-----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, OmdmLjjihSYJgPQ+Mp4ixgDHAi7AFeoJMKHbQ6L9b9hi0ap36Uvbx/4m/XKMaLOQ uby6wrgI7rj7pBx6a3NOow== 0000950144-00-005712.txt : 20000502 0000950144-00-005712.hdr.sgml : 20000502 ACCESSION NUMBER: 0000950144-00-005712 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000501 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/A SEC ACT: SEC FILE NUMBER: 000-27925 FILM NUMBER: 615909 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/A 1 NETZEE, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 FORM 10-K/A (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. Documents incorporated by reference: None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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.......... 41 Item 11. Executive Compensation...................................... 44 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 49 Item 13. Certain Relationships and Related Transactions.............. 50 PART IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 54
i 3 EXPLANATORY NOTE We have filed this amendment to our Form 10-K pursuant to the SEC's requirements primarily in order to include information in Part III of this Form 10-K that, pursuant to General Instruction H to the Form 10-K, has been omitted. We will not file our proxy statement by May 1, 2000, as required by General Instruction H for incorporation of Part III information into the Form 10-K from the proxy statement. All other information in this Form 10-K/A is substantially identical to that contained in the Form 10-K that we filed with the SEC on March 29, 2000. 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 1 4 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 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. 2 5 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. 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%. 3 6 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 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 4 7 functions. We have also designed these Internet-based systems with the flexibility to accommodate increased numbers of users. 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/ 5 8 liability analytics provide risk assessment and portfolio analysis relative to the possible effects of potential transactions and fluctuations in interest rates. 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 6 9 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 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. 7 10 - 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). - 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; 8 11 - verification for merchants that there are sufficient funds in their customers' accounts; - 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 March 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 for our retail suite 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 five 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 - our ability to attract new customers or strategic partners. 15 18 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 an officer options to purchase an aggregate of 100,000 shares of common stock at $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 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 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. 20 23 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 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 21 24 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 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 22 25 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. To the extent that we are unable to provide quality customer service to community financial institutions and their customers, we may experience reduced growth or a decline in our sales. 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 32 35 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. 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 33 36 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. 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. 34 37 Our business could suffer if our community financial institution customers terminate their contracts with us 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 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 35 38 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 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 3,039,919 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 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial 39 42 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. 40 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information about our directors and executive officers, including their ages, as of April 17, 2000:
NAME AGE POSITION - ---- ---- -------- Glenn W. Sturm............................ 46 Chief Executive Officer and Director Catherine G. Silver....................... 43 President and General Manager C. Michael Bowers......................... 52 Chief Operating Officer Richard S. Eiswirth....................... 31 Senior Executive Vice President, Chief Financial Officer and Secretary Michael E. Murphy......................... 51 Vice President and Chief Technology Officer John W. Collins........................... 52 Chairman of the Board of Directors Jon R. Burke.............................. 52 Director Gayle M. Earls............................ 63 Director Joel A. Katz.............................. 55 Director Stiles A. Kellett, Jr. ................... 56 Director Jefferson B. A. Knox, Sr.................. 37 Director Bruce P. Leonard.......................... 46 Director Joseph F. Quinlan, Jr..................... 52 Director A. Jay Waite.............................. 51 Director
GLENN W. STURM has served as our Chief Executive Officer and a director since our inception in 1999. Since 1997, Mr. Sturm has served as a director of InterCept, which beneficially owns approximately 35% of our common stock. Since 1992, Mr. Sturm has been a partner in the law firm of Nelson Mullins Riley & Scarborough, L.L.P., where he served as Corporate Chairman until 1999 and serves as a member of the Executive Committee. From 1997 until 1999, Mr. Sturm also served as a director of WebMD, Inc. Mr. Sturm serves on the board of directors of two other public companies: Towne Services, Inc., a provider of sales and financing transactions products and services, and comstar.net, an Internet service provider. CATHERINE G. SILVER has served as our President and General Manager since April 2000 and as our Senior Executive Vice President and General Manager -- Marketing and Client Services from January to April 2000. From January 1999 until November 1999, Ms. Silver was President of the Professional Division of Healtheon/WebMD Corporation. From November 1997 until December 1998, Ms. Silver was a principal at Synectics, Inc., a management consulting company. From November 1996 until November 1997, Ms. Silver was Vice President of New Business Development at Reed Elsevier, a publisher and information services company. From October 1995 to November 1996, Ms. Silver was Vice President of Sales and Marketing for Herring Communications, publisher of the technology and business magazine "The Red Herring." C. MICHAEL BOWERS has served as our Chief Operating Officer since August 1999 and our President from August 1999 until April 2000. Mr. Bowers served as the President and Chief Executive Officer of Dyad from its inception in 1996 until we acquired it in 1999. From March 1991 to April 1996, Mr. Bowers was the manager of management consulting for Porter Keadle Moore, LLP (formerly Evans, Porter, Bryan & Co.), a financial institution accounting and consulting firm located in Atlanta, Georgia. Prior to joining Porter Keadle Moore, Mr. Bowers served in various capacities with seven community financial institutions. Mr. Bowers has over 25 years of experience with community financial institutions. RICHARD S. EISWIRTH has served as our Senior Executive Vice President, Chief Financial Officer and Secretary since August 1999. Prior to joining Netzee, Mr. Eiswirth was a certified public accountant with Arthur Andersen LLP from 1991 until 1999. MICHAEL E. MURPHY has served as our Vice President since March 2000 and as our Chief Technology Officer since April 2000. From May 1995 until March 2000, he served as Chief Executive Officer of Digital Visions. 41 44 Mr. Murphy has over 31 years of experience in investment operations and automation, with significant experience in the direction of software and product development projects. JOHN W. COLLINS has served as our Chairman of the Board of Directors since inception. Mr. Collins was the co-founder of InterCept and has served as its Chairman of the Board and Chief Executive Officer since 1996. Prior to co-founding InterCept, Mr. Collins served as a director and executive officer of several of its predecessor companies and affiliates since 1986. Mr. Collins has over 26 years of experience in various aspects of electronic commerce for community financial institutions. Mr. Collins is also a director of Towne Services, Inc. and several privately held companies. JON R. BURKE has served as a director of Netzee since October 1999. Since 1995, Mr. Burke has served as a principal with Brown, Burke Capital Partners, Inc., a financial consulting firm for companies involved in mergers and acquisitions. Mr. Burke also serves as the general managing member of Capital Appreciation Management Company, L.L.C., the managing general partner of an Atlanta-based merchant-banking fund. From 1973 to 1995, he was employed by The Robinson-Humphrey Company, Inc., most recently serving as a Senior Vice President in the Research Department. Mr. Burke currently serves on the Board of Directors of InterCept, HealthTronics, Inc., a provider of medical treatment solutions, and United Companies Financial Corporation, a financial services holding company engaged in commercial lending. GAYLE M. EARLS has served as a director of Netzee since September 1999. Since 1986, Mr. Earls has served as the President, Chief Executive Officer and a director of TIB The Independent BankersBank. Mr. Earls served for the past six years as a director of the Federal Reserve Bank of Dallas. JOEL A. KATZ has served as a director of Netzee since September 1999. Since 1998, Mr. Katz has been a shareholder in the law firm of Greenberg Traurig, P.A. in Atlanta, Georgia, where he specializes in the practice of entertainment and sports law. From 1971 to 1998, Mr. Katz practiced law in Atlanta with Katz, Smith & Cohen. STILES A. KELLETT, JR. has been a director of Netzee since October 1999. Since March 1996, Mr. Kellett has been the owner and Chairman of the Board of Directors of Kellett Investment Corp., a privately-held investment firm. From 1976 to 1995, Mr. Kellett was co-owner and served as Chairman of the Board of Directors of Convalescent Services, Inc., a long-term health care company located in Atlanta, Georgia. Mr. Kellett also serves as a director of MCI WORLDCOM, Inc. and as a director of 1st Virtual, Inc., an Internet bank based in Palm Beach Gardens, Florida. JEFFERSON B. A. KNOX, SR. has served as a director of Netzee since April 2000. Since April 1998, Mr. Knox has been the Executive Director of The Knox Foundation, a private charitable foundation. From 1992 to 1998, Mr. Knox was the President of the Columbia County, Georgia division of Allied Bank of Georgia, which was acquired by Regions Bank of Georgia in 1997. From 1987 to 1992, Mr. Knox served as the President of The Bank of Columbia County, which at that time was a wholly-owned subsidiary of Allied Bankshares, Inc. Mr. Knox is currently a member of the Board of Directors of Regions Bank of Central Georgia in Thomson, Georgia. Mr. Knox is the son of Boone A. Knox, a director of InterCept. BRUCE P. LEONARD has served as a director of Netzee since September 1999. Since 1990, Mr. Leonard has served as the President, Chief Executive Officer and a director of The Bankers Bank and its affiliate, Community Financial Services, Inc. Prior to that, he was Senior Vice President-Marketing of The Bankers Bank. He has served as past Chairman of the U.S. Bankers' Banks CEO Council and as a board member of the Independent Bankers Association of America. He is currently a board member of the Georgia Bankers Association, Community Bankers Association of Georgia and Southeastern Bankcard Association. JOSEPH F. QUINLAN, JR. has served as a director of Netzee since April 2000. Since 1984, Mr. Quinlan has been the President and Chief Executive Officer of First National Banker's Bank, a bankers' bank located in Baton Rouge, Louisiana. Mr. Quinlan also has served as the Chairman of First National Banker's Bank since 1995. He also served from 1977 to 1984 as the President of Citizens Bank and Trust in Thibodeaux, Louisiana. Mr. Quinlan is also the past President of the Community Bankers of Louisiana and the past Chairman of the Bankers' Bank Council. 42 45 A. JAY WAITE has served as a director of Netzee since September 1999. Mr. Waite is currently a private investor. From 1989 to 1998, Mr. Waite served as the Chairman of the Board of Reily Electrical Supply, Inc., an electrical equipment distributor. TERMS OF DIRECTORS AND EXECUTIVE OFFICERS Pursuant to our articles of incorporation, the board of directors is divided into three classes, as nearly equal in number as possible, designated class I, class II and class III. Messrs. Katz, Kellett, Quinlan and Sturm currently serve as class I directors, Messrs. Burke, Knox and Waite currently serve as class II directors, and Messrs. Collins, Leonard and Earls currently serve as class III directors. At each annual meeting of shareholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The term of the initial class I directors terminates on the date of the 2000 annual meeting of shareholders, the term of the class II directors terminates on the date of the 2001 annual meeting of shareholders, and the term of the class III directors terminates on the date of the 2002 annual meeting of shareholders, and in each case upon the election and qualification of their successors. However, because Mr. Burke was elected by the board of directors to fill a newly created directorship, his term will, in addition to the terms of the class I directors, expire on the date of the 2000 annual meeting of shareholders. Under agreements with each of The Bankers Bank and TIB, we agreed to cause Bruce P. Leonard, President and Chief Executive Officer of The Bankers Bank, and Gayle M. Earls, President and Chief Executive Officer of TIB, to be elected as class III directors, whose terms will expire on the date of the 2002 annual meeting. Under the terms of the Line of Credit Agreement by and between Netzee and Kellett Partners, L.P., we agreed to cause a representative of Kellett Partners to be elected to the board of directors. Stiles A. Kellett, Jr. has been designated by Kellett Partners as its representative to serve on our board of directors and was elected to the board of directors on October 19, 1999. Although this agreement was terminated on December 15, 1999, Mr. Kellett remains as a member of our board of directors. We have entered into two-year employment agreements with each of Messrs. Sturm, Bowers, Eiswirth and Murphy. COMMITTEES OF THE BOARD OF DIRECTORS The board of directors has established an audit committee and a compensation committee. The audit committee consists of Messrs. Leonard and Waite, and the compensation committee consists of Messrs. Katz and Waite. The audit committee reviews the scope and timing of our audit services and any other services our independent auditors are asked to perform, the auditor's report on our financial statements following completion of their audit and their policies and procedures with respect to internal accounting and financial control. In addition, the audit committee will make annual recommendations to the board of directors of the appointment of independent auditors for the following year. In connection with recent amendments to the rules of the Nasdaq National Market, we are now required to establish an audit committee that is generally comprised of at least three independent directors, one of whom must be sophisticated in finance or accounting. We intend to cause our audit committee to comply with these rule changes as soon as practicable. The compensation committee reviews and evaluates the compensation and benefits of all our officers, reviews general policy matters relating to compensation and benefits of our employees and makes recommendations concerning these matters to the board of directors. The compensation committee also administers our 1999 Stock Option and Incentive Plan. 43 46 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and any person who beneficially owns more than 10% of our common stock, to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of our common stock. These persons are required by the SEC's regulations to furnish us with copies of all section 16(a) forms they file. Based solely upon on a review of copies of section 16(a) filings we received during or with respect to fiscal 1999 and certain written representations of our officers and directors with respect to the filing of annual reports of changes in beneficial ownership on Form 5, we believe that each filing required to be made pursuant to section 16(a) of the Exchange Act during fiscal 1999 and for prior fiscal years has been filed in a timely manner with the exception of the following: - Richard S. Eiswirth, our Senior Executive Vice President, Chief Financial Officer and Secretary, did not file a Form 4 during fiscal 1999 to report a grant of options to him on November 9, 1999 pursuant to the Netzee, Inc. 1999 Stock Option and Incentive Plan. Mr. Eiswirth filed this Form 4 with the SEC on April 27, 2000. - C. Michael Bowers, our Chief Operating Officer, did not file a Form 4 during fiscal 1999 to report a grant of options to him on November 9, 1999 under the plan. Mr. Bowers filed this Form 4 with the SEC on April 27, 2000. - Each of Messrs. Eiswirth and Bowers did not file a Form 5 for the 1999 fiscal year with respect to each of the transactions above that were not timely filed on Form 4. - A. Jay Waite, one of our directors, did not file a Form 4 in fiscal 1999 with respect to the acquisition of 10,000 shares of common stock by Waite Family Fund Ltd. on November 9, 1999. This transaction was reported on Mr. Waite's Form 5 for the 1999 fiscal year. - Bruce P. Leonard, one of our directors, did not file a Form 4 with respect to the acquisition of 875 shares of common stock on November 16, 1999. This transaction was reported on Mr. Leonard's Form 5 for the 1999 fiscal year. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth as of December 31, 1999, all compensation paid during our last fiscal year to our Chief Executive Officer. No other executive officer earned more than $100,000 in total salary and bonus during the last fiscal year. Because none of our executive officers were employed by Netzee or any of its predecessors prior to July 1999, we have omitted information in this table for fiscal years 1997 and 1998. Pursuant to the rules of the SEC, the compensation described in this table does not include the value of medical insurance, group life insurance or other benefits received by the named executive officer that are available generally to all salaried employees. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------------------- AWARDS ------------------------- ANNUAL COMPENSATION RESTRICTED SECURITIES ------------------------------ STOCK UNDERLYING FISCAL OTHER ANNUAL AWARDS OPTIONS/SARS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION ($) (#) COMPENSATION - --------------------------- ------ ------ ----- ------------ ---------- ------------ ------------ Glenn W. Sturm Chief Executive Officer............ 1999 $1(1) $-0-(1) $-0- -0- 310,000 $-0-
