EXHIBIT 99.1
SLMSoft.com, Inc.
(Formerly Bankline Holding, Inc.)
(a Kansas corporation and a subsidiary of
SLMSoft.com, Inc., an Ontario corporation)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SLMSoft.com, Inc.:
We have audited the accompanying balance sheets of SLMSOFT.COM, INC. (a Kansas
Corporation and a subsidiary of SLMSoft.com, Inc., an Ontario corporation) as of
December 31, 1999 and 2000 and the related statements of operations,
shareholders' equity (deficit), and cash flows for the period from January 1,
1998 to October 31, 1998, the period from November 1, 1998 to December 31, 1998,
and the years ended December 31, 1999 and 2000. 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 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 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 SLMSoft.com, Inc. as of
December 31, 1999 and 2000 and the results of its operations and its cash flows
for the period from January 1, 1998 to October 31, 1998, the period from
November 1, 1998 to December 31, 1998, and the years ended December 31, 1999 and
2000 in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 20, 2001
SLMSOFT.COM, INC.
(A KANSAS CORPORATION)
(A SUBSIDIARY OF SLMSOFT.COM, INC., AN ONTARIO CORPORATION)
(Formerly Bankline Holding, Inc.)
(in thousands)
BALANCE SHEETS
ASSETS
December 31,
1999 2000
----------- ---------
CURRENT ASSETS:
Cash $ 0 $ 89
Accounts receivable, net of allowance for doubtful accounts of $613 and $989 in 1999 and
2000, respectively 4,858 3,194
Prepaid and other current assets 553 937
Deferred tax asset 0 5,340
-------- --------
Total current assets 5,411 9,560
DUE FROM PARENT - SOFTWARE 5,260 8,888
PROPERTY AND EQUIPMENT, net 7,663 5,547
INTANGIBLE ASSETS, net of accumulated amortization of $1,927 and $4,554 in 1999 and 2000,
respectively 4,905 2,379
OTHER NONCURRENT ASSETS 135 178
-------- --------
Total assets $ 23,374 $ 26,552
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,001 $ 2,961
Current portion of capital lease obligations 1,422 259
Line of credit 4,333 0
Due to parent 1,669 25,225
Accounts payable and accrued expenses 8,604 8,263
Deferred revenues 1,567 1,490
------- --------
Total current liabilities 18,596 38,198
------- --------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 4,330 0
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 2,730 125
------- --------
Total liabilities 25,656 38,323
------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Cumulative convertible preferred stock; par value $.01; authorized 1,750,000 shares, issued 750 750
and outstanding 750,000 shares
Common stock, $.01 par value; authorized 2,000,000 shares; issued 1,290,306 shares, 13 13
outstanding 1,149,311 shares in 1999 and 2000
Treasury Stock (391) (391)
Additional paid-in capital 10,697 10,780
Accumulated deficit (13,351) (22,923)
-------- --------
Total shareholders' equity (deficit) (2,282) (11,771)
-------- --------
$ 23,374 $ 26,552
======== ========
The accompanying notes are an integral part of these balance sheets.
The purchase method of accounting was used to record assets acquired and
liabilities assumed by SLMSoft.com, Inc. Such accounting generally results in
increased depreciation and amortization reported in future periods. Accordingly,
the accompanying financial statements of the Predecessor and SLMSoft.com, Inc.
are not comparable in all material respects since those financial statements
report financial position, results of operations, and cash flows of these two
separate entities.
3
SLMSOFT.COM, INC.
(A KANSAS CORPORATION)
(A SUBSIDIARY OF SLMSOFT.COM, INC., AN ONTARIO CORPORATION)
(Formerly Bankline Holding, Inc.)
