<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 3, 1999
---------------------
THE INTERCEPT GROUP, INC.
-------------------------
(Exact Name of Registrant
as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Georgia 01-14213 58-2237359
- --------------------------------------------------------------------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
</TABLE>
3150 Holcomb Bridge Road, Suite 200, Norcross, Georgia 30071
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (770) 248-9600
--------------
N/A
------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The registrant hereby amends its report on Form 8-K filed on September 17,
1999 by deleting the text under Item 7 and replacing it with the following text.
(a) Financial Statements of Business Acquired.
Included as Exhibit 99.1, 99.2 and 99.3 hereto and incorporated
herein by reference.
(b) Pro Forma Financial Information.
Included as Exhibit 99.4 hereto and incorporated herein by
reference.
(c) Exhibits.
Item No. Exhibit List
2.1 Agreement and Plan of Merger dated September 3, 1999 by and
between Netzee, Inc. and Direct Access Interactive, Inc. *
2.2 Agreement and Plan of Merger dated September 3, 1999 by and
between Netzee, Inc., Dyad Corporation and certain of the
shareholders of Dyad Corporation.*
2.3 Asset Contribution Agreement dated September 3, 1999 by and among
The InterCept Group, Inc., Netzee, Inc. and The Bankers bank.*
2.4 Asset Contribution Agreement dated September 3, 1999 by and among
The InterCept Group, Inc., and TIB The Independent Banker's
Bank.*
99.1 The following financial statements of Dyad Corporation together
with the report by Arthur Andersen LLP for the periods stated
therein:
Consolidated Balance Sheets as of December 31, 1997 and 1998 and
June 30, 1999 (Unaudited)
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1998
and 1999 (Unaudited)
Consolidated Statements of Changes in Shareholders' Deficit for
the years ended December 31, 1997 and 1998 and the six months
ended June 30, 1999 (Unaudited)
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998 and for the six months ended June 30,
1998 and 1999 (Unaudited)
Notes to Consolidated Financial Statements
99.2 The following financial statements of The Bankers Bank together
with the report by Arthur Andersen LLP for the periods stated
therein:
Balance Sheets as of December 31, 1998 and June 30, 1999
(Unaudited)
Statements of Operations for the period from Inception (March 1,
1998) to December 31, 1998 and for the period from Inception
(March 1, 1998) to June 30, 1998 and for the six month period
ended June 30, 1999 (Unaudited)
Statements of Changes in Accumulated Deficit for the period from
Inception (March 1, 1998) to December 31, 1998 and for the six
month period ended June 30, 1999 (Unaudited)
Statements of Cash Flows for the period from Inception (March 1,
1998) to December 31, 1998 and for the period from Inception
(March 1, 1998) to June 30, 1998 and for the six month period
ended June 30, 1999 (Unaudited)
Notes to Financial Statements
2
<PAGE>
99.3 The following financial statements of The Independent BankersBank
together with the report by Arthur Andersen LLP for the periods
stated therein:
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited)
Statements of Operations for the period from inception
(February 1, 1997) to December 31, 1997 and for the year ended
December 31, 1998 and for the six months ended June 30, 1998
and 1999 (Unaudited)
Statements of Changes in Accumulated Deficit for the period from
inception (February 1, 1997) to December 31, 1997 and for the
year ended December 31, 1998 and for the six months ended
June 30, 1999 (Unaudited)
Statements of Cash Flows for the period from inception
(February 1, 1997) to December 31, 1997 and for the year ended
December 31, 1998 and for the six months ended June 30, 1998 and
1999 (Unaudited)
Notes to Financial Statements
99.4 The following unaudited pro forma condensed consolidated
financial statements of The InterCept Group, Inc., the Company's
recent acquisitions including Dyad, The Bankers Bank and The
Independent BankersBank.
Pro Forma Condensed Consolidated Balance Sheet as of June 30,
1999.
Pro Forma Condensed Consolidated Statement of Operations for the
six months ended June 30, 1999.
Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1998.
Notes to Pro Forma Condensed Consolidated Financial Statements.
* Previously filed with the registrant's Current Report on Form 8-K filed
September 17, 1999.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE INTERCEPT GROUP, INC.
By: /s/ Scott R. Meyerhoff
-----------------------------------------
Scott R. Meyerhoff
Chief Financial Officer
Dated: September 30, 1999
4
<PAGE>
EXHIBIT LIST
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger dated September 3, 1999 by and
between Netzee, Inc. and Direct Access Interactive, Inc. *
2.2 Agreement and Plan of Merger dated September 3, 1999 by and
between Netzee, Inc., Dyad Corporation and certain of the
shareholders of Dyad Corporation.*
2.3 Asset Contribution Agreement dated September 3, 1999 by and among
The InterCept Group, Inc., Netzee, Inc. and The Bankers bank.*
2.4 Asset Contribution Agreement dated September 3, 1999 by and among
The InterCept Group, Inc., and TIB The Independent Banker's
Bank.*
99.1 The following financial statements of Dyad Corporation together
with the report by Arthur Andersen LLP for the periods stated
therein:
Consolidated Balance Sheets as of December 31, 1997 and 1998 and
June 30, 1999 (Unaudited)
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1998
and 1999 (Unaudited)
Consolidated Statements of Changes in Shareholders' Deficit for
the years ended December 31, 1997 and 1998 and the six months
ended June 30, 1999 (Unaudited)
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998 and for the six months ended June 30,
1998 and 1999 (Unaudited)
Notes to Consolidated Financial Statements
99.2 The following financial statements of The Bankers Bank together
with the report by Arthur Andersen LLP for the periods stated
therein:
Balance Sheets as of December 31, 1998 and June 30, 1999
(Unaudited)
Statements of Operations for the period from Inception (March 1,
1998) to December 31, 1998 and for the period from Inception
(March 1, 1998) to June 30, 1998 and for the six month period
ended June 30, 1999 (Unaudited)
Statements of Changes in Accumulated Deficit for the period from
Inception (March 1, 1998) to December 31, 1998 and for the six
month period ended June 30, 1999 (Unaudited)
Statements of Cash Flows for the period from Inception (March 1,
1998) to December 31, 1998 and for the period from Inception
(March 1, 1998) to June 30, 1998 and for the six month period
ended June 30, 1999 (Unaudited)
Notes to Financial Statements
99.3 The following financial statements of The Independent BankersBank
together
5
<PAGE>
with the report by Arthur Andersen LLP for the periods stated
therein:
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited)
Statements of Operations for the period from inception
(February 1, 1997) to December 31, 1997 and for the year ended
December 31, 1998 and for the six months ended June 30, 1998
and 1999 (Unaudited)
Statements of Changes in Accumulated Deficit for the period from
inception (February 1, 1997) to December 31, 1997 and for the
year ended December 31, 1998 and for the six months ended
June 30, 1999 (Unaudited)
Statements of Cash Flows for the period from inception
(February 1, 1997) to December 31, 1997 and for the year ended
December 31, 1998 and for the six months ended June 30, 1998 and
1999 (Unaudited)
Notes to Financial Statements
99.4 The following unaudited pro forma condensed consolidated
financial statements of The InterCept Group, Inc., the Company's
recent acquisitions including Dyad, The Bankers Bank and The
Independent BankersBank.
Pro Forma Condensed Consolidated Balance Sheet as of June 30,
1999.
Pro Forma Condensed Consolidated Statement of Operations for the
six months ended June 30, 1999.
Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1998.
Notes to Pro Forma Condensed Consolidated Financial Statements.
* Previously filed with the registrant's Current Report on Form 8-K filed
September 17, 1999.
6
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dyad Corporation:
We have audited the accompanying consolidated balance sheets of DYAD
CORPORATION (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997
and 1998 and the related consolidated statements of operations, shareholders'
deficit, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Dyad Corporation and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
September 3, 1999
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1997 1998 1999
----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 1,910,621 $ 15,326 $ 18,689
Restricted cash............................ 245,000 204,167 0
Accounts receivable........................ 31,326 25,870 22,670
Inventories................................ 114,628 3,286 0
Other current assets....................... 7,272 0 0
----------- ---------- ----------
Total current assets..................... 2,308,847 248,649 41,359
PROPERTY AND EQUIPMENT, net.................. 255,687 50,972 18,667
GOODWILL, net of accumulated amortization of
$59,568, $97,050, and $114,542 at December
31, 1997 and 1998 and June 30, 1999,
respectively................................ 145,347 107,864 90,372
DEFERRED FINANCING COSTS..................... 7,746,121 6,664,397 6,076,138
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net
of accumulated amortization of $20,990,
$37,813, and $46,017 at December 31, 1997
and 1998 and June 30, 1999, respectively.... 33,230 16,407 8,203
OTHER ASSETS................................. 7,791 0 0
----------- ---------- ----------
Total assets............................. $10,497,023 $7,088,289 $6,234,739
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses...... $ 179,908 $ 148,920 $ 116,461
Customer deposits.......................... 60,000 0 0
Current portion of long-term debt.......... 17,520 19,123 424,495
Deferred revenue........................... 135,250 0 0
----------- ---------- ----------
Total current liabilities................ 392,678 168,043 540,956
----------- ---------- ----------
LONG-TERM LIABILITIES:
Debt, less current portion and unamortized
discount of 2,120,573, 1,972,304, and
1,869,845 at December 31, 1997 and 1998
and June 30, 1999, respectively........... 1,405,464 1,533,803 1,632,193
Deferred revenue........................... 411,666 0 0
----------- ---------- ----------
Total long-term liabilities.............. 1,817,130 1,533,803 1,632,193
----------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 11,
and 12)
WARRANTS WITH REDEMPTION FEATURE............. 9,752,573 10,404,573 10,730,573
----------- ---------- ----------
SHAREHOLDERS' DEFICIT:
Preferred stock, no par value; 50,000
shares authorized, no shares issued and
outstanding............................... 0 0 0
Common stock, no par value; 1,000,000
shares authorized, 11,677, 12,027, and,
12,027 shares issued and outstanding at
December 31, 1997 and 1998 and June 30,
1999, respectively........................ 1,287,218 1,937,218 1,937,218
Subscription receivable (Note 10).......... (5,000) (5,000) (5,000)
Accumulated deficit........................ (2,747,576) (6,950,348) (8,601,201)
----------- ---------- ----------
Total shareholders' deficit.............. (1,465,358) (5,018,130) (6,668,983)
----------- ---------- ----------
Total liabilities and shareholders'
deficit................................. $10,497,023 $7,088,289 $6,234,739
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended For the Six Months Ended
December 31, June 30,
------------------------ --------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Equipment and hardware
sales................. $ 418,773 $ 375,140 $ 108,834 $ 97,246
License fees........... 108,334 97,499 65,000 0
Support and maintenance
fees.................. 7,000 32,702 10,417 5,840
----------- ----------- ------------ ------------
Total revenues....... 534,107 505,341 184,251 103,086
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Cost of sales.......... (400,934) (409,002) (96,570) (54,779)
Selling, general, and
administrative........ (1,634,456) (1,524,266) (806,301) (390,244)
Research and
development........... (283,027) (164,243) (60,376) (32,995)
Asset impairment
charge................ 0 (143,000) 0 0
Depreciation and
amortization.......... (159,840) (136,795) (72,138) (48,565)
----------- ----------- ------------ ------------
Total costs and
expenses............ (2,478,257) (2,377,306) (1,035,385) (526,583)
----------- ----------- ------------ ------------
OPERATING LOSS........... (1,944,150) (1,871,965) (851,134) (423,497)
----------- ----------- ------------ ------------
OTHER INCOME (EXPENSE)
Other income........... 25,000 0 36,186 4,199
Interest expense, net.. (89,689) (1,678,807) (842,263) (905,555)
----------- ----------- ------------ ------------
(64,689) (1,678,807) (806,077) (901,356)
----------- ----------- ------------ ------------
NET LOSS................. $(2,008,839) $(3,550,772) $ (1,657,211) $ (1,324,853)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Total
----------------- Subscription Accumulated Shareholders'
Shares Amount Receivable Deficit Deficit