- --------------- (1) In 1999, Mr. Sturm waived the receipt of all salary and bonus owed to him by Netzee, except for $1. All of our executive officers joined us in 1999, except for Ms. Silver, who joined us in January 2000 and Mr. Murphy, who joined us in March 2000. We entered into employment agreements with Messrs. Sturm, Bowers and Eiswirth on September 1, 1999, except that we amended our employment agreement with Mr. Eiswirth on March 1, 2000. The employment agreements with these executive officers provide for 44 47 minimum annual salaries as follows: Mr. Sturm, $250,000; Mr. Bowers, $200,000; and Mr. Eiswirth, $140,000. However, Mr. Sturm has elected to waive all of his salary and bonus for fiscal year 1999 and for the first quarter of fiscal year 2000. In addition, each of these employment agreements provide, among other things: - for a term of two years, subject to extension by us for an additional two years; - for incentive compensation based upon achievement of targeted levels of performance and other criteria that may be established by the board of directors from time to time; - that the executive is eligible to participate in all of our management incentive programs, and in our stock, retirement and similar plans, that we will pay for the executive's club dues and that we will provide him with an automobile allowance, permit him to use our assets free of charge and provide him with other benefits; - for termination upon death or disability or for cause; - that the executive may terminate the agreement following a change in control of Netzee; - that, if the agreement is terminated by us without cause or by the executive after our breach or after a change in control: - the executive will receive as a lump sum accrued compensation and bonus, and his annual base salary, bonus and certain benefits for the remainder of the term of the agreement (or if the remainder of the term is less than one year, his salary for one year), and, with respect to Mr. Sturm only, we must continue his insurance benefits until he reaches age 65 unless he obtains these benefits from a subsequent employer or Medicare; and - options and other stock awards held by the executive vest and become immediately exercisable; - the executive shall have piggyback registration rights to have his shares included in any registered offering we complete, subject to various limitations and conditions; - the executive shall be permitted to participate in venture capital and other investments whether or not we participate in the particular investment; and - if the executive is required to pay Federal excise taxes by reason of a golden parachute payment, we will reimburse him for those excise taxes. Mr. Sturm's employment agreement permits him to remain a partner at Nelson Mullins Riley & Scarborough, L.L.P., provided that his work for that firm and any other organization of which he is an officer or director does not materially interfere with his duties as our Chief Executive Officer and is not materially adverse to our interests. He is entitled to keep all compensation paid to him by that firm. In the event that in any instance his work for Nelson Mullins or any other organization shall be adverse to our interests, Mr. Sturm will immediately withdraw from any involvement or participation in that work. Further, under Mr. Sturm's arrangement with Nelson Mullins, Mr. Sturm is prohibited from receiving any benefit, financial or otherwise, from any work that Nelson Mullins may do for us. Additionally, Mr. Sturm's employment agreement gives him demand registration rights if he is terminated for any reason other than for cause and if, at the time of termination, he owns options that have not been subject to registration on a Form S-8 or otherwise. On February 28, 2000, we entered into a two-year employment agreement with Mr. Murphy that provides him with a base salary of $185,000 per year. We also granted Mr. Murphy an incentive stock option under our 1999 Stock Option and Incentive Plan to purchase up to 100,000 shares of our common stock. This option has an exercise price of $22.125 per share. One-half of the option will vest after 12 months of employment and the remaining one-half of the option will vest after 24 months of employment, except that the option shall vest immediately upon a transfer of control of Netzee. If the employment agreement is terminated by us without cause, Mr. Murphy will receive payment of his base salary for the greater of 12 months or the remainder of the term. The agreement also prohibits Mr. Murphy from competing with us or soliciting our customers, employees or consultants, during the term of the agreement and for a period up to 18 months after it expires, as we may in our discretion determine. However, if we extend the period of time during which Mr. Murphy 45 48 must refrain from soliciting our customers or competing with us, we must pay him the amount of his last monthly salary during each month that these restrictions are extended. We have also entered into agreements with other employees who are not executive officers. COMPENSATION OF DIRECTORS Neither employee nor non-employee directors receive cash compensation for services performed in their capacity as directors. We reimburse each director for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors and any of its committees. In addition, directors are eligible to receive grants of awards under our 1999 Stock Option and Incentive Plan. We have granted to each of our directors a one-time option to purchase 40,000 shares of common stock, 10,000 of which vest immediately and the remainder of which vest in equal portions over three years. STOCK OPTIONS The following table sets forth information regarding grants of stock options in fiscal 1999 to our chief executive officer, the only executive officer named in the summary compensation table. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------------------------------------------- NUMBER OF SECURITIES PERCENT OF TOTAL FAIR MARKET UNDERLYING OPTIONS/SARS PER SHARE VALUE OPTIONS/SARS GRANTED EXERCISE OR OF STOCK ON GRANTED TO EMPLOYEES BASE PRICE DATE OF GRANT EXPIRATION NAME (#) IN FISCAL YEAR ($/SH) ($/SH) DATE - ---- ------------ ---------------- ----------- ------------- ----------------- Glenn W. Sturm............ 170,000(2) 6.0% $ 2.00 $ 2.00 July 1, 2009 40,000(3) 1.4% $ 5.00 $11.50(1) September 7, 2009 100,000(4) 3.5% $14.00 $14.00 October 19, 2009 POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM ------------------------------ NAME 0%(1) 5% 10% - ---- -------- -------- -------- Glenn W. Sturm............ $ -- $ 26,373 $ 80,170 $260,000 $295,681 $368,466 $ -- $108,593 $330,113
- --------------- (1) For accounting purposes only, the fair market value of our common stock as of September 7, 1999, as derived from our consolidated financial statements, was assumed to be $11.50 per share. (2) The shares subject to this option vest as follows: 85,000 shares were vested as of November 15, 1999, the date we completed our initial public offering, and the remaining 85,000 shares will vest in three equal installments over three years. (3) The shares subject to this option vest as follows: 10,000 shares were vested as of September 7, 1999, the date of grant, and the remaining 30,000 shares will vest in three equal installments over three years. (4) The shares subject to this option vested in full on November 15, 1999, the date we completed our initial public offering. 46 49 EXERCISE OF OPTIONS AND YEAR-END VALUES No options were exercised in fiscal 1999 by the named executive officer. The following table sets forth information concerning the value at December 31, 1999 of unexercised options owned by the executive officer named in the summary compensation table. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1) ------------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------- --------------- ------------ -------------- Glenn W. Sturm......................... 195,000 115,000 $1,621,875 $1,591,875
- --------------- (1) Based upon a per share price of $16.625, the closing price of a share of our common stock on December 31, 1999, as reported by the Nasdaq National Market. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Our compensation committee is currently comprised of Messrs. Katz and Waite. Until our compensation committee was established on September 10, 1999, our board of directors, acting as a whole, determined executive compensation. Glenn W. Sturm, our Chief Executive Officer, is a member of our board of directors and, as such, participated in board deliberations concerning executive officer compensation. Mr. Sturm is a partner of Nelson Mullins Riley & Scarborough, L.L.P. This firm provided legal services to Netzee and its predecessor, Direct Access Interactive, in 1999, in the aggregate amount of $98,000. NETZEE, INC. 1999 STOCK OPTION AND INCENTIVE PLAN Effective August 5, 1999, our board of directors and shareholders approved the Netzee, Inc. 1999 Stock Option and Incentive Plan. Under this plan, we may grant to eligible persons, including our employees, directors, consultants and advisors, incentive stock options, non-qualified stock options, restricted stock awards and stock appreciation rights. We believe that this plan is an important part of our overall compensation program. The plan supports our ongoing efforts to attract and retain talented employees and directors and gives us the ability to provide employees with incentives that are directly linked to our financial results and increases in shareholder value. In addition, we may grant options outside of the plan. Eligibility. The compensation committee of the board of directors shall determine the persons eligible to receive awards under the plan. These persons may include, without limitation, our employees, directors, key consultants or advisors. Administration. The compensation committee administers the plan, except that with respect to options or awards granted to our officers, directors or more than 10% shareholders, the full board of directors or a committee comprised solely of two or more non-employee directors (if the compensation committee is not so comprised) is responsible for granting awards. The compensation committee will determine the terms of any awards granted under the plan, within limitations specified in the plan. Shares Reserved. The maximum number of shares of common stock that currently may be subject to outstanding awards, determined immediately after the grant of any award, is 4,816,768 shares, subject to adjustments for stock splits, dividends and other dilution events. The plan provides that the number of shares of common stock available for issuance under the plan shall be increased on the first day of each calendar year so that the maximum number of shares available for the issuance of awards is equal to 20% of the number of shares of common stock outstanding on the preceding trading day, as determined on a fully-diluted basis, but in no case will the number of shares be less than 3,500,000. The shares of common stock subject to any award that terminates, expires or is cashed out without payment being made in the form of common stock will again be available for distribution under the plan. 47 50 We have granted options to purchase an aggregate of 2,102,549 shares of common stock to our executive officers and directors, at per share exercise prices ranging from $2.00 to $22.125. As of April 17, 2000, the following executive officers and directors have received grants of options to purchase the specified amount of shares of common stock:
AMOUNT OF SHARES UNDERLYING EXECUTIVE OFFICER OR DIRECTOR OPTIONS GRANTED - ----------------------------- ---------------- Glenn W. Sturm.............................................. 410,000 Richard S. Eiswirth......................................... 350,000 C. Michael Bowers........................................... 300,000 John W. Collins............................................. 215,000 Michael E. Murphy........................................... 202,549 Catherine G. Silver......................................... 175,000 Bruce P. Leonard............................................ 85,000 Jon R. Burke................................................ 80,000 Gayle M. Earls.............................................. 45,000 Donny R. Jackson(1)......................................... 40,000 Joel A. Katz................................................ 40,000 Stiles A. Kellett, Jr....................................... 40,000 Jefferson B. A. Knox, Sr.................................... 40,000 Joseph F. Quinlan, Jr....................................... 40,000 A. Jay Waite................................................ 40,000
- --------------- (1) Mr. Jackson resigned as a member of the board of directors on April 17, 2000. All options that we have granted to our executive officers and directors vest in equal installments over a three-year period from the date of grant except: - 50,000 shares subject to Mr. Eiswirth's options were immediately exercisable when granted, of which options to purchase 30,000 shares were exercised by Mr. Eiswirth; - 2,549 shares subject to Mr. Murphy's options were immediately exercisable on March 7, 2000, and 50,000 shares subject to Mr. Murphy's options will become exercisable on each of February 28, 2001, April 17, 2001, February 28, 2002 and April 17, 2002; - 100,000 shares subject to an option held by Mr. Sturm will become exercisable in 12 equal monthly installments beginning on May 17, 2000; - 100,000 shares subject to an option held by Ms. Silver and 50,000 shares subject to an option held by Mr. Eiswirth will each become exercisable in 36 equal monthly installments beginning on May 17, 2000; - 10,000 shares subject to an option held by each of Messrs. Burke, Collins, Earls, Jackson, Katz, Kellett, Knox, Leonard, Quinlan, Sturm and Waite are currently vested; and - 185,000 shares subject to Mr. Sturm's options, 175,000 shares subject to Mr. Bowers' option and 150,000 of the remaining 250,000 shares subject to Mr. Eiswirth's options, vested on November 15, 1999, the date we completed our initial public offering. In addition, options to purchase 1,603,570 shares of common stock have been granted to other employees and consultants of Netzee as of April 17, 2000, of which options to purchase 500 shares have been exercised and options to purchase 7,500 shares have been cancelled. The board of directors has approved a one-time grant of options to purchase 40,000 shares to each director as of the date the director is first elected to the board of directors, one-fourth of which vests immediately and the remainder of which vests in equal portions over the three anniversaries of the date of grant. 48 51 Stock-Based Awards. The plan permits us to grant incentive stock options, which qualify for special tax treatment, and non-qualified stock options, as well as restricted stock awards and stock appreciation rights. The exercise price for incentive stock options cannot be less than the fair market value of common stock on the date of grant, as determined under the plan, or, with respect to a shareholder owning more than 10% of the total combined voting power of all classes of our stock, not less than 110% of the fair market value of the common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, or five years if granted to a shareholder owning more than 10% of the total combined voting power of all classes of stock. The number of shares subject to options granted to a person in a year may not exceed 1,000,000. The plan permits the compensation committee to cancel an option upon exercise by the holder and pay the holder, in cash or common stock, the difference between the fair market value of the shares covered by the option and the exercise price. Under the plan, we may also award shares of restricted common stock. Each award agreement will set forth conditions that must be satisfied before the restricted stock vests and becomes transferable. Restricted stock awards may be forfeited if, for example, the recipient's employment terminates before the award vests. Except as specified at the time of grant, holders of restricted stock will have voting rights and the right to receive dividends on their restricted stock. On November 15, 1999, an award of 75,000 shares of restricted stock was granted to Ms. Silver. This award will vest in three equal installments on November 15, 2000, 2001 and 2002, if Ms. Silver continues to be employed by us on each vesting date. As of April 17, 2000, this award was the only award of restricted stock that we have granted. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to the beneficial ownership of our common stock as of April 17, 2000 by: - each of our directors; - each shareholder known by us to be the beneficial owner of more than 5% of our common stock; and - all of our executive officers and directors as a group. As of April 17, 2000, we had 21,705,083 shares of common stock issued and outstanding. A person is deemed to be a beneficial owner of a security if that person has or shares "voting power," which includes the power to vote or to direct the voting of a security, or "investment power," which includes the power to dispose of or to direct the disposition of a security. For purposes of this table, a person or group of persons also is deemed to have beneficial ownership of any shares that the person or group has the right to acquire within 60 days after April 17, 2000. Except as otherwise indicated, and subject to applicable community property laws, the persons named below have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Unless otherwise indicated, the address of each beneficial owner below is 6190 Powers Ferry Road, Suite 400, Atlanta, Georgia 30339.
