-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBR+T716QR5LKW30rij7Q0Ugn98AEb/LIsWJ17TLsSU4xNUaUIs7AGqg80odgRru NC55yftmd+6rL9kt8pPf7w== 0000950144-00-003994.txt : 20000411 0000950144-00-003994.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950144-00-003994 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETZEE INC CENTRAL INDEX KEY: 0001094335 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 582488883 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27925 FILM NUMBER: 583487 BUSINESS ADDRESS: STREET 1: 6190 POWERS FERRY RD STREET 2: SUITE 400 CITY: ATLANTA STATE: GA ZIP: 30339 BUSINESS PHONE: 7708504000 MAIL ADDRESS: STREET 1: 2410 PACES FERRY RD STREET 2: 150 PACES SUMMIT CITY: ATLANTA STATE: GA ZIP: 30339 10-K 1 NETZEE, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 0-27925 NETZEE, INC. (Exact name of registrant as specified in its charter) --------------------- GEORGIA 58-2488883 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
6190 POWERS FERRY ROAD, SUITE 400 30339 ATLANTA, GEORGIA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (770) 850-4000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of March 20, 2000 was: $182,876,635. The number of shares of Netzee, Inc. common stock outstanding as of March 20, 2000 was 21,705,083. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INDEX
PAGE ---- PART I: Item 1. Business.................................................... 1 Item 2. Properties.................................................. 16 Item 3. Legal Proceedings........................................... 17 Item 4. Submission of Matters to a Vote of Security Holders......... 17 PART II: Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 17 Item 6. Selected Financial Data..................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 24 Item 7A. Qualitative and Quantitative Disclosures Regarding Market Risk........................................................ 40 Item 8. Financial Statements and Supplementary Data................. 40 Item 9. Disagreements on Accounting and Financial Disclosure........ 40 PART III: Item 10. Directors and Executive Officers of the Registrant.......... 40 Item 11. Executive Compensation...................................... 40 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 41 Item 13. Certain Relationships and Related Transactions.............. 41 PART IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 41
i 3 ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS This Form 10-K contains statements which constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements include all statements that are not statements of historical fact regarding the intent, belief or expectations of Netzee, Inc. and our management. The words "may," "will," "anticipate," "believe," "intend," "expect," "estimate," "plan," "strategy" and similar expressions are intended to identify forward-looking statements. These statements are based upon a number of assumptions and estimates that are subject to significant uncertainties, many of which are beyond our control. These forward-looking statements are not guarantees of future performance, and actual results may differ materially from those projected in the forward-looking statements as a result of risks related to our brief operating history and our ability to achieve or maintain profitability; the integration of acquired assets and businesses; our ability to achieve, manage or maintain growth and execute our business strategy successfully; our dependence on developing, testing, implementing, and our ability to successfully market and sell, enhanced and new products and services; risks associated with possible system failures and rapid changes in technology; our ability to retain existing customers and execute agreements with new customers; our ability to sell our products and services to financial institution customers and their customers; our ability to respond to competition; the volatility associated with Internet-related companies; and various other factors discussed in detail in this Form 10-K and our other filings with the Securities and Exchange Commission, including the risks described in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Our Future Results of Operations or Financial Condition." We do not undertake any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or future operating results. GENERAL Our mission is to offer Internet products and services that meet the retail and wholesale needs of community financial institutions in the United States with assets of less than $10 billion. As of December 31, 1999, we had relationships to provide our products and services to over 7,000 community financial institutions. As of December 31, 1999, we had over 700 interactive customers, which are institutions under contract to utilize one or more of our Internet or voice response products and services. More than 450 customers have contracted for one or more of our Internet products, and more than 350 of these customers were implemented as of year-end 1999. We provide a retail suite of integrated Internet banking products and services and Internet commerce solutions to community financial institutions. The retail suite provides cost-effective, outsourced, secure and scalable Internet banking and commerce solutions that enable community financial institutions to offer to their customers a wide array of financial products and services over the Internet. These products and services are branded with the financial institution's own name and contain each institution's logo, colors and other distinctive branding characteristics. This branded solution enables community financial institutions to provide their customers with the convenience of Internet banking without losing the personal relationship and service associated with the local community financial institution. Complementing this retail suite, we offer to community financial institutions custom web site design, implementation and marketing services, telephone banking products and Internet access services. Our broad range of products and services are designed to enable a community financial institution to compete effectively with the services offered by both larger and Internet-based financial institutions. Our Internet commerce product, Banking on Main Street(TM), enables a community financial institution to place its business customers on the Internet through the creation of individualized web sites. Links to these web sites are incorporated into the community financial institution's home page. The community financial institution's web site, therefore, becomes a central Internet marketplace where consumers and businesses may conduct banking and Internet commerce transactions, where local businesses may sell their products and 1 4 services, and where national vendors may access this entire group of customers, all under the trusted brand name of the community financial institution. Beginning in December 1999, we began to market and sell a wholesale group of products and services that helps fulfill the operational needs and regulatory requirements of financial institutions. Our wholesale suite of products and services enables financial institutions to create internal efficiencies and provides employees with information to better manage banking operations. These applications provide for: - streamlined electronic regulatory reporting; - Internet-based bond portfolio and asset/liability management analytic tools; and - access to key information and services from various providers of financial information via the Internet. With respect to our retail suite of products and services, we currently earn substantially all of our revenues from recurring monthly service fees, flat monthly per user fees and per transaction charges. With respect to our wholesale suite of products and services, we earn substantially all of our revenues from annual, quarterly and monthly subscription fees paid by financial institutions who use these applications. We expect to derive little or no revenue from up-front software or implementation fees. We are focused on increasing our community financial institution customer base, expanding relationships with our existing community financial institution customers, and increasing the penetration of our products and services with community financial institution customers. FORMATION OF NETZEE Netzee was formed as a Georgia corporation in August 1999 to be merged with Direct Access Interactive, Inc. ("Direct Access" or the "Predecessor"), a company that was formed in October 1996 to provide Internet and telephone banking products and services. The InterCept Group, Inc. ("InterCept") acquired Direct Access as a wholly-owned subsidiary in March 1999. InterCept currently owns approximately 35% of our common stock. In August 1999, Direct Access acquired SBS Corporation ("SBS") in a merger. Immediately after the merger, Direct Access sold all of the assets of SBS, other than its Internet and telephone banking assets, to InterCept. Based in Birmingham, Alabama, SBS provided automated technology products and services, including Internet and telephone banking systems, to community financial institutions nationwide. In September 1999, Direct Access was merged into Netzee, with Netzee being the surviving corporation. On that same day, Netzee acquired the Internet banking divisions of each of TIB The Independent BankersBank ("TIB"), a Texas state chartered and Federal Reserve member bank, and The Bankers Bank, a Georgia state chartered and Federal Reserve member bank. A "bankers' bank" is a bank that exclusively serves and is owned by other financial institutions. In September 1999, Netzee also acquired all of the ownership interests in Call Me Bill, LLC ("Call Me Bill"). Based in Elizabethtown, Kentucky, Call Me Bill provides 24-hour electronic bill payment services to financial institutions' customers. We have integrated these services into our Internet banking solution. In September 1999, Netzee also acquired Dyad Corporation ("Dyad"). Based in Norcross, Georgia, Dyad developed proprietary loan application, approval and fulfillment software that is being integrated into our Internet banking solution. In December 1999, a wholly-owned subsidiary of Netzee acquired certain of the assets and liabilities of DPSC Software, Inc. ("DPSC"). Located near Los Angeles, California, DPSC provided regulatory reporting and support applications designed to meet the needs of community financial institutions. As of December 15, 1999, DPSC had over 7,000 financial institutions as customers. 2 5 RECENT ACQUISITION In March 2000, Netzee completed the acquisition of substantially all of the assets of Digital Visions, Inc. ("DVI"). Based in Minneapolis, Minnesota, DVI provided Internet-based financial information tools for community financial institutions. As consideration for this acquisition, we issued 838,475 shares of common stock. We also issued options to purchase 70,419 shares of common stock in exchange for the cancellation of options to purchase DVI common stock. In addition, we assumed approximately $4.5 million in liabilities. DVI also has the right to receive up to 628,272 additional shares of our common stock if certain revenue targets are met in fiscal years 2000 and 2001. INDUSTRY OVERVIEW The Internet and E-Commerce The Internet has emerged as the fastest growing global communications and transactional medium in history and is dramatically changing the way people and businesses share information and conduct commerce. International Data Corporation, a leading provider of research for the information technology industry, estimates that the number of Internet users worldwide will increase from approximately 142 million in 1998 to 502 million by 2003, a compound average growth rate of approximately 29%. This growth is being driven by a number of factors, including: - an expanding base of personal computers in the home and workplace; - an increasing general awareness of the Internet and e-commerce among consumer and business users; - improvements in network and communications infrastructure and security; - easier, faster and less expensive access to the Internet and commercial on-line services; and - the introduction of alternative Internet-enabled devices, such as televisions and hand-held computers. Businesses have also embraced the Internet as an important means of communicating and conducting transactions. Many companies' web sites are interactive and transaction-based, enabling them to provide a wide range of e-commerce applications. International Data Corporation estimates that revenue from business to consumer e-commerce will increase from approximately $15 billion in 1998 to more than $177 billion in 2003, a compound annual growth rate of approximately 64%. International Data Corporation estimates that revenue from business to business e-commerce will increase from approximately $35 billion in 1998 to more than $1.1 trillion in 2003, a compound annual growth rate of approximately 100%. Internet Banking Consumers, businesses and financial institutions are recognizing that the Internet is a powerful and efficient medium for the delivery of banking services. These services include Internet banking, bill payment, bill presentment and other services for individuals, and cash management, payroll and other services for the commercial customers of financial institutions. Consumers and small businesses are increasing their demand for Internet banking as a convenient and cost-effective method to monitor financial accounts and transact business 24 hours a day, seven days a week. Additionally, unlike personal computer banking, which requires users to load specialized software onto their computers, Internet banking provides the flexibility to perform a wide range of transactions from any personal computer or Internet-enabled device delivered through a browser. International Data Corporation estimates that there were approximately 8 million users banking over the Internet in the United States at the end of 1998, and projects that the number will increase to approximately 40 million by 2003, a compound annual growth rate of approximately 38%. In addition to customer demand, financial institutions are motivated to provide Internet banking solutions to retain existing customers, attract new customers, provide additional non-interest sources of revenues and reduce costs. International Data Corporation also estimates the number of financial institutions offering on-line banking services will increase from 1,150 in 1998 to 15,845 by 2003, and that these services will be offered primarily via the Internet. Financial institutions have been faced with the loss of their traditional customer 3 6 bases due, in part, to customer demand for comprehensive financial services from a single provider. The Internet provides the platform to market traditional banking products and services and the flexibility to expand into non-traditional banking services, such as brokerage services, insurance and bill presentment. Internet banking also allows a financial institution to collect and analyze customer data for use in targeted marketing programs. Internet Banking for Community Financial Institutions According to Online Banking Report, over 50% of the 100 largest banks in the United States offer Internet banking. By contrast, only approximately 5% of community financial institutions in the United States currently offer Internet banking. According to the Federal Deposit Insurance Corporation (the "FDIC") and the National Credit Union Administration, there are approximately 8,540 banks, 1,630 thrifts and 10,750 credit unions in the United States with assets of less than $10 billion each. As a result of the adoption of Internet banking services by their larger competitors and the growth of e-commerce, community financial institutions are under increasing pressure to offer Internet-based home and business banking services. Community financial institutions realize that if their product and service offerings are inadequate, they risk losing customers to larger institutions, Internet-only banks, investment and brokerage companies, retailers, insurance companies or locally competitive community financial institutions that offer these services. Community financial institutions face many hurdles in providing a comprehensive Internet banking solution to their retail and business banking customers. In particular, competition from other bank and non-bank financial institutions has eroded profit margins and has forced community financial institutions to focus on reducing non-interest related costs. Therefore, these institutions often lack the capital and human resources to develop and maintain the necessary technology and infrastructure, to design in-house, on-line banking services, and to provide integrated customer support for their on-line banking services. Because of these capital and human resources constraints, we believe that many community financial institutions require a low-cost, outsourced Internet-based banking solution. This solution must be implemented rapidly and cost-effectively and must interface with the institution's existing core processing system. A community financial institution's Internet banking system must be secure, reliable and scalable. In addition, the Internet solution must provide the flexibility to add new products and services such as e-commerce and other non-traditional banking service offerings. THE NETZEE SOLUTION We provide products and services that fulfill the retail and wholesale needs of community financial institutions. Our retail suite provides Internet banking and commerce solutions that enable community financial institutions to offer to their customers a wide array of financial products and services over the Internet, while our wholesale suite helps fulfill the operational needs and regulatory requirements of financial institutions. Our Internet banking solutions consist of (1) our Internet banking and commerce products and services, (2) implementation, web site design and support and other related services and (3) data centers that support and host these products and services. The data centers interface with a community financial institution's existing computer hardware and core processing systems, as well as with the financial institution's customers. The data centers contain the web servers, computers, data storage, retrieval and security systems, and support personnel necessary to operate the Internet-based systems. This solution offers a wide array of Internet-based functions, including products and services for the financial institution, and its home and business banking customers. Each community financial institution can choose the products and services that best fit its customer base and its internal requirements, and can easily customize our system to add new or different functions. We have also designed these Internet-based systems with the flexibility to accommodate increased numbers of users. 4 7 Our products and services offer the following features: Internet Banking Services in an Outsourced Community Environment. Our Internet-based retail suite gives community financial institutions the ability to provide the convenience of on-line banking services while maintaining personal relationships and affording quality service to their customers. Each community financial institution can create a customized and branded Internet banking system, with its trademarks, logo, colors and other distinctive features. Additionally, the community financial institution's customers perceive that they are interacting with their community financial institution. This allows the community financial institution to compete more effectively in its market, to improve its customer relations, to increase its customer base, to offer its customers additional products and services, and to increase its non-interest income. We provide all of the proprietary software and the hardware necessary to operate Internet-based systems. Community financial institutions that use our solution do not need to develop in-house software, purchase or maintain expensive equipment, or hire a technical staff. We also offer customers web site design, development and hosting. We generally waive up-front implementation costs, which makes our products and services an affordable outsourced solution for many community financial institutions concerned with the cost of implementing Internet technology. Compared with installing in-house Internet systems, we can significantly reduce the time and expense necessary to implement, upgrade and support an Internet solution. We have implemented data encryption and firewall technology to shield our core Internet servers from unauthorized access. We have been certified by ICSA, a company that has developed standards for testing the security of a product against internationally accepted risk-reduction criteria. Gateway to Internet Commerce. Our retail suite of Internet banking products and services includes Banking on Main Street(TM), which is a branded Internet commerce enhancement that enables community financial institutions to provide their customers an easily accessible gateway to a branded Internet-based network of products and services offered by both national companies and local merchants. Additionally, through Banking on Main Street(TM), businesses can increase their customer base and sales by using the Internet. In addition to standard financial account services, community financial institutions can offer their commercial customers Internet commerce accounts that include a customized web page and a "storefront" on the Internet. This product allows community financial institutions to develop stronger relationships with their commercial customers by providing their businesses direct access to a rapidly growing number of Internet users. Internet Access and Telephony Services. Through a five-year strategic alliance with UUNet Technologies, Inc. ("UUNet"), a wholly-owned subsidiary of MCI WORLDCOM, Inc., announced in January 2000, we will offer a comprehensive suite of communications products and Internet access services to community financial institutions. As our customer, the community financial institution will be able to offer both its retail and commercial business customers Internet access services and discounted telephony services. The various services are co-branded with the community financial institution's name. We will pay UUNet a fee for our right to market and sell these services, and we also will pay commissions to community financial institutions with respect to our sales of these Internet access services to their customers. Regulatory Reporting and Support Applications. Several applications within our wholesale suite provide financial institutions with software to complete certain required regulatory reports and related tasks in an electronic medium. These applications are being converted to Internet-based applications. Bond Accounting, Portfolio and Asset/Liability Management Analytics. These analytical tools, accessible via the Internet, allow a financial institution to complete bond accounting, risk assessment and other management functions related to the financial operations of the institution. The portfolio and asset/ liability analytics provide risk assessment and portfolio analysis relative to the possible effects of potential transactions and fluctuations in interest rates. 5 8 Access to Critical Information Sources. Through our Banc Mall(TM) and PortPro Mall(TM) products, employees of our financial institution customers can access sources of critical information via the Internet, enabling the financial institutions to streamline their operating functions. Available information services include vehicle valuations, credit reports, industry and economic forecasts, and title and lien search information. Marketing and Consulting Services. We also provide marketing and sales training programs for community financial institutions and their customers. These programs are specifically designed to increase usage of our Internet-based products and services by a community financial institution's customer base. Compatibility with Existing Core Processing Software. Our Internet-based systems are designed to work with different types of core processing software and data processing services. At present, we have successfully installed Internet banking products and services that interface with approximately 41 different core processing environments. Further, we believe that we have the ability to interface our products with many other core processing systems with nominal effort and expense. We also design these systems so that they work with other banking functions that the financial institution may support, such as loan application and check imaging services. THE NETZEE STRATEGY Our mission is to offer products and services that meet the retail and wholesale needs of community financial institutions. We provide an innovative gateway to the Internet by combining Internet banking products and services with Internet commerce capabilities and other Internet-based products. Community financial institutions can utilize these products and services to create new banking relationships and enhance relationships with their existing customers. We also provide our customers with a suite of wholesale products and services that helps fulfill the operational needs and regulatory requirements of financial institutions. Our goal is to become the leading provider of these retail and wholesale products and services to community financial institutions by: Increasing Revenue from Existing Customers. We currently serve over 7,000 institutional customers. One of our primary objectives is to cross-market our products and services to existing institutional customers. Additionally we anticipate that we will actively market our products and services to the institutional customer's potential end users. We provide institutional customers with marketing assistance programs and related support services in order to increase the number of users of our on-line banking systems. We use our client marketing and consulting personnel to encourage community financial institutions to advertise and promote their on-line systems effectively. Additionally, our base of commercial and consumer end users provides a significant audience to which regional and national advertising campaigns can be directed. We anticipate that this targeted marketing will provide an additional source of revenue. Capitalizing on Strategic Marketing Alliances with Bankers' Banks and Other Partners. We plan to increase our customer base by entering into additional strategic marketing alliances with bankers' banks, commercial regional banks, national broker dealers, developers of core processing software and Internet-related service providers. Our existing strategic partners have business relationships with numerous financial institutions to which they will exclusively market our Internet banking solution. We also intend to expand our existing sales force to increase opportunities with existing strategic partners as well as to develop new strategic alliances. Expanding Internet Commerce Products. With the addition of our wholesale suite of products and services, we continue to build upon our retail suite of Internet-based applications available to the community financial institution market. Our strategy is to provide customers with a comprehensive set of Internet commerce and Internet-enabled tools to help them remain competitive in today's rapidly changing business environment. We believe that access to information for better and quicker decision- making, coupled with streamlining portions of normal operations, will provide value to our customers. In addition to traditional on-line banking services, we intend to provide community financial institutions 6 9 with access to new products and services, such as loan origination and processing, insurance, brokerage, bill presentment, electronic safe deposit boxes and additional Internet commerce opportunities. We have designed our Internet banking system to store, access and process large amounts of information. We believe that this system can quickly and easily be upgraded to offer new on-line products and services to a financial institution's customers. We also intend to expand upon and improve existing technology to enhance the overall functionality and performance of the system. We believe these improvements will further enhance our Internet banking system and provide additional services to our customers. Creating Branded Electronic Marketplaces. We intend to position the community financial institution's web site as the destination for on-line financial and Internet commerce applications. Our Banking on Main Street(TM) product capitalizes on this opportunity by providing our customers' commercial clients with a convenient and cost-effective means of selling their products and services on-line. We utilize and market our Internet commerce products and services in tandem with our Internet banking system to offer community financial institutions a complete Internet-based presence. PRODUCTS AND SERVICES Overview We design, implement and sell products and services designed to meet the retail and wholesale needs of our community financial institution customers. Our retail suite provides Internet banking and commerce solutions that enable community financial institutions to offer to their customers a wide array of financial products and services over the Internet, while our wholesale suite helps fulfill the operational needs and regulatory requirements of financial institutions. Internet-Based Retail Products and Services Our retail suite of products and services is designed to meet each of our customer's specific requirements, including a web site branded under an individual customer's own name and customized product offerings targeted directly to a customer's core consumer and business customer bases. As of December 31, 1999, we have contracted with over 450 customers to provide one or more Internet products from our retail suite. This retail suite consists of the following: - proprietary software; - interfaces with a customer's core processing systems; - Internet commerce capabilities; - Internet access services; - secure data centers and backup capabilities; - system maintenance and upgrades; - training and marketing assistance; and - web site design, development and hosting. Our retail products and services enable a community financial institution's customers to access the following services on-line: - Account Information. Customers can view balance information for checking and savings accounts, certificates of deposit, lines of credit, automobile loans and mortgage loans. Customers can also view year-to-date interest accrued or paid, interest rates and deposit maturity dates. - Cash Management. Business customers can monitor their accounts, make tax payments and execute wire transfers. We also provide a cash concentration function, which periodically sweeps cash from several bank accounts into a single interest-bearing account. - Funds Transfer. Customers can transfer funds among accounts and establish electronic bill payment. - Compatibility with Personal Financial Management Software. Customers can download their account information into popular personal financial management software, such as Quicken(R) and Microsoft Money(R). 7 10 - Bill Payment. Customers can pay bills electronically 24 hours a day, seven days a week and can establish future and recurring payments. - U.S. Series EE Savings Bonds. Customers can purchase Series EE U.S. Savings Bonds. - Additional Features. Customers can reorder paper checks, request an account statement or contact financial institution personnel by e-mail. Community financial institutions typically enter into three- to five-year contracts for our Internet banking products and services. Customers pay a monthly fee under these contracts, based upon the level of usage by their customers and the types of optional products and services utilized. We also charge additional fees for optional products and services that our customers elect to receive, such as consulting and marketing services. Banking on Main Street(TM) Internet Commerce System We believe that we are one of the only companies to design, develop and sell an Internet commerce software package specifically tailored to meet the needs of community financial institutions and their customers. Banking on Main Street(TM) expands the gateway to the Internet established through our Internet banking system. The Banking on Main Street(TM) program integrates products and services for both local businesses and consumers into an on-line marketplace. The marketplace features merchants in a fully Internet commerce-enabled environment and will offer a "universal shopping cart" for customers. This universal shopping cart concept will permit users to pay for products and services purchased from multiple vendors in a single settlement transaction. The Banking on Main Street(TM) program allows each community financial institution the ability to offer local and national businesses and vendors the opportunity to offer their products and services through their own web site, which is linked to the community financial institution's home page. Community financial institutions can easily add new local businesses and vendors at any time. A web site design "wizard" allows community financial institution employees to design and implement a customized web site for businesses in a matter of minutes. We provide users a variety of consumer and small business products and services over the Internet, including products offered by book, office furniture and supply, and video and game retailers, as well as payroll, leasing, check collection and human resource management services. In addition to the basic software package, we provide each community financial institution that uses Banking on Main Street(TM) with training and usage consulting services to teach its employees how to use the system and to explain all of its features to the community financial institution's commercial customers. Telephone Banking Product We also offer a telephone banking product to provide a community financial institution's customers with convenient and safe access to information regarding their accounts from their homes or businesses at any time of day or night. This product also allows the community financial institution to spend less time responding to routine account information requests and to devote more time to developing important personal customer relationships. As of December 31, 1999, we had more than 400 community financial institution customers under contract to utilize our telephone banking product. Standard features of this telephone banking product include: - account information, such as current balance, interest rates and account activity for checking and savings accounts, certificates of deposit and loans; - fund transfers between accounts; - verification for merchants that there are sufficient funds in their customers' accounts; 8 11 - promotional, marketing and community-related messages; and - time and temperature. This telephone banking product can be installed in a community financial institution in less than a week with minimal investment and inconvenience. It also provides customized messages, menu items and services to meet customers' individual needs. We charge community financial institution customers who subscribe to this telephone banking product a recurring monthly fee. Wholesale Applications We also design, implement, market, sell and support a suite of regulatory reporting and support applications to over 7,000 financial institutions. Our wholesale suite of products and services allows these financial institutions to submit required annual and quarterly financial reports to the appropriate government regulatory agencies. The supporting applications provide the financial institution with an analysis of the financial institution's performance and how it compares to other institutions in its peer group. Among other programs, this suite includes the following: - CallReporter(TM). CallReporter(TM) automates the completion, edit verification, and electronic submission of the quarterly Federal Financial Institutions Examination Council ("FFIEC") Call Report. The Call Report is a detailed Report of Condition (detailed balance sheet and supporting schedules) and Income Statement. Every insured commercial financial institution and FDIC-supervised savings institution must submit this report on a quarterly basis. At present, the CallReporter(TM) software program is used by over 5,500 financial institutions to complete and submit the Call Report. - OTS Reporter(TM). OTS Reporter(TM) automates the completion and electronic submission of the quarterly thrift financial, consolidated maturity and cost of funds reports to the Office of Thrift Supervision ("OTS"), which regulates and supervises approximately 1,200 thrifts and savings and loan associations. - Riskreporter(TM). Riskreporter(TM), a risk-based capital compliance system, calculates the required values to complete the Regulatory Capital Schedule of the FFIEC Call Report. The program also provides financial institution management with the tools to manage the financial institution's risk-based compliance requirements. - Riskmonitor(TM). Riskmonitor(TM) is an asset/liability analysis program that calculates the impact of potential interest rate changes on the financial institution's margin and interest income. The report is a combination of tabular and graphical reports with narratives that provide the financial institution with the information and tools to respond to the regulatory requirement of monitoring on a quarterly basis the financial institution's overall interest rate risk profile. - PortPro(R) Bond Accounting and Analytics. PortPro(R) offers a comprehensive set of bond accounting software delivered via the Internet. This includes summary and detailed management reporting, regulatory reporting, and import/export capabilities for use with the financial institution's accounting system. In addition, the software provides risk, purchase and pro forma analyses based on current bond pricing. - PALMS(TM) Asset/Liability Management. PALMS(TM) furthers the capabilities of PortPro(R) by providing reporting and analytics tools for the financial institution's assets and liabilities. The software allows for data to be imported from various systems, including the institution's general ledger, bond accounting system, loan system and deposit system. Simulations can be run on an asset-by-asset and liability-by-liability basis. - Banc Mall(TM) and PortPro Mall(TM). These services provide employees of the financial institution with Internet-based access to critical data required for various functions, processes and decision-making. These include access to vehicle valuations, credit reports, industry and economic forecasts and title and lien search information. 