<PAGE>
As filed with the Securities and Exchange Commission on November 4, 1999
Registration No. 333-87089
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Pre-Effective Amendment No. 3 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
NETZEE, INC.
(Exact name of registrant as specified in its governing instruments)
<TABLE>
<CAPTION>
Georgia 7375 58-2488883
<S> <C> <C>
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
</TABLE>
2410 Paces Ferry Road
150 Paces Summit
Atlanta, Georgia 30339
(770) 805-2100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Glenn W. Sturm, Chief Executive Officer
Netzee, Inc.
2410 Paces Ferry Road
150 Paces Summit
Atlanta, Georgia 30339
(770) 805-2100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Mark D. Kaufman, Esq. M. Hill Jeffries, Esq.
Charles D. Ganz, Esq. Alston & Bird LLP
Sutherland Asbill & Brennan LLP One Atlantic Center
999 Peachtree Street, N.E. 1201 West Peachtree Street, N.E.
Atlanta, Georgia 30309-3996 Atlanta, Georgia 30309-3424
(404) 853-8000 (404) 881-7000
(404) 853-8806 (fax) (404) 881-4777 (fax)
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1999
P R O S P E C T U S
4,448,155 Shares
Common Stock
-----------
Netzee, Inc. is offering for sale 4,000,000 shares of our common stock, and
the selling shareholders are offering for sale an additional 448,155 shares of
our common stock. This is our initial public offering. Prior to this offering,
no public market has existed for our common stock. We currently expect the
initial public offering price for the shares to be between $12.00 and $14.00
per share. The common stock has been approved for quotation on the Nasdaq
National Market under the trading symbol "NETZ."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.......................................... $ $
Underwriting discounts......................................... $ $
Proceeds to Netzee............................................. $ $
Proceeds to the selling shareholders........................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 667,223
additional shares of common stock to cover over-allotments.
The underwriters are offering the shares on a firm commitment basis. The
underwriters expect to deliver the shares on or about , 1999.
-----------
The Robinson-Humphrey Company J.C. Bradford & Co.
SunTrust Equitable Securities
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
The Netzee Solution
[thick underline]
Offering Via The Internet:
[small Netzee logo] Cash Management [small Netzee logo] Banking on Main
Street(TM)
[small Netzee logo] Bill Payment [small Netzee logo] Communications
[small Netzee logo] Internet Banking Services
To Community Banks and Bankers' Banks
[Grecian facade] [Grecian facade]
Community Banks Bankers' Banks
[vertical white dashed centered line] [vertical white dashed centered line]
[large multicolored Netzee logo] [large multicolored Netzee logo]
[vertical white dashed centered line] [vertical white dashed centered line]
[globe with lines circling around] [globe with lines circling around]
The Internet The Internet
[two diagonal lines underneath, one [two diagonal lines underneath, one
branching right, one branching left] branching right, one branching left]
[picture of cityscape on left, picture [Grecian facade to left and right]
of human figures on right] Community Banks
Commercial Retail
Customers Customers
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 16
Netzee................................................................... 18
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Unaudited Pro Forma Combined Financial Statements........................ 24
Selected Financial Information........................................... 32
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 34
Business................................................................. 50
Management............................................................... 64
Related Party Transactions............................................... 70
Principal and Selling Shareholders....................................... 73
Description of Capital Stock............................................. 75
Shares Eligible for Future Sale.......................................... 79
Underwriting............................................................. 81
Experts.................................................................. 84
Legal Matters............................................................ 84
Where You Can Find More Information...................................... 84
Index to Financial Statements............................................ F-1
</TABLE>
i
<PAGE>
SUMMARY
This section summarizes information contained in other parts of this
prospectus. This summary does not contain all of the information you should
consider before investing in our common stock. You should read the entire
prospectus carefully before deciding to invest in our common stock.
Unless we state otherwise, the information in this prospectus assumes that
the underwriters' over-allotment option is not exercised and the initial public
offering price is $13.00 per share, the midpoint of the range of anticipated
initial public offering prices.
Netzee, Inc.
Our Business
Netzee is a leading provider of Internet banking products and services and
e-commerce solutions to small and mid-sized banks, thrifts and credit unions,
typically with total assets of less than $10 billion. We provide cost-
effective, outsourced, secure and expandable solutions that enable these
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
enables community financial institutions to provide their customers with the
convenience of Internet banking without losing the personal relationship and
service normally associated with a community financial institution. Our belief
that we are a leading provider of Internet banking products and services to
community financial institutions is based upon our knowledge of the number of
community financial institutions to which our competitors are currently
providing similar products and services. As of October 15, 1999, we had
contractual arrangements in place to provide Internet banking products and
services to approximately 380 community financial institutions.
In addition to our Internet banking products and services, our e-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 e-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.
Complementing our Internet banking system, we offer community financial
institutions custom web site design, implementation and marketing services,
telephone banking products, Internet access services, a help desk and a
24 hours a day, seven days a week emergency support service. Our broad range of
products and services enables community financial institutions to compete
effectively with the services offered by larger financial institutions and the
growing competitive threat of Internet-based financial institutions. As of
October 15, 1999, we had contractual arrangements to provide one or more of our
products and services to over 600 community financial institutions.
Our primary marketing efforts are focused on building awareness of our
products and services among our target group of community financial
institutions and establishing new strategic alliances. Our sales and marketing
efforts are conducted through both direct and indirect channels. We have
established exclusive strategic marketing alliances, as a means of business
referral, with bankers' banks located in Georgia and Texas, and we intend to
enter into similar strategic marketing alliances with bankers' banks located in
California, Pennsylvania and Oklahoma. A "bankers' bank" is a bank that
exclusively serves and is owned by other financial institutions. These bankers'
banks, which have relationships with approximately 1,850 financial
institutions, have agreed to recommend our products exclusively to their
customers and member financial institutions.
1
<PAGE>
Our Industry
The Internet has become a powerful and efficient medium for the delivery of
banking services. These services include Internet banking, bill payment, cash
management, payroll and other related services. 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, Internet banking provides the flexibility
to perform a wide range of transactions from any personal computer or Internet-
enabled device. 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. 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 currently offer Internet
banking.
Our Business Strategy
We believe that by providing a gateway to the Internet and its potential
e-commerce opportunities, our community financial institution customers will be
able to create new banking relationships and enhance relationships with their
existing customers. Our objective is to become the leading provider of Internet
banking and related products and services to small and mid-sized banks, thrifts
and credit unions, with a focus on community financial institutions with total
assets of less than $10 billion. Our strategy to accomplish these goals
includes the following:
. provide flexible Internet banking products;
. create electronic marketplaces branded with a community financial
institution's name and logo;
. capitalize on strategic marketing alliances with bankers' banks and
other partners;
. increase recurring revenue from existing customers;
. invest in new products and technologies; and
. develop and enhance the "Netzee" brand.
Our Relationship with The InterCept Group, Inc.
InterCept provides a wide range of products and services to community
financial institutions in the United States. We intend to form a marketing
alliance with InterCept to market our products and services to InterCept's
customer base of over 1,300 community financial institutions. Upon the
completion of this offering, InterCept will own approximately 39% of our common
stock. Our Chairman, John W. Collins, is the Chairman and Chief Executive
Officer of InterCept. Our Chief Executive Officer, Glenn W. Sturm, is a
director and shareholder of InterCept. Additionally, some of our other
directors and officers are directors, officers or shareholders of InterCept.
These relationships may present conflicts of interest between us and InterCept.
See "Risk Factors--Our relationship with InterCept may present potential
conflicts of interest" for a discussion of the material risks associated with
these conflicts of interest.
How to Reach Us
Our principal executive offices are located at 2410 Paces Ferry Road, 150
Paces Summit, Atlanta, Georgia 30339, and our telephone number is (770) 805-
2100. Our web site is located at http://www.netzee.com. Information on our web
site is not, however, part of this prospectus, and you should rely only on the
information contained in this prospectus before deciding to invest in our
common stock.
2
<PAGE>
This Offering
<TABLE>
<CAPTION>
<S> <C>
Common stock we are offering...... 4,000,000 shares
Common stock the selling
shareholders are offering........ 448,155 shares
Common stock to be outstanding im-
mediately
after this offering.............. 19,395,855 shares (1)
Use of proceeds................... Repayment of debt, expansion of sales and
marketing efforts, product development,
and general corporate purposes, including
working capital and potential acquisitions.
Nasdaq National Market symbol..... "NETZ"
</TABLE>
- --------
(1) The number of shares of common stock to be outstanding excludes shares that
we may issue upon the exercise of options and warrants already outstanding
or to be granted or issued after the completion of this offering. See
"Management" and "Related Party Transactions."
3
<PAGE>
Summary Financial Information
You should read the following summary historical and pro forma financial and
operating information in conjunction with "Use of Proceeds," our financial
statements and related notes, including the unaudited interim and pro forma
financial information, and other financial information which appears later in
this prospectus. The historical financial information prior to February 28,
1999 presents the financial information of Direct Access Interactive, Inc., our
predecessor, which we acquired on March 9, 1999. The purchase method of
accounting was used to record the Direct Access Interactive assets acquired and
liabilities assumed by us. This accounting method generally results in
increased amortization to be reported in future periods. Accordingly, the
accompanying financial information of our predecessor on and before February
28, 1999 is not comparable in all material respects with our financial
information subsequent to February 28, 1999, since that financial information
reports financial position and results of operations on a different basis of
accounting.
The pro forma statements of operations, balance sheet and other information
reflect the following, as if the transactions had occurred on June 30, 1999 or
at the beginning of the periods presented:
. the acquisitions in the third quarter of 1999 of Call Me Bill and Dyad
and the remote banking operations of SBS and the Internet banking
divisions of each of TIB The Independent BankersBank and The Bankers
Bank;
. the acquisition of Direct Access Interactive, Inc. in the first quarter
of 1999;
. the stock subscriptions to management and a director entered into on
July 1, 1999 for 1,555,000 shares;
. the exercise of stock options for 30,000 shares of common stock by a
member of management on August 9, 1999;
. the sale of 128,617 shares of common stock to three bankers' banks on
September 10, 1999;
. the sale of 85,000 shares of common stock on September 3, 1999;
. the deferred compensation of $11.5 million to be recorded on the options
issued in August, September and October 1999; and
. the issuance of warrants to purchase 461,876 shares of common stock on
October 18, 1999, with an exercise price of $3.25 per share.
The pro forma financial information does not represent what our results of
operations would have been if these acquisitions had occurred on those dates,
nor does it indicate our future financial position or results of future
operations. The pro forma adjustments are based on currently available
information and certain assumptions that we believe are reasonable. The "Pro
forma as adjusted" column reflects our sale of 4,000,000 shares of common stock
pursuant to this offering and the application of the estimated net proceeds
from this offering.
4
<PAGE>
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------
For the For the Pro forma
period from For the For the period for the
inception For the year ended six period from from six
(October 10, December 31, months January 1, March 1, months
1996) to ------------------------- ended 1999 to 1999 to ended
December 31, Pro forma June 30, February 28, June 30, June 30,
1996 1997 1998 1998 1998 1999 1999 1999
------------ ------ ------ --------- -------- ------------ -------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ 45 $ 642 $ 591 $ 3,061 $ 210 $ 90 $ 250 $ 2,093
Operating loss.......... (55) (99) (332) (41,869) (228) (18) (334) (21,506)
Net loss................ (55) (99) (352) (45,801) (241) (22) (334) (23,453)
Basic and diluted net
loss per share......... $(0.03) $(0.05) $(0.18) $(0.12) $(0.01) $(0.04)
====== ====== ====== ====== ====== ========
Weighted average common
shares outstanding..... 2,000 2,000 2,000 2,000 2,000 8,000
====== ====== ====== ====== ====== ========
Pro forma basic and
diluted net loss per
share.................. $ (2.97) $ (1.52)
======== ========
Pro forma weighted
average common shares
outstanding............ 15,396 15,396
======== ========
Pro forma adjusted
EBITDA (1) ............ $ (3,259) $ (1,347)
======== ========
<CAPTION>
June 30, 1999
--------------------------------
Pro forma
Pro as
Actual forma adjusted
------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................................................................. $ -- $ 939 $ 18,103
Working capital ...................................................... 25 193 17,357
Total assets.......................................................... 2,699 106,815 123,979
Long-term debt, net of current maturities............................. 750 29,566 750
Redeemable common stock............................................... -- 29,900 --
Total shareholders' equity............................................ 1,832 44,864 120,744
</TABLE>
- --------
(1) Pro forma adjusted earnings before interest, taxes, depreciation and
amortization, or pro forma adjusted EBITDA, represents the sum of net loss
before income taxes plus interest expense, depreciation and amortization,
adjusted to eliminate stock compensation expense for the periods
presented. Pro forma adjusted EBITDA is presented here to provide
additional information about our ability to meet our obligations. Pro
forma adjusted EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered as
an alternative either to net loss as an indicator of our operating
performance, or to cash flow as a measure of our liquidity.
5
<PAGE>
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors, as well as the other information
presented in this prospectus, in deciding whether to invest in our common
stock. Each of these factors could adversely affect our operations, the market
price of our common stock and our financial results and could result in a
complete loss of your investment.
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 completed five acquisitions in August and
September 1999. See "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. An investor in our common stock must consider the risks we will
face as an early stage company with a new management team in the new and
rapidly evolving Internet banking and e-commerce markets. These risks include
our inability to:
. integrate successfully our recently acquired businesses and the senior
management personnel that joined us from each acquired business;
. 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 Internet banking 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. There can be no
assurance that we will ever achieve or sustain profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We have a history of losses and anticipate losses in the future, and we cannot
guarantee we will become profitable
We incurred net losses, on a pro forma basis to reflect our recent
acquisitions, of approximately $45.8 million for the year ended December 31,
1998 and approximately $23.5 million for the six months ended June 30, 1999. We
expect to incur significant operating losses in the 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, on a pro forma basis, for the year ended December 31, 1998 were
approximately $3.1 million, and our operating expenses for the year were
approximately $44.9 million. Our revenues, on a pro forma basis, for the six
months ended June 30, 1999 were approximately $2.1 million, and our operating
expenses for that period were approximately $23.6 million. We plan to increase
significantly our sales and marketing, research and development and general and
administrative expenses throughout the remainder of 1999, for 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. See "Selected Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
6
<PAGE>
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 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 Internet banking
products and related 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 control;
. acquire and install new equipment and facilities;
. integrate our new management team;
. integrate successfully the operations and personnel of any other
businesses we acquire; and
. respond quickly and effectively to unanticipated changes in the
industry.
Our relationship with InterCept may present potential conflicts of interest
Upon the completion of this offering, InterCept will own approximately 39%
of our common stock. InterCept provides a wide range of products and services,
including electronic fund transfer, core data processing, check imaging, data
communications management and other processing solutions to community financial
institutions in the United States, and therefore InterCept may in the future
compete with us in our business. Additionally, our Chairman, our Chief
Executive Officer and some of our other directors and officers are directors,
officers or shareholders of InterCept.
When the interests of InterCept diverge from our interests, InterCept may
exercise its influence in its own best interests and not in the best interests
of you or our other shareholders. Some decisions concerning our operations or
finances may present conflicts of interest between us and InterCept or its
affiliates. 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, but not fewer than two, of our disinterested
directors and that these transactions must be on terms no less favorable to us
than could have been obtained from unaffiliated third parties on an arm's
length basis. Georgia law may also prohibit a shareholder from successfully
challenging a transaction with InterCept if the transaction 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
Internet banking products and services
We expect to earn most of our future revenue from monthly charges based upon
the number of customers who actually use the Internet banking products and
services that we provide to community financial institutions. We expect to earn
only a small percentage of our future revenues simply because a community
financial institution decides to implement our Internet banking products and
services. Thus, unless a significant number of customers of community financial
institutions utilize our Internet banking products and services, our business
will suffer significantly.
Our business and financial condition will be adversely affected if there is a
decline in demand for our products and services or in the use of the Internet
We expect to 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 are derived from our Internet and telephone banking products and
services. Our future success
7
<PAGE>
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. 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.
There can be no assurance that we will continue 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 banking systems, could have a material adverse
effect on our business, financial condition and results of operations.
We rely on the Internet to provide access to our banking 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 our competitiveness
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 our business. Further, we cannot predict the time
required and costs involved in developing new and integrated products and
services. Actual development costs could substantially exceed budgeted amounts,
and estimated product development schedules could require extensions. In these
cases, our operating results and business could be seriously harmed.
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 results of
operations or stock price. Acquisitions involve 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.
8
<PAGE>
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 cannot
assure you that we will be able to identify suitable acquisition candidates
that are available for sale at reasonable prices. We may elect to finance
future acquisitions using some or all of the proceeds of this offering. 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 your common stock
investment 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 "Risk
Factors."
Further, the market for Internet and technology companies has experienced
extreme price and volume volatility that have often been unrelated or
disproportionate to the operating performance of those companies. These broad
market and industry factors may materially and adversely affect our stock
price, regardless of our operating performance. The trading prices of the
stocks 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 operating results.
Our operating results may adversely be affected because implementation of our
solution by our community financial institution customers may take longer than
we anticipate
During the course of an initial implementation of our products and services,
we must integrate our Internet banking software with a community financial
institution's core processing software. This involves the installation of an
interface to permit communication between our products and services and the
community financial institution's core processing software. We may, from time
to time, experience some delays in the
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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 operating results 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 the strategic marketing relationships
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 center would result in failures or interruptions in
providing our products and services to our customers, which could jeopardize
our business and customer relationships
All of our communications and network equipment is located at our data
center in Birmingham, Alabama. Although we have a backup facility to provide
Internet services if our data center fails to function, a natural disaster,
such as a fire, tornado or flood, or other unanticipated problem at our data
center, 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.
Potential year 2000 problems may cause us to lose customers and subject us to
significant liabilities and costs
The risks posed by year 2000 issues could adversely affect our business in a
number of significant ways. The year 2000 issue refers to problems that may
occur when computers attempt to make calculations involving dates on and after
January 1, 2000. We note in particular that:
. our and our customers' critical systems, as well as the systems of
suppliers upon whom we rely, may not be year 2000 ready;
. our costs and liabilities related to year 2000 issues may be
significant;
. we may become involved in litigation related to year 2000 issues; and
. community financial institutions may delay purchasing our products and
services because of fear of year 2000 issues.
If year 2000 problems cause the failure of any of our systems, the systems
of our suppliers or the servers or other internal systems of our customers, we
could lose customers and revenue, incur significant disruption in our business
and incur substantial liabilities and expenses.
In addition, the Internet could face serious disruptions arising from year
2000 issues, which generally may have an adverse impact on traffic and commerce
on the Internet.
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Even if year 2000 problems do not cause any of these failures or
disruptions, our suppliers, current or prospective customers or others could
expect that these failures or disruptions will occur. This could:
. reduce the growth of the Internet and e-commerce;
. hamper existing Internet activity and electronic commerce; and
. reduce the demand for our products and services.
Further, year 2000 problems incurred by our suppliers or customers or by
others could materially and adversely affect our business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our business could suffer if our community financial institution customers
terminate their contracts with us as a result of business combinations or for
other reasons
Significant consolidation is occurring in the financial services industry,
and our community financial institution customers that are involved in mergers
and acquisitions may terminate their agreements with us or 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.
The loss of our chief executive officer and other key executive personnel could
significantly harm our business
Our future success depends to a significant extent on the continued services
of our senior management and other key personnel, particularly Glenn W. Sturm,
our Chief Executive Officer. The loss of the services of Mr. Sturm or other key
employees would likely have a significant adverse effect on our business. We do
not maintain "key person" life insurance insuring Mr. Sturm or any of our other
senior officers or key employees.
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 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 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,
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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.
Undetected 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
undetected errors, defects or bugs. Although we have not suffered significant
harm from any errors or defects to date, we may discover significant errors or
defects in the future that we may or may not be able to correct. We have
recently introduced and will be continually introducing new products in the
market and have not experienced any product liability claims to date, but the
sale and support of our products and services may entail the risk of these
claims. A product liability claim brought against us could have a material
adverse effect on our business, financial condition and results of operations.
Furthermore, if the volume of traffic and transactions on our system
increases substantially, we could experience periodic temporary capacity
constraints, which may cause unanticipated system disruptions, slower 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 Internet banking
systems, 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.
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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,
service marks, domain names and similar proprietary rights. In addition,
effective copyright and trademark protection 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 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 services.
There can be no assurance that we would 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.
Our growth may be adversely affected by government regulation and legal
uncertainties that could add additional costs to doing business on the Internet
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. There can be no assurance that federal, state or foreign governmental
authorities will not adopt new regulations addressing electronic financial
institution operations that could require us to modify our current or future
products and services. For example, the U.S. Congress is currently considering
financial services reform legislation that may include limitations on the
ability of financial institutions to disclose to nonaffiliated third parties
nonpublic consumer financial information. The adoption of 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 and other Internet
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activities. 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.
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
Although we believe that our existing capital resources and available
financing will be adequate to fund our operations for the foreseeable future,
these resources may be inadequate. We do not have sustained earnings or
positive cash flow, and initially our business strategy will require 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 may require
additional funds during or after this period 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 ISPs 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.
The lack of a prior market for our common stock may cause unexpected
fluctuations in the price of our common stock, which could significantly reduce
the value of shares of our common stock
Prior to this offering, there has been no public market for our common
stock. Accordingly, we cannot predict the extent to which investor interest in
Netzee will lead to the development of a trading market for our common stock or
how liquid that market might become. The initial public offering price for our
common stock will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market. See "Underwriting" for a description of the
factors that we and the underwriters will consider in determining the initial
public offering price.
Our common stock has been approved for quotation on the Nasdaq National
Market. Thus, we will be subject to financial and market-related tests
established by Nasdaq to maintain our listing. We may not be able to maintain
these listing criteria in the future, and our inability to do so could
ultimately hinder the liquidity of our common stock and your ability to buy or
sell it.
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Your stock value may be adversely affected because our management and
affiliates will beneficially own approximately 60% of our common stock, and no
corporate actions requiring shareholder approval can be taken without their
approval
Following this offering, our officers, directors and affiliated persons will
beneficially own approximately 60% of our common stock. As a result, our
officers, directors and affiliated persons will effectively be 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 may depress our stock price
Sales of a substantial number of shares of our common stock in the public
market following this offering, including sales by InterCept or by our officers
and directors, or the perception by the market that these sales may occur,
could lower the market price of our common stock and make it more difficult for
us to raise funds through future offerings. After this offering, 19,395,855
shares of our common stock will be outstanding. All of the shares sold in this
offering will generally be freely tradable. The remaining shares of common
stock outstanding after this offering will be restricted as a result of
securities laws or lock-up agreements signed by substantially all of our
shareholders. These restricted shares will be available for sale in the public
market as follows:
. no restricted shares will be eligible for sale as of the date of this
prospectus or within 180 days after the date of this prospectus when the
lock-up agreements with the underwriters expire; and
. approximately 15,395,855 restricted shares will become eligible for sale
at various times upon the expiration of their respective holding periods
and if otherwise sold in accordance with the provisions of Rule 144 of
the Securities and Exchange Commission.
We have initially reserved a total of 3,500,000 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. We have also issued warrants and
options to purchase a total of 2,673,376 shares of common stock under this plan
and pursuant to other warrant and stock option agreements. We intend to
register all of the shares issuable under this plan and these warrant and
option agreements for sale in the public market. In addition, we have also
agreed to register up to 6,402,007 shares of common stock that we issued in
connection with some of our acquisitions and that may be acquired through the
exercise of warrants, subject to the terms and conditions of applicable
registration rights agreements. See "Shares Eligible for Future Sale."
Management may not use the proceeds of this offering effectively
Our management will have broad discretion in how we use a significant
portion of the net proceeds of this offering. We currently expect to use the
net proceeds from this offering for repayment of debt, expansion of our
business, including sales, marketing and product development expenditures, and
general corporate purposes, including working capital. Investors will be
relying on the judgment of our management regarding the
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application of the proceeds from this offering. If management is unable to
apply these funds effectively, our business may be materially and adversely
affected.
Our future earnings will be reduced because we have a significant amount of
intangible assets
On a pro forma basis, as of June 30, 1999, approximately $96.7 million, or
90.5%, 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.
Investors in this offering will suffer immediate and substantial dilution in
the net tangible book value of their shares
The initial public offering price is substantially higher than the pro forma
net tangible book value per share of our outstanding common stock immediately
after the offering. Accordingly, purchasers of common stock in this offering
will experience immediate and substantial dilution in the net tangible book
value of their shares of approximately $11.76 in pro forma net tangible book
value per share, or approximately 90.5% of the offering price of $13.00 per
share. Investors will incur additional dilution upon the exercise of
outstanding stock options and warrants.
Our articles of incorporation and bylaws, as well as Georgia corporate law, may
prevent or delay third parties from buying your stock and result in a decrease
in the 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;
. 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. See "Description of
Capital Stock--Business Combination Provisions of Georgia Law."
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus represents our expectations or
projections for Netzee. You can generally identify these forward-looking
statements by the use of the words "may," "will," "expects," "intends,"
"plans," "estimates," "anticipates," "believes" or similar language. These
forward-looking statements are made only as of the date of this prospectus and
therefore involve substantial risks and uncertainties. We believe that it is
important to communicate our expectations for the future to our investors,
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and we believe the expectations expressed in our forward-looking statements are
reasonable and accurate based on information we currently have. However, our
expectations may not prove to be correct due to future events that we have not
accurately predicted or over which we have no control. Important factors that
could cause actual results to differ from our expectations are disclosed under
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and in other parts of this prospectus.
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NETZEE
Netzee is a leading provider of Internet banking products and services and
e-commerce solutions to small and mid-sized banks, thrifts and credit unions,
typically with assets of less than $10 billion. Our belief that we are a
leading provider of Internet banking products and services to community
financial institutions is based upon our knowledge of the number of community
financial institutions to which our competitors are currently providing similar
products and services. Netzee currently has contractual arrangements to provide
one or more of its products in place with approximately 600 community financial
institutions. Based upon information in the public domain, Netzee understands
that its competitors have established fewer contractual arrangements than has
Netzee. Digital Insight Corporation's press release dated October 14, 1999
states that it has over approximately 370 contractual arrangements in place
with financial institutions. Further, nFront, Inc.'s press release dated
October 8, 1999 states that nFront has approximately 200 contractual
arrangements in place. Finally, Online Resources and Communications
Corporation's press release dated October 9, 1999 states that it has 400
contractual arrangements.
Our predecessor, Direct Access Interactive, Inc., was formed in October 1996
to provide Internet and telephone banking products and services. InterCept
purchased Direct Access in March 1999.
Acquisition of the Remote Banking Operations of SBS Corporation
In August 1999, Direct Access acquired SBS Corporation in a merger pursuant
to which it issued to the SBS shareholders 2.6 million shares of its common
stock and approximately $16.6 million in cash. Direct Access also repaid
approximately $4.9 million in debt owed by SBS. Immediately after the merger,
Direct Access sold all of the assets of SBS, other than its Internet and
telephone banking assets, to its parent company, InterCept, in exchange for
450,000 shares of Direct Access common stock previously owned by InterCept.
Based in Birmingham, Alabama, SBS provided automated technology products and
services, including Internet and telephone banking systems, to community
financial institutions nationwide. As of August 6, 1999, SBS had entered into
agreements with 135 community financial institutions to provide Internet
banking and related services. For the year ended December 31, 1998, SBS's
remote banking operations generated approximately $1.4 million in revenues.
David W. Brasfield, who served as the Chief Executive Officer of SBS, currently
serves as our Senior Executive Vice President--Sales and Marketing. See
"Related Party Transactions."
Acquisition of the Internet Banking Divisions of TIB and The Bankers Bank
Netzee was formed on August 25, 1999. On September 3, 1999, Netzee acquired
the Internet banking divisions of each of TIB, a Texas state chartered and
Federal Reserve member bank, and The Bankers Bank, a Georgia state chartered
and Federal Reserve member bank. In these acquisitions, we issued 1,361,000
shares of our common stock to each of these bankers' banks, and we issued
options to purchase a total of 55,000 shares of common stock at an exercise
price of $5.00 per share to management and directors of the Internet banking
divisions of TIB and The Bankers Bank. We also sold 76,000 shares of common
stock to a third party for $100,000. A "bankers' bank" is a bank that itself is
owned by other financial institutions and provides depository, loan and other
banking services exclusively to financial institutions. At the end of 1998,
these two institutions were the largest bankers' banks in the United States,
with approximately 1,300 independent community financial institution customers
in Texas, New Mexico, Alabama, Georgia, North Carolina, South Carolina,
Tennessee and Florida.
As of September 3, 1999, the Internet banking divisions of TIB and The
Bankers Bank had entered into agreements with 57 financial institutions to
provide Internet banking and related services. We have also entered into
marketing agreements with TIB and The Bankers Bank pursuant to which they will
exclusively market our Internet banking products and services to their
customers and member financial institutions. See "Related Party Transactions."
For the year ended December 31, 1998, the Internet banking divisions of TIB and
The Bankers Bank had total revenues of approximately $77,000 and $432,000,
respectively.
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Acquisition of Call Me Bill, LLC
On September 3, 1999, we also acquired Call Me Bill, LLC for approximately
$3.3 million in cash. At that time we also sold approximately 31,000 shares of
our common stock to former owners of Call Me Bill for $10.50 per share. Based
in Elizabethtown, Kentucky, Call Me Bill provides 24-hour electronic bill
payment services to financial institutions' customers. For the year ended
December 31, 1998, Call Me Bill had total revenues of approximately $62,000.
Acquisition of Dyad Corporation
On September 3, 1999, we also acquired Dyad Corporation for approximately
$900,000 in cash and 618,137 shares of our common stock and the assumption of
$3.5 million in debt which was repaid at the closing. Based in Norcross,
Georgia, Dyad developed, among other things, proprietary loan application,
approval and fulfillment software that is being integrated into our Internet
banking solution. Some of Dyad's directors and officers have become directors
or officers of Netzee. See "Related Party Transactions." For the year ended
December 31, 1998, Dyad had total revenues of approximately $505,000.
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USE OF PROCEEDS
We estimate that we will receive net cash proceeds of approximately $46.0
million, after deducting estimated underwriting discounts and estimated
offering expenses and based upon an initial public offering price of $13.00 per
share, which is the midpoint of the estimated price range. We will not receive
any proceeds from the sale of shares by the selling shareholders.
We currently intend to use the net proceeds of this offering received by us
as follows:
. approximately $29.3 million to repay principal and accrued interest owed
to InterCept;
. approximately $3.1 million to repay working capital advances and accrued
interest owed to InterCept;
. approximately $6.0 million to expand our sales and marketing efforts
over the next 12 months;
. approximately $4.0 million to continue our product development over the
next 12 months; and
. approximately $3.6 million for working capital and other general
corporate purposes, including potential acquisitions.
The loans we intend to repay bear interest at a rate equal to the prime rate
plus 2% per year. As of October 15, 1999, this rate was 10.25%. These loans
mature on the earlier of (1) the completion of our initial public offering or
(2) August and September 2001. The borrowings were used to fund our
acquisitions of SBS, Dyad and Call Me Bill.
From time to time in the ordinary course of business, we evaluate the
acquisition of businesses and technologies that complement our business, and we
may use a portion of the net proceeds from this offering to fund these
acquisitions. Currently, however, we do not have any understandings,
commitments or agreements with respect to any acquisitions, and we may not be
able to identify suitable acquisition candidates or complete any acquisition.
The amount of funds that we actually use for these purposes, other than debt
repayment, will depend on many factors, including revisions to our business
plan, material changes in our revenue or expenses, and other factors described
under "Risk Factors." Accordingly, our management will have significant
discretion over the use and investment of the net proceeds from the offering.
Pending the uses described above, we will invest the net proceeds in
interest-bearing accounts or short-term, interest-bearing securities, or both.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings and do not anticipate paying any
cash dividends in the foreseeable future.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
. on an actual basis;
. on an unaudited pro forma basis to reflect (1) the acquisitions in the
third quarter of Call Me Bill and Dyad, the remote banking operations of
SBS and the Internet banking divisions of each of TIB and The Bankers
Bank; (2) the acquisition of Direct Access Interactive, Inc. in the
first quarter of 1999; (3) the stock subscriptions to management and a
director entered into on July 1, 1999 for 1,555,000 shares; (4) the
exercise of stock options for 30,000 shares of common stock by a member
of management on August 9, 1999; (5) the sale of 128,617 shares of
common stock to three bankers banks on September 10, 1999; (6) the sale
of 85,000 shares of common stock on September 3, 1999; (7) the deferred
compensation of $11.5 million to be recorded on the options issued in
August, September and October 1999; and (8) the issuance of warrants to
purchase 461,876 shares of common stock on October 18, 1999 with an
exercise price of $3.25 per share; and
. on an unaudited pro forma as adjusted basis to reflect the transactions
described above and our receipt of the net proceeds from the sale of
4,000,000 shares of common stock in this offering, as if each of them
had occurred as of June 30, 1999.
The information in the table should be read in conjunction with the
financial statements and accompanying notes that we have included elsewhere in
this prospectus. See "Unaudited Pro Forma Combined Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
(in thousands)
<S> <C> <C> <C>
Short-term borrowings and current portion of
long-term debt................................ $ -- $ -- $ --
====== ======== ========
Long-term debt, net of current portion......... $ 750 $ 29,566 $ 750
------ -------- --------
Redeemable common stock........................ -- 29,900 --
Shareholders' (deficit) equity:
Preferred stock, no par value; 5,000,000 shares
authorized; no shares issued and outstanding.. -- -- --
Common stock, no par value; 70,000,000 shares
authorized; 8,000,000 shares issued and out-
standing, actual; 15,395,855 shares issued
andoutstanding, pro forma; and 19,395,855
shares issued and outstanding pro forma, as
adjusted...................................... 2,166 56,147 132,027
Notes receivable from shareholders............. -- (3,203) (3,203)
Warrants....................................... -- 4,619 4,619
Deferred compensation.......................... -- (11,472) (11,472)
Accumulated deficit............................ (334) (1,227) (1,227)
------ -------- --------
Total shareholders' equity..................... 1,832 44,864 120,744
------ -------- --------
Total capitalization........................... $2,582 $104,330 $121,494
====== ======== ========
</TABLE>
21
<PAGE>
DILUTION
The assumed initial public offering price of $13.00 per share exceeds the
pro forma net tangible book value per share of Netzee. As of June 30, 1999, our
net tangible book value was approximately $38,000 or $0.01 per share. Pro forma
net tangible book (deficit) was approximately $(51.8) million or $(3.36) per
share. Pro forma net tangible book value per share is determined by subtracting
our total liabilities from our total tangible assets as of June 30, 1999 and
dividing this difference by the number of shares of common stock issued and
outstanding, assuming that the following transactions had occurred as of June
30, 1999:
. the acquisitions in the third quarter of 1999 of Call Me Bill and
Dyad and the remote banking operations of SBS and the Internet
banking divisions of each of TIB and The Bankers Bank;
. the acquisition of Direct Access Interactive, Inc. in the first
quarter of 1999;
. the stock subscriptions to management and a director entered into on
July 1, 1999 for 1,555,000 shares;
. the exercise of stock options for 30,000 shares of common stock by a
member of management on August 9, 1999;
. the sale of 128,617 shares of common stock to three bankers' banks on
September 10, 1999;
. the sale of 85,000 shares of common stock on September 3, 1999;
. the deferred compensation of $11.5 million to be recorded on the
options issued in August, September and October 1999; and
. the issuance of warrants to purchase 461,876 shares of common stock
on October 18, 1999 with an exercise price of $3.25 per share.
The sale of shares of common stock by us in this offering and the
application of the net proceeds therefrom will result in an immediate increase
in pro forma net tangible book value to $24.1 million or $1.24 per share to
existing shareholders and an immediate dilution of $11.76 per share to
investors purchasing shares of common stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $13.00
Net tangible book value at June 30, 1999........................ $0.01
Decrease per share attributable to pro forma adjustments ....... (3.37)
-----
Pro forma net tangible book (deficit) per share at June 30, 1999
................................................................ (3.36)
Increase per share attributable to this offering ............... 4.60
-----
Pro forma net tangible book value per share after this
offering........................................................ 1.24
------
Dilution per share purchased in this offering................... $11.76
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the number of shares of common stock we will sell in this offering, the total
price to be paid for these shares, the number of shares of common stock
previously issued, the total consideration paid and the average price per share
paid.
<TABLE>
<CAPTION>
Total Average
Shares Sold by Netzee Consideration Purchase
--------------------------------------------- Price Per
Number Percent Amount Percent Share
------------- ----------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.. 15,395,855 79.4% $ 56,147,000 51.9% $ 3.65
New investors.......... 4,000,000 20.6% 52,000,000 48.1% 13.00
------------- -------- ------------ -----
Total................. 19,395,855 100.0% $108,147,000 100.0%
============= ======== ============ =====
</TABLE>
22
<PAGE>
The foregoing tables assume:
.a public offering price of $13.00 per share;
.no exercise of the underwriters' over-allotment option; and
.no exercise of any of the 2,641,376 outstanding options and warrants to
purchase common stock.
Sales by the selling shareholders in this offering will reduce the number of
shares of common stock held by existing shareholders to 14,947,700, or 77.1% of
the total number of shares of common stock to be outstanding after this
offering, and will increase the number of shares to be held by new investors to
4,448,155, or 22.9% of the total number of shares of common stock to be
outstanding after this offering. If the underwriters exercise their over-
allotment option in full, the percentage of shares to be held by existing
shareholders will decrease further to 74.5% of the total shares to be
outstanding after the exercise, and the number of shares to be held by new
investors will increase to 5,115,378, or 25.5% of the total shares to be
outstanding after the exercise.
To the extent that any options or warrants that are outstanding or will be
issued in the future are exercised, purchasers of the common stock in this
offering would incur further dilution.
23
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
In this section we have provided you with our unaudited pro forma combined
financial statements for the year ended December 31, 1998 and as of and for the
six months ended June 30, 1999. This financial information gives effect the
following as if they occurred as of June 30, 1999 or at the beginning of the
period presented:
. the acquisitions in the third quarter of 1999 of Call Me Bill and Dyad
and the remote banking operations of SBS and the Internet banking
divisions of each of TIB and The Bankers Bank;
. the acquisition of Direct Access Interactive, Inc. in the first quarter
of 1999;
. the stock subscriptions to management and a director entered into on
July 1, 1999 for 1,555,000 shares;
. the exercise of stock options for 30,000 shares of common stock by a
member of management on August 9, 1999;
. the sale of 128,617 shares of common stock to three bankers' banks on
September 10, 1999;
. the sale of 85,000 shares of common stock on September 3, 1999;
. the deferred compensation of $11.5 million to be recorded on the options
issued in August, September and October 1999; and
. the issuance of warrants to purchase 461,876 shares of common stock on
October 18, 1999 with an exercise price of $3.25 per share.
We based our unaudited pro forma combined financial statements for the year
ended December 31, 1998 in part on our audited financial statements and the
audited financial statements of Call Me Bill, Dyad, the remote banking
operations of SBS and the Internet banking divisions of TIB and The Bankers
Bank, for the year ended December 31, 1998 and the unaudited financial
statements as of and for the six months ended June 30, 1999.
In July 1999, we issued stock subscriptions to management and a director for
1,555,000 shares of common stock at a purchase price of $2.00 per share. The
members of management and the director entered into full-recourse notes payable
bearing interest at 7%.
In August, September and October 1999, we granted options to purchase shares
of our common stock at exercise prices ranging from $3.11 to $5.00 per share.
We recorded deferred compensation of approximately $11.5 million, which will be
amortized to expense over the vesting period of the options, which is generally
three years. If we complete our initial public offering, 233,000 of these
options will vest immediately. We recorded approximately $1.9 million in
deferred compensation on options that will be expensed upon completion of the
initial public offering.
In August 1999, a member of management exercised options to purchase 30,000
shares of common stock with a full-recourse interest-bearing note payable for
$93,300.
On September 10, 1999, we sold 128,617 shares of our common stock to three
bankers' banks for $3.11 per share. These shares were sold in connection with
the entering into of a one-year general marketing agreement under which each
bankers' bank will agree to use its best efforts to promote and market our
Internet banking products and services to community banks. We will record an
intangible asset of approximately $1.1 million related to these marketing
agreements for the difference between the fair value of the common stock and
the price paid. This intangible asset will be amortized over the expected
benefit period of two years for each of these agreements.
Additionally, we sold 85,000 shares of our common stock for $1.00 per share
to an employee on September 3, 1999. The difference between the fair value and
the price paid for these shares was recorded as stock compensation expense.
24
<PAGE>
On October 18, 1999, we issued warrants to purchase 461,876 shares of common
stock in connection with entering into a $3.0 million line of credit. The fair
value of the warrants of approximately $4.6 million will be amortized to
interest expense over the three-year term of the line of credit.
These financial statements do not project what our results of operations or
financial position will be as of any future date or for any future period. You
should read this financial information together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the audited
financial statements and accompanying notes located in other parts of this
prospectus.
25
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Historical
--------------------------------------------
The Call
Bankers Me Pro Forma Pro
Netzee SBS Bank TIB Dyad Bill Adjustments Forma
------ ------ ------- ----- ------ ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................... $ 0 $ 312 $ 0 $ 0 $ 19 $ 23 (b) $ 100 $ 939
(h) 400
(i) 85
Accounts receivable,
net................... 90 181 156 116 22 114 (e) (74) 605
Inventories............ 0 55 0 32 0 0 87
Deferred expenses...... 0 0 182 0 0 0 182
Prepaids and other
current assets........ 51 244 705 0 0 5 (e) (705) 300
------ ------ ------ ----- ------ ---- --------
Total current assets... 141 792 1,043 148 41 142 2,113
------ ------ ------ ----- ------ ---- --------
PROPERTY AND EQUIPMENT,
net.................... 764 149 284 30 19 148 1,394
------ ------ ------ ----- ------ ---- --------
DEFERRED FINANCING
COSTS.................. 0 0 0 0 6,076 0 (c) (6,076) 4,619
(k) 4,619
OTHER ASSETS:
Intangible assets,
net................... 1,794 0 0 0 90 0 (a) 46,182 96,647
(b) 30,703
(c) 13,524
(d) 3,275
(h) 1,079
Capitalized software
development costs,
net................... 0 0 645 645 8 0 1,298
Deposits and other
long-term assets...... 0 744 0 0 0 0 744
------ ------ ------ ----- ------ ---- --------
Total other assets..... 1,794 744 645 645 98 0 98,689
------ ------ ------ ----- ------ ---- --------
Total assets........... $2,699 $1,685 $1,972 $ 823 $6,234 $290 $106,815
====== ====== ====== ===== ====== ==== ========
LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable,
accrued expenses and
other................. $ 41 $ 193 $ 76 $ 713 $ 116 $ 49 (e) $ (779) $ 409
Deferred revenue....... 76 849 251 57 0 278 1,511
Current maturities of
long-term debt........ 0 0 0 0 424 0 (c) (424) 0
Due to parent.......... 0 148 2,494 816 0 0 (a) (148) 0
(b) (3,310)
------ ------ ------ ----- ------ ---- --------
Total current
liabilities........... 117 1,190 2,821 1,586 540 327 1,920
NONCURRENT LIABILITIES:
Deferred revenue....... 0 565 0 0 0 0 565
Long-term debt, net of
current maturities.... 0 0 0 0 1,632 0 (a) 21,535 28,816
(d) 2,882
(c) 2,767
Due to parent.......... 750 0 0 0 0 0 750
------ ------ ------ ----- ------ ---- --------
Total liabilities.... 867 1,755 2,821 1,586 2,172 327 32,051
WARRANTS WITH REDEMPTION
FEATURE................ 0 0 0 0 10,731 0 (c) (10,731) 0
REDEEMABLE COMMON
STOCK.................. 0 0 0 0 0 0 (a) 29,900 29,900
SHAREHOLDERS' (DEFICIT)
EQUITY:
Subscription
receivable............ 0 0 0 0 (5) 0 (c) 5 0
Preferred stock........ 0 0 0 0 0 0 0
Common stock........... 2,166 0 0 0 1,937 650 (a) (5,175) 56,147
(b) 32,503
(c) 7,228
(d) (294)
(f) 3,110
(g) 93
(h) 1,479
(i) 978
(j) 11,472
Notes receivable from
shareholders.......... 0 0 0 0 0 0 (f) (3,110) (3,203)
(g) (93)
Warrants............... 0 0 0 0 0 0 (k) 4,619 4,619
Deferred compensation.. 0 0 0 0 0 0 (j) (11,472) (11,472)
Accumulated deficit.... (334) (70) (849) (763) (8,601) (687) (a) 70 (1,227)
(b) 1,612
(c) 8,601
(d) 687
(i) (893)
------ ------ ------ ----- ------ ---- --------
Total shareholders'
(deficit) equity...... 1,832 (70) (849) (763) (6,669) (37) 44,864
------ ------ ------ ----- ------ ---- --------
Total liabilities and
shareholders'
(deficit) equity...... $2,699 $1,685 $1,972 $ 823 $6,234 $290 $106,815
====== ====== ====== ===== ====== ==== ========
</TABLE>
26
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
---------------------------------------------
The Call
Bankers Me Pro Forma Ad- Pro
Netzee SBS Bank TIB Dyad Bill justments Forma
------ ------ ------- ----- ------- ----- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
License, hardware and
implementation........ $ 455 $1,409 $ 67 $ 274 $ 472 $ 28 (u) $ (54) $ 2,651
Monthly maintenance and
services.............. 136 39 10 158 33 34 410
----- ------ ----- ----- ------- ----- --------
Total revenues......... 591 1,448 77 432 505 62 3,061
----- ------ ----- ----- ------- ----- --------
OPERATING EXPENSES:
Costs of license,
hardware,
implementation,
maintenance and
service............... 466 254 113 434 409 28 (v) 40 1,610
(u) 54
Selling, general and
administrative
expenses.............. 442 1,437 416 508 1,688 378 4,869
Stock compensation
expense............... 0 0 0 0 0 0 (y) (4,354) 5,247
(z) (893)
Amortization from
acquisition
intangibles........... 0 0 0 0 0 0 (l) (620) 32,832
(m) (15,282)
(n) (10,744)
(o) (4,538)
(p) (1,108)
(x) (540)
Depreciation and
amortization.......... 15 42 5 7 137 23 229
Asset impairment....... -- -- -- -- 143 -- 143
----- ------ ----- ----- ------- ----- --------
Total operating
expenses.............. 923 1,733 534 949 2,377 429 44,930
----- ------ ----- ----- ------- ----- --------
OPERATING LOSS.......... (332) (285) (457) (517) (1,872) (367) (41,869)
OTHER INCOME, net....... -- 288 -- 54 -- -- (v) (40) 302
INTEREST EXPENSE, net... 20 -- -- -- 1,679 (1) (q) (2,153) 4,234
(r) (295)
(s) (451)
(t) 1,679
(w) 224
(aa) (1,540)
----- ------ ----- ----- ------- ----- --------
NET (LOSS) INCOME....... $(352) $ 3 $(457) $(463) $(3,551) $(366) $(45,801)
===== ====== ===== ===== ======= ===== ========
BASIC AND DILUTED NET
LOSS PER SHARE......... $ (2.97)
========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING..... 15,396
========
</TABLE>
27
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
--------------------------------------------
The Call
Bankers Me Pro Forma Pro
Netzee SBS Bank TIB Dyad Bill Adjustments Forma
------ ----- ------- ----- ------- ----- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
License, hardware and
implementation........ $ 222 $ 997 $ 189 $ 225 $ 97 $ 74 (u) $ (109) $ 1,695
Monthly maintenance and
services.............. 119 24 47 111 6 91 398
----- ----- ----- ----- ------- ----- --------
Total revenues......... 341 1,021 236 336 103 165 2,093
----- ----- ----- ----- ------- ----- --------
OPERATING EXPENSES:
Costs of license,
hardware,
implementation,
maintenance and
service............... 171 134 232 250 55 24 (u) 109 757
Selling, general and
administrative
expenses.............. 326 1,071 382 310 423 335 2,847
Stock compensation
expense............... 0 0 0 0 0 0 (y) (2,600) 3,493
(z) (893)
Amortization from
acquisition
intangibles........... 138 0 0 0 0 0 (l) (103) 16,347
(m) (7,641)
(n) (5,372)
(o) (2,269)
(p) (554)
(x) (270)
Depreciation and
amortization.......... 58 14 14 7 49 13 155
----- ----- ----- ----- ------- ----- --------
Total operating
expenses.............. 693 1,219 628 567 527 372 23,599
----- ----- ----- ----- ------- ----- --------
OPERATING LOSS.......... (352) (198) (392) (231) (424) (207) (21,506)
OTHER INCOME, net....... -- 50 -- 109 4 1 164
INTEREST EXPENSE, net... 4 -- -- -- 906 (1) (q) $(1,077) 2,111
(r) (148)
(s) (225)
(t) 906
(w) 112
(aa) (770)
----- ----- ----- ----- ------- ----- --------
NET LOSS................ $(356) $(148) $(392) $(122) $(1,326) $(207) $(23,453)
===== ===== ===== ===== ======= ===== ========
BASIC AND DILUTED NET
LOSS PER SHARE......... $ (1.52)
========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING..... 15,396
========
</TABLE>
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma balance sheet as of June 30, 1999 reflects the
following adjustments as if they occurred on June 30, 1999:
(a) The issuance of common stock, payment of cash and the recording of
intangible assets associated with the acquisition of SBS. The non-remote
banking assets of SBS were sold to InterCept after the acquisition.
InterCept transferred 450,000 shares of Direct Access Interactive common
stock back to Netzee in consideration for those assets. The purchase price
of SBS included 2,600,000 shares of common stock, $16.6 million in cash and
approximately $4.9 million in repayment of SBS debt. Netzee recorded the
purchase price at the net shares issued of 2,150,000, valued at $11.50 per
share and the cash purchase price of $21.5 million. SBS has the right to
put the shares of stock back to Netzee at $11.50 per share if an initial
public offering is not completed by August 6, 2001. Netzee obtained the
$21.5 million in cash through a promissory note to InterCept. The note
currently bears an interest rate of 10.25% payable quarterly beginning on
October 1, 1999. The excess of the purchase price over net tangible assets
was allocated to the following identifiable intangible assets with the
following amortization lives:
<TABLE>
<S> <C> <C>
Workforce $ 440,000 3 years
Contracts in process $ 1,340,000 4 years
Acquired technology $44,402,000 3 years
</TABLE>
(b) The issuance of common stock and stock options and the recording of
intangible assets associated with the acquisition of the Internet banking
divisions of TIB and The Bankers Bank. The purchase price included
2,722,000 shares of common stock valued at $11.50 per share, options to
purchase 55,000 shares of common stock at an exercise price of $5.00 per
share granted to management of TIB and The Bankers Bank and 76,000 shares
of stock sold to a third party for $100,000. The options were issued to
individuals who were members of management of TIB and The Bankers Bank who
would not continue to be employees of Netzee after the acquisition. The
value of these options was calculated to be approximately $357,500 and has
been included as a component of the purchase price. As part of the
acquisition of TIB and The Bankers Bank, Netzee allowed the third party to
purchase 76,000 shares of common stock for $100,000. The $774,000
difference between the fair value of the common stock and the price paid
has been considered in the above purchase prices of TIB and The Bankers
Bank. The total purchase price was approximately $32.4 million. The excess
of the purchase price over net tangible assets was allocated to the
following identifiable intangible assets with the following amortization
lives:
<TABLE>
<S> <C> <C>
Workforce $ 330,000 3 years
Contracts in process $ 150,000 3 years
Marketing agreement $ 3,056,000 2 years
Acquired technology $27,166,000 3 years
</TABLE>
(c) The issuance of common stock, payment of cash and the recording of
intangible assets associated with the acquisition of Dyad. The purchase
price of Dyad included 618,137 shares of our common stock valued at $11.50
per share and approximately $900,000 in cash. Netzee financed this
acquisition through a promissory note for approximately $4.4 million to
InterCept. The note currently bears an interest rate of 10.25% payable
quarterly with the first installment due October 1, 1999. Netzee used $3.5
million of the proceeds from the note to pay existing debt at Dyad. Prior
to the acquisition, Dyad had outstanding warrants to a financial
institution. Those warrants were exercised prior to the acquisition;
therefore, all historical balances related to the warrants were removed in
the pro forma adjustments. The excess of the purchase price over net
tangible assets was allocated to the following identifiable intangible
assets with the following amortization lives:
<TABLE>
<S> <C> <C>
Workforce $ 70,000 3 years
Acquired technology $13,543,000 3 years
</TABLE>
29
<PAGE>
(d) The payment of cash and the recording of intangible assets
associated with the acquisition of Call Me Bill. The purchase price of Call
Me Bill was approximately $3.3 million in cash and approximately 31,000
shares of Netzee stock sold to former members of Call Me Bill at a price of
$10.50 per share. These shares were valued by Netzee at $11.50 per share.