NUMBER OF PERCENTAGE BENEFICIALLY NAME OF BENEFICIAL OWNER SHARES OWNED - ------------------------ --------- ----------------------- The InterCept Group, Inc.(1)................................ 7,557,673 34.8% 3150 Holcomb Bridge Road, Suite 200 Norcross GA 30071 Community Financial Services, Inc.(2)....................... 1,361,000 6.3% 2410 Paces Ferry Road 600 Paces Summit Atlanta, GA 30339-4098 Glenn W. Sturm(3)(4)........................................ 931,556 4.3% John W. Collins(3)(5)(6).................................... 757,594 3.5% Jon R. Burke(3)(6).......................................... 10,000 *
49 52
NUMBER OF PERCENTAGE BENEFICIALLY NAME OF BENEFICIAL OWNER SHARES OWNED - ------------------------ --------- ----------------------- Gayle M. Earls(6)(7)........................................ 10,000 * Joel A. Katz(6)............................................. 10,000 * Stiles A. Kellett, Jr.(6)(8)................................ 511,000 2.4% Jefferson B. A. Knox, Sr.(6)................................ 10,000 * Bruce P. Leonard(6)(9)...................................... 10,000 * Joseph F. Quinlan, Jr.(6)(10)............................... 10,000 * A. Jay Waite(6)(11)......................................... 20,000 * All directors and executive officers as a group (14 persons)(12).......................................... 2,892,104 12.9%
- --------------- * Less than 1% of our outstanding common stock. (1) Includes 767 shares of common stock held by First Union National Bank, as escrow agent. All 7,557,673 shares of common stock beneficially owned by InterCept have been pledged by InterCept as collateral to a lender to secure debt for money borrowed. (2) Community Financial Services, Inc. is the ultimate parent of The Bankers Bank. (3) Excludes 7,557,673 shares of common stock held by InterCept as to which Mr. Burke, Mr. Sturm and Mr. Collins, directors of InterCept, each disclaim beneficial ownership. (4) Includes 8,989 shares of common stock held by First Union, as escrow agent, and 211,667 shares of common stock underlying options that are exercisable within 60 days of April 17, 2000. (5) Includes 10,366 shares of common stock held by First Union, as escrow agent, and 118,932 shares of common stock held indirectly through FDS, LLC, in which Mr. Collins owns a 60% membership interest. (6) Includes 10,000 shares of common stock underlying options that are immediately exercisable. (7) Excludes 969,792 shares of common stock held by Independent Bankers Financial Corporation, the ultimate parent of TIB, as to which Mr. Earls, as President and Chief Executive Officer of Independent Bankers Financial Corporation, disclaims beneficial ownership. (8) Includes 493,000 shares of common stock held by Kellett Partners, L.P. and 1,000 shares of common stock held by Mr. Kellett's wife, as to which Mr. Kellett disclaims beneficial ownership. (9) Excludes 1,361,000 shares of common stock held by Community Financial Services, as to which Mr. Leonard, as President and Chief Executive Officer of Community Financial Services, disclaims beneficial ownership. (10) Excludes 2,000 shares of common stock held by First National Banker's Bank, as to which Mr. Quinlan, as Chairman, President and Chief Executive Officer of First National Banker's Bank, disclaims beneficial ownership. (11) Includes 10,000 shares of common stock held by Waite Family Fund Ltd., a limited partnership in which Mr. Waite is the sole general partner. Mr. Waite disclaims beneficial ownership of all shares of common stock held by Waite Family Fund. (12) Includes a total of 657,550 shares of common stock underlying options that are exercisable within 60 days of April 17, 2000. John W. Collins is the Chief Executive Officer, the Chairman of the Board of Directors and a shareholder of InterCept, as well as the Chairman of the Board of Directors of Netzee. Glenn W. Sturm is a director and shareholder of InterCept, as well as the Chief Executive Officer and a director of Netzee. Bruce P. Leonard is the President and Chief Executive Officer of The Bankers Bank and a director of Netzee. Jon R. Burke is one of our directors and also a director of InterCept. 50 53 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We believe that all of the following transactions were made on terms no less favorable to us than could have been obtained from unaffiliated third parties on an arm's length basis. All transactions with our shareholders, officers and directors or their affiliates, if any, are subject to the approval of a majority of the independent and disinterested outside directors and are conducted on terms no less favorable to us than could be obtained from unaffiliated third parties on an arm's length basis. ACQUISITIONS Between August 1999 and March 2000, we acquired in separate transactions Dyad, Digital Visions, the remote banking operations of SBS and the Internet banking divisions of TIB and The Bankers Bank. See "Item 1. Business -- Formation of Netzee." In these transactions, some of the persons who were previously officers, directors or shareholders of the acquired companies became executive officers or directors of Netzee or beneficial owners of more than 5% of our common stock. The following table summarizes the total number of shares of common stock that we issued to these interested persons in those acquisitions. All of these shares were issued at a price of $10.50 per share, except for the shares issued to Digital Visions, which were issued at a price of $22.125 per share. Of the shares shown for each person below with respect to the Dyad, SBS and Digital Visions acquisitions, 10% were placed in escrow for one year from the date of acquisition for indemnification purposes.
ACQUISITION NAME OF RELATED PARTY NUMBER OF SHARES ISSUED - ----------- --------------------- ----------------------- Dyad Glenn W. Sturm.................................... 89,889 C. Michael Bowers................................. 69,057 John W. Collins(1)................................ 103,662 Donny R. Jackson(1)(2)............................ 23,019 FDS, LLC(1)....................................... 118,932 Remote banking operations of SBS David W. Brasfield(2)(3).......................... 866,666 Michael Vaughn(3)................................. 866,666 Robert D. Kirk(3)................................. 866,666 Internet banking division of TIB TIB(3)............................................ 1,361,000 Internet banking division of The Bankers Bank The Bankers Bank.................................. 1,361,000 Digital Visions Michael E. Murphy................................. 82,014(4)
- --------------- (1) Mr. Collins beneficially owns 60% of the membership interests in FDS and Mr. Jackson beneficially owns 20% of the membership interests in FDS. (2) This person is no longer an executive officer or director of Netzee. (3) This person or entity no longer beneficially owns more than 5% of our common stock. (4) Does not include (a) any shares that may be issued to Digital Visions pursuant to the attainment of revenue targets in fiscal years 2000 and 2001 or (b) options to purchase 102,549 shares of common stock that we granted to Mr. Murphy in connection with our acquisition of Digital Visions. RELATIONSHIP WITH INTERCEPT InterCept currently owns approximately 35% of our common stock. Our Chairman of the Board of Directors, John W. Collins, is the Chairman and Chief Executive Officer of InterCept, and Donny R. Jackson, who, until April 2000, was one of our directors, is the President, Chief Operating Officer and a director of InterCept. In addition, our Chief Executive Officer, Glenn W. Sturm, is also a director of InterCept and Jon R. Burke is one of our directors and also a director of InterCept. Boone A. Knox, the father of Jefferson B. A. Knox, Sr., one of our directors, is a director of InterCept. 51 54 Marketing Agreement We have entered into a marketing arrangement with InterCept under which our salespersons will sell InterCept's products and services and InterCept salespersons will sell our products and services. Under this arrangement, 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. Sale of SBS Non-Remote Banking Operations In August 1999, Direct Access Interactive, our predecessor, purchased SBS for 2.6 million shares of its common stock and $16.6 million in cash. Additionally, Direct Access Interactive repaid approximately $4.9 million of SBS debt. In August 1999, while Direct Access Interactive was a majority-owned subsidiary of InterCept, Direct Access Interactive sold all of the assets it acquired from SBS, other than SBS's Internet and telephone banking assets, to InterCept for 450,000 shares of Direct Access Interactive's common stock, which InterCept previously had owned. Leases We lease our sales, marketing and administrative offices in Birmingham, Alabama from DMB, LLC, which is principally owned by David W. Brasfield, who until March 2000 was our Senior Executive Vice President -- Sales and Marketing. During fiscal 1999, we paid DMB a monthly rent of $20,000. We currently sublease a portion of this property to InterCept. We received $65,000 in rent from InterCept in fiscal 1999 under this sublease. InterCept currently leases the property that includes our data center in Birmingham, Alabama from DMB, LLC at a monthly rent of $8,500. We currently sublease a portion of this facility from InterCept. We paid $14,875 in rent to InterCept in fiscal 1999 under this sublease. Promissory Notes In August and September 1999, we and our predecessor, Direct Access Interactive, issued promissory notes payable to InterCept in the aggregate amount of $28.9 million. These notes matured on November 15, 1999, the closing date of our initial public offering, and were repaid in full with the proceeds of that offering. These notes had been secured by all of our assets. In conjunction with the acquisition of DPSC, we received a commitment for a $15 million line of credit from InterCept. Borrowings on the line of credit will bear interest at prime plus 2%. As of December 31, 1999, we have 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. The borrowings under the note are being used to fund working capital requirements. During 1999, we incurred approximately $677,000 of interest expense associated with our borrowings from InterCept. RELATIONSHIP WITH TIB, THE BANKERS BANK AND FIRST NATIONAL BANKER'S BANK In March 2000, we entered into a master agreement with each of TIB and The Bankers Bank to allow these bankers' banks to utilize our Internet-based, bank-to-bank cash management system with their financial 52 55 institution customers. This system allows customers of the bankers' banks to communicate electronically with the bankers' banks and to perform a given set of electronic banking and cash management transactions. In connection with the master agreements, each bankers' bank will pay us for the implementation, training, maintenance and support of the system for its financial institution customers during an initial one-year term. In connection with the master agreements, each of the bankers' banks has also signed a one-year agreement that takes effect in March 2001 for the continued maintenance and support of the system. The maintenance and support agreement may be renewed by each bankers' bank, in its sole discretion, for additional one-year terms. In connection with our purchase of the Internet banking division of each of TIB and The Bankers Bank in September 1999, we agreed to cause Bruce P. Leonard, President and Chief Executive Officer of The Bankers Bank, and Gayle M. Earls, President and Chief Executive Officer of TIB, to be elected as class III directors, with terms expiring in 2002. In addition, we also entered into strategic marketing agreements with each of these bankers' banks. See "Item 1. Business -- Sales and Marketing -- Strategic Marketing Alliances." In 1999, we leased our former headquarters in Atlanta, Georgia from The Bankers Bank, which at the time beneficially owned more then 5% of our common stock. We terminated this lease on February 15, 2000. We paid a total of $32,400 to The Bankers Bank in 1999 under this lease. In January 2000, we entered into a strategic marketing agreement with First National Banker's Bank. See "Item 1. Business -- Sales and Marketing -- Strategic Marketing Alliances." Joseph F. Quinlan, Jr., the Chairman, President and Chief Executive Officer of First National Banker's Bank, was appointed as a director of Netzee in April 2000. DIRECTOR AND OFFICER LOANS On July 1, 1999, Messrs. Collins, Sturm and Jackson entered into substantially similar full-recourse promissory notes with Direct Access Interactive as lender. These notes were given as consideration for the issuance of shares of common stock to these individuals. Mr. Collins borrowed $1.1 million, Mr. Sturm borrowed $1.3 million and Mr. Jackson borrowed $400,000. Each of these notes bears interest at 7% per year, and interest must be paid on each June 30 and December 31 until the note is paid in full. These notes mature on June 30, 2002. Mr. Jackson resigned as a director of Netzee in April 2000. On August 5, 1999, Mr. Eiswirth borrowed $93,300 from Direct Access Interactive and signed a full-recourse promissory note evidencing this loan. He borrowed this money to exercise an option to purchase 30,000 shares of Direct Access Interactive common stock. This loan bears interest at a rate of 7% per year. Interest is payable on each June 30 and December 31 until the note is paid in full. This note matures on August 4, 2002. LINE OF CREDIT AGREEMENT AND WARRANT On October 18, 1999, we entered into a Line of Credit Agreement with Kellett Partners, L.P. Stiles A. Kellett, Jr., who became a director of Netzee as a result of this transaction, is an affiliate of Kellett Partners. Pursuant to this agreement, Kellett Partners agreed to loan up to $3.0 million to Netzee on a revolving basis at an interest rate equal to the prime rate. We terminated this line of credit on December 15, 1999. In connection with the line of credit, we issued to Kellett Partners a warrant to purchase up to 461,876 shares of our common stock at an exercise price of $3.25 per share. On March 2, 2000, the holders of these warrants exercised the warrants in full. 53 56 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. 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.
54 57
EXHIBIT NO. DESCRIPTION OF EXHIBITS - --------- ----------------------- 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., as amended. 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. 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.
