1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MARCH 16, 2000
CHECKFREE HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 0-26802 58-2360335
- ---------------------------- --------------------- ----------------------
(STATE OR OTHER JURISDICTION (COMMISSION FILE NO.) (IRS EMPLOYER
OF INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
4411 East Jones Bridge Road
Norcross, Georgia 30092
(678) 375-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
Not Applicable
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
2
ITEM 5. OTHER EVENTS.
On December 21, 1999, CheckFree Holdings Corporation announced that it
had entered into a definitive merger agreement to acquire BlueGill Technologies,
Inc., the leading provider of Internet billing and statement creation software
applications, for shares of CheckFree common stock. Attached as an exhibit to
this report are the financial statements of BlueGill as of December 31, 1997,
1998, and 1999, together with the Report of Independent Public Accountants.
Additionally, on February 15, 2000, CheckFree announced that it had
entered into a definitive merger and contribution agreement to acquire MSFDC LLC
and its subsidiaries, TransPoint Technology & Services LLC, TransPoint LLC, and
MSFDC International, LP, collectively referred to as or TransPoint, entities
owned by Microsoft Corporation, First Data Corporation and Citicorp, N.A.
Attached as an exhibit to this report are the audited financial statements of
TransPoint as of and for the periods ended July 3, 1998 and July 2, 1999, and
the unaudited financial statements as of and for the six months ended December
31, 1999.
Also included in this report are the unaudited pro forma condensed
combining financial information for CheckFree, BlueGill and TransPoint, for
CheckFree and BlueGill, and for CheckFree and TransPoint. A copy of the BlueGill
and TransPoint financial statements and the unaudited pro forma condensed
combining financial information were filed with the Securities and Exchange
Commission on March 16, 2000 as part of CheckFree's Form S-4 Registration
Statement (Registration No. 333-32644).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
(1) BLUEGILL TECHNOLOGIES, INC.
The following is a list of the BlueGill audited financial statements
filed with this report:
Report of Independent Accountants................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999........ F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.................................. F-3
Consolidated Statements of Stockholder's Equity (Deficit) for the
Years Ended December 31, 1997, 1998 and 1999...................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 ................................. F-5
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998 and 1999........................................ F-6
(2) THE TRANSPOINT ENTITIES.
The following is a list of the TransPoint audited and unaudited
financial statements filed with this report:
Independent Auditors' Report....................................... F-17
Consolidated Balance Sheets as of July 3, 1998, as of July 2, 1999,
and as of December 31, 1999 (unaudited).......................... F-18
Consolidated Statements of Operations for the Period from Inception
to July 3, 1998, for the Year Ended July 2, 1999, for the Period
from Inception to July 2, 1999, for the Six Months Ended December
31, 1998 (unaudited), for the Six Months Ended December 31, 1999
(unaudited), and for the Period from Inception to December
31, 1999 (unaudited)............................................. F-19
Consolidated Statements of Members' Capital Deficiency for the Year
Ended July 3, 1998, for the Period from Inception to July 3,
1998, for the Year Ended July 2, 1999, for the Period from
Inception to July 2, 1999, for the Six Months Ended December 31,
1998 (unaudited), for the Six Months Ended December 31, 1999
(unaudited), and for the Period from Inception to December 31,
1999 (unaudited)................................................. F-20
2
3
Consolidated Statements of Cash Flows for the Period from Inception
to July 3, 1998, for the Year Ended July 2, 1999, for the Period
from Inception to July 2, 1999, for the Six Months Ended
December 31, 1998 (unaudited), for the Six Months Ended
December 31, 1999 (unaudited), and for the Period from Inception
to December 31, 1999 (unaudited)................................. F-21
Notes to Consolidated Financial Statements......................... F-22
(b) PRO FORMA FINANCIAL INFORMATION.
The following is a list of the unaudited pro forma condensed combining
financial information for CheckFree, BlueGill and TransPoint, for CheckFree and
BlueGill, and for CheckFree and TransPoint. filed with this report:
Unaudited Pro Forma Condensed Combining Balance Sheet With
BlueGill and TransPoint as of December 31, 1999......... PF-1
Unaudited Pro Forma Condensed Combining Statement of Operations
With BlueGill and TransPoint For the Year Ended
June 30, 1999........................................... PF-2
Unaudited Pro Forma Condensed Combining Statement of Operations
With BlueGill and TransPoint For the Six Months Ended
December 31, 1999....................................... PF-3
Notes to Unaudited Pro Forma Condensed Combining Financial
Information With BlueGill and TransPoint................ PF-4
Unaudited Pro Forma Condensed Combining Balance Sheet With
BlueGill as of December 31, 1999........................ PF-8
Unaudited Pro Forma Condensed Combining Statement of Operations
With BlueGill For the Year Ended June 30, 1999.......... PF-9
Unaudited Pro Forma Condensed Combining Statement of Operations
With BlueGill For the Six Months Ended December
31, 1999................................................ PF-10
Notes to Unaudited Pro Forma Condensed Combining Financial
Information With BlueGill............................... PF-11
Unaudited Pro Forma Condensed Combining Balance Sheet With
TransPoint as of December 31, 1999...................... PF-18
Unaudited Pro Forma Condensed Combining Statement of Operations
With TransPoint For the Year Ended June 30, 1999........ PF-19
Unaudited Pro Forma Condensed Combining Statement of Operations
With TransPoint For the Six Months Ended
December 31, 1999....................................... PF-20
Notes to Unaudited Pro Forma Condensed Combining Financial
Information With TransPoint............................. PF-21
(c) EXHIBITS.
EXHIBIT NO. DESCRIPTION
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Arthur Andersen LLP.
3
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 hereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: March 20, 2000 By: /s/ Allen L. Shulman
-------------------------------------------
Allen L. Shulman, Executive Vice President,
Chief Financial Officer and General Counsel
4
5
Report of Independent Public Accountants
To the Stockholders of
BlueGill Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of BLUEGILL
TECHNOLOGIES, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. 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 BlueGill Technologies, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/Arthur Andersen LLP
Ann Arbor, Michigan,
February 28, 2000.
F-1
6
BLUEGILL TECHNOLOGIES, INC.
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, December 31,
ASSETS 1998 1999
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,111,200 $ 17,039,531
Accounts receivable, net of allowance for doubtful accounts of
$0 and $344,248 as of December 31, 1998 and 1999, respectively 484,235 1,804,302
Prepaid expenses and other 23,777 147,688
------------ ------------
Total current assets 4,619,212 18,991,521
PROPERTY AND EQUIPMENT, at cost:
Computer equipment 260,423 1,020,211
Office furniture and equipment 29,630 244,132
Vehicles and other 19,080 267,884
------------ ------------
309,133 1,532,227
Less- Accumulated depreciation 64,392 267,274
------------ ------------
Net property and equipment 244,741 1,264,953
------------ ------------
OTHER ASSETS 3,099 2,066
------------ ------------
Total assets $ 4,867,052 $ 20,258,540
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Line of credit $ 189,569 $ 555,856
Accounts payable 244,363 1,234,325
Accrued compensation and payroll taxes 22,739 396,869
Other accrued liabilities 61,870 570,781
Deferred revenue 21,209 672,467
------------ ------------
Total current liabilities 539,750 3,430,298
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Series A, convertible preferred stock, 12,503,301 shares outstanding 6,468,387 6,468,387
Series B, convertible preferred stock, 12,825,651 shares outstanding - 19,495,000
------------ ------------
Total redeemable preferred stock 6,468,387 25,963,387
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value, 41,000,000 shares authorized,
4,766,000 and 6,070,833 shares issued and outstanding at
December 31, 1998 and 1999, respectively 4,766 6,071
Additional paid-in capital 974,252 1,698,465
Deferred stock-based compensation (16,002) (634,094)
Accumulated deficit (3,109,930) (10,207,207)
Accumulated other comprehensive income 5,829 1,620
------------ ------------
Total stockholders' deficit (2,141,085) (9,135,145)
------------ ------------
Total liabilities and stockholders' deficit $ 4,867,052 $ 20,258,540
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
7
BLUEGILL TECHNOLOGIES, INC.
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
REVENUES $ 422,500 $ 1,474,678 $ 5,396,967
COST OF REVENUES 74,000 218,095 533,965
------------ ------------ ------------
Gross profit 348,500 1,256,583 4,863,002
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 479,938 894,944 2,123,192
Selling, general and administrative 845,198 2,416,938 10,290,279
------------ ------------ ------------
Total operating expenses 1,325,136 3,311,882 12,413,471
------------ ------------ ------------
Loss from operations (976,636) (2,055,299) (7,550,469)
INTEREST INCOME 11,471 148,167 482,650
INTEREST EXPENSE (22,177) (36,295) (29,458)
------------ ------------ ------------
Loss before benefit for income taxes (987,342) (1,943,427) (7,097,277)
BENEFIT FOR INCOME TAXES - - -
------------ ------------ ------------
NET LOSS $ (987,342) $ (1,943,427) $ (7,097,277)
============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.22) $ (0.41) $ (1.43)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES 4,530,340 4,766,000 4,969,736
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-3
8
BLUEGILL TECHNOLOGIES, INC.
---------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional
-- --------------------------- Paid-In
Shares Amount Capital
------------ ------------ ------------
BALANCE - DECEMBER 31, 1996 3,900,000 $ 3,900 $ 398,400
Issuance of common stock for cash 866,000 866 323,884
Compensation expense on stock option grants - - 168,300
Proceeds from issuance of common stock warrants - - 18,768
Net loss - - -
Foreign currency translation adjustment - - -
------------ ------------ ------------
Comprehensive loss
BALANCE - DECEMBER 31, 1997 4,766,000 4,766 909,352
Issuance of common stock for cash 823,000 823 492,977
Issuance of redeemable preferred stock in exchange for common stock (823,000) (823) (492,977)
Compensation related to stock option grants - - 64,900
Net loss - - -
Foreign currency translation adjustment - - -
------------ ------------ ------------
Comprehensive loss
BALANCE - DECEMBER 31, 1998 4,766,000 4,766 974,252
Issuance of common stock upon exercise of stock options 1,304,833 1,305 21,926
Compensation related to stock option grants - - 702,287
Amortization of deferred stock compensation - - -
Net loss - - -
Foreign currency translation adjustment - - -
------------ ------------ ------------
Comprehensive loss
BALANCE - DECEMBER 31, 1999 6,070,833 $ 6,071 $ 1,698,465
============ ============ ============
Accumulated
Deferred Other
Stock-based Accumulated Comprehensive
Compensation Deficit Income
------------ ------------ ------------
BALANCE - DECEMBER 31, 1996 $ - $ (179,161) $ 42
Issuance of common stock for cash - - -
Compensation expense on stock option grants - - -
Proceeds from issuance of common stock warrants - - -
Net loss - (987,342) -
Foreign currency translation adjustment - - 313
------------ ------------ ------------
Comprehensive loss
BALANCE - DECEMBER 31, 1997 - (1,166,503) 355
Issuance of common stock for cash - - -
Issuance of redeemable preferred stock in exchange for common stock - - -
Compensation related to stock option grants (16,002) - -
Net loss - (1,943,427) -
Foreign currency translation adjustment - - 5,474
------------ ------------ ------------
Comprehensive loss
BALANCE - DECEMBER 31, 1998 (16,002) (3,109,930) 5,829
Issuance of common stock upon exercise of stock options - - -
Compensation related to stock option grants (702,287) - -
Amortization of deferred stock compensation 84,195 - -
Net loss - (7,097,277) -
Foreign currency translation adjustment - - (4,209)
------------ ------------ ------------
Comprehensive loss
BALANCE - DECEMBER 31, 1999 $ (634,094) $(10,207,207) $ 1,620
============ ============ ============
Total
Stockholders'
Equity Comprehensive
(Deficit) Loss
------------ ------------
BALANCE - DECEMBER 31, 1996 $ 223,181
Issuance of common stock for cash 324,750
Compensation expense on stock option grants 168,300
Proceeds from issuance of common stock warrants 18,768
Net loss (987,342) $ (987,342)
Foreign currency translation adjustment 313 313
------------ ------------
Comprehensive loss $ (987,029)
============
BALANCE - DECEMBER 31, 1997 (252,030)
Issuance of common stock for cash 493,800
Issuance of redeemable preferred stock in exchange for common stock (493,800)
Compensation related to stock option grants 48,898
Net loss (1,943,427) $ (1,943,427)
Foreign currency translation adjustment 5,474 5,474
------------ ------------
Comprehensive loss $ (1,937,953)
============
BALANCE - DECEMBER 31, 1998 (2,141,085)
Issuance of common stock upon exercise of stock options 23,231
Compensation related to stock option grants -
Amortization of deferred stock compensation 84,195
Net loss (7,097,277) (7,097,277)
Foreign currency translation adjustment (4,209) (4,209)
------------ ------------
Comprehensive loss $ (7,101,486)
============
BALANCE - DECEMBER 31, 1999 $ (9,135,145)
============
The accompanying notes are an integral part of these consolidated statements.