9 12 RELATED SERVICES Implementation Services We provide the implementation services necessary to install our Internet-based retail suite and to create a customized Internet-based interface that includes the logo, colors and other distinctive branded characteristics of the community financial institution. This interface integrates our products and services with the community financial institution's core processing systems. For a typical Internet banking system installation, the implementation period is currently approximately 60 days. We currently have the ability to interface with approximately 41 core processing environments. We use existing third-party software and other application tools to design interfaces with financial institution core processing systems. Marketing Services We provide our financial institution customers with an Internet marketing package designed to increase the number of their customers who use our Internet products and services. We charge fees for these services based upon the type and length of engagement. This marketing package includes the following services: - Strategic Marketing Services. We provide our customers with strategic assistance in developing, marketing and supporting the success of their Internet banking and commerce products and services. We also offer customized consulting services to community financial institutions that have specific marketing and training needs. These services allow financial institutions to conduct effective in-branch and community-wide promotions of our Internet banking services. - Advertising and Promotional Efforts. We assist customers in advertising their on-line services through newspapers, radio, press releases, direct mail and other media. We also provide customers with in-branch marketing materials, such as brochures, banners and other promotional items. - Employee Training. We assist our customers in educating their employees about the uses and benefits of Internet banking and commerce. Our employee training guide also explains the financial and security features of the on-line systems, introduces sales techniques, instructs employees on how to overcome common customer objections and provides additional resources for learning about the Internet and on-line banking in general. Web Site Development and Related Services Our team of in-house web site designers creates fully interactive and customized web sites for our community financial institution customers. Working closely with the customer, the team designs a web site to incorporate the form and functionality required by the community financial institution, including the integration of proprietary and value-added financial services such as logos and other branding methods, application forms, financial calculators and links to other web sites. We offer basic web site development services without charge and provides additional enhancement, customization and design services for a fee. We host and maintain most of our customers' web sites at our data centers. PRODUCT AND SERVICE DEVELOPMENT We are continuing to expand and enhance the products and services that we provide to community financial institutions to enable them to offer a wider variety of Internet commerce products and services to their customers. SYSTEMS ARCHITECTURE Fat Server Architecture Our computer systems operate in a "fat server" environment. A server is computer hardware and software attached to a network and shared by multiple users, or clients. Clients and servers operate in two primary environments: "fat server" and "thin server." A fat server environment exists where the servers store and 10 13 process most or all of the information in the network. By contrast, a thin server environment exists where the clients or other servers process most of the information in the network. By using fat server technology, our system can process and store large amounts of information without having to wait for a financial institution's core processing system to retrieve the information and relay it back to the central computer. Fat server technology provides the following important advantages over thin server technology: - Greater Ability to Store Information. Because a fat server is required to perform substantially more tasks than a thin server, it must have greater storage capabilities than a thin server. This allows the fat server to retain more financial information for each user than a thin server. The fat server system currently stores multiple years of customer data, whereas thin server systems typically provide access to 60 to 90 days of financial data. We believe that the information storage capacity of a fat server provides a more useful and flexible solution for a community financial institution's customers. - Greater Ability to Process Information. Fat servers contain most of the information processing and analysis applications and are designed to manipulate and analyze customer account information easily. Financial institutions can utilize fat server technology to analyze customer account information efficiently to market and sell a variety of financial products and services, including loan, brokerage, insurance and tax services, directly to their customers. - Greater Ability to Collect Information from Different Sources. Fat servers are better equipped to collect and consolidate financial information from several different sources for the end user. For example, brokerage portfolio, insurance and loan balance information could be collected from separate sources, transmitted to a server, processed and organized into a single, easy-to-understand monthly statement that a user can access and review on-line. Data Centers Our Internet banking and commerce services that we provide are hosted and processed in our three data centers located in Atlanta, Georgia; Birmingham, Alabama; and Elizabethtown, Kentucky. The data centers contain the web servers for the system, as well as the communications equipment, data storage, retrieval and security software and hardware, and support personnel necessary to operate Internet services for each community financial institution's customers. The data centers also connect those customers to the community financial institution's existing core processing systems. Our data centers communicate with a community financial institution customer by transferring data from the community financial institution's core system to our servers in the data centers. We have been certified by ICSA, a company that certifies that a product is secure based upon internationally accepted security criteria. This certification means that our operations have been tested by ICSA and have been found to meet defined standards for risk reduction against a set of known security threats. In order to maintain this ICSA certification, our operations will be retested annually and will be subject to spot-checks to verify that we continue to comply with ICSA's security standards. In addition to ICSA certification, we have also been examined by federal and state banking authorities, including the Office of the Comptroller of Currency. To prevent service interruption and information losses due to power failures, our data centers are backed up by high-capacity battery systems. These battery systems provide continuous power to all production systems, including servers, monitors, telecommunications equipment and individual computers. In the event of an extended power outage, fuel-powered generators also provide backup power to the facilities. Each data center also serves as a backup facility to the other data centers. If one data center should experience a disruption, network traffic from that data center would be rerouted to one of the other operational data centers. This redundancy feature minimizes the risk of customer service disruption and allows for rapid response to an extended power or systems failure or other interruption. Off-site files are backed up on a daily basis to minimize the loss of stored customer information and to ensure system integrity in the event of a disaster. 11 14 SALES AND MARKETING Overview Our primary marketing efforts are focused on building awareness of our products and services among our target group of community financial institutions, identifying potential customers and establishing new strategic alliances. Our sales and marketing efforts are conducted through both direct and indirect channels. Direct Sales Channel. We use print advertisement, direct mail, telemarketing and trade shows to develop contacts at the senior officer level of target community financial institutions. These contacts are then passed along to regional sales personnel who follow up with the specific contact. Indirect Sales Channel. Our sales force also uses indirect sales methods to generate new customers. We engage third parties to refer financial customers that may be interested in purchasing our products and services. A sales staff member will then make a presentation to the proposed customer and, if successful, complete the transaction. We pay these third parties a commission based on the amount of sales of our products and services that result from their efforts. Strategic Marketing Alliances When evaluating Internet banking solutions, financial institutions usually focus on the ease of interfacing their existing core processing software with the Internet banking software. Core processing software is the central software used by a financial institution that processes information concerning banking transactions, such as deposits and withdrawals. The link between the core processing software and the Internet banking software allows for the transfer of transactional data between both software systems. We have formed a strategic marketing alliance with InterCept, a provider of integrated electronic commerce products and services for community financial institutions, as well as with vendors of core processing software and outsourced data processing services, all of which market our products and services to their customer bases. In addition, we have developed relationships with five bankers' banks to market and promote our services to their customers and shareholders, all of which are depository institutions. In September 1999, we entered into a General Marketing Agent Agreement with each of TIB The Independent Bankers Bank, The Bankers Bank, Pacific Coast Bankers' Bank and Atlantic Central Bankers' Bank. In January 2000, we also entered into a similar agreement with the First National Bankers' Bank. Pursuant to these agreements, each bankers' bank agrees to use its best efforts to promote and market our Internet banking products and services to community banks on an exclusive basis. In return, we pay commissions to each of these bankers' banks for all contracts with the community financial institutions. In addition to these obligations, each bankers' bank has agreed to conduct its business so as to maintain and increase our goodwill and reputation. In January 2000, we expanded our strategic marketing alliances through the acquisition of DVI. We entered into relationships with 22 commercial regional banks and broker dealers, pursuant to which each bank and broker dealer agrees to use its best efforts to promote and market our Internet-based PortPro(R) services to its financial institution customers. These alliances are with a variety of banking and brokerage institutions, including First Union Securities, Inc., First Tennessee Capital Markets, J.C. Bradford & Co., Inc., Zions Bank and Dain Rauscher, Inc. CUSTOMERS Our target market is the approximately 20,000 community financial institutions in the United States with assets of less than $10 billion each. Within this target market, we focus on (1) independent community financial institutions, including banks, savings and loan associations, thrifts, trust companies and credit unions, and (2) financial institutions that are associated with or shareholders of a bankers' bank, which in each case rely on one or more of the data processing vendors with which we have developed interfaces. We seek to expand the number of vendors with which we have interfaces. 12 15 As of December 31, 1999, we had over 7,000 institutional customers that bought one or more products from us. Over 700 of these customers were interactive customers, which are institutions that have purchased either an Internet or a voice response product. More than 450 customers have contracted for one or more of our Internet products. For the year ended December 31, 1999, no individual customer accounted for 10% or more of our total revenues. COMPETITION The market for Internet-based banking products and services is highly competitive, and we expect that competition will intensify in the future. The market in which we operate is highly fragmented, as more than 100 on-line service outsourcing companies provide Internet-based banking products and services in the United States. We face competition from at least four major sectors: - Providers of outsourced Internet banking services to community financial institutions, including, among others, Cavion Technologies, Inc., Corillian Corporation, Digital Insight Corporation, FundsXpress, Inc., Home Account Network, Inc., Online Resources and Communications Corporation, Q-Up Systems, Inc., S1 Corporation, Source One Software, Inc. and Sanchez Computer Associates, Inc. - Large vendors that offer transaction processing services to financial institutions and also market their own Internet banking solutions, including, among others, Electronic Data Systems Corporation, Fiserv Correspondent Services, Inc., Jack Henry & Associates, Inc. and Marshall & Ilsley Corporation. - Large financial institutions that provide competitive products and services to individuals and businesses, including BankOne, through its Internet subsidiary, Wingspan bank.com, and Citigroup, Inc., through its Internet subsidiary, e-Citi. Through their Internet banking products and services, these large financial institutions can obtain customers from communities in distant locations, effectively decreasing demand for our products and services in these markets. - Other wholesale regulatory support application vendors that provide similar products and services, including SunGard Financial Services, Inc. and Sheshunoff Information Services, Inc. - Internet portals such as E*TRADE, Yahoo!, RealEstate.com, E-LOAN, Lending Tree.com, and iXL Enterprises, which serve as an alternative to financial institutions' web sites. In addition, we could experience competition from our potential customer financial institutions that develop their own on-line banking solutions and other Internet-enabled functions. Rather than purchasing Internet-based products and services from third-party vendors, community financial institutions could develop, implement and maintain their own services and applications. We also believe that we face competition from the various competitive alternative approaches for Internet-based solutions, such as thin servers, fat clients (personal financial management software) and in-house development. Each of these alternatives competes with our fat server, outsourced solution. We believe that our ability to compete successfully depends upon a number of factors, including, among other things: - the comprehensiveness, expandability, ease of use and service level of our products and services; - our market presence with community financial institutions, which is enhanced by our strategic marketing alliances; - our pricing policies compared to the pricing policies of competitors and suppliers; - our ability to interface with vendors of core processing software and services; - the reliability, security, speed and capacity of our systems and technical infrastructure; - the timing of introductions of new products and services by us and our competitors; and - our ability to support unique customer requirements. 13 16 We expect competition to increase significantly as new companies enter the potential market area and current competitors expand their product lines and services. INTELLECTUAL PROPERTY Although we believe that our success depends more upon our technical expertise than our proprietary rights, our future success and ability to compete depends in part upon our proprietary technology and proprietary technology we may license from others. None of our technology is currently patented, except that we have pending patent applications in both the United States and Canada with respect to our PALMS(TM) asset/liability management software. Instead, we rely on a combination of contractual rights and copyright, trademark and trade secret laws to establish and protect our proprietary technology. We generally enter into confidentiality agreements with our employees, consultants, resellers, customers and potential customers. We also limit access to and distribution of our source code, and we further limit the disclosure and use of other proprietary information. The steps that we may take in this regard may not be adequate to prevent misappropriation of our technology or technology we license from others. Further, our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology or that which we license from others. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. GOVERNMENT REGULATION Regulation of the Financial Services Industry The financial services industry is subject to extensive and complex federal and state regulation. Our current and prospective customers, which consist of community financial institutions such as commercial banks, savings and loans, credit unions, thrifts, securities brokers, finance companies, other loan originators, insurers and other providers of financial services, operate in markets that are subject to rigorous regulatory oversight and supervision. Our customers must ensure that marketing our products and services to their customers is permitted by the extensive and evolving regulatory requirements applicable to those community financial institutions. These laws and regulations include federal and state truth-in-lending and truth-in-savings rules, usury laws, the Equal Credit Opportunity Act, the Fair Housing Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy Act and the Community Reinvestment Act. The compliance of our products and services with these requirements depends on a variety of factors, including the particular functionality, the interactive design and the classification of the customer. Our financial services customers must assess and determine what is required of them under these regulations and are responsible for ensuring that our system and the design of their sites conform to their regulatory needs. We do not make representations to customers regarding applicable regulatory requirements, and we rely on each customer to identify its regulatory issues and to adequately specify appropriate responses. It is not possible to predict the impact that any of these regulations could have on our business. We are not licensed by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the National Credit Union Administration or other federal or state agencies that regulate or supervise depository institutions or other providers of financial services. We are subject to examination by the federal depository institution regulators under the Bank Service Company Act and the Examination Parity and Year 2000 Readiness for Financial Institutions Act. These regulators have broad supervisory authority to remedy any shortcomings identified in any examination they may conduct. We are also subject to encryption and security export laws and regulations which, depending on future developments, could render our business or operations more costly, less efficient or impossible. Federal, state or foreign authorities could adopt laws, rules or regulations affecting our business operations, such as requiring compliance with data, record keeping and other processing requirements. We may become subject to additional regulation as the market for our business evolves. It is possible that laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, content, characteristics and quality of services and products. Existing regulations may be modified. 14 17 For example, we are not subject to the disclosure requirements of Regulation E of the Federal Reserve Board under the Electronic Fund Transfer Act, because we do not contract with consumers to provide them with electronic funds transfer services or provide access devices (such as cards, codes or other means of accessing accounts to initiate electronic funds transfers) to them. Regulation E regulates certain electronic funds transfers made by providers of access devices and electronic fund transfer services. Under Regulation E, our customers are required, among other things, to provide certain disclosures to retail customers using electronic transfer services, to comply with certain notification periods regarding changes in the terms of service provided and to follow certain procedures for dispute resolution. The Federal Reserve Board could adopt new rules and regulations for electronic funds transfers that could lead to increased operating costs and could also reduce the convenience and functionality of our services, possibly resulting in reduced market acceptance. The Gramm-Leach-Bliley Act On November 12, 1999, Congress passed the Gramm-Leach-Bliley Act (the "Act"), which introduced sweeping changes in the way the financial services industry is regulated. Among other things, the Act provides for greater restrictions upon the use and dissemination by financial institutions of non-public personal financial and other information regarding individuals who interact with financial institutions for personal, family or household purposes. The Act regulates the receipt and use of non-public personal financial information by both financial institutions and non-affiliated third parties to whom financial institutions may transmit such financial information. A financial institution is defined broadly as any person that contracts directly with individuals to provide financial services for personal, family or household purposes. Because we currently contract directly with individuals to provide them with such services, we would be subject to regulation under the Act as a financial institution. Further, because we receive financial information from our non-affiliated financial institution customers, we would also be regulated under the Act primarily by the Federal Trade Commission as a non-affiliated third party. When we act as a financial institution, the Act would require us to provide individuals with whom we interact (1) notice of our privacy policies, (2) the names of non-affiliated third parties to which we may provide non-public personal information and (3) the opportunity to opt out of having such information shared, except with respect to information that we may wish to provide an entity that provides services to us and in certain other circumstances. Even if that individual does not opt out at that time, he or she must be free to do so at any time after we provide the individual with the mandated disclosures. When we act as a non-affiliated third party providing services to financial institutions, we would be allowed under the Act to receive non-public personal information notwithstanding the fact that an individual has exercised his or her "opt out" rights. However, with respect to our ability to disseminate non-public personal information, we would be subject to the same restrictions as the financial institution, and thus would be prohibited from disseminating such information to others (except as otherwise permitted by the Act) if the customer has "opted out." The Act mandates that, no later than May 12, 2000, the various federal banking authorities, the Securities and Exchange Commission and the Federal Trade Commission must adopt final rules and regulations to implement these restrictions, including rules to define the term "non-public personal information." With the exception of the rulemaking requirements of the Act, the provisions of the Act will take effect six months after the date on which these rules are required to be adopted, unless a later effective date is specified in such rules. At present, these banking authorities and agencies have not adopted such rules and regulations, although the various banking authorities and the Federal Trade Commission have already issued proposed rules. Thus, we are unable to state at this time what effect the Act and, once adopted, the rules and regulations implementing the Act, may have on: - our business, results of operations and financial condition; - the ability of our customers and strategic partners to continue to do business with us; or 15 18 - our ability to attract new customers or strategic partners. However, the Act in its present form will restrict or prohibit our ability to offer third parties access to the financial information generated by our products and services to the extent that individuals to whom we provide such products and services, as well as individual customers of financial institutions, have exercised their "opt out" rights. In addition, we will have an ongoing obligation to continually inquire of financial institutions as to the "opt out" status of each individual financial institution customer, who has the ability to change such status at any time. Further, with respect to the information of each particular individual, we will be required to comply with the privacy policies that are adopted by the particular individual's financial institution, which may be different with respect to each such financial information. The rules and regulations under the Act, once adopted, may impose more stringent restrictions or prohibitions on our products, services and operations. Once effective, it is possible that the Act and the rules that will be promulgated thereunder could have a material adverse effect upon our business, results of operations and financial condition. Finally, the Act specifically allows the states to enact consumer privacy laws that may be stricter than that the restrictions under the Act and other federal laws. Several states are already considering such legislation, and it is possible that every state in which we do business could adopt privacy legislation that may be as or more restrictive than the Act. To the extent that additional or more restrictive privacy legislation is adopted by the states, such legislation could make our operations more difficult or burdensome and could significantly increase the cost of our existing, or curtail future, operations. Our responsibilities with respect to compliance with privacy laws that may vary from state to state could increase the overall costs incurred by us to provide our products and services on a nationwide basis. In this regard, the passage of state privacy legislation could have a material adverse effect on our business, results of operations and financial condition. Taxation of E-Commerce A number of proposals at the federal, state and local level and by certain foreign governments would, if enacted, expand the scope of regulation of Internet-based financial services and could impose taxes on the sale of goods and services made over the Internet and certain other Internet activities. Any development that substantially impairs the growth of the Internet or its acceptance as a medium for commerce or transaction processing could have a material adverse effect on our business, financial condition and operating results. EMPLOYEES As of December 31, 1999, we had approximately 145 full-time employees and five part-time employees. None of our employees is covered by a union or a collective bargaining agreement. We have not experienced any work stoppages and we consider relations with our employees to be good. ITEM 2. PROPERTIES Our principal executive office consists of 25,179 square feet of leased space located in Atlanta, Georgia. As of March 20, 2000, we also leased the following additional locations:
LOCATION PRIMARY USE APPROXIMATE SQUARE FEET - -------- ----------- ----------------------- Birmingham, Alabama............ Administration, sales and 15,747 product management Birmingham, Alabama............ Remote banking center 6,514 Bloomington, Minnesota(1)...... Regulatory reporting and 11,867 support applications Calabasas Hills, California.... Regulatory reporting and 6,000 support applications
16 19
LOCATION PRIMARY USE APPROXIMATE SQUARE FEET - -------- ----------- ----------------------- Cordova, Tennessee............. Sales and implementation 3,350 Elizabethtown, Kentucky........ Bill payment services 2,600 Lewisville, Texas.............. Sales and implementation 3,660 St. Louis Park, Minnesota(2)... Regulatory reporting and 5,641 support applications
- --------------- (1) We entered into this lease on February 4, 2000, effective May 1, 2000. (2) This lease expires on April 30, 2000 and will not be renewed. We believe that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. ITEM 3. LEGAL PROCEEDINGS From time to time, we may be involved in litigation arising in the normal course of our business. We are not a party to any litigation, individually or in the aggregate, that we believe would have a material adverse effect on our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our common stock, no par value, has been traded on the Nasdaq National Market under the symbol "NETZ" since November 9, 1999. The low and high sales prices for our common stock from November 9, 1999 to December 31, 1999, as reported by the Nasdaq National Market, were $13.0625 and $18.00, respectively. As of March 20, 2000, our common stock was held of record by approximately 77 persons. DIVIDENDS ON SHARES OF OUR CAPITAL STOCK We have not paid cash dividends on our common stock and do not anticipate paying any such dividends on our common stock in the foreseeable future. On January 31, 2000, we paid a dividend of approximately $24,200 on our Series A preferred stock for the period from December 15, 1999 to December 31, 1999. RECENT SALES OF UNREGISTERED SECURITIES Formation and Related Issuances On September 3, 1999, in connection with the merger of Direct Access with and into Netzee, we issued 11,735,000 shares of common stock to the former shareholders of Direct Access. We also issued options to purchase in the aggregate 610,000 shares of common stock at exercise prices of $2.00 and $3.11 per share to 17 20 persons who had been issued options to purchase Direct Access common stock. These options vest and become exercisable as follows:
NUMBER OF SHARES SUBJECT TO OPTIONS GRANTED VESTING SCHEDULE - ------------------------------------------- ---------------- 270,000...................................... These options will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. 200,000(1)................................... One fourth of these options vested and became immediately exercisable as of the date of grant, 75,000 shares subject to this option became immediately exercisable on November 15, 1999 and the remainder will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. 170,000...................................... One half of these options vested as of November 15, 1999. The remainder will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant.
- --------------- (1) In August 1999, 30,000 of these options were exercised prior to being assumed by Netzee. On September 3, 1999, in connection with the merger of Dyad with and into Netzee, we issued 618,137 shares to certain former shareholders of Dyad. On September 3, 1999, we issued 1,361,000 shares of common stock to each of TIB and The Bankers Bank in connection with the acquisition of the Internet banking divisions of each of these bankers' banks. On September 9, 1999, we sold 31,100 shares of common stock to certain former employees of Call Me Bill, LLC for $10.50 per share. Option Issuances to Employees, Directors and Consultants On September 7, 1999, we issued to certain of our executive officers, directors and employees options to purchase an aggregate of 220,000 shares of common stock at an exercise price of $3.11 per share. No shares of common stock have been issued pursuant to the exercise of these options. These options vest and become exercisable as follows:
NUMBER OF SHARES SUBJECT TO OPTIONS GRANTED VESTING SCHEDULE - ------------------------------------------- ---------------- 200,000...................................... One half of these options vested and became immediately exercisable on November 15, 1999. The remainder will vest and become exercisable in three equal installments on the first, second and third anniversaries on the date of grant. 20,000....................................... Two fifths of these options vested and became immediately exercisable on November 15, 1999. The remainder will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant.
18 21 On September 7, 1999, we issued to certain of our directors, employees and consultants options to purchase an aggregate of 1,019,000 shares of common stock at an exercise price of $5.00 per share. We have issued 500 shares of common stock pursuant to the exercise of these options. These options vest and become exercisable as follows:
NUMBER OF SHARES SUBJECT TO OPTIONS GRANTED VESTING SCHEDULE - ------------------------------------------- ---------------- 629,000...................................... These options will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. 280,000...................................... One fourth of these options vested and became exercisable on the date of grant. The remainder will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. 100,000...................................... One half of these options vested and became immediately exercisable on November 15, 1999. The remainder will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. 10,000....................................... One third of these options vested and became immediately exercisable on November 15, 1999. One-third of these options will vest and become exercisable on the first anniversary of the date of grant. The remaining one-third of these options will vest and become exercisable on the second anniversary of the date of grant.
On October 19, 1999, we issued to certain of our executive officers and directors options to purchase an aggregate of 330,000 shares of common stock, at an exercise price of $14.00 per share. No shares of common stock have been issued pursuant to the exercise of these options. These options vest and become exercisable as follows:
NUMBER OF SHARES SUBJECT TO OPTIONS GRANTED VESTING SCHEDULE - ------------------------------------------- ---------------- 250,000...................................... These options vested and became immediately exercisable on November 15, 1999. 80,000....................................... One fourth of these options vested and became immediately exercisable on the date of grant. The remainder of these options will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant.
On November 9, 1999, we issued to certain of our employees, officers and consultants options to purchase an aggregate of 327,000 shares of common stock at exercise prices of $5.00 and $14.00 per share. No shares of common stock have been issued pursuant to the exercise of these options. These options vest and become exercisable as follows:
NUMBER OF SHARES SUBJECT TO OPTIONS GRANTED VESTING SCHEDULE ------------------------------------------- ---------------- 322,000...................................... These options will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. 5,000........................................ These options vest and become exercisable in twelve equal monthly installments beginning on the date of grant and ending one year after the date of grant.
19 22 On November 9, 1999, we issued an award of 75,000 shares of restricted stock to one of our executive officers. The restricted stock will vest in three equal installments over a three-year period from the date of grant so long as the executive officer is employed by Netzee or a subsidiary as of each such vesting date. Upon termination of the executive officer's employment, all shares of stock under this award that have not vested will be forfeited as of the date of such termination. Between November 15, 1999 and November 29, 1999, we issued to certain of our employees options to purchase in the aggregate 11,000 shares of common stock at exercise prices ranging from $14.19 to $15.00 per share. No shares of common stock have been issued pursuant to the exercise of these options. The options will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. In December 1999, we issued to certain of our employees options to purchase in the aggregate 298,500 shares of common stock at exercise prices ranging from $14.19 to $14.75 per share. No shares of common stock have been issued pursuant to the exercise of these options. These options will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. In January 2000, we issued to certain of our employees options to purchase in the aggregate 62,000 shares of common stock at exercise prices ranging from $15.25 to $15.94 per share. No shares of common stock have been issued pursuant to the exercise of these options. These options will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. In March 2000, we issued to certain of our employees and officers options to purchase an aggregate of 223,000 shares of common stock at exercise prices between $21.125 and $22.125 per share. No shares of common stock have been issued pursuant to the exercise of these options. These options vest and become exercisable as follows:
NUMBER OF SHARES SUBJECT TO OPTIONS GRANTED VESTING SCHEDULE - ------------------------------------------- ---------------- 123,000...................................... These options will vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. 100,000...................................... These options vest and become exercisable in two equal installments on the first and second anniversaries of the date of grant.
On February 11, 2000, Netzee filed a registration statement on Form S-8 to register up to 4,816,768 shares of common stock issuable under the Netzee, Inc. 1999 Stock Option and Incentive Plan (the "Plan"). As of March 20, 2000, 75,000 shares of restricted stock and options to purchase an aggregate of 3,170,919 shares of common stock have been awarded under the Plan, of which options to purchase 500 shares have been exercised and options to purchase 7,500 shares have been forfeited to us. Issuances to DPSC Software, Inc. On December 15, 1999, we issued 525,000 shares of common stock and 500,000 shares of Series A 8% Convertible Preferred Stock (the "Preferred Stock") in connection with the acquisition of substantially all the assets and the assumption of certain of the liabilities of DPSC relating to its business of developing, marketing and distributing financial institution software and related products and services. Of these shares, 295,000 shares of common stock and 150,000 shares of Preferred Stock were placed in escrow for indemnification and other purposes, of which 175,000 shares of common stock have been released from such escrow. In connection with these issuances, we also granted to the former shareholders of DPSC demand and piggyback registration rights with respect to the shares of common stock issued in the acquisition and the shares of common stock that may be received upon the conversion of the Preferred Stock into common stock. The Preferred Stock entitles the holder thereof to receive cumulative cash dividends when, as and if declared by our Board of Directors at the rate of 8% per year. Dividends shall accrue each day and must be paid in full before any dividend may be paid on any stock ranking junior to the Preferred Stock, including the 20 23 common stock. The Preferred Stock is also entitled to receive a preferential liquidation payment upon the liquidation, dissolution or winding up of Netzee for any reason. This payment must be made before the payment or distribution of any assets of Netzee in liquidation to the holders of any stock ranking junior to the Preferred Stock, including the common stock. The shares of Preferred Stock are immediately convertible into an aggregate of 411,067 shares of common stock, subject to certain anti-dilution adjustments. The Preferred Stock is also redeemable at our option if the average closing price of our common stock for any four week period equals or exceeds $26.00 per share. Issuances Pursuant to the Acquisition of Digital Visions, Inc. On March 7, 2000, we issued 838,475 shares of common stock in connection with the acquisition of substantially all the assets of DVI. Of these shares, 83,847 shares were placed in escrow for indemnification and other purposes. We also granted to DVI the right to receive up to 628,272 shares of common stock upon the attainment of certain revenue targets in fiscal years 2000 and 2001. We also issued options to purchase 70,419 shares of our common stock in exchange for the cancellation of options to purchase DVI common stock. In connection with the acquisition of DVI, we issued 8,377 shares of our common stock to a financial advisor. Other Issuances On September 9 and 10, 1999, we issued 289,617 shares of common stock to persons who certified to Netzee that they were "accredited investors" as defined in Regulation D of the Securities Act. We received a total of $585,000 in consideration for these shares. On October 18, 1999, we issued an immediately exercisable warrant to purchase up to 461,876 shares of common stock at an exercise price of $3.25 per share. We issued this warrant as consideration for extending a $3,000,000 three-year line of credit to us, which was terminated as of December 15, 1999. On March 2, 2000, the holders of this warrant exercised it in full and received in the aggregate 461,876 shares of common stock. The issuances of the securities in all of the transactions described in "Recent Sales of Unregistered Securities" were deemed to be exempt from registration under the Securities Act in reliance on sections 3(b) and 4(2) of the Securities Act, including Rules 506 and 701 promulgated thereunder, and the Commission's interpretations of such provisions, as transactions by an issuer not involving any public offering. All recipients of common and preferred stock described above were persons whom we believed were accredited investors within the meaning of Regulation D of the Securities Act. Appropriate legends were affixed to the share certificates issued in the transactions described above and we did not engage in any general solicitation or advertising in connection with offers or sales of these securities. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, our Consolidated Financial Statements and the related Notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K, as well as with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7. The selected consolidated financial data prior to February 28, 1999 reflect the financial position and results of operations of our predecessor, Direct Access, which was formed in October 1996. We acquired Direct Access on March 9, 1999; however, the financial data below is presented as if the acquisition occurred on March 1, 1999. The activity between March 1, 1999 and March 9, 1999 was immaterial. The purchase method of accounting was used to record the assets and liabilities of Direct Access. The selected consolidated financial data of our predecessor on or before February 28, 1999 is not comparable in all material respects with our financial information after February 28, 1999. The selected consolidated financial data as of December 31, 1997, 1998 and 1999, for the period from inception (October 10, 1996) to December 31, 1996, for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999 and for the period from March 1, 1999 to December 31, 1999, have been derived from our consolidated financial statements, which have been audited by Arthur 21 24 Andersen LLP, independent public accountants. The selected consolidated financial data as of December 31, 1996, have been derived from our unaudited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the information.