(in thousands)
STATEMENTS OF OPERATIONS
Predecessor
-----------
For the For the
Period From Period From
January 1, 1998 to November 1, 1998 to
October 31, 1998 December 31, 1998 1999 2000
------------------ ------------------- --------- ---------
REVENUES:
Service fee income $11,768 $4,297 $ 28,898 $ 30,676
Equipment, product, and other income 4,771 1,208 3,526 2,311
------- ------ -------- --------
Total revenues 16,539 5,505 32,424 32,987
------- ------ -------- --------
COSTS AND EXPENSES:
Cost of installation, maintenance, and usage 13,594 4,356 23,558 22,931
Net royalties to related party 0 275 4,646 4,646
Selling, general and administrative expenses 2,865 645 14,282 15,190
Depreciation and amortization 718 163 3,718 5,202
------- ------ -------- --------
Total costs and expenses 17,177 5,439 46,204 47,969
------- ------ -------- --------
OPERATING (LOSS) INCOME (638) 66 (13,780) (14,982)
INTEREST EXPENSE (248) (31) (490) (704)
INTEREST INCOME-RELATED PARTY 0 97 774 774
------- ------ -------- --------
(LOSS) EARNINGS BEFORE INCOME TAXES (886) 132 (13,496) (14,912)
(BENEFIT) FOR INCOME TAXES 0 0 0 (5,340)
MINORITY INTEREST 0 (52) 65 0
------- ------ -------- --------
NET (LOSS) INCOME $ (886) $ 80 $(13,431) $ (9,572)
======= ====== ======== ========
The accompanying notes are an integral part of these statements.
The purchase method of accounting was used to record assets acquired and
liabilities assumed by SLMSoft.com, Inc. Such accounting generally results in
increased depreciation and amortization reported in future periods. Accordingly,
the accompanying financial statements of the Predecessor and SLMSoft.com, Inc.
are not comparable in all material respects since those financial statements
report financial position, results of operations, and cash flows of these two
separate entities.
4
SLMSOFT.COM, INC.
(A KANSAS CORPORATION)
(A SUBSIDIARY OF SLMSOFT.COM, INC., AN ONTARIO CORPORATION)
(Formerly Bankline Holding, Inc.)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except shares)
Preferred Stock Common Stock
---------------------- ---------------- Treasury
Shares Amount Shares Amount Stock
--------- ------ ------ ------ ---------
PREDECESSOR:
Balance, December 31, 1997 0 $ 0 1,290,306 $13 $ (51)
Sale of 750,000 shares of cumulative convertible preferred
stock 750,000 750 0 0 0
Purchase of 100,995 shares of common stock for the treasury 0 0 0 0 (340)
Dividends on cumulative convertible preferred stock 0 23 0 0 0
Net loss 0 0 0 0 0
------- ---- --------- --- -----
Balance, October 31, 1998 750,000 $773 1,290,306 $13 $(391)
======= ==== ========= === =====
SLMSOFT.COM, INC. (A SUBSIDIARY OF SLMSOFT.COM, INC.):
Initial parent investment, November 13, 1998 750,000 $750 743,297 $ 7 $(391)
Net loss 0 0 0 0 0
------- ---- --------- --- -----
Balance, December 31, 1998 750,000 750 743,297 7 (391)
Additional parent investment, March 31, 1999 0 0 547,009 6 0
Amortization of deferred stock compensation 0 0 0 0 0
Net loss 0 0 0 0 0
------- ---- --------- --- -----
Balance, December 31, 1999 750,000 750 1,290,306 13 (391)
Amortization of deferred stock compensation 0 0 0 0 0
Net loss 0 0 0 0 0
------- ---- --------- --- -----
Balance, December 31, 2000 750,000 $750 1,290,306 $13 $(391)
======= ==== ========= === =====
Total
Shareholders'
Accumulated Equity
APIC Deficit (Deficit)
-------- ----------- ------------
PREDECESSOR:
Balance, December 31, 1997 $ 1,955 $ (815) $ 1,102
Sale of 750,000 shares of cumulative convertible preferred
stock 0 0 750
Purchase of 100,995 shares of common stock for the treasury 0 0 (340)
Dividends on cumulative convertible preferred stock 0 (23) 0
Net loss 0 (886) (886)
------- -------- --------
Balance, October 31, 1998 $ 1,955 $ (1,724) $ 626
======= ======== ========
SLMSOFT.COM, INC. (A SUBSIDIARY OF SLMSOFT.COM, INC.):
Initial parent investment, November 13, 1998 $ 3,716 $ 0 $ 4,082
Net loss 0 80 80
------- -------- --------
Balance, December 31, 1998 3,716 80 4,162
Additional parent investment, March 31, 1999 6,885 0 6,891
Amortization of deferred stock compensation 96 0 96
Net loss 0 (13,431) (13,431)
------- -------- --------
Balance, December 31, 1999 10,697 (13,351) (2,282)
Amortization of deferred stock compensation 83 0 83
Net loss 0 (9,572) (9,572)
------- -------- --------
Balance, December 31, 2000 $10,780 $(22,923) $(11,771)
======= ======== ========
The accompanying notes are an integral part of these statements.