F-4
9
BLUEGILL TECHNOLOGIES, INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (987,342) $ (1,943,427) $ (7,097,277)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 18,711 47,128 202,301
Provision for losses on accounts receivable - - 344,248
Compensation expense on stock options 168,300 48,898 84,195
Amortization of discount on note payable 4,277 14,491 -
Interest expense on converted note payable 17,737 - -
Increase (decrease) in cash resulting from changes in-
Accounts receivable (256,000) (228,235) (1,664,315)
Prepaid expenses and other - (23,777) (123,911)
Other assets (5,635) - -
Accounts payable 32,236 143,684 989,962
Accrued compensation and payroll taxes 12,188 (9,184) 374,130
Other accrued liabilities 61,242 57,238 508,911
Deferred revenue - 21,209 651,258
------------ ------------ ------------
Net cash used in operating activities (934,286) (1,871,975) (5,730,498)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property and equipment (44,045) (239,634) (1,221,480)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock - 5,435,045 19,495,000
Proceeds from issuance of common stock 324,750 493,800 23,231
Borrowings under note payable and line of credit 500,000 189,569 366,287
------------ ------------ ------------
Net cash provided by financing activities 824,750 6,118,414 19,884,518
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 601 5,867 (4,209)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (152,980) 4,012,672 12,928,331
CASH AND CASH EQUIVALENTS:
Beginning of period 251,508 98,528 4,111,200
------------ ------------ ------------
End of period $ 98,528 $ 4,111,200 $ 17,039,531
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 163 $ 1,042 $ 29,458
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-5
10
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
BlueGill Technologies, Inc. ("BlueGill") and its wholly-owned
subsidiaries (collectively, the "Company") develop, market and
support electronic document transmission software technology. In
addition, the Company provides consulting, training and
maintenance services to customers.
The Company is in the early phases of implementing its operating
strategy. The Company's future success is subject to several
technical and business risks including customer acceptance,
availability and retention of key employees, competition and
technological changes. Since inception, the Company's revenues
have been derived from a limited number of customers located
primarily in the United States.
In December 1999, the Company signed an Agreement and Plan of Merger
with CheckFree Acquisition Corporation III, a publicly held
Delaware corporation and a wholly-owned subsidiary of CheckFree
Holdings Corporation (the "Parent"). The merger agreement provides
for all of the outstanding capital shares of BlueGill
Technologies, Inc. to be exchanged for approximately 3,205,000
shares of the Parent's common stock, subject to adjustment,
depending on the average trading price of Parent's common stock
and the diluted number of shares of BlueGill common stock
outstanding.
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of BlueGill and its wholly owned subsidiaries,
BlueGill Technologies Corporation (an Ontario, Canada
Corporation, "BlueGill Canada") and BlueGill Technologies
International, Inc. (a Michigan corporation, "BlueGill
International"). BlueGill Canada is a research and development
center that conducts development activities solely for
BlueGill. Prior to 1998, BlueGill owned a 49% interest in
BlueGill Canada. In 1998, the Company purchased the remaining
51% interest in BlueGill Canada for $51. A minority stockholder
of BlueGill held the 51% interest. BlueGill International
engages in sales and marketing efforts in Europe and Asia. All
significant intercompany balances and transactions have been
eliminated in the consolidation.
Foreign Currency Translation
----------------------------
The assets and liabilities of BlueGill Canada and Bluegill
International are translated using exchange rates in effect at
the balance sheet date. Revenues and expenses are translated at
average exchange rates during the period. The resulting foreign
currency translation adjustments are included in accumulated
other comprehensive income in the accompanying consolidated
financial statements.
Revenue Recognition
-------------------
Revenue consists primarily of license fees for the Company's
software products. Revenue is recognized only when a customer
contract is fully executed, the software is delivered and no
significant remaining obligations to the customer exist.
F-6
11
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue related to advance payments received under software
maintenance agreements is deferred and amortized over the terms
of the respective agreements. Revenue from other services is
recognized upon performance of the service.
Research and Development
------------------------
Research and development expenses include all payroll costs
attributable to product development activities and an
allocation of overhead expenses incurred by the Company.
Product Development
-------------------
Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed,"
capitalization of software development costs begins upon the
establishment of technological feasibility of the product
(defined as a working model). The ongoing assessment of the
recoverability of these costs require considerable judgment by
management with respect to certain external factors, including,
but not limited to, anticipated future gross product revenue,
estimated economic product lives and changes in software and
hardware technology. Amounts that would have been capitalized
under this Statement after consideration of the above factors
were immaterial, and therefore no software development costs
have been capitalized by the Company.
Cash and Cash Equivalents
-------------------------
The Company considers highly liquid investments with a maturity of
90 days or less to be cash equivalents.
Property and Equipment
----------------------
Additions to property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over
the estimated useful lives of the respective assets generally
ranging from three to five years.
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation using the
intrinsic value method prescribed under Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair value of the
Company's common stock at the date of the grant over the amount
the employee must pay to acquire the stock. As supplemental
information, the Company has provided pro forma disclosure of
the fair value at the date of grant of stock options granted
during 1997, 1998 and 1999 in Note 7, in accordance with the
requirements of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation."
F-7
12
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Loss
------------------
Comprehensive loss is the total of net loss and all other
non-owner changes in equity. The difference between net loss,
as reported in the accompanying consolidated statements of
operations, and comprehensive loss is the foreign currency
translation adjustment for the period.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting
standards for derivative instruments. The Company has not yet
quantified the impact of this statement on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition", which
provides guidance on when revenue should be recognized. This
bulletin did not have a material impact on the accompanying
financial statements.
Reclassifications
-----------------
Certain amounts from the 1997 and 1998 financial statements have
been reclassified to conform with the 1999 presentation.
(3) LINE OF CREDIT
In 1998, the Company entered into a line-of-credit agreement with a
bank whereby the Company may borrow up to $750,000. Outstanding
borrowings bear interest at the bank's prime rate plus 0.25%
(effective rate of 8% and 8.75% as of December 31, 1998 and 1999,
respectively) which is payable monthly. Outstanding borrowings are
collateralized by substantially all assets of the Company. The
agreement expires on April 29, 2002.
F-8
13
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
Year Ended December 31,
---------------------
1998 1999
-------- --------
Accrued Royalties $ 34,000 $ 62,300
Accrued Professional fees - 221,252
Other 27,870 287,229
-------- --------
Total $ 61,870 $570,781
======== ========
(5) INCOME TAXES
The components of the benefit for income taxes are as follows:
Year Ended December 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
Tax benefit $ (334,000) $ (656,000) $(2,419,000)
Change in valuation Allowance 334,000 656,000 2,419,000
----------- ----------- -----------
Total benefit $ - $ - $ -
=========== =========== ===========
The effective tax rate of zero differs from the Federal statutory
rate primarily due to providing a valuation allowance on future
tax benefits.
At December 31, 1998 and December 31, 1999, the Company had pre-tax
net operating loss carryforwards of approximately $3,100,000 and
$10,133,000, respectively, available for tax reporting purposes
which may be used to offset future taxable income. The loss
carryforwards expire between 2012 and 2019. The Company's ability
to utilize these loss carryforwards may be limited under Section
382 of the Internal Revenue Code. Due to the losses incurred since
inception, the deferred income tax asset is fully reserved by a
valuation allowance.
F-9
14
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997, 1998 and 1999, the Company has a deferred
income tax asset prior to the valuation allowance totaling
$276,000, $1,054,000 and $3,445,000, respectively, consisting
primarily of the tax benefit of net operating loss carryforwards.
(6) STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
In June 1998, the Company amended its Certificate of Incorporation in
order to affect a 1000-to-1 common stock split and increased the
authorized shares of common stock to 30,000,000 from 12,000,000
(post-split). All information in the accompanying consolidated
financial statements has been restated to reflect the stock split.
Later in June 1998, the Company amended and restated its Certificate
of Incorporation pursuant to which it authorized 12,500,000 shares
of Series A convertible preferred stock.
In December 1998, the Company amended its Certificate of
Incorporation pursuant to which the Company increased the
authorized shares of Series A convertible preferred stock to
13,250,000 shares from 12,500,000. At various times during the
period from June 1, 1998 through December 31, 1998, the Company
issued an aggregate of 12,503,301 shares of Series A convertible
preferred stock at $0.5174 per share for cash and conversion of a
note payable. Certain holders of common stock were permitted to
exchange that stock for Series A convertible preferred stock.
In June 1999, the Company amended and its Certificate of
Incorporation pursuant to which the Company authorized 12,000,000
shares of Series B convertible preferred stock, authorized
12,000,000 shares of Series B-1 convertible preferred stock,
reduced the number of authorized shares of Series A convertible
preferred stock to 12,505,000 and increased the number of
authorized shares of common stock to 40,000,000 from 30,000,000.
In September 1999, the Company amended its Certificate of
Incorporation pursuant to which the Company increased the number
of authorized shares of Series B convertible preferred stock to
13,000,000 shares from 12,000,000 shares, Series B-1 convertible
preferred stock to 13,000,000, from 12,000,000 and common stock to
41,000,000 from 40,000,000.
At various times during the period from June 1, 1999 through
September 30, 1999, the Company issued an aggregate of 12,825,651
shares of Series B convertible preferred stock at $1.52 per share.
Common Stock
------------
The Company and its founding stockholders (the "Founders") have
entered into agreements generally providing the Company the
right of first refusal to repurchase any shares of common stock
offered for sale by the Founders or upon termination of a
Founder's employment with the Company.
The holder of each outstanding share of common stock is entitled
to one voting right per share.
F-10
15
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Warrants
---------------------
In June 1997, the Company received $500,000 from the issuance of
convertible notes with detachable warrants to purchase 300,000
shares of common stock at $0.375 per share. Accordingly, the
proceeds were allocated to the note and warrants based on their
relative fair values. The fair value of the warrants was
estimated using the Black-Scholes valuation model using the
following assumptions: estimated volatility of 0.70, risk-free
interest rate of 6.5%, no dividend yield and an expected life
of the warrants of three years. Based on the resulting fair
value of the warrants and their fair value relative to that of
the note, $18,768 of the proceeds was recorded for the warrants
as additional paid-in capital in the accompanying consolidated
balance sheets.
The balance of the proceeds of $481,232 was recorded as the
initial carrying value of the note. The resulting discount on
the note was being amortized using the effective interest
method through December 31, 1998. However, in June 1998 the
note and accrued interest converted into 1,042,794 shares of
Series A preferred stock. Concurrently, the unamortized
discount on the note of $8,769 was expensed. Total amortization
expense was $4,277 in 1997 and $14,491 in 1998 which is
included in interest expense in the accompanying consolidated
statements of operations. The note bore interest at a stated
rate of 15% and the effective interest rate was 18.19%.
The common stock warrants are exercisable at any time through the
earlier of July 24, 2002, or consummation of an initial public
offering. As of December 31, 1999, the warrants had not been
exercised.
Preferred Stock
---------------
The holders of Series A, Series B and Series B-1 convertible
preferred stock have certain rights, privileges and preferences
which include the following:
Dividends
---------
The holders are entitled to receive dividends before any
dividend is declared or paid on shares of common stock. Such
dividends are payable only when declared by the Board of
Directors and are noncumulative. After payment of the
preferential dividends, no dividends are paid to common
stockholders unless an equivalent dividend is made on the
preferred stock.
Conversion
----------
At the holder's option, each share of preferred stock is
convertible into shares of common stock. Each series of
preferred stock is automatically converted into common stock
upon a public offering of common stock of a certain size and
a specified percentage vote of holders of that series. The
preferred stock has antidilution protection for issuances
below the specified conversion prices, as defined, which is
initially equal to $0.5174 per share for the Series A
preferred stock and $1.52 for the Series B preferred stock.
F-11
16
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Voting Rights
-------------
Except with respect to the election of the directors, the
holders of preferred stock (voting on an as-converted basis)
vote with the holders of common stock. Certain actions
require separate approvals by the holders of each series of
preferred stock, each voting separately as a class.
Redemption Rights
-----------------
The holders of at least 75% of the outstanding shares of the
Series A convertible preferred stock and the holders of 75%
of the outstanding Series B convertible preferred stock may
each require the Company to repurchase such shares of that
series at any time after June 15, 2003. The redemption
prices for the Series A preferred stock and Series B
preferred stock are equal to $0.5174 and $1.52 per share,
respectively.
Liquidation Preference
----------------------
In the event of any liquidation, dissolution or winding up of
the Company, either voluntarily or involuntarily, the holder
of each share of Series A convertible preferred stock and
each share of Series B convertible preferred stock are
entitled to receive, prior to and in preference to any
distributions to the holders of common stock, an amount
equal to $0.5174 and $1.52 per share, respectively. The
liquidation preference of a particular series will not be
applicable if the Series A preferred stock will receive more
than $2.33 per share and the Series B preferred stock will
receive more than $3.04 per share.
Registration Rights
-------------------
The holders of Series A and Series B convertible preferred
stock have demand "piggyback" registration rights.
(7) STOCK OPTION PLANS
1997 Stock Option Plan
----------------------
In April 1997, the Company established a stock option plan (the
"1997 Plan") to increase its ability to attract and retain key
employees, consultants and directors. Options granted are
nonqualified stock options, which may be granted at less than
the fair market value of the common stock on the date of grant.
All options are granted at the discretion of the Board of
Directors. The maximum number of shares that may be granted
under the 1997 Plan is 3,200,000, except that upon
establishment of the 1998 Stock Option Plan (see below), the
remaining 525,000 ungranted options under the 1997 Plan can no
longer be granted. Options granted generally become exercisable
over a period of two years from the date of grant except that
450,000 options granted vested immediately. Outstanding options
expire ten years after the date of grant.
F-12
17
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1998, the Company cancelled and re-granted 1,125,000
options for which the exercise price of the options being
cancelled were significantly in excess of the estimated fair
value of the underlying common stock. The replacement options
were granted with an exercise price equal to the estimated fair
value of the underlying common stock.
In June 1998, the Company also extended the vesting period for
1,100,000 options that were fully vested with an exercise price
of $0.001 per share. Under the new vesting schedule, one-third
of the options vested immediately, one-third vested on
September 30, 1998, and one-third will vest on June 30, 2000.
The Company accounted for this event as a cancellation and
re-grant of these options. The Company recorded deferred
compensation expense totaling $64,900 for the difference
between the exercise price and the estimated fair value of the
underlying common stock which is being amortized over the
revised vesting period. As a result, the Company recorded
compensation expense of approximately $48,898 in 1998 and
$10,669 in 1999 related to these options.
