<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 7, 2000
Netzee, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 0-27925 58-2488883
- --------------------------------- ------------ ----------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or organization) File Number) Identification No.)
6190 Powers Ferry Road, Suite 400, Atlanta, Georgia 30339
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(Address of principal executive offices)
(770) 850-4000
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(Registrant's telephone number including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
<PAGE> 2
This Current Report on Form 8-K/A amends the Current Report on Form 8-K filed by
Netzee, Inc. on March 22, 2000.
Item 2. Acquisition or Disposition of Assets.
Pursuant to the terms of the Asset Purchase Agreement dated February 28, 2000 by
and among Netzee, Inc. ("Netzee"), and Digital Visions, Inc. ("Digital
Visions"), a Minnesota corporation, and certain shareholders of Digital Visions,
Netzee acquired substantially all the assets of Digital Visions and assumed
certain liabilities of Digital Visions. This transaction was consummated on
March 7, 2000. As consideration for this acquisition, Netzee issued 838,475
shares of Netzee common stock and issued options to purchase 70,419 shares of
common stock in exchange for the cancellation of options to purchase Digital
Visions common stock. In addition, Netzee assumed approximately $3,300,000 in
outstanding debt of Digital Visions and $1,200,000 in operating liabilities and
other acquisition costs. A portion of the shares of common stock issued in this
transaction was placed in escrow for indemnification and other purposes. Digital
Visions also has the right to receive up to approximately 628,000 additional
shares of Netzee common stock if certain revenue targets are met in fiscal years
2000 and 2001. The amount of the consideration was determined based upon arm's
length negotiations.
Digital Visions is located in Minneapolis, Minnesota and was engaged principally
in the business of developing, marketing and distributing a wholesale suite of
Internet-based products and services to financial institutions. These products
and services include bond portfolio and asset liability management analytic
tools and access to critical information sources such as vehicle valuations,
credit reports, industry economic forecasts and title and lien search
information. Netzee intends to continue to use the acquired assets to engage in
these activities.
Michael Murphy, the founder and former Chief Executive Officer of Digital
Visions, has become Vice President and Chief Technology Officer of Netzee, Inc.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
Included as Exhibit 99.2 hereto and incorporated herein by
reference.
(b) Pro Forma Financial Information.
Included as Exhibit 99.3 hereto and incorporated herein by
reference.
(c) Exhibits.
<TABLE>
<CAPTION>
Item No. Exhibit List
<S> <C>
2.1* Asset Purchase Agreement dated February 28, 2000 by
and among Netzee, Digital Visions and certain of
Digital Visions' shareholders.**
4.1* Registration Rights Agreement, dated March 7, 2000 by
and between Netzee and Digital Visions.
99.1* Press Release dated March 10, 2000.
99.2 The following financial statements of Digital
Visions, Inc. together with the report by Arthur
Andersen LLP for the periods stated therein:
Balance Sheet as of December 31, 1999
Statement of Operations for the Year Ended December
31, 1999
Statement of Changes in Shareholders' Equity for the
Year Ended December 31, 1999
</TABLE>
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<TABLE>
<S> <C>
Statement of Cash Flows for the Year Ended December
31, 1999
Notes to Financial Statements
99.3 The following unaudited pro forma consolidated
financial statements of Netzee, Inc. for the periods
stated therein:
Unaudited Pro Forma Consolidated Balance Sheet for
the Year Ended December 31, 1999
Unaudited Pro Forma Consolidated Statement of
Operations for the Year Ended December 31, 1999
Notes to Unaudited Pro Forma Consolidated Financial
Statements
</TABLE>
*Previously filed with the Registrant's Current Report on Form 8-K (File No.
0-27925), as filed with the Securities and Exchange Commission on March 22,
2000, and is hereby incorporated by reference herein.
**Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish
supplementally a copy of any omitted schedule or exhibit to this Exhibit to the
Securities and Exchange Commission upon request.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETZEE, INC.
Date: May 22, 2000 /s/ Richard S. Eiswirth
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Senior Executive Vice President, Chief
Financial Officer and Secretary (Principal
Financial and Accounting Officer and Duly
Authorized Officer)
<PAGE> 5
EXHIBIT LIST
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
2.1* Asset Purchase Agreement dated February 28, 2000 by
and among Netzee, Digital Visions and certain of
Digital Visions' shareholders.**
4.1* Registration Rights Agreement, dated March 7, 2000,
by and between Netzee and Digital Visions.
99.1* Press Release dated March 10, 2000.
99.2 The following financial statements of Digital
Visions, Inc. together with the report by Arthur
Andersen LLP for the periods stated therein:
Balance Sheet as of December 31, 1999
Statement of Operations for the Year Ended December
31, 1999
Statement of Changes in Shareholders' Equity for the
Year Ended December 31, 1999
Statement of Cash Flows for the Year Ended December
31, 1999
Notes to Financial Statements
99.3 The following unaudited pro forma consolidated
financial statements of Netzee, Inc. for the periods
stated therein:
Unaudited Pro Forma Consolidated Balance Sheet for
the Year Ended December 31, 1999
Unaudited Pro Forma Consolidated Statement of
Operations for the Year Ended December 31, 1999
Notes to Unaudited Pro Forma Consolidated Financial
Statements
</TABLE>
*Previously filed with the Registrant's Current Report on Form 8-K (File No.
0-27925), as filed with the Securities and Exchange Commission on March 22,
2000, and is hereby incorporated by reference herein.
**Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish
supplementally a copy of any omitted schedule or exhibit to this Exhibit to the
Securities and Exchange Commission upon request.
<PAGE> 1
EXHIBIT 99.2
DIGITAL VISIONS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999
TABLE OF CONTENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Balance Sheet as of December 31, 1999
Statement of Operations for the Year Ended December 31, 1999
Statement of Changes in Shareholders' Deficit for the Year Ended
December 31, 1999
Statement of Cash Flows for the Year Ended December 31, 1999
NOTES TO FINANCIAL STATEMENTS
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Digital Visions, Inc.:
We have audited the accompanying balance sheet of DIGITAL VISIONS, INC. (a
Minnesota corporation) as of December 31, 1999 and the related statements of
operations, changes in shareholders' deficit, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 Digital Visions, Inc. as of
December 31, 1999 and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 28, 2000
<PAGE> 3
DIGITAL VISIONS, INC.
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 120,569
Accounts receivable 206,117
Prepaid and other current assets 211,381
-----------
Total current assets 538,067
-----------
FURNITURE AND EQUIPMENT 636,175
Less accumulated depreciation (309,769)
-----------
Net furniture and equipment 326,406
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OTHER ASSETS:
Acquired technology, net of accumulated amortization of $563,676 997,255
Deferred financing costs, net of amortization of $1,586,072 227,206
Capitalized software development costs, net of amortization of $210,751 117,731
-----------
Other assets 5,518
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Total other assets 1,347,710
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Total assets $ 2,212,183
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 270,858
Accrued and other liabilities 108,351
Deferred revenue 72,809
Line of credit 1,525,000
Notes payable 3,442,489
Current portion of capital lease obligations 56,846
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Total current liabilities 5,476,353
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion 9,547
-----------
Total liabilities 5,485,900
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COMMITMENTS AND CONTINGENCIES (NOTE 11)
REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION (NOTE 6) 1,690,019
-----------
SHAREHOLDERS' DEFICIT:
Common stock, par value $.01; 20,000,000 shares authorized; 2,318,333 shares issued and
outstanding 23,183
Additional paid-in capital 2,536,001
Warrants outstanding to purchase 1,197,758 shares of common stock 1,698,847
Accumulated deficit (9,221,767)
-----------
Total shareholders' deficit (4,963,736)
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Total liabilities and shareholders' deficit $ 2,212,183
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE> 4
DIGITAL VISIONS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
REVENUES $ 971,228
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COSTS AND OPERATING EXPENSES:
Costs of service 286,432
Selling and marketing 716,047
General and administrative 2,595,212
Depreciation 115,978
Amortization of intangible assets 607,999
-----------
Total operating expenses 4,321,668
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OPERATING LOSS (3,350,440)
INTEREST AND DEBT-RELATED EXPENSES 1,508,006
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NET LOSS (4,858,446)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 5
DIGITAL VISIONS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN WARRANTS ACCUMULATED
SHARES AMOUNT CAPITAL OUTSTANDING DEFICIT TOTAL
---------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 1,983,333 $ 19,833 $ 1,290,264 $ 1,689,874 $(4,363,321) $(1,363,350)
Issuance of common stock in connection
with exercise of warrants 490,000 4,900 1,344,438 (435,590) 0 913,748
Issuance of common stock 125,000 1,250 248,750 0 0 250,000
Repurchase and retirement of
common stock (300,000) (3,000) (247,000) 0 0 (250,000)
Issuance of common stock in exchange
for services 20,000 200 66,800 0 0 67,000
Issuance of warrants 0 0 0 444,563 0 444,563
Preferred stock dividends 0 0 (60,898) 0 0 (60,898)
Accretion of mandatorily redeemable
preferred stock 0 0 (106,353) 0 0 (106,353)
Net loss 0 0 0 0 (4,858,446) (4,858,446)
---------- -------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 2,318,333 $ 23,183 $ 2,536,001 $ 1,698,847 $(9,221,767) $(4,963,736)
========== ======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
DIGITAL VISIONS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,858,446)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation 115,978
Amortization of debt discount 306,626
Amortization of deferred financing fees 651,323
Amortization of intangible assets 607,999
Changes in assets and liabilities:
Accounts receivable (181,403)
Accounts payable 22,737
Accrued and other liabilities 104,481
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Net cash flows used in operating activities (3,230,705)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (104,916)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 800,000
Payments on notes payable to related parties (89,305)
Deferred financing costs (69,788)
Payments on capital lease obligations (84,589)
Issuance of preferred stock, net of offering expenses 1,924,771
Issuance of common stock warrants 6,645
Issuance of common stock, net of offering expenses 1,163,748
Repurchase of common stock from officer (250,000)
-----------
Net cash flows provided by financing activities 3,401,482
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NET INCREASE IN CASH AND CASH EQUIVALENTS 65,861
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 54,708
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CASH AND CASH EQUIVALENTS, END OF YEAR $ 120,569
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 534,969
===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred $ 67,905
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Preferred stock issuance--fair value of warrants $ 402,003
===========
Issuance of common stock and warrants for prepaid license fees $ 162,700
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
DIGITAL VISIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Digital Visions, Inc. (the "Company") develops and markets an
integrated information system for banks, savings and loan associations,
credit unions, broker-dealers, municipalities, and other financial
institutions throughout the United States. The Company provides
value-priced, user-defined, on-demand asset/liability risk and
investment analysis tools and related customer support as well as a
variety of financial management information as an application service
provider via the Internet.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES
The accompanying financial statements are presented in accordance with
accounting principles generally accepted in the United States ("GAAP").
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of 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 vary from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
REVENUE RECOGNITION
The Company's customers generally enter into one-year automatically
renewable contracts to have access to the Company's products and
services via the Internet. The customers pay a usage-based transaction
fee and/or a monthly product service fee which is recognized as the
services are performed.
Any revenues collected from customers in advance of performing the
related services are recorded as deferred revenue in the accompanying
balance sheet and are recognized as revenue as the services are
performed.
FURNITURE AND EQUIPMENT
Furniture and equipment, including assets acquired by capital leases,
are carried at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the useful lives of the
assets of four to six years. Depreciation expense in the amount of
$115,978 was recorded for the year ended December 31, 1999.
DEFERRED FINANCING COSTS
Legal and other direct financing costs incurred in connection with the
Company's long-term debt are capitalized as deferred financing costs
and are amortized as interest expense over the remaining lives of the
debt instruments. The fair values of warrants issued to loan guarantors
are capitalized as deferred financing costs and are amortized as
interest expense over the remaining lives of the debt instruments to
which the guarantees apply.
<PAGE> 8
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CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company accounts for its software development costs following the
guidance provided in the American Institute of Certified Public
Accountants Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Costs
incurred during the preliminary project stage of development, as well
as training and maintenance costs, are expensed as they are incurred.
Capitalizable costs, which were incurred in the application development
stage, included external costs of materials and services incurred in
developing the software, as well as internal payroll and
payroll-related costs for employees directly associated with software
development projects subject to capitalization.
Capitalized software development costs are being amortized on the
straight-line basis over an estimated life of three years. Amortization
expense in the amount of $101,125 was recorded for the year ended
December 31, 1999. The Company periodically reassesses the future
service potential of the capitalized software following the guidance of
Financial Accounting Standards Board Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of."
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Such assets and liabilities are
measured using enacted tax rates expected to apply when the differences
are expected to be recovered.
STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees in
accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Stock-based compensation issued to nonemployees is
accounted for under SFAS No. 123 based on the fair value of the goods
or services received or the fair value of the equity instruments
issued, whichever is more readily measurable.
RECENT ACCOUNTING PRONOUNCEMENTS
During December 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," to
establish guidelines for revenue recognition and enhance revenue
recognition disclosure requirements. The bulletin clarifies basic
criteria for the culmination of the earnings process. SAB 101 is
effective for the quarter ended June 30, 2000. The Company does not
expect SAB 101 to have a material impact on the Company's financial
statements.
SIGNIFICANT CUSTOMERS
The Company derives a significant portion of its revenues from a few
customers. For the year ended December 31, 1999, four customers
comprised 23%, 22%, 11%, and 10%, of the Company's revenues.
2. PURCHASE OF PORTPRO SYSTEMS, INC.
On November 2, 1998, the Company acquired the assets, liabilities, and
business operations of PortPro Systems, Inc. ("PSI") for an aggregate
purchase price of $1,507,850, consisting of 198,333 shares of common
stock with a value of $1.20 per share and the forgiveness of $1,269,850
in preacquisition advances. The acquisition was accounted for as a
purchase, and the excess of the consideration given
<PAGE> 9
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over the fair value of the net assets acquired of $1,560,931 was
allocated to Acquired Technology and is being amortized over an
estimated economic life of three years.
3. LINE OF CREDIT
The Company had $1,525,000 outstanding at December 31, 1999 under a
line of credit (the "Line") with a bank. The Line is due on demand and
matures in June 2000. Interest is payable monthly at the bank's prime
rate plus 1% (9.5% at December 31, 1999). The Line is guaranteed by
certain investors of the Company. In any event of default in payment of
the Line, the indebtedness evidenced by the investor guarantee of the
Line shall be discharged by the substitution of convertible
subordinated debentures as described in Note 7. The Line was secured by
all of the assets owned by the Company and was subject to customary
representations, warranties, and certain affirmative and negative
covenants made by the Company to the bank, including restrictions on
the payment of dividends and restrictions on the purchase, redemption,
or acquisition of capital stock.