The purchase method of accounting was used to record assets acquired and
liabilities assumed by SLMSoft.com, Inc. Such accounting generally results in
increased depreciation and amortization reported in future periods. Accordingly,
the accompanying financial statements of the Predecessor and SLMSoft.com, Inc.
are not comparable in all material respects since those financial statements
report financial position, results of operations, and cash flows of these two
separate entities.
5
SLMSOFT.COM, INC. (A KANSAS CORPORATION) (A SUBSIDIARY OF SLMSOFT.COM, INC.)
(Formerly Bankline Holding, Inc.)
(in thousands)
STATEMENTS OF CASH FLOWS
Predecessor
-------------------
For the For the
Period From Period From
January 1, 1998 to November 1, 1998 to
October 31, 1998 December 31, 1998 1999 2000
------------------ ------------------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (886) $ 80 $(13,431) $(9,572)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 718 163 3,718 5,202
Amortization of deferred compensation 0 0 96 83
Deferred tax benefit 0 0 0 (5,340)
Non cash royalty expense 0 275 4,646 4,646
Non cash interest income 0 (97) (774) (774)
Changes in assets and liabilities:
Accounts receivable (1,918) (943) (721) 1,664
Accounts payable and accrued expenses 270 1,686 5,405 (342)
Prepaid expenses (396) (110) 751 (425)
Deferred revenues 268 212 101 (77)
Other assets 53 0 0 0
Minority interest 0 52 (65) 0
------- ------ ----- ------
Net cash (used in) provided by operating activities (1,891) 1,318 (274) (4,935)
------- ------ ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid /received in acquisitions 1,419 0 (320) (101)
Capitalized software development (57) 0 0 0
Due from Parent 0 (4,770) (1,670) 7,747
Purchase of property and equipment (507) (508) (956) (358)
------- ------ ----- ------
Net cash provided by (used in) investing activities 855 (5,278) (2,946) 7,288
------- ------ ----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 805 5,673 4,407 9
Payments on long term debt (1,137) (1,475) (419) (1,765)
Payments on capital lease obligations (374) (156) (940) (508)
Purchase of treasury stock (340) 0 0 0
Payment of preferred dividends 0 (23) 0 0
Sale of preferred stock 750 0 0 0
Collection of stock subscription 750 0 0 0
------- ------ ----- ------
Net cash provided by (used in) financing activities 454 4,019 3,048 (2,264)
------- ------ ----- ------
NET (DECREASE) INCREASE IN CASH (582) 59 (172) 89
CASH, beginning of period 695 113 172 0
------- ------ ----- ------
CASH, end of period $ 113 $ 172 $ 0 $ 89
======= ======= ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 259 $ 73 $ 457 $ 723
======= ======= ===== =======
The accompanying notes are an integral part of these statements.
The purchase method of accounting was used to record assets acquired and
liabilities assumed by SLMSoft.com, Inc. Such accounting generally results in
increased depreciation and amortization reported in future periods. Accordingly,
the accompanying financial statements of the Predecessor and SLMSoft.com, Inc.
are not comparable in all material respects since those financial statements
report financial position, results of operations, and cash flows of these two
separate entities.
6
SLMSOFT.COM, INC. (A KANSAS CORPORATION) (A SUBSIDIARY OF SLMSOFT.COM, INC.)
(formerly Bankline Holding, Inc.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
1. ORGANIZATION AND NATURE OF BUSINESS
Bankline Holding, Inc. ("Predecessor" or "Bankline"), a Kansas corporation,
provided data processing services, computer hardware, and internally
developed software and maintenance to financial institutions located
throughout the United States through its data centers. On November 13, 1998,
Bankline's stockholders entered into an agreement with SLMSoft.com, Inc., an
Ontario corporation (formerly SLM Software, Inc.) ("SLM Parent") whereby all
of the outstanding convertible preferred stock and a portion of the common
stock of Bankline was acquired by SLM Parent for 938,467 shares of SLM Parent
common stock valued at approximately $3.3 million and cash of $750,000. The
purchase price was determined by reference to the fair market value of the
SLM Parent stock issued in the acquisition based on the trading value on the
Toronto Stock Exchange of $3.55 per share on November 13, 1998. The
acquisition of Bankline was accounted for as a purchase. The results of
Bankline have been consolidated with SLM Parent's operations since October
31, 1998. Minority interest in income (loss) on the accompanying financial
statements represents the minority shareholder's proportionate share of the
equity and earnings of the Company for the period from acquisition to March
31, 1999, at which time the remaining common stock of Bankline was purchased
by SLM Parent for cash of approximately $6.9 million. The excess of the
purchase price over the minority interest totaling approximately $6.6 million
was allocated to goodwill and is being amortized over approximately 3 years.
In 1999, Bankline's name was changed to SLMSoft.com, Inc., a Kansas
corporation ("SLM") or ("the Company") and operated as a wholly owned
subsidiary of SLM Parent.
The excess of the purchase price over the net assets acquired was allocated
to purchased software. The software was then immediately sold to SLM Parent
on the acquisition date. The Company sold the software for approximately $9.7
million and recorded a receivable from SLM Parent in the same amount. The
Company had a book value of the software in the amount of $1.2 million. As a
result, the Company recorded a deferred gain in the amount of $8.5 million
that will be amortized to net royalties related parties over the three year
term of the software license agreement. The receivable, net of the deferred
gain, is included in the accompanying balance sheet in Due from Parent-
software. The receivable bears interest at 8%. Interest income on the
receivable of $97,000, $774,000, and $774,000 was recorded for the two months
ended December 31, 1998 and the years ended December 31, 1999 and 2000,
respectively. Total amortization of the deferred gain for the years ended
December 31, 1999 and 2000 was $357,000 and $2.9 million, respectively. SLM
pays royalties to SLM Parent for the use of the software. Royalties totaled
approximately $632,000, $7.5 million, and $7.5 million for the period from
November 1, 1998 to December 31, 1998, and the years ended December 31, 1999
and 2000, respectively, and are included in net royalties related parties in
the accompanying financial statements. The acquisition included contingently
issuable shares of SLM Parent stock which were to be earned upon achievement
of
7
specified earnings goals in 1999 through 2001. As of December 31, 2000, none
of the contingent shares had been earned or issued.
History of Losses
SLM has incurred substantial operating losses and negative cash flows from
operations due to: a pricing structure of little or no up-front fees,
increased sales staff, expansion of data center operations and increased
staff required to support growth. The Company incurred net losses of
approximately $886,000, $13.4 million and $9.6 million for the period from
January 1, 1998 to October 31, 1998, and the years ended December 31, 1999
and 2000, respectively. The Company had net income of approximately $80,000
for the period from November 1, 1998 to December 31, 1998. The Company's
operations used cash of approximately $1.9 million, $274,000 and $4.9 million
for the period from January 1, 1998 to October 31, 1998 and the years ended
December 31, 1999 and 2000, respectively. For the period November 1, 1998 to
December 31, 1998 operations provided cash of approximately $1.3 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Predecessor for the period from January 1,
1998 to October 31, 1998 include the accounts of Bankline and its wholly-
owned subsidiaries, Interdyne Computer Concepts, Inc., Bankline, Inc.,
Bankline Texas, Inc., Bankline New England, Inc., Bankline Mid-America, Inc.,
and Questpoint, Inc. All significant intercompany accounts have been
eliminated in consolidation. On the date of the acquisition by SLM Parent,
these subsidiaries were merged into the Company.
The financial statements of the Company for the period from November 1, 1998
to December 31, 2000 have been derived from the statements of SLM and have
been prepared to present the financial position, results of operations, and
cash flows on a stand-alone basis. A portion of the operating expenses in the
accompanying financial statements have been allocated to SLM by SLM Parent.
These costs have been specifically identified and represent administrative
salaries of employees of SLM Parent devoting time to the Company. These
allocations represent management's best estimate of what costs would have
been had the Company been operated as a separate entity. SLM Parent has
funded the operations of the Company since November 13, 1998. All funding has
been included in the Due From/Due to Parent in the accompanying financial
statements. As of December 31, 1999 and 2000, the Company had a receivable of
$5,260,000 and $8,888,000, respectively, from its parent. This amount relates
to the sale of software discussed in Note 1. At December 31, 1999 and 2000,
the Company owed its parent $1,669,000 and $25,225,000, respectively, which
relates primarily to the assumption of debt by its parent (Note 5) and
accrual of royalties due on software as discussed in Note 1.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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
8
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents
The Company considers all short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Deferred Revenue
Deferred revenue represents accounts receivable and amounts collected prior
to revenue recognition. The balance primarily consists of annual billings
collected in advance and recognized ratably over the subsequent twelve
months.
Unbilled receivables
Unbilled receivables represent revenues earned but not billed as of each
period end and are included in accounts receivable in the accompanying
financial statements. Unbilled receivables totaled $2,097,000 and $205,000
as of December 31, 1999 and 2000, respectively.
