<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended
March 31, 2000.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the transition period from
_____ to _____, 20_____.
Commission file number: 0-27925
-------
===============================================================================
Netzee, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2488883
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
6190 Powers Ferry Road, Suite 400, Atlanta, Georgia 30339
---------------------------------------------------------
(Address of principal executive offices)
(770) 850-4000
--------------------------------------------------
(Registrant's telephone number including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 8, 2000, there were 21,705,083 shares of the Registrant's Common
Stock outstanding.
<PAGE> 2
NETZEE, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETZEE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
----------------- -----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,255,099 $ 1,329,349
Accounts receivable, net of allowance for doubtful accounts of $242,750 and
$380,321 at December 31, 1999 and March 31, 2000, respectively 2,496,953 4,646,994
Leases receivable, current 330,191 356,031
Prepaid and other current assets 503,364 974,791
----------------- -----------------
Total current assets 14,585,607 7,307,165
Property and equipment, net 6,938,710 7,926,358
Intangible assets, net of accumulated amortization of $12,756,790 and $24,487,455
at December 31, 1999 and March 31, 2000 respectively 120,611,688 132,070,815
Leases receivable, net of current portion 922,788 1,360,320
Other assets 185,463 102,854
----------------- -----------------
Total assets $ 143,244,256 $ 148,767,512
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 4,234,307 $ 3,955,902
Deferred revenue 5,425,278 7,662,350
Notes payable 103,462 617,435
Other current liabilities 24,200 108,552
----------------- -----------------
Total current liabilities 9,787,247 12,416,239
Related-party borrowings 10,956,930 7,750,092
Note payable, net of current portion 1,215,673 1,181,186
Deferred revenue, net of current portion 904,032 1,217,603
----------------- -----------------
Total liabilities 22,863,882 22,565,120
----------------- -----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized:
Series A 8% convertible preferred stock, no par value, $13 stated value;
500,000 authorized, issued and outstanding at December 31, 1999
and March 31, 2000 6,500,000 6,500,000
Common stock, no par value, 70,000,000 shares authorized, 20,395,855 shares
issued and outstanding at December 31, 1999 and 21,705,083 shares issued
and outstanding at March 31, 2000 148,056,611 173,565,005
Notes receivable from shareholders (3,314,799) (3,370,857)
Deferred stock compensation (8,547,212) (7,754,453)
Warrants outstanding for the purchase of 461,876 shares and 0 shares at
December 31, 1999 and March 31, 2000, respectively 4,618,760 0
Accumulated deficit (26,932,986) (42,737,303)
----------------- -----------------
Total shareholders' equity 120,380,374 126,202,392
----------------- -----------------
Total liabilities and shareholders' equity $ 143,244,256 $ 148,767,512
================= =================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE> 4
The three month period ended March 31, 1999 is presented in two columns below
due to the acquisition of the Predecessor on March 9, 1999, which established a
new basis of accounting for certain assets and liabilities of Netzee, Inc. The
purchase method of accounting was used to record assets acquired and
liabilities assumed by Netzee, Inc. Such accounting generally results in
increased amortization reported in future periods. Accordingly, the
accompanying financial statements of the Predecessor and Netzee, Inc. are not
comparable in all material respects, since those financial statements report
financial position, results of operations, and cash flows on a different basis
of accounting.
NETZEE, INC.
(FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR"))
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR NETZEE, INC.
------------------ | --------------------------------------------
FOR THE PERIOD | FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1999 | MARCH 1, 1999 JANUARY 1, 2000
TO FEBRUARY 28, 1999 | TO MARCH 31, 1999 TO MARCH 31, 2000
------------------- | ------------------- -------------------
| (UNAUDITED) (UNAUDITED)
<S> <C> | <C> <C>
Revenues: |
Maintenance and service $ 33,082 | $ 17,322 $ 2,757,236
License, hardware and implementation 57,080 | 57,600 100,808
------------------- | ------------------- -------------------
Total revenues 90,162 | 74,922 2,858,044
------------------- | ------------------- -------------------
|
Operating expenses: |
Costs of service, license, hardware, |
implementation and maintenance 44,358 | 42,535 1,590,902
Selling and marketing 12,350 | 6,669 2,242,075
General and administrative 49,399 | 26,677 1,828,822
Amortization of stock-based compensation 0 | 0 792,759
Depreciation 2,476 | 13,584 275,278
Amortization 0 | 34,734 11,733,798
------------------- | ------------------- -------------------
Total operating expenses 108,583 | 124,199 18,463,634
------------------- | ------------------- -------------------
|
Operating loss (18,421) | (49,277) (15,605,590)
Interest expense, net (3,469) | (428) (68,727)
------------------- | ------------------- -------------------
Net loss before preferred dividends $ (21,890) | $ (49,705) $ (15,674,317)
Preferred stock dividends 0 | 0 (130,000)
------------------- | ------------------- -------------------
Net loss attributable to common shareholders $ (21,890) | $ (49,705) $ (15,804,317)
=================== | =================== ===================
|
Basic and diluted net loss per share | $ (0.01) $ (0.76)
| =================== ===================
|
Weighted average common shares |
outstanding | 8,000,000 20,780,927
| =================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
The three month period ended March 31, 1999 is presented in two columns below
due to the acquisition of the Predecessor on March 9, 1999, which established a
new basis of accounting for certain assets and liabilities of Netzee, Inc. The
purchase method of accounting was used to record assets acquired and liabilities
assumed by Netzee, Inc. Such accounting generally results in increased
amortization reported in future periods. Accordingly, the accompanying financial
statements of the Predecessor and Netzee, Inc. are not comparable in all
material respects, since those financial statements report results of
operations, and cash flows on a different basis of accounting.
NETZEE, INC.
(FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR"))
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR NETZEE, INC.
-------------------- | -------------------------------------------
FOR THE PERIOD FROM | FOR THE PERIOD FROM FOR THE PERIOD FROM
JANUARY 1, 1999 | MARCH 1, 1999 JANUARY 1, 2000
TO FEBRUARY 28, 1999 | TO MARCH 31, 1999 TO MARCH 31, 2000
------------------- | ------------------- -------------------
| (UNAUDITED) (UNAