the Internet will become widespread or that extensive content will continue to be provided over the Internet. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary infrastructure, such as a reliable network backbone, or timely development and commercialization of performance improvements, including high speed modems. In addition, to the extent that the Internet continues to experience significant growth in the number of users and level of use, there can be no assurance that the Internet infrastructure will continue to be able to support the demands placed upon it by such potential growth or that the performance or reliability of the Web will not be adversely affected by this continued growth. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services to support the Internet also could result in slower response times and adversely affect usage of the Web. If use of the Internet does not continue to grow, or if the Internet infrastructure does not effectively support growth that may occur, the Company's business, operating results and financial condition would be materially and adversely affected. Developing Market; Unproven Acceptance Of The Company's Products And Business Strategy. The markets for the Company's products and media properties have only recently begun to develop, are rapidly evolving and are characterized by an increasing number of market entrants who have introduced or developed information navigation products and services for use on the Internet and the Web. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Because the market for virtual commerce and advertising on the Internet is new and evolving, it is difficult to predict the future growth rate, if any, and size of this market. There can be no assurance either that the market for virtual commerce and advertising on the Internet will develop or that demand content and promotional advertising will emerge or become sustainable. The Company's ability to successfully sell advertising on its co-branded websites depends substantially on use of the Company's websites. If use of the Company's websites fails to continue to grow, the Company's ability to sell advertising would be materially and adversely affected. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, or if the Company's websites do not achieve or sustain market acceptance, the Company's business, operating results and financial condition will be materially and adversely affected. Risks Associated With Brand Development. The Company believes that 14 establishing and maintaining the "netClearing,", "Books Now", "WeatherLabs" and "Videos Now" brands is a critical aspect of its efforts to attract and expand its Internet audience and that the importance of brand recognition will increase due to the growing number of Internet sites and the relatively low barriers to entry. Promotion and enhancement of these brands will depend largely on the Company's success in providing high quality products and services, which cannot be assured. If consumers do not perceive the Company's existing websites to be of high quality, or if the Company introduces new features and services or enters into new business ventures that are not favorably received by consumers, the Company will be unsuccessful in promoting and maintaining its brands, and will risk diluting its brands and decreasing the attractiveness of its audiences to advertisers. Furthermore, in order to attract and retain Internet users and to promote and maintain these brands in response to competitive pressures, the Company may find it necessary to increase substantially its financial commitment to creating and maintaining a distinct brand loyalty among its consumers. If the Company is unable to provide high quality features and services or otherwise fails to promote and maintain its brands, or if the Company incurs excessive expenses in an attempt to improve its features and services or promote and maintain its brands, the Company's business, operating results and financial condition will be materially and adversely affected. Reliance On Advertising Revenues And Uncertain Adoption Of The Web As An Advertising Medium. The Company anticipates deriving a significant part of its revenues from the sale of advertisements by the Internet portals, websites and other customers who utilize the Company's content under short-term contracts, and expects to continue to do so for the foreseeable future. Most Internet advertising customers have only limited experience with the Web as an advertising medium, have not devoted a significant portion of their advertising expenditures to Webbased advertising and may not find such advertising to be effective for promoting their products and services relative to traditional print and broadcast media. The Company's ability to generate significant advertising revenues will depend upon, among other things, advertisers' acceptance of the Web as an effective and sustainable advertising medium, the development of a large base of users of the Company's services possessing demographic characteristics attractive to advertisers, and the ability of the Company to develop and update effective advertising delivery and measurement systems. No standards have yet been widely accepted for the measurement of the effectiveness of Web-based advertising, and there can be no assurance that such standards will develop sufficiently to support Web-based advertising as a significant advertising medium. Certain advertising filter software programs are available that limit or remove advertising from an Internet user's desktop. Such software, if generally adopted by users, may have a materially adverse effect upon the viability of advertising on the Internet. The Company also recently completed the transition from a third-party advertising sales agent to internal advertising sales personnel, which involves additional risks and uncertainties, including (among others) risks associated with the recruitment, retention, management, training and motivation of sales personnel. As a result of these factors, there can be no assurance that the Company will sustain or increase current advertising sales levels. Failure to do so will have a material adverse effect on the Company's business, operating results and financial position. In addition, there is intense competition in the sale of advertising on the Internet, including competition from other Internet navigational tools as well as other high-traffic sites, which has resulted in a wide range of rates quoted by different vendors for a variety of advertising services, which makes it difficult to project future levels of Internet advertising revenues that will be realized generally or by any specific company. Competition among current and future suppliers of Internet navigational services or Web sites, as well as competition with other traditional media for advertising placements, could result in significant price competition and reductions in advertising revenues. There also can be no assurance that the Company's advertising customers will accept the internal and third-party measurements of impressions received by advertisements on the Company's websites, or that such measurements will not contain errors. Substantial Dependence Upon Third Parties. The Company depends substantially upon third parties for several critical elements of its business including, among others, telecommunications, technology and infrastructure, distribution activities and advertising sales. The Company believes that there are other third party providers who can provide the same services as those providers currently used by the Company. 15 Technology And Infrastructure. The Company depends substantially upon its own computer equipment and its maintenance and technical support to ensure accurate and rapid presentation of content and advertising to the Company's customers. Any failure by the Company to effectively maintain such equipment and provide such information could have a material adverse effect on the Company's business, operating results and financial condition. In addition, any termination of telecom agreements with Sprint, or Sprint's failure to renew the Company's agreement upon expiration could result in substantial additional costs to the Company in developing or licensing replacement telecom capacity, and could result in a loss of levels of use of the Company's navigational services. Enhancement Of The Company's Products. To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality, features and content of the Company's main product offerings. There can be no assurance that the Company will be able to successfully maintain competitive user response time or implement new features and functions, which will involve the development of increasingly complex technologies. Furthermore, enhancements of or improvements to the Company's products may contain undetected errors that require significant design modifications, resulting in a loss of customer confidence and user support and a decrease in the value of the Company's products and services. Any failure of the Company to effectively improve its products, or failure to achieve market acceptance, could adversely affect the Company's business, results of operations and financial condition. Technological Change. The market for Internet products and services is characterized by rapid technological developments, evolving industry standards and customer demands, and frequent new product introductions and enhancements. These market characteristics are exacerbated by the emerging nature of this market and the fact that many companies are expected to introduce new Internet products and services in the near future. The Company's future success will depend in significant part on its ability to continually improve the performance, features and reliability of the Company's products and content offerings in response to both evolving demands of the marketplace and competitive product offerings, and there can be no assurance that the Company will be successful in doing so. Management Of Potential Growth. The process of managing large, potentially high traffic Web sites such as the Company's products and content offerings will become an increasingly important and complex task. To the extent that any extended failure of the Company's technology affects customers or partners, the Company may be exposed to "make good" obligations with its customers or partners, which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to effectively manage the expansion of its operations, that the Company's systems, procedures or controls will be adequate to support the Company's operations or that Company management will be able to achieve the rapid execution necessary to fully exploit the market opportunity for the Company's products. Any inability to effectively manage growth could have a material adverse effect on the Company's business, operating results and financial condition. Risk Of Capacity Constraints And Systems Failures. A key element of the Company's strategy is to generate a high volume of use of its products and content offerings. Accordingly, the performance of the Company's technology is critical to the Company's reputation, its ability to attract advertisers to the Company's products and to achieve market acceptance of these products and media properties. Any system failure that causes interruption or an increase in response time of the Company's websites could result in less traffic to the Company's content destinations and, if sustained or repeated, could reduce the attractiveness of the Company's content offerings to advertisers. An increase in the volume of traffic to the Company's websites could strain the capacity of the software or hardware deployed by the Company, which could lead to slower response time or system failures, and adversely affect the number of impressions received by advertising and thus the Company's advertising revenues. In addition, as the number of affiliated Web pages and users increase, there can be no assurance that the Company's infrastructure will be able to scale accordingly. The Company is also dependent upon its own technology and link to the Internet. Any disruption in Internet access or any failure of the Company's technology to handle higher volumes of user traffic could have a material adverse effect on the Company's business, operating results and financial 16 condition. Furthermore, the Company is dependent on hardware suppliers for prompt delivery, installation and service of servers and other equipment used to deliver the Company's products and services. The Company's operations are dependent in part upon its ability to protect its operating systems against physical damage from fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events. The Company does not presently have redundant, multiple site capacity in the event of any such occurrence. Despite the implementation of network security measures by the Company, its servers are vulnerable to computer viruses, breakins and similar disruptions from unauthorized tampering with the Company's computer systems. The occurrence of any of these events could result in interruptions, delays or cessations in service to users of the Company's websites, which could have a material adverse effect on the Company's business, operating results and financial condition. Integration Of Potential Acquisitions. During fiscal 1998, the Company has acquired Books Now, Inc., WeatherLabs, Inc., and Digital Courier International, Inc. and has evaluated several other potential acquisitions. As part of its business strategy the Company expects to enter into further business combinations and/or make significant investments in, complementary companies, products or technologies. Any such transactions would be accompanied by the risks commonly encountered in such transactions. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the acquired companies, the potential disruption of the Company's ongoing business, the inability of management to maximize the financial and strategic position of the Company through the successful incorporation of acquired technology or content and rights into the Company's products and services, the difficulties of integrating personnel of acquired entities, additional expenses associated with amortization of acquired intangible assets, the maintenance of uniform standards, controls, procedures and policies, the impairment of relationships with employees and customers as a result of any integration of new management personnel, and the potential unknown liabilities associated with acquired businesses. There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered in connection with such acquisitions. Trademarks And Proprietary Rights. The Company regards its copyrights, trademarks, trade dress, trade secrets and similar intellectual property as critical to its success, and the Company relies upon trademark and copyright law, trade secret protection and confidentiality and/or license agreements with its employees, customers, partners and others to protect its proprietary rights. The Company pursues the registration of its trademarks in the United States, and has applied for the registration of certain of its trademarks. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that third parties will not infringe or misappropriate the Company's copyrights, trademarks, trade dress and similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against the Company. The Company anticipates that it may be subject to legal proceedings and claims in the ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its licensees. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company's financial position or results of operations. Dependence On Key Personnel. The Company's performance is substantially dependent on the performance of its senior management and key technical personnel. In particular, the Company's success depends substantially on the continued efforts of its senior management team, which currently is composed of a small number of individuals who only recently joined the Company. The Company does not carry key person life insurance on any of its senior management personnel. The loss of the services of any of its executive officers or other key employees could have a material adverse effect on the business, operating results and financial condition of the Company. 17 The Company's future success also depends on its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to retain its key managerial and technical employees or that it will be able to attract and retain additional highly qualified technical and managerial personnel in the future. The inability to attract and retain the necessary technical and managerial personnel could have a material and adverse effect upon the Company's business, operating results and financial condition. Government Regulation And Legal Uncertainties. The Company is not currently subject to direct regulation by any government agency in the United States, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. Due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing and characteristics and quality of products and services. For example, the Company may be subject to the provisions of the Communications Decency Act (the "CDA"). Although the constitutionality of the CDA, the manner in which the CDA will be interpreted and enforced and its effect on the Company's operations cannot be determined, it is possible that the CDA could expose the Company to substantial liability. The CDA could also dampen the growth in use of the Web generally and decrease the acceptance of the Web as a communications and commercial medium, and could, thereby, have a material adverse effect on the Company's business, results of operations and financial condition. A number of other countries also have enacted or may enact laws that regulate Internet content. The adoption of such laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for the Company's products and media properties. Such laws and regulations also could increase the Company's cost of doing business or otherwise have an adverse effect on the Company's business, operating results and financial condition. Moreover, the applicability to the Internet of the existing laws governing issues such as property ownership, defamation, obscenity and personal privacy is uncertain, and the Company may be subject to claims that its services violate such laws. Any such new legislation or regulation or the application of existing laws and regulations to the Internet could have a material adverse effect on the Company's business, operating results and financial condition. Liability For Information Services. Because materials may be downloaded by the online or Internet services operated or facilitated by the Company and may be subsequently distributed to others, there is a potential that claims will be made against the Company for defamation, negligence, copyright or trademark infringement, personal injury or other theories based on the nature and content of such materials. Such claims have been brought, and sometimes successfully pressed against online services in the past. In addition, the Company could be exposed to liability with respect to the listings that may be accessible through the Company's websites, or through content and materials that may be posted by users in classifieds, bulletin board and chat room services offered by the Company. It is also possible that if any information provided through the Company's services, such as stock quotes, analyst estimates or other trading information, contains errors, third parties could make claims against the Company for losses incurred in reliance on such information. Also, to the extent that the Company provides users with information relating to purchases of goods and services, the Company or its operating subsidiaries could face claims relating to injuries or other damages arising from such goods and services. Although the Company carries general liability insurance, the Company's insurance may not cover potential claims of this type or may not be adequate to indemnify the Company for all liability that may be imposed. Any imposition of liability or legal defense expenses that are not covered by insurance or is in excess of insurance coverage could have a material adverse effect on the Company's business, operating results and financial condition. Concentration Of Stock Ownership. As of October 7, 1998, the present directors, executive officers, greater than 5% stockholders and their respective affiliates beneficially owned approximately 37% of the outstanding Common Stock of the Company. As a result of their ownership, the directors, executive officers, greater than 5% stockholders and their respective affiliates collectively are able to control all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of the Company. 18 Volatility Of Stock Price. The trading price of the Company's Common Stock has been and may continue to be subject to wide fluctuations in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new affiliations and services by the Company or its competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to the Company, and news reports relating to trends in the Company's markets. In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the trading price of the Company's Common Stock, regardless of the Company's operating performance. Antitakeover Effect Of Certain Charter Provisions. The Board of Directors has the authority to issue up to 2,500,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock may be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. DIRECTORS AND EXCUTIVE OFFICERS OF THE REGISTRANT Set forth below is information regarding (i) the current directors of the Company, who will serve until the next annual meeting of stockholders or until their successors are elected or appointed and qualified, and (ii) the current executive officers of the Company, who are elected to serve at the discretion of the Board of Directors. The Company's executive officers and directors are as follows: Name Age Position ---- --- -------- James A. Egide* 64 Director and Chairman Raymond J. Pittman 29 Director, Chief Executive Officer Mitchell L. Edwards 40 Director, Executive Vice President and Chief Financial Officer Glen Hartman* 41 Director Kenneth M. Woolley* 52 Director *Serves on compensation and audit committees. James A. Egide: Director and Chairman Mr. Egide was appointed as a Director of the Company in January 1995 and Chairman in September 1997. Since 1990, Mr. Egide has primarily been involved in managing his personal investments, including multiple international and national business enterprises. In 1978 he co-founded Carme, a public company, and served as CEO and Chairman of the Board until 1989 when it was sold. From 1976 until 1980, Mr. Egide's primary occupation was President and Director of Five Star Industries, Inc., a California corporation which was a general contractor and real estate developer. His principal responsibilities were land acquisition, lease negotiations and financing. 19 Raymond J. Pittman: Director and Chief Executive Officer. Mr. Pittman has been Chief Executive Officer of the Company since March 1998. Mr. Pittman was the founder and Chief Executive Officer of Digital Courier International, Inc. from 1996 until Digital Courier International was acquired by the Company in September 1998. Prior to forming Digital Courier International, Inc., Mr. Pittman was the Chief Executive Officer of Broadway Technologies Group, a technology development and consulting group. Mr. Pittman received a Masters degree in Engineering-Economic Systems from Stanford University and Bachelors degree in Computer Engineering from the Univeristy of Michigan. Mitchell L. Edwards: Director, Executive Vice President and Chief Financial Officer Mr. Edwards has been Executive Vice President and Chief Financial Officer of the Company since June 1997. From 1995 until joining the Company, Mr. Edwards was Managing Director of Law and Business Counsellors, a mergers and acquisitions and corporate finance consulting firm with offices in California and Utah, and prior to that was a Partner in the law firm of Brobeck, Phleger & Harrison in Los Angeles. Mr. Edwards' practice for over 10 years has specialized in mergers and acquisitions, corporate finance, public offerings, venture capital and other transactions for emerging and high technology companies throughout the country. Mr. Edwards received a J.D. from Stanford Law School, a B.A/M.A. in International Business Law from Oxford University (Marshall Scholar), and a B.A. in Economics from Brigham Young University (Valedictorian). He has also worked at the White House and at the United States Supreme Court. Glen Hartman: Director Mr. Hartman has been a director of the Company since July 1998. Mr. Hartman is the founder. principal and a member of the board of directors of Cosine Communications, Inc. since 1996. Mr. Hartman is also the founding general partner of Falcon Capital, LLC, a private equity investment company, specializing in technology companies since 1995. From 1992 to 1995 Mr. Hartman served as CEO and Chairman of Apex Data, a computer peripherals manufacturing company. Mr. Hartman holds a B.A. in Economics from UCLA.. Kenneth M. Woolley: Director Mr. Woolley has been a founder and director of several companies. Mr. Woolley served on the Board of Directors of Megahertz Holding Corporation, the leading manufacturer of fax/modems for laptop and notebook computers until February 1995. Prior to the merger of Megahertz and VyStar Group, Inc. in June 1993, Mr. Woolley had served as President of the parent company. Since 1979, Mr. Woolley has been a principal in Extra Space Management, Inc. and Extra Space Storage, privately held companies engaged in the ownership and management of mini-storage facilities. Since 1989, Mr. Woolley has been a partner in D.K.S. Associates, and since 1990 a director and executive officer of Realty Management, Inc., privately held companies engaged in the ownership and management of apartments, primarily in Las Vegas, Nevada. Mr. Woolley is a director of Cirque Corporation. Mr. Woolley also serves as an associate professor of business management at Brigham Young University. Mr. Woolley holds a B.A. in Physics from Brigham Young University, an M.B.A. and Ph.D. in Business Administration from the Stanford University Graduate School of Business. Mr. Woolley is available to the Company on a part-time, as needed basis. 20 Significant Employees Michael D. Bard: Controller Mr. Bard joined the Company in September 1996. Mr. Bard was the Controller for ARD, Inc., a professional services corporation located in Burlington, Vermont from 1991 to 1996. Prior to joining ARD, Inc., Mr. Bard was Senior Vice President, Controller for CACI, Inc. International, an information technology company located in Fairfax, Virginia from 1976 to 1991. Mr. Bard is a certified public accountant and holds a bachelors degree in accounting. Brendan Larson: Senior Vice President Business Applications Mr. Larson joined the Company in 1996. Mr. Larson is the founder of WeatherLabs, Inc. and served as an officer of WeatherLabs from it founding in 1991 to the present. In 1996 Mr. Larson was employed as a consultant by Broadway Technologies Group, a software development company. Mr. Larson has an extensive background in the combined fields of meteorology, broadcast journalism and computer science. Mr. Larson holds a B.S. degree from Northern Illinois University. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the National Association of Securities Dealers. Officers, directors and greater than ten-percent stockholders are required by Securities and Exchange Commission regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company and on representations that no other reports were required, the Company has determined that during the last fiscal year all applicable 16(a) filing requirements were met except as follows: Mr. Edwards and Mr. Bard were late in filing Form 4's which were due 10 days following the end of the month in which certain stock options were granted. ITEM 2. PROPERTIES - ------- ---------- The Company is leasing from third parties modern office space in Park City and Salt Lake City, Utah. These offices include a computer data center and general offices. In August 1996, the Company moved its offices to 12,000 square feet of modern office space in Salt Lake City, Utah. In May 1997, the Company acquired 11,000 square feet of additional modern office space in a neighboring building in Salt Lake City. All facilities are leased from third parties. The new offices are being leased under three to five year arrangements. Some leases contain options to renew. The computer equipment and software development facilities remain in the previous location. The Company also leases office space and space for a data center in San Francisco. These facilities are believed adequate for the Company's current needs. The current total monthly rental for all facilities is $67,014. Some of the leases are subject to annual increases for inflation adjustments. The Company presently has approximately 11,000 square feet of office space in Salt Lake City which it is attempting to sublease. There was a charge to earnings during the year ended June 30, 1998 of approximately $544,000 for the costs of subleasing idle facilities and obligations for which the Compnay will receive no future benefit.. 21 ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Company is not a party to any legal proceedings which, in its opinion, after consultation with legal counsel, could have a material adverse effect on the Company. However, the Company is involved in ordinary routine litigation incidental to it's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1998. PART II ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS - ------- -------------------------------------------------------- Price Range of Common Stock - --------------------------- On February 5, 1997, the Company's Common Stock began trading on The Nasdaq National Market System. Commencing in January 1995 and until the stock was listed on The Nasdaq National Market, the Company's Common Stock was quoted on the OTC Bulletin Board. During 1993 and 1994, there was no public market for the securities of the Company's predecessor, and the Company is not aware of any quotations for its securities during this period. In prior years, securities of the Company's predecessor, Exchequer, were traded in the over-the-counter market. The Company's common stock trades on The Nasdaq Stock Exchange under the symbol "DCTI". The following table reflects the high and low bid sales price reported by The Nasdaq National Market or by the OTC Bulletin Board, as appropriate, for the periods indicated. The quotes represent interdealer quotations, do not include mark-up, mark-down or commissions and may not reflect actual transactions. High Low ---- --- Fiscal Year Ending June 30, 1998 -------------------------------- April 1 to June 30, 1998 $9.97 $3.50 January 1 to March 31, 1998 $2.13 $5.00 October 1 to December 31, 1997 $2.44 $5.00 July 1 to September 30, 1997 $2.75 $5.88 Fiscal Year Ended June 30, 1997 ------------------------------- April 1 to June 30, 1997 $7.38 $2.75 January 1 to March 31, 1997 $11.00 $6.75 October 1 to December 31, 1996 $14.38 $7.00 July 1 to September 30, 1996 $16.00 $10.63 On October 7, 1998, the Common Stock was quoted on The Nasdaq National Market at a closing price of $2.625. Approximate Number of Equity Security Holders - --------------------------------------------- As of October 7, 1998, there were approximately 669 holders of record of the Company's Common Stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.. 22 Dividend Policy The Company has not paid any cash dividends since its inception. The Company currently intends to retain future earnings in the operation and expansion of its business and does not expect to pay any cash dividends in the foreseeable future. Changes in Securities Since June 30, 1997, the Company sold the following securities which were exempt from registration under the Securities Act of 1933 (the "Act"): In November 1997, the Company issued 20,000 shares of its common stock to Reed Hansen in lieu of compensation. In January 1998, the Company issued 100,000 shares of its common stock to the former shareholders of Books Now, Inc. in connection with the acquisition of Books Now, Inc. In March 1998, the Company issued 136,364 shares of its common stock to Sven Bensen, 40,909 shares to Arthur E. Benjamin and 24,545 shares to Thomas Dearden under its Amended and Restated Stock Incentive Plan (the "Plan"). These shares were issued under the provisions of the Plan, which permit the cashless exercise of options. The Plan has been registered with the SEC on Form S-8. In April 1998, the Company issued 13,151 shares of its common stock to Richard Bentz and 4,939 shares to Edwin Patterson under its Plan. These shares were issued under the provisions of the Plan which permit the cashless exercise of options. In May 1998, the Company issued 10,000 shares of its common stock to Mark Johnson, a former employee, for cash consideration of $1.00 per share under its Plan. In May 1998, the Company issued 253,260 shares of its common stock to the former shareholders of WeatherLabs, Inc. in connection with the acquisition of WeatherLabs, Inc. In June 1998, the Company issued 955,414 shares of its common stock and warrants to purchase 318,471 additional shares of its common stock at a price of $6.28 per share to America Online, Inc. ("AOL") in accordance with the Interactive Marketing Agreement that the Company had signed with AOL. All shares except those issued to the former shareholders of Books Now, Inc. and WeatherLabs, Inc. and to AOL were issued on the exercise of options which had been previously granted to the purchaser, and were issued pursuant to the Company's effective registration statement on Form S-8. The issuance of shares to the shareholders of Books Now Inc. and WeatherLabs, Inc. and to AOL were offerings not involving a public offering and were exempt from registration pursuant to Section 4(2) of the Act. 23 ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The following unaudited selected financial data should be read in conjunction with the Company's consolidated financial statements appearing elsewhere herein.