Property and Equipment
Property and equipment 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 over the
useful life of the asset. Estimated useful lives for the Company's assets
are as follows:
Computer equipment 3 to 5 years
Computer software 3 to 5 years
Furniture and fixtures 5 to 7 years
Leasehold improvements shorter of life of the lease or life of the
asset, generally 5 years
Intangible Assets
The Company's intangible assets include goodwill associated with certain
acquisitions discussed in Note 3. Amortization expense for the period from
January 1, 1998 to October 31, 1998, for the period from November 30, 1998 to
December 31, 1998, and for the years ended December 31, 1999 and 2000 was
$16,000, $0, $1,927,000 and $2,627,000, respectively. The carrying amount of
the intangible assets are reviewed for impairment when events and
circumstances indicate that their recorded costs may not be recoverable. If
the review indicates that the undiscounted cash flows from operations of the
related intangible assets over the remaining amortization period is expected
to be less than the recorded amount of the intangible, the Company' s
carrying value of the intangible asset will be reduced to its estimated fair
value.
9
Capitalized Software Development Costs
Capitalized software development costs represents software acquired as well
as capitalized software development costs for software to be sold. 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 which is five to seven years. The Company
capitalized $57,000 in 1998 and subsequent to the sale of the software to SLM
Parent in 1998 (Note 1), the Company ceased capitalization as the primary
focus of the development department was primarily repairs and maintenance
related. Amortization expense recorded by the Predecessor for the period
from January 1, 1998 to October 31, 1998 was approximately $176,000. The
software products were sold to SLM Parent after acquisition of Bankline.
See Note 1 to the financial statements.
Segment Reporting
The Company does not disclose segment information as it believes it has only
one segment. The Company offers multiple products and services to the same
customer base of financial institutions. Additionally, management reviews
company performance on a consolidated level rather than on a product or
service level.
Revenue Recognition
The Company's revenues include core and item processing fees, software
license fees, software maintenance, and hardware sales, installation and
maintenance. Core and item processing fee income is recognized as services
are performed. Revenue from software license fees, hardware sales and
installations is recognized upon installation of the product, and any related
maintenance revenue is recognized ratably over the period during which the
services are performed, typically 12 months. Revenue from software sales is
recognized in accordance with the American Institute of Certified Public
Accountants Statement of Position No. 97-2, "Software Revenue Recognition."
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.
10
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. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that
a deferred tax asset will not be realized.
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets or
liabilities, including cash, accounts receivable, and accounts payable,
approximate carrying value due to the short-term maturity of the instruments.
The fair value of the line of credit approximates carrying value as the
interest rates attached to this line of credit are based on current market
rates.
Advertising Costs
The Company expenses all advertising costs as incurred.
Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and all other
non-owner changes in shareholders' equity (deficit). For the period from
January 1, 1998 to October 31, 1998, the period from November 1, 1998 to
December 31, 1998, and the years ended December 31, 1999 and 2000,
comprehensive income (loss) is the same as the net loss as presented in the
accompanying statements of operations.
New Accounting Pronouncements
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 Company adopted the new statement on
January 1, 2001. The Statement did not have a significant impact on the
Company's financial statements. During December 1999, the Securities and
Exchange Commission released Staff Accounting Bulletin 101, "Revenue
Recognition" ("SAB 101"), to establish guidelines for revenue recognition and
enhance revenue recognition disclosure requirements. The Bulletin clarifies
basic criteria for when revenues are taken into account for purposes of a
company's financial statements. The Company adopted SAB 101 in all periods
presented.
11
3. ACQUISITIONS
In July 1998, Bankline purchased Blackstone Financial, a data processing
company operating primarily in Massachusetts, for approximately $33,000. The
acquisition was accounted for as a purchase. The consideration exchanged
exceeded the fair value of the net assets received by approximately $47,000.
The amount was allocated to goodwill and was being amortized over a period of
4 years. The results of operations of the acquired business have been
included in Bankline's financial statements from the date of acquisition.
The agreement also included contingent consideration equal to 40% of net
profits of Blackstone Financial for the three months ended December 31, 1998
and 2% of the gross monthly revenues for the nine months ended September 30,
1999. The final amount of contingent consideration paid was immaterial to
the results of operations of the Company. The fair value of the net assets
was redetermined in the acquisition of Bankline by SLM in 1998.