PREDECESSOR NETZEE, INC. -------------------------------------------------------------- ----------------- FOR THE PERIOD FROM INCEPTION FOR THE PERIOD FOR THE PERIOD (OCTOBER 10, FROM JANUARY FROM MARCH 1, 1996) TO YEAR ENDED YEAR ENDED 1, 1999 TO 1999 TO DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 28, DECEMBER 31, 1996 1997 1998 1999 1999(1) -------------- ------------- ------------ -------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Monthly maintenance and service................... $ 4 $ 59 $ 136 $ 33 $ 1,738 License, hardware and implementation............ 41 583 455 57 522 ------ ------ ------ ----- --------- Total revenues....... 45 642 591 90 2,260 Operating expenses: Costs of service, license, hardware, implementation and maintenance........... 50 422 465 44 1,914 Selling and marketing........ 12 77 111 12 2,575 General and administrative, excluding amortization of stock-based compensation.............. 36 231 332 49 1,845 Amortization of stock-based compensation.............. 0 0 0 0 4,592 Depreciation................. 2 11 15 3 190 Amortization................. 0 0 0 0 12,863 ------ ------ ------ ----- --------- Total operating expenses........... 100 741 923 108 23,979 ------ ------ ------ ----- --------- Operating loss................. (55) (99) (332) (18) (21,719) Interest expense, net.......... 0 0 (20) (4) (671) ------ ------ ------ ----- --------- Loss before extraordinary loss......................... (55) (99) (352) (22) (22,390) Extraordinary loss............. 0 0 0 0 (4,519) ------ ------ ------ ----- --------- Net loss before preferred dividends.................... (55) (99) (352) (22) (26,909) Preferred dividends............ 0 0 0 0 (24) ------ ------ ------ ----- --------- Net loss attributable to common shareholders................. $ (55) $ (99) $ (352) $ (22) $ (26,933) ====== ====== ====== ===== ========= Basic and diluted loss per share before extraordinary item(2)...................... (0.01) (0.01) (0.04) (1.94) Extraordinary loss per share... 0 0 0 (0.40) ------ ------ ------ --------- Basic and diluted net loss per share(2)..................... $(0.01) $(0.01) $(0.04) $ (2.34) ====== ====== ====== ========= Weighted average common shares outstanding(2)(3)............ 8,000 8,000 8,000 11,542
- --------------- (1) On August 6, 1999, we acquired SBS in a transaction accounted for as a purchase, and its results of operations have been included in our consolidated financial statements since the date of acquisition. On September 3, 1999, we acquired Call Me Bill, Dyad and the Internet banking divisions of TIB and The 22 25 Bankers Bank, in transactions accounted for as purchases, and their results of operations have been included in our consolidated financial statements since the date of acquisition. On December 15, 1999, we acquired DPSC in a transaction accounted for as a purchase, and its results of operations have been included in our consolidated financial statements since the date of acquisition. See Note 3 of the Notes to Consolidated Financial Statements. (2) Weighted average common shares shown for the period from March 1, 1999 to December 31, 1999 is calculated by assuming a calculation period from January 1, 1999 to December 31, 1999. Basic and diluted net loss per share for the period from March 1, 1999 to December 31, 1999 is calculated from net loss for the period from January 1, 1999 to February 28, 1999 and the period from March 1, 1999 to December 31, 1999 divided by weighted average shares as noted. (3) Weighted average common shares outstanding for the years ended December 31, 1997 and 1998, reflect the initial investment of InterCept in the Predecessor. InterCept was the former parent company of the Predecessor and owned all of its capital stock prior to September 3, 1999.
PREDECESSOR NETZEE, INC. -------------------- ------------ DECEMBER 31, DECEMBER 31, -------------------- ------------ 1996 1997 1998 1999 ---- ----- ----- ------------ BALANCE SHEET DATA (IN THOUSANDS): Cash........................................................ $13 $ 28 $ 14 $11,255 Working capital............................................. (53) (94) (499) 4,798 Total assets................................................ 72 88 94 143,244 Long-term debt, net of current portion...................... 0 0 0 12,173 Total shareholders' (deficit) equity........................ (4) (103) (455) 120,380
23 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes and other financial information included elsewhere in this Annual Report. This discussion also contains certain forward-looking statements which are subject to, but not limited to, the risks and uncertainties included in "Factors That May Affect Future Our Results of Operations or Financial Condition" below and elsewhere in this Annual Report. OVERVIEW Netzee is a provider of retail and wholesale products and services and Internet commerce solutions to meet the needs of community financial institutions in the United States with assets of less than $10 billion. We provide cost-effective, outsourced, secure and scalable retail solutions that enable financial institutions to offer their customers a wide array of financial products and services over the Internet. In addition, we provide a wholesale group of products and services that fulfills the operational and regulatory requirements of financial institutions. Direct Access, our predecessor entity, was acquired by InterCept in March 1999. During the third quarter of 1999, we completed a series of acquisitions to provide us with additional strategic marketing partners and complementary products and services to integrate into our existing Internet banking operations. We have accounted for each of these acquisitions to date using the purchase method of accounting. On August 6, 1999, Direct Access acquired the remote banking operations of SBS Corporation ("SBS"). This acquisition provided Direct Access with additional customers, strategic marketing partners and the Banking on Main Street(TM) Internet commerce software. On September 3, 1999, after the formation of Netzee and its merger with Direct Access, we acquired the Internet banking divisions of TIB and The Bankers Bank, which provided strategic marketing access to the approximately 1,300 community financial institution customers of these two bankers' banks, as well as to business cash management software that was added to our existing suite of products and services. On September 3, 1999, we also acquired Call Me Bill and Dyad. Call Me Bill provides electronic bill payment services and Dyad provided loan application, procurement and fulfillment software. As a result of these acquisitions and other related stock issuances, InterCept's ownership interest in Netzee was reduced below 50 percent. We completed our initial public offering in November 1999. We issued 4,400,000 shares of common stock, including the exercise of a portion of the underwriter's over-allotment option, at an offering price of $14 per share. Our net proceeds from the offering were approximately $54.9 million after deducting underwriters' discounts, commissions and expenses of the offering. The proceeds were used to repay principal and accrued interest owed to InterCept, to fund working capital requirements, and to acquire DPSC. On December 15, 1999, we acquired DPSC, which provided regulatory reporting and portfolio management software primarily to community financial institutions. This acquisition provided an enhanced group of products to further differentiate us from our competition and allowed us access to the more than 7,000 financial institutions currently utilizing DPSC's specialized software. We collectively refer to Call Me Bill, DPSC, Dyad, the remote banking operations of SBS, and the Internet banking divisions of the two bankers' banks as the "Acquired Entities." We have historically derived our revenues from software license, hardware and implementation fees for Internet and telephone banking products and services. Historically, software license, hardware and implementation fees were recognized upon implementation, and maintenance and service fees were recognized on a monthly basis as the services were provided. 24 27 During the third and fourth quarter of 1999, we changed pricing policies for our existing retail products and services and modified the pricing policies of the Acquired Entities to match more closely our new pricing policies. These pricing policies are summarized as follows: Internet Banking. We charge a fixed monthly fee based on the number of Internet services purchased by the financial institution and variable fees that are based on the number of end users and the number of transactions. We generally provide Internet banking products and services under contracts with terms ranging from three to five years. Telephone Banking. We charge a fixed monthly fee for providing telephone banking products. We do not charge additional fees based on the number of financial institution customers who actually use the telephone banking product. Regulatory Reporting and Support Applications. We charge an annual software subscription fee based on the software products purchased. As a result of these new pricing policies, we believe that recurring monthly maintenance and service fees will constitute a significantly greater percentage of total revenues in the future. We also believe that Internet banking products and services, Internet commerce solutions and regulatory reporting and support applications will comprise a significantly greater percentage of total revenues in the future, and that telephone banking products will continue to decrease as a percentage of total revenues. Our costs of service, license, hardware, implementation and maintenance are comprised of the initial equipment and personnel costs required to implement Internet and telephone banking for the financial institution, production and shipping expenses associated with our regulatory reporting and support applications, and the ongoing personnel and system maintenance costs associated with our data centers. Although we have experienced significant growth in customers and revenues, we have incurred substantial operating losses and negative cash flows from operations due to changing pricing structure, increasing the sales staff, expanding data center operations, and increasing the support staff required to support our rapid growth. We expect to continue to incur substantial operating losses and negative cash flows in the foreseeable future. 25 28 RESULTS OF OPERATIONS The following table sets forth the results of our operations for the years ended December 31, 1997, 1998 and 1999. These operating results are not necessarily indicative of our future results.
YEARS ENDED DECEMBER 31, ------------------------------------- 1997 1998 1999(1) ---------- --------- ------------ REVENUES: Monthly maintenance and service........................ $ 59,013 $ 136,141 $ 1,770,674 License, hardware and implementation................... 583,086 454,871 579,239 ---------- --------- ------------ Total revenues................................. 642,099 591,012 2,349,913 ---------- --------- ------------ OPERATING EXPENSES: Costs of service, license, hardware, implementation and maintenance......................................... 422,375 465,577 1,958,318 Selling and marketing.................................. 77,050 110,603 2,587,607 General and administrative, excluding amortization of stock-based compensation............................ 231,147 331,810 1,894,028 Amortization of stock-based compensation............... 0 0 4,591,888 Depreciation........................................... 10,547 14,736 193,000 Amortization........................................... 0 0 12,863,016 ---------- --------- ------------ Total operating expenses....................... 741,119 922,726 24,087,857 ---------- --------- ------------ Operating loss........................................... (99,020) (331,714) (21,737,944) Interest expense, net.................................... (117) (20,147) (673,972) ---------- --------- ------------ Loss before extraordinary loss........................... (99,137) (351,861) (22,411,916) Extraordinary loss....................................... 0 0 (4,518,760) ---------- --------- ------------ Net loss before preferred dividends...................... (99,137) (351,861) (26,930,676) Preferred dividends...................................... 0 0 (24,200) ---------- --------- ------------ Net loss attributable to common shareholders............. $ (99,137) $(351,861) $(26,954,876) ========== ========= ============ Basic and diluted loss per share before extraordinary item................................................... $ (0.01) $ (0.04) $ (1.94) Extraordinary loss per share............................. 0 0 (0.40) ---------- --------- ------------ Basic and diluted net loss per share..................... $ (0.01) $ (0.04) $ (2.34) ========== ========= ============ Cash loss(2)............................................. $ (99,137) $(351,861) $ (4,981,212) ========== ========= ============ Cash loss per share(2)................................... $ (0.01) $ (0.04) $ (0.43) ========== ========= ============ Weighted average common shares outstanding............... 8,000,000 8,000,000 11,542,034 ========== ========= ============
- --------------- (1) The results of operations for the Predecessor from January 1, 1999 to February 28, 1999 and the results of operations for Netzee for the period from March 1, 1999 to December 31, 1999 have been combined for comparative purposes. (2) Cash loss is defined as net loss attributable to the common shareholders, excluding the effect of amortization of intangibles, stock-based compensation and extraordinary items. Cash loss and cash loss per share are not measures of financial performance under generally accepted accounting principles and should not be considered as an alternative either to net loss attributable to common shareholders as an indicator of our operating performance, or to cash flow as a measure of our liquidity. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 The Predecessor was acquired on March 9, 1999, which established a new basis of accounting for certain of our assets and liabilities. The purchase method of accounting was used to record assets acquired and liabilities assumed by Netzee. Such accounting generally results in increased amortization reported in future 26 29 periods. Although the Predecessor was acquired on March 9, 1999, the financial statements of the Predecessor have been presented as if the acquisition occurred on the close of business on February 28, 1999 instead of March 9, 1999. The operations between March 1, 1999 and March 9, 1999 were not material. The results of operations for the Predecessor from January 1, 1999 to February 28, 1999 and for Netzee for the period from March 1, 1999 to December 31, 1999 as shown in our Consolidated Financial Statements have been combined for comparative purposes. Revenues Total revenues increased approximately $1.76 million or 298% from approximately $591,000 for the year ended December 31, 1998 to approximately $2.35 million for the year ended December 31, 1999. This increase consisted of an increase of approximately $1.63 million in monthly maintenance and service revenues due primarily to the increase in the number of financial institution customers obtained from the Acquired Entities. Costs of service, license, hardware, and implementation Total costs of service, license, hardware and implementation increased approximately $1.49 million or 321% from approximately $466,000 for the year ended December 31, 1998 to approximately $1.96 million for the year ended December 31, 1999. The increase in the costs of service, license, hardware and implementation was due primarily to an increase in the number of new institutional customers for which we have installed our products. Additionally, we experienced increased data center costs required to support the increase in the total number of institutions to which we provided services. Selling and marketing expenses Selling and marketing expenses include marketing and advertising expenses, sales commissions, and sales employee compensation and benefits. Commissions are paid to sales personnel based on products and services sold. Total selling and marketing expenses increased approximately $2.48 million from approximately $111,000 for the year ended December 31, 1998 to approximately $2.59 million for the year ended December 31, 1999. The increase in selling and marketing expenses was due primarily to an increase in sales personnel, an increase in sales commissions due to additional sales and an increase in advertising expenses. General and administrative expenses General and administrative expenses include employee compensation and benefits and general office expenses incurred in the ordinary course of business. General and administrative expenses increased approximately $1.56 million or 471% from approximately $332,000 for the year ended December 31, 1998 to approximately $1.89 million for the year ended December 31, 1999. The increase in general and administrative expenses was due primarily to increases in overall business and operating activities and an increase in the number of employees obtained from the Acquired Entities and added to support our rapid growth. Depreciation Total depreciation increased approximately $178,000 from approximately $15,000 for the year ended December 31, 1998 to approximately $193,000 for the year ended December 31, 1999. This increase was due primarily to the depreciation of acquired assets and from depreciation associated with capital acquisitions used to support the growth of the Company. Interest expense, net Total net interest expense increased approximately $654,000 from approximately $20,000 for the year ended December 31, 1998 to approximately $674,000 for the year ended December 31, 1999. The increase was due primarily to additional debt incurred in connection with the acquisitions of the Acquired Entities and to fund our operations during the year ended December 31, 1999. 27 30 Amortization of stock-based compensation Stock-based compensation consists of amortization of deferred compensation for certain stock options granted during 1999 with an exercise price below fair market value, compensation expense for stock sold to an employee at a price below fair market value, and compensation expense for stock awarded to an employee. Stock-based compensation expense was $4.59 million for the year ended December 31, 1999. Amortization Amortization of intangible assets relates to purchase accounting adjustments resulting from our acquisitions. Intangible assets are being amortized over lives ranging from two to five years. Amortization expense was $12.86 million for the year ended December 31, 1999. Extraordinary Loss The extraordinary loss relates to the termination of a line of credit agreement in December 1999. To obtain the original line of credit, we issued warrants and recognized a deferred financing asset related to the warrants. Upon termination of the line, we incurred a one-time $4.5 million expense representing the unamortized balance of this asset. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenues Total revenues decreased approximately $51,000 or 8% from approximately $642,000 for the year ended December 31, 1997 to approximately $591,000 for the year ended December 31, 1998. License, hardware and implementation revenues decreased approximately $128,000 from approximately $583,000 for the year ended December 31, 1997 to approximately $455,000 for the year ended December 31, 1998. The decrease was due to a decrease in sales to new financial institution customers for the year ended December 31, 1998 as compared to the year ended December 31, 1997, and was partially offset by an increase in monthly service fee revenues. Costs of service, license, hardware, and implementation The costs of service, license, hardware, and implementation increased approximately $43,000 or 10% from approximately $422,000 for the year ended December 31, 1997 to approximately $466,000 for the year ended December 31, 1998. The increase occurred primarily because we provided monthly maintenance and service to an increased number of customers for the year ended December 31, 1998 as compared to the year ended December 31, 1997. Selling and marketing expenses Selling and marketing expenses increased approximately $34,000 or 44% from approximately $77,000 for the year ended December 31, 1997 to approximately $111,000 for the year ended December 31, 1998. The increase was due primarily to an increase in sales personnel and associated sales commissions. General and administrative expenses General and administrative expenses increased approximately $101,000 or 44% from approximately $231,000 for the year ended December 31, 1997 to approximately $332,000 for the year ended December 31, 1998. The increase in general and administrative expenses was due primarily to an increase in rent expense. Depreciation Depreciation expense increased approximately $4,000 from approximately $11,000 for the year ended December 31, 1997 to approximately $15,000 for the year ended December 31, 1998. This increase was primarily due to depreciation related to new property and equipment purchases. 28 31 Interest expense, net Net interest expense increased approximately $20,000 from the year ended December 31, 1997 to approximately $20,000 for the year ended December 31, 1998 due to the establishment and use of a line of credit to fund our operations. LIQUIDITY AND CAPITAL RESOURCES Prior to its acquisition by InterCept, the Predecessor financed operations through contributions from shareholders and draws on a line of credit. Upon the Predecessor's acquisition by InterCept, the line of credit was paid in full and terminated. Following the acquisition by InterCept, operations were financed through cash flow from operations and contributions and borrowings from InterCept, as discussed below. On August 6, 1999 and September 3, 1999, we issued three promissory notes to InterCept in an aggregate principal amount of approximately $28.9 million. We used the proceeds of these three promissory notes to fund our acquisitions of SBS, Call Me Bill and Dyad. These notes bore interest at a rate of prime plus 2% per year. InterCept also agreed to loan us additional funds to the extent necessary to fund our working capital and general corporate requirements prior to the date of our initial public offering. All outstanding balances due to InterCept related to these promissory notes were repaid with proceeds from our initial public offering. In October 1999, we borrowed approximately $1.3 million for capital expenditures from a financial institution. This loan bears interest at LIBOR plus 2%. We are required to make monthly principal payments of $8,621 plus interest. The loan matures on October 1, 2004, at which time we must make a balloon payment of approximately $936,300 plus any remaining interest then due. In November 1999, we completed our initial public offering. We issued 4,400,000 shares of common stock (including the partial exercise of the underwriters' over-allotment option) at an offering price of $14 per share. We received net proceeds from the offering of approximately $54.9 million after deducting underwriters' discounts, commissions and expenses of the offering. On December 15, 1999, we acquired DPSC in exchange for approximately $18.5 million in cash, 500,000 shares of Series A 8% cumulative convertible preferred stock, 525,000 shares of common stock, the payment of other acquisition costs of approximately $1.0 million, and the assumption of certain operating liabilities. In conjunction with the acquisition of DPSC, we received a commitment for a $15 million line of credit from InterCept. Borrowings on the line will bear interest at a rate of prime plus 2%. As of December 31, 1999, we had borrowed approximately $11.0 million from InterCept on terms consistent with this commitment. After December 31, 1999, we repaid a portion of these borrowings with cash on hand. On March 24, 2000, pending the finalization of the line of credit, we issued a promissory note to InterCept in the principal amount of approximately $7.8 million, which reflects the amount borrowed under terms consistent with the commitment as of that date. This note bears interest at a rate of prime plus 2% and is secured by substantially all of our assets. Accrued interest under this note is payable monthly beginning May 1, 2000. These borrowings are being used to fund working capital requirements. Our operating activities used cash of approximately $33,000, $226,000 and $2.5 million for the years ending December 31, 1997, December 31, 1998 and December 31, 1999, respectively. Cash used in operating activities resulted primarily from our operating loss. Our investing activities used cash of approximately $2,000, $18,000, and $53.2 million for the years ending December 31, 1997, December 31, 1998 and December 31, 1999, respectively. The cash used in investing activities resulted from the acquisitions of the Acquired Entities and the purchase of property, equipment and external software development. Our financing activities generated cash of approximately $50,000, $229,000 and $66.9 million for the years ending December 31, 1997, December 31, 1998 and December 31, 1999, respectively. The cash generated by financing activities for the year ended December 31, 1999 resulted primarily from proceeds from private placements of common stock, our initial public offering and borrowings from our line of credit facility. 29 32 We believe that our existing capital resources, together with cash provided by our operations, will be sufficient to fund our working capital requirements for the next 12 months. If we expand more rapidly than currently anticipated, if our working capital requirements exceed our current expectations, or if we make additional acquisitions, we may need to raise additional capital either through debt or equity sources before that time. We cannot be sure that we will be able to obtain the additional financing necessary to satisfy these additional capital requirements or to implement our growth strategy on acceptable terms or at all. If we cannot obtain this financing on terms acceptable to us, we may be forced to curtail some planned business expansion and may be unable to fund our ongoing operations. YEAR 2000 ISSUE The year 2000 issue refers to the problems that may have arisen from the improper processing of dates and date-sensitive calculations by computers and embedded microprocessors as the year 2000 was reached. These problems generally arose from the fact that most computer hardware and software components historically have been programmed to use only two digits to identify the year in a date. For example, the computer would recognize a code of "00" as the year 1900 rather than the year 2000. Effect of Year 2000 on Operations As of March 20, 2000, we had not encountered any significant year 2000 business interruptions or losses, either from our own systems or from those of our suppliers or customers. Costs As of December 31, 1999, we had incurred approximately $110,000 in costs associated with the year 2000 issue and the implementation of our year 2000 plan. All costs associated with our year 2000 plan were expensed, except those which were capital in nature. FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OF OPERATIONS OR FINANCIAL CONDITION Because we have a limited operating history in a rapidly evolving industry, it is difficult to evaluate our business and prospects We were incorporated in August 1999 as the successor to a company which had operated only since October 1996. We have completed seven acquisitions since August 1999. See "Business -- Formation of Netzee." Because key members of our management team came from different entities, the members of our senior management team have only worked together for a short time. Therefore, it is difficult to evaluate us and our prospects. The risks we will face as an early stage company with a new management team in the new and rapidly evolving Internet banking and commerce markets. These risks include our inability to: - integrate successfully the Acquired Entities and the senior management personnel that joined us from each Acquired Entity; - develop, test, market and sell our products and services; - expand successfully our sales and marketing efforts; - maintain our current, and develop new, strategic marketing alliances; - promote acceptance of our products and services by our community financial institution customers and their customers; - respond effectively to competitive pressures; and - continue to develop and upgrade our technology. We may not succeed in achieving any or all of these goals, and current evaluations of us and our prospects may prove to be inaccurate. We may never achieve or sustain profitability. 30 33 We have a history of losses and anticipate losses in the future, and we may never become profitable We incurred net losses of approximately $27 million for the year ended December 31, 1999. We expect to incur significant operating losses in the foreseeable future. We will need to generate significant revenues to achieve and maintain profitability, and we cannot give assurances that we will be able to do so. Our revenues for the year ended December 31, 1999 were approximately $2.3 million, and our operating expenses for the year were approximately $24.1 million. We plan to increase significantly our sales and marketing, research and development and general and administrative expenses throughout the remainder of 2000 and for the foreseeable future. Our expenses are partially based on our expectations regarding future revenues and are largely fixed in nature, particularly in the short term. If our revenues grow more slowly than we anticipate or if we cannot control our operating expenses, our financial performance will be adversely affected. We are currently experiencing a period of significant growth that may place a strain on our resources We have experienced significant growth in our operations through recent acquisitions, and we expect to continue to grow rapidly. Expansion of our business will place additional demands on our management, operational capacity and financial resources. Our current management, sales, technical, operational and accounting resources may not be adequate to support our recent expansion and anticipated future growth. To manage our expected growth, we will be required to devote significant resources to improving or replacing existing operational, accounting and information systems, procedures and controls. Our future operating results will substantially depend on the ability of our management to handle changing business conditions and to implement and improve our systems. To manage our growth effectively, we must: - predict accurately the growth in the demand for our products and services and our capacity to address that demand; - attract, train, motivate, manage and retain key employees; - continue to expand and improve our operating and financial systems, procedures and controls; - acquire and install new equipment and facilities; - continue to integrate our management team with individuals who have recently joined our management team as a result of our acquisitions; - integrate the operations and personnel of any other businesses we acquire; and - respond effectively to changes in the industry. Our relationship with InterCept may present potential conflicts of interest, which may result in decisions that favor InterCept over our other shareholders Because we and InterCept are both engaged in the sale of electronic commerce products and services to community financial institutions, numerous potential conflicts of interest exist between our companies or their affiliates. We will compete with each other when offering some products and services to potential customers. Our bylaws contain provisions addressing potential conflicts of interest between us and InterCept and the allocation of transactions that, absent such allocation, could constitute corporate opportunities of both companies. Under these provisions, InterCept may take advantage of a corporate opportunity rather than presenting that opportunity to us, absent a clear indication that the opportunity was directed to us rather than to InterCept. In addition, we plan to use and market InterCept's electronic commerce technologies, products and services as part of our Internet banking solution, and any failure or refusal by InterCept to provide these products and services could negatively impact our business. Our existing and future agreements and relationships with InterCept have not resulted and will not necessarily result from arms-length negotiations. InterCept currently owns approximately 35% of our common stock. Our Chairman and three of our other directors are directors and significant shareholders of InterCept. In addition, John W. Collins, one of those directors, serves as Chief Executive Officer of InterCept. When the 31 34 interests of InterCept diverge from our interests, InterCept's officers and directors may exercise their influence in InterCept's best interests. Therefore, our agreements and relationships with InterCept may be less favorable to us than those that we could obtain from unaffiliated third parties. Moreover, many of the transactions between us and InterCept do not lend themselves to precise allocations of costs and benefits. Thus, the value of these transactions will be left to the discretion of the parties, who are subject to potentially conflicting interests. Other than the provisions of our bylaws relating to corporate opportunities, there is no mechanism in place to resolve these conflicts of interest, except that it is our policy that transactions with affiliated parties be approved by a majority of our disinterested directors. Nevertheless, due to the extensive relationships between InterCept and us, we may take decisions that potentially favor InterCept or its affiliates at the expense of our shareholders. Furthermore, Georgia law may prohibit our shareholders from successfully challenging these decisions, if the decision received the affirmative vote of a majority, but not less than two, of our disinterested directors who received full disclosure of the existence and nature of the conflict. Our business and prospects will suffer if end users do not accept and use our products and services We derive substantially all of our revenues from products and services provided to community financial institutions, their customers and other participants in the financial services industry. Substantially all of our revenues have historically been derived from our Internet and telephone banking products and services. Our future success depends significantly upon the willingness of community financial institutions to offer technological innovations such as Internet and telephone banking and upon their customers' demand for and acceptance of these technological innovations and the willingness of these financial institutions to use our regulatory reporting and support applications. If community financial institutions and their customers do not readily accept these technological innovations as reflected in our products and services, we will experience reduced demand for our products and services. We may not be able to be successful in marketing these products and services or other integrated products and services. In addition, changes in economic conditions and unforeseen events, including recession, inflation or other adverse occurrences, may result in a significant decline in the utilization of community financial institution services or demand for our products and services. Any event that results in decreased consumer or corporate use of community financial institution services, or increased pressures on community financial institutions toward the in-house development of Internet based systems, could have a material adverse effect on our business, financial condition and results of operations. Because we offer Internet-based products and services, our business would be adversely affected if Internet use does not continue to grow or grows more slowly than expected. Internet usage may be inhibited for a number of reasons, including inadequate network infrastructure, security concerns, inconsistent quality of service, and unavailability of cost effective, high-speed access to the Internet. If the market for Internet-based financial services fails to grow, grows more slowly than anticipated, or becomes saturated with competitors, our business, financial condition and results of operations likely would be materially adversely affected. We may experience delays in product development, and these delays may adversely affect us The electronic banking and financial services industry is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new product and service introductions. Our future success will depend on our ability to develop, test, sell and support new and integrated products and services that will keep pace with technological advances and industry standards and satisfy the evolving needs of both financial institutions and their customers. Our inability to develop and introduce new and integrated products and services in a timely manner could limit the marketability of our products and services and could render them obsolete, which would adversely affect us. Further, we cannot predict the time required and costs involved in developing new and integrated products and services. Actual development costs could substantially exceed budgeted amounts, and estimated product development schedules could require extensions. In these cases, our business, financial condition and results of operations may be materially adversely affected. 