4. NOTES PAYABLE
Notes payable debt as of December 31, 1999 consisted of the following:
<TABLE>
<S> <C>
Revolving credit notes to a bank bearing interest at prime plus 1%
(9.5% at December 31, 1999), maturing in June 2000 $1,760,000
Revolving credit notes payable to investors bearing interest at prime
plus 1% (9.5% at December 31, 1999), maturing in June 2000, net of
discount of $82,511 682,489
Series B subordinated notes to investors bearing interest at 12.5%,
payable on demand 1,000,000
----------
$3,442,489
==========
</TABLE>
Interest is payable on the above debt instruments on a monthly basis.
The notes are subordinate to the Line and were issued subject to
customary representations, warranties, and affirmative covenants, with
which the Company was in compliance as of December 31, 1999.
5. CAPITAL LEASE OBLIGATIONS
The company leases certain equipment using capital leases. Obligations
under capital leases are accounted for using the present value of
future lease payments discounted at the marginal interest rate of the
Company. Amortization of related assets using the Company's normal
depreciation policy is included under depreciation expense in the
accompanying statement of operations.
The capitalized cost of leased assets amounting to $309,243 at December
31, 1999, less accumulated depreciation of $177,005, has been included
under furniture and equipment in the accompanying balance sheet.
<PAGE> 10
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Future minimum lease payments consist of the following at December 31,
1999:
<TABLE>
<S> <C>
2000 $ 64,394
2001 9,886
--------
Total minimum lease payments 74,280
Less amount representing interest (7,887)
--------
Present value of future minimum lease payments 66,393
Less current portion (56,846)
--------
Long-term portion of capital lease obligations $ 9,547
========
</TABLE>
6. REDEEMABLE PREFERRED STOCK
The Company has authorized 1,200,000 shares of 10% mandatorily
redeemable convertible cumulative preferred stock with a stated value
of $3.35 per share and has issued 650,852 shares of preferred stock in
a private placement as of December 31, 1999.
Dividends on the preferred shares accumulate based on 10% of stated
value and are paid quarterly in arrears commencing six months after the
date of issuance, beginning in February 2000, and thereafter quarterly
in arrears. Each share of preferred stock is convertible into one share
of common stock at the discretion of the preferred stockholder anytime
during the five years following the date of issue at an initial
conversion price of $3.35 per share, subject to adjustment, as defined.
In addition, the preferred stock converts automatically into one share
of common stock in the event of a qualifying initial public offering
("IPO"), as defined.
The preferred stockholders have no voting rights except those related
to certain corporate actions. In the event of dissolution, the
preferred stockholders are entitled to receive an amount equal to the
stated value per share, plus all accrued but unpaid dividends, before
any distribution to the holders of the Company's common stock,
resulting in a liquidation preference of $551,233 over the carrying
amount of the preferred stock at December 31, 1999.
The Company is required to redeem the preferred stock at 125% of the
stated value plus all accrued but unpaid dividends five years from the
date of issue if there has been no qualifying IPO. The carrying amount
of the preferred stock is being increased by periodic accretion due to
the mandatory redemption feature.
7. SHAREHOLDERS' EQUITY
CONVERTIBLE SUBORDINATED DEBENTURES
In conjunction with the borrowings under the Line, if (i) the
investors' guarantee of the Line is called by the bank or (ii) in the
event of any default in payment of the Company's notes payable, the
investors or the other lenders will be issued convertible subordinated
promissory notes in the amount of the guaranty underlying the portion
of the Line satisfied or the discharge of indebtedness evidenced by the
notes payable. The convertible debentures will be convertible to common
stock at the option of the investor at, or any time prior to, the
earlier of the second anniversary date of the issuance of the note or
the first payment of amortized principal on the note at a conversion
price of $2 per share. No convertible subordinated debentures were
issued or outstanding at December 31, 1999.
1995 STOCK INCENTIVE PLAN
The Company grants stock incentives to certain key individuals under
the 1995 Stock Incentive Plan (the "Plan"). The Plan provides for the
issuance of up to 450,000 shares of the Company's common stock at the
discretion of the board of directors. All employees (including
officers), nonemployee directors, and consultants of the Company are
eligible to receive options or awards under the Plan. The exercise
price
<PAGE> 11
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for all options or awards is determined by the board, and may not be
less than market value at the dates of grant. All options expire and
may only be exercised on the date five years after the dates of grant.
Options vest immediately upon a qualifying change of control.
Incentive stock options to acquire 140,635 shares of common stock were
granted during 1999 at a weighted average exercise price of $2.83 per
share. As of December 31, 1999, there were 337,675 shares outstanding
under the Plan with exercise prices ranging from $2 to $3.35 per share,
with a weighted average exercise price of $2.34 per share and a
weighted average remaining contractual life of 44 months. None of these
options were exercisable as of December 31, 1999.
The use of the fair value method to determine compensation cost for the
options consistent with SFAS No. 123 would have decreased reported net
income by $21,086 for the year ended December 31, 1999 based on a
minimum value calculation using risk-free interest rates ranging from
4.65% to 6.28% and an expected dividend yield of 0%.