Effective October 1, 1998, Bankline purchased Questpoint Holdings, Inc. and
Questpoint Check Services, E.P. ("Questpoint"), a data processing company
operating six centers in New Jersey, for a cash payment of approximately
$215,000. In consideration of assuming the assets and liabilities of
Questpoint, the Company received $1,751,000 of cash from the seller in
connection with the acquisition, resulting in net cash proceeds of
approximately $1,536,000. The acquisition has been accounted for using the
purchase method of accounting. Under this method, the purchase price has
been allocated among the assets and liabilities of the acquiree at their fair
values as of the acquisition date. The excess of the fair value over the
costs of net assets acquired represents negative goodwill. All long term
assets were reduced to zero and negative goodwill of Questpoint as of the
acquisition date was being accreted to earnings on a straight-line basis over
a period of four years. The operations of the Company include the operations
of the acquiree from the acquisition date. The fair value of the net assets
associated with this acquisition was redetermined in the acquisition of
Bankline by SLM in 1998.
Effective January 4, 1999, the Company purchased the assets of Systems
Analysis, Inc., ("SAI") a data processing company operating primarily in
Washington, for approximately $320,000. The acquisition was accounted for as
a purchase. The consideration exchanged exceeded the fair value of the assets
received by approximately $194,000. The amount was allocated to goodwill and
is being amortized over a period of 7 years. The results of operations of the
acquired business have been included in the Company's consolidated financial
statements from the date of acquisition. The agreement also included
contingent consideration equal to 30% of net profits of SAI for the first 24
months following the acquisition, up to a maximum of $250,000. No additional
contingent consideration has been paid.
During 2000, the Company made a payment of approximately $101,000 which
represented a contingent payment related to a 1996 acquisition completed by
Bankline. Goodwill is being amortized over 4 years.
12
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 2000 consist of the
following:
1999 2000
------------ -----------
Computer equipment $ 5,470,000 $ 5,759,000
Computer equipment under capital lease 1,685,000 1,786,000
Computer software 1,192,000 1,201,000
Furniture and fixtures 500,000 529,000
Leasehold improvements 801,000 801,000
Less accumulated depreciation (1,985,000) (4,529,000)
----------- -----------
Property and equipment, net $ 7,663,000 $ 5,547,000
=========== ===========
Depreciation expense for the period from January 1, 1998 to October 31, 1998,
for the period from November 1, 1998 to December 31, 1998, and for the years
ended December 31, 1999 and 2000 was approximately $702,000, $161,000,
$1,791,000 and $2,575,000, respectively.
13
5. LONG-TERM DEBT
Long-term debt at December 31, 1999 and 2000 consists of the following:
1999 2000
---------- ----------
Term loan payable to bank, maturing November 2003, payable in 60
monthly installments of principal and interest of $77,000,
bearing interest at 8.5%; secured by all assets of the Company
and guaranteed by SLM Parent; repaid in 2000 $3,444,000 $ 0
Term loan payable to bank, maturing August 2004, payable in 60
monthly installments of principal and interest of $41,000,
bearing interest at 8.5%; secured by all assets of the Company
and guaranteed by SLM Parent; repaid in 2000 1,887,000 0
$5.5 million revolving line of credit payable to bank, as amended;
repaid in 2000 4,333,000 0
Term loan payable to bank, maturing September 2001, payable in 14
monthly installments of principal and interest of $113,000,
bearing interest at prime plus .5%; secured by certain assets of
the Company; repaid in full in 2001
0 2,961,000
---------- ----------
Total 9,664,000 2,961,000
Less current maturities 5,334,000 2,961,000
---------- ----------
Long-term debt $4,330,000 $ 0
========== ==========
In 2000, SLM Parent entered into a new financing arrangement with a bank. The
remaining balance of the 1999 term loans outstanding as well as the revolving
line of credit were paid off with this facility. The repayment has been
reflected in the accompanying financial statements in the due to /from
Parent. The Parent's new facility is secured by substantially all assets of
SLM Parent as well as the Company. Also in 2000, the Company renegotiated
certain of its capital lease obligations and converted them into the above
term loan payable to bank.
6. INCOME TAXES
The Company has incurred net operating losses ("NOL") since inception. As of
December 31, 2000, the Company has NOL carryforwards of approximately $29.3
million available to offset its future income tax liability. The NOL
carryforwards begin to expire in 2017. Due to the uncertainty of the
realizability of the net operating losses, the Company has not reflected in
the accompanying statements of operations an income tax benefit for the
periods ending December 31, 1998 or 1999 and recorded a valuation allowance
equal to the net deferred tax
14
assets of the Company at December 31, 1999. Additionally, the Company's net
operating loss carryforward could be limited by Section 382 of the Internal
Revenue Code upon a change in the ownership of the Company of greater than
50%.