For the Year Ended June 30, --------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Statement of Operations Data: Net sales $ 803,011 $ 8,812 $ -- $ $ -- Cost of sales 745,871 492 -- -- -- ------------- ------------- ------------- ------------- ------------- Gross margin 57,140 8,320 -- -- -- ------------- ------------- ------------- ------------- ------------- Operating expenses: General and administrative 4,092,737 1,400,916 685,528 56,199 -- Depreciation and amortization 1,536,388 398,066 86,828 25,413 -- Research and development 1,432,006 3,966,185 1,478,890 535,502 -- Selling 1,290,012 1,897,665 -- -- -- AOL agreement costs 675,000 Compensation expense related to issuance of options by principal stockholder -- -- 1,484,375 -- -- ------------- ------------- ------------- ------------- ------------- 9,026,143 7,662,832 3,735,621 617,114 -- ------------- ------------- ------------- ------------- ------------- Other income (expense), net 20,738 495,661 57,209 (973) -- ------------- ------------- ------------- ------------- ------------- Income (loss) from continuing operations before income taxes and discontinued operations (8,948,265) (7,158,851) (3,678,412) (618,087) -- Income tax benefit 2,684,000 -- 91,999 132,681 -- ------------- ------------- ------------- ------------- ------------- Loss from continuing operations (6,264,265) (7,158,851) $(3,586,413) $(485,406) $ -- ------------- ------------- ------------- ------------- ------------- Discontinued operations: Income from discontinued direct mail advertising operations, net of income taxes 111,377 300,438 153,332 221,136 62,998 Gain on sale of direct mail advertising operations, net of income taxes 4,394,717 -- -- -- -- Loss from discontinued internet service provider subsidiary, net of income taxe (265,674) (2,482,403) -- -- -- Gain on sale of Internet service provider subsidiary, net of income taxes 232,911 -- -- -- -- ------------- ------------- ------------- ------------- ------------- Income (loss) from discontinued operations 4,473,331 (2,181,965) 153,332 221,136 62,998 ------------- ------------- ------------- ------------- ------------- Net income (loss) $ (1,790,934) $ (9,340,816) $ (3,433,081) $ (264,270) $ 62,998 ============= ============= ============= ============= ============= Net income (loss) per common share: Income (loss) from continuing operations: Basic $ (0.74) (0.86) (0.61) (0.$0) -- Diluted (0.74) (0.86) (0.61) (0.10) -- Net income (loss): Basic (0.21) (1.12) (0.58) (0.06) 0.01 Diluted (0.21) (1.12) (0.58) (0.06) 0.01 Weighted average common shares outstanding: Basic 8,422,345 8,309,467 5,917,491 4,713,028 4,282,299 Diluted 8,422,345 8,309,467 5,917,491 4,713,028 4,432,881 As of June 30, -------------- 1998 1997 1996 1995 1994 Balance Sheet Data: Working capital $ 2,964,313 $ 3,624,308 $ 12,774,113 $ 794,156 $ 350,428 Total assets 23,222,948 11,320,660 16,222,902 1,073,225 476,210 Long-term debt, net of current portion, capital lease obligation 1,384,132 -- -- -- -- Stockholders' equity 18,197,898 9,826,083 15,541,624 1,073,225 476,210
24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- ----------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Overview The Company began operations in 1987 to provide highly targeted business to consumer advertising through direct mail. Since the Company's founding, the direct mail marketing business had provided substantially all of the Company's revenues. The direct mail marketing business was sold in March 1998 and its results of operations are classified as discontinued operations in the accompanying consolidated financial statements. In fiscal 1994, the Company began developing its own proprietary websites. Since fiscal 1994, the Company has devoted significant resources towards the development and launch of these websites. In January 1997, the Company acquired Sisna, Inc. ("Sisna"), an Internet service provider headquartered in Salt Lake City, Utah. In March 1998, Sisna was resold to its original owner for 35,000 shares of the Company's common stock. Sisna's results of operations are included in the accompanying consolidated statements of operations from the date of acquisition through the date of sale, as discontinued operations. In January 1998, the Company acquired all of the outstanding stock of Books Now, Inc. ("Books Now"), a book reseller, in exchange for a maximum of 362,500 shares of the Company's common stock. One hundred thousand shares were issued at closing and 262,500 shares are subject to a three-year earn-out contingency based upon achieving certain financial performance objectives. The acquisition was accounted for as a purchase. Books Now's results of operations are included in the accompanying consolidated statements of operations since the date of acquisition. In May, 1998, the Company acquired all of the outstanding stock of WeatherLabs, Inc., a provider of weather and weather-related information and products on the Internet, in exchange for up to 777,220 shares of the Company's common stock. 253,260 shares were issued at closing, and an additional 523,960 shares may be issued upon the attainment by WeatherLabs of certain financial performance targets. The acquisition was accounted for as purchase. The results of operations of WeatherLabs are included in the accompanying financial statements from the date of acquisition. The Company entered into a Stock Exchange Agreement with Digital Courier International, Inc., a Nevada corporation ("Digital Courier"), dated as of March 17, 1998 (the "Exchange Agreement"). The Exchange Agreement was approved by the shareholders of the Company in a Special Meeting held on September 16, 1998 during which the shareholders approved a name change from DataMark Holding, Inc. to Digital Courier Technologies, Inc. Pursuant to the Exchange Agreement, the Company has agreed to issue 4,659,080 shares of its common stock to the shareholders of Digital Courier International, Inc.. This acquisition will be accounted for as a purchase and the Company anticipates that approximately $11.7 million of the total purchase price of approximately $13 million will be allocated to in process research and development and will be expensed in the first quarter fo fiscal 1999. This allocation will be finanlized upon completion of a third-party valuation. Digital Courier International, Inc. is a Java based Internet and wireless communications software development company originally incorporated as Digital Courier Technologies, Inc. on July 23, 1996. For the year ended December 31, 1997, Digital Courier International, Inc. had no revenues. Digital Courier International, Inc.'s results of operations are not included in the accompanying financial statements. Results of Operations Year ended June 30, 1998 compared with year ended June 30, 1997 Net Sales Net sales for the year ended June 30, 1998 were $803,011 as compared to $8,812 for the year ended June 30, 1997. The Books Now operations which were 25 acquired in January 1998 accounted for $392,719 of the fiscal 1998 net sales and a one time sale of a turn-key Internet computer system accounted for the remainder of the fiscal 1998 net sales. Cost of Sales Cost of sales for the year ended June 30, 1998 were $745,871 or 92.9% of net sales, $408,667 of the cost of sales were for the one time sale of a turn-key Internet computer system.. For the year ended June 30, 1997 costs of sales were $492. Operating Expenses General and administrative expense increased 192.1% to $4,092,737 during the year ended June 30, 1998 from $1,400,916 during the year ended June 30, 1997. The increase in general and administrative expense was due to the addition of administrative and support staff, as well as increased related facilities costs, associated with WorldNow Online. In addition, the Company accrued $544,014 for the cost of subleasing idle facilities and the future costs of idle facilities during the year ended June 30, 1998. General and administrative expense for the year ended June 30, 1998 also included a charge of $362,125 for compensation costs related to the issuance and exercise of stock options. Depreciation and amortization expense increased 286% to $1,536,388 during the year ended June 30, 1998 from $398,066 during the year ended June 30, 1997. The increase was due to having the Company's state of the art computer facility in service during the entire year ended June 30, 1998 as compared to only two months during the year ended June 30, 1997. Research and development expense decreased 63.9% to $1,432,006 during the year ended June 30, 1998 from $3,966,185 during the year ended June 30, 1997. Research and development expense decreased due to decreased levels of activity required for the development of WorldNow Online. Selling expense decreased 32% to $1,290,012 during the year ended June 30, 1998 from $1,897,665 during the year ended June 30, 1997. The decrease in selling expense was due to reductions in the sales and marketing staff of WorldNow Online. During the year ended June 30, 1998, the Company incurred costs associated with an interactive marketing agreement with America Online, Inc. ("AOL") of $675,000. On June 1, 1998, the Company entered into an Interactive Marketing Agreement with America Online, Inc. ("AOL") for an initial term of 39 months (the "Agreement"), which can be extended for successive one-year terms by AOL thereafter. Under the Agreement, the Company will pay AOL $12,000,000 in cash and issue a seven-year warrant to purchase 318,471 shares of the Company's common stock at $12.57 per share (the "Performance Warrant") in exchange for AOL providing the Company with certain permanent anchor tenant placements for its Videos Now site on the AOL Network and promotion of the Videos Now site. The Company is scheduled to make cash payments to AOL of $1,200,000 upon execution of the agreement in June 1998, $4,000,000 prior to January 1, 1999, $4,000,000 prior to July 1, 1999 and $2,800,000 prior to January 1, 2000. The initia $1,200,000 payment was not actually made until July 6, 1998. The Performance Warrant vests over the term of the agreement as certain promotion criteria are achieved by AOL. The agreement includes an option whereby AOL elected to provide additional permanent anchor tenant placements for Videos Now on AOL.com (a separate and distinct website) in exchange for 955,414 shares of the Company's common stock and a seven-year, fully vested warrant to purchase 318,471 shares of the Company's common stock at a price of $6.28 per share (the "Option Warrant"). The original $12 million of cash payments and the value of the Performance Warrant, to be determined as the warrant vests, will be accounted for as 26 follows: (i) the estimated fair value of the permanent anchor tenant placements on the AOL Network of $1,750,000 per year, or approximately $5,250,000 in total, will be charged to expense ratably over the period from the launch of the Company's interactive site, which is expected to be October 15, 1998, through the original term of the agreement; and (ii) the remaining amount will be treated as advertising costs and will be expensed as paid or as the Performance Warrant vests. The advertising will be expensed as paid in accordance with SOP 93-7, because the Company has no experience on which to evaluate the effectiveness of the direct response advertising. The value of the common shares issued of $8,330,016 and the value of the Option Warrant of $2,519,106 represent the value of the permanent anchor tenant placements on AOL.com and will be charged to expense ratably over the period from the launch of the Company's interactive site on AOL.com through the original term of the agreement. As of June 30, 1998, the initial $1,200,000 payment obligation was allocated $525,000 to AOL anchor tenant placement costs and $675,000 to expense as advertising costs. The value of the common stock issued and the Option Warrant was recorded as AOL anchor tenant placement costs in the accompanying consolidated financial statements. Discontinued Operations During March 1998, the Company sold its direct mail marketing and Internet service operations, therefore, their results of operations are presented as discontinued operations. During the year ended June 30, 1998, pretax income from the direct mail marketing operations was $178,204 as compared to $480,701 for the year ended June 30, 1997. During the year ended June 30, 1998, the Internet service operations incurred a pretax loss of $425,078 as compared to a pretax loss of $2,662,666 during the year ended June 30, 1997. The Company realized a pretax gain of $7,031,548 from the sale of its direct mail marketing operations and a $372,657 gain from the sale of its Internet service operations during the year ended June 30, 1998. Year ended June 30, 1997 compared with year ended June 30, 1996 Net Sales Net sales for the year ended June 30, 1997 were $8,812. There were no net sales from continuing operations during the year ended June 30, 1996. Cost of Sales Cost of sales for the computer online operations for the year ended June 30, 1997 were $492. There were no sales or related cost of sales for the year ended June 30, 1996. Operating Expenses General and administrative expense increased 104.4% to $1,400,916 during the year ended June 30, 1997 from $685,528 during the year ended June 30, 1996. The increase in general and administrative expense was due to the addition of administrative and support staff, as well as increased related facilities costs, associated with WorldNow Online. Depreciation and amortization expense increased 358.5% to $398,066 during the year ended June 30, 1997 from $86,828 during the year ended June 30, 1996. The increase was due to acquiring the Company's state of the art computer facility during the year ended June 30, 1997 and placing it into service during the fourth quarter of the year ended June 30, 1997. Research and development expense increased 168.2% to $3,966,185 during the year ended June 30, 1997 from $1,478,890 during the year ended June 30, 1996. Research and development expense increased due to accelerated levels of activity required for the development of WorldNow Online. Selling expense for the year ended June 30, 1997 was $1,897,665. The 27 Company did not incur any selling expense during the year ended June 30, 1996 related to continuing operations, because the WorldNow Online main web site was in its early development stages and was not at the point where net sales could be attained. Discontinued Operations During March 1998, the Company sold its direct mail marketing and Internet service operations, therefore, their results of operations are presented as discontinued operations. During the year ended June 30, 1997, pretax income from the direct mail marketing operations was $480,701 as compared to $245,331 for the year ended June 30, 1996. During the year ended June 30, 1997, the Internet service operations incurred a pretax loss of $2,662,666. There were no Internet service operations during the year ended June 30, 1996. 28 Quarterly Results The following tables set forth certain quarterly financial information of the Company for each quarter of fiscal 1998 and fiscal 1997. This information has been derived from the quarterly financial statements of the Company which are unaudited but which, in the opinion of management, have been prepared on the same basis as the audited financial statements included herein and include all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial results for such periods. This information should be read in conjunction with the financial statements and the notes thereto and the other financial information appearing elsewhere herein.
For the three months ended Sep. 30, 1997 Dec. 31, 1997 Mar. 31, 1998 Jun 30, 1998 ------------- ------------- ------------- ------------ Net sales $ 17,545 $ 1,942 $ 385,671 $ 397,853 Cost of sales 5,459 59,598 258,144 422,670 ------------- ------------- ------------- ------------ Gross margin 12,086 (57,656) 127,527 (24,817) ------------- ------------- ------------- ------------ Operating expenses: General and administrative 548,659 425,483 738,944 2,379,651 Depreciation and amoritization 385,904 398,817 383,329 368,338 Research and development 473,350 373,717 454,218 130,721 Selling 642,006 336,355 188,861 122,790 AOL agreement costs -- -- -- 675,000 ------------- ------------- ------------- ------------ 2,049,919 1,534,372 1,765,352 3,676,500 ------------- ------------- ------------- ------------ Other income (expense), net 61,063 (27,589) (26,397) 13,661 ------------- ------------- ------------- ------------ Loss from continuing operations before income taxes and discontinued operations (1,976,770) (1,619,617) (1,664,222) (3,687,656) Benefit (provision) for income taxes -- (49,829) 2,733,829 -- ------------- ------------- ------------- ------------ Income (loss) from continuing operations (1,976,770) (1,669,446) 1,069,607 (3,687,656) ------------- ------------- ------------- ------------ Discontinued operations: Income (loss) from continuing operations advertising operations, net of income taxes 110,558 51,368 (50,548) -- Loss from operations of discontinued internet service subsidiary, net of income taxes (121,431) (123,546) (20,698) -- Gain on sale of direct mail advertising operations, net of income taxes -- -4,394,717 -- Gain on sale of internet service provider subsidiary, net of income taxes -- -- 232,911 -- ------------- ------------- ------------- ------------ Income (loss) from discontinued operations (10,873) (72,178) 4,556,382 -- ------------- ------------- ------------- ------------ Net income (loss) $(1,987,643) $(1,741,624) $ 5,625,989 $(3,687,656) ------------- ------------- ------------- ------------ Net income (loss) per common share: Income (loss) from continuing operations: Basic $ (0.23) $ (0.19) $ 0.12 $ (0.48) Diluted (0.23) (0.19) 0.12 (0.48) Net income (loss): Basic (0.23) (0.20) 0.64 (0.48) Diluted (0.23) (0.20) 0.64 (0.48) Weighted average common shares outstanding Basic 8,560,932 8,605,767 8,763,505 7,723,563 Diluted 8,560,932 8,605,767 8,832,086 7,723,563
29
For the three months ended -------------------------- Sep. 30, 1996 Dec. 31, 1996 Mar 31, 1997 Jun. 30, 1997 ------------- ------------- ------------ ------------- Net sales -- -- -- 8,812 Cost of sales -- -- -- 492 ------------- ------------- ------------ ------------- Gross margin -- -- -- 8,320 ------------- ------------- ------------ ------------- Operating expenses: Research and development 307,754 660,362 970,194 2,027,875 General and administrative 109,027 272,640 388,405 630,844 Selling 657,871 273,582 341,400 624,812 Depreciation and amortization 65,709 73,769 80,269 178,319 ------------- ------------- ------------ ------------- 1,140,361 1,280,353 1,780,268 3,461,850 ------------- ------------- ------------ ------------- Other income (expense), net 160,691 128,840 120,259 85,871 Loss from continuing operations before income taxes and discontinued operations (979,670) (1,151,513) (1,660,009) (3,367,659) Income tax benefit 51,813 33,850 -- -- ------------- ------------- ------------ ------------- Loss from continuing operations (927,857) (1,117,663) (1,660,009) (3,367,659) ------------- ------------- ------------ ------------- Discontinued operations: Income from discontinued direct mail advertising operations, net of income taxes 86,356 56,415 120,901 36,766 Loss from discontinued internet service provider subsidiary, net of income taxes -- (1,823,006) (745,060) ------------- ------------- ------------ ------------- Income (loss) from discontinued operations 86,356 56,415 (1,702,105) (708,294) ------------- ------------- ------------ ------------- Net loss $ (841,501) $(1,061,248) $(3,362,114) $(4,075,953) ============= ============= ============ ============= Net loss per common share: Income (loss) from continuing operations: Basic $ (0.11) $ (0.14) $ (0.20) $ (0.41) Diluted (0.11) (0.14) (0.20) (0.41) Net income (loss): Basic (0.10) (0.13) (0.40) (0.49) Diluted (0.10) (0.13) (0.40) (0.49) Weighted average common shares outstanding: Basic 8,110,407 8,126,649 8,479,376 8,309,467 Diluted 8,110,407 8,126,649 8,479,376 8,309,467
(1) The sum of net income (loss) per share amounts for the four quarters may not equal annual amounts due to rounding. Liquidity and Capital Resources Prior to calendar year 1996, the Company satisfied its cash requirements through cash flows from operating activities and borrowings from financial institutions and related parties. However, in order to fund the expenses of developing and launching WorldNow Online, in March 1996, the Company began a private placement to major institutions and other accredited investors (the "March 96 Placement"). The Company completed the March 96 Placement for net proceeds of $16,408,605 during fiscal year 1997, including the exercise of warrants. In October 1997, the Company entered into a three-year sale and leaseback agreement which provided the Company with $2,750,000 in additional working capital. The Company was required to place $250,000 in escrow upon signing this agreement. In March 1998, the Company sold the net assets of DataMark Systems, Inc., its direct mail marketing subsidiary. To date, the Company has received $6,857,300 from the sale of these net assets and is scheduled to receive an additional $700,000 in June 1999. 30 In April 1998, the Company purchased 1,800,000 shares of its common stock held by a former officer of the Company in exchange for $1,500,000 in cash. On June 1, 1998, the Company entered into a thirty-nine month Interactive Marketing Agreement with America Online, Inc. ("AOL"), wherein the Company has agreed to pay AOL $12,000,000. The Company made a cash payment to AOL of $1,200,000 in July 1998, and is scheduled to make payments to AOL of $4,000,000 prior to January 1, 1999, $4,000,000 prior to July 1, 1999 and $2,800,000 prior to January 1, 2000. AOL has exercised its option under the contract and has received 955,414 shares of the Company's common stock and warrants for 318,471 shares of common stock. Operating activities used $6,752,970 during the year ended June 30, 1998 compared to $6,334,660 during the year ended June 30, 1997. The increase in cash used by operating activities during the year ended June 30, 1998 as compared to 1997 was primarily attributable to the accrual of $675,000 for the AOL agreement. Cash used in investing activities was $1,944,751 and $3,697,694 during the years ended June 30, 1998 and 1997, respectively. During the year ended June 30, 1998, the Company's investing activities included cash advances for operating activities to Digital Courier International, Inc., the acquisition of equipment for $794,344, a net investment in CommTouch, Ltd. valued at $375,000 and the receipt of proceeds from the sale of equipment for $20,938. During the year ended June 30, 1997, the Company investing activities included the acquisition of equipment for $3,188,360 and investment in net long-term assets of discontinued operations of $509,334. Cash provided by financing activities was $6,971,041 during the year ended June 30, 1998 as compared to $1,811,354 during the year ended June 30, 1997. The increase in cash provided was attributable to the net receipt of $6,857,300 from the sale of the direct mail marketing net assets in March 1998, $2,650,000 from the sale and leaseback agreement entered into in October 1997, $32,417 from the proceeds received upon the exercise of stock options and $86,000 from loan proceeds. This increase in cash provided during the year ended June 30, 1998 was offset in part by the payment of $1,500,000 for the retirement of common stock owned by former officers of the Company. During the year ended June 30, 1997, the Company received $1,811,354 from the issuance of common stock. Management projects that there will not be sufficient cash flows from operating activities during the next twelve months to provide capital for the Company to sutain its operations. As of June 30, 1998, the Company had $3,211,724 of cash. As described above. The Company made a cash payment to AOL of $1,200,000 in July, 1998. The Company is currently attempting to obtain additional debt or equity funding. If adequate funding is not available, the Company may be required to revise its plans and reduce future expenditures. As reflected in the accompanyin consolidated financial statements, the Company has incurred losses from continuing operations of $6,264,265, $7,158,851 and $3,586,413 and the Company's operating activities have used $6,752,970, $6,334,660 and $1,385,567 of cash during the years ended June 30, 1998, 1997 and 1996, respectively. As of June 30, 1998, the Company has a tangible working capital deficit of $272,968 and is scheduled to make substantial payments as described above to AOL. None of the Company's continuing operations are generating positive cash flows. Additional funding will be required before the Company's continuing operations will achieve and sustain profitability, if at all. Management's plans in regard to these matters include pursuing various potential funding sources. The Company is currently in negotiations with two firms to obtain additional working capital through a private placement of the Company's equity securities. The Company is attempting to accelerate payments that are due to the Company in the future totaling approximately $1,200,000. The Company has contacted the entities owing these amounts to negotiate the acceleration of these payments. The Company is negotiating with a lender to obtain working capital of $1,200,000 against which loan those receivables would be pledged. Certain directors of the Company have made oral commitments to make loans to and additional investments in the Company. Management is actively pursuing these alternatives until such time as market conditions are more 31 favorable to obtaining additional equity financing. There can be no assurance that additional funding will be available or, if available, that it will be available on acceptable terms or in required amounts. Management projects that there will not be sufficient cash flows from operating activities during the next twelve months to provide capital for the Company to sustain its operations. Year 2000 Issue Beginning in October 1997, the Company initiated the review and assessment of all its computerized hardware and internal-use software systems in order to ensure that such systems will function properly in the year 2000 and beyond. During the last two years, the Company's computerized information systems have been substantially replaced and are believed to be Year 2000 compliant. It is possible, however, that software programs acquired from third parties and incorporated into other applications utilized by the Company may not be fully Year 2000 compliant, however, in the most likely worst case scenario these programs would have minimal financial impact on the Company. The Company intends to continue testing, replacing, or enhancing its internal applications through the end of 1999 to ensure that risks related to such software are minimized. Management does not believe that costs associated with Year 2000 compliance efforts will have a material impact on the Company's financial result or operations. Forward-Looking Information Statements regarding the Company's expectations as to future revenue from its business strategy, and certain other statements presented herein, constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from expectations. In addition to matters affecting the Company's industry generally, factors which could cause actual results to differ from expectations include, but are not limited to (i) the Company has only generated minimal revenue from its Internet businesses, and has not generated and may not generate the level of purchases, users or advertisers anticipated, and (ii) the costs to market the Company's Internet services. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- -------------------------------------------- The consolidated financial statements and reports of independent public accountants are filed as part of this report on pages F-1 through F-26. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- ----------------------------------------------------------------- FINANCIAL STATEMENT DISCLOSURE. ------------------------------- Effective June 28, 1996, the Registrant dismissed Hansen, Barnett & Maxwell ("Hansen") as its certifying accountant. Hansen's reports on the Registrant's financial statements for the years ended June 30, 1995 and 1994 did not contain an adverse opinion or a disclaimer of opinion and were not qualified as to uncertainty, audit scope, or accounting principles. The Registrant's board of directors unanimously approved dismissal of Hansen. On June 28, 1996, the Registrant engaged Arthur Andersen LLP ("Andersen") to perform its audits and provide accounting services thereafter. The Registrant did not consult with Andersen prior to such date regarding any reportable matter. 32 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- Located in Part I as permitted by Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- Incorporated by reference to the Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- The following table sets forth information regarding Common Stock of the Company beneficially owned as of October 7, 1998 by: (i) each person known by the Company to beneficially own 5% or more of the outstanding Common Stock, (ii) each director and director nominee, (iii) each executive officer named in the Summary Compensation Table, and (iv) all officers and directors as a group. As of October 7, 1998, there were 13,099,210 shares of Common Stock outstanding and no Preferred Stock outstanding. Amount of Percentage Names and Addresses of Common of Voting Principal Stockholders Shares* Securities ---------------------- ------- ---------- Lorne House Trust 995,296 7.6% Castletown, Isle of Man America Online, Inc. 955,414 7.3% 22000 AOL Way Dulles, Virginia 20166 Officers and Directors ---------------------- James A. Egide 1,663,898(1) 12.7% 136 Heber Avenue, Suite 204 Park City, Utah 84060 Raymond J. Pittman 1,930,127 14.7% 187 Fremont Street San Francisco, California 94105 Kenneth M. Woolley 387,000(2) 2.9% 136 Heber Avenue., Suite 204 Park City, Utah 84060 Mitchell L. Edwards 420,307(3) 3.1% 136 Heber Avenue., Suite 204 Park City, Utah 84060 Glen Hartman 66,667 0.5% 136 Heber Avenue, Suite 204 Park City, Utah 84060 All Directors and Executive Officers 4,467,999 32.7% 33 (5 persons) * Assumes exercise of all exercisable options held by listed security holders which can be acquired within 60 days from October 7, 1998. (1) Includes 25,000 shares which Mr. Egide may acquire on exercise of options. (2) Includes 225,000 shares which Mr. Woolley may acquire on exercise of options. (3) Includes 280,000 shares which Mr. Edwards may acquire on exercise of options. Does not include 85,000 shares which may be acquired on exercise of options which are not currently exercisable. The stockholders listed have sole voting and investment power, except as otherwise noted. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- During the year ended June 30, 1994, the Company made cash loans to two officers totaling $46,000, which were settled during the year ended June 30, 1995, except for $1,000 which was settled during the year ended June 30, 1997. Prior to July 1, 1994, the Company had borrowed money from certain officers. Additional borrowings of $50,000 and $129,500 were made during the years ended June 30, 1996 and 1995, respectively. Principal payments on these notes were $1,666, $199,500, and $2,152 during the years ended June 30, 1997, 1996 and 1995, respectively. The amounts due on these loans at June 30, 1998, 1997 and 1996 were $0, $0 and $1,666, respectively. During the year ended June 30, 1996, the Company borrowed $500,000 from a bank to fund computer equipment purchases. Certain officers and stockholders guaranteed the loan. In exchange for the guarantee, such persons received a one-year option to purchase 25,000 shares of common stock at $5.00 per share. During the year ended June 30, 1997, the Company negotiated services and equipment purchase agreements with CasinoWorld Holdings, Ltd., Cybergames, Inc., Online Investments, Inc. and Barrons Online, Inc., companies in which Mr. Egide, one of the Company's directors and stockholders has an ownership interest. Under the agreements, the Company provided software development services, and configured hardware and other computer equipment. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------- ---------------------------------------------------------------- (a) INDEX TO FINANCIAL STATEMENTS Title of Documents Page No. - ------------------ -------- DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES - --------------------------------------------------- Report of Independent Public Accountants F-1 Consolidated Balance Sheets as of June 30, 1998 and 1997 F-2 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996 F-4 34 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, 1997 and 1996 F-6 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 F-8 Notes to Consolidated Financial Statements F-10 (b) Reports on Form 8-K ------------------- The Company did not file any Current Reports on Form 8-K during the fourth quarter of its fiscal year ended June 30, 1998. (c) Exhibits -------- The following documents are included as exhibits to this report.