STOCK PURCHASE WARRANTS--LONG-TERM DEBT
INVESTOR WARRANTS--LINE OF CREDIT AND NOTES PAYABLE
In conjunction with the borrowings under the Line and the notes,
the Company issued warrants for the purchase of a maximum of
1,012,500 shares of the Company's common stock (the "Investor
Warrants") to certain investors in consideration for their
guaranty of a specified amount of the Line or for a direct line
of credit to the Company. The Investor Warrants have an exercise
price of $2 per share and expire seven years and vest three
years from the date of issue. The Investor Warrants were valued
using the Black-Scholes option pricing model. As a result,
$1,181,766 was recorded as deferred financing costs for warrants
given in exchange for guarantees and $270,025 was recorded as a
reduction in the carrying amount of the notes for warrants given
in conjunction with direct lines of credit. Investor Warrants to
acquire 490,000 shares of common stock were exercised during
1999. There were 522,500 Investor Warrants outstanding with a
purchase price of $2 per share as of December 31, 1999.
1999 INVESTOR WARRANTS
In conjunction with the exercise of Investor Warrants, investors
were issued additional warrants for the purchase of a total of
98,000 shares of the Company's common stock (the "1999 Investor
Warrants") which remain outstanding at December 31, 1999. The
1999 Investor Warrants have an exercise price of $4 per share
and expire seven years from the date of issue and may not be
exercised prior to May 27, 2000. The 1999 Investor Warrants were
valued using the Black-Scholes option pricing model, resulting
in a valuation of $220,500 which has been recorded as a
reduction in additional paid-in capital.
SERIES B NOTE WARRANTS
In conjunction with the Series B notes discussed in Note 4, the
Company issued warrants for the purchase of a maximum of 250,000
shares of the Company's common stock (the "Series B Note
Warrants") to investors in consideration for the investor
providing a direct line of credit to the Company. The Series B
Note Warrants have an exercise price of $1 per share and expire
seven years from the date of issue and may not be exercised
prior to May 27, 2000. Series B Note Warrants to acquire a total
of 250,000 shares of common stock were issued during 1998 and
1999 and are outstanding at December 31, 1999. Using the
Black-Scholes option pricing model, the fair value of the
warrants was determined to be $174,158 and was recorded as a
reduction in the carrying amount of the Series B Notes.
All warrants issued in conjunction with the Company's long-term debt
vest immediately upon a change of control, as defined, or earlier at
the discretion of the Company.
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PREFERRED STOCK WARRANTS
In conjunction with the Company's preferred stock offering discussed in
Note 6, the Company issued warrants to the preferred investors for the
purchase of a maximum of 300,000 shares of the Company's common stock
(the "Preferred Stock Warrants"). The Preferred Stock Warrants have an
exercise price of $4 per share and expire seven years from the date of
issue and vest one year from the date of issue except at the discretion
of the Company or in the event of a change in control, as defined.
Preferred Stock Warrants to acquire a total of 162,758 shares of common
stock were issued during 1999 and are outstanding at December 31, 1999.
The total fair value of the warrants was determined to be $408,648,
using the Black-Scholes option pricing model, and is recorded as a
reduction to the carrying value of the preferred stock.
STOCK PURCHASE WARRANTS--SELLING AGENTS
In conjunction with the Company's private placements, the Company
agreed to sell to certain selling agents warrants to purchase shares of
common stock (the "Selling Agent Warrants") up to a maximum of 201,135
shares at exercise prices ranging from $1 to $4 per share. The Selling
Agent Warrants have a weighted average exercise price of $2.62 per
share and expire seven years from the date of issue. Selling Agent
Warrants for the purchase of 49,000 shares of common stock with an
exercise price of $2 per share were issued in connection with the
exercise of Investor Warrants during 1999 and are outstanding at
December 31, 1999. The Selling Agent Warrants were valued using the
Black-Scholes option pricing model, resulting in a valuation of
$28,910, which has been recorded as a reduction in additional paid-in
capital. One of the selling agents is a director of the Company.
In connection with the Company's 1996 private placement memorandum to
issue shares of common stock, the Company issued to the selling agents
warrants to purchase 57,500 shares of common stock of the Company.
These warrants are exercisable at any time at a variable exercise price
based on 75% of the price offered to common stock shareholders in a
change of control, or the average exercise price per share of the last
two options granted to employees of the Company under the 1995 Stock
Incentive Plan. The warrants expire five years from the dates of grant.
Warrants to acquire a total of 57,500 shares of common stock were
issued during 1996 and 1997 and are outstanding and exercisable at
December 31, 1999 under these arrangements. The Warrants were valued
using the Black-Scholes option pricing model, resulting in a valuation
of $78,775, which has been recorded as a reduction in additional
paid-in capital.