------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996................... 9,611 $ 288,218 $(5,000) $ (738,737) $ (455,519)
Issuance of common
stock for cash....... 1,066 949,000 0 0 949,000
Issuance of common
stock in connection
with the acquisition
of MoneyPro.......... 1,000 50,000 0 0 50,000
Net loss.............. 0 0 0 (2,008,839) (2,008,839)
------ ---------- ------- ----------- -----------
BALANCE, December 31,
1997................... 11,677 1,287,218 (5,000) (2,747,576) (1,465,358)
Issuance of common
stock to Phoenix
(Note 4)............. 350 650,000 0 0 650,000
Accretion of Warrants
with redemption
feature (Note 7)..... 0 0 0 (652,000) (652,000)
Net loss.............. 0 0 0 (3,550,772) (3,550,772)
------ ---------- ------- ----------- -----------
BALANCE, December 31,
1998................... 12,027 1,937,218 (5,000) (6,950,348) (5,018,130)
Accretion of Warrants
with redemption
feature (unaudited).. 0 0 0 (326,000) (326,000)
Net loss (unaudited).. 0 0 0 (1,324,853) (1,324,853)
------ ---------- ------- ----------- -----------
BALANCE, June 30, 1999
(Unaudited)............ 12,027 $1,937,218 $(5,000) $(8,601,201) $(6,668,983)
====== ========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended For the Six Months Ended
December 31, June 30,
------------------------ --------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(2,008,839) $(3,550,772) $ (1,657,211) $ (1,324,853)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization........ 176,663 157,780 80,760 58,001
Amortization of
deferred financing
costs and discount
on notes payable.... 0 1,229,186 578,192 686,649
Asset impairment..... 0 143,000 0 0
Changes in assets and
liabilities, net of
effects of
acquisition:
Accounts
receivable........ (31,326) 5,456 3,725 3,200
Inventories........ 8,865 111,342 (75,478) 3,286
Restricted Cash.... (245,000) 40,833 0 204,167
Deferred revenue... 546,916 103,089 (65,000) 0
Other assets....... 60,543 15,063 (19,071) 0
Accounts payable
and accrued
expenses.......... (33,736) (30,988) (47,514) (32,459)
Customer deposits.. 28,805 (60,000) 0 0
----------- ----------- ------------ ------------
Net cash used in
operating
activities....... (1,497,109) (1,836,011) (1,201,867) (402,009)
----------- ----------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment......... (202,718) (41,764) (35,765) 0
----------- ----------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments of long-term
debt.................. (25,379) (17,520) 0 0
Payment of deferred
financing costs....... (114,121) 0 0 0
Proceeds from sale of
common stock.......... 949,000 0 0 0
Decrease in due to
related party......... (735,981) 0 0 0
Proceeds from issuance
of debt and warrants.. 3,500,000 0 6,548 405,372
----------- ----------- ------------ ------------
Net cash provided
by (used in)
financing
activities....... 3,573,519 (17,520) 6,548 405,372
----------- ----------- ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 1,873,692 (1,895,295) (1,231,084) 3,363
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 36,839 1,910,621 1,910,621 15,326
----------- ----------- ------------ ------------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 1,910,531 $ 15,326 $ 679,537 $ 18,689
=========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 89,689 $ 459,285 $ 205,051 $ 166,001
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(Information as of June 30, 1999 and for the Six Months Ended
June 30, 1998 and 1999 is Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
Financial Delivery Systems, Inc. was incorporated in Georgia on May 9, 1996
and later changed its name to Dyad Corporation (the "Company"). The Company
develops high technology products and services which will enable consumers to
obtain financing for consumer durables at the point of sale through the use of
automated loan devices.
In January, 1997, the Company acquired MoneyPro, Inc. ("MoneyPro") which
provides mortgage lending information technology and related services in a
transaction accounted for as a purchase (Note 3).
In May, 1997, the Company acquired Bank Systems & Equipment Corporation
("Basecorp") which provides automated branching centers, printers, and related
supplies to financial institutions in a transaction accounted for as a pooling
of interests (Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, MoneyPro and Basecorp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
Interim Unaudited Financial Information
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited; however, in the opinion of management,
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash
In conjunction with the Sirrom Note (Note 6), the Company was required to
establish an interest escrow account of $245,000 in December of 1997. The
account is designated for monthly interest payments on the Note payable to
Sirrom Investments, Inc. (See Note 6) if the Company fails to make such
payments.
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant Customers
Approximately 24% of the Company's revenues were derived from the license
fee of a national distributor for the year ended December 31, 1998.
Approximately 40% and 15% of the Company's revenues were derived from equipment
and hardware sales to four major customers during the year ended 1998 and the
six month period ended 1999, respectively.
Property and Equipment
Property and equipment are stated at cost less impairment changes as
discussed in Note 5. Major property additions, replacements, and betterments
are capitalized, while maintenance and repairs which do not extend the useful
lives of these assets are expensed as incurred. The detail of property and
equipment at December 31, 1997 and 1998 and June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Useful
1997 1998 1999 Lives
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Furniture and fixtures............ $ 74,014 $ 48,274 $ 48,274 Five years
Computers and equipment........... 248,610 180,446 179,216 Three years
Vehicles.......................... 25,327 16,747 16,747 Five years
Leasehold improvements............ 18,617 19,866 19,866 Lease term
--------- -------- --------
366,568 265,333 264,103
Less accumulated depreciation..... (110,881) (214,361) (245,436)
--------- -------- --------
$ 255,687 $ 50,972 $ 18,667
========= ======== ========
</TABLE>
Depreciation expense for the year ended December 31, 1997 and 1998 and the
six months ended June 30, 1998 and 1999 was $55,203, $103,480, $52,147, and
$31,075, respectively.
Capitalized Software Development Costs
Research and development costs are expensed as incurred. Software
development costs are charged to research and development expense until
technological feasibility of the software is established, after which remaining
software production costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for Computer
Software to be Sold, Leased, or Otherwise Marketed." Amortization of
capitalized software development costs begins as products are made available
for sale or as the product is put into use with annual amortization equal to
the greater of the amount computed using the ratio that current gross revenues
bear to the total of current and anticipated future gross revenues for the
product or the straight-line method over the remaining economic life of the
product. Amortization expense of $20,990, $16,823, $8,411, and $8,204 for the
years ended December 31, 1997 and 1998 and for the six months ended June 30,
1998 and 1999, respectively, has been included in cost of sales in the
accompanying consolidated statements of operations. The Company amortizes
software development costs over three years.
Goodwill
Goodwill represents the excess of the purchase price over the net tangible
and identifiable intangible assets of acquired businesses. Goodwill is
amortized on a straight-line basis over five years. Amortization expense for
the year ended December 31, 1997 and 1998 and the six months ended June 30,
1998 and 1999 was $59,568, $37,482, $18,741, and $17,492, respectively.
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 1997 and 1998 and June
30, 1999 consist of the following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Accounts payable.................................. $ 85,240 $ 55,805 $ 48,495
Accrued expenses.................................. 94,668 93,115 67,966
-------- -------- --------
$179,908 $148,920 $116,461
======== ======== ========
</TABLE>
Revenue Recognition
Dyad's sources of revenue included equipment and hardware sales, software
license fees, hardware support and maintenance fees. Revenue from equipment and
hardware sales is recognized upon receipt and acceptance by customers. For
software license fees, hardware support, and maintenance fees, the Company
recognizes revenue ratably over the period of the applicable agreement.
Deferred Revenues
Deferred revenues represent the liability for amounts collected prior to
complete performance of maintenance contracts and for advanced billings to
customers related to software license fees.
Fair Value of Financial Instruments
The fair value of instruments classified as current assets or liabilities,
including cash and cash equivalents, restricted cash, accounts receivable, and
accounts payable approximate carrying value due to the short-term maturity of
the instruments.
Long-Lived Assets
The Company periodically reviews the values assigned to tangible and
intangible long-lived assets to determine if any impairments have occurred. If
the review indicates that the undiscounted cash flows from operations of the
related long-lived assets over the remaining depreciation or amortization
period are expected to be less than the recorded amount of the long-lived
assets, the Company's carrying value of the long-lived assets will be reduced
to their estimated fair value. Management believes that the long-lived assets
on the accompanying balance sheet are appropriately valued.
Inventories
Inventories consist of computer equipment and hardware that are carried at
the lower of cost (determined by the first in, first out method) or market
(replacement cost).
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized.
Comprehensive Loss
Comprehensive loss for years ended December 31, 1997 and 1998 and the six-
month period ended June 30, 1999 is the same as the net loss as presented in
the accompanying statements of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
New Accounting Pronouncement
In June of 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Statement is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Statement is not
expected to have a significant impact on the Company's financial statements.
3. ACQUISITIONS
In January, 1997, the Company acquired all of the outstanding shares of
common stock of MoneyPro in exchange for 1,000 shares of common stock of the
Company with a total fair value of $50,000, based upon recent sales of common
stock to outside parties. The transaction was accounted for as a purchase. The
total consideration exchanged exceeded the net tangible asset value of MoneyPro
by $204,914. This amount was allocated to goodwill and is being amortized over
a period of five years. The results of operations of the acquired business have
been included in the Company's consolidated financial statements from the date
of acquisition.
On May 13, 1997, the Company acquired all of the outstanding shares of
common stock of Basecorp in exchange for 1,111 shares of common stock of the
Company. The transaction was accounted for as a pooling of interests. The
results of operations of Basecorp have been included in the accompanying
financial statements for all periods presented.
4. LICENSE AND DISTRIBUTION AGREEMENT WITH PHOENIX INTERNATIONAL LTD., INC.
("PHOENIX")
On March 5, 1997, the Company granted Phoenix an exclusive right to market,
sell, and license the Company's products internationally and to current Phoenix
customers as well as the nonexclusive right to market, sell, and license the
Company's products to potential Phoenix customers. Phoenix paid the Company
$650,000 for this five-year license. The license fee was being recognized
ratably over the period of the license agreement of five years.
On September 31, 1998, the Company issued 350 shares of common stock of the
Company to Phoenix as consideration to terminate the agreement. Accordingly,
the remaining deferred license fee of $444,167 at September 31, 1998 was
reclassified to common stock in the accompanying December 31, 1998 balance
sheet, and a contract settlement expense of $205,833 for the previous revenue
recognized was included in selling and general expenses in the statement of
operations for years ended December 31, 1998.
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. ASSET IMPAIRMENT CHARGE
Pursuant to SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", the Company evaluated the
recoverability of the long-lived assets, including intangibles as of December
31, 1998. The Company determined that the future undiscounted cash flows were
below the carrying value of property and equipment, resulting in a noncash
asset impairment charge of $143,000, included in the accompanying statement of
operations for the year ended December 31, 1998.
6. DEBT
Long-term debt as of December 31, 1997 and 1998 and June 30, 1999 consists
of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Note payable to Sirrom Investments, Inc.