1998 Stock Option Plan
----------------------
In June 1998, the Company established a stock option plan (the
"1998 Plan") to increase its ability to attract and retain key
employees, consultants and directors. Options granted may be
either incentive stock options, which are granted at not less
than the fair market value of the common stock on the date of
grant (as determined under the plan), or nonqualified stock
options, which may be granted at less than the fair market
value of the common stock on the date of grant. All options are
granted at the discretion of the Board of Directors. The
maximum number of shares that may be granted under the 1998
Plan is 6,000,000. Options granted generally become exercisable
over a period of five years from the date of grant except that
200,000 options granted vest over two years and 650,000 options
granted vest over four years. Outstanding options expire ten
years after the date of grant.
F-13
18
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other information concerning all stock options is as follows:
Weighted
Price Average
Number of per Exercise Expiration
Shares Share Price Date
--------- ----------- ------ ---------
Plan Inception - April 1997 - - - -
Options granted 2,450,000 $0.001-0.06 $ 0.02 2007-2008
Options exercised -
Options cancelled -
---------
Outstanding - December 31, 1997 2,450,000 $0.001-0.06 $ 0.02
Options granted 4,787,000 $0.001-0.06 $ 0.04 2007-2008
Options exercised -
Options cancelled (2,265,000) $0.001-0.06 $ 0.16
---------
Outstanding - December 31, 1998 4,972,000 $0.001-0.06 $ 0.04 2007-2008
Options granted 1,906,500 $0.06-0.56 $ 0.24 2009
Options exercised (1,186,834) $0.06 $ 0.014
Options cancelled (578,500) $0.001-0.32 $ 0.05
---------
Outstanding - December 31, 1999 5,113,166 $ 0.12 2007-2009
=========
Exercisable - December 31, 1999 1,946,041
=========
Stock-Based Compensation
------------------------
Using the intrinsic value method under APB 25, compensation
related to stock options granted to employees with exercise
prices at less than the deemed fair value for financial
reporting purposes totaled $112,200, $64,900 and $344,612 in
1997, 1998 and 1999, respectively. Compensation expense
recognized on these stock options totaled $112,200, $48,898 and
$7,952 in 1997, 1998 and 1999, respectively, and is included in
selling, general and administrative expenses in the
accompanying consolidated statements of operations. The
unamortized balance of compensation related to these stock
options totaling $16,002 and $341,993 at December 31, 1998 and
1999, respectively, is included as a separate component of
stockholders' equity in the accompanying consolidated balance
sheets.
F-14
19
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for stock options granted to non-employees
under SFAS No. 123 and Emerging Issues Task Force ("EITF") No.
96-18. In January 1999, the Company granted 50,000 options to
an outside consultant in exchange for services to be rendered
over a five-year period. The options are exercisable at $0.06
per share and vest 20% on March 31, 1999, 20% on April 26, 2000
and 5% each quarter thereafter. The Company initially measured
the estimated fair value of these options at the grant date
using the Black-Scholes valuation model with the following
assumptions--risk-free interest rate of 5.25%, estimated
volatility of 0.89, no dividend yield and an expected life of
five years. Under SFAS No. 123 and EITF 96-18, the Company
accounts for these options as a variable award and re-measures
the estimated fair value of these stock options at each balance
sheet date. Accordingly, compensation expense is adjusted at
each balance sheet date for any change in the estimated fair
value of the stock options. At December 31, 1999, compensation
related to this stock option grant totaled $357,675.
Compensation expense recognized on these stock options totaled
$65,574 in 1999 and is included in selling, general and
administrative expenses in the accompanying consolidated
statements of operations. The unamortized balance of
compensation related to these stock options totaling $292,101
at December 31, 1999, is included as a separate component of
stockholders' equity in the accompanying consolidated balance
sheets. The estimated fair value of these options at the date
of grant was $0.04 per share.
In June 1997, the Company granted an aggregate of 150,000 stock
options to two outside consultants in exchange for past
services rendered and for services to be rendered through
September 1997. The options are exercisable at $0.001 per share
and vested immediately upon issuance. The Company initially
measured the estimated fair value of these options at the grant
date using the Black-Scholes valuation model with the following
assumptions--risk-free interest rate of 6.52%, estimated
volatility of 0.70, no dividend yield and an expected life of
three years. Under SFAS No. 123 and EITF 96-18, the Company
accounted for these options as a variable award and re-measured
the estimated fair value of these stock options upon completion
of the services in September 1997. Compensation expense
recognized on these stock options totaled $56,100 in 1997 and
is included in selling, general and administrative expenses in
the accompanying consolidated statements of operations. The
estimated fair value of these options at the date of grant was
$0.374 per share.
Had compensation expense for all stock option grants been
determined based on the fair value at the date of grant
consistent with SFAS 123, the reported net loss would have
increased by $122, $7,378 and $35,454 in 1997, 1998 and 1999,
respectively. The reported net loss per share would not have
changed in 1998 but would have increased to $(1.44) in 1999.
This pro forma compensation expense may not be representative
of that to be expected in future years.
The pro forma fair value of options was estimated at the date of
grant using the minimum value option valuation method under
SFAS 123 with the following assumptions: Weighted average
risk-free interest rate of 5.12%; dividend yield of 0%; and
expected life of options of five years. Option valuation models
require the input of highly subjective assumptions. Because
changes in subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
model does not necessarily provide a reliable single measure of
the fair value of the Company's stock options.
F-15
20
BLUEGILL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RELATED PARTY TRANSACTIONS
The holder of the note payable, who subsequently became a stockholder
of the Company in 1998, provided consulting services to the
Company in 1998. Payments for these consulting services totaled
approximately $35,000 in 1998.
(9) COMMITMENTS
The Company leases its office space under operating lease agreements,
which expire at various dates through July 2001. Total rent
expense was approximately $12,000, $33,000 and $423,000 in 1997,
1998 and 1999, respectively. Minimum future rental payments under
noncancellable operating lease agreements as of December 31, 1999,
are as follows:
2000 $ 436,786
2001 442,198
2002 430,466
2003 431,664
Thereafter 107,916
-----------
$ 1,849,030
===========
F-16
21
INDEPENDENT AUDITORS' REPORT
MSFDC, L.L.C.
Redmond, Washington
We have audited the accompanying consolidated balance sheets of MSFDC, L.L.C.
and subsidiaries, a development stage company (the Company), as of July 2, 1999,
and July 3, 1998, and the related consolidated statements of operations,
members' capital deficiency, and cash flows for the year ended July 2, 1999, and
the periods from June 18, 1997 (inception) to July 3, 1998, and from June 18,
1997 (inception) to July 2, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of July 2, 1999, and
July 3, 1998, and the results of its operations and its cash flows for the year
ended July 2, 1999, and for the periods from June 18, 1997 (inception) to July
3, 1998, and from June 18, 1997 (inception) to July 2, 1999, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touch LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
October 22, 1999 (February 15, 2000, as to Note 4)
F-17
22
MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, July 2, July 3,
ASSETS 1999 1999 1998
- ------ ---- ---- ----
(unaudited)
CASH AND CASH EQUIVALENTS $ 19,837,565 $ 51,113,749 $ -
PROPERTY AND EQUIPMENT:
Equipment 4,679,620 3,924,418 2,004,261
Accumulated depreciation (3,234,582) (2,213,876) (343,409)
------------ ------------ ------------
Total property and equipment 1,445,038 1,710,542 1,660,852
CAPITALIZED SOFTWARE 9,438,708
------------ ------------ ------------
TOTAL $ 30,721,311 $ 52,824,291 $ 1,660,852
============ ============ ============
LIABILITIES AND MEMBERS'
CAPITAL DEFICIENCY
------------------
LIABILITIES:
Checks drawn in excess of bank balances $ - $ - $ 57,830
Accounts payable (See Note 3) 12,180,931 16,289,271 6,095,216
Accrued liabilities 1,246,504 592,192 361,261
Unearned revenue 250,000
------------ ------------ ------------
13,677,435 16,881,463 6,514,307
MINORITY INTEREST 43,060,952 45,936,458
MEMBERS' CAPITAL DEFICIENCY:
Membership interest - MS member (13,008,538) (4,996,815) (2,426,694)
Membership interest - FDC member (13,008,538) (4,996,815) (2,426,761)
------------ ------------ ------------
Total members' capital deficiency (26,017,076) (9,993,630) (4,853,455)
------------ ------------ ------------
TOTAL $ 30,721,311 $ 52,824,291 $ 1,660,852
============ ============ ============
See notes to consolidated financial statements.
F-18
23
MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Six months
ended
Year ended Inception to Inception to December 31,
July 2, 1999 July 3, 1998 July 2, 1999 1999
------------ ------------ ------------ ------------
(unaudited)
REVENUES $ - $ - $ - $ 3,060
OPERATING EXPENSES:
Product development (See Note 3) 26,559,520 10,032,522 36,592,042 1,520,976
Selling, general, and administrative (See Note 3) 18,637,762 5,839,118 24,476,880 18,292,485
------------ ------------ ------------ ------------
Total operating expenses 45,197,282 15,871,640 61,068,922 19,813,461
OTHER EXPENSE (463,632) (18,118) (481,750) (911,449)
------------ ------------ ------------ ------------
Loss before minority interest 44,733,650 15,853,522 60,587,172 18,898,952
MINORITY INTEREST (2,063,542) (2,063,542) (2,875,506)
------------ ------------ ------------ ------------
NET LOSS $ 42,670,108 $ 15,853,522 $ 58,523,630 $ 16,023,446
============ ============ ============ ============
Six months
ended Inception to
December 31, December 31,
1998 1999
------------ ------------
(unaudited) (unaudited)
REVENUES $ - $ 3,060
OPERATING EXPENSES:
Product development (See Note 3) 11,901,143 38,113,018
Selling, general, and administrative (See Note 3) 7,282,878 42,769,365
------------ ------------
Total operating expenses 19,184,021 80,882,383
OTHER EXPENSE (22,832) (1,393,199)
------------ ------------
Loss before minority interest 19,161,189 79,486,124
MINORITY INTEREST (4,939,048)
------------ ------------
NET LOSS $ 19,161,189 $ 74,547,076
============ ============
See notes to consolidated financial statements.
F-19
24
MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL DEFICIENCY
- --------------------------------------------------------------------------------
MS MEMBER FDC MEMBER TOTAL
------------ ------------ ------------
Capital contributions $ 5,500,067 $ 5,500,000 $ 11,000,067
Net loss (7,926,761) (7,926,761) (15,853,522)
------------ ------------ ------------
Balance, July 3, 1998 (2,426,694) (2,426,761) (4,853,455)
Capital contributions 18,764,933 18,765,000 37,529,933
Net loss (21,335,054) (21,335,054) (42,670,108)
------------ ------------ ------------
Balance, July 2, 1999 (4,996,815) (4,996,815) (9,993,630)
Capital contributions (unaudited)
Net loss (unaudited) (8,011,723) (8,011,723) (16,023,446)
------------ ------------ ------------
Balance, December 31, 1999 (unaudited) $(13,008,538) $(13,008,538) $(26,017,076)
============ ============ ============
INCEPTION TO JULY 2, 1999
- -------------------------
Capital contributions $ 24,265,000 $ 24,265,000 $ 48,530,000
Net loss (29,261,815) (29,261,815) (58,523,630)
------------ ------------ ------------
Balance, July 2, 1999 $ (4,996,815) $ (4,996,815) $ (9,993,630)
============ ============ ============
INCEPTION TO DECEMBER 31, 1999
- ------------------------------
Capital contributions (unaudited) $ 24,265,000 $ 24,265,000 $ 48,530,000
Net loss (unaudited) (37,273,538) (37,273,538) (74,547,076)
------------ ------------ ------------
Balance, December 31, 1999 (unaudited) $(13,008,538) $(13,008,538) $(26,017,076)
============ ============ ============
See notes to consolidated financial statements.
F-20
25
MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Six months
ended
Year ended Inception to Inception to December 31,
July 2, 1999 July 3, 1998 July 2, 1999 1999
------------ ------------ ------------ ----
(unaudited)
OPERATING ACTIVITIES:
Net loss $(42,670,108) $(15,853,522) $(58,523,630) $(16,023,446)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 1,870,467 343,409 2,213,876 1,020,706
Minority interest share of loss (2,063,542) (2,063,542) (2,875,506)
Cash provided (used) by changes in
operating assets and liabilities:
Checks drawn in excess of
bank balance (57,830) 57,830
Accounts payable and accrued
liabilities 10,424,986 6,456,477 16,881,463 (3,454,028)
Unearned revenue 250,000
------------ ------------ ------------ ------------
Net cash used by operating activities (32,496,027) (8,995,806) (41,491,833) (21,082,274)
INVESTING ACTIVITIES:
Acquisition of equipment (1,920,157) (2,004,261) (3,924,418) (755,202)
Capitalized software (9,438,708)
------------ ------------ ------------ ------------
Net cash used by investing activities (1,920,157) (2,004,261) (3,924,418) (10,193,910)
FINANCING ACTIVITIES:
Member capital contributions 37,529,933 11,000,067 48,530,000
Capital contribution from minority interest 48,000,000 48,000,000
------------ ------------ ------------
Net cash provided by financing activities 85,529,933 11,000,067 96,530,000
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 51,113,749 51,113,749 (31,276,184)
CASH AND CASH EQUIVALENTS:
Beginning of period 51,113,749
------------ ------------ ------------ ------------
End of period $ 51,113,749 $ - $ 51,113,749 $ 19,837,565
============ ============ ============ ============
Six months Inception
ended to
December 31, December 31,
1998 1999
---- ----
(unaudited) (unaudited)
OPERATING ACTIVITIES:
Net loss $(19,161,189) $(74,547,076)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 785,507 3,234,582
Minority interest share of loss (4,939,048)
Cash provided (used) by changes in
operating assets and liabilities:
Checks drawn in excess of
bank balance (57,830)
Accounts payable and accrued
liabilities 3,065,303 13,427,435
Unearned revenue 250,000
------------ ------------
Net cash used by operating activities (15,368,209) (62,574,107)
INVESTING ACTIVITIES:
Acquisition of equipment (639,964) (4,679,620)
Capitalized software (9,438,708)
------------ ------------
Net cash used by investing activities (639,964) (14,118,328)
FINANCING ACTIVITIES:
Member capital contributions 16,579,933 48,530,000
Capital contribution from minority interest 48,000,000
------------ ------------
Net cash provided by financing activities 16,579,933 96,530,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 571,760 19,837,565
CASH AND CASH EQUIVALENTS:
Beginning of period
------------ ------------
End of period $ 571,760 $ 19,837,565
============ ============
See notes to consolidated financial statements.
F-21
26
MSFDC, L.L.C. AND SUBSIDIARIES
- ------------------------------
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS: The purpose of the business is to provide
electronic statement presentment and electronic remittance services to
consumers and businesses using the Internet. The business has been in the
development stage and commenced commercial operations in July 1999.
ORGANIZATION: MSFDC, L.L.C. is a Delaware limited liability company and was
formed pursuant to the Limited Liability Company Agreement of MSFDC, L.L.C.
dated as of June 18, 1997 (inception) (the LLC Agreement). The members of
MSFDC, L.L.C. are MS II, L.L.C., a Delaware limited liability company (the
MS member), and First Data L.L.C., a Delaware limited liability company
(the FDC member). The MS member is a wholly owned subsidiary of Microsoft
Corporation (MS). The FDC member is a wholly owned subsidiary of First Data
Corporation (FDC).
In September 1998, MSFDC, L.L.C. entered into an arrangement whereby the
electronic bill presentment and payment service business in the United
States previously under development by MSFDC, L.L.C. was contributed to a
newly formed entity, Newco L.L.C. (TransPoint). The members of TransPoint
are MSFDC, L.L.C. and Citicorp Electronic Commerce Inc. (the Citicorp
member). The Citicorp member of TransPoint is a wholly owned subsidiary of
Citicorp. In connection with this new arrangement, two additional entities
were formed: New MSFDC, L.L.C. (TransPoint Technologies and Services) and
Jointco L.L.C. (TransPoint Accounting). The Citicorp member interest in
TransPoint Technologies and Services and TransPoint is 25% and 5%,
respectively, with MSFDC, L.L.C. holding the remaining interests.
TransPoint Technologies and Services and TransPoint each hold 50% capital
interests in TransPoint Accounting. These three new entities are
collectively referred to as the TransPoint limited liability companies.
The TransPoint limited liability companies collectively have rights to all
future domestic revenues generated by the electronic bill presentment and
payment service previously under development by MSFDC, L.L.C. The MS and
FDC members have established a new limited partnership, MSFDC International
L.P., to account for the future international revenues and related costs.
CONTRIBUTIONS: Upon formation of MSFDC, L.L.C. in 1997, the MS member
contributed $50,000 in cash. First Data Resources, Inc. contributed $40,000
in cash, and Integrated Payment Systems, Inc. contributed $10,000 as
initial capital contributions. Immediately following the initial capital
contribution, Integrated Payment Systems, Inc. transferred its membership
interest to First Data Resources, Inc. These interests were then
transferred to First Data L.L.C.
In connection with the formation of the new TransPoint limited liability
companies, Citicorp contributed $48,000,000 in cash as its initial
contribution and MSFDC, L.L.C. contributed $37,529,933. MSFDC, L.L.C. and
the Citicorp member also made nonmonetary contributions to the TransPoint
limited liability companies with a stated value of $446,250,000 and
$30,750,000, respectively. The MSFDC, L.L.C. nonmonetary contribution was
in the form of software development, goodwill, and tangible and intangible
assets. The Citicorp member nonmonetary contribution represented an option
to obtain a license of software and intangible assets and no value has been
ascribed to this contribution in the accompanying consolidated financial
statements.
F-22
27
LOSS AND CASH FLOW ALLOCATIONS: The allocation of profit and loss and cash
flow of MSFDC, L.L.C. and the TransPoint limited liability companies is
defined in the respective limited liability company agreements. These
agreements generally result in a sharing of ongoing capital contribution
requirements and profit and loss based on initial membership interests.
Cash distributions are to be made annually in an amount equal to the
assumed tax liability of the entities, or if greater, excess cash flow. For
financial reporting purposes, losses from the TransPoint limited liability
companies have been allocated to MSFDC, L.L.C. and the Citicorp member
based on their respective capital account interests of 85% and 15%,
respectively. Citicorp loss allocations commenced upon the date of their
capital contribution in April 1999.
UNAUDITED INTERIM FINANCIAL STATEMENTS: The interim financial information
contained herein is unaudited but, in the opinion of management, reflects
all adjustments which are necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods
presented. All such adjustments are of a normal, recurring nature. Results
of operations for interim periods presented herein are not necessarily
indicative of results of operations for the entire year.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The financial statements include all majority and wholly
owned subsidiaries (collectively, the Company). Intercompany balances and
transactions have been eliminated in consolidation.
MINORITY INTEREST: Citicorp's capital contributions and share of losses in
the TransPoint limited liability companies has been recorded as a minority
interest.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and related
disclosures. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost, less
accumulated depreciation, and consists primarily of computers and related
technical equipment. Depreciation is provided utilizing the straight-line
method over the estimated useful lives of the assets, which range from one
year to 3 years.
The carrying value of equipment is reviewed periodically for impairment. If
the carrying amount of the asset is not recoverable, the asset is
considered to be impaired and the value is adjusted to the estimated fair
value.
INCOME TAXES: As a limited liability company, the Company is treated as a
partnership for federal and state income tax purposes and its income or
loss is taxable directly to its members. Accordingly, the accompanying
financial statements do not include any income tax provisions.
PRODUCT DEVELOPMENT: Product development costs, which include development
costs for software to be used for internal use, are expensed as incurred.
RECENT ACCOUNTING PRONOUNCEMENT: In March 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP)
98-1, Accounting for the Cost of Computer Software Developed or Obtained
for Internal Use. SOP 98-1 requires capitalization and amortization of
costs relating to internal-use software, and was adopted by the Company
beginning July 3, 1999.
F-23
28
NOTE 3: RELATED PARTY TRANSACTIONS AND COMMITMENTS
OPERATING COSTS AND REIMBURSEMENTS: The MS member and the FDC member
provide certain operational services, some of which are reimbursed by the
Company. Selling, general, and administrative expenses related to these
services provided by the MS member and the FDC member for the year ended
July 2, 1999, totaled $2,248,000 and $11,601,000, respectively, and
$7,338,000 and $7,080,000, respectively, for the period from June 18, 1997
(inception) to July 3, 1998.
Services related to selling, general, and administrative expenses for the
six-month periods ended December 31, 1999 and 1998 (unaudited) totaled
$10,461,000 and $895,000, respectively, for the MS member and $2,798,000
and $5,809,000, respectively, for the FDC member.
RESEARCH AND DEVELOPMENT COSTS AND REIMBURSEMENTS: The MS member and the
FDC member perform certain research and development activities, some of
which are reimbursed by the Company. Research and development expenses
related to these activities performed by the MS member and the FDC member
for the year ended July 2, 1999, and the period from June 18, 1997
(inception) to July 3, 1998, totaled $18,886,000 and $4,279,000,
respectively, and $6,502,000 and $3,155,000, respectively.
Research and development costs for the six-month periods ended December 31,
1999 and 1998 (unaudited) totaled $10,522,000 and $-0-, respectively, for
the MS member and $8,422,000 and $2,022,000, respectively, for the FDC
member. Of research and development costs incurred during the six-month
period ended December 31, 1999, $9,439,000 (unaudited) was capitalized
under SOP 98-1 as software developed for internal use.
ACCOUNTS PAYABLE: Accounts payable includes $11,722,000 and $4,407,000 to
the MS member and the FDC member, respectively, as of July 2, 1999, and
$2,569,000 and $2,582,000 to the MS member and the FDC member,
respectively, as of July 3, 1998.
Accounts payable as of December 31, 1999 (unaudited) includes $11,352,000
and $956,000 for the MS member and FDC member, respectively.
NOTE 4: SUBSEQUENT EVENT
On February 15, 2000, the Company entered into an agreement to be acquired.
Under the terms of the agreement, the members have agreed to fund the Company
with $100 million in cash before the closing of the transaction.
F-24
29
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
WITH BLUEGILL AND TRANSPOINT
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
HISTORICAL AMOUNTS
---------------------------------- PRO FORMA
CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL
--------- -------- ---------- ----------- ----------
Assets:
Current Assets:
Cash and cash equivalents................. $ 152,779 $ 17,040 $ 19,837 $ 100,000 (1) $ 289,656
Investments............................... 17,015 - - - 17,015
Accounts receivable, net.................. 46,780 1,804 - - 48,584
Prepaid expenses and other assets......... 11,863 148 - - 12,011
Deferred income taxes..................... 8,324 - - - 8,324
--------- --------- -------- ---------- ----------
Total current assets.................... 236,761 18,992 19,837 100,000 375,590
Property and equipment, net.................. 80,416 1,265 1,445 - 83,126
Capitalized software, net.................... 21,584 - 9,439 202,061 (1) 221,184
(11,900) (2)
Goodwill, net................................ 30,559 - - 1,059,312 (1) 1,089,871
Other intangible assets, net................. 12,795 - - 576,800 (1) 589,595
Investments.................................. 31,663 - - - 31,663
Deferred income taxes........................ 31,095 - - - 31,095
Other noncurrent assets...................... 12,855 2 - - 12,857
--------- --------- -------- ---------- ----------
Total assets............................ $ 457,728 $ 20,259 $ 30,721 $1,926,273 $2,434,981
========= ========= ======== ========== ==========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable.......................... $ 8,679 $ 1,234 $ 12,181 $ - $ 22,094
Line of credit............................ - 556 - - 556
Accrued liabilities....................... 37,494 969 1,246 3,855 (1) 44,764
1,200 (3)
Deferred income taxes..................... - - - 88,341 (1) 88,341
Current portion of long-term obligations.. 5,069 - - - 5,069
Deferred revenue.......................... 25,840 672 250 - 26,762
--------- --------- -------- ---------- ----------
Total current liabilities............... 77,082 3,431 13,677 93,396 187,586
Accrued rent and other....................... 4,862 - - - 4,862
Obligations under capital leases - less
current portion............................ 906 - - - 906
Convertible subordinated notes............... 172,500 - - - 172,500
Minority interest............................ - - 43,061 (43,061) (1) -
Deferred income taxes........................ - - - 222,081 (1) 222,081
--------- --------- -------- ---------- ----------
Total liabilities....................... 255,350 3,431 56,738 272,416 587,935
Redeemable preferred stock................... - 25,963 - (25,963) (1) -
Stockholders' equity:
Common stock.............................. 524 6 - 196 (1) 726
Additional paid-in capital................ 504,058 1,698 - 1,655,868 (1) 2,160,424
(1,200) (3)
Other..................................... (299) (632) - 632 (1) (299)
Member's capital deficiency............... - - (26,017) 26,017 (1) -
Accumulated deficit....................... (301,905) (10,207) - 10,207 (1) (313,805)
(11,900) (2)
--------- --------- -------- ---------- ----------
Total stockholders' equity.............. 202,378 (9,135) (26,017) 1,679,820 1,847,046
--------- --------- -------- ---------- ----------
Total liabilities and stockholders'
equity.............................. $ 457,728 $ 20,259 $ 30,721 $1,926,273 $2,434,981
========= ========= ======== ========== ==========
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-1
30
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL AND TRANSPOINT
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL AMOUNTS
------------------------------------ PRO FORMA
CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL
---------- --------- --------- --------- ---------
Revenues:
Processing and servicing.................. $ 201,059 $ - $ - $ - $ 201,059
License fees.............................. 15,975 2,517 - - 18,492
Maintenance fees.......................... 17,746 48 - - 17,794
Other..................................... 15,351 925 - - 16,276
---------- --------- --------- --------- ---------
Total revenues....................... 250,131 3,490 - - 253,621
Expenses:
Cost of processing, servicing and support. 146,704 969 3,062 - 150,735
Research and development.................. 21,085 1,457 26,560 - 49,102
Sales and marketing....................... 32,354 2,318 11,302 - 45,974
General and administrative................ 31,466 2,045 2,404 - 35,915
Depreciation and amortization............. 24,630 106 1,870 432,714 (4) 459,230
In-process research and development....... 2,201 - - - 2,201
---------- --------- --------- --------- ---------
Total expenses....................... 258,440 6,895 45,198 432,714 743,247
Net gain on dispositions of assets........ 4,576 - - - 4,576
---------- --------- --------- --------- ---------
Loss from operations......................... (3,733) (3,405) (45,198) (432,714) (485,050)
Other:
Minority interest......................... - - 2,064 (2,064) (5) -
Interest, net............................. 2,181 194 464 - 2,839
---------- --------- --------- --------- ---------
Loss before income taxes..................... (1,552) (3,211) (42,670) (434,778) (482,211)
Income tax benefit........................... (12,009) - (88,341) (4) (100,350)
---------- --------- --------- --------- ---------
Net income (loss)............................ $ 10,457 $ (3,211) $ (42,670) $(346,437) $(381,861)
========== ========= ========= ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share........ $ 0.20 $ (5.26)
========== =========
Equivalent number of shares............... 52,444 20,205 (1) 72,649
========== ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share........ $ 0.18 $ (5.26)
========== =========
Equivalent number of shares............... 56,529 16,120 (6) 72,649
========== ========= =========
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-2
31
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL AND TRANSPOINT
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL AMOUNTS
-------------------------------------- PRO FORMA
CHECKFREE BLUEGILL TRANSPOINT ADJUSTMENTS TOTAL
------------ ----------- ------------ --------------- -------------
Revenues:
Processing and servicing.................. $ 120,931 $ - $ 3 $ - $ 120,934
License fees.............................. 6,197 2,231 - - 6,428
Maintenance fees.......................... 8,956 224 - - 9,180
Other..................................... 5,905 622 - - 6,527
------------ ----------- ------------ --------------- -------------
Total revenues....................... 141,989 3,077 3 - 145,069
Expenses:
Cost of processing, servicing and support. 86,899 789 7,616 - 95,304
Research and development.................. 15,110 1,226 1,521 - 17,857
Sales and marketing....................... 18,577 3,132 7,799 - 29,508
General and administrative................ 19,287 3,193 1,267 - 23,747
Depreciation and amortization............. 14,756 147 1,610 193,857 (4) 210,370
In-process research and development....... - - - - -
------------ ----------- ------------ --------------- -------------
Total expenses....................... 154,629 8,487 19,813 193,857 376,786
Net gain on dispositions of assets - - - -
------------ ----------- ------------ --------------- -------------
Loss from operations (12,640) (5,410) (19,810) (193,857) (231,717)
Other:
Minority interest......................... - - 2,876 (2,876) (5) -
Interest, net............................. 143 397 911 - 1,451
------------ ----------- ------------ --------------- -------------
Loss before income taxes..................... (12,497) (5,013) (16,023) (196,733) (230,266)
Income tax benefit........................... (4,592) - - (35,170) (4) (39,762)
------------ ----------- ------------ --------------- -------------
Net income (loss)............................ $ (7,905) $ (5,013) $(16,023) $ (161,563) $ (190,504)
============ =========== ============ =============== =============
Basic earnings (loss) per share:
Net income (loss) per common share........ $ (0.15) $ (2.64)
============ =============
Equivalent number of shares............... 52,023 20,205 (1) 72,228
============ =============== =============
Diluted earnings (loss) per share:
Net income (loss) per common share........ $ (0.15) $ (2.64)
============ =============
Equivalent number of shares............... 52,023 20,205 (1) 72,228
============ =============== =============
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-3
32
CHECKFREE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
WITH BLUEGILL AND TRANSPOINT
1. Adjustment to reflect the issuance of CheckFree common stock, options
and related direct acquisition expenses as the total purchase price for the net
assets of BlueGill and TransPoint, and the elimination of BlueGill's redeemable
preferred stock and stockholders' equity and the elimination of TransPoint's
capitalized software costs, minority interest and member's capital deficiency.