Netzee obtained most of the cash by issuing a promissory note to InterCept.
The note currently bears an interest rate of 10.25% payable quarterly with
the first installment due on October 1, 1999. The excess of the purchase
price over net assets acquired was allocated to goodwill and acquired
technology and will be amortized over three years.
(e) This adjustment removes the payable to TIB from the Bankers Bank
and the related receivable from The Bankers Bank for approximately $74,000.
A third party provides conversion services for implementation of the
Internet banking system to The Bankers Bank's customers. Fees for
conversion services historically were billed and paid through TIB. This
adjustment also removes the payable to The Bankers Bank from TIB and the
related receivable from TIB for approximately $705,000. The Bankers Bank
was paying for certain development costs that were shared with TIB.
(f) The issuance of stock subscriptions to management and a director
for 1,555,000 shares of common stock for full recourse notes payable of
approximately $3.1 million bearing interest at 7% per annum.
(g) The exercise of options to purchase 30,000 shares of common stock
by a member of management for a full recourse note payable of approximately
$93,300 bearing interest at 7% per annum.
(h) The sale of 128,617 shares of common stock to three bankers' banks
on September 10, 1999 for $400,000 or $3.11 per share. The difference
between the price paid per share of $3.11 and the fair value per share of
$11.50 is recorded as an intangible asset of approximately $1.1 million
that will be amortized over the two-year life of the marketing agreements
entered into with the three bankers' banks.
(i) The sale of 85,000 shares of common stock to an employee for
$85,000. The difference between the price paid of $1.00 per share and the
fair value of $11.50 per share is reflected as compensation expense.
(j) The recording of deferred compensation of approximately $11.5
million recorded on options issued in August, September and October 1999 at
below fair market value.
(k) The recording of deferred financing fees of approximately $4.6
million related to the issuance of warrants to purchase 461,876 shares of
common stock in connection with the entering into of a $3.0 million line of
credit.
The unaudited pro forma statements of operations for the six months
ended June 30, 1999 and the year ended December 31, 1998 reflect the
following adjustments as if they occurred on January 1, 1998 and are based
on the historical statements of operations, adjusted to reflect the
following:
(l) The additional amortization of the intangible assets recognized
upon the acquisition of Direct Access Interactive, Inc. of $103,000 for the
six months ended June 30, 1999 and $620,000 for the year ended December 31,
1998.
(m) The additional amortization of the intangible assets recognized
upon the acquisition of SBS of approximately $7.6 million for the six
months ended June 30, 1999 and approximately $15.3 million for the year
ended December 31, 1998. Amortization expense was calculated on a straight
line basis over the estimated useful lives of the intangible assets
acquired discussed in (a).
(n) The additional amortization of the intangible assets recognized
upon the acquisition of TIB and The Bankers Bank, of approximately
$5.4 million for the six months ended June 30, 1999 and approximately
$10.7 million for the year ended December 31, 1998. Amortization expense
was calculated on a straight line basis over the estimated useful lives of
the intangible assets acquired discussed in (b).
30
<PAGE>
(o) The additional amortization of the intangible assets recognized
upon the acquisition of Dyad of approximately $2.3 million for the six
months ended June 30, 1999 and approximately $4.5 million for the year
ended December 31, 1998. Amortization expense was calculated on a straight-
line basis over the estimated useful lives of the intangible assets
acquired discussed in (c).
(p) The additional amortization of the intangible assets recognized
upon the acquisition of Call Me Bill of approximately $554,000 for the six
months ended June 30, 1999 and approximately $1.1 million for the year
ended December 31, 1998. Amortization expense was calculated on a straight-
line basis over the estimated useful lives of the intangible assets
acquired discussed in (d).
(q) The additional interest expense on the promissory note to InterCept
to acquire SBS of approximately $1.1 million for the six months ended June
30, 1999 and approximately $2.2 million for the year ended December 31,
1998.
(r) The additional interest expense on the promissory note to InterCept
to acquire Call Me Bill of approximately $148,000 for the six months ended
June 30, 1999 and approximately $295,000 for the year ended December 31,
1998.
(s) The additional interest expense on the promissory note to InterCept
to acquire Dyad of approximately $225,000 for the six months ended June 30,
1999 and approximately $451,000 for the year ended December 31, 1998.
(t) The elimination of the interest expense on the warrants and the
debt at Dyad of approximately $906,000 for the six months ended June 30,
1999 and $1.7 million for the year ended December 31, 1998.
(u) The elimination of revenue of TIB from The Bankers Bank and the
related expense of The Bankers Bank for the conversion services billed and
paid through TIB as discussed in (e).
(v) The elimination of a $40,000 fee The Bankers Bank paid to TIB for
the right to share outsourced financial institution customer date
conversion services.
(w) The interest income on the notes receivable from shareholders of
approximately $112,000 for the six months ended June 30, 1999 and
approximately $224,000 for the year ended December 31, 1998.
(x) The additional amortization on the intangible asset for the
marketing agreement entered into with the three bankers' banks of
approximately $270,000 for the six months ended June 30, 1999 and
approximately $540,000 for the year ended December 31, 1998.
(y) The amortization of deferred compensation related to the issuance
of stock options of approximately $2.6 million for the six months ended
June 30, 1999 and approximately $4.4 million for the year ended December
31, 1998.
(z) The recording of stock compensation expense related to the sale of
common stock to an employee of approximately $893,000 for the six months
ended June 30, 1999 and the year ended December 31, 1998.
(aa) The recording of additional interest expense of approximately
$770,000 related to the issuance of warrants to purchase 461,876 shares of
common stock for the six months ended June 30, 1999 and approximately $1.5
million for the year ended December 31, 1998.
31
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical and pro forma financial
information for Netzee. The selected historical financial information prior to
February 28, 1999 reflects the financial position and results of operations of
our predecessor, Direct Access Interactive, Inc., which was formed in October
1996. We acquired Direct Access Interactive on March 9, 1999; however, the
financial information below is presented as if the acquisition occurred on
February 28, 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 Interactive. The financial information 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 historical financial information as of December 31, 1997 and
1998 and for the period from inception (October 10, 1996) to December 31, 1996
and for the years ended December 31, 1996, 1997 and 1998 have been derived from
our financial statements included in this prospectus, which have been audited
by Arthur Andersen LLP, independent public accountants. The selected historical
financial information as of December 31, 1996 has been derived from our
unaudited financial statements that are not included in this prospectus. The
selected historical financial information as of June 30, 1999 and for the six
months ended June 30, 1998, for the period from January 1, 1999 to February 28,
1999 and for the period from March 1, 1999 to June 30, 1999, have been derived
from our unaudited financial statements included in this prospectus and, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the information.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire fiscal year. The
selected historical and pro forma financial information is qualified by
reference to, and should be read in conjunction with, our financial statements
and the notes to the financial statements, including the unaudited pro forma
financial information, included in this prospectus, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The pro forma statements of operations and balance sheet information reflect
the following as if all of these transactions had occurred on June 30, 1999 or
at the beginning of the periods presented:
. the acquisitions in the third quarter of 1999 of Call Me Bill, Dyad, the
remote banking operations of SBS and the Internet banking divisions of
each of TIB and The Bankers Bank;
. the acquisition of Direct Access Interactive, Inc. in the first quarter
of 1999;
. the stock subscriptions to management and a director entered into on
July 1, 1999 for 1,555,000 shares;
. the exercise of stock options for 30,000 shares of common stock by a
member of management on August 9, 1999;
. the sale of 128,617 shares of common stock to three bankers' banks on
September 10, 1999;
. the sale of 85,000 shares of common stock on September 3, 1999;
. the deferred compensation of $11.5 million to be recorded on the options
issued in August, September and October 1999; and
. the issuance of warrants to purchase 461,876 shares of common stock on
October 18, 1999 with an exercise price of $3.25 per share.
The pro forma financial information does not represent what our results of
operations would have been if the transactions had occurred on that date, nor
does it indicate our future financial position or results of future operations.
The pro forma adjustments are based on currently available information and
certain assumptions that we believe are reasonable.
32
<PAGE>
<TABLE>
<CAPTION>
Predecessor
----------------------------------------------------------------------------
For the period For the year ended
from Inception December 31, For the six For the period
(October 10, 1996) ------------------------- months ended from January 1,
to Pro forma June 30, 1999 to
December 31, 1996 1997 1998 1998 1998 February 28, 1999
------------------ ------ ------ --------- ------------ -----------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
License,
hardware and
implementation.. $ 41 $ 583 $ 455 $ 2,651 $ 152 $ 57
Monthly
maintenance and
service........ 4 59 136 410 58 33
------ ------ ------ -------- ------ ------
Total
revenues....... 45 642 591 3,061 210 90
Operating
expenses:
Costs of
license,
hardware,
implementation,
maintenance and
service........ 50 422 466 1,610 206 44
Selling, general
and
administrative
expenses....... 48 308 442 4,869 225 62
Asset
impairment..... -- -- -- 143 -- --
Stock
compensation
expense........ -- -- -- 5,247 -- --
Amortization
from
acquisition
intangibles.... -- -- -- 32,832 -- --
Depreciation and
amortization... 2 11 15 229 7 2
------ ------ ------ -------- ------ ------
Total operating
expenses....... 100 741 923 44,930 438 108
------ ------ ------ -------- ------ ------
Operating loss... (55) (99) (332) (41,869) (228) (18)
Other income..... -- -- -- 302 -- --
Interest expense,
net............. -- -- (20) 4,234 (13) (4)
------ ------ ------ -------- ------ ------
Net loss......... $ (55) $ (99) $ (352) $(45,801) $ (241) $ (22)
====== ====== ====== ======== ====== ======
Basic and diluted
net loss per
share........... $(0.03) $(0.05) $(0.18) $(0.12) $(0.01)
====== ====== ====== ====== ======
Weighted average
common shares
outstanding..... 2,000 2,000 2,000 2,000 2,000
====== ====== ====== ====== ======
Pro forma basic
and diluted net
loss per share.. $ (2.97)
========
Pro forma
weighted average
common shares
outstanding..... 15,396
- --------------------------------------------------
========
<CAPTION>
Pro forma
For the period for the six
from March 1, months ended
1999 to June 30,
June 30, 1999 1999
-------------- ------------
<S> <C> <C>
Statement of Operations Data:
Revenues:
License,
hardware and
implementation.. $ 164 $ 1,695
Monthly
maintenance and
service........ 86 398
-------------- ------------
Total
revenues....... 250 2,093
Operating
expenses:
Costs of
license,
hardware,
implementation,
maintenance and
service........ 127 757
Selling, general
and
administrative
expenses....... 264 2,847
Asset
impairment..... -- --
Stock
compensation
expense........ -- 3,493
Amortization
from
acquisition
intangibles.... -- 16,347
Depreciation and
amortization... 193 155
-------------- ------------
Total operating
expenses....... 584 23,599
-------------- ------------
Operating loss... (334) (21,506)
Other income..... -- 164
Interest expense,
net............. -- 2,111
-------------- ------------
Net loss......... $ (334) $(23,453)
============== ============
Basic and diluted
net loss per
share........... $(0.04)
==============
Weighted average
common shares
outstanding..... 8,000
==============
Pro forma basic
and diluted net
loss per share.. $ (1.52)
============
Pro forma
weighted average
common shares
outstanding..... 15,396
- --------------------------------------------------
============
</TABLE>
<TABLE>
<CAPTION>
Predecessor
------------------
December 31, Pro forma
------------------ June 30, June 30,
1996 1997 1998 1999 1999
---- ----- ----- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................................. $ 13 $ 28 $ 14 $ -- $ 939
Working capital ...................... (53) (94) (499) 25 193
Total assets.......................... 72 88 94 2,699 106,815
Long-term debt, net of current
maturities........................... -- -- -- 750 29,566
Redeemable common stock............... -- -- -- -- 29,900
Total shareholders' (deficit) equity.. (4) (103) (455) 1,832 44,864
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements and related notes and other financial information included elsewhere
in this prospectus. This discussion contains forward-looking statements related
to such matters as our future financial performance, business strategy and
financing plans that involve risks and uncertainties. Our actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of many known and unknown factors, including those under
"Risk Factors" and elsewhere in this prospectus.
Overview
Netzee is a rapidly growing provider of integrated Internet banking products
and services and e-commerce solutions to community financial institutions. We
provide cost-effective, outsourced, secure and scalable solutions that enable
community financial institutions to offer to their customers a wide array of
financial products and services over the Internet. Our rapid growth is
indicated by the expansion of our customer base from approximately 200 total
customers in March 1999 to more than 600 as of mid-October 1999. As of October
15, 1999, we had contractual relationships to provide Internet banking products
and services to approximately 380 community financial institutions and to
provide telephone banking products and services to approximately 220 additional
community financial institutions. Further, the number of our employees has
grown from seven in March 1999 to approximately 90 as of October 15, 1999.
The following discussion of our results of operations includes the results
of our predecessor, Direct Access Interactive, for the periods prior to
March 9, 1999. Direct Access was formed in October 1996. InterCept acquired
Direct Access 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 Internet banking operations. On
August 6, 1999, our predecessor, Direct Access, acquired the remote banking
operations of SBS Corporation. These operations provided customers, additional
strategic marketing partners and our Banking on Main Street(TM) e-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 us with strategic marketing access to
approximately 1,300 community financial institution customers of these two
bankers' banks, as well as business cash management software that we have added
to our suite of products and services. Also on September 3, 1999, we acquired
Call Me Bill, LLC and Dyad Corporation. Call Me Bill provides electronic bill
payment services and Dyad provides loan application, procurement and
fulfillment software. We are integrating the products of both Call Me Bill and
Dyad into our Internet banking system. We refer to Call Me Bill, Dyad, the
remote banking operations of SBS and the Internet banking divisions of the two
bankers' banks as the Acquired Companies.
We have accounted for all of our acquisitions to date using the purchase
method of accounting. Because the acquisitions occurred in the third quarter of
1999, the discussion below of our results of operations is presented (1) on a
combined basis for us and each Acquired Company, including a discussion of us
and each Acquired Company on a stand-alone basis, for the years ended December
31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999 and (2)
for us on a stand-alone basis for the years ended December 31, 1996 and 1997.
The only differences between the following presentation of combined operations
and a pro forma presentation relate to increased amortization of the intangible
assets acquired and the additional interest expense on our promissory notes
payable to InterCept. These items are discussed in "--Results of Operations for
Netzee and the Acquired Companies" and "--Liquidity and Capital Resources"
below.
Although we and the Acquired Companies, on a combined basis, have
experienced significant growth in customers and revenues, we and the Acquired
Companies have incurred substantial operating losses and
34
<PAGE>
negative cash flows from operations on a combined basis, and we expect to
continue to incur substantial operating losses and negative cash flows for the
foreseeable future. We and the Acquired Companies incurred net losses on a
combined basis of approximately $5.2 million for the year ended December 31,
1998 and approximately $2.5 million for the six months ended June 30, 1999.
We have historically derived our revenues from software license, hardware
and implementation fees for our Internet and telephone banking products and
services. All of these fees are paid by the community financial institutions to
us rather than by their customers. Historically, we and the Acquired Companies
have recognized software license, hardware and implementation fees upon the
installation of our products and we recognize our revenues from maintenance and
service on a monthly basis as the services are provided.
We are currently changing our pricing policies for our existing products and
services. We have also modified the pricing policies of the Acquired Companies
to match more closely our new pricing policies. These pricing policies are
summarized as follows:
Internet Banking. We do not currently intend to charge an up-front
implementation fee. Depending on the number of Internet services purchased
by the community financial institution, we will charge the community
financial institution a fixed monthly fee, plus variable fees that are
based on the number of end users and the number of transactions. We
generally provide our Internet banking products and services under
contracts with terms ranging from three to five years.
Telephone Banking. We intend to continue charging community financial
institutions a fixed monthly fee for providing telephone banking product,
but do not intend to charge an up-front fee. We do not charge additional
fees based on the number of financial institution customers who actually
use the telephone banking product we provide.
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. Furthermore, we believe that Internet banking
products and services and e-commerce solutions will comprise a significantly
greater percentage of our total revenues in the future and that Internet
telephone banking products will continue to decrease as a percentage of total
revenues.
Our cost of license, hardware, implementation, maintenance and service is
comprised of the initial equipment and personnel costs required to implement
Internet and telephone banking for the community financial institution, as well
as the ongoing personnel and system maintenance costs associated with our data
center and the amortization of capitalized software development costs.
Selling, general and administrative expenses include marketing expenses,
sales commissions, employee compensation and benefits, and general office
expenses incurred in the ordinary course of business. Historically we and the
Acquired Companies paid commissions to sales personnel based on products and
services sold.
Depreciation and amortization consists of depreciation of property and
equipment and amortization of intangible assets. Amortization expense will
increase approximately $10.9 million, $32.8 million, $32.1 million, $20.3
million and $200,000 in 1999, 2000, 2001, 2002 and 2003, respectively, due to
amortization of intangibles resulting from purchase accounting adjustments for
the Acquired Companies.
In July through October 1999, we granted options to purchase 1,891,500
shares of common stock to employees, directors and consultants at exercise
prices below fair market value on the date of grant. The deferred compensation
of approximately $11.5 million was recorded as an increase in additional paid
in capital that will be amortized to expense over the vesting period of the
options, generally three years. The vesting of options to purchase 568,000
shares of common stock will accelerate upon an initial public offering.
In the future, we intend to continue to use our internal sales force to
generate new customers. We also have entered into or intend to enter into
additional strategic marketing alliances with partners who will co-
35
<PAGE>
market our products and services to their customer base. We will pay a
commission to these strategic alliance partners based upon the number of new
financial institution customers that they refer to us. We will also pay our
strategic alliance partners a lower commission based upon the number of new
financial institution customers that are located in the partners' specific
geographic regions.
Results of Operations for Netzee and the Acquired Companies
The following table sets forth the combined results of our operations and
the operations of the Acquired Companies for the years ended December 31, 1997
and 1998 and for the six months ended June 30, 1998 and 1999. The combined
operating results of us and the Acquired Companies for the periods presented
below are not necessarily indicative of our future results.
<TABLE>
<CAPTION>
Historical Unaudited
Combined Financial Information
----------------------------------------------------
Year Ended December 31, Six Months Ended June 30,
------------------------ --------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Internet banking:
License, hardware and
implementation......... $ 177 $ 721 $ 367 $ 930
Monthly maintenance and
service................ -- 239 48 299
----------- ----------- ------------ ------------
Total Internet
banking revenues.... 177 960 415 1,229
----------- ----------- ------------ ------------
Telephone banking:
License, hardware and
implementation......... 1,604 1,513 539 777
Monthly maintenance and
service................ 63 138 67 92
----------- ----------- ------------ ------------
Total telephone
banking revenues.... 1,667 1,651 606 869
----------- ----------- ------------ ------------
Other.................... 534 505 184 103
----------- ----------- ------------ ------------
Total revenues........... 2,378 3,116 1,205 2,201
Operating expenses:
Cost of license,
hardware,
implementation,
maintenance and service
....................... 1,059 1,703 639 866
Selling, general and
administrative
expenses............... 3,398 4,871 2,185 2,847
Depreciation and
amortization........... 206 228 98 292
Asset impairment........ -- 143 -- --
----------- ----------- ------------ ------------
Total operating
expenses............ 4,663 6,945 2,923 4,005
----------- ----------- ------------ ------------
Operating loss.......... (2,285) (3,829) (1,718) (1,804)
Other income, net........ 49 342 57 165
Interest expense, net.... 90 1,698 855 909
----------- ----------- ------------ ------------
Net loss................. $ (2,326) $ (5,185) $ (2,516) $(2,548)
=========== =========== ============ ============
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1999 for
Netzee and the Acquired Companies
Revenues
Total combined revenues increased approximately $996,000 or 82.7% from
approximately $1.2 million for the six months ended June 30, 1998 to
approximately $2.2 million for the six months ended June 30, 1999. This
increase consisted of an increase of approximately $801,000 in combined
license, hardware and implementation revenues, an increase of approximately
$276,000 in combined monthly maintenance and service revenues and a decrease in
other revenue of approximately $81,000.
36
<PAGE>
Internet Banking. Total combined Internet banking revenues increased
from approximately $415,000 for the six months ended June 30, 1998 to
approximately $1.2 million for the six months ended June 30, 1999. Total
combined Internet banking license, hardware and implementation revenues
increased from approximately $367,000 for the six months ended June 30,
1998 to approximately $930,000 for the six months ended June 30, 1999. The
increase was due to an increase in sales of Internet banking products and
services to 18 new community financial institution customers for the six
months ended June 30, 1998 as compared to 84 new community financial
institution customers for the six months ended June 30, 1999. Total
combined monthly maintenance and service revenues increased from
approximately $48,000 for the six months ended June 30, 1998 to
approximately $299,000 for the six months ended June 30, 1999. This
increase was due to providing monthly maintenance and service to six
customers for the six months ended June 30, 1998 as compared to 109
customers for the six months ended June 30, 1999.
Telephone Banking. Total combined telephone banking revenues increased
from approximately $606,000 for the six months ended June 30, 1998 to
approximately $869,000 for the six months ended June 30, 1999. Total
combined telephone banking license, hardware and implementation revenues
increased from approximately $539,000 for the six months ended June 30,
1998 to approximately $777,000 for the six months ended June 30, 1999. The
increase was due to an increase in sales of telephone banking products to
38 new community financial institution customers for the six months ended
June 30, 1998 as compared to 72 new community financial institution
customers for the six months ended June 30, 1999. Total combined monthly
maintenance and service revenues increased from approximately $67,000 for
the six months ended June 30, 1998 to approximately $92,000 for the six
months ended June 30, 1999. This increase was due to providing monthly
maintenance and service to 98 customers for the six months ended June 30,
1998 as compared to 193 customers for the six months ended June 30, 1999.
The sources of the changes are summarized as follows:
Netzee. Total revenues increased from approximately $210,000 for the six
months ended June 30, 1998 to approximately $341,000 for the six months
ended June 30, 1999. The sources of the increase are summarized below:
Internet Banking. Netzee began selling Internet banking products and
services in the second half of 1998. Internet banking revenues were
approximately $54,000 for the six months ended June 30, 1999. Internet
banking license, hardware and implementation revenues were
approximately $18,000 for the six months ended June 30, 1999. Monthly
maintenance and service revenues were approximately $36,000 for the six
months ended June 30, 1999.
Telephone Banking. Telephone banking revenues increased from
approximately $210,000 for the six months ended June 30, 1998 to
approximately $287,000 for the six months ended June 30, 1999.
Telephone banking license, hardware and implementation revenues
increased from approximately $152,000 for the six months ended June 30,
1998 to approximately $204,000 for the six months ended June 30, 1999.
The increase was due to an increase in sales of telephone banking
products to 13 new community financial institution customers for the
six months ended June 30, 1998 as compared to 15 new community
financial institution customers for the six months ended June 30, 1999.
Telephone banking monthly maintenance and service revenues increased
from approximately $58,000 for the six months ended June 30, 1998 to
approximately $83,000 for the six months ended June 30, 1999. This
increase was due to providing monthly maintenance and service to 95
customers for the six months ended June 30, 1998 as compared to 136
customers for the six months ended June 30, 1999.
SBS Remote Banking Operations. Total revenues increased from
approximately $543,000 for the six months ended June 30, 1998 to
approximately $1.0 million for the six months ended June 30, 1999. The
sources of the increase are summarized below:
Internet Banking. Internet banking revenues increased from
approximately $160,000 for the six months ended June 30, 1998 to
approximately $455,000 for the six months ended June 30, 1999.
37
<PAGE>
Internet banking license, hardware and implementation revenues
increased from approximately $160,000 for the six months ended June 30,
1998 to approximately $431,000 for the six months ended June 30, 1999.
The increase was due to an increase in sales of Internet banking
products and services to 12 new community financial institution
customers for the six months ended June 30, 1998 as compared to 18 new
community financial institution customers for the six months ended June
30, 1999. There were no monthly maintenance and service revenues for
the six months ended June 30, 1998. Monthly maintenance and service
revenues were approximately $24,000 for the six months ended June 30,
1999. We provided monthly maintenance and service to 10 customers for
the six months ended June 30, 1999.
Telephone Banking. Telephone banking license, hardware and
implementation revenues increased from approximately $383,000 for the
six months ended June 30, 1998 to approximately $566,000 for the six
months ended June 30, 1999. The increase was due to decrease in sales
of telephone banking products to 24 new community financial institution
customers for the six months ended June 30, 1998 as compared to 15 new
community financial institution customers for the six months ended June
30, 1999 offset by an increase in recurring license fees from customers
continuing services from prior periods. There were no monthly
maintenance and services revenues for the six months ended June 30,
1998 and 1999.
Internet Banking Divisions of TIB and The Bankers Bank. Total revenues
increased from approximately $255,000 for the six months ended June 30,
1998 to approximately $572,000 for the six months ended June 30, 1999. TIB
and The Bankers Bank did not provide telephone banking products. Internet
banking license, hardware and implementation revenues increased from
approximately $207,000 for the six months ended June 30, 1998 to
approximately $414,000 for the six months ended June 30, 1999. The increase
was due to an increase in sales of Internet banking products and services
to six new community financial institution customers for the six months
ended June 30, 1998 as compared to 16 new community financial institution
customers for the six months ended June 30, 1999. Monthly maintenance and
service revenues increased from approximately $47,000 for the six months
ended June 30, 1998 to approximately $158,000 for the six months ended June
30, 1999. This increase was due to providing monthly maintenance and
service to six customers for the six months ended June 30, 1998 as compared
to 30 customers for the six months ended June 30, 1999.
Call Me Bill. Total revenues increased from approximately $13,000 for
the six months ended June 30, 1998 to approximately $164,000 for the six
months ended June 30, 1999. The sources of the increase are summarized
below:
Internet Banking. Call Me Bill began selling Internet banking
products and services during the second half of 1998. Internet banking
revenues were approximately $148,000 for the six months ended June 30,
1999. Internet banking license, hardware and implementation revenues
were approximately $66,000 for the six months ended June 30, 1999.
Monthly maintenance and service revenues were approximately $81,000 for
the six months ended June 30, 1999.
Telephone Banking. Telephone banking revenues increased from
approximately $13,000 for the six months ended June 30, 1998 to
approximately $16,000 for the six months ended June 30, 1999. Telephone
banking license, hardware, and implementation revenues increased from
approximately $4,000 for the six months ended June 30, 1998 to
approximately $7,000 for the six months ended June 30, 1999. This
increase was due to implementations of Internet banking products and
services for one new community financial institution customer during
the six months ended June 30, 1998 as compared to implementations of
Internet banking products and services for 42 new community financial
institution customers during the six months ended June 30, 1999.
Telephone banking monthly maintenance and service revenues were
approximately $9,000 for the six months ended June 30, 1998 and for the
six months ended June 30, 1999. In July 1998, Call Me Bill began
selling
38
<PAGE>
Internet banking products and services, with telephone banking
capabilities. The customers who contracted for the Internet banking
products and services primarily utilized the Internet related aspects
of the products, and therefore, the portions of telephone banking
license, hardware, and implementation revenues and monthly maintenance
services revenue for telephone banking products were minimal.
Dyad. Total revenues decreased from approximately $184,000 for the six
months ended June 30, 1998 to approximately $103,000 for the six months
ended June 30, 1999. The decrease was due primarily to a decrease in
equipment and hardware sales. We do not anticipate that the hardware and
equipment sales associated with the non-Internet banking services
historically sold by Dyad will continue in the future.
Cost of license, hardware, implementation, maintenance and service
Total combined cost of license, hardware, implementation, maintenance and
service increased approximately $227,000 or 35.5% from approximately $639,000
for the six months ended June 30, 1998 to approximately $866,000 for the six
months ended June 30, 1999. The sources of the increase are summarized as
follows:
Netzee. The cost of license, hardware, implementation, maintenance and
service decreased from approximately $206,000 for the six months ended June
30, 1998 to approximately $171,000 for the six months ended June 30, 1999.
The decrease was due to a reduction in the labor force utilized to provide
implementation and maintenance services, coupled with lower hardware costs
experienced during the six months ended June 30, 1999. Additionally, Netzee
began selling Internet banking products and services in the second half of
1998. Netzee was paid a monthly maintenance and service fee by 95 customers
during the six months ended June 30, 1998 increasing to 136 customers
during the six months ended June 30, 1999.
SBS Remote Banking Operations. The cost of license, hardware,
implementation, maintenance and service decreased from approximately
$141,000 for the six months ended June 30, 1998 to approximately $134,000
for the six months ended June 30, 1999. The decrease was due to
implementations of Internet banking products and services for 12 new
community financial institution customers and telephone banking products
and services for 24 new community financial institution customers during
the six months ended June 30, 1998 as compared to implementations of
Internet banking products and services for 18 new community financial
institution customers and telephone banking products and services for 15
new community financial institution customers during the six months ended
June 30, 1999. SBS also provided monthly maintenance and service to 10
customers during the six months ended June 30, 1999.
Internet Banking Divisions of TIB and The Bankers Bank. The cost of
license, hardware, implementation, maintenance and service increased from
approximately $188,000 for the six months ended June 30, 1998 to
approximately $482,000 for the six months ended June 30, 1999 due to an
increase in implementations of Internet banking products and services to
six new community financial institution customers during the six months
ended June 30, 1998 compared to 16 new community financial institution
customers during the six months ended June 30, 1999. TIB and The Bankers
Bank also provided monthly maintenance and service to six customers during
the six months ended June 30, 1998 compared to 30 customers during the six
months ended June 30, 1999.
Call Me Bill. The cost of license, hardware, implementation, maintenance
and service increased from approximately $7,000 for the six months ended
June 30, 1998 to approximately $24,000 for the six months ended June 30,
1999. The increase was due to sales of bill payment services to one new
community financial institution customer during the six months ended June
30, 1998 as compared to sales of bill payment services to 42 new community
financial institution customers during the six months ended June 30, 1999.
Call Me Bill provided monthly maintenance and service to one customer
during the six months ended June 30, 1998 compared to 57 customers during
the six months ended June 30, 1999.
39
<PAGE>
Dyad. The cost of license, hardware, implementation, maintenance and
service decreased from approximately $97,000 for the six months ended
June 30, 1998 to $55,000 for the six months ended June 30, 1999. This
decrease was due primarily to a decrease in equipment and hardware sales.
Selling, general and administrative expenses
Total combined selling, general and administrative expenses increased
approximately $661,000 or 30.2% from approximately $2.2 million for the six
months ended June 30, 1998 to approximately $2.8 million for the six months
ended June 30, 1999. The sources of the increase are summarized as follows:
Netzee. Selling, general and administrative expenses increased from
approximately $225,000 for the six months ended June 30, 1998 to
approximately $326,000 for the six months ended June 30, 1999. The increase
was due primarily to an increase in sales personnel and associated sales
commissions, as well as an increase in rent expense during the six months
ended June 30, 1999.
SBS Remote Banking Operations. Selling, general and administrative
expenses increased from approximately $600,000 for the six months ended
June 30, 1998 to approximately $1.1 million for the six months ended June
30, 1999. The increase was due primarily to increased sales and other
personnel.
Internet Banking Divisions of TIB and The Bankers Bank. Selling, general
and administrative expenses increased from approximately $343,000 for the
six months ended June 30, 1998 to approximately $692,000 for the six months
ended June 30, 1999. The increase was due primarily to increases in overall
business and operating activities and an increase in the number of
employees.
Call Me Bill. Selling, general and administrative expenses increased
from approximately $150,000 for the six months ended June 30, 1998 to
approximately $335,000 for the six months ended June 30, 1999. The increase
was due primarily to the increased customer base and increased business
activity.
Dyad. Selling, general and administrative expenses decreased from
approximately $867,000 for the six months ended June 30, 1998 to
approximately $423,000 for the six months ended June 30, 1999. The decrease
was due primarily to the closing of certain offices and the related
decrease in personnel.
Depreciation and amortization
Total combined depreciation and amortization increased approximately
$194,000 or 198.0% from approximately $98,000 for the six months ended June 30,
1998 to approximately $292,000 for the six months ended June 30, 1999. This
increase was due primarily to the amortization of the intangible assets from
the acquisition of Direct Access Interactive by Netzee.
Interest expense, net
Total combined net interest expense increased approximately $54,000 or 6.3%
from approximately $855,000 for the six months ended June 30, 1998 to
approximately $909,000 for the six months ended June 30, 1999. The increase was
due primarily to additional debt incurred by Dyad during the six months ended
June 30, 1999.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1998 for
Netzee and the Acquired Companies
Revenues
Total combined revenues increased approximately $738,000 or 31.0% from
approximately $2.4 million for the year ended December 31, 1997 to
approximately $3.1 million for the year ended December 31, 1998. This increase
was comprised of an increase of approximately $453,000 in combined license,
hardware and
40
<PAGE>
implementation revenues, an increase of approximately $314,000 in combined
monthly maintenance and service revenues and a decrease in other revenues of
approximately $29,000.
Internet Banking. Total combined Internet banking revenues increased
from approximately $177,000 for the year ended December 31, 1997 to
approximately $1.0 million for the year ended December 31, 1998. Total
combined Internet banking license, hardware and implementation revenues
increased from approximately $177,000 for the year ended December 31, 1997
to approximately $721,000 for the year ended December 31, 1998. The
increase was due to an increase in sales of Internet banking products and
services to 28 new community financial institution customers for the year
ended December 31, 1997 as compared to 76 new community financial
institution customers for the year ended December 31, 1998. We had no
monthly maintenance and service revenues for the year ended December 31,
1997. Total combined monthly maintenance and service revenues were
approximately $239,000 from 45 customers for the year ended December 31,
1998.
Telephone Banking. Total combined telephone banking revenues were
approximately $1.7 million for the year ended December 31, 1997 and for the
year ended December 31, 1998. Total combined telephone banking license,
hardware and implementation revenues decreased from approximately
$1.6 million for the year ended December 31, 1997 to approximately
$1.5 million for the year ended December 31, 1998. The decrease was due to
a decrease in sales of our telephone banking product from 104 new community
financial institution customers for the year ended December 31, 1997 as
compared to 103 new community financial institution customers for the year
ended December 31, 1998. Total combined monthly maintenance and service
revenues increased from approximately $63,000 for the year ended December
31, 1997 to approximately $138,000 for the year ended December 31, 1998.
This increase was due to providing monthly maintenance and service to two
customers for the year ended December 31, 1997 as compared to 17 customers
for the year ended December 31, 1998.
The sources of the changes are summarized as follows:
Netzee. Total revenues decreased from approximately $642,000 for the
year ended December 31, 1997 to approximately $591,000 for the year ended
December 31, 1998. The sources of the decrease are summarized below:
Internet Banking. Netzee began selling Internet banking products and
services in 1998 with sales to four new community financial institution
customers. Internet banking revenues were approximately $24,000 for the
year ended December 31, 1998. Internet banking license, hardware and
implementation revenues were approximately $15,000 for the year ended
December 31, 1998, while Internet banking monthly maintenance and
service revenues were approximately $9,000 for the year ended December
31, 1998.
Telephone Banking. Telephone banking revenues decreased from
approximately $642,000 for the year ended December 31, 1997 to
approximately $567,000 for the year ended December 31, 1998. Telephone
banking license, hardware and implementation revenues decreased from
approximately $583,000 for the year ended December 31, 1997 to
approximately $440,000 for the year ended December 31, 1998. The
decrease was due to a decrease in sales of our telephone banking product
to 49 new community financial institution customers for the year ended
December 31, 1997 as compared to 39 new community financial institution
customers for the year ended December 31, 1998. Telephone banking
monthly maintenance and service revenues increased from approximately
$59,000 for the year ended December 31, 1997 to approximately $127,000
for the year ended December 31, 1998. This increase was due to providing
monthly maintenance and service to 82 customers for the year ended
December 31, 1997 as compared to 121 customers for the year ended
December 31, 1998.
SBS Remote Banking Operations. Total revenues increased from
approximately $1.2 million for the year ended December 31, 1997 to
approximately $1.4 million for the year ended December 31, 1998. The
sources of the increase are summarized below:
Internet Banking. Internet banking revenues increased from
approximately $177,000 for the year ended December 31, 1997 to
approximately $381,000 for the year ended December 31, 1998.
41
<PAGE>
Internet banking license, hardware and implementation revenues
increased from approximately $177,000 for the year ended December 31,
1997 to approximately $342,000 for the year ended December 31, 1998.
The increase was due to an increase in sales of Internet banking
products and services to 28 new community financial institution
customers for the year ended December 31, 1997 as compared to 43 new
community financial institution customers for the year ended December
31, 1998. There were no monthly maintenance and services revenues for
the year ended December 31, 1997. Monthly maintenance and service
revenues were approximately $39,000 for the year ended December 31,
1998.
Telephone Banking. Telephone banking license, hardware and
implementation revenues increased from approximately $1.0 million for
the year ended December 31, 1997 to approximately $1.1 million for the
year ended December 31, 1998. The increase was due to an increase in
recurring license fees from customers continuing services from prior
periods. There were no monthly maintenance and services revenues for
the year ended December 31, 1997 or for the year ended December 31,
1998.
Internet Banking Divisions of TIB and The Bankers Bank. The Internet
banking divisions of TIB and The Bankers Bank began selling Internet
banking products and services in 1998. Total revenues were approximately
$509,000 for the year ended December 31, 1998. TIB and The Bankers Bank did
not provide telephone banking products or services. Internet banking
license, hardware and implementation revenues were approximately $341,000
for the year ended December 31, 1998, while monthly maintenance and service
revenues were approximately $168,000 for the year ended December 31, 1998.
Call Me Bill. Total revenues increased from approximately $4,000 for the
year ended December 31, 1997 to approximately $62,000 for the year ended
December 31, 1998. The sources of the increase are summarized below:
Internet Banking. Call Me Bill began selling Internet banking
products and services in 1998. Internet banking revenues were
approximately $44,000 for the year ended December 31, 1998. Internet
banking license, hardware and implementation, were approximately
$22,000 for the year ended December 31, 1998. Monthly maintenance and
service revenues were approximately $22,000 for the year ended
December 31, 1998.
Telephone Banking. Telephone banking revenues increased from
approximately $4,000 for the year ended December 31, 1997 to
approximately $18,000 for the year ended December 31, 1998. We had no
telephone banking license, hardware and implementation revenues for the
year ended December 31, 1997. Telephone banking license, hardware and
implementation revenues were approximately $6,000 for the year ended
December 31, 1998 for sales of our telephone banking product to 15 new
community financial institution customers. Monthly maintenance and
service revenues increased from approximately $4,000 for the year ended
December 31, 1997 to approximately $12,000 for the year ended December
31, 1998. This increase was due to providing monthly maintenance and
service to two customers for the year ended December 31, 1997 as
compared to 17 customers for the year ended December 31, 1998.
Dyad. Total revenues decreased from approximately $534,000 for the year
ended December 31, 1997 to approximately $505,000 for the year ended
December 31, 1998. The decrease was due primarily to a decrease in
equipment and hardware sales.
Cost of license, hardware, implementation, maintenance and service
Total combined cost of license, hardware, implementation, maintenance and
service increased approximately $644,000 or 60.8% from approximately
$1.1 million for the year ended December 31, 1997 to approximately $1.7 million
for the year ended December 31, 1998. The sources of the increases are
summarized as follows:
Netzee. The cost of license, hardware, implementation, maintenance and
service increased from approximately $422,000 for the year ended
December 31, 1997 to approximately $466,000 for the year
42
<PAGE>
ended December 31, 1998. The increase was primarily due to Netzee providing
monthly maintenance and service to 82 customers for the year ended
December 31, 1997 increasing to 121 customers for the year ended
December 31, 1998. We completed implementations of telephone banking
products for 49 new community financial institution customers for the year
ended December 31, 1997 as compared to implementations for 39 new community
financial institution customers ended December 31, 1998. Additionally, we
began selling Internet banking products and services in the year ended
December 31, 1998 with implementations for four new community financial
institution customers.
SBS Remote Banking Operations. The cost of license, hardware,
implementation, maintenance and service increased from approximately
$234,000 for the year ended December 31, 1997 to approximately $254,000 for
the year ended December 31, 1998. The increase was primarily due to
implementations of Internet banking products and services for 28 new
community financial institution customers and telephone banking products
and services for 53 new community financial institutions in the year ended
December 31, 1997 as compared to implementations of Internet banking
products and services for 43 new community financial institution customers
and telephone banking products for 49 new community financial institution
customers in the year ended December 31, 1998. We had no cost of monthly
maintenance and service to customers in the year ended December 31, 1997.
We provided monthly maintenance and services to ten customers in the year
ended December 31, 1998.
Internet Banking Divisions of TIB and The Bankers Bank. We had no cost
of license, hardware, implementation, maintenance and service for the year
ended December 31, 1997. Cost of license, hardware, implementation,
maintenance and service was approximately $546,000 for the year ended
December 31, 1998. The increase was due to initiation of sales of Internet
banking products and services by TIB and The Bankers Bank in the year ended
December 31, 1998 with implementations for 14 new community financial
institution customers. TIB and The Bankers Bank also provided monthly
maintenance and service to 14 customers in the year ended December 31,
1998.
Call Me Bill. The cost of license, hardware, implementation, maintenance
and service increased from approximately $2,000 for the year ended December
31, 1997 to approximately $28,000 for the year ended December 31, 1998. The
increase was due to sales of bill payment services to two new community
financial institution customers in the year ended December 31, 1997 as
compared to sales of bill payment services to 15 new community financial
institution customers in the year ended December 31, 1998. Call Me Bill
also provided monthly maintenance and service to 2 customers in the year
ended December 31, 1997.
Dyad Corporation. The cost of license, hardware, implementation,
maintenance and services remained constant at approximately $400,000 for
the years ended December 31, 1997 and 1998.
Selling, general and administrative expenses
Total combined selling, general and administrative expenses increased
approximately $1.5 million or 43.4% from $3.4 million for the year ended
December 31, 1997 to approximately $4.9 million for the year ended December 31,
1998. The sources of the increase are summarized as follows:
Netzee. Selling, general and administrative expenses increased from
approximately $308,000 for the year ended December 31, 1997 to
approximately $442,000 for the year ended December 31, 1998. The increase
was due primarily to an increase in sales personnel and associated sales
commissions, as well as an increase in rent expense.
SBS Remote Banking Operations. Selling, general and administrative
expenses increased from approximately $886,000 for the year ended December
31, 1997 to approximately $1.4 million for the year ended December 31,
1998. The increase was due primarily to increased sales and other
personnel.
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<PAGE>
Internet Banking Divisions of TIB and The Bankers Bank. Selling, general
and administrative expenses increased from approximately $174,000 for the
year ended December 31, 1997 to approximately $925,000 for the year ended
December 31, 1998. The increase was due primarily to the establishment of
the Internet Banking Division of The Bankers Bank on March 1, 1998,
increases in overall business and operating activities, and an increase in
the number of employees.
Call Me Bill. Selling, general and administrative expenses increased
from approximately $111,000 for the year ended December 31, 1997 to
approximately $378,000 for the year ended December 31, 1998. The increase
was due primarily to operations for a full year in 1998 and increased
business activity.
Dyad. Selling, general and administrative expenses decreased from
approximately $1.9 million for the year ended December 31, 1997 to
approximately $1.7 million for the year ended December 31, 1998. The
decrease was due primarily to the closing of certain offices and the
related decrease in personnel.
Depreciation and amortization
Total combined depreciation and amortization increased approximately $22,000
or 10.7% from approximately $206,000 for the year ended December 31, 1997 to
approximately $228,000 for the year ended December 31, 1998 primarily due to
the increase in depreciation related to new property and equipment purchases.
Interest expense, net
Total combined net interest expense increased approximately $1.6 million
from approximately $90,000 for the year ended December 31, 1997 to
approximately $1.7 million for the year ended December 31, 1998. The primary
reason for the increase in net interest expense was a loan obtained by Dyad in
December 1997.
Results of Operations for Netzee
The following table sets forth our unaudited results of operations on a
stand-alone basis for the years ended December 31, 1996 and 1997. Our operating
results for the periods presented below are not necessarily indicative of
results to be expected for any future period.
44
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997
----------- -----------
(in thousands)
<S> <C> <C>
Revenues:
License, hardware and implementation............... $ 41 $ 583
Monthly maintenance and service.................... 4 59
----------- -----------
Total revenues................................... 45 642
Operating expenses:
Cost of license, hardware, implementation,
maintenance and service........................... 50 422
Selling, general and administrative expenses....... 48 308
Depreciation and amortization...................... 2 11
----------- -----------
Total operating expenses......................... 100 741
----------- -----------
Operating loss..................................... (55) (99)
Other income, net.................................... -- --
Interest expense, net................................ -- --
----------- -----------
Net loss............................................. $ (55) $ (99)
=========== ===========
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997 for
Netzee
Revenues
Revenues increased approximately $597,000 or 1,326.7% from approximately
$45,000 for the year ended December 31, 1996 to approximately $642,000 for the
year ended December 31, 1997. License, hardware and implementation revenues
increased from approximately $41,000 for the year ended December 31, 1996 to
approximately $583,000 for the year ended December 31, 1997. The increase was
due to sales of telephone banking products and services to 20 new community
financial institution customers for the year ended December 31, 1996 as
compared to sales to 49 new community financial institution customers for the
year ended December 31, 1997. Monthly maintenance and service revenues
increased from approximately $4,000 for the year ended December 31, 1996 to
approximately $59,000 for the year ended December 31, 1997. The increase was
due to Netzee providing monthly maintenance and service to 33 customers for the
year ended December 31, 1996 increasing to 82 customers for the year ended
December 31, 1997.
Cost of license, hardware, implementation, maintenance and service
Cost of license, hardware, implementation, maintenance and service increased
approximately $372,000 or 744.0% from approximately $50,000 for the year ended
December 31, 1996 to approximately $422,000 for the year ended December 31,
1997. The increase was due to implementations of telephone banking products for
20 new community financial institution customers the year ended December 31,
1996 as compared to implementations for 49 new community financial institution
customers for the year ended December 31, 1997. Netzee was paid monthly
maintenance and service fees by 33 customers for the year ended December 31,
1996 increasing to 82 customers for the year ended December 31, 1997.
Selling, general and administrative expenses
Selling, general and administrative expenses increased approximately
$260,000 or 541.7% from approximately $48,000 for the year ended December 31,
1996 to approximately $308,000 for year ended December 31, 1997. The increase
was due primarily to increases in sales personnel and incurred sales
commissions.
Depreciation and amortization
Depreciation and amortization increased approximately $9,000 or 450.0% from
approximately $2,000 for the year ended December 31, 1996 to approximately
$11,000 for the year ended December 31, 1997. The Company was established in
October 1996, and therefore the first full year that fixed assets were
depreciated was the year ended December 31, 1997.
45
<PAGE>
Liquidity and Capital Resources
Since inception, we have financed our operations through cash flow from
operations and borrowings from InterCept, as discussed below, as well as
through a bank line of credit. We paid the line of credit in full in March 1999
in connection with the acquisition of Direct Access Interactive and
subsequently terminated this line of credit. In October 1999, we entered into a
$3.0 million revolving line of credit with an affiliate of one of our
directors. Borrowings under this line of credit bear interest at a rate equal
to the prime rate. At present, we have not borrowed any funds under this line
of credit. In addition, 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 beginning November 1, 1999. 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.
Our operating activities generated cash of approximately $13,000 for the
period from inception (October 10, 1996) to December 31, 1996. Our operating
activities used cash of approximately $33,000 and $226,000 for the years ended
December 31, 1997 and 1998, respectively. Cash used by operating activities in
each of these periods primarily resulted from our net losses, partially offset
by increases in accounts payable, accrued expenses and deferred revenues. Our
operating activities generated cash of approximately $350,000 for the six
months ended June 30, 1999. Cash from operating activities for the six months
ended June 30, 1999 resulted primarily from increases in accounts payable and
accrued expenses.
Our investing activities used cash of approximately $2,000, $18,000, and
$863,000 for the years ended December 31, 1996 and 1997 and the six months
ended June 30, 1999, respectively. The cash used in investing activities
primarily resulted from the purchase of property and equipment, primarily in
the six months ended June 30, 1999 as we purchased additional computer
equipment for operations.
Our financing activities generated cash of approximately $50,000, $229,000
and $509,000 for the years ended December 31, 1997 and 1998 and the six months
ended June 30, 1999, respectively. The cash generated by financing activities
during the years ended December 31, 1997 and 1998 resulted primarily from
increased borrowings under the line of credit and loans from shareholders, and
the cash generated by financing activities during the six months ended June 30,
1999 resulted primarily from advances from InterCept, offset by payments of
debt. As of June 30, 1999, we had no cash and a working capital deficit of
approximately $25.2 million.
Prior to September 3, 1999, we were a majority-owned subsidiary of
InterCept, and InterCept financed our working capital and general corporate
requirements. We anticipate that we will have additional working capital needs
to be funded by InterCept of between $4.0 million and $6.1 million from August
31, 1999 to November 30, 1999. InterCept has agreed to loan us additional funds
to the extent necessary to fund our working capital and general corporate
requirements through the completion of this offering. We have borrowed
approximately $3.0 million from InterCept on this basis as of October 15, 1999.
These borrowings are on substantially the same terms as the borrowings
discussed in the next paragraph. We anticipate that InterCept will make any
necessary additional funding available to us on an arm's length basis.
On August 6, 1999 and September 1, 1999, we entered into three promissory
notes with InterCept for an aggregate principal amount of approximately $28.8
million. We used the proceeds of these three promissory notes to fund our
acquisitions of Call Me Bill, Dyad and SBS. These notes currently bear interest
at a rate of 10.25% per year. Each note matures on the earlier of (1) two years
from the date of the promissory note or (2) the completion of our initial
public offering. We intend to use approximately $29.3 million of the net
proceeds of the offering to pay in full the principal and accrued interest on
these promissory notes, as described further in "Use of Proceeds."
We believe that the net proceeds of this offering will be sufficient to
satisfy our cash requirements for at least the next 12 months. However if we
expand more rapidly than currently anticipated, if our working capital needs
exceed our current expectations or if we make acquisitions, we may need to
raise additional capital from
46
<PAGE>
equity or debt sources. We cannot be sure that we will be able to obtain the
additional financing necessary to satisfy these expanded cash requirements or
to implement an expanded 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.
Market Risk
Our interest income and expense is sensitive to changes in the general level
of U.S. interest rates. Changes in U.S. interest rates affect the interest that
we earn on our cash equivalents as well as the interest that we incur on our
long-term debt. Based on our cash equivalents balance and level of debt at June
30, 1999, our exposure to interest rate risk is not material.
We do not currently employ any derivative financial instruments, other
financial instruments or derivative commodity instruments to hedge any market
risks, and we do not currently plan to employ them in the future.
Year 2000 Readiness
The year 2000 issue refers to the problems that may arise from the improper
processing of dates and date-sensitive calculations by computers and embedded
microprocessors as the year 2000 approaches and is reached. These problems
generally arise 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 will recognize a code of "00" as
the year 1900 rather than the year 2000.
Our business could suffer if the systems on which we depend to conduct our
operations are not year 2000 ready. Our potential areas of exposure include:
. information technology, including computers, software and systems that
we have developed internally or purchased or licensed from others, such
as our Internet and telephone banking products and services and our
billing and accounts receivable system, and hardware and software that
reside in our data center;
. non-information technology, including telephone, utilities and other
similar systems that we use in our internal operations; and
. third parties' systems, particularly the core processing and interface
systems of our community financial institution customers.