Exhibits Exhibit Description Page or Location - -------- ------------------- ---------------- 3.1 Amended and restated certificate of incorporation attached herewith 3.2 By-laws attached herewith 10.1 Lease Agreement + 10.2 Amended and restated DataMark Holding, Inc Incentive # Plan 10.3 Interactive Marketing Agreement with America Online, Inc. attached herewith 10.4 Content license and distribution agreement with At Home attached herewith Corporation 10.5 Stock Exchange Agreement with Digital Courier * International, Inc. 10.6 Asset Purchase Agreement with Focus Direct, Inc. * 21.1 Subsidiaries of the Registrant attached herewith 22.0 Consent of Independent Public Accountants attached herewith 27.0 Financial Data Schedule attached herewith
Incorporated by reference to the Company's Proxy statement filed on September 1, 1998 for Special Stockholders meeting to be held on September 16, 1998. # Incorporated by reference to the Company's Form S-8 filed on April 28, 1998. + Incorporated by reference to the Company's Annual Report for the year ended June 30, 1995. 35 DIGITAL COURIER TECHNOLOGIES, INC. (formerly DataMark Holding, Inc.) AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1998 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Digital Courier Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc.) and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Digital Courier Technologies, Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from continuing operations of $6,264,265, $7,158,851 and $3,586,413 during the years ended June 30, 1998, 1997 and 1996, respectively. The Company has a tangible working capital deficit of $272,968 as of June 30, 1998. None of the Company's continuing operations are generating positive cash flows. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Salt Lake City, Utah September 23, 1998 F-1 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND 1997 ASSETS
1998 1997 ------------------------------- CURRENT ASSETS: Cash $ 3,211,724 $ 4,938,404 Trade accounts receivable 16,459 -- Inventory 21,046 -- Current portion of AOL anchor tenant placement costs 3,237,281 -- Other current assets 118,721 74,742 Net current assets of discontinued operations -- 105,739 ------------------------------- Total current assets 6,605,231 5,118,885 ------------------------------- PROPERTY AND EQUIPMENT: Computer and office equipment 6,225,817 5,210,607 Furniture, fixtures and leasehold improvements 777,419 724,717 Vehicles -- 29,059 ------------------------------- 7,003,236 5,964,383 Less accumulated depreciation and amortization (2,109,736) (510,307) ------------------------------- Net property and equipment 4,893,500 5,454,076 ------------------------------- AOL ANCHOR TENANT PLACEMENT COSTS, net of current portion 8,136,841 -- ------------------------------- GOODWILL, net of accumulated amortization of $67,997 1,318,661 -- ------------------------------- RECEIVABLE FROM DIGITAL COURIER INTERNATIONAL, INC 810,215 -- ------------------------------- NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS -- 709,063 ------------------------------- OTHER ASSETS 1,458,500 38,636 ------------------------------- $ 23,222,948 $ 11,320,660 -------------------------------
See accompanying notes to consolidated financial statements. F-2 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) AS OF JUNE 30, 1998 AND 1997 LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997 CURRENT LIABILITIES: -------------------------------- Current portion of capital lease obligations $ 1,006,906 $ -- Note payable 100,000 -- Accounts payable 1,458,598 1,086,474 Accrued rental payments for vacated facilities 544,014 -- Other accrued liabilities 531,400 408,103 -------------------------------- Total current liabilities 3,640,918 1,494,577 -------------------------------- CAPITAL LEASE OBLIGATIONS, net of current portion 1,384,132 -- -------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 1, 4, 7 and 12) STOCKHOLDERS' EQUITY: Preferred stock, $.0001 par value; 2,500,000 shares authorized, no shares issued Common stock, $.0001 par value; -- -- 20,000,000 shares authorized, 8,268,489 and 8,560,932 shares outstanding, respectively 827 856 Additional paid-in capital 30,506,614 22,714,366 Warrants outstanding 2,519,106 -- Receivable to be settled through the repurchase of common shares by the Company (148,576) -- Accumulated deficit (14,680,073) (12,889,139) -------------------------------- Total stockholders' equity 18,197,898 9,826,083 -------------------------------- $ 23,222,948 $ 11,320,660 --------------------------------
See accompanying notes to consolidated financial statements. F-3 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 ------------------------------------------ NET SALES $ 803,011 $ 8,812 $ -- COST OF SALES 745,871 492 -- ------------------------------------------ Gross margin 57,140 8,320 -- ------------------------------------------ OPERATING EXPENSES: General and administrative 4,092,737 1,400,916 685,528 Depreciation and amortization 1,536,388 398,066 86,828 Research and development 1,432,006 3,966,185 1,478,890 Selling 1,290,012 1,897,665 -- AOL agreement costs 675,000 -- -- Compensation expense related to issuance of options by principal stockholder -- -- 1,484,375 ------------------------------------------ Total operating expenses 9,026,143 7,662,832 3,735,621 ------------------------------------------ OPERATING LOSS (8,969,003) (7,654,512) (3,735,621) ------------------------------------------ OTHER INCOME (EXPENSE): Interest and other income 178,354 496,365 95,408 Interest expense (157,616) (704) (38,199) ------------------------------------------ Net other income 20,738 495,661 57,209 ------------------------------------------ LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (8,948,265) (7,158,851) (3,678,412) INCOME TAX BENEFIT 2,684,000 -- 91,999 ------------------------------------------ LOSS FROM CONTINUING OPERATIONS (6,264,265) (7,158,851) (3,586,413) ------------------------------------------
See accompanying notes to consolidated financial statements. F-4 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 DISCONTINUED OPERATIONS: -------------------------------------------- Income from operations of discontinued direct mail advertising operations, net of income tax provision of $66,827, $180,263 and $91,999, respectively $ 111,377 $ 300,438 $ 153,332 Gain on sale of direct mail advertising operations, net of income tax provision of $2,636,831 4,394,717 -- -- Loss from operations of discontinued Internet service provider subsidiary, net of income tax benefit of $159,404 and $180,263, respectively (265,674) (2,482,403) -- Gain on sale of Internet service provider subsidiary, net of income tax provision of $139,746 232,911 -- -- -------------------------------------------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS 4,473,331 (2,181,965) 153,332 -------------------------------------------- NET LOSS $(1,790,934) $(9,340,816) $(3,433,081) ============================================ NET LOSS PER COMMON SHARE: Loss from continuing operations: Basic and diluted $ (0.74) $ (0.86) $ (0.61) ============================================ Income (loss) from discontinued operations: Basic and diluted $ 0.53 $ (0.26) $ 0.03 ============================================ Net Loss: Basic and diluted $ (0.21) $ (1.12) $ (0.58) ============================================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and diluted 8,422,345 8,309,467 5,917,491 ============================================
See accompanying notes to consolidated financial statements. F-5 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 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 1,674,721 -- Net loss -- -- -- -- -------------------------------------------------------------------------------- BALANCE, June 30, 1997 8,560,932 856 22,714,366 -- --------------------------------------------------------------------------------
Stock Receivable To Be Subscriptions Accumulated Settled In Stock 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 -- -- (9,340,816) -------------------------------------------------------------------------------- BALANCE, June 30, 1997 -- -- (12,889,139) --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (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 $ 22,714,366 $ 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 10 234,365 Issuance of common stock to acquire WeatherLabs, Inc. 253,260 26 709,103 -- Issuance of common stock and warrants in connection with AOL agreement 955,414 96 8,329,920 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 computer software (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 $ 30,506,614 $ $ 2,519,106 --------------------------------------------------------------------------------
Stock Receivable To Be Subscriptions Accumulated Settled In Stock Receivable Deficit -------------------------------------------------------------------------------- BALANCE, June 30, 1997 $ -- $ -- $(12,889,139) 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 2,519,106 -- -- 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 computer software -- -- -- Receivable to be settled through the repurchase of common shares by the Company (148,576) -- -- Net loss -- -- (1,790,934) -------------------------------------------------------------------------------- BALANCE, June 30, 1998 $ (148,576) $ -- $(14,680,073) ================================================================================
See accompanying notes to consolidated financial statements. F-7 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996 Increase (Decrease) in Cash
1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------------------------ Net loss $(1,790,934) $(9,340,816) $(3,433,081) Adjustments to reconcile net loss to net cash used in operating activities: Gains on sales of direct mail and Internet service operations (7,404,205) -- -- Depreciation and amortization 1,536,388 398,066 86,828 Compensation expense related to issuance of stock options 343,750 -- 1,484,375 Issuance of common stock as compensation 61,250 -- -- Compensation expense related to cashless exercise of stock options 18,375 -- -- Loss on disposition of equipment 11,196 -- -- Expense purchased research and development -- 1,674,721 -- Changes in operating assets and liabilities, net of effect of acquisitions and dispositions- Trade accounts receivable 101,653 8,206 (8,206) Inventory 836 -- -- AOL anchor tenant placement costs (525,000) -- -- Other current assets 154,263 (74,742) 2,042 Net current assets of discontinued operations -- 182,041 (178,964) Other assets (13,360) (38,636) 84,570 Accounts payable 446,168 588,899 443,813 Accrued liabilities 306,650 267,601 133,056 ------------------------------------------ Net cash used in operating activities (6,752,970) (6,334,660) (1,385,567) CASH FLOWS FROM INVESTING ACTIVITIES: ------------------------------------------ Purchase of property and equipment (794,344) (3,188,360) (2,589,212) Proceeds from sale of equipment 20,938 -- -- Increase in receivable from Digital Courier International, Inc. (810,215) -- -- Increase in net long-term assets of discontinued operations -- (509,334) (70,628) Cash of discontinued operations 13,870 -- -- Increase in other assets (375,000) -- -- ------------------------------------------ Net cash used in investing activities (1,944,751) (3,697,694) (2,659,840) ------------------------------------------
See accompanying notes to consolidated financial statements. F-8 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996 Increase (Decrease) in Cash
1998 1997 1996 -------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the sale of direct mail advertising operations $ 6,857,300 $ -- $ -- Net proceeds from sale and lease back of equipment 2,650,000 -- -- Net proceeds from issuance of common stock and other contributed capital 32,417 358,418 16,417,105 Collection of receivables from sale of common stock -- 1,496,137 719,000 Proceeds from borrowings 86,000 -- 29,701 Purchase of common stock from officers (1,700,000) -- -- Principal payments on capital lease obligation (690,183) -- -- Principal payments on borrowings (264,493) (43,201) -- -------------------------------------------- Net cash provided by financing activities 6,971,041 1,811,354 17,165,806 -------------------------------------------- NET INCREASE (DECREASE) IN CASH (1,726,680) (8,221,000) 13,120,399 CASH AT BEGINNING OF YEAR 4,938,404 13,159,404 39,005 -------------------------------------------- CASH AT END OF YEAR $ 3,211,724 $ 4,938,404 $ 13,159,404 ============================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 157,616 $ 9,495 $ 56,942
See accompanying notes to consolidated financial statements. F-9 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF THE COMPANY Organization and Principles of Consolidation DataMark Systems, Inc. ("Systems") was incorporated under the laws of the State of Nevada on April 29, 1987. DataMark Printing, Inc. ("Printing") was incorporated under the laws of the State of Utah on March 23, 1992. WorldNow Online Network, Inc. ("WorldNow"), formerly DataMark Media, Inc., was incorporated as a wholly owned subsidiary of Systems on October 3, 1994. Systems negotiated a plan of reorganization and subscription agreement with the shareholders of Printing (who were also greater than 80 percent shareholders of Systems) whereby those shareholders transferred all of the outstanding shares of common stock of Printing to Systems as an additional contribution to capital in December 1994. No additional shares of common stock of Systems were issued in the transaction. Exchequer I, Inc. ("Exchequer"), a publicly held Delaware corporation, was incorporated May 16, 1985. On January 11, 1995, Systems consummated a merger agreement with Exchequer whereby Systems became a wholly owned subsidiary of Exchequer, which changed its name to DataMark Holding, Inc. ("Holding" or the "Company"). The shareholders of Systems received 2121.013 shares of Holding's common stock for each share of Systems' common stock outstanding at the date of the merger. Accordingly, the 2,132 shares of Systems' common stock were converted into 4,522,000 shares of Holding's common stock. The accompanying financial statements have been restated to reflect the stock conversion for all periods presented. The merger was accounted for as a reverse acquisition with Systems being considered the acquiring company for accounting purposes. Prior to the merger, Holding had no assets, $26,215 of liabilities and 471,952 shares of common stock issued and outstanding. The reverse acquisition was accounted for by recording the liabilities of Holding at the date of merger at their historical cost, which approximated fair value. Effective March 17, 1998, Holding entered into a Stock Exchange Agreement (the "Exchange Agreement") with Digital Courier International, Inc., a Nevada corporation ("DCII"). Pursuant to the Exchange Agreement, Holding agreed to issue 4,659,080 shares of its common stock to the shareholders of DCII. The acquisition and the changing of Holding's name to Digital Courier Technologies, Inc. ("DCTI") were approved by the shareholders of Holding on September 16, 1998. The acquisition of DCII will be accounted for as a purchase and the Company anticipates that approximately $11.7 million of the total purchase price of approximately $13.0 million will be allocated to in process research and development and will be expensed in the first quarter of fiscal year 1999. This allocation will be finalized upon completion of a third-party valuation. After entering into the Exchange Agreement, the Company made advances to DCII to fund its operations. The amount loaned to DCII totaled $810,215 as of June 30, 1998 and is reflected as a noncurrent receivable in the accompanying June 30, 1998 consolidated balance sheet. DCII is a Java-based Internet and wireless communications software development company originally incorporated on July 23, 1996. For the year ended December 31, 1997, DCII had no revenues. On January 8, 1997, the Company acquired all of the outstanding shares of common stock of Sisna, Inc. ("Sisna"). In January 1998, the Company acquired all of the outstanding shares of common stock of Books Now, Inc. ("Books Now") and in May 1998 acquired all of the outstanding common stock of WeatherLabs Technologies, Inc. ("WeatherLabs"). The acquisitions of Sisna, Books Now and WeatherLabs have been accounted for as purchases with the results of operations of the acquired entities being included in th accompanying consolidated financial statements from the dates of the acquisitions. Additionally, in March 1998, the Company sold its direct mail advertising operations to Focus Direct, Inc. ("Focus See accompanying notes to consolidated financial statements. F-10 Direct") and sold the shares of common stock of Sisna acquired in January 1997 back to Sisna's former major shareholder (see Note 3 for pro forma information). The accompanying consolidated financial statements have been retroactively restated to present the direct mail advertising operations and Sisna's Internet service operations as discontinued operations. On July 15, 1998, the Company signed an agreement to sell certain assets related to the Company's Internet-related business branded under the "WorldNow" and "WorldNow Online Network" marks to Gannaway Web Holdings, LLC ("Gannaway"). The assets relate primarily to the national Internet-based network of local television stations (see Note 12). DCTI, WeatherLabs, Books Now, WorldNow, Printing and Sisna are collectively referred to herein as the "Company". All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations and Related Risks The Company's historical operations have primarily consisted of providing highly targeted business to consumer advertising for its clients. During fiscal years 1998, 1997 and 1996, the medium for such targeted advertising was direct mail and was being expanded to include an online network (see discussion below). The direct mail advertising operations were sold in March 1998. In January 1997, the Company acquired Sisna, which operates as an Internet service provider allowing its customers access to the Internet. Through a network of franchisees, Sisna offers Internet access in 12 states. Sisna was sold back to Sisna's former major shareholder in March 1998. In fiscal 1994, the Company began developing an advertiser funded national Internet service ("WorldNow Online") which was launched in the last quarter of fiscal year 1997. The Company's strategy for WorldNow Online included the creation of a national Internet-based network of local television stations. WorldNow would provide free web hosting, web maintenance and other Internet features, including national content and advertising, to the television stations. In return, the stations would provide local content, ranging from news, weather and sports, to entertainment, recreational and cultural events, as well as free television advertising and promotions in order to drive local users of the Internet to the WorldNow site. Both WorldNow and the stations' revenues would be derived from local and national advertising as well as related commerce conducted via the Internet. WorldNow went online in June 1997, and began generating minimal advertising revenues in August 1997. In July 1998, the Company agreed t sell certain assets related to the national Internet-based network of local television stations (see Note 12). As discussed above, the Company has recently acquired Books Now, WeatherLabs and DCII. The Company's strategy is to be an Internet services company and engage in e-commerce and provide Internet content development, packaging and distribution for Internet portals and websites. In addition to e-commerce and web hosting from its data center, the Company is creating virtual content and commerce products that can be branded and used by existing Internet portals, websites and Internet communities. Its main product offerings are Videos Now(TM), WeatherLabs(TM)and Books Now(TM). The Company has a limited operating history upon which an evaluation of the Company can be based, and its prospects are subject to the risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for Internet products and services. Specifically, such risks include, without limitation, the dependence on continued growth in use of the Internet, the ability of the Company to effectively integrate the technology and operations of acquired businesses or technologies with its operations, the ability to maintain and expand the channels of distribution, the ability to maintain continuing expertise in proprietary and third-party technologies, the timing of introductions of new services, the pricing policies of the Company's competitors and suppliers and the ability to identify, attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks or that the Company will achieve or sustain profitability. The limited operating history of the Company and the uncertain nature of the markets addressed by the Company make the prediction of future results of operations difficult or impossible. See accompanying notes to consolidated financial statements. F-11 As reflected in the accompanying consolidated financial statements, the Company has incurred losses from continuing operations of $6,264,265, $7,158,851 and $3,586,413 and the Company's operating activities have used $6,752,970, $6,334,660 and $1,385,567 of cash during the years ended June 30, 1998, 1997 and 1996, respectively. As of June 30, 1998, the Company has a tangible working capital deficit of $272,968. None of the Company's continuing operations are generating positive cash flows. Additional funding will be required before the Company's continuing operations will achieve and sustain profitability, if at all. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's plans in regard to these matters include pursuing various potential funding sources. The Company is currently in negotiations with two firms to obtain additional working capital through a private placement of the Company's equity securities. The Company is attempting to accelerate payments that are due to the Company in the future totaling approximately $1,200,000. The Company has contacted the entities owing these amounts to negotiate the acceleration of these payments. The Company is negotiating with a lender to obtain working capital of $1,200,000 against which loan those receivables would be pledged. Certain directors of the Company have made oral commitments to make loans to and additional investments in the Company. Management is actively pursuing these alternatives until such time as market conditions are more favorable to obtaining additional equity financing. There can be no assurance that additional funding will be available or, if available, that it will be available on acceptable terms or in required amounts. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventory Inventory is valued at the lower of cost or market, with cost being determined using the first-in, first-out method. As of June 30, 1998, inventory consists primarily of purchased books to be sold and distributed by Books Now. Property and Equipment Property and equipment are stated at cost. Major additions and improvements are capitalized, while minor repairs and maintenance costs are expensed when incurred. Depreciation and amortization of property and equipment are computed using primarily an accelerated method over the estimated useful lives of the related assets, which are as follows: Vehicles 5 years Printing equipment 5 years Computer and office equipment 5 - 7 years Furniture, fixtures and leasehold improvements 5 - 10 years When property and equipment are retired or otherwise disposed of, the book value is removed from the asset and related accumulated depreciation and amortization accounts, and the net gain or loss is included in the determination of net loss. See accompanying notes to consolidated financial statements. F-12 Other Assets As of June 30, 1998 and 1997, other assets consist of the following:
1998 1997 ----------------------------------- Noncurrent receivable from Focus Direct (see Note 3) $ 700,000 $ - Investment in CommTouch preferred stock (see below) 375,000 - Security deposit under capital lease arrangement (see Note 7) 250,000 - Deposits and other 133,500 38,636 ----------------------------------- $ 1,458,500 $ 38,636 ================== ================
During fiscal year 1998, the Company entered into a Series C Preferred Share Purchase Agreement with CommTouch Software Ltd. ("CommTouch"), an Israeli company, whereby the Company agreed to invest $750,000 in CommTouch's Series C Preferred Stock. One half of the investment was made on July 2, 1997 and the other half was made on September 17, 1997. The Company also has an option to make an additional $1,000,000 investment in CommTouch's Series C Preferred Stock. CommTouch is engaged in the development, manufacture and marketing of PC-based Internetworking software. As of June 30, 1998, management of the Company determined that the investment in CommTouch was partially impaired and recorded a reserve of $375,000 against the investment. Fair Value of Financial Instruments The carrying amounts reported in the accompanying consolidated balance sheets for cash, accounts receivable, and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company's note payable and capital lease obligations also approximate fair value based on current rates for similar debt. The $700,000 noncurrent receivable related to the sale of the direct mail advertising business is noninterest bearing and is not due until June 30, 1999. The estimated fair value of the receivable as of June 30, 1998 is approximately $640,500. Revenue Recognition Revenue is recognized upon shipment of product and as services are provided or pro rata over the service period. The Company defers revenue paid in advance relating to future services and products not yet shipped. Research and Development Research and development costs are expensed as incurred. Income Taxes The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Net Loss Per Common Share Basic net loss per common share ("Basic EPS") excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the fiscal year. Diluted net loss per common share ("Diluted EPS") reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on net loss per common share. See accompanying notes to consolidated financial statements. F-13 Options to purchase 1,445,000, 1,424,815 and 1,072,215 shares of common stock at weighted average exercise price of $3.82, $5.36, and $4.63 per share as of June 30, 1998, 1997, and 1996, respectively and warrants to purchase 656,942, 20,000 and 56,125 shares of common stock at weighted average exercise prices of $9.37, $7,75 and $7.75 per share, respectively, were not included in the computation of diluted EPS. The inclusion of the options and warrants would have been antidilutive, thereby decreasing net loss per common shares. As of June 30, 1998, the Company has agreed to issue up to an additional 1,048,940 shares of common stock in connection with the acquisitions of Books Now and WeatherLabs (see Note 3). The issuance of the shares is contingent on the achievement of certain performance criteria and/or the future stock price of the Company's common stock. These contingent shares have also been excluded from the computation of diluted EPS. Supplemental Cash Flow Information Noncash investing and financing activities consist of the following: During the year ended June 30, 1998, the Company issued 955,414 shares of common stock and warrants to purchase 318,471 shares of common stock to America OnLine, Inc. ("AOL") in connection with an Interactive Marketing Agreement. The common shares issued were recorded at their fair value of $8,330,016 and the warrants were recorded at their fair value of $2,519,106 with the offset being recorded as AOL anchor tenant placement costs (see Note 4). In addition, the Company acquired the common stock of Book Now and WeatherLabs in exchange for 100,000 and 253,260 shares of common stock, respectively (see Note 3). During the year ended June 30, 1997, the Company acquired $96,000 of computer software in exchange for 12,000 shares of common stock. During the year ended June 30, 1998, the software was returned by the Company and the Company received back the 12,000 shares of common stock. During fiscal year 1997, the Company acquired the common stock of Sisna in exchange for 325,000 shares of the Company's common stock. During fiscal year 1998, the Company sold the common stock of Sisna back to the former major shareholder of Sisna for the return of 35,000 shares of the Company's common stock. During the year ended June 30, 1996, the Company received subscription agreements for the purchase of 214,500 shares of common stock at $7.75 per share amounting to $1,496,137, net of commissions of $166,238. Payment was received subsequent to June 30, 1996 (see Note 8). Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components and SFAS No. 131 establishes new standards for public companies to report information about their operating segments, products and services, geographi areas and major customers. Both statements are effective for financial statements issued for periods beginning after December 15, 1997, accordingly, the Company will adopt SFAS No. 130 and SFAS No. 131 in its fiscal year 1999 consolidated financial statements. Management believes the adoption of SFAS Nos. 130 and 131 will not have a material impact on the consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999; accordingly, the Company will adopt SFAS No. 133 in its fiscal year 2000 consolidated financial statements. Management believes the adoption of SFAS No. 133 will not have a material impact on the consolidated financial statements. See accompanying notes to consolidated financial statements. F-14 Reclassifications Certain reclassifications have been made to the previous years' consolidated financial statements to be consistent with the fiscal year 1998 presentation. (3) ACQUISITIONS AND DISPOSITIONS Books Now In January 1998, the Company acquired all of the outstanding stock of Books Now, a seller of books through advertisements in magazines and over the Internet. The shareholders of Books Now received 100,000 shares of the Company's common stock upon signing the agreement and can receive 87,500 additional shares per year for the next three years based on performance goals established in the agreement. The annual number of shares could increase up to a maximum of 175,000 shares if the Company's average stock price, as defined, does not exceed $8.50 per share at the end of the three-year period. The Company granted certain piggyback registration rights and a one time demand registration right with regard to the shares received under the agreement. The Company also entered into a three-year employment agreement with the president of Books Now that provides for base annual compensation of $81,000 and a bonus on pretax income ranging from 5% to 8% based on the level of earnings. The acquisition has been accounted for as a purchase and the operations of Books Now are included in the accompanying consolidated financial statements since the date of acquisition. The tangible assets acquired included $261 of cash, $21,882 of inventory and $50,000 of equipment. Liabilities assumed included $112,335 of notes payable, $24,404 of capital lease obligations and $239,668 of accounts payable and accrued liabilities. The excess of the purchase price over the estimated fair value of the acquired assets of $538,639 has been recorded as goodwill and is being amortized over a period of five years. WeatherLabs On March 17, 1998, the Company entered into a Stock Exchange Agreement to acquire all of the outstanding stock of WeatherLabs, one of the leading providers of weather and weather-related information on the Internet. The acquisition was closed in May 1998. At closing the shareholders of WeatherLabs were issued 253,260 shares of the Company's common stock. These shareholders are entitled to receive a total of 523,940 additional shares over the next three years based on the stock price of the Company's common stock, as defined, at the end of the Company's next three fiscal years. The acquisition has been accounted for as a purchase and the operations of WeatherLabs are included in the accompanying consolidated financial statements since the date of acquisition. The tangible assets acquired included $3,716 of cash, $19,694 of accounts receivable, $115,745 of equipment and $13,300 of deposits. Liabilities assumed included $100,000 of notes payable, $56,902 of capital lease obligations and $134,444 of accounts payable and accrued liabilities. The excess of the purchase price over the estimated fair value of the acquired assets of $848,019 has been recorded as goodwill and is being amortized over a period of five years. Unaudited Pro Forma Data for Acquisitions of Continuing Operations The unaudited pro forma results of operations of the Company for the years ended June 30, 1998 and 1997 (assuming the acquisitions of Books Now and WeatherLabs had occurred as of July 1, 1996) are as follows: 1998 1997 -------------------------------- Revenues $ 1,171,200 $ 368,802 Loss from continuing operations (6,993,401) (7,574,632) Loss from continuing operations per share (0.80) (0.87) See accompanying notes to consolidated financial statements. F-15 Sisna, Inc. On January 8, 1997, the Company completed the acquisition of Sisna pursuant to an Amended and Restated Agreement and Plan of Reorganization (the "Agreement"). Pursuant to the Agreement, Holding issued 325,000 shares of its common stock in exchange for all of the issued and outstanding shares of Sisna. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of the acquired assets less liabilities assumed was $1,674,721, which was allocated to purchased research and development and expensed at the date of the acquisition. Sisna has not been profitable since its inception. The tangible assets acquired consisted of $32,212 of trade accounts receivable, $124,151 of inventory and $500,000 of computer and office equipment. The liabilities assumed consisted of $10,550 of bank overdrafts, $278,227 of accounts payable, $233,142 of notes payable and $134,444 of other accrued liabilities. In connection with the acquisition, the Company entered into three-year employment agreements with four of Sisna's key employees and shareholders. The employment agreements provided for automatic renewals for one or more successive one-year terms (unless notice of non-renewal was given by either party), could be terminated by the Company for cause (as defined), or could be terminated by the Company without cause. If terminated without cause, the employees were entitled to their regular base salary up to the end of the then current term and any bonus owed pursuant to the employment agreements. The four employment agreements provided for aggregate base annual compensation of $280,000. The employment agreements also provided for aggregate bonuses of $500,000, which were paid as of the date of the acquisition. These bonuses were earned and expensed as the employees completed certain computer installations. The employment agreements also included noncompetition provisions for periods extending three years after the termination of employment with the Company. In March 1998, the Company sold the operations of Sisna back to Sisna's major shareholder, who was a director of the Company, in exchange for 35,000 shares of the Company's common stock. The purchaser of Sisna received tangible assets of approximately $55,000 of accounts receivable, $35,000 of prepaid expenses, $48,000 of computer and office equipment, and $10,000 of other assets and assumed liabilities of approximately $33,000 of accounts payable, $102,000 of notes payable, and $244,000 of other accrued liabilities resulting in a pretax gain on the sale of $372,657. The operations of Sisna have been reflected in the accompanying consolidated financial statements from the acquisition date in January 1997 through the sale date in March 1998 as discontinued operations. The Sisna revenues were $555,686 and $341,842, respectively, and the losses from operations were $(425,078) and $(2,662,666) during fiscal years 1998 and 1997, respectively. Sale of Direct Mail Advertising Operations In March 1998, the Company sold its direct mail advertising operations to Focus Direct, a Texas corporation. Pursuant to the asset purchase agreement, Focus Direct purchased all assets, properties, rights, claims and goodwill, of every kind, character and description, tangible and intangible, real and personal wherever located of the Company used in the Company's direct mail operations. Focus Direct also agreed to assume certain liabilities of the Company related to the direct mail advertising operations. Focus Direct is not affiliated with the Company. Pursuant to the agreement, Focus Direct agreed to pay the Company $7,700,000 for the above described assets. Focus Direct paid the Company $6,900,000 at closing and will pay the additional $800,000 by June 30, 1999. The total purchase price was adjusted for the difference between the assets acquired and liabilities assumed at November 30, 1997 and those as of the date of closing. This sale resulted in a pretax gain of $7,031,548. The purchaser acquired tangible assets consisting of approximately $495,000 of accounts receivable, $180,000 of inventory, $575,000 of furniture and equipment, and $10,000 of other assets, and assumed liabilities of approximately $590,000 of accounts payable and $320,000 of other accrued liabilities. See accompanying notes to consolidated financial statements. F-16 The direct mail advertising operations have been reflected as discontinued operations in the accompanying consolidated financial statements. The direct mail advertising revenues for the years ended June 30, 1998, 1997 and 1996 amounted to $7,493,061, $6,448,156 and $4,256,887, respectively. (4) Interactive Marketing Agreement with America Online, Inc. On June 1, 1998, the Company entered into an Interactive Marketing Agreement with America Online, Inc. ("AOL") for an initial term of 39 months (the "Agreement"), which can be extended for successive one-year terms by AOL thereafter. Under the Agreement, the Company will pay AOL $12,000,000 in cash and issue a seven-year warrant to purchase 318,471 shares of the Company's common stock at $12.57 per share (the "Performance Warrant") in exchange for AOL providing the Company with certain permanent anchor tenant placements for its Videos Now site on the AOL Network and promotion of the Videos Now site. The Company is scheduled to make cash payments to AOL of $1,200,000 upon execution of the agreement in June 1998, $4,000,000 prior to January 1, 1999, $4,000,000 prior to July 1, 1999 and $2,800,000 prior to January 1, 2000. The initial $1,200,000 payment was not actually made until July 6, 1998. The Performance Warrant vests over the term of the agreement as certain promotion criteria are achieved by AOL The agreement includes an option whereby AOL elected to provide additional permanent anchor tenant placements for Videos Now on AOL.com (a separate and distinct website) in exchange for 955,414 shares of the Company's common stock and a seven-year, fully vested warrant to purchase 318,471 shares of the Company's common stock at a price of $6.28 per share (the "Option Warrant"). The original $12 million of cash payments and the value of the Performance Warrant, to be determined as the warrant vests, will be accounted for as follows: (i) the estimated fair value of the permanent anchor tenant placements on the AOL Network of $1,750,000 per year, or approximately $5,250,000 in total, will be charged to expense ratably over the period from the launch of the Company's interactive site, which is expected to be October 15, 1998, through the original term of the agreement; and (ii) the remaining amount will be treated as advertising costs and will be expensed as paid or as the Performance Warrant vests. The advertising will be expensed as paid in accordance with SOP 93-7, because the Company has no experience on which to evaluate the effectiveness of the direct response advertising. The value of the common shares issued of $8,330,016 and the value of the Option Warrant of $2,519,106 represent the value of the permanent anchor tenant placements on AOL.com and will be charged to expense ratably over the period from the launch of the Company's interactive site on AOL.com through the original term of the agreement. As of June 30, 1998, the initial $1,200,000 payment obligation was allocated $525,000 to AOL anchor tenant placement costs and $675,000 to expense as advertising costs. The value of the common stock issued and the Option Warrant was recorded as AOL anchor tenant placement costs in the accompanying consolidated financial statements. (5) NOTE PAYABLE As of June 30, 1998, the Company has a note payable to an unrelated individual in the amount of $100,000. The note was assumed in the acquisition of WeatherLabs. The note is unsecured, bears interest at eight percent and is due on demand. (6) INCOME TAXES The components of the net deferred income tax assets as of June 30, 1998 and 1997 are as follows:
1998 1997 ---------------------------------------------- Net operating loss carryforwards $ 3,611,000 $ 3,464,800 Accrued liabilities 271,400 83,400 Receivable reserves and other 162,000 22,000 ---------------------------------------------- Total deferred income tax assets 4,044,400 3,570,200 Valuation allowance (4,044,400) (3,570,200) ---------------------------------------------- Net deferred income tax asset $ - $ - ==============================================
See accompanying notes to consolidated financial statements. F-17 As of June 30, 1998, the Company had net operating loss carryforwards for federal income tax reporting purposes of approximately $10,030,000. For federal income tax purposes, utilization of these carryforwards is limited if the Company has had more than a 50 percent change in ownership (as defined by the Internal Revenue Code) or, under certain conditions, if such a change occurs in the future. The tax net operating losses will expire beginning in 2009. No benefit for income taxes was recorded during the year ended June 30, 1997. The income tax benefits recorded for the years ended June 30, 1998 and 1996 of $2,684,000 and $91,999, respectively, were limited to the income tax provision recorded on income from discontinued operations. As discussed in Note 1, certain risks exist with respect to the Company's future profitability, and accordingly, a valuation allowance was recorded against the entire net deferred income tax asset. (7) COMMITMENTS AND CONTINGENCIES Leases In October 1997, the Company entered into a sale and three-year capital leaseback agreement related to $3,000,000 of the Company's computer equipment. The agreement provided that $250,000 of the proceeds be placed in escrow upon signing the agreement. The equipment was sold at book value resulting in no deferred gain or loss on the transaction. The Company assumed certain minor capital lease obligations related to equipment as a result of the acquisitions of Books Now and WeatherLabs. The Company leases certain facilities and equipment used in its operations under operating lease arrangements. Commitments for minimum rentals under noncancelable leases as of June 30, 1998 are as follows, net of sublease rentals:
Minimum Operating Leases ------------------------------------------------ Capital Minimum Deduct Net Lease Lease Sublease Rental Year ending June 30, Payments Rentals Rentals Commitments - --------------------------------------------------------------------------------------------------------------- 1999 $ 1,155,481 537,293 $ 188,617 $ 348,676 2000 1,150,872 475,109 267,166 207,943 2001 301,321 293,791 198,044 95,747 2002 13,763 120,478 99,122 21,356 2003 5,220 - - - ------------------------------------------------------------------- Total minimum lease payments 2,626,657 1,426,671 $ 752,949 $ 673,722 ================================================= Less amount representing interest (235,619) Present value of net minimum lease payments, including current maturities of $1,006,906 $ 2,391,038 =================
The Company incurred rent expense of $552,264, $472,572 and $118,923 in connection with its operating leases for the years ended June 30, 1998, 1997 and 1996, respectively. Due to the sale of the Company's direct mail advertising operations and the Sisna Internet service operations during fiscal 1998, the Company vacated certain leased facilities. The Company accrued a liability for an estimated $544,014 of future rental payments for vacated facilities that will not be covered by subleases. See accompanying notes to consolidated financial statements. F-18 Purchase Commitment On November 28, 1996, the Company entered into an agreement with Sprint Communications Company L.P. ("Sprint") to establish special prices and minimum purchase commitments in connection with the use of communication products and services. This agreement was terminated and superceded by an agreement effective July 15, 1997. The Company has committed to minimum annual usage of at least $500,000 over a three-year period. Legal Matters As discussed in Note 3, during fiscal year 1998 DCTI acquired the common stock of Books Now in exchange for 100,000 shares of DCTI's common stock with additional shares to be earned based on Books Now achieving certain performance goals during the three years following the acquisition date. In June 1998, the Company received a letter from the prior owner of Books Now, who is also the current president of Books Now, alleging that his duties had been changed without his consent and Books Now had been prevented by DCTI from reaching its financial goals for the first year. The former owner contends that DCTI breached its agreements with him, breached the implied covenant of good faith and fair dealing in connection with the agreements and defrauded him in connection with DCTI's purchase of Books Now's common stock. DCTI and the former owner are engaged in settlement discussions in an effort to resolve this matter without litigation. While management believes, after consultation with legal counsel, that the ultimate outcome of this matter will not have a significant effect on the Company's consolidated financial position, liquidity or results of operations, it is possible that a change in the Company's estimate of its probable liability, if any, could occur. The Company is the subject of certain other legal matters which it considers incidental to its business activities. It is the opinion of management, after consultation with legal counsel, that the ultimate disposition of these legal matters will not have a material impact on the consolidated financial position, liquidity or results of operations of the Company. (8) CAPITAL TRANSACTIONS Preferred Stock The Company is authorized to issue up to 2,500,000 shares of its $.0001 par value preferred stock. As of June 30, 1998, no preferred stock has been issued. The Company's Board of Directors is authorized, without shareholder approval, to fix the rights, preferences, privileges and restrictions of one or more series of the authorized shares of preferred stock. Common Stock Issuances and Other Transactions During the year ended June 30, 1996, the Company raised equity capital through private placements of its restricted common stock at $7.75 per share. The Company engaged finders to introduce potential investors to the Company. The finders received a ten percent commission and warrants to purchase 250,000 shares of the Company's common stock at a price of $7.75 per share. During fiscal year 1997 these warrants were cancelled and replaced with 125,000 options to purchase common stock at $9.00 per share. The Company sold 1,992,179 shares of common stock for $13,914,849 in proceeds, net of offering costs of $1,524,538, and received subscriptions for an additional 214,500 shares of common stock. The proceeds from the subscriptions of $1,496,137, net of offering costs of $166,238, were received in fiscal year 1997. The Company issued warrants to purchase up to 377,900 shares of the Company's common stock at $7.75 per share to certain of the investors. During the years ended June 30, 1997 and 1996, 36,125 and 321,775 of these warrants to purchase shares of the Company's common stock were exercised, respectively. The Company agreed with certain of the investors to use its best efforts to register the issued shares and warrants under the Securities Act of 1933. The Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission during fiscal year 1996 and it became effective in fiscal year 1997. See accompanying notes to consolidated financial statements. F-19 As discussed in Note 3, during the year ended June 30, 1997, the Company issued 325,000 shares of its common stock to purchase Sisna. During the year ended June 30, 1998, the Company sold the operations of Sisna back to Sisna's former major shareholder for 35,000 shares of the Company's common stock. In fiscal year 1997, the Company acquired certain computer software in exchange for 12,000 shares of common stock. In fiscal year 1998, the Company returned the computer software for the return of the 12,000 shares of common stock. During the year ended June 30, 1998, the Company issued 100,000 and 253,260 shares of its common stock to purchase Books Now and WeatherLabs, respectively (see Note 3). The Company issued 955,414 shares of common stock and warrants to purchase common stock to AOL in connection with the Interactive Marketing Agreement described in Note 4. On April 28, 1998, the Company entered into an Amended Stock Repurchase Agreement (the "Repurchase Agreement") with Mr. Chad L. Evans, the former CEO and Chairman of the Board of the Company. Pursuant to the Repurchase Agreement, the Company agreed to repurchase 1,800,000 shares of the Company's common stock held by Mr. Evans for $1,500,000. Additionally, the Company entered into a Confidentiality and Noncompetition Agreement with Mr. Evans, pursuant to which Mr. Evans, for consideration consisting of $25,000, has agreed, among other things, not to compete with the Company, solicit employees from the Company, or use proprietary information of the Company for a period of three years. In addition, the Company acquired 66,110 shares of common for $199,813 from the president of the direct mail advertising operations that were sold during the year. See accompanying notes to consolidated financial statements. F-20 (9) STOCK OPTIONS The Company has established the Omnibus Stock Option Plan (the "Option Plan") for employees and consultants. The Company's Board of Directors has from time to time authorized the grant of stock options outside of the Option Plan to directors, officers and key employees as compensation and in connection with obtaining financing and guarantees of loans. The following table summarizes the option activity for the years ended June 30, 1998, 1997 and 1996. Options Outstanding Number of Option Price Shares Per Share ------------------------------------ Balance at June 30, 1995 150,592 $ 0.25 Granted 470,000 5.00-9.00 Balance at June 30, 1996 620,592 0.25-9.00 Granted 65,000 3.25 Expired or cancelled (100,000) 5.00 Balance at June 30, 1997 585,592 0.25-9.00 Granted 365,000 2.75-5.00 Expired or cancelled (305,000) 3.25-7.75 Exercised (150,592) 0.25 Balance at June 30, 1998 495,000 $2.75-9.00 ===================================== All of the above options have been granted with exercise prices equal to or greater than the intrinsic fair value of the Company's common stock on the dates of grant. During the year ended June 30, 1998, the Company decreased the option price to $2.75 per share for 315,000 of the options that had been previously granted at prices ranging from $3.25 to $7.75 per share and extended the exercise periods for certain of the options. As of June 30, 1998, 430,000 of the above options are exercisable and the above options expire, if not exercised, from December 31, 1998 through June 30, 2002. The Option Plan provides for the issuance of a maximum of 2,500,000 shares of common stock. The Option Plan is administered by the Board of Directors who designate option grants as either incentive stock options or non-statutory stock options. Incentive stock options are granted at not less than 100 percent of the market value of the underlying common stock on the date of grant. Non-statutory stock options are granted at prices determined by the Board of Directors. Both types of options are exercisabl for the period as defined by the Board of Directors on the date granted; however, no incentive stock option is exercisable after ten years from the date of grant. The following table summarizes the stock option activity for the years ended June 30, 1998, 1997 and 1996 under the Option Plan. See accompanying notes to consolidated financial statements. F-21 Options Outstanding Number of Option Price Shares Per Share ----------------------------------------- Balance at June 30, 1995 634,946 $ 0.50-1.00 Granted 175,000 7.75 Expired or canceled (341,323) 0.50-1.00 Exercised (17,000) 0.50 Balance at June 30, 1996 451,623 0.50-7.75 Granted 510,000 3.25-9.00 Expired or canceled (20,000) 0.50-5.00 Exercised (102,400) 0.50-1.00 Balance at June 30, 1997 839,223 0.50-9.00 Granted 635,000 2.75-7.75 Expired or canceled (250,000) 0.50-7.25 Exercised (274,223) 0.50-3.38 Balance at June 30, 1998 950,000 $ 2.75-9.00 ========================================= In June 1996, in connection with an employment agreement with an officer of WorldNow, a principal stockholder granted an option to the officer to purchase 237,500 shares of restricted common stock from the principal stockholder at $1.50 per share. As discussed in Note 8, during the year ended June 30, 1996 the Company sold shares of restricted common stock in a private placement at $7.75 per share; accordingly, the Company recognized $1,484,375 of compensation expense related to this transaction during the year ended June 30, 1996. Stock-Based Compensation The Company has elected to continue to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans as they relate to employees and directors. SFAS No. 123, "Accounting for Stock-Based Compensation," requires pro forma information regarding net income (loss) as if the Company had accounted for its stock options granted to employees and directors subsequent to June 30, 1995 under the fair value method of SFAS No. 123. The fair value of these stock options was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions: average risk-free interest rates of 5.50, 6.47 and 5.86 percent in fiscal years 1998, 1997 and 1996, respectively, a dividend yield of 0 percent, volatility factors of the expected common stock price of 88.91, 77.80 and 77.80 percent, respectively, and weighted average expected lives ranging from one to nine years for the stock options. For purposes of the pro forma disclosures the estimated fair value of the stock options is amortized over the vesting periods of the respective stock options. Following are the pro forma disclosures and the related impact on net loss for the years ended June 30, 1998, 1997 and 1996: See accompanying notes to consolidated financial statements. F-22 1998 1997 1996 --------------------------------------------------- Net loss: As reported $ (1,790,934) $ (9,340,816) $ (3,433,081) Pro forma (4,895,300) (10,378,303) (3,926,658) Net loss per share (basic and diluted): As reported (0.21) (1.12) (0.58) Pro forma (0.58) (1.25) (0.66) Because the SFAS No. 123 method of accounting has not been applied to options granted prior to June 30, 1995, and due to the nature and timing of option grants, the resulting pro forma compensation cost may not be indicative of future years. (10) EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) profit sharing plan for the benefit of its employees. All employees are eligible to participate and may elect to contribute to the plan annually. The Company has no obligation to contribute and did not contribute additional matching amounts to the Plan during any year presented. (11) RELATED-PARTY TRANSACTIONS During the year ended June 30, 1994, the Company made cash loans to two officers totaling $46,000, which were settled during the year ended June 30, 1995, except for $1,000 which was settled during the year ended June 30, 1997. Prior to July 1, 1995, the Company had borrowed money from certain officers. Additional borrowings of $50,000 were made during the year ended June 30, 1996. Principal payments on these notes were $1,666, and $199,500 during the years ended June 30, 1997 and 1996, respectively. The amounts due on these loans at June 30, 1997 and 1996 were $0 and $1,666, respectively. During the year ended June 30, 1996, the Company borrowed $500,000 from a bank to fund computer equipment purchases. Certain officers and shareholders guaranteed the loan. In exchange for the guarantee, such persons received a one-year option to purchase 25,000 shares of common stock at $5.00 per share (see Note 9). During the year ended June 30, 1997, the Company negotiated services and equipment purchase agreements with CasinoWorld Holdings, Ltd. and Barrons Online, Inc., companies in which one of the Company's directors and shareholders has an ownership interest. Under the agreements, the Company provided software development services, configured hardware and other computer equipment and related facilities amounting to $410,292. As of June 30, 1998, the Company had a receivable from these companies in the amount of $148,576. The Company had agreed to repurchase shares of its common stock as settlement for the receivable. Accordingly, the receivable is reflected as contra equity in the accompanying June 30, 1998 consolidated balance sheet. (12) SUBSEQUENT EVENT Agreement to Sell Certain Assets Related to WorldNow On July 15, 1998, the Company signed an agreement to sell certain assets related to the Company's Internet-related business branded under the "WorldNow" and WorldNow Online Network" marks to Gannaway Web Holdings, LLC ("Gannaway"). The assets related primarily to the national Internet-based network of local television stations. Pursuant to the asset purchase agreement, Gannaway agreed to pay $487,172 (less certain amounts as defined) in installments over a one-year period from the date of closing and agreed to pay earn-out payments of up to $500,000. The earn-out payments are based upon ten percent of monthly revenues actually received by the buyer in excess of $100,000 and are to be paid See accompanying notes to consolidated financial statements. F-23 quarterly. The purchaser acquired tangible assets of approximately $100,000 and assumed no liabilities. The operations of WorldNow have been reflected in the accompanying consolidated financial statements in loss from continuing operations. See accompanying notes to consolidated financial statements. F-24 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL COURIER TECHNOLOGIES, INC. Dated: October 12, 1998 By /s/ James A. Egide ----------------------------------------- James A. Egide, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ James A. Egide Director and Chairman October 12, 1998 - ---------------------------- of the Board James A. Egide /s/ Raymond J. Pittman Director and Chief October 12, 1998 - ---------------------------- Operating Officer Raymond J. Pittman /s/ Mitchell L. Edwards Director, Executive Vice President, October 12, 1998 - ---------------------------- and Chief Financial Officer Mitchell L. Edwards Director October , 1998 - ---------------------------- Glen Hartman Director October , 1998 - ---------------------------- Kenneth Woolley /s/ Michael D. Bard Controller October 12, 1998 - ---------------------------- Michael D. Bard
See accompanying notes to consolidated financial statements. EX-3.(I) 2 ARTICLES OF INCORPORATION Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF DATAMARK HOLDING, INC. (Originally incorporated as Exchequer, Inc. To be known hereafter as Digital Courier Technologies, Inc.) The following Amended and Restated Certificate of Incorporation of DataMark Holding, Inc. amends and restates the provisions of and supersedes the Certificate of Incorporation filed with the Secretary of State of the State of Delaware on May 16, 1985 in its entirety and any and all certificates of amendment filed with the Secretary of State of the State of Delaware prior to September 16, 1998. ARTICLE I NAME ---- The name of the corporation hereby created shall be Digital Courier Technologies, Inc. ARTICLE II DURATION -------- The Corporation shall continue in existence perpetually unless sooner dissolved according to law. ARTICLE III PURPOSES -------- The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV CAPITALIZATION -------------- The total number of shares of stock of all classes which the Corporation shall have authority to issue is Twenty Two Million Five Hundred Thousand (22,500,000), of which Twenty Million (20,000,000) shares shall have the 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"). ARTICLE V CLASSES OF STOCK ---------------- A statement of the designations and the powers, preferences, and rights, and the qualifications, limitations, or restrictions thereof, of the shares of stock of each class which the Corporation shall be authorized to issue, is as follows: (a) Preferred Stock. Shares of preferred stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors. Each series shall be distinctly designated. All shares of any one series of the preferred stock shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative. The powers, preferences, participating, optional and other rights of each such series qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. Subject to the provisions of subparagraph (i) of Paragraph (c) of this Article V, the Board of Directors of this Corporation is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of each particular series of preferred stock, the designation, powers, preferences and relative, participating, optional and other rights and the qualifications, limitations and restrictions thereof, if any, of such series, including, without limiting the generality of the foregoing the following: (i) The distinctive designation of , and the number of shares of preferred stock which shall constitute, the series, which number may be increased (except as otherwise fixed by the Board of Directors) or decreased (but not below the number of shares thereof outstanding) from time to time by action of the Board of Directors; (ii) The rate and times at which, and the terms and conditions upon which, dividends, if any, on shares of the series shall be paid, the extent of preferences or relation, if any, of such dividends to the dividends payable on any other class or classes of stock of this Corporation, or on any series of preferred stock, and whether such dividends shall be cumulative or noncumulative; (iii)The right, if any, of the holders of shares of the series to convert the same into, or exchange the same for any other series, or any other class or classes of stock of this Corporation, and the terms and conditions of such conversion or exchange; (iv) Whether shares of the series shall be subject to redemption, and the redemption price or prices, including, without limitation, a redemption price or prices payable in shares of the Common Stock, cash or other property and the time or times at which, and the terms and conditions upon which, shares of the series may be redeemed; (v) The rights, if any, of the holders of shares of the series upon voluntary or involuntary liquidation merger, consolidation, distribution or sale of assets, dissolution or winding up of this Corporation; (vi) The terms of the sinking fund or redemption or purchase account, if any, to be provided for shares of the series; and (vii)The voting powers, if any, of the holders of shares of the series which may, without limiting the generality of the foregoing, include (A) the right to more or less than one vote per share on any or all matters voted upon by the shareholders and (B) the right to vote as a series by itself or together without preferred stock as a class, upon such matters, under such circumstances and upon such conditions as the Board of Directors may fix, including, without limitation, the right, voting as a series by itself or together with other series of preferred or together with all series of preferred stock as a class, to elect one or more directors of this Corporation in the event there shall have been a default in the payment of dividends on any one or more series of preferred stock or under such other circumstances and upon such conditions as the Board may determine. (b) Common Stock. The Common Stock shall be non-assessable and shall not have cumulative voting rights or pre-emptive rights. In addition, the Common Stock shall have the following powers, preferences, rights, qualifications, limitations and restrictions. ------------- (i) After the requirements with respect to preferential dividends of preferred stock (fixed in accordance with the provisions of Paragraph (a) of this Article V), if any, shall have been met and after this Corporation shall comply with all the requirements, if any, with respect to the setting aside of funds as sinking funds or redemption or purchase accounts (fixed in accordance with provisions of Paragraph (a) of this Article V) and subject further to any other conditions which may be fixed in accordance with the provisions of paragraph (a) of this Article V, but not otherwise, the holders of Common Stock shall be entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors. (ii) After distribution in full of the preferential amount (fixed in accordance with the provisions of Paragraph (a) of this Article V), if any, to be distributed to the holders of preferred stock in the event of a voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of this Corporation, the holders of the Common Stock shall be entitled to receive all of the remaining assets of this Corporation, tangible and intangible, of whatever kind available for distribution to stockholders, ratably in proportion to the number of shares of the Common Stock held by each; (iii) Shares of the Common Stock may be issued from time to time as the Board of Directors shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors; (iv) No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any pre-emptive right to purchase or subscribe for any unissued stock of any class or series of any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, or bonds, certificate of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any rights to purchase stock of any class or series, but any such unissued stock, additional authorized issue of shares of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such person, firms, corporation or associations, whether such holders or others, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. (c) Other Provisions. The relative powers, preferences and rights of each series of preferred stock in relation to the powers, preferences and rights of each other series of preferred stock shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to authority granted in Paragraph (a) of this Article V, and the consent by class or series vote or otherwise, of the holders of the preferred stock of such of the series of preferred stock as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of preferred stock whether the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with the powers, preferences and rights of such outstanding series, or any of them: provided, however, that the Board of Directors may provide in such resolution or resolutions adopted with respect to any series of preferred stock that the consent of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of preferred stock. (ii) Subject to the provisions of subparagraph (i) of this Paragraph, shares of any series of preferred stock may be issued from time to time as the Board of Directors shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. (iii) Shares of the Common Stock may be issued from time to time as the Board of Directors shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. (iv) No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any pre-emptive right to purchase or subscribe for any unissued stock of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, or bonds, certificate of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any rights to purchase stock of any class or series, but any such unissued stock, additional authorized issue of shares of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, whether such holders or others, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. ARTICLE VI BYLAWS ------ In furtherance and not in limitation of the powers conferred by the statute, the Board of Directors is expressly authorized to make, alter or repeal the Bylaws of the Corporation. ARTICLE VII MEETINGS AND RECORDS -------------------- Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. Elections of directors need not be by written ballot unless the Bylaws of the Corporation so provide. ARTICLE VIII REGISTERED OFFICE AND AGENT --------------------------- The name of the Corporation's registered agent and address of its registered office in the State of Delaware are: The Corporation Trust Company County of New Castle 1209 Orange Street Wilmington, Delaware 19801 ARTICLE IX REMOVAL OF DIRECTORS -------------------- Any director of the Corporation may be removed for cause at any annual or special meeting of the shareholders by the same vote as that required to elect a director provided, that such director prior to his removal shall receive a copy of the charges against him, delivered to him personally or by mail at his address appearing on the records of the Corporation, at least thirty (30) days prior to the meeting at which such removal is to be considered, and such director has an opportunity to be heard on such charges at the meeting of shareholders of the Corporation at which the question of his removal is to be considered. ARTICLE X INDEMNIFICATION OF OFFICERS AND DIRECTORS ----------------------------------------- The Corporation shall indemnify any and all persons who may serve or who have served at any time as director or officers, or who, at the request of the Board of Directors of the Corporation, may serve, or at any time have served as directors or officers of another corporation in which the Corporation at such time owned or may own shares of stock, or which it was or may be a creditor, or may own shares of stock, or which it was or may be a creditor, and the respective heirs, administrators, successors, and assigns, against any and all expenses, including amounts paid upon judgment, counsel fees, and amounts paid in settlement (before or after suit is commenced), actually or necessarily by such persons in connection with the defense or settlement of any claim, action, suit, or proceeding in which they, or any of them, are made parties, or a party, or which may be assessed against them or any of them, by reason of being or having been directors or officers of the Corporation, or such other corporation, except in relation to matters as to which any such director or officer of the Corporation, or such other corporations, or former director or officer shall be adjudged in any action, suit or proceeding to be liable for his own negligence of misconduct in performance of his duties. Such indemnification shall be in addition to any other rights to which those indemnified may be entitled under any Law, by-law, agreement, vote of stockholders or otherwise. ARTICLE XI AMENDMENT --------- Except as set forth herein and in the General Corporation Law of the State of Delaware, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders are granted subject to this reservation. ARTICLE XII OFFICERS' AND DIRECTORS' CONTRACTS ---------------------------------- No contract or other transactions between this Corporation and any other firm or corporation shall be affected by the fact that a director or officer of this Corporation has an interest in, or is a director or officer of such firm or other corporation. Any officer or director, individually or with others, may be a party to , or may have an interest in, any transaction of this Corporation or any transaction in which this Corporation is a party or has an interest. Each person who is now or may become an officer or director of this Corporation is hereby relieved from liability that he might otherwise obtain in the event such officer or director contracts with this Corporation for the benefit of himself or any other firm or corporation in which he may have an interest, provided such officer or director acts in good faith. This Amended and Restated Certificate of Incorporation of the Corporation was duly adopted in accordance with the provisions of Sections 242 and 245 to the General Corporation law of the State of Delaware. IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO BE SIGNED BY MITCHELL EDWARDS, ITS' SECRETARY, THIS DAY OF SEPTEMBER, 1998. ------------------------- DataMark Holdings, Inc. ------------------------- By: Mitchell Edwards Its: Secretary EX-3.(II) 3 BY-LAWS Exhibit 3.2 BY-LAWS OF DIGITAL COURIER TECHNOLOGIES, INC. A Delaware corporation Article I Identification Section 1.1. Name. The name of the Corporation is Digital Courier Technologies, Inc. Section 1.2. Registered Office and Registered Agent. The address of the registered office of the corporation shall be 1209 Orange Street, Wilmington, Delaware 19801 and the name of the registered agent at such address is The Corporation Trust Company. Section 1.3. Principal Business Office. The principal office and place of business of the Corporation shall be located at 136 Heber Avenue, Park City, Utah 84068-1990, or at such other location, either within or without the State of Delaware, as the Board of Directors may from time to time designate. The Corporation may have such other offices, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the Corporation may from time to time require. Article II Stockholders, Stock Section 2.1. Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. Section 2.2. Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by the Board of Directors, or by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority include the power to call such meetings, but such special meetings may not be called by any other person or persons. Section 2.3. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such a meeting. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Section 2.4. Adjournments. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than sixty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 2.5. Quorum. At each meeting of stockholders, except where otherwise provided by law or the Certificate of Incorporation or these by-laws, the holders of one-third of the outstanding shares of stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum. In the absence of a quorum, the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 2.4 of these by-laws until a quorum shall attend. Section 2.6. Organization. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in his absence by a Vice President, or in the absence of the foregoing persons, by a chairman designated by the Board of Directors, or in the absence of such designation, by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.7. Voting; Proxies. Each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by him which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall b irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. At all meetings of stockholders for the election of directors a plurality of the votes cast shall be sufficient to elect. All other elections and questions shall, unless otherwise provided by law or by the Certificate of Incorporation or these by-laws, be decided by the vote of the holders of a majority of the outstanding shares of stock entitled to vote thereon present in person or by proxy at the meeting. Section 2.8. Fixing Date for Determination of Stockholders of Record. (a) In order that the Corporation may determined the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not precede the date such record date is fixed and shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given. The record date for any other purpose other than stockholder action by written consent shall be at the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or any officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. Section 2.9. List of Stockholders Entitled to Vote. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examin the stock ledger, the list of stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 2.10. Action by Consent of Stockholders. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 2.11. Certificates. Every holder of stock shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by him in the Corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 2.12. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE III Board of Directors Section 3.1. Number; Qualifications. The Board of Directors shall consist of at least three or more members, the actual number thereof to be determined from time to time by resolution of the Board of Directors. Directors need not be stockholders. Section 3.2. Election; Resignation; Removal; Vacancies. At each annual meeting of stockholders, the stockholders shall elect the Directors of the corporation, or, in the case of Directors elected for a specified term, the stockholders shall replace those Directors whose terms then expire. Any Director may resign at any time upon written notice to the Corporation. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the Board, although such majority is less than a quorum, or by a plurality of the votes cast at a meeting of stockholders, and each Director so elected shall hold office until the expiration of the term of office of the Director whom he has replaced. Section 3.3. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine, and if so determined notices thereof need not be given. Section 3.4. Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the President, any Vice President, the Secretary, or by any member of the Board of Directors. Reasonable notice thereof shall be given by the person or persons calling the meeting, not later than the second day before the date of the special meeting. Section 3.5. Telephonic Meetings Permitted. Members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and the participation in a meeting is pursuant to this by-law shall constitute presence in person at such meeting. Section 3.6. Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the whole Board shall constitute a quorum for the transaction of business. Except in cases in which the Certificate of Incorporation or these by-laws otherwise provide, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 3.7. Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 3.8. Informal Action by Directors. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE IV Committees Section 4.1. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporatio to be affixed to all papers which may require it; bur no such committee shall have power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law, fix any of the preferences or rights of such shares, except voting rights of the shares), adopting an agreement of merge or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, or amending these by-laws; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Section 4.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these by-laws. ARTICLE V Officers Section 5.1. Executive Officers; Election; Qualifications; Term of Office; Resignation; Removal; Vacancies. The Board of Directors shall choose a Chief Executive Officer, a President and Secretary, and it may, if it so determines, choose a Chairman of the Board and a Vice Chairman of the Board from among its members. The Board of Directors may also choose one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next succeeding this election, and until his successor is elected and qualified or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The Board of Directors may remove any officer with or without cause at any time, but such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. Any number of offices may be held by the same person. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. Section 5.2. Powers and Duties of Executive Officers. The officers of the Corporation shall have such powers and duties in the management of the Corporation as may be prescribed by the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors. The Board of Directors may require any officer, agent or employee to give security for the faithful performance of his duties. Section 5.3 Policies and Procedures. The Board of Directors may, by resolution, establish policies and procedures regarding the operation and management of the Corporation by the Officers and Directors, including, but not limited to, actions requiring the prior consent of the Board of Directors of a Committee of the Board of Directors. ARTICLE VI Miscellaneous Section 6.1. Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. Section 6.2. Seal. The corporate seal shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors and Committees. Any written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. Section 6.4. Indemnification of Directors, Officers and Employees. The Corporation shall indemnify to the full extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the Corporation or any predecessor of the Corporation or serves or served any other enterprise as a director. Officer or employee at the request of the Corporation or any predecessor of the Corporation. . Section 6.5. Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors of officers are directors of officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 6.6. Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of any information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 6.7. Amendment of By-laws. These by-laws may be altered or repealed, and new by-laws made, by the Board of Directors, but the stockholders may make additional by-laws and may alter and repeal any by-laws whether adopted by them or otherwise. CERTIFICATE OF SECRETARY KNOW ALL MEN BY THESE PRESENTS: That the undersigned does hereby certify that he is the Secretary of the Corporation; that the foregoing by-laws of said Corporation were duly and regularly adopted as such by the Board of Directors effective _____________, 199_; and that the foregoing by-laws are now in full force and effect. ------------------------------- Secretary EX-10 4 MATERIAL CONTRACTS Exhibit 10.3 Confidential INTERACTIVE MARKETING AGREEMENT ------------------------------- This Interactive Marketing Agreement (the "Agreement") dated as of June 1, 1998 (the "Effective Date"), is between America Online, Inc. ("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia 20166, and DataMark Holding Inc., a Delaware corporation, d/b/a Digital Courier Technologies, Inc., ("MP"), with offices at 448 E. Winchester Street, Suite 400, Salt Lake City, Utah 84107. AOL and MP may be referred to individually as a "Party* and collectively as the "Parties." INTRODUCTION ------------ AOL and MP each desires to enter into an interactive marketing relationship whereby AOL will promote and distribute an interactive site referred to (and further defined) herein as the Affiliated MP Site. This relationship is further described below and is subject to the terms and conditions set forth in this Agreement. Defined terms used but not defined in the body of the Agreement will be as defined on Exhibit B attached hereto. TERMS ----- 1 . PROMOTION, DISTRIBUTION AND MARKETING. -------------------------------------- 1.1. AOL Promotion of Affiliated MP Site. AOL will provide MP with the promotions (or any comparable promotions as provided below) for the Affiliated MP Site described on Exhibit A (the "Promotions"). Subject to MP's reasonable approval, AOL will have the right to fulfill its promotional commitments with respect to any of the foregoing by providing MP with comparable promotional placements in appropriate alternative areas of the AOL Network. In addition, if AOL is unable to deliver any particular Promotion, subject to MP's reasonable approval, AOL will provide MP, as its sole remedy, with a comparable promotional placement. AOL reserves the right to redesign or modify the organization, structure, "look and feel," navigation and other elements of the AOL Network at any time. In the event such modifications materially and adversely affect any specific Promotion, subject to MP's reasonable approval, AOL will provide MP, as its sole remedy, with a comparable promotional placement. 1.2. Impressions. During the Term, AOL shall deliver Five Hundred Million (500,000,000) Impressions to MP through the Promotions (the "Impressions Commitment"). With respect to the Impressions Commitment, any shortfall in Impressions at the end of a year will not be deemed a breach of the Agreement by AOL; instead such shortfall will be added to the Impressions target for the subsequent year. In the event there is (or will be in AOL's reasonable judgment) a shortfall in Impressions as of the end of the Initial Term (a "Final Shortfall"), AOL will provide MP, as its sole remedy, with advertising placements on the AOL Network which have a total value, based on AOL's then-current advertising rate card, equal to the value of the Final Shortfall (determined by multiplying the percentage of Impressions that were not delivered by the total, guaranteed payment provided for below). In the event AOL provides an excess of Impressions in any year, the Impressions target for the subsequent year will be reduced by the amount of such windfall. 1.3 AOL.com Promotions. ------------------- (i) AOL Option. On or prior to June 30, 1998 (the "Closing Date"), AOL shall have the option (the "AOL Option"), exercisable in AOL's sole discretion, to provide MP with the additional package of promotions and placements on AOL.com as provided on Exhibit A-1 attached hereto (the "AOL.com Promotions"), by providing MP with written 1 notice, which notice shall be attached hereto as an appendix and will be incorporated as part of this Agreement. Should AOL exercise the AOL Option, MP shall accept the AOL.com Promotions and shall immediately begin payment of the amounts required pursuant to Section 4.2 hereof. In such event, the AOL.com Promotions will be applied towards fulfilling the Impressions Commitment and such AOL.com Promotions will be deemed to be a part of the Promotions as defined in Section 1.1 hereof. (ii) AOL.com Promotions. Provided that AOL has exercised the AOL Option, at any time during the Term, AOL shall have the right to cease the AOL.com Promotions by providing MP with at least thirty (30) days notice of its intent to do so. In the event that AOL exercises the foregoing right, AOL shall forfeit all rights in and to any unvested Performance Warrant Shares granted to AOL pursuant to Section 5 hereof. Notwithstanding the foregoing, in no event will AOL provide less than the Impressions Commitment through the Promotions. (iii) AOL.com Premier Position. In the event that AOL decides to offer a premier video partner position to any third party on AOL.com which is similar to the Premier Video Partner position provided to MP in Section 3 hereof, AOL shall enter into good faith negotiations with MP for a period of time not to exceed fifteen (15) days with respect to offering a premier video position to MP on AOL.com. 1.4. Content of Promotions. Promotions for MP will link only to the Affiliated MP Site and will promote only the Premier Product. The specific MP Content to be contained within the Promotions (including, without limitation, advertising banners and contextual promotions) (the Promo Content") will be determined by MP, subject to AOL's technical limitations, the terms of this Agreement and AOL's then-applicable policies relating to advertising and promotions. MP will submit in advance to AOL for its review a quarterly online marketing plan with respect to the Affiliated MP Site. The Parties will meet in person or by telephone at least monthly to review operations and performance hereunder, including a review of the Promo Content to ensure that it is designed to maximize performance. MP will consistently update the Promo Content no less than twice per week. Except to the extent expressly described herein, the specific form, placement, duration and nature of the Promotions will be as determined by AOL in its reasonable editorial discretion (consistent with the editorial composition of the applicable screens). 1.5. MP Promotion of Affiliated MP Site and AOL. As set forth in fuller detail in Exhibit C, MP will promote AOL as its preferred Interactive Service and will promote the availability of the Affiliated MP Site through the AOL Network. MP will not implement or authorize any promotion similar in any material respect (including, without limitation, in scope, purpose, amount, prominence or regularity) to the promotion required or provided pursuant to Exhibit C for any other Interactive Service. 2. AFFILIATED MP SITE. ------------------- 2.1. Customized Site. The Affiliated MP Site shall be a customized, optimized and "mirrored" version of MP's main web site containing the specific Content described in Section 2.2 below. 2.2. Content. MP will make available through the Affiliated MP Site the comprehensive offering of Products and other related Content described on Exhibit D. Except as mutually agreed in writing by the Parties, the Affiliated MP Site will contain only Content that is directly related to the MP Products listed on Exhibit D and will not contain any third-party products, services, programming or other Content. All sales of Products through the Affiliated MP Site will be conducted through a direct sales format; MP will not promote, sell, offer or otherwise distribute 2 34434-3 any products through any format other than a direct sales format (e.g., through auctions or clubs) without the prior written consent of AOL. MP will review, delete, edit, create, update and otherwise manage all Content available on or through the Affiliated MP Site in accordance with the terms of this Agreement. MP will ensure that the Affiliated MP Site does not in any respect promote, advertise, market or distribute the products, services or content of any other Interactive Service or any entity reasonably construed to be in competition with AOL. 2.3. Production Work. Except as agreed to in writing by the Parties pursuant to the "Production Work" section of the Standard Online Commerce Terms & Conditions attached hereto as Exhibit F, MP will be responsible for all production work associated with the Affiliated MP Site, including all related costs and expenses. 2.4. Hosting: Communications. MP will be responsible for all communications, hosting and connectivity costs and expenses associated with the Affiliated MP Site. In addition, MP will provide all computer hardware (e.g., servers, network devices, routers, switches, telephones and other similar equipment) and all computer software (e.g., web servers, operating systems, applications, databases and other similar resources) necessary for MP to access the AOL Network. Additionally MP will bear responsibility for the implementation, management and costs associated with the Affiliated MP Site. MP will utilize a dedicated high speed connection to maintain quick and reliable transport of information to and from the MP data center and AOL's designated data center. 2.5. Technology. MP will take all reasonable steps necessary to conform its promotion and sale of Products through the Affiliated MP Site to the then-existing technologies identified by AOL which are optimized for the AOL Service. Additionally, MP shall have the right to make available to AOL users (i) "streaming audio or video" or any comparable audio or video delivery technology and (ii) "wav" files, mpeg files or other downloadable, nonstreamed audio or video files through any linked pages of the Affiliate MP Site; provided that, MP shall not make available any full length Video Products or any substantial portion thereof through the products described in either clause (i) or (ii) above, and (b) if MP's provision of the foregoing products result in an increase in AOL's network costs, AOL shall have the right to restrict MP's offering of the foregoing and the Parties shall renegotiate the economic terms of this Agreement. AOL will be entitled to require reasonable changes to the Content (including, without limitation, the features or functionality) within any linked pages of the Affiliated MP Site to the extent such Content will, in AOL's good faith judgment, adversely affect any operational aspect of the AOL Network. AOL reserves the right to review and test the Affiliated MP Site from time to time to determine whether the site is compatible with AOL's then-available client and host software and the AOL Network. 2.6. Product Offering. MP will ensure that the Affiliated MP Site includes all of the Products and other Content (including, without limitation, any features, offers, contests, functionality or technology) that are then made available by or on behalf of MP through any Additional MP Channel; provided, however, that (a) such inclusion will not be required where it is commercially or technically impractical to either Party (i.e., inclusion would cause either Party to incur substantial incremental costs); and (b) the specific changes in scope, nature and/or offerings required by such inclusion will be subject to AOL's review and approval and the terms of this Agreement. 2.7. Pricing and Terms. MP will ensure that: (a) the prices (and any other required consideration) for Products in the Affiliated MP Site do not exceed the prices for the Products or substantially similar Products offered by or on behalf of MP through any Additional MP Channel; (b) the terms and conditions related to Products in the Affiliated MP Site are no less favorable in any respect than the terms and conditions for the Products or substantially similar Products offered by or on behalf of MP through any Additional MP Channel; and (c) both the prices and 3 34434-3 the terms and conditions related to Products in the Affiliated MP Site are reasonably and generally competitive in all material respects with the prices and terms and conditions for the Products or substantially similar Products offered by third parties which offer Video Products through any Interactive Site. 2.8. Special Offers. MP will (a) promote through the Affiliated MP Site any special or promotional off ers made available by or on behalf of MP through any Additional MP Channel and (b) promote through the Affiliated MP Site on a regular and consistent basis special offers exclusively available to AOL Members and /or AOL Users ((a) and (b) collectively, the "Special Offers"). MP will provide AOL with reasonable prior notice of Special Offers so that AOL can market the availability of such Special Offers in the manner AOL deems appropriate in its editorial discretion, subject to the terms and conditions hereof. 2.9. Operatinq Standards. MP will ensure that the Affiliated MP Site complies at all times with the standards set forth in Exhibit E attached hereto. To the extent site standards are not established in Exhibit E with respect to any aspect or portion of the Affiliated MP Site (or the Products or other Content contained therein), MP will provide such aspect or portion at a level of accuracy, quality, completeness, and timeliness which meets or exceeds prevailing standards in the video sale and rental industry. In the event MP fails to comply with any material terms of this Agreement or any Exhibits attached hereto, AOL will have the right (in addition to any other remedies available to AOL hereunder) to decrease the promotion it provides to MP hereunder (and to decrease or cease any other contractual obligation hereunder) until such time as MP corrects its non-compliance (and in such event, AOL will be relieved of the proportionate amount of any promotional commitment made to MP by AOL hereunder corresponding to such decrease in promotion) and (b) any revenue threshold(s) set forth in Section 4.2 will each be adjusted proportionately to correspond to such decrease in promotion and other obligations during the period of non-compliance. 2.10. Advertising Sales. MP shall have the right to sell promotions, advertisements, links pointers or similar services or rights through the Affiliated MP Site ("Advertisements"). The specific advertising inventory within the Affiliated MP Site will be as reasonably determined by MP. Notwithstanding the foregoing, in the event that MP desires to retain a third party to sell advertising in the Affiliated MP Site on behalf of MP, MP shall first offer to AOL the right to sell such Advertisements on behalf of MP. MP and AOL shall share the revenues derived from the sale of Advertisements in the Affiliated MP Site pursuant to Section 4.4 hereof. All Advertisements in the Affiliated MP Site shall be subject to AOL's then-applicable advertising policies, exclusivities and prior approval. 2.11. Traffic Flow. MP will take reasonable efforts to ensure that AOL traffic is either kept within the Affiliated MP Site or channeled back into the AOL Network (with the exception of advertising links sold and implemented pursuant to the Agreement). The Parties will work together on implementing mutually acceptable links from the Affiliated MP Site back to the AOL Service. 3. PREMIER STATUS. --------------- 3.1. Premier Product Provided MP is in compliance with all material terms of this Agreement, during the Initial Term, MP will be one of only two third-party resellers of Premier Products (each a "Premier Video Partner") expressly promoted by AOL on the Premier Screens of the AOL Service as provided on Exhibit A attached hereto. 3.2. Exceptions. Notwithstanding anything to the contrary contained in this Section 3 (and without limiting any actions which may be taken by AOL without violation of MP's rights hereunder), no provision of this Agreement will limit AOL's ability (on or off the AOL Network) to: (i) undertake activities or perform duties pursuant to existing arrangements with third parties (or 4 34434-3 pursuant to any agreements to which AOL becomes a party subsequent to the Effective Date as a result of a Change of Control, assignment, merger, acquisition or other similar transaction); (ii) promote or provide "run of service" advertisement placements; (iii) promote or provide advertisement placements to any third party in any shopping area or channel; (iv) promote or provide advertisement placements to any video club, motion picture, television or film studio or any entity which creates films, television programs, or motion picture theatrical productions; (v) promote or provide advertisement placements to any reseller of Video Products, provided that, except for the other Premier Video Partner, such promotions or advertisements cannot promote any online transactions in connection with Video Products or link to a web site which offers online transactions in connection with Video Products; (vi) enter into an arrangement with any third party for the primary purpose of acquiring AOL Members whereby such party is allowed to promote or market products or services to AOL Members that are acquired as a result of such agreement; (vii)create contextual links or editorial commentary relating to any third party marketer of the Premier Product; or (viii) promote, advertise or distribute the products of any third party which is an aggregator of products (i.e., it is primarily engaged in activities other than marketing Video Products) each an "Aggregator"); provided that such promotions do not expressly promote an Aggregator's Premier Product within the Premier Screens. 3.3. Product Offer Right. In the event that MP does not offer certain Video Products through the Affiliated MP Site, and if AOL, in its reasonable judgment, determines that the offering of such Video Products is important to a good AOL User experience, MP shall have thirty (30) days after notice from AOL to provide such Video Products in the MP Affiliated Site, and if within such thirty (30) day period MP is unable to provide such Video Products, AOL shall have the right to engage other third parties to provide such Video Products. 4. PAYMENTS. --------- 4.1. Guaranteed AOL Service Payments. MP will pay AOL a non-refundable guaranteed payment of Twelve Million Dollars (US $12,000,000) as follows: (i) One Million Two Hundred Thousand Dollars (US $1,200,000) upon execution of this Agreement; (ii) Four Million Dollars (US $4,000,000) on or prior to January 1, 1999; (iii) Four Million Dollars (US $4,000,000) on or prior to July 1, 1999; and (iv) Two Million Eight Hundred Thousand Dollars (US $2, 800,000) on or prior to January 1, 2000. (v) Notwithstanding the foregoing, all payments required pursuant to this Section 4.1 shall immediately become due and payable within five (5) days of the occurrence of an underwritten secondary public offering of shares of MP resulting in net proceeds to MP of at least Twenty Million Dollars (US $20,000,000). 4.2 Guaranteed AOL.com Payments. In the event that AOL exercises the AOL Option pursuant to Section 1.3 hereof, on the Closing Date, MP shall deliver to AOL either (i) an aggregate of nine hundred fifty five thousand four hundred fourteen (955,414) shares of common stock of MP (the "Common Stock") or (ii) in the event that the ten day trailing average closing price per price of the Common Stock reported on the NASDAQ Stock Market ("the Market Price") as of the Closing Date, is less than the Market Price as of the execution date hereof, such number of shares of Common Stock as determined by dividing (i) the Market Price as of the Closing Date into (ii) Six Million Dollars (US $6,000,000). 5 34434-3 4.3. Sharing of Transaction Revenues. MP shall pay to AOL an amount equal to four tenths of one percent (.4%) of Transaction Revenues until such time as the Revenue Threshold has been met. From and after the Revenue Threshold has been met, MP shall pay to AOL an amount equal to three percent (3%) of all Transaction Revenues generated hereunder. MP will pay all of the foregoing amounts on a quarterly basis within thirty (30) days following the end of the quarter in which the applicable Transaction Revenues were generated. 4.4. Sharing of Advertising Revenues. MP shall pay to AOL an amount equal to fifty percent (50%) of all Advertising Revenues generated hereunder. Each Party will pay the other Party all Advertising Revenues received and owed to such other Party as described herein on a quarterly basis within thirty (30) days following the end of the quarter in which such amounts were generated by such Party. 4.5. Alternative Revenue Streams. In the event MP or any of its affiliates (a) receives or desires to receive, directly or indirectly, any Additional Revenues in connection with the Affiliated MP Site (an "Alternative Revenue Stream"), MP will promptly inform AOL in writing, and the Parties will negotiate in good faith regarding whether MP will be allowed to market Products producing such Alternative Revenue Stream through the Affiliated MP Site, and if so, the equitable portion of revenues from such Alternative Revenue Stream (if applicable) that will be shared with AOL (in no event less than the percentage of Transaction Revenues to be paid to AOL pursuant to this Section 4). 4.6. Late Payments: Wired Payments. All amounts owed hereunder not paid when due and payable will bear interest from the date such amounts are due and payable at the prime rate in effect at such time as listed in the Wall Street Journal. All payments required hereunder will be paid in immediately available, non-refundable U.S. funds wired to the "America Online" account, Account Number 323070752 at The Chase Manhattan Bank, 1 Chase Manhattan Plaza, New York, NY 10081 (ABA: 021000021). 4.7. Auditing Rights. MP will maintain complete, clear and accurate records of all expenses, revenues and fees in connection with the performance of this Agreement. For the sole purpose of ensuring compliance with this Agreement, AOL will have the right, at its expense, to direct an independent certified public accounting firm to conduct a reasonable and necessary inspection of portions of the books and records of MP which are relevant to MP's performance pursuant to this Agreement. Any such audit may be conducted after twenty (20) business days prior written notice. 4.8. Taxes. MP will collect and pay and indemnify and hold AOL harmless from, any sales, use, excise, import or export value added or similar tax or duty not based on AOL's net income, including any penalties and interest, as well as any costs associated with the collection or withholding thereof, including attorneys'fees. 4.9. Reports. -------- 4.9.1. Sales Reports. MP will provide AOL in an automated manner with a monthly report in an AOL-designated format, detailing the following activity in such period (and any other information mutually agreed upon by the Parties or reasonably required for measuring revenue activity by MP through the Affiliated MP Site): summary sales information by day (date, number of Products, number of orders, total Transaction Revenues); and (ii) detailed sales information (order date/time stamp (if technically feasible), purchaser name and screenname, SKU or Product description) (the information in clauses (i) and (ii), "Sales Reports"). AOL will be entitled to use the Sales Reports in its business operations, subject to the terms of this Agreement. More generally, each payment to be made by MP pursuant to this Section 4 will be accompanied 6 34434-3 by a report containing information which supports the payment, including information identifying (i) gross Transaction Revenues and all items deducted or excluded from gross Transaction Revenues to produce Transaction Revenues, including, without limitation, chargebacks and credits for returned or canceled goods or services (and, where possible, an explanation of the type of reason therefor, e.g., bad credit card information, poor customer service, etc.) and (ii) any applicable Advertising Revenues. 4.9.2. Fraudulent Transactions To the extent permitted by applicable laws, MP will provide AOL with an prompt report of any fraudulent order, including the date, screenname or email address and amount associated with such order, promptly following MP obtaining knowledge that the order is, in fact, fraudulent. 5. WARRANTS. --------- 5.1 Grant of Warrants. (i) First Warrant. MP hereby grants to AOL a warrant representing the right for a seven (7) year period to purchase an aggregate of three hundred eighteen thousand four hundred seventy one (318,471) shares of Common Stock (the "Performance Warrant Shares") at an exercise price equal to Twelve Dollars and Fifty Seven Cents ($12.57). (ii) Second Warrant. In the event that MP exercises the AOL Option pursuant to Section 1.3 hereof, on the Closing Date, MP will grant to AOL a warrant representing the right for a seven (7) year period to purchase (i) an aggregate of three hundred eighteen thousand four hundred seventy one (318,471) fully vested shares of Common Stock (the "Time Warrant Shares") at an exercise price equal to Six Dollars and Twenty Eight Cents ($6.28) or (ii) in the event that the Market Price as of the Closing Date is less than the Market Price as of the execution date hereof, such number of fully vested shares of Common Stock as determined by dividing (i) the Market Price as of the Closing Date into (ii)Two Million Dollars (US $2,000,000), at an exercise price equal to the Market Price as of the Closing Date. 5.2 Vesting of Performance Warrant Shares. The Performance Warrant Shares granted hereunder shall vest in accordance with the following schedule: (i) during the second (2nd), third (3rd), fourth (4th ) and fifth (5th ) quarters of the Term, provided that AOL shall have delivered at least twenty five million (25,000,000) Impressions to MP during each of the foregoing quarters, at the end of each such quarter, AOL shall vest in twenty six thousand, five hundred thirty nine (26,539) of the Performance Warrant Shares; and (ii) during the sixth (6th) through thirteenth (13th) quarters of the Term, provided that AOL shall have delivered at least fifty million (50,000,000) Impressions to MP during each of the foregoing quarters, at the end of each such quarter, AOL shall vest in twenty six thousand, five hundred thirty nine (26,539) of the Performance Warrant Shares. (iii) Notwithstanding the foregoing, all Performance Warrant Shares shall immediately vest (a) in the event that AOL and MP shall enter into a binding agreement with respect to the promotion by AOL of other content or commerce offerings of MP, or (b) upon a Change of Control of MP. 7 34434-3 5.3 Terms and Conditions/ Anti-Dilution Rights. MP hereby agrees to use best efforts to amend its current registered "shelf" offering to ensure that any shares of Common Stock granted to AOL hereunder, or any warrants convertible into or exchangeable for Common Stock, shall be granted to AOL from shares of Common Stock that are registered and fully transferable under MP's current "shelf" offering. On the execution date hereof, AOL shall have weighted average anti-dilution protection rights in the event that MP issues any shares of Common Stock or any security convertible into or exchangeable for Common Stock to any person or entity and the consideration per share is less than the exercise price of the Time Warrant Shares (as applicable) or the Performance Warrant Shares. All rights granted in this Section 5.3 are supplementary and additional to any other rights provided herein, including, without limitation, the rights granted in Section 5.1 hereof. 5.4 Approval: Final Agreement. -------------------------- (a) The provisions of this Section 5 contain all of the principal and essential terms and conditions of the Warrant granted to AOL hereunder, and without limiting the foregoing, within thirty (30) days of the execution hereof (the "Cutoff Date"), MP shall issue the Warrant granted hereunder and will enter into a Common Stock Subscription Warrant Agreement substantially in the form of Exhibit H attached hereto which will document the Warrants granted to AOL hereunder. (b) MP hereby acknowledges and agrees that, in the event of a breach of the provisions of this Section 5.4, AOL would be irreparably harmed and it would be impossible for AOL to determine the amount of damages that would result from such breach, and that accordingly, any remedy at law for any such breach or threatened breach thereof, would be inadequate. Accordingly, MP agrees that if the Cutoff Date shall have occurred and MP shall not have executed a Common Stock Subscription Warrant, the provisions of this Section 5.4 may be specifically enforced through equitable and injunctive relief in addition to any other applicable rights or remedies AOL may have, from any court of competent jurisdiction. MP hereby waives the claim or defense that a remedy at law would be adequate in respect to this provision, and agrees to have this Section 5.4 specifically enforced against MP without the necessity of posting bond or other security, and consents to the entry of injunctive relief enjoining or restraining any breach or threatened breach of this Section 5.4. 6. TERM; RENEWAL; TERMINATION. --------------------------- 6.1. Term. Unless earlier terminated as set forth herein, the initial term of this Agreement will be thirty nine (39) months from the Effective Date (the "Initial Term"). 