The fair market values of intangible assets are preliminary estimates based on
independent appraisals and current facts and circumstances. The final value of
intangible assets will change with any change in the final purchase price of
either BlueGill or TransPoint or both and any resulting change could be
material.
(in thousands)
Cash............................................. $ 100,000
Capitalized software, net........................ 202,061
Goodwill, net.................................... 1,059,312
Other intangible assets, net..................... 576,800
BlueGill redeemable preferred stock.............. 25,963
BlueGill common stock............................ 6
BlueGill additional paid in capital.............. 1,698
TransPoint minority interest..................... 43,061
CheckFree common stock...................... $ 202
CheckFree additional paid in capital........ 1,657,566
BlueGill accumulated deficit................ 10,207
BlueGill other equity....................... 632
TransPoint member's capital deficiency...... 26,017
Current deferred income tax liability....... 88,341
Long-term deferred income tax liability..... 222,081
Accrued acquisition expenses................ 3,855
-------------- --------------
Totals........................................... $ 2,008,901 $2,008,901
============== ==============
The following chart indicates the components of the estimated purchase
prices of the acquisitions inherent in the adjusting entry:
(in thousands)
BLUEGILL TRANSPOINT COMBINED
ACQUISITION ACQUISITION TOTAL
-------------- --------------- --------------
CheckFree common stock.......................... $ 298,244 $1,350,083 $1,684,327
Issuance of CheckFree options................... 9,441 - 9,441
TransPoint cash infusion........................ - (100,000) (100,000)
Estimated direct acquisition costs.............. 530 3,325 3,855
-------------- --------------- --------------
Total estimated purchase price............. $ 308,215 $1,253,408 $1,561,623
============== =============== ==============
The combined estimated purchase price will be issued in exchange for the
net assets of BlueGill and TransPoint on their respective closing dates.
The purchase price of BlueGill reflects the assumed issuance of 3,205,128
shares of our common stock at $93.05 per share which is the average closing
price of our stock for the three trading days preceding and the three trading
days following the announcement of the acquisition. Under the terms of the
merger agreement, we are also issuing an estimated 243,263 CheckFree options to
replace unvested BlueGill options. The value of the assumed CheckFree option
grant is based on a Black-Scholes valuation model assuming a $93.05 stock price,
an average strike price of $2.18, an average life of 2.9 years, a risk-free
interest rate of 6.47% and volatility of 70%. The option value will vary from
this estimate based on option grants and cancellations, resulting changes in the
average strike price, changes in the fair market value of our stock, and changes
in the risk-free rate and volatility of our stock between the date of this
information statement/prospectus and the closing of the merger.
PF-4
33
The purchase price of TransPoint reflects the assumed issuance of
17,000,000 shares of our common stock at $79.42 per share, which is the average
end of day price of our stock for the three trading days preceding and the three
days following the announcement of the acquisition. Under the terms of the
merger and contribution agreement, TransPoint is to be funded with $100 million
in cash immediately prior to the closing of the transaction.
The following table provides the preliminary allocation of the purchase
price inherent in the adjusting entry:
(in thousands)
BLUEGILL TRANSPOINT
ACQUISITION ACQUISITION COMBINED
-------------- -------------- ---------------
In process research and development................ $ 11,900 $ $ 11,900
-
Current technologies and products.................. 14,600 185,000 199,600
-------------- -------------- ---------------
Sub-total capitalized software, net.......... 26,500 185,000 211,500
Goodwill, net...................................... 253,309 806,003 1,059,312
Other intangible assets:
Workforce in place.............................. 2,600 - 2,600
Customer list................................... 10,200 25,000 35,200
Tradename....................................... 14,800 29,000 43,800
Strategic agreements............................ - 494,000 494,000
Covenants not to compete........................ 1,200 - 1,200
-------------- -------------- ---------------
Sub-total other intangible assets............ 28,800 548,000 576,800
Deferred income taxes.............................. (17,222) (293,200) (310,422)
Net assets of respective company:
Cash and cash equivalents....................... 17,040 19,838 36,878
Property and equipment.......................... 1,265 1,445 2,710
Other, net...................................... (1,477) (13,678) (15,155)
-------------- -------------- ---------------
Sub-total net assets......................... 16,828 7,605 24,433
-------------- -------------- ---------------
Total purchase price............................... $ 308,215 $1,253,408 $1,561,623
============== ============== ===============
Details of specific technologies and the related useful lives of all
intangible assets are described in the Notes to Unaudited Pro Forma Condensed
Combining Financial Information for CheckFree and BlueGill on page PF-12 and
CheckFree and TransPoint on page PF-22.
2. Adjustment to write off the balance of in-process research and
development. As the amounts are non-deductible for federal and state tax
purposes, there is no related income tax benefit resulting from the charge.
Refer to Note B in the Notes to Unaudited Pro Forma Condensed Combining
Financial Information for CheckFree and BlueGill on page PF-13 and CheckFree and
TransPoint on page PF-23 for a detailed description of in-process research and
development for the respective acquisition. The amount of in-process research
and development is $11.9 million for BlueGill and $0 million for TransPoint.
(in thousands)
Accumulated deficit.................. $11,900
Capitalized software, net....... $11,900
3. Adjustment to accrue the cost of registering CheckFree shares to be
issued for BlueGill of $525,000 and for TransPoint of $675,000.
(in thousands)
Additional paid-in capital.......... $ 1,200
Accrued liabilities............ $ 1,200
PF-5
34
4. Adjustment to reflect additional amortization expense and the related
income tax benefit associated with the intangible assets acquired.
(in thousands)
COMBINED
BLUEGILL TRANSPOINT ADJUSTMENT
-------------- ------------- -----------------------
YEAR ENDED JUNE 30, 1999
Depreciation and amortization................... $ 73,713 $ 359,001 $ 432,714
Current deferred income tax liability........... 9,221 79,120 88,341
Capitalized software, net................... 4,145 61,667 $ 65,812
Goodwill, net............................... 50,662 161,201 211,863
Other intangible assets, net................ 18,906 136,133 155,039
Income tax benefit.......................... 9,221 79,120 88,341
---------- ---------
Total........................................... $ 521,055 $ 521,055
========== =========
SIX MONTHS ENDED DECEMBER 31, 1999
Depreciation and amortization................... $ 28,857 $ 165,000 $ 193,857
Current deferred income tax liability........... 1,410 33,760 35,170
Capitalized software, net................... 1,453 30,833 $ 32,286
Goodwill, net............................... 25,331 80,600 105,931
Other intangible assets, net................ 2,073 53,567 55,640
Income tax benefit.......................... 1,410 33,760 35,170
---------- ---------
Total........................................... $ 229,027 $ 229,027
========== =========
Goodwill amortization is non-deductible for federal and state income
tax purposes. A blended effective income tax rate of 40% was applied to the
deductible amortization to determine the related income tax benefit in the
entries above.
5. Adjustment to reflect the elimination of minority interest recorded
in the period due to the acquisition of all of the ownership interest in
TransPoint by CheckFree.
6. When combined with BlueGill's historical loss, TransPoint's
historical loss and the combined pro forma adjustments, the historical CheckFree
net income for the year ended June 30, 1999 resulted in a combined net loss. As
a result, due to the anti-dilutive effect on earnings per share, the equivalent
number of shares for purposes of determining diluted earnings per share, was
reduced to agree with the equivalent number of shares for basic earnings per
share. The following chart identifies by type of potentially dilutive security,
the number of additional shares that could potentially dilute basic earnings per
share in the future and the number of shares issued for both BlueGill and
TransPoint.
(in thousands)
CheckFree common shares issued for:
TransPoint..................................... 17,000
BlueGill....................................... 3,205
Potentially dilutive securities:
Options and warrants........................... (4,085)
------
Net adjustment to dilutive shares outstanding....... 16,120
======
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
Note A: Management believes that the assumptions used in preparing
the Unaudited Pro Forma Condensed Combining Balance Sheet and the
Unaudited Pro Forma Condensed Combining Statement of Operations provide
a reasonable basis for presenting the significant effects of the
acquisitions of BlueGill and TransPoint; that the pro forma adjustments
give appropriate effect to those assumptions; and that the pro forma
adjustments are properly applied in the Unaudited Pro Forma Condensed
Combining Balance Sheet and Statement of Operations.
PF-6
35
Note B: The Unaudited Pro Forma Condensed Combining Balance Sheet
of CheckFree, BlueGill and TransPoint has been prepared as if the
mergers were completed as of December 31, 1999 and were accounted for
as purchases.
The number of CheckFree common shares to be issued in the BlueGill
merger will depend on a number of factors as specified in Note D. We
have assumed for purposes of these pro forma financial statements that
3,205,128 shares of CheckFree common stock will be issued with a fair
market value of $93.05 per share. The excess of fair value over the
strike price of options issued per the merger agreement carry a value
of $9,441,000. We expect to incur $530,000 of direct acquisition costs.
The total purchase price of $308,215,128 was allocated to the assets
acquired and liabilities assumed based on BlueGill's December 31, 1999
balance sheet.
We will issue 17,000,000 shares of our common stock at an assumed
value of $79.42 for the net assets of TransPoint. Under the merger and
contribution agreement, TransPoint is to be funded with $100 million of
cash immediately prior to the closing of the transaction. We expect to
incur approximately $3,325,000 of direct acquisition costs. The total
purchase price of $1,253,408,000 was allocated to assets acquired and
liabilities assumed based on TransPoint's December 31, 1999 balance
sheet.
The allocation of the BlueGill and TransPoint purchase prices
among their related identifiable tangible and intangible assets and
purchased in-process research and development is based on preliminary
estimates of the fair market value of those assets. Final determination
of the allocation of the purchase prices will be based on independent
appraisals that we expect to have completed shortly after the
respective mergers are consummated. For a detailed description of
in-process research and development charges, see Note B for BlueGill on
page PF-13 and Note B for TransPoint on page PF-23.
Note C: CheckFree's statement of operations for the year ended
June 30, 1999, has been combined with the BlueGill statement of
operations and the TransPoint statement of operations for the twelve
months ended June 30, 1999. Our statement of operations for the six
month period ended December 31, 1999 has been combined with the
BlueGill statement of operations and the TransPoint statement of
operations for the six months ended December 31, 1999. Actual
statements of operations of CheckFree and BlueGill, and CheckFree and
TransPoint will be combined from the effective date of the respective
merger, with no retroactive restatement.
Note D: The unaudited pro forma condensed combining statement of
operations for CheckFree, BlueGill and TransPoint have been prepared as
if the merger was completed as of July 1, 1998, the beginning of the
earliest period presented. The unaudited pro forma combined net income
(loss) per share is based on the weighted average number of shares of
our common stock outstanding during the periods, adjusted to give
effect to shares assumed to be issued had the mergers taken place as of
July 1, 1998.