55 58
EXHIBIT NO. DESCRIPTION OF EXHIBITS - --------- ----------------------- 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. 10.23++ Master Agreement, dated March 1, 2000, by and between Netzee, Inc. and The Bankers Bank. 10.24++ Maintenance Agreement, dated March 1, 2001, by and between Netzee, Inc. and The Bankers Bank. 23.1 Consent of Arthur Andersen LLP. 27.1**** Financial Data Schedule (for SEC use only). 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. **** Previously filed as an exhibit to Netzee, Inc.'s Form 10-K for the year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 29, 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. ++ Portions of this exhibit have been omitted pursuant to a confidential treatment request that Netzee, Inc. has filed with the Securities and Exchange Commission simultaneously herewith. 56 59 (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. 57 60 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: April 28, 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 April 28, 2000 - ----------------------------------------------------- Director (Principal Executive Glenn W. Sturm Officer) /s/ RICHARD S. EISWIRTH Senior Executive Vice April 28, 2000 - ----------------------------------------------------- President, Richard S. Eiswirth Chief Financial Officer and Secretary (Principal Financial and Accounting Officer /s/ JOHN W. COLLINS Chairman of the Board of April 28, 2000 - ----------------------------------------------------- Directors John W. Collins /s/ BRUCE P. LEONARD Director April 28, 2000 - ----------------------------------------------------- Bruce P. Leonard /s/ GAYLE M. EARLS Director April 28, 2000 - ----------------------------------------------------- Gayle M. Earls /s/ STILES A. KELLETT, JR. Director April 28, 2000 - ----------------------------------------------------- Stiles A. Kellett, Jr. /s/ A. JAY WAITE Director April 28, 2000 - ----------------------------------------------------- A. Jay Waite
EX-3.2 2 AMENDED AND RESTATED BYLAWS OF NETZEE, INC. 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF NETZEE, INC. (a Georgia corporation) AS AMENDED BY THE BOARD OF DIRECTORS ON APRIL 17, 2000 References in these Bylaws to "Articles of Incorporation" are to the Articles of Incorporation of NETZEE, INC., a Georgia corporation (the "Corporation"), as amended and restated from time to time. All of these Bylaws are subject to contrary provisions, if any, of the Articles (including provisions designating the preferences, limitations, and relative rights of any class or series of shares), the Georgia Business Corporation Code (the "Code"), and other applicable law, as in effect on and after the effective date of these Bylaws. References in these Bylaws to "Sections" shall refer to sections of the Bylaws, unless otherwise indicated. ARTICLE I Section 1. Registered Office and Agent. The Corporation shall maintain a registered office and shall have a registered agent whose business office is the same as the registered office. Section 2. Principal Office. The principal office of the Corporation shall be at the place designated in the Corporation's annual registration with the Georgia Secretary of State. Section 3. Other Offices. In addition to its registered office and principal office, the Corporation may have offices at other locations either in or outside the State of Georgia. ARTICLE II Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders shall be held on such date, at such time and at such place as shall be set by the Board of Directors of the Corporation (the "Board of Directors") for the purpose of electing directors and for the transaction of such other business as may come before the meeting. Section 2. Special Meetings. Special meetings of the shareholders, for any purpose, unless otherwise prescribed by statute, may be called by the Chairman of the Board and Chief Executive Officer, the President, the Board of Directors or by holders of outstanding stock having not less than seventy-five percent (75%) of the votes entitled to be cast by all of the outstanding shares of the Corporation. 2 Section 3. Place of Meeting. The Board of Directors may designate any place as the place for an annual meeting or special meeting of shareholders. If no designation is made, the place of the meeting shall be the principal office of the Corporation. Section 4. Notice of Meeting. Written or printed notice stating the place, day and hour of the meeting, and, in case of a special meeting, the purpose for which the meeting is called, shall be delivered no fewer than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board and Chief Executive Officer, the President, or the Secretary, to each shareholder of record entitled to vote at such meeting. If mailed, the notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. A shareholder may waive any notice required by the Code, the Corporation's Articles of Incorporation (the "Articles of Incorporation"), or these Bylaws, before or after the date and time of the matter to which the notice relates, by delivering to the Corporation a written waiver of notice signed by the shareholder entitled to the notice. In addition, a shareholder's attendance at a meeting shall be (a) a waiver of objection to lack of notice or defective notice of the meeting unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting, and (b) a waiver of objection to consideration of a particular matter at the meeting that is not within the purpose stated in the meeting notice, unless the shareholder objects to considering the matter when it is presented. Except as otherwise required by the Code, neither the purpose of, nor the business transacted at, the meeting must be specified in any waiver. Section 5. Nominations of Directors. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations of persons for election to the Board of Directors may only be made (a) by the Board of Directors or a committee appointed by the Board of Directors; (b) by any shareholder entitled to vote in the election of directors generally and who complies with the procedures set forth in this section 5; or (c)(i) the person is nominated to replace a person previously identified as a proposed nominee (in accordance with the provisions of this section 5) who has since become unable or unwilling to be nominated or to serve if elected, (ii) the shareholder who furnished such previous identification makes the replacement nomination and delivers to the Secretary of the Corporation (at the time of or prior to making the replacement nomination) an affidavit or other sworn statement affirming that the shareholder had no reason to believe the original nominee would be so unable or unwilling, and (iii) such shareholder also furnishes in writing to the Secretary of the Corporation (at the time of or prior to making the replacement nomination) the same type of information about the replacement nominee as required by this section 5 to have been furnished about the original nominee. No person shall be eligible for election as a director unless nominated in accordance with this section 5; however, the chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting that the defective nomination shall be disregarded. 2 3 Nominations by shareholders shall be made pursuant to timely written notice by registered or certified mail to the Secretary of the Corporation delivered to or mailed and received at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than ninety (90) days nor more than one hundred twenty (120) days prior to the first anniversary of the date of the preceding year's annual meeting; provided, however, that in the event that the date of the current year's annual meeting is changed by more than 30 days from such anniversary date, notice by the shareholder to be timely must be received by the Corporation no later than the close of business on the tenth (10th) day following the earlier of (i) the day on which notice of the date of the meeting was mailed or (ii) the day on which public disclosure of the date of the meeting was made; and (b) in the case of a special meeting at which directors are to be elected, not later than the close of business on the tenth (10th) day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure of the special meeting was made. Each such shareholder's notice shall set forth (a) any understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (b) as to each person whom the shareholder proposes to nominate for election or reelection as a director: (i) the name, business address, residence address and age of the proposed nominee, (ii) the principal occupation and employment of the proposed nominee, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the nominee, and (iv) any other information relating to the nominee that is required to be disclosed in solicitations for proxies for election of directors pursuant to section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder, (c) as to the shareholder giving the notice and the beneficial owners, if any, on whose behalf the nomination is made: (i) the name and address, as they appear on the Corporation's books, of such shareholder and of such beneficial owners, (ii) the class and number of shares of the Corporation which are beneficially owned and are owned of record by such shareholder and such beneficial owners, and (iii) a representation that the shareholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice. Any person nominated by the shareholders for election as a director also shall furnish to the Secretary of the Corporation all biographical, financial and other information and shall complete all certifications, reports and submissions that are required by the Corporation to determine the eligibility of the nominee to serve as director. No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Bylaw. Section 6. New Business. No matter of business may be brought before any annual meeting except (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors, or (c) by any shareholder of the Corporation who is a shareholder of record at the time of giving of the notice provided for in this Bylaw, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this section 6. 3 4 For business to be properly brought before an Annual Meeting by a shareholder pursuant to this section 6, the shareholder must have given timely written notice to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than one hundred twenty (120) days nor more than one hundred fifty (150) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the meeting is changed by more than thirty (30) days from such anniversary date, notice by the shareholder to be timely must be received no later than the close of business on the tenth (10th) day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the meeting: (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (c) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder of record and by the beneficial owner, if any, one whose behalf the proposal is made as such terms are defined in Rule 13d-3 of the Exchange Act and (d) any material interest of such shareholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business. For purposes of clause (d) above, a "material interest of such shareholder" shall be deemed to occur if such interest were reportable (assuming that the shareholder's business was in fact brought before the annual meeting) pursuant to Item 5 of Schedule 14A (Rule 14a-101) promulgated under the Exchange Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an Annual Meeting except in accordance with the procedures set forth in this section 6. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 7. Quorum. Except as otherwise provided by the Articles of Incorporation or the Code, a majority of the votes entitled to be cast on a matter by the shareholders, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a quorum is represented at a meeting, the meeting may be adjourned without further notice if the time and place thereof are announced at the meeting at which the adjournment is taken, provided, however, that the period shall not exceed thirty days (30) for any one adjournment. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally called. If a quorum is present, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation, a bylaw adopted by the shareholders under Section 14-2-1021 of the Code, or the Code requires a greater number of affirmative votes. Unless otherwise provided in the Articles of Incorporation, directors of the Corporation shall be elected 4 5 by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. Section 8. Proxies. At all meetings of shareholders, a shareholder may vote by proxy authorized by the shareholder or his duly authorized attorney in fact in the manner authorized by the Code. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. Section 9. Voting of Shares. Each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of the shareholders except as otherwise provided in the Articles of Incorporation or the Code. In the election of directors, each record holder of stock entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, and for whose election he has the right to vote. Cumulative voting shall not be allowed. Section 10. Presiding Officer. Except as otherwise provided herein, the Chairman of the Board of Directors, and in his absence or disability the Chief Executive Officer of the Corporation, shall preside at every shareholders' meeting (and any adjournment thereof) as its chairman, if either of them is present and willing to serve. If neither the Chairman of the Board of Directors nor the Chief Executive Officer of the Corporation is present and willing to serve as chairman of the meeting, then the President of the Corporation shall preside. If neither of the Chairman of the Board, the Chief Executive Officer or the President of the Corporation is present and is willing to serve as the chairman of the meeting, and in the event that the duty has not been otherwise properly delegated, a majority of the Corporation's directors present at the meeting shall be entitled to designate a person to serve as chairman. If no director of the Corporation is present at the meeting or if a majority of the directors who are present cannot be established, then a chairman of the meeting shall be selected by a majority vote of the shares present at the meeting that would be entitled to vote in an election of directors. The chairman of the meeting may designate other persons to assist with the meeting. Section 11. Action Without a Meeting. Unless otherwise provided in the Articles of Incorporation, any action required to be taken or that may be taken at a meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by all of the shareholders of the Corporation. Where required by Section 14-2-704 or other applicable provision of the Code, the Corporation shall provide shareholders with written notice of actions taken without a meeting. 5 6 ARTICLE III Board of Directors Section 1. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed by, the Board of Directors, subject to any limitation set forth in the Articles, in bylaws approved by the shareholders, or in agreements among all the shareholders that are otherwise lawful. Section 2. Number and Election of Board. The Board of Directors shall consist of such number of directors as fixed or changed from time to time by the Board of Directors and shall be divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of shareholders following the annual meeting at which such director was elected; provided, however, that each initial director in Class I shall hold office until the first annual meeting of shareholders after his election; each initial director in Class II shall hold office until the second annual meeting of shareholders after his election; and each initial director in Class III shall hold office until the third annual meeting of shareholders after his election. Despite the expiration of a director's term, each director shall serve until his successor is elected and qualified or until his earlier death, resignation or removal. The number of directors may be increased or decreased from time to time by resolution of the Board of Directors; provided, however, that the total number of directors at any time shall not be less than three unless these Bylaws are amended to delete the classification of the Board of Directors. Any vacancies on the Board of Directors for any reason, and any directorships resulting from any increase in the authorized number of directors, may be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum. Any directors chosen to fill a vacancy shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified, and any directors chosen by reason of an increase in the number of directors shall hold office until the next election of directors by the shareholders and until their successors shall be elected and qualified. Subject to the foregoing and the Code, at each annual meeting of shareholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting. Section 3. Chairman of the Board. Subject to the provisions of Article II, section 10 of these Bylaws, the Chairman of the Board shall preside at all meetings of the Board of Directors and of the Shareholders, and may delegate such authority to any other director or officer of the Corporation. The Chairman of the Board shall not be deemed to be an officer of the Corporation, but shall have all such other duties and powers as are incident to his position or properly prescribed from time to time by the Board of Directors. Section 4. Resignation and Removal. 6 7 (a) Resignation. Any director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, or to the Secretary of the Corporation. Such resignation shall take effect at the time delivered unless a later date is specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. (b) Removal. Any director or the entire Board of Directors may be removed by the shareholders at any time, with cause; provided that directors elected by a particular voting group may be removed only by the shareholders in that voting group. Removal action may be taken only at a shareholders' meeting for which notice of the removal action has been given, and a director may be removed only by the holders of two-thirds of the votes entitled to be cast. A removed director's successor, if any, may be elected at the same meeting to serve the unexpired them. Directors may not be removed without cause. Section 5. Compensation. Directors may receive such compensation for their services as directors as may be fixed by the Board of Directors from time to time. A director may also serve the Corporation in one or more capacities other than that of director and receive compensation for services rendered in those other capacities. Section 6. Qualification of Directors. No person elected to serve as a director of the Corporation shall assume office and begin serving unless and until duly qualified to serve, as determined by reference to the Code, the Articles of Incorporation and any further eligibility requirements established in these Bylaws. Section 7. Regular Meetings. A regular meeting of the Board of Directors shall be held without notice immediately after and at the same place as the annual meeting of shareholders. The Board of Directors may adopt a resolution as to the time and place for the holding of additional regular meetings without notice other than such resolution. The failure to hold the annual meeting does not affect the validity of any corporate action. Section 8. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board and Chief Executive Officer, the President or any director. The person or persons authorized to call special meetings of the Board of Directors may fix any place as the place for holding any special meeting of the Board of Directors called by him or them. Section 9. Notice. Notice of any special meeting shall be given at least twenty-four (24) hours prior thereto by written notice delivered personally or mailed (first class mail) to each director at his business address or by notice given by telecopy to such address. If mailed, such notice shall be deemed to be delivered three days following the deposit of such notice in the United States mail so addressed, with postage thereon prepaid. If notice is given by telecopy, such notice shall be deemed to be delivered upon printed confirmation of receipt by the transmitting telecopier. Any director may waive notice of any meeting. The attendance of a 7 8 director at a meeting shall constitute a waiver of notice of such meeting unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 10. Quorum. A majority of the total number of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than a majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. Section 11. Manner of Action. Except as otherwise provided in the Articles of Incorporation, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 12. Expenses. The Corporation shall pay the actual out-of-pocket expenses incurred by each director in connection with attending the meetings of the Board of Directors and any committee thereof; provided, that the Corporation shall not be obligated to pay for any of such expenses that are significantly in excess of the customary out-of-pocket expenses that would have been incurred for travel to such meetings from such director's home or office. Section 13. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he files his written notice of dissent or abstention to such action with the presiding officer of the meeting before the adjournment thereof or shall forward such dissent to the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 14. Meeting by Conference Telephone. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment by which all persons participating in a meeting can hear each other during the meeting. Such participation shall constitute presence in person at the meeting. Section 15. Action Without a Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof and filed with the minutes of the proceedings of the Board of Directors. Such consent shall have the same force and effect as a unanimous vote of the directors. 8 9 Section 16. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, appoint an executive committee and any other committee of the Board of Directors, the composition of each of which shall consist of one or more directors of the Corporation, and may delegate to any such committee any of the authority of the Board of Directors, however conferred, other than the power or authority to (i) approve or propose to shareholders action that the Code requires be approved by shareholders; (ii) fill vacancies on the Board of Directors or any of its committees; (iii) amend the Articles of Incorporation pursuant to Section 14-2-1002 of the Code; (iv) adopt, amend or repeal the Bylaws of the Corporation; or (v) approve a plan of merger not requiring shareholder approval. Each such committee shall serve at the pleasure of the Board of Directors. Any such committee shall keep written minutes of its meetings and report the same to the Board of Directors at the next regular meeting of the Board of Directors. ARTICLE IV Officers and Agents Section 1. General. The officers of the Corporation shall be a Chief Executive Officer, a President, a Secretary, a Chief Financial Officer and a Chief Operating Officer. The Board of Directors may appoint such other officers, assistant officers and agents, including Vice Presidents, assistant secretaries and assistant treasurers, as it may consider necessary, who shall be chosen in such a manner, hold their offices for such terms and have such authority and duties as from time to time may be determined by the Board of Directors. The compensation for all the officers of the Corporation shall be fixed by the Board of Directors. Any number of offices may be held by the same person. In all cases in which duties of any officer, agent or employee are not prescribed by the Bylaws or by the Board of Directors, such officer, agent or employee shall follow the orders and instructions of the Chief Executive Officer. Section 2. Election and Term of Office. The officers of the Corporation shall be elected by the Board of Directors annually at the first meeting of the Board held after each annual meeting of the shareholders. Each officer shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. Section 3. Removal. All officers (regardless of how elected or appointed) may be removed, with or without cause, by the Board of Directors, and any officer appointed by another officer may also be removed, with or without cause, by any senior officer authorized to have appointed the officer to be removed. Removal will be without prejudice to the contract rights, if any, of the person removed but shall be effective notwithstanding any damage claim that may result from infringement of such contract rights. Section 4. Vacancies. A vacancy in any office, however occurring, may be filled by the Board of Directors. 9 10 Section 5. Chief Executive Officer. The Chief Executive Officer of the Corporation shall be responsible for the administration of the Corporation (including the general supervision of the policies of the Corporation, the general and active management of the business and financial affairs of the Corporation and the supervision and direction of the actions of the other officers of the Corporation), shall have the authority to sign and deliver agreements, certificates and other instruments on behalf of the Corporation and shall have all such other duties and powers that are incident to his office or that are from time to time assigned to him by the Board of Directors. In the absence of the Chairman of the Board and if the Chairman of the Board has not delegated his authority to preside, the Chief Executive Officer shall preside at meetings of the Shareholders and, if he is a director, at meetings of the Board. He may exercise any powers, authorities or functions, granted or designated, to be performed by the President under the Bylaws, by law or by a resolution adopted by the Board of Directors. Section 6. President. The President, subject to the direction of the Board of Directors and the Chief Executive Officer, shall have general supervision of the day-to-day operational affairs of the Corporation, shall, subject to the Chief Executive Officer, supervise and direct the day-to-day actions of the other officers of the Corporation, shall have the power to sign and deliver agreements, certificates and other instruments on behalf of the Corporation and shall have all such other duties and powers that are incident to his office or that are from time to time assigned by the Board of Directors or the Chief Executive Officer. In the absence of the Chairman of the Board and the Chief Executive Officer, and if their authority to preside is not otherwise delegated, (a) the President shall preside at meetings of the shareholders, and, (b) if he is a director, at meetings of the Board of Directors. Section 7. Secretary. The Secretary shall keep and prepare minutes of all meetings of the shareholders of the Corporation and the Board of Directors, shall have charge of the minute books, stock records and seal of the Corporation, shall authenticate records of the Corporation and shall perform such other duties and have such other powers as are from time to time assigned by the Chief Executive Officer, the President or the Board of Directors. Section 8. Chief Financial Officer. The Chief Financial Officer shall be charged with the management of the financial affairs of the Corporation. The Chief Financial Officer shall perform all of the duties incident to the office of a treasurer and financial officer and such other duties as are from time to time assigned by the Chief Executive Officer, the President or the Board of Directors. Section 9. Chief Operating Officer. The Chief Operating Officer shall be charged with overseeing the development of the Corporation's products and services and shall perform any and all other duties as are assigned by the Chief Executive Officer, the President or the Board of Directors. 10 11 ARTICLE V Distributions and Dividends Section 1. Dividends. Unless the Articles of Incorporation provide otherwise, the Board of Directors may, from time to time in its discretion, authorize or declare distributions or share dividends in accordance with the Code. ARTICLE VI Stock Section 1. Stock Certificates. The interest of each shareholder of the Corporation shall be evidenced by a certificate or certificates representing shares of the Corporation. Stock certificates shall be issued in consecutive order and shall be in a form or forms prescribed by the Board of Directors and shall be numbered in the order in which they are issued. They shall be signed by (1) the Chief Executive Officer, the President or any Vice President and (2) the Secretary or an Assistant Secretary. If there is a seal of the Corporation, such seal (or a facsimile of it) shall be affixed to such certificates. Signatures on a share certificate may be facsimiles but in such case the certificate must be countersigned by a transfer agent or registered by a registrar other than the Corporation or an employee of the Corporation. Section 2. Rights of Corporation with Respect to Registered Owners. Prior to presentation for transfer of shares, the Corporation may treat the registered owner of the shares (or the beneficial owner of the shares to the extent of any rights granted by a nominee certificate on file with the Corporation pursuant to any procedure that may be established by the Corporation in accordance with the Code) as the person exclusively entitled to vote the shares, to receive any dividend or other distribution with respect to the shares, and for all other purposes; the Corporation shall not be bound to recognize any equitable or other claim to or interest in the shares on the part of any other person, whether or not it has express or other notice of such a claim or interest, except as otherwise provided by law. Section 3. Transfers of Shares. Transfers of shares shall be made upon the books of the Corporation only upon direction of the person named in the certificate or by an attorney lawfully constituted in writing. Before a new certificate is issued, the old certificate shall be surrendered for cancellation or, in the case of a certificate alleged to have been lost, stolen, or destroyed, the provisions of these Bylaws shall have been complied with. Section 4. Duty of Corporation to Register Transfer. Notwithstanding any of the provisions of Section 3 above, the Corporation is under a duty to register the transfer of its shares only if: (a) the share certificate is endorsed by the appropriate person or persons; (b) reasonable assurance is given that each required endorsement is genuine and effective; (c) the Corporation has no duty to inquire into adverse claims or has discharged any such duty; (d) any applicable law 11 12 relating to the collection of taxes has been complied with; and (e) the transfer is in compliance with applicable provisions of any transfer restrictions of which the Corporation shall have notice. Section 5. Lost, Stolen, or Destroyed Certificates. Any person claiming a share certificate to be lost, stolen, or destroyed shall make an affidavit or affirmation of this claim in such a manner as the Corporation may require and shall, if the Corporation requires, give the Corporation a bond of indemnity in form and amount, and with one or more sureties satisfactory to the Corporation, as the Corporation may require, whereupon an appropriate new certificate may be issued in lieu of the one alleged to have been lost, stolen or destroyed. Section 6. Fixing of Record Date. For the purpose of determining shareholders (a) entitled to notice of or to vote at any meeting of shareholders or, if necessary, any adjournment thereof, (b) entitled to receive payment of any distribution or dividend, or (c) for any other proper purpose, the Board of Directors may fix in advance a date as the record date. The record date may not be more than seventy (70) days (and, in the case of a notice to shareholders of a shareholders' meeting, not less than ten (10) days) prior to the date on which the particular action requiring the determination of shareholders is to be taken. A separate record date may be established for each voting group entitled to vote separately on a matter at a meeting. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting, unless the Board of Directors shall fix a new record date for the reconvened meeting, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If no record date is fixed as provided in this Section, then the record date for any determination of shareholders that may be proper or required by law shall be, as appropriate, the date on which notice of a shareholders' meeting is mailed, the date on which the Board of Directors adopts a resolution declaring a dividend or authorizing a distribution, or the date on which any other action is taken that requires a determination of shareholders. Section 7. Regulations, Transfer Agents and Registrars. The Board of Directors may make all such rules and regulations as it may deem expedient concerning the issuance, transfer, conversion, registration and cancellation of share certificates not inconsistent with applicable law, the Articles of Incorporation or the Bylaws of the Corporation. The Board of Directors may appoint one or more transfer agents or registrars, or both, and may require all share certificates to bear the signature of a transfer agent or registrar or both. ARTICLE VII Indemnification of Officers and Directors Section 1. Indemnification of Directors. The Corporation shall indemnify and hold harmless, and shall advance funds to pay for or reimburse expenses to, any person (an "Indemnified Person") who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, 12 13 administrative, arbitrative or investigative, whether formal or informal, including any action or suit by or in the right of the Corporation (for purposes of this Article Seven, collectively, a "Proceeding") because he is or was a director of the Corporation, against any obligation to pay a judgment, settlement, penalty, fine, or reasonable expenses (including, but not limited to, attorneys' fees and disbursements, court costs and expert witness fees) incurred with respect to the Proceeding (for purposes of this Article Seven, a "Liability"), if he conducted himself in good faith and he reasonably believed that, in the case of conduct in his official capacity, his conduct was in the best interests of the Corporation, in all other cases, his conduct was at least not opposed to the best interests of the Corporation, and, in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful; provided, however, that no indemnification shall be made for any Liability for which, under the Code, indemnification may not be authorized by action of the Board of Directors, the shareholders, or otherwise, including, but not limited to, any Liability of a director to the Corporation for: (a) any appropriation by a director, in violation of the director's duties, of any business opportunity of the Corporation; (b) any acts or omissions of a director that involve intentional misconduct or a knowing violation of law; (c) the types of liability set forth in Code Section 14-2-832; or (d) any transaction from which the director received an improper personal benefit. Indemnification in connection with a Proceeding brought by or in the right of the Corporation is limited to reasonable expenses incurred in connection with the Proceeding. Section 2. Indemnification of Others. The Board of Directors shall have the power to cause the Corporation to provide to officers, employee and agents of the Corporation all or any part of the right to indemnification and other rights of the type provided under Sections 1, 5 and 6 of this Article Seven (subject to the conditions, limitations, and obligations specified in those sections) upon a resolution to that effect identifying the officers, employees, or agents (by position or name) to be indemnified and specifying the particular rights provided, which may be different for each of the persons identified. Each officer, employee or agent of the Corporation so identified shall be an "Indemnified Person" for purposes of the provisions of this Article Seven. Section 3. Other Organizations. The Board of Directors shall have the power to cause the Corporation to provide to any director, officer, employee or agent of the Corporation who is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, all or any part of the right to indemnification and other rights of the type provided under Sections 1, 5 and 6 of this Article Seven (subject to the conditions, limitations, and obligations specified in those sections) upon a resolution to that effect identifying the persons to be indemnified and specifying the particular rights provided, which may be different for each of the persons identified. Each person so identified shall be an "Indemnified Person" for purposes of the provisions of this Article Seven. Section 4. Determination. Notwithstanding any judgment, order, settlement, conviction, or plea in any Proceeding, an Indemnified Person shall be entitled to indemnification as provided in Section 1 if a determination that such Indemnified Person is entitled to such 13 14 indemnification shall be made (a) if there are two or more directors who are not at the time parties to the Proceeding, by the Board of Directors by a majority vote of a quorum consisting of directors who are not at the time parties to the Proceeding; (b) if a quorum cannot be obtained under (a) above, by majority vote of a committee duly designated by the Board of Directors (in which designated directors who are parties may participate), consisting solely of two or more directors who are not at the time parties to the Proceeding; (c) in a written opinion by special legal counsel selected as required by the Code; or (d) by the shareholders; provided, however, that shares owned by or voted under the control of directors who are at the time parties to the Proceeding may not be voted on the determination. Section 5. Advances. To the extent the Corporation has funds reasonably available to be used for this purpose, expenses (including, but not limited to, attorneys' fees and disbursements, court costs and expert witness fees) incurred by an Indemnified Person in defending any Proceeding of the kind described in Section 1 (or in Sections 2 or 3, if the Board of Directors has specified that advancement of expenses be made available to such Indemnified Person) shall be paid by the Corporation in advance of the final disposition of such Proceeding as set forth herein. The Corporation shall promptly pay the amount of such expenses to the Indemnified Person, but in no event later than 10 days following the Indemnified Person's delivery to the Corporation of a written request for an advance pursuant to this Section 5, together with a reasonable accounting of such expenses; provided, however, that the Indemnified Person shall furnish the Corporation a written affirmation of his good faith belief that he has met the standard of conduct set forth in the Code and a written undertaking and agreement to repay to the Corporation any advances made pursuant to this Section 5 if it shall be determined that the Indemnified Person is not entitled to be indemnified by the Corporation for such amounts. The Corporation may make the advances contemplated by this Section 5 regardless of the Indemnified Person's financial ability to make repayment. Any advances and undertakings to repay pursuant to this Section 5 may be unsecured and interest-free. Section 6. Non-Exclusivity. Subject to any applicable limitation imposed by the Code or the Articles of Incorporation, the indemnification and advancement of expenses provided by or granted pursuant to this Article Seven shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any provision of the Articles of Incorporation, or any Bylaw, resolution, or agreement specifically or in general terms approved or ratified by the affirmative vote of holders of a majority of the shares entitled to be voted thereon. Nothing contained in this Article Seven shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements which provide indemnification rights and procedures permitted by the Code. Section 7. Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or who, while serving in such a capacity, is or was also serving at the request of the Corporation as a director, officer, trustee, partner, employee or agent of any corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any Liability 14 15 that may be asserted against him or incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article Seven. Section 8. Notice. If the Corporation indemnifies or advances expenses to a director under any of Sections 14-2-851 through 14-2-854 of the Code (or any equivalent provision of these Bylaws) in connection with a Proceeding by or in the right of the Corporation, the Corporation shall, to the extent required by Section 14-2-1621 or any other applicable provision of the Code, report the indemnification or advance in writing to the shareholders with or before the notice of the next shareholders' meeting. Section 9. Security. The Corporation may designate certain of its assets as collateral, provide self-insurance, establish one or more indemnification trusts or otherwise secure or facilitate its ability to meet its obligations under this Article Seven, or under any indemnification agreement or plan of indemnification adopted and entered into in accordance with the provisions of this Article Seven, as the Board of Directors deems appropriate. Section 10. Amendment. Any amendment to this Article Seven that limits or otherwise adversely affects the right of indemnification, advancement of expenses, or other rights of any Indemnified Person hereunder shall, as to such Indemnified Person, apply only to Proceedings based on actions, events, or omissions occurring after such amendment and after delivery of notice of such amendment to the Indemnified Person so affected (collectively, "Post Amendment Events"). Any Indemnified Person shall, as to any Proceeding based on actions, events, or omissions occurring prior to the date of receipt of such notice, be entitled to the right of indemnification, advancement of expenses, and other rights under this Article Seven to the same extent as if such provisions had continued as part of the Bylaws of the Corporation without such amendment. This Section 10 cannot be altered, amended, or repealed in a manner effective as to any Indemnified Person (except as to Post Amendment Events) without the prior written consent of such Indemnified Person. Section 11. Continuing Benefits. The rights of indemnification and advancement of expenses permitted or authorized by this Article Seven shall, unless otherwise provided when such rights are granted or conferred, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. Section 12. Successors. For purposes of this Article Seven, the term "Corporation" shall include any corporation, joint venture, trust, partnership or unincorporated business association that is the successor to all or substantially all of the business or assets of this Corporation, as a result of merger, consolidation, sale, liquidation, or otherwise, and any such successor shall be liable to the persons indemnified under this Article Seven on the same terms and conditions and to the same extent as this Corporation. 15 16 Section 13. Severability. Each of the Sections of this Article Seven, and each of the clauses set forth herein, shall be deemed separate and independent, and should any part of any such Section or clause be declared invalid or unenforceable by any court of competent jurisdiction, such invalidity or unenforceability shall in no way render invalid or unenforceable any other part thereof or any separate Section or clause of this Article Seven that is not declared invalid or unenforceable. ARTICLE VIII Transactions Involving The InterCept Group, Inc. Section 1. Relationship with The InterCept Group, Inc. In anticipation that in the foreseeable future The InterCept Group, Inc. ("InterCept") will remain a substantial shareholder of the Corporation, and in anticipation that the Corporation and InterCept may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, and in recognition of the benefits to be derived by the Corporation through its continued contractual, corporate and business relations with InterCept (including service of officers and directors of InterCept as officers and directors of the Corporation), the provisions of this Article Eight are set forth to regulate and define the conduct of certain affairs of the Corporation as they may involve InterCept and its officers and directors, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and shareholders in connection therewith. Section 2. Similar Business Activities. No officer or director of InterCept or the Corporation shall be liable to the Corporation or its shareholders (except as provided in section 3 below) for breach of any fiduciary duty by reason of InterCept engaging in the same or similar activities or lines of business as the Corporation, or by reason of such person's participation therein. Section 3. Corporate Opportunities. (a) In the event that a director or officer of the Corporation who is also a director or officer of InterCept acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both the Corporation and InterCept (whether such potential transaction or matter is proposed by a third party or is conceived of by such director or officer of Corporation), such director or officer of the Corporation shall act in a manner consistent with the following policy: (i) a corporate opportunity offered to any person who is an officer of the Corporation and is also a director but not an officer of InterCept, shall be presented to and belong to the Corporation, unless such opportunity is expressly offered to such person primarily in his or her capacity as a 16 17 director of InterCept, in which case such opportunity shall be presented to and belong to InterCept; (ii) a corporate opportunity offered to any person who is a director but not an officer of the Corporation, and who is also a director or officer of InterCept, shall be presented to and belong to the Corporation if such opportunity is expressly offered to such person solely in his or her capacity as a director of the Corporation; otherwise, such opportunity shall be presented to and belong to InterCept; and (iii) a corporate opportunity offered to any person who is an officer of both InterCept and the Corporation shall belong to the Corporation, unless such opportunity is expressly offered to such person primarily in his or her capacity as an officer or director of InterCept, in which case such opportunity shall be presented to and belong to InterCept. (b) A corporate opportunity offered to an officer or director under circumstances that make it unclear whether such opportunity was presented to such person primarily in their capacity as an officer or director of either the Corporation or InterCept shall be presented as such director or officer deems appropriate under the circumstances in his or her sole discretion exercised in good faith. (c) Each director and officer acting in accordance with the above policy: (i) shall be deemed to have fully satisfied and fulfilled his or her fiduciary duty to the Corporation and its shareholders with respect to such corporate opportunity; (ii) shall be deemed to have acted in good faith and in a manner such person reasonably believes to be in and not opposed to the best interests of the Corporation; (iii) shall be deemed not to have breached any duty of loyalty or other duty such person may have to the Corporation or its shareholders; and (iv) shall be deemed not to have derived an improper benefit from a transaction or opportunity which is handled in accordance with the above policy, unless he or she fails to disclose to the Corporation his or her personal interest(s) in such transaction, if any. Section 4. Limitation of Liability. No director or officer of the Corporation acting in accordance with the above policy shall be liable to the Corporation or its shareholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Corporation or the derivation of any improper personal benefit by reason of the fact that (a) such director or officer offered such corporate opportunity to InterCept rather than the Corporation or did not communicate information regarding such corporate opportunity to the Corporation or (b) InterCept pursues or acquires such corporate opportunity for itself or does not communicate information regarding such corporate opportunity to the Corporation. Section 5. Definitions. For purposes of this Article Eight, a director of the Corporation who is Chairman of the Board of Directors of the Corporation or a committee 17 18 thereof shall not be deemed to be an officer of the Corporation by reason of holding such position (without regard to whether such position is deemed an office of the Corporation generally under these bylaws), unless such person is a full-time employee of the Corporation; and the Corporation shall include all subsidiary corporations and other entities in which the Corporation owns (directly or indirectly) more than 50 percent of the outstanding voting capital stock or voting power. Section 6. Severability. Any conduct by the Corporation or InterCept, or any of their respective officers or directors, in connection with the affairs of the Corporation that does not follow the guidelines set forth in this Article Eight shall not by reason thereof void the transaction or make it voidable or be deemed a breach of any fiduciary or other duty to the Corporation, but shall be governed by the other provisions of these bylaws, the Corporation's articles of incorporation, the Georgia Business Corporation Code and other applicable law. The provisions of this Article Eight shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. Section 7. Deemed Consent of Shareholders. Any person or entity purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article Eight. Section 8. Termination of Bylaw. Notwithstanding anything in these bylaws to the contrary, the foregoing provisions of this Article Eight shall expire on the first day on which (a) InterCept does not own beneficially common stock representing at least ten percent (10%) of the combined voting power of outstanding shares of common stock of the Corporation and (b) no person who is a director or officer of the Corporation is also a director or officer of InterCept. Neither the alteration, amendment or repeal of this Article Eight nor the adoption of any provision inconsistent with this Article Eight shall eliminate or reduce the effect of this Article Eight in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article Eight, would accrue or arise, prior to such alteration, amendment, repeal or adoption. ARTICLE IX Miscellaneous Section 1. Inspection of Books and Records. The Board of Directors shall have the power to determine which accounts, books, and records of the Corporation shall be available for shareholders to inspect or copy, except for those books and records required by the Code to be made available upon compliance by a shareholder with applicable requirements, and shall have the power to fix reasonable rules and regulations (including confidentiality restrictions and procedures) not in conflict with applicable law for the inspection and copying of such accounts, books, and records that by law or by determination of the Board of Directors are made available. Unless required by the Code or otherwise provided by the Board of Directors, a shareholder of the Corporation holding less than two percent (2%) of the total shares of the Corporation then outstanding shall have no right to inspect the books and records of the Corporation. 18 19 Section 2. Fiscal Year. The Board of Directors is authorized to fix the fiscal year of the Corporation and to change the fiscal year from time to time as it deems appropriate. Section 3. Corporate Seal. The corporate seal will be in such form as the Board of Directors may from time to time determine. The Board of Directors may authorize the use of one or more facsimile forms of the corporate seal. The corporate seal need not be used unless its use is required by law, by these Bylaws, or by the Articles of Incorporation. ARTICLE X Amendments Subject to the Articles of Incorporation, these Bylaws and the Code, these Bylaws may be amended (or repealed and new bylaws adopted) by the Board of Directors. Any Bylaws adopted by the Board of Directors may be altered, amended or repealed, and new Bylaws adopted, by the shareholders. The shareholders of the Corporation may provide expressly that any bylaws adopted, amended or repealed by them shall not be amended or repealed by the Board of Directors. * * * * * 19 EX-10.23 3 MASTER AGREEMENT 1 EXHIBIT 10.23 MASTER AGREEMENT - TERMS AND CONDITIONS This Master Agreement (this "Agreement") is made between Netzee, Inc. ("Netzee") and the single business entity or organization identified as "Bankers Bank" in Addendum I -- License/Services Schedule (the "License/Services Schedule") and Addendum II - Maintenance Agreement (the "Maintenance Agreement"). On or before sixty (60) days prior to the expiration of the initial one (1) year term specified for the initial License/Services Schedule, and on or before sixty (60) days prior to the expiration of the initial and any renewal terms specified for any Maintenance Agreement, Bankers Bank may elect to enter into a Maintenance Agreement on the terms specified in the attached form of Maintenance Agreement and this Agreement. In the event that Bankers Bank does not deliver written notice to Netzee on or before sixty (60) days prior to such expiration, then Bankers Bank shall be deemed to have elected to enter into a Maintenance Agreement for an additional one (1) year term, with rights to renew as specified in this paragraph. Bankers Bank may elect in its sole option to add additional Participating Banks to this Agreement by notifying Netzee of such addition pursuant to the License/Services Schedule. In addition, if the parties agree upon other Services or Software that Netzee may provide Banker's Bank, they shall document their agreement through additional Addenda as applicable. Each Maintenance Addendum (initial and subsequent) will be effective when signed by Bankers Bank. All terms and conditions set forth in this Agreement are automatically incorporated in, and deemed part of, each Addendum. Unless otherwise stated in an Addendum, each Addendum is intended to be a separate contract providing for separate Software and Services as identified therein. 1. DEFINITIONS. In addition to other terms defined in this Agreement, the following definitions shall apply as applicable: (a) "Bankers Bank Content" means any information or data, including without limitation account or personal data of Participating Banks or its customers, that is provided by Bankers Bank or Participating Banks and posted on or accessed through Bankers Bank Website or otherwise processed by the Software. (b) "Internet" means a worldwide series of interconnected computer networks, which communicate by a shared network communication protocol known as Transmission Control Protocol/Internet Protocol or any successor or alternative protocol. (c) "Intranet" means a computer network (whether local area network or wide area network) that uses, in whole or in part, World Wide Web browser software and Internet protocols, or any successors or alternatives thereto, as the platform for an entity's internal applications and/or as a gateway to the Internet. (d) "Services" are as defined in each Addendum and in this Agreement. (e) "World Wide Web" or "Web" means the Internet-based distributed information service that uses the hypertext transfer protocol or any successors or alternatives thereto. (g) "Affiliates" means an entity and all persons and/or entities directly or indirectly controlling or controlled by or under direct or indirect common control with such entity. (h) The "Link," "Link Product" or "System" is an Internet/Intranet-based system that enables [MATERIAL HAS BEEN DELETED FROM THIS EXHIBIT PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST] 2 Bankers Bank to provide to "Participating Banks" means to communicate electronically with Bankers Bank and perform Services. Comprising the Link is a host system operated by Netzee (the "Host"), Services provided to Bankers Bank, Participating Banks and, as applicable, their customers using the Host, and a limited amount of software provided to the Bankers Bank and/or Participating Banks to receive the Services and communicate with the Host (the "Client Software"). Except for the Client Software, the Bankers Bank and Participating Banks are responsible for their own equipment, software and communications. (i) "Escrowed Software" is the Client Software and host software proprietary to Netzee operated to provide the Link (exclusive of third-party equipment, software and communications and to the extent segregated therefrom). 2. SERVICES. (a) Netzee agrees to provide to Bankers Bank the Services identified in each Addendum and in this Agreement. (b) Netzee warrants that it will use its commercially reasonable efforts, skill, and knowledge and sound and professional principles and practices in accordance with normally accepted industry standards in the performance of Services. (c) Other Services may be added as shown in additional future Addenda. (d) Netzee may add or change Services in normal course of its business, provided material changes will be documented in a revised Addendum. Notwithstanding the foregoing, Netzee shall make no change in Services that will result in loss of features or functions regularly utilized by Bankers Bank or Participating Banks. 3. SOFTWARE. (a) Netzee grants Bankers Bank, and Bankers Bank accepts, a non-exclusive, non-transferable (except as authorized herein), license to install, store, operate and use, and, as necessary to use the System, provide to Participating Banks, the object code or interpreted code versions of the Client Software. For this purpose, the Client Software will automatically be deemed to include any maintenance modifications or upgrades provided to Bankers Bank in the future. (c) Client Software may not be removed from Bankers Bank's or, as applicable, Participating Banks' designated site(s), subject to necessary back-up or recovery, and provided the Client Software will be removed and returned to Netzee upon termination of Bankers Bank's license. (d) Bankers Bank and, as applicable, Participating Banks may create a sufficient number of copies of the Client Software and related user documentation for non-productive backup and archival purposes only, including, without limitation, one or more hot sites. All copies of the Client Software and such documentation shall be accounted for (by number, location and use) upon Netzee's request. (e) The Client Software is for the use and benefit of the Bankers Bank and Participating Banks only in connection with the Services and use of the System. (f) If the Bankers Bank or Participating Users decide to engage the services of independent service providers (ISPs), including facilities managers, "outsourcing" vendors, or (for purposes of use of such term) service corporations wholly owned by the Bankers Bank, Participating Banks or their Affiliates, those ISPs may access or operate the Client Software, or manage or coordinate Services, provided they do so for the sole benefit of the Bankers Bank or Participating Banks. As a condition of each ISP's access to the Software or Services, Bankers Bank shall arrange for such ISP to execute a confidentiality agreement reasonably acceptable to Netzee in which the ISP agrees to access and use the Client Software, manage or coordinate the Services, and otherwise receive and use Confidential Information of Netzee only for purposes of 2 3 assisting the Bankers Bank and/or Participating Banks to receive the Services. (g) The Bankers Bank and/or Participating Banks may also authorize suppliers and/or customers to use the Client Software for purposes of facilitating contractual relationships involving complementary goods and services. 