32 35 If our acquisition strategy is not successful, we may lose our competitive position, and our business and financial results may suffer We intend to continue to evaluate potential acquisition candidates within our industry, and we may acquire complementary technologies or businesses in the future. Due to consolidation trends within the on-line services industry, failure to adopt and to implement successfully a long-term acquisition strategy could damage our competitive position. Future acquisitions may involve large, one-time write-offs and amortization expenses related to goodwill and other intangible assets. Any of these factors could adversely affect our business, financial condition or results of operations. An acquisition involves numerous risks, including: - assimilating effectively the operations, products and services, technology, information systems and personnel of the acquired company into our operations; - diverting our management's attention from other business concerns; - impairing relationships with our employees, affiliates, strategic marketing alliances and content providers; - failing to maintain uniform standards, controls, procedures and policies; - entering markets in which we have no direct prior experience; and - losing key employees of the acquired company. Some or all of these risks could result in a material adverse effect on our business, financial condition and results of operations. In addition, we may not be able to identify suitable acquisition candidates that are available for sale at reasonable prices. We may also elect to finance future acquisitions with debt financing, which would increase our debt service requirements, or through the issuance of additional common or preferred stock, which could result in dilution to our shareholders. There can be no assurance that we will be able to arrange adequate financing for any acquisitions on acceptable terms. The unpredictability of our future financial results and events beyond our control may adversely affect the trading price of our common stock Our financial results and the price of our common stock may fluctuate substantially in the future. These fluctuations may be caused by several factors, including pricing competition for our products and services and our ability to make sales. Other factors which may cause our common stock to be adversely affected and which may cause significant fluctuations in our stock price include: - our actual or anticipated operating results; - our actual or anticipated growth rates, as they may change from time to time; - changes in analysts' estimates; - competitors' announcements; - regulatory actions; - industry conditions; - general economic conditions; and - a variety of other factors that we have discussed elsewhere in "Factors That May Affect Our Future Results of Operations or Financial Condition." Further, the market for Internet and technology companies has experienced extreme price and volume volatility that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may materially and adversely affect our stock price, regardless of our operating performance. The trading prices of the stock of many Internet and technology companies are at or near historical highs and reflect relative valuation levels substantially above historical levels. These trading prices and relative valuation levels may not be sustained and may not be applicable to our common stock. 33 36 Our sales efforts may be delayed because community financial institutions are generally slow to adopt new technology Due in part to the nature of our applications and the associated hardware, software and consulting expenditures, community financial institutions tend to be cautious in making purchase decisions regarding new technologies. This requires us to provide a significant level of education to prospective customers regarding the use and benefits of our products and services prior to the purchase of our products and services. Further, community financial institutions are frequently slow to approve capital expenditures and to review new technologies that affect key operations. All of this could have the affect of significantly lengthening our sales cycle thereby delaying revenue growth and adversely affecting our business, operating results and financial condition. Our operating results may adversely be affected because implementation of our Internet banking products and services by our community financial institution customers may take longer than we anticipate During the course of an initial implementation of our Internet banking products and services, we must integrate our Internet banking software with a community financial institution's core processing systems. This involves the installation of an interface to permit communication between our Internet banking products and services and the community financial institution's core processing systems. We may, from time to time, experience some delays in the integration process, particularly if we do not already have an established interface for a particular core processing software. It takes us an average of 60 days to implement our Internet banking services. A longer integration period will increase our costs associated with the implementation and delay the recognition of revenues. Changes to existing core software systems by existing customers and custom implementations for future client financial institutions may also cause integration delays in future implementations that could have a material adverse effect on our business, operating results and financial condition for subsequent periods. We rely on our strategic marketing alliances to generate customers and revenue, and the loss of a significant strategic marketing partner would adversely affect our revenue We expect that revenues generated from the sale of our products and services based on leads generated through our strategic marketing alliances will account for a significant portion of our revenues for the foreseeable future. In particular, we expect that, over time, a limited number of our strategic marketing relationships will account for a substantial portion of our community financial institution leads and, therefore, revenues. Our arrangements with these strategic partners are relatively new and have not yet generated material revenues. Further, if we lose one or more of our major strategic marketing alliances, we may be unable to replace them with other alliances that have comparable customer bases and user demographics. The loss of some or all of our strategic marketing alliances would adversely affect our business, financial condition and results of operations. Damage to our data centers would result in failures or interruptions in providing our products and services to our customers, which could jeopardize our business and customer relationships Although we have a contingency plan to provide Internet services if one or more of our data centers fail to function, a natural disaster, such as a fire, tornado or flood, or other unanticipated problem at one or more of our data centers, including an extended power loss, telecommunications failure, break-in, computer virus, hacker attack or other events beyond our control, could nevertheless result in failures or interruptions in providing our products and services to our customers. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations. Our business could suffer if our community financial institution customers terminate their contracts with us as a result of business combinations or for other reasons Significant consolidation is occurring in the financial services industry, and our community financial institution customers that are involved in mergers and acquisitions may terminate their agreements with us or 34 37 fail to renew them when they expire. An existing community financial institution customer may be acquired by or merged with another financial institution that utilizes a different Internet banking system or does not desire to continue the relationship with us for some other reason. This could result in the new entity terminating the relationship with us. This risk is particularly relevant to us because we target small to mid-sized community financial institutions as customers, which are more likely to be potential acquisition candidates. Our business, financial condition and results of operations would suffer if community financial institution customers terminate their relationships with us. If we cannot hire and retain qualified personnel, we will not be able to conduct our operations successfully or at all There is significant competition for qualified employees, and high employee turnover exists among Internet and other technology companies today. As a result, we may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Our operating results may be adversely affected if we cannot hire or retain employees or if we experience increased expenses related to attracting, training and retaining qualified employees. Our failure to succeed in attracting new personnel or retaining and motivating our current personnel could adversely affect our business, financial condition and results of operations. Network security problems could hinder the growth of the Internet and cause us to lose customers To the extent that our activities involve the storage and transmission of proprietary information, security breaches could expose us to possible liability and damage our reputation. Any compromise of our security or the security of the Internet in general could harm our business and could deter people from using the Internet to conduct transactions that involve transmitting confidential information. We rely on standard Internet security systems, all of which are licensed from third parties, to provide the security and authentication necessary to effect secure transmission of data. Nevertheless, compromises or breaches of our security measures may occur. Our networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Someone who is able to circumvent our security measures could misappropriate our proprietary information or cause interruptions in our Internet operations. Internet and on-line service providers have in the past experienced, and we may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, including current and former employees or others. Concerns regarding security risks may deter community financial institutions from purchasing our products and services and deter their customers from using our products and services. We may need to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. These breaches may also require us to pay money damages to others who were harmed by them. Eliminating computer viruses and alleviating other security problems may result in interruptions, delays or termination of service to users accessing web sites that deliver our services, any of which could harm our business, financial condition and results of operations. Defects in software products that we use in our products and our inability to sustain a high volume of traffic may materially and adversely affect our business The software used by our systems and products and services may contain errors, defects or bugs. Although we have not suffered significant harm from any errors or defects to date, we may discover significant errors or defects in the future that we may or may not be able to correct. We have recently introduced and will be continually introducing new products in the market and have not experienced any product liability claims to date, but the sale and support of our products and services may entail the risk of these claims. A product liability claim brought against us could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if the volume of traffic and transactions on our system increases substantially, we could experience periodic temporary capacity constraints, which may cause unanticipated system disruptions, slower 35 38 response times and lower levels of customer service. We may be unable to project accurately the rate or timing of increases, if any, in the use of our services or expand and upgrade our systems and infrastructure in a timely manner to accommodate these increases. Any inability to do so could harm our business. Increased competition may increase pricing pressures, reduce margins and create a loss of market share The market for our products and services is highly competitive. We compete with a variety of third parties, including other providers of retail and wholesale products and services, as well as systems developed internally by financial institutions. We also expect competition in our markets to increase significantly as new companies enter our market and current competitors expand their product lines and services. These new competitors may include non-bank financial institutions, such as brokerage firms, on-line service providers and data processing vendors, among others. In many instances, these entities are dominant competitors and may enjoy substantial competitive advantages, including: - greater name recognition; - greater financial, technical and marketing resources to devote to the development, promotion and sale of their services; - longer operating histories; and - a larger base of client financial institutions. Any pricing pressures, reduced margins or loss of market share resulting from our failure to compete effectively would materially and adversely affect our business, financial condition and operating results. Infringement by others upon our proprietary technology could harm our ability to establish and protect our proprietary rights, which could adversely affect our business Our inability to protect our proprietary rights adequately could have a material adverse effect on the acceptance of our brand names and on our business, financial condition and operating results. We rely on a combination of copyright, trademark and trade secret laws and contractual provisions to establish and protect our proprietary rights. Further, we have pending patent applications in the United States and Canada with respect to our PALMS(TM) asset/liability management software. There can be no assurance that the steps we have taken, and will take in the future, to protect our proprietary rights will be adequate or that third parties will not infringe upon or misappropriate our copyrights, trademarks, patents (if and when issued), service marks, domain names and similar proprietary rights. In addition, effective patent, copyright and trademark protections may be unenforceable or limited in foreign countries, and the global nature of the Internet makes it impossible to control the ultimate destination of our services. Our competitors or others may adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Moreover, because Internet domain names derive value from the individual's ability to remember these names, we cannot guarantee that our Internet domain names will maintain their value if, for example, users begin to rely on mechanisms other than Internet domain names to access on-line resources. Furthermore, we may become involved in litigation or other proceedings regarding our patents (if and when issued) trade secrets, copyrights and other intellectual property rights. An adverse determination in intellectual property litigation could result in the loss of proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties or prevent us from selling our products and services. We may not be able to obtain licenses, if necessary, on commercially reasonable terms, if at all. In addition, litigation would divert management resources and be expensive. Any of these results could have a material adverse effect on the acceptance of our brand names and on our business, financial condition and operating results. 36 39 Changes in financial institution regulatory reporting requirements may hinder our ability to market and sell our wholesale reporting software to financial institutions If state and federal banking authorities change their financial institution reporting requirements or the means by which financial institutions must complete or submit these reports, our financial institution customers may be unable to utilize some of our wholesale reporting products. We may not be able to adapt our software in a timely manner or at all to reflect changes in these regulatory reporting requirements. In this event, financial institution customers purchasing these products and services would be required either to replace our products and services with those of our competitors or to develop their own reporting software, which would cause us to lose the recurring revenue from such customers. Further, we would be unable to sell these products and services to new customers until our software became compliant with the changed reporting requirements. Thus, these changes may have a material adverse effect on our business, financial condition and operating results. Our growth may be adversely affected by government regulation and legal uncertainties that could add additional costs to doing business on the Internet Other than the Act, there are currently few laws or regulations that specifically regulate communications or commerce on the Internet. However, laws and regulations may be adopted in the future that address issues, including user privacy, pricing, and the characteristics and quality of products and services. For example, the Telecommunications Act sought to prohibit transmitting various types of information and content over the Internet. Several telecommunications companies have petitioned the Federal Communications Commission to regulate Internet service providers and on-line service providers in a manner similar to long distance telephone carriers and to impose access fees on those companies. This could increase the cost of transmitting data over the Internet. Moreover, it may take years to determine the extent to which existing laws relating to issues such as property ownership, libel and personal privacy issues apply to the Internet. Any new laws or regulations relating to the Internet or the manner in which existing laws are applied to the Internet could adversely affect our business. Our primary customers are community financial institutions, which are heavily regulated. In addition, financial institution regulators can effectively control and mandate the standards for the required security systems, communication technologies and other features of our products and services. Federal, state or foreign governmental authorities may adopt new regulations addressing electronic financial institution operations that could require us to modify our current or future products and services. Once effective, the Act will restrict or prohibit our ability to offer third parties access to non-public personal information generated by our products and services. Further, with respect to the information of each particular individual that does business with a community financial institution, we will be required to comply with the privacy policies that are adopted by each financial institution. This law also requires the federal banking authorities, the Securities and Exchange Commission and the Federal Trade Commission to adopt rules and regulations implementing this law, which may impose more stringent restrictions or prohibitions on our products, services and operations. Finally, this law specifically permits states to adopt financial privacy laws that are more restrictive than federal law. This law or the adoption of other laws or regulations affecting our business or our community financial institution customers' businesses could reduce our growth rate or could otherwise have a material adverse effect on our business, financial condition and operating results. See "Business -- Government Regulation." Taxation of our Internet products and services could affect our pricing policies and reduce demand for our products and services Any legislation that substantially impairs the growth of e-commerce could have a material adverse effect on our business, financial condition and operating results. The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals at the federal, state and local levels in the United States and before foreign governments would, if enacted, impose taxes on the sale of goods and services provided over the Internet. A recently enacted law places a temporary moratorium on some forms of taxation on Internet commerce. We cannot predict the effect of current attempts to tax or regulate commerce over the Internet. 37 40 To execute our strategy, we may require additional funding that may not be available on favorable terms or at all, and a lack of funds could substantially impair our ability to operate, grow and be profitable We do not have sustained earnings or positive cash flow, and our business strategy currently requires us to incur significant expenses to operate competitively and to grow our business. We do not currently, and will not for the foreseeable future, have adequate cash flow from operations to fund these expenses. Consequently, we will likely require additional funds to operate our business and to execute our strategy successfully. Additional financing may not be available on favorable terms or at all. If we cannot raise adequate funds to satisfy our operating and capital requirements, we may have to limit our operations significantly. Our future operating and capital requirements depend upon many factors, including: - the rate at which we expand our sales and marketing operations; - the response of competitors to our product and service offerings; - the extent to which we expand our products and services; - the extent to which we develop and upgrade our technology and data network infrastructure; and - the occurrence, timing, size and successful integration of acquisitions. Disruptions or reductions in Internet capacity could jeopardize our ability to offer Internet access service, which could adversely affect our financial results Our ability to offer Internet access service depends upon the size, ease of expansion, reliability and security of our network infrastructure, including the transmission capabilities we lease from the Internet service providers that connect us and our customers to the Internet. A disruption or reduction in Internet capacity by these suppliers could prevent us from maintaining our service and cause us to lose customers. In addition, we may experience disruptions or capacity constraints in the local telecommunications lines and leased long-distance lines that connect us to our customers. Finally, the growth of the market for our products and services depends on improvements being made to the entire Internet infrastructure to alleviate congestion and to maintain reliability. Our stock value may be adversely affected because our management and affiliates beneficially own approximately 54% of our common stock, and thus no corporate actions requiring shareholder approval can be taken without their approval Our officers, directors and affiliated persons beneficially own approximately 54% of our common stock. As a result, our officers, directors and affiliated persons effectively are able to: - elect, or defeat the election of, our directors; - amend or prevent amendment of our articles of incorporation or bylaws; - effect or prevent a merger, sale of assets or other corporate transaction; and - control the outcome of any other matter submitted to the shareholders for vote. Our public shareholders, for so long as they hold less than a majority of the outstanding shares of our common stock, will be unable to control the outcome of any shareholder vote. Management's stock ownership may discourage a potential acquiror from offering to purchase or otherwise attempting to obtain control of Netzee, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price. Future sales of our common stock will dilute current shareholder ownership and may depress our stock price To carry out our growth strategies, we plan to acquire other businesses and products using a combination of our stock and cash, and we may also sell additional shares of our stock to raise money for expanding our operations. We may issue more shares of stock, both common and preferred, in future acquisitions or in sales of our stock, which would dilute current shareholder ownership interest in Netzee. If our shareholders sell substantial amounts of our common stock, including shares issuable upon the conversion of shares of preferred stock and the exercise of outstanding options, the market price of our 38 41 common stock could fall. These sales also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. As of March 20, 2000, we had 21,705,083 shares of common stock outstanding and 411,067 shares of common stock reserved for issuance upon the conversion of preferred stock we issued. In connection with our acquisition of DVI, we also agreed to issue to DVI up to 628,272 shares of our common stock upon the attainment by DVI's operations of revenue goals in fiscal years 2000 and 2001. In addition, we have also agreed to register up to 6,430,043 shares of common stock that we issued in connection with some of our acquisitions, subject to the terms and conditions of applicable registration rights agreements. Further, we have reserved a total of 4,816,768 shares of our common stock for issuance under our stock option plan. The plan provides that this amount will be automatically increased on January 1 of each year to an amount equal to 20% of the fully diluted shares of our common stock on the preceding December 31, provided, however, that the number of shares available for issuance shall not be less than 3,500,000. As of March 20, 2000, we have outstanding options to purchase a total of 3,162,919 shares of common stock under this plan. We have registered all of the shares presently issuable under this plan for sale in the public market. Our future earnings will be reduced because we have a significant amount of intangible assets As of December 31, 1999, approximately $120.6 million, or 84%, of our total assets were intangible assets. These intangible assets primarily represent amounts attributable to the issuance of stock in acquisitions accounted for as purchases. We will likely record additional intangible assets in the future if we acquire complementary businesses. Additionally, we currently amortize intangible assets over a useful life that management believes is reasonable and is allowable under generally accepted accounting principles, or GAAP. GAAP can change in the future and affect the amortization period and therefore our future results. Additionally, any impairment in the value of these intangible assets could have a material adverse effect on our business, financial condition and operating results. Our articles of incorporation and bylaws, as well as Georgia corporate law, may prevent or delay third parties from acquiring us and result in a decrease in our stock price Our articles of incorporation, bylaws and Georgia law could make it more difficult for a third party to acquire us, even if a change in control would be beneficial to our shareholders. For example, our articles of incorporation and bylaws provide, among other things, that: - the board of directors, without shareholder approval, has the authority to issue preferred stock with rights superior to the rights of the holders of common stock, and we have already issued a series of preferred stock in connection with one of our acquisitions; - our directors may only be removed for cause, and only upon the vote of the holders of at least 66 2/3% of our voting stock; - the board of directors is divided into three classes and directors have staggered terms; and - the shareholders may call a special meeting only upon request of 75% of votes entitled to be cast on an issue. Georgia law also contains "business combination" and "fair price" provisions. Our board of directors may adopt these provisions and other "anti-takeover" measures without shareholder approval, the effect of which may be to delay, deter or prevent a change in control of Netzee. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It 39 42 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. As we currently do not engage in the use of derivative instruments or hedging activities, we do not expect this Statement will have a significant impact on our financial statements. During December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish guidelines for revenue recognition and enhance revenue recognition disclosure requirements. The Bulletin clarifies basic criteria for when revenues are taken into account for purposes of a company's financial statements. SAB 101 is effective for the quarter ended June 30, 2000. We are currently assessing the implications of adopting SAB 101, as revenue for non-refundable, up-front fees associated with product implementation will be recognized over the term of the underlying contract, rather than upon the completion of product implementation. In the period of adoption, the cumulative impact will be reported as a change in accounting principles as dictated by SAB 101. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES REGARDING MARKET RISK We do not use derivative financial instruments in our operations or investments and do not have significant operations subject to fluctuations in foreign currency exchange rates. We have issued a promissory note to InterCept that has an interest rate that fluctuates based upon the prime rate. Any increases in the prime rate or in other interest rates upon which the prime rate is calculated or based may dramatically increase the interest rate under our borrowings and would make it more costly for us to borrow funds thereunder. Such increased costs may impede our acquisition and growth strategies if management determines that the costs associated with borrowing funds are too high to implement these strategies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements, including our Consolidated Balance Sheets as of December 31, 1998 and 1999 and Consolidated Statements of Operations, Consolidated Statements of Cash Flows and Consolidated Statements of Changes in Shareholders' (Deficit) Equity for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999, and for the period from March 1, 1999 to December 31, 1999, together with the report thereto of Arthur Andersen LLP, are attached hereto as pages F-1 through F-19. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Since January 1, 1998, we have not had any disagreements on accounting or financial disclosures with our accountants, and we have not changed such accountants. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In accordance with General Instruction H to the Form 10-K, the information required by this item is hereby incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION In accordance with General Instruction H to the Form 10-K, the information required by this item is hereby incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission. 40 43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In accordance with General Instruction H to the Form 10-K, the information required by this item is hereby incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with General Instruction H to the Form 10-K, the information required by this item is hereby incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits and Financial Statements. (1) Financial Statements The following consolidated financial statements of Netzee, Inc. and Subsidiaries are filed as part of this Report and are attached hereto as pages F-1 through F-19: (i) Report of Independent Public Accountants (ii) Consolidated Balance Sheets of December 31, 1998 and 1999 (iii) Consolidated Statements of Operations for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999, and for the period from March 1, 1999 to December 31, 1999 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999, and for the period from March 1, 1999 to December 31, 1999 (v) Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999, and for the period from March 1, 1999 to December 31, 1999 (vi) Notes to Consolidated Financial Statements (2) Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts, is incorporated by reference herein from Exhibit 99.1 filed herewith. The Report of Independent Public Accountants on Financial Statement Schedule with respect thereto is incorporated by reference herein from Exhibit 99.2 filed herewith. (3) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- ----------------------- 2.1* Agreement and Plan of Merger, dated August 6, 1999, by and among Direct Access Interactive, Inc., SBS Corporation and the shareholders of SBS Corporation. 2.2* Agreement and Plan of Merger, dated September 3, 1999, by and among Netzee, Inc., Dyad Corporation and certain of the shareholders of Dyad Corporation. 2.3* Asset Contribution Agreement, dated September 3, 1999, by and among The InterCept Group, Inc., Netzee, Inc. and The Bankers Bank. 2.4* Asset Contribution Agreement, dated September 3, 1999, by and among The InterCept Group, Inc., Netzee, Inc. and TIB The Independent BankersBank.
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EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- ----------------------- 2.5* Acquisition Agreement, dated September 3, 1999, by and among Netzee, Inc., Call Me Bill, LLC and each of the members of Call Me Bill, LLC. 2.6* Asset Transfer Agreement, dated August 6, 1999, by and between The InterCept Group, Inc. and Direct Access Interactive, Inc. 2.7* Agreement and Plan of Merger, dated September 3, 1999, by and between Netzee, Inc. and Direct Access Interactive, Inc. 2.8** Asset Purchase Agreement, dated December 15, 1999, by and among Netzee, Inc., Netcal, Inc. and DPSC Software, Inc. 2.9*** Asset Purchase Agreement, dated February 28, 2000, by and among Netzee, Inc., Digital Visions, Inc. and certain shareholders of Digital Visions, Inc. 3.1** Amended Articles of Incorporation of Netzee, Inc., as amended to date. 3.2* Amended and Restated Bylaws of Netzee, Inc. 4.1* Form of Netzee, Inc. common stock certificate. 4.2** Form of Netzee, Inc. Series A 8% Convertible Preferred Stock certificate. 4.3* Registration Rights Agreement, dated August 6, 1999, by and among Netzee, Inc. (as successor to Direct Access Interactive, Inc.) and each of the former shareholders of SBS Corporation. 4.4* Registration Rights Agreement, dated September 3, 1999, by and among Netzee, Inc., The Bankers Bank and TIB The Independent BankersBank. 4.5* Registration Rights Agreement, dated August 31, 1999, by and among Netzee, Inc. and each of the former shareholders of Dyad Corporation. 4.6* Agreement, dated September 3, 1999, by and between Netzee, Inc. and Sirrom Investments, Inc., regarding registration rights of Sirrom. 4.7* Registration Rights Agreement, dated October 18, 1999, by and between Netzee, Inc. and Kellett Partners, L.P. 4.8* Warrant, dated October 18, 1999, issued to Kellett Partners, L.P. 4.9** Registration Rights Agreement, dated December 15, 1999, by and between Netzee, Inc. and each of the former shareholders of DPSC Software, Inc. 4.10*** Registration Rights Agreement, dated March 7, 2000, by and between Netzee, Inc. and Digital Visions, Inc. 10.1* Netzee, Inc. 1999 Stock Option and Incentive Plan. 10.2* Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as successor to Direct Access Interactive, Inc.) and Glenn W. Sturm. 10.3* Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as successor to Direct Access Interactive, Inc.) and John W. Collins. 10.4* Option Agreement, dated August 5, 1999, by and between Netzee, Inc. (as successor to Direct Access Interactive, Inc.) and Richard S. Eiswirth. 10.5* Employment Agreement, dated September 1, 1999, by and between Netzee, Inc. and Glenn W. Sturm. 10.6* Employment Agreement, dated September 1, 1999, by and between Netzee, Inc. and C. Michael Bowers. 10.7 Employment Agreement, dated March 1, 2000, by and between Netzee, Inc. and Richard S. Eiswirth. 10.8* Form of Indemnification Agreement to be entered into between Netzee, Inc. and each of its executive officers and directors.