Note E: The unaudited pro forma condensed combining statement of
operations do not include a charge for the value of the estimated $11.9
million (no income tax effect) of purchased research and development
arising from the merger with BlueGill, which will be expensed at
acquisition, as such expense will have no continuing impact.
PF-7
36
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
WITH BLUEGILL
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
HISTORICAL AMOUNTS
------------------------------- PRO FORMA
CHECKFREE BLUEGILL ADJUSTMENTS TOTAL
-------------- -------------- -------------- ------------
Assets:
Current assets:
Cash and cash equivalents................. $ 152,779 $ 17,040 $ - $ 169,819
Investments............................... 17,015 - - 17,015
Accounts receivable, net.................. 46,780 1,804 - 48,584
Prepaid expenses and other assets......... 11,863 148 - 12,011
Deferred income taxes..................... 8,324 - - 8,324
-------------- -------------- -------------- ------------
Total current assets................. 236,761 18,992 - 255,753
Property and equipment, net.................. 80,416 1,265 - 81,681
Capitalized software, net.................... 21,584 - 26,500 (1) 36,184
(11,900) (2)
Goodwill, net................................ 30,559 - 253,309 (1) 283,868
Other intangible assets, net................. 12,795 - 28,800 (1) 41,595
Investments.................................. 31,663 - - 31,663
Deferred income taxes........................ 31,095 - - 31,095
Other noncurrent assets...................... 12,855 2 - 12,857
-------------- -------------- -------------- ------------
Total assets.......................... $ 457,728 $ 20,259 $ 296,709 $ 774,696
============== ============== ============== ============
Liabilities and Stockholder's Equity:
Current liabilities:
Accounts payable.......................... $ 8,679 $ 1,234 $ - $ 9,913
Line of credit............................ - 556 - 556
Accrued liabilities....................... 37,494 969 530 (1) 39,518
525 (3)
Deferred income taxes..................... - - 9,221 (1) 9,221
Current portion of long-term obligations.. 5,069 - - 5,069
Deferred revenue.......................... 25,840 672 - 26,512
-------------- -------------- -------------- ------------
Total current liabilities............. 77,082 3,431 10,276 90,789
Accrued rent and other....................... 4,862 - - 4,862
Obligations under capital leases - less
current portion............................ 906 - - 906
Convertible subordinated notes............... 172,500 - - 172,500
Deferred income taxes........................ - - 8,001 (1) 8,001
-------------- -------------- -------------- ------------
Total liabilities..................... 255,350 3,431 18,277 277,058
Redeemable preferred stock................... - 25,963 (25,963) (1) -
Stockholders' equity:
Common stock.............................. 524 6 26 (1) 556
Additional paid-in capital................ 504,058 1,698 305,955 (1) 811,186
(525) (3)
Other..................................... (299) (632) 632 (1) (299)
Accumulated deficit (301,905) (10,207) 10,207 (1)
Accumulated deficit....................... (301,905) (10,207) (11,900) (2) (313,805)
-------------- -------------- -------------- ------------
Total stockholder's equity............ 202,378 (9,135) 304,395 497,638
-------------- -------------- -------------- ------------
Total liabilities and stockholders'
equity.................... $ 457,728 $ 20,259 $ 296,709 $ 774,696
============== ============== ============== ============
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-8
37
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL AMOUNTS
------------------------------- PRO FORMA
CHECKFREE BLUEGILL ADJUSTMENTS TOTAL
------------- ------------ ------------- ----------
Revenues:
Processing and servicing.................. $ 201,059 $ - $ - $ 201,059
License fees.............................. 15,975 2,517 - 18,492
Maintenance fees.......................... 17,746 48 - 17,794
Other..................................... 15,351 925 - 16,276
------------- ------------ ------------- ----------
Total revenues....................... 250,131 3,490 - 253,621
Expenses:
Cost of processing, servicing and support. 146,704 969 - 147,673
Research and development.................. 21,085 1,457 - 22,542
Sales and marketing....................... 32,354 2,318 - 34,672
General and administrative................ 31,466 2,045 - 33,511
Depreciation and amortization............. 24,630 106 73,713 (4) 98,449
In-process research and development....... 2,201 - 2,201
------------- ------------ ------------- ----------
Total expenses....................... 258,440 6,895 73,713 339,048
Net gain on dispositions of assets........ 4,576 - - 4,576
------------- ------------ ------------- ----------
Loss from operations......................... (3,733) (3,405) (73,713) (80,851)
Other:
Interest, net............................. 2,181 194 - 2,375
------------- ------------ ------------- ----------
Loss before income taxes..................... (1,552) (3,211) (73,713) (78,476)
Income tax benefit........................... (12,009) - (9,221) (4) (21,230)
------------- ------------ ------------- ----------
Net income (loss)............................ $ 10,457 $ (3,211) $ (64,492) $ (57,246)
============= ============ ============= ==========
Basic earnings (loss) per share:
Net income (loss) per common share........ $ 0.20 $ (1.03)
============= ==========
Equivalent number of shares............... 52,444 3,205 (1) 55,649
============== ============== ==========
Diluted earnings (loss) per share:
Net income (loss) per common share........ $ 0.18 $ (1.03)
============= ==========
Equivalent number of shares............... 56,529 (880) (5) 55,649
============= ============== ==========
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-9
38
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH BLUEGILL
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL AMOUNTS
------------------------------- PRO FORMA
CHECKFREE BLUEGILL ADJUSTMENTS TOTAL
--------------- -------------- --------------- ---------------
Revenues:
Processing and servicing.................. $ 120,931 $ - $ - $ 120,931
License fees.............................. 6,197 2,231 - 8,428
Maintenance fees.......................... 8,956 224 - 9,180
Other..................................... 5,905 622 - 6,527
--------------- -------------- --------------- ---------------
Total revenues....................... 141,989 3,077 - 145,066
Expenses:
Cost of processing, servicing and support. 86,899 789 - 87,688
Research and development.................. 15,110 1,226 - 16,336
Sales and marketing....................... 18,577 3,132 - 21,709
General and administrative................ 19,287 3,193 - 22,480
Depreciation and amortization............. 14,756 147 28,857 (4) 43,760
In-process research and development....... - - - -
--------------- -------------- --------------- ---------------
Total expenses....................... 154,629 8,487 28,857 191,973
Net gain on dispositions of assets........ - - - -
--------------- -------------- --------------- ---------------
Loss from operations......................... (12,640) (5,411) (28,857) (46,907)
Other:
Interest, net............................. 143 397 - 540
--------------- -------------- --------------- ---------------
Loss before income taxes..................... (12,497) (5,014) (28,857) (46,367)
Income tax benefit........................... (4,592) - (1,410) (4) (6,002)
--------------- -------------- --------------- ---------------
Net income (loss)............................ $ (7,905) $ (5,014) $ (27,447) $ (40,365)
=============== ============== =============== ===============
Basic earnings (loss) per share:
Net income (loss) per common share........ $ (0.15) $ (0.73)
================ ===============
Equivalent number of shares............... 52,023 3,205 (1) 55,228
================ =============== ===============
Diluted earnings (loss) per share:
Net income (loss) per common share........ $ (0.15) $ (0.73)
================ ===============
Equivalent number of shares............... 52,023 3,205 (1) 55,228
================ ================ ===============
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-10
39
CHECKFREE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
WITH BLUEGILL
1. Adjustment to reflect the issuance of CheckFree common stock, CheckFree
options and related acquisition expenses as the total purchase price for the net
assets of BlueGill, and the elimination of BlueGill's redeemable preferred stock
and shareholders' equity. The fair market values of intangible assets are
preliminary estimates based on an independent appraisal, and current facts and
circumstances. The final value of intangible assets will change with any change
in the final purchase price and any resulting change could be material.
(in thousands)
Capitalized software, net ...................... $ 26,500
Goodwill, net .................................. 253,309
Other intangible assets, net ................... 28,800
BlueGill redeemable preferred stock ............ 25,963
BlueGill common stock .......................... 6
BlueGill additional paid-in capital ............ 1,698
CheckFree common stock ................... $ 32
CheckFree additional paid-in capital ..... 307,653
BlueGill accumulated deficit ............. 10,207
BlueGill other equity .................... 632
Current deferred income tax liability .... 9,221
Long term deferred income tax liability .. 8,001
Accrued acquisition expenses ............. 530
-------- --------
Totals ......................................... $336,276 $336,276
======== ========
The following chart indicates the components of the estimated purchase
price inherent in the adjusting entry:
(in thousands)
CheckFree common stock ............... $298,244
Issuance of CheckFree options ........ 9,441
Estimated direct acquisition costs ... 530
--------
Total estimated purchase price .. $308,215
========
The estimated purchase price will be issued in exchange for of the common
and preferred shares, warrants and vested options of BlueGill on the closing
date.
The purchase price reflects the assumed issuance of 3,205,128 shares of our
common stock at $93.05 per share which is the average end of day price of our
stock for the three trading days preceding and the three days following the
announcement of the acquisition of BlueGill. Under the terms of the merger
agreement, we are also issuing an estimated 243,263 CheckFree options to replace
unvested BlueGill options. The value of the assumed CheckFree option grant is
based on a Black-Scholes valuation model assuming a $93.05 stock price, an
average strike price of $2.18, an average life of 2.9 years, a risk-free
interest rate of 6.47% and volatility of 70%. The option value will vary from
this estimate based on option grants and cancellations, resulting changes in the
average strike price, changes in the fair market value of our stock, and changes
in the risk-free rate and volatility of our stock between the date of the
information statement/prospectus and the closing of the merger.
The following table provides the allocation of the purchase price inherent
in the adjusting entry:
PF-11
40
(in thousands)
In-process research and development (Note B) $ 11,900
Current technology and products:
Print / extraction (estimated life of 3 years).. 4,200
Data management engine (estimated life of 4 years).. 6,700
API or application protocol interfaces (estimated life of 2 years).. 1,100
Web applications (estimated life of 5 years).. 2,600
--------
Sub-total IPR&D and current technology and products............. 26,500
Goodwill (estimated life of 5 years).. 253,309
Other intangible assets:
Workforce in place (estimated life of 3 years).. 2,600
Customer list (estimated life of 5 years).. 10,200
Tradename (estimated life of 1 year ).. 14,800
Covenants not to compete (estimated life of 1 year ).. 1,200
--------
Sub-total other intangible assets.............................. 28,800
Deferred income taxes.................................................... (17,222)
Net assets of BlueGill:
Cash and cash equivalents............................................. 17,040
Property and equipment................................................ 1,265
Other, net............................................................ (1,477)
--------
Sub-total net assets.......................................... 16,828
--------
Total Purchase Price..................................................... $308,215
========
The useful lives of the various intangible assets identified are based on
management's preliminary estimates. Under the caption of current technology and
products, lives are based on assumptions regarding the time expected for the
indicated technology or product to become obsolete, which are driven primarily
by planned future development work designed to replace the existing technology
or product. The useful life assigned to goodwill is based upon currently
acceptable lives for such assets. The useful life on workforce in place is based
on our estimate of the average tenure expected from the BlueGill employee base.
The useful life we assigned to the customer base is based on our estimate of the
future revenue base from the existing customers. Although the BlueGill tradename
is widely known at this time, we currently have no plans to continue to utilize
the name once the technologies of BlueGill and CheckFree are consolidated in to
a single product offering, which we expect to take place within one year of the
merger. We assigned a one-year life to the covenants not to compete to coincide
with the contractual life of the related agreements. We will amortize these
intangible assets on a straight-line basis over their estimated useful lives.
2. Adjustment to write off the balance of in-process research and
development. As the amount is not deductible for federal or state income tax
purposes, there is no related income tax benefit resulting from the charge.
Refer to Note B for an explanation of in process research and development.
(in thousands)
Accumulated deficit.................. $11,900
Capitalized software, net....... $11,900
3. Adjustment to accrue the cost of registering CheckFree shares to be
issued for BlueGill.
(in thousands)
Additional paid-in capital.......... $525
Accrued liabilities............ $525
4. Adjustment to reflect additional amortization expense and the related
income tax benefit associated with the intangible assets acquired from BlueGill.
PF-12
41
(in thousands)
YEAR ENDED JUNE 30, 1999
Depreciation and amortization............. $73,713
Current deferred income tax liability..... 9,221
Capitalized software, net............. $ 4,145
Goodwill, net......................... 50,662
Other intangible assets, net.......... 18,906
Income tax benefit.................... 9,221
------- -------
Total..................................... $82,934 $82,934
======= =======
SIX MONTHS ENDED DECEMBER 31, 1999
Depreciation and amortization............. $28,857
Current deferred income tax liability..... 1,410
Capitalized software, net............. $ 1,453
Goodwill, net......................... 25,331
Other intangible assets, net.......... 2,073
Income tax benefit.................... 1,410
------- -------
Total..................................... $30,267 $30,267
======= =======
Goodwill amortization is non-deductible for federal and state
income tax purposes. A blended effective income tax rate of 40% was
applied to the deductible amortization to determine the related income
tax benefit in the entries above.
5. When combined with BlueGill's historical loss and the pro
forma adjustments, the historical CheckFree net income for the year
ended June 30, 1999 resulted in a combined net loss. As a result, due
to the anti-dilutive effect on earnings per share, the equivalent
number of shares for purposes of determining diluted earnings per
share, was reduced to agree with the equivalent number of shares for
basic earnings per share. The following chart identifies by type of
potentially dilutive security, the number of additional shares that
could potentially dilute basic earnings per share in the future and the
number of shares issued for BlueGill.