The components of the deferred tax assets and liabilities are as follows as
of December 31, 1999 and 2000:
1999 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 4,119,000 $11,121,000
Deferred gain on sale of software 2,010,000 925,000
Accounts receivable 233,000 376,000
Other 29,000 29,000
----------- -----------
Total deferred tax assets 6,391,000 12,451,000
Deferred tax liabilities:
Accelerated depreciation (639,000) (1,039,000)
----------- -----------
Valuation allowance (5,752,000) (6,072,000)
----------- -----------
Net deferred tax assets $ 0 $ 5,340,000
=========== ===========
The components of the Company's benefit for income taxes was primarily
deferred federal and state benefits. The Company's effective tax rate
differed from the statutory rate primarily due to the establishment of a
valuation allowance against the deferred tax assets, as well as nondeductible
meals and entertainment which represents less than 1% of the difference
between the statutory rate and the effective rate for all periods presented.
State taxes were approximately 4% per year. The Company has reduced the
valuation allowance at December 31, 2000 and established a deferred tax asset
as the Company expects to be able to utilize a portion of it's net operating
loss carryforward to offset the gain related to the sale of certain of the
Company's assets to The InterCept Group, Inc. (Note 12).
7. STOCK OPTIONS
During 1998, 1999, and 2000, options to purchase shares of SLM Parent common
stock were issued to various employees of the Company. The options vest
ratably over 3 to 4 years and expire after 10 years.
15
A summary status of the outstanding stock options and changes during the year
is presented below:
Price Weighted Average
Shares Range Option Price
----------- ------------- -----------------
Outstanding at November 1, 1998 0
Granted 588,117 $ 3.13 $3.13
-------
Outstanding at December 31, 1998 588,117 $ 3.13 $3.13
Granted 351,500 $4.43- $4.82 $4.71
-------
Outstanding at December 31, 1999 939,617 $ 3.13-$4.82 $3.72
Granted 4,000 $ 3.90 $3.90
Terminated (4,000) $ 4.43 $4.43
-------
Outstanding at December 31, 2000 939,617 $3.13- $4.82 $3.72
=======
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting methodology required by APB Opinion
No. 25 must make pro forma disclosures of net income and, if presented,
earnings per share as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied.
The Company has elected to account for its stock based compensation plans
under APB Opinion No. 25. Certain options were issued at a price less than
fair value. The Company is recognizing the difference between the fair value
and the exercise price as stock compensation expense ratably over the vesting
period in accordance with APB Opinion No. 25. Approximately $96,000 and
$83,000 of stock compensation expense was recorded in 1999 and 2000,
respectively for options issued at less than fair market value. The Company
has also computed, for pro forma disclosure purposes, the value of all
options issued to its employees using the Black-Scholes option pricing model
prescribed by SFAS No. 123 and the following weighted-average assumptions:
1998 1999 2000
----------- ---------- ----------
Risk-free interest rate 4.5% 5.2% 5.8%
Expected dividend yield 0% 0% 0%
Expected lives Five years Five years Five years
Expected volatility 83.6% 83.6% 83.6%
The weighted average fair value of options for the stock granted to employees
of the Company in 1998, 1999 and 2000 was $2.52, $2.75 and $3.23 per share,
respectively. The total value of options for the SLM Parent common stock
granted to employees of the
16
Company during 1998, 1999 and 2000 was computed as approximately $1,480,000,
$965,000 and $13,000, respectively, which would be amortized on a pro forma
basis over the vesting period of the options. If the Company had accounted
for these plans in accordance with SFAS No. 123, the Company's net loss would
have been $2,000, $14,020,000, and $10,082,000 for the two months ended
December 31, 1998 and the years ended December 31, 1999 and 2000,
respectively.
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
Weighted
Exercise Weighted Average
Price Number Average Contractual
Range of Shares Price Life (in years)
----------- ----------- ------------- -----------------
$3.13-$4.43 689,617 $3.32 8.0
4.82- 4.82 250,000 4.82 8.9
At December 31, 2000, 525,161 options for SLM Parent common stock with a
weighted average exercise price of $3.52 were exercisable by employees of the
Company. In connection with the acquisition discussed in Note 12, these
options were fully vested and were not assumed by The InterCept Group, Inc.