STOCK-BASED COMPENSATION FOR NONEMPLOYEE SERVICES
During 1999, the Company compensated a vendor for entering into a
software licensing agreement by issuing 20,000 shares of common stock
with a fair value of $67,000 and by issuing warrants for the purchase
of 58,000 shares of the Company's common stock with a Black-Scholes
option pricing model valuation of $95,700 (Note 11). The warrants have
an exercise price of $3.35 per share and expire five years from the
date of issue and may not be exercised for three years from the date of
issuance, except at the discretion of the Company or in the event of a
change of control as defined in the agreement.
8. 401(K) PROFIT-SHARING PLAN
The Company provides a 401(k) profit-sharing plan which covers
substantially all of the Company's employees. The Company may make
discretionary matching contributions of each participant's contribution
up to a maximum matching contribution of 4% of participant
compensation. The Company also may make a discretionary profit-sharing
contribution determined annually by the board of directors. Company
employer contributions to the plan totaled $52,015 for the year ended
December 31, 1999.
<PAGE> 13
- 7 -
9. INCOME TAXES
The components of the income tax benefit for the year ended December
31, 1999 are as follows:
<TABLE>
<S> <C>
Income tax benefit $(1,846,210)
Change in valuation allowance 1,846,210
-----------
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 year ended December 31, 1999:
<TABLE>
<S> <C>
Tax benefit at statutory rate (34)%
Effect of:
State income tax, net (4)
Valuation allowance 38
---
Income tax benefit 0%
===
</TABLE>
The Company's deferred tax assets and liabilities were comprised of the
following at December 31, 1999:
<TABLE>
<S> <C>
Total deferred tax assets $ 3,235,000
Valuation allowance (3,207,000)
-----------
Net deferred tax assets 28,000
Total deferred tax liabilities 28,000
-----------
Total deferred income taxes $ 0
===========
</TABLE>
Deferred income taxes were principally related to net operating losses,
property and equipment depreciation, and amortization of capitalized
software development costs. A valuation allowance has been established
due to the uncertainty of the realizability of the net deferred tax
assets.
At December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $8,540,000 available that expire
through the year 2015. Changes in the stock ownership of certain
shareholders of the Company occurred in 1999 that defer the
availability of these net operating loss carryforwards to offset future
taxable income.
10. OPERATING LEASES
The Company's office space is leased under a noncancelable operating
lease expiring in 2003. The Company also has certain other
noncancelable automobile and equipment operating leases expiring
through 2003.
Rent expense under these arrangements totaled $92,505 for the year
ended December 31, 1999. Future minimum payments under these
arrangements is as follows as of December 31, 1999:
<TABLE>
<S> <C>
2000 $104,944
2001 107,764
2002 112,267
2003 93,784
--------
Total $418,759
========
</TABLE>
<PAGE> 14
- 8 -
11. COMMITMENTS AND CONTINGENCIES
During 1998, the Company entered into a five-year software license
agreement with a vendor. Under the terms of the agreement, the Company
agreed to pay a monthly fee of $11,300 during 1998 and 1999, $21,300
during 2000, $31,300 during 2001, and $36,300 during 2002.
During 1999, the Company entered into a three-year software license
agreement with a vendor and paid advance product royalties totaling
$212,700, consisting of a $50,000 cash amount, 20,000 shares of company
common stock with a fair value of $67,000, and warrants to purchase
58,000 shares of company common stock with a fair value of $95,700
(Note 7). Such amounts will be expensed as the related royalty payments
become payable to the vendor based on a percentage of future customer
product usage over a period not to exceed three years.
In addition, the Company has entered into annually renewable software
license agreements with certain other vendors. The Company accrues the
minimum royalties on a monthly basis based on the next scheduled
payment.
12. SUBSEQUENT EVENT
Effective March 7, 2000, the Company was acquired by Netzee, Inc., a
Georgia corporation. As consideration for this acquisition, Netzee
issued 838,475 shares of Netzee common stock and issued options to
purchase 70,419 shares of Netzee common stock in exchange for the
cancellation of options to purchase the Company's common stock. In
addition, Netzee assumed approximately $3.3 million in outstanding debt
of the Company and $1.2 million in operating liabilities and other
acquisition costs. The Company's shareholders have the right to receive
up to approximately 628,000 additional shares of Netzee common stock if
certain revenue targets are met in fiscal years 2000 and 2001. The
acquisition of the Company was accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16.