CheckFree common shares issued for BlueGill ....... 3,205
Potentially dilutive securities:
Options and warrants ......................... (4,085)
Other ........................................ --
------
Total potentially dilutive securities .. (4,085)
------
Net adjustment to dilutive shares outstanding ..... (880)
======
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
Note A: Management believes that the assumptions used in preparing the
Unaudited Pro Forma Condensed Combining Balance Sheet and the Unaudited Pro
Forma Condensed Combining Statement of Operations provide a reasonable basis for
presenting the significant effects of the acquisition of BlueGill; that the pro
forma adjustments give appropriate effect to those assumptions; and that the pro
forma adjustments are properly applied in the Unaudited Pro Forma Condensed
Combining Balance Sheet and Statement of Operations.
Note B: The unaudited pro forma condensed balance sheet of CheckFree and
BlueGill has been prepared as if the merger was completed as of December 31,
1999, and was accounted for as a purchase. The number of CheckFree common shares
to be issued in the merger will depend on a number of factors as specified in
the merger agreement. We have assumed for purposes of these pro forma financial
statements that 3,205,128 shares of CheckFree common stock will be issued with a
fair market value of $93.05 per share. The total purchase price of $308,215,000
was allocated to assets acquired and liabilities assumed based on BlueGill's
December 31, 1999 balance sheet.
The allocation of the BlueGill purchase price among the identifiable
tangible and intangible assets and purchased in process research and development
is based on preliminary estimates of the fair market value of those
PF-13
42
assets. Final determination of the allocation of the purchase price will be
based on independent appraisals that we expect to have completed shortly after
the merger is consummated.
BlueGill currently has five general technologies and application suites
under development that meet the specific requirements of SFAS No. 2 for
qualification as in-process research and development or IPRD. Critical elements
of SFAS No. 2's definition of IPRD are that:
o The product has not yet demonstrated its technological
feasibility; and
o The product does not have an alternative future use.
These in-process technologies and applications include print and extraction
technology, the Data Management Engine (DME) technology, API technology, web
applications and OFX payment technology. Their descriptions are found below.
Print and extraction technology. Print and extraction technology allows for
the extraction and print parsing of a biller's legacy billing information
through to BlueGill's products. The following features of the print / extraction
technology are under development:
o PDF Server, which converts line data input streams into PDF
data output;
o SmartXpress 2.2.0 that comprises updates to accommodate core
changes to BlueGill's DME 2.2.0; and
o SmartXpress 2.3.0 which comprises enhancements to SmartXpress
user functionality.
Data Management Engine (DME) technology. The DME technology allows for
archiving of transactions and linkage of data to the necessary environment
within the BlueGill network. The DME is the main translator of input data to
output data. The following features are under development:
o WebStream, which is a quick-to-market bill presentment system
that is a repackaging of existing components;
o Archive Interface, which is a generic archive interface to
support linkage to OnDemand and INSCI;
o Xerox Metacode Support, which is Xerox print support on the
AIX, Solaris and HP-UX platforms; and
o SQL Server Support, which is additional data base support.
APIs. The API technology encompasses knowledge engineering procedures and
expert system analysis, design and development. The API technology works in
between the print/extraction and parsing modules and the web applications or
templates. The API "surrounds" the DME as its interface to these other
technologies. The following features are under development:
o BlueGill Engine 2.2.0,which encompasses pre-requisites for
Biller Direct and OFX;
o BlueGill Engine 3.0.0 - Pure JAVA Interface, which provides a
pure JAVA version of the public API set; and
o CheckFree E-Bill 3.1 Format Support, which provides batch mode
support for the CheckFree E-Bill 3.1 format.
Web Applications. The web application technologies help in the design of
industry specific templates for electronic billing and statement presentation.
The following features are under development:
o i-Biller Template for the utility industry billing statement
templates;
o i-Broker Template for the brokerage industry statement
templates;
o i-Telco Template for the telecommunications industry billing
templates;
o Control Center, which is the host for BlueGill Administration
applications consisting of functions like relationship
management, remote control execution of BlueGill programs,
viewing of program execution reports, viewing of program
execution logs, market direct, statement preview, and
enrollment and activation of customers; and
o Statement Counter, which accumulates transaction charges for
statement viewing.
Payments or OFX. The payments or OFX technology will allow for bill
publishing services to be integrated with the i-Series products and bill
consolidators. The following feature is under development:
PF-14
43
o OFX Bill Publisher Server, which is the core OFX engine
integrated with the i-Series engine support and Bill Publisher
component to link to consolidators.
There are risks and uncertainties associated with the completion of these
in-process technologies. These risks include:
o Not Technologically Feasible.
The acquired IPRD had not demonstrated technological
or commercial feasibility as of the transaction date for
BlueGill. Significant risks exist because BlueGill is unsure
of the obstacles it will encounter in the form of market
acceptance, time and cost necessary to produce a
technologically feasible product. SFAS No. 2 does not
specifically require an analysis of the development effort
expended relative to an acquisition date. It is reasonable to
assume, however, that an IPRD project would require a
significant amount of time and cost in order to modify for
CheckFree's use in the marketplace. Should the proposed
technology fail to become viable, it is unlikely that
CheckFree would be able to realize any value from the sale of
the technology to another party.
o No Alternative Future Use.
The acquired IPRD consists of BlueGill's work to date
on its products. The products are very specific to the tasks
and markets for which it is intended. As is typically the case
with software, there are no alternative uses for the
in-process work in the event that the product does not become
feasible for CheckFree. The development effort for the
acquired IPRD does not possess an alternative future use for
CheckFree under the terms of SFAS No. 2.
o If the BlueGill project underway fails, there will be a very
limited life to the existing product because the continuing
pace of technological developments in the marketplace will
have rendered them non-competitive. In the event of a failure,
the technology acquired, as embodied in either current or
in-process products, will have no alternative use and would be
written off as a loss by CheckFree.
o As of the valuation date, all of the IPRD technologies were
subject to numerous technological, timing, cost and market
risks. In addition to these risks already mentioned, another
major risk associated with the technologies pertains to the
language it's written in. According to BlueGill management,
all of the base code may go to the JAVA computer language,
causing large sections of the codes to be re-written.
The following table represents information regarding the status of the
various in-process research and development projects to be acquired:
PF-15
44
ESTIMATED EXPECTED
STAGE OF ESTIMATED COST TO
COMPLETION COMPLETION DATE COMPLETE VALUATION
---------- --------------- --------- ---------
(in thousands)
Print / Extraction ...... 25% December 2000 $168 $ 1,300
Data Management Engine .. 75% February 2000 10 4,900
APIs .................... 54% December 2000 229 2,700
Web Applications ........ 79% March 2000 8 2,100
Payments or OFX ......... 43% December 2000 112 900
---- -------
Total .............. $527 $11,900
==== =======
The method used to allocate the purchase consideration to IPRD was the
modified income approach. Under the income approach, fair value reflects the
present value of the projected free cash flows that will be generated by the
IPRD projects and that is attributable to the acquired technology, if
successfully completed. The modified income approach takes the income approach,
modified to include the following factors:
o Analysis of the stage of completion of each project;
o Exclusion of value related to research and development
yet-to-be completed as part of the on-going IPRD projects; and
o The contribution of existing technologies and applications.
The projected revenue used in the income approach are based upon the
incremental revenues associated with a portion of the project related to
BlueGill's technology likely to be generated upon completion of the project and
the beginning of commercial sales, as estimated by management. The projections
assume that the projects will be successful and the project's development and
commercialization are as set forth by management. The discount rate used in this
analysis is an after tax rate of 25%.
Note C: CheckFree's statement of operations for the year ended June 30,
1999, has been combined with the BlueGill statement of operations for the twelve
months ended June 30, 1999. Our statement of operations for the six month period
ended December 31, 1999 has been combined with the BlueGill statement of
operations for the six month period ended December 31, 1999. Actual income
statements of CheckFree and BlueGill will be combined from the effective date of
the merger, with no retroactive restatement.
Note D: The unaudited pro forma condensed combining statement of operations
for CheckFree and BlueGill have been prepared as if the merger was completed as
of July 1, 1998, the beginning of the earliest period presented. The unaudited
pro forma combined net income (loss) per share is based on the weighted average
number of shares of our common stock outstanding during the periods, adjusted to
give effect to shares assumed to be issued had the merger taken place as of July
1, 1998.
Note E: The unaudited pro forma condensed combining statement of operations
do not include a charge for the value of the estimated $11.9 million (no income
tax effect) of purchased research and development arising from the merger, which
will be expensed at acquisition, as this expense will not have a continuing
impact.
Note F: The merger agreement between CheckFree and BlueGill includes
specific terms and conditions to address the impact on the purchase price and
the relative number of shares of our common stock to be issued in the event of
significant variation in the price of our common stock from the date of the
merger agreement to the closing date. The initially agreed upon purchase price
was $250 million, or 3,205,128 shares of our common stock when the market value
of the stock was $78.00 per share. The following is a summary of the impact on
the purchase price and/or the shares to be issued based on specified values of
the average trading price of our common stock. The average trading price is
defined in the agreement as the weighted average intraday trading price of our
common stock on the Nasdaq National Market during the three days immediately
preceding the closing date of the merger, as reported by Bloomberg.
o If the average trading price is greater than or equal to
$78.00 per share and less than or equal to $101.40 per share,
the number of shares of our common stock shares to be issued
as consideration will remain fixed at 3,205,128. To the extent
that the ultimate purchase price exceeds $250 million, the
additional amount, up
PF-16
45
to $75 million, will be reflected on our balance sheet as
additional goodwill. This additional goodwill will be
amortized on a straight-line basis over an estimated life of
five years commencing immediately upon the closing of the
merger agreement.
o If the average trading price is greater than $101.40 per
share, the purchase price will be fixed at $325 million and
the number of shares of our common stock to be issued as
consideration will be reduced accordingly. At the baseline
average trading price of $101.40 per share, we will issue
3,205,128 shares in consideration for BlueGill's stock. If the
average trading price is $106.40, or $5.00 per share above the
$101.40 baseline, the number of shares of our common stock
shares will reduce by 150,617 to 3,054,511 and if the average
trading price is $111.40, or $10.00 per share above the
$101.40 baseline, the number of shares of our common stock
will reduce by 287,723 to 2,917,415. The additional purchase
price of $75 million from the baseline price of $250 million
will be reflected on the balance sheet as goodwill and will be
amortized on a straight-line basis over the next five years.
o If the average trading price is greater than or equal to
$50.00 per share and less than or equal to $78.00 per share,
the purchase price will be fixed at $250 million and the
number of shares of our common stock to be issued as
consideration will increase accordingly. At a baseline average
trading price of $78.00 per share, we again issue 3,205,128
shares in consideration for BlueGill's stock. If the average
trading price is $73.00 per share, or $5.00 per share below
the $78.00 baseline, the number of shares of our common stock
issued will increase by 219,529 shares to 3,424,657and if the
average trading price is $68.00 per share, or $10.00 per share
below the $78.00 baseline, the number of shares of our common
stock issued will increase by 471,342 shares to 3,676,470.
Because the price will remain fixed at $250 million, under
this scenario there will be no added impact on the balance
sheet or future statements of operations.
o If the average trading price is less than $50.00 per share
there are two options available:
(1) We may terminate the merger. If BlueGill, however,
elects to reinstate the merger agreement, the number
of shares of our common stock to be issued as
consideration will be fixed at 5,000,000. If the
average trading price is $45.00 per share, the
purchase price would become $225 million and if the
average trading price is $40.00 per share, the
purchase price would become $200 million. To the
extent that the purchase price is lower than $250
million, the reduction will reflect itself in lower
goodwill on the balance sheet and will result in
lower straight-line goodwill amortization expense
over the next five year period.
(2) If we do not terminate the merger, the purchase price
will be fixed at $250 million and the number of
shares of our common stock issued in consideration
will be determined by dividing $250 million by the
average trading price. In this instance, if the
average trading price is $45.00 per share, we would
issue 5,555,555 shares in consideration for
BlueGill's stock and if the average trading price is
$40.00 per share, we would issue 6,250,000 shares in
consideration for BlueGill's stock. Because the
purchase price will remain fixed at $250 million,
under this scenario there will be no added impact on
the balance sheet or future statements of operations.