6.2. Renewal. Upon conclusion of the Initial Term of this Agreement, AOL will have the right to renew the Agreement for successive one-year renewal terms (each a "Renewal Term" and together with the Initial Term, the "Term") by providing MP with notice of AOL's intention to renew the Agreement for a subsequent Renewal Term no later than thirty (30) days prior to the commencement of such Renewal Term. During any such Renewal Term: (i) MP will not be required to pay any guaranteed, fixed payment or perform the cross promotional obligations specified in Section 1; and (ii) AOL will not be required to provide MP with the premier promotions as provided in Section 3 and Exhibit A hereof; provided that (iii) for so long as AOL may elect to maintain the premier promotions contained herein during a Renewal Term, MP will continue to perform its cross-promotional obligations. 6.3. Termination for Breach. Except as expressly provided elsewhere in this Agreement, either Party may terminate this Agreement at any time in the event of a material breach of the Agreement by the other Party which remains uncured after thirty (30) days written notice thereof to the other Party (or such shorter period as may be specified elsewhere in this Agreement); provided that AOL will not be required to provide notice to MP 8 34434-3 in connection with MP's failure to make any payment to AOL required hereunder, and the cure period with respect to any scheduled payment will be five(5) days from the date for such payment provided for herein. Notwithstanding the foregoing, in the event of a material breach of a provision that expressly requires action to be completed within an express period shorter than 30 days (e.g., the service level response times set forth in Section 5 of Exhibit E), either Party may terminate this Agreement if the breach remains uncured after written notice thereof to the other Party. 6.4. Termination for Bankruptcy/Insolvency. Either Party may terminate this Agreement immediately following written notice to the other Party if the other Party (i) ceases to do business in the normal course, (ii) becomes or is declared insolvent or bankrupt, (iii) is the subject of any proceeding related to its liquidation or insolvency (whether voluntary or involuntary) which is not dismissed within ninety (90) calendar days or (iv) makes an assignment for the benefit of creditors. 6.5. Termination on Change of Control In the event of (i) a Change of Control of MP resulting in control of MP by an Interactive Service or (ii) a Change of Control of AOL, AOL may terminate this Agreement by providing thirty (30) days prior written notice of such intent to terminate. 6.6. Termination for Failure to Create an Affiliated MP Site. Notwithstanding anything to contrary contained herein, if MP shall not have created an Affiliated MP Site which complies with the provisions hereof (including, without limitation, Sections 2.2, 2.5, 2.6, 2.9, 2.11, and the provisions of Exhibit I attached hereto) prior to August 31, 1998, AOL shall have the right to immediately terminate this Agreement. 6.7. Early Termination Right. Notwithstanding anything to the contrary contained herein, at any time prior to the Closing Date, MP shall have the right to terminate this Agreement (the "Termination Right") by providing AOL with no less than two (2) days written notice thereof, provided that (i) upon exercise of such Termination Right, MP shall pay to AOL a sum of One Million Dollars (US $1,000,000) in lieu of the payments required pursuant to Section 4.1 hereof, and (ii) at such time as AOL shall exercise the AOL Option pursuant to Section 1.3 hereof, MP shall no longer have the right to exercise the Termination Right, and such right shall be void and of no further legal effect. 7. MANAGEMENT COMMITTEE/ARBITRATION. --------------------------------- 7.1. The Parties will act in good faith and use commercially reasonable efforts to promptly resolve any claim, dispute, claim, controversy or disagreement (each a "Dispute") between the Parties or any of their respective subsidiaries, affiliates, successors and assigns under or related to this Agreement or any document executed pursuant to this Agreement or any of the transactions contemplated hereby. If the Parties cannot resolve the Dispute within such time frame, the Dispute will be submitted to the Management Committee for resolution. For ten (10) days following submission of the Dispute to the Management Committee, the Management Committee will have the exclusive right to resolve such Dispute; provided further that the Management Committee will have the final and exclusive right to resolve Disputes arising from any provision of the Agreement which expressly or implicitly provides for the Parties to reach mutual agreement as to certain terms. If the Management Committee is unable to amicably resolve the Dispute during the ten-day period, then the Management Committee will consider in good faith the possibility of retaining a third party mediator to facilitate resolution of the Dispute. In the event the Management Committee elects not to retain a mediator, the dispute will be subject to the resolution mechanisms described below. "Management Committee" will mean a committee made up of a senior executive from each of the Parties for the purpose of resolving Disputes under this Section 7 and generally overseeing the relationship between the Parties contemplated by this 9 34434-3 Agreement. Neither Party will seek, nor will be entitled to seek, binding outside resolution of the Dispute unless and until the Parties have been unable to amicably resolve the Dispute as set forth in this Section 7 and then, only in compliance with the procedures set forth in this Section 7. 7.2. Except for Disputes relating to issues of (i) proprietary rights, including but not limited to intellectual property and confidentiality, and (ii) any provision of the Agreement which expressly or implicitly provides for the Parties to reach mutual agreement as to certain terms (which will be resolved by the Parties solely and exclusively through amicable resolution as set forth in Section 7.1), any Dispute not resolved by amicable resolution as set forth in Section 7.1 will be governed exclusively and finally by arbitration. Such arbitration will be conducted by the American Arbitration Association ("AAA") in Washington, D.C. and will be initiated and conducted in accordance with the Commercial Arbitration Rules ("Commercial Rules") of the AAA, including the AAA Supplementary Procedures for Large Complex Commercial Disputes ("Complex Procedures"), as such rules will be in effect on the date of delivery of a demand for arbitration ("Demand"), except to the extent that such rules are inconsistent with the provisions set forth herein. Notwithstanding the foregoing, the Parties may agree in good faith that the Complex Procedures will not apply in order to promote the efficient arbitration of Disputes where the nature of the Dispute, including without limitation the amount in controversy, does not justify the application of such procedures. 7.3. The arbitration panel will consist of three (3) arbitrators. Each Party will name an arbitrator within ten (10) days after the delivery of the Demand. The two arbitrators named by the Parties may have prior relationships with the naming Party, which in a judicial setting would be considered a conflict of interest. The third arbitrator, selected by the first two, will be a neutral participant, with no prior working relationship with either Party. If the two arbitrators are unable to select a third arbitrator within ten (10) days, a third neutral arbitrator will be appointed by the AAA from the panel of commercial arbitrators of any of the AAA Large and Complex Resolution Programs. If a vacancy in the arbitration panel occurs after the hearings have commenced, the remaining arbitrator or arbitrators may not continue with the hearing and determination of the controversy, unless the Parties agree otherwise. 7.4. The Federal Arbitration Act, 9 U.S.C. Secs. 1-16, and not state law, will govern the arbitrability of all Disputes. The arbitrators will allow such discovery as is appropriate to the purposes of arbitration in accomplishing a fair, speedy and cost-effective resolution of the Disputes. The arbitrators will reference the Federal Rules of Civil Procedure then in effect in setting the scope and timing of discovery. The Federal Rules of Evidence will apply in toto. The arbitrators may enter a default decision against any Party who fails to participate in the arbitration proceedings. 7.5. The arbitrators will have the authority to award compensatory damages only. Any award by the arbitrators will be accompanied by a written opinion setting forth the findings of fact and conclusions of law relied upon in reaching the decision. The award rendered by the arbitrators will be final, binding and non-appealable, and judgment upon such award may be entered by any court of competent jurisdiction. The Parties agree that the existence, conduct and content of any arbitration will be kept confidential and no Party will disclose to any person any information about such arbitration, except as may be required by law or by any governmental authority or for financial reporting purposes in each Party's financial statements. 7.6. Each Party will pay the fees of its own attorneys, expenses of witnesses and all other expenses and costs in connection with the presentation of such Party's case (collectively, "Attorneys' Fees"). The remaining costs of the arbitration, including without limitation, fees of the arbitrators, costs of records or transcripts and administrative fees (collectively, "Arbitration Costs") will be born equally by the Parties. Notwithstanding the 10 34434-3 foregoing, the arbitrators may modify the allocation of Arbitration Costs and award Attorneys' Fees in those cases where fairness dictates a different allocation of Arbitration Costs between the Parties and an award of Attorneys' Fees to the prevailing Party as determined by the arbitrators. 7.7. Any Dispute that is not subject to final resolution by the Management Committee or to arbitration under this Section 6 or by law (collectively, "Non-Arbitration Claims") will be brought in a court of competent jurisdiction in the Commonwealth of Virginia. Each Party irrevocably consents to the exclusive jurisdiction of the courts of the Commonwealth of Virginia and the federal courts situated in the Commonwealth of Virginia, over any and all Non-Arbitration Claims and any and all actions to enforce such claims or to recover damages or other relief in connection with such claims. 8. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set forth on Exhibit F attached hereto and Standard Legal Terms & Conditions set forth on Exhibit G attached hereto are each hereby made a part of this Agreement. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the Effective Date. AMERICA ONLINE, INC. DATAMARK HOLDING, INC., D/B/A DIGITAL COURIER TECHNOLOGIES, INC. By: By: ---------------------------------- ---------------------------------- Print Name: Print Name: -------------------------- -------------------------- Title: Title: ------------------------------- ------------------------------- 11 34434-3 EXHIBIT A AOL Service Placement/Promotions -------------------------------- Screen Description ------ ----------- - --------------------------- ------------------------------------------- Level I Promotions 100,000,000 Impressions - --------------------------- ------------------------------------------- 1 Entertainment Channel Permanent Anchor Tenant Placement; - Home Video Main Premier Screen (launch scheduled for 8/98) - --------------------------- ------------------------------------------- 2 Families Channel - Permanent Anchor Tenant Placement; Weekend Activities Premier Screen (launch scheduled for 8/98) Main - --------------------------- ------------------------------------------- 3 Entertainment Channel, Premium Rotational Banners Run of Channel (Movies, TV, Video, etc.) - --------------------------- ------------------------------------------- 4 Network Programming Seasonal and Holiday Promotional -Seasonal/Holiday Packages; Premium Rotational Banners Contextual Packages - --------------------------- ------------------------------------------- 5 AOL Shopping Permanent Anchor Tenant Placement (will Channel: Books,Music launch at next re-design, scheduled for 8/98) Video Department - --------------------------- ------------------------------------------- 6 Aol Shopping Seasonal and Holiday Premium Rotational Channel: Holiday Gift Banners Programs - --------------------------- ------------------------------------------- 7 Digital Cities National Rotational placements-banners or Page graphic/text intergration - --------------------------- ------------------------------------------- 8 DCI Main City Level Rotational placements-banners or Page graphic/text intergration - --------------------------- ------------------------------------------- 9 Digital Cities-Movie Permanent Anchor Tenant Guide - --------------------------- ------------------------------------------- 10 DCI Entertainment Main Rotational placements-banners or Screens graphic/text intergration - --------------------------- ------------------------------------------- 11 DCI News Screens Rotational placements-banners or graphic/text intergration - --------------------------- ------------------------------------------- 12 DCI Dining and Event Rotational placements-banners or Guides graphic/text intergration - --------------------------- ------------------------------------------- 13 Sports, Lifestyles, Contextual Promotion and/or Rotational Interests, Personal Banners Finance, Health, Computing, Travel, Research & Learn, Influence and Games Channels: AOL Live - --------------------------- ------------------------------------------- 14 Three (3) AOL Service Three (3) permanent Keywords for keywords, VideosNow brand - --------------------------- ------------------------------------------- 15 Other Comparable As determined by the Parties Promotions - --------------------------- ------------------------------------------- Level 2 Promotions 150,000,000 Impressions - --------------------------- ------------------------------------------- 1 People Connection: Rotational Banners in Contextually Relevant Arts and Entertainment Chat - --------------------------- ------------------------------------------- 12 34434-3 - --------------------------- ------------------------------------------- 2 Run of Service- Rotational Banners Targeted by Key Demographically Demographic/Psychographic Variables Targeted Banners - --------------------------- ------------------------------------------- 3 Entertainment Channel Rotational Banners Newsletters - --------------------------- ------------------------------------------- 4 Other Comparable As determined by the Parties Promtions - --------------------------- ------------------------------------------- Level 3 Promotions 250,000,000 Impressions - --------------------------- ------------------------------------------- 1 Run of Service- Rotational Banners; Random Serving General - --------------------------- ------------------------------------------- 2 Run of E-Mail- Rotational Banners General - --------------------------- ------------------------------------------- 3 Additional Placements Rotational Banners in People Connections - --------------------------- ------------------------------------------- 4 Other Comparable As determined by the Parties Promotions - --------------------------- ------------------------------------------- Annual Impressions Target - -------------------------------------------------------------------------------- Year 1 100,000,000 - -------------------------------------------------------------------------------- Year 2 200,000,000 - -------------------------------------------------------------------------------- Year 3 200,000,000 - -------------------------------------------------------------------------------- TOTAL 500,000,000 - -------------------------------------------------------------------------------- 13 34434-3 EXHIBIT A-1 AOL.com Promotions ------------------ - --------------------------- ------------------------------------------- Screen Description - --------------------------- ------------------------------------------- Level 1 Promotions - --------------------------- ------------------------------------------- AOL.com Shopping Permanent Anchor Tenant Placement (or Channel: Books, Music equivalent in case of redesign) Video Department (or equivalent in case of redesign - --------------------------- ------------------------------------------- AOL.com movies, Contextual Placement and/or Rotational Entertainment, other Promotion channels - --------------------------- ------------------------------------------- AOL.com Keyword Keywords to be determined Package - --------------------------- ------------------------------------------- Level 3 Promotions - --------------------------- ------------------------------------------- AOL.com Run of Service - --------------------------- ------------------------------------------- 14 34434-3 EXHIBIT B Definitions ----------- The following definitions will apply to this Agreement: Additional MP Channel. Any other distribution channel (e.g., an Interactive Service other than AOL) through which MP makes available an offering comparable in nature to the Affiliated MP Site. Additional Revenues. Any revenues other than Transaction Revenues and Advertising Revenues. Advertising Revenues. The combination of AOL Advertising Revenues and Internet Advertising Revenues: AOL Advertising Revenues, Aggregate amounts collected plus the fair market value of any other compensation received (such as barter advertising) by MP, AOL or either Party's agents, as the case may be, arising from the license or sale of advertisements, promotions, links or sponsorships ("Advertisements") that appear within any pages of the Affiliated MP Site which may be exclusively available to AOL Users, less applicable Advertising Sales Commissions. AOL Advertising Revenues do not include amounts arising from Advertisements on any screens or forms preceding, framing or otherwise directly associated with the Affiliated MP Site, which will be sold exclusively by AOL. Internet Advertising Revenues. For each Advertisement on a page of the Affiliated MP Site which is not exclusively available to AOL Users, the product of: (a) the amount collected plus the fair market value of any other compensation received (such as barter advertising) by MP or its agents arising from the license or sale of such Advertisement attributable to a given period of time and (b) the quotient of (i) Impressions on the page containing such Advertisement by AOL Users for such period of time divided by (ii) total Impressions on the page containing such Advertisement by all users for such period of time (the "Internet Advertising Quotient") (or such other percentage or formula as is mutually agreed upon in writing by the Parties), less applicable Advertising Sales Commissions. MP will be responsible for calculating the Internet Advertising Quotient related to Internet Advertising Revenues. For any period during which MP fails to calculate the Internet Advertising Quotient (other than as a sole result of AOL's failure to provide necessary Impressions information), such quotient will be deemed to be one hundred percent (100%). Advertising Sales Commission. (i) Actual amounts paid as commission to third party agencies by either buyer or seller in connection with sale of the Advertisement or (ii) fifteen percent (15%), in the event the Party has sold the Advertisement directly and will not be deducting any third party agency commissions. Affiliated MP Site. The specific area created by MP to be promoted and distributed by AOL hereunder through which MP can market and complete transactions regarding its Products. AOL Interactive Site. Any Interactive Site which is managed, maintained, owned or controlled by AOL or its agents. AOL Member. Any authorized user of the AOL Service, including any sub-accounts using the AOL Service under an authorized master account. AOL Network. (i) The AOL Service, (ii) AOL.com and (iii) any other product or service owned, operated, distributed or authorized to be distributed by or through AOL or its affiliates worldwide (and including those properties excluded from the definitions of the AOL Service or AOL.com). It is understood and agreed that the rights of MP relate only to the AOL Service and not generally to the AOL Network. AOL Purchaser. (i) Any person or entity who enters the Affiliated MP Site from the AOL Network including, without limitation, from any third party area therein (to the extent entry from such third party area is traceable through both Parties' commercially reasonable efforts), and generates Transaction Revenues (regardless of whether such person or entity provides an e-mail address during 15 34434-3 registration which includes a domain other than an "AOL.com" domain); and (ii) any other person or entity who, when purchasing a product, good or service through an MP Interactive Site, provides an AOL.com domain name as part of such person or entity's e-mail address; provided that any person or entity who has previously satisfied the definition of AOL Purchaser will remain an AOL Purchaser, and any subsequent purchases by such person or entity will also give rise to Transaction Revenues hereunder(and will not be conditioned on the person or entity's satisfaction of clauses (i) or (ii) above). AOL Service.The standard, narrow-band U.S. version of the America Online(R) brand service, specifically excluding (a) AOL.com or any other AOL Interactive Site, (b) the international versions off the America Online(R) brand service (e.g., AOL Japan), (c) "Driveway,""AOL NetFind(TM)" "AOL Instant Messenger(TM)", "NetMail(TM)" or any similar independent product or service offered by or through the U.S. version of the America Online brand service, (d) any programming or Content area offered by or through the U.S. version of the America Online brand service over which AOL does not exercise complete operational control (including, without limitation, Content areas controlled by other parties and member-created Content areas), (e) any programming or Content area offered by or through the U.S. version of the America Online brand service which was operated, maintained or controlled by the former AOL Studios division (e.g., Electra, Thrive, Real Fans, Love@AOL, Entertainment Asylum, Digital Cities), (f) any yellow pages, white pages, classifieds or other search, directory or review services or Content offered by or through the U.S. version of the America Online brand service, (g) any property, feature, product or service which AOL or its affiliates may acquire subsequent to the Effective Date and (h) any other version of an America Online service which is materially different from the narrow-band U.S. version of the America Online brand service, by virtue of its branding, distribution, functionality, Content and services, including, without limitation, any co-branded version of the service and any version distributed through any broadband distribution platform or through any platform or device other than a desktop personal computer. AOL User. Any user of the AOL Service, AOL.com or the AOL Network. AOL.com. AOL's primary Internet-based Interactive Site marketed under the "AOL. COMBAT" brand, specifically excluding (a) the AOL Service, (b) any international versions of such site, (c) "Driveway," "AOL NetFind," "AOL Instant Messenger "NetMail or any similar independent product or service offered by or through such site or any other AOL Interactive Site, (d) any programming or Content area offered by or through such site over which AOL does not exercise complete operational control (including, without limitation, Content areas controlled by other parties and member-created Content areas), (e) any programming or Content area offered by or through the U.S. version of the America Online) brand service which was operated, maintained or controlled by the former AOL Studios division (e.g., Electra, Thrive, Real Fans, Love@AOL, Entertainment Asylum, Digital Cities), (f) any yellow pages, white pages, classifieds or other search, directory or review services or Content offered by or through such site or any other AOL Interactive Site, (g) any property, feature, product or service which AOL or its affiliates may acquire subsequent to the Effective Date and (h) any other version of an America Online Interactive Site which is materially different from AOL's primary Internet-based Interactive Site marketed under the "AOL.COM" brand, by virtue of its branding, distribution, functionality, Content and services, including, without limitation, any co-branded versions and any version distributed through any broadband distribution platform or through any platform or device other than a desktop personal computer. Change of Control. (a) The consummation of a reorganization, merger or consolidation or sale or other disposition of substantially all of the assets of a party; or (b) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1933, as amended) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under such Act) of more than 50% of either (i) the then outstanding shares of common stock of such party; or (ii) the combined voting power of the then outstanding voting securities of such party entitled to vote generally in the election of directors. Confidential information. Any information relating to or disclosed in the course of the Agreement, which is or should be reasonably understood to be confidential or proprietary to the disclosing Party, including, but not limited to, the material terms of this Agreement, information about AOL Members, AOL Users, AOL Purchasers and-MP customers, technical processes and formulas, source codes, 16 34434-3 product designs, sales, cost and other unpublished financial information, product and business plans, projections, and marketing data. "Confidential Information" will not include information (a) already lawfully known to or independently developed by the receiving Party, (b) disclosed in published materials, (c) generally known to the public, or (d) lawfully obtained from any third party. Content. Text, images, video, audio (including, without limitation, music used in synchronization or timed relation with visual displays) and other data, products, advertisements, promotions, links, pointers and software, including any modifications, upgrades, updates, enhancements and related documentation. Impression. User exposure to the applicable promotion or advertisement, as such exposure may be reasonably determined and measured by AOL in accordance with its standard methodologies and protocols. Interactive Service. Any entity that offers online or Internet connectivity (or any successor form of connectivity), aggregates (for sale or otherwise) and/or distributes a broad selection of third-party Content, or provides interactive navigational services (including, without limitation, any online service providers, Internet service providers, WebTV, @Home or other broadband providers, search or directory providers, "push" product providers such as the Pointcast Network or providers of interactive navigational environments such as Microsoft's "Active Desktop"). Interactive Site. Any interactive site or area, including, by way of example and without limitation, (i) an MP site on the World Wide Web portion of the Internet or (ii) a channel or area delivered through a "push" product such as the Pointcast Network or interactive environment such as Microsoft's Active Desktop. Licensed Content. All Content offered through the Affiliated MP Site pursuant to this Agreement or otherwise provided by MP or its agents in connection herewith (e.g., offline or online promotional Content, Promotions, AOL "slideshows" , etc.), including in each case, any modifications, upgrades, updates, enhancements, and related documentation. MP Interactive Site. Any Interactive Site (other than the Affiliated MP Site) which is managed, maintained, owned or controlled by MP or its agents. Premier Products. Consumer movies and other consumer oriented video content delivered in fixed media formats (including, without limitation, VHS cassettes, digital video disks, DIVX and laserdiscs, ("Video Products"), specifically excluding, however, (i) music audio entertainment products, (ii) any form of computer software (e.g. games and entertainment programs) and (iii) any movie or video content or other products distributed or delivered through an electronic data transfer format. Product. Any product, good or service which MP (or others acting on its behalf or as distributors) offers, sells, provides, distributes or licenses to AOL Users directly or indirectly through (i) the Affiliated MP Site (including through any Interactive Site linked thereto), (ii) any other electronic means directed at AOL Users (e.g., e-mail offers), or (iii) an "offline" means (e.g., toll-free number) for receiving orders related to specific offers within the Affiliated MP Site requiring purchasers to reference a specific promotional identifier or tracking code, including, without limitation, products sold through surcharged downloads (to the extent expressly permitted hereunder). Revenue Threshold. Aggregate Transaction Revenues and Advertising Revenues generated hereunder equal to One Hundred Million Dollars (US$ 100,000,000). Site Revenues. The combination of Transaction Revenues, Advertising Revenues and Additional Revenues. Transaction Revenues. Aggregate amounts paid by AOL Purchasers in connection with the sale, licensing, distribution or provision of any Products, including, in each case, handling, shipping, service charges, and excluding, in each case, (a) amounts collected for sales or use taxes or duties and (b) credits and chargebacks for returned or canceled goods or services, but not excluding cost of goods sold or any similar cost. 17 34434-3 EXHIBIT C MP Cross-Promotion ------------------ Online - ------ In each MP Interactive Site, MP will include: A prominent promotional banner linking to AOL-designated Content on AOL.com or the AOL Service (if feasible) appearing "above the fold" on the first screen of the MP Interactive Site: A prominent "Try AOL" feature where users can obtain promotional information about AOL products and services and, at AOL's option, download or order AOL's then-current version of client software for the AOL Service or software for any other AOL products or services (e.g., AOL's Instant Messenger service)*; and To the extent MP offers or promotes any products or services similar to AOL's "component" products and services (e.g., "Driveway,""AOL NetFind "AOL Instant Messenger" "NetMail" or any similar products or services, chat, buddy list and/or message board technology, yellow pages, white pages, classifieds or other search, directory or review services, voice communications), prominent offers or promotions related to such AOL-designated products or services. Additionally, MP shall make available to AOL remnant advertising inventory which is available in any MP Interactive Site, on terms and conditions that are no less favorable than those offered to any other third party. Off line -------- In MP's television, radio and print advertisements and in any publications, programs, features or other forms of media over which MP exercises at least partial editorial control, MP will include: Specific references or mentions (verbally where possible) of the Affiliated MP Site's availability through America Online prior to, and at least as prominent as, any reference to any MP Interactive Site; and For instance, listing of the "URL(s)" for any MP Interactive Site will be accompanied by the AOL "keyword" for the Affiliated MP Site. - ----------------------- *AOL will pay MP a one-time standard bounty for each person who registers for the AOL Service using MP's special identifier for this promotion and subsequently pays AOL monthly usage fees across at least three billing cycles for the use of the AOL Service. Note that if this promotion is delivered through Microsoft's Active Desktop or any other "push" product (an "Operating System"), such feature will link users directly to AOL software within the Operating System or direct users without Internet access to an AOL application setup program within the Operating System (all subject to any standard policies of the Operating System). 18 34434-3 EXHIBIT D Description of Products and Other Content ----------------------------------------- [MP TO PROVIDE] 19 34434-3 EXHIBIT E Operating Standards ------------------- 1. General. The Affiliated MP Site and/or load testing will be related to (including the Products and other the following areas AOL compatibility Content contained therein) will be in testing (AOL client V3.0, Windows the top three (3) online sites in the 95/Macintosh, Browser: MSIE 3.X/MSIE video sale and rental industry, as 2.1; AOL client V4.0, Windows determined by both of the following 95/Macintosh, Browser: MSIE 3.X); methods: (a) based on a cross-section caching implementation; graphics of third-party reviewers who are quality; user interface and functional recognized authorities in such testing; review of advanced web industry and (b) with respect to all technologies; load testing: website material quality averages or standards architecture (hardware, network in such industry, including each of configuration software - web servers, the following: (i) pricing of databases, etc.); network redundancy Products. (ii) scope and selection of and reliability: performance Products, (iii) quality of Products, thresholds (network bandwidth, web (iv) customer service and fulfillment server capacity, simultaneous users); associated with the marketing and sale and electronic commerce (encryption of Products and (v) ease of use. validation, encryption technology -SSL V2/V3, PCT, commerce implementation 2. Hosting; Capacity. MP will provide review - cookies, iCat, webforce, all computer hardware (e.g., servers, etc., facility physical security, routers, network devices, switches and safeguards related to private customer associated hardware) in an amount information. necessary to meet anticipated traffic demands, adequate power supply 4. User Interface. MP will maintain a (including generator back-up) and graphical user interface within the HVAC, adequate insurance, adequate Affiliated MP Site that is competitive service contracts and all necessary in all material respects with equipment racks, floor space, network interfaces of other similar sites cabling and power distribution to based on similar form technology. AOL support the Affiliated MP Site. MP is reserves the right to review and fully responsible for the maintenance approve the user interface and site implementation and the day-to-day design prior to launch of the operation of the Affiliated Site and Promotions and to conduct focus group MP will provide AOL with a detailed testing to assess compliance with diagram of MP's network. In addition, respect to such consultation and with MP will provide AOL with detailed respect to MP's compliance with the information regarding separate file preceding sentence. With respect to downloads available from the the foregoing, MP shall provide AOL Affiliated MP Site, including file with no less than three (3) weeks size, type and download/installation notice of the launch of the Affiliated procedures. MP Site, so that AOL will have an adequate amount of time to review the 3. Speed: Accessibility. MP will user interface of the Affiliated MP ensure that the performance and Site and any other component of the availability of the Affiliated MP Affiliated MP Site as AOL may Site (a) is monitored on a continuous, reasonably request. 