4. PARTICIPATING BANKS. (a) Bankers Bank may resell the Services and/or transact business using the Services with Participating Banks, with right of resale includes the right to sublicense to Participating Banks any Software necessary to utilize the Services. (b) Netzee's relationship under this Agreement is solely with Bankers Bank and not with Participating Banks. Bankers Bank is responsible for all support (except as provided in the Services), billing and collection of or from Participating Banks. (c) Bankers Bank shall require Participating Banks to comply with and acknowledge terms and conditions for use of the Services consistent with this Agreement. Bankers Bank will defend, indemnify and hold Netzee harmless from and against any claims resulting from Bankers Bank's and/or any Participating Bank's use of the Services, except for claims arising out of Netzee's breach of the terms of this Agreement or any Addendum, any infringement of intellectual property rights for which Netzee is responsible, or any negligence or intentional misconduct of Netzee. (d) Bankers Bank will cooperate to identify and resolve any security infringements that involve Participating Banks and use of the System. 5. WEB LINK AND ADVERTISING. (a) As necessary or appropriate for each party to design, establish and maintain the link and host Bankers Bank's Website as part of the Services, operate and conduct the Services, describe, promote or link the parties' respective Websites, and promote the Service through mutually agreed other advertising, each party grants the other party a worldwide, non-exclusive right to use and display its Brand Marks, subject in each instance to such party's prior approval. Presentation of the Brand Marks shall also be in accordance with conventions specified by the party owning such Brand Marks. Use of the Brand Marks shall be confined to the purposes of this Agreement. For purposes of this Agreement, "Brand Marks" mean trademarks, service marks, trade names, logos, slogans and advertising (including text, graphic or audiovisual features of icons, banners, frames, etc. to the extent distinctive to either party) and, if provided by either party, depiction of characters or celebrities. (b) Netzee reserves the right to suspend or deactivate Services as necessary to terminate or investigate illegal or improper activities, provided Bankers Bank will be notified of such action and the Services will be suspended or deactivated only to the degree necessary for such purpose. 6. GENERAL LIMITATIONS. (a) The Software and Services may be used by Bankers Bank only for Bankers Bank's and, as applicable, Participating Banks' internal business requirements, as further described in this Agreement. (b) Bankers Bank and each applicable Participating Bank will be responsible for the conduct of its business, including use of the Services in accordance with applicable laws and regulations. Netzee in the normal course of its business may provide assistance to Bankers Bank and Participating Banks, but Bankers Bank and each Participating Bank retains final responsibility for such compliance. 3 4 7. SOURCE CODE ESCROW. Netzee agrees to deposit in escrow, within 15 days after the commencement date of this Agreement with an escrow agent approved by Bankers Bank (which approval shall not be unreasonably withheld), pursuant to an escrow agreement reasonably acceptable to Bankers Bank, the source code of the Escrowed Software (which will be updated as provided in the escrow agreement). The escrow agreement will list third-party software that is integrated or combined with the Escrowed Software in such a manner that such third-party software is necessary for the operation or use of the Escrowed Software. Release of the Escrowed Software shall be permitted only upon the occurrence of one of the following events: (a) In the event Netzee files for relief under the federal Bankruptcy Code, or any action is filed against Netzee under such Code and such action is not cured within 30 days; (b) In the event Netzee enters into a general assignment for the benefit of creditors; (c) In the event Netzee otherwise substantially ceases doing business, and its business is not continued by virtue of a merger or consolidation with, or a sale of all or substantially all of its assets to, or otherwise by, another corporation or entity; (d) In the event (1) Netzee fail to provide support, maintenance, updates or other Services as required under this Agreement or any other agreement between Netzee and Bankers Bank (receipt of such Escrowed Software not to constitute waiver of any other remedies by Bankers Bank for Netzee's breach pursuant to any such agreements) or is unwilling or unable to provide on reasonable terms development or customization needed by the Bankers Bank, as determined by the Bankers Bank, and (2) Bankers Bank notifies Netzee of such matter and Netzee does not provide Bankers Bank a solution within thirty (30) days or a plan for correction within (15) days which the Bankers Bank, in its sole discretion, determines to be acceptable; or (e) In the event there occurs a substantial change of ownership of Netzee as referenced in Section 9(d) hereof and Bankers Bank requests but does not receive assurances in a manner reasonably acceptable to Bankers Bank that Netzee or its successor(s) is willing and able to continue to meet its obligations under this Agreement and any Addendum. Should the Bankers Bank obtain the Escrowed Software pursuant to this section, the Bankers Bank shall thereafter have the right (in the form of a nonexclusive, royalty free license) to use and modify it (in object code and source code form, as applicable) to maintain or restore the Services and otherwise independently use the Escrowed Software for the benefit of the Bankers Bank and Participating Users, with full rights to alter, revise, modify and update the Escrowed Software for such purpose (which such alterations, revisions, modifications and updates by the Bankers Bank being owned exclusively by the Bankers Bank), provided it otherwise adheres to its obligations under this Agreement. At the time the Escrowed Software is obtained, Bankers Bank may demand, and shall be entitled to receive, to the extent not included with the Escrowed Software and not otherwise in Bankers Bank's possession, copies of any existing technical manuals associated with such Escrowed 4 5 Software; existing maintenance tools (such as, test programs and program specifications); existing menu and support programs and subroutine libraries in source and object code form; existing compilation procedures in human and machine readable form; existing execution procedures in human and machine readable form; existing end user documentation; and existing system flow charts, programmers' notes, program flow charts, file layouts, report layouts, and screen layouts. This Section supersedes the license made available to Bankers Bank pursuant to Section 1 of the Agreement between Netzee and the Bankers Bank dated September 3, 1999. 8. DATA. Bankers Bank or, as applicable, Participating Banks shall be responsible for entering all information and data required for the Services. Bankers Bank retains all intellectual property and other rights in and to all Bankers Bank Content. Netzee shall be allowed to use the Bankers Bank Content for the sole purpose of providing Services under this Agreement and any Addendum, provided that Netzee and its service partners may use information as necessary for delivering or customizing the Services, Netzee may collect and share aggregate data (provided that personally identifying information is not shared without the user's permission), and, when users request goods or services provided by Netzee's retail partners or pursuant to third-party promoters, such retail partners or promoters are governed by their own procedures with regard to any information associated with such request. 9. RESTRICTIONS. (a) Except as expressly permitted above, Bankers Bank agrees not to sublicense, license, rent, sell, loan, give or otherwise distribute all or any part of the Software or subcontract or resell the Services to any third party, without Netzee's consent. (b) Bankers Bank agrees not to reverse engineer, disassemble, decompile, modify, or alter the Software or any copy thereof, in whole or in part. (c) If either party is merged, consolidated or sold, or if either party sells or transfers all or substantially all of its assets relating to the use of the Software, such party shall have the right to transfer or assign its rights and obligations under this Agreement to the surviving or buying entity, provided that (i) the successor in any asset purchase which includes a transfer of this Agreement shall assume the terms and conditions of this Agreement in a manner reasonably acceptable to the other party; (ii) if the transferor is Bankers Bank, the overall scope of this Agreement may not be substantially altered without Netzee's prior approval; and (iii) if the transferor is Netzee, and if the transfer is, directly or indirectly, to a purchaser or affiliated group under circumstances that can reasonably be expected to significantly alter Netzee's management and direction, Bankers Bank shall be entitled to request and receive reasonable assurances in a manner reasonably acceptable to Bankers Bank that Netzee or its successor(s) is willing and able to continue to meet its obligations under this Agreement and any Addendum, and Section 7(e) shall apply if Bankers Bank does not receive such assurance. 10. TERM. (a) The Term of this Agreement and the initial Addendum shall last for one (1) year from the date of execution of the initial Addendum and continuing thereafter for so long as Bankers Bank elects to receive services under the Maintenance Agreement; provided, however, that Bankers Bank may terminate this Agreement by giving at least 5 6 thirty (30) days' advance notice of termination in the event it is determined that Netzee cannot meet Bankers Bank's requirements as identified in this Agreement. (b) Bankers Bank shall receive help desk, error correction and updates to the Software and Services, as described in the Maintenance Agreement and this Agreement, during the initial term and has the option to receive such services pursuant to the Maintenance Agreement upon expiration of the initial one (1) year term of the License/Services Schedule. If Bankers Bank declines to receive or renew maintenance at the end of such initial term or any subsequent maintenance term, the Agreement will terminate. 11. FEES. (a) Bankers Bank shall pay the fees indicated on each Addendum for the corresponding Software or Services. Fees for each identified item of Software will be fully earned and non-refundable when and as that Software is delivered or put in use. Fees for Services will be fully earned and non-refundable when and as the Services are performed. Services required but not described in this Agreement or an Addendum will be charged to Bankers Bank at Netzee's standard rates. (b) Unless otherwise stated in the applicable Addendum, all amounts due shall be paid in U.S. Dollars promptly on receipt of invoice. (c) An Addendum may, as applicable, require payment of reasonable out-of-pocket expenses incurred by Netzee, subject to Bankers Bank's prior written approval of same. Communications, equipment usage, and similar expenses set forth in such Addendum, if applicable, will be based on standard rates provided generally by Netzee. (d) Any payment not received within thirty (30) days of the date due shall bear interest from the date due at the rate of one (1%) per month (prorated for partial periods) or the maximum rate permitted by applicable law, whichever is less. (e) Bankers Bank shall be responsible for sales or use taxes or similar obligations imposed by any government authority with respect to the Software or Services (except Netzee retains responsibility for franchise taxes and federal and state taxes on its net income or net worth). 12. WARRANTY AND INDEMNIFICATION. (a) All Software will recognize dates with a four-digit field and in a manner that calculates the year 2000 as a leap year. (b) Support may provide response measures that are in addition to warranties. Warranties on third-party software, services, equipment, etc. are limited to third-party obligations. (c) Netzee does not warrant that the Software or Services shall be uninterrupted or error free or that it shall meet Bankers Bank's needs. (d) Netzee will provide reasonable security in accordance with banking industry standards. Bankers Bank or Participating Banks, as applicable, are otherwise solely responsible for the accuracy and integrity of its own data, reports, documentation and security. Netzee will provide upon request a description of security methods and procedures employed by Netzee. Bankers Bank or Participating Banks, as applicable, will employ additional procedures as appropriate to secure the integrity of its data. Bankers Bank understands that certain risks are inherent in the transmission of information over the Internet. (e) The exclusive remedy of Bankers Bank, and Netzee's sole obligation, in the event of any warranty claim or any other contract deficiency shall be for Netzee to repair or replace the defect or, if such repair or replacement is not provided or does not correct the defective item, to refund an equitable part of Bankers Bank's payments for the defective item. (f) Netzee will indemnify, defend and hold the Bankers Bank Entities harmless from any damages or liabilities resulting from third-party claims 6 7 that the Software or Services or their use (exclusive of the Bankers Bank Content, which is Bankers Bank's responsibility) infringe U.S. patents, copyrights or similar intangible rights or misappropriate the trade secrets or confidential information of third parties, provided that Bankers Bank will promptly notify Netzee of the matter, cooperate with Netzee as requested, and permit Netzee to control the investigation, defense and disposition of the same. (g) EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION, NO WARRANTY OR ASSURANCE, EXPRESS, IMPLIED, OR STATUTORY, IS GIVEN BY NETZEE WITH RESPECT TO SOFTWARE, SERVICES OR ANY OTHER MATTER, INCLUDING, WITHOUT LIMITATION (AND NETZEE SPECIFICALLY DISCLAIMS) ALL WARRANTIES OF TITLE, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. (h) Bankers Bank is responsible for entering into agreements with Participating Banks appropriate to give effect to the restrictions and limitations set forth in this Agreement as contemplated to apply to such Participating Banks. 13. LIMITATION OF LIABILITY. (a) EXCEPT FOR ANY OBLIGATIONS OF INDEMNITY UNDER THIS AGREEMENT OR ANY ADDENDUM, IN NO EVENT SHALL NETZEE BE LIABLE TO BANKERS BANK, WHETHER IN CONTRACT OR IN TORT OR UNDER ANY OTHER LEGAL THEORY (INCLUDING, WITHOUT LIMITATION, STRICT LIABILITY AND NEGLIGENCE) FOR LOST PROFITS OR REVENUES, LOSS OR INTERRUPTION OF USE, LOST OR DAMAGED DATA, REPORTS, DOCUMENTATION OR SECURITY, OR SIMILAR ECONOMIC LOSS, OR FOR ANY INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL OR SIMILAR DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THE PERFORMANCE OR NON-PERFORMANCE OF THIS AGREEMENT, OR FOR ANY CLAIM MADE AGAINST BANKERS BANK BY ANY OTHER PARTY, EVEN IF NETZEE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH CLAIM. (b) EXCEPT FOR ANY OBLIGATIONS OF INDEMNITY UNDER THIS AGREEMENT OR ANY ADDENDUM, IN NO EVENT SHALL NETZEE'S LIABILITY UNDER ANY CLAIM MADE BY BANKERS BANK EXCEED THE TOTAL AMOUNT OF FEES PAID BY BANKERS BANK TO NETZEE WITHIN ONE (1) YEAR PRIOR TO THE DATE THE CLAIM AROSE (OR, IF LESS THAN ONE (1) YEAR HAS TRANSPIRED SINCE THE DATE OF COMMENCEMENT OF THE SERVICES, THE ANNUALIZED AMOUNT OF BASE MONTHLY FEES PAID THROUGH SUCH DATE) RELATING TO THE AFFECTED SOFTWARE OR SERVICES. (c) NO ACTION, REGARDLESS OF FORM, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT MAY BE BROUGHT BY BANKERS BANK MORE THAN ONE (1) YEAR AFTER THE EVENT GIVING RISE TO SUCH CAUSE OF ACTION. 14. CONFIDENTIALITY; OWNERSHIP OF WORK PRODUCT. (a) Each of the parties hereto agrees to protect and maintain as secret all information designated as confidential by the other party ("Confidential Information") by (i) treating the Confidential Information of the other party with at least the same care and protection accorded its own Confidential Information; (ii) using great care in the assignment of personnel who receive Confidential Information of the 7 8 other party, and instructing such personnel to take all reasonable precautions to prevent unauthorized use or disclosure thereof; and (iii) not using or disclosing such Confidential Information except as necessary to fulfill the terms of this Agreement or as otherwise authorized by the disclosing party. However, neither party shall have an obligation of confidentiality with regard to any information that: (A) is known to such party prior to disclosure; (B) is or becomes publicly available other than as a result of a breach of this Agreement; or (C) is disclosed to such party by a third party not subject to an obligation of confidentiality. (b) For purposes of this Agreement, the parties acknowledge that information collected from Bankers Bank, Participating Banks and their accounts is (as between the parties hereto), and is hereby designated as, Confidential Information of Bankers Bank. Netzee and third-party service providers may collect and use such information only if Bankers Bank agrees in writing and identifying information is first screened or filtered, or as otherwise required to perform the Services. (c) If advertising or content supplied by either party pertaining to its products, services or business embodies any work of authorship protected under U.S. or foreign copyright laws or database interest protected under international laws or conventions, the party supplying such material shall be responsible for securing rights and licenses necessary for the use and exercise of such interests incident to the Services. (d) All systems, programs, operating instructions and other documentation, including all rights in patentable inventions, trade secrets and know how, database interests and copyrights associated therewith, which are conceived, prepared, developed or delivered by Netzee (whether alone or with others, and whether independent of or in connection with the conduct of its performance hereunder), shall be and remain the sole property of Netzee. (e) All Confidential Information that are trade secrets under law shall be protected in accordance with this Section 14 for as long as such Confidential Information remains a trade secret. All Confidential Information that is not a trade secret shall be protected under this Agreement for the term of this Agreement and three (3) years thereafter. 15. TERMINATION. (a) Either party, at its option, may terminate this Agreement (and thereupon terminate Bankers Bank's license to the Client Software and Bankers Bank's right to receive any remaining Services) if the other party commits a substantial breach of this Agreement and fails to cure the breach within thirty (30) days (or ten business (10) days if for non-payment) after notice of such breach is given, provided that, so long as Bankers Bank is current in all payment obligations within and after the cure period, the Services may be continued for an additional period of up to ninety (90) days as necessary for Bankers Bank to effect a transition in such Services. For this purpose, the Bankers Bank will not be deemed in substantial breach of this Agreement (and therefore Netzee will not be entitled to terminate this Agreement for reason of such a breach, but without prejudice to any other rights Netzee may have at law or equity) if base monthly maintenance fees, as well as any other undisputed obligations, are paid in full to Netzee, and obligations (other than monthly maintenance fees) to the extent disputed are escrowed on terms reasonably acceptable to Netzee. Termination of this Agreement shall simultaneously result in termination of Addenda then in effect. (b) Upon termination of this Agreement, subject to the foregoing possible extension, regardless of the reason, Bankers Bank shall immediately cease use of the Client Software, remove the Client Software from Bankers Bank's 8 9 computers, and follow Netzee's instructions for the return or destruction of all remaining copies of the Software and related documentation. Bankers Bank agrees to certify its compliance with the foregoing requirement upon Netzee's request. 