<PAGE> 1
EXHIBIT 99.3
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------- PRO FORMA
NETZEE ACQUISITION(A) COMBINED ADJUSTMENTS PRO FORMA
------------ ------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,255,099 $ 120,569 $ 11,375,668 $ 11,375,668
Accounts receivables, net 2,496,953 206,117 2,703,070 2,703,070
Leases receivable, current 330,191 330,191 330,191
Prepaid and other current assets 503,364 211,381 714,745 714,745
------------ ---------- ------------- -------------
Total current assets 14,585,607 538,067 15,123,674 15,123,674
PROPERTY AND EQUIPMENT, net 6,938,710 326,406 7,265,116 7,265,116
INTANGIBLE ASSETS, NET 120,611,688 997,255 121,608,943 (b) 22,019,215 142,630,903
(c) (997,255)
LEASES RECEIVABLE, NET OF CURRENT PORTION 922,788 -- 922,788 922,788
OTHER NON-CURRENT ASSETS 185,463 350,455 535,918 (c) (227,206) 308,712
------------ ---------- ------------- -------------
Total assets $143,244,256 $2,212,183 $ 145,456,439 $ 166,251,193
============ ========== ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 4,234,307 $ 379,209 $ 4,613,516 (b) $ 800,000 $ 5,413,516
Deferred revenue 5,425,278 72,809 5,498,087 5,498,087
Notes payable 103,462 2,525,000 2,628,462 (d) (2,525,000) 103,462
Current portion of long-term debt -- 2,442,489 2,442,489 2,442,489
Other current liabilities 24,200 56,846 81,046 81,046
------------ ---------- ------------- -------------
Total current liabilities 9,787,247 5,476,353 15,263,600 13,538,600
RELATED-PARTY BORROWINGS 10,956,930 -- 10,956,930 10,956,930
NOTES PAYABLE, net of current portion 1,215,673 -- 1,215,673 1,215,673
DEFERRED REVENUE, net of current
portion 904,032 -- 904,032 904,032
OTHER NON-CURRENT LIABILITIES -- 9,547 9,547 9,547
------------ ---------- ------------- -------------
Total liabilities 22,863,882 5,485,900 28,349,782 26,624,782
------------ ---------- ------------- -------------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock 6,500,000 1,629,121 8,129,121 (b) (1,629,121) 6,500,000
Common stock 148,056,611 23,183 148,079,794 (b) 19,246,037 167,302,648
(b) (23,183)
Additional paid-in capital -- 2,836,204 2,836,204 (b) (2,836,204) --
Notes receivable from shareholders (3,314,799) -- (3,314,799) (3,314,799)
Deferred compensation (8,547,212) -- (8,547,212) (8,547,212)
Warrants outstanding 4,618,760 1,698,847 6,317,607 (d) (1,698,847) 4,618,760
Accumulated deficit (26,932,986) (9,461,072) (36,394,058)(b) 6,461,686 (26,932,986)
(d) 2,525,000
(c) (1,224,461)
(d) 1,698,847
------------ ---------- -------------- ----------- -------------
Total shareholders' equity
(deficit) 120,380,374 (3,273,717) 117,106,657 139,626,411
Total liabilities and ------------ ---------- ------------- ----------- -------------
shareholders' equity
(deficit) $143,244,256 $2,212,183 $ 145,456,439 $ 166,251,193
============ ========== ============= =========== =============
</TABLE>
<PAGE> 2
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Historical
-------------------------------------------- Pro Forma
Netzee Digital Visions Acquisitions(e) Combined Adjustments Pro Forma
----------- --------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Monthly maintenance and service $ 1,770,674 $ 971,228 $ 4,999,700 $ 7,741,602 $ 7,741,602
License, hardware, and
implementation 579,239 1,943,167 2,522,406 (o) $ (109,000) 2,413,406
----------- ----------- ------------- ------------ -----------
Total revenues 2,349,913 971,228 6,942,867 10,264,008 10,155,008
----------- ----------- ------------- ------------ -----------
OPERATING EXPENSES:
Costs of service, license,
hardware, implementation, and
maintenance 1,958,318 286,432 1,362,427 3,607,177 (o) (109,000) 3,498,177
Selling, general, and
administrative expenses 4,481,635 3,311,259 5,849,935 13,642,829 13,642,829
Amortization of stock-based
compensation 4,591,888 -- -- 4,591,888 4,591,888
Depreciation and amortization 13,056,016 723,977 197,759 13,977,752 (f) 103,000 52,343,263
(g) 8,915,000
(h) 7,163,000
(i) 3,025,000
(j) 739,000
(k) 11,328,773
(l) 7,339,738
(m) (608,000)
(q) 360,000
----------- ----------- ------------- ------------ -----------
Total operating expenses 24,087,857 4,321,668 7,410,121 35,819,646 74,076,157
----------- ----------- ------------- ------------ -----------
OPERATING LOSS (21,737,944) (3,350,440) (467,254) (25,555,638) (63,921,149)
OTHER INCOME, NET -- -- 210,333 210,333 210,333
INTEREST EXPENSE, NET 673,972 1,508,006 1,221,743 3,403,721 (n) (1,209,000) 2,063,721
(p) (131,000)
----------- ----------- ------------- ------------ -----------
LOSS BEFORE EXTRAORDINARY LOSS (22,411,916) (4,858,446) (1,478,664) (28,749,026) (65,774,537)
EXTRAORDINARY LOSS (4,518,760) -- -- (4,518,760) (4,518,760)
----------- ----------- ------------- ------------ -----------
LOSS BEFORE PROVISION FOR INCOME
TAXES (26,930,676) (4,858,446) (1,478,664) (33,267,786) (70,293,297)
PROVISION FOR INCOME TAXES -- -- (512,249) (512,249)(k) 512,249 --
----------- ----------- ------------- ------------ -----------
NET LOSS BEFORE PREFERRED DIVIDENDS (26,930,676) (4,858,446) (1,990,913) (33,780,035) (70,293,297)
PREFERRED DIVIDEND (24,200) -- -- (24,200) (24,200)
----------- ----------- ------------- ------------ -----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $(26,954,876) $(4,858,446) $ (1,990,913) $(33,804,235) $(70,317,497)
============ =========== ============= ============ ============
BASIC AND DILUTED LOSS PER SHARE
BEFORE EXTRAORDINARY LOSS $(1.94) $ (3.03)
EXTRAORDINARY LOSS PER SHARES
OUTSTANDING (0.40) (0.21)
----------- -----------
BASIC AND DILUTED NET LOSS PER SHARE $ (2.34) $ (3.24)
=========== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 11,542,034 21,696,206
=========== ============
</TABLE>
<PAGE> 3
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
The unaudited pro forma consolidated balance sheet as of December 31, 1999
reflects the following adjustments as if they occurred on December 31 1999:
(a) The historical information for our acquisition of Digital Visions on
March 7, 2000.