("Sirrom") (the "Sirrom Note"),
interest payable monthly at 14%,
$3,500,000 due January 31, 2003........ $3,500,000 $3,500,000 $3,500,000
Note payable to The InterCept, Inc.,
interest at 8.5%, payable monthly, due
on demand.............................. 0 0 415,214
Note payable to American Express Small
Business Services, interest at prime
plus 3.75% (11.75% at December 31,
1998), payable monthly through November
2000................................... 17,427 11,662 9,284
Note payable to Barnett Bank of Central
Florida, interest at 9%, payable
monthly through August 2000............ 11,203 7,461 0
Note payable to AT&T, interest at
17.11%, payable monthly through
September 1999......................... 14,927 6,107 2,035
---------- ---------- ----------
3,543,557 3,525,230 3,926,533
Less current portion.................... (17,520) (19,123) (424,495)
---------- ---------- ----------
3,526,037 3,506,107 3,502,038
Less unamortized original issue
discount............................... (2,120,573) (1,972,304) (1,869,845)
---------- ---------- ----------
$1,405,464 $1,533,803 $1,632,193
========== ========== ==========
</TABLE>
The above long-term debt as of December 31, 1998 is due as follows:
<TABLE>
<S> <C>
1999.......................................................... $ 19,123
2000.......................................................... 6,107
2003.......................................................... 3,500,000
----------
3,525,230
Less current portion.......................................... (19,123)
Original issue discount....................................... (1,972,304)
----------
Total....................................................... $1,533,803
==========
</TABLE>
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Sirrom Note was issued on December 31, 1997 for $3,500,000 and is
secured by all assets of the Company. As discussed in Note 7, warrants to
purchase up to 3,587 shares at $.01 per share were issued with the Sirrom Note.
The value of the warrants was determined to be $2,120,573. The value was
determined based on the relative fair value of the warrants, based on
management's estimates considering recent sales of common stock to outside
parties. A corresponding amount of the loan proceeds has been allocated to the
warrants and has been accounted for as a debt discount and warrants with
redemption feature in the accompanying balance sheets. The debt discount is
being amortized to interest expense over the term of the Sirrom Note. Total
amortization of the debt discount for the year ended December 31, 1998 and for
the six months ended June 30, 1998 and 1999 was $638,264, $311,108, and
$347,100, respectively.
A guarantee for the Sirrom Note has been provided by a major shareholder of
the Company. As consideration for providing this guarantee the shareholder
entered into a warrant agreement, as discussed in Note 7, whereby the
shareholder will receive warrants to purchase up to 5,088 shares at $.01 per
share. The fair market values of the warrants at December 31, 1997 was
$7,632,000, based on management's estimates considering recent sales of common
stock to outside parties as of December 31, 1997 and has been recorded as a
deferred financing cost and will be amortized as additional interest expense
over the term of the Sirrom Note. Total amortization of the debt discount for
the year ended December 31, 1998 and for the six months ended June 30, 1998 and
1999 was $1,081,724, $527,263, and $588,259, respectively.
7. WARRANTS WITH REDEMPTION FEATURE
In connection with the issuance of the Sirrom Note and the provision of the
guarantee by the major shareholder discussed in Note 6, the Company issued
warrants to purchase 1,470 shares of common stock at a price of $.01 per share.
In the event the Sirrom Note remains outstanding on January 1, 2003, Sirrom and
the major shareholder will receive an additional 7,205 shares of common stock,
based on a graduated scale with six-month increments, as defined. As discussed
in Note 6, the value assigned to these warrants was $9,752,573. Sirrom and the
major shareholder have the option to require the Company to redeem the warrants
for a period of 30 days after maturity of the Sirrom Note in December 2002 at a
purchase price equal to fair market value, as defined. Upon the acquisition of
the Company by Netzee, the redemption right terminated. Accordingly, in periods
prior to the Netzee acquisition, the Company has accounted for the warrants as
temporary equity under Emerging Issues Task Force 88-9, "Put Warrants." The
excess of the redemption value over the carrying value is being accrued by
periodic charges to accumulated deficit over the redemption period. This
accrual amounted to $652,000 and $326,000 for the year ended December 31, 1998
and for the six months ended June 30, 1999, respectively.
In conjunction with the acquisition of the Company by Netzee, Inc.
("Netzee") in September 1999 (Note 12), the Company intends to repay the Sirrom
Note prior to December 1999. As such, Sirrom will receive warrants to purchase
a total of 1,745 shares, or 13% of the Company, for $.01 per share and the
major shareholder will receive warrants to purchase a total of 2,276 shares, or
14.5% of the Company, for $.01 per share. The warrants were exercised and the
redemption rights were terminated during September 1999.
8. INCOME TAXES
The Company has incurred a net operating loss ("NOL") since inception. As of
December 31, 1998, the Company has NOL carryforwards of approximately
$4,500,000 available to offset its future income tax liability. The NOL
carryforwards begin to expire in 2011. Due to the uncertainty of the
realizability of the net operating losses, the Company has not reflected in the
accompanying statement of operations an income tax benefit for any period
presented and recorded a valuation allowance equal to the net deferred tax
assets of the
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company at December 31, 1997 and 1998. Additionally, due to the acquisition
discussed in Note 12, the Company's ability to benefit from certain NOL
carryforwards could be limited under Section 382 of the Internal Revenue Code
when ownership of the Company changes by more than 50%, as defined.
The components of the deferred tax assets and liabilities are as follows as
of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 651,188 $ 1,709,953
Inventory........................................... 0 51,472
Accrued liabilities................................. 5,966 5,966
Property............................................ 6,707 13,413
Research and development............................ 171,952 234,364
Amortization........................................ 34,412 68,824
Other............................................... 60,110 60,110
--------- -----------
Total deferred tax assets.......................... 930,335 2,144,102
Valuation allowance.................................. (930,335) (2,144,102)
--------- -----------
Net deferred tax assets.............................. $ 0 $ 0
========= ===========
</TABLE>
The components of the income tax benefit for the years ended December 31,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Current:
Federal........................................... $ (0) $ (0)
State............................................. (0) (0)
----------- -----------
(0) (0)
----------- -----------
Deferred:
Federal........................................... (1,174,305) (2,033,320)
State............................................. (138,154) (239,214)
----------- -----------
(1,312,459) (2,272,534)
----------- -----------
Total benefit...................................... (1,312,459) (2,272,534)
Valuation allowance............................... 1,312,459 2,272,534
----------- -----------
Total............................................ $ 0 $ 0
=========== ===========
</TABLE>
The following is a summary of the items which resulted in recorded income
taxes to differ from taxes computed using the statutory federal income tax rate
for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Tax provision at federal statutory rate.......................... 34% 34%
Tax provision at state statutory rate............................ 4 4
Effect of valuation allowance.................................... (38) (38)
--- ---
Income tax benefit............................................... 0% 0%
=== ===
</TABLE>
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases an automobile under an operating lease agreement. Future
minimum annual obligations under these leases as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999............................................................... $3,991
2000............................................................... 2,743
------
Total............................................................ $6,734
======
</TABLE>
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31,
1998, management is not aware of any unasserted, asserted, or pending material
litigation or claims against the Company.
10. SUBSCRIPTION RECEIVABLE
During 1996, a shareholder of the Company purchased shares of the Company's
common stock. In consideration of the common shares, the shareholder entered
into a $5,000 nonrecourse, noninterest-bearing note (the "Note"). The
outstanding principal balance of the Note has been reflected as a component of
shareholders' deficit in the accompanying balance sheet.
11. RELATED-PARTY TRANSACTIONS
The Company rents certain office space in Norcross, Georgia, from a related
party.The Company incurred approximately $39,000 and $16,000 of rent expense
related to this lease for the year ended December 31, 1997 and 1998,
respectively.
12. SUBSEQUENT EVENT
On September 3, 1999, the Company was acquired by Netzee. The consideration
received was approximately 618,137 shares of common stock of Netzee,
approximately $900,000 of cash, and assumption of debt, including the Sirrom
Note, of approximately $3,500,000. This acquisition has been accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16.
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Internet Banking Division of
The Bankers Bank:
We have audited the accompanying balance sheet of THE INTERNET BANKING
DIVISION OF THE BANKERS BANK (an unincorporated division of a Georgia chartered
Federal Reserve member bank) as of December 31, 1998 and the related statements
of operations, changes in accumulated deficit, and cash flows for the period
from inception (March 1, 1998) to December 31, 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Internet Banking
Division of The Bankers Bank as of December 31, 1998 and the results of its
operations and its cash flows for the period from inception (March 1, 1998) to
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
September 3, 1999
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $0 and $36,000 at December 31, 1998 and
June 30, 1999, respectively........................ $ 205,750 $ 156,346
Other receivables................................... 214,224 705,095
Deferred expenses................................... 286,500 181,500
---------- ----------
Total current assets.............................. 706,474 1,042,941
PROPERTY AND EQUIPMENT, net........................... 113,563 284,498
CAPITALIZED SOFTWARE DEVELOPMENT COSTS................ 214,145 644,717
---------- ----------
Total assets...................................... $1,034,182 $1,972,156
========== ==========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 314,826 $ 75,778
Deferred revenue.................................... 326,500 251,000
Due to Parent....................................... 849,531 2,494,118
---------- ----------
Total current liabilities......................... 1,490,857 2,820,896
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 7)
ACCUMULATED DEFICIT:
Accumulated deficit................................. (456,675) (848,740)
---------- ----------
Total liabilities and accumulated deficit......... $1,034,182 $1,972,156
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period For the Period
from Inception from Inception For the Six
(March 1, 1998) to (March 1, 1998) to Months Ended
December 31, 1998 June 30, 1998 June 30, 1999
------------------ ------------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES:
Installation fees........ $ 67,500 $ 10,000 $ 189,000
Monthly license and
support fees............ 9,536 354 46,721
--------- --------- ---------
Total revenues......... 77,036 10,354 235,721
--------- --------- ---------
OPERATING EXPENSES:
Cost of installation,
license, and support.... (112,583) (12,000) (231,934)
Selling, general, and
administrative
expenses................ (416,455) (120,214) (381,756)
Depreciation and
amortization............ (4,673) (1,369) (14,096)
--------- --------- ---------
Total operating
expenses.............. (533,711) (133,583) (627,786)
--------- --------- ---------
NET OPERATING LOSS......... $(456,675) $(123,229) $(392,065)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
STATEMENTS OF CHANGES IN ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Accumulated
Deficit
-----------
<S> <C>
BALANCE at inception, March 1, 1998................................ $ 0
Net loss......................................................... (456,675)
---------
BALANCE, December 31, 1998......................................... (456,675)
Net loss (unaudited)............................................. (392,065)
---------
BALANCE, June 30, 1999 (unaudited)................................. $(848,740)
=========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception For the Period
(March 1, 1998) From Inception For the
to (March 1, 1998) Six Months Ended
December 31, 1998 to June 30, 1998 June 30, 1999
----------------- ---------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................. $(456,675) $(123,229) $ (392,065)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 4,673 1,369 14,096
Changes in assets and
liabilities:
Accounts receivable..... (205,750) (45,250) 49,404
Other receivables....... (214,224) 0 (490,871)
Deferred expenses....... (286,500) (108,000) 105,000
Accounts payable and
accrued expenses....... 314,826 138,955 (239,048)
Deferred revenue........ 326,500 101,000 (75,500)
--------- --------- -----------
Net cash used in
operating
activities........... (517,150) (35,155) (1,028,984)
--------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to capitalized
software development
costs................... (214,145) 0 (430,572)
Purchase of property and
equipment............... (118,236) (15,899) (185,031)
--------- --------- -----------
Net cash used in
investing
activities........... (332,381) (15,899) (615,603)
--------- --------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from
Parent............... 849,531 51,054 1,644,587
--------- --------- -----------
NET CHANGE IN CASH........ 0 0 0
CASH, beginning of
period................... 0 0 0
--------- --------- -----------
CASH, end of period....... $ 0 $ 0 $ 0
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Information as of June 30, 1999 and for the Six Months Ended
June 30, 1998 and 1999 is Unaudited)
1. ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
The Internet Banking Division of The Bankers Bank (the "Company") was
established as an unincorporated division on March 1, 1998 by The Bankers Bank
(the "Parent"), a Georgia chartered Federal Reserve member bank. The Company
was organized to provide business solutions utilizing Internet-enabled
technology to financial institutions and their customers and business customers
in the United States. The Company provides a blend of marketing and technical
expertise to deliver, support, and promote Internet-enabled technology to
financial institutions. The Company has developed a number of Internet banking
services that enable financial institutions to utilize a system of hardware and
software, developed, implemented, and maintained by the Company, through which
customers of the financial institution can use commonly available personal
computer software to communicate electronically with the financial institution
and perform certain electronic home banking, bill paying, and other on-line
banking transactions.