Internet and Telephone Banking Products and Services. We acquired the main
operating systems for our banking products and services with our acquisition of
SBS in August 1999, and these systems now serve as the core systems for all of
the Internet and telephone banking products and services we provide. SBS
completed its own year 2000 compliance program to test the readiness of these
systems and to determine whether these systems would be year 2000 compliant.
Based on the results of these tests, we believe that our core Internet and
telephone banking systems are year 2000 compliant.
As part of the compliance tests, SBS followed the initial date and testing
guidelines mandated for financial institutions, including the following five
phases:
. Awareness. During late 1997, SBS identified potential year 2000 issues.
. Assessment. In February 1998, SBS determined the scope of the year 2000
compliance program and developed a plan of action.
. Renovation. Between February and August 1998, SBS updated its network
infrastructure and made cosmetic interface changes in order to
facilitate the display of four digits to end users of its product.
47
<PAGE>
. Validation. From August 1998 to January 1999, SBS tested all renovated
hardware and software systems to verify that they were year 2000
compliant. The upgraded Internet and telephone banking products and
services are specifically designed to be year 2000 compliant. The year
portion of all dates is stored as four digits instead of two. Because
there are no date calculations or date "roll-overs" in this renovated
system, the dates will be correct as long as the correct dates are
passed from our community financial institution customers.
. Vendor and Customer Compliance. To maintain the current and future
integrity of these systems, SBS began in early 1999 to proactively
educate and communicate with vendors and customers with respect to their
year 2000 readiness.
Additionally, Call Me Bill and the Internet banking operations of TIB and
The Bankers Bank have updated all of their products and services and have
verified them to be year 2000 compliant. Direct Access Interactive's operating
system and hardware is no longer being utilized. Dyad is scheduled for a system
upgrade in December 1999, but there can be no assurances that this upgrade will
be completed before January 1, 2000. Because our Internet and telephone banking
customers do not currently use Dyad's system, a year 2000 failure at Dyad will
not materially affect our operations.
Internal Operations. We have tested the systems and technologies supporting
our internal operations, including computers and related software, and non-
information technology systems, such as security, telephone, heating and air
conditioning equipment. All of these systems and technologies, with the
exception of the Direct Access Interactive operating systems and software, have
been successfully updated to be year 2000 compliant. The Direct Access
Interactive system will be replaced by the SBS operating system in December
1999. Once this is accomplished, our internal operations should be
substantially year 2000 compliant.
Third Party Compliance. The assessment of external year 2000 readiness is
ongoing, and we have provided each of our customers with a detailed disclosure
explaining our year 2000 strategy. In these disclosures, we emphasized that,
although our internal year 2000 testing appears to be successful, each customer
is responsible for ensuring that its systems are prepared for the event. We did
not solicit reports from our customers detailing their compliance progress;
however, our primary customers are banking institutions. As a result, the
majority of our customers have been subjected to the stringent year 2000
compliance requirements established by Federal and state financial regulatory
agencies.
In addition, the vendors and other third parties from whom we have purchased
or licensed items have provided us with assurances that their products are year
2000 compliant. These third parties have provided detailed disclosures
concerning the status of their year 2000 compliance efforts and, where
necessary, have provided updated products, which address the year 2000 issue.
We have made every effort to obtain these updates and now believe that products
obtained from third parties will not be materially affected by the year 2000
issue.
Costs
As of September 1, 1999, we had incurred approximately $60,000 in costs
associated with the year 2000 issue and the implementation of our year 2000
plan. We expect that we will incur $50,000 in additional year 2000 expenses
during the remainder of 1999, which will be used to purchase contingency
hardware, software and other equipment. We intend to expense all costs
associated with our year 2000 compliance program as they are incurred.
Risks
Our failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, normal business activities or operations. In
a worst case scenario, problems with third party products or services could
force substantial delays in service. In particular, we depend on Internet
service providers, providers of telecommunications and data services, utility
companies and other third party service providers
48
<PAGE>
over whom we have little or no control. If any of these entities fail to
correct their year 2000 issues, our operations may suffer. The results of such
a failure could include:
. the loss of revenue and goodwill caused by contact breaches resulting
from year 2000 disruptions;
. the impairment of long-lived assets that must be reclassified to reflect
a shortened life spans due to the year 2000 issue;
. the loss of current customers due to unacceptable service problems; and
. the loss of business opportunities due to delays caused by the year 2000
problem.
See "Risk Factors--Potential year 2000 problems may cause us to lose customers
and subject us to significant liabilities and costs."
Contingency Plans
Although we have found no material year 2000 compliance issues with our
products, services or operating systems, or those of third parties with whom we
do business, contingency plans are currently being developed to mitigate the
risks associated with a year 2000 systems failure. Depending on the systems
affected and the severity of the problem, our finalized contingency plans may
include the replacement of affected equipment and software, use of backup
equipment and emergency allocation of personnel to address year 2000 issues.
However, the implementation of our contingency plans, once finalized, may not
remediate all of our year 2000 issues. This could have a material adverse
effect on our business, financial condition and operating results.
Forward-Looking Statements
The estimates and conclusions included in this discussion contain forward-
looking statements and are based on our management's best estimates of future
events. Our expectations about risks, future costs and timely completion of our
year 2000 testing may turn out to be incorrect, and any variance from these
expectations could cause actual results to differ from this discussion. Factors
that could influence our year 2000 compliance risks, the amount of future costs
and the timing of our remediation efforts include our success in identifying
and correcting potential year 2000 issues and the ability of others to address
year 2000 issues.
The statements above related to the ability of our services to operate
properly before, on and after January 1, 2000 are "Year 2000 Readiness
Disclosures" under the Year 2000 Information and Readiness Disclosure Act of
1998. Those statements are not a guaranty, contract or warranty, and our
compliance with that act does not preclude any claims against us based on the
federal securities laws.
Recent Accounting Pronouncements
In June of 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
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. The Statement is not expected to have a significant impact on our
financial statements.
Effects of Inflation
Inflation generally affects our business by increasing the cost of labor,
equipment and materials. If we were to incur variable rate debt, inflation
would also increase the interest expense associated with this type of debt. We
do not believe that inflation has had any material effect on our business
during the periods discussed in this section.
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BUSINESS
Overview
We are a leading provider of integrated Internet banking products and
services and e-commerce solutions to community financial institutions. We
provide cost-effective, outsourced, secure and scalable Internet banking and e-
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.
In addition to our Internet banking products and services, our recently
introduced e-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 e-
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.
Complementing our Internet banking system, we offer community financial
institutions custom web site design, implementation and marketing services,
telephone banking products and Internet access services. These products and
services are supported by a help desk and a 24 hours a day, 7 days a week,
emergency support service. Our broad range of products and services enables a
community financial institution to compete effectively with the services
offered by larger and Internet-based financial institutions.
Through our Internet banking system, a community financial institution is
able to provide consumer Internet banking, including:
. account statements and balance inquiries;
. check imaging;
. fund transfer capabilities;
. loan application; and
. bill payment.
Along with the services provided to retail customers, our system will enable
a community financial institution to offer its commercial customers value-added
business banking and e-commerce functions, including:
. corporate cash management;
. e-commerce services; and
. web site design and hosting.
We expect to earn substantially all of our revenues from recurring monthly
service fees, which are based on flat monthly per user and per transaction
charges paid by our community financial institution customers. We expect to
derive little or no revenue from up-front software or implementation fees.
Our system is supported by our data center, which provides the hardware,
software, communications, transaction processing and data storage services
necessary to allow our community financial institutions to outsource their
Internet banking needs. Through our network design and our relationships with
data processing vendors, we are able to interface our products and services
with a financial institution's existing core banking
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and data processing systems. We have successfully interfaced our products and
services with approximately 25 different core processing systems.
As of October 15, 1999, we had approximately 380 community financial
institution customers under contract to utilize one or more of our Internet
products and services. We are focused on increasing our community financial
institution customer base, expanding our relationships with our community
financial institution customers, and increasing the penetration of our products
and services with their customers.
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 PC
banking which requires the user to load 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 eight
million users banking over the Internet in the United States at the end of
1998, and projects that the number will increase to approximately 40 million by
2003, a compound annual growth rate of approximately 38%.
In addition to customer demand, financial institutions are motivated to
provide Internet banking solutions to retain existing customers, attract new
customers, provide additional non-interest sources of revenues and to reduce
costs. International Data Corporation estimates the number of banks 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
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Internet. Financial institutions have been faced with the loss of their
traditional customer base 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 currently offer Internet banking.
Nevertheless, according to SNL Securities and The National Credit Union
Administration, there are approximately 7,193 banks, 1,469 thrifts and 10,964
credit unions in the United States with assets of less than $10 billion each.
These community financial institutions hold approximately $1.9 trillion in
deposits, or approximately 46% of total U.S. customer deposits. 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 a full suite of integrated Internet banking products and services
and e-commerce solutions to community financial institutions. Our system
consists of (1) our Internet banking and e-commerce products and services, (2)
implementation, web site design and support and other related services and (3)
our Internet banking data center that supports and hosts these products and
services. Our Internet data center interfaces with a community financial
institution's existing computer hardware and core processing systems, as well
as with a financial institution's customers. Our data center contains the web
servers, computers, data storage, retrieval and security systems, and support
personnel necessary to operate our system.
Our solution provides our customers with the following strategic advantages:
. Internet Banking Services in a Community Environment. Our system 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 institutions' 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
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relations, to increase its customer base, to offer its customers
additional products and services, and to increase its non-interest
income.
. Gateway to E-Commerce. Our suite of Internet banking products and
services includes Banking on Main Street(TM), which is our recently
introduced, branded e-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 e-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.
. Outsourcing Solution; Rapid Implementation with Little to No Up-Front
Costs. We provide all of the proprietary software and the hardware
necessary to operate an Internet banking system. 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 our customers web site design, development and
hosting. We generally waive up-front implementation costs, which makes
our products and services an affordable solution for many community
financial institutions concerned with the cost of implementing Internet
technology. Compared with installing in-house Internet banking systems,
we can significantly reduce the time and expense necessary to implement,
upgrade and support an Internet solution.
. Internet Access Services. Through an independent ISP, we enable a
community financial institution to sell Internet access services as part
of its Internet banking solution. This Internet access service is
branded in the community financial institution's own name. We charge the
community financial institution a monthly fee for providing this
service.
. Marketing and Consulting Services. We provide on-site marketing and
sales training programs for our 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
banking system is 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 25 different core processing software and
data processing systems. Further, we believe that we have the ability to
interface with many other core processing systems with nominal effort
and expense. We also design our systems so that they work with other
banking functions that the financial institution may support, such as
loan application and check imaging services.
. Security Measures. We implement data encryption and firewall technology
to shield our core Internet banking servers from unauthorized access.
Our Internet banking systems have been certified by ICSA, a company that
has developed standards for testing the security of a product against
internationally accepted risk-reduction standards.
. Full Functionality and Expandability. Our solution offers a wide array
of Internet-based banking functions, including products and services for
home and business banking customers, in a single, customized system.
Each community financial institution can choose the products and
services that best fit its customer base and can easily customize its
system to add new or different functions. We have also designed our
Internet banking system with the flexibility to accommodate increased
numbers of users easily.
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The Netzee Strategy
We believe that by combining Internet banking products and services with e-
commerce capabilities, we can provide an innovative gateway to the Internet.
Community financial institutions can utilize our system to create new banking
relationships and enhance relationships with their existing customers. Our
objective is to become the leading provider of Internet banking and e-commerce
products and services to community financial institutions. To accomplish these
goals, we intend to:
. Create Branded Electronic Marketplaces. We intend to position the
community financial institution's web site as the destination for on-
line financial and e-commerce applications. Our recently introduced
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
intend to utilize and market our e-commerce products and services in
tandem with our Internet banking system to offer community financial
institutions a complete Internet-based presence.
. Capitalize on Strategic Marketing Alliances with Bankers' Banks and
Other Partners. We plan to increase our customer base through our
strategic marketing alliances with bankers' banks, developers of core
processing software and Internet-related service providers. Our existing
strategic partners have business relationships with over 1,850 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 partners as well as to develop new strategic
alliances.
. Increase Revenue from Existing Customers. We expect our revenues to be
derived primarily from recurring fees from our community financial
institution customers and per-user fees and other related Internet
services that we provide. In order to increase the number of users of
our on-line banking systems, we provide our customers with marketing
assistance programs and related support services. We intend to 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
will provide 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.
. Develop and Promote Non-Traditional On-Line Banking Service
Offerings. In addition to traditional on-line banking services, we
intend to provide our 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 e-commerce opportunities.
. Invest in New Products and Technologies. We have designed our system to
store, access and process large amounts of information. We believe that
our 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 our current technology to enhance the
overall functionality and performance of our system. We believe these
improvements will further enhance our Internet banking system and
provide additional services to our customers.
Products and Services
Overview
We design, implement and sell a suite of fully integrated Internet products
and services that enable community financial institutions to offer integrated
Internet banking and e-commerce solutions to their customers. Our Internet
banking system is designed to meet each of our customer's specific
requirements, including a web site branded under our customer's own name and
customized product offerings targeted
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directly to our customer's core individual and business customer base. Our
Internet banking system consists of the following:
. proprietary software;
. an interface with a customer's core processing systems;
. e-commerce capabilities;
. Internet access services;
. a secure data center and a backup facility;
. on-site training;
. system maintenance and upgrades;
. a help desk and a 24 hour, seven days a week emergency support service;
. marketing assistance; and
. web site design, development and hosting.
Internet Banking Products and Services
Our 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. We have already begun
to implement this service on a limited basis, and we expect by the end
of 1999 to make cash management services widely available to our
customers.
. Funds Transfer. Customers can transfer funds among accounts and
establish electronic bill payment.
. Check Imaging. Customers can view images of their cancelled checks on
the Internet, provided that the customer's bank has check imaging
capabilities.
. 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. Savings Bonds. Customers can purchase U.S. Savings Bonds.
. Secure Messaging. Customers can communicate with a financial institution
through secure, encrypted message systems.
. 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. Our customers pay us
a monthly fee under these contracts, based upon the level of usage by their
customers and the types of optional products and services utilized. While we
generally waive up-front fees for the installation of our basic Internet
banking products and services, we may charge additional fees for optional
products and services that our customers elect to receive, such as consulting
and marketing services.
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Banking on Main Street(TM) E-Commerce System
We believe we are one of the only companies to design, develop and sell an
e-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. This system assists community financial institutions in
attracting new customers and increasing non-interest revenue from existing
customers by offering their customers an easy to use and fully customizable
product designed to enable these customers to advertise and conduct business
over the Internet.
The Banking on Main Street(TM) program integrates three principal types of
products and services: local merchants, consumer products and business
services. These components are linked together on a Web page that resembles a
typical town square, with the products and services offered on-line represented
by shops and stores that line the streets. A user simply clicks on a building
or store to access one of the service types.
Our Banking on Main Street(TM) program will offer the following:
. Local Merchants. This service is the cornerstone of the Banking on Main
Street(TM) concept. This service allows each community financial
institution the ability to offer local businesses and merchants their
own web site. Local merchants who already have web sites should be able
to increase traffic to their web site by being included in the community
financial institution's web site. Local merchants can advertise and sell
products and services, and offer coupons or discounts on their products
and services, all for a low monthly fee. Community financial
institutions can easily adapt this service to their specific area by
adding new local merchants at any time. This feature includes a web site
design "wizard" that allows community financial institution employees to
design and implement a fully functional and customized web site for
small business customers in a matter of minutes.
. Consumer Products. This service will provide users a variety of consumer
products and services over the Internet, including discount health
cards, legal and tax services, long distance telephone service, Internet
access and book, video and game retailers. We are in the process of
establishing relationships with both regional and national providers of
these products and services.
. Business Products and Services. This service will offer products and
services to small business customers of financial institutions at
wholesale prices. This service will allow financial institutions to help
their commercial customers become more competitive and profitable. For
example, we are in the process of establishing alliances with companies
that sell office products and furniture, as well as with providers of
printing, payroll, leasing, check collection and human resource
management services.
Through Banking on Main Street(TM), a community financial institution can
offer to its commercial customers a new banking product, called the "e-commerce
account." When coupled with its standard commercial checking accounts and other
financial services, a financial institution can market and sell its e-commerce
account as a separate commercial banking product that will generate additional
non-interest revenue for the financial institution. The combination of our
Internet banking and e-commerce products allows a financial institution to
provide its customers with a complete gateway to Internet-based products,
services and business opportunities.
In addition to the basic software package, we will 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 their small business customers. We will also
provide marketing assistance and materials and a help desk and a 24 hour, seven
days a week emergency support service.
Telephone Banking Product
As with our Internet banking product, our telephone banking product offers a
community financial institution's customers convenient and safe access to
information regarding their accounts from their homes or
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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 October 15, 1999, we had approximately 318
community financial institution customers under contract to utilize our
telephone banking product. Standard features of our telephone banking product
include:
. account information, such as current balance, interest rates and account
activity for checking and savings accounts, certificates of deposit and
loans;
. fund transfers between accounts;
. verification for merchants that there are sufficient funds in their
customers' accounts;
. promotional, marketing and community-related messages; and
. time and temperature.
Our telephone banking product can be installed in a community financial
institution in less than a week with minimal investment and inconvenience. Our
product provides customized messages, menu items and services to meet our
customers' individual needs. We also support our telephone banking product with
a marketing package designed to help our clients introduce the telephone
banking product to their customers and potential customers. We charge our
community financial institution customers who subscribe to our telephone
banking product a recurring monthly fee with no up-front installation fees.
Related Services
Implementation Services
We provide the implementation services necessary to install our products 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 currently
averages approximately 60 days.
We currently have the ability to interface with approximately 25 core
processing systems. We use existing third party software and other application
tools to design interfaces with financial institution core processing systems.
Because we rely on existing applications instead of creating proprietary
software, we believe that we have the ability to interface with many core
processing systems with minimal effort and expense.
Marketing Services
We provide our financial institution customers with an Internet marketing
package designed to increase the number of their customers who use their
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 e-commerce products and services. We also offer
customized consulting services to community financial institutions,
which 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 our customers in
advertising their on-line services through newspapers, radio, press
releases, banners, billboards, direct mail and other media. We also
provide our customers with in-branch marketing materials, such as
brochures, banners and other promotional items.
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. Employee Training. We assist our customers in educating their employees
about the uses and benefits of Internet banking and e-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
generally.
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 we provide additional enhancement, customization and design
services for a fee. We host and maintain most of our customers' web sites at
our data center.
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 and e-commerce products and services to their customers.
Our development efforts are focused on, among other things:
. Banking on Main Street(TM). We are developing enhancements and new
functions to our Banking on Main Street(TM) e-commerce software package.
For example, we intend to allow financial institutions to include local
advertising on their Internet banking gateway and on their customers' e-
commerce web sites. We anticipate that we will add more products and
features to this package that will enhance its functionality and design.
. Commercial Bill Payment. We are enhancing our commercial bill payment
system to allow businesses to pay bills to third parties over the
Internet.
. Merchant Banking Products. We are designing software that will enable
financial institutions to transact business with bankers' banks over the
Internet. Some of these functions will include fund transfers, account
information and loan origination and participation services.
. Improving Our Products and Services. We are improving the functionality
and breadth of our Internet banking and e-commerce products and
services. We intend to offer on-line access to insurance, loan
origination and fulfillment, electronic safe deposit box, brokerage,
credit history management, bill presentment, tax preparation and filing
and merchant services.
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 process most or all of the information in the network. By
contrast, a thin server environment exists where the clients or other servers
process more information.
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 our
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
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server to retain more financial information for each user than a thin
server. Our 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 can
be collected from separate sources, transmitted to our server, processed
and organized into a single, easy-to-understand monthly statement that a
user can access and review on-line.
Data Center
All of the Internet banking and e-commerce services that we provide are or
can be hosted and processed in our data center in Birmingham, Alabama. The data
center contains 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 each community financial institution
customers' Internet services and connect them to their existing core processing
systems. Our data center communicates with a community financial institution
customer by transferring data from the client community financial institution's
core system to our servers in the data center.
Our data center has been certified by ICSA, a risk-based security company
that, among other things, certifies that a product is secure based upon
internationally accepted security criteria. This certification means that our
data center has been tested by ICSA and has been found to meet defined
standards for risk reduction against a set of known security threats. In order
to maintain our ICSA certification, our data center will be retested annually
and will be subject to spot-checks to verify that it continues to comply with
ICSA's security standards. In addition to ICSA certification, our data center
has also been found to comply with regulations imposed 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 center is 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, natural gas-powered generators also
provide backup power to the facilities. We have also implemented a separate
disaster recovery center or "hot site." The hot site maintains pre-programmed
communications designed to take the place of our main data center in the event
of a disaster. This 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.
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.
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. Direct Sales Channel. We use print advertisement, telemarketing and
other similar communications 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 to us
financial customers who may be interested in using our products and
services. A member of our sales staff will then make a presentation to
the proposed customer and, if successful, complete the transaction. We
also engage third parties to sell and implement our on-line banking
products directly with the community financial institution. In this
case, our sales force does not directly deal with the community
financial institution. We pay the sales group a commission based on the
amount of our products and services that they sell.
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 community 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 intend to form
strategic marketing alliances with InterCept and vendors of core processing
software and outsourced data processing services, all of whom market our
products and services to their customer base. In addition, we have developed
relationships with five bankers' banks to market and promote our services to
their customers and shareholders, all of whom are depository institutions. We
have summarized the material terms of each of our current strategic alliances
below.
In September 1999, we entered into a General Marketing Agent Agreement with
each of TIB and The Bankers Bank. We intend to enter into similar agreements
shortly with Pacific Coast Bankers' Bank, Bankers Bancorp of Oklahoma, Inc. and
Atlantic Central 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
will pay commissions to each of these bankers' banks for all finalized
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.
Customers
Our target market is the approximately 19,500 community financial
institutions in the United States with assets of less than $10 billion each.
Within our 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 whom we have developed interfaces. We are
seeking to expand the number of vendors with whom we have interfaces.
As of October 15, 1999, we have contracts with approximately 380 community
financial institutions to provide our Internet banking products and services
and contracts with approximately 600 community financial institutions to
provide one or more of our products and services. For the year ended December
31, 1998 and the six months ended June 30, 1999, no individual customer
accounted for more than 10% of our total revenues.
Competition
The market for Internet and telephone banking products and services is
highly competitive, and we expect that competition will intensify in the
future. Our market is highly fragmented, as more than 100 on-line service
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outsourcing companies provide Internet and telephone banking products and
services in the United States. We face competition from at least four major
sectors:
. We compete with other companies that provide outsourced Internet banking
services to community financial institutions, including, among others,
Corillian Corporation, Digital Insight Corporation, FundsXpress, Inc.,
Home Account Network, Inc., nFront, Inc., Online Resources and
Communications Corporation, Q-Up Systems, Inc., Source One Software,
Inc. and Sanchez Computer Associates, Inc.
. We compete with large vendors that offer transaction processing services
to financial institutions and also market their own Internet banking
solutions. Among these vendors are Electronic Data Systems Corporation,
Fiserv Correspondent Services, Inc., Jack Henry & Associates, Inc. and
Marshall & Ilsley Corporation.
. We compete with large financial institutions, who 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.
. We compete with 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 customer financial
institutions and potential customers who develop their own on-line banking
solutions. Rather than purchasing Internet banking products and services from
third-party vendors, community financial institutions could develop, implement
and maintain their own services and applications. We can give no assurance that
these financial institutions will perceive sufficient value in our products and
services to justify investing in them. We also believe that we face competition
from the various competitive alternative approaches for Internet banking
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 our 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.
We expect competition to increase significantly as new companies enter our
market and current competitors expand their product lines and services. See
"Risk Factors -- Increased competition may increase pricing pressures, reduce
margins or cause a loss of market share."
Government Regulation
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
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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 site conform to their regulatory needs. We do not make
representations to customers regarding applicable regulatory requirements, and
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 us to comply 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.
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 disclosure 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 resolutions. 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.
In addition, the U.S. Congress is currently considering financial services
reform legislation. The House and Senate have adopted two different bills, and
a continuing House-Senate conference has been convened to craft a compromise.
In addition to other substantive differences between the House bill and the
Senate bill, the House bill includes an entire title devoted to financial
information privacy. The House bill bars a financial institution from
disclosing to nonaffiliated third parties, for any purpose, either directly or
through an affiliate, any nonpublic personal consumer information, unless the
consumer is provided an opportunity to opt out of that disclosure. The Senate
bill contains more limited provisions that relate only to fraudulent
activities. Thus, the final form of any financial services reform legislation
adopted by Congress might limit our ability to offer third parties access to
the consumer information generated by our Internet banking products and
services.
If enacted or deemed applicable to us, the laws, rules or regulations
applicable to financial services activities would render our business or
operations more costly, burdensome, less efficient or impossible. We cannot
assure that federal, state or foreign governmental authorities will not adopt
new regulations addressing electronic financial services or operations
generally that could require us to modify our current or future
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products and services. The adoption of laws or regulations affecting our
business or our customer banks' business could have a material adverse effect
on our business, financial condition and results of operations.
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.
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. 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 further limit the
disclosure and use of other proprietary information. We cannot assure that the
steps taken by us in this regard will be adequate to prevent misappropriation
of our technology or technology we license from others or that our competitors
will not 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.
Properties
We currently lease the following properties:
<TABLE>
<CAPTION>
Approximate
Location Primary Use Square Feet
----------------------- ------------------------------------------- -----------
<S> <C> <C>
Atlanta, Georgia Corporate headquarters 4,450
Birmingham, Alabama Administrative, sales and marketing offices 15,747
Birmingham, Alabama Remote banking data center 6,514
Elizabethtown, Kentucky Bill payment services office 2,600
Cordova, Tennessee Sales office 3,350
</TABLE>
We are in the process of identifying additional facilities to accommodate
our growth and expect to enter into a new lease and relocate our corporate
headquarters in Atlanta by the end of 1999. We believe that suitable additional
or alternative space will be available in the future on commercially reasonable
terms as needed.
Employees
As of October 15, 1999, we had a total of approximately 90 full-time
employees. None of our employees is covered by a union or a collective
bargaining agreement. We have not experienced any work stoppages and consider
our relations with our employees to be good.
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
financial condition or results of operations.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information about our directors and executive
officers, including their ages as of October 19, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Glenn W. Sturm.......... 45 Chief Executive Officer and Director
C. Michael Bowers....... 52 President and Chief Operating Officer
David W. Brasfield...... 40 Senior Executive Vice President -- Sales and Marketing
Richard S. Eiswirth..... 30 Executive Vice President, Chief Financial Officer and Secretary
Steven D. Simpson....... 32 Senior Vice President -- Internet Development and Marketing
John W. Collins......... 52 Chairman of the Board of Directors
Jon R. Burke............ 52 Director
Gayle M. Earls.......... 63 Director
Donny R. Jackson........ 50 Director
Joel A. Katz............ 55 Director
Stiles A. Kellett, Jr... 55 Director
Bruce P. Leonard........ 46 Director
A. Jay Waite............ 50 Director
</TABLE>
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
The InterCept Group, Inc., which upon the completion of this offering will
beneficially own approximately 39% 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 serves as Corporate Chairman and as a member of the Executive
Committee. Mr. Sturm serves as a member of the Executive Committee of the Board
of Directors of WebMD, Inc. Mr. Sturm serves on the board of directors of two
public companies: The InterCept Group, Inc. and Towne Services, Inc.
C. Michael Bowers has served as our President and Chief Operating Officer
since September 1999. Mr. Bowers served as the Chief Executive Officer of Dyad
Corporation from its inception in 1996 until we acquired it in 1999. From April
1991 to April 1996, Mr. Bowers was the manager of management consulting for
Porter Keadle Moore (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.
David W. Brasfield has served as our Senior Executive Vice President --
Sales and Marketing since August 1999. Mr. Brasfield served as the President
and Chief Executive Officer of SBS Corporation from 1989 until Netzee acquired
it in August 1999. He also served as the President and Chief Executive Officer
of SBS Data, Inc., a sister company of SBS Corporation, from 1994 until it was
acquired by InterCept in August 1999. Mr. Brasfield currently serves on the
Board of Directors of First National Bank of Shelby County in Columbiana,
Alabama.
Richard S. Eiswirth has served as our 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.
Steven D. Simpson has served as our Senior Vice President -- Internet
Development and Marketing since September 1999. Prior to joining Netzee, Mr.
Simpson served as Senior Vice President of Operations and Internet Banking for
TIB where he focused on developing technology driven products to assist
community financial institutions from March 1995 until April 1999. From
December 1994 to March 1995, Mr. Simpson served as the Manager for Electronic
Banking at Bank of America, Texas.
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John W. Collins has served as a director of Netzee 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 e-commerce for community financial
institutions. Mr. Collins is also the Chairman of the Board of Directors 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 both InterCept 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 also serves as a
director of the Federal Reserve Bank of Dallas.
Donny R. Jackson has served as a director of Netzee since inception. Mr.
Jackson was a co-founder of InterCept and has served as its President, Chief
Operating Officer and a director since its inception in April 1996. Prior to
co-founding InterCept, Mr. Jackson served as a director and executive officer
of several of its predecessor companies and affiliates since 1986. From 1991 to
1992, Mr. Jackson served as the President of Bank Atlanta. Mr. Jackson has over
24 years of experience with community financial institutions, including in
service bureau, enterprise software and other processing and accounting
operations.
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 in
Atlanta, Georgia, where he specializes in the practice of entertainment and
sports law. From 1971 to 1998, Mr. Katz practiced law in Atlanta, most recently
with Katz, Smith & Cohen.
Stiles A. Kellett, Jr. has been a director of Netzee since October 1999.
Since March 1996, Mr. Kellett has been Chairman of the Board of Directors of
Kellett Investment Corp., a privately-held investment firm. From 1976 to 1995,
Mr. Kellett served as Chairman of the Board of Directors of Convalescent
Services, Inc., a long-term health care company in Atlanta, Georgia. Mr.
Kellett also serves as a director of MCI WorldCom Communications, Inc. and as a
director of Satellink Paging, a paging company located in Roswell, Georgia.
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, which is located in Atlanta, Georgia, and
its affiliate, Community Financial Services, Inc. Prior to that, he was Senior
Vice President 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.
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, Sturm and Kellett currently
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serve as class I directors, Messrs. Waite, Jackson and Burke 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. We have entered into two-year
employment agreements with each of Messrs. Sturm, Bowers, Brasfield and
Eiswirth.
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 no earlier than our third
annual meeting of shareholders following this offering.
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.
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.
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.
Compensation Committee Interlocks and Insider Participation
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 at Nelson Mullins Riley & Scarborough L.L.P. This
firm provided legal services to Netzee and its predecessor, Direct Access
Interactive, in 1999.
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 options under our 1999 Stock Option and Incentive Plan. We
have granted to each of our directors a one-time
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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.
Executive Compensation
All five of our executive officers joined us in 1999. We entered into
employment agreements with Messrs. Sturm, Bowers, Brasfield and Eiswirth on
September 1, 1999. The employment agreements with these executive officers
provide for minimum annual salaries as follows: Mr. Sturm, $250,000; Mr.
Bowers, $200,000; Mr. Brasfield, $185,000; and Mr. Eiswirth, $140,000. 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, except that Mr. Brasfield's agreement may not be extended by
us for the 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, and
that we will pay for the executive's health insurance and 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, for Mr. Sturm, Mr. Bowers, and Mr.
Brasfield only, 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; and
. 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 invest 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 LLP 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.
We have also entered into agreements with other employees who are not
executive officers.
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Stock Options
Our board of directors and shareholders have approved the Netzee, Inc. 1999
Stock Option and Incentive Plan. Under this plan, we may grant to our
employees, directors and consultants 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 profitability and increases in
shareholder value. In addition, we have granted, and from time to time in the
future will grant, options outside of the plan.
Eligibility. All of our employees, directors, consultants and advisors are
eligible to receive awards under the plan.
Administration. The compensation committee of the board of directors
administers the plan, except that with respect to options or awards 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 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 3,500,000 shares, subject to anti-dilution
adjustments. The plan provides that the number of shares of common stock
available for issuance under the plan shall be increased if necessary on the
first day of each calendar year beginning January 1, 2000 so that the maximum
number of shares available for the issuance of options 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, and 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.
Options to purchase an aggregate of 1,620,000 shares of common stock were
granted to some of our executive officers and directors in July through October
1999, at per share exercise prices of $2.00, $3.11, $5.00 and at the initial
public offering price. The following executive officers and directors have
received grants of options in the specified amount of shares of common stock:
<TABLE>
<CAPTION>
Amount of Shares
Underlying
Participant Options Granted
----------- ----------------
<S> <C>
Richard S. Eiswirth........................................ 275,000
C. Michael Bowers.......................................... 275,000
David Brasfield............................................ 100,000
John W. Collins............................................ 165,000
Jon R. Burke............................................... 80,000
Gayle M. Earls............................................. 45,000
Donny R. Jackson........................................... 40,000
Joel A. Katz............................................... 40,000
Stiles A. Kellett, Jr...................................... 40,000
Bruce P. Leonard........................................... 85,000
Steven D. Simpson.......................................... 125,000
Glenn W. Sturm............................................. 310,000
A. Jay Waite............................................... 40,000
</TABLE>
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<PAGE>
In addition, options to purchase 591,500 shares of common stock have been
granted to other employees and consultants of Netzee. All options that we have
granted vest in equal installments over a three-year period except:
. 50,000 of Mr. Eiswirth's options that were immediately exercisable when
granted, 30,000 of which were exercised by Mr. Eiswirth;
. 10,000 options of each of Messrs. Burke, Collins, Earls, Jackson, Katz,
Kellett, Leonard, Sturm and Waite are currently vested; and
. 185,000 of Mr. Sturm's options, 175,000 of Mr. Bowers' options, 50,000
of Mr. Brasfield's options and 150,000 of the remaining 225,000 of Mr.
Eiswirth's options, will vest upon the completion of our initial public
offering.
Upon the completion of the offering, we intend to grant options to purchase
approximately 252,500 shares of common stock under the plan to some of our
employees. These options will vest in equal installments over a three-year
period and will have an exercise price equal to the initial public offering
price.
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.
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, 10,000 of which vest immediately and the remainder of
which vest in equal portions over three years.
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 subject to
forfeiture 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 shares.
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<PAGE>
RELATED PARTY 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. Following the completion of this offering, all
transactions with our shareholders, officers and directors or their affiliates,
if any, will be subject to the approval of a majority of the independent and
disinterested outside directors and will continue to be conducted on terms no
less favorable to us than could be obtained from unaffiliated third parties on
an arm's length basis.
Acquisitions
In September 1999, we acquired in separate transactions Call Me Bill, Dyad,
the remote banking operations of SBS and the Internet banking divisions of TIB
and The Bankers Bank. See "Netzee." In these transactions, many 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. These shares were issued at a price of $10.50 per share. Of
the shares shown for each person receiving shares in the Dyad and SBS
acquisitions, 10% were placed in escrow for one year from the date of
acquisition for indemnification purposes.
<TABLE>
<CAPTION>
Name of Related Number of
Acquisition Party Shares Issued
-------------------------------- ------------------- -------------
<S> <C> <C>
Dyad Glenn W. Sturm 89,889
C. Michael Bowers 69,057
John W. Collins 103,662
Donny R. Jackson 23,019
FDS, LLC(1) 118,932
SBS remote banking David W. Brasfield 866,666
operations Michael Vaughn 866,666
Robert D. Kirk, III 866,666
Internet banking division of TIB TIB 1,361,000
Internet banking division of The
Bankers Bank The Bankers Bank 1,361,000
</TABLE>
--------
(1) Mr. Collins owns 60% of the membership interests in FDS
and Mr. Jackson owns 20% of the membership interests in
FDS.
Relationship with InterCept
InterCept currently owns approximately 49% of our common stock and will own
approximately 39% after this offering. Our Chairman of the Board of Directors,
John W. Collins, is the Chairman and Chief Executive Officer of InterCept, and
Donny R. Jackson, 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.
Marketing Agreement
We intend to enter into a marketing agreement with InterCept under which our
salespersons will sell InterCept products and services and InterCept
salespersons will sell our products and services. Under this agreement, we will
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 will pay us for sales and referrals by our
salespersons.
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<PAGE>
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, our
Senior Executive Vice President--Sales and Marketing. We pay DMB a monthly rent
of $20,000. We intend to sublease a portion of this property to InterCept.
InterCept currently leases the property that includes our data center
facility in Birmingham, Alabama from DMB, LLC at a monthly rent of $8,500. We
intend to enter into a sublease with InterCept with respect to this facility.
We lease our headquarters in Atlanta, Georgia from The Bankers Bank, the
owner of 8.8% of our common stock. We pay $8,100 per month for this lease.
Promissory Notes
In August 1999, our predecessor, Direct Access Interactive, issued a
promissory note payable to InterCept in the amount of $21.5 million. This note
matures on the earlier of August 6, 2001 or the closing date of our initial
public offering and carries an interest rate of the prime rate as published in
The Wall Street Journal (Eastern Edition) plus 2%. As of October 15, 1999, this
loan bore interest at a rate of 10.25% per year. Interest on the outstanding
balance is due quarterly. The note is secured by all of our assets. As of
October 15, 1999, we had recognized interest expense of approximately $430,000.
In September 1999, we issued two promissory notes payable to InterCept in
the amounts of $4.4 million and $2.9 million. Each note matures on the earlier
of September 1, 2001 or the closing date of our initial public offering, and
each note carries an interest rate of the prime rate as published in The Wall
Street Journal (Eastern Edition) plus 2%. These loans currently bear interest
at a rate of 10.25% per year. Interest only is due quarterly in arrears with
the first payment due on October 1, 1999. The notes are secured by all of our
assets, and we have granted InterCept a security interest in all of the assets
we acquired from Dyad and Call Me Bill. As of October 15, 1999, we had
recognized interest expense of approximately $51,000 and $36,000 on the two
loans.
We intend to repay the principal and accrued interest on the loans with a
portion of the net proceeds of this offering, as described in "Use of
Proceeds."
Relationship with TIB and The Bankers Bank
In connection with our purchase of the Internet banking division of each of
TIB and The Bankers Bank in September 1999, we agreed to use our commercially
reasonable efforts to begin marketing and selling the Icom B product, no later
than March 2000. Icom B is an Internet banking product that allows financial
institutions to interface with bankers' banks. We have agreed to grant them a
nonexclusive, royalty free license to the Icom B product and its source code so
that they can continue to use the Icom B product and market it to other
correspondent banks. We have also agreed to pay commissions to each of these
bankers' banks for licensing the Icom B product pursuant to our strategic
marketing agreements. Under these agreements, 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. See "Business--Sales and
Marketing--Strategic Marketing Alliances."
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<PAGE>
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.
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 options 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., a director of Netzee, 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. This line of credit terminates on September 30, 2002.
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. The warrant expires on August 31, 2004. We have
granted to Kellett Partners piggyback registration rights with respect to the
common stock that we may issue to Kellett Partners pursuant to this warrant.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of November 4, 1999, and as adjusted to
reflect our sale of the common stock in this offering, by
. each of our directors;
. each shareholder known by us to be the beneficial owner of more than 5%
of our common stock;
. all of our executive officers and directors as a group; and
. each selling shareholder.
As of November 4, 1999, we had 15,395,855 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. 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 2410 Paces Ferry Road, 150 Paces
Summit, Atlanta, Georgia 30339.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering After the Offering
---------------------------- Number of -----------------------------
Name of Beneficial Owner Number Percent Shares Offered Number Percent
- ------------------------ -------------- -------------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
The InterCept Group,
Inc.(1)
3150 Holcomb Bridge
Road, Suite 200
Norcross GA 30071...... 7,557,673 49.1% -- 7,557,673 39.0%
Independent Bankers
Financial
Corporation(2)
P. O. Box 560528
Dallas TX 75356-0528... 1,361,000 8.8% 391,208 969,792 5.0%
The Bankers Bank
2410 Paces Ferry Road
600 Paces Summit
Atlanta GA 30339-4098.. 1,361,000 8.8% -- 1,361,000 7.0%
David W. Brasfield(3)(4)
1500 Resource Drive
Birmingham AL 35242.... 835,252 5.4% -- 835,252 4.3%
Michael Vaughn(3)(5)
1500 Resource Drive
Birmingham AL 35242.... 866,667 5.6% -- 866,667 4.5%
Robert D. Kirk,
III(3)(6)
1500 Resource Drive
Birmingham AL 35242.... 948,082 6.2% -- 948,082 4.9%
Glenn W. Sturm(7)(8).... 914,889 5.9% -- 914,889 4.8%
John W. Collins(7)(9)... 757,594 4.9% -- 757,594 3.9%
Donny R.
Jackson(7)(10)......... 351,951 2.3% -- 351,951 1.8%
Sirrom Investments,
Inc.(11)
500 Church Street
Nashville TN 37219..... 66,947 * 56,947 10,000 *
Jon R. Burke(12)........ 10,000 * -- 10,000 *
Gayle M. Earls(12)...... 10,000 * -- 10,000 *
Joel A. Katz(12)........ 10,000 * -- 10,000 *
Stiles A. Kellett,
Jr.(12)(13)............ 417,996 2.6% -- 417,996 2.1%
Bruce P. Leonard(12).... 10,000 * -- 10,000 *
A. Jay Waite(12)........ 10,000 * -- 10,000 *
All directors and
executive
officers(13)(14)
as a group (13
persons)............... 3,737,807 22.7% -- 3,737,807 18.3%
</TABLE>
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<PAGE>
- --------
* Less than 1% of the outstanding common stock
(1) All 7,557,673 of our shares beneficially owned by InterCept have been
pledged by InterCept as collateral to a lender to secure debt for money
borrowed.
(2) Independent Bankers Financial Corporation is the ultimate parent of TIB The
Independent BankersBank.
(3) Includes 86,667 shares held of record by First Union National Bank, as
escrow agent.
(4) Includes 50,000 shares underlying options that will become exercisable upon
the completion of this offering.
(5) Includes 780,000 shares beneficially owned indirectly through Vaughn
Investments LLC.
(6) Includes 350,000 shares beneficially owned indirectly through Kirk
Investments LLC.
(7) Excludes 7,557,673 shares held by InterCept as to which Mr. Sturm, Mr.
Collins and Mr. Jackson, directors of InterCept, each disclaim beneficial
ownership.
(8) Includes (1) 8,989 shares held by First Union National Bank, as escrow
agent, and (2) 195,000 shares underlying options that are immediately
exercisable or will become exercisable upon the completion of this
offering.
(9) Includes (1) 10,366 shares held by First Union National Bank, as escrow
agent, and (2) 118,932 shares held indirectly through FDS, LLC, in which
Mr. Collins owns a 60% membership interest.
(10) Includes (1) 2,302 shares held by First Union National Bank, as escrow
agent, and (2) 118,932 shares held indirectly through FDS, LLC, in which
Mr. Jackson owns a 20% membership interest.
(11) Includes 6,695 shares held by First Union National Bank, as escrow agent.
(12) Includes 10,000 shares underlying options that are immediately
exercisable.
(13) Includes (1) 397,996 shares held by Kellett Partners, L.P. underlying an
immediately exercisable warrant and (2) 10,000 shares underlying an
immediately exercisable warrant held by Mr. Kellett's adult daughter, of
which Mr. Kellett disclaims beneficial ownership.
(14) Includes a total of 670,000 shares underlying options that are immediately
exercisable or will become exercisable upon the completion of this
offering.
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.
Donny R. Jackson is the President, a director and a shareholder of InterCept,
as well as a director of Netzee. Bruce P. Leonard is the Chief Executive
Officer of The Bankers Bank and a director of Netzee. Gayle M. Earls is the
Chief Executive Officer of TIB and a director of Netzee. Jon R. Burke is one of
our directors and also a director of InterCept.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is only a summary and is
subject to the provisions of our articles of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and the provisions of applicable law.
Authorized and Outstanding Capital Stock
Our articles of incorporation authorize the board of directors to issue
70,000,000 shares of common stock without par value and 5,000,000 shares of
preferred stock without par value, in one or more classes or series and to
determine the voting rights, preferences as to dividends and in liquidation,
and conversion and other rights of each series. We have issued no preferred
stock. As of November 4, 1999, 15,395,855 shares of common stock were
outstanding and held by approximately 42 shareholders of record.
Common Stock
Under the articles of incorporation, holders of common stock are entitled to
receive dividends as the board of directors may legally declare. Each
shareholder is entitled to one vote per share on all matters to be voted upon
and is not entitled to cumulate votes for the election of directors. Holders of
common stock do not have preemptive, redemption or conversion rights and, upon
liquidation, dissolution or winding up of Netzee, will be entitled to share
ratably in the net assets of Netzee available for distribution to common
shareholders. The rights, preferences and privileges of holders of common stock
are subject to the rights, preferences and privileges of holders of any classes
or series of preferred stock that we may issue in the future.
Preferred Stock
The articles of incorporation authorize the board of directors to issue,
without further action by the holders of the common stock, shares of preferred
stock in one or more series and to fix any preferences, conversion and other
rights, voting powers, restrictions, limitations, qualifications and terms and
conditions of redemption as shall be set forth in resolutions adopted by the
board of directors. Articles of amendment must be filed with the Georgia
Secretary of State prior to the issuance of any shares of preferred stock of
the applicable series. Any preferred stock so issued may rank senior to the
common stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding-up, or both. In addition, any shares of
preferred stock issued may have class or series voting rights. Issuances of
preferred stock, while providing us with flexibility in connection with general
corporate purposes, may, among other things, have an adverse effect on the
rights of holders of common stock and could have the effect of discouraging or
making it more difficult for a third party to acquire a majority of our
outstanding voting stock or the effect of decreasing the market price of the
common stock. As of the date of this prospectus, no shares of preferred stock
are outstanding, and we have no present plan to issue any shares of preferred
stock.
Classified Board of Directors
The articles of incorporation provide that the board of directors shall
consist of not less than three members, unless the articles of incorporation
are amended to delete the classification of the board of directors. The board
of directors is divided into three classes of directors, as nearly equal in
number as possible, serving staggered three-year terms. As a result,
approximately one-third of the members of the board of directors are elected at
each annual meeting of shareholders. The classification of directors permits
the remaining directors to fill any vacancies on the board of directors and has
the effect of making it more difficult for shareholders to change the
composition of the board of directors. As a result, at least two annual
meetings of shareholders may be required for the shareholders to change a
majority of the directors, whether or not any change in the board of directors
would be beneficial to us and our shareholders and whether or not a majority of
our shareholders believes that such a change would be desirable. We believe,
however, that the longer time required to elect a majority of a classified
board of directors will help to ensure the continuity and stability of our
management
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<PAGE>
and policies. Currently, the terms of class I directors expire upon the date of
the 2000 annual meeting of shareholders, the terms of class II directors expire
upon the date of the 2001 annual meeting of shareholders, and the terms of
class III directors expire upon the date of the 2002 annual meeting of
shareholders.
Removal of Directors and Filling Vacancies
The bylaws provide that, unless the board of directors otherwise determines,
any vacancies, including vacancies resulting from an increase in the number of
directors, will be filled by the affirmative vote of a majority of the
remaining directors, even if less than a quorum. Directors elected to fill a
vacancy shall hold office until the next election of the class for which they
were chosen. Directors may only be removed for cause, and then only by the
affirmative vote of the holders of at least 66 2/3% of our voting stock.
Special Meetings and Action of Shareholders by Written Consent
Under the bylaws, the holders of shares representing 75% or more of the
votes entitled to be cast may call a special meeting. This provision makes it
more difficult for shareholders to call special meetings of shareholders.
Further, under the articles of incorporation, the shareholders may act without
a meeting and by written consent, if the written consent is signed by all of
the shareholders of Netzee. This provision makes it more difficult for
shareholders to take action outside of a duly called annual or special meeting.
Advance Notification of Director Nominations and New Business
Our bylaws require shareholders to notify us in advance of their nominations
of candidates for election to the board of directors who are not nominated by
the board of directors. This provision also requires advance notification of
shareholder proposals to be presented at the annual meeting of shareholders.
Without compliance with these provisions, any director nominations or proposals
to be presented by shareholders without the approval of the board of directors
cannot be considered by the shareholders at a meeting.
Indemnification and Limitation of Liability
The articles of incorporation eliminate, subject to certain exceptions, the
personal liability of a director to us or our shareholders for monetary damage
for breaches of such director's duty of care or other duties as a director. The
articles of incorporation do not provide for the elimination of or any
limitation on the personal liability of a director for (1) any appropriation,
in violation of the director's duties, of any business opportunity of ours, (2)
acts or omissions that involve intentional misconduct or a knowing violation of
law, (3) unlawful corporate distributions, or (4) any transactions from which
the director derived an improper personal benefit. The articles of
incorporation further provide that if the Georgia Business Corporation Code is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the Georgia Business
Corporation Code, as amended, without further action by the shareholders. These
provisions of the articles of incorporation will limit the remedies available
to a shareholder in the event of breaches of any director's duties to the
shareholder or to us.
Our bylaws require us to indemnify and hold harmless any director 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, administrative or
investigative, including any action or suit by or in the right of Netzee,
because he or she is or
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<PAGE>
was a director of Netzee, against expenses (including, but not limited to,
attorney's fees and disbursements, court costs and expert witness fees), and
against judgments, fines, penalties, and amounts paid in settlement incurred by
him or her in connection with the action, suit or proceeding. Indemnification
would be disallowed under any circumstances where indemnification may not be
authorized by action of the board of directors, the shareholders or otherwise.
The board of directors has the power to cause us to indemnify our (1) officers,
employees and agents, and (2) any director, officer, employee or agent of
Netzee who is or was serving at our request as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. In order to provide this
indemnification, the board of directors must adopt a resolution identifying the
person or persons to be indemnified and specifying the particular rights to be
provided, which may be different for each person.
We intend to enter into indemnification agreements with each of our
executive officers and directors that will indemnify them to the fullest extent
permitted by the Georgia Business Corporation Code.
To the extent that we have funds reasonably available to be used, we shall
advance to any Netzee director, and may advance to any officer, employee or
agent of Netzee (but only if so provided by a resolution of the board of
directors), expenses incurred in defending any proceeding for which
indemnification is applicable, even before the final disposition of the
proceeding. However, the indemnified party must provide a written affirmation
of his or her good faith belief that he or she has met the standard of conduct
required for indemnification and a written undertaking to repay any advances
made if it is determined that the person is not entitled to indemnification. At
present, the board of directors has not adopted any indemnification resolutions
although it may do so at any time.
Our bylaws also permit us to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of Netzee, or
who, while serving in that capacity, is also or was also serving at our request
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, whether or not we were required to indemnify the person by any
bylaw provision or resolution of the board of directors. We intend to purchase
a policy of insurance providing reimbursement of liabilities incurred by
directors and officers in their capacities as such.
Business Combination Provisions of Georgia Law
The Georgia Business Corporation Code generally restricts a corporation from
entering into certain business combinations with an interested shareholder,
which is defined as any person or entity that is the beneficial owner of at
least 10% of the company's voting stock, or its affiliates for a period of five
years after the date on which the shareholder became an interested shareholder,
unless:
. the transaction is approved by the board of directors of the corporation
prior to the date such person became an interested shareholder,
. the interested shareholder acquires 90% of the corporation's voting
stock in the same transaction in which it exceeds 10%, or
. subsequent to becoming an interested shareholder, the shareholder
acquires 90% of the corporation's voting stock and the business
combination is approved by the holders of a majority of the voting stock
entitled to vote on the transaction.
The "fair price" provisions of the Georgia Business Corporation Code further
restrict business combination transactions with 10% shareholders. These
provisions require that the consideration paid for stock acquired in the
business combination must meet specified tests, which are designed to ensure
that shareholders receive at least fair market value for their shares in the
business combination.
The interested shareholder and fair price provisions of the Georgia Business
Corporation Code do not apply to a corporation unless the bylaws of the
corporation specifically provide that these provisions are
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<PAGE>
applicable to the corporation. Netzee has not elected to be covered by these
provisions, but it could do so by action of the board of directors at any time.
Relationship with InterCept
Our bylaws address potential conflicts of interest between us and InterCept,
which upon the completion of the offering will own approximately 39% of our
common stock. These bylaw provisions are designed to make clear to all persons
who may, from time to time, purchase our shares that the undertaking by
InterCept of specific corporate transactions that might otherwise be deemed to
be corporate opportunities of ours and of InterCept will not constitute a
usurpation of corporate opportunities. These provisions also clarify that a
director or officer has fulfilled his fiduciary and other duties to us and has
not derived an improper benefit if he acts consistently with the following
policy:
. A corporate opportunity offered to any person who is an officer of
Netzee, and is also a director but not an officer of InterCept, should
belong to Netzee.