(b) The issuance of common stock and the recording of intangible assets
associated with the purchase of certain assets and assumption of
certain liabilities of Digital Visions. The purchase price included
838,475 common shares valued at $22.125 per share and options to
purchase 70,419 shares of common stock that were issued in exchange for
the cancellation of options to purchase Digital Visions common stock.
Digital Visions also has the right to receive up to 628,272 shares of
common stock if certain revenue targets are met in fiscal years 2000
and 2001. No contingent consideration is included in the pro forma
consolidated financial statements due to the uncertainty of meeting the
defined earnings thresholds. Transaction costs of approximately
$800,000 were incurred as a result of the purchase. The excess of the
purchase price over net tangible assets acquired approximated $22
million and was allocated to the acquired technology identifiable
intangible asset and will be amortized over a three-year period.
(c) The elimination of the intangible assets and deferred financing costs
recorded by Digital Visions.
(d) Outstanding Digital Visions warrants and certain liabilities were
excluded in the purchase agreement discussed in note (b).
The unaudited pro forma consolidated statements of operations for the year ended
December 31, 1999 reflects the following adjustments as if they occurred on
January 1, 1999 and are based on the historical statements of operations,
adjusted to reflect the following:
(e) The historical information for the period from January 1, 1999, to the
date of acquisition for our acquisitions completed on August 6, 1999
(the remote Internet and telephone banking divisions of SBS), September
3, 1999 (Call Me Bill LLC, Dyad Corporation and the Internet banking
divisions of The Bankers Bank and The Independent BankersBank), and
December 15, 1999 (DPSC Software, Inc.).
(f) The additional amortization of the intangible assets recognized upon
the acquisition of Direct Access Interactive of $103,000 for the period
from January 1, 1999 to March 8, 1999.
(g) The additional amortization of the intangible assets recognized upon
the acquisition of SBS of approximately $8.9 million for the period
from January 1, 1999 to August 5, 1999. Amortization expense was
calculated on a straight-line basis over the estimated useful lives of
the intangible assets acquired.
(h) The additional amortization of the intangible assets recognized upon
the acquisition of TIB and The Bankers Bank of approximately $7.2
million for the period from January 1, 1999 to September 2, 1999.
Amortization expense was calculated on a straight-line basis over the
estimated useful lives of the intangible assets acquired.
(i) The additional amortization of the intangible assets recognized upon
the acquisition of Dyad of approximately $3.0 million for the period
from January 1, 1999 to September 2, 1999. Amortization expense was
calculated on a straight-line basis over the estimated useful lives of
the intangible assets acquired.
<PAGE> 4
-2-
(j) The additional amortization of the intangible assets recognized upon
the acquisition of Call Me Bill of approximately $739,000 for the
period from January 1, 1999 to September 2, 1999.
(k) The additional amortization of the intangible assets recognized upon
the acquisition of DPSC of $11.3 million for the period from January 1,
1999 to December 14, 1999 and the elimination of the DPSC tax provision
as we will file consolidated tax returns.
(l) The additional amortization of the intangible assets recognized upon
the acquisition of Digital Visions of $7.3 million for the year ended
December 31, 1999. Amortization expense was calculated on a
straight-line basis over the estimated useful lives of intangible
assets acquired.
(m) The elimination of the amortization of intangible assets of Digital
Visions prior to the acquisition date of approximately $608,000 for the
year ended December 31, 1999.
(n) The elimination of the interest expense on the warrants and the debt of
Dyad of approximately $1.2 million for the period from January 1, 1999
to September 2, 1999.
(o) The elimination of revenue of TIB from The Bankers Bank and the related
expenses of The Bankers Bank for the conversion services billed and
paid through TIB for the period from January 1, 1999 to September 2,
1999.
(p) The interest income on the notes receivable from shareholders of
approximately $131,000 for the period from January 1, 1999 to August 5,
1999.
(q) The additional amortization on the intangible asset for the marketing
agreements entered into with three bankers' banks of approximately
$360,000 for the period from January 1, 1999 to September 9, 1999.