42 45
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- ----------------------- 10.9* Promissory Note, dated August 6, 1999, from Netzee, Inc. as maker to The InterCept Group, Inc. as payee, in the principal amount of $21,534,625. 10.10* Promissory Note, dated September 1, 1999, from Netzee, Inc. as maker to The InterCept Group, Inc. as payee, in the principal amount of $4,399,639.22. 10.11* Promissory Note, dated September 1, 1999, from Netzee, Inc. as maker, to The InterCept Group, Inc. as payee, in the principal amount of $2,882,200. 10.12* Promissory Note, dated September 1, 1999, from John W. Collins as maker, to Netzee, Inc. (as successor to Direct Access Interactive, Inc.). 10.13* Promissory Note, dated September 1, 1999, from Glenn W. Sturm as maker, to Netzee, Inc. (as successor to Direct Access Interactive, Inc.). 10.14* Promissory Note, dated September 1, 1999, from Donny R. Jackson as maker, to Netzee, Inc. (as successor to Direct Access Interactive, Inc.). 10.15* Promissory Note, dated September 1, 1999, from Richard S. Eiswirth as maker, to Netzee, Inc. (as successor to Direct Access Interactive, Inc.). 10.16* Line of Credit Agreement, dated October 18, 1999, by and between Netzee, Inc. and Kellett Partners, L.P. 10.17*+ General Marketing Agent Agreement, dated September 3, 1999, as amended, by and between Netzee, Inc. and TIB The Independent BankersBank. 10.18*+ General Marketing Agent Agreement, dated September 3, 1999, as amended, by and between Netzee, Inc. and The Bankers Bank. 10.19* Sublease, dated September 1, 1999, by and between The Bankers Bank and Netzee, Inc. 10.20* Commercial Lease, dated January 9, 1998, by and between DMB, LLC and Netzee, Inc. (as successor to Direct Access Interactive, Inc. (as successor to SBS Corporation)). 10.21 Employment Agreement, dated February 28, 2000, by and between Netzee, Inc. and Michael E. Murphy. 10.22 Promissory Note, dated March 24, 2000, from Netzee, Inc. as maker, to The InterCept Group, Inc., as payee, in the principal amount of $7,800,000. 23.1 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule. 99.1 Schedule II to Consolidated Financial Statements. 99.2 Report of Independent Public Accountants on Financial Statement Schedule.
- --------------- * Previously filed as an exhibit to Netzee, Inc.'s Registration Statement on Form S-1 (File No. 333-87089), and hereby incorporated by reference herein. ** Previously filed as an exhibit to Netzee, Inc.'s Form 10-Q for the quarter ended September 30, 1999, as filed with the Securities and Exchange Commission on December 22, 1999, and hereby incorporated by reference herein. *** Previously filed as an exhibit to Netzee, Inc.'s Form 8-K dated March 7, 2000, as filed with the Securities and Exchange Commission on March 22, 2000, and hereby incorporated by reference herein. + Portions of this exhibit were previously omitted pursuant to a confidential treatment request granted by the Securities and Exchange Commission on November 8, 1999. 43 46 (b) Reports on Form 8-K. During the last quarter of the Company's 1999 fiscal year, the Company filed the following report on Form 8-K: Form 8-K, dated December 15, 1999, as filed with the Securities and Exchange Commission on December 30, 1999, reporting the acquisition of DPSC Software, Inc. No financial statements were filed with this report. 44 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: NETZEE, INC. By: /s/ GLENN W. STURM ------------------------------------ Glenn W. Sturm Chief Executive Officer Date: March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GLENN W. STURM Chief Executive Officer and March 29, 2000 - ----------------------------------------------------- Director (Principal Executive Glenn W. Sturm Officer) /s/ RICHARD S. EISWIRTH Senior Executive Vice March 29, 2000 - ----------------------------------------------------- President, Richard S. Eiswirth Chief Financial Officer and Secretary (Principal Financial and Accounting Officer /s/ JOHN W. COLLINS Chairman of the Board of March 29, 2000 - ----------------------------------------------------- Directors John W. Collins /s/ JON R. BURKE Director March 29, 2000 - ----------------------------------------------------- Jon R. Burke /s/ BRUCE P. LEONARD Director March 29, 2000 - ----------------------------------------------------- Bruce P. Leonard /s/ GAYLE M. EARLS Director March 29, 2000 - ----------------------------------------------------- Gayle M. Earls /s/ STILES A. KELLETT, JR. Director March 29, 2000 - ----------------------------------------------------- Stiles A. Kellett, Jr. /s/ A. JAY WAITE Director March 28, 2000 - ----------------------------------------------------- A. Jay Waite
48 NETZEE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 TABLE OF CONTENTS
PAGE ------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 1998 and 1999................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999 and for the period from March 1, 1999 to December 31, 1999..................... F-4 Consolidated Statements of Changes in Shareholders' (Deficit) Equity for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999 and for the period from March 1, 1999 to December 31, 1999................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999 and for the period from March 1, 1999 to December 31, 1999..................... F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-7
F-1 49 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Netzee, Inc.: We have audited the accompanying consolidated balance sheet of NETZEE, INC. (a Georgia corporation, formerly Direct Access Interactive, Inc.) AND SUBSIDIARIES as of December 31, 1999 and the related consolidated statement of operations, shareholders' equity, and cash flows for the period from March 1, 1999 to December 31, 1999, and the consolidated balance sheet of the predecessor (Direct Access Interactive, Inc.) as of December 31, 1998 and the related consolidated statements of operations, shareholders' (deficit) and cash flows for the years ended December 31, 1997 and 1998 and for the period from January 1, 1999 to February 28, 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 Netzee, Inc. and subsidiaries as of December 31, 1999 and the results of their operations and their cash flows for the period from March 1, 1999 to December 31, 1999, and the financial position of the predecessor (Direct Access Interactive, Inc.) as of December 31, 1998 and the results of its operations and its cash flows for the years ended December 31, 1997 and 1998 and for the period from January 1, 1999 to February 28, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Atlanta, Georgia February 8, 2000 (except with respect to the matters discussed in Note 16, as to which the date is March 24, 2000) F-2 50 The purchase method of accounting was used to record assets acquired and liabilities assumed by Netzee, Inc. Under the purchase method, assets and liabilities are recorded at their estimated fair value at the date of purchase. Accordingly, the accompanying consolidated financial statements of the Predecessor and Netzee, Inc. are not comparable in all material respects, since those financial statements report financial position, results of operations, and cash flows on a different basis of accounting. NETZEE, INC. (FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR")) CONSOLIDATED BALANCE SHEETS
PREDECESSOR NETZEE, INC. ----------------- ----------------- DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------- ----------------- ASSETS Current assets: Cash and cash equivalents................................. $ 13,985 $ 11,255,099 Accounts receivable, net of allowance for doubtful accounts of $10,000 and $242,750 at December 31, 1998 and 1999, respectively.................................. 35,780 2,496,953 Leases receivable, current................................ 0 330,191 Prepaid and other current assets.......................... 0 503,364 -------- ------------ Total current assets............................... 49,765 14,585,607 Property and equipment, net................................. 43,892 6,938,710 Intangible assets, net of accumulated amortization of $0 and $12,756,780 at December 31, 1998 and 1999, respectively... 0 120,611,688 Leases receivable, net of current portion................... 0 922,788 Other non-current assets.................................... 0 185,463 -------- ------------ Total assets....................................... $ 93,657 $143,244,256 ======== ============ LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable and accrued liabilities.................. $165,089 $ 4,234,307 Line of credit............................................ 199,973 0 Current portion of related-party loans from shareholder... 79,500 0 Deferred revenue.......................................... 103,913 5,425,278 Note payable.............................................. 0 103,462 Other current liabilities................................. 0 24,200 -------- ------------ Total current liabilities.......................... 548,475 9,787,247 Related-party borrowings.................................... 0 10,956,930 Note payable, net of current portion........................ 0 1,215,673 Deferred revenue, net of current portion.................... 0 904,032 -------- ------------ Total liabilities.................................. 548,475 22,863,882 -------- ------------ Commitments and contingencies Shareholders' (deficit) equity: Preferred stock, no par value; 5,000,000 shares authorized: Series A 8% convertible preferred stock, no par value, $13 stated value; 0 shares and 500,000 shares authorized at December 31, 1998 and 1999, respectively; 0 and 500,000 shares issued and outstanding at December 31, 1998 and 1999, respectively.......................................... 0 6,500,000 Common stock, no par value; 40,000,000 shares authorized, 8,000,000 shares issued and outstanding at December 31, 1998; 70,000,000 shares authorized, 20,395,855 shares issued and outstanding at December 31, 1999............. 50,871 148,056,611 Notes receivable from shareholders........................ 0 (3,314,799) Deferred stock compensation............................... 0 (8,547,212) Warrants outstanding for the purchase of 0 shares and 461,876 shares at December 31, 1998 and 1999, respectively............................................ 0 4,618,760 Accumulated deficit....................................... (505,689) (26,932,986) -------- ------------ Total shareholders' (deficit) equity............... (454,818) 120,380,374 -------- ------------ Total liabilities and shareholders' (deficit) equity........................................... $ 93,657 $143,244,256 ======== ============
The accompanying notes are an integral part of these consolidated balance sheets. F-3 51 The year ended December 31, 1999 is presented in two columns below due to the acquisition of the predecessor on March 9, 1999, which established a new basis of accounting for certain assets and liabilities of Netzee, Inc. The purchase method of accounting was used to record assets acquired and liabilities assumed by Netzee, Inc. Such accounting generally results in increased amortization reported in future periods. Accordingly, the accompanying consolidated financial statements of the Predecessor and Netzee, Inc. are not comparable in all material respects, since those financial statements report financial position, results of operations, and cash flows on a different basis of accounting. NETZEE, INC. (FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR")) CONSOLIDATED STATEMENTS OF OPERATIONS
NETZEE, INC PREDECESSOR ----------------- ------------------------------------------------- FOR THE FOR THE PERIOD FROM YEAR ENDED YEAR ENDED PERIOD FROM MARCH 1, 1999 TO DECEMBER 31, DECEMBER 31, JANUARY 1, 1999 TO DECEMBER 31, 1997 1998 FEBRUARY 28, 1999 1999 ------------ ------------ ------------------- ----------------- Revenues: Monthly maintenance and service..... $ 59,013 $ 136,141 $ 33,082 $ 1,737,592 License, hardware and implementation................... 583,086 454,871 57,080 522,159 ----------- --------- -------- ------------ Total revenues.............. 642,099 591,012 90,162 2,259,751 ----------- --------- -------- ------------ Operating expenses: Costs of service, license, hardware, implementation and maintenance... 422,375 465,577 44,358 1,913,960 Selling and marketing............... 77,050 110,603 12,350 2,575,257 General and administrative, excluding amortization of stock-based compensation......... 231,147 331,810 49,399 1,844,629 Amortization of stock-based compensation..................... 0 0 0 4,591,888 Depreciation........................ 10,547 14,736 2,476 190,524 Amortization........................ 0 0 0 12,863,016 ----------- --------- -------- ------------ Total operating expenses.... 741,119 922,726 108,583 23,979,274 ----------- --------- -------- ------------ Operating loss........................ (99,020) (331,714) (18,421) (21,719,523) Interest expense, net................. (117) (20,147) (3,469) (670,503) ----------- --------- -------- ------------ Loss before extraordinary loss........ (99,137) (351,861) (21,890) (22,390,026) Extraordinary loss.................... 0 0 0 (4,518,760) ----------- --------- -------- ------------ Net loss before preferred dividends... (99,137) (351,861) (21,890) (26,908,786) Preferred dividends................... 0 0 0 (24,200) ----------- --------- -------- ------------ Net loss attributable to common shareholders........................ $ (99,137) $(351,861) $(21,890) $(26,932,986) =========== ========= ======== ============ Basic and diluted loss per share before extraordinary item........... $ (0.01) $ (0.04) $ (1.94) Extraordinary loss per share.......... 0 0 (0.40) ----------- --------- ------------ Basic and diluted net loss per share............................... $ (0.01) $ (0.04) $ (2.34) =========== ========= ============ Weighted average common shares outstanding......................... 8,000,000 8,000,000 11,542,034 =========== ========= ============
The accompanying notes are an integral part of these consolidated statements. F-4 52 The purchase method of accounting was used to record assets acquired and liabilities assumed by Netzee, Inc. Such accounting generally results in increased amortization reported in future periods. Accordingly, the accompanying consolidated financial statements of the Predecessor and Netzee, Inc. are not comparable in all material respects, since those financial statements report financial position, results of operations, and cash flows on a different basis of accounting. NETZEE, INC. (FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR")) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
PREFERRED STOCK COMMON STOCK SHAREHOLDERS' DEFERRED -------------------- ------------------------- NOTES STOCK SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION ------- ---------- ---------- ------------ ---------- ------------- ------------ Predecessor: Balance, December 31, 1996................. 0 $ 0 2,000,000 $ 50,871 $ 0 $ 0 $ 0 Net loss............. 0 0 0 0 0 0 0 ------- ---------- ---------- ------------ ---------- ----------- ------------ Balance, December 31, 1997................. 0 0 2,000,000 50,871 0 0 0 Net loss............. 0 0 0 0 0 0 0 ------- ---------- ---------- ------------ ---------- ----------- ------------ Balance, December 31, 1998................. 0 0 2,000,000 50,871 0 0 0 Net loss............. 0 0 0 0 0 0 0 ------- ---------- ---------- ------------ ---------- ----------- ------------ Balance, February 28, 1999................. 0 $ 0 2,000,000 $ 50,871 $ 0 $ 0 $ 0 ======= ========== ========== ============ ========== =========== ============ - --------------------------------------------------------------------------------------------------------------------- Netzee, Inc.: Initial InterCept investment, March 9, 1999................. 0 $ 0 8,000,000 $ 1,379,965 $ 0 $ 0 $ 0 Issuance of common stock for notes receivable........... 0 0 1,555,000 3,110,000 0 (3,110,000) 0 Capital contributions........ 0 0 0 1,990,556 0 0 0 Issuance of common stock in connection with acquisitions.... 0 0 6,122,238 71,884,011 0 0 0 Issuance of common stock in connection with marketing agreements........... 0 0 128,617 1,479,096 0 0 0 Deferred stock-based compensation......... 0 0 160,000 13,224,100 0 (85,000) (13,139,100) Amortization of deferred stock-based compensation......... 0 0 0 0 0 0 4,591,888 Stock options exercised for note receivable........... 0 0 30,000 93,300 0 (93,300) 0 Payment of shareholder note................. 0 0 0 0 0 85,000 0 Interest on shareholder notes................ 0 0 0 0 0 (111,499) 0 Issuance of warrants to purchase common stock................ 0 0 0 0 4,618,760 0 0 Initial public offering proceeds, net of expenses............. 0 0 4,400,000 54,895,583 0 0 0 Issuance of preferred stock in connection with acquisition..... 500,000 6,500,000 0 0 0 0 0 Net loss attributable to common shareholders......... 0 0 0 0 0 0 0 ------- ---------- ---------- ------------ ---------- ----------- ------------ Balance, December 31, 1999................. 500,000 $6,500,000 20,395,855 $148,056,611 $4,618,760 $(3,314,799) $ (8,547,212) ======= ========== ========== ============ ========== =========== ============ TOTAL ACCUMULATED SHAREHOLDERS' DEFICIT (DEFICIT) EQUITY ------------ ---------------- Predecessor: Balance, December 31, 1996................. $ (54,691) $ (3,820) Net loss............. (99,137) (99,137) ------------ ------------ Balance, December 31, 1997................. (153,828) (102,957) Net loss............. (351,861) (351,861) ------------ ------------ Balance, December 31, 1998................. (505,689) (454,818) Net loss............. (21,890) (21,890) ------------ ------------ Balance, February 28, 1999................. $ (527,579) $ (476,708) ============ ============ - ------------------------------------------------------------------------- Netzee, Inc.: Initial InterCept investment, March 9, 1999................. $ 0 $ 1,379,965 Issuance of common stock for notes receivable........... 0 0 Capital contributions........ 0 1,990,556 Issuance of common stock in connection with acquisitions.... 0 71,884,011 Issuance of common stock in connection with marketing agreements........... 0 1,479,096 Deferred stock-based compensation......... 0 0 Amortization of deferred stock-based compensation......... 0 4,591,888 Stock options exercised for note receivable........... 0 0 Payment of shareholder note................. 0 85,000 Interest on shareholder notes................ 0 (111,499) Issuance of warrants to purchase common stock................ 0 4,618,760 Initial public offering proceeds, net of expenses............. 0 54,895,583 Issuance of preferred stock in connection with acquisition..... 0 6,500,000 Net loss attributable to common shareholders......... (26,932,986) (26,932,986) ------------ ------------ Balance, December 31, 1999................. $(26,932,986) $120,380,374 ============ ============
The accompanying notes are an integral part of these consolidated statements. F-5 53 The year ended December 31, 1999 is presented in two columns below due to the acquisition of the predecessor on March 9, 1999, which established a new basis of accounting for certain assets and liabilities of Netzee, Inc. The purchase method of accounting was used to record assets acquired and liabilities assumed by Netzee, Inc. Such accounting generally results in increased amortization reported in future periods. Accordingly, the accompanying consolidated financial statements of the Predecessor and Netzee, Inc. are not comparable in all material respects, since those financial statements report financial position, results of operations, and cash flows on a different basis of accounting. NETZEE, INC. (FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR")) CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR NETZEE, INC. ------------------------------------------------ ----------------- FOR THE FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED PERIOD FROM PERIOD FROM DECEMBER 31, DECEMBER 31, JANUARY 1, 1999 TO MARCH 1, 1999 TO 1997 1998 FEBRUARY 28, 1999 DECEMBER 31, 1999 ------------ ------------ ------------------ ----------------- Cash flows from operating activities: Net loss................................ $(99,137) $(351,861) $(21,890) $(26,932,986) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......... 10,547 14,736 2,476 13,053,540 Stock-based compensation expense...... 0 0 0 4,591,888 Extraordinary loss.................... 0 0 0 4,518,760 Interest income on shareholder notes.............................. 0 0 0 (111,499) Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable................ (9,222) (16,558) 12,606 (2,008,746) Leases receivable.................. 0 0 0 (198,873) Prepaid and other current assets... 0 0 0 (303,528) Accounts payable and accrued liabilities...................... 13,783 92,794 (42,889) 3,238,796 Deferred revenue................... 50,953 35,375 41,222 1,602,925 Other current liabilities.......... 0 0 0 24,200 -------- --------- -------- ------------ Net cash used in operating activities..................... (33,076) (225,514) (8,475) (2,525,523) -------- --------- -------- ------------ Cash flows from investing activities: Acquisitions, net of cash acquired...... 0 0 0 (48,938,638) Purchase of property, equipment and capitalized software.................. (1,969) (18,031) 0 (4,233,946) -------- --------- -------- ------------ Net cash used in investing activities..................... (1,969) (18,031) 0 (53,172,584) -------- --------- -------- ------------ Cash flows from financing activities: Contributions from shareholder.......... 0 0 0 1,240,556 Borrowings from shareholder............. 0 0 0 41,830,132 Payments on borrowings from shareholder........................... 0 0 0 (31,524,798) Increase (decrease) in line of credit... 0 199,973 0 (277,473) Payments on note payable................ 0 0 0 (25,865) Sale of common stock.................... 0 0 0 55,707,144 Increase (decrease) in related-party loans from shareholder of predecessor entity................................ 50,000 29,500 (2,000) 0 -------- --------- -------- ------------ Net cash provided by (used in) financing activities........... 50,000 229,473 (2,000) 66,949,696 -------- --------- -------- ------------ Net increase (decrease) in cash and cash equivalents............................. 14,955 (14,072) (10,475) 11,251,589 Cash and cash equivalents, beginning of period.................................. 13,102 28,057 13,985 3,510 -------- --------- -------- ------------ Cash and cash equivalents, end of period.................................. $ 28,057 $ 13,985 $ 3,510 $ 11,255,099 ======== ========= ======== ============
The accompanying notes are an integral part of these consolidated statements. F-6 54 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998 AND 1999 1. ORGANIZATION AND NATURE OF BUSINESS Netzee, Inc. is a provider of Internet banking products and services and Internet commerce solutions to small and mid-sized banks, thrifts and credit unions, typically with assets of less than $10 billion. We provide solutions that enable financial institutions to offer their customers a wide array of financial products and services over the Internet. We also offer financial institutions custom web site design, implementation and marketing services, telephone banking products, regulatory reporting and support applications, and Internet access services. Direct Access Interactive, Inc. ("Direct Access" or the "Predecessor") was incorporated on October 10, 1996. On March 9, 1999, Direct Access was purchased by The InterCept Group, Inc. ("InterCept"). Direct Access was operated as a separate subsidiary of InterCept. On August 6, 1999, Direct Access purchased the remote banking operations of SBS Corporation ("SBS"). Direct Access was later merged with and into Netzee. On September 3, 1999, we purchased the Internet banking divisions (collectively, the "Divisions") of TIB The Independent BankersBank ("TIB") and The Bankers Bank, and we acquired Dyad Corporation and subsidiaries ("Dyad") and Call Me Bill, LLC ("Call Me Bill"). On December 15, 1999, we purchased DPSC Software, Inc. ("DPSC"). SBS, TIB, The Bankers Bank, Dyad, Call Me Bill and DPSC are collectively referred to as the "Acquired Entities." In November 1999, we completed our initial public offering. We issued 4,400,000 shares of common stock (including the exercise of a portion of the underwriter's over-allotment option) at an offering price of $14 per share. Net proceeds from the offering were approximately $54.9 million after deducting underwriters' discounts, commissions and expenses of the offering. We used the proceeds to repay principal and accrued interest owed to InterCept, to repay working capital advances and accrued interest to InterCept and to acquire DPSC. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements for the period from March 1, 1999 to December 31, 1999 include the accounts of our company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements of the Predecessor and our company are not comparable in all material respects, since those financial statements report the financial position, results of operations, and cash flows on a different basis of accounting. Although Direct Access was acquired on March 9, 1999, the accompanying financial statements for the year ended December 31, 1999 are presented as if the acquisition occurred on the close of business on February 28, 1999 instead of March 9, 1999. The operations between March 1, 1999 and March 9, 1999 were not material. The accompanying financial statements prior to February 28, 1999 present the financial position and the results of operations and cash flows of Direct Access, the predecessor to our company. The Acquired Entities noted above were accounted for using the purchase method of accounting. Accordingly, the results of operations of the Acquired Entities have been included in the consolidated financial statements from their respective dates of acquisition. 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 F-7 55 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS We consider all short-term, highly liquid investments with an original maturity date of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Subsequent to March 9, 1999, acquisition property and equipment are stated at fair value at the date of acquisition. Major additions and improvements are charged to the property accounts while replacements, maintenance and repairs which do not improve or extend the lives of respective assets are expensed in the current period. Estimated useful lives for our assets are as follows: Leasehold improvements...................................... 2 to 3 years Computer equipment.......................................... 3 to 7 years Furniture and fixtures...................................... 10 years Machinery and other equipment............................... 3 to 15 years Software.................................................... 3 to 5 years
INTANGIBLE ASSETS Intangible assets consist of the intangibles recorded in the acquisitions discussed in Note 1 and include acquired technology, workforce, contracts in process and marketing agreements. The carrying amounts of the intangible assets are reviewed for impairment when events and circumstances indicate that the recorded costs may not be recoverable. If the review indicates that the undiscounted cash flows from operations of the related intangible assets over the remaining amortization period are expected to be less than the recorded amount of the intangible, our carrying value of the intangible asset would be reduced to its estimated fair value. We have allocated the value of acquired intangible assets to workforce, contracts in process and acquired technology. The value of the workforce was determined by reference to the cost of the workforce retained and is amortized on a straight-line basis over a period of three years. Contracts in process represent existing customers acquired. The value of the contracts in process was determined by reference to the recurring revenue generated from the existing customers and is amortized on a straight-line basis over a period of three to four years. We determined that the remaining value of intangible assets acquired related to acquired technology. Acquired technology also represents internally-developed software acquired and is amortized on a straight-line basis over a period of three to five years. Marketing agreements represent agreements with several bankers' banks to use their best efforts to promote and market our products and services to community financial institutions on an exclusive basis. Marketing agreements are amortized on a straight-line basis over a period of two years. SOFTWARE DEVELOPMENT COSTS Research and development costs are expensed as incurred. Computer software development costs are charged to research and development expense until technological feasibility of the software is established, after which remaining significant software production costs are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for Computer Software to Be Sold, Leased, or Otherwise Marketed." These costs are amortized on the straight-line basis over the estimated economic life of the software. Amortization of capitalized software development costs begins when products are made F-8 56 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) available for sale or when the related product is put into use. We make an ongoing assessment of recoverability of our capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value ("NRV") of the product. If the NRV is less than the amount capitalized, a write-down of the amount capitalized is recorded. REVENUE RECOGNITION Our revenue historically resulted from (1) fees for software for Internet banking and telephone banking, (2) implementation of the Internet banking and telephone banking software, (3) sale of hardware, and (4) maintenance and support services for the Internet banking and telephone banking software. We historically charged a nonrefundable license, hardware, and implementation fee, with an annual maintenance fee, which is typically renewed every 12 months. The revenue from software license fees was recognized in accordance with SOP No. 97-2, "Software Revenue Recognition," in 1997, 1998 and 1999. We recognized the one-time nonrefundable software, hardware, and implementation fee upon completion of the implementation of software and hardware. The maintenance fee was recognized ratably over the term maintenance period, typically 12 months. Subsequent to June 30, 1999, we have entered into contracts pursuant to which we collect license and maintenance fees for services rendered, typically on a monthly basis. The revenue from these arrangements is recognized as the services are rendered. We also collect fees based on the number of end users which are recognized on a monthly basis. Our regulatory reporting and support application subscriptions are billed on a monthly, quarterly, or annual basis. These subscriptions are recognized ratably over the contract period, as services are provided. DEFERRED REVENUE Deferred revenue represents accounts receivable and amounts collected prior to revenue recognition. The balance primarily consists of annual billings collected in advance and recognized ratably over the subsequent twelve months. LONG-LIVED ASSETS We periodically review the values assigned to long-lived assets to determine whether any impairments have occurred. Management believes that the long-lived assets on the accompanying balance sheet are appropriately valued. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for a portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax-planning strategies. F-9 57 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of financial instruments classified as current assets or liabilities, including cash and cash equivalents, accounts receivable and accounts payable, approximate carrying value due to the short-term maturity of the instruments. The fair values of short-term and long-term debt amounts approximate carrying value and are based on their effective interest rates compared to current market rates. COMPREHENSIVE LOSS Comprehensive loss for the years ended December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999 and for the period from March 1, 1999 to December 31, 1999 is the same as the net loss as presented in the accompanying statements of operations. SEGMENT REPORTING We have adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," effective January 1, 1998. SFAS No. 131 establishes standards for the way that public business enterprises report selected information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographical areas and major customers. SFAS No. 131 requires the use of the "management approach" in disclosing segment information; based largely on how senior management generally analyzes the business operations. We currently operate in only one segment, and as such, no additional disclosure is required. Additionally, we did not have any operations or net assets or liabilities in foreign locations. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The statement is not expected to have a significant impact on our financial statements. During December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish guidelines for revenue recognition and enhance revenue recognition disclosure requirements. The Bulletin clarifies basic criteria for the culmination of the earnings process. SAB 101 is effective for the quarter ended June 30, 2000. We are currently assessing the implications of adopting SAB 101, as revenue for non-refundable, up-front fees associated with product implementation will be recognized over the term of the underlying contract, rather than upon the completion of product implementation. In the period of adoption, the cumulative impact will be reported as a change in accounting principles as dictated by SAB 101. 3. ACQUISITIONS ACQUISITION OF THE REMOTE INTERNET AND TELEPHONE BANKING DIVISION OF SBS CORPORATION On August 6, 1999, Direct Access purchased the remote banking operations of SBS. The purchase price of SBS included 2,600,000 shares of our common stock at the estimated fair market value of $11.50 per share F-10 58 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and $21,534,625 in cash. Only the remote Internet and telephone banking operations of SBS were retained by our company and the remaining operations were sold to InterCept for 450,000 shares of our common stock valued at $11.50 per share, for a total sales price of $5,175,000. No gain or loss was recorded on the transaction by our company, as the transaction was a related party transaction. The acquisition of SBS was accounted for as a purchase. The results of operations of SBS have been included in the consolidated financial statements from the date of acquisition. The excess of the purchase price over the net tangible assets acquired was allocated to the following intangible assets with the following amortization lives: Acquired technology......................................... $45,041,300 3 years Contracts in process........................................ 1,340,000 4 years Workforce................................................... 440,000 3 years
ACQUISITIONS OF THE INTERNET BANKING DIVISIONS OF TIB THE INDEPENDENT BANKERSBANK AND THE BANKERS BANK On September 3, 1999, we purchased the Divisions. The acquisitions of the Divisions were accounted for as purchases. The purchase price of the Divisions included a total of 2,722,000 shares of our common stock valued at $11.50 per share, options to purchase a total of 55,000 shares of common stock at an exercise price of $5.00 per share granted to management and directors of the Divisions, and 76,000 shares of common stock sold to a third party for $100,000. The results of operations of the Divisions have been included in the consolidated financial statements from the date of acquisition. The excess of the purchase price over the tangible net assets was allocated to the following intangible assets with the following amortization lives: Acquired technology......................................... $28,353,000 3 years Marketing agreements........................................ 3,056,000 2 years Workforce................................................... 330,000 3 years Contracts in process........................................ 150,000 3 years
ACQUISITION OF DYAD CORPORATION On September 3, 1999, we purchased Dyad. The purchase price of Dyad included 618,137 shares of our common stock valued at $11.50 per share and approximately $900,000 in cash. We also assumed debt owed by Dyad of approximately $3,500,000. The acquisition of Dyad was accounted for as a purchase. The results of operations of Dyad have been included in the consolidated financial statements from the date of acquisition. The excess of the purchase price over the net tangible assets acquired totaled approximately $12,290,000 and was allocated to acquired technology with a three-year amortization life. ACQUISITION OF CALL ME BILL, LLC On September 3, 1999, we purchased Call Me Bill. The purchase price of Call Me Bill included cash of approximately $3,288,000 and approximately 31,000 shares of our common stock sold to former owners of Call Me Bill for $10.50 per share. These shares were valued at $11.50 per share. The acquisition of Call Me Bill was accounted for as a purchase. The results of operations of Call Me Bill have been included in the consolidated financial statements from the date of acquisition. The excess of the purchase price over the net tangible assets acquired totaled approximately $3,530,000 and was allocated to acquired technology with a three-year amortization life. ACQUISITION OF DPSC SOFTWARE, INC. On December 15, 1999, we purchased DPSC. The purchase price of DPSC included 525,000 shares of our common stock, 500,000 shares of preferred stock with a stated value of $13 per share, $18,500,000 in cash and the payment of other acquisition costs of approximately $1,000,000. The acquisition of DPSC was accounted for as a purchase. The results of operations of DPSC have been included in the consolidated F-11 59 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) financial statements from the date of acquisition. The excess of the purchase price over the net tangible assets acquired totaled $35,521,000 and was allocated to acquired technology with a three-year amortization life. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma consolidated financial information for the years ended December 31, 1998 and 1999 assume that the acquisitions discussed above occurred as of January 1, 1998.