. A corporate opportunity offered to any person who is a director but not
an officer of Netzee, and who is also a director or officer of InterCept
shall belong to Netzee, if the opportunity is expressly offered to that
person in working solely in his or her capacity as a director of Netzee.
Otherwise, the opportunity shall belong to InterCept.
. A corporate opportunity offered to any person who is an officer of both
Netzee and InterCept shall belong to Netzee.
Additionally, these bylaw provisions provide that a corporate opportunity
offered to a person under circumstances where it is unclear whether it was
offered primarily in that person's capacity as an officer or director of us or
of InterCept may be presented to whichever company the director or officer
deems appropriate under the circumstances in his sole discretion exercised in
good faith.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is SunTrust Bank,
Atlanta.
78
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and a significant public market for the common stock may not develop or be
sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus. When we complete this offering, we
will have 19,395,855 shares of common stock outstanding, or 20,063,078 shares
if the underwriters exercise their over-allotment option in full. Of this
amount, the 4,448,155 shares sold in this offering, or 5,115,378 shares if the
over-allotment option is exercised in full, will be freely tradeable without
restriction or further registration under the Securities Act, unless the shares
are purchased by persons who are our "affiliates," as that term is defined in
Rule 144 under the Securities Act. Sales by affiliates are subject to the
limitations and restrictions imposed by Rule 144, as described below.
We sold the remaining 15,395,855 outstanding shares in private transactions.
Unless registered under the Securities Act, these shares, which we refer to as
"restricted shares," must be sold in accordance with the holding period
requirements, volume limits and other conditions of an applicable exemption
from registration, such as Rule 144 under the Securities Act discussed below.
Shares that we register in this offering that are purchased by our affiliates
must be sold in accordance with all of the requirements of Rule 144 except for
the holding period. Additionally, substantially all of our shareholders have
agreed not to sell any common stock or securities convertible into common stock
for 180 days after the date of this prospectus without the prior approval of
The Robinson-Humphrey Company, LLC, except that we may grant options and sell
shares under our 1999 Stock Option and Incentive Plan without obtaining this
consent. Although Robinson-Humphrey may, in its sole discretion, release all or
a portion of the shares subject to any lockup agreement, Robinson-Humphrey does
not intend to do so except in cases of financial hardship, subject to market
conditions. If a shareholder should request that Robinson-Humphrey waive the
180-day lock-up period, Robinson-Humphrey would likely take into consideration
the number of shares as to which the request relates, the identity of the
requesting shareholder, the relative demand for additional shares of common
stock in the market, the period of time since the completion of the offering,
and the average trading volume and price performance of the common stock during
that period.
Based on the above, the following table indicates when the shares that will
be outstanding upon completion of this offering will be eligible for sale in
the public market:
<TABLE>
<CAPTION>
Days after the Date Approximate Shares
of this Prospectus Eligible for Future Sale Comment
- ------------------------ ------------------------ -----------------------------------
<S> <C> <C>
Upon effectiveness...... 4,448,155 Freely tradeable shares sold in
this offering and restricted shares
salable under Rule 144(k) that
are not subject to 180-day
lockup.
90 days................. None Restricted shares salable under
Rule 144 or 144(k) that are not
subject to 180-day lockup.
180 days................ None Lockup released; restricted
shares salable under Rule 144,
144(k).
181-366 days............ 14,947,700 Restricted shares salable
under Rule 144.
</TABLE>
79
<PAGE>
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this prospectus a number of shares that does not exceed the greater
of:
. 1% of the then outstanding shares of common stock (approximately 193,959
shares immediately after the offering), or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the date upon which a Form 144 was filed with
respect to the sale.
Persons selling under Rule 144 must also comply with Rule 144's requirements
concerning the availability of specified public information about us, the
manner of sale and filing of notice of sale. However, a person, or persons
whose shares are aggregated, who is not deemed to have been an affiliate of
ours at any time during the three months immediately preceding the sale and who
has beneficially owned his or her shares for at least two years is entitled to
sell his or her shares under Rule 144(k) without regard to the limitations
described above. Persons deemed to be affiliates must always sell under Rule
144 even after the one-year holding period has been satisfied.
We intend to file a registration statement on Form S-8 under the Securities
Act within 90 days after the date of this prospectus to register 3,500,000
shares of common stock reserved for issuance under our 1999 Stock Option and
Incentive Plan. This will permit non-affiliates to sell immediately those
shares in the public market without limitation and will permit affiliates to
sell their shares in compliance with all requirements of Rule 144, except the
holding period.
In connection with our acquisition of SBS Corporation and Dyad Corporation,
we granted the former shareholders of SBS and Dyad the right to register their
shares of our common stock they received in that acquisition. The former SBS
and Dyad shareholders may require us to register their stock if, at any time
after we have completed this offering, we propose to register any of our
securities under the Securities Act, other than registrations on Form S-4 or
Form S-8.
In connection with our acquisitions of the Internet banking divisions of
each of TIB and The Bankers Bank, we granted to each of these bankers' banks
demand and piggyback registration rights with respect to the 1,361,000 shares
of our common stock that each of them received in these acquisitions. Each
bankers' bank's demand registration rights vest 180 days after the completion
of this offering and if the bankers' bank is required by a regulatory authority
to divest some or all of our common stock. Only one demand registration may be
requested by the bankers' banks. Their piggyback registration rights vest upon
the earlier of (1) 180 days after September 3, 1999 or (2) the date that we
become a public company. We have agreed to pay all our expenses incurred in
registering the bankers' banks common stock, and the first $25,000 of expenses
incurred by the selling shareholders.
In October 1999, we issued to Kellett Partners, L.P. a warrant to purchase
up to 461,876 shares of our common stock in connection with the establishment
of a $3.0 million line of credit with that third party. We granted to Kellett
Partners piggyback registration rights substantially similar to those granted
to the former shareholders of SBS and Dyad. Stiles A. Kellett, Jr., an
affiliate of Kellett Partners, is a director of Netzee.
In connection with employment agreements entered into with each of Glenn W.
Sturm, C. Michael Bowers, Richard S. Eiswirth and David W. Brasfield, we have
granted to these executive officers piggyback registration rights, and, with
respect to Mr. Sturm, demand registration rights under certain circumstances,
with respect to their shares of our common stock.
We cannot estimate the number of shares that will be sold under Rule 144,
our Form S-8 registration statement or any registration statement that we may
file on behalf of any holders of registration rights since this will depend on
the market price of our common stock, the personal circumstances of the sellers
and other factors.
80
<PAGE>
UNDERWRITING
The Robinson-Humphrey Company, LLC, J.C. Bradford & Co. and SunTrust
Equitable Securities Corporation are acting as representatives of the
underwriters named below. Subject to the terms and conditions contained in the
underwriting agreement between us, the selling shareholders and the
representatives of the underwriters, each underwriter named below has severally
agreed to purchase from us and the selling shareholders the number of shares of
common stock indicated opposite the name of each underwriter, at the public
offering price less the underwriting discount set forth on the cover page of
this prospectus:
<TABLE>
<CAPTION>
Underwriter Number of Shares
- ----------- ----------------
The Robinson-Humphrey Company, LLC...............................
<S> <C>
J.C. Bradford & Co...............................................
SunTrust Equitable Securities Corporation........................
Total.......................................................... 4,448,155
</TABLE>
The underwriters are obligated to purchase all of the shares, other than
those covered by the over-allotment option described below, if they purchase
any of the shares. The offering is a firm underwritten offering. However, the
underwriting agreement generally contains standard terms found in an
underwriting agreement for an offering of this type that give the underwriters
the right to withdraw, cancel or modify the offering and to reject orders in
whole or in part. These rights would generally be exercised upon the occurrence
of a materially adverse change in our business, financial condition or results
of operations or upon the occurrence of a major downturn in the general
economy.
The underwriters propose to offer part of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
part of the shares to dealers at that price less a concession not in excess of
$ per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share on sales to other dealers. After the
initial public offering, the representatives may change the public offering
price and the other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 667,223 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise the option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent the option
is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to each underwriter's initial purchase commitment.
We and the selling shareholders will pay the underwriters a commission of 7%
of the per share public offering price for each share of common stock that the
underwriters purchase in the offering. The following table shows the
underwriting fees that we and the selling shareholders will pay to the
underwriters in connection with the offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares of our common stock.
<TABLE>
<CAPTION>
To be Paid by
Selling
To be Paid by Netzee Shareholders
-------------------- -----------------
Full No Full
No Exercise Exercise Exercise Exercise
----------- -------- -------- --------
<S> <C> <C> <C> <C>
Per share................................ $ $ $ $
Total.................................... $ $ $ $
</TABLE>
We estimate our expenses of this offering, exclusive of the underwriting
discount, will be approximately $2.4 million. Additionally, we and the selling
shareholders have agreed to indemnify the underwriters against specified
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
81
<PAGE>
The representatives have informed us that the underwriters do not expect to
make sales of common stock offered by this prospectus to accounts over which
they exercise discretionary authority in excess of 5% of the number of shares
of common stock offered by this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 222,408 shares of common stock for our employees, directors and
other persons we have designated, who have expressed an interest in purchasing
shares of our common stock. The number of shares available for sale to the
general public in this offering will be reduced to the extent those persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered to the general public on the same basis as other shares offered by this
prospectus.
Substantially all of our shareholders have agreed that during the 180-day
period following the date of the prospectus, they will not, without the prior
written consent of The Robinson-Humphrey Company, LLC:
. directly or indirectly make, agree to or cause any offer, sale
(including short sale), loan, pledge or other disposition of, or grant
any options, rights or warrants to purchase with respect to, or
otherwise transfer or reduce any risk of ownership of, directly or
indirectly, any shares of our common stock or any securities convertible
into or exchangeable or exercisable for our common stock;
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of the common
stock; or
. make any demand for, or exercise any right with respect to, the
registration of shares of our common stock or any securities convertible
into or exchangeable or exercisable for our common stock.
In addition, during the 180-day period, we have also agreed not to issue, or
to file any registration statement with respect to the registration of, any
shares of our common stock or any securities convertible into or exercisable
for our common stock, except that we intend to file a registration statement on
Form S-8 under the Securities Act within 90 days after the completion of the
offering to register shares of common stock issuable under outstanding stock
options or reserved for issuance under our 1999 Stock Option and Incentive
Plan. This will permit holders of those shares to sell them in the public
market without compliance with any holding period requirement.
Before this offering, there has been no public trading market for the common
stock. Consequently, the initial public offering price of the common stock has
been determined by negotiations among us, the representatives of the selling
shareholders and the representatives of the underwriters. The factors
considered in determining the initial public offering price included the
following:
. the history and future prospects of Netzee and our industry;
. our past and present revenues and earnings and the prospects for growth
in our revenues and earnings;
. the present state of our development;
. an assessment of our management;
. the general condition of the economy and the securities markets at the
time of this offering; and
. the market prices of and demand for publicly traded common stock of
comparable companies at the time of the offering.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "NETZ."
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the underwriters and specified selling group members
to bid for and purchase the common stock. As an exception
82
<PAGE>
to these rules, the representatives of the underwriters are permitted to engage
in specified transactions that stabilize the price of the common stock. These
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock. If the underwriters create a short
position in the common stock in connection with this offering (that is, if they
sell more shares of common stock than are set forth on the cover page of this
prospectus), the representatives may reduce that short position by purchasing
common stock in the open market. The representatives of the underwriters may
also elect to reduce any short position by exercising all or part of the over-
allotment option described above. The representatives of the underwriters may
also impose a penalty bid on underwriters and selling group members in some
cases. This means that if the representatives purchase shares of common stock
in the open market to reduce the underwriters' short position or to stabilize
the price of the common stock, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases. The imposition of a penalty bid
might also have an effect on the price of a security if it discourages resales
of the security. None of Netzee, the selling shareholders or any of the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the common stock. In addition, the underwriters are not required to
engage in these activities and may end any of these activities at any time. The
representatives intend to make a market in the common stock after the
completion of the offering.
Michael C. Nunan and James Graves, partners of J.C. Bradford & Co., one of
the underwriters, and JCB Venture Partnership III, an investment partnership
that is affiliated with J.C. Bradford & Co., own 3,837, 3,837 and 38,366 shares
of Netzee's common stock, respectively. These shareholders received their
shares in connection with Netzee's acquisition of Dyad in September 1999.
In September 1999, we paid The Robinson-Humphrey Company, LLC a fee in the
amount of $50,000 for advisory services rendered in connection with our
acquisition of Dyad.
From time to time in the future in the ordinary course of business, the
representatives may provide investment banking services to us.
There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986
and the Public Offers of Securities Regulations 1995 with respect to anything
done by any person in relation to the common stock in, from or otherwise
involving the United Kingdom must be complied with.
Each underwriter has also agreed that it has:
. not offered or sold, and prior to the date six months after the date of
issue of the shares of common stock will not offer or sell, any shares
of common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of
their businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995;
. complied, and will comply with, all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything
done by it in relating to the shares of common stock in, from or
otherwise involving the United Kingdom; and
. only issued or passed on, and will only issue or pass on, in the United
Kingdom any document received by it in connection with the issuance of
the shares of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) of Great Britain or
is a person to whom the document may otherwise lawfully be issued or
passed on.
83
<PAGE>
EXPERTS
The audited financial statements and schedule included in this prospectus
and elsewhere in the registration statement to the extent and for the periods
indicated in their reports have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP, Atlanta, Georgia, will issue an opinion
regarding the validity of the common stock we are offering. Alston & Bird LLP,
Atlanta, Georgia, is representing the underwriters in this offering. Attorneys
at Sutherland Asbill & Brennan may purchase shares in this offering.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act to register the common stock we are offering. This prospectus is
part of that registration statement and, as permitted by SEC rules, omits some
of the information in the registration statement and the exhibits and schedules
to the registration statement. For further information about us and our common
stock, you should read the registration statement, together with the
accompanying exhibits and schedules. Statements contained in this prospectus
regarding the contents of any contract or other document are necessarily
summaries. You should read the exhibit for a more complete description of the
contract or document. We qualify each statement contained in this prospectus
regarding the contents of any contract or document filed as an exhibit to the
registration statement by reference to the exhibit.
You may read the registration statement at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 and may obtain copies of the
registration statement from the Public Reference Room at prescribed rates. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an Internet site at
http://www.sec.gov through which you may review the registration statement.
We are not presently a reporting company and do not file reports or other
information with the SEC. On the effective date of the registration statement,
however, we will become a reporting company, and we will register our
securities under the Securities Exchange Act of 1934. Accordingly, the
additional reporting requirements of the Exchange Act will apply to us, and we
will be required to file reports, proxy statements and other information with
the SEC. In addition, after the completion of this offering, we intend to
furnish our shareholders with annual reports containing audited financial
statements, and with quarterly reports, containing unaudited summary financial
information for each of the first three quarters of each fiscal year.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with additional or different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information
contained in this prospectus is accurate as of any date other than the date on
the front of this prospectus.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Netzee, Inc. and Direct Access Interactive, Inc. (Predecessor)
Report of Independent Public Accountants................................ F-3
Balance Sheets as of December 31, 1997 and 1998 for Direct Access
Interactive, Inc. (Predecessor) and June 30, 1999 (Unaudited).......... F-4
Statements of Operations for the period from Inception (October 10,
1996) to December 31, 1996 and for the years ended December 31, 1997
and 1998, the six months ended June 30, 1998, and for the period from
January 1, 1999 to February 28, 1999 (Unaudited) for Direct Access
Interactive, Inc. (Predecessor) and for the period from March 1, 1999
to June 30, 1999 (Unaudited)........................................... F-5
Statements of Changes in Shareholders' (Deficit) Equity for the period
form Inception (October 10, 1996) to December 31, 1996 and for the
years ended December 31, 1997 and 1998 and for the periods ended
February 28, 1999 (Unaudited) for Direct Access Interactive, Inc.
(Predecessor) and June 30, 1999 (Unaudited)............................ F-6
Statements of Cash Flows for the period form Inception (October 10,
1996) to December 31, 1996 and for the years ended December 31, 1997
and 1998, for the six months ended June 30, 1998, and for the period
from January 1, 1999 to February 28, 1999 (Unaudited) for Direct Access
Interactive, Inc. (Predecessor) and for the period from March 1, 1999
to June 30, 1999 (Unaudited)........................................... F-7
Notes to Financial Statements........................................... F-8
Dyad Corporation and Subsidiaries
Report of Independent Public Accountants................................ F-18
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June
30, 1999 (Unaudited)................................................... F-19
Consolidated Statements of Operations for the years ended December 31,
1997 and 1998 and the six months ended June 30, 1998 and 1999
(Unaudited)............................................................ F-20
Consolidated Statements of Changes in Shareholders' Deficit for the
years ended December 31, 1997 and 1998 and the six months ended June
30, 1999 (Unaudited)................................................... F-21
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998 and 1999
(Unaudited)............................................................ F-22
Notes to Consolidated Financial Statements.............................. F-23
The Internet Banking Division of The Bankers Bank ("TBB")
Report of Independent Public Accountants ............................... F-31
Balance Sheets as of December 31, 1998 and June 30, 1999 (Unaudited).... F-32
Statements of Operations for the period from Inception (March 1, 1998)
to December 31, 1998 and for the period from Inception (March 1, 1998)
to June 30, 1998 and for the six month period ended June 30, 1999
(Unaudited)............................................................ F-33
Statements of Changes in Accumulated Deficit for the period from
Inception (March 1, 1998) to December 31, 1998 and for the six month
period ended June 30, 1999 (Unaudited)................................. F-34
Statements of Cash Flows for the period from Inception (March 1, 1998)
to December 31, 1998 and for the period from Inception (March 1, 1998)
to June 30, 1998 and for the six month period ended June 30, 1999
(Unaudited)............................................................ F-35
Notes to Financial Statements........................................... F-36
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
The Internet Banking Division of The Independent BankersBank ("TIB")
Report of Independent Public Accountants................................ F-42
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited)............................................................ F-43
Statements of Operations for the period from inception (February 1,
1997) to December 31, 1997 and for the period from Inception (July 31,
1997) to December 31, 1997 and for the year ended December 31, 1998 and
for the six months ended June 30, 1998 and 1999 (Unaudited)............ F-44
Statements of Changes in Accumulated Deficit for the period from
inception (February 1, 1997) to December 31, 1997 and for the year
ended December 31, 1998 and for the six months ended June 30, 1999
(Unaudited)............................................................ F-45
Statements of Cash Flows for the period from inception (February 1,
1997) to December 31, 1997 and for the year ended December 31, 1998 and
for the six months ended June 30, 1998 and 1999 (Unaudited)............ F-46
Notes to Financial Statements........................................... F-47
Call Me Bill, LLC
Report of Independent Public Accountants................................ F-53
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited)............................................................ F-54
Statements of Operations for the period from Inception (July 31, 1997)
to December 31, 1997 and for the year ended December 31, 1998 and for
the six months ended June 30, 1998 and June 30, 1999 (Unaudited)....... F-55
Statements of Changes in Members' Deficit for the period from Inception
(July 31, 1997) to December 31, 1997 and for the year ended December
31, 1998 and for the six months ended June 30, 1999 (Unaudited)........ F-56
Statements of Cash Flows for the year ended December 31, 1998 and for
the six months ended June 30, 1998 and 1999............................ F-57
Notes to Financial Statements........................................... F-58
SBS Corporation Internet and Telephone Banking Business
Report of Independent Public Accountants................................ F-62
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited)............................................................ F-63
Statements of Operations for the years ended December 31, 1997 and 1998
and the six months ended June 30, 1998 and 1999 (Unaudited)............ F-64
Statements of Changes in Shareholders' Earnings (Deficit) for the years
ended December 31, 1997 and 1998 and the six months ended June 30, 1999
(Unaudited)............................................................ F-65
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and for the six months ended June 30, 1998 and 1999 (Unaudited)........ F-66
Notes to Financial Statements........................................... F-67
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netzee, Inc.:
We have audited the accompanying balance sheets of NETZEE, INC. (a Georgia
corporation, formerly Direct Access Interactive, Inc.) as of December 31, 1997
and 1998 and the related statements of operations, shareholders' deficit, and
cash flows for the period from inception (October 10, 1996) to December 31,
1996 and for the years ended December 31, 1997 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netzee, Inc. as of December
31, 1997 and 1998 and the results of its operations and its cash flows for the
period from inception (October 10, 1996) to December 31, 1996 and for the years
ended December 31, 1997 and 1998 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
September 8, 1999 (except
with respect to the matters
discussed in Note 9 as to
which the date is October
19, 1999)
F-3
<PAGE>
The purchase method of accounting was used to record assets acquired and
liabilities assumed by Netzee, Inc. Such accounting generally results in
increased amortization reported in future periods. Accordingly, the
accompanying financial statements of the Predecessor and Netzee, Inc. are not
comparable in all material respects, since those financial statements report
financial position, results of operations, and cash flows on a different basis
of accounting.
NETZEE, INC.
(Formerly Direct Access Interactive, Inc. "Predecessor")
BALANCE SHEETS
<TABLE>
<CAPTION>
Predecessor
------------------ June 30,
December 31, 1999
1997 1998 (Unaudited)
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................................ $ 28,057 $ 13,985 $ 0
Accounts receivable, net of allowance for doubtful accounts of $0, $10,000, and $10,000 at
December 31, 1997 and 1998, and June 30, 1999, respectively................................ 19,222 35,780 90,483
Prepaid and other current assets............................................................ 0 0 50,547
-------- -------- ----------
Total current assets...................................................................... 47,279 49,765 141,030
PROPERTY AND EQUIPMENT, net................................................................... 1,575 15,006 763,631
-------- -------- ----------
INTANGIBLE ASSETS, net of accumulated amortization of $11,849, $21,985, and $138,938 at
December 31, 1997 and 1998, and June 30, 1999, respectively.................................. 39,022 28,886 1,794,154
-------- -------- ----------
Total assets.............................................................................. $ 87,876 $ 93,657 $2,698,815
======== ======== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses....................................................... $ 72,295 $165,089 $ 41,390
Line of credit.............................................................................. 0 199,973 0
Current portion of related-party loans from shareholders.................................... 0 79,500 0
Deferred revenues........................................................................... 68,538 103,913 74,465
-------- -------- ----------
Total current liabilities................................................................. 140,833 548,475 115,855
-------- -------- ----------
Due to Parent................................................................................. 0 0 750,000
-------- -------- ----------
RELATED-PARTY LOANS FROM SHAREHOLDERS......................................................... 50,000 0 0
-------- -------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' (DEFICIT) EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding
........................................................................................... 0 0 0
Common stock, no par value; 10,000,000 shares authorized, 2,000,000 shares issued and
outstanding at December 31, 1997 and 1998; no par value, 70,000,000 shares authorized,
8,000,000 issued and outstanding at June 30, 1999.......................................... 50,871 50,871 2,166,889
Accumulated deficit......................................................................... (153,828) (505,689) (333,929)
-------- -------- ----------
Total shareholders' (deficit) equity...................................................... (102,957) (454,818) 1,832,960
-------- -------- ----------
Total liabilities and shareholders' (deficit) equity...................................... $ 87,876 $ 93,657 $2,698,815
- --------------------------------------------------
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE>
The six month period ended June 30, 1999 is presented in two columns below
due to the acquisition of the predecessor on March 9, 1999 which established a
new basis of accounting for certain assets and liabilities of the Company. The
purchase method of accounting was used to record assets acquired and
liabilities assumed by Netzee, Inc. Such accounting generally results in
increased amortization reported in future periods. Accordingly, the
accompanying financial statements of the Predecessor and Netzee, Inc. are not
comparable in all material respects, since those financial statements report
financial position, results of operations, and cash flows on a different basis
of accounting.
NETZEE, INC.
(Formerly Direct Access Interactive, Inc. "Predecessor")
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor
----------------------------------------------------------------------------
Year Ended For the For the
Period From Inception December 31, Six Months Period From
(October 10, 1996) to -------------------- Ended January 1, 1999 to
December 31, 1996 1997 1998 June 30, 1998 February 28, 1999
--------------------- --------- --------- ------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
License, hardware and
installation............... $ 40,640 $ 583,086 $ 454,871 $ 152,405 $ 57,080
Monthly maintenance and
service.................... 4,183 59,013 136,141 57,785 33,082
--------- --------- --------- --------- ---------
Total revenues.............. 44,823 642,099 591,012 210,190 90,162
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Cost of license, hardware,
installation, maintenance
and service................ (49,700) (422,375) (465,577) (205,601) (44,358)
Selling, general and
administrative expenses.... (48,118) (308,197) (442,413) (225,469) (61,749)
Depreciation and
amortization............... (1,696) (10,547) (14,736) (6,728) (2,476)
--------- --------- --------- --------- ---------
Total operating expenses.... (99,514) (741,119) (922,726) (437,798) (108,583)
--------- --------- --------- --------- ---------
OPERATING LOSS............... (54,691) (99,020) (331,714) (227,608) (18,421)
INTEREST EXPENSE............. 0 (117) (20,147) (13,173) (3,469)
--------- --------- --------- --------- ---------
NET LOSS..................... $ (54,691) $ (99,137) $(351,861) $(240,781) $ (21,890)
========= ========= ========= ========= =========
BASIC AND DILUTED NET LOSS
PER SHARE................... $ (0.03) $ (0.05) $ (0.18) $ (0.12) $ ( 0.01)
========= ========= ========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING.......... 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
- --------------------------------------------------
========= ========= ========= ========= =========
<CAPTION>
For the
Period From
March 1, 1999 to
June 30, 1999
----------------
(Unaudited)
<S> <C>
REVENUES:
License, hardware and
installation............... $ 164,472
Monthly maintenance and
service.................... 86,063
----------------
Total revenues.............. 250,535
----------------
OPERATING EXPENSES:
Cost of license, hardware,
installation, maintenance
and service................ (126,454)
Selling, general and
administrative expenses.... (264,310)
Depreciation and
amortization............... (193,272)
----------------
Total operating expenses.... (584,036)
----------------
OPERATING LOSS............... (333,501)
INTEREST EXPENSE............. (428)
----------------
NET LOSS..................... $(333,929)
================
BASIC AND DILUTED NET LOSS
PER SHARE................... $ (0.04)
================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING.......... 8,000,000
- --------------------------------------------------
================
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
The purchase method of accounting was used to record assets acquired and
liabilities assumed by Netzee, Inc. Such accounting generally results in
increased amortization reported in future periods. Accordingly, the
accompanying financial statements of the Predecessor and Netzee, Inc. are not
comparable in all material respects, since those financial statements report
financial position, results of operations, and cash flows on a different basis
of accounting.
NETZEE, INC.
(Formerly Direct Access Interactive, Inc. "Predecessor")
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Shareholders'
-------------------- Accumulated Equity
Shares Amount Deficit (Deficit)
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
PREDECESSOR:
Balance at inception, October
10, 1996..................... 0 $ 0 $ 0 $ 0
Issuance of common stock.... 2,000,000 50,871 0 50,871
Net loss.................... 0 0 (54,691) (54,691)
--------- ---------- --------- ----------
Balance, December 31, 1996.... 2,000,000 50,871 (54,691) (3,820)
Net loss.................... 0 0 (99,137) (99,137)
--------- ---------- --------- ----------
Balance, December 31, 1997.... 2,000,000 50,871 (153,828) (102,957)
Net loss.................... 0 0 (351,861) (351,861)
--------- ---------- --------- ----------
Balance, December 31, 1998.... 2,000,000 50,871 (505,689) (454,818)
Net loss (unaudited)........ 0 0 (21,890) (21,890)
--------- ---------- --------- ----------
Balance, February 28, 1999
(unaudited).................. 2,000,000 $ 50,871 $(527,579) $ (476,708)
========= ========== ========= ==========
- -------------------------------------------------------------------------------
NETZEE, INC.:
Initial parent investment,
March 9, 1999 (unaudited).... 8,000,000 $1,379,965 $ 0 $1,379,965
Contribution from parent
(Unaudited).................. 0 786,924 0 786,924
Net loss (Unaudited)........ 0 0 (333,929) (333,929)
--------- ---------- --------- ----------
Balance, June 30, 1999........ 8,000,000 $2,166,889 $(333,929) $1,832,960
========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
The six month period ended June 30, 1999 is presented in two columns below
due to the acquisition of the predecessor on March 9, 1999 which established a
new basis of accounting for certain assets and liabilities of the Company. The
purchase method of accounting was used to record assets acquired and
liabilities assumed by Netzee, Inc. Such accounting generally results in
increased amortization reported in future periods. Accordingly, the
accompanying financial statements of the Predecessor and Netzee, Inc. are not
comparable in all material respects, since those financial statements report
financial position, results of operations, and cash flows on a different basis
of accounting.
NETZEE, INC.
(Formerly Direct Access Interactive, Inc. "Predecessor")
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor
---------------------------------------------------------------------------
Year Ended For the For the
Period From Inception December 31, Six Months Period From
(October 10, 1996) to ------------------- Ended January 1, 1999 to
December 31, 1996 1997 1998 June 30, 1998 February 28, 1999
--------------------- -------- --------- ------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss..................... $(54,691) $(99,137) $(351,861) $(240,781) $(21,890)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities:
Depreciation and
amortization................ 1,696 10,547 14,736 6,728 2,476
Changes in assets and
liabilities:
Prepaids and other.......... 0 0 0 0 0
Accounts receivable......... (10,000) (9,222) (16,558) (1,791) 12,606
Accounts payable and
accrued expenses........... 58,515 13,783 92,794 46,734 (42,889)
Deferred revenues........... 17,582 50,953 35,375 (15,481) 41,222
-------- -------- --------- --------- --------
Net cash provided by (used
in) operating activities.. 13,102 (33,076) (225,514) (204,591) (8,475)
-------- -------- --------- --------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment................... 0 (1,969) (18,031) (4,181) 0
-------- -------- --------- --------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Contributions from Parent.... 0 0 0 0 0
Borrowings from Parent....... 0 0 0 0 0
Increase (decrease) in line
of credit................... 0 0 199,973 198,000 0
Increase (decrease) in
related-party loans from
shareholders................ 0 50,000 29,500 27,500 (2,000)
-------- -------- --------- --------- --------
Net cash provided by (used
in) financing activities... 0 50,000 229,473 225,500 (2,000)
-------- -------- --------- --------- --------
NET INCREASE (DECREASE) IN
CASH......................... 13,102 14,955 (14,072) 16,728 (10,475)
CASH, beginning of period..... 0 13,102 28,057 28,057 13,985
-------- -------- --------- --------- --------
CASH, end of period........... $ 13,102 $ 28,057 $ 13,985 $ 44,785 $ 3,510
======== ======== ========= ========= ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest....... $ 0 $ 0 $ 14,034 $ 5,366 $ 2,971
- --------------------------------------------------
======== ======== ========= ========= ========
<CAPTION>
For the
Period From
March 1, 1999 to
June 30, 1999
----------------
(Unaudited)
<S> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss..................... $ (333,929)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities:
Depreciation and
amortization................ 193,272
Changes in assets and
liabilities:
Prepaids and other.......... (50,547)
Accounts receivable......... (70,788)
Accounts payable and
accrued expenses........... (150,463)
Deferred revenues........... 12,222
----------------
Net cash provided by (used
in) operating activities.. (400,233)
----------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment................... (862,728)
----------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Contributions from Parent.... 786,924
Borrowings from Parent....... 750,000
Increase (decrease) in line
of credit................... (277,473)
Increase (decrease) in
related-party loans from
shareholders................ 0
----------------
Net cash provided by (used
in) financing activities... 1,259,451
----------------
NET INCREASE (DECREASE) IN
CASH......................... (3,510)
CASH, beginning of period..... 3,510
----------------
CASH, end of period........... $ 0
================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest....... $ 12,515
- --------------------------------------------------
================
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
(Information as of June 30, 1999 and for the Six Months Ended
June 30, 1998 and 1999 is Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
Netzee, Inc. ("Netzee" or the "Company") was formed to effect the
acquisition of certain companies in the Internet banking and related
businesses. Direct Access Interactive, Inc. ("Direct Access") was incorporated
on October 10, 1996. Direct Access was organized to provide telephone banking
and Internet banking services to financial community institutions in the United
States.
The Company is planning an initial public offering (the "Offering") of its
common stock.
Acquisition
On March 9, 1999, Direct Access ("Predecessor") was purchased by The
InterCept Group, Inc. ("InterCept"). Direct Access was operated as a separate
subsidiary of Intercept. The purchase price of Direct Access included
approximately 150,000 shares of InterCept stock and the assumption of
approximately $275,000 in liabilities. Direct Access was later merged with and
into Netzee as discussed in Note 9. The acquisition of Direct Access was
accounted for as a purchase. The excess of the purchase price over the net
tangible assets acquired totaled $1,860,000 and was allocated to the following
identifiable intangible assets with the following amortization lives:
<TABLE>
<S> <C> <C>
Workforce.............................................. $ 60,000 3 years
Contracts in process................................... 390,000 3 years
Acquired technology.................................... 1,410,000 3 years
</TABLE>
The purchase price was determined by reference to the fair market value of
the InterCept stock issued in the acquisition based on the trading value of
$9.25 per share on March 9, 1999. The purchase method of accounting generally
results in increased amortization reported in future periods. Accordingly, the
accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects, since those financial statements report
the financial position, results of operations, and cash flows on a different
basis of accounting.
Although Direct Access was acquired on March 9, 1999, the accompanying
unaudited financial statements for the six months ended June 30, 1999 are
presented as if the acquisition occurred on the close of business on February
28, 1999 instead of March 9, 1999. The operations between March 1, 1999 and
March 9, 1999 were not material. The accompanying financial statements prior to
February 28, 1999 present the financial position and the results of operations
and cash flows of Direct Access, the predecessor to Netzee.
Historical Losses
The Company has incurred net losses since inception. The Company will need
to generate significant revenues to achieve and maintain profitability which
can not be assured. Even if the Company does achieve profitability, the Company
cannot assure that they can sustain or increase profitability on a quarterly or
an annual basis in the future. The Company plans to significantly increase its
sales and marketing, research and development and general and administrative
expenses throughout the remainder of fiscal year 1999. The Company has not
sustained earnings or positive cash flow and will incur substantial expenses to
operate. Advances from Intercept as of June 30, 1999 were approximately
$786,924. Subsequent to June 30, 1999, Netzee has obtained further financing
from InterCept in the form of promissory notes totaling approximately
$28,800,000. These notes bear interest at a rate equal to Prime plus 2% and
mature on the earlier of two years
F-8
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
from the date of the promissory note (August and September of 1999) or an
initial public offering. The promissory notes were used to pay the cash
purchase price of $28,800,000 for certain acquisitions discussed in Note 9.
Additional funds from InterCept will be used to fund future operations. Netzee
is planning an initial public offering to pay the balance of the promissory
notes and to fund this expansion. This initial public offering cannot be
assured. The Company anticipates they will have additional working capital
needs to be funded by InterCept of between $4,000,000 and $6,100,000 from
August 31, 1999 to November 30, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Unaudited Financial Information
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited; however, in the opinion of management,
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
Property and Equipment
Property and equipment are stated at cost. Subsequent to the March 9, 1999,
acquisition property and equipment are stated at fair value at the date of the
acquisition. Major property additions, replacements, and betterments are
capitalized, while maintenance and repairs which do not extend the useful lives
of these assets are expensed as incurred. Depreciation is provided using the
straight-line method over the useful life of the asset. Property and equipment
consist of furniture and office equipment and are being depreciated over a
period of five years.
Intangible Assets
Intangible assets consist of the intangibles recorded in the acquisition
discussed in Note 1. The carrying amounts of the intangible assets are reviewed
for impairment when events and circumstances indicate that the recorded costs
may not be recoverable. If the review indicates that the undiscounted cash
flows from operations of the related intangible assets over the remaining
amortization period are expected to be less than the recorded amount of the
intangible, the Company's carrying value of the intangible asset is reduced to
its estimated fair value.
F-9
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Capitalized Software Development Costs
Research and development costs are expensed as incurred. Computer software
development costs are charged to research and development expense until
technological feasibility of the software is established, after which remaining
software production costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for Computer
Software to Be Sold, Leased, or Otherwise Marketed." These costs are amortized
on the straight-line basis over three years, the estimated economic life of the
software. Amortization of software development costs is included in cost of
license, hardware, installation, monthly maintenance, and service. Amortization
of capitalized software development costs begins as products are made available
for sale or as the related product is put into use, with annual amortization
equal to the greater of the amount computed using the ratio that current gross
revenues bear to the total of current and anticipated future gross revenues for
the product or the straight-line method over the remaining economic life of the
product which is a maximum of three years.
Revenue Recognition
The Company's revenue historically resulted from (1) licensing of software
for Internet banking and telephone banking, (2) installation of the Internet
banking and telephone banking software, (3) sale of hardware, and (4)
maintenance and support services for the Internet banking and telephone banking
software. The Company historically charged a nonrefundable license, hardware,
and installation fee, with an annual maintenance fee, typically renewed every
12 months. The Company recognized the software license fee in 1996 and 1997 in
accordance with the provisions of the American Institute of Certified Public
Accountants Statement of Position ("SOP") No. 91-1, "Software Revenue
Recognition." The revenue from software license fees was recognized in
accordance with SOP No. 97-2, "Software Revenue Recognition," in 1998 and for
the six months ended June 30, 1999. The Company recognized the one-time
nonrefundable software, hardware, and installation fee upon completion of the
installation of the software and hardware. The maintenance fee is recognized
ratably over the term maintenance period, typically 12 months. The Company
anticipates that in the future, it will not charge a license fee at the
beginning of the contract and will collect fees for services rendered on a
monthly basis. The revenue from these arrangements will be recognized as the
services are rendered, typically on a monthly basis.
Deferred Revenue
Deferred revenue represents the liability for amounts collected prior to
complete performance for telephone and Internet banking maintenance service.
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets or
liabilities, including cash, accounts receivable, and accounts payable,
approximates carrying value due to the short-term maturity of the instruments.
The fair value of the line of credit approximates carrying value, as the
interest rates attached to this line of credit are based on current market
rates.
F-10
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets
The Company periodically reviews the values assigned to long-lived assets to
determine whether any impairments have occurred. Management believes that the
long-lived assets on the accompanying balance sheets are appropriately valued.
Income Taxes
The Company uses the liability method of accounting for income taxes, as set
forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized.
Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share is computed by using net loss divided
by the weighted average number of shares of common stock outstanding for the
period presented. The effect of warrants and stock options has been excluded
from the presentation of diluted net loss per share, as they are antidilutive.
There were no options or warrants outstanding for the period from inception
(October 10, 1996) to December 31, 1996 or for the years ended December 31,
1997 and 1998. The Company had no options or warrants outstanding as of June
30, 1999.
Comprehensive Loss
Comprehensive loss for the six-month periods ended June 30, 1998 and 1999
and for the periods from inception to December 31, 1998 is the same as the net
loss as presented in the accompanying statements of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The statement is not
expected to have a significant impact on the Company's financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 and June 30, 1999
consist of the following:
<TABLE>
<CAPTION>
Predecessor
--------------- June 30,
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Furniture and office equipment.................... $1,969 $20,000 $817,965
Less accumulated depreciation..................... (394) (4,994) (54,334)
------ ------- --------
Property and equipment, net....................... $1,575 $15,006 $763,631
====== ======= ========
</TABLE>
Depreciation expense for the period from inception (October 10, 1996) to
December 31, 1996, for the years ended December 31, 1997 and 1998, and for the
six months ended June 30, 1998 and 1999 was $0, $394, $4,600, $1,660, and
$55,123, respectively.
F-11
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 and 1998 and June 30, 1999 consist of
the following:
<TABLE>
<CAPTION>
Predecessor
---------------- June 30,
1997 1998 1999
------- ------- ----------
<S> <C> <C> <C>
Capitalized software development costs......... $50,871 $50,871 $ 73,092
Workforce...................................... 0 0 60,000
Contracts in progress.......................... 0 0 390,000
Acquired technology............................ 0 0 1,410,000
Less amortization.............................. (11,849) (21,985) (138,938)
------- ------- ----------
Intangible assets, net......................... $39,022 $28,886 $1,794,154
======= ======= ==========
</TABLE>
The Company allocated the value of the acquired intangible assets from the
acquisition of Direct Access on March 9, 1999 to workforce, contracts in
progress and acquired technology. The value of the workforce was determined by
reference to the cost of the workforce retained. The value of the contracts in
progress was determined by reference to the recurring revenue generated from
the existing customers of Direct Access. The Company determined that the
remaining value related to acquired technology for the internet and telephone
banking technology.
Amortization expense for the period from inception (October 10, 1996) to
December 31, 1996, for the years ended December 31, 1997 and 1998, and for the
six months ended June 30, 1998 and 1999 was $1,696, $10,153, $10,136, $5,068,
and $140,629, respectively.
5. LINE OF CREDIT
As of December 1998, the Company had a line of credit for up to $202,614,
which is available through July 22, 1999, with a principal balance outstanding
of $199,973 at December 31, 1998. The debt was secured by rental real estate
property and the Company's annual license and maintenance fees. The line of
credit was paid in full on March 9, 1999.
6. RELATED-PARTY TRANSACTIONS
As discussed in Note 9, the Company completed several acquisitions in 1999.
In these transactions, 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 Netzee's common stock.
Management believes that these transactions were made on terms no less
favorable to Netzee than could have been obtained with unaffiliated third
parties on an arm's length basis.
The Company's Chairman of the Board of Directors is the Chairman and Chief
Executive Officer of InterCept, and a director of the Company is the President,
Chief Operating Officer and a director of InterCept.
The Company's Chief Executive Officer is a director of InterCept and is a
partner at Nelson Mullins Riley & Scarborough, L.L.P. This firm provided legal
services to the Company totaling approximately $50,000 during 1999.
In September 1999, the Company entered into a marketing agreement with
InterCept under which company salespeople will sell InterCept products and
services and InterCept salespeople will sell the Company's products and
services. Under this agreement, the Company pays a commission to InterCept for
each sale of the Company's products and services made by InterCept salespersons
and for each referral to the
F-12
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company's sales force that results in a sale. InterCept correspondingly pays
the Company for sales and referrals by the Company's salespersons. Management
believes that the transactions will be made on terms no less favorable than
could be obtained from unaffiliated third parties on an arm's length basis.
Related-party loans from shareholders at December 31, 1997 and 1998 and
June 30, 1999 consist of the following:
<TABLE>
<CAPTION>
Predecessor
---------------- June 30,
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Loan from shareholders, interest payable monthly at 8.5%; the loan was repaid on March 9,
1999........................................................................................... $50,000 $ 77,500 $ 0
Loan from shareholders, noninterest-bearing note; the loan was repaid on January 8, 1999........ 0 2,000 0
------- -------- ---
50,000 79,500 0
Less current maturities......................................................................... 0 (79,500) 0
------- -------- ---
$50,000 $ 0 $ 0
--------------------------------------------------
======= ======== ===
</TABLE>
Towne Services, Inc. is a related party vendor that sold software to the
Company during the six-month period ended June 30, 1999. Certain board members
and shareholders of Netzee are also board members and shareholders of Towne
Services, Inc. The amount will be paid by Intercept, our former Parent, and
this amount has been included as due to Parent on the accompanying balance
sheet.
7. INCOME TAXES
The Company has incurred net operating losses ("NOL") since inception. As
of December 31, 1998, the Company has NOL carryforwards of approximately
$350,000 available to offset its future income tax liability. The NOL
carryforwards begin to expire in 2012. Due to the uncertainty of the
realizability of the net operating losses, the Company has not reflected in
the accompanying statements of operations an income tax benefit for any period
presented and has recorded a valuation allowance equal to the net deferred tax
assets of the Company at December 31, 1997 and 1998. Due to the acquisition on
March 9, 1999, the NOL carryforwards could be limited under Section 382 of the
Internal Revenue Code when ownership of the Company changes by more than 50%,
as defined.
The components of the deferred tax assets and liabilities are as follows as
of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Predecessor
-------------------
1997 1998
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 55,011 $ 133,191
Accounts receivable................................... 0 3,800
Accrued liabilities................................... 4,100 6,506
Deferred revenue...................................... 26,044 39,487
-------- ---------
Total deferred tax assets............................. 85,155 182,984
Valuation allowance................................... (85,155) (182,984)
-------- ---------
Net deferred tax assets............................... $ 0 $ 0
======== =========
</TABLE>
F-13
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the income tax benefit for the period from inception
(October 10, 1996) to December 31, 1996 and the years ended December 31, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
Predecessor
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Current provision:
Federal..................................... $ 0 $ 0 $ 0
State....................................... 0 0 0
-------- -------- ---------
0 0 0
-------- -------- ---------
Deferred benefit:
Federal..................................... (18,594) (33,707) (119,633)
State....................................... (2,188) (3,965) (14,075)
-------- -------- ---------
(20,782) (37,672) (133,708)
-------- -------- ---------
Total benefit................................. (20,782) (37,672) (133,708)
Valuation allowance........................... 20,782 37,672 133,708
-------- -------- ---------
Total..................................... $ 0 $ 0 $ 0
======== ======== =========
</TABLE>
The following is a summary of the items which resulted in recorded income
taxes that differ from taxes computed using the statutory federal income tax
rate for the period from inception (October 10, 1996) to December 31, 1996 and
the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Predecessor
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Tax provision at federal statutory rate.................... 34% 34% 34%
Tax provision at state statutory rate...................... 4 4 4
Effect of valuation allowance.............................. (38) (38) (38)
--- --- ---
Income tax benefit......................................... 0% 0% 0%
=== === ===
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company leases various equipment and facilities under operating lease
agreements. Future minimum annual obligations under these leases as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................ $ 80,335
2000................................ 77,061
2001................................ 77,061
2002................................ 55,986
--------
Total............................. $290,443
========
</TABLE>
Rent expense for the period from inception (October 1, 1996) to December 31,
1996, the years ended December 31, 1997 and 1998 and the six month periods
ended June 30, 1998 and 1999 was $13,401, $20,241, $53,604, $24,802, and
$38,167, respectively.
Product Liability
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and
F-14
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
testing and use by current and potential customers, errors will not be found in
new Internet banking systems after commencement of commercial release or, if
discovered, that the Company will be able to successfully correct such errors
in a timely manner or at all. The occurrence of errors and failures in the
Company's products could result in loss of or delay in the market acceptance of
the Company's Internet banking systems, and alleviating such errors and
failures could require significant expenditure of capital and other resources
by the Company. The consequences of such errors and failures could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31,
1998, management is not aware of any unasserted, asserted, or pending material
litigation or claims against the Company.
9. SUBSEQUENT EVENTS
Acquisition of the remote Internet and telephone banking division of SBS
Corporation
On August 6, 1999, Direct Access purchased the remote banking operations of
SBS Corporation ("SBS Corp"). The purchase price of SBS Corp included 2,600,000
shares of the Company's stock at the estimated fair market value of $11.50 per
share and $21,534,625 in cash. Only the remote Internet and telephone banking
operations of SBS Corp was retained by the Company and the non-Internet banking
operations were sold to InterCept for 450,000 shares of Netzee's stock valued
at $11.50 per share, for a total purchase price of $5,175,000. No gain or loss
was recorded on the transaction by the Company, as the transaction was a
related party transaction. The 2,600,000 shares are redeemable by the Company
on August 6, 2001 at a price of $11.50 per share if the Company's planned
Offering has not occurred two years from the date of issuance. The Company
obtained the cash through a promissory note with InterCept. The note bears an
interest rate of Prime + 2%, payable quarterly. The Company intends to pay the
principal and interest on the note with the proceeds of the planned Offering.
The acquisition of SBS Corp was accounted for as a purchase. The excess of the
purchase price over the net tangible assets acquired was allocated to the
following identifiable intangible assets with the following amortization lives:
<TABLE>
<S> <C> <C>
Workforce............... $ 440,000 3 years
Contracts in process.... 1,340,000 4 years
Acquired technology..... 44,402,000 3 years
</TABLE>
Acquisitions of the Internet banking divisions of The Independent BankersBank
and the Internet banking division of The Bankers Bank
On September 3, 1999, Netzee purchased the Internet banking division of The
Independent BankersBank ("TIB") and the Internet banking division of The
Bankers Bank ("The Bankers Bank"). The acquisitions of TIB and The Bankers Bank
was accounted for as a purchase. The purchase price of TIB and The Bankers Bank
included 2,722,000 shares of Netzee stock valued at $11.50 per share, options
to purchase a total of 55,000 shares of common stock at an exercise price of
$5.00 per share granted to management and directors of the Internet banking
divisions of TIB and The Bankers Bank, and 76,000 shares of common stock sold
to a third party for $100,000. The excess of the purchase price over the
tangible net assets was allocated to the following identifiable intangible
assets with the following amortization lives:
<TABLE>
<S> <C> <C>
Workforce............... $ 330,000 3 years
Contracts in process.... 150,000 3 years
Marketing agreements.... 3,056,000 2 years
Acquired technology.... 27,166,000 3 years
</TABLE>
F-15
<PAGE>
NETZEE, INC.
(formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Acquisition of Dyad Corporation
On September 3, 1999, the Company purchased all the assets of Dyad
Corporation and subsidiaries ("Dyad"). The purchase price of Dyad included
618,137 shares of Netzee stock valued at $11.50 per share and approximately
$900,000 in cash. The Company also assumed debt owed by Dyad of approximately
$3,500,000. The Company obtained the cash purchase price and the cash to pay
the assumed debt by issuing a promissory note to InterCept in the amount of
$4,400,000. The note bears interest at prime plus 2%, payable quarterly. The
Company intends to repay the principal and interest on the note with the
proceeds of the planned Offering. The acquisition of Dyad was accounted for as
a purchase. The excess of the purchase price over the net tangible assets
acquired was allocated to the following identifiable intangible assets with the
following amortization lives:
<TABLE>
<S> <C> <C>
Workforce............... $ 70,000 3 years
Acquired technology..... 13,543,000 3 years
</TABLE>
Acquisition of Call Me Bill LLC
On September 3, 1999, Netzee purchased all the assets of Call Me Bill LLC
("Call Me Bill"). The purchase price of Call Me Bill included cash of
approximately $3,288,000 and approximately 31,000 shares of Netzee stock sold
to former owners of Call Me Bill for $10.50 per share. These shares were valued
at $11.50 per share. The Company obtained approximately $2,882,000 in cash
through a promissory note payable with InterCept. The note bears an interest
rate of Prime + 2%, payable quarterly. The Company intends to pay the principal
and interest on the note with the proceeds of the planned Offering. The
acquisition of Call Me Bill was accounted for as a purchase. The excess of the
purchase price over the net tangible assets acquired totaled approximately
$3,325,000 and was allocated to acquired technology with a three year
amortization life.
Issuance of Stock Subscriptions to Employees and Directors
On July 1, 1999, certain employees and directors entered into binding stock
subscriptions for 1,555,000 shares of common stock at a subscription price of
$2.00 per share. The issuance of the shares of stock was pending Board of
Director authorization to increase the number of authorized shares, which was
approved on August 6, 1999. The employees were full time employees of InterCept
at the time of the issuance of the equity securities; however, the employees
were performing services for the Company, which at the time, was a majority
owned subsidiary of InterCept. Therefore, the Company accounted for the
issuance of the equity securities to the employees of InterCept and the
directors of the Company as an issuance of equity securities to employees. The
purchase price of the stock was paid in the form of full recourse, interest
bearing notes payable from the employees and the directors. These notes bear
interest at 7% and are due three years from the date of the notes. The Company
accounted for the issuance of stock to the employees and the directors under
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees." APB No. 25 requires that a Company recognize the
intrinsic value of any equity instrument issued to employees at a price below
the fair value of the Company's common stock. The Company determined that its
value as of July 1, 1999 was approximately $2.00 per share. As the price per
share for the restricted stock was equal to the fair value on the date of
issuance, the Company recorded no expense associated with the issuance of these
equity securities.