24/7 basis and (b) remains competitive in all material respects with the 5. Service Level Response. MP agrees performance and availability of other to use commercially reasonable efforts similar sites based on similar form to provide the following service technology. MP will use commercially levels in response to problems with or reasonable efforts to ensure that: (a) improvements to the Affiliated MP the functionality and features within Site: o For material functions of the Affiliated MP Site are optimized software that are or have become for the client software then in use by substantially inoperable (e.g., AOL Users: and (b) the Affiliated MP inability to access website or conduct Site is designed and populated in a transactions), MP will provide a bug manner that minimizes delays when AOL fix or workaround within four (4) Users attempt to access such site. At hours after the first report of such a minimum, MP will ensure that error to AOL or MP. o For functions of Affiliated MID Site's data transfer the software that are impaired or initiates within fewer than fifteen otherwise fail to operate in (15) seconds on average. Prior to accordance with agreed upon launch of any promotions described specifications (e.g., search engine), herein, MP will permit AOL to conduct MP will provide a bug fix or performance and/or load testing of the workaround within twenty-four (24) Affiliated MP Site (in person or hours after the first report of such through remote communications) until error to AOL or MP. o For errors AOL is reasonably satisfied that disabling only certain non-essential launch can occur. AOL's performance functions (e.g., broken links or 20 34434-3 noncritical applications), MP will 9. Technical Performance. MP will provide a bug fix or workaround within perform the following technical fourteen (14) days after the first obligations (and any reasonable report of such error to AOL or MP. For updates thereto from time to time by all other errors, MP will address AOL): these requests on a case-by-case basis MP will design the Affiliated MP Site as soon as reasonably feasible. to support the Windows version of the Microsoft Internet Explorer 3.0 and 6. Monitoring. MP will provide AOL 4.0 Browser, the Macintosh version of with MP's detailed escalation the Microsoft Internet Explorer 2.1 procedures (e.g., contact names and and 3.0, and make commercially notification mechanisms such as email, reasonable efforts to support all phone, page, etc.) and notification of other AOL browsers listed at "http: any scheduled or unscheduled // webmaster. info. aol. com/ downtimes. AOL Network Operations BrowTable. html." Center will work with MP's designated MP will configure the server from technical contacts in the event of any which it serves the site to examine performance malfunction or other the HTTP User-Agent field in order to emergency related to the Affiliated identify the "AOL Member-Agents" MP Site and will either assist or listed at: "http: // webmaster. info. work in parallel with MP's contact aol. com/ Brow2Text. html." using MP tools and procedures, as MP will design its site to support applicable. The Parties will develop a HTTP 1.0 or later protocol as defined process to monitor performance and in RFC 1945 (available at "http: // member behavior with respect to ds. internic. net1rfc/rfc 1945.text") access, capacity, security and related and to adhere to AOL's parameters for issues both during normal operations refreshing cached information listed and during special promotions/events. at "http: // webmaster. info. aol. com/CacheText. html." 7. Telecommunications. The Parties 10. AOL Internet Products Partner agree to explore encryption Support. AOL will provide MP with methodology to secure data access to the standard online communications between the resources, standards and guidelines Parties'data centers such that no documentation, technical phone private member information requested support, monitoring and after-hours by MP will be transferred in an assistance that AOL makes generally unencrypted format. The network available to similarly situated between the Parties will be configured web-based partners on similar terms such that no single component failure and conditions . AOL support will not, will significantly impact AOL Users. in any case, be involved with content The network will be sized such that no creation on behalf of MP or support single line runs at more than seventy for any technologies, databases, percent (70%) average utilization for software or other applications which a 5-minute peak in a daily period. are not supported by AOL or are related to any MP area other than the 8. Security Review. MP and AOL will Affiliated MP Site. Support to be work together to perform an initial provided by AOL is contingent on MP security review of, and to perform providing to AOL demo account tests of, the MP system, network, and information (where applicable), a service security in order to evaluate detailed description of the Affiliated the security risks and provide MP Site's software, hardware and recommendations to MP. including network architecture and access to the periodic follow-up reviews as Affiliated MP site for purposes of reasonably required by MP or AOL. MP such performance and load testing as will use commercially reasonable best AOL elects to conduct. efforts to fix any security risks or breaches of security as may be identified by AOL's Operations Security team. Specific services to be performed on behalf of AOL's Operations Security team will be as determined by AOL in its sole discretion. 21 34434-3 EXHIBIT F Standard Online Commerce Terms & Conditions ------------------------------------------- 1 . AOL Network Distribution. MP will transactions are solely between MP and not authorize or permit any third AOL Users purchasing Products from MP. party to distribute or promote the Affiliated MP Site or any MP 6. AOL Look and Feel. MP acknowledges Interactive Site through the AOL and agrees that AOL will own all Network absent AOL's prior written right, title and interest in and to approval. The Promotions and any other the elements of graphics, design, promotional or advertising rights or organization, presentation, layout, space purchased from or provided by user interlace, navigation and AOL will link only to the Affiliated stylistic convention (including the MP Site, will be used by MP solely for digital implementations thereof) which its own benefit and will not be are generally associated with online resold, traded, exchanged, bartered, areas contained within the AOLNetwork, brokered or otherwise offered to any subject to MP's ownership rights in third party any MP trademarks or copyrighted material within the Affiliated MP 2. Provision of Other Content. In the Site. event that AOL notifies MP that (i) as reasonably determined by AOL, any 7. Management of the Affiliated MP Content within the Affiliated MP Site Site. MP will manage. review, delete, violates AOL's then applicable edit, create, update and otherwise standard Terms of Service (as set manage all Products available on or forth on the America Online brand through the Affiliated MP Site. in a service), the terms of this Agreement timely and professional manner and in or any other standard, written AOL accordance with the terms of this policy or (ii) AOL reasonably objects Agreement. MP will ensure that each to the inclusion of any Content within Affiliated MP Site is current, the Affiliated MP Site (other than any accurate and well-organized at all specific items of Content which may be times. MP warrants that the Products expressly identified in this and other Licensed Content: (i) will Agreement), then MP will take not infringe on or violate any commercially reasonable steps to block copyright, trademark. U.S. patent or access by AOL Users to such Content any other third party right, including using MP's then-available technology. without limitation, any music In the event that MP cannot, through performance or other music-related its commercially reasonable efforts, rights; (ii) will not violate AOL's block then MP will provide AOL prompt then-applicable Terms of Service: and written notice of such fact.AOL may (iii) will not violate any applicable then, at its option, restrict access law or regulation, including those from the AOL Network to the Content in relating to contests, sweepstakes or question using technology available to similar promotions. Additionally, MP AOL, MP will cooperate with AOL's represents and warrants that it owns reasonable requests to the extent AOL or has a valid license to all rights elects to implement any such access to any Licensed Content used in AOL restrictions. "slideshow" or other formats embodying elements such as graphics, animation 3. Contests. MP will take all steps and sound, free and clear of all necessary to ensure that any contest, encumbrances and without violating the sweepstakes or similar promotion rights of any other person or entity. conducted or promoted through the MP also warrants that a reasonable Affiliated MP Site (a "Contest") basis exists for all Product complies with all applicable federal, performance or comparison claims state and local appearing through the Affiliated MP Site. MP shall not in any manner, 4. Navigational Icons. Subject to the including, without limitation in any prior consent of MP, which consent Promotion, the Licensed Content or the will not be unreasonably withheld, AOL Materials state or imply that AOL will be entitled to establish recommends or endorses MP or MP's navigational icons, links and pointers Products (e.g., no statements that MP connecting the Affiliated MP Site (or is an "official" or "preferred" portions thereof) with other content provider of products or services for areas on or outside of the AOL AOL). AOL will have no obligations Network. with respect to the Products available on or through the Affiliated MP Site, 5. Disclaimers. Upon AOL's request, MP including, but not limited to, any agrees to include within the duty to review or monitor any such Affiliated MP Site a product Products. disclaimer (the specific form and substance to be mutually agreed upon by the Parties) indicating that 22 34434-3 8. Duty to Inform. MP will promptly estimated development schedule for inform AOL of any information related such work. To the extent the Parties to the Affiliated MP Site which could reach agreement regarding reasonably lead to a claim, demand, or implementation of agreed-upon liability of or against AOL and/or its Production Plan, such agreement will affiliates by any third party. be reflected in a separate work order signed by the Parties. To the extent 9. Customer Service. It is the sole MP elects to retain a third party responsibility of MP to provide provider to perform any such customer service to persons or production work, work produced by such entities purchasing Products through third party provider must generally the AOL Network ("Customers"). MP will conform to AOL's production Standards bear full responsibility for all & Practices (a copy of which will be customer service, including without supplied by AOL to MP upon request). limitation, order processing, billing, The specific production resources fulfillment, shipment, collection and which AOL allocates to any production other customer service associated with work to be performed on behalf of MP any Products offered, sold or licensed will be as determined by AOL in its through the Affiliated MP Site, and sole discretion. AOL will have no obligations whatsoever with respect thereto. MP 11. Overhead Accounts. To the extent will receive all emails from Customers AOL has granted MP any overhead via a computer available to MP's accounts on the AOL Service, MP will customer service staff and generally be responsible for the actions taken respond to such emails within one under or through its overhead business day of receipt. MP will accounts, which actions are subject to receive all orders electronically and AOL's applicable Terms of Service and generally process all orders within for any surcharges, including, without one business day of receipt, provided limitation, all premium charges, Products ordered are not advance order transaction charges, and any items. MP will ensure that all orders applicable communication surcharges of Products are received, processed, incurred by any overhead Account fulfilled and delivered on a timely issued to MP, but MP will not be and professional basis. MP will offer liable for charges incurred by any AOL Users who purchase Products overhead account relating to AOL's through such Affiliated MP Site a standard monthly usage fees and money back satisfaction guarantee. MP standard hourly charges, which charges will bear all responsibility for AOL will bear. Upon the termination of compliance with federal, state and this Agreement, all overhead accounts, local laws in the event that Products related screen names and any are out of stock or are no longer associated usage credits or similar available at the time an order is rights, will automatically terminate. received. MP will also comply with the AOL will have no liability for loss of requirements of any federal. state or any data or content related to the local consumer protection or proper termination of any overhead disclosure law. Payment for Products account. will be collected by MP directly from customers. MP's order fulfillment 12. Navigation Tools. To the extent operation will be subject to AOL's AOL grants MP any "keywords" on the reasonable review. AOL Service or "search terms" on AOL.corn (collectively, "Keywords"), 10. Production Work. In the event that the Keywords will be subject to MP requests AOL's production availability and will consist only of assistance in connection with (i) MP's registered trademarks. AOL ongoing programming and maintenance reserves the right at any time to related to the Affiliated MP Site, revoke MP's use of any Keywords that (ii) a redesign of or addition to the are not registered trademarks of MP. Affiliated MP Site (e.g.. a change to To the extent AOL allows AOL Users to an existing screen format or "bookmark" the URL or other locator construction of a new custom form), for the Affiliated MP Site, such (iii) production to modify work bookmarks will be subject to AOL's performed by a third party provider or control at all times. Upon the (iv) any other type of production termination of this Agreement, MP's work, MP will work with AOL to develop rights to any Keywords and bookmarking a detailed production plan for the will terminate. requested production assistance (the "Production Plan"). Following receipt 13. AOL User Communications. To the of the final Production Plan, AOL will extent MP sends any form of notify MP of (i) AOL's availability to communications to AOL Users, MP will perform the requested production work, promote the Affiliated MP Site as the (ii) the proposed fee or fee structure location at which to purchase Products for the requested production and (as compared to any more general or maintenance work and (iii) the other site or location). In addition, 23 34434-3 MP will not encourage AOL Users to take any action inconsistent with the scope and purpose of this Agreement. including without limitation, the following actions: (a) using Content other than the Licensed Content; (b) bookmarking of Interactive Sites; (c) using Interactive Sites other than those covered by the revenue-sharing provisions herein; (d) changing the default home page on the AOL browser: or (e) using any Interactive Service other than AOL. Any email newsletters sent to AOL Users by MP or its agents will (i) be subject to AOL's policies on use of the email functionality, including but not limited to AOL's policy on unsolicited bulk email. (ii) be sent only to AOL Users requesting to receive such newsletters, (iii) not contain Content which violates AOL's Terms of Service. and (iv) not contain any advertisements, marketing or promotion for any other Interactive Service. In any commercial e-mail communications to AOL Users which are otherwise permitted hereunder. MP will provide the recipient with a prominent and easy means to "opt-out" of receiving any future commercial e-mail communications from MP. 14. Merchant Certification Program MP will participate in any generally applicable "Certified Merchant" program operated by AOL or its authorized agents or contractors. Such program may require merchant participants on an ongoing basis to meet certain reasonable, generally applicable standards relating to provision of electronic commerce through the AOL Network (including, as a minimum, use of 40-bit SSL encryption and if requested by AOL, 128-bit encryption) and may also require the payment of certain reasonable certification fees to the applicable entity operating the program. Each Certified Merchant in good standing will be entitled to place on its affiliated Interactive Site an AOL designed and approved button promoting the merchants status as an AOL Certified Merchant. 24 34434-3 EXHIBIT G Standard Legal Terms & Conditions --------------------------------- 1. Promotional Materials/Press the other Party. Each Party Releases. Each Party will submit to acknowledges that its utilization of the other Party, for its prior the other Party's Marks will not written approval, which will not be create in it, nor will it represent unreasonably withheld or delayed, any it has, any right, title, or marketing, advertising. press interest in or to such Marks other releases, and all other promotional than the licenses expressly granted materials related to the Affiliated herein. Each Party agrees not to do MP Site and/or referencing the other anything contesting or impairing the Party and/or its trade names, trademark rights of the other Party. trademarks. and service marks (the "Materials"); provided, however, that 5. Quality Standards. Each Party either Party's use of screen shots of agrees that the nature and quality the Affiliated MP Site for of its products and services promotional purposes will not require supplied in connection with the the approval of the other Party so other Party's Marks will conform to long as America Online is clearly quality standards set by the other identified as the source of such Party. Each Party agrees to supply screen shots; and provided further, the other Party, upon request. with however, that, following the initial a reasonable number of samples of public announcement of the business any Materials publicly disseminated relationship between the Parties in by such Party which utilize the accordance with the approval and other Party's Marks. Each Party will other requirements contained herein, comply with all applicable laws, either Party's subsequent factual regulations, and customs and obtain reference to the existence of a any required government approvals business relationship between the pertaining to use of the other Parties will not require the approval Party's marks. of the other Party. Each Party will solicit and reasonably consider the 6. Infringement Proceedings. Each views of the other Party in designing Party agrees to promptly notify the and implementing such Materials. Once other Party of any unauthorized use approved, the Materials may be used of the other Party's Marks of which by a Party and its affiliates for the it has actual knowledge. Each Party purpose of promoting the Affiliated will have the sole right and MP Site and the content contained discretion to bring proceedings therein and reused for such purpose alleging infringement of its Marks until such approval is withdrawn with or unfair competition related reasonable prior notice. In the event thereto; provided, however, that such approval is withdrawn, existing each Party agrees to provide the inventories of Materials may be other Party with its reasonable depleted. Notwithstanding the cooperation and assistance with foregoing, either Party may issue respect to any such infringement press releases and other disclosures proceedings. as required by law or as reasonably advised by legal counsel without the 7. Representations and Warranties. consent of the other Party and in, Each Party represents and warrants such event, the disclosing Party will to the other Party that: (i) such provide at least five (5) business Party has the full corporate right, days prior written notice of such power and authority to enter into proposed disclosure to the other this Agreement and to perform the Party. acts required of it hereunder; (ii) the execution of this Agreement by 2. License. MP hereby grants AOL a such Party, and the performance by non-exclusive worldwide license to such Party of its obligations and market, license, distribute, duties hereunder, do not and will reproduce, display, perform, transmit not violate any agreement to which and promote the Licensed Content (or such Party is a party or by which it any portion thereof) through such is otherwise bound; (iii) when areas or features of the AOL Network executed and delivered b such Party, as AOL deems appropriate. MP this Agreement will constitute the acknowledges and agrees that the legal, valid and binding obligation foregoing license permits AOL to of such Party, enforceable against distribute portions of the Licensed such Party in accordance with its Content in synchronization or timed terms: and (iv) such Party relation with visual displays acknowledges that the other Party prepared by MP or AOL (e.g., as part makes no representations, warranties of an AOL "slideshow"). In addition, or agreements related to the subject AOL Users will have the right to matter hereof that are not expressly access and use the Affiliated MP provided for in this Agreement. Site. 8. Confidentiality. Each Party 3. Trademark License. In designing acknowledges that Confidential and implementing the Materials and Information may be disclosed to the subject to the other provisions other Party during the course of contained herein, MP will be entitled this Agreement. Each Party agrees to use the following trade names, that it will take reasonable steps, trademarks, and service marks of AOL: at least substantially equivalent to the "America Online" brand service, the steps it takes to protect its "AOL" service/software and AOL's own proprietary information, during triangle logo; and AOL and its the term of this Agreement, and for affiliates will be entitled to use a period of three (3) years the trade names, trademarks, and following expiration or termination service marks of MP for which MP of this Agreement, to prevent the holds all rights necessary for use in duplication or disclosure of connection with this Agreement Confidential Information of the (collectively, together with the AOL other Party, other than by or to its marks listed above, the "Marks"); employees or agents who must have provided that each Party: (i) does access to such Confidential not create a unitary composite mark Information to perform such Party's involving a Mark of the other Party obligations hereunder, who will each without the prior written approval of agree to comply with this section. such other Party; and (ii) displays Notwithstanding the foregoing, symbols and notices clearly and either Party may issue a press sufficiently indicating the trademark release or other disclosure status and ownership of the other containing Confidential Information Party's Marks in accordance with without the consent of the other applicable trademark law and Party, to the extent such disclosure practice. is required by law, rule, regulation or government or court order. In 4. Ownership of Trademarks. Each such event, the disclosing Party Party acknowledges the ownership of will provide at least five (5) the other Party in the Marks of the business days prior written notice other Party and agrees that all use of such proposed disclosure to the of the other Party's Marks wi11 inure other Party. Further, in the event to the benefit, and be on behalf, of such disclosure is required of either Party under the laws, rules or regulations of the Securities 24 34434-3 and Exchange Commission or any other 9.4. Claims. If a Party entitled to applicable governing body, such Party indemnification hereunder (the will (i) redact mutually agreedupon "Indemnified Party") becomes aware portions of this Agreement to the of any matter it believes is fullest extent permitted under indemnifiable hereunder involving applicable laws, rules and any claim, action, suit, regulations and (ii) submit a request investigation, arbitration or other to such governing body that such proceeding against the Indemnified portions and other provisions of this Party by any third party (each an Agreement receive confidential "Action"), the Indemnified Party treatment under the laws, rules and will give the other Party (the regulations of the Securities and "Indemnifying Party") prompt written Exchange Commission or otherwise be notice of such Action. Such notice held in the strictest confidence to will (i) provide the basis on which the fullest extent permitted under indemnification is being asserted the laws, rules or regulations of any and (ii) be accompanied by copies of other applicable governing body. all relevant pleadings, demands, and other papers related to the Action 9. Limitation of Liability and in the possession of the Disclaimer; Indemnification. Indemnified Party. The Indemnifying Party will have a period of ten (10) 9.1. Liability. UNDER NO days after delivery of such notice CIRCUMSTANCES WILL EITHER PARTY BE to respond. If the Indemnifying LIABLE TO THE OTHER PARTY FOR Party elects to defend the Action or INDIRECT, INCIDENTAL, CONSEQUENTIAL, does not respond within the SPECIAL OR EXEMPLARY DAMAGES (EVEN IF requisite ten (10) day period, the THAT PARTY HAS BEEN ADVISED OF THE Indemnifying Party will be obligated POSSIBILITY OF SUCH DAMAGES), ARISING to defend the Action. at its own FROM BREACH OF THE AGREEMENT, THE expense, and by counsel reasonably SALE OF PRODUCTS, THE USE OR satisfactory to the Indemnified INABILITY TO USE THE AOL NETWORK, THE Party. The Indemnified Party will AOL SERVICE, AOL.COM OR THE cooperate, at the expense of the AFFILIATED MP SITE, OR ARISING FROM Indemnifying Party, with the ANY OTHER PROVISION OF THIS Indemnifying Party and its counsel AGREEMENT, SUCH AS, BUT NOT LIMITED in the defense and the Indemnified TO, LOSS OF REVENUE OR ANTICIPATED Party will have the right to PROFITS OR LOST BUSINESS participate fully, at its own (COLLECTIVELY, "DISCLAIMED DAMAGES"); expense, in the defense of such PROVIDED THAT EACH PARTY WILL REMAIN Action. if the Indemnifying Party LIABLE TO THE OTHER PARTY TO THE responds within the required ten EXTENT ANY DISCLAIMED DAMAGES ARE (10) day period and elects not to CLAIMED BY A THIRD PARTY AND ARE defend such Action, the Indemnified SUBJECT TO INDEMNIFICATION PURSUANT Party will be free, without TO SECTION 9.3. EXCEPT AS PROVIDED IN prejudice to any of the Indemnified SECTION 9.3, (1) LIABILITY ARISING Party's rights hereunder, to UNDER THIS AGREEMENT WILL BE LIMITED compromise or defend (and control TO DIRECT, OBJECTIVELY MEASURABLE the defense of) such Action. In such DAMAGES, AND (11) THE MAXIMUM case, the Indemnifying Party will LIABILITY OF ONE PARTY TO THE OTHER cooperate, at its own expense, with PARTY FOR ANY CLAIMS ARISING IN the Indemnified Party and its CONNECTION WITH THIS AGREEMENT WILL counsel in the defense against such NOT EXCEED THE AGGREGATE AMOUNT OF Action and the Indemnifying Party PAYMENT OBLIGATIONS OWED TO THE OTHER will have the right to participate PARTY HEREUNDER IN THE YEAR IN WHICH fully, at its own expense, in the LIABILITY ACCRUES; PROVIDED THAT EACH defense of such Action. Any PARTY WILL REMAIN LIABLE FOR THE compromise or settlement of an AGGREGATE AMOUNT OF ANY PAYMENT Action will require the prior OBLIGATIONS OWED TO THE OTHER PARTY written consent of both Parties PURSUANT TO THE AGREEMENT. hereunder, such consent not to be unreasonably withheld or delayed. 9.2. No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS 9.5. Acknowledgment. AOL and MP each AGREEMENT, NEITHER PARTY MAKES ANY, acknowledges that the provisions of AND EACH PARTY HEREBY SPECIFICALLY this Agreement were negotiated to DISCLAIMS ANY REPRESENTATIONS OR reflect an informed, voluntary WARRANTIES, EXPRESS OR IMPLIED, allocation between them of all risks REGARDING THE AOL NETWORK, THE AOL (both known and unknown) associated SERVICE, AOL.COM OR THE AFFILIATED MP with the transactions contemplated SITE, INCLUDING ANY IMPLIED WARRANTY hereunder. The limitations and OF MERCHANTABILITY OR FITNESS FOR A disclaimers related to warranties PARTICULAR PURPOSE AND IMPLIED and liability contained in this WARRANTIES ARISING FROM COURSE OF Agreement are intended to limit the DEALING OR COURSE OF PERFORMANCE. circumstances and extent of WITHOUT LIMITING THE GENERALITY OF liability. The provisions of this THE FOREGOING, AOL SPECIFICALLY Section 9 will be enforceable DISCLAIMS ANY WARRANTY REGARDING THE independent of and severable from PROFITABILITY OF THE AFFILIATED MP any other enforceable or SITE. unenforceable provision of this Agreement. 9.3. Indemnity. Either Party will defend, indemnity, save and hold 10. Solicitation of AOL Users. harmless the other Party and the During the term of this Agreement, officers ' directors, agents, and for the two-year period affiliates, distributors, franchisees following the expiration or and employees of the other Party from termination of this Agreement, any and all third party claims, neither MP nor its agents will use demands, liabilities, costs or the AOL Network to (i) solicit, or expenses. including reasonable participate in the solicitation of attorneys' fees ("Liabilities"), AOL Users when that solicitation is resulting from the indemnifying for the benefit of any entity Party's material breach of any duty. (including MP) which could representation. or warranty of this reasonably be construed to be or Agreement. become in competition with AOL or (ii) promote any services which are ancillary to the sale of MP's Products hereunder or which could reasonably be construed to be in competition with AOL including, but not limited to, services available through the Internet. In addition, MP may not send AOL Users email communications promoting MP's Products through the AOL Network without a "Prior Business Relationship." For purposes of this Agreement, a "Prior Business Relationship" will mean that the AOL User has either (i) engaged in a transaction with MP through the AOL Network or (ii) voluntarily provided information to MP through a contest, registration, or other communication, which included notice to the AOL User that the information provided by the AOL User could result in an e-mail being sent to that AOL User by MP or its agents. A Prior Business Relationship does not exist by virtue of an AOL User's visit to the Affiliated MP Site 25 34434-3 or any MP Interactive Site (absent Agreement will be given in writing the elements above). More generally, and will be deemed to have been MP will be subject to any standard delivered and given for all purposes policies regarding e-mail (i) on the delivery date if distribution through the AOL Network delivered by electronic mail on the which AOL may implement. AOL Network (to screenname "AOLNotice@AOL.com" in the case of 11. Collection of User Information. AOL) or by confirmed facsimile. (ii) MP is prohibited from collecting AOL on the delivery date if delivered User screennames from public or personally to the Party to whom the private areas within the AOL Service same is directed; (iii) one business or AOL.com, except as specifically day after deposit with a commercial provided below. MP will ensure that overnight carrier, with written any survey, questionnaire or other verification of receipt; or (iv) means of collecting User Information five business days after the mailing including, without limitation, date, whether or not actually requests directed to specific AOL received, if sent by U.S. mail, User screennames or email addresses return receipt requested, postage and automated methods of collecting and charges prepaid, or any other screennames (an "Information means of rapid mail delivery for Request") complies with (i) all which a receipt is available. In the applicable laws and regulations, (ii) case of AOL, such notice will be AOL's applicable Terms of Service. provided to both the Senior Vice and (iii) any privacy policies which President for Business Affairs (fax have been issued by AOL in writing no. 703-265-1206) and the Deputy during the term (or, in the case of General Counsel (fax no. the Affiliated MP Site, MP's standard 703-265-1105), each at the address privacy policies, to the extent such of AOL set forth in the first policies are prominently published on paragraph of this Agreement. In the the site and provide adequate notice case of MP, except as otherwise and disclosure to users regarding specifie herein, the notice address MP's collection, use and disclosure will be the address for MP set forth of any user information) in the first paragraph of this (collectively, the "Applicable Agreement, with the other relevant Privacy Policies"). Each Information notice information, including the Request will clearly and recipient for notice and, as conspicuously specify to the AOL applicable, such recipient's fax Users at issue the purpose for which number or AOL e-mail address, to be User Information collected through as reasonably identified by AOL. the Information Request will be used (the "Specified Purpose"). 16. Launch Dates. In the event that any terms contained herein relate to 12. Use of User Information. MP will or depend on the commercial launch restrict use of the User Information date of the Affiliated MP Site collected through an Information contemplated by this Agreement (the Request to the Specified Purpose. In 'Launch Date"), then it is the no event will MP (i) provide User intention of the Parties to record Information to any third party such Launch Date in a written (except to the extent specifically instrument signed by both Parties (a) permitted under the AOL Privacy promptly following such Launch Date; Policies or (b) authorized by the provided that, in the absence of members in question), (ii) rent, sell such a written instrument, the or barter User Information, (iii) Launch Date will be as reasonably identity, promote or otherwise determined by AOL based on the disclose such User Information in a information available to AOL. manner that identifies AOL Users as end-users of the AOL Service, AOL.com 17. No Waiver. The failure of either or the AOL Network or (iv) otherwise Party to insist upon or enforce use any User Information in strict performance by the other contravention of Section 10 above. Party of any provision of this Notwithstanding the foregoing, in the Agreement or to exercise any right case of AOL Members who purchase under this Agreement will not be Products from MP, MP will be entitled construed as a waiver or to use User Information from such AOL relinquishment to any extent of such Members as part of MP's aggregate Party's right to assert or rely upon list of customers; provided that MP's any such provision or right in that use does not in any way identify, or any other instance; rather, the promote or otherwise disclose such same will be and remain in full User Information in a manner that force and effect. identifies such AOL Members as end-users of the AOL Service, 18. Return of Information. Upon the AOL.corn or the AOL Network. In expiration or termination of this addition, MP will not use any User Agreement. each Party will, upon the Information for any purpose written request of the other Party, (including any Specified Purpose) not return or destroy (at the option of directly related to the business the Party receiving the request) all purpose of the Affiliated MP Site. confidential information, documents, manuals and other materials 13. Excuse. Neither Party will be specified the other Party. liable for, or be considered in breach of or default under this 19. Survival. Sections 8 through 29 Agreement on account of, any delay or of this Exhibit will survive the failure to perform as required by completion, expiration, termination this Agreement as a result of acts of or cancellation of this Agreement. god, general telecommunications outages, or any causes or conditions 20. Entire Agreement. This Agreement which are beyond such Party's sets forth the entire agreement and reasonable control and which such supersedes any and all prior Party is unable to overcome by the agreements of the Parties with exercise of reasonable diligence. respect to the transactions set forth herein. Neither Party will be 14. Independent Contractors. The bound by, and each Party Parties to this Agreement are specifically objects to. any term, independent contractors. Neither condition or other provision which Party is an agent, representative or is different from or in addition to partner of the other Party. Neither the provisions of this Agreement Party will have any right, power or (whether or not it would materially authority to enter into any agreement alter this Agreement) and which is for or on behalf of, or incur any proffered by the other Party in any obligation or liability of, or to correspondence or other document, otherwise bind, the other Party. This unless the Party to be bound thereby Agreement will not be interpreted or specifically agrees to such construed to create an association, provision in writing. agency, joint venture or partnership between the parties or to impose any 21. Amendment. No change, amendment liability attributable to such a or modification of any provision of relationship upon either Party. this Agreement will be valid unless set forth in a written instrument 15. Notice. Any notice, approval, signed by the Party subject to request. authorization, direction or enforcement of such amendment, and other communication under this in the case of AOL, by an executive of at least the same standing to the executive who signed the Agreement. 26 34434-3 22. Further Assurances. Each Party will take such action (including, but not limited to, the execution, acknowledgment and delivery of documents) as may reasonably be requested by any other Party for the implementation or continuing performance of this Agreement. 23. Assignment. MP will not assign this Agreement or any right, interest or benefit under this Agreement without the prior written consent of AOL. Assumption of the Agreement by any successor to MP (including, without limitation, by way of merger or consolidation) will be subject to AOL's prior written approval. Subject to the foregoing, this Agreement will be fully binding upon, inure to the benefit of and be enforceable by the Parties hereto and their respective successors and assigns. 