The accompanying financial statements present the financial position,
results of operations, and cash flows of the Company as if it were a separate
entity for all periods presented. Accordingly, the accompanying financial
statements for the period from inception (March 1, 1998) to December 31, 1998,
the period from inception (March 1, 1998) to June 30, 1998, and the six month
period ended June 30, 1999 include certain administrative costs and expenses
which have been allocated to the Company by the Parent. The costs have been
allocated on a pro rata basis based primarily on employee headcount or incurred
time and services and represent management's best estimates of what support
costs would have been had the Company been operated as a separate entity. The
Parent performs services and incurs certain costs for the Company. Services
provided include tax, treasury, risk management, employee benefits, legal, data
processing, application of cash receipts, and other general corporate services.
Corporate costs of Parent services totaling $145,670, $60,006, and $236,596
have been allocated to the Company during the period from inception (March 1,
1998) to December 31, 1998, the period from inception (March 1, 1998) to June
30, 1998, and the six month period ended June 30, 1999, respectively, and are
included in selling, general, and administrative expenses in the accompanying
statements of operations. In the opinion of management, the method of
allocating these costs is reasonable. However, the costs of services charged to
the Company are not necessarily indicative of the costs that would have been
incurred if the Company had performed these functions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
Interim Unaudited Financial Information
The financial statements as of June 30, 1999 and for the period from
inception (March 1, 1998) to June 30, 1998, and for the six months ended June
30, 1999 are unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements for these interim periods
have been included. The results of the interim periods are not necessarily
indicative of the results to be obtained for a full year.
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
The Parent holds legal title to all property and equipment. These assets are
stated at cost. Major property additions, replacements, and betterments are
capitalized, while maintenance and repairs which do not extend the useful lives
of these assets are expensed as incurred. Depreciation is provided using the
straight-line method for financial reporting purposes. The property and
equipment primarily consist of leasehold improvements and are depreciated over
the remaining term of the lease.
Capitalized Software Development Costs
Research and development costs are expensed as incurred. Computer software
development costs are charged to research and development expense until
technological feasibility of the software is established; after which,
remaining software production costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting For
Computer Software to be Sold, Leased, or Otherwise Marketed." Amortization of
capitalized software-development costs begins as products are made available
for sale or as the related product is put into use with annual amortization
equal to the greater of the amount computed using the ratio that current gross
revenues bear to the total of current and anticipated future gross revenues for
the product or the straight-line method over the remaining economic life of the
product, not to exceed five years. Currently, none of the developed software is
available for general release and, as such, is not being amortized.
Revenue Recognition
The Company's revenue consists of revenues from the licensing of software
and fees from consulting, implementation, training, and maintenance services.
The Company recognizes revenue in accordance with the provisions of the
American Institute of Certified Public Accountants Statement of Position No.
97-2, "Software Revenue Recognition." The Company recognizes the one-time
nonrefundable implementation fee upon completion of the installation of the
software. License revenues and maintenance fees related to customer maintenance
and support are billed together and recognized ratably over the term of the
software license and support agreement, which is typically three years.
Amounts that have been prepaid or invoiced but that do not yet qualify for
recognition under the Company's revenue recognition policy are reflected as
deferred revenues.
Deferred Revenue and Deferred Expenses
Deferred revenue represents the liability for advanced billings to customers
primarily related to Internet banking software and hardware implementation and
training. Such amounts are recognized upon completion. Deferred expenses
represent services provided to the Company's customers by third parties. These
third parties provide service related to Internet banking software and hardware
implementation, training and conversion of the financial institution's customer
data. Such amounts are recognized in expense when the related revenue is
recognized.
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair Value Financial Instruments
The fair value of instruments classified as current assets or liabilities,
including accounts receivable and accounts payable, approximate carrying value
due to the short-term maturity of the instruments.
Long-Lived Assets
The Company periodically reviews the values assigned to long-lived assets to
determine if any impairments have occurred. Management believes that the long-
lived assets on the accompanying balance sheets are appropriately valued.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following as of December
31, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Accounts payable............................................ $294,826 $75,778
Accrued license fee......................................... 20,000 0
-------- -------
$314,826 $75,778
======== =======
</TABLE>
Funding of Operations by Parent
The Parent funds the Company's operations as necessary. Transfers of
operating funds between the Parent and the Company occur on a noninterest-
bearing basis, with the net amounts of these transfers reflected in due to the
Parent in the accompanying balance sheets. The net balance in due to Parent of
$849,531 and $2,494,118 at December 31, 1998 and June 30, 1999, respectively,
is classified as a component of current liabilities in the accompanying balance
sheets.
Income Taxes
The Company uses the liability method of accounting for income taxes, as set
forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized.
Comprehensive Loss
Comprehensive loss for the period from inception (March 1, 1998) to December
31, 1998, the period from inception (March 1, 1998) to June 30, 1998, and the
six month period ended June 30, 1999 is the same as the net loss as presented
in the accompanying statements of operations.
Advertising and Sales Promotion Costs
Advertising and sales promotion costs are expensed as incurred and totaled
$23,037, $54,692, and $50 from the period from inception (March 1) to June 30,
1998, the period from inception (March 1) to December 31, 1998, and the six
month period ended June 30, 1999, respectively.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
for derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal quarters
for all fiscal years beginning after June 15, 2000. The statement is not
expected to have a significant impact on the Company's financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and June 30, 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Furniture, fixtures, and leasehold improvements.......... $ 93,771 $150,391
Computer equipment....................................... 20,482 129,292
Computer software........................................ 3,983 23,584
-------- --------
118,236 303,267
Less accumulated depreciation............................ (4,673) (18,769)
-------- --------
Property and equipment, net.............................. $113,563 $284,498
======== ========
</TABLE>
Depreciation expense for the period from inception (March 1, 1998) to
December 31, 1998, the period from inception (March 1, 1998) to June 30, 1998,
and the six month period ended June 30, 1999 was $4,673, $1,369, and $14,096,
respectively.
4. RELATED-PARTY TRANSACTIONS
On September 3, 1999, the Company was acquired by Netzee, Inc. ("Netzee"),
as discussed in Note 8. The Internet Banking Division of The Independent
Bankers Bank ("TIB") was also acquired by Netzee on this date. The Company and
TIB have conducted business together since the Company's inception (March 1,
1998). The Company paid TIB $40,000 for the period from inception (March 1,
1998) to December 31, 1998 for the right to share outsourced financial
institution customer data conversion services, for which TIB has an agreement
with a third party. This fee is included in cost of implementation,
maintenance, and usage on the accompanying statements of operations for the
period from inception (March 1, 1998) to December 31, 1998.
Actual fees for conversion services are billed and paid through TIB. The
Company incurred $54,000, $12,000, and $109,000 in conversion services expense
during the period from inception (March 1, 1998) to December 31, 1998, the
period from inception (March 1, 1998) to June 30, 1998, and the six month
period ended June 30, 1999, respectively. At December 31, 1998 and June 30,
1999, the Company owed TIB $25,710 and $74,386, respectively, for conversion
services performed by the third party.
On January 1, 1999, the Company entered into a product development agreement
with TIB and an independent developer (the "Developer"), in which the Developer
is developing two commercial cash management systems for the Company and TIB,
who will share ownership and development costs of such systems equally. The
actual development began in 1998. The Company pays the Developer for all costs
incurred and TIB reimburses the Company for half of the amounts. The Company
accounts for the computer development costs in accordance with SFAS No. 86, as
discussed in Note 1. At December 31, 1998 and June 30, 1999, TIB owed the
Company $214,224 and $704,893, respectively, for development costs incurred to
date. This receivable is included in other receivables on the accompanying
balance sheets.
5. INCOME TAXES
The Company was included in the consolidated federal income tax return of
the Parent for the fiscal year ended December 31, 1998. The Company's provision
for income tax benefit in the accompanying
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
statements of operations reflect the federal and state income taxes calculated
as if the Company was a stand-alone entity. The Company has incurred a net
operating loss ("NOL") since inception. As of December 31, 1998, the Company
has NOL carryforwards of approximately $416,000 available to offset its future
income tax liability. The NOL carryforwards begin to expire in 2018. Due to the
uncertainty of the realizability of the net operating losses, the Company has
not reflected these carryforwards in the accompanying statements of operations
on a stand-alone basis an income tax benefit for any period presented and
recorded a valuation allowance equal to the net deferred tax assets of the
Company at December 31, 1998.
The components of the income tax benefit for the period from inception
(March 1, 1998) to December 31, 1998 are as follows:
<TABLE>
<S> <C>
Current:
Federal...................................................... $ 0
State........................................................ 0
---------
0
Deferred:
Federal...................................................... (155,087)
State........................................................ (18,246)
---------
(173,333)
Change in valuation allowance.................................. 173,333
---------
Total...................................................... $ 0
=========
</TABLE>
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate for
the period from inception (March 1, 1998) to December 31, 1998:
<TABLE>
<S> <C>
Tax benefit at statutory rate....................................... (34)%
Effect of:
State income tax, net............................................. (4)
Valuation allowance............................................... 38
---
Income tax benefit.................................................. 0 %
===
</TABLE>
Deferred tax assets and liabilities are determined based on the difference
between the financial accounting and tax basis of assets and liabilities.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 158,133
Deferred revenue............................................. 124,070
---------
282,203
---------
Deferred tax liabilities:
Deferred expenses............................................ (108,870)
---------
Net deferred tax assets before valuation allowance............. 173,333
Valuation allowance............................................ (173,333)
---------
Net deferred tax assets........................................ $ 0
=========
</TABLE>
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. EMPLOYEE BENEFIT PLANS
The Parent sponsors a 401(k) profit sharing plan (the "Plan"), a defined
contribution plan covering substantially all employees of the Company. Under
the Plan's deferred compensation arrangement, eligible employees who elect to
participate in the Plan may contribute between 1% and 15% of eligible
compensation, as defined, to the Plan. The Parent is required to match employee
contributions up to 3%. During the period from inception (March 1, 1998) to
December 31, 1998, matching contributions to company employees totaled $2,066
and are included as a component of selling, general, and administrative
expenses in the accompanying statements of operations.
7. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases certain office space under an operating lease agreement.
Future minimum annual obligations under this lease as of December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999................................. $51,380
2000................................. 22,890
-------
Total.............................. $74,270
=======
</TABLE>
Rent expense for the period from inception (March 1, 1998) to December 31,
1998, the period from inception (March 1, 1998) to June 30, 1998, and the six
month period ended June 30, 1999 was $14,000, $5,600, and $19,845,
respectively.