Sale of Common Stock
On September 10, 1999, the Company sold 128,617 shares of common stock to
three bankers' banks for $3.11 per share. These shares were sold in connection
with the entering into of a one-year general marketing
F-16
<PAGE>
NETZEE, INC.
(formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
agreement under which each bankers' bank has agreed to use its best efforts to
promote and market the Company's Internet banking products and services to
community financial institutions. The Company will record as an intangible
asset the difference between the fair value of common stock and the price paid.
This intangible asset will be amortized over the two-year expected benefit
period for these agreements. On September 3, 1999, the Company sold 85,000
shares of common stock to an employee. The difference between the fair value of
shares and the price paid for them was recorded as compensation expense.
Employment Agreements
The Company's executive officers intend to enter into employment agreements
providing for minimum annual salaries ranging from $140,000 to $250,000. Each
employment agreement is for a term of two years and provides for incentive
compensation.
Issuance of Options
The Company had no outstanding options as of December 31, 1998. On August 5,
1999, the Company adopted the Direct Access Interactive, Inc. 1999 Stock Option
and Incentive Plan. Pursuant to the merger of Direct Access Interactive into
Netzee, all the outstanding options to purchase shares of Direct Access
Interactive became options to purchase shares of Netzee. On September 2, 1999,
the Company adopted the Netzee, Inc. 1999 Stock Option and Incentive Plan (the
"Plan"). The Plan is administered by the Board of Directors. The Plan provides
for the granting of incentive and nonqualified stock options, restricted stock
awards and stock appreciation rights. No restricted stock awards or stock
appreciation right grants were made as of December 31, 1998 or September 8,
1999. The total number of shares to be purchased under the Plan currently is
3,500,000 shares. The number of shares of stock available for issuance under
the Plan shall automatically increase on January 1 of each year beginning
January 1, 2000 to an amount equal to 20% of the fully diluted shares of stock
assuming the conversion of all outstanding options and warrants on
December 31 of the previous year, provided however, that the shares available
for issuance shall not be less than 3,500,000. The options are granted at terms
determined by the Board of Directors. The Company had 1,929,500 options
outstanding as of October 19, 1999 and 1,540,500 available for future grant.
The date of grant, the number of options, and the exercise price are as
follows:
<TABLE>
<CAPTION>
Number of Exercise
Date of Grant Options Price
------------- --------- --------
<S> <C> <C>
July 1, 1999......................................... 320,000 $ 2.00
August 5, 1999....................................... 320,000 3.11
September 7, 1999.................................... 220,000 3.11
September 7, 1999.................................... 1,019,500 5.00
October 19, 1999..................................... 80,000 $ 5.00
</TABLE>
An employee exercised 30,000 of the options on August 5, 1999 with a full
recourse interest bearing note. As of September 8, 1999, 110,000 of the options
were exercisable. On October 19, 1999, the board of directors authorized the
issuance of options to purchase 250,000 shares of common stock at the offering
price. These options will be fully vested on the date of the offering. The
majority of the options vest over a three year period with 568,000 options
being subject to accelerated vesting upon an initial public offering.
F-17
<PAGE>
NETZEE, INC.
(Formerly Direct Access Interactive, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company recorded deferred compensation expense on certain of the options
noted above as the exercise price of the options was below the fair market
value of the Company's common stock at the time of grant. The fair market value
of the Company's common stock for each of the grant dates in 1999 and the
compensation recorded was as follows:
<TABLE>
<CAPTION>
Fair Deferred
Date of Grant Value Compensation
------------- ------ ------------
<S> <C> <C>
July 1, 1999.......................................... $ 2.00 $ 0
August 5, 1999........................................ $11.50 2,685,000
September 7, 1999..................................... $11.50 8,147,000
October 19, 1999...................................... $13.00 640,000
-----------
Total............................................... $11,472,000
===========
</TABLE>
Pro forma information is required by SFAS No. 123, "Accounting for Stock-
Based Compensation." SFAS No. 123 requires that the information be determined
as if the Company has accounted for the issuance of equity securities to
employees under the fair value method required by SFAS No. 123. The fair value
of each option granted in 1999 has been estimated as of the date of grant using
the Black-Scholes option pricing model with an expected dividend yield of 0%,
expected volatility of 90%, a risk free rate of return ranging from 5.85% to
5.93%, and an expected life of 5 years. Using these assumptions, the fair value
of the options granted in 1999 was $13,066,434 which would be amortized over
the vesting period of the options.
Line of Credit Agreement and Issuance of Warrants
On October 18, 1999, the Company entered into a $3,000,000 line of credit
facility with an affiliated company of a director of Netzee. The line of credit
facility bears interest at the prime rate and terminates on September 30, 2002.
In conjunction with the line of credit facility, the Company issued warrants to
purchase 461,876 shares of common stock at an exercise price of $3.25 per
share. The Company will record deferred financing costs for the difference
between the fair value of common stock and the exercise price of the warrants.
The deferred financing costs will be expensed over the term of the line of
credit facility.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dyad Corporation:
We have audited the accompanying consolidated balance sheets of DYAD
CORPORATION (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997
and 1998 and the related consolidated statements of operations, shareholders'
deficit, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dyad Corporation and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
September 3, 1999
F-19
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1997 1998 1999
----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 1,910,621 $ 15,326 $ 18,689
Restricted cash............................ 245,000 204,167 0
Accounts receivable........................ 31,326 25,870 22,670
Inventories................................ 114,628 3,286 0
Other current assets....................... 7,272 0 0
----------- ---------- ----------
Total current assets..................... 2,308,847 248,649 41,359
PROPERTY AND EQUIPMENT, net.................. 255,687 50,972 18,667
GOODWILL, net of accumulated amortization of
$59,568, $97,050, and $114,542 at December
31, 1997 and 1998 and June 30, 1999,
respectively................................ 145,347 107,864 90,372
DEFERRED FINANCING COSTS..................... 7,746,121 6,664,397 6,076,138
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net
of accumulated amortization of $20,990,
$37,813, and $46,017 at December 31, 1997
and 1998 and June 30, 1999, respectively.... 33,230 16,407 8,203
OTHER ASSETS................................. 7,791 0 0
----------- ---------- ----------
Total assets............................. $10,497,023 $7,088,289 $6,234,739
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses...... $ 179,908 $ 148,920 $ 116,461
Customer deposits.......................... 60,000 0 0
Current portion of long-term debt.......... 17,520 19,123 424,495
Deferred revenue........................... 135,250 0 0
----------- ---------- ----------
Total current liabilities................ 392,678 168,043 540,956
----------- ---------- ----------
LONG-TERM LIABILITIES:
Debt, less current portion and unamortized
discount of 2,120,573, 1,972,304, and
1,869,845 at December 31, 1997 and 1998
and June 30, 1999, respectively........... 1,405,464 1,533,803 1,632,193
Deferred revenue........................... 411,666 0 0
----------- ---------- ----------
Total long-term liabilities.............. 1,817,130 1,533,803 1,632,193
----------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 11,
and 12)
WARRANTS WITH REDEMPTION FEATURE............. 9,752,573 10,404,573 10,730,573
----------- ---------- ----------
SHAREHOLDERS' DEFICIT:
Preferred stock, no par value; 50,000
shares authorized, no shares issued and
outstanding............................... 0 0 0
Common stock, no par value; 1,000,000
shares authorized, 11,677, 12,027, and,
12,027 shares issued and outstanding at
December 31, 1997 and 1998 and June 30,
1999, respectively........................ 1,287,218 1,937,218 1,937,218
Subscription receivable (Note 10).......... (5,000) (5,000) (5,000)
Accumulated deficit........................ (2,747,576) (6,950,348) (8,601,201)
----------- ---------- ----------
Total shareholders' deficit.............. (1,465,358) (5,018,130) (6,668,983)
----------- ---------- ----------
Total liabilities and shareholders'
deficit................................. $10,497,023 $7,088,289 $6,234,739
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-20
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended For the Six Months Ended
December 31, June 30,
------------------------ --------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Equipment and hardware
sales................. $ 418,773 $ 375,140 $ 108,834 $ 97,246
License fees........... 108,334 97,499 65,000 0
Support and maintenance
fees.................. 7,000 32,702 10,417 5,840
----------- ----------- ------------ ------------
Total revenues....... 534,107 505,341 184,251 103,086
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Cost of sales.......... (400,934) (409,002) (96,570) (54,779)
Selling, general, and
administrative........ (1,634,456) (1,524,266) (806,301) (390,244)
Research and
development........... (283,027) (164,243) (60,376) (32,995)
Asset impairment
charge................ 0 (143,000) 0 0
Depreciation and
amortization.......... (159,840) (136,795) (72,138) (48,565)
----------- ----------- ------------ ------------
Total costs and
expenses............ (2,478,257) (2,377,306) (1,035,385) (526,583)
----------- ----------- ------------ ------------
OPERATING LOSS........... (1,944,150) (1,871,965) (851,134) (423,497)
----------- ----------- ------------ ------------
OTHER INCOME (EXPENSE)
Other income........... 25,000 0 36,186 4,199
Interest expense, net.. (89,689) (1,678,807) (842,263) (905,555)
----------- ----------- ------------ ------------
(64,689) (1,678,807) (806,077) (901,356)
----------- ----------- ------------ ------------
NET LOSS................. $(2,008,839) $(3,550,772) $ (1,657,211) $ (1,324,853)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-21
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Total
----------------- Subscription Accumulated Shareholders'
Shares Amount Receivable Deficit Deficit
------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996................... 9,611 $ 288,218 $(5,000) $ (738,737) $ (455,519)
Issuance of common
stock for cash....... 1,066 949,000 0 0 949,000
Issuance of common
stock in connection
with the acquisition
of MoneyPro.......... 1,000 50,000 0 0 50,000
Net loss.............. 0 0 0 (2,008,839) (2,008,839)
------ ---------- ------- ----------- -----------
BALANCE, December 31,
1997................... 11,677 1,287,218 (5,000) (2,747,576) (1,465,358)
Issuance of common
stock to Phoenix
(Note 4)............. 350 650,000 0 0 650,000
Accretion of Warrants
with redemption
feature (Note 7)..... 0 0 0 (652,000) (652,000)
Net loss.............. 0 0 0 (3,550,772) (3,550,772)
------ ---------- ------- ----------- -----------
BALANCE, December 31,
1998................... 12,027 1,937,218 (5,000) (6,950,348) (5,018,130)
Accretion of Warrants
with redemption
feature (unaudited).. 0 0 0 (326,000) (326,000)
Net loss (unaudited).. 0 0 0 (1,324,853) (1,324,853)
------ ---------- ------- ----------- -----------
BALANCE, June 30, 1999
(Unaudited)............ 12,027 $1,937,218 $(5,000) $(8,601,201) $(6,668,983)
====== ========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-22
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended For the Six Months Ended
December 31, June 30,
------------------------ --------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(2,008,839) $(3,550,772) $ (1,657,211) $ (1,324,853)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization........ 176,663 157,780 80,760 58,001
Amortization of
deferred financing
costs and discount
on notes payable.... 0 1,229,186 578,192 686,649
Asset impairment..... 0 143,000 0 0
Changes in assets and
liabilities, net of
effects of
acquisition:
Accounts
receivable........ (31,326) 5,456 3,725 3,200
Inventories........ 8,865 111,342 (75,478) 3,286
Restricted Cash.... (245,000) 40,833 0 204,167
Deferred revenue... 546,916 103,089 (65,000) 0
Other assets....... 60,543 15,063 (19,071) 0
Accounts payable
and accrued
expenses.......... (33,736) (30,988) (47,514) (32,459)
Customer deposits.. 28,805 (60,000) 0 0
----------- ----------- ------------ ------------
Net cash used in
operating
activities....... (1,497,109) (1,836,011) (1,201,867) (402,009)
----------- ----------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment......... (202,718) (41,764) (35,765) 0
----------- ----------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments of long-term
debt.................. (25,379) (17,520) 0 0
Payment of deferred
financing costs....... (114,121) 0 0 0
Proceeds from sale of
common stock.......... 949,000 0 0 0
Decrease in due to
related party......... (735,981) 0 0 0
Proceeds from issuance
of debt and warrants.. 3,500,000 0 6,548 405,372
----------- ----------- ------------ ------------
Net cash provided
by (used in)
financing
activities....... 3,573,519 (17,520) 6,548 405,372
----------- ----------- ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 1,873,692 (1,895,295) (1,231,084) 3,363
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 36,839 1,910,621 1,910,621 15,326
----------- ----------- ------------ ------------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 1,910,531 $ 15,326 $ 679,537 $ 18,689
=========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 89,689 $ 459,285 $ 205,051 $ 166,001
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-23
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(Information as of June 30, 1999 and for the Six Months Ended
June 30, 1998 and 1999 is Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
Financial Delivery Systems, Inc. was incorporated in Georgia on May 9, 1996
and later changed its name to Dyad Corporation (the "Company"). The Company
develops high technology products and services which will enable consumers to
obtain financing for consumer durables at the point of sale through the use of
automated loan devices.
In January, 1997, the Company acquired MoneyPro, Inc. ("MoneyPro") which
provides mortgage lending information technology and related services in a
transaction accounted for as a purchase (Note 3).
In May, 1997, the Company acquired Bank Systems & Equipment Corporation
("Basecorp") which provides automated branching centers, printers, and related
supplies to financial institutions in a transaction accounted for as a pooling
of interests (Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, MoneyPro and Basecorp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Unaudited Financial Information
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited; however, in the opinion of management,
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash
In conjunction with the Sirrom Note (Note 6), the Company was required to
establish an interest escrow account of $245,000 in December of 1997. The
account is designated for monthly interest payments on the Note payable to
Sirrom Investments, Inc. (See Note 6) if the Company fails to make such
payments.
F-24
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant Customers
Approximately 24% of the Company's revenues were derived from the license
fee of a national distributor for the year ended December 31, 1998.
Approximately 40% and 15% of the Company's revenues were derived from equipment
and hardware sales to four major customers during the year ended 1998 and the
six month period ended 1999, respectively.
Property and Equipment
Property and equipment are stated at cost less impairment changes as
discussed in Note 5. Major property additions, replacements, and betterments
are capitalized, while maintenance and repairs which do not extend the useful
lives of these assets are expensed as incurred. The detail of property and
equipment at December 31, 1997 and 1998 and June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Useful
1997 1998 1999 Lives
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Furniture and fixtures............ $ 74,014 $ 48,274 $ 48,274 Five years
Computers and equipment........... 248,610 180,446 179,216 Three years
Vehicles.......................... 25,327 16,747 16,747 Five years
Leasehold improvements............ 18,617 19,866 19,866 Lease term
-------- -------- --------
366,568 265,333 264,103
Less accumulated depreciation..... (110,881) (214,361) (245,436)
-------- -------- --------
$255,687 $ 50,972 $ 18,667
======== ======== ========
</TABLE>
Depreciation expense for the year ended December 31, 1997 and 1998 and the
six months ended June 30, 1998 and 1999 was $55,203, $103,480, $52,147, and
$31,075, respectively.
Capitalized Software Development Costs
Research and development costs are expensed as incurred. Software
development costs are charged to research and development expense until
technological feasibility of the software is established, after which remaining
software production costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for Computer
Software to be Sold, Leased, or Otherwise Marketed." Amortization of
capitalized software development costs begins as products are made available
for sale or as the product is put into use with annual amortization equal to
the greater of the amount computed using the ratio that current gross revenues
bear to the total of current and anticipated future gross revenues for the
product or the straight-line method over the remaining economic life of the
product. Amortization expense of $20,990, $16,823, $8,411, and $8,204 for the
years ended December 31, 1997 and 1998 and for the six months ended June 30,
1998 and 1999, respectively, has been included in cost of sales in the
accompanying consolidated statements of operations. The Company amortizes
software development costs over three years.
Goodwill
Goodwill represents the excess of the purchase price over the net tangible
and identifiable intangible assets of acquired businesses. Goodwill is
amortized on a straight-line basis over five years. Amortization expense for
the year ended December 31, 1997 and 1998 and the six months ended June 30,
1998 and 1999 was $59,568, $37,482, $18,741, and $17,492, respectively.
F-25
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 1997 and 1998 and June
30, 1999 consist of the following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Accounts payable.................................. $ 85,240 $ 55,805 $ 48,495
Accrued expenses.................................. 94,668 93,115 67,966
-------- -------- --------
$179,908 $148,920 $116,461
======== ======== ========
</TABLE>
Revenue Recognition
Dyad's sources of revenue included equipment and hardware sales, software
license fees, hardware support and maintenance fees. Revenue from equipment and
hardware sales is recognized upon receipt and acceptance by customers. For
software license fees, hardware support, and maintenance fees, the Company
recognizes revenue ratably over the period of the applicable agreement.
Deferred Revenues
Deferred revenues represent the liability for amounts collected prior to
complete performance of maintenance contracts and for advanced billings to
customers related to software license fees.
Fair Value of Financial Instruments
The fair value of instruments classified as current assets or liabilities,
including cash and cash equivalents, restricted cash, accounts receivable, and
accounts payable approximate carrying value due to the short-term maturity of
the instruments.
Long-Lived Assets
The Company periodically reviews the values assigned to tangible and
intangible long-lived assets to determine if any impairments have occurred. If
the review indicates that the undiscounted cash flows from operations of the
related long-lived assets over the remaining depreciation or amortization
period are expected to be less than the recorded amount of the long-lived
assets, the Company's carrying value of the long-lived assets will be reduced
to their estimated fair value. Management believes that the long-lived assets
on the accompanying balance sheet are appropriately valued.
Inventories
Inventories consist of computer equipment and hardware that are carried at
the lower of cost (determined by the first in, first out method) or market
(replacement cost).
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
F-26
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized.
Comprehensive Loss
Comprehensive loss for years ended December 31, 1997 and 1998 and the six-
month period ended June 30, 1999 is the same as the net loss as presented in
the accompanying statements of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
New Accounting Pronouncement
In June of 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Statement is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Statement is not
expected to have a significant impact on the Company's financial statements.
3. ACQUISITIONS
In January, 1997, the Company acquired all of the outstanding shares of
common stock of MoneyPro in exchange for 1,000 shares of common stock of the
Company with a total fair value of $50,000, based upon recent sales of common
stock to outside parties. The transaction was accounted for as a purchase. The
total consideration exchanged exceeded the net tangible asset value of MoneyPro
by $204,914. This amount was allocated to goodwill and is being amortized over
a period of five years. The results of operations of the acquired business have
been included in the Company's consolidated financial statements from the date
of acquisition.
On May 13, 1997, the Company acquired all of the outstanding shares of
common stock of Basecorp in exchange for 1,111 shares of common stock of the
Company. The transaction was accounted for as a pooling of interests. The
results of operations of Basecorp have been included in the accompanying
financial statements for all periods presented.
4. LICENSE AND DISTRIBUTION AGREEMENT WITH PHOENIX INTERNATIONAL LTD., INC.
("PHOENIX")
On March 5, 1997, the Company granted Phoenix an exclusive right to market,
sell, and license the Company's products internationally and to current Phoenix
customers as well as the nonexclusive right to market, sell, and license the
Company's products to potential Phoenix customers. Phoenix paid the Company
$650,000 for this five-year license. The license fee was being recognized
ratably over the period of the license agreement of five years.
On September 31, 1998, the Company issued 350 shares of common stock of the
Company to Phoenix as consideration to terminate the agreement. Accordingly,
the remaining deferred license fee of $444,167 at September 31, 1998 was
reclassified to common stock in the accompanying December 31, 1998 balance
sheet, and a contract settlement expense of $205,833 for the previous revenue
recognized was included in selling and general expenses in the statement of
operations for years ended December 31, 1998.
F-27
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. ASSET IMPAIRMENT CHARGE
Pursuant to SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", the Company evaluated the
recoverability of the long-lived assets, including intangibles as of December
31, 1998. The Company determined that the future undiscounted cash flows were
below the carrying value of property and equipment, resulting in a non-cash
asset impairment charge of $143,000, included in the accompanying statement of
operations for the year ended December 31, 1998.
6. DEBT
Long-term debt as of December 31, 1997 and 1998 and June 30, 1999 consists
of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Note payable to Sirrom Investments, Inc.
("Sirrom") (the "Sirrom Note"),
interest payable monthly at 14%,
$3,500,000 due January 31, 2003........ $3,500,000 $3,500,000 $3,500,000
Note payable to The InterCept Group,
Inc., interest at 8.5%, payable
monthly, due on demand................. 0 0 415,214
Note payable to American Express Small
Business Services, interest at prime
plus 3.75% (11.75% at December 31,
1998), payable monthly through November
2000................................... 17,427 11,662 9,284
Note payable to Barnett Bank of Central
Florida, interest at 9%, payable
monthly through August 2000............ 11,203 7,461 0
Note payable to AT&T, interest at
17.11%, payable monthly through
September 1999......................... 14,927 6,107 2,035
---------- ---------- ----------
3,543,557 3,525,230 3,926,533
Less current portion.................... (17,520) (19,123) (424,495)
---------- ---------- ----------
3,526,037 3,506,107 3,502,038
Less unamortized original issue
discount............................... (2,120,573) (1,972,304) (1,869,845)
---------- ---------- ----------
$1,405,464 $1,533,803 $1,632,193
========== ========== ==========
</TABLE>
The above long-term debt as of December 31, 1998 is due as follows:
<TABLE>
<S> <C>
1999.......................................................... $ 19,123
2000.......................................................... 6,107
2003.......................................................... 3,500,000
----------
3,525,230
Less current portion.......................................... (19,123)
Original issue discount....................................... (1,972,304)
----------
Total....................................................... $1,533,803
==========
</TABLE>
F-28
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Sirrom Note was issued on December 31, 1997 for $3,500,000 and is
secured by all assets of the Company. As discussed in Note 7, warrants to
purchase up to 3,587 shares at $.01 per share were issued with the Sirrom Note.
The value of the warrants was determined to be $2,120,573. The value was
determined based on the relative fair value of the warrants, based on
management's estimates considering recent sales of common stock to outside
parties. A corresponding amount of the loan proceeds has been allocated to the
warrants and has been accounted for as a debt discount and warrants with
redemption feature in the accompanying balance sheets. The debt discount is
being amortized to interest expense over the term of the Sirrom Note. Total
amortization of the debt discount for the year ended December 31, 1998 and for
the six months ended June 30, 1998 and 1999 was $638,264, $311,108, and
$347,100, respectively.
A guarantee for the Sirrom Note has been provided by a major shareholder of
the Company. As consideration for providing this guarantee the shareholder
entered into a warrant agreement, as discussed in Note 7, whereby the
shareholder will receive warrants to purchase up to 5,088 shares at $.01 per
share. The fair market values of the warrants at December 31, 1997 was
$7,632,000, based on management's estimates considering recent sales of common
stock to outside parties as of December 31, 1997 and has been recorded as a
deferred financing cost and will be amortized as additional interest expense
over the term of the Sirrom Note. Total amortization of the debt discount for
the year ended December 31, 1998 and for the six months ended June 30, 1998 and
1999 was $1,081,724, $527,263, and $588,259, respectively.
7. WARRANTS WITH REDEMPTION FEATURE
In connection with the issuance of the Sirrom Note and the provision of the
guarantee by the major shareholder discussed in Note 6, the Company issued
warrants to purchase 1,470 shares of common stock at a price of $.01 per share.
In the event the Sirrom Note remains outstanding on January 1, 2003, Sirrom and
the major shareholder will receive an additional 7,205 shares of common stock,
based on a graduated scale with six-month increments, as defined. As discussed
in Note 6, the value assigned to these warrants was $9,752,573. Sirrom and the
major shareholder have the option to require the Company to redeem the warrants
for a period of 30 days after maturity of the Sirrom Note in December 2002 at a
purchase price equal to fair market value, as defined. Upon the acquisition of
the Company by Netzee Inc. ("Netzee"), the redemption right terminated.
Accordingly, in periods prior to the Netzee acquisition, the Company has
accounted for the warrants as temporary equity under Emerging Issues Task Force
88-9, "Put Warrants." The excess of the redemption value over the carrying
value is being accrued by periodic charges to accumulated deficit over the
redemption period. This accrual amounted to $652,000 and $326,000 for the year
ended December 31, 1998 and for the six months ended June 30, 1999,
respectively.
In conjunction with the acquisition of the Company by Netzee in September
1999 (Note 12), the Company intends to repay the Sirrom Note prior to December
1999. As such, Sirrom will receive warrants to purchase a total of 1,745
shares, or 13% of the Company, for $.01 per share and the major shareholder
will receive warrants to purchase a total of 2,276 shares, or 14.5% of the
Company, for $.01 per share. The warrants were exercised and the redemption
rights were terminated during September 1999.
8. INCOME TAXES
The Company has incurred a net operating loss ("NOL") since inception. As of
December 31, 1998, the Company has NOL carryforwards of approximately
$4,500,000 available to offset its future income tax liability. The NOL
carryforwards begin to expire in 2011. Due to the uncertainty of the
realizability of the net operating losses, the Company has not reflected in the
accompanying statement of operations an income tax benefit for any period
presented and recorded a valuation allowance equal to the net deferred tax
assets of the
F-29
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company at December 31, 1997 and 1998. Additionally, due to the acquisition
discussed in Note 12, the Company's ability to benefit from certain NOL
carryforwards could be limited under Section 382 of the Internal Revenue Code
when ownership of the Company changes by more than 50%, as defined.
The components of the deferred tax assets and liabilities are as follows as
of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 651,188 $ 1,709,953
Inventory........................................... 0 51,472
Accrued liabilities................................. 5,966 5,966
Property............................................ 6,707 13,413
Research and development............................ 171,952 234,364
Amortization........................................ 34,412 68,824
Other............................................... 60,110 60,110
--------- -----------
Total deferred tax assets.......................... 930,335 2,144,102
Valuation allowance.................................. (930,335) (2,144,102)
--------- -----------
Net deferred tax assets.............................. $ 0 $ 0
========= ===========
</TABLE>
The components of the income tax benefit for the years ended December 31,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Current:
Federal........................................... $ (0) $ (0)
State............................................. (0) (0)
----------- -----------
(0) (0)
----------- -----------
Deferred:
Federal........................................... (1,174,305) (2,033,320)
State............................................. (138,154) (239,214)
----------- -----------
(1,312,459) (2,272,534)
----------- -----------
Total benefit...................................... (1,312,459) (2,272,534)
Valuation allowance............................... 1,312,459 2,272,534
----------- -----------
Total............................................ $ 0 $ 0
=========== ===========
</TABLE>
The following is a summary of the items which resulted in recorded income
taxes to differ from taxes computed using the statutory federal income tax rate
for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Tax provision at federal statutory rate.......................... 34% 34%
Tax provision at state statutory rate............................ 4 4
Effect of valuation allowance.................................... (38) (38)
--- ---
Income tax benefit............................................... 0% 0%
=== ===
</TABLE>
F-30
<PAGE>
DYAD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases an automobile under an operating lease agreement. Future
minimum annual obligations under these leases as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999............................................................... $3,991
2000............................................................... 2,743
------
Total............................................................ $6,734
======
</TABLE>
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31,
1998, management is not aware of any unasserted, asserted, or pending material
litigation or claims against the Company.
10. SUBSCRIPTION RECEIVABLE
During 1996, a shareholder of the Company purchased shares of the Company's
common stock. In consideration of the common shares, the shareholder entered
into a $5,000 nonrecourse, noninterest-bearing note (the "Note"). The
outstanding principal balance of the Note has been reflected as a component of
shareholders' deficit in the accompanying balance sheet.
11. RELATED-PARTY TRANSACTIONS
The Company rents certain office space in Norcross, Georgia, from a related
party.The Company incurred approximately $39,000 and $16,000 of rent expense
related to this lease for the year ended December 31, 1997 and 1998,
respectively.
12. SUBSEQUENT EVENT
On September 3, 1999, the Company was acquired by Netzee. The consideration
received was approximately 618,137 shares of common stock of Netzee,
approximately $900,000 of cash, and assumption of debt, including the Sirrom
Note, of approximately $3,500,000. This acquisition has been accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16.
F-31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Internet Banking Division of
The Bankers Bank:
We have audited the accompanying balance sheet of THE INTERNET BANKING
DIVISION OF THE BANKERS BANK (an unincorporated division of a Georgia chartered
Federal Reserve member bank) as of December 31, 1998 and the related statements
of operations, changes in accumulated deficit, and cash flows for the period
from inception (March 1, 1998) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Internet Banking
Division of The Bankers Bank as of December 31, 1998 and the results of its
operations and its cash flows for the period from inception (March 1, 1998) to
December 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
September 3, 1999
F-32
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $0 and $36,000 at December 31, 1998 and
June 30, 1999, respectively........................ $ 205,750 $ 156,346
Other receivables................................... 214,224 705,095
Deferred expenses................................... 286,500 181,500
---------- ----------
Total current assets.............................. 706,474 1,042,941
PROPERTY AND EQUIPMENT, net........................... 113,563 284,498
CAPITALIZED SOFTWARE DEVELOPMENT COSTS................ 214,145 644,717
---------- ----------
Total assets...................................... $1,034,182 $1,972,156
========== ==========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 314,826 $ 75,778
Deferred revenue.................................... 326,500 251,000
Due to Parent....................................... 849,531 2,494,118
---------- ----------
Total current liabilities......................... 1,490,857 2,820,896
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 7)
ACCUMULATED DEFICIT:
Accumulated deficit................................. (456,675) (848,740)
---------- ----------
Total liabilities and accumulated deficit......... $1,034,182 $1,972,156
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-33
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period For the Period
from Inception from Inception For the Six
(March 1, 1998) to (March 1, 1998) to Months Ended
December 31, 1998 June 30, 1998 June 30, 1999
------------------ ------------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES:
Installation fees........ $ 67,500 $ 10,000 $ 189,000
Monthly license and
support fees............ 9,536 354 46,721
--------- --------- ---------
Total revenues......... 77,036 10,354 235,721
--------- --------- ---------
OPERATING EXPENSES:
Cost of installation,
license, and support.... (112,583) (12,000) (231,934)
Selling, general, and
administrative
expenses................ (416,455) (120,214) (381,756)
Depreciation and
amortization............ (4,673) (1,369) (14,096)
--------- --------- ---------
Total operating
expenses.............. (533,711) (133,583) (627,786)
--------- --------- ---------
NET OPERATING LOSS......... $(456,675) $(123,229) $(392,065)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
STATEMENTS OF CHANGES IN ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Accumulated
Deficit
-----------
<S> <C>
BALANCE at inception, March 1, 1998................................ $ 0
Net loss......................................................... (456,675)
---------
BALANCE, December 31, 1998......................................... (456,675)
Net loss (unaudited)............................................. (392,065)
---------
BALANCE, June 30, 1999 (unaudited)................................. $(848,740)
=========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception For the Period
(March 1, 1998) From Inception For the
to (March 1, 1998) Six Months Ended
December 31, 1998 to June 30, 1998 June 30, 1999
----------------- ---------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................. $(456,675) $(123,229) $ (392,065)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 4,673 1,369 14,096
Changes in assets and
liabilities:
Accounts receivable..... (205,750) (45,250) 49,404
Other receivables....... (214,224) 0 (490,871)
Deferred expenses....... (286,500) (108,000) 105,000
Accounts payable and
accrued expenses....... 314,826 138,955 (239,048)
Deferred revenue........ 326,500 101,000 (75,500)
--------- --------- -----------
Net cash used in
operating
activities........... (517,150) (35,155) (1,028,984)
--------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to capitalized
software development
costs................... (214,145) 0 (430,572)
Purchase of property and
equipment............... (118,236) (15,899) (185,031)
--------- --------- -----------
Net cash used in
investing
activities........... (332,381) (15,899) (615,603)
--------- --------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from
Parent............... 849,531 51,054 1,644,587
--------- --------- -----------
NET CHANGE IN CASH........ 0 0 0
CASH, beginning of
period................... 0 0 0
--------- --------- -----------
CASH, end of period....... $ 0 $ 0 $ 0
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Information as of June 30, 1999 and for the Six Months Ended
June 30, 1998 and 1999 is Unaudited)
1. ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
The Internet Banking Division of The Bankers Bank (the "Company") was
established as an unincorporated division on March 1, 1998 by The Bankers Bank
(the "Parent"), a Georgia chartered Federal Reserve member bank. The Company
was organized to provide business solutions utilizing Internet-enabled
technology to financial institutions and their customers and business customers
in the United States. The Company provides a blend of marketing and technical
expertise to deliver, support, and promote Internet-enabled technology to
financial institutions. The Company has developed a number of Internet banking
services that enable financial institutions to utilize a system of hardware and
software, developed, implemented, and maintained by the Company, through which
customers of the financial institution can use commonly available personal
computer software to communicate electronically with the financial institution
and perform certain electronic home banking, bill paying, and other on-line
banking transactions.
The accompanying financial statements present the financial position,
results of operations, and cash flows of the Company as if it were a separate
entity for all periods presented. Accordingly, the accompanying financial
statements for the period from inception (March 1, 1998) to December 31, 1998,
the period from inception (March 1, 1998) to June 30, 1998, and the six month
period ended June 30, 1999 include certain administrative costs and expenses
which have been allocated to the Company by the Parent. The costs have been
allocated on a pro rata basis based primarily on employee headcount or incurred
time and services and represent management's best estimates of what support
costs would have been had the Company been operated as a separate entity. The
Parent performs services and incurs certain costs for the Company. Services
provided include tax, treasury, risk management, employee benefits, legal, data
processing, application of cash receipts, and other general corporate services.
Corporate costs of Parent services totaling $145,670, $60,006, and $236,596
have been allocated to the Company during the period from inception (March 1,
1998) to December 31, 1998, the period from inception (March 1, 1998) to June
30, 1998, and the six month period ended June 30, 1999, respectively, and are
included in selling, general, and administrative expenses in the accompanying
statements of operations. In the opinion of management, the method of
allocating these costs is reasonable. However, the costs of services charged to
the Company are not necessarily indicative of the costs that would have been
incurred if the Company had performed these functions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Unaudited Financial Information
The financial statements as of June 30, 1999 and for the period from
inception (March 1, 1998) to June 30, 1998, and for the six months ended June
30, 1999 are unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements for these interim periods
have been included. The results of the interim periods are not necessarily
indicative of the results to be obtained for a full year.
F-37
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
The Parent holds legal title to all property and equipment. These assets are
stated at cost. Major property additions, replacements, and betterments are
capitalized, while maintenance and repairs which do not extend the useful lives
of these assets are expensed as incurred. Depreciation is provided using the
straight-line method for financial reporting purposes. The property and
equipment primarily consist of leasehold improvements and are depreciated over
the remaining term of the lease.
Capitalized Software Development Costs
Research and development costs are expensed as incurred. Computer software
development costs are charged to research and development expense until
technological feasibility of the software is established; after which,
remaining software production costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting For
Computer Software to be Sold, Leased, or Otherwise Marketed." Amortization of
capitalized software-development costs begins as products are made available
for sale or as the related product is put into use with annual amortization
equal to the greater of the amount computed using the ratio that current gross
revenues bear to the total of current and anticipated future gross revenues for
the product or the straight-line method over the remaining economic life of the
product, not to exceed five years. Currently, none of the developed software is
available for general release and, as such, is not being amortized.
Revenue Recognition
The Company's revenue consists of revenues from the licensing of software
and fees from consulting, implementation, training, and maintenance services.
The Company recognizes revenue in accordance with the provisions of the
American Institute of Certified Public Accountants Statement of Position No.
97-2, "Software Revenue Recognition." The Company recognizes the one-time
nonrefundable implementation fee upon completion of the installation of the
software. License revenues and maintenance fees related to customer maintenance
and support are billed together and recognized ratably over the term of the
software license and support agreement, which is typically three years.
Amounts that have been prepaid or invoiced but that do not yet qualify for
recognition under the Company's revenue recognition policy are reflected as
deferred revenues.
Deferred Revenue and Deferred Expenses
Deferred revenue represents the liability for advanced billings to customers
primarily related to Internet banking software and hardware implementation and
training. Such amounts are recognized upon completion. Deferred expenses
represent services provided to the Company's customers by third parties. These
third parties provide service related to Internet banking software and hardware
implementation, training and conversion of the financial institution's customer
data. Such amounts are recognized in expense when the related revenue is
recognized.
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
F-38
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair Value Financial Instruments
The fair value of instruments classified as current assets or liabilities,
including accounts receivable and accounts payable, approximate carrying value
due to the short-term maturity of the instruments.
Long-Lived Assets
The Company periodically reviews the values assigned to long-lived assets to
determine if any impairments have occurred. Management believes that the long-
lived assets on the accompanying balance sheets are appropriately valued.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following as of December
31, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Accounts payable............................................ $294,826 $75,778
Accrued license fee......................................... 20,000 0
-------- -------
$314,826 $75,778
======== =======
</TABLE>
Funding of Operations by Parent
The Parent funds the Company's operations as necessary. Transfers of
operating funds between the Parent and the Company occur on a noninterest-
bearing basis, with the net amounts of these transfers reflected in due to the
Parent in the accompanying balance sheets. The net balance in due to Parent of
$849,531 and $2,494,118 at December 31, 1998 and June 30, 1999, respectively,
is classified as a component of current liabilities in the accompanying balance
sheets.
Income Taxes
The Company uses the liability method of accounting for income taxes, as set
forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized.
Comprehensive Loss
Comprehensive loss for the period from inception (March 1, 1998) to December
31, 1998, the period from inception (March 1, 1998) to June 30, 1998, and the
six month period ended June 30, 1999 is the same as the net loss as presented
in the accompanying statements of operations.
Advertising and Sales Promotion Costs
Advertising and sales promotion costs are expensed as incurred and totaled
$23,037, $54,692, and $50 from the period from inception (March 1) to June 30,
1998, the period from inception (March 1) to December 31, 1998, and the six
month period ended June 30, 1999, respectively.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards
F-39
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
for derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal quarters
for all fiscal years beginning after June 15, 2000. The statement is not
expected to have a significant impact on the Company's financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and June 30, 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Furniture, fixtures, and leasehold improvements.......... $ 93,771 $150,391
Computer equipment....................................... 20,482 129,292
Computer software........................................ 3,983 23,584
-------- --------
118,236 303,267
Less accumulated depreciation............................ (4,673) (18,769)
-------- --------
Property and equipment, net.............................. $113,563 $284,498
======== ========
</TABLE>
Depreciation expense for the period from inception (March 1, 1998) to
December 31, 1998, the period from inception (March 1, 1998) to June 30, 1998,
and the six month period ended June 30, 1999 was $4,673, $1,369, and $14,096,
respectively.
4. RELATED-PARTY TRANSACTIONS
On September 3, 1999, the Company was acquired by Netzee, Inc. ("Netzee"),
as discussed in Note 8. The Internet Banking Division of The Independent
Bankers Bank ("TIB") was also acquired by Netzee on this date. The Company and
TIB have conducted business together since the Company's inception (March 1,
1998). The Company paid TIB $40,000 for the period from inception (March 1,
1998) to December 31, 1998 for the right to share outsourced financial
institution customer data conversion services, for which TIB has an agreement
with a third party. This fee is included in cost of implementation,
maintenance, and usage on the accompanying statements of operations for the
period from inception (March 1, 1998) to December 31, 1998.
Actual fees for conversion services are billed and paid through TIB. The
Company incurred $54,000, $12,000, and $109,000 in conversion services expense
during the period from inception (March 1, 1998) to December 31, 1998, the
period from inception (March 1, 1998) to June 30, 1998, and the six month
period ended June 30, 1999, respectively. At December 31, 1998 and June 30,
1999, the Company owed TIB $25,710 and $74,386, respectively, for conversion
services performed by the third party.
On January 1, 1999, the Company entered into a product development agreement
with TIB and an independent developer (the "Developer"), in which the Developer
is developing two commercial cash management systems for the Company and TIB,
who will share ownership and development costs of such systems equally. The
actual development began in 1998. The Company pays the Developer for all costs
incurred and TIB reimburses the Company for half of the amounts. The Company
accounts for the computer development costs in accordance with SFAS No. 86, as
discussed in Note 1. At December 31, 1998 and June 30, 1999, TIB owed the
Company $214,224 and $704,893, respectively, for development costs incurred to
date. This receivable is included in other receivables on the accompanying
balance sheets.
5. INCOME TAXES
The Company was included in the consolidated federal income tax return of
the Parent for the fiscal year ended December 31, 1998. The Company's provision
for income tax benefit in the accompanying
F-40
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
statements of operations reflect the federal and state income taxes calculated
as if the Company was a stand-alone entity. The Company has incurred a net
operating loss ("NOL") since inception. As of December 31, 1998, the Company
has NOL carryforwards of approximately $416,000 available to offset its future
income tax liability. The NOL carryforwards begin to expire in 2018. Due to the
uncertainty of the realizability of the net operating losses, the Company has
not reflected these carryforwards in the accompanying statements of operations
on a stand-alone basis an income tax benefit for any period presented and
recorded a valuation allowance equal to the net deferred tax assets of the
Company at December 31, 1998.
The components of the income tax benefit for the period from inception
(March 1, 1998) to December 31, 1998 are as follows:
<TABLE>
<S> <C>
Current:
Federal...................................................... $ 0
State........................................................ 0
---------
0
Deferred:
Federal...................................................... (155,087)
State........................................................ (18,246)
---------
(173,333)
Change in valuation allowance.................................. 173,333
---------
Total...................................................... $ 0
=========
</TABLE>
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate for
the period from inception (March 1, 1998) to December 31, 1998:
<TABLE>
<S> <C>
Tax benefit at statutory rate....................................... (34)%
Effect of:
State income tax, net............................................. (4)
Valuation allowance............................................... 38
---
Income tax benefit.................................................. 0 %
===
</TABLE>
Deferred tax assets and liabilities are determined based on the difference
between the financial accounting and tax basis of assets and liabilities.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 158,133
Deferred revenue............................................. 124,070
---------
282,203
---------
Deferred tax liabilities:
Deferred expenses............................................ (108,870)
---------
Net deferred tax assets before valuation allowance............. 173,333
Valuation allowance............................................ (173,333)
---------
Net deferred tax assets........................................ $ 0
=========
</TABLE>
F-41
<PAGE>
THE INTERNET BANKING DIVISION OF THE BANKERS BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. EMPLOYEE BENEFIT PLANS
The Parent sponsors a 401(k) profit sharing plan (the "Plan"), a defined
contribution plan covering substantially all employees of the Company. Under
the Plan's deferred compensation arrangement, eligible employees who elect to
participate in the Plan may contribute between 1% and 15% of eligible
compensation, as defined, to the Plan. The Parent is required to match employee
contributions up to 3%. During the period from inception (March 1, 1998) to
December 31, 1998, matching contributions to company employees totaled $2,066
and are included as a component of selling, general, and administrative
expenses in the accompanying statements of operations.
7. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases certain office space under an operating lease agreement.
Future minimum annual obligations under this lease as of December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999................................. $51,380
2000................................. 22,890
-------
Total.............................. $74,270
=======
</TABLE>
Rent expense for the period from inception (March 1, 1998) to December 31,
1998, the period from inception (March 1, 1998) to June 30, 1998, and the six
month period ended June 30, 1999 was $14,000, $5,600, and $19,845,
respectively.
Product Liability
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in new Internet
banking systems after commencement of commercial release or, if discovered,
that the Company will be able to successfully correct such errors in a timely
manner or at all. The occurrence of errors and failures in the Company's
products could result in loss of or delay in the market acceptance of the
Company's Internet banking systems, and alleviating such errors and failures
could require significant expenditure of capital and other resources by the
Company. The consequences of such errors and failures could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31,
1998, management is not aware of any unasserted, asserted, or pending material
litigation or claims against the Company.
8. SUBSEQUENT EVENT
On September 3, 1999, the Company was acquired by Netzee, Inc. ("Netzee")
for 1,361,000 shares of Netzee's stock. The acquisition of the Company was
accounted for as a purchase under Accounting Principles Board Opinion No. 16.
F-42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Internet Banking Division of
The Independent BankersBank:
We have audited the accompanying balance sheets of THE INTERNET BANKING
DIVISION OF THE INDEPENDENT BANKERSBANK (an unincorporated division of a Texas
chartered Federal Reserve member bank) as of December 31, 1997 and 1998 and the
related statements of operations, changes in accumulated deficit, and cash
flows for the period from inception (February 1, 1997) to December 31, 1997,
and the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Internet Banking
Division of The Independent BankersBank as of December 31, 1997 and 1998 and
the results of its operations and its cash flows for the period from inception
(February 1, 1997) to December 31, 1997 and the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
September 3, 1999
F-43
<PAGE>
THE INTERNET BANKING DIVISION OF
THE INDEPENDENT BANKERSBANK
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------- June 30,
1997 1998 1999
--------- --------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable ...................... $ 5,054 $ 91,520 $ 116,083
Inventory ................................ 15,300 30,885 31,635
--------- --------- ---------
Total current assets.................... 20,354 122,405 147,718
PROPERTY AND EQUIPMENT, net................. 4,721 23,111 30,283
CAPITALIZED SOFTWARE DEVELOPMENT COSTS (Note
2)......................................... 0 214,145 644,717
--------- --------- ---------
Total assets............................ $ 25,075 $ 359,661 $ 822,718
========= ========= =========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accrued expenses.......................... $ 1,060 $ 7,285 $ 7,285
Accounts payable ......................... 0 214,224 704,894
Deferred revenue.......................... 22,625 98,250 57,000
Due to Parent............................. 179,761 680,974 816,314
--------- --------- ---------
Total current liabilities............... 203,446 1,000,733 1,585,493
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 6 and
7)
ACCUMULATED DEFICIT:
Accumulated deficit....................... (178,371) (641,072) (762,775)
--------- --------- ---------
Total liabilities and accumulated
deficit................................ $ 25,075 $ 359,661 $ 822,718
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-44
<PAGE>
THE INTERNET BANKING DIVISION OF
THE INDEPENDENT BANKERSBANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
From Inception For the Year For the Six Months
(February 1, 1997) Ended Ended June 30,
to December 31, December 31, --------------------
1997 1998 1998 1999
------------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Installation fees...... $ 0 $ 273,747 $ 197,415 $ 224,859
Monthly license and
support fees.......... 0 158,513 46,950 111,435
--------- --------- --------- ---------
Total revenues....... 0 432,260 244,365 336,294
--------- --------- --------- ---------
OPERATING EXPENSES:
Cost of installation,
license, and support.. 0 (433,820) (176,214) (250,445)
Selling, general and
administrative
expenses.............. (173,679) (508,559) (222,488) (309,808)
Depreciation and
amortization.......... (4,692) (6,582) (3,081) (6,744)
--------- --------- --------- ---------
Total operating
expenses............ (178,371) (948,961) (401,783) (566,997)
--------- --------- --------- ---------
Other Income........... 0 54,000 0 109,000
--------- --------- --------- ---------
NET OPERATING LOSS....... $(178,371) $(462,701) $(157,418) $(121,703)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
THE INTERNET BANKING DIVISION OF
THE INDEPENDENT BANKERSBANK
STATEMENT OF CHANGES IN ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Accumulated
(Deficit)
-----------
<S> <C>
BALANCE, February 1, 1997.......................................... $ 0
Net loss......................................................... (178,371)
---------
BALANCE, December 31, 1997......................................... (178,371)
Net loss......................................................... (462,701)
---------
BALANCE, December 31, 1998......................................... (641,072)
Net loss (unaudited)............................................. (121,703)
---------
BALANCE, June 30, 1999 (unaudited)................................. $(762,775)
=========
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
THE INTERNET BANKING DIVISION OF
THE INDEPENDENT BANKERSBANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception For the Six Months
February 1, 1997 For the Ended June 30
to Year Ended -----------------------
December 31, 1997 December 31, 1998 1998 1999
----------------- ----------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............. $(178,371) $(462,701) $(157,418) $(121,703)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization....... 4,692 6,582 3,081 6,744
Changes in assets
and liabilities:
Accounts
receivable........ (5,054) (86,466) (117,362) (24,563)
Accrued expenses... 1,060 6,225 0 0
Inventory.......... (15,300) (15,585) 7,665 (750)
Deferred revenues.. 22,625 75,625 (22,625) (41,250)
--------- --------- --------- ---------
Net cash (used in)
provided by
operating
activities....... (170,348) (476,320) (286,659) (181,522)
--------- --------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to
capitalized software
development costs... 0 (214,145) 0 (430,572)
Accounts payable
related to funding
of software
development......... 0 214,224 0 490,670
Purchase of property
and equipment....... (9,413) (24,972) (11,681) (13,916)
--------- --------- --------- ---------
Net cash used in
investing
activities....... (9,413) (24,893) (11,681) (46,182)
--------- --------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net proceeds from
Parent.............. 179,761 501,213 298,340 135,340
--------- --------- --------- ---------
NET CHANGE IN CASH..... 0 0 0 0
CASH, beginning of
period................ 0 0 0 0
--------- --------- --------- ---------
CASH, end of period.... $ 0 $ 0 $ 0 $ 0
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(Information as of June 30, 1999 and for the Six Months Ended
June 30, 1998 and 1999 is Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
The Internet Banking Division of The Independent BankersBank (the "Company")
was established as an unincorporated division on February 1, 1997. The Company
was organized by The Independent BankersBank (the "Parent"), a Texas chartered
Federal reserve member bank to provide Internet banking solutions and internet
banking services to other banker's associations and independent financial
institutions in the United States. The Company provides a blend of marketing
and technical expertise to deliver, support, and promote Internet-enabled
technology to financial institutions. The Company has developed a number of
Internet banking services that enable financial institutions to utilize a
system of hardware and software, developed, implemented, and maintained by the
Company, through which customers of the financial institution can use commonly
available personal computer software to communicate electronically with the
financial institution and perform certain electronic home banking, bill paying,
and other on-line banking transactions.
The accompanying financial statements present the financial position,
results of operations, and cash flows of the Company as if it were a separate
entity for all periods presented. Accordingly, the accompanying financial
statements for the period of inception (February 1, 1997) to December 31, 1997,
the year ended December 31, 1998, and the six month periods ended June 30, 1998
and 1999 include certain administrative costs and expenses, which have been
allocated to the Company by Parent. The costs have been allocated on a pro rata
basis based primarily on employee headcount or incurred time and services and
represent management's best estimates of what support costs would have been had
the Company been operated as a separate entity. The Parent performs services
and incurs certain costs for the Company. Services provided include tax,
treasury, risk management, employee benefits, legal, data processing,
application of cash receipts, and other general corporate services. Corporate
costs of Parent services totaling $85,376, $116,079, $55,682, and $70,416 have
been allocated to the Company during the period from inception (February 1,
1997) to December 31, 1997, the year ending December 31, 1998, and the six
month periods ended June 30, 1998 and 1999, respectively, and are included in
selling, general, and administrative expenses in the accompanying statements of
operations. In the opinion of management, the method of allocating these costs
is reasonable. However, the costs of services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the
Company had performed these functions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Unaudited Financial Information
The financial statements as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 are unaudited; however, in the opinion of management,
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
F-48
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
Inventory
The Company maintains finished goods, comprised of hardware that are
provided to banks as part of the implementation process. These inventories are
valued at the lower of cost or market, cost being determined on the first-in,
first-out ("FIFO") basis.
Property and Equipment
The Parent holds legal title to all property and equipment. These assets are
stated at cost. Major property additions, replacements, and betterments are
capitalized, while maintenance and repairs which do not extend the useful lives
of these assets are expensed as incurred. Depreciation is provided using the
straight-line method for financial reporting purposes. The property and
equipment primarily consists of furniture and office equipment and is
depreciated in five years.
Capitalized Software Development Costs
Research and development costs are expensed as incurred. Computer software
development costs are charged to research and development expense until
technological feasibility of the software is established; after which,
remaining software production costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting For
Computer Software to be Sold, Leased, or Otherwise Marketed." Amortization of
capitalized software-development costs begins as products are made available
for sale or as the related product is put into use with annual amortization
equal to the greater of the amount computed using the ratio that current gross
revenues bear to the total of current and anticipated future gross revenues for
the product or the straight-line method over the remaining economic life of the
product, not to exceed five years. Currently none of the developed software is
available for general release and, as such, is not being amortized.
Revenue Recognition
The Company's revenue consists of revenues from the licensing of software
and fees from consulting, implementation, training, and maintenance services.