24. Construction: Severability. In the event that any provision 7f this Agreement conflicts with the law under which this Agreement is to be construed or if any such provision is held invalid by a court with jurisdiction over the Parties to this Agreement, (i) such provision will be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law, and (ii) the remaining terms, provisions, covenants and restrictions of this Agreement will remain in full force and effect. 25. Remedies. Except where otherwise specified, the rights and remedies granted to a Party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the Party may possess at law or in equity; provided that, in connection with any dispute hereunder, MP will be not entitled to offset any amounts that it claims to be due and payable from AOL against amounts otherwise payab!e by MP to AOL. 26. Applicable Law. Except as otherwise expressly provided herein, this Agreement will be interpreted, construed and enforced in all respects in accordance with the laws of the Commonwealth of Virginia except for its conflicts of laws principles. 27. Export Controls. Both Parties will adhere to all applicable laws, regulations and rules relating to the export of technical data and will not export or re-export any technical data, any products received from the other Party or the direct product of such technical data to any proscribed country listed in such app!icable laws, regulations and rules unless properly authorized. 28. Headings. The captions and headings used in this Agreement are inserted for convenience only and will not affect the meaning or interpretation of this Agreement. 29. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original and all of which together will constitute one and the same document 27 34434-3 EXHIBIT H To be provided by AOL --------------------- 28 34434-3 Confidential Draft June 18, 1998 EXHIBIT I 29 34434-2 arbitrators may modify the allocation of Arbitration Costs and award Attorneys' Fees in those cases where fairness dictates a different allocation of Arbitration Costs between the Parties and an award of Attorneys' Fees to the prevailing Party as determined by the arbitrators. 7.7. Any Dispute that is not subject to final resolution by the Management Committee or to arbitration under this Section 6 or by law (collectively, "Non-Arbitration Claims") will be brought in a court of competent jurisdiction in the Commonwealth of Virginia. Each Party irrevocably consents to the exclusive jurisdiction of the courts of the Commonwealth of Virginia and the federal courts situated in the Commonwealth of Virginia, over any and all Non-Arbitration Claims and any and all actions to enforce such claims or to recover damages or other relief in connection with such claims. 8. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set forth on Exhibit F attached hereto and Standard Legal Terms & Conditions set forth on Exhibit G attached hereto are each hereby made a part of this Agreement. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the Effective Date. AMERICA ONLINE, INC. DATAMARK HOLDING, INC., D/B/A DIGITAL COURIER TECHNOLOGIES, INC By: By: ------------------------------ ------------------------------ Print Name: Print Name: ---------------------- ---------------------- Title: Title: --------------------------- --------------------------- 30 34434-3 EX-10 5 MATERIAL CONTRACTS Exhibit 10.4 @HOME NETWORK/DATAMARK HOLDING, INC. CONTENT LICENSE AND DISTRIBUTION AGREEMENT This Content License and Distribution Agreement (the "Agreement") is made as Of July 10, 1998 (the "Effective Date") by and between At Home Corporation, a Delaware corporation with principal offices at 425 Broadway, Redwood City, CA 94063 ("@Home"), and DataMark Holding, Inc. d.b.a. Digital Courier Technologies, Inc., a Delaware corporation with principal offices at 448 East 6400 South, Suite 400, Salt Lake City, UT 84107 by and through its wholly-owned subsidiary, WeatherLabs, Inc. ("DCTI"). In consideration of the representations, warranties and covenants contained herein, and other good and valuable consideration, the parties agree to be bound by the terms and conditions contained in this Agreement. 1. Definitions. a) "@Home Service" means @Home's International subscription broadband service offering. b) "Above the Fold" means situated within that portion of a page that is designed to be visible on a standard computer screen with a resolution of 800 pixels by 600 pixels without requiring the user to scroll horizontally or vertically through the page. c) "Channel Home Page" means the first page or top level page accessed by a subscriber when entering a given channel on The @Home Service (e.g. "News" or "Finance") using a persistent navigation button with the name of the channel depicted which is directly accessible from anywhere within the @Home Service. d) "Co-branded Weather@Home" means a customized, optimized and mirrored version of Weather@Home that is located within WeatherLabs Online which will contain a comprehensive offering of the products and services that are substantially similar to those offered on Weather@Home. e) "Contract Year" means a period beginning on the Effective Date or any anniversary thereof, and ending one year later. f) "Cover Feature" means the portion of a Channel Home Page that is produced daily by the @Home editorial staff. g) "DCTI Competitors" means Accuweather, The Weather Channel, WeatherNews Inc., Weather Services Corporation, Intellicast, National Weather Center, and USA Today. h) "Distribution Affiliates" means at any given time, @Home's then-current domestic and International distribution affiliates who offer the @Home Service. As of the Effective Date, the Distribution Affiliates are: Tele-Communications Inc., Cablevision Systems Corp., Comcast Corporation, Cox Communications, Bresnan Communications Company, Insight Communications, Jones Intercable, Garden State Cable, Cogeco Cable, Lenfest Communications, InterMedia Partners, Marcus Cable, Century Communications, Rogers Cablesystems Limited and Shaw Communications. i) "Impression" means a single viewing of a page. An Impression is recorded whether or not the viewer acts on an advertisement located on that page. j) "Net Advertising Revenue" means the gross advertising and sponsorship revenue collected by @Home which is directly attributable solely to Weather@Home, less third party agency commissions and seller sales costs to be computed as 20% of the gross advertising and sponsorship revenue on Weather@Home. k) "News Channel" means a collection of web pages on the @Home Service that are grouped together by a persistent, dedicated navigation HTML button currently labeled "News", which is directly accessible from anywhere within the @Home Service. l) "News Home Page" means the first page accessed by a subscriber when entering the News Channel. m) "Semiannual Period" means, with respect to any Contract Year, a six month period starting at either. (i) the beginning of such Contract Year; or (ii) six months after the beginning of such Contract Year. n) "WeatherLabs Online" means the World Wide Web site with URL: www.weatherlabs.com. o) "Weather@Home" means an HTML feature page embedded within the @Home News Channel, and accessible via a dedicated subchannel HTML button, containing weather content and customized for placement on the @Home Service, all as further described herein and in Exhibit A, which represents a sample Weather@Home Home Page (with navigation depicted) for illustrative purposes. p) "Weather Video Wall" means an HTML feature page that may be embedded within Weather@Home (via an HTML link) or other channels and applications on the @Home Service, with any additional placements determined by @Home. The Weather Video Wall will contain one or more .jpeg or .gif images hyperlinked to multimedia videos with a weather focus that may be provided by DCTI and/or other content providers. 2. @Home Channel Contribution. a) Weather@Home Page During the term of this Agreement, the Weather@Home page will display and provide content, navigation, and features which are Substantially Similar to those shown in Exhibit A. For purposes of this Section 2(a), "Substantially Similar" means Page 2 approximately the same relative branding size and prominence for WeatherLabs content as depicted in Exhibit A. The Weather@Home page will be free of charge to all @Home subscribers. b) Persistent Channel Navigation During the term of this Agreement, @Home will provide one button in the News Channel navigation bar exclusively dedicated to accessing Weather@Home (the "Weather Button"). This button will receive persistent placement, will be accessible from any page within the News Channel area, and will link to Weather@Home. The button will appear in a position that best encourages use of the @Home News Channel and will appear Above the Fold. In addition, @Home may, in its sole discretion, add additional navigational elements or links across the @Home Service which link to all or part of Weather@Home. c) DCTI Exclusive Position. DCTI will receive an Exclusive Position within the @Home Service. As used in this Agreement this "Exclusive Position" means: i) Elimination of Navigation Placement. @Home will not include in the News Channel any persistent navigation or any persistent button which links to pages displaying content from DCTI Competitors. ii) DCTI Competitor Content With the exception of video, @Home will not display any content from DCTI Competitors on the Weather@Home page during the term of this Agreement. iii) Video from Other Providers. DCTI agrees and acknowledges that @Home has made commitments to another weather provider for placement of one or more video weather segments on the Weather@Home page (as generally depicted on Exhibit A - "Video Assets"), and may launch a Weather Video Wall on the @Home Service at some future date during the term of the Agreement. In no event will @Home's placement of video from a weather provider other than DCTI on the Weather@Home page or the integration of a Weather Video Wall from a weather provider other than DCTI constitute a breach of this Agreement. d) Editorial Autonomy . Notwithstanding the provisions of Section 2(c) above, DCTI's Exclusive Position will not preclude @Home from: i) Permitting @Home editors to place editorial content from DCTI Competitors (which may include a link back to the content provider) in any Cover Feature. a) In those cases where a variety of sources provide similar information or materially similar coverage of a weather story that appears in a Cover Feature, and where The Weather Labs provides similar information or materially similar coverage of such a weather story, @Home's editors will give preferential treatment to The Weather Labs Source within the respective Channel Home Page Cover Feature. Page 3 b) In those cases where The Weather Labs provides only tangentially related or less extensive coverage for a Cover Feature topic than other sources, @Home reserves the right to link to other information sources within or outside of the Channel Home Page on a basis which provides preferential treatment to such other sources. However, in cases where The Weather Labs has material that beneficially supplements an @Home weather feature, @Home will make reasonable efforts to link to that material. ii) Permitting @Home editors to place their own news and weather stories within the News Channel or other Channels across the service. iii) Permitting the Distribution Affiliates complete autonomy in the programming of the local area of the @Home Service. e) DCTI will offer @Home the option to integrate any newly developed online weather products, content and software tools that DCTI invents. If a competing weather content provider offers @Home a weather service or product that WeatherLabs does not offer at that time, @Home will give DCTI, upon a 60-day written notice, an opportunity to develop and produce a similar or superior weather service or product first before using any DCTI Competitor's service or product. 3. @Home Marketing Contribution. a) Ad Inventory . At part of its consideration hereunder, @Home will provide DCTI with Above the Fold advertising at no additional cost in the amounts set forth herein to promote Weather@Home. The advertisements will be cross-promoted across the @Home Channels (run of site) such as "Finance", "News", "Entertainment", and "Technology", at the following levels: 200,000 Impressions during the first Contract Year, 450,000 Impressions during the second Contract Year, and 700,000 Impressions during the third Contract Year. @Home will also provide creative services to assist the production of up to four B*Box advertisements per year. This may include a marketing campaign to build a broader consumer awareness of Weather@Home and/or Co-Branded Weather@Home. b) Outbound Marketing. Home will use reasonable efforts with its Distribution Affiliates to include the WeatherLabs in any content-related external marketing pieces. These marketing pieces will, at a minimum, include the WeatherLabs logo but may also include the WeatherLabs descriptions, screen shots, video of the @Home Service which includes Weather@Home, etc. Possible marketing avenues may include, but are not limited to, cable TV spots, newspaper ads, bill stuffers, postcards, door hangers, direct mail, and take-one brochures. c) Other Online Marketing . @Home and DCTI will work together to include the WeatherLabs in other appropriate online mechanisms for showcasing Weather@Home and other offerings as these mechanisms are developed. Page 4 d) Usage Data. @Home will provide DCTI with aggregated usage data concerning access (unique site visitation, total Impressions, etc.) by visitors to Weather@Home. Usage data reports will be provided semi-annually and as reasonably requested by DCTI The reports will be delivered in the format most commonly collected by @Home. All usage data will be considered Confidential Information of @Home. Unless @Home is legally or contractually otherwise required, @Home will not provide to any third party, other than Distribution Affiliates, usage data specific to WeatherLabs Online or Weather@Home that has not been aggregated with other data, without DCTIs prior consent. 4. @Home Network and Distribution Contribution. a) @Home Distribution. @Home will distribute Weather@Home through all means by which it distributes its national content to subscribers using personal computers. b) Channel Serving and Distribution. @Home. will provide backbone transport, caching, and network management associated with the distribution of Weather@Home and any related content to @Home subscribers over the @Home Network. Without limiting any rights @Home. may have under applicable laws, DCTI agrees that @Home may promote (as contemplated by this Agreement), transport (i.e. transmit and serve), cache on proxy servers, replicate on replication servers and reproduce on related storage devices operated by @Home and its Distribution Affiliates, the content provided by DCTI to @Home for Weather@Home. c) Connectivity to the @Home Backbone If both parties together determine that a direct connection is required between @Home and the WeatherLabs, @Home and DCTI will share equally (50/50) the cost of direct connectivity from the DCTI Data Server Farm and the nearest @Home Network backbone access point. 5. DCTI Contribution. a) Co-branded Weather@Home site. DCTI will create and host the Co-branded Weather@Home. Except as mutually agreed in writing by the parties, the Co branded Weather@Home site will contain, at a minimum, the content described in Section 5b and will not contain any third-party products, services, programming or elements generally not depicted in Exhibit A. DCTI will review, delete, edit, create, update and otherwise manage all content available on or through the Co branded Weather@Home site in accordance with the terms of this Agreement. DCTI will ensure that the Co-branded Weather@Home site does not in any respect promote, advertise, market or distribute the products, services or content of any other interactive service or any entity reasonably construed to be in competition with @Home. Additionally DCTI will bear responsibility for the implementation, management and costs associated with the Co-branded Weather@Home site. Page 5 b) Weather Content. Weather@Home and Co-branded Weather@Home will consist of a News On-Line weather service that is rich in graphics, text, and animations and will include, at a minimum, weather data supplied by DCTI as follows: i) 24-hour round-the-clock weather information; ii) Day Local Forecast, Regional Forecast, & National Forecast; iii) Local, Regional, and National Radar Map; iv) Local, Regional, and National Satellite Imagery; v) Severe Weather Report; and vi) Weather Personalization Features. c) Ad Inventory At part of its consideration hereunder, DCTI will provide @Home with advertising banners at no cost in the amounts set forth herein to promote Weather@Home or other @Home offerings. Such banner Impressions shall be provided on a "run-of-site" basis, that is, the banner Impressions shall be substantially distributed randomly both throughout The Weather Labs Online and over the course of a twenty-four (24) hour day, until such banner Impressions are achieved at the following levels: 2,000,000 banner Impressions during the first Contract Year, 3,500,000 banner Impressions during the second Contract Year, and 5,000,000 banner Impressions during the third Contract Year. If DCTI is unable to deliver the minimum number of Impressions, subject to @Home's approval (which shall not be unreasonably withheld), DCTI will provide @Home, as its sole remedy, with a comparable promotional placement. d) Production Work. DCTI will be responsible for all production work associated with Co-branded Weather@Home, including all related costs and expenses. e) Hosting; Communications. DCTI will be responsible for all communications, hosting and connectivity costs and expenses associated with the Co-branded Weather@Home site. In addition, DCTI will provide all computer hardware (e.g., servers, network devices, routers, switches, telephones and other similar equipment) and all computer software (e.g., web servers, operating systems, applications, databases and other similar resources) necessary for DCTI to access the @Home Network. f) Traffic Flow. DCTI will take reasonable efforts to ensure that @Home traffic is either kept within the Co-branded Weather@Home site or channeled back into the @Home Network (with the exception of advertising links sold and implemented pursuant to the Agreement). The Parties will work together on implementing mutually acceptable links from the Co-branded Weather@Home site back to the @Home Service. g) Active Web Presence. During the term of this Agreement, WeatherLabs will maintain an Active Web Presence. For the purpose of this Agreement, "Active Web Presence" means the maintenance of the Page 6 WeatherLabs World Wide Web site that offers at least the level of performance and functionality as offered on the Effective Date (including breadth and depth of offerings, services and suppliers). h) Quality of Services. If the quality of the primary features and functions of Weather@Home (including frequency of updates, breadth and depth of coverage, usability, etc.) are not substantially equal to or better than the analogous functions and features provided by other third party content providers of weather information, then @Home may so notify DCTI in writing of such deficiencies, including a description of how Weather@Home is deficient. Within thirty (30) days of receiving such notice DCTI will provide @Home with a reasonable plan for rectifying such deficiencies. Such plan must be completed as soon as possible and in no event later than ninety (90) days after the date DCTI received the notice of deficiency. If DCTI fails to provide such plan or to implement it within such periods, or if such implementation does not rectify the specified deficiencies, then @Home may terminate all or any relevant portion of the "Exclusive Position" granted to DCTI under Section 2 above. i) @Home Exclusive Position. During the term of this Agreement, DCTI will not directly distribute the WeatherLabs content through any Distribution Affiliates. j) Customer Support. @Home will forward all telephone calls and e-mails @Home receives related to Weather@Home to DCTI personnel if weather support is needed. k) Weather Data Feed. DCTI will provide @Home HTTP access to a regularly updated weather data file, in a mutually agreed upon format defined by both parties. 1) Problem Escalation. DCTI will provide a contact point for problem escalation. DCTI will make all reasonable efforts to respond to problem escalation within one hour of notification. 6. Joint @Home/DCTI Contribution. a) User Interface and Content. @Home and DCTI will mutually agree on the User interface design and on the types of content which appear in: i) The Weather@Home page, which shall be consistent with the @Home look-and-feel, and ii) The Co-branded Weather@Home site. b) Technical Specifications. DCTI and @Home will mutually agree upon the technical specifications for Weather@Home and Co-branded Weather@Home. If @Home makes changes in the applicable technical specifications, DCTI will make good faith efforts to comply with such changes. c) @Home User Interface Change @Home reserves the right to change the @Home Service user interface at its discretion; provided that: (a) Page 7 @Home will give DCTI reasonable advance notice of any change that is reasonably likely to have a material impact on DCTI promotional placements (including, among other things, the size, functionality, prominence or relative importance of such placements) or advertising Impressions and an opportunity to consult with @Home regarding such change, and (b) following any such change, @Home will provide DCTI with promotional and exclusivity placements substantially similar to those described in this Agreement. 7. Cash Compensation. a) Guaranteed Service Payments to @Home The parties have agreed that the cash value of the services provided by @Home during the term of the agreement (as outlined hereunder) are One Hundred Fifty Thousand Dollars ($150,000) in Contract Year one, Three Hundred Fifty Thousand Dollars ($350,000) in Contract Year two, and Five Hundred Thousand Dollars ($500,000) in Contract Year 3. In consideration for the above services, DCTI will pay @Home a non-refundable guaranteed payment of One Million Dollars US ($1,000,000) as follows: i) Upon execution of this Agreement: a) Two Hundred Sixty-Six Thousand Dollars (US$266,000); and b) 20,534 shares common stock of DCTI to be registered on an S3 Shelf Registration Statement (the "Common Stock"), such number of shares of Common Stock as determined by dividing the 12-day trailing average price per share of DCTI Common Stock for the 12 days prior to the Effective Date, computed as nine dollars and seventy four cents ($9.74) per share, as reported on the NASDAQ Stock Market (the "Market Price") into Two Hundred Thousand Dollars (US $200,000). c) DCTI represents and warrants that it is eligible to file an S-3 Shelf Registration (the "Registration Statement") and will complete such registration within ninety (90) days of the Effective Date. The Registration Statement shall remain in effect for a period of one year from its effective date. ii) On the first anniversary of the Effective Date: Two Hundred Sixty-Seven Thousand Dollars (US $267,000); and iii) On the second anniversary of the Effective Date: Two Hundred Sixty-Seven Thousand Dollars (US $267,000). b) Method of Payment. Cash payments will be made by check or wire transfer to the following account: Silicon Valley Bank Santa Clara, Routing/ Transit # 121140399, For Credit of At Home Corporation, Credit Account # 3300113199, By Order of: DCTI. Page 8 8. Warrants. a) Grant of Warrants. i) First Warrant. DCTI will grant to @Home a warrant representing the right for a seven (7) year period to purchase an aggregate of One Hundred Thousand (100,000) shares of unrestricted DCTI Common Stock (the "Warrant Shares") at an exercise price of nine dollars and seventy four cents ($9.74) per share. Such warrant shall be covered by the Registration Statement. ii) Second Warrant. DCTI will grant to @Home a warrant representing the right for a seven (7) year period to purchase an aggregate of One Hundred Thousand (100,000) shares of unrestricted DCTI Common Stock (the "Performance Warrant Shares") at an exercise price equal nineteen dollars and forty-eight cents ($19.48) per share. Such warrant shall be covered by the Registration Statement. iii) The parties will work together to execute warrant documents within thirty (30) days of the Effective Date. b) Vesting of Warrant Shares. The Warrant Shares granted hereunder shall vest and become exercisable immediately upon the Effective Date. c) Vesting of Performance Warrant Shares. The Performance Warrant Shares granted hereunder shall vest and become exercisable in accordance with the following schedule: i) At the end of the first Contract Year, provided that Weather@Home shall have received at least three million (3,000,000) Impressions during each of the foregoing quarters or a total of twelve million (12,000,000) Impressions over the course of the Contract Year, thirty-three percent (33%) of the Performance Warrant Shares (33,333.33 shares) shall vest and become immediately exercisable. ii) At the end of the second Contract Year, provided that Weather@Home shall have received at least ten million (10,000,000) Impressions during each of the foregoing quarters or a total of forty million (40,000,000) Impressions over the course of the Contract Year, thirty-three percent 33% of the Performance Warrant Shares (33,333.33 shares) shall vest and become immediately exercisable. In addition, up to 33% (33,333.33) additional Performance Warrant Shares shall vest and become immediately exercisable as of this date to the extent that: (1) these shares did not vest in the prior Contract Year due to @Home's failure to reach the Impression target set forth herein for that Contract Year; and (ii) @Home has subsequently performed hereunder to remedy any such shortfall. Page 9 iii) At the end of the third Contract Year, provided that Weather@Home shall have received at least twenty-one million (21,000,000) Impressions during each of the foregoing quarters or a total of eighty four million (84,000,000) Impressions over the course of the Contract Year, thirty-three percent 33% of the Performance Warrant Shares (33,333.34 shares) shall vest and become immediately exercisable. In addition, up to 66% (66,666.66) additional Performance Warrant Shares shall vest and become immediately exercisable as of this date to the extent that:(i) these shares did not vest in the prior Contract Years due to @Home's failure to reach the Impression target set forth herein for those Contract Years; and (ii) @Home has subsequently performed hereunder to remedy any such shortfall. iv) The warrant agreement shall contain a net exercise provision such that @Home can commence its Rule 144 holding period on the date of issuance of the warrants. v) Notwithstanding the foregoing, all Performance Warrant Shares shall immediately vest in the event that: (a) @Home and DCTI enter into a binding agreement with respect to the promotion by @Home of other content or commerce offerings that may include either VideosNow or netClearing, both products of DCTI; or (b) a change of control of DCTI occurs, whichever is earlier. 9. Other Financial Considerations. a) Advertising Revenue . i) Inventory Selling on Weather@Home @Home has the exclusive right to sell advertising inventory on the Weather@Home page. ii) Inventory Selling on Co-branded Weather@Home DCTI has the exclusive right to sell promotions, advertisements, links pointers or similar services or rights on the Co-branded Weather@Home site. The specific advertising inventory within the Co-branded Weather@Home site win be as reasonably determined by DCTI. Notwithstanding the foregoing, in the event that DCTI desires to retain a third party to sell advertisements in the Co-branded Weather@Home site on behalf of DCTI, DCTI shall first offer to @Home the right to sell such Advertisements on behalf of DCTI. All advertisements in the Co-branded Weather@Home site shall be subject to @Home's then-applicable advertising policies, exclusivity obligations and prior approval. iii) Revenue Split on Weather@Home During the term of this Agreement, @Home will remit to DCTI 40% of its Net Advertising Revenue generated from Weather@Home. Page 10 iv) No Revenue Split on Co-branded Weather@Home During the term of this Agreement, DCTI will keep all Advertising and Sponsorship Revenue generated from Co-branded Weather@Home. b) Payment Frequency . All Net Advertising Revenue amounts owed from one party to the other shall be paid within thirty (30) days of the end of each Semiannual Period of each Contract Year. c) Alternative Revenue Streams. In the event DCTI or any of its affiliates receives or desires to receive, directly or indirectly, any additional revenues in connection with the Co-branded Weather@Home site (an "Alternative Revenue Stream"), DCTI will promptly inform @Home in writing, and the Parties will negotiate in good faith regarding whether DCTI will be allowed to market products producing such Alternative Revenue Stream through the Co-branded Weather@Home site, and if so, the equitable portion of revenues from such Alternative Revenue Stream (if applicable) that will be shared with @Home. d) Audit Rights . DCTI will maintain complete, clear and accurate records of all expenses, revenues and fees in connection with the performance of this Agreement. For the sole purpose of ensuring compliance with this Agreement, @Home will have the right, at its expense, to direct an independent certified public accounting firm to conduct a reasonable and necessary inspection of portions of the books and records of DCTI which are relevant to DCTIs performance pursuant to this Agreement. Any such audit may be conducted after twenty (20) business days prior written notice. e) Taxes. DCTI will be solely responsible for the payment of, and will indemnify and hold @Home harmless from, any sales, use, excise, import or export value added or similar tax or duty not based on @Home's net income, including any penalties and interest, as well as any costs associated with the collection or withholding thereof, including attorneys' fees. 10. Commencement. a) Both parties agree to use reasonable commercial efforts to cause Weather@Home to become commercially available to @Home subscribers on or before sixty (60) days from the Effective Date. 11. Term and Termination. a) Initial Term. The initial term of this Agreement will begin on the Effective Date and will end three (3) years after the date that Weather@Home page is first commercially available to @Home subscribers. b) Termination Due to Breach. Either party may terminate this Agreement, effective upon thirty (30) days' written notice, if the Page 11 other party fails to cure a material breach of any material obligation under this Agreement within thirty (30) days following written notice to such party. c) No Liability for Termination. Neither @Home nor DCTI will have any liability to the other merely as a result of termination of this Agreement in accordance with this Section 11, however all amounts earned but unpaid as of such termination shall be due and payable to either party in accordance with the terms set forth in this Agreement. 12. Trademarks. a) Use During Agreement. @Home and DCTI each will have the right, without charge, to use in promoting Weather@Home and the @Home Service the other's business name and any tradenames, trademarks and service marks that @Home may adopt for use with the @Home Service (collectively, "@Home Marks") and that DCTI may adopt for use with Weather@Home and/or Co-branded Weather@Home (collectively, "DCTI Marks"). However, any such use must be identical to use by the party that owns the Mark, and as approved by the owner in writing in advance, or otherwise in accordance with any trademark usage guidelines communicated by the owner. DCTI expressly authorizes the use of DCTI Marks in connection with the outbound marketing described in Section 3(b), and will provide @Home with guidelines for how to describe/display the WeatherLabs in @Home marketing efforts. b) Proprietary Rights . The owner retains all goodwill and all other rights thereto, and the other party obtains no goodwill or any other rights thereto as a result of the use of the owner's Marks. Except as explicitly set forth herein, no other licenses or rights are granted or implied. 13. Representatives and Warranties; Indemnification. a) Mutual Representations and Warranties. Each party to this Agreement represents and warrants to the other party that: (a) such party has the full corporate right, power and authority to enter into this Agreement and to perform the acts required of it hereunder; (b) the execution of this Agreement by such party, and the performance by such party of its obligations and duties hereunder, do not and will not violate any agreement to which such party is a party or by which it is otherwise bound; and (c) when executed and delivered by such party, this Agreement will constitute the legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms. b) DCTI Representations and Warranties. DCTI warrants that it has full power and authority to provide the data provided hereunder (the "Weather Data") and the Weather Data will be substantially similar to the specifications set forth in Exhibit A. DCTI represents that it will deliver the Weather Data to @Home in the form of electronic Page 12 data file(s) via the Internet. DCTI makes no representation or warranty as to the capability of the Internet to provide a continuous on-line connection for delivery of the Weather Data. DCTI will make commercially reasonable efforts to ensure that such online connection to the Internet is upheld. DCTI does not warrant or guarantee the accuracy of its weather, forecasts. ALL OTHER WARRANTIES, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE ARE HEREBY EXCLUDED. c) @Home Representations and Warranties. EXCEPT AS OTHERWISE SET FORTH IN THIS AGREEMENT: (A) @HOME DOES NOT MAKE ANY WARRANTIES CONCERNING THE @HOME NETWORK OR THE @HOME SERVICE, EXPRESS, IMPLIED OR OTHERWISE, (B) @Home SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT WITH RESPECT TO THIRD PARTY RIGHTS, AND (C) THE @HOME NETWORK, THE @HOME SERVICE, AND ANY AND ALL CONTENT AND TOOLS AND RELATED DELIVERABLES PROVIDED BY @HOME IN CONNECTION WITH: THIS AGREEMENT ARE PROVIDED BY @HOME "AS IS". d) Indemnification. Each party will indemnify the other party and its customers and affiliates for, and hold them harmless from, any loss, expense (including reasonable attorney's fees and court costs), damage or liability arising out of any claim, demand or suit resulting from a breach of any of the warranties of the indemnifying party in this Section 13. As a condition to indemnification (a) the indemnified party will promptly inform the indemnifying party in writing of any such claim, demand or suit and the indemnifying party will fully cooperate in the defense thereof; and (b) the indemnified party will not agree to the settlement of any such claim, demand or suit prior to a final judgment thereon without the consent of the indemnifying party. 14. Limitation Of Liability. a) @HOME, @HOME's DISTRIBUTION AFFILIATES AND DCTI WILL NOT BE LIABLE TO ONE ANOTHER, UNDER ANY LEGAL OR EQUITABLE THEORY, FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES OF ANY KIND, SUFFERED BY OR OTHERWISE CONPENSABLE TO THE OTHER, ARISING OUT OF, UNDER OR RELATING TO THIS AGREEMENT, WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WITH @HOME OR @HOME'S DISTRIBUTION AFFILIATES HAVE ANY LIABILITY OF ANY NATURE OR AMOUNT WHATSOEVER To DCTI ARISING OUT OF, UNDER OR RELATING TO ANY FAILURE OF THE DISTRIBUTION OF THE CONTENT OR ANY PART THEREOF OR ANY SOFTWARE PROGRAM, SOFTWARE OR WEB SITE LINK OR LINK MECHANISM, OR OTHER MATERIAL OR ITEMS THROUGH THE @HOME NETWORK OR OTHERWISE (INCLUDING BUT NOT LIMITED TO ANY SUCH FAILURE OF DISTRIBUTION RESULTING FROM A DISTRIBUTION AFFILIATE'S ELECTION NOT TO DISTRIBUTE MATERIAL OR ITEMS, OR DUE TO TECHNICAL DIFFICULTIES OR OTHERWISE). IN NO EVENT WILL EITHER PARTYS LIABILITY TO THE OTHER FOR DAMAGES ARISING OUT Page 13 EX-21 6 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 DATAMARK HOLDING, INC. Subsidiaries of the Registrant The Company has three wholly owned operating subsidiaries; namely, Books Now, Inc., WorldNow Online Network, Inc., and WeatherLabs, Inc. Books Now, Inc. and WorldNow Online Network, Inc. are Nevada corporations. WeatherLabs, Inc is an Illinois corporation. EX-22 7 PUBLISHED REPORT REGARDING MATTERS SUBMITTED Exhibit 22.0 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated September 23, 1998 included in the Form 10-K, into the Company's previously filed Registration Statement File No. 333-51183. Arthur Andersen LLP Salt Lake City, Utah October 12, 1998 EX-27 8 FDS --
5 12-MOS JUN-30-1998 JUL-01-1998 JUN-30-1998 32117247 0 16859 0 21046 6605231 7003236 2109736 23222948 3640916 1384132 0 0 827 18197071 18197898 803011 803011 745871 9026143 0 0 157616 (8948265) (2684000) (6264265) (4473331) 0 0 (1790934) (0.74) (0.21)
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