Product Liability
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in new Internet
banking systems after commencement of commercial release or, if discovered,
that the Company will be able to successfully correct such errors in a timely
manner or at all. The occurrence of errors and failures in the Company's
products could result in loss of or delay in the market acceptance of the
Company's Internet banking systems, and alleviating such errors and failures
could require significant expenditure of capital and other resources by the
Company. The consequences of such errors and failures could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31,
1998, management is not aware of any unasserted, asserted, or pending material
litigation or claims against the Company.
8. SUBSEQUENT EVENT
On September 1, 1999, the Company was acquired by Netzee, Inc. ("Netzee")
for 1,361,000 shares of Netzee's stock. The acquisition of the Company was
accounted for as a purchase under Accounting Principles Board Opinion No. 16.
<PAGE>
EXHIBIT 99.3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Internet Banking Division of
The Independent BankersBank:
We have audited the accompanying balance sheets of THE INTERNET BANKING
DIVISION OF THE INDEPENDENT BANKERSBANK (an unincorporated division of a Texas
chartered Federal Reserve member bank) as of December 31, 1997 and 1998 and the
related statements of operations, changes in accumulated deficit, and cash
flows for the period from inception (February 1, 1997) to December 31, 1997,
and the year ended December 31, 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 financial statements referred to above present fairly,
in all material respects, the financial position of The Internet Banking
Division of The Independent BankersBank as of December 31, 1997 and 1998 and
the results of its operations and its cash flows for the period from inception
(February 1, 1997) to December 31, 1997 and the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
September 3, 1999
<PAGE>
THE INTERNET BANKING DIVISION OF
THE INDEPENDENT BANKERSBANK
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------- June 30,
1997 1998 1999
--------- --------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable ...................... $ 5,054 $ 91,520 $ 116,083
Inventory ................................ 15,300 30,885 31,635
--------- --------- ---------
Total current assets.................... 20,354 122,405 147,718
PROPERTY AND EQUIPMENT, net................. 4,721 23,111 30,283
CAPITALIZED SOFTWARE DEVELOPMENT COSTS (Note
2)......................................... 0 214,145 644,717
--------- --------- ---------
Total assets............................ $ 25,075 $ 359,661 $ 822,718
========= ========= =========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accrued expenses.......................... $ 1,060 $ 7,285 $ 7,285
Accounts payable ......................... 0 214,224 704,894
Deferred revenue.......................... 22,625 98,250 57,000
Due to Parent............................. 179,761 680,974 816,314
--------- --------- ---------
Total current liabilities............... 203,446 1,000,733 1,585,493
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 6 and
7)
ACCUMULATED DEFICIT:
Accumulated deficit....................... (178,371) (641,072) (762,775)
--------- --------- ---------
Total liabilities and accumulated
deficit................................ $ 25,075 $ 359,661 $ 822,718
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
THE INTERNET BANKING DIVISION OF
THE INDEPENDENT BANKERSBANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
From Inception For the Year For the Six Months
(February 1, 1997) Ended Ended June 30,
to December 31, December 31, --------------------
1997 1998 1998 1999
------------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Installation fees...... $ 0 $ 273,747 $ 197,415 $ 224,859
Monthly license and
support fees.......... 0 158,513 46,950 111,435
--------- --------- --------- ---------
Total revenues....... 0 432,260 244,365 336,294
--------- --------- --------- ---------
OPERATING EXPENSES:
Cost of installation,
license, and support.. 0 (433,820) (176,214) (250,445)
Selling, general and
administrative
expenses.............. (173,679) (508,559) (222,488) (309,808)
Depreciation and
amortization.......... (4,692) (6,582) (3,081) (6,744)
--------- --------- --------- ---------
Total operating
expenses............ (178,371) (948,961) (401,783) (566,997)
--------- --------- --------- ---------
Other Income........... 0 54,000 0 109,000
--------- --------- --------- ---------
NET OPERATING LOSS....... $(178,371) $(462,701) $(157,418) $(121,703)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
THE INTERNET BANKING DIVISION OF
THE INDEPENDENT BANKERSBANK
STATEMENT OF CHANGES IN ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Accumulated
(Deficit)
-----------
<S> <C>
BALANCE, February 1, 1997.......................................... $ 0
Net loss......................................................... (178,371)
---------
BALANCE, December 31, 1997......................................... (178,371)
Net loss......................................................... (462,701)
---------
BALANCE, December 31, 1998......................................... (641,072)
Net loss (unaudited)............................................. (121,703)
---------
BALANCE, June 30, 1999 (unaudited)................................. $(762,775)
=========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
THE INTERNET BANKING DIVISION OF
THE INDEPENDENT BANKERSBANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception For the Six Months
February 1, 1997 For the Ended June 30
to Year Ended -----------------------
December 31, 1997 December 31, 1998 1998 1999
----------------- ----------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............. $(178,371) $(462,701) $(157,418) $(121,703)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization....... 4,692 6,582 3,081 6,744
Changes in assets
and liabilities:
Accounts
receivable........ (5,054) (86,466) (117,362) (24,563)
Accrued expenses... 1,060 6,225 0 0
Inventory.......... (15,300) (15,585) 7,665 (750)
Deferred revenues.. 22,625 75,625 (22,625) (41,250)
--------- --------- --------- ---------
Net cash (used in)
provided by
operating
activities....... (170,348) (476,320) (286,659) (181,522)
--------- --------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to
capitalized software
development costs... 0 (214,145) 0 (430,572)
Accounts payable
related to funding
of software
development......... 0 214,224 0 490,670
Purchase of property
and equipment....... (9,413) (24,972) (11,681) (13,916)
--------- --------- --------- ---------
Net cash used in
investing
activities....... (9,413) (24,893) (11,681) (46,182)
--------- --------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net proceeds from
Parent.............. 179,761 501,213 298,340 135,340
--------- --------- --------- ---------
NET CHANGE IN CASH..... 0 0 0 0
CASH, beginning of
period................ 0 0 0 0
--------- --------- --------- ---------
CASH, end of period.... $ 0 $ 0 $ 0 $ 0
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(Information as of June 30, 1999 and for the Six Months Ended
June 30, 1998 and 1999 is Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
The Internet Banking Division of The Independent BankersBank (the "Company")
was established as an unincorporated division on February 1, 1997. The Company
was organized by The Independent BankersBank (the "Parent"), a Texas chartered
Federal reserve member bank to provide Internet banking solutions and internet
banking services to other banker's associations and independent financial
institutions in the United States. The Company provides a blend of marketing
and technical expertise to deliver, support, and promote Internet-enabled
technology to financial institutions. The Company has developed a number of
Internet banking services that enable financial institutions to utilize a
system of hardware and software, developed, implemented, and maintained by the
Company, through which customers of the financial institution can use commonly
available personal computer software to communicate electronically with the
financial institution and perform certain electronic home banking, bill paying,
and other on-line banking transactions.
The accompanying financial statements present the financial position,
results of operations, and cash flows of the Company as if it were a separate
entity for all periods presented. Accordingly, the accompanying financial
statements for the period of inception (February 1, 1997) to December 31, 1997,
the year ended December 31, 1998, and the six month periods ended June 30, 1998
and 1999 include certain administrative costs and expenses, which have been
allocated to the Company by Parent. The costs have been allocated on a pro rata
basis based primarily on employee headcount or incurred time and services and
represent management's best estimates of what support costs would have been had
the Company been operated as a separate entity. The Parent performs services
and incurs certain costs for the Company. Services provided include tax,
treasury, risk management, employee benefits, legal, data processing,
application of cash receipts, and other general corporate services. Corporate
costs of Parent services totaling $85,376, $116,079, $55,682, and $70,416 have
been allocated to the Company during the period from inception (February 1,
1997) to December 31, 1997, the year ending December 31, 1998, and the six
month periods ended June 30, 1998 and 1999, respectively, and are included in
selling, general, and administrative expenses in the accompanying statements of
operations. In the opinion of management, the method of allocating these costs
is reasonable. However, the costs of services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the
Company had performed these functions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
Interim Unaudited Financial Information
The financial statements as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 are unaudited; however, in the opinion of management,
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
Inventory
The Company maintains finished goods, comprised of hardware that are
provided to banks as part of the implementation process. These inventories are
valued at the lower of cost or market, cost being determined on the first-in,
first-out ("FIFO") basis.
Property and Equipment
The Parent holds legal title to all property and equipment. These assets are
stated at cost. Major property additions, replacements, and betterments are
capitalized, while maintenance and repairs which do not extend the useful lives
of these assets are expensed as incurred. Depreciation is provided using the
straight-line method for financial reporting purposes. The property and
equipment primarily consists of furniture and office equipment and is
depreciated in five years.
Capitalized Software Development Costs
Research and development costs are expensed as incurred. Computer software
development costs are charged to research and development expense until
technological feasibility of the software is established; after which,
remaining software production costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting For
Computer Software to be Sold, Leased, or Otherwise Marketed." Amortization of
capitalized software-development costs begins as products are made available
for sale or as the related product is put into use with annual amortization
equal to the greater of the amount computed using the ratio that current gross
revenues bear to the total of current and anticipated future gross revenues for
the product or the straight-line method over the remaining economic life of the
product, not to exceed five years. Currently none of the developed software is
available for general release and, as such, is not being amortized.
Revenue Recognition
The Company's revenue consists of revenues from the licensing of software
and fees from consulting, implementation, training, and maintenance services.
The Company recognizes revenue in accordance with the provisions of American
Institute of Certified Public Accountants Statement of Position ("SOP") No. 97-
2, "Software Revenue Recognition." The company recognizes the one-time non-
refundable implementation fee upon completion of the installation of the
software. License revenues and maintenance fees related to customer maintenance
and support are billed together and recognized ratably over the term of the
software license and support agreement, which is typically three years.
Revenues from services fees are recognized as the services are performed.
Amounts that have been prepaid or invoiced but that do not yet qualify for
recognition under the Company's revenue recognition policy are reflected as
deferred revenues.
Deferred Revenue and Deferred Expenses
Deferred revenue represents the liability for advanced billings to customers
primarily related to internet banking software and hardware implementation and
training. Such amounts are recognized as revenue ratably
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
over the period of the applicable agreement. Deferred expenses represent
services provided to the Company's customers by third parties. These third
parties provide services related to Internet banking software and hardware
implementation training and conversion of the financial institution's customer
data. Such amounts are recognized in connection with the recognition of related
revenues.
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
Fair Value Financial Instruments
The fair value of instruments classified as current assets or liabilities,
including accounts receivable and accounts payable, approximate carrying value
due to the short-term maturity of the instruments.
Long-Lived Assets
The Company periodically reviews the values assigned to long-lived assets to
determine if any impairments have occurred. Management believes that the long-
lived assets on the accompanying balance sheets are appropriately valued.
Funding of Operations by Parent
Parent funds the Company's operations as necessary. Transfers of operating
funds between Parent and the Company occur on a noninterest-bearing basis, with
the net amounts of these transfers reflected in due to Parent in the
accompanying balance sheets. The net balance is due to Parent of $179,761,
$680,974, and $816,314 at December 31, 1997, December 31, 1998, and June 30,
1999, respectively, is classified as a component of current liabilities in the
accompanying balance sheets.
Income Taxes
The Company uses the liability method of accounting for income taxes, as set
forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized.