PF-17
46
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
WITH TRANSPOINT
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
HISTORICAL AMOUNTS
------------------------- PRO FORMA
CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL
--------- ---------- ----------- -----
Assets:
Current assets:
Cash and cash equivalents .......................... $ 152,779 $ 19,837 $ 100,000 (1) $ 272,616
Investments ........................................ 17,015 -- -- 17,015
Accounts receivable, net ........................... 46,780 -- -- 46,780
Prepaid expenses and other assets .................. 11,863 -- -- 11,863
Deferred income taxes .............................. 8,324 -- -- 8,324
--------- -------- ---------- ----------
Total current assets .......................... 236,761 19,837 100,000 356,598
Property and equipment, net ........................... 80,416 1,445 -- 81,861
Capitalized software, net ............................. 21,584 9,439 175,561 (1) 206,584
Goodwill, net ......................................... 30,559 -- 806,003 (1) 836,562
Other intangible assets, net .......................... 12,795 -- 548,000 (1) 560,795
Investments ........................................... 31,663 -- -- 31,663
Deferred income taxes ................................. 31,095 -- -- 31,095
Other noncurrent assets ............................... 12,855 -- -- 12,855
--------- -------- ---------- ----------
Total assets ................................... $ 457,728 $ 30,721 $1,629,564 $2,116,013
========= ======== ========== ==========
Liabilities and Stockholder's Equity:
Current liabilities:
Accounts payable ................................... $ 8,679 $ 12,181 $ -- $ 20,860
Accrued liabilities ................................ 37,494 1,246 3,325 (1) 42,740
675 (2)
Deferred income taxes .............................. -- -- 79,120 (1) 79,120
Current portion of long-term obligations ........... 5,069 -- -- 5,069
Deferred revenue ................................... 25,840 250 -- 26,090
--------- -------- ---------- ----------
Total current liabilities ...................... 77,082 13,677 83,120 173,879
Accrued rent and other ................................ 4,862 -- -- 4,862
Obligations under capital leases - less current
portion ............................................. 906 -- -- 906
Convertible subordinated notes ........................ 172,500 -- -- 172,500
Minority interest ..................................... -- 43,061 (43,061)(1) --
Deferred income taxes ................................. -- -- 214,080 (1) 214,080
--------- -------- ---------- ----------
Total liabilities .............................. 255,350 56,738 254,139 566,227
Stockholders' equity:
Common stock ....................................... 524 -- 170 (1) 694
Additional paid-in capital ......................... 504,058 -- 1,349,913 (1) 1,853,296
(675)(2)
Members' capital deficiency ........................ -- (26,017) 26,017 (1) --
Other .............................................. (299) -- -- (299)
Accumulated deficit ................................ (301,905) -- -- (301,905)
--------- -------- ---------- ----------
Total stockholder's equity ..................... 202,378 (26,017) 1,375,425 1,551,786
--------- -------- ---------- ----------
Total liabilities and stockholders'
equity ............................. $ 457,728 $ 30,721 $1,629,564 $2,118,013
========= ======== ========== ==========
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-18
47
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH TRANSPOINT
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL AMOUNTS
------------------------- PRO FORMA
CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL
--------- ---------- ----------- -----
Revenues:
Processing and servicing .................... $201,059 $ -- $ -- $ 201,059
License fees ................................ 15,975 -- -- 15,975
Maintenance fees ............................ 17,746 -- -- 17,746
Other ....................................... 15,351 -- -- 15,351
-------- -------- --------- ---------
Total revenues ......................... 250,131 -- -- 250,131
Expenses:
Cost of processing, servicing and support ... 146,704 3,062 -- 149,766
Research and development .................... 21,085 26,560 -- 47,645
Sales and marketing ......................... 32,354 11,302 -- 43,656
General and administrative .................. 31,466 2,403 -- 33,869
Depreciation and amortization ............... 24,630 1,870 359,001 (3) 385,501
In-process research and development ......... 2,201 -- -- 2,201
-------- -------- --------- ---------
Total expenses ......................... 258,440 45,197 359,001 662,638
Net gain on dispositions of assets .......... 4,576 -- -- 4,576
-------- -------- --------- ---------
Loss from operations ........................... (3,733) (45,197) (359,001) (407,931)
Other:
Minority interest ........................... -- 2,063 (2,063)(4) --
Interest, net ............................... 2,181 464 -- 2,645
-------- -------- --------- ---------
Loss before income taxes ....................... (1,552) (42,670) (361,064) (405,286)
Income tax benefit ............................. (12,009) -- (79,120)(3) (91,129)
-------- -------- --------- ---------
Net income (loss) .............................. $ 10,457 $(42,670) $(281,944) $(314,157)
======== ======== ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share .......... $ 0.20 $ (4.52)
======== =========
Equivalent number of shares ................. 52,444 17,000 (1) 69,444
======== ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share .......... $ 0.18 $ (4.52)
======== =========
Equivalent number of shares ................. 56,529 12,915 (5) 69,444
======== ========= =========
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-19
48
CHECKFREE HOLDINGS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
WITH TRANSPOINT
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL AMOUNTS
------------------------- PRO FORMA
CHECKFREE TRANSPOINT ADJUSTMENTS TOTAL
--------- ---------- ----------- -----
Revenues:
Processing and servicing .................... $120,931 $ 3 $ -- $ 120,934
License fees ................................ 6,197 -- -- 6,197
Maintenance fees ............................ 8,956 -- -- 8,956
Other ....................................... 5,905 -- -- 5,905
-------- -------- --------- ---------
Total revenues ......................... 141,989 3 -- 141,992
Expenses:
Cost of processing, servicing and support ... 86,899 7,616 -- 94,515
Research and development .................... 15,110 1,521 -- 16,631
Sales and marketing ......................... 18,577 7,799 -- 26,376
General and administrative .................. 19,287 1,267 -- 20,554
Depreciation and amortization ............... 14,756 1,610 165,000 (3) 181,366
In-process research and development ......... -- -- -- --
-------- -------- --------- ---------
Total expenses ......................... 154,629 19,813 165,000 339,442
Net gain on dispositions of assets .......... -- -- -- --
-------- -------- --------- ---------
Loss from operations ........................... (12,640) (19,810) (165,000) (197,450)
Other:
Minority interest ........................... -- 2,876 (2,876)(4) --
Interest, net ............................... 143 911 -- 1,054
-------- -------- --------- ---------
Loss before income taxes ....................... (12,497) (16,023) (167,876) (196,396)
Income tax benefit ............................. (4,592) -- (33,760)(3) (38,352)
-------- -------- --------- ---------
Net income (loss) .............................. $ (7,905) $(16,023) $(134,116) $(158,044)
======== ======== ========= =========
Basic earnings (loss) per share:
Net income (loss) per common share .......... $ (0.15) $ (2.29)
======== =========
Equivalent number of shares ................. 52,023 17,000 (1) 69,023
======== ========= =========
Diluted earnings (loss) per share:
Net income (loss) per common share .......... $ (0.15) $ (2.29)
======== =========
Equivalent number of shares ................. 52,023 17,000 (1) 69,023
======== ========= =========
See Notes to Unaudited Pro Forma Condensed Combining Financial Information
PF-20
49
CHECKFREE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
WITH TRANSPOINT
1. Adjustment to reflect the issuance of CheckFree common stock and related
acquisition expenses as the total purchase price for the net assets of
TransPoint, and the elimination of TransPoint's capitalized software costs,
minority interest and member's capital deficiency, net of a contractual infusion
of $100 million of cash by TransPoint. The fair market values of intangible
assets are preliminary estimates based on an independent appraisal, and current
facts and circumstances. The final value of intangible assets will change with
any change in the final purchase price and any resulting change could be
material.
(in thousands)
Cash................................................ $ 100,000
Capitalized software, net........................... 175,561
Goodwill, net....................................... 806,003
Other intangible assets, net........................ 548,000
TransPoint minority interest........................ 43,061
CheckFree common stock...................... $ 170
CheckFree additional paid-in capital........ 1,349,913
TransPoint member's capital deficiency...... 26,017
Current deferred income tax liability....... 79,120
Long term deferred income tax liability..... 214,080
Accrued acquisition expenses................ 3,325
---------- ----------
Totals.............................................. $1,672,625 $1,672,625
========== ==========
The following chart indicates the components of the estimated purchase
price inherent in the adjusting entry:
(in thousands)
CheckFree common stock...................... $1,350,083
TransPoint cash infusion.................... (100,000)
Estimated direct acquisition costs.......... 3,325
----------
Total estimated purchase price......... $1,253,408
==========
The estimated purchase price will be issued in exchange for the net assets
of TransPoint on the closing date.
The purchase price reflects the assumed issuance of 17,000,000 shares of
our common stock at $79.42 per share, which is the average end of day price of
our stock for the three trading days preceding and the three days following the
announcement of the acquisition of TransPoint. Under the terms of the merger and
contribution agreement, TransPoint is to be funded with $100 million in cash
before the closing of the transaction.
The following table provides the allocation of the purchase price inherent
in the adjusting entry:
PF-21
50
(in thousands)
In-process research and development (Note B) $ 0
Current technology and products:
BIS / communications (estimated life of 3 years)........ 26,000
Service center (estimated life of 3 years)........ 85,000
Delivery applications (estimated life of 3 years)........ 50,000
Payments / interface (estimated life of 3 years)........ 24,000
----------
Sub-total IPRD and current technology and products............. 185,000
Goodwill (estimated life of 5 years)........ 806,003
Other intangible assets:
Customer list (estimated life of 3 years)........ 25,000
Tradename (estimated life of 1 year )........ 29,000
Strategic agreements (estimated life of 5 years)........ 494,000
----------
Sub-total other intangible assets............................. 548,000
Deferred income taxes................................................... (293,200)
Net assets of TransPoint:
Cash and cash equivalents............................................ 19,838
Property and equipment............................................... 1,445
Liabilities assumed.................................................. (13,678)
----------
Sub-total net assets......................................... 7,605
----------
Total Purchase Price.................................................... $1,253,408
==========
The useful lives of the various intangible assets identified are based on
management's preliminary estimates. Under the caption of current technology and
products, lives are based on assumptions regarding the time expected for the
indicated technology or product to become obsolete, which are driven primarily
by planed future development work designed to replace the existing technology or
product. The useful life assigned to goodwill is based upon currently acceptable
lives for such assets. The useful life we assigned to the customer list is based
on the estimate of the future revenue base from the existing customers. The
useful life we assigned to tradename is based on the estimated time that will
pass before we discontinue the use of the related name. We assigned a five-year
life to the strategic agreements to coincide with the contractual life of the
related agreements. We will amortize these intangible assets on a straight-line
basis over their estimated useful lives.
2. Adjustment to accrue the cost of registering CheckFree shares to be
issued for TransPoint.
(in thousands)
Additional paid-in capital.......... $675
Accrued liabilities............ $675
3. Adjustment to reflect additional amortization expense and the related
income tax benefit associated with the intangible assets acquired from
TransPoint.
PF-22
51
(in thousands)
YEAR ENDED JUNE 30, 1999
Depreciation and amortization........... $359,001
Current deferred income tax liability... 79,120
Capitalized software, net........... $ 61,667
Goodwill, net....................... 161,201
Other intangible assets, net........ 136,133
Income tax benefit.................. 79,120
-------- --------
Total................................... $438,121 $438,121
======== ========
SIX MONTHS ENDED DECEMBER 31, 1999
Depreciation and amortization........... $165,000
Current deferred income tax liability... 33,760
Capitalized software, net........... $ 30,833
Goodwill, net....................... 80,600
Other intangible assets, net........ 53,567
Income tax benefit.................. 33,760
-------- --------
Total................................... $198,760 $198,760
======== ========
Goodwill amortization is non-deductible for federal and state
income tax purposes. A blended effective income tax rate of 40% was
applied to the deductible amortization to determine the related income
tax benefit in the entries above.
4. Adjustment to reflect the elimination of minority interest
recorded in the period due to the acquisition of all of the ownership
interest in TransPoint by CheckFree.
5. When combined with TransPoint's historical loss and the pro
forma adjustments, the historical CheckFree net income for the year
ended June 30, 1999 resulted in a combined net loss. As a result, due
to the anti-dilutive effect on earnings per share, the equivalent
number of shares for purposes of determining diluted earnings per
share, was reduced to agree with the equivalent number of shares for
basic earnings per share. The following chart identifies by type of
potentially dilutive security, the number of additional shares that
could potentially dilute basic earnings per share in the future and the
number of shares issued for TransPoint.
(in thousands)
CheckFree common shares issued for TransPoint...... 17,000
Potentially dilutive securities:
Options and warrants.......................... (4,085)
------
Net adjustment to dilutive shares outstanding...... 12,915
======
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
Note A: Management believes that the assumptions used in
preparing the Unaudited Pro Forma Condensed Combining Balance Sheet and
the Unaudited Pro Forma Condensed Combining Statement of Operations
provide a reasonable basis for presenting the significant effects of
the acquisition of TransPoint; that the pro forma adjustments give
appropriate effect to those assumptions; and that the pro forma
adjustments are properly applied in the Unaudited Pro Forma Condensed
Combining Balance Sheet and Statement of Operations.
Note B: The Unaudited Pro Forma Condensed Combining Balance
Sheet of CheckFree and TransPoint has been prepared as if the
transaction was completed as of December 31, 1999, and was accounted
for as a purchase. We will issue 17,000,000 shares of our common stock
valued at $79.42 for the net assets of TransPoint. Under the terms of
the merger and contribution agreement, TransPoint is to be funded with
$100 million of cash immediately prior to the closing of the
transaction. We expect to incur approximately $3.3 million of direct
acquisition costs. The total purchase price of $1,253,408,000 was
allocated to assets acquired and liabilities assumed based on
TransPoint's December 31, 1999 balance sheet.
PF-23
52
The allocation of the TransPoint purchase price among the
identifiable tangible and intangible assets is based on preliminary
estimates of the fair market value of those assets. Final determination
of the allocation of the purchase price will be based on independent
appraisals that we expect to have completed shortly after the
transaction is consummated.
This transaction is expected to close within four to six
months. TransPoint released the latest version of their electronic
billing and payment processing system just one week prior to the
announcement of this transaction. As a result, at this time, the value
of in-process research and development is nominal and therefore not
reflected. However, we will reassess the fair market value of the
assets and liabilities assumed from TransPoint at the time of closing
and we expect a portion of the purchase price to be allocated to
in-process research and development at that time. Due to uncertainties
regarding the specific products or technology enhancements that will be
included in the next release and the specific date of the closing, we
cannot currently provide a reasonable estimate of the expected value of
in-process research and development.
Note C: CheckFree's statement of operations for the year ended
June 30, 1999, has been combined with the TransPoint statement of
operations for the twelve months ended June 30, 1999. Our statement of
operations for the six month period ended December 31, 1999 has been
combined with the TransPoint statement of operations for the six months
ended December 31, 1999. Actual income statements of CheckFree and
TransPoint will be combined from the effective date of the transaction,
with no retroactive restatement.
Note D: The unaudited pro forma condensed combining statements
of operations for CheckFree and TransPoint have been prepared as if the
transaction was completed as of July 1, 1998, the beginning of the
earliest period presented. The unaudited pro forma combined net income
(loss) per share is based on the weighted average number of shares of
our common stock outstanding during the periods, adjusted to give
effect to shares assumed to be issued had the transaction taken place
as of July 1, 1998.
PF-24
53
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of Arthur Andersen LLP.
----------
* Filed with this report.