The Company recognizes revenue in accordance with the provisions of American
Institute of Certified Public Accountants Statement of Position ("SOP") No. 97-
2, "Software Revenue Recognition." The company recognizes the one-time non-
refundable implementation fee upon completion of the installation of the
software. License revenues and maintenance fees related to customer maintenance
and support are billed together and recognized ratably over the term of the
software license and support agreement, which is typically three years.
Revenues from services fees are recognized as the services are performed.
Amounts that have been prepaid or invoiced but that do not yet qualify for
recognition under the Company's revenue recognition policy are reflected as
deferred revenues.
Deferred Revenue and Deferred Expenses
Deferred revenue represents the liability for advanced billings to customers
primarily related to internet banking software and hardware implementation and
training. Such amounts are recognized as revenue ratably
F-49
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
over the period of the applicable agreement. Deferred expenses represent
services provided to the Company's customers by third parties. These third
parties provide services related to Internet banking software and hardware
implementation training and conversion of the financial institution's customer
data. Such amounts are recognized in connection with the recognition of related
revenues.
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
Fair Value Financial Instruments
The fair value of instruments classified as current assets or liabilities,
including accounts receivable and accounts payable, approximate carrying value
due to the short-term maturity of the instruments.
Long-Lived Assets
The Company periodically reviews the values assigned to long-lived assets to
determine if any impairments have occurred. Management believes that the long-
lived assets on the accompanying balance sheets are appropriately valued.
Funding of Operations by Parent
Parent funds the Company's operations as necessary. Transfers of operating
funds between Parent and the Company occur on a noninterest-bearing basis, with
the net amounts of these transfers reflected in due to Parent in the
accompanying balance sheets. The net balance is due to Parent of $179,761,
$680,974, and $816,314 at December 31, 1997, December 31, 1998, and June 30,
1999, respectively, is classified as a component of current liabilities in the
accompanying balance sheets.
Income Taxes
The Company uses the liability method of accounting for income taxes, as set
forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized.
Comprehensive Loss
Comprehensive loss for the period from inception (February 1, 1997) to
December 31, 1997, the year ended December 31, 1998, and the six month periods
ended June 30, 1998 and 1999 is the same as the net loss as presented in the
accompanying statements of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal quarters
for all fiscal years beginning after June 15, 2000. The statement is not
expected to have a significant impact on the Company's financial statements.
Advertising and Sales Promotion Costs
Advertising and sales promotion costs are expensed as incurred and totaled
$10,780, $8,613, $5,321 and $3,576 for the period from inception (February 1,
1997) to December 31, 1998, and the six month periods ended June 30, 1998 and
1999, respectively.
F-50
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998, and June 30, 1999
consist of the following:
<TABLE>
<CAPTION>
December 31
--------------- June 30,
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Furniture and office equipment.................... $9,413 $34,385 $48,301
Less accumulated depreciation................... (4,692) (11,274) (18,018)
------ ------- -------
Property and equipment, net....................... $4,721 $23,111 $30,283
====== ======= =======
</TABLE>
4. INCOME TAXES
The Company was included in the consolidated federal income tax return of
the Parent for the fiscal years ended December 31, 1997 and 1998. The Company's
provision for income tax benefit in the accompanying statements of operations
reflects the federal income tax calculated as if the Company was a stand-alone
entity. At December 31, 1998, the Company has incurred a net operating loss
("NOL") since inception of approximately $462,700. As of December 31, 1998, the
Company has NOL carryforwards available to offset its future income tax
liability. The NOL carryforwards begin to expire in 2012. Due to the
uncertainty of the realizability of the net operating losses, the Company has
not reflected these carryforwards in the accompanying statement of operations
on a stand-alone basis an income tax benefit for any period presented and has
recorded a valuation allowance equal to the net deferred tax assets of the
Company at December 31, 1997 and 1998. The Company is a Texas chartered bank
and is not subject to state income taxes.
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate for
the period from inception (February 1, 1997) to December 31, 1997 and for the
year ended December 31, 1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Tax provision at federal statutory rate.......................... 34% 34%
Valuation allowance.............................................. (34) (34)
--- ---
0% 0%
=== ===
</TABLE>
The components of the deferred tax asset for the period from inception
(February 1, 1997) to December 31, 1997 and for the year ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Deferred income tax benefit:
Net operating loss carryforward......................... $60,646 $157,318
Accrued liabilities..................................... 360 2,477
Deferred revenue........................................ 7,694 33,405
------- --------
Deferred tax asset.................................. 68,700 193,200
Valuation allowance....................................... (68,700) (193,200)
------- --------
Net deferred tax assets............................. $ 0 $ 0
======= ========
</TABLE>
5. EMPLOYEE BENEFIT PLAN
Parent sponsors the Company's 401(k) plan (the "Plan"), a defined
contribution plan covering substantially all employees of the Company. To
become eligible, employees must be with the company at least
F-51
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
six months at the time of the Plan enrollment date. These enrollment dates
occur on January 1 and July 1 of each year. Eligible employees who elect to
participate in the Plan may contribute between 1% and 15% of eligible
compensation, as defined by the Plan. Employee contribution matching is
determined by the Parent as elective deferral contributions are made. These
matches are discretionary up to 5% of the employees' compensation. Expenses
relating to the matching contributions are allocated to the Company. During the
period from inception (February 1, 1997) to December 31, 1997, the year ended
December 31, 1998, and the six month periods end June 30, 1998 and 1999. Parent
matching totals were $0, $3,951, $0, and $8,195, respectively, and is included
as a component of selling, general, and administrative expenses in the
accompanying statements of operations.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
Internet Banking Division currently subleases space from the Parent,
however, there is not a signed agreement for future commitments. The Company
has no lease obligations and currently has no lease commitments outstanding.
The total rent expense for the period from inception (February 1, 1997) to
December 31, 1997, the year ended December 31, 1998, and the six month periods
ended June 30, 1998 and 1999 is $1,015, $8,036, $1,427, and $4,557,
respectively.
Product Liability
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in new Internet
banking systems after commencement of commercial release or, if discovered,
that the Company will be able to successfully correct such errors in a timely
manner or at all. The occurrence of errors and failures in the Company's
products could result in loss of or delay in the market acceptance of the
Company's Internet banking systems, and alleviating such errors and failures
could require significant expenditure of capital and other resources by the
Company. The consequences of such errors and failures could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31,
1998, management is not aware of any unasserted, asserted, or pending material
litigation or claims against the Company.
7. RELATED-PARTY TRANSACTIONS
On September 3, 1999, the Company was acquired by Netzee, Inc. ("Netzee"),
as discussed in Note 8. The Internet Banking Division of The Bankers Bank of
Georgia ("BB-GA") was also acquired by Netzee on this date. The Company and BB-
GA have conducted business together since the BB-GA'S inception (March 1,
1998). The Company has received $40,000 for the period from March 1, 1998
through December 31, 1998 from BB-GA, for the right of BB-GA to share
outsourced financial institution customer data conversion services, for which
the Company has an agreement with a third party to perform. This fee is
included in other income revenues on the accompanying statement of operations
for the year end December 31, 1998.
F-52
<PAGE>
THE INTERNET BANKING DIVISION OF THE INDEPENDENT BANKERSBANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
The conversion service provider bills the company actual fees for conversion
services which are billed and paid through BB-GA. The Company recognized $0,
$54,000, $12,000, and $109,000 in conversion services revenues during the
period from inception (February 1, 1997) to December 31, 1997, the year ended
December 31, 1998, and the six month periods ended June 30, 1998 and 1999,
respectively. At December 31, 1998 and June 30, 1999, the Company had a
receivable from BB-GA of $25,710 and $74,386, respectively, for conversion
services performed by the third party.
On January 1, 1999, the Company entered into a product development agreement
with BB-GA and an independent developer (the "Developer"), in which the
Developer is developing two commercial cash management systems for the Company
and BB-GA, who will share ownership and development costs of such systems
equally. The actual commencement of the development began in 1998. The Company
reimburses BB-GA for half of the amounts incurred by Developer for contractual
services performed. The Company accounts for the capitalized software
development costs in accordance with SFAS No. 86, as discussed in Note 1. As of
December 31, 1997 and 1998 and June 30, 1999, the Company had a payable of $0,
$214,224, and $704,893, respectively, to BB-GA for development costs incurred
to date. This payable is stated separately on the accompanying balance sheets.
8. SUBSEQUENT EVENT
On September 3, 1999, the Company was acquired by Netzee, Inc., ("Netzee"),
for 1,361,000 shares of Netzee's stock. The acquisition of the Company was
accounted for as a purchase under Accounting Principles Board Opinion No. 16.
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Call Me Bill, LLC:
We have audited the accompanying balance sheets of CALL ME BILL, LLC (a
Kentucky limited liability company) as of December 31, 1997 and 1998 and the
related statements of operations, changes in members' deficit, and cash flows
for the period from inception (July 31, 1997) to December 31, 1997 and for the
year ended December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Call Me Bill, LLC as of
December 31, 1997 and 1998 and the results of its operations and its cash flows
for the period from inception (July 31, 1997) to December 31, 1997 and for the
year ended December 31, 1998 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Atlanta, Georgia
September 3, 1999
F-54
<PAGE>
CALL ME BILL, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-------------------- June 30,
1997 1998 1999
--------- --------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................... $ 386 $ 13,989 $ 23,358
Accounts receivable, net of allowance for
doubtful accounts of $0, $7,500, and $7,500
at December 31, 1997, December 31, 1998, and
June 30, 1999, respectively................. 750 76,437 114,076
Other assets................................. 1,868 7,368 4,535
--------- --------- ---------
Total current assets..................... 3,004 97,794 141,969
PROPERTY AND EQUIPMENT, net.................. 73,825 93,234 147,796
OTHER ASSETS:
Organizational costs, net.................. 5,181 0 0
--------- --------- ---------
Total assets........................... $ 82,010 $ 191,028 $ 289,765
========= ========= =========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses...... $ 3,711 $ 27,719 $ 48,458
Deferred revenues.......................... 15,813 193,844 278,352
--------- --------- ---------
Total current liabilities................ 19,524 221,563 326,810
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6 and 7)
MEMBERS' DEFICIT:
Members' equity............................ 176,367 449,921 649,921
Accumulated deficit........................ (113,881) (480,456) (686,966)
--------- --------- ---------
Total members' deficit................... 62,486 (30,535) (37,045)
--------- --------- ---------
Total liabilities and members'
deficit............................... $ 82,010 $ 191,028 $ 289,765
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-55
<PAGE>
CALL ME BILL, LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six For the Six
For the Period From Inception For the Months Ended Months Ended
(July 31, 1997) to Year Ended June 30, June 30,
December 31, 1997 December 31, 1998 1998 1999
----------------------------- ----------------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Monthly transaction
fees................. $ 3,687 $ 33,432 $ 9,153 $ 90,536
Implementation fees... 0 28,285 3,750 73,870
--------- --------- --------- ---------
Total revenues...... 3,687 61,717 12,903 164,406
OPERATING EXPENSES:
Cost of transactions
and implementations.. (1,835) (27,732) (7,609) (23,688)
Selling, general, and
administrative
expenses............. (111,337) (378,122) (150,237) (335,426)
Depreciation and
amortization......... (4,397) (22,987) (10,438) (13,130)
--------- --------- --------- ---------
Total operating
expenses........... (117,569) (428,841) (168,284) (372,244)
--------- --------- --------- ---------
OPERATING LOSS.......... (113,882) (367,124) (155,381) (207,838)
OTHER INCOME............ 0 0 0 747
INTEREST INCOME......... 1 549 130 581
--------- --------- --------- ---------
NET OPERATING LOSS...... $(113,881) $(366,575) $(155,251) $(206,510)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
CALL ME BILL, LLC
STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
<TABLE>
<CAPTION>
Total
Members' Accumulated Members'
Equity Deficit Deficit
-------- ----------- ---------
<S> <C> <C> <C>
BALANCE at inception, July 31, 1997............ $ 0 $ 0 $ 0
Contribution for membership units............ 176,367 0 176,367
Net loss..................................... 0 (113,881) (113,881)
-------- --------- ---------
BALANCE, December 31, 1997..................... 176,367 (113,881) 62,486
Contribution for membership units............ 273,554 0 273,554
Net loss..................................... 0 (366,575) (366,575)
-------- --------- ---------
BALANCE, December 31, 1998..................... 449,921 (480,456) (30,535)
Contribution for membership units
(unaudited)................................. 200,000 0 200,000
Net loss (unaudited)......................... 0 (206,510) (206,510)
-------- --------- ---------
BALANCE, June 30, 1999 (Unaudited)............. $649,921 $(686,966) $ (37,045)
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
CALL ME BILL, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the For the Six Months
From Inception Year Ended Ended June 30
(July 31, 1997) to December 31, -----------------------
December 31, 1997 1998 1998 1999
------------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............. $(113,881) $(366,575) $(155,251) $(206,510)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization....... 4,397 22,987 10,438 13,130
Bad debt expense.... 0 7,500 0 0
Gain on disposal of
fixed assets....... 0 0 0 (747)
Changes in assets and
liabilities:
Accounts
receivable......... (750) (83,187) (3,570) (37,639)
Other assets........ (1,868) (5,500) (735) 2,833
Accounts payable and
accrued expenses... 3,711 24,008 12,135 20,739
Deferred revenues... 15,813 178,031 20,376 84,508
--------- --------- --------- ---------
Net cash used in
operating
activities........ (92,578) (222,736) (116,607) (123,686)
--------- --------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Organizational
costs............... (6,258) 0 0 0
Purchases of property
and equipment, net.. (77,145) (37,215) (17,513) (66,945)
--------- --------- --------- ---------
Net cash used in
operating
activities........ (83,403) (37,215) (17,513) (66,945)
--------- --------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Contributions from
members............. 176,367 273,554 136,257 200,000
--------- --------- --------- ---------
NET CHANGE IN CASH..... 386 13,603 2,137 9,369
CASH, beginning of
period................ 0 386 386 13,989
--------- --------- --------- ---------
CASH, end of period.... $ 386 $ 13,989 $ 2,523 $ 23,358
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
CALL ME BILL, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
Call Me Bill, LLC (the "Company") was organized on July 31, 1997 by Fort
Knox National Company ("FKNC", 60% member owner) and Military Services
Incorporated ("MSI", 40% member owner), both Kentucky corporations. The Company
was organized for providing business solutions utilizing Internet and telephone
technology to financial institutions and real estate property management
companies and their customers in the United States. The Company provides a
blend of marketing and technical expertise to deliver, support, and promote
Internet and telephone technology to financial institutions and property
management companies. The Company has developed a number of Internet and
telephone banking services that enable financial institutions and property
management companies to utilize a system of hardware and software, developed,
implemented, and maintained by the Company, through which customers can use
commonly available personal computer software and telephone technology to
perform certain electronic home banking, bill paying, and other on-line banking
transactions.
The Company's Articles of Organization state that the termination date of
the Company is December 31, 2025, unless sooner dissolved in a manner provided
by law.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Unaudited Financial Information
The financial statements for the six months ended June 30, 1998 and 1999 are
unaudited; however, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
the unaudited financial statements for these interim periods have been
included. The results of interim periods are not necessarily indicative of the
results to be obtained for a full year.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed as incurred.
Depreciation is provided using the straight-line method for financial reporting
purposes. The property and equipment primarily consist of computer hardware and
software and are depreciated over a five-year period.
Revenue Recognition
The Company's functions allow customers to process transactions utilizing
the Company's software. The Company's revenues are generated through initial
installation fees and recurring transaction fees. Management
F-59
<PAGE>
CALL ME BILL, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
believes that the prices charged for both the installation fees and the
recurring transaction fees are based on the relative fair value of the related
services provided. Accordingly, the Company recognized the installation and
recurring transaction fees as the related services are provided. Revenues
related to the installation fees are recognized upon completion of the
installation. Transaction fees are recognized on a monthly basis as earned.
Deferred Revenues
Deferred revenues represent implementation fees and annual service fees
collected but not recognized.
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
Fair Value of Financial Instruments
The fair values of instruments classified as current assets or liabilities,
including accounts receivable and accounts payable, approximate carrying value
due to the short-term maturity of the instruments.
Long-Lived Assets
The Company periodically reviews the values assigned to long-lived assets
to determine whether any impairments have occurred. Management believes that
the long-lived assets on the accompanying balance sheets are appropriately
valued.
Income Taxes
The Company is a limited liability company and is considered a partnership
for income tax purposes, and thus, no income tax benefit has been recorded in
the financial statements. Losses of the Company are considered on the members'
respective returns.
Comprehensive Losses
Comprehensive loss for the period from inception (July 31, 1997) to
December 31, 1997, the year ended December 31, 1998, and the six-month periods
ended June 30, 1998 and 1999 is the same as the net loss as presented in the
accompanying statements of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal quarters
for all fiscal years beginning after June 15, 2000. Adoption of the statement
is not expected to have a significant impact on the Company's financial
statements.
F-60
<PAGE>
CALL ME BILL, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 and June 30, 1999
consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Computer hardware............................... $57,639 $ 60,048 $ 69,093
Computer software............................... 17,124 47,638 42,500
Telephone equipment............................. 2,382 2,382 20,008
Construction in progress........................ 0 3,020 48,212
------- -------- --------
77,145 113,088 179,813
Less accumulated depreciation................... (3,320) (19,854) (32,017)
------- -------- --------
Property and equipment, net..................... $73,825 $ 93,234 $147,796
======= ======== ========
</TABLE>
Depreciation expense for the period from inception (July 31, 1997) to
December 31, 1997 the year ended December 31, 1998, and the six months ended
June 30, 1998 and 1999 was $3,320, $17,806, $7,848, and $12,163, respectively.
4. INTANGIBLE ASSETS
The Company has certain deferred organizational costs relating to the start-
up of the business which were fully amortized as of December 31, 1998.
5. EMPLOYEE BENEFIT PLANS
FKNC sponsors the Company's 401(k) plan (the "Plan"), a defined contribution
plan covering substantially all employees of the Company. Under the Plan's
deferred compensation arrangement, eligible employees who elect to participate
in the Plan may contribute between 1% and 15% of eligible compensation, as
defined by the Plan. Employee contribution matching is determined by FKNC as
elective deferral contributions are made. The Company joined the Plan January
1, 1998, and FKNC's matching contributions for the year ended December 31, 1998
were $2,210. Expenses relating to the matching contributions are allocated to
the Company (Note 7).
6. COMMITMENTS AND CONTINGENCIES
Letter of Credit
On May 11, 1998, the Company established a one-year, $100,000 irrevocable
standby letter of credit with Bank One of Kentucky. However, the Company has
not drawn on the letter of credit since the inception of the business. The
letter of credit was automatically renewed on May 11, 1999 for one year.
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31, 1997
and 1998, management is not aware of any unasserted, asserted, or pending
material litigation or claims against the Company.
F-61
<PAGE>
CALL ME BILL, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. RELATED-PARTY TRANSACTIONS
Operating Lease
The Company subleases facilities from MSI under an operating sublease and
leases equipment and furniture under an operating lease. There is no formal
written lease or sublease agreement. However, for the period from inception
(July 31, 1997) to December 31, 1997, for the year ended December 31, 1998, and
for the six-month periods ending June 30, 1998 and 1999, the Company paid
$10,956, $25,607, $13,007, and $12,600, respectively, in lease expense to MSI.
In August 1999, the Company renewed both the sublease and lease for $1,300 and
$600 per month, respectively, under a written one-year operating sublease and
lease agreement.
Cost Allocation
The accompanying financial statements include certain administrative costs
and expenses, which have been allocated to the Company by FKNC and MSI. FKNC
and MSI perform services and incur certain costs on behalf of the Company.
Services provided include tax, accounting, risk management, employee benefits,
data processing, application of cash receipts, and other general corporate
services. The costs have been allocated on a pro rata basis, primarily on
employee head count and incurred time and services, and represent management's
best estimates of what support costs would have been had the Company incurred
such costs on its own. Corporate costs of member owners' services totaling
$60,813, $19,041, $6,160, and $44,885 have been allocated to the Company during
the period of inception (July 31, 1997) to December 31, 1997, the year ended
December 31, 1998, and the six-month periods ended June 30, 1998 and 1999,
respectively, and are included in selling, general, and administrative expenses
in the accompanying statements of operations. In the opinion of management, the
method of allocating these costs is reasonable.
8. SUBSEQUENT EVENT
In April 1999, the Company organized Net-merce, LLC for the purpose of
selling Internet banking and bill payment products to financial institutions
and real estate property management companies. The June 30, 1999 financial
statements are consolidated and include the accounts of the Company and the
wholly owned subsidiary.
On September 3, 1999, the Company was acquired by Netzee, Inc. ("Netzee")
for approximately $3,288,000 in cash and approximately 31,000 shares of Netzee
stock sold at $10.50 per share. These shares were sold to former members of the
Company and were valued at $11.50 per share. The acquisition of the Company was
accounted for as a purchase under Accounting Principles Board Opinion No. 16.
F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SBS Corporation:
We have audited the accompanying balance sheets of SBS CORPORATION INTERNET
AND TELEPHONE BANKING BUSINESS (an unincorporated division of SBS Corporation,
an Alabama corporation) as of December 31, 1997 and 1998 and the related
statements of operations, retained earnings (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SBS Corporation Internet
and Telephone Banking Business as of December 31, 1997 and 1998 and the results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
September 6, 1999
F-63
<PAGE>
SBS CORPORATION
INTERNET AND TELEPHONE BANKING BUSINESS
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................... $ 27,278 $ 273,962 $ 311,533
Accounts receivable, net of an
allowance for doubtful accounts of $0,
$7,140, and $0 at December 31, 1997,
1998, and June 30, 1999,
respectively.......................... 37,873 275,292 181,658
Lease receivable, current.............. 51,341 191,795 244,356
Other assets........................... 44,105 59,194 54,950
-------- ---------- ----------
Total current assets................. 160,597 800,243 792,497
PROPERTY AND EQUIPMENT, net.............. 81,149 145,954 149,297
OTHER ASSETS:
Lease receivable, net of current
portion............................... 97,769 522,395 743,794
Due from Parent........................ 250,957 0 0
-------- ---------- ----------
Total assets......................... $590,472 $1,468,592 $1,685,588
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accrued expenses....................... $ 58,293 $ 74,765 $ 67,175
Customer deposits...................... 92,544 107,580 126,450
Deferred revenue, current.............. 296,269 651,628 849,282
Due to Parent.......................... 0 177,407 148,141
-------- ---------- ----------
Total current liabilities............ 447,106 1,011,380 1,191,048
LONG-TERM LIABILITIES:
Deferred revenue, net of current
portion............................... 68,965 380,259 564,753
COMMITMENTS AND CONTINGENCIES:
RETAINED EARNINGS (DEFICIT).............. 74,401 (76,953) (70,213)
-------- ---------- ----------
Total liabilities and accumulated
deficit............................. $590,472 $1,468,592 $1,685,588
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-64
<PAGE>
SBS CORPORATION
INTERNET AND TELEPHONE BANKING BUSINESS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------------- -----------------------
1997 1998 1998 1999
---------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
License, hardware, and
implementation.............. $1,198,260 $1,408,965 $ 542,571 $ 997,162
Monthly maintenance and
service..................... -- 39,241 -- 23,820
---------- ---------- --------- ----------
Total revenues............. 1,198,260 1,448,206 542,571 1,020,982
---------- ---------- --------- ----------
OPERATING EXPENSES:
Costs of license, hardware,
implementation, and
maintenance................. (234,005) (254,177) (141,012) (134,132)
Selling, general, and
administrative.............. (886,497) (1,437,104) (600,378) (1,070,647)
Depreciation................. (26,910) (42,262) (4,393) (13,850)
---------- ---------- --------- ----------
Total operating expenses... (1,147,412) (1,733,543) (745,783) (1,218,629)
---------- ---------- --------- ----------
OPERATING INCOME (LOSS)........ 50,848 (285,337) (203,212) (197,647)
OTHER INCOME................... 23,553 287,889 20,702 50,481
---------- ---------- --------- ----------
NET INCOME (LOSS).............. $ 74,401 $ 2,552 $(182,510) $ (147,166)
========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE>
SBS CORPORATION
INTERNET AND TELEPHONE BANKING BUSINESS
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Retained
Earnings
/(Deficit)
----------
<S> <C>
BALANCE, December 31, 1996.......................................... $ --
Net income........................................................ 74,401
---------
BALANCE, December 31, 1997.......................................... 74,401
Net income........................................................ 2,552
---------
BALANCE, December 31, 1998.......................................... 76,953
Net loss (unaudited).............................................. (147,166)
---------
BALANCE, June 30, 1999 (unaudited).................................. $ (70,213)
=========
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
SBS CORPORATION
INTERNET AND TELEPHONE BANKING BUSINESS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
------------------ -----------------------
1997 1998 1998 1999
-------- -------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 74,401 $ 2,552 $(182,510) $(147,166)
Adjustments to reconcile net
income (loss) to net cash used in
operating activities:
Depreciation..................... 26,910 42,262 4,393 13,850
Changes in assets and
liabilities:
Accounts receivable............. 39,921 (237,419) (275,052) 93,634
Lease receivable................ 1,006 (565,080) (513,580) (273,960)
Inventories..................... (9,005) (15,089) (15,089) 4,244
Deferred revenue................ 591 666,653 1,029,781 382,148
Accrued liabilities............. 21,060 16,472 (30,438) (7,590)
Customer deposits............... 29,205 15,036 (1,259) 18,870
-------- -------- --------- ---------
Net cash provided by (used in)
operating activities.......... 184,089 (74,613) 16,246 84,030
-------- -------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment........................ (61,740) (107,067) (26,521) (17,193)
-------- -------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances to/from Parent, net...... (305,036) 428,364 105,581 (29,266)
-------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (182,687) 246,684 95,306 37,571
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 209,965 27,278 27,278 273,962
-------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 27,278 $273,962 $ 122,584 $ 311,533
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
SBS CORPORATION
INTERNET AND TELEPHONE BANKING BUSINESS
NOTES TO FINANCIAL STATEMENTS
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 are unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
SBS Corporation (an Alabama corporation) ("SBS" or "Parent") designs,
develops, markets, and supports computer software and provides computer
equipment primarily to community financial institutions located predominantly
in the southeastern region of the United States. The financial statements and
related footnotes contained herein reflect the operations of the SBS
Corporation Internet and Telephone Banking Business ("SBS Internet and
Telephone Banking Business" or the "Company").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company is not a separate subsidiary of SBS nor has it been operated as
a separate division of SBS. The financial statements of the internet and
telephone banking business have been derived from the statements of SBS and
have been prepared to present its financial position, results of operations,
and cash flows on a stand-alone basis. The majority of the operating expenses
in the accompanying financial statements have been allocated to the internet
and telephone banking business by SBS. These costs have been allocated based on
specific identification where possible or on a pro rata basis based primarily
on employee headcount or time incurred and represent management's best estimate
of what support cost would have been had the Company been operated as a
separate entity. Such allocated expenses may not be indicative of what such
expenses would have been had the internet and telephone banking business been
operated as a separate entity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Unaudited Financial Information
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited; however, in the opinion of management,
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
Funding of Operations by Parent
The Parent Company funds the Company's operations as necessary. Transfers of
operating funds between the Parent Company and the Company occur on a
noninterest-bearing basis, with the net amounts of these transfers reflected in
due to/from Parent Company in the accompanying balance sheets.
F-68
<PAGE>
SBS CORPORATION
INTERNET AND TELEPHONE BANKING BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
SBS holds legal title to all property and equipment. These assets are stated
at cost. Major property additions, replacements, and betterments are
capitalized, while maintenance and repairs which do not extend the useful lives
of these assets are expensed as incurred. The Company provides for depreciation
using the straight-line method over the estimated useful lives of the assets.
Property, plant, and equipment consisted of the following at December 31, 1997
and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
December 31,
------------------ June 30, Useful
1997 1998 1999 Lives
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Furniture and fixtures................. $ 35,906 $ 54,570 $ 54,570 7 years
Machinery and equipment................ 78,923 167,326 184,520 5 years
-------- -------- --------
114,829 221,896 239,070
Less accumulated depreciation.......... (33,680) (75,942) (89,793)
-------- -------- --------
$ 81,149 $145,954 $149,297
======== ======== ========
</TABLE>
Product Development Costs
Software research and development costs and maintenance costs related to
software development are expensed as incurred.
Revenue Recognition
The Company's revenue is generated from internet and telephone banking
sales. Internet banking is charged based on an initial installation fee and an
ongoing monthly license fee which is billed in advance for the following twelve
months. Telephone banking, historically, has been billed in a similar manner to
internet banking, with an initial installation fee and an ongoing annual
license fee which is billed in advance. The Company changed the way in which
telephone banking is billed during 1998. The majority of new customers in 1998
entered into a five year sales-type lease agreement with five equal payments in
advance which incorporates the initial installation and ongoing license for
five years. Those customers that do not enter into sale-type lease agreements
are billed according to the historical approach of an initial installation fee
and an ongoing annual license fee.
Revenue from software license fees in 1997 was recognized in accordance with
the provisions of the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 91-1, "Software Revenue
Recognition". Effective from the beginning of 1998, the revenue from software
license fees was recognized in accordance with AICPA SOP No. 97-2 "Software
Revenue Recognition". Revenue recognition under SOP No. 91-1 and SOP No. 97-2
is not significantly different. Specifically, in all periods presented, the
ongoing license fees, for contracts other than those involving a lease, have
been deferred and recognized ratably over the twelve month period to which the
ongoing licenses apply on the basis that the reduced ongoing license fees are
essentially post-contract customer support entitling the customer to
unspecified upgrades/enhancements and telephone support. Revenue for all lease
agreements, with the exception of revenue attributable to equipment which is
recognized upon installation, has been deferred and recognized ratably over the
period of the lease on the basis that the fee is not "fixed and determinable"
as defined by SOP No. 97-2.
Deferred Revenues
Deferred revenues represent the liability for amounts billed prior to
complete performance on maintenance contracts, for advanced billings related to
software license fees and for hardware, software, installation and continuing
license fees financed through sales-type leases. (See Note 3)
F-69
<PAGE>
SBS CORPORATION
INTERNET AND TELEPHONE BANKING BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Returns and Product Warranty
The Company provides for the costs of returns and product warranty claims
when specific problems are identified. The Company has not experienced
significant returns or warranty claims to date.
Fair Value Financial Instruments
The fair value of instruments classified as current assets or liabilities,
including accounts receivable, and accrued liabilities, approximate carrying
value due to the short-term maturity of the instruments. Likewise, the carrying
amount of the Company's long-term debt approximates fair value based on current
rates for debt with similar maturities.
Long-Lived Assets
The Company periodically reviews the values assigned to long-lived assets to
determine if any impairments have occurred. Management believes that the long-
lived assets on the accompanying balance sheets are appropriately valued.
Other Assets
Other assets represent equipment held predominantly at customer sites
awaiting installation and are carried at the lower of market or cost as
determined by the first-in, first-out method.
Income Taxes
The Parent Company elected S corporation status for federal and state income
tax purposes as of February 1, 1992, whereby profits, losses and credits are
taxed to the shareholders. Accordingly, no provision for income taxes is
reflected in the accompanying financial statements.
New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Statement is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Statement is not
expected to have a significant impact on the Company's financial statements.
3. MINIMUM LEASE PAYMENTS RECEIVABLE
The Company's leasing operations relate to telephone banking. All of the
leases are classified as sales-type leases. (See Note 2)
F-70
<PAGE>
SBS CORPORATION
INTERNET AND TELEPHONE BANKING BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, future minimum lease payments receivable under non-
cancelable leases, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31:
------------------------
<S> <C>
1999.......................................................... $ 239,016
2000.......................................................... 210,516
2001.......................................................... 182,156
2002.......................................................... 176,616
---------
Total minimum lease payments receivable........................... 808,304
Less amount representing interest................................. (94,114)
---------
Present value of net minimum lease payments receivable............ 714,190
Less current maturities of lease payments receivable.............. (191,795)
---------
Capital lease payments receivable................................. $ 522,395
=========
</TABLE>
4. DUE FROM PARENT COMPANY
The Parent Company borrows and advances funds from/to the internet and
telephone banking business on a noninterest-bearing basis.
5. LAWSUIT SETTLEMENT
During 1998, the Company, as plaintiff, settled a lawsuit and received
$250,000. This settlement is included in other income in the statement of
operations. The Company incurred approximately $113,000 in legal expenses in
relation to this settlement. These legal fees are included in selling, general
and administrative in the statement of operations.
6. RELATED-PARTY TRANSACTIONS
SBS rents certain office space in Birmingham, Alabama, from a related party.
The Company, which utilizes a portion of this office space, incurred expense of
approximately $49,618, $45,824, $22,912 and $30,394 for the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999,
respectively.
7. EMPLOYEE BENEFITS
The Company maintains a defined contribution 401(k) benefit plan which
covers substantially all employees, subject to certain minimum age and service
requirements. Under the plan, employees may elect to defer up to ten percent of
their salary, subject to Internal Revenue Code limits. The Company matches one
hundred percent of the first six percent of the employees contributions. In
addition, the plan allows for the Company to make discretionary contributions
based on the participants' salary. The Company made contributions to the plan
of $27,511, $31,868, $15,934 and $22,501 for the years ended December 31, 1997
and 1998 and the six months ended June 30, 1998 and 1999, respectively.
8. SUBSEQUENT EVENT
On August 6, 1999, SBS was acquired by Direct Access Interactive, Inc., a
predecessor of Netzee, Inc. ("Netzee"). Prior to the acquisition, SBS borrowed
approximately $4,900,000 from a bank. The consideration received was
approximately 2,600,000 shares of common stock of Netzee and $21,534,000 in
cash of which $4,900,000 was used to repay the note to the bank. The
acquisition was accounted for as a purchase under Accounting Principles Board
No. 16.
F-71
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,448,155 Shares
Common Stock
----------------
P R O S P E C T U S
----------------
The Robinson-Humphrey Company
J.C. Bradford & Co.
SunTrust Equitable Securities
, 1999
Until , 1999, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Unless otherwise defined, all capitalized terms contained in this Part II
shall have the meanings ascribed to them in the prospectus which forms a part
of this registration statement. Netzee is sometimes referred to in this Part II
as the "registrant."
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses that we expect to incur
in connection with the sale and distribution of the securities we are
registering pursuant to this registration statement, other than underwriting
discounts. All amounts are estimated except the SEC registration fee, the
National Association of Securities Dealers, Inc. filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee............................................. $ 19,910
National Association of Securities Dealers, Inc. filing fee...... 7,662
Nasdaq National Market listing fee............................... 95,000
Blue sky fees and expenses....................................... 5,000
Accounting fees and expenses..................................... 950,000
Legal fees and expenses.......................................... 400,000
Printing and engraving expenses.................................. 350,000
Registrar and transfer agent's fees.............................. 10,000
Directors' and officers' liability insurance..................... 315,000
Miscellaneous fees and expenses.................................. 227,428
----------
Total .......................................................... $2,380,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Georgia Business Corporation Code
Section 14-2-851 of the Georgia Business Corporation Code, or the "GBCC,"
empowers a corporation to indemnify a director (including a former director and
including a director who is or was serving at the request of the corporation as
a director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise) against liability arising from official acts if the
director acted in good faith and reasonably believed that his or her conduct
was in the best interests of the corporation. For all other acts, the
corporation may indemnify a director who acted in good faith and reasonably
believed that the conduct was not opposed to the best interests of the
corporation. The corporation may indemnify a director with respect to criminal
proceedings if the director acted in good faith and had no reasonable cause to
believe the conduct was unlawful. A corporation may not indemnify a director
adjudged liable for conduct involving receipt of an improper personal benefit.
In addition, section 14-2-856 of the GBCC permits the articles of
incorporation, bylaws, a contract, or resolution approved by the shareholders
to authorize the corporation to indemnify a director against claims to which
the director was a party, including claims by the corporation or in the right
of the corporation (e.g., a shareholder derivative action). However, the
corporation may not indemnify the director for liability to the corporation for
any appropriation of a corporate opportunity, intentional misconduct or knowing
violation of law, unlawful distributions or receipt of an improper benefit.
Section 14-2-852 of the GBCC provides for mandatory indemnification against
reasonable expenses incurred by a director who is wholly successful in
defending an action to which the director was a party due to
II-1
<PAGE>
his or her status as a director of the corporation on the merits or otherwise.
Section 14-2-854 allows a court, upon application by a director, to order
indemnification and advancement of expenses if it determines that the director
is entitled to indemnification under the GBCC or if it determines that
indemnification is fair and reasonable even if the director has failed to meet
the statutory standard of conduct under section 14-2-851. However, the court
may not order indemnification in excess of reasonable expenses for liability to
the corporation or for receipt of an improper benefit.
Section 14-2-857 of the GBCC permits a corporation to indemnify an officer
(including a former officer and including an officer who is or was serving at
the request of the corporation as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise) to the same
extent as a director. A corporation may indemnify an officer who is not a
director to a further extent by means of articles of incorporation, bylaw,
board resolution, or contract. However, the corporation may not indemnify an
officer for liability arising from conduct involving appropriation of a
corporate opportunity, intentional misconduct or knowing violation of law,
unlawful distributions, or receipt of an improper personal benefit. An officer
who is not a director is also entitled to mandatory indemnification and may
apply for court-ordered indemnification.
Section 14-2-858 of the GBCC permits a corporation to purchase and maintain
insurance on behalf of directors and officers against liability incurred by
them in their capacities or arising out of their status as directors and
officers of the corporation, regardless of whether the corporation would have
the power to indemnify or advance expenses to the director or officer for the
same liability under the GBCC.
We intend to enter into indemnification agreements with each of our
executive officers and directors that will indemnify them to the fullest extent
permitted by the GBCC.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Netzee pursuant
to the foregoing provisions, we have been informed that in the opinion of the
SEC, this indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Articles of Incorporation
Article VIII of the Articles of Incorporation exculpates the directors of
Netzee from personal liability for money damages to Netzee or its shareholders
to the fullest extent permitted by the GBCC, as it may be amended from time to
time. Currently, under the GBCC, the directors are exculpated from all
liability to Netzee or its shareholders except for liability arising from
conduct involving appropriation of a corporate opportunity, intentional
misconduct or knowing violation of law, unlawful distributions, or receipt of
an improper personal benefit. The Articles of Incorporation also provide that
any repeal or modification of Article VIII of the Articles of Incorporation by
the shareholders of Netzee shall not adversely affect any right or protection
of a director of Netzee existing at the time of such repeal or modification.
Bylaws
Article VII of Netzee's Bylaws provides that Netzee must indemnify any
person who is or was a director of Netzee who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, including any action or suit by or in the right of Netzee,
against any judgment, settlement, penalty, fine or reasonable expenses incurred
with any of the foregoing proceedings.
Insurance
We intend to purchase a policy of insurance providing reimbursement to our
officers and directors of indemnification payments and related liabilities
incurred in their capacities as such.
II-2
<PAGE>
Underwriting Agreement
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
underwriters of Netzee, its directors and its officers and the selling
shareholders, and by Netzee and the selling shareholders of the underwriters,
for certain liabilities, including liabilities arising under the Securities
Act, and affords certain rights of contribution with respect thereto.
Item 15. Recent Sales of Unregistered Securities.
Since its inception in August 1999, Netzee has issued the following
securities that were not registered under the Securities Act of 1933:
(1) On September 3, 1999, in connection with the merger of Direct Access
Interactive, Inc. with and into Netzee, Netzee issued 11,735,000 shares
of common stock to the former shareholders of Direct Access
Interactive. Netzee also issued options to purchase 610,000 shares of
Netzee common stock to persons who had been issued options to purchase
Direct Access Interactive common stock.
(2) On September 3, 1999, in connection with the merger of Dyad Corporation
with and into Netzee, Netzee issued 618,137 shares to those former
shareholders of Dyad who certified to Netzee that they qualified as
"accredited investors" as defined in Regulation D of the Securities Act
of 1933.
(3) On September 3, 1999, Netzee issued 1,361,000 shares of common stock to
each of TIB The Independent Bankers Bank and The Bankers Bank in
connection with the acquisition of the Internet banking divisions of
each of these bankers' banks.
(4) On September 7, 1999, Netzee issued to certain executive officers,
directors and employees of Netzee stock options to purchase 220,000
shares of common stock at a weighted average exercise price of $3.11
per share. No shares of common stock have been issued pursuant to the
exercise of these options.
(5) On September 7, 1999, Netzee issued to certain employees of Netzee
stock options to purchase 1,016,500 shares of common stock at a
weighted average exercise price of $5.00 per share. No shares of common
stock have been issued pursuant to the exercise of these options.
(6) On September 9, 1999, Netzee issued 31,100 shares of common stock to
certain former employees of Call Me Bill, LLC who certified to Netzee
that they qualified as "accredited investors" as defined in Regulation
D of the Securities Act of 1933.
(7) On September 9 and 10, 1999, Netzee 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. Netzee
received a total of $750,000 in consideration for these shares.
(8) On October 18, 1999, Netzee issued a warrant to purchase up to 461,876
shares of common stock at an exercise price of $3.25 per share to an
entity that certified to Netzee that it was an "accredited investor"
as defined in Regulation D of the Securities Act. Netzee issued this
warrant as consideration for a $3,000,000 three-year line of credit
agreement between Netzee and the entity.
(9) On October 19, 1999, Netzee issued to certain executive officers and
directors of Netzee stock options to purchase 330,000 shares of common
stock. No shares of common stock have been issued pursuant to the
exercise of these options.
The issuances of these securities in the transactions described above 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.
Appropriate legends were affixed to the share certificates issued in the
transactions described above.
II-3
<PAGE>
Item 16. Exhibits and Financial Statements Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
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.
3.1++ Articles of Incorporation of Netzee, Inc., as amended to date.
3.2++ Amended and Restated Bylaws of Netzee, Inc.
4.1+ Form of Netzee, Inc. common stock certificate.
4.2+ 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.
4.3+ Registration Rights Agreement, dated September 3, 1999, by and among
Netzee, Inc., The Bankers Bank and TIB The Independent BankersBank.
4.4+ Registration Rights Agreement, dated August 31, 1999, by and among
Netzee, Inc. and each of the former shareholders of Dyad Corporation.
4.5+ Agreement, dated September 3, 1999, by and between Netzee, Inc. and
Sirrom Investments, Inc., regarding registration rights of Sirrom.
4.6+ Registration Rights Agreement, dated October 18, 1999, by and between
Netzee, Inc. and Kellett Partners, L.P.
4.7+ Warrant, dated October 18, 1999, issued to Kellett Partners, L.P.
5.1+ Opinion of Sutherland Asbill & Brennan LLP.
10.1+ Netzee, Inc. 1999 Stock Option and Incentive Plan.
10.2+ Direct Access Interactive, Inc. 1999 Stock Option and Incentive Plan.
10.3+ Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as
successor to Direct Access Interactive, Inc.) and Glenn W. Sturm.
10.4+ Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as
successor to Direct Access Interactive, Inc.) and John W. Collins.
10.5+ Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as
successor to Direct Access Interactive, Inc.) and Richard S. Eiswirth.
10.6+ Employment Agreement, dated September 1, 1999, by and between Netzee,
Inc. and Glenn W. Sturm.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<C> <S>
10.7+ Employment Agreement to be entered into by and between Netzee, Inc.
and C. Michael Bowers.
10.8+ Employment Agreement to be entered into by and between Netzee, Inc.
and David W. Brasfield.
10.9+ Employment Agreement to be entered into by and between Netzee, Inc.
and Richard S. Eiswirth.
10.10+ Form of Indemnification Agreement between Netzee, Inc. and each of its
executive officers and directors.
10.11+ 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.
10.12+ 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.
10.13+ Promissory Note, dated September 1, 1999, from Netzee, Inc. as maker
to The InterCept Group, Inc. as payee, in the principal amount of
$2,882,200.
10.14+ Promissory Note, dated July 1, 1999, from John W. Collins as maker, to
Netzee, Inc. (as successor to Direct Access Interactive, Inc.), as
payee.
10.15+ Promissory Note, dated July 1, 1999, from Glenn W. Sturm as maker, to
Netzee, Inc. (as successor to Direct Access Interactive, Inc.), as
payee.
10.16+ Promissory Note, dated July 1, 1999, from Donny R. Jackson as maker,
to Netzee, Inc. (as successor to Direct Access Interactive, Inc.), as
payee.
10.17+ Promissory Note, dated August 5, 1999, from Richard S. Eiswirth, Jr.
as maker, to Netzee, Inc. (as successor to Direct Access Interactive,
Inc.).
10.18+ Line of Credit Agreement, dated October 18, 1999, by and between
Netzee, Inc. and Kellett Partners, L.P.
10.19+* General Marketing Agent Agreement, dated September 3, 1999, as
amended, by and between Netzee, Inc. and TIB The Independent
BankersBank.
10.20+* General Marketing Agent Agreement, dated September 3, 1999, as
amended, by and between Netzee, Inc. and The Bankers Bank.
10.21 Sublease, dated September 1, 1999, by and between The Bankers Bank and
Netzee, Inc.
10.22 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)).
21.1+ Subsidiaries of Netzee.
23.1+ Consent of Sutherland Asbill & Brennan LLP, which is included in
Exhibit 5.1.
23.2 Consent of Arthur Andersen LLP.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
27.2+ Financial Data Schedule.
27.3+ Financial Data Schedule.
27.4+ Financial Data Schedule.
27.5+ Financial Data Schedule.
99.1+ Schedule II to Financial Statements.
99.2+ Report of Independent Public Accountants on Financial Statement
Schedule.
</TABLE>
- --------
*Netzee has filed a confidential treatment request with respect to a portion
of this exhibit.
+Previously filed.
++ Filed as an exhibit to Netzee's Registration Statement on Form 8-A (File No.
0-27925), as filed with the Commission on November 3, 1999, and incorporated
herein by reference.
II-5
<PAGE>
(b) Financial Statements and Schedule
See Index to Financial Statements on page F-1 of the prospectus which
forms a part of this Registration Statement.
Schedule II - Valuation and Qualifying Accounts, incorporated by
reference from Exhibit 99.1 to this registration statement.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing(s) specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and
this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on the 4th day of November, 1999
NETZEE, INC.
/s/ Glenn W. Sturm
By: _________________________________
Glenn W. Sturm, Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated above.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Glenn W. Sturm Chief Executive Officer November 4, 1999
______________________________________ and Director (Principal
Glenn W. Sturm Executive Officer)
/s/ Richard S. Eiswirth Executive Vice President November 4, 1999
______________________________________ and Chief Financial
Richard S. Eiswirth Officer (Principal
Financial and Accounting
Officer)
* President and Chief November 4, 1999
______________________________________ Operating Officer
C. Michael Bowers
* Chairman of the Board of November 4, 1999
______________________________________ Directors
John W. Collins
* Director November 4, 1999
______________________________________
Jon R. Burke
* Director November 4, 1999
______________________________________
Donny R. Jackson
* Director November 4, 1999
______________________________________
Bruce P. Leonard
* Director November 4, 1999
______________________________________
Gayle M. Earls
* Director November 4, 1999
______________________________________
Joel A. Katz
* Director November 4, 1999
______________________________________
Stiles A. Kellett, Jr.
* Director November 4, 1999
______________________________________
</TABLE> A. Jay Waite
/s/ Richard S. Eiswirth
*By: ____________________________
Richard S. Eiswirth
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
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.
3.1++ Articles of Incorporation of Netzee, Inc., as amended to date.
3.2++ Amended and Restated Bylaws of Netzee, Inc.
4.1+ Form of Netzee, Inc. common stock certificate.
4.2+ 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.
4.3+ Registration Rights Agreement, dated September 3, 1999, by and among
Netzee, Inc., The Bankers Bank and TIB The Independent BankersBank.
4.4+ Registration Rights Agreement, dated August 31, 1999, by and among
Netzee, Inc. and each of the former shareholders of Dyad Corporation.
4.5+ Agreement, dated September 3, 1999, by and between Netzee, Inc. and
Sirrom Investments, Inc., regarding registration rights of Sirrom.
4.6+ Registration Rights Agreement, dated October 18, 1999, by and between
Netzee, Inc. and Kellett Partners, L.P.
4.7+ Warrant, dated October 18, 1999, issued to Kellett Partners, L.P.
5.1+ Opinion of Sutherland Asbill & Brennan LLP.
10.1+ Netzee, Inc. 1999 Stock Option and Incentive Plan.
10.2+ Direct Access Interactive, Inc. 1999 Stock Option and Incentive Plan.
10.3+ Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as
successor to Direct Access Interactive, Inc.) and Glenn W. Sturm.
10.4+ Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as
successor to Direct Access Interactive, Inc.) and John W. Collins.
10.5+ Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as
successor to Direct Access Interactive, Inc.) and Richard S. Eiswirth.
10.6+ Employment Agreement, dated September 1, 1999, by and between Netzee,
Inc. and Glenn W. Sturm.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<C> <S>
10.7+ Employment Agreement, dated September 1, 1999, by and between Netzee,
Inc. and C. Michael Bowers.
10.8+ Employment Agreement, dated September 1, 1999, by and between Netzee,
Inc. and David W. Brasfield.
10.9+ Employment Agreement, dated September 1, 1999, by and between Netzee,
Inc. and Richard S. Eiswirth.
10.10+ Form of Indemnification Agreement between Netzee, Inc. and each of its
executive officers and directors.
10.11+ 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.
10.12+ 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.
10.13+ Promissory Note, dated September 1, 1999, from Netzee, Inc. as maker
to The InterCept Group, Inc. as payee, in the principal amount of
$2,882,200.
10.14+ Promissory Note, dated July 1, 1999, from John W. Collins as maker, to
Netzee, Inc. (as successor to Direct Access Interactive, Inc.), as
payee.
10.15+ Promissory Note, dated July 1, 1999, from Glenn W. Sturm as maker, to
Netzee, Inc. (as successor to Direct Access Interactive, Inc.), as
payee.
10.16+ Promissory Note, dated July 1, 1999, from Donny R. Jackson as maker,
to Netzee, Inc. (as successor to Direct Access Interactive, Inc.), as
payee.
10.17+ Promissory Note, dated August 5, 1999, from Richard S. Eiswirth, Jr.
as maker, to Netzee, Inc. (as successor to Direct Access Interactive,
Inc.).
10.18+ Line of Credit Agreement, dated October 18, 1999, by and between
Netzee, Inc. and Kellett partners, L.P.
10.19+* General Marketing Agent Agreement, dated September 3, 1999, as
amended, by and between Netzee, Inc. and TIB The Independent
BankersBank.
10.20+* General Marketing Agent Agreement, dated September 3, 1999, as
amended, by and between Netzee, Inc. and The Bankers Bank.
10.21 Sublease, dated September 1, 1999, by and between The Bankers Bank and
Netzee, Inc.
10.22 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)).
21.1+ Subsidiaries of Netzee.
23.1+ Consent of Sutherland Asbill & Brennan LLP, which is included in
Exhibit 5.1.
23.2 Consent of Arthur Andersen LLP.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
27.2+ Financial Data Schedule.
27.3+ Financial Data Schedule.
27.4+ Financial Data Schedule.
27.5+ Financial Data Schedule.
99.1+ Schedule II to Financial Statements.
99.2+ Report of Independent Public Accountants on Financial Statement
Schedule.
</TABLE>
- --------
*Netzee has filed a confidential treatment request with respect to a portion
of this exhibit.
+Previously filed.
++ Filed as an exhibit to Netzee's Registration Statement on Form 8-A (File No.
0-27925), as filed with the Commission on November 3, 1999, and incorporated
herein by reference.
<PAGE>
EXHIBIT 1.1
NETZEE, INC.
COMMON STOCK
----------------------
UNDERWRITING AGREEMENT
----------------------
November __, 1999
THE ROBINSON-HUMPHREY COMPANY, LLC
J.C. BRADFORD & CO.