Comprehensive Loss
Comprehensive loss for the period from inception (February 1, 1997) to
December 31, 1997, the year ended December 31, 1998, and the six month periods
ended June 30, 1998 and 1999 is the same as the net loss as presented in the
accompanying statements of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal quarters
for all fiscal years beginning after June 15, 2000. The statement is not
expected to have a significant impact on the Company's financial statements.
Advertising and Sales Promotion Costs
Advertising and sales promotion costs are expensed as incurred and totaled
$10,780, $8,613, $5,321 and $3,576 for the period from inception (February 1,
1997) to December 31, 1998, and the six month periods ended June 30, 1998 and
1999, respectively.
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998, and June 30, 1999
consist of the following:
<TABLE>
<CAPTION>
December 31
--------------- June 30,
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Furniture and office equipment.................... $9,413 $34,385 $48,301
Less accumulated depreciation................... (4,692) (11,274) (18,018)
------ ------- -------
Property and equipment, net....................... $4,721 $23,111 $30,283
====== ======= =======
</TABLE>
4. INCOME TAXES
The Company was included in the consolidated federal income tax return of
the Parent for the fiscal years ended December 31, 1997 and 1998. The Company's
provision for income tax benefit in the accompanying statements of operations
reflects the federal income tax calculated as if the Company was a stand-alone
entity. At December 31, 1998, the Company has incurred a net operating loss
("NOL") since inception of approximately $462,700. As of December 31, 1998, the
Company has NOL carryforwards available to offset its future income tax
liability. The NOL carryforwards begin to expire in 2012. Due to the
uncertainty of the realizability of the net operating losses, the Company has
not reflected these carryforwards in the accompanying statement of operations
on a stand-alone basis an income tax benefit for any period presented and has
recorded a valuation allowance equal to the net deferred tax assets of the
Company at December 31, 1997 and 1998. The Company is a Texas chartered bank
and is not subject to state income taxes.
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate for
the period from inception (February 1, 1997) to December 31, 1997 and for the
year ended December 31, 1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Tax provision at federal statutory rate.......................... 34% 34%
Valuation allowance.............................................. (34) (34)
--- ---
0% 0%
=== ===
</TABLE>
The components of the deferred tax asset for the period from inception
(February 1, 1997) to December 31, 1997 and for the year ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Deferred income tax benefit:
Net operating loss carryforward......................... $60,646 $157,318
Accrued liabilities..................................... 360 2,477
Deferred revenue........................................ 7,694 33,405
------- --------
Deferred tax asset.................................. 68,700 193,200
Valuation allowance....................................... (68,700) (193,200)
------- --------
Net deferred tax assets............................. $ 0 $ 0
======= ========
</TABLE>
5. EMPLOYEE BENEFIT PLAN
Parent sponsors the Company's 401(k) plan (the "Plan"), a defined
contribution plan covering substantially all employees of the Company. To
become eligible, employees must be with the company at least
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
six months at the time of the Plan enrollment date. These enrollment dates
occur on January 1 and July 1 of each year. Eligible employees who elect to
participate in the Plan may contribute between 1% and 15% of eligible
compensation, as defined by the Plan. Employee contribution matching is
determined by the Parent as elective deferral contributions are made. These
matches are discretionary up to 5% of the employees' compensation. Expenses
relating to the matching contributions are allocated to the Company. During the
period from inception (February 1, 1997) to December 31, 1997, the year ended
December 31, 1998, and the six month periods end June 30, 1998 and 1999. Parent
matching totals were $0, $3,951, $0, and $8,195, respectively, and is included
as a component of selling, general, and administrative expenses in the
accompanying statements of operations.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
Internet Banking Division currently subleases space from the Parent,
however, there is not a signed agreement for future commitments. The Company
has no lease obligations and currently has no lease commitments outstanding.
The total rent expense for the period from inception (February 1, 1997) to
December 31, 1997, the year ended December 31, 1998, and the six month periods
ended June 30, 1998 and 1999 is $1,015, $8,036, $1,427, and $4,557,
respectively.
Product Liability
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in new Internet
banking systems after commencement of commercial release or, if discovered,
that the Company will be able to successfully correct such errors in a timely
manner or at all. The occurrence of errors and failures in the Company's
products could result in loss of or delay in the market acceptance of the
Company's Internet banking systems, and alleviating such errors and failures
could require significant expenditure of capital and other resources by the
Company. The consequences of such errors and failures could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31,
1998, management is not aware of any unasserted, asserted, or pending material
litigation or claims against the Company.
7. RELATED-PARTY TRANSACTIONS
On September 3, 1999, the Company was acquired by Netzee, Inc. ("Netzee"),
as discussed in Note 8. The Internet Banking Division of The Bankers Bank of
Georgia ("BB-GA") was also acquired by Netzee on this date. The Company and BB-
GA have conducted business together since the BB-GA'S inception (March 1,
1998). The Company has received $40,000 for the period from March 1, 1998
through December 31, 1998 from BB-GA, for the right of BB-GA to share
outsourced financial institution customer data conversion services, for which
the Company has an agreement with a third party to perform. This fee is
included in other income revenues on the accompanying statement of operations
for the year end December 31, 1998.
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
The conversion service provider bills the company actual fees for conversion
services which are billed and paid through BB-GA. The Company recognized $0,
$54,000, $12,000, and $109,000 in conversion services revenues during the
period from inception (February 1, 1997) to December 31, 1997, the year ended
December 31, 1998, and the six month periods ended June 30, 1998 and 1999,
respectively. At December 31, 1998 and June 30, 1999, the Company had a
receivable from BB-GA of $25,710 and $74,386, respectively, for conversion
services performed by the third party.
On January 1, 1999, the Company entered into a product development agreement
with BB-GA and an independent developer (the "Developer"), in which the
Developer is developing two commercial cash management systems for the Company
and BB-GA, who will share ownership and development costs of such systems
equally. The actual commencement of the development began in 1998. The Company
reimburses BB-GA for half of the amounts incurred by Developer for contractual
services performed. The Company accounts for the capitalized software
development costs in accordance with SFAS No. 86, as discussed in Note 1. As of
December 31, 1997 and 1998 and June 30, 1999, the Company had a payable of $0,
$214,224, and $704,893, respectively, to BB-GA for development costs incurred
to date. This payable is stated separately on the accompanying balance sheets.
8. SUBSEQUENT EVENT
On September 3, 1999, the Company was acquired by Netzee, Inc., ("Netzee"),
for 1,361,000 shares of Netzee's stock. The acquisition of the Company was
accounted for as a purchase under Accounting Principles Board Opinion No. 16.
<PAGE>
EXHIBIT 99.4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In this section, we have provided you with our unaudited pro forma condensed
consolidated financial statements as of and for the six months ended June 30,
1999 and for the year ended December 31, 1998. This financial information gives
effect to the following events as if they occurred (a) on June 30, 1999 for the
balance sheet and (b) at the beginning of the period presented for each of the
statements of operations:
. Our acquisitions of Item Processing of America, the operations of
Advance Data, and the data processing business of Nova Financial
Corporation in 1998;
. Our acquisition of Direct Access in March 1999;
. Our acquisition of L.E. Vickers & Associates and Data Equipment
Services in May 1999;
. Our acquisition of SBS Data and, through Direct Access, SBS Corp. in
August 1999;
. Our transfer of 450,000 shares of Direct Access common stock in
exchange for the non-remote banking operations of SBS Corp. in August
1999;
. Our creation of Netzee in August 1999;
. Our recording of compensation expense related to equity securities
issued by Direct Access below fair market value in August 1999;
. Netzee's merger with Direct Access in September 1999;
. Netzee's acquisition of the Internet banking operations of TIB The
Independent BankersBank and The Bankers Bank in September 1999;
. Netzee's acquisition of Call Me Bill in September 1999;
. Netzee's acquisition of Dyad in September 1999; and
. The deconsolidation of the operations of Netzee from our operations
effective September 3, 1999.
We acquired Direct Access in a transaction that was initially accounted for
as a pooling of interest. Due to the subsequent transactions involving Netzee
listed above, we restated our financial statements to account for this
transaction as a purchase. Our historical financial statements therefore include
the operations of Direct Access only from the date of purchase.
Because Direct Access merged with Netzee, all references to Netzee in the
accompanying notes include actions taken by Direct Access prior to the merger.
Due to Netzee's issuance of common stock in connection with several of the
above transactions, our ownership percentage in Netzee decreased to
approximately 49% as of September 3, 1999. As a result, we no longer include
the results of operations of Netzee in our consolidated financial statements.
After September 3, 1999, we account for our investment in Netzee under the
equity method, which requires us to record the operations of Netzee in a single
line item in our statement of operations titled "net loss in unconsolidated
subsidiary." Because we are currently funding the operations of Netzee, all of
the losses of Netzee will be included in our statement of operations, rather
than our relative percentage of those losses. When our funding of the
operations of Netzee is complete, we will record only our relative percentage
of the net losses of Netzee.
In August 1999, Netzee issued stock options to management at exercise prices
below the fair market value of its common stock on the date of grant. Total
deferred compensation recorded for the issuance of these options was
approximately $1.5 million. Because we owned the majority of the common stock
of Netzee at the time these options were granted, we have recognized
compensation expense of approximately $608,000. Netzee will recognize as
compensation expense the remaining $892,000 in deferred compensation over the
remaining vesting period of the options.
1
<PAGE>
We based our unaudited pro forma condensed consolidated financial statements
on our audited consolidated financial statements and the audited financial
statements of the acquired entities for the year ended December 31, 1998 and on
our unaudited financial statements and those of the acquired entities as of and
for the six months ended June 30, 1999. The pro forma adjustments for the
events described above are described in the accompanying notes.
Our unaudited pro forma condensed consolidated statements of operations do
not include any adjustments for potential savings or other improvements and do
not purport to represent what our combined results of operations or financial
position would actually have been if any of the above events had occurred as
described above. You should not rely on the pro forma statements of operations
as being representative of our future results of operations.