1998 1999 ------------ ------------ Total revenue........................................... $ 7,429,272 $ 9,183,780 ============ ============ Loss before extraordinary loss.......................... (51,898,855) (49,213,173) Extraordinary loss...................................... 0 (4,518,760) ------------ ------------ Net loss attributable to common shareholders............ $(51,898,855) $(53,749,933) ============ ============ Basic and diluted loss per share before extraordinary loss.................................................. $ (2.55) $ (2.42) Extraordinary loss per share............................ 0 (0.22) ------------ ------------ Basic and diluted net loss per share.................... $ (2.55) $ (2.64) ============ ============
The unaudited pro forma consolidated financial information does not purport to represent what our results of operations would have been had the acquisitions occurred as of such date, or what the results will be for any future period. 4. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1998 and 1999 consisted of the following:
PREDECESSOR NETZEE ----------- ---------- 1998 1999 ----------- ---------- Leasehold improvements...................................... $ 0 $ 739,241 Computer equipment.......................................... 0 2,667,190 Furniture and fixtures...................................... 20,000 155,733 Machinery and other equipment............................... 0 1,686,017 Software.................................................... 50,871 1,831,667 -------- ---------- 70,871 7,079,848 Less accumulated depreciation............................... (26,979) (141,138) -------- ---------- Property and equipment, net................................. $ 43,892 $6,938,710 ======== ==========
5. INTANGIBLE ASSETS Intangible assets at December 31, 1998 and 1999 consisted of the following:
PREDECESSOR NETZEE ----------- ------------ 1998 1999 ----------- ------------ Workforce.................................................. $ 0 $ 830,000 Contracts in progress...................................... 0 1,880,000 Marketing agreements....................................... 0 4,135,104 Acquired technology........................................ 0 126,523,364 -------- ------------ 0 133,368,468 Less accumulated amortization.............................. 0 (12,756,780) -------- ------------ Intangible assets, net..................................... $ 0 $120,611,688 ======== ============
F-12 60 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangible amortization expense for the years ended December 31, 1997 and 1998, the period from January 1, 1999 to February 28, 1999 and the period from March 1, 1999 to December 31, 1999 was $0, $0, $0, and $12,763,016, respectively. 6. NOTE PAYABLE On October 18, 1999, we entered into a $1,345,000 term loan with a bank to secure the purchase of equipment. The loan bears interest at LIBOR plus 2% per annum and is due in 60 monthly installments starting November 1, 1999. The loan matures on October 1, 2004, and a balloon payment of approximately $936,300 is due at that time. The loan is secured by equipment and a personal guaranty by certain officers of our company. As of December 31, 1999, the outstanding loan balance was $1,319,135. 7. RELATED-PARTY TRANSACTIONS As discussed in Note 3, we completed several acquisitions in 1999. In some of these transactions, persons who were previously officers, directors or shareholders of the acquired companies became executive officers or one of our directors or beneficial owners of more than 5% of our common stock. Management believes that these transactions were made on terms no less favorable to us than could have been obtained with unaffiliated third parties on an arm's length basis. Our Chairman of the Board of Directors is the Chairman and Chief Executive Officer of InterCept, and one of our directors is the President, Chief Operating Officer and a director of InterCept. A non-employee director of our company is also a director of InterCept. Our Chief Executive Officer is a director of InterCept and is a partner at Nelson Mullins Riley & Scarborough, L.L.P. This firm provided legal services to us totaling approximately $98,000 during 1999. On July 1, 1999, certain officers and directors of our company entered into full-recourse promissory notes with our Predecessor as lender. We became the lender under these notes upon the merger of the Predecessor into Netzee. These notes totaled $3,110,000 and were given as consideration for the issuance of shares of our Predecessor's common stock to these individuals. Each of the notes bears interest at 7% per year and matures on June 30, 2002. On August 5, 1999, one of our officers entered into a full-recourse promissory note with our Predecessor as lender. We became the lender under this note upon the merger of the Predecessor into Netzee. The note totaled $93,300 and the proceeds were used to exercise options to purchase shares of our Predecessor's common stock. The loan bears interest at a rate of 7% and matures on August 4, 2002. In 1999, we leased our former headquarters in Atlanta, Georgia from The Bankers Bank. We paid a total of $32,400 to The Bankers Bank in 1999 under this lease. We shared some of our facilities with InterCept and received administrative support during 1999. We incurred expenses of approximately $124,000 related to these shared costs. In September 1999, we entered into a marketing agreement with InterCept under which our salespeople will sell InterCept products and services and InterCept salespeople will sell our products and services. Under this agreement, we pay a commission to InterCept for each sale of our products and services made by InterCept salespersons and for each referral to our sales force that results in a sale. InterCept correspondingly pays us for sales and referrals by our salespersons. We paid Intercept $188,000 in 1999 as a result of this agreement. Management believes that the transactions will be made on terms no less favorable than could be obtained from unaffiliated third parties on an arm's length basis. F-13 61 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Related-party loans from shareholders at December 31, 1998 and 1999 consisted of the following: PREDECESSOR NETZEE ----------- ----------- 1998 1999 ----------- ----------- Loan from shareholders, interest payable monthly at 8.5%; the loan was repaid on March 9, 1999...................... $ 77,500 $ 0 Loan from shareholders, noninterest-bearing note; the loan was repaid on January 8, 1999............................. 2,000 0 Borrowings from InterCept, interest payable monthly at prime plus 2% beginning May 1, 2000; principal payable in full on March 31, 2002; the note is collateralized by substantially all of our assets........................... 0 10,956,930 -------- ----------- 79,500 $10,956,930 Less current maturities..................................... (79,500) 0 -------- ----------- $ 0 $10,956,930 ======== ===========
Prior to our initial public offering, InterCept loaned us money to fund the cash portions of the acquisitions discussed in Note 3 and to fund our operations. All pre-offering borrowings were paid off with proceeds from the offering. On December 15, 1999, we received a commitment for a $15 million line of credit from InterCept. Borrowings on this line will bear interest at a rate of prime plus 2%. As of December 31, 1999, we had borrowed approximately $11.0 million from InterCept on terms consistent with this commitment. During 1999, we incurred approximately $677,000 of interest expense associated with these borrowings. After December 31, 1999, we repaid a portion of these borrowings with cash on hand. See Note 16 for discussion of financing completed subsequent to year end. 8. EXTRAORDINARY ITEM On October 18, 1999, we entered into a $3,000,000 line of credit facility with a company, an affiliate of which was appointed as one of our directors. The line of credit facility bore interest at the prime rate. In conjunction with the line of credit facility, we issued warrants to purchase 461,876 shares of common stock at an exercise price of $3.25 per share. We recorded deferred financing costs for the difference between the fair value of common stock and the exercise price of the warrants. The deferred financing costs were to be recognized over the three-year term of the line of credit. The line of credit facility was terminated in December 1999 in connection with the receipt of a commitment from InterCept discussed above. The termination resulted in the recognition of an extraordinary non-cash loss of approximately $4,519,000 for the period from March 1, 1999 to December 31, 1999. 9. INCOME TAXES We have incurred net operating losses ("NOL") since inception. As of December 31, 1998, the Predecessor had $350,000 in NOL carryforwards available to offset its future income tax liability. These NOL carryforwards will not be utilized as a result of InterCept's acquisition of the Predecessor and Netzee's subsequent formation. As of December 31, 1999, we had NOL carryforwards of approximately $2,960,000 available to offset our future income tax liability. The NOL carryforwards begin to expire in 2014. Due to the uncertainty of the realizability of the net operating losses, we have not reflected an income tax benefit in the accompanying statements of operations for any period presented and has recorded a valuation allowance equal to the net deferred tax assets at December 31, 1998 and 1999. F-14 62 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the deferred tax assets and liabilities are as follows as of December 31, 1998 and 1999: PREDECESSOR NETZEE ----------- ----------- 1998 1999 ----------- ----------- Deferred tax assets: Net operating loss carryforwards............................ $ 133,191 $ 1,124,895 Deferred revenue............................................ 39,487 2,405,020 Accrued liabilities......................................... 6,506 68,780 Accounts receivable......................................... 3,800 108,965 Stock compensation.......................................... 0 1,744,960 Intangibles................................................. 0 280,440 --------- ----------- Total deferred tax assets................................... 182,984 5,733,060 Valuation allowance......................................... (182,984) (5,733,060) --------- ----------- Net deferred tax assets..................................... $ 0 $ 0 ========= ===========
The components of the income tax benefit for the years ended December 31, 1997, 1998 and the period from March 1, 1999 to December 31, 1999 are as follows: PREDECESSOR NETZEE -------------------- ----------- 1997 1998 1999 -------- --------- ----------- Current benefit: Federal........................................... $ 0 $ 0 $(1,006,485) State............................................. 0 0 (117,226) -------- --------- ----------- 0 0 (1,123,711) -------- --------- ----------- Deferred benefit: Federal........................................... (33,707) (119,633) (4,128,377) State............................................. (3,965) (14,075) (480,972) -------- --------- ----------- (37,672) (133,708) (4,609,349) -------- --------- ----------- Total benefit....................................... (37,672) (133,708) (5,733,060) Valuation allowance................................. 37,672 133,708 5,733,060 -------- --------- ----------- Total..................................... $ 0 $ 0 $ 0 ======== ========= ===========
The following is a summary of the items which resulted in recorded income taxes that differ from taxes computed using the statutory federal income tax rate for the years ended December 31, 1997, 1998 and 1999: PREDECESSOR NETZEE ------------ ------ 1997 1998 1999 ---- ---- ------ Tax provision at federal statutory rate..................... 34% 34% 34% Tax provision at state statutory rate....................... 4 4 4 Nondeductible amortization.................................. 0 0 (17) Effect of valuation allowance............................... (38) (38) (21) --- --- --- Income tax benefit.......................................... 0% 0% 0% === === ===
The income tax benefit for the period from January 1, 1999 to February 28, 1999 was not material. 10. PREFERRED STOCK In December 1999, we issued 500,000 shares of Series A 8% Convertible Preferred Stock ("Preferred Stock") with a stated value of $13 per share as part of our acquisition of DPSC. The Preferred Stock is F-15 63 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) convertible at the option of the shareholder, in whole or in part, into 411,067 shares of common stock. In addition, if the average closing stock price of our common stock equals or exceeds $26.00 per share for any four week period, we may redeem the Preferred Stock for cash or 411,067 shares of common stock upon at least 10 but not more than 90 days' written notice. If we elect to redeem the Preferred Stock in cash, the preferred shareholder has the option to receive payment in common stock by providing notice of such election within 5 days of the notice of redemption. Preferred Stock dividends are cumulative and are paid when declared by the Board of Directors at the rate of $1.04 per share. We have accrued $24,200 in Preferred Stock dividends for the period from March 1, 1999 to December 31, 1999. 11. STOCK OPTION PLAN During 1999, we adopted, and our shareholders approved, the 1999 Stock Option and Incentive Plan (the "Plan"). Awards under the Plan are granted by the Board of Directors or by a committee composed of two members (the "Committee") of the Board of Directors. Awards issued under the Plan may include incentive stock options ("ISOs"), nonqualified stock options ("NQSs"), restricted stock, or stock appreciation rights. The Committee administers the Plan and generally has the discretion to determine the terms of an option grant, including the number of option shares, option price, term, vesting schedule, the post-termination exercise period, and whether the grant will be an ISO or NQS. The board of directors has approved grants of options to purchase 40,000 shares to each of our directors, 10,000 of which vest immediately and the remainder which vest in equal portions over three years. The maximum number of shares of common stock that may be issued under the Plan as of January 1, 2000 is 4,816,768. The Plan provides that the number of shares of common stock available for issuance thereunder shall be automatically increased on January 1 of each year to an amount equal to 20% of the fully diluted shares of stock outstanding on December 31 of the previous year, provided that the shares available for issuance shall not be less than 3,500,000. The Plan will remain in effect until terminated by the Board of Directors. The Plan may generally be amended by the Board of Directors without the consent of our shareholders. A summary of stock options granted and related information as of December 31, 1999 is presented below:
SHARES PRICE RANGE --------- -------------- Outstanding at December 31, 1998........................... 0 Granted.................................................. 2,815,500 $2.00 - $14.75 Exercised................................................ 0 --------- Outstanding at December 31, 1999........................... 2,815,500 $2.00 - $14.75 ========= Exercisable at December 31, 1999........................... 712,166 $2.00 - $14.00 =========
The following summarizes information about the stock options outstanding as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- -------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE - --------------- -------------- ----------- --------- -------------- --------- $ 2.00 - $ 3.11 830,000 9.58 years $ 2.68 318,000 $ 2.81 $5.00 1,021,000 9.69 years $ 5.00 123,333 $ 5.00 $14.00 - $14.75 964,500 9.87 years $14.12 270,833 $14.00 --------- ------- 2,815,500 9.72 years $ 7.47 712,166 $ 7.45 ========= =======
F-16 64 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1999, we issued 75,000 shares of restricted stock under the Plan. The restricted shares vest ratably over three years. The weighted average fair value of these shares at grant date was $15.00. During 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to use the accounting methodology required by APB Opinion No. 25 must make pro forma disclosures of net income, and, if presented, earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. We have elected to account for our stock-based compensation plan under APB Opinion No. 25. We have computed, for pro forma disclosure purposes, the value of all options for shares of our common stock granted in 1999 to our employees using the Black-Scholes option pricing model prescribed in SFAS No. 123 and the following weighted-average assumptions: risk-free interest rates of 5.80 to 6.17%, expected dividend yield of 0%, expected lives of four years, and expected volatility of 69%. The weighted average fair value of options for the stock granted to our employees in 1999 was $11.32 per share. The total value of the options for stock granted to these employees during 1999 was computed as approximately $21.0 million, which would be amortized on a pro forma basis over the three-year vesting period of the options. If we had accounted for the Plan in accordance with SFAS No. 123, our combined net income with our predecessor for the year ended December 31, 1999 would have been as follows:
AS REPORTED PRO FORMA ------------ ------------ Net loss attributable to common shareholders for the year ended December 31, 1999................................. $(26,954,876) $(28,212,750) Basic and diluted net loss per share for the year ended December 31, 1999....................................... $ (2.34) $ (2.44)
12. BASIC AND DILUTED NET LOSS PER SHARE Basic and diluted net loss per share have been computed in accordance with SFAS No. 128, "Earnings per Share," using net loss divided by the weighted average number of shares of common stock outstanding for the period presented. Potentially dilutive options to purchase 2,815,500 shares of common stock with a weighted average exercise price of $7.44 per share outstanding at December 31, 1999, 411,067 common shares issuable upon conversion of the preferred stock and 461,876 outstanding warrants to purchase common stock were excluded from the presentation of diluted net loss per share, as they are antidilutive due to the net loss. There were no potentially dilutive securities outstanding for the years ended December 31, 1997 and 1998. 13. EMPLOYEE BENEFITS In 1999, we established a defined contribution 401(k) savings plan, which covers substantially all employees, subject to certain minimum age and service requirements. Contributions to this plan are voluntary; however, we match 100% of the first 6% of an employee's contribution. F-17 65 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
PREDECESSOR NETZEE ------------------------------------------ ------------ FOR THE FOR THE PERIOD FROM PERIOD FROM FOR THE YEAR FOR THE YEAR JANUARY 1, MARCH 1, ENDED ENDED 1999 TO 1999 TO DECEMBER 31, DECEMBER 31, FEBRUARY 28, DECEMBER 31, 1997 1998 1999 1999 ------------ ------------ ------------ ------------ Cash paid for interest........................ $0 $14,034 $2,971 $ 740,638 Supplemental disclosure of non-cash investing and financing activities: Stock issued for acquisitions............... 0 0 0 71,557,450 Warrants issued for the purchase of common stock.................................... 0 0 0 4,618,760 Stock issued for notes receivable........... 0 0 0 3,110,000 Purchase of property and equipment with note payable.................................. 0 0 0 1,345,000 Stock issued as deferred compensation....... 0 0 0 1,125,000 Stock issued in connection with marketing agreements, net of cash paid............. 0 0 0 1,079,096 Capital contribution for property and equipment from shareholder............... 0 0 0 750,000 Exercise of stock options for note receivable............................... 0 0 0 93,300
15. COMMITMENTS AND CONTINGENCIES We lease various equipment and facilities under operating lease agreements. Future minimum annual obligations under these leases as of December 31, 1999 are as follows: 2000........................................................ $ 617,314 2001........................................................ 638,283 2002........................................................ 462,714 2003........................................................ 173,240 2004........................................................ 173,725 Thereafter.................................................. 188,890 ---------- Total............................................. $2,254,166 ==========
Rent expense for the years ended December 31, 1997 and 1998, the period from January 1, 1999 and February 28, 1999 and the period from March 1, 1999 to December 31, 1999 was $20,241, $53,604, $8,934 and $138,874, respectively. LITIGATION We are party to various claims and legal proceedings that arise in the normal course of business. Management, on the advice of legal counsel, does not believe that a negative outcome of any known pending litigation would have a material adverse effect on us or our financial position and results of operations. 16. SUBSEQUENT EVENTS ACQUISITION OF DIGITAL VISIONS, INC. On March 7, 2000, we acquired certain assets and assumed certain liabilities of Digital Visions, Inc. ("DVI"), for a purchase price of 838,475 shares of our common stock, options to purchase 70,419 shares of common stock that were received in exchange for the cancellation of options to purchase DVI common stock, F-18 66 NETZEE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the assumption of approximately $3,300,000 in outstanding debt, and the assumption of operating liabilities and payment of other acquisition costs of approximately $1,200,000. A portion of the shares of common stock issued in this transaction was placed in escrow for indemnification and other purposes. DVI also has the right to receive up to 628,272 additional shares of our common stock if certain revenue targets are met in fiscal years 2000 and 2001. EXERCISE OF WARRANTS TO PURCHASE COMMON STOCK On March 2, 2000, warrants to purchase 461,876 shares of common stock were exercised. Proceeds from the exercise of the warrants totaled approximately $1.5 million. PROMISSORY NOTE TO INTERCEPT On March 24, 2000, pending finalization of the line of credit discussed in Note 7, we issued a promissory note to InterCept in the principal amount of approximately $7.8 million, which reflects the amount borrowed under terms consistent with the commitments as of that date. This note bears interest at a rate of prime plus 2% and is secured by substantially all of our assets. Accrued interest is payable monthly beginning May 1, 2000. F-19 EX-10.7 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into by and between NETZEE, INC., a Georgia corporation (the "Company"), and RICHARD S. EISWIRTH, JR., an individual resident of the State of Georgia (the "Executive"), to be effective as of the 1st day of March, 2000 (the "Effective Date"). The Company and the Executive previously entered into that certain Employment Agreement, dated September 1, 1999 (the "Old Agreement"), whereby the Executive was employed by the Company as the Company's Executive Vice President of Finance and Chief Financial Officer. The Company and the Executive desire to mutually terminate the Old Agreement, effective as of the Effective Date, and adopt this Agreement for the purpose of making such changes as the parties herein agree, in consideration for the outstanding efforts and achievements of the Executive since the commencement of the Old Agreement. In this regard, the Company desires to continue the employment of the Executive as its Executive Vice President of Finance and Chief Financial Officer, and the Executive is willing to continue to serve the Company on the terms and conditions provided herein. Defined Terms: Capitalized terms used in this Agreement that are not otherwise defined herein are defined at Section 19 hereof. 1. Employment. The Company hereby employs the Executive, and the Executive hereby agrees to serve the Company, as the Executive Vice President of Finance and Chief Financial Officer of the Company, upon the terms and conditions set forth herein. The Executive shall be the only Executive Vice President of Finance and Chief Financial Officer of the Company. The Executive shall have such authority and responsibilities as are consistent with his position as provided herein and as may be set forth in the Bylaws or assigned by the Chief Executive Officer of the Company (the "CEO") from time to time. The Executive shall report to the CEO. The Executive shall devote his full business time, attention, skill, and efforts to the performance of his duties hereunder, except during periods of illness or periods of vacation and leaves of absence consistent with Company policy. This employment relationship between the Executive and the Company shall be exclusive; provided, however, the Executive may devote reasonable periods of time (and be exclusively entitled to all compensation and other income related thereto) to continue to provide consulting services to other persons and organizations, to serve as a director or advisor to other organizations, to perform charitable and other community activities, 1 2 and to manage his personal investments; provided, further, however, that such activities do not interfere with the performance of his duties hereunder and are not adverse to the interests of the Company. Unless otherwise agreed to by the Executive, the Executive shall be headquartered at the Company's offices in and around the metropolitan area of Atlanta, Georgia, but shall do such traveling as is reasonably required of him in the performance of his duties. 2. Term. Unless earlier terminated as provided herein, the Executive's employment under this Agreement shall commence as of the Effective Date and shall continue until August 31, 2001(the "Initial Term"); provided, however, the Company may extend the Initial Term for two (2) addition years (the "Extended Term"), effective September 1, 2001, upon (i) written notice to the Executive on or before January 15, 2001, and (ii) a minimum of a seven percent (7%) increase to the Executive's then existing base salary (as described at Section 3.a. below). (The Initial Term and the Extended Term shall be individually and collectively referred to herein as the "Term.") 3. Compensation and Benefits. a. The Company shall pay to the Executive a base salary at a rate of not less than $140,000 per annum, in accordance with the salary payment practices of the Company in effect from time to time. On or before each September 1st of the Term (beginning September 1, 2000) the CEO (or Compensation Committee) shall review the base salary of the Executive and increase (but not decrease) such base salary by an amount determined in the discretion of the CEO (or Compensation Committee). b. During the Term, the Executive shall be eligible to participate in any management incentive programs established by the Company and to receive incentive compensation based upon achievement of targeted levels of performance and such other criteria as the CEO (or Compensation Committee) may establish from time to time. In addition, the CEO (or the Compensation Committee) shall annually consider (on or before each September 1st) the Executive's performance and determine if additional bonus is appropriate. c. The Executive may participate in any executive stock incentive plans established by the Company from time to time and shall be eligible for the grant of stock options, stock, and/or other awards provided thereunder. Additionally, the Board (or the Compensation Committee), upon 2 3 recommendation by the CEO, shall annually consider (on or before each September 1st) the Executive's performance and determine if additional grants of stock options, stock, and/or other awards are appropriate. d. The Executive shall continue to participate in all retirement, welfare, deferred compensation, life and health insurance (including health insurance for Executive's spouse and his dependants), and other benefit plans or programs of the Company now or hereafter applicable to the Executive or applicable generally to executives of the Company or to a class of executives that includes senior executives of the Company; provided, however, that during any period during the Term that the Executive is subject to a Disability, and during the 180-day period of physical or mental infirmity leading up to the Executive's Disability, the amount of the Executive's compensation provided under Section 3.a. shall be reduced by the sum of the amounts, if any, paid to the Executive for the same period under any disability benefit or pension plan of the Company or any of its subsidiaries. e. The Company shall provide to the Executive an automobile owned or leased by the Company of a make and model appropriate to the Executive's status (in the reasonable business judgement of the Executive) or, in lieu thereof at the Executive's option, shall provide the Executive with an monthly allowance of not less than $1,000 to partially cover the cost of an automobile owned or leased by the Executive. f. The Executive shall be entitled to three (3) weeks paid vacation (in addition to Company-wide holiday periods) each year during the Term, to be taken in accordance with the Company's vacation policies for executives, as in effect from time to time. g. The Company shall reimburse the Executive's expenses for dues and capital assessments (but not initiation fees) of one (1) country and (1) dining club membership currently held (or to be held) by the Executive; provided, however, that if the Executive during the term of his employment with the Company ceases his membership in any such clubs and any bonds or other capital payments made by the Company are repaid to the Executive, the Executive shall pay over such payments to the Company. h. The Company shall reimburse the Executive for first-class travel and accommodations, seminar, and other expenses related to the Executive's duties that are incurred and accounted for in accordance with the practices of the Company, as in effect from time to time. Further, the Company shall reimburse the Executive for all fees, dues, seminars (including travel and lodging) and other related costs and expenses reasonably required by the 3 4 Executive to maintain his status as a certified public accountant in each state that the Executive is, or may be, so certified. Upon the prior approval of the CEO, the Executive shall be entitled to personal use of assets of the Company, free of charge or assessment, whether or not such personal use is separate or in conjunction with a business purpose. i. The Company agrees that the Executive shall be entitled to invest in venture capital and similar investments whether or not the Company also participates in such investments. 4. Termination. a. The Executive's employment under this Agreement may be terminated prior to the end of the Initial Term, or if extended, the Extended Term, only as follows: (i) upon the death of the Executive; (ii) by the Company due to the Disability of the Executive upon delivery of a Notice of Termination to the Executive; (iii) by the Company for Cause upon delivery of a Notice of Termination to the Executive; (iv) by the Company without Cause upon delivery of a Notice of Termination; (v) following a Change in Control, by the Executive for any reason upon delivery of a Notice of Termination to the Company within a 90-day period beginning on the 30th day after any occurrence of a Change in Control or within a 90-day period beginning on the one year anniversary of the occurrence of any Change in Control; and (vi) by the Executive upon a material breach of this Agreement by the Company, upon delivery of a Notice of Termination to the Company at least thirty (30) days prior to the Termination Date and chance to cure therein. b. If the Executive's employment with the Company shall be terminated during the Term (i) by reason of the Executive's death, or (ii) by the Company for Disability or Cause, the Company shall pay to the Executive (or in the case 4 5 of his death, the Executive's estate) within 15 days after the Termination Date, a lump sum cash payment equal to the Accrued Compensation and, if such termination is other than by the Company for Cause, the Pro Rata Bonus. c. If the Executive's employment with the Company shall be terminated during the Term pursuant to Sections 4.a. (iv), (v), or (vi), the Executive shall be entitled to all of the following: (i) the Company shall pay to the Executive in cash, as a lump-sum, within 15 days of the Termination Date, an amount equal to all Accrued Compensation and the Pro Rata Bonus; (ii) the Company shall pay to the Executive in cash, as a lump-sum, within 15 days of the Termination Date, an amount equal to the base salary (as described in Section 3.a.), then in effect, that would otherwise have been payable to the Executive during the Term if such Term was not earlier terminated; provided, however, if the otherwise remaining Term is less than 365 days, such remaining Term shall automatically be deemed to be 365 days; (iii) the Company shall pay to the Executive in cash, as a lump-sum, within 15 days of the Termination Date an amount equal to the product of the Bonus Amount, multiplied by the number of months that were otherwise remaining in the Term, divided by 12; (iv) the Company shall pay to the Executive in cash, as a lump-sum, within 15 days of the Termination Date, an amount equal to those amounts described in Sections 3.e. and 3.g. that would have otherwise been payable during the Term if such Term was not earlier terminated; (v) the restrictions on any outstanding incentive awards (including stock options) granted to the Executive under any Company plan or arrangement shall lapse and such incentive award shall become 100% vested, and all stock options and stock appreciation rights granted to the Executive by the Company shall become immediately exercisable and shall become 100% vested; and (vi) upon a Termination Date occurring prior to the earlier of (A) an Initial Public Offering, or (B) the date in which the Company becomes subject to the reporting requirements set forth in the Securities Exchange Act of 1934, the Company shall, within 15 days 5 6 after the Termination Date, offer to repurchase all of the Company's capital stock and other debt and securities of the Company (collectively, the "Company Equity") then owned by the Executive, at a purchase price equal to the Fair Market Value of such Company Equity, as determined in accordance with the provisions below. The question of the Fair Market Value of the Company Equity shall be submitted to three impartial and reputable appraisers. The Executive and the Company shall each select one appraiser, and such appraisers shall select a third, independent appraiser. The three appraisers shall thereafter proceed as expeditiously as possible to determine (by concurrence of a majority of such appraisers) the Fair Market Value of the Company Equity, and the appraisers shall deliver an appraisal report to the Executive and the Company as soon as practicable after it is completed. The determination of the question of the Fair Market Value of the Company Equity by such appraisers shall be final and binding on the Executive and the Company for purposes of this Agreement. The Company shall pay the reasonable fees and expenses of such appraisers. For the purposes hereof, "Fair Market Value" shall mean the relevant percentage of the fair value of the business of the Company represented by the Company Equity as to which such determination is being made, which shall be determined on a going concern basis and as between a willing seller and a willing buyer, taking into account the Company's financial condition, performance, market share and other relevant criteria, but not taking into account the absence of a public market for the shares or that the shares constitute a minority interest in the Company. d. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and no such payment shall be offset nor reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment. 7 e. In the event that any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")) to the Executive or for his benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company or a change in ownership or effective control of the Company or of a substantial portion of its assets ( a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code and/or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter 6 8 collectively referred to as the "Excise Tax"), then the Executive shall promptly receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown due on his return, imposed with respect to such taxes and the Excise Tax, including any Excise Tax imposed upon the Gross-Up Payment, the Executive would retain an amount equal to such original payment or benefit. f. The severance pay and benefits provided for in this Section 4 shall be in lieu of any other severance or termination pay to which the Executive may be entitled under any Company severance or termination plan, program, practice or arrangement. The Executive's entitlement to any other compensation or benefits shall be determined in accordance with the Company's executive benefit plans and other applicable programs, policies and practices then in effect. 5. Protection of Trade Secrets and Confidential Information. a. Through exercise of his rights and performance of his obligations under this Agreement, Executive will be exposed to "Trade Secrets" and "Confidential Information" (as those terms are defined below). "Trade Secrets" shall mean information or data or of about the Company or any affiliated entity, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, products plans, or lists of actual or potential customers, clients, distributors, or licensees, that: (i) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. To the extent that the foregoing definition is inconsistent with a definition of "trade secret" mandated under applicable law, the latter definition shall govern for purposes of interpreting Executive's obligations under this Agreement. Except as required to perform his obligations under this Agreement or except with Company's prior written permission, Executive shall not use, redistribute, market, publish, disclose or divulge to any other person or entity any Trade Secrets of the Company. The Executive's obligations under this provision shall remain in force (during and after the Term) for so long as such information or data shall continue to constitute a "trade secret" under applicable law. Executive agrees to cooperate with any and all confidentiality requirements of the Company and Executive shall immediately notify the Company of any unauthorized disclosure or use of 7 9 any Trade Secrets of which Executive becomes aware. b. The Executive agrees to maintain in strict confidence and, except as necessary to perform his duties for the Company, not to use or disclose any Confidential Business Information at any time during the term of his employment and for a period of one year after the later of (i) the Executive's last date of employment and (ii) the last day of the period with respect to which the Executive received compensation by reason of his termination of employment. "Confidential Business Information" shall mean any non-public information of a competitively sensitive or personal nature, other than Trade Secrets, acquired by the Executive, directly or indirectly, in connection with the Executive's employment (including his employment with the Company prior to the date of this Agreement), including (without limitation) oral and written information concerning the Company or its affiliates relating to financial position and results of operations (revenues, margins, assets, net income, etc.), annual and long-range business plans, marketing plans and methods, account invoices, oral or written customer information, and personnel information. Confidential Business Information also includes information recorded in manuals, memoranda, projections, minutes, plans, computer programs, and records, whether or not legended or otherwise identified by the company and its affiliates as Confidential Business Information, as well as information that is the subject of meetings and discussions and not so recorded; provided, however, that Confidential Business Information shall not include information that is generally available to the public, other than as a result of disclosure, directly or indirectly, by the Executive, or was available to the Executive on a non-confidential basis prior to its disclosure to the Executive. c. Upon termination of employment, the Executive shall leave with the Company all business records relating to the Company and its affiliates including, without limitation, all contracts, calendars, and other materials or business records concerning its business or customers, including all physical, electronic, and computer copies thereof, whether or not the Executive prepared such materials or records himself. Upon such termination, the Executive shall retain no copies of any such materials. d. As set forth above, the Executive shall not disclose Trade Secrets or Confidential Business Information. However, nothing in this provision shall prevent the Executive from disclosing Trade Secrets or Confidential Business Information pursuant to a court order or court-issued subpoena, so long as the Executive first notifies (unless such notice is impracticable or impossible) the Company of said order or subpoena in sufficient time to allow the Company to seek an appropriate protective order. The Executive agrees that if he 8 10 receives any formal or informal discovery request, court order, or subpoena requesting that he disclose Trade Secrets or Confidential Business Information, he will immediately notify the Company and provide the Company with a copy of said request, court order, or subpoena. 6. Non-Solicitation and Related Matters. a. If the Executive is terminated for Cause or if the Executive resigns without Adequate Justification, then for a period of two years following the date of termination, the Executive shall not (except on behalf of or with the prior written consent of the Company) either directly or indirectly, on the Executive's own behalf or in the service or on behalf of others, (i) solicit, divert, or appropriate to or for a Competing Business, or (ii) attempt to solicit, divert, or appropriate to or for a Competing Business, any person or entity that was a customer or prospective customer of the Company on the date of termination and with whom the Executive had direct material contact within twelve months of the Executive's last date of employment. b. If the Executive is terminated for Cause or if the Executive resigns without Adequate Justification, then for a period of two years following the date of termination, the Executive shall not, either directly or indirectly, on the Executive's own behalf or in the service or on behalf of others, (i) solicit, divert, or hire away, or (ii) attempt to solicit, divert, or hire away any employee of, or consultant to, the Company or any of its affiliates engaged or experienced in the Business, regardless of whether the employee or consultant is full-time or temporary, the employment or engagement is pursuant to written agreement, or the employment is for a determined period or is at will. c. The Executive acknowledges and agrees that great loss and irreparable damage would be suffered by the Company if the Executive should breach or violate any of the terms or provisions of the covenants and agreements set forth in this Section 6. The Executive further acknowledges and agrees that each of these covenants and agreements is reasonably necessary to protect and preserve the interests of the Company. The parties agree that money damages for any breach of clauses (a) and (b) of this Section 6 will be insufficient to compensate for any breaches thereof, and that the Executive or any of the Executive's affiliates, as the case may be, will, to the extent permitted by law, waive in any proceeding initiated to enforce such provisions any claim or defense that an adequate remedy at law exists. The existence of any claim, demand, action, or cause of action against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the 9 11 covenants or agreements in this Agreement; provided, however, that nothing in this Agreement shall be deemed to deny the Executive the right to defend against this enforcement on the basis that the Company has no right to its enforcement under the terms of this Agreement. d. The Executive acknowledges and agrees that: (i) the covenants and agreements contained in clauses (a) through (e) of this Section 6 are the essence of this Agreement; (ii) that the Executive has received good, adequate and valuable consideration for each of these covenants; and (iii) each of these covenants is reasonable and necessary to protect and preserve the interests and properties of the Company. The Executive also acknowledges and agrees that: (i) irreparable loss and damage will be suffered by the company should the Executive breach any of these covenants and agreements; (ii) each of these covenants and agreements in clauses (a) and (b) of this Section 6 is separate, distinct and severable not only from the other covenants and agreements but also from the remaining provisions of this Agreement; and (iii) the unenforceability of any covenants or agreements shall not affect the validity or enforceability of any of the other covenants or agreements or any other provision or provisions of this Agreement. The Executive acknowledges and agrees that if any of the provisions of clauses (a) and (b) of this Section 6 shall ever be deemed to exceed the time, activity, or geographic limitations permitted by applicable law, then such provisions shall be and hereby are reformed to the maximum time, activity, or geographical limitations permitted by applicable law. e. The Executive and the Company hereby acknowledge that it may be appropriate from time to time to modify the terms of this Section 6 and the definition of the term "Business" to reflect changes in the Company's business and affairs so that the scope of the limitations placed on the Executive's activities by this Section 6 accomplishes the parties' intent in relation to the then current facts and circumstances. Any such amendment shall be effective only when completed in writing and signed by the Executive and the Company. 7. Successors; Binding Agreement. a. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. 10 12 b. Neither this Agreement not any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 8. Fees and Expenses. The Company shall pay all reasonable legal fees and related expenses (including but not limited to the costs of experts, accountants and counsel) incurred by the Executive as they become due as a result of any of the following: (a) the preparation, negotiation, counsel, and execution of this Agreement; (b) the termination of the Executive's employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment); or (c) the Executive seeking to obtain or enforce any right or benefit provided by this Agreement. 9. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other; provided, however, that all notices to the Company shall be directed to the attention of the Chairman of Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof. 10. Settlement of Claim. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right that the Company may have against the Executive or others. The Company may, however, withhold from any benefits payable under this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 11. Modification and Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by any party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 12. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia without giving effect to the conflict of laws principles thereof. Any action brought by any party to this 11 13 Agreement shall be brought and maintained in a court of competent jurisdiction in State Georgia. 13. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements (including the Old Agreement), understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. 15. Headings. The headings of Sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 17. Piggyback Registration Rights. a. Rights. Subject to the provision of this Section 17, if the Company proposes to make a registered public offering of shares of its Common Stock, excluding an Initial Public Offering, of any of its securities under the Act (whether to be sold by it or by one or more third parties), other than an offering registered on Form S-8, Form S-4, or comparable forms, the Company shall, not less than 45 days prior to the proposed filing date of the registration form, given written notice of the proposed registration to the Executive, and at the written request of the Executive delivered to the Company within 15 days after the receipt of such notice, shall, subject to the provisions of subsection (b) below, include in such registration and offering, and in any underwriting of such offering, all shares of Common Stock as may have been designated in the Executive's request. b. Offering Reduction. If a registration in which the Executive has the right to participate pursuant to this Section 17 is an underwritten offering, and if the managing underwriters determine in their reasonable discretion that the number of securities requested to be included in such registration exceeds the number that can be sold in such offering, then the Company shall include in such registration only the number of shares of Common Stock requested to be sold by the Company as the managing underwriters shall determine; and the Executive and all other persons who have exercised registration rights 12 14 with respect to the proposed offering shall participate in the offering in proportion to the number of shares of Common Stock so requested by each of them to be so included. 18. Other Registration Issues. a. The Company shall have no obligation to include shares of Common Stock owned by the Executive in a registration statement pursuant to Section 17 hereof, unless and until the Executive has furnished the Company with all information and statements about or pertaining to the Executive in such reasonable detail as is reasonably deemed by the Company to be necessary or appropriate with respect to the preparation of the registration statement. Whenever the Executive has requested that any shares of Common Stock be registered pursuant to Section 17 hereof, subject to the provisions of those Sections, the Company shall, as expeditiously as reasonably possible: (i) prepare and file with the SEC a registration statement with respect to such shares and use its best efforts to cause such registration statement to become effective as soon as reasonably practicable thereafter (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish counsel for the Executive with copies of all such documents proposed to be filed); (ii) prepare and file with the SEC such amendments and supplements to such registration statement and prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than nine (9) months or until the underwriters have completed the distribution described in such registration statement, whichever occurs first; (iii) furnish to the Executive such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus), and such other documents as the Executive may reasonably request; (iv) use its best efforts to register or qualify such shares under such other securities or Blue Sky Laws of such jurisdictions as the Executive reasonably requests (and to maintain such registrations and qualifications effective for a period of nine months or until the underwriters have completed the distribution of such shares, whichever occurs first), and to do any and all other acts and things 13 15 which may be necessary or advisable to enable the Executive or underwriters to consummate the disposition in such jurisdictions of such shares; provided, further, however, that, notwithstanding anything to the contrary in this Agreement with respect to the bearing of expenses, if any such jurisdiction shall require that expenses incurred in connection with the qualification of such shares in that jurisdiction be borne in part or full by the Executive, then the Executive shall pay such expenses to the extent required by such jurisdiction; (v) cause all such shares to be listed on securities exchanges, if any, on which similar securities issued by the Company are then listed; (vi) provide a transfer agent and registrar for all such shares not later than the effective date of such registration statements; (vii) enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions as the Executive and underwriters reasonably request (and subject to approval by the Company's counsel) in order to expedite or facilitate the disposition of such shares; and (viii) make available for inspection by the Executive, by any underwriter participating in any distribution pursuant to such registration statement, and by any attorney, accountant or other agent retained by the Executive or underwriter, or by any such underwriter, all financial and other records, pertinent corporate documents, and properties (other than confidential intellectual property) of the Company; provided, however, that the Company may condition delivery of any information, records or corporate documents upon the receipt from the Executive and the underwriter and their counsel, accountants, advisors and agents, of a confidentiality agreement in form and substance acceptable to the Company and its counsel in the exercise of their exclusive discretion. b. Holdback Agreement. In the event that the Company effects an underwritten public offering of any of the Company's equity securities, the Executive agrees, if requested by the managing underwriters, not to effect any sale or distribution, including any sale pursuant to Rule 144 under the Act, of any equity securities (except as party of such underwritten offering) during the 180-day period commencing with the effective date of the registration statement for such offering. 14 16 c. Stockholder Expenses. If, pursuant to Section 17 hereof, shares of Common Stock owned by the Executive are included in a registration statement, then the Executive shall pay all transfer taxes, if any, relating to the sale of its shares, the fees and expenses of his own counsel, and its pro rata portion of any underwriting discounts, fees or commissions or the equivalent thereof. d. The Company's Expenses. Except for the fees and expenses specified in Section 18(c) hereof and except as provided below in this Section 18(d), the Company shall pay all expenses incident to the registration and to the Company's performance of or compliance with this Agreement, including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or Blue Sky Laws, underwriting discounts, fees and commissions (other than the Executive's pro rata portion of any underwriting discounts or commissions or the equivalent thereof), printing expenses, messenger and delivery expenses, and fees and expenses of counsel for the Company and all independent certified public accountants and other persons retained by the Company. If the Company shall previously have paid, pursuant to this Section 18(d), the expenses of a registration, then the Executive shall pay all expenses described in this Section 18(d) (but not expenses described in Section 18(e) hereof). e. Other. With respect to any registration pursuant to Section 17 hereof, the Company shall pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties) and the expenses and fees for listing the securities to be registered on exchanges on which similar securities issued by the Company are then listed. f. Indemnity. In the event that any shares of Common Stock owned by the Executive are offered or sold by means of a registration statement pursuant to Section 17 hereof, the Company agrees to indemnify and hold harmless the Executive and each person, if any, who controls or may control the Executive within the meaning of the Act (the Executive and any such other persons being hereinafter referred to individually as an "Indemnified Person" and collectively as "Indemnified Persons") from and against all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, costs, and expenses, including, without limitation, interest, penalties, and reasonable attorneys fees and disbursements, asserted against, resulting to, imposed upon or incurred by such Indemnified Person, jointly or severally, directly or indirectly (hereinafter referred to in this Section 18(f) in the singular as a "claim" and in the plural as "claims"), based upon, arising out of, or resulting from any untrue statement or alleged untrue statement of a 15 17 material fact contained in the registration statement, any preliminary or final prospectus contained therein, or any amendment or supplement thereto, or any document incident to registration or qualification of any such shares, or any omission or alleged omission to state therein a material fact necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading, or any violation by the Company of the Act of any state securities or Blue Sky Laws, except insofar as such claim is based upon, arises out of or results from information developed or certified by the Executive for use in connection with the registration statement or arises out of or results from the omission of information known to the Executive prior to the violation or alleged violation. The Executive agrees to indemnify and hold harmless the Company, its officers and directors, and each person, if any, who controls or may control the Company within the meaning of the Act (the Company, its officers and directors, and any such persons also being hereinafter referred to individually in this context as an "Indemnified Person" and collectively as "Indemnified Persons"(from and against all claims based upon, arising out of, or resulting from any untrue statement of a material fact contained in the registration statement, or any omission to state therein a material fact necessary in order to make the statement made therein, in the light of the circumstances under which they were made, not misleading, to the extent that such claim is based upon, arises out of, or results from information developed or certified by the Executive for use in connection with the registration statement or arises out of, or results from an omission of information known to the Executive prior to the violation or alleged violation; provided, however, that the maximum amount of liability in respect of such indemnification shall be limited to an amount equal to the net proceeds actually received by the Company or the Executive from the sale of such shares effected pursuant to such registration. The indemnifications set forth herein shall be in addition to any liability the Company or the Executive may otherwise have to the Indemnified Persons. Promptly after actually receiving definitive notice of any claim in respect of which an Indemnified Person may seek indemnification under this Section 18(f), such Indemnified Person shall submit written notice thereof to either the Company or the Executive, as the case may be (sometimes being hereinafter referred to as an "Indemnifying Person"). The omission of the Indemnified Person so to notify the Indemnifying Person of any such claim shall not relieve the Indemnifying Person from any liability it may have hereunder except to the extent that (a) such liability was caused or increased by such omission, or (b) the ability of the Indemnifying Person to reduce such liability was materially adversely affected by such omission. In addition, the omission of the Indemnified Person to notify the Indemnifying Person of any such claim shall not relieve the Indemnifying Person to notify the Indemnifying Person of any such claim shall not relieve the Indemnifying 16 18 Person from any liability it may have otherwise hereunder. The Indemnifying Person shall have the right to undertake, by counsel or representatives of its own choosing, the defense, compromise or settlement (without admitting liability of the Indemnified Person) of any such claim asserted, such defense, compromise or settlement to be undertaken at the expense and risk of the Indemnifying Person, and the Indemnified Person shall have the right to engage separate counsel, at its own expense, whom counsel for the Indemnifying Person shall keep informed and consult with in a reasonable manner. In the event the Indemnifying Person shall elect not to undertake such defense by its own representatives, the Indemnifying Person shall give prompt written notice of such election tot he Indemnified Person, and the Indemnified Person shall give prompt written notice os such election to the Indemnified Person, and the Indemnified Person shall undertake the defense, compromise or settlement (without admitting liability of the Indemnified Person) thereof on behalf of and for the account and risk of the Indemnifying Person by counsel or other representatives designed by the Indemnified Person. In the event that any claim shall arise out of a transaction or cover any period or periods wherein the Company and the Executive shall each be liable hereunder for part of the liability or obligation arising therefrom, then the parties shall, each choosing its own counsel and bearing its own expenses, defend such claims, and no settlement or compromise of such claim may be made without the joint consent or approval of the Company and the Executive. Notwithstanding the foregoing, no Indemnifying Person shall be obligated hereunder with respect to amounts paid in settlement of any claim if such settlement is effected without the consent of such Indemnifying Person (which consent shall not be unreasonably withheld). 19. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: a. "Accrued Compensation" shall mean the aggregate amount of all amounts earned or accrued through the Termination Date but not paid as of the Termination Date including (i) base salary and other amounts set forth in Sections 3.e., f., g., and h., (ii) reimbursement for expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date and not otherwise reimbursed hereunder, and (iii) bonuses and incentive compensation (other than the Pro Rata Bonus). b. "Act" shall mean the Securities Act of 1933, as amended. c. "Adequate Justification" shall mean the occurrence after a Change in Control of any of the following events or conditions: (i) a material failure of the 17 19 Company to comply with the terms of this Agreement; (ii) any relocation of the Executive outside the Atlanta, Georgia metropolitan area; or (iii) other than as provided for herein, the removal of the Executive from the position and/or duties described above or any other substantial diminution in the Executive's authority or the Executive's responsibilities that is not approved by a majority of the members of the Board. d. "Bonus Amount" shall mean the greater of (i) the most recent annual bonuses paid or payable to the Executive, or (ii) the average of the annual bonuses paid or payable to the Executive during all previous fiscal years ended prior to the Termination Date. e. "Business" shall mean the design, development, marketing and implementation of electronic banking software and services for financial institutions. f. "Bylaws" shall mean the Bylaws of the Company, as amended, supplemented or otherwise modified form time to time. g. "Cause" shall mean the occurrence of any of the following: 1. any act that constitutes, on the part of the Executive, fraud or gross malfeasance of duty; provided, however, that such conduct shall not constitute Cause: (1.) unless (1) there shall have been delivered to the Executive a written notice setting forth with specificity the reasons that the Board believes the Executive's conduct constitutes the criteria set forth in clause (i), (2) the Executive shall have been provided the opportunity, if such behavior is susceptible to cure, to cure the specific inappropriate behavior within 30 days following written notice, (3) after such 30-day period, the Board of Directors determines that the behavior has not been cured, and (4) the termination is evidenced by a resolution adopted in good faith by two-thirds of the members of the Board (other than the Executive); or (2.) if such conduct (1) was believed by the Executive in good faith to have been in or not opposed to the interests of the Company, and (2) was not intended to and did not result in the direct or indirect gain to or personal enrichment of the Executive; or 18 20 (ii) the conviction (from which no appeal may be or is timely taken) or plea of other than "not guilty" of the Executive of a felony or misdemeanor if such misdemeanor involves moral turpitude; or (iii) the material breach of this Agreement by the Executive, upon forty-five (45) days written notice thereof and chance to cure therein. b. A "Change in Control" shall mean the occurrence during the Term of any of the following events: (i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term "person" is used for purposes of Section 13(d) or 14(d) of the Securities Exchange act of 1934 (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 35% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities that are acquired in a "Non-Control Acquisition" (as defined below) shall not constitute an acquisition that would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary"), (2) the Company or any Subsidiary, or (3) any Person in connection with a "Non-Control Transaction" (as defined below); (ii) The individuals who, as of the date of the Initial Public Offering, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board following the date of the Initial Public Offering; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including 19 21 by reason of any agreement intended to avoid or settle any Election contest or Proxy Contest; or (1) (iii) Approval by stockholders of the Company of: (A.) A merger, consolidation, or reorganization involving the Company, unless (1) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, own at least two-thirds of the combined voting power of the outstanding voting securities of the corporation resulting form such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, and (2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation. (A transaction described in clauses (1) and (2) shall herein be referred to as a "Non-Control Transaction") (B) A complete liquidation or dissolution of the Company; or (C) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the Executive reasonably demonstrates that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control (a "Third Party") or (B) otherwise occurred in connection with, or in anticipation of, a Change in Control that actually occurs, then for 20 22 all purposes of this Agreement, the date of a Change in Control with respect to the Executive shall mean the date immediately prior to the date of such termination of the Executive's employment. i. "Compensation Committee" shall mean the compensation committee of the Board. j. "Competing Business" shall mean any business that, in whole or in part, is the same or substantially the same as the Business, unless such Business is operated and/or conducted by an affiliate of the Company. k. "Disability" shall mean the inability of the Executive to perform substantially all of his current duties as required hereunder for a continuous period of 90 days because of mental or physical condition, illness or injury. l. "Initial Public Offering" shall mean the closing of the first public offering of the Company's common stock registered under the Act in which aggregate proceeds to the Company, net of all underwriting discounts and commissions and other expenses of issuance and distribution as stated in the prospectus relating to such offering, are equal to at least twelve million dollars ($12,000,000). m. "Notice of Termination" shall mean a written notice of termination from the Company or the Executive, as the case may be, that specifies an effective date of termination, indicates the specific termination provision in this Agreement relied upon, and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. n. "Pro Rata Bonus" shall mean an amount equal to the Bonus Amount multiplied by a fraction the numerator of which is the number of days in the fiscal year through the Termination Date and the denominator of which is 365. o. "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement), whether by operation of law or otherwise. p. "Termination Date" shall mean, in the case of the Executive's death, his date of death, and in all other cases, the date specified in the Notice of Termination. [Continued on the next page.] 21 23 IN WITNESS WHEREOF, the Company and Executive have caused this Agreement to be executed, effective as of the Effective Date. COMPANY: NETZEE, INC. by: /s/ Glenn W. Sturm --------------------------------------- Name: Glen W. Sturm --------------------------------------- Title: Chief Executive Officer --------------------------------------- EXECUTIVE: /s/ Richard S. Eiswirth, Jr. -------------------------------------------- RICHARD S. EISWIRTH, JR. 22 EX-10.21 3 EMPLOYMENT AGREEMENT, DATED 2/28/00 1 EXHIBIT 10.21 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into the 28th day of February, 2000 (the "Effective Date"), by and between Michael E. Murphy (the "Employee"), and Netzee, Inc., a Georgia corporation (the "Company"). W I T N E S S E T H : WHEREAS, the Company has agreed to acquired substantially all the assets and assume certain obligations of Digital Visions, Inc.("DVI"), pursuant to an Asset Purchase Agreement dated February 28, 2000; WHEREAS, the Company recognizes Employee's contributions in connection with his former employment with DVI and desires to provide for the employment of Employee by the Company; WHEREAS, Employee is willing to serve the Company on the terms and conditions herein provided. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Employee and the Company, including, without limitation, the premises and covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Scope of Employment 1.1 Employment. Subject to the terms hereof, the Company hereby agrees to employ Employee, and Employee hereby accepts such employment. Employee shall have such title as determined by the Company (but no less than Vice President) and shall report to and assist the Chief Executive Officer, President or Senior Executive Vice President of the Company (the "Reporting Officer") in performing the financial management services business of the Company (such duties and services referred to as the "Services"). The Reporting Officer may, in his or her discretion, request that Employee perform other or additional services as are consistent with the position of Employee and such other or additional services shall also be considered Services. The Reporting Officer may, in his or her discretion, assign to Employee such additional or different title or titles, having equivalent stature to those titles currently held, as are appropriate to the Services being performed by Employee. At the request and in the discretion of the Reporting Officer, Employee shall serve as an officer or director of any subsidiary or affiliate of the Company, and shall perform services for any such subsidiary or affiliate as are appropriate to and consistent with the Services being performed by Employee for the Company. Employee shall devote substantially all of Employee's productive business time, energy and skill (except on vacation days and holidays) to performing his obligations hereunder and shall perform his obligations hereunder diligently, faithfully and to the best of Employee's abilities. This Agreement is contingent upon consummation of the transactions contemplated in the Asset 2 Purchase Agreement and the other Purchase Agreements and this Agreement shall be null and void and of no effect whatsoever if such transactions are not consummated. 1.2 Place of Performance. During the term of his employment hereunder (the "Term"), Employee shall be based in the Minneapolis/St. Paul, Minnesota area except for reasonably required business travel. 1.3 Compliance with Policies. Subject to the terms of this Agreement, during the Term, Employee shall comply in all material respects with all policies and procedures applicable to similarly situated employees of the Company generally and specifically to Employee as may be established by the Company. Section 2. Term. Subject to prior termination as provided in Section 5 of the Agreement, the term of the Agreement shall be twenty-four (24) months, commencing on the Effective Date hereof and ending on the date that marks the end of twenty-four (24) months thereafter (the "Term"). Section 3. Compensation; Expenses. 3.1 (a) Base Salary. Employee shall be paid a base salary (the "Base Salary") during the Term at the rate of $185,000 per year. The Base Salary and expense reimbursements pursuant to this Section 3 shall be (i) payable bi-monthly on the schedule that the Company may implement for similarly situated employees from time to time for such payments, and (ii) subject to any withholdings and deductions required by applicable law. (b) Stock Options. Employee shall be granted a non-qualified stock option under the Company's 1999 Stock Option Plan to purchase 100,000 shares (subject to adjustment for stock splits, stock dividends and recapitalizations) of registered Company stock. The options shall have an exercise price equal to the fair market value of Company stock on the date of grant, vest one-half (50,000 shares) upon twelve (12) months of employment and the remaining one-half (50,000 shares) upon twenty-four (24) months of employment and be exercisable for a period of ten (10) years, subject to early termination and other provisions, all as more particularly set forth in the plan and Employee's stock option agreement. The options shall vest immediately upon a transfer of control of the Company. 3.2 Expense Reimbursement. The Company shall pay or reimburse Employee for all reasonable business expenses incurred or paid by Employee in the course of performing his duties hereunder and in accordance with the Company policy. As a condition to such payment or reimbursement, however, Employee shall maintain and provide to the Company, upon the Company's request, reasonable documentation and receipts for such expenses. Section 4. Employee Benefits. 4.1 Benefit Plans. During the Term, Employee shall be entitled to participate in such of the Company's retirement, supplemental retirement, profit sharing and pension plans, life, health, disability and other insurance programs, as well as other benefit programs (including an appropriate car allowance), which are generally available to other similarly situated employees of 2 3 the Company, subject to the Company's policies with respect to all such benefits or insurance programs or plans. The Company shall not, by virtue of this provision, be under any obligation to Employee to continue to maintain any particular plan or program or any particular benefit level under any plan or program. 4.2 Vacation. Employee shall be entitled to vacation and perquisites (e.g. cellular telephone) during the Term, to be accrued and in accordance with a policy that is no less favorable for Employee than the Company's normal vacation policy applicable to similarly situated employees. Section 5. Termination. 5.1 Death or Total Disability. Employee's employment hereunder shall terminate upon Employee's death. The Company may, in accordance with applicable state and federal laws and regulations, terminate Employee's employment hereunder in the event of Employee's total disability (total disability meaning the inability of Employee to perform substantially all of his current duties as required hereunder for a continuous period of 90 days because of mental or physical condition, illness or injury). 5.2 Cause. The Company may terminate Employee's employment hereunder for "Cause." "Cause" shall mean (a) Employee's, willful malfeasance, fraud or dishonesty in the performance of his obligations hereunder; (b) the commission of a willful act or omission of an act by Employee which causes material harm to the Company; (c) the conviction of Employee for the commission or perpetration by Employee of any felony or any act of fraud; (d) subject to the provisions of Section 1.1, the failure of Employee to devote his full time and attention to the business as provided in Section 1; (e) Employee's breach of or failure to observe the terms of this Agreement in any material respect; (f) the failure of Employee to perform his duties hereunder in a manner satisfactory to the Reporting Officer, as determined in his or her reasonable discretion; provided, however, that Employee shall have 30 days (or such lesser amount of time as is necessary) to cure such failure after receiving notice from the Company; and provided, further that the Company shall be obligated to provide only one notice to Employee with respect to any identified deficiency or failure pursuant to this Section 5.2(f) and, thereafter, the Company may terminate Employee, without Employee having a right to cure with respect to that identified failure or deficiency; or (g) Employee's engaging in conduct or activities involving moral turpitude that is or are reasonably likely to cause material damage to the business or reputation of the Company, or any affiliate of the Company. 5.3 Termination Without Cause. In the event the Company shall terminate the employment of Employee without cause prior to the expiration of the Term, Employee shall be entitled to payment of his Base Salary for the greater of (a) twelve (12) months or (b) the remainder of the Term, which shall continue to be paid in equal monthly installments. 5.4 Termination Date and Notice of Termination. Any termination of Employee's employment by the Company (other than termination upon the death of Employee) shall be communicated by written notice to Employee, and the date of termination shall be the date on which such notice is given. 3 4 Section 6. Representations. 6.1 Of Employee. Employee represents and warrants to the Company that (a) his execution, delivery and performance of this Agreement does not and will not conflict with, violate, or constitute a breach of or default under any provision of law or regulation applicable to his or any provision of any agreement, contract or other instrument to which he is a party or otherwise bound; (b) this Agreement constitutes the legal, valid and binding obligation of Employee, enforceable against Employee in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general application relating to or affecting creditors rights and to general equitable principles; and (c) Employee has not received any legal advice contrary to his representations or warranties set forth in this Section 6.1. 6.2 Of the Company. The Company represents and warrants to Employee that (a) this Agreement has been duly executed and delivered by the Company; (b) the execution, delivery and performance of this Agreement by the Company have been duly authorized by all necessary corporate action; (c) this Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms; (d) the execution, delivery and performance of this Agreement by the Company do not and will not conflict with, violate, or constitute a breach of the Articles of Incorporation or By-laws of the Company or any of its subsidiaries or any law or regulation applicable to the Company or any of its subsidiaries; or any provision of any agreement or other instrument to which the Company or any of its subsidiaries is a party or otherwise is bound; and (e) the Company has not received any legal advice contrary to the Company's representations and warranties set forth in this Section 6.2. Section 7. Noncompetition. During the Term of his employment with the Company, and at the option of the Company, exercised by written notice to Employee, for an additional period of eighteen (18) months after the Term of employment, the Employee shall not directly or indirectly, through one or more intermediaries or otherwise, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed or otherwise connected as an officer, employee, stockholder, partner or otherwise with, any business that at any relevant time during such period directly or indirectly provides products or services offered or provided by the Company. The ownership by Employee of less than five percent (5%) of the shares of the capital stock of a publicly-held corporation engaged in providing the same products or services offered or provided by the Company shall not be a violation of this Section 7. Section 8. Non-Solicitation of Customers. During the Term of his employment with the Company, and at the option of the Company, exercised by written notice to Employee, for an additional period of eighteen (18) months after the Term of employment, the Employee shall not directly or indirectly, through one or more intermediaries or otherwise, solicit, direct or appropriate, or attempt to solicit, direct or appropriate, any individual or entity which is, at any time during such period, a customer or client of the Company and with whom Employee had material contact during the Term or at any time during which Employee performed services on behalf of the Company for the purpose of providing a service or product to such customer or client which is the same type of service or product offered or provided by the Company. 4 5 Section 9. Consideration for Compliance. If the Company notifies Employee that he must comply with Sections 7 and 8 hereof, the Company will pay Employee his last monthly salary, as consideration therefor, each month during such period of required compliance. The Company may cease to make such payments at any time, but if the Company ceases to make such payments, Employee's obligations to comply with Sections 7 and 8 hereof thereupon shall terminate. Section 10. Non-Solicitation of Personnel. During the Term of his employment with the Company, and for a period of eighteen months (18) thereafter, Employee shall not, directly or indirectly, through one or more intermediaries or otherwise, employ, induce, solicit for employment, or assist others in employing, inducing or soliciting for employment any individual who is at any time during such period an employee or consultant of the Company for the purpose of providing services that are the same or similar to the types of services offered to or engaged in by the Company. Section 11. Rights to Work Product. Except as expressly provided in this Agreement, the Company (and its related entities) alone shall be entitled to all benefits, profits and results arising from or incidental to Employee's performance of the Services. To the greatest extent possible, any work product, property, data, documentation or information or materials prepared, conceived, discovered, developed or created by Employee in connection with performing the Services or any other of his employment responsibilities during the Term ("Work Product") shall be deemed to be "work made for hire" as defined in the Copyright Act, 17 U.S.C.A. ss. 101 et seq., as amended, and owned exclusively and perpetually by the Company. Employee hereby unconditionally and irrevocably transfers and assigns to the Company all intellectual property or other rights, title and interest Employee may currently have (or in the future may have) by operation of law or otherwise in or to any Work Product. Employee agrees to execute and deliver to the Company any transfers, assignments, documents or other instruments that the Company may deem necessary or appropriate to vest complete and perpetual title and ownership of any Work Product and all associated rights exclusively in the Company. The Company shall have the right to adapt, change, revise, delete from, add to and/or rearrange the Work Product or any part thereof written or created by Employee, and to combine the same with other works to any extent, and to change or substitute the title thereof, and in this connection Employee hereby waives the "moral rights" of authors as that term is commonly understood throughout the world including, without limitation, any similar rights or principles of law which Employee may now or later have by virtue of the law of any locality, state, nation, treaty, convention or other source. Unless otherwise specifically agreed, Employee shall not be entitled to any compensation in addition to that provided for in Section 3 of this Agreement for any exercise by the Company of its rights set forth in the preceding sentence. Section 12. Nondisclosure Covenant. Through exercise of his rights and performance of his obligations under this Agreement, Employee will be exposed to "Trade Secrets" and "Confidential Information" (as those terms are defined in the next sentences). "Trade Secrets" shall mean information or data of or about the Company or any affiliated entity, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, products plans, or lists of actual or potential customers, clients, distributors, or licensees, that: (i) derive economic value, 5 6 actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. To the extent the foregoing definition is inconsistent with a definition of "trade secrets" mandated under applicable law, the latter definition shall govern for purposes of interpreting Employee's obligations under this Agreement. "Confidential Information" shall mean valuable, non-public, competitively sensitive data and information relating to the business of the Company or any affiliated entity, other than Trade Secrets. Employee acknowledges and agrees that any unauthorized disclosure or use of any Trade Secrets or Confidential Information would be wrongful and would likely result in immediate and irreparable injury to the Company. Except as required to perform his obligations under this Agreement or except with Company's prior written permission, Employee shall not, without the express prior written consent of the Company, redistribute, market, publish, disclose or divulge to any other person or entity, or use or modify for use, directly or indirectly in any way for any person or entity: (i) any Trade Secrets at any time (during or after the Term) during which such information or data shall continue to constitute a "trade secret" under applicable law; and (ii) any Confidential Information during the Term and for a period of two (2) years after termination. Employee agrees to cooperate with any reasonable confidentiality requirements of the Company. Employee shall immediately notify the Company of any unauthorized disclosure or use of any Trade Secrets or Confidential Information of which Employee becomes aware. Section 13. Return of Materials. At any point during the Term at the specific request of the Company, or, in any event, as promptly as practicable after Employee's employment hereunder has been terminated, Employee will return to the Company all Work Product (including any copies or reproductions thereof and any materials constituting or containing Trade Secrets or Confidential Information of the Company) that are in Employee's possession or control. Section 14. Acknowledgment. The parties acknowledge and agree that the covenants of Employee in Sections 7, 8, 10, 11, 12 and 13 (collectively, the "Protective Covenants") are reasonable as to time, scope and territory given the Company's need to protect its substantial investment in its Confidential Information, Trade Secrets and customer relationships, and particularly given (a) the compensation and benefits that are to be provided Employee, (b) the Company's investment of time, effort and capital in enhancing Employee's business skills and opportunities, (c) the complexity and competitive nature of the Company, and (d) that Employee has sufficient skills to find alternative, commensurate employment or consulting work in Employee's field of expertise that would not entail a violation of the Protective Covenants. Notwithstanding Section 15 below, the parties further acknowledge that any breach or threatened breach of a Protective Covenant by Employee is likely to result in irreparable injury to the Company, and therefore, in addition to all remedies provided at law or in equity (which remedies shall be cumulative and not mutually exclusive), Employee agrees that the Company shall be entitled to file suit in a court of competent jurisdiction to seek a temporary restraining order and a permanent injunction to prevent a breach or contemplated breach of the Protective Covenant. 6 7 Section 15. Arbitration. Any controversy or claim brought by any person or entity against the Employee, the Company or any of its officers, directors, employees or agents arising from, out of or relating to this Agreement, the breach thereof (other than controversies or claims arising from, out of or relating to the provisions in Sections 7, 8, 10, 11, 12 and 13 with respect to which either party may upon 24 hours notice to the other seek injunctive and/or other equitable relief in a court of competent jurisdiction as set forth in Section 16.2), or the employment or termination of Employee by the Company which would give rise to a claim under federal, state or local law (including but not limited to claims based in tort or contract, claims for discrimination under state or federal law, and/or claims for violation of any federal, state or local law, statute or regulation) ("Claims") shall be submitted to an impartial mediator ("Mediator") selected jointly by the parties. Both parties shall attend a mediation conference and attempt to resolve any and all Claims. If they are not able to resolve all Claims, any unresolved Claims, including any dispute as to whether a matter constitutes a Claim which must be submitted to arbitration, shall be determined by final and binding arbitration in Atlanta, Georgia in accordance with the Model Employment Dispute Resolution Rules ("Rules") of the American Arbitration Association, by an experienced employment arbitrator licensed to practice law in the State of Georgia in accordance with the Rules, except as herein specified. The arbitrator shall be selected by alternate striking from a list of six arbitrators, half of which shall be supplied by the Company and half by Employee. The party not initiating the arbitration shall strike first. The process shall be repeated twice until an arbitrator is selected. If an arbitrator is still not selected, the Mediator shall provide a list of three names which will be alternately struck, with the party initiating the arbitration striking first, until a selection is made. A demand for arbitration shall be made within a reasonable time after the Claim has arisen. In no event shall the demand for arbitration be made after the date when institution of legal and/or equitable proceedings based on such Claim would be barred by the applicable statute of limitations. Each party to the arbitration will be entitled to be represented by counsel. The parties shall formulate a written plan of pre-hearing discovery by agreement, or, if no agreement can be reached, a plan of discovery shall be formulated by the parties in collaboration with the Mediator, whose decision shall be final. By mutual agreement of the parties, additional depositions may be taken. The arbitrator shall have the authority to hear and grant a motion to dismiss and/or for summary judgment, applying the standards governing such motions under the Federal Rules of Civil Procedure. Each party shall have the right to subpoena witnesses and documents for the arbitration hearing. A court reporter shall record all arbitration proceedings. With respect to any Claim brought to arbitration hereunder, either party may be entitled to recover whatever damages would otherwise be available to that party in any legal proceeding based on the federal and/or state law applicable to the matter and as specified by Section 16.2. The decision of the arbitrator may be entered and enforced in any court of competent jurisdiction by either the Company or Employee. Unless otherwise awarded by the Mediator, each party shall pay the fees of their respective attorneys, the expenses of their witnesses and any other expenses connected with presenting their Claim or defense, and shall pay that party's pro rata share of other costs of the arbitration, including the fees of the Mediator, the arbitrator, the cost of any record or transcript of the arbitration, administrative fees, and other fees and costs. Should Employee or the Company pursue any dispute or matter covered by this Section by any method other than said arbitration, the responding party shall be entitled to recover from the other party 7 8 all damages, costs, expenses, and attorneys' fees incurred as a result of such action. The provisions contained in this Section 15 shall survive the termination and/or expiration of this Agreement. The parties indicate their acceptance of the foregoing arbitration requirement by initialing below: -------------------------------- -------------------------------- For the Company Employee Section 16. Miscellaneous. 16.1 Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon Employee and his executor, administrator, heirs, personal representative and assigns, and the Company and its successors and assigns; provided, however, that neither party hereto shall be entitled to assign any of its rights, or delegate any of its duties hereunder (except, in the case of Employee, customary delegation of authority not inconsistent with this Agreement; and except, in the case of the Company, to any person or entity acquiring all or substantially all of the assets of the Company or to any entity controlling, controlled by or under common control with the Company), without the prior written consent of the other party. Any attempted assignment or delegation in violation of this provision shall be null and void. 16.2 Governing Law. This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed and governed by and in accordance with, the laws of the State of Georgia. The parties hereto agree that the state or federal courts in the State of Georgia shall have personal jurisdiction over them with respect to, and shall be the exclusive forum for the resolution of, any matter or controversy arising from or with respect to Sections 7, 8, 10, 11, 12 and 13 of this Agreement. Service of a summons and complaint concerning any such matter or controversy may, in addition to any other lawful means, be effected by sending a copy of such summons and complaint by certified mail to the party to be served as specified in Section 16.4 hereof. 16.3 Headings. The section and subsection headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 16.4 Notices. All notices or other communications that are required or permitted hereunder shall be in writing and sufficient if delivered personally, by a reputable overnight or express courier, registered or certified mail, return receipt requested, with proper postage prepaid, or telefax (with subsequent delivery via one of the previous methods) as follows: 8 9 (a) If to the Employee, addressed to; Michael E. Murphy 203 Wilshire Walk Hopkins, Minnesota 55305 (b) If to the Company, addressed to: Netzee, Inc. 6190 Powers Ferry Road Suite 400 Atlanta, Georgia 30339 Attn: President & Chief Financial Officer with a copy to: Sutherland Asbill & Brennan, LLP 999 Peachtree St., N.E., Suite 2300 Atlanta, Georgia 30309 Attn: Mark D. Kaufman or to such other addresses as shall be furnished in writing by any party to the other, and any such notice or communication shall be deemed to have been given (i) when personally delivered, (ii) as of three (3) business days after the date actually mailed, (iii) as of the next business day after the date actually sent via overnight or express courier or (iv) upon telefax confirmation of receipt to addressee by the sender. 16.5 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 16.6 Entire Agreement. This Agreement is intended by the parties to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by each of the parties hereto. 16.7 Severability. All provisions of this Agreement are severable from one another, and the unenforceability or invalidity of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement; provided, however, that should any judicial body interpreting this Agreement deem any provision to be unreasonably broad in time, territory, scope or otherwise, the Company and Employee intend for the judicial body, to the greatest extent possible, to reduce the breadth of the provision to the maximum legally allowable parameters rather than deeming such provision totally unenforceable or invalid. 9 10 16.8 Modification and Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is in writing and duly executed by the party to be charged with the waiver or modification. The waiver by either the Company or Employee of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any prior or subsequent breach of the same provision by the other party or a waiver of a breach of another provision of this Agreement by the other party. [Reminder of this page intentionally left blank] 10 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "Company" Netzee, Inc. By: /s/ RS Eiswirth Jr. ------------------------------------------ Name: RS Eiswirth Jr. --------------------------------- Title: SEVP & CFO --------------------------------- "Employee" /s/ Michael E. Murphy --------------------------------------------- Michael E. Murphy 11 EX-10.22 4 PROMISSORY NOTE DATED MARCH 24, 2000 1 EXHIBIT 10.22 PROMISSORY NOTE $7,800,000 MARCH 24, 2000 NETZEE, INC., successor to Direct Access Interactive, Inc. (hereinafter referred to as "Maker"), for value received, hereby promises to pay to the order of THE INTERCEPT GROUP, INC., a Georgia corporation (hereinafter referred to as "Payee"), the aggregate principal amount of SEVEN MILLION EIGHT HUNDRED THOUSAND DOLLARS ($ 7,800,000) together with interest on the unpaid principal balance and all other outstanding amounts and fees owed hereunder for which interest may accrue under applicable law from the date hereof at the rate of Prime Rate + 2.0% (a total of 11.0% at the date of this Note) per annum (computed on the basis of a 360-day year). The Prime Rate shall be equal to the prime rate as published in The Wall Street Journal (Eastern Edition). All amounts owed hereunder, including principal, interest, costs, fees and expenses, shall be immediately due and payable to Payee upon the earlier to occur of (a) March 31, 2002, (b) a change in control of Maker from that which exists on the date hereof, including but not limited to by reason of stock purchase or sale, merger, reorganization, voting agreement, or other transaction or agreement involving Maker and its subsidiaries or any of them whereby the current shareholders of Maker cease to own at least 75% of the voting securities of Maker or its successor or combined entity, or the sale or all or substantially all of the assets of Maker and its subsidiaries, or by reason of a change in the membership of Maker's board of directors such that the present members of such board cease to represent at least 2/3 of the members of the board, or (c) a default by Maker under this Note, the Security Agreement (defined below) or any material agreement between Maker or any of its subsidiaries, on the one hand, and Payee and any of its subsidiaries, on the other hand, which default continues beyond any applicable cure period. Interest only on the outstanding principal balance hereof shall be due and payable monthly, in arrears, with the first installment being payable on the first (1st) day of May, 2000 and subsequent installments being payable on the first (1st) day of each succeeding month thereafter until the Maturity Date, at which time the entire outstanding principal balance, together with all accrued and unpaid interest and all other sums owed hereunder, shall be immediately due and payable in full. All amounts due under this Note are payable at 3150 Holcomb Bridge Road, Suite 200, Norcross, GA 30071 or at such other place as Payee may from time to time designate to Maker in writing, in coin or currency of the United States of America. This Note shall be binding upon the Maker and its successors and assigns and shall inure to the benefit of Payee and its successors and assigns. The indebtedness evidenced hereby may be prepaid in whole or in part, at any time and from time to time, without penalty. Any such prepayments shall be credited first to any accrued and unpaid interest and then to the outstanding principal balance hereof. This Note is with full recourse to any assets of Maker. The proceeds of this Note are to be used by Maker for its working capital needs. This Note is secured by a lien and security interest to Maker's assets and properties, wherever located, now or hereafter acquired, as further described and evidenced by the Security Agreement dated on or about August 6, 1999 executed 2 by Maker for the benefit of Payee (the "Security Agreement"). All obligations of Maker under this Promissory Note shall be secured by such Security Agreement. If any of the following events (an "Event of Default") shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise), then this Note shall thereupon be and become, forthwith due and payable, without any further notice or demand of any kind whatsoever, all of which are hereby expressly waived: (a) If Maker defaults in the payment of principal or interest on this Note when and as the same shall become due and payable and such default continues for 20 days after Maker receives notice from Payee of such default; or (b) If Maker makes an assignment for the benefit of creditors or admits in writing an inability to pay his or its debts generally as they become due; (c) If an order, judgment or decree is entered adjudicating Maker bankrupt or insolvent; (d) If Maker petitions or applies to any tribunal for the appointment of a trustee or receiver of Maker, or of any substantial part of the assets of Maker, or commences any proceedings relating to Maker under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect; (e) If any such petition or application is filed, or any such proceedings are commenced, against Maker, and Maker by any act indicates its approval thereof, consent thereto, or acquiescence therein, or an order is entered appointing any such trustee or receiver, or approving the petition in any such proceedings, and such order remains unstayed and in effect for more than 90 days; (f) If Maker breaches any of its representations, warranties, covenants, agreements or other obligations under the Security Agreement, which breach is not cured within ten (10) days of such breach; (g) If Maker defaults on any other obligations owed to Payee under any now existing or hereafter arising agreement, promissory note, contract or other document; or (h) If Maker dissolves or otherwise ceases to conduct business in the ordinary course as presently conducted. Any failure on the part of Payee at any time to require the performance by Maker of any of the terms or provisions hereof, even if known, shall in no way affect the right thereafter to enforce the same, nor shall any failure of Payee to insist on strict compliance with the terms and 2 3 conditions hereof be taken or held to be a waiver of any succeeding breach or of the right of Payee to insist on strict compliance with the terms and conditions hereof. Time is of the essence with respect to this Note. This Note shall be governed by, and enforced and interpreted in accordance with, the laws of the State of Georgia without regard to the principles of conflict of laws. In the event this note, or any part hereof, is collected by or through an attorney-at-law, Maker agrees to pay all costs of collection including, but not limited to, attorneys' fees equal to 15% of the principal and interest then due. In the event that Maker fails to make any payment when due, Payee shall provide written notice of default to Maker, which notice shall allow Maker ten (10) days from the date of receipt of such notice in which to cure such default. If such default is not cured within the time allowed, the balance hereof shall be deemed to be immediately accelerated without further notice to Maker. IN WITNESS WHEREOF, Maker has executed this Note under seal as of the date first set forth above. MAKER: Netzee, Inc. /s/ Richard Eiswirth ---------------------------------------------- By: Richard Eiswirth Chief Financial Officer [CORPORATE SEAL] 3 EX-23.1 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into Netzee, Inc.'s previously filed Registration Statement File No. 333-30252. ARTHUR ANDERSEN LLP Atlanta, Georgia March 28, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 10-MOS DEC-31-1999 MAR-01-1999 DEC-31-1999 11,255,099 0 2,739,703 242,750 0 14,585,607 7,079,848 141,138 143,244,256 9,787,247 1,215,673 0 6,500,000 148,056,611 (34,176,237) 143,244,256 2,259,751 2,259,751 1,913,960 23,979,274 0 0 670,503 (22,390,026) 0 (22,390,026) 0 (4,518,760) 0 (26,908,786) (2.34) (2.34)
EX-99.1 7 SCHEDULE II CONSOLIDATED 1 EXHIBIT 99.1 Netzee, Inc. (formerly Direct Access Interactive, Inc.) Valuation and Qualifying Accounts Allowance for Doubtful Accounts (Schedule II to Audited Consolidated Financial Statements)
Balance at Provision Transfers Balance at Beginning Charged to from End of Period Expense Acquisitions Charge-offs of Period ---------- ---------- ------------ ----------- ---------- 1997............ $ -- $ -- $ -- $ -- $ -- 1998............ -- 10,000 -- -- 10,000 1999............ $10,000 $25,000 $276,750 $69,000 $242,750
EX-99.2 8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 99.2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To Netzee, Inc. We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of Netzee, Inc. included in this Form 10-K and have issued our report thereon dated February 8, 2000 (except with respect to the matters discussed in Note 16, as to which the date is March 24, 2000). Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule included as Exhibit 99.1 is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia February 8, 2000 -----END PRIVACY-ENHANCED MESSAGE-----