SUNTRUST EQUITABLE SECURITIES CORPORATION
As representatives of the several
Underwriters named in Schedule I hereto,
c/o The Robinson-Humphrey Company, LLC
3333 Peachtree Road, N.E.
Atlanta, Georgia 30326
Dear Sirs:
Upon and subject to the terms and conditions set forth below, (i)
Netzee, Inc., a Georgia corporation (the "Company"), proposes to issue and sell
to the Underwriters named in Schedule I (the "Underwriters") an aggregate of
4,000,000 shares of common stock, without par value ("Common Stock"), of the
Company (the "Company Firm Shares"), (ii) the shareholders of the Company named
in Schedule II hereto (the "Selling Shareholders") propose to sell to the
Underwriters an aggregate of 448,155 shares of Common Stock in the respective
amounts set forth opposite their names in Schedule II hereto (such shares
together with the Company Firm Shares, the "Firm Shares"), and (iii) at the
election of the Underwriters, the Company proposes to sell to the Underwriters
up to 667,223 additional shares of Common Stock (the "Optional Shares") (the
Firm Shares and the Optional Shares that the Underwriters elect to purchase
pursuant to Section 2 hereof are collectively called the "Shares").
<PAGE>
1. (a) Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-87089)
with respect to the Shares, including a prospectus, has been filed by
the Company with, and has been declared effective by, the Securities
and Exchange Commission (the "Commission") under the Securities Act of
1933, as amended (the "Act"). After the execution of this Agreement,
the Company will file with the Commission, within the applicable
period specified in Rule 424(b) under the Act, a prospectus in the
form most recently included in an amendment to such registration
statement, with such changes or insertions as are required by Rule
430A or permitted by Rule 424(b) under the Act and as have been
provided to and approved by the Representatives. As used in this
Agreement, the term "Registration Statement" means such registration
statement, as amended at the time when it was declared effective,
including all financial statement schedules and exhibits thereto and
including any information omitted therefrom pursuant to Rule 430A
under the Act and included in the Prospectus (as hereinafter defined);
the term "Preliminary Prospectus" means each prospectus subject to
completion included in such registration statement or any amendment or
post-effective amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement at the time
it was or is declared effective); and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act or, if no prospectus is required to be so filed, such
term means the prospectus included in the Registration Statement. For
purposes of the following representations and warranties, to the
extent reference is made to the Prospectus and at the relevant time
the Prospectus is not yet in existence, such reference shall be deemed
to be to the most recent Preliminary Prospectus. If the Company has
filed or is required pursuant to the terms hereof to file a
Registration Statement pursuant to Rule 462(b) under the Act
registering additional shares of Common Stock (a "Rule 462(b)
Registration Statement"), such Rule 462(b) Registration Statement will
become effective no later than 10:00 p.m., Atlanta, Georgia time, on
the date of this Agreement. Unless otherwise specified, any reference
herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued and no proceeding for that
purpose has been instituted or, to the Company's knowledge, threatened
by the Commission or the securities authority of any state or other
jurisdiction. No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no
proceeding for that purpose has been instituted or, to the Company's
knowledge, threatened or, to the knowledge of the Company,
-2-
<PAGE>
contemplated by the Commission or the securities authority of any
state or other jurisdiction.
(iii) When any Preliminary Prospectus was filed with the
Commission it (A) complied in all material respects with the
requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading. When the Registration
Statement (other than any Rule 462(b) Registration Statement to be
filed by the Company after the effectiveness of this Agreement) or any
amendment thereto, if applicable, was or is declared effective, and at
each Time of Delivery (as hereinafter defined), it (A) contained or
will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects
with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the
Prospectus or any amendment or supplement thereto, if applicable, is
filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto
containing such amendment or supplement to the Prospectus was or is
declared effective) and at each Time of Delivery, the Prospectus, as
amended or supplemented at any such time, (A) contained or will
contain all statements required to be stated therein in accordance
with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If the
Company is required to file a Rule 462(b) Registration Statement after
the effectiveness of this Agreement, such Rule 462(b) Registration
Statement or any amendment thereto, if applicable, when it becomes
effective and at each Time of Delivery, (A) will contain all
statements required to be stated therein in accordance with, and will
comply in all material respects with the requirements of, the Act and
the rules and regulations of the Commission thereunder and (B) will
not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not
misleading. The representations and warranties made in the foregoing
provisions of this paragraph (iii) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration
Statement or any amendment thereto, the Prospectus or any amendment or
supplement thereto or any Rule 462(b) Registration Statement or any
amendment thereto in reliance upon and in conformity with written
information furnished to the Company by
-3-
<PAGE>
any Underwriter through you specifically for use therein. The
statistical and market-related data included in the Prospectus are
based on or derived from independent sources which the Company
believes to be reliable and accurate in all material respects or
represent the Company's good faith estimates that are made on the
basis of data derived from such sources.
(iv) There are no (A) contracts, instruments or other
documents or agreements that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement and are not so described or filed as
required, (B) laws, orders, judgments, decrees, rules or regulations
that are required to be described in the Registration Statement or the
Prospectus and are not so described as required, (C) pending or
threatened legal or governmental proceedings that are required to be
described in the Registration Statement or the Prospectus and are not
so described as required, or (D) relationships, direct or indirect,
between or among the Company, on the one hand, and the directors,
officers or shareholders of the Company on the other hand, that are
required to be described in the Registration Statement or the
Prospectus and are not so described as required; and all descriptions
thereof in the Registration Statement (including the statements under
Items 14 and 15 of Part II of the Registration Statement) and the
Prospectus are fair summaries thereof and fairly present the
information required to be disclosed with respect thereto under the
Act.
(v) Each of the Company and its subsidiaries has been duly
organized, is validly existing in good standing under the laws of its
jurisdiction of organization and has full corporate or limited
liability company power and authority to own, lease and operate its
properties and conduct its business as described in the Registration
Statement and the Prospectus. The Company has full corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder. Each of the Company and its subsidiaries is duly qualified
to transact business as a foreign corporation and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties, or conducts any business, so as to require such
qualification, except where the failure to so qualify would not have a
material adverse effect on the financial position, results of
operations or business of the Company and its subsidiaries taken as a
whole.
(vi) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued and
outstanding shares of capital stock of the Company (including, without
limitation, the Shares to be sold by the Selling Shareholders) have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description of the Common Stock
contained in the Registration Statement and the Prospectus. None of
the issued
-4-
<PAGE>
shares of capital stock of the Company Direct Access Interactive, Inc.
("Direct Access") or any of its subsidiaries has been issued or is
owned or held in violation of any preemptive rights of shareholders,
and no person or entity (including any holder of outstanding shares of
capital stock of the Company or its subsidiaries) has any preemptive
or other rights to subscribe for any of the Shares.
(vii) All of the issued and outstanding shares of capital stock
of each of the Company's subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable and are owned
beneficially by the Company free and clear of all liens, security
interests, pledges, charges, encumbrances, defects, shareholders'
agreements, voting trusts, equities or claims of any nature
whatsoever, except those security interests as disclosed in the
Prospectus. Other than the subsidiaries listed on Exhibit 21.1 to the
Registration Statement, the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint
venture or other association.
(viii) Except as disclosed in the Prospectus and rights set
forth in the Antidilution Agreements between the Company and each TIB
The Independent Bankers Bank and The Bankers Bank (the "Bankers
Banks"), which terminate at the First Time of Delivery (the "Bankers
Banks' Antidilution Rights"), there are no outstanding (A) securities
or obligations of the Company or any of its subsidiaries convertible
into or exchangeable for any capital stock of the Company or any such
subsidiary, (B) warrants, rights or options to subscribe for or
purchase from the Company or any such subsidiary any such capital
stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any such subsidiary
to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights
or options.
(ix) Since the date of the most recent audited financial
statements included in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any
material loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree,
otherwise than as disclosed in or contemplated by the Prospectus.
(x) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, (A) neither the
Company nor any of its subsidiaries has incurred any liabilities or
obligations, direct or contingent, or entered into any transactions,
not in the ordinary course of business,
-5-
<PAGE>
that are material to the Company and its subsidiaries taken as a
whole, (B) the Company has not purchased any of its outstanding
capital stock or declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock, (C) there has not been
any change in the capital stock, or material change in the long-term
debt or short-term debt of the Company or any of its subsidiaries, and
(D) there has not been any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
financial position, results of operations or business of the Company
and its subsidiaries, in each case other than as disclosed in or
contemplated by the Prospectus.
(xi) The Shares to be issued and sold by the Company have been
duly authorized for issuance and sale pursuant to this Agreement and,
when issued and delivered by the Company against payment therefor as
provided herein, will be validly issued, fully paid and nonassessable
and will conform to the description of the Common Stock contained in
the Prospectus and the issuance thereof will not be subject to any
preemptive or similar rights; the certificates evidencing the Shares
will comply with all applicable requirements of Georgia law; and the
Shares have been approved for listing on the Nasdaq National Market,
subject to notice of issuance.
(xii) Except as disclosed in the Registration Statement and the
Prospectus and except for registration rights granted in favor of the
Bankers Banks and Sirrom Investments, Inc., which terminate upon the
First Time of Delivery, (A) there are no contracts, agreements or
understandings between the Company and any person granting such person
the right to require the Company to file a registration statement
under the Act with respect to any securities of the Company or to
require the Company to include any securities in the securities
registered pursuant to the Registration Statement (or any such right
has been effectively waived) or any securities being registered
pursuant to any other registration statement filed by the Company
under the Act and (B) neither the filing of the Registration Statement
nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights for or relating to the registration
of any securities of the Company.
(xiii) All offers and sales of the Company's capital stock and
its predecessors prior to the date hereof were at all relevant times
exempt from the registration requirements of the Act by reason of
Sections 3(b) or 4(2) thereof and were the subject of an available
exemption from the registration requirements of the applicable state
securities or blue sky laws.
(xiv) Neither the Company nor any of its subsidiaries is, or
with the giving of notice or passage of time or both would be, (A) in
violation of its
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<PAGE>
Articles of Incorporation, Bylaws or Operating Agreement, as
appropriate, or (B) in default under any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective
properties or assets are subject, except, in the case of clause (B),
such defaults that would not have a material adverse effect on the
Company and its subsidiaries taken as a whole.
(xv) The execution of this Agreement, the issue and sale of
the Shares to be issued and sold by the Company under this Agreement,
the sale of the Shares to be sold by the Selling Shareholders under
this Agreement the performance of this Agreement by the Company and
the Selling Shareholders and the consummation of the other
transactions herein contemplated will not (A) conflict with, or (with
or without the giving of notice or the passage of time or both) result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of
any Lien upon any property or assets of the Company pursuant to, any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which the Company or any of its
subsidiaries is a party or to which any of their respective properties
or assets is subject, (B) conflict with or violate any provision of
the Articles of Incorporation Bylaws or Operating Agreement of the
Company or any of its subsidiaries or (C) conflict with or violate any
provision of any constitution, statute, rule or regulation or any
order, judgment or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their respective properties or assets, except, in the case of
clauses (A) and (C), such breach, violation, default or Lien that
would not have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(xvi) Each of the Company and its subsidiaries has all such
licenses, certificates, authorizations, consents, exemptions,
qualifications, franchises, permits and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals as are necessary to
own, lease, license and operate its assets and properties and to
conduct its business, except any such Authorization, filing or notice,
the failure of which to hold or make would not have a material adverse
effect on the Company and its subsidiaries taken as a whole. Each such
Authorization is valid and in full force and effect, and the Company
is in compliance, in all material respects, with all the terms and
conditions thereof and with the applicable rules and regulations of
the authorities and governing bodies having jurisdiction with respect
thereto, except any such noncompliance that would not have a material
adverse effect on the Company and its subsidiaries taken as a whole;
and no event has occurred
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<PAGE>
(including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of
time or both, would allow revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or
both, would result in any other impairment of the rights under any
such Authorization, except such revocation, suspension, termination or
impairment that would not have a material adverse effect on the
Company and its subsidiaries taken as a whole; and no such
Authorization contains any restriction that is materially burdensome
to the Company.
(xvii) The Company and its subsidiaries do not own any real
property, and have good title to all personal property owned by them,
in each case free and clear of all liens, security interests, pledges,
charges, encumbrances, mortgages and defects, except such as are
disclosed in the Prospectus or such as do not materially and adversely
affect the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company or any of its subsidiaries are held under valid,
subsisting and enforceable leases, with such exceptions as are
disclosed in the Prospectus or are not material and do not interfere
with the use made or proposed to be made of such property and
buildings by the Company or such subsidiary.
(xviii) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or filing with,
any court or governmental agency or body is required on the part of
the Company for the sale of the Shares or the consummation of the
transactions contemplated by this Agreement, except the registration
of the Shares under the Act and such as may be required under state
securities or blue sky laws in connection with the offer, sale and
distribution of the Shares by the Underwriters.
(xix) There is no litigation, arbitration, claim, proceeding
(formal or informal) or investigation pending or, to the Company's
knowledge, threatened (or any basis therefor) in which the Company or
any of its subsidiaries is a party or of which any of their respective
properties or assets are the subject which, if determined adversely to
the Company or any such subsidiary, would individually or in the
aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries
taken as a whole. Neither the Company nor any of its subsidiaries is
in violation of, or in default with respect to, any statute, rule,
regulation, order, judgment or decree, except as described in the
Prospectus or such as do not and will not individually or in the
aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries
taken as a whole, and
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<PAGE>
neither the Company nor any of its subsidiaries is bound by any order,
judgment or decree.
(xx) Arthur Andersen LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries, are and
were, during the periods covered by their reports included in the
Registration Statement and the Prospectus, independent public
accountants as required by the Act and the rules and regulations of
the Commission thereunder.
(xxi) The consolidated financial statements together with
related notes and schedules of the Company and its consolidated
subsidiaries included in the Registration Statement, the Prospectus or
any Preliminary Prospectus were prepared in accordance with generally
accepted accounting principles consistently applied throughout the
periods involved and fairly present the financial position and results
of operations of the Company and its subsidiaries, on a consolidated
basis, at the dates and for the periods presented; all adjustments
necessary for a fair presentation of results for such periods have
been made; the selected financial information included under the
captions "Summary -- Summary Financial Information" and "Selected
Financial Information" in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) present fairly
the information shown therein and have been compiled on a basis
consistent with the financial statements presented therein; the pro
forma financial statements and related notes thereto included in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto) present fairly the information shown therein, have
been prepared in accordance with the Act and the Commission's rules
and guidelines with respect to pro forma financial statements, have
been prepared on a basis consistent with the historical financial
statements of the Company, have been compiled on the pro forma bases
described therein, and (x) the assumptions underlying the pro forma
adjustments are reasonable, (y) such adjustments are appropriate to
give effect to the transactions or circumstances referred to therein
and have been properly applied to the historical amounts in the
compilation of such statements and (z) such statements fairly present
the pro forma financial position and results of operations and other
information purported to be shown therein at the respective dates or
for the respective periods therein specified; the supporting
schedules, if any, included in the Registration Statement present
fairly in accordance with generally accepted accounting principles the
information required to be stated therein; and the other financial and
statistical information and data respecting the Company set forth in
the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately
presented and prepared on a basis consistent with such financial
statements and the books and records of the Company. No other
financial statements, supporting schedules or other financial
information (whether
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<PAGE>
pro forma financial statements or otherwise) are required to be
included in the Registration Statement or the Prospectus. As of the
date of the Prospectus, the Company is not engaged in substantive
discussions with any third party with respect to, or obligated to
complete, any acquisitions for which disclosure of pro forma financial
information in the Registration Statement and the Prospectus is
required by the Act.
(xxii) This Agreement has been duly authorized, executed and
delivered by the Company.
(xxiii) Neither the Company nor any of its officers, directors
or affiliates has (A) taken, directly or indirectly, any action
designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Shares or (2) paid or
agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(xxiv) The Company has obtained for the benefit of the Company
and the Underwriters from each of its directors, officers, Selling
Shareholders and each shareholder listed on Annex II hereto (each, an
"Executing Shareholder") a written agreement (each, a "Lock-Up
Agreement") that for a period of 180 days from the date of the
Prospectus such director, officer or shareholder will not, without
your prior written consent, (A) directly or indirectly make, agree to
or cause any offer, sale (including short sale), loan, pledge or other
disposition of, or grant any options, rights or warrants to purchase
with respect to, or otherwise transfer or reduce any risk of ownership
of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for Common
Stock; (B) enter into any swap or other arrangement that transfers all
or a portion of the economic consequences associated with the
ownership of the Common Stock; (C) make any demand for, or exercise
any right with respect to, the registration of shares of Common Stock
or any securities convertible into or exchangeable or exercisable for
Common Stock; provided, however that during such period, each
Executing Shareholder may transfer shares of Common Stock pursuant to
a bona fide gift; provided that any recipient of Common Stock pursuant
to any such gift shall, prior to such recipient's receipt thereof,
agree in writing to be bound by all of the restrictions contained in
such Executing Shareholder's Lock-Up Agreement until 180 days after
the date of the Prospectus.
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<PAGE>
(xxv) The Company has not violated any federal, state, local or
foreign law, order, judgment, decree, rule or regulation (including,
without limitation, any such law, order, judgment, decree, rule or
regulation relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), the Employee Retirement Income
Security Act of 1974, as amended, and the rules and regulations
thereunder ("ERISA"), or the Foreign Corrupt Practices Act and the
rules and regulations thereunder), except for such violations which
would not, individually or in the aggregate, have material adverse
effect on the financial position, results or operations or business of
the Company and its subsidiaries taken as a whole. The Company has no
material liability (contingent or otherwise) in connection with any
Environmental Law or the release into the environment of any substance
regulated by any Environmental Law.
(xxvi) The Company and its subsidiaries own or have the right
to use all patents, patent applications, trademarks, trademark
applications, tradenames, service marks, copyrights, franchises, trade
secrets, proprietary or other confidential information and intangible
properties and assets (collectively, "Intangibles") necessary to
operate their respective businesses as presently conducted or as the
Prospectus indicates the Company or such subsidiary proposes to
conduct; to the Company's knowledge, neither the Company nor any
subsidiary has infringed or is infringing, and neither the Company nor
any subsidiary has received notice of infringement with respect to,
asserted Intangibles of others; and, to the knowledge of the Company,
there is no infringement by others of Intangibles of the Company or
any of its subsidiaries.
(xxvii) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; and neither the Company nor any
such subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a comparable cost, except as
disclosed in the Prospectus.
(xxviii) Each of the Company and its subsidiaries makes and
keeps accurate books and records reflecting its assets and maintains a
system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance
with management's authorization, (B) transactions are recorded as
necessary to permit preparation of the Company's consolidated
financial statements in accordance with generally accepted accounting
principles and to maintain accountability for the assets of the
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<PAGE>
Company, (C) access to the assets of the Company and each of its
subsidiaries is permitted only in accordance with management's
authorization, (D) the recorded accountability for assets of the
Company and each of its subsidiaries is compared with existing assets
at reasonable intervals and appropriate action is taken with respect
to any differences; and (E) such controls would prevent or detect
errors or irregularities in amounts that would be material to the
Company.
(xxix) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distributions on such subsidiary's capital stock,
from repaying to the Company any loans or advances to such subsidiary
or from transferring any of such subsidiary's property or assets to
the Company or any other subsidiary of the Company, except as
disclosed in the Prospectus.
(xxx) The Company and its subsidiaries have filed all foreign,
federal, state and local income, franchise tax and other tax returns
that are required to be filed by them and have paid all taxes
(including, without limitation, withholding taxes) shown as due on
such returns as well as all other taxes, assessments and governmental
charges (including, without limitation, all penalties and interest)
that are due and payable; and no deficiency with respect to any such
return has been assessed or proposed.
(xxxi) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment
company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(xxxii) The Company has previously disclosed and delivered or
made available to the Representatives copies of all pension,
retirement, profit-sharing, deferred compensation, stock option,
employee stock ownership, severance pay, vacation, bonus or other
incentive plans, all other written employee programs, arrangements or
agreements, all medical, vision, dental or other health plans, all
life insurance plans and all other employee benefit plans or fringe
benefit plans, including, without limitation, "employee benefit plans"
as that term is defined in Section 3(3) of ERISA, adopted, maintained,
sponsored in whole or in part, or contributed to by the Company, its
predecessors or any subsidiary of the Company or its predecessors for
the benefit of employees, retirees, dependents, spouses, directors,
independent contractors or other beneficiaries and under which
employees, retirees, dependents, spouses, directors, independent
contractors or other beneficiaries are eligible to participate
(collectively, the "Company Benefit Plans").
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<PAGE>
The Company and each predecessor of the Company or a subsidiary
of the Company that adopted or contributed to a Company Benefit Plan
have maintained all Company Benefit Plans (including, without
limitation, filing all reports and returns required to be filed with
respect thereto) in accordance with their terms and in compliance with
the applicable terms of ERISA and the Internal Revenue Code of 1986,
as amended, and the rules and regulations thereunder (the "Code"),
except where the failure to do so would not, individually or in the
aggregate, have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries.
Each Company Benefit Plan which is intended to be qualified under
Section 401(a) of the Code has either received a favorable
determination letter from the Internal Revenue Service, timely
requested such a letter or relies upon an opinion letter from the
Internal Revenue Service with respect to the qualified status of any
non-individually designed plan and has at all times been maintained in
accordance with Section 401 of the Code, except where any failure to
receive or seek such a favorable determination letter or so maintain
such Company Benefit Plan would not, individually or in the aggregate,
have a material adverse effect on the financial position, results of
operations or business of the Company and its subsidiaries. The
Company has not engaged in a transaction with respect to any Company
Benefit Plan that would subject the Company to a tax or penalty
imposed by either Section 4975 of the Code or Section 502(i) of ERISA,
except for any such transaction, tax or penalty which would not,
individually or in the aggregate, have a material adverse effect on
the financial position, results of operations or business of the
Company and its subsidiaries.
Except as required pursuant to Code Section 4980B and ERISA
Section 609 et. seq., the Company is not obligated to provide post-
retirement medical benefits or any other unfunded post-retirement
welfare benefits, except for the provisions of any such benefits which
would not, individually or in the aggregate, have a material adverse
effect on the financial position, results of operations or business of
the Company and its subsidiaries. Neither the Company nor any member
of a group of trades or businesses under common control (as defined in
ERISA Sections 4001(a)(14) and 4001(b)(1)) with the Company have at
any time within the last six years sponsored, contributed to or been
obligated under Title I or IV of ERISA to contribute to a "defined
benefit plan" (as defined in ERISA Section 3(35)). Within the last six
years, neither the Company nor any member of a group of trades or
businesses under common control (as defined in ERISA Sections
4001(a)(14) and 4001(b)(1)) with the Company have had an "obligation
to contribute" (as defined in ERISA Section 4212) to a "multiemployer
plan" (as defined in ERISA Sections 4001(a)(3) and 3(37)(A)).
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<PAGE>
(xxxiii) The Company has reviewed its operations and has made
the assessments and undertaken the actions described under the caption
"Year 2000 Readiness" in the Prospectus with respect to the operations
of any third parties with which the Company has a material
relationship to evaluate the extent to which the business or
operations of the Company will be affected by the Year 2000 Problem
(as defined below). As a result of such review, the Company has no
reason to believe, and does not believe, that the Year 2000 Problem
will have a material adverse effect on the financial position, results
of operations or business of the Company and its subsidiaries. The
"Year 2000 Problem" as used herein means any risk that the computer
hardware or software used in the receipt, transmission, storage,
retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000.
Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters at any
Time of Delivery Date shall be deemed to be a representation and
warranty by the Company to the Underwriters as to the matters covered
thereby.
(b) Representations and Warranties of the Selling Shareholders. Each
Selling Shareholder, severally, and not jointly, represents and warrants to, and
agrees with, each of the several Underwriters and the Company that:
(i) Such Selling Shareholder has full corporate power and
authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement (as hereinafter defined) and to sell, assign,
transfer and deliver to the Underwriters the Shares to be sold by such
Selling Shareholder hereunder; the execution and delivery of this
Agreement, the Power of Attorney and the Custody Agreement have been
duly authorized by all necessary action of such Selling Shareholder;
such Selling Shareholder has duly executed and delivered this
Agreement, the Power of Attorney and the Custody Agreement; and each
of this Agreement, the Power of Attorney and the Custody Agreement is
a valid and binding agreement of such Selling Shareholder, enforceable
in accordance with its terms.
(ii) No consent, approval, authorization, order or declaration
of or from, or registration, qualification or filing with, any court
or governmental agency or body is required for the sale of the Shares
to be sold by such Selling Shareholder or the consummation of the
transactions contemplated by this Agreement, the Power of Attorney or
the Custody Agreement, except the
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<PAGE>
registration of such Shares under the Act and such as may be required
under state securities or blue sky laws in connection with the offer,
sale and distribution of such Shares by the Underwriters.
(iii) The sale of the Shares to be sold by such Selling
Shareholder under this Agreement and the execution, delivery and
performance of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with, or (with or without the giving of
notice or the passage of time or both) result in a breach of violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which such Selling Shareholder or any of
its subsidiaries is a party or to which any of their respective
properties or assets is subject, nor will such action conflict with or
violate any provision of the Articles of Incorporation or Bylaws or
other governing instruments of such Selling Shareholder or any of its
subsidiaries or any constitution, statute, rule or regulation or any
order, judgment or decree of any court or governmental agency or body
having jurisdiction over such Selling Shareholder or any of such
Selling Shareholder's properties or assets.
(iv) Such Selling Shareholder has, and immediately prior to the
First Time of Delivery (as defined in Section 4 hereof), such Selling
Shareholder will have, good and valid title to the Shares to be sold
by such Selling Shareholder hereunder, free and clear of all
restrictions on transfer, liens, security interests, pledges, charges,
encumbrances, defects, shareholders' agreements, voting trusts,
equities or claims of any nature whatsoever; and, upon delivery of
such Shares against payment therefor as provided herein, good and
valid title to such Shares, free and clear of all liens, security
interests, pledges, charges, encumbrances, defects, shareholders'
agreements, voting trusts, equities or claims of any nature
whatsoever, will pass to the several Underwriters.
(v) Neither such Selling Shareholder nor any of its officers,
directors or affiliates has (A) taken, directly or indirectly, any
action designed to cause or result in, or that has constituted or
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Shares or (2) paid or
agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(vi) Certificates in negotiable form representing all of the
Shares to be sold by such Selling Shareholder hereunder have been
placed in
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<PAGE>
custody under a Custody Agreement, in the form heretofore furnished to
and approved by the Representatives, duly executed and delivered by
such Selling Shareholder to SunTrust Bank, Inc., as custodian (the
"Custodian"). Such Selling Shareholder has duly executed and delivered
a Power of Attorney, in the form heretofore furnished to and approved
by the Representatives, appointing the persons indicated in Schedule
II hereto as such Selling Shareholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this
Agreement on behalf of such Selling Shareholder, to determine the
purchase price to be paid by the Underwriters to the Selling
Shareholders as provided in Section 2 hereof, to authorize the
delivery of the Shares to be sold by such Selling Shareholder
hereunder and otherwise to act on behalf of such Selling Shareholder
in connection with the transactions contemplated by this Agreement and
the Custody Agreement.
(vii) The information in the Registration Statement under the
caption "Principal and Selling Shareholders" which specifically
relates to the undersigned does not, and will not on the date of the
execution of the Underwriting Agreement or on the First Time of
Delivery, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, and if there is any change in
the information referred to in this paragraph, the undersigned will
immediately notify you of such change.
Each certificate signed by or on behalf of such Selling
Shareholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by
such Selling Shareholder to the Underwriters as to the matters covered
thereby.
In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Code with respect to the transactions herein
contemplated, each of the Selling Shareholders agrees to deliver to the
Representatives prior to or at the First Time of Delivery (as hereinafter
defined) a properly completed and executed United States Treasury Department
Form W-9 (or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
Each of the Selling Shareholders specifically agrees that the Shares
represented by the certificates held in custody for such Selling Shareholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder, and that the arrangements made by such Selling Shareholder for such
custody, and the appointment by such Selling Shareholder of the Attorneys-in-
Fact by the Power of Attorney, are irrevocable. Each of the Selling Shareholders
specifically agrees that the obligations of
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<PAGE>
the Selling Shareholders hereunder shall not be terminated by operation of law,
whether in the case of a partnership or corporation, by the dissolution of such
partnership or corporation or by the occurrence of any other event.
2. Purchase and Sale of Shares. Subject to the terms and conditions
herein set forth, (a) the Company and each Selling Shareholder agree, severally
and not jointly, to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company and
each Selling Shareholder, at a purchase price of $________ per share, the number
of Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Shares to be sold by the
Company and the Selling Shareholders as set forth opposite their respective
names in Schedule II hereto by a fraction, the numerator of which is the
aggregate number of Firm Shares to be purchased by such Underwriter as set forth
opposite the name of such Underwriter in Schedule I hereto, and the denominator
of which is the aggregate number of Firm Shares to be purchased by the
Underwriters from the Company and the Selling Shareholders hereunder and (b) in
the event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction, the numerator of which is the maximum number
of Optional Shares that such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of the Optional Shares that all of the
Underwriters are entitled to purchase hereunder.
Subject to the terms and conditions herein set forth, the Company
hereby grants to the Underwriters the right to purchase at their election in
whole or in part from time to time up to 667,223 Optional Shares, at the
purchase price per share set forth in clause (a) in the paragraph above, for the
sole purpose of covering over-allotments in the sale of Firm Shares. Any such
election to purchase Optional Shares may be exercised by written notice from you
to the Company, given from time to time within a period of 30 calendar days
after the date of this Agreement and setting forth the aggregate number of
Optional Shares to be purchased and the date on which such Optional Shares are
to be delivered, as determined by you, but in no event earlier than the First
Time of Delivery (as hereinafter defined) or, unless you and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice (i.e. on a "T+3" basis in accordance with the Act
and the Securities Exchange Act of 1934, as amended (the "Exchange Act")). In
the event you elect to purchase all or a portion of the Optional Shares, the
Company agrees to furnish or cause to be furnished to you the certificates,
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letters and opinions, and to satisfy all conditions, set forth in Section 7
hereof at each Subsequent Time of Delivery (as hereinafter defined).
3. Offering by the Underwriters. Upon the authorization by you of the
release of the Shares, the several Underwriters propose to offer the Shares for
sale upon the terms and conditions disclosed in the Prospectus.
4. Delivery of Shares; Closing. Certificates in definitive form for
the Shares to be purchased by each Underwriter hereunder, and in such
denominations and registered in such names as The Robinson-Humphrey Company, LLC
may request upon at least 48 hours' prior notice to the Company and the
Attorneys-in-Fact, shall be delivered by or on behalf of the Company and the
Selling Shareholders to you through the facilities of the Depository Trust
Company ("DTC") for the account of such Underwriter, against payment by such
Underwriter on its behalf of the purchase price therefor by wire transfer of
immediately available funds, payable to the order of the Company and the
Custodian, as their interests may appear. The closing of the sale and purchase
of the Shares shall be held at the offices of Alston & Bird LLP, 1201 West
Peachtree Street, Atlanta, Georgia 30309, except that physical delivery of such
certificates shall be made at the office of DTC, 55 Water Street, New York, New
York 10041, or its designated custodian. The time and date of such delivery and
payment shall be, with respect to the Firm Shares, at 9:00 a.m., Atlanta time,
on November ___, 1999 or at such other time and date as you and the Company and
the Attorneys-in-Fact, on behalf of the Selling Shareholders, may agree upon in
writing, and, with respect to the Optional Shares, at 9:00 a.m., Atlanta time,
on the date specified by you in the written notice given by you of the
Underwriters' election to purchase all or part of such Optional Shares, or at
such other time and date as you and the Company may agree upon in writing. Such
time and date for delivery of the Firm Shares is herein called the "First Time
of Delivery," such time and date for delivery of any Optional Shares, if not the
First Time of Delivery, is herein called a "Subsequent Time of Delivery," and
each such time and date for delivery is herein called a "Time of Delivery." The
Company will make such certificates available for checking and packaging at
least 24 hours prior to each Time of Delivery at the office of DTC or its
designated custodian in New York, New York or at such other location in New
York, New York specified by you in writing at least 48 hours prior to such Time
of Delivery.
5. (a) Covenants of the Company. The Company covenants and agrees
with each of the Underwriters:
(i) The Company will file the Prospectus with the Commission in
the manner and within the time period required by Rule 424(b). The
Company will advise you promptly of any such filing pursuant to Rule
424(b).
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(ii) The Company will not file with the Commission the
Prospectus, any amendment or supplement to the Prospectus or any
amendment to the Registration Statement unless you have received a
reasonable period of time to review the Prospectus or any such
proposed amendment or supplement and consented to the filing thereof.
Upon the request of the Representatives or counsel for the
Underwriters, the Company will promptly prepare and file with the
Commission, in accordance with the rules and regulations of the
Commission, any amendments to the Registration Statement or amendments
or supplements to the Prospectus that may be necessary, or in the good
faith opinion of the Representatives, advisable in connection with the
distribution of the Shares by the several Underwriters and will use
its best efforts to cause any such amendment to the Registration
Statement to be declared effective as promptly as possible. If
required, the Company will file any amendment or supplement to the
Prospectus with the Commission in the manner and within the time
period required by Rule 424(b) under the Act. The Company will advise
the Representatives, promptly after receiving notice thereof, of the
time when any amendment to the Registration Statement, or when any
Rule 462(b) Prospectus or any amendment thereto, has been filed or
declared effective or when the Prospectus or any amendment or
supplement thereto has been filed and will provide evidence to the
Representatives of each such filing or effectiveness.
(iii) The Company will advise you promptly after receiving
notice or obtaining knowledge of (A) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or any part thereof or any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, (B) the suspension of the
qualification of the Shares for offer or sale in any jurisdiction or
of the initiation or threatening of any proceeding for any such
purpose, or (C) any request made by the Commission or any securities
authority of any other jurisdiction for amending the Registration
Statement, for amending or supplementing the Prospectus or for
additional information. The Company will use its best efforts to
prevent the issuance of any such stop order and, if any such stop
order is issued, to obtain the withdrawal thereof as promptly as
possible.
(iv) If the delivery of a prospectus relating to the Shares is
required under the Act at any time prior to the expiration of nine
months after the date of the Prospectus and if at such time any events
have occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading, or if for any reason it is necessary during
such same period to amend or supplement the Prospectus to comply with
the Act or the rules and
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regulations thereunder, the Company will promptly notify you and upon
your request (but at the Company's expense) prepare and file with the
Commission an amendment or supplement to the Prospectus that corrects
such statement or omission or effects such compliance and will furnish
without charge to each Underwriter and to any dealer in securities as
many copies of such amended or supplemented Prospectus as you may from
time to time reasonably request. If the delivery of a prospectus
relating to the Shares is required under the Act at any time nine
months or more after the date of the Prospectus, upon your request but
at the expense of the Underwriter making such request, the Company
will prepare and deliver to such Underwriter as many copies as you may
request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act. Neither your consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 7.
(v) The Company promptly from time to time will take such
action as you may reasonably request to qualify the Shares for
offering and sale under the securities or blue sky laws of such
jurisdictions as you may request and will continue such qualifications
in effect for as long as may be necessary to complete the distribution
of the Shares, provided that in connection therewith the Company shall
not be required to qualify as a foreign corporation or a dealer in
securities or to file a general consent to service of processor to
render the Company subject to any franchise or other taxes other than
consent to service of process or the subjection to any franchise or
other taxes as to matters and transactions related to the Prospectus,
the Registration Statement, any Preliminary Prospectus or the offering
or sale of the Shares, in any jurisdiction in which it is not now
subject.
(vi) The Company will promptly provide you, without charge,
(A) three manually executed copies of the Registration Statement as
originally filed with the Commission and of each amendment thereto,
(B) for each other Underwriter a conformed copy of the Registration
Statement as originally filed and of each amendment thereto, without
exhibits, and (C) so long as a prospectus relating to the Shares is
required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as you may reasonably request.
(vii) As soon as practicable, but in any event not later than
90 days after the end of the first quarter ending after one year
following the effective date of the Registration Statement, the
Company will make generally available to its security holders an
earnings statement of the Company and its subsidiaries, if any,
covering a period of at least 12 months beginning after the effective
date of
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<PAGE>
the Registration Statement (which need not be audited) complying with
Section 11(a) of the Act and the rules and regulations thereunder, and
advise you in writing when such statement has been so made available.
(viii) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, the Company will not, without the prior written consent of
The Robinson-Humphrey Company, LLC ("Robinson Humphrey"), directly or
indirectly make, agree to or cause any offer, sale (including short
sale), loan, pledge or other disposition of, or grant any options,
rights or warrants to purchase with respect to, or otherwise transfer
or reduce any risk of ownership of, directly or indirectly, or file
any registration statement with respect to the registration of any
shares of Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock, except as provided in
Section 2 and except that the Company may (A) grant awards pursuant to
the Company's existing incentive plans and may issue shares of Common
Stock upon the exercise of such awards, (B) issue shares of Common
Stock upon the exercise of any option or warrant outstanding and
approved by the Company's Board of Directors on the date hereof
(C) issue shares of Common Stock to be used as the purchase price for
any acquisition of another business; provided, that any recipient of
Common Stock in any such acquisition shall, prior to such recipient's
receipt thereof, agree in writing to be bound by all of the
restrictions applicable to the Company in this paragraph, (D) file a
registration statement on Form S-8 under the Act within 90 days after
the completion of offering of the Shares contemplated hereby with
respect to up to __________ shares of Common Stock issuable or
reserved for issuance under the Company's 1999 Stock Option and
Incentive Plan, and (E) register shares pursuant to registration
rights in favor of the Bankers Banks.
(x) The Company shall, prior to or concurrently with the
execution of this Agreement, deliver a Lock-Up Agreement executed by
each Executing Shareholder to the effect that such person will not,
during the period commencing on the date such person signs such
agreement and ending 180 days after the date of the Prospectus,
without the prior written consent of Robinson-Humphrey or pursuant to
Section 2 hereof, (A) directly or indirectly make, agree to or cause
any offer, sale (including short sale), loan, pledge or other
disposition of, or grant any options, rights or warrants to purchase
with respect to, or otherwise transfer or reduce any risk of ownership
of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for Common
Stock; (B) enter into any swap or other arrangement that transfers all
or a portion of the economic consequences associated with the
ownership of the Common Stock; or (C) make any demand for, or exercise
any right with respect to, the registration of shares of Common Stock
or any securities
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convertible into or exchangeable or exercisable for Common Stock.
Notwithstanding the immediately preceding sentence, during such
period, each Executing Shareholder may transfer shares of Common Stock
pursuant to a bona fide gift; provided that any recipient of Common
Stock pursuant to any such gift shall, prior to such recipient's
receipt thereof, agree in writing to be bound by all of the
restrictions contained in such Executing Shareholder's Lock-Up
Agreement until 180 days after the date of the Prospectus.
(xi) During a period of five years from the effective date of
the Registration Statement, the Company will furnish to you and, upon
request, to each of the other Underwriters, without charge, (A) copies
of all reports or other communications (financial or other) furnished
to shareholders, (B) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange, and (C) such
additional information concerning the business and financial condition
of the Company and its subsidiaries, if any, as you may reasonably
request from time to time, other than any report or other
communication that has been filed with the Commission under its EDGAR
System and that is publicly available.
(xii) Neither the Company nor any of its officers, directors or
affiliates will (A) take, directly or indirectly, prior to the
termination of the underwriting syndicate contemplated by this
Agreement, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of any of the Shares, (B) sell, bid for, purchase
or pay anyone any compensation for soliciting purchases of, the Shares
or (C) pay or agree to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(xiii) The Company will apply the net proceeds from the
offering substantially in the manner set forth under "Use of Proceeds"
in the Prospectus but in no event to invest or otherwise use the net
proceeds from the offering in such a manner as would require the
Company to register as an "investment company" within the meaning of
the Investment Company Act.
(xiv) The Company will use its best efforts to cause the Shares
be listed on the Nasdaq National Market at each Time of Delivery and
for at least three years from the date hereof.
(xv) If the Registration Statement at the time of the
effectiveness of this Agreement does not cover all of the Shares, the
Company will file a Rule 462(b) Registration Statement with the
Commission registering the Shares not so
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covered in compliance with Rule 462(b) by 10:00 p.m., Atlanta time, on
the date of this Agreement and will pay to the Commission the filing
fee for such Rule 462(b) Registration Statement at the time of the
filing thereof or to give irrevocable instructions for the payment of
such fee pursuant to Rule 111(b) under the Act.
(xvi) The Company will file with the Commission, from time to
time after the effective date of the Registration Statement, such
reports as are required by the Act (including, without limitation,
Rule 463 of the Commission under the Act or any successor provision),
Exchange Act, and the rules and regulations of the Commission
thereunder, and will also file with the securities commissions in
jurisdictions where the Shares have been sold by any Underwriter any
such reports as are required to be filed by the securities acts and
the regulations of those jurisdictions.
(xvii) If at any time during the period beginning on the date
the Registration Statement becomes effective and ending on the later
of (A) the date 30 days after such effective date and (B) the date
that is the earlier of (1) the date on which the Company first files
with the Commission a Quarterly Report on Form 10-Q after such
effective date and (2) the date on which the Company first issues a
quarterly financial report to shareholders after such effective date,
any rumor, publication or event relating to or affecting the Company
shall occur as a result of which in your reasonable opinion the market
price of the Common Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or event
necessitates an amendment of or supplement to the Prospectus), the
Company will, after written notice from you advising the Company to
the effect set forth above, forthwith prepare, consult with you
concerning the substance of, and disseminate a press release or other
public statement, reasonably satisfactory to you, responding to or
commenting on such rumor, publication or event.
(xviii) The Company will maintain a transfer agent, and if
necessary under the laws of the State of Georgia, a registrar for the
Shares.
(b) Covenants of the Selling Shareholders. Each Selling Shareholder
covenants and agrees with each of the Underwriters:
(i) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, such Selling Shareholder will not, without the prior
written consent of The Robinson-Humphrey Company, LLC or pursuant to
Section 2 hereof, (A) directly or indirectly make, agree to or cause
any offer, sale (including short sale), loan, pledge or other
disposition of, or grant any options, rights or warrants to purchase
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with respect to, or otherwise transfer or reduce any risk of ownership
of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for Common
Stock; (B) enter into any swap or other arrangement that transfers all
or a portion of the economic consequences associated with the
ownership of the Common Stock; or (C) make any demand for, or exercise
any right with respect to, the registration of shares of Common Stock
or any securities convertible into or exchangeable or exercisable for
Common Stock.
(ii) Neither such Selling Shareholder nor any of its officers,
directors or affiliates will (A) take, directly or indirectly, prior
to the termination of the underwriting syndicate contemplated by this
Agreement, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of any of the Shares, (B) sell, bid for, purchase
or pay anyone any compensation for soliciting purchases of, the Shares
or (C) pay to or agree to pay any person any compensation for
soliciting another to purchase any other securities of the Company.
(iii) Such Selling Shareholder will pay or to cause to be
paid all transfer or other taxes payable in connection with the
transfer and delivery of the Shares to be sold by such Selling
Shareholder.
6. Expenses. The Company will pay all costs and expenses incident to
the performance of the Company's and each of the Selling Shareholders'
obligations under this Agreement, whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated pursuant to Section 10
hereof, including, without limitation, all costs and expenses incident to (a)
the fees, disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and, if applicable, filing
of the Registration Statement (including all amendments thereto), any
Preliminary Prospectus, the Prospectus and any amendments and supplements
thereto, this Agreement and any blue sky memoranda; (b) the delivery of copies
of the foregoing documents to the Underwriters; (c) the filing fees of the
Commission and the National Association of Securities Dealers, Inc. relating to
the Shares; (d) the preparation, issuance and delivery to the Underwriters of
any certificates evidencing the Shares, including transfer agent's and
registrar's fees; (e) the qualification of the Shares for offering and sale
under state securities or blue sky laws, including all filing fees; (f) any
listing of the Shares on the National Association Securities Dealers Automated
Quotation National Market System, (g) the fees and disbursements of counsel for
the Underwriters in connection with the review and clearance by the National
Association of Securities Dealers, Inc., of the underwriting and underwriters'
compensation terms and
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<PAGE>
arrangements and the qualification of the Shares for offering and sale under
state securities or blue sky laws, and the clearance by the Commission and the
National Association of Securities Dealers, Inc., of the directed share offering
to the shareholders of The InterCept Group, Inc. and (h) any expenses for
travel, lodging and meals incurred by the Company and any of its officers,
directors and employees in connection with any meetings with prospective
investors in the Shares. It is understood, however, that, except as provided in
this Section, Section 8 and Section 10 hereof, the Underwriters will pay all of
their own costs and expenses, including the fees of their counsel, stock
transfer taxes on resale of any of the Shares by them, and any advertising
expenses relating to the offer and sale of the Shares. The provisions of this
Section 6 shall not supersede or otherwise affect any agreement that the Company
and the Selling Shareholders may otherwise have for allocation of such expenses
among themselves.
7. Conditions of the Underwriters' Obligations. The several
obligations of the Underwriters hereunder to purchase and pay for the Shares to
be delivered at each Time of Delivery shall be subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
contained herein as of the date hereof and as of such Time of Delivery, to the
accuracy of the statements of Company officers made pursuant to the provisions
hereof, to the performance by the Company and the Selling Shareholders of their
respective covenants and agreements hereunder, and to the following additional
conditions precedent:
(a) All filings required by Rule 424, Rule 430A, Rule 434 or Rule
462(b) under the Act, if applicable, shall have been duly made; if the Company
is required to file a Rule 462(b) Registration Statement after the effectiveness
of this Agreement, such Rule 462(b) Registration Statement shall have been
declared effective not later than 11:00 a.m., Atlanta time, on the date of this
Agreement or such later date and time as shall have been consented to by you in
writing. If required, the Prospectus and any amendment or supplement thereto
shall have been filed with the Commission pursuant to Rule 424(b) within the
applicable time period prescribed for such filing and in accordance with Section
5(a) of this Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceedings for that purpose shall have been instituted, or to the knowledge of
the Company and the Representatives, threatened or contemplated by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction.
(b) Alston & Bird LLP, counsel for the Underwriters, shall have
furnished to you such opinion or opinions, dated such Time of Delivery, with
respect to the incorporation of the Company, the validity of the Shares being
delivered at such Time of Delivery, the Registration Statement, the Prospectus,
and other related matters as you
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<PAGE>
may reasonably request, and the Company shall have furnished to such counsel
such documents as they request for the purpose of enabling them to pass upon
such matters.
(c) You shall have received an opinion, dated such Time of Delivery, of
Sutherland Asbill & Brennan LLP, counsel for the Company, in form and substance
satisfactory to you and your counsel, to the effect that:
(i) The Company was duly organized as a corporation, and is
existing and in good standing, under the laws of the State of Georgia and
has the corporate power to execute and deliver this Agreement, to perform
its obligations hereunder, to own and use its properties and to conduct its
business as described in the Registration Statement and the Prospectus.
The Company is qualified to transact business as a foreign corporation and
is in good standing under the laws of each other jurisdiction in which it
owns or leases property, or conducts any business, so as to require such
qualification, except where the failure to so qualify would not have a
material adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries.
(ii) Each of the subsidiaries of the Company was duly organized,
and is existing, and in good standing, under the laws of its jurisdiction
of organization and has the corporate or limited liability company power to
own and use its properties and to conduct its business as described in the
Registration Statement and the Prospectus. Each such subsidiary is
qualified to transact business as a foreign corporation or limited
liability company, as appropriate, and is in good standing under the laws
of each other jurisdiction in which it owns or leases property, or conducts
any business, so as to require such qualification, except where the failure
to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its
subsidiaries.
(iii) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued and outstanding
shares of capital stock of the Company (including the Shares to be sold by
the Selling Shareholders) have been duly authorized and validly issued, are
fully paid and nonassessable and conform in all material respects to the
description of the Common Stock contained in the Registration Statement and
the Prospectus. None of the issued shares of capital stock of the Company
or Direct Access or any of its subsidiaries has been issued or is owned or
held in violation of any preemptive rights of shareholders, and no person
or entity (including any holder of outstanding shares of capital stock of
the Company or its subsidiaries) has any preemptive or other rights to
subscribe for any of the Shares.
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<PAGE>
(iv) All of the issued and outstanding shares or units, as
appropriate, of capital stock of each of the Company's subsidiaries have
been duly authorized and validly issued, are fully paid and nonassessable,
and, to such counsel's knowledge, are owned beneficially by the Company
free and clear of all liens, security interests, pledges, charges,
encumbrances, shareholders' agreements, voting trusts, defects, equities or
claims of any nature whatsoever, except as disclosed in the Prospectus. To
such counsel's knowledge, other than the subsidiaries listed on Exhibit
21.1 to the Registration Statement, the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint venture or
other association.
(v) Except as disclosed in the Prospectus and the Bankers Banks'
Antidilution Rights, there are no outstanding (A) securities or obligations
of the Company or any of its subsidiaries convertible into or exchangeable
for any capital stock of the Company or any such subsidiary, (B) warrants,
rights or options to subscribe for or purchase from the Company or any such
subsidiary any such capital stock or any such convertible or exchangeable
securities or obligations, or (C) obligations of the Company or any such
subsidiary to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights or
options. All such securities, obligations, warrants and options described
in (A), (B) and (C) above have been duly authorized by the Company's Board
of Directors.
(vi) The Shares to be issued and sold by the Company have been
duly authorized for issuance and sale pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor as provided
herein, will be validly issued, fully paid and nonassessable and will
conform in all material respects to the description of the Common Stock
contained in the Prospectus, and the issuance thereof will not be subject
to any preemptive or, to such counsel's knowledge similar rights; the
certificates evidencing the Shares comply with all applicable requirements
of Georgia law, the Articles of Incorporation and Bylaws of the Company,
and The Nasdaq Stock Market; and the Common Stock has been registered under
the Exchange Act, and approved for inclusion on The Nasdaq Stock Market's
National Market subject to notice of issuance.
(vii) Except as disclosed in the Registration Statement and
the Prospectus, (A) there are no contracts, agreements or understandings
known to such counsel between the Company and any person granting such
person the right to require the Company to file a registration statement
under the Act with respect to any securities of the Company or to require
the Company to include any
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<PAGE>
securities in the securities registered pursuant to the Registration
Statement (or any such right has been effectively waived) or in any
securities being registered pursuant to any other registration statement
filed by the Company under the Act and (B) the filing of the Registration
Statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights for or relating to the registration of
any securities of the Company.
(viii) All offers and sales of capital stock of the Company
and its predecessors prior to the date hereof were exempt from the
registration requirements of the Act by reason of Sections 3(b) and 4(2)
thereof and were the subject of an available exemption from the
registration requirements of the applicable state securities or blue sky
laws.
(ix) Neither the Company nor any of its subsidiaries is, or with
the giving of notice or passage of time or both, would be, (A) in violation
of its Articles of Incorporation, Bylaws or Operating Agreement or (B) in
default under any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any of its subsidiaries or
any of their respective properties or assets is subject and which is filed
as an exhibit to the Registration Statement (each, a "Material Agreement"),
except, in the case of clause (B), such defaults that would not have a
material adverse effect on the Company and its subsidiaries taken as a
whole.
(x) The execution of this Agreement did not, the issue and sale
of the Shares being issued at such Time of Delivery and the performance of
this Agreement and the consummation of the other transactions herein
contemplated will not, (A) (with or without the giving of notice or the
passage of time or both) result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or result in the
creation or imposition of any Lien upon any property or assets of the
Company pursuant to, any Material Agreement, (B) violate any provision of
the Articles of Incorporation, Bylaws or Operating Agreement of the Company
or any of its subsidiaries or (C) violate any provision of any
constitution, statute, rule or regulation or any order, judgment or decree
of any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective properties or
assets, except, in the case of clauses (A) and (C),.such breach, violation,
default or Lien that would not have a material adverse effect on the
Company and its subsidiaries taken as a whole.
(xi) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good title to all personal
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property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects except
such as are disclosed in the Prospectus or such as do not materially and
adversely affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company or any of its subsidiaries are held by the Company or such
subsidiary under valid, subsisting and enforceable leases with such
exceptions as are disclosed in the Prospectus or are not material and do
not interfere with the use made and proposed to be made of such property
and buildings by the Company or such subsidiary.
(xii) No consent, approval, authorization, order or declaration
of or from, or registration, qualification or filing with, any court or
governmental agency or body on the part of the Company is required for the
issue and sale of the Shares or the consummation of the transactions
contemplated by this Agreement, except the registration of the Shares under
the Act and such as may be required under state securities or blue sky laws
in connection with the offer, sale and distribution of the Shares by the
Underwriters.