2
<PAGE>
The InterCept Group, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
TIB
The The
SBS SBS Independent Bankers Call Me Acquisition Deconsolidation
InterCept Corp. Data BankersBank Bank Bill Dyad Adjustments Total Adjustments Pro Forma
Assets --------- ------ ------ ----------- ------- ------- ------ ----------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents..... $ 2,443 $ 312 $ 691 $ -- $ -- $ 23 $ 19 $ 100 (a) $ 3,588 $ (454)(f) $ 3,134
Accounts
receivable,
net............. 4,214 2,404 1,759 116 156 114 22 (1,134)(b) 7,651 (607)(f) 7,044
Investment in
unconsolidated
subsidiary...... -- -- -- -- -- -- -- -- -- 35,364 (f) 35,364
Inventories,
prepaid
expenses and
other........... 2,595 883 17 32 705 5 -- -- 4,237 (1,090)(f) 3,147
Deferred income
tax asset....... 103 -- -- -- -- -- -- -- 103 -- 103
Property and
equipment,
net............. 9,257 883 447 30 284 148 19 -- 11,068 (1,394)(f) 9,674
Deferred
expenses........ -- -- 172 -- 182 -- -- -- 354 (182)(f) 172
Deferred
financing
costs........... -- -- -- -- -- -- 6,076 (6,076)(c) -- --
Intangible
assets, net..... 12,731 -- -- -- -- -- 90 30,953 (a) 91,534 (71,219)(f) 20,315
13,613 (c)
3,325 (d)
(90)(c)
9,378 (b)
Note receivable
from
unconsolidated
subsidiary...... -- -- -- -- -- -- -- 21,534 -- 29,566 (h) 29,566
Other noncurrent
assets.......... 612 2,218 1,361 645 645 -- 8 (2,228)(b) 3,261 (2,042)(f) 1,219
------- ------ ------ ----- ------ ----- ------ ------- -------- -------- --------
Total assets.... $31,955 $6,700 $4,447 $ 823 $1,972 $ 290 $6,234 $69,375 $121,796 $(12,058) $109,738
======= ====== ====== ===== ====== ===== ====== ======= ======== ======== ========
Liabilities and
shareholders'
equity
Notes payable,
current......... $ 860 $ 491 $ 66 $ -- $ -- $ -- $ 424 $ (424)(c) $ 860 $ -- $ 860
(491)(b)
(66)(b)
Accounts payable
and accrued
liabilities..... 3,223 2,138 229 713 76 49 116 -- 6,544 (1,114)(f) 5,430
Deferred
revenue......... 1,151 1,896 2,372 57 251 278 -- -- 6,005 (2,076)(f) 3,929
Due to parent.... -- -- -- 816 2,494 -- -- (816)(a) -- -- --
(2,494)(a)
Notes payable,
long-term....... 157 222 93 -- -- -- 1,632 (1,632)(c) 28,973 -- 28,973
21,534 (b)
2,882 (d)
4,400 (c)
(222)(b)
(93)(b)
Other long-term
liabilities..... -- 1,657 505 -- -- -- -- (921)(b) 1,241 -- 1,241
Deferred tax
liability....... 259 -- -- -- -- -- -- 259 12,712 (f) 12,971
Minority
interest........ 115 -- -- -- -- -- -- 115 -- 115
Warrants with
redemption
feature......... -- -- -- -- -- -- 10,731 (10,731)(c) -- -- --
Redeemable
common stock.... -- -- -- -- -- -- -- 29,900 (b) -- -- --
(29,900)
Deferred
compensation.... -- -- -- -- -- -- -- (11,398)(e) (11,398) 11,398 (g) --
Subscription
receivable...... -- -- -- -- -- -- (5) 5 (c) -- -- --
Common stock..... 25,071 176 201 -- -- 650 1,937 (1,937)(c) 88,078 (53,720)(f) 55,708
(650)(d) 18,997 (f)
(176)(b) (7,219)(f)
32,752 (a) 608 (g)
9,165 (c)
11,398 (e)
406 (d)
9,286 (b)
(201)(b)
Preferred
stock........... -- -- -- -- -- -- -- -- -- -- --
Accumulated
other
comprehensive
income.......... 212 -- -- -- -- -- -- -- 212 -- 212
Accumulated
deficit......... 907 120 981 (763) (849) (687) (8,601) (120)(b) 907 (608)(g) 299
849 (a) 14,457 (f)
763 (a) (5,493)(f)
8,601 (c)
687 (d)
(981)(b)
------- ------ ------ ----- ------ ----- ------ ------- -------- -------- --------
Total
liabilities and
shareholder's
equity......... $31,955 $6,700 $4,447 $ 823 $1,972 $ 290 $6,234 $69,375 $121,796 $(12,058) $109,738
======= ====== ====== ===== ====== ===== ====== ======= ======== ======== ========
</TABLE>
3
<PAGE>
The InterCept Group, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the six months ended June 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
L.E. Vickers
& Associates,
Inc. TIB
and Data The The
Equipment Direct SBS Independent Bankers Call Me Acquisition
InterCept Services, Inc. Access Corp. SBS Data BankersBank Bank Bill Dyad Adjustments Total
--------- -------------- ------ ------ -------- ----------- ------- ------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $18,664 $1,599 $114 $7,149 $2,591 $ 336 $ 236 $ 165 $ 103 $ -- $ 30,957
------- ------ ---- ------ ------ ----- ----- ----- ------- --------
Costs of
services........ 7,202 571 44 3,242 636 250 232 24 55 -- 12,256
Selling, general
and
administrative
expenses........ 7,083 665 62 3,453 1,333 310 382 335 423 608 (t) 14,654
Depreciation and
amortization.... 1,109 123 2 120 52 7 14 13 49 113 (i) 17,962
57 (j)
7,600 (k)
302 (l)
147 (m)
5,400 (n)
2,300 (o)
554 (p)
------- ------ ---- ------ ------ ----- ----- ----- ------- -------- --------
Total operating
expenses....... 15,394 1,359 108 6,815 2,021 567 628 372 527 17,081 44,872
------- ------ ---- ------ ------ ----- ----- ----- ------- -------- --------
Operating income
(loss).......... 3,270 240 6 334 570 (231) (392) (207) (424) (17,081) (13,915)
Interest
expense......... (14) -- (3) -- (10) -- -- -- (906) 1,100 (q) 661
1,400 (r)
(906)(s)
Other income,
net............. 77 -- -- (14) 28 109 -- -- 4 -- 204
------- ------ ---- ------ ------ ----- ----- ----- ------- -------- --------
Income (loss)
before net loss
in
unconsolidated
subsidiary,
provision
(benefit) for
income taxes and
minority
interest........ 3,333 240 3 320 588 (122) (392) (207) (1,326) (15,487) (13,050)
Net loss in
unconsolidated
subsidiary...... -- -- -- -- -- -- -- -- -- -- --
Provision
(benefit) for
income taxes.... 1,272 91 -- 121 221 -- -- -- -- (2,731)(v) (1,026)
Minority interest
in (income) loss
of consolidated
subsidiary...... (58) -- -- -- -- -- -- -- -- -- (58)
------- ------ ---- ------ ------ ----- ----- ----- ------- -------- --------
Net income (loss)
................ $ 2,003 $ 149 $ 3 $ 199 $ 367 $(122) $(392) $(207) $(1,326) $(12,756) $(12,082)
======= ====== ==== ====== ====== ===== ===== ===== ======= ======== ========
Pro forma basic
and diluted loss
per common
share...........
Pro forma basic
and diluted
weighted average
common shares
outstanding.....
<CAPTION>
<PAGE>
Deconsolidation Pro
Adjustments Forma
---------------- ---------
<S> <C> <C>
Revenues......... $ (2,202)(w) $ 28,755
---------------- ---------
Costs of
services........ (866)(w) 11,390
Selling, general
and
administrative
expenses........ (2,847)(w) 11,807
Depreciation and
amortization.... (16,119)(w) 1,688
(155)(w)
---------------- ---------
Total operating
expenses....... (19,987) 24,885
---------------- ---------
Operating income
(loss).......... 17,785 (w) 3,870
Interest
expense......... -- 661
Other income,
net............. (165)(w) 39
---------------- ---------
Income (loss)
before net loss
in
unconsolidated
subsidiary,
provision
(benefit) for
income taxes and
minority
interest........ 17,620 4,570
Net loss in
unconsolidated
subsidiary...... (17,620)(w) (17,620)
Provision
(benefit) for
income taxes.... -- (1,026)
Minority interest
in (income) loss
of consolidated
subsidiary...... -- (58)
---------------- ---------
Net income (loss)
................ $ -- $(12,082)
================ =========
Pro forma basic
and diluted loss
per common
share........... $ (1.20)
=========
Pro forma basic
and diluted
weighted average
common shares
outstanding..... 10,104
=========
</TABLE>
4
<PAGE>
The InterCept Group, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the year ended December 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
L.E. Vickers
&
Associates,
Inc. TIB The
Item and Data Indepen-
Process- Advance Nova Equipment dent The
ing of Data Financial Services, Direct SBS SBS Bankers Bankers Call Me
InterCept America Partnership Corporation Inc. Access Corp. Data Bank Bank Bill Dyad
--------- ------- ----------- ----------- ----------- ------ ------- ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $28,902 $865 $893 $ 661 $3,853 $ 591 $12,553 $4,229 $ 432 $ 77 $ 62 $ 505
------- ---- ---- ----- ------ ----- ------- ------ ----- ----- ----- --------
Costs of
services........ 12,031 470 190 567 1,516 466 6,377 960 434 113 28 409
Selling, general
and
administrative
expenses........ 11,222 236 475 176 2,087 442 5,539 2,248 508 416 378 1,688
Depreciation and
amortization.... 1,337 12 75 98 278 15 166 152 7 5 23 137
Asset
impairment...... -- -- -- -- -- -- -- -- -- -- -- 143
------- ---- ---- ----- ------ ----- ------- ------ ----- ----- ----- --------
Total operating
expenses....... 24,590 718 740 841 3,881 923 12,082 3,360 949 534 429 2,377
------- ---- ---- ----- ------ ----- ------- ------ ----- ----- ----- --------
Operating
income.......... 4,312 147 153 (180) (28) (332) 471 869 (517) (457) (367) (1,872)
Interest
expense......... (345) (1) (2) (78) -- (20) (14) (12) -- -- 1 (1,679)
Other income,
net............. 161 -- -- -- -- -- 166 31 54 -- -- --
------- ---- ---- ----- ------ ----- ------- ------ ----- ----- ----- --------
Income (loss)
before net loss
in
unconsolidated
subsidiary,
provision
(benefit) for
income taxes and
minority
interest........ 4,128 146 151 (258) (28) (352) 623 888 (463) (457) (366) (3,551)
Net loss in
unconsolidated
subsidiary...... -- -- -- -- -- -- -- -- -- -- -- --
Provision
(benefit) for
income taxes.... 1,564 -- 58 -- (9) -- 237 329 -- -- -- --
Minority interest
in income (loss)
of consolidated
subsidiary...... (89) -- -- -- -- -- -- -- -- -- -- --
------- ---- ---- ----- ------ ----- ------- ------ ----- ----- ----- --------
Net income (loss)
before preferred
dividends....... 2,475 146 93 (258) (19) (352) 386 559 (463) (457) (366) (3,551)
Preferred
dividends....... (16) -- -- -- -- -- -- -- -- -- -- --
------- ---- ---- ----- ------ ----- ------- ------ ----- ----- ----- --------
Net income (loss)
attributable to
common
shareholders.... $ 2,459 $146 $ 93 $(258) $ (19) $(352) $ 386 $ 559 $(463) $(457) $(366) $(3,551)
======= ==== ==== ===== ====== ===== ======= ====== ===== ===== ===== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acquisition Deconsolidation Pro
Adjustments Total Adjustments Forma
----------- -------- --------------- --------
<S> <C> <C> <C> <C>
Revenues................ $ -- $ 53,623 $ (3,115)(w) $ 50,508
-------- -------- -------- --------
Costs of services....... -- 23,561 (1,664)(w) 21,897
Selling, general and
administrative
expenses............... 608 (t) 26,023 (4,869)(w) 21,154
Depreciation and
amortization........... 340 (j) 35,701 (32,605)(w) 3,096
272 (i)
186 (u)
604 (l)
15,300 (k)
294 (m)
10,800 (n)
4,500 (o)
1,100 (p)
Asset impairment........ -- 143 -- 143
-------- -------- -------- --------
Total operating
expenses.............. 34,004 85,428 (39,138) 46,290
-------- -------- -------- --------
Operating income........ (34,004) (31,805) 36,023 (w) 4,218
Interest expense........ (2,200)(q) 210 -- 210
1,679 (s)
81 (u)
Other income, net....... 2,800 (r) 412 (302)(w) 110
-------- -------- -------- --------
Income (loss) before net
loss in unconsolidated
subsidiary, provision
(benefit) for income
taxes and minority
interest............... (31,644) (31,183) 35,721 4,538
Net loss in
unconsolidated
subsidiary............. -- -- (35,721) (35,721)
Provision (benefit) for
income taxes........... (6,163)(v) (3,984) -- (3,984)
Minority interest in
(income) loss of
consolidated
subsidiary............. -- (89) -- (89)
-------- -------- -------- --------
Net income (loss) before
preferred dividends.... (25,481) (27,288) -- (27,288)
Preferred dividends..... -- (16) -- (16)
-------- -------- -------- --------
Net income (loss)
attributable to common
shareholders........... $(25,481) $(27,304) $ -- $(27,304)
======== ======== ======== ========
Pro forma basic and
diluted net loss per
common share........... $ (3.04)
========
Pro forma basic and
diluted weighted
average common shares
outstanding............ 8,975
</TABLE>
5
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Notes to Balance Sheet
The acquisitions adjustments column shows those adjustments necessary to
reflect the transactions as if they had occurred on June 30, 1999.
