<PAGE>
P R O S P E C T U S
FILED PURSUANT TO
RULE 424(B)(4)
FILE NO: 333-87089
4,448,155 Shares
[LOGO APPEARS HERE]
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. 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.................................... $14.00 $62,274,170
Underwriting discounts................................... $ 0.98 $ 4,359,192
Proceeds to Netzee....................................... $13.02 $52,080,000
Proceeds to the selling shareholders..................... $13.02 $ 5,834,978
</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 November 15, 1999.
----------------
The Robinson-Humphrey Company J.C. Bradford & Co.
SunTrust Equitable Securities
November 9, 1999
<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
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<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.
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 $ 21,823
Working capital ...................................................... 25 193 21,077
Total assets.......................................................... 2,699 106,815 127,699
Long-term debt, net of current maturities............................. 750 29,566 750
Redeemable common stock............................................... -- 29,900 --
Total shareholders' equity............................................ 1,832 44,864 124,464
</TABLE>
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(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
9
<PAGE>
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 has been 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 considered in determining the initial
public offering price.
Our common stock has been approved for quotation on the Nasdaq National
Market. Thus, we are 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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<PAGE>
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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<PAGE>
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 $12.56 in pro forma net tangible book
value per share, or approximately 89.7% of the offering price of $14.00 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 $49.7
million, after deducting underwriting discounts and estimated offering
expenses. 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 $33.5 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 $3.1 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.
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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 56,147 135,747
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 44,864 124,464
------ -------- --------
Total capitalization........................... $2,582 $104,330 $125,214
====== ======== ========
</TABLE>
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DILUTION
The initial public offering price of $14.00 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 $27.8 million or $1.44 per share to
existing shareholders and an immediate dilution of $12.56 per share to
investors purchasing shares of common stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $14.00
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 ............... 4.80
-----
Pro forma net tangible book value per share after this
offering........................................................ 1.44
------
Dilution per share purchased in this offering................... $12.56
======
</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 50.1% $ 3.65
New investors.......... 4,000,000 20.6% 56,000,000 49.9% 14.00
------------- -------- ------------ -----
Total................. 19,395,855 100.0% $112,147,000 100.0%
============= ======== ============ =====
</TABLE>
22
<PAGE>
The foregoing tables assume:
.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
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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.
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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
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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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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.
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<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.
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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 $4.8 million from InterCept on this basis as of November 8, 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 $33.5 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
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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.
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. 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.
49
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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 crafted a compromise. 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 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.
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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 June 30, 1999 and October 15, 1999, we had a total of approximately 10
and 90 full-time employees, respectively. 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 November 8, 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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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."
71
<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 piggyback registration rights with respect to the common stock that we
may issue 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 8, 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 8, 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>
73
<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.
74
<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 8, 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
76
<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
77
<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.
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<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 piggyback
registration rights with respect to the common stock that we may issue pursuant
to this warrant. These registration rights are 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
----------- ----------------
<S> <C>
The Robinson-Humphrey Company, LLC.......................... 1,409,262
J.C. Bradford & Co.......................................... 1,409,262
SunTrust Equitable Securities Corporation................... 704,631
Deutsche Banc Alex. Brown................................... 95,000
A.G. Edwards & Sons, Inc.................................... 95,000
Hambrecht & Quist LLC....................................... 95,000
Salomon Smith Barney Inc.................................... 95,000
Soundview Technology Group, Inc............................. 95,000
William Blair & Company, LLC................................ 50,000
Friedman Billings Ramsey.................................... 50,000
Hoak Breedlove Wesneski & Co................................ 50,000
Morgan Keegan & Company Incorporated........................ 50,000
Raymond James & Associates Inc.............................. 50,000
Scott & Stringfellow, Inc................................... 50,000
Stephens Inc................................................ 50,000
U.S. Bancorp Piper Jaffray Inc.............................. 50,000
Wachovia Securities, Inc.................................... 50,000
=========
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
$0.55 per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 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
81
<PAGE>
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.............................. $ 0.98 $ 0.98 $ 0.98 $ 0.98
Total.................................. $3,920,000 $4,573,879 $439,192 $439,192
</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.
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;
82
<PAGE>
. 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 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;
83
<PAGE>
. 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.
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.
Prior to this offering, we were not a reporting company and did not file
reports or other information with the SEC. However, in connection with this
offering, we became a reporting company, and we registered our common stock
under the Securities Exchange Act of 1934. Accordingly, the additional
reporting requirements of the Exchange Act now apply to us, and we are 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.
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-19
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June
30, 1999 (Unaudited)................................................... F-20
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-21
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-22
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-23
Notes to Consolidated Financial Statements.............................. F-24
The Internet Banking Division of The Bankers Bank ("TBB")
Report of Independent Public Accountants ............................... F-32
Balance Sheets as of December 31, 1998 and June 30, 1999 (Unaudited).... F-33
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-34
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-35
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-36
Notes to Financial Statements........................................... F-37
</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-43
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited)............................................................ F-44
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-45
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-46
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-47
Notes to Financial Statements........................................... F-48
Call Me Bill, LLC
Report of Independent Public Accountants................................ F-54
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited)............................................................ F-55
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-56
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-57
Statements of Cash Flows for the year ended December 31, 1998 and for
the six months ended June 30, 1998 and 1999............................ F-58
Notes to Financial Statements........................................... F-59
SBS Corporation Internet and Telephone Banking Business
Report of Independent Public Accountants................................ F-63
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited)............................................................ F-64
Statements of Operations for the years ended December 31, 1997 and 1998
and the six months ended June 30, 1998 and 1999 (Unaudited)............ F-65
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-66
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-67
Notes to Financial Statements........................................... F-68
</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
November 9, 1999
Until December 4, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