8. SHAREHOLDERS' EQUITY
In 1998, one of Bankline's major shareholders who is also a customer
purchased 750,000 of cumulative convertible preferred stock. The stock paid
dividends at the prime rate and was convertible into shares of common stock
at the greater of the liquidation value ($1.00 per share), plus accrued
unpaid dividends divided by $3.19, or an amount based on multiple of
earnings. The Company recorded related dividends of $23,000 during 1998.
Dividends ceased at the purchase of Bankline in November of 1998.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases various equipment and facilities under operating lease
agreements. Rental expense for the period from January 1, 1998 to October
31, 1998, for the period from November 30, 1998 to December 31, 1998, and for
the years ended December 31, 1999 and 2000 was $558,000, $276,000, $1.5
million and $1.6 million, respectively. Future minimum annual obligations
under these leases as of December 31, 2000 are as follows:
17
2001 $1,354,000
2002 1,200,000
2003 817,000
2004 488,000
2005 397,000
Thereafter 194,000
----------
Total $4,450,000
==========
The Company also leases equipment under capital leases. Future minimum lease
payments as of December 31, 2000 are as follows:
2001 $ 282,000
2002 78,000
2003 30,000
2004 25,000
---------
Total future minimum lease payments
415,000
Less amount representing interest (31,000)
---------
Present value of future minimum lease payments
384,000
---------
Less current portion (259,000)
---------
Noncurrent portion $ 125,000
=========
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business. As of December 31, 2000, management is not aware
of any unasserted, asserted, or pending material litigation or claims
against the Company.
10. EMPLOYEE BENEFITS
The Company maintains a defined contribution 401(k) savings plan. Employees
may participate in the plan after completing 90 days of employment. The
Company matches 25% of the first 5% of eligible wages contributed by
employees. Contributions to the plan for the period from January 1, 1998 to
October 31, 1998, for the period from November 1, 1998 to December 31, 1998,
and for the years ended December 31, 1999 and 2000 were $35,000, $15,000,
$271,000 and $93,000, respectively.
11. RELATED PARTY TRANSACTIONS
The Company leases office space from an entity owned by an officer and
former shareholder of Bankline. The lease requires monthly payments of
approximately $33,000 through November 2006, with four five-year options to
renew. Rent expense paid to the affiliate for the period from January 1,
1998 to October 31, 1998, for the period from
18
November 1, 1998 to December 31, 1998, and for the years ended December
31, 1999 and 2000 was $201,000, $66,000, $397,000 and $397,000,
respectively.
On January 1, 1998, the Company purchased the minority interest of Bankline
MidAmerica, Inc. held personally by one of the Company's stockholders in
exchange for approximately $73,000.
12. SUBSEQUENT EVENTS
On January 4, 2001 SLM Parent and the Company divested certain assets of the
check item and back office processing portion of the Company. Total proceeds
consisted of $40 million and 1,254,000 shares of the purchaser, The
InterCept Group, Inc. ("InterCept"), valued at approximately $28.0 million.
Of the $40 million, $5 million was advanced to SLM Parent in December 2000,
$32.5 million was paid on January 4, 2001, and $2.5 million will be kept in
escrow to satisfy unresolved contingencies existing at the closing date. Of
the 1,254,000 shares, 609,000 were issued to SLM Parent at closing and
258,000 shares will be kept in escrow to satisfy unresolved contingencies
existing at the closing date. The remaining 386,000 shares represent
contingent consideration and are subject to continuation of the revenue
stream associated with certain customers.
The Company licenses core processing software, to InterCept for certain of
its financial institutions. Revenues related to InterCept for the period
from January 1, 1998 to October 1, 1998, the period from November 1, 1998 to
December 31, 1998, and the years ended December 31, 1999 and 2000 totaled
$167,000, $41,000, $182,000, and $148,000, respectively. As of December 31,
1999 and 2000, InterCept owed approximately $76,000 and $76,000,
respectively, to the Company which is included in accounts receivable in the
accompanying financial statements. Deferred revenue of the Company as of
December 31, 1999 and 2000 included approximately $0 and $89,000,
respectively, representing payments for future services to InterCept.
In connection with the acquisition of the Company by InterCept, the Company
entered into a settlement agreement with one of its major customers which
resulted in a net payment of approximately $421,000. All related amounts
were fully accrued for as of December 31, 2000.
19