(xiii) Except as disclosed in the Registration Statement and
the Prospectus, to such counsel's knowledge there is no litigation,
arbitration, claim, proceeding (formal or informal) or investigation
pending or threatened (or any basis therefor) in which the Company or any
of its subsidiaries is a party or of which any of their respective
properties or assets is the subject which, if determined adversely to the
Company or any such subsidiary, would individually or in the aggregate have
a material adverse effect on the financial position, results of operations
or business of the Company and its subsidiaries taken as a whole; to such
counsel's knowledge, neither the Company nor any of its subsidiaries is in
violation of, or in default with respect to, any statute, rule, regulation,
order, judgment or decree, except as described in the Prospectus, neither
the Company nor any subsidiary is bound by any order, judgment or decree
and the Company holds all Authorizations necessary for the conduct of its
business as described in the Registration Statement and the Prospectus.
(xiv) The Company has duly authorized the execution and
delivery of this Agreement and the performance by the Company thereunder
and has duly executed and delivered the Agreement.
(xv) The Registration Statement and the Prospectus and each
amendment or supplement thereto (other than the financial statements and
related schedules therein, as to which such counsel need express no
opinion), as of their respective effective or issue dates, complied as to
form in all material respects
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with the requirements of the Act and the rules and regulations thereunder.
To the knowledge of such counsel, there are no (A) contracts, instruments
or other documents or agreements that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement and are not so described or filed as required, (B)
constitutions, laws, orders, judgments, decrees, rules or regulations which
are required to be described in the Registration Statement or the
Prospectus and are not so described as required, (C) pending or threatened
legal or governmental proceedings that are required to be described in the
Registration Statement or the Prospectus and are not so described as
required, or (D) relationships, direct or indirect, between or among the
Company, on the one hand, and the directors, officers or shareholders of
the Company on the other hand, which are required to be described in the
Registration Statement or the Prospectus and are not so described as
required; to such counsel's knowledge, as of the date of the Prospectus and
at such Time of Delivery, the Company is not engaged in substantive
discussions with any third party with respect to, or obligated to complete,
any acquisitions for which disclosure of pro forma financial information in
the Prospectus is required by the Act; and all descriptions in the
Registration Statement (including, without limitation, the statements under
Items 14 and 15 of Part II of the Registration Statement) and the
Prospectus of (W) contracts, instruments and other documents and
agreements, (X) laws, orders, judgments, decrees, rules and regulations,
(Y) pending and threatened legal and governmental proceedings, and (Z)
relationships, direct or indirect, between or among the Company on the one
hand, and the directors, officers, and shareholders of the Company on the
other hand, are fair summaries thereof and fairly present the information
required to be disclosed with respect thereto under the Act.
(xvi) The Registration Statement is effective under the Act;
any required filing of the Prospectus pursuant to Rule 424(b) or Rule 430A
has been made in the manner and within the time period required; and to
such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or threatened or are
contemplated by the Commission.
(xvii) The Company is not, and will not be as a result of the
consummation of the transactions contemplated by this Agreement, an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940.
Such counsel shall also state that they have no reason to believe that
the Registration Statement, or any further amendment thereto made prior to such
Time of Delivery, on its effective date and as of such Time of Delivery,
contained or contains any
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untrue statement of a material fact or omitted or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus, or any amendment or supplement thereto
made prior to such Time of Delivery, as of its issue date and as of such Time of
Delivery, contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial or statistical
data contained in the Registration Statement, any amendment thereto, or the
Prospectus, or any amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
(d) You shall have received an opinion, dated such Time of Delivery, of
Winstead Sechrest & Minick P.C., counsel for Independent Bankers Financial
Corporation, and [counsel for Sirrom Investments, Inc.], counsel for Sirrom
Investments, Inc., in form and substance reasonably satisfactory to you and your
counsel, to the effect that:
(i) Such Selling Shareholder has full corporate power and
authority to enter into each of this Agreement and such Selling
Shareholder's Power of Attorney and Custody Agreement, to sell, assign,
transfer and deliver the Shares being sold by the Selling Shareholder in
the manner provided herein and therein, and to perform the Selling
Shareholder's other obligations hereunder and thereunder.
(ii) A Power of Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Shareholder, each of which is
enforceable against such Selling Shareholder in accordance with its terms
subject to applicable bankruptcy, insolvency, reorganization and moratorium
laws and other laws relating to or affecting the enforcement of creditors'
rights generally and to general equitable principles (except the right to
indemnity and contribution may be limited by federal and state securities
laws).
(iii) This Agreement has been duly executed and delivered by or
on behalf of such Selling Shareholder; the sale of the Shares to be sold by
such Selling Shareholder at such Time of Delivery and the performance of
this Agreement, the Power of Attorney and the Custody Agreement and the
consummation of the transactions herein and therein contemplated will not
(with or without the giving of notice or the passage of time or both)
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement,
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lease or other agreement or instrument to which such Selling Shareholder or
any of its subsidiaries is a party or to which any of their respective
properties or assets is subject, nor will such action conflict with or
violate any provision of the Articles of Incorporation or Bylaws or other
governing instruments of such Selling Shareholder or any of its
subsidiaries or any statute, rule or regulation or any order, judgment or
decree of any court or governmental agency or body having jurisdiction over
such Selling Shareholder or any of such Selling Shareholder's properties or
assets.
(iv) No consent, approval, authorization, order or declaration of
or from, or registration, qualification or filing with, any court or
governmental agency or body is required for the issue and sale of the
Shares being sold by such Selling Shareholder or the consummation of the
transactions contemplated by this Agreement, the Power of Attorney or the
Custody Agreement, except the registration of such Shares under the Act and
such as may be required under state securities or blue sky laws in
connection with the offer, sale and distribution of such Shares by the
Underwriters.
(v) Such Selling Shareholder is the sole registered owner of the
Shares to be sold by such Selling Shareholder, and assuming (A) an
Underwriter acquires its interest in the Shares to be sold by such Selling
Shareholder to such Underwriter without notice of any adverse claim (within
the meaning of the Uniform Commercial Code as in effect in the State of
Georgia (the "UCC")), (B) such Underwriter has paid the purchase price of
such Shares and (C) such Shares have been credited to the securities
account of such Underwriter maintained with DTC, then such Underwriter will
have a securities entitlement (as defined in Section 8-102(a)(17) of the
UCC) to such Shares purchased by such Underwriter and no action based on an
adverse claim to such Shares, whether framed in conversion, replevin,
constructive trust, equitable lien or other theory, may be asserted against
such Underwriter.
In rendering any such opinion, such counsel may assume that all state
laws are the same law as the state of organization of the Selling Shareholder,
which such counsel represents, and may rely, as to matters of fact, to the
extent such counsel deem proper, on certificates of responsible officers of the
Company, the Selling Shareholders, the Attorneys and public officials.
(e) You shall have received from Arthur Andersen LLP letters dated,
respectively, the date hereof (or, if the Registration Statement has been
declared effective on a date prior to date of the execution and delivery of this
Agreement, dated such effective date and the date of this Agreement) and each
Time of Delivery, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto. In the event that the letters referred to in this
Section 7(e) set forth any changes, decreases or increases in the items
specified in paragraph of _____ Annex I, it shall be a further condition to the
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obligations of the Underwriters that (i) such letters shall be accompanied by a
written explanation by the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (ii) such changes,
decreases or increases do not, in your sole judgment, make it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date of such letter.
(f) Since the date of the latest audited financial statements included
in the Prospectus, neither the Company nor any of its subsidiaries shall have
sustained (i) any loss or interference with their respective businesses from
fire, explosion, flood, hurricane or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as disclosed in or contemplated by the Prospectus, or
(ii) any change, or any development involving a prospective change (including
without limitation a change in management or control of the Company), in or
affecting the position (financial or otherwise), results of operations or net
worth of the Company and its subsidiaries, otherwise than as disclosed in or
contemplated by the Prospectus, the effect of which, in either such case, is in
your judgment so material and adverse as to make it impracticable or inadvisable
to proceed with the purchase, sale and delivery of the Shares being delivered at
such Time of Delivery as contemplated by the Registration Statement, as amended
as of the date hereof.
(g) Subsequent to the date hereof, there shall not have occurred any of
the following: (i) any suspension or limitation in trading in securities
generally on the New York Stock Exchange, or the Nasdaq National Market or any
setting of minimum prices for trading on such exchange, or in the Common Stock
by the Commission or the Nasdaq National Market; (ii) a moratorium on commercial
banking activities in New York or Georgia declared by either federal or state
authorities; (iii) any outbreak or escalation of hostilities involving the
United States, declaration by the United States of a national emergency or war
or any other national or international calamity or emergency if the effect of
any such event specified in this clause (iii) in your reasonable judgment makes
it impracticable or inadvisable to proceed with the purchase, sale and delivery
of the Shares being delivered at such Time of Delivery as contemplated by the
Registration Statement, as amended as of the date hereof (v) the enactment,
publication, decree or other promulgation of any constitution, statute,
regulation, rule, order, law, decree, writ or judgment of any court or other
governmental authority which in your good faith opinion materially and adversely
affects, or will materially and adversely affect, the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (vi) the taking of any action by any federal,
state or local government or agency in respect of its monetary or fiscal affairs
which in your good faith opinion has a material adverse effect on the financial
markets in the United States or (vii) any adverse change in general economic,
political, financial or international conditions
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which has an adverse impact on trading prices of securities that, in your good
faith judgment, makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares on the terms and in the manner
contemplated by the Prospectus.
(h) The Company shall have furnished to you at such Time of Delivery
certificates of officers of the Company and certificates of the Selling
Shareholders, satisfactory to you, as to the accuracy of the representations and
warranties of the Company and such Selling Shareholders herein at and as of such
Time of Delivery, as to the performance by the Company and such Selling
Shareholders of all of their respective obligations hereunder to be performed at
or prior to such Time of Delivery, and as to such other matters as you may
reasonably request, and the Company shall have furnished or caused to be
furnished certificates as to the matters set forth in subsections (a) and (f) of
this Section 7, and as to such other matters as you may reasonably request.
(i) The Shares shall be included for quotation on the Nasdaq National
Market, subject to notice of issuance.
8. Indemnification and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter its directors, its officers and each person,
if any, who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act from and against any and all losses, claims,
damages, liabilities and judgments, joint or several, to which such Underwriter
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages, liabilities or judgments (or actions in respect thereof) are caused by,
arise out of or are based upon: (i) any breach of any representation or warranty
made by the Company in Section l(a) of this Agreement; (ii) any untrue statement
or alleged untrue statement of any material fact contained in (A) the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or (B) any application or
other document, or any amendment or supplement thereto, executed by the Company
or based upon written information furnished by or on behalf of the Company filed
in any jurisdiction in order to qualify the Shares under the securities or blue
sky laws thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"); or (iii) the omission or alleged
omission to state in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or any Application a material fact required to be stated therein or necessary to
make the statements therein (in the case of any Preliminary Prspectus or the
Prospectus, in light of the circumstance under which they were made) not
misleading, and will reimburse each Underwriter for any legal or other expenses
(including, without limitation, the reasonable fees and expenses of counsel)
reasonably incurred by such Underwriter in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
-----------------
Company shall not be liable in any such
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case to the extent that any such loss, claim, damage, liability or action arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto or any Application in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through you
expressly for use therein (it being understood that the only information so
provided is the information included in the last paragraph on the cover page and
the first five paragraphs and the seventh, thirteenth, fourteenth, fifteenth,
eighteenth and nineteenth paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and the Prospectus). The Company will not, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding (or related cause of action or portion thereof) in respect of which
indemnification may be sought hereunder (whether or not such Underwriter is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of such Underwriter from
all liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof).
(b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter its directors, its officers and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages, liabilities and judgments, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages, liabilities or judgment (or actions in respect thereof)
arise out of or are based upon: (i) any untrue statement or alleged untrue
statement made by such Selling Shareholder in Section l(b) of this Agreement; or
(ii) any untrue statement or alleged untrue statement of any material fact by
such Selling Shareholder contained in the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto, or any Application or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Preliminary Prospectus or the Prospectus, in light of the circumstance under
which they were made) not misleading, and will reimburse each Underwriter for
any legal or other expenses (including, without limitation, the reasonable fees
and expenses of counsel) reasonably incurred by such Underwriter in connection
with investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
--------
however, that a Selling Shareholder shall only be liable in its capacity as a
- -------
Selling Shareholder pursuant to clause (ii) to the extent that any statements in
or omissions or alleged omissions to state in the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto, or any application, are based upon written information
furnished to the Company
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<PAGE>
by such Selling Shareholder specifically for use therein or to the extent such
Selling Shareholder has failed to bring to the attention of the Underwriters
anything that has come to the attention of such Selling Shareholder to cause
such Selling Shareholder to believe that there is any untrue statement relating
to the Company of any material fact contained in the Registration Statement or
any amendment thereto, the Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or any application, or any omission to state
therein a material fact relating to the Company required to be stated therein or
necessary to make the statements therein not misleading; provided, further,
-----------------
however, that no such Selling Shareholder shall be liable in any such case to
- -------
the extent that any such loss, claim, damage, liability or action arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto or any Application in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you expressly
for use therein (it being understood that the only information so provided is
the information included in the last paragraph on the cover page and the first
five paragraphs and the seventh, thirteenth, fourteenth, fifteenth, eighteenth
and nineteenth paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and the Prospectus); provided, further, however, that such Selling
-------- ------- -------
Shareholder shall be liable hereunder in any case only to the extent of the
total net proceeds from the offering (before deducting expenses) received by
such Selling Shareholder from the Underwriters for the Shares sold by such
Selling Shareholder hereunder unless any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement or any
amendment or supplement thereto, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto or any Application in reliance upon and
conformity with written information furnished to the Company by such Selling
Shareholder expressly for use therein, in which case such limitation of the
liability of such Selling Shareholder shall not apply. No Selling Shareholder
will, without the prior written consent of each Underwriter, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding (or related cause of action or portion
thereof) in respect of which indemnification may be sought hereunder (whether or
not such Underwriter is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of such Underwriter from all liability arising out of such claim, action, suit
or proceeding (or related cause of action or portion thereof).
(c) Each Underwriter, severally but not jointly, agrees to indemnify
and hold harmless the Company and each Selling Shareholder against any losses,
claims, damages or liabilities to which the Company or any Selling Shareholder
may become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or
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alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or any Application or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through you expressly for use therein (it being
understood that the only information so provided is the information included in
the last paragraph on the cover page and the first five paragraphs and the
seventh, thirteenth, fourteenth, fifteenth, eighteenth and nineteenth paragraphs
under the caption "Underwriting" in any Preliminary Prospectus and the
Prospectus); and will reimburse the Company and each Selling Shareholder for any
legal or other expenses reasonably incurred by the Company or such Selling
Shareholder in connection with investigating or defending any such loss, claim,
damage, liability or action.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party); provided, however, that if the defendants in any such
-------- -------
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it or other indemnified parties which are different
from or additional to those available to the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party and such indemnified party shall have the
right to select separate counsel to defend such action on behalf of such
indemnified party. After such notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
or (ii) the indemnifying party has authorized
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the employment of counsel for the indemnified party at the expense of the
indemnifying party or (iii) the indemnifying party shall have failed to assume
the defense of such action or employ counsel reasonably satisfactory to the
indemnified party. Nothing in this Section 8(d) shall preclude an indemnified
party from participating at its own expense in the defense of any such action so
assumed by the indemnifying party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages,
liabilities or judgments (or actions in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other from the offering
of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (d) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Shareholders on the one hand and the Underwriters on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling Shareholders
bear to the total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Shareholders on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this subsection
(e) were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this subsection (e). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), no Underwriter shall be
required to contribute any amount in excess of the amount by
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which the total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. Further,
notwithstanding the provisions of this subsection (e), no Selling Shareholder
shall be required to contribute any amount that, together with the amount of any
damages which such Selling Shareholder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission, exceeds the limit on such Selling Shareholder's liability prescribed
by Section 8(b). No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Shareholders under
this Section 8 shall be in addition to any liability which the Company or such
Selling Shareholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and any Selling Shareholder and to each
person, if any, who controls the Company or any Selling Shareholder within the
meaning of the Act.
9. Default of Underwriters. (a) If any Underwriter defaults in its
obligation to purchase Shares at a Time of Delivery, you may in your discretion
arrange for you or another party or other parties to purchase such Shares on the
terms contained herein. If within thirty-six (36) hours after such default by
any Underwriter you do not arrange for the purchase of such Shares, the Company
and the Selling Shareholders shall be entitled to a further period of thirty-six
(36) hours within which to procure another party or other parties satisfactory
to you to purchase such Shares on such terms. In the event that, within the
respective prescribed periods, you notify the Company and the Selling
Shareholders that you have so arranged for the purchase of such Shares, or the
Company and the Selling Shareholders notify you that they have so arranged for
the purchase of such Shares, you or the Company and the Selling Shareholders
shall have the right to postpone a Time of Delivery for a period of not more
than seven days or such longer period agreed to by you and the Company in order
to effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus that in your opinion may thereby be made necessary. The cost of
preparing, printing and filing any such amendments shall be paid for by the
Underwriters. The term "Underwriter" as used in
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this Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of Shares to be purchased at such Time of Delivery, then
the Company and the Selling Shareholders shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made, but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. Termination. (a) This Agreement may be terminated with respect to
the Firm Shares or any Optional Shares in the sole discretion of the
Representatives by notice to the Company given prior to the First Time of
Delivery or any Subsequent Time of Delivery, respectively, in the event that (i)
any condition to the obligations of the Underwriters set forth in Section 7
hereof has not been satisfied, or (ii) the Company or the Selling Shareholders
shall have failed, refused or been unable to deliver the Shares or to perform
all obligations and satisfy all conditions on their respective parts to be
performed or satisfied hereunder at or prior to such Time of Delivery, in either
case other than by reason of a default by any of the Underwriters. If this
Agreement is terminated pursuant to this Section 10(a), the Company and the
Selling Shareholders, pro rata in accordance with the number of Shares to be
sold hereunder will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Shares. Neither the Company nor any Selling Shareholder shall in any event
be liable to any of the Underwriters for the loss of anticipated profits from
the transactions covered by this Agreement.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholders as provided in Section 9(a), the aggregate number of
such Shares which remains unpurchased exceeds one-eleventh of the aggregate
number of Shares to be purchased at such Time of Delivery, or if the Company and
the Selling Shareholders shall not exercise the right described in Section 9(b)
to require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to a
Subsequent Time of Delivery, the obligations of the Underwriters to purchase and
of the Company to sell the Optional Shares) shall thereupon
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terminate, without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Shareholders, except for the expenses to be borne by the
Company, the Selling Shareholders and the Underwriters as provided in Section 6
hereof and the indemnity and contribution agreements in Section 8 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
11. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company, its officers, the Selling
Shareholders and the several Underwriters, as set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation (or any
statement as to the results thereof) made by or on behalf of any Underwriter or
any controlling person referred to in Section 8(e) or the Company, any Selling
Shareholder or any officer or director or controlling person of the Company or
any Selling Shareholder referred to in Section 8(e), and shall survive delivery
of and payment for the Shares. The respective agreements, covenants,
indemnities and other statements set forth in Sections 6 and 8 hereof shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement.
12. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be mailed, delivered or transmitted by
facsimile and confirmed in writing to you in care of The Robinson-Humphrey
Company, LLC, 3333 Peachtree Road, N.E., Atlanta, Georgia 30326, Attention:
Corporate Finance Department (with a copy to Alston & Bird LLP, 1201 West
Peachtree Street, Atlanta, Georgia 30309 Attention: M. Hill Jeffries; if to any
Selling Shareholder shall be sufficient in all respects if delivered or sent by
registered mail for such Selling Shareholder at its address set forth in
Schedule II hereto with a copy to its counsel at its address set forth on
Schedule II hereto; and if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed in writing to the Company at 2410 Paces Ferry Road,
150 Paces Summit, Atlanta, Georgia 30309, Attention: Glenn W. Sturm (with a copy
to Sutherland, Asbill & Brennan LLP, 999 Peachtree Street, Atlanta, Georgia
30309, Attention: Charles D. Ganz).
13. Representatives. You will act for the several Underwriters in
connection with the transactions contemplated by this Agreement, and any action
under this Agreement taken by you jointly or by The Robinson-Humphrey Company,
LLC will be binding upon all the Underwriters.
14. Binding Effect. This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters, the Company and the Selling
Shareholders and to the extent provided in Sections 8 and 10 hereof, the
officers and directors and controlling persons referred to therein and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
-41-
<PAGE>
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
15. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Georgia without giving effect to any
provisions regarding conflicts of laws.
16. Counterparts. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
-42-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and upon
the acceptance hereof by The Robinson-Humphrey Company, LLC, on behalf of each
of the Underwriters, this letter will constitute a binding agreement among the
Underwriters and the Company. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in the Master Agreement among Underwriters, a copy of which shall be
submitted to the Company for examination, upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
Netzee, Inc.
By:
---------------------------------------
Name: Glenn Sturm
Title: Chief Executive Officer
Independent Bankers Financial Corporation
By:
---------------------------------------
[Insert Name]
Attorney-in-Fact
Sirrom Investments, Inc.
By:
---------------------------------------
[Insert Name]
Attorney-in-Fact
-43-
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the date first
written above at Atlanta, Georgia.
THE ROBINSON-HUMPHREY COMPANY, LLC
J. C. BRADFORD & CO.
SUNTRUST EQUITABLE SECURITIES CORPORATION
By: The Robinson-Humphrey Company, LLC
By:
---------------------------------
Joseph M. Thompson
First Vice President
On behalf of each of the Underwriters
-44-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Firm Purchased if
Shares to be Maximum Option
Underwriter Purchased Exercised
----------- -------------------- -------------------
<S> <C> <C>
The Robinson-Humphrey Company, LLC
J. C. Bradford & Co.
SunTrust Equitable Securities Corporation
__________ __________
Total __________ __________
</TABLE>
-45-
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Total Number of
Firm Shares to
Selling Shareholders* Be Sold
--------------------- ---------------
<S> <C>
Independent Bankers Financial Corporation 391,208
350 Phelps Court, Suite 200
Irving, Texas 75038
Attn: A. Mackey Harral, Executive Vice President
Sirrom Investments, Inc. 56,947
</TABLE>
- ------------
* Each of the Selling Shareholders has executed and delivered a Power of
Attorney appointing Glenn L. Sturm and Richard S. Eiswirth such Selling
Shareholder's Attorneys-in-Fact. Independent Bankers Financial Corporation is
represented by Winstead Secrest & Minick P.C., 5400 Renaissance Tower, 1201
Elm Street, Dallas, Texas 75207, Attn: Valinda Wolfert and D. Forrest
Brumbaugh. Sirrom Investments, Inc. is represented by [insert name and
address of counsel].
-46-
<PAGE>
EXHIBIT 10.21
STATE OF GEORGIA SUBLEASE
COUNTY OF COBB
THIS SUBLEASE is made and entered into this 1st day of September, 1999 by
and between The Bankers Bank, hereinafter referred to as Sublessor and Netzee,
Inc., hereinafter referred to as Sublessee;
WITNESSETH:
THAT WHEREAS, Sublessor is presently leasing certain premises from Builders
Insurance, a Mutual Captive Company (Overlessor) under a lease dated October 31,
1996, as amended (the Overlease), such premises being known as Suite 150 (the
Premises), containing approximately 4,450 usable square feet of floor area in
the building located at 2410 Paces Ferry Road, Atlanta, Georgia (the Building);
and
WHEREAS, Sublessor has agreed to sublease to Sublessee and Sublessee has
agreed to sublease from Sublessor 4,450 usable square feet of floor area (the
Sublet Premises) in accordance with the terms and conditions hereinafter set
forth;
NOW THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Sublease. Sublessor leases to Sublessee and Sublessee subleases from
--------
Sublessor the Sublet Premises for a term that begins on September 1, 1999 (the
Commencement Date) and extends through February 15, 2000 (the Termination Date).
2. Rental. Sublessee shall pay rental to Sublessor for the Sublet Premises
------
beginning September 1, 1999 in the amount of Eight Thousand One Hundred Dollars
($8,100.00) per month. The rental shall be due and payable on the first (1st)
day of each month beginning September 1, 1999.
3. Indemnity. Sublessee does hereby indemnify and hold harmless Sublessor
---------
and Overlessor from and against any and all claims for bodily injury, including
death, and property damage or any other cost or expense occurring in or about
the Sublet Premises or resulting from the occupancy of the Sublet Premises by
Sublessee.
4. Terms of Lease. This Sublease, except as specifically provided herein,
--------------
shall be subject to the terms and conditions of the Overlease as if said
Sublessor were the Landlord therein and Sublessee were the Tenant therein. A
copy of the Overlease is attached hereto as Exhibit B and incorporated herein by
reference. Sublessee shall have no renewal option, expansion option, buyout and
termination option or rights of first or second refusal. Sublessee shall be
responsible for and shall pay to Sublessor the rental provided herein.
<PAGE>
SUBLEASE
PAGE 2
Sublessee shall also pay its proportionate share of all other charges provided
for in the Overlease, including without limitation additional rent based on
increases in the Operating Cost of the Building, based on the proportion that
the usable square footage of the Sublet Premises bears to the usable square
footage of the Premises.
5. Sublessor Warranty. Sublessor warrants that the Overlease is in full
------------------
force and effect and that to the best knowledge of Sublessor there exists no
defaults on the part of the Overlessor or Sublessor. Sublessor warrants that
during the term of this Sublease that Sublessor will comply with the Overlease
and make all payments to Overlessor required thereunder and will commit no
default thereunder, and Sublessor shall indemnify Sublessee and hold Sublessee
harmless from any liability, loss, cost or expense incurred by Sublessee
resulting from Sublessors breach of the foregoing warranty.
6. Sublessee Warranty. Sublessee warrants to Sublessor that it will make
-------------------
all payments required under the Sublease and abide by and perform all
obligations thereunder and commit not default under the Sublease or the
Overlease and that Sublessee shall indemnify Sublessor and hold it harmless from
any liability, loss, cost or expense resulting from Sublessees breach of this
warranty.
SUBLESSEE ATTEST
NETZEE, INC.
BY: illegible /s/ Patty Byrd
----------------------------- -------------------------------
TITLE: President & Chief
Operating Officer
--------------------------
SUBLESSOR ATTEST
THE BANKERS BANK
BY: illegible /s/ Heather Adams
----------------------------- -------------------------------
TITLE: Senior Vice President/
Chief Financial Officer
--------------------------
<PAGE>
EXHIBIT 10.22
COMMERCIAL LEASE
This is a legally binding contract. If not understood, seek competent advice.
APPROVED BY BIRMINGHAM AREA BOARD OF REALTORS(R)
7/27/??
(Previous forms obsolete)
STATE OF ALABAMA Shelby County
----------
This lease made this 9th day of January 19 98 by and between
----- --------- ---- -------------
DMB LLC
- --------------------------------------------------------------------------------
hereinafter called "Lessor," by SBS Corporation as agent for the Lessor and by
-----------------
hereinafter called "Lessee":
- ---------------------------------------------------
WITNESSETH: That the Lessor does hereby demise and let unto the Lessee the
following described premises in the City of Hoover Alabama, to-wit:
--------
The property located on 1500 Resource Drive, Birmingham, AL 35242
Subject to existing easements, if any, and the regulatory laws and ordinances of
the political subdivision in which the property is situated, for use and
occupation by the Lessee as
and for no other or different use or purpose, for and during the term of
five years beginning on 9th day of January 1998 and ending on the 13th day
- ----------- ----- -------------- ------
of January 2003 in consideration whereof, the Lessee agrees to pay the
--------------
Lessor's agent at office of said agent,
on the first day of each month of said term, in advance, as rent for said
premises, the sum of
DOLLARS ( $20,000 ) per month,
---------
being at the rate of DOLLARS ( $240,000 ) per annum.
----------
Lessee agrees that a Service and Bookkeeping charge of 10% shall become
-----
due and payable each and every month that the rent has not been received in the
office of Barbara Skates by the 10th of the month, or if a check accepted as
----------------
rent or other payment is returned unpaid to agent for any reason.
Should premises be completed and turned over to Lessee either prior to, or
after February 1, 1998 then in that event rent for such fractional month shall
------------------
be pro-rated, and this lease term shall commence on the first day of the next
calendar month.
Lessor and Lessee agree that Lessee will deposit with Lessor's agent the
sum of $ on the date of execution of this lease, to be held,
--------------
without interest payable to Lessee, as a security for the payment of rent and
any and all other sums of money for which Lessee shall or may become liable to
pay to Lessor under the lease, and for the faithful performance by Lessee of all
covenants and agreements under this lease, said deposit to be returned to Lessee
after the termination of this lease and any renewal hereof, provided Lessee
shall have made all such payments and performed all such covenants and
agreements. Nothing in this paragraph shall be deemed to limit the amount of any
claim, demand or cause of action of Lessor against Lessee under the provision of
this lease.
This lease is made upon the following terms, conditions and covenants: The
Lessor covenants to keep the Lessee in possession of said premises during said
term, but shall not be liable for the loss of use by eminent domain nor the
failure or inability of the Lessee to obtain possession thereof provided the
Lessor shall exercise due diligence and effort to place the Lessee in
possession. Nothing herein contained shall be construed as a warranty that said
premises are in good condition or are fit or suitable for the use or purpose for
which they are let. The Lessor or Lessor's agent have made no representations or
promises with respect to said building or the demised premises except as herein
expressly set forth. The Lessee has examined the leased premises and accepts the
same in the physical condition in which the same now exists (except as otherwise
expressly provided herein.)
Lessee and Lessor expressly acknowledge that the Broker(s) have not made an
independent investigation or determination with respect to the existence or
non-existence of asbestos, PCB transformers, or other toxic, hazardous or
contaminated substances or gases, in, on, or about the property, or for the
presence of underground storage tanks. Any such investigation or determination
shall be the responsibility of Lessor and/or Lessee, and Broker(s) shall not be
held responsible therefor.
Should the roof of the building leak at any time during said term, due to
no fault on the part of the Lessee, the Lessor will repair the same within a
reasonable time after being requested in writing by the Lessee so to do, but in
no event shall the Lessor be liable for damages or injuries arising from such
defect or the failure to make said repairs after being so notified, except to
the extent of the reasonable cost of repairing said roof; nor shall the Lessor
be liable for damages or injuries arising from defective workmanship or
materials, the Lessee hereby expressly waiving the same. Lessor and its agents,
shall not be liable for any deaths, injury, loss or damage resulting from any
repair or improvement and undertaken, voluntarily or involuntarily by or on
behalf of, the Lessor, other than willfully wrongful acts of Lessor.
In the event heating, ventilating and air conditioning equipment or a part
of any air conditioning equipment is installed by Lessee on the roof of any
building hereby leased, or in the event that the Lessee installs a sign on the
roof, then Lessee shall be responsible for repairing any roof leaks,
attributable to such installation, during the term of this lease at Lessee's
sole cost and expense, but no such air conditioning equipment or sign may be
installed until the consent in writing of the Lessor is first had and obtained
thereto.
The Lessee will keep the roof and the leased grounds free of all cans,
bottles, fragments, debris and trash, and the Lessee will keep the downspouts,
gutters and drains clean, open and free of obstruction, and in good working
order.
Lessor shall not be obligated or required to make any other repairs or do
any other work on or about said premises or any part thereof, or the elevators
therein, if any, or on or about any premises connected therewith, but not hereby
leased, unless and only to the extent herein agreed. All other portions of any
building hereby leased shall be kept in good repair by Lessee and at the end of
the term hereof, the Lessee shall deliver the demised premises to Lessor in good
repair and condition, reasonable wear and tear excepted.
<PAGE>
However, Lessor reserves the right to enter upon said premises and to make
such repairs and to do, such work on or about said premises as Lessor may deem
necessary or proper, or that Lessor may be lawfully required to make. Lessor
reserves the right to visit and inspect said premises at all reasonable times
and the right to show said premises to prospective tenants and purchasers, and
the right to display "For Sale" and "For Rent" signs on said premises.
Should the Lessee fail to make repairs agreed to by him under this lease,
the Lessor may enter the premises and make such repairs and collect the cost
thereof from the Lessee as additional rent. Except as herein specifically
provided, the Lessee will not make or permit to be made any alterations,
additions, improvements or changes in the premises, nor will the Lessee paint
the outside of the building or permit the same to be painted without the
written consent of the Lessor before work is contracted or let. No signs of any
character shall be erected on the roof until the consent thereof in writing is
first had and obtained from the Lessor. The consent to a particular alteration,
addition, improvement or change shall not be deemed a consent to, nor a waiver
of, a restriction against alterations, additions, improvements or changes for
the future.
Lessee will replace all plate and other glass, if and when broken, and
failing so to do the Lessor may replace the same and the Lessee will pay the
Lessor the cost and expense thereof upon demand. Lessee will replace all keys
lost or broken, and will pay all bills for utilities and services used on said
premises. Lessee will keep all elevators, heating, ventilating and
air-conditioning (HVAC) equipment, electric wiring, water pipes, water closets,
drains sewer lines and other plumbing on said premises in such good order and
repair and will do all repairs, modifications and replacements which may be
required by the applicable laws or ordinances. Lessor shall not be liable for
any damages caused by, or growing out of, any breakage, leakage, getting out of
order or defective conditions of said elevators, heating, ventilating and
air-conditioning (HVAC) equipment, electric wiring, pipes, water closets,
drains, and sewer lines or plumbing, or any of them. Lessee will comply, at all
times and in all respects with all the applicable laws and ordinances relating
to nuisance, insofar as the building and premises hereby let, and the streets
and highways bounding the same, are concerned, and the Lessee will not by any
act, or omission render the Lessor liable for any violation thereof. Lessee will
not commit any waste of property, or permit the same to be done, and will take
good care of said building and said premises at all times.
The Lessee agrees to pay all sewer rentals or other charges becoming due,
levied under the authority of the Act No. 618 of the Alabama Legislature of
1949, approved September 19, 1949, or any other act, law or regulation. Failure
to pay said rental shall constitute a default under the terms of this lease.
Lessee shall during the entire term of this Lease, at Lessee's own expense
keep in force by advance payment of premiums, public liability insurance in an
amount of not less than $1,000,000.00 for injury to or death of one person or as
a result of one occurrence and not less than $300,000.00 for injury to or death
of more than one person as a result of one occurrence and for damage to property
in the amount of $100,000.00, or single limit of $ , insuring
Lessee, Lessor, and Lessor's Agents, Servants, and employees (as an additional
assured) against any liability that may accrue against them or either of them on
account of any occurrences in or about the demised premises during the term or
in consequence of Lessee's occupancy thereof and resulting in personal injury or
death or property damage. Lessee shall on request furnish to Lessor certificates
of all insurance required under this paragraph.
Lessor shall not be liable for any injury or damage caused by, or growing
out of, any defect in said building, or its equipment, drains, plumbing, wiring,
electric equipment or appurtenances, or in said premises, or caused by, or
growing out of fire, rain, wind, leaks, seepage or other cause.
If the leased premises, or any part thereof, consist of first floor space,
adjacent upon the street, or ground adjacent to the street, the Lessee will keep
the sidewalk, curb and gutter in front thereof or adjacent thereto clean and
free from snow, ice, debris and obstructions and will hold the Lessor harmless
from all damages or claims arising out of the Lessee's failure to so do.
Upon the happening of any one or more of the events as expressed in this
paragraph, the Lessor shall have the right, at the option of the Lessor, to
either annul and terminate this lease upon two days written notice to Lessee and
thereupon re-enter and take possession of the premises; or the right upon two
days written notice to the Lessee to re-enter and re-let said premises, from
time to time, as agents of the Lessee, and such re-entry or re-letting or both,
shall not discharge the Lessee from any liability or obligation hereunder,
except that rents (That is, gross rents less the expense of collecting and
handling, and less commission) collected as a result of such re-letting shall be
credited on the Lessee's liability up to the amount due under the terms of this
lease and the balance, if any, credited to the Lessor. Nothing herein, however,
shall be construed to require the Lessor to re-enter and re-let, nor shall
anything herein be construed to postpone the right of the Lessor to sue for
rents, whether matured by acceleration or otherwise, but on the contrary, the
Lessor is hereby given the right to sue therefor at any time after default. The
events of default referred to herein are: failure of the Lessee to pay any one
or more of the installments of rent, or any other sum, provided for in this
lease as and when the same become due, the removal, attempt to remove or
permitting to be removed from said premises, except in the usual course of
trade, the goods, furniture, effects or other property of the Lessee or any
assignee, or sub-tenant of the Lessee; the levy of an execution or other legal
process upon the goods, furniture, effects or other property of the Lessee
brought on the leased premises or upon the interest of the Lessee in this lease;
the filing of a Petition in Bankruptcy, a Petition for an Arraignment or
reorganization by or against the Lessee; the appointment of a receiver or
trustee, or other court officer, for the assets of the Lessee; the execution of
an assignment for the benefit of creditors of the Lessee; the vacation or
abandonment by the Lessee of the leased premises or the use thereof for any
purpose other than the purpose for which the same are hereby let or (if the
rental herein is based in whole or in part on the percentage of Lessee's sales)
failure of the Lessee to exercise diligent effort to produce the maximum volume
of sales; the assignment by Lessee of this lease or the re-letting or sub-
letting by the Lessee of the leased premises or any part thereof without the
written consent of the Lessor first had and obtained; the violation by the
Lessee of any other of the terms, conditions or covenants not set out in this
paragraph on the part of the Lessee herein contained and failure of the Lessee
to remedy such violation within ten (10) days after written notice thereof is
given by the Lessor to the Lessee.
The Lessee shall not remove any of the goods, wares or merchandise of the
Lessee from said premises other than in the regular course of Lessee's trade or
business without having first paid all rent due or to become due under the terms
of this lease.
Upon termination or breach of this lease or re-entry upon said premises for
any one or more of the causes set forth above, or upon termination of this lease
or re-entry of said premises, the rents provided for in this lease for the
balance of the original rental term, or any renewal term or other extended term,
and all other indebtedness to the Lessor owed by the Lessee, shall be and become
immediately due and payable at the option of the Lessor and without regard to
whether or not possession of the premises shall have been surrendered to or
taken by the Lessor. The Lessee agrees to pay Lessor, or on Lessor's behalf, a
reasonable attorney's fee in the event Lessor employs an attorney to collect any
rents due hereunder by Lessee, or to protect the interest of Lessor in the event
the Lessee is adjudged a bankrupt, or legal process is levied upon the goods,
furniture, effects or personal property of the Lessee upon the said premises, or
upon the interest of the Lessee in this lease or in said premises, or in the
event the Lessee violates any of the terms, conditions, or covenants on the part
of the Lessee herein contained. In order to further secure the prompt payments
of said rents, as and when the same mature, and the faithful performance by the
Lessee of all and singular the terms, conditions and covenants on the part of
the Lessee herein contained, and all damages, and costs that the Lessor may
sustain by reason of the violation of said terms, conditions and covenants, or
any of them, the Lessee hereby waives any and all rights to claim personal
property as exempt from levy and sale, under the laws of any State or the United
States.
In the event the Lessee abandons the leased premises before the expiration
of the term, whether voluntarily or involuntarily, or violates any of the terms,
conditions, or covenants hereof, the Lessor shall have the privilege at Lessor's
option of re-entering and taking possession of said premises and leasing all or
any portion of said premises for such term and for such use deemed as
satisfactory to the Lessor, applying each month the net proceeds obtained from
said leasing to the credit of the Lessee herein, up to the amount due under the
terms of this lease and the balance to the Lessor and, said leasing shall not
release the Lessee from liability hereunder for the rents reserved for the
residue of the term hereof, but Lessee shall be responsible each month for the
difference, if any, between the net rents obtained from such leasing and the
monthly rent reserved hereunder, and said difference shall be payable to the
Lessor on the first day of each month for the residue of the term hereof.
<PAGE>
No re-entry hereunder shall bar the recovery of rent or damages for the
breach of any of the terms, conditions, or convenants on the part of the Lessee
as herein contained. The receipt of rent after breach of a condition broken, or
delay on the part of Lessor to enforce any right hereunder, shall not be deemed
a waiver of forfeiture, or a waiver of the right of the Lessor to annul the
lease or to re-enter said premises or to re-let the same, or to accelerate the
maturity of the rents hereunder.
If this lease is terminated by the Lessor for any reason, including
non-payment of rent, and the Lessee pays the rent, attorneys' fees and other
charges and thus makes himself current, and/or remains or continues to be in
possession of the leased premises or any part thereof, with the Lessor's
consent, this lease will be considered reinstated, and will continue in effect
as though it had not been terminated.
All improvements and additions to the leased premises shall adhere to the
leased premises, and become the property of the Lessor, with the exception of
such additions as are usually classed as furniture and trade fixtures; said
furniture and trade fixtures are to remain the property of the Lessee, and may
be removed by the Lessee two (2) weeks prior to the expiration of this lease,
provided all terms, conditions and covenants of within contract have been
complied with by Lessee and provided said Lessee restores the building and
premises to its original condition, normal wear and tear excepted.
In the event of the total destruction of, or partial damage to, the
buildings upon the demised premises by fire or other casualty, Lessor shall
proceed with due diligence and dispatch to repair and restore the buildings to
the conditions to which they existed immediately prior to the occurrence of such
casualty, at Lessor's cost and expense, provided such cost does not exceed the
proceeds of insurance collected on the buildings, by reason of such casualty,
the application of which insurance proceeds are not prohibited, by reason of any
mortgage provision, from being used toward the cost of restoration and repairing
the same; provided, further, that if the unexpired portion of the term or any
extension thereof shall be two (2) years or less on the date of such casualty
and the cost of such repair or restoration exceeds twenty percent (20%) of the
then replacement value of said damaged leased premises, as estimated by two or
more reputable contractors, Lessor may by written notice to the Lessee, within
thirty (30) days after the occurrence of such casualty, terminate this lease. If
Lessor exercises the above right to terminate this lease and Lessee elects to
exercise an option of renewal privilege which Lessee may have under this lease,
which if exercised, would extend the unexpired term beyond two (2) years. Lessee
may void such above notice of Lessor's right to terminate this lease by
exercising such option renewal privilege within such thirty (30) day period. If
the insurance proceeds are insufficient to affect such restoration or repairs,
Lessor at its option may cancel this lease by written notice to Lessee within
Thirty (30) days after the occurrance of such casualty.
In the event the repairing and restoring of the buildings can not be
completed within four (4) months after the date of occurrence of such casualty,
as estimated by two or more reputable contractors, the Lessee shall have the
right to terminate this lease upon giving written notice to Lessor within thirty
(30) days from the date of occurrance of said casualty. From the date of such
damage or destruction until said building has been substantially repaired or
restored, an equitable abatement of rent shall be allowed the Lessee.
Each and every transfer or assignment of this lease, or any interest
therein, and each and every sub-letting of said premises, or any part thereof,
or any interest therein, shall be null and void, unless the written consent
of the Lessor be first obtained thereto. As a condition precedent to the
obtaining of such consent, the assignee or sub-lessee must assume, in writing,
all the obligations of the Lessee hereunder, but such assumption shall not
operate to release the Lessee from any agreement or understanding on the part of
the Lessee expressed or implied in this Lease. If a lease assignment is
consumated for this Lessee or any one or more assigns before expiration term of
this lease, then the Lease or his subsequent assigns shall pay a $____________
assignment fee to agent for each and every lease assignment made.
All notices and demands authorized or required to be given to the Lessee
under any provision hereof must be in writing, and may be delivered to the
Lessee in person or left on or in the leased premises or shall be conclusively
deemed to have been delivered to the Lessee if the same be deposited in the
United States mail addressed to the Lessee at the leased premises, with the
proper postage affixed thereto. All notices herein authorized are required to be
given to the Lessor may be given by certified mail, addressed to the Lessor at
the address of the Lessor shown on page 1 of this lease, or in care of the
Lessor's rental agent at that time authorized by the Lessor to service this
lease, and said notices must be in writing.
THE COMMISSIONS PAYABLE FOR THE SALE, LEASE OR MANAGEMENT OF PROPERTY
ARE NOT SET BY THE BIRMINGHAM AREA BOARD OF REALTORS(R), INC., BUT IN ALL CASES
ARE NEGOTIABLE BETWEEN THE BROKER AND THE CLIENT.
Lessor in consideration of the services rendered by ___________________
as agent of Lessor in leasing said premises to Lessee, does hereby authorize
said _____________________________________ its successors or assigns, to collect
and receipt for the rents payable hereunder during the entire term hereof and
any renewals or extensions of the within lease, whether renewed or extended, or
the premises re-leased to the Lessee hereunder, or Lessee's successors or
assigns, and hereby agrees to pay to the said _______________________ its
successors or assigns, for the services rendered in effecting this lease or any
renewal, extension, or re-leasing as above provided, an amount equal to
___________ per cent of all rents paid by virtue thereof, whether or not
affected by ____________ or any other person, firm or corporation, or whether or
not said rent is paid direct to _________________ its successors or assigns,
payment of said commissions to be made as and when rents are received by the
Lessor, its successors or assigns, and the said _________________ its successors
or assigns shall be entitled to said commission from the present Lessor, the
Lessor's personal representative, heirs, successors, assigns or grantees in
title of the property herein described, and the same shall be charged upon the
land, tenements and hereditaments herein described.
As a further consideration for the services rendered by ________________ if
the term of this lease is for twelve (12) months or less the Lessor agrees to
pay the agent ______% of all rents paid as commission instead of the
aforementioned _____% provided for in the preceding paragraph; if the term of
this lease is in excess of one year and less than three years, Lessor agrees
that in addition to said commission provided in the preceding paragraph, said
agent shall be entitled to receive __________ rent payable hereunder, or, if
this lease term is for three years or more, to receive ____________ rent payable
hereunder, but percentage commission stated above shall not apply on said first
month's rent; and the additional __________________ rent commission shall not be
paid to the agent for any lease renewal or extension to the herein named Lessee.
In the event the within lease is cancelled or terminated by virtue of
any act or default by the Lessor, including the sale of the leased premises, the
Agent shall be entitled to be paid an amount equal to the full commission which
the Agent would have earned, provided the lease had not been cancelled or
terminated.
The undersigned Lessor agrees to pay to _________________________, as
agent, a commission of _______ as compensation for services rendered if: (1)
Lessor and Lessee enter into an agreement whereby Lessee agrees to purchase the
subject property from the Lessor during the term of this Lease or any extension
thereof: or (2) said property is sold or leased whether by ____________________
or by the undersigned Lessor or by or through anyone else during the term of the
lease; or (3) any contract for the sale or lease of said property is made
directly or indirectly by the undersigned Lessor prior to said expiration of
said Lease; or (4) within one year after the expiration of the Lease, said
property is sold or leased to the Lessee. If the subject property is owned by a
corporation and the Lessor elects to effect a sale to the Lessee by a sale of
stock rather than assets, the Lessor shall pay to ____________________________
the full agreed compensation for services rendered.
If the Lessor undertakes to make any improvements or repairs on the
leased premises during the term of this lease, the cost of which exceeds
$_________, and if the agent supervises the same, the Lessor agrees to pay the
said agent a reasonable fee for the additional services rendered.
<PAGE>
Lessee will indemnify and hold Lessor and Lessor's agent free and harmless
from all demands, claims and suits or expenses caused by any default committed
hereunder on the part of the Lessee. Lessee will further indemnify and save
harmless Lessor and Lessor's agent from any loss, cost, damage and/or expenses
caused by injuries to persons or property while in, on or about the demised
premises, not attributable to the willful or wrongful act of the Lessor or
Lessor's agent. Any property stored in the demised premises shall be at the
sole risk of Lessee.
Neither Lessor nor Lessee shall be liable to the other for any loss or
damage from risks ordinarily insured against under fire insurance policies with
extended-coverage endorsements, irrespective of whether such loss or damage
results from their negligence or that of any of their agents, servants,
employees, licensees or contractors to the extent that such losses are covered
by valid and collectible insurance on the property at the time of the loss.
Should the Lessee continue to occupy the premises after the expiration of
the said term or after a forfeiture incurred, whether with or against the
consent of the Lessor, such tenancy shall be a tenancy at sufferance and in
event a tenancy from month to month, or from year to year.
The failure of the Lessor to insist, in any one or more instances, upon a
strict performance of any of the covenants of this lease, or to exercise any
option herein contained, shall not be construed as a waiver, or a relinquishment
for the future, of such covenant or option, but the same shall continue and
remain in full force and effect. The receipt by the Lessor of rent, with
knowledge of the breach of any covenant hereof, shall not be deemed a waiver of
such breach, and no waiver by the Lessor of any provision hereof shall be deemed
to have been made unless expressed in writing, and signed by the Lessor.
If all or any part of the demised premises is taken by eminent domain
("eminent domain" shall include the exercise of any similar power of taking, and
any purchase or acquisition in lieu of condemnation), or in the event the
improvements are condemned and ordered torn down or removed by lawful authority,
then the term of this lease shall cease as of the date possession shall be taken
by the condemning authority, or as of the date improvements are ordered torn
down or removed, whichever may be applicable, with the rent to be apportioned as
of the date of such taking or of such order, as the case may be; provided,
however, if as a result of a partial taking of the demised premises by eminent
domain, the ground floor area of the building forming a part of the demised
premises is reduced by not more than twenty-five percent (25%), the Lessor may
elect to continue the term of this lease and to restore, at Lessor's expense,
the remaining premises to a complete architectural unit with storefront, signs
and interior of equal appearance and utility as they had previous to the taking,
but there will be prorata reduction of the rent payable each month. The Lessor
shall be deemed to have exercised its said option to restore the premises
unless, within 30 days after the date of taking, the Lessor shall notify the
Lessee in writing of its election to terminate this lease. The Lessor shall be
entitled to receive all of the proceeds of any total or partial taking of the
demised premises by eminent domain, including any part of such award as may be
attributable to the unexpired leasehold interest or other rights of the Lessee
in the premises, and the Lessee hereby assigns, and transfers to the Lessor all
of the Lessee's right to receive any part of such proceeds.
At the option of Lessor this Lease may be subordinated to the lien of any
mortgage or mortgages, or the lien resulting from any other method of financing
or refinancing, now or hereafter in force against the land and/or Building of
which the Premises are a part and to all advances heretofore made or hereafter
to be made upon the security thereof. The Lessee agrees to execute and deliver
to the Lessor from time to time within ten (10) days after written request by
the Lessor all instruments which might be required by the Lessor to confirm such
subordination.
The Lessee hereby agrees that upon the expiration or prior termination of
this lease, the Lessee will promply remove from the leased premises all signs,
trash, debris and property of the Lessee, and the Lessee will leave the floors,
stairs, passageways, elevators and shafts as clean as it is possible to clean
them by means of the use of broom and shovel.
In the event that during the term of this Lease or any renewal period
thereof, the total real estate taxes, special assessments, or insurance cost
levied or assessed on the subject property owned by Lessor should be increased
over and above the Real Estate taxes (after a full assessment), special
assessments or insurance costs in effect at the commencement date of this Lease,
then Lessee shall pay to Lessor as additional rent a prorata share of such
increased taxes, special assessments, or insurance costs which shall be in the
proportion which the total area of the Leased premises bears to the total
building area owned by the Lessor of which these premises are a part.
This lease consists of __________ pages together with an Addendum of ______
pages which is attached hereto, initialed by the parties and incorporated in
this lease by reference. In case of conflict between the printed portion of this
lease and the Addendum, the terms of the Addendum shall prevail.
It is understood and agreed by the parties hereto that this lease shall be
binding upon the Lessee, its executor, administrator, heirs, assigns or
successor.
FURTHER TERMS AND CONDITIONS MADE A PART HEREOF
This lease will renew automatically at the end of the lease term unless
notification is received in writing 30 days prior to the expiration of this
lease.
IN WITNESS WHEREOF, the Lessor and the Lessee have respectively executed
these presents this ____ day of January, 1998.
Agent
Witness for Lessor: /s/ David W. Brasfield (Lessor)
------------------------------
/s/ [illegible] /s/ David W. Brasfield (Lessor)
- ------------------------------ ------------------------------
Lessee
Witness for Lessee
[illegible] (L.S.)
- ------------------------------ ------------------------------
Lessee
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 4, 1999