16. FORCE MAJEURE. Neither party shall be responsible for failures or interruptions of communications facilities or equipment of third parties, labor strikes or slowdowns, shortages of resources or materials, natural disasters, world events, delay or disruption of shipment or delivery, trespass or interference of third parties, or similar events or circumstances outside its reasonable control, whether or not otherwise enumerated. 17. ARBITRATION. (a) In the event any claim, controversy or dispute of any kind whatsoever (a "Dispute") shall arise between the parties (including their subsidiaries and affiliates) in connection with, relating to or arising out of this Agreement (including any Addenda) or any other agreement or transaction between the parties, including (without limitation) the interpretation, performance, non-performance or termination hereof or thereof, the parties, at either party's request, shall attempt to settle such Dispute in the first instance through mutual discussion. Such request shall be made by written notice referencing this provision. If such Dispute has not been resolved through mutual discussion within thirty (30) days following such notice, the parties shall endeavor to settle the Dispute by non-binding mediation under the Mediation Rules of the American Arbitration Association prior to any recourse to arbitration pursuant to this Section 17. (b) If such Dispute has not been resolved within thirty (30) days after submission to mediation pursuant to Section 15(a) above (the "Mediation Period"), such Dispute shall be settled by an arbitral tribunal (the "Tribunal") under the Commercial Arbitration Rules of the American Arbitration Association (the "Arbitration Rules"). Each party shall appoint an arbitrator within thirty (30) days after the expiration of the Mediation Period, which arbitrators shall then jointly appoint a third arbitrator within thirty (30) days after the appointment of the first two (2) arbitrators, to act as president of the Tribunal. Arbitrators not so appointed shall be appointed pursuant to the Arbitration Rules. The costs of the arbitration shall be borne by the parties as determined by the Tribunal. The award rendered in any arbitration commenced hereunder shall be final and binding and judgment thereon may be entered in any court having jurisdiction for its enforcement. Neither party shall appeal to any court from the decision of the Tribunal, or have any right to commence or maintain any suit or legal proceeding concerning a Dispute until such Dispute has been determined in accordance with the arbitration procedure provided for herein, and then only for enforcement of the award rendered in the arbitration. (c) Notwithstanding the foregoing, nothing in this Section 17 shall be deemed as preventing either party from seeking injunctive relief from the courts pursuant to Section 17(d) below. All mediation and arbitration proceedings pursuant to this Agreement shall take place in Atlanta, Georgia. The assertion, prosecution and settlement of Disputes shall be maintained in confidence by the parties, except as required for either party to comply with applicable laws and regulations. (d) Each party acknowledges that violation of Sections 3, 5, 8 or 13 will cause irreparable harm to the other not adequately compensable by monetary damages. In addition to other relief, each party agrees that injunctive relief shall be available to the 9 10 other in the event of such violations without the necessity of posting bond to prevent any actual or threatened violation of such provisions. 18. MISCELLANEOUS. (a) Netzee may refer to Bankers Bank in advertising or publicity, provided that, except as necessary to meet legal obligations or provide the Services, it shall first consult Bankers Bank and obtain Bankers Bank's prior written approval. (b) Except as expressly stated herein, the terms and conditions of this Agreement and any Addendum may not be amended, waived or modified, except in a writing signed by the party to be charged therewith. (c) No failure or delay of either party to exercise any rights or remedies under this Agreement or any Addendum shall operate as a waiver thereof, nor shall any single or partial exercise of any rights or remedies preclude any further or other exercise of the same or any other rights or remedies, nor shall any waiver of any rights or remedies with respect to any circumstances be construed as a waiver thereof with respect to any other circumstances. (d) If any provisions of this Agreement or any Addendum is held invalid or unenforceable in any circumstances by a court of competent jurisdiction, the remainder of this Agreement and such Addendum, and the application of such provisions in any other circumstances, and in any other jurisdiction, shall not be affected thereby. (e) The terms and conditions of this Agreement, as applied to and incorporated in each separate Addendum, shall be construed to be a separate contract for each separate Addendum. (f) Invoices, purchase orders, acknowledgments, confirmations and other communications submitted by Bankers Bank shall not be considered part of any Addendum or this Agreement unless signed and approved by an authorized representative of Netzee clearly indicating Addendum in which it is incorporated. In the event of any conflict between this Agreement and an Addendum, the terms of this Agreement shall control unless the conflict is expressly noted in the applicable Addendum and Addendum provides to the contrary. (g) All notices and other communications under this Agreement or Addendum shall be in writing and shall be deemed to have been given upon actual delivery by reputable overnight courier to the address from which it sends or receives invoices or at such other address as such party may indicate in writing, except that invoices shall be sent to Bankers Bank in accordance with standard procedures. (h) This Agreement and each Addendum shall be governed by and construed and enforced in accordance with the laws of the State of Georgia, excluding its principles of conflicts of law. (i) This Agreement and each Addendum may be executed in one or more counterparts. (j) Netzee shall perform this Agreement solely as an independent contractor, and not as any Bankers Bank Entity's partner, agent, or employee. Netzee has no authority to make any statement, representation or commitment of any kind or to take any action binding upon any Bankers Bank Entity, without Bankers Bank's prior written authorization. (k) Subject to the other provisions of this Agreement, each party during the term of this Agreement shall fully comply, and cause its subcontractors, employees, agents, and representatives fully to comply, with all applicable laws, governmental regulations, rules, requirements, ordinances and other requirements of local and state authorities and the Federal government, including, without limitation, all applicable laws and regulations regulating financial institutions. 10 11 IN WITNESS WHEREOF, the undersigned duly authorized representatives of the parties hereto have made and entered in this Agreement as of the date first above written. NETZEE, INC. THE BANKERS BANK, a Georgia banking corporation By: /s/ Richard S. Eiswirth By: /s/ Kevin Tweddle ------------------------ -------------------------- Name: Richard S. Eiswirth Name: Kevin Tweddle ------------------------ -------------------------- Title: SEVP & CFO Title: SVP & CFO ------------------------ -------------------------- 11 12 NETZEE, INC. LICENSE/SERVICES SCHEDULE TO MASTER AGREEMENT Netzee has developed an Internet/Intranet based banking product (collectively the "Link," "Link Product" or "System") that enables THE BANKERS BANK ("Bankers Bank"), a Georgia banking corporation, to provide to Correspondent Banking Institutions which are Bankers Bank's customers - sometimes referred to as "Participating Banks" - with means to communicate electronically with Bankers Bank and perform certain electronic banking transactions. Comprising the Link is a host system operated by Netzee (the "Host"), Services provided to Bankers Bank, Participating Banks and, as applicable, their customers using the Host, and a limited amount of software provided to the Bankers Bank and/or Participating Banks to receive the Services and communicate with the Host (the "Client Software"). Except for the Client Software, the Bankers Bank and Participating Banks are responsible for their own equipment, software and communications. The Services to be provided by Netzee to Bankers Bank comprising the Link shall apply to the __ Participating Banks identified at execution of this Agreement. Such Participating Banks may change or increase to include other members of Bankers Bank at Bankers Bank's election, provided Netzee will be so notified of the change. The Services are described in EXHIBIT A. Bankers Bank will provide the information and perform the activities described in EXHIBIT B. Bankers Bank agrees to pay fees as provided in EXHIBIT C. THIS LICENSE/SERVICES SCHEDULE IS GOVERNED BY, AND SHALL BE SUBJECT TO, THE TERMS AND CONDITIONS OF THE MASTER AGREEMENT BETWEEN NETZEE AND BANKERS BANK, INCLUDING THE LIMITED WARRANTY AND DISCLAIMER AND LIMITATIONS OF LIABILITY PROVIDED THEREIN. SUCH TERMS AND CONDITIONS ARE HEREBY AFFIRMED BY BOTH PARTIES AND INCORPORATED BY REFERENCE IN THIS LICENSE/SERVICES SCHEDULE. EFFECTIVE DATE OF THIS ADDENDUM: MARCH 1, 2000 1 13 IN WITNESS WHEREOF, the undersigned duly authorized representatives of the parties hereto have made and entered in this Agreement as of the date above written. NETZEE, INC. THE BANKERS BANK, a Georgia banking corporation By: /s/ Richard S. Eiswirth By: /s/ Kevin Tweddle ------------------------ -------------------------- Name: Richard S. Eiswirth Name: Kevin Tweddle ------------------------ -------------------------- Title: SEVP & CFO Title: SVP & CFO ------------------------ -------------------------- 2 14 EXHIBIT A TO LICENSE/SERVICES SCHEDULE Services As the Services to be delivered upon execution of this Agreement and for a Term of one (1) year, Netzee shall, as applicable, develop, implement, test, operate and maintain, and support computer systems, software and interfaces included in the System, and Netzee will provide the Services, as well as provide assistance in training Bankers Bank personnel in the use of the Services. Maintenance and support provided by Netzee during the initial Term of this Agreement shall include (1) standard maintenance upgrades and modifications offered by Netzee to its customers generally, and for such purpose Netzee will use commercially reasonable efforts to make and include (without limitation) as such modifications changes and upgrades necessary to comply with generally applicable industry and regulatory requirements of which it is notified, (2) 5x12 call-in support between hours of 6:30 a.m. and 6:30 p.m. Eastern Time Monday through Friday, (3) in the event of material discrepancies between the Services as provided and the specifications for such Services (which shall be furnished in reasonably acceptable form), reasonable effort (in relation to importance, impact, and scheduled development plans) to correct those discrepancies, and (4) availability of basic Services with at least 99% uptime between 4:00 a.m Monday and 7:00 p.m. Friday and between 8:00 a.m. Saturday and 2:00 p.m. Saturday Eastern Time, exclusive of outages caused by off-peak prescheduled maintenance or causes beyond Netzee's reasonable control (including third-party equipment or communications). The Link Product allows Bankers Bank to use the following applications to receive and deliver specific information to Participating Banks and their accounts. Bankers Bank has the right to delete an application that does not apply to its institution. The applications consist of the following: ACCOUNT DELIVERY FUNDS TRANSFER Bank to Bank Transfer Internal Transfer Local Clearing Recurring Wire Table OFAC Travelers INTERNATIONAL WIRE Exchange Rates Foreign Drafts Recurring Table ACH ACH Received ACH Origination 3 15 ACH Return/Notice of Change Recurring Table EFTPS ENR INVESTMENTS Increase/Decrease Fed Funds Investments Research Requests Corporate Sweep Messages Securities Purchased and Sold Stock Order or Sale Pledge & Repo/Resell Maintenance Treasury Fund Factor Messages Fed Fund Rates T-Bill Rates Wallstreet Report Investment Broadcast Reports Bond Portfolio Reports Transaction Advices Safekeeping Income Report FILE DELIVERY MICR Delivery Open Case Case Inquiry Cash Letter Worksheet Reports Check Adjustment Advice Cash Letter Availability Over Night Fed Fund Report FRB SERVICES Coin/Currency Order & Shipment Coin/Currency Order & Shipment Notification Large Dollar Return Item Recurring Savings Bond Table Series EE and I T T & L Report FR2900 Import NOTIFICATIONS FR2900 Confirmation FED ACH Advice Fed Funds Sold & Purchased Weekly Fed Fund Re-Cap 4 16 Incoming & Outgoing Wire Advices Internal Transfer Advice Miscellaneous Entry Advice Savings Bond Order Advice T T & L Advice STATEMENT DELIVERY Account Analysis FRB Statement Daily and Weekly Account Statements FRB Charges EVENT NOTIFICATION DETAILED ADMINISTRATION CONTROLS ONLINE HELP 5 17 EXHIBIT B Bankers Bank Responsibilities In addition to the requirements of Bankers Bank set forth in the Agreement, Bankers Bank shall provide the following: Bankers Bank shall be responsible for providing to Netzee certain Bankers Bank Content mutually agreed between Bankers Bank and Netzee within 60 days of the Effective Date. Without assuming responsibility for the creation, testing, implementation, and support of the System, Bankers Bank shall provide such cooperation and approvals as may be reasonably requested and shall make its technical personnel, facilities and computer and software systems reasonably available during normal business hours in a timely manner for such purposes. Bankers Bank shall obtain and maintain at its expense a communications link conforming to the specifications provided in writing by Netzee from time to time to connect Bankers Bank's systems with the System. Bankers Bank shall enter a binding agreement with each Participating Bank electing to utilize any of the Services and shall provide Netzee upon request, copies of such agreements. In no event shall Bankers Bank make representations and warranties concerning the Services exceeding the scope of this Agreement or otherwise not authorized in writing by Netzee. Bankers Bank shall develop and provide adequate written disclosure material to the Participating Banks regarding its policies and all laws and regulations which may apply to the use of the Services. Upon request of Netzee, Bankers Bank shall provide Netzee with a copy of all such disclosure material. In addition, Bankers Bank will: - - Provide a dedicated Bankers Bank project leader - - Provide equipment and telecommunications requirements to meet the specifications set forth by Netzee - - Schedule initial meeting with Netzee and Bankers Bank staff to gather required product information - - Provide required and mutually agreed Bankers Bank information including camera ready art, URL destinations, product name product and color scheme within 10 days of initial one day meeting - - Provide Netzee with required sample files for delivery and interface - - Schedule employees for user testing for 2 weeks and actively test product functionality for a 2 week testing period Bankers Bank's responsibilities as provided in this Exhibit will also apply, following expiration of this License/Services Schedule, in relation to any maintenance that Netzee continues to supply. 6 18 EXHIBIT C Fees and Expenses For the Services, as outlined on Exhibit A, during the initial one-year term of the Agreement, Bankers Bank will pay Netzee the one-time sum of $[XXX] multiplied by [XXX], which is the total initial authorized number of Participating Banks shown on the first page of the License/Services Schedule. Such fees shall not be applicable to additional Participating Banks that are subsequently added. Such fees shall be fully earned and non-refundable for such work and services provided in the initial one-year term of the Agreement. Out-of-pocket expenses incurred by Netzee in the course of providing Services to Bankers Bank and Participating Banks are not reimbursable unless separately agreed. ***MATERIAL DENOTED BY [XXX] HAS BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST.*** 7 EX-10.24 4 MAINTENANCE AGREEMENT 1 EXHIBIT 10.24 NETZEE, INC. MAINTENANCE AGREEMENT This Agreement provides for Continued Service and for Netzee to provide basic maintenance in support following expiration of the initial one (1) year term of the License/Services Schedule. The Continued Service provided by Netzee will be the operation, maintenance, and support of the computer systems, software and interfaces included in the System. Bankers Bank agrees to pay fees equal to $[XXX] per month for all Participating Banks (original or added) for which maintenance is provided. The maintenance is for a period of one (1) year commencing upon expiration of the initial one (1) year term of the License/Services Schedule. Following the completion of such maintenance term, Bankers Bank may, at its option, renew maintenance for subsequent periods of one (1) year each, subject to adjustments proposed by Netzee not to exceed [XXX] at least sixty (60) days in advance of the applicable renewal date. Maintenance provided by Netzee during the term of this Agreement shall include (1) standard maintenance upgrades and modifications offered by Netzee to its customers generally, standard maintenance upgrades and modifications offered by Netzee to its customers generally, and for such purpose Netzee will use commercially reasonable efforts to make and include (without limitation) as such modifications changes and upgrades necessary to comply with generally applicable industry and regulatory requirements of which it is notified (2) 5x12 call-in support between hours of 6:30 a.m. and 6:30 p.m. Eastern Time Monday through Friday, (3) in the event of material discrepancies between the Services as provided and the specifications for such Services (which shall be furnished in reasonably acceptable form), reasonable effort (in relation to importance, impact, and scheduled development plans) to correct those discrepancies, and (4) availability of basic Services with at least 99% uptime between 4:00 a.m Monday and 7:00 p.m. Friday and between 8:00 a.m. Saturday and 2:00 p.m. Saturday Eastern Time, exclusive of outages caused by off-peak prescheduled maintenance or causes beyond Netzee's reasonable control (including third-party equipment or communications). THIS MAINTENANCE AGREEMENT IS GOVERNED BY, AND SHALL BE SUBJECT TO, THE TERMS AND CONDITIONS OF THE MASTER AGREEMENT BETWEEN NETZEE AND BANKERS BANK, INCLUDING THE LIMITED WARRANTY AND DISCLAIMER AND LIMITATIONS OF LIABILITY PROVIDED THEREIN. SUCH TERMS AND CONDITIONS ARE HEREBY AFFIRMED BY BOTH PARTIES AND INCORPORATED BY REFERENCE IN THIS MAINTENANCE AGREEMENT, INCLUDING, WITHOUT LIMITATION, ALL LICENSES GRANTED OR EXERCISABLE THEREUNDER. COMMENCEMENT DATE FOR MAINTENANCE UNDER THIS ADDENDUM: MARCH 1, 2001 ***MATERIAL DENOTED BY [XXX] HAS BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST.*** 8 2 IN WITNESS WHEREOF, the undersigned duly authorized representatives of the parties hereto have made and entered in this Agreement. NETZEE, INC. THE BANKERS BANK, a Georgia banking corporation By: /s/ Richard S. Eiswirth By: /s/ Kevin Tweddle ------------------------ -------------------------- Name: Richard S. Eiswirth Name: Kevin Tweddle ------------------------ -------------------------- Title: SEVP & CFO Title: SVP & CFO ------------------------ -------------------------- 9 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/A into Netzee, Inc.'s previously filed Registration Statement File No. 333-30252. ARTHUR ANDERSEN LLP Atlanta, Georgia April 28, 2000 -----END PRIVACY-ENHANCED MESSAGE-----