(a) Reflects the issuance of common stock and stock options of Netzee
and the recording of intangible assets associated with Netzee's acquisition
of the Internet banking divisions of TIB The Independent BankersBank and
The Bankers Bank. The purchase price included 2,722,000 shares of Netzee
common stock valued at $11.50 per share, options to purchase 50,000 shares
of common stock of Netzee granted to management of TIB The Independent
BankersBank and The Bankers Bank, and 76,000 shares of Netzee common stock
sold to a third party for $100,000. The options were issued to individuals
who were members of management at TIB The Independent BankersBank and The
Bankers Bank who would not be employees of Netzee after the acquisition.
The options were valued at approximately $575,000. The $774,000 difference
between the fair value of the common stock sold to a third party and its
purchase price has been included in the total purchase price for the
acquisition, which was approximately $32.7 million. The excess of the
purchase price over net tangible assets was allocated to the following:
<TABLE>
<CAPTION>
Amortization
Allocation Period
----------- ------------
<S> <C> <C>
Workforce........................................... $ 330,000 3 years
Contracts in progress............................... $ 150,000 3 years
Marketing agreement................................. $ 3,056,000 2 years
Acquired technology................................. $27,417,000 3 years
</TABLE>
(b) Reflects the issuance of our stock and the stock of Netzee, the
payment of cash and the recording of intangible assets associated with the
purchase of SBS Corp. and SBS Data. In exchange for all of the shares of
SBS Corp., Netzee issued 2,600,000 shares of its common stock, valued at
$11.50 per share, and paid cash of approximately $16.6 million to the
shareholders of SBS Corp. Netzee also repaid approximately $4.9 million of
SBS Corp. debt. The former shareholders of SBS Corp. have the right to put
the shares back to Netzee at $11.50 per share if Netzee does not complete
an initial public offering by August 6, 2001. To enable Netzee to complete
this transaction, we borrowed $21.6 million under our line of credit and
loaned those funds to Netzee. Netzee then transferred the non-Internet and
telephone banking assets of SBS Corp. to us in exchange for 450,000 shares
of Netzee common stock held by us. The purchase price of SBS Data included
192,307 shares of our common stock with a fair market value of $21.38 per
share. The excess of the purchase price over the net tangible assets was
allocated to the following:
<TABLE>
<CAPTION>
Amortization
Allocation Period
----------- ------------
<S> <C> <C>
Workforce........................................... $ 740,000 3 years
Contracts in progress............................... $ 2,140,000 4-5 years
Acquired technology................................. $44,402,000 3 years
Goodwill............................................ $ 8,187,000 10-20 years
</TABLE>
(c) Reflects the issuance of common stock of Netzee, the payment of cash
and the recording of intangible assets associated with the acquisition of
Dyad. The purchase price of Dyad included 618,137 shares of Netzee common
stock valued at $11.50 per share and approximately $900,000 in cash. Netzee
also repaid approximately $3.5 million in debt of Dyad. To enable Netzee to
complete this transaction, we borrowed $4.4 million under our line of
credit and loaned those funds to Netzee. Dyad had warrants
6
<PAGE>
outstanding which were exercised prior to the acquisition. Therefore, all
historical balances related to the warrants were removed in the pro forma
adjustments. The excess of the purchase price over the net tangible assets
was allocated to the following:
<TABLE>
<CAPTION>
Amortization
Allocation Period
----------- ------------
<S> <C> <C>
Workforce........................................... $ 70,000 3 years
Acquired technology and goodwill.................... $13,543,000 3 years
</TABLE>
(d) Reflects the payment of cash and the recording of intangible assets
associated with the acquisition of Call Me Bill. The purchase price of Call
Me Bill was approximately $3.3 million in cash. To enable Netzee to
complete this transaction, we borrowed $2.9 million under our line of
credit and loaned those funds to Netzee. The excess of the purchase price
over the net assets acquired was allocated to goodwill and acquired
technology and will be amortized over three years.
(e) Reflects the recording of deferred compensation of approximately
$11.4 million for stock options issued to management in August and
September 1999 by Netzee below fair market value.
The deconsolidation adjustments column shows those adjustments necessary to
reflect the transactions as if they had occurred on June 30, 1999.
(f) Reflects the elimination of the assets and liabilities of Netzee and
its acquired entities and the establishment of our investment in
unconsolidated subsidiary as our ownership percentage in Netzee was reduced
to approximately 49%. We will account for our investment in Netzee under
the equity method and will record the operating income and losses of Netzee
in a single line item in our statement of operations. Because we are
currently funding the operations of Netzee, all of the losses of Netzee
will be included in our statement of operations, rather than our relative
percentage of those losses. When our funding of the operations of Netzee is
complete, we will record only our relative percentage of the net losses of
Netzee. As a result of the reduction in our percentage ownership of Netzee,
we have recognized gains in accordance with Staff Accounting Bulletin
No. 51 related to the increases in our percentage of the net equity of
Netzee. This gain totaled approximately $33.4 million, or approximately
$20.9 million after taxes, and has been recorded as an increase in
additional paid-in capital.
(g) As noted in (e) above, Netzee issued stock options to management in
August and September 1999 at below fair market value. The total
compensation expense recorded by InterCept and Netzee before our ownership
percentage decreased to 49% was approximately $608,000, which is included
as a reduction of retained earnings and an addition to additional paid-in
capital in the accompanying pro forma balance sheet.
(h) Reflects the establishment of the note payable to First Union for
the borrowings under our line of credit for the acquisitions noted above
and the related receivables from Netzee of approximately $28.8 million, and
funding of Netzee from inception of approximately $750,000.
Notes to Statements of Operations
The acquisitions column shows those adjustments necessary to reflect the
transactions as if they occurred on January 1, 1998.
(i) Reflects the additional amortization of intangible assets recognized
upon the acquisition of L.E. Vickers & Associates and Data Equipment
Services of approximately $113,000 for the six months ended June 30, 1999
and approximately $272,000 for the year ended December 31, 1998.
Amortization was calculated on a straight line basis over the estimated
useful lives of the intangible assets of 5 to 20 years.
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(j) Reflects the additional amortization of intangible assets recognized
upon the acquisition of Netzee of approximately $57,000 for the six months
ended June 30, 1999 and approximately $340,000 for the year ended December
31, 1998. Amortization was calculated on a straight line basis over the
estimated useful lives of the intangible assets of five years.
(k) Reflects the additional amortization of intangible assets recognized
upon Netzee's acquisition of the Internet and telephone banking operations
of SBS Corp. of approximately $7.6 million for the six months ended June
30, 1999 and approximately $15.3 million for the year ended December 31,
1998. Amortization was calculated on a straight line basis using the
estimated lives indicated in (b).
(l) Reflects the additional amortization of intangible assets recognized
upon our acquisition of the non-Internet and telephone banking operations
of SBS Corp. of approximately $302,000 for the six months ended June 30,
1999 and approximately $604,000 for the year ended December 31, 1998. The
Non-Internet and telephone banking operations of SBS Corp. were valued at
approximately $5.2 million, which we paid for by transferring to Netzee
450,000 shares of Netzee common stock valued at $11.50 per share.
Amortization expense will be recorded on a straight line basis over the
estimated useful lives of the intangible assets of 3 to 10 years.
(m) Reflects the additional amortization of intangible assets recognized
upon our acquisition of SBS Data of approximately $147,000 for the six
months ended June 30, 1999 and approximately $294,000 for the year ended
December 31, 1998. Amortization expense will be recorded on a straight line
basis over the estimated useful lives of the intangible assets of 3 to 20
years.
(n) Reflects the additional amortization of the intangible assets
recognized upon the acquisition by Netzee of TIB The Independent
BankersBank and The Bankers Bank of approximately $5.4 million for the six
months ended June 30, 1999 and approximately $10.8 million for the year
ended December 31, 1998. Amortization was calculated on a straight line
basis over the estimated useful lives indicated in (a).
(o) Reflects the additional amortization of the intangible assets
recognized upon the acquisition by Netzee of Dyad of approximately $2.3
million for the six months ended June 30, 1999 and approximately $4.5
million for the year ended December 31, 1998. Amortization was calculated
on a straight line basis over the estimated useful lives indicated in (c).
(p) Reflects the additional amortization of intangible assets recognized
upon the acquisition by Netzee of Call Me Bill of approximately $554,000
for the six months ended June 30, 1999 and approximately $1.1 million for
the year ended December 31, 1998. Amortization was calculated on a straight
line basis over the estimated useful lives indicated in (d).
(q) Reflects the additional interest expense on the additional amounts
borrowed under the line of credit with First Union in connection with the
acquisition of SBS Corp., Dyad and Call Me Bill of approximately $1.1
million for the six months ended June 30, 1999 and approximately $2.2
million for the year ended December 3, 1998. These amounts bear interest at
approximately 7.5% per year.
(r) Reflects the additional interest income from the notes receivable
from Netzee of approximately $1.4 million for the six months ended June 30,
1999 and approximately $2.8 million for the year ended December 31, 1998.
The interest rate on these notes is approximately 10.25% per year.
(s) Reflects the elimination of the interest expense on the warrants and
the debt at Dyad of approximately $906,000 for the six months ended June
30, 1999 and approximately $1.7 million for the year ended December 31,
1998.
(t) Reflects the recording of approximately $608,000 of compensation
expense for options issued to management of Netzee in August 1999 at
exercise prices below the fair market value of the common stock of Netzee.
(u) Reflects the additional amortization of intangible assets recognized
upon the acquisition of Item Processing of America and the acquisition of
the operations of Advance Data and Nova Financial Corporation's data
processing business of approximately $186,000 for the year ended December
31, 1998,
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and the removal of interest expense for these transactions of approximately
$81,000 for the year ended December 31, 1998.
(v) Reflects the adjustment to the income tax provision benefit assuming
a 38% tax rate for the six months ended June 30, 1999 and the year ended
December 31, 1998. The amortization expenses associated with the
acquisitions of SBS Corp., SBS Data, and Dyad are non-deductible for tax
purposes.
The deconsolidation column shows the adjustments necessary to reflect the
transactions as if they occurred on January 1, 1998.
(w) Reflects the elimination of the operations of Netzee and its
acquired entities and the recording of the losses of Netzee in a single
line item as our ownership percentage was reduced to approximately 49%. We
will account for our investment in Netzee under the equity method and will
record the operating income and losses of Netzee in a single line item in
our statement of operations. Because we are currently funding the
operations of Netzee, all of the losses of Netzee will be included in our
statement of operations, rather than our relative percentage of those
losses. When our funding of the operations of Netzee is complete, we will
record our percentage of the net losses of Netzee. As a result of the
reduction in our percentage of Netzee, we have recognized gains in
accordance with Staff Accounting Bulletin No. 51 related to the increases
in our percentage of the net equity of Netzee. This gain totaled
approximately $33.4 million, or approximately $20.9 million after taxes,
and has not been recorded in the statements of operations due to the non-
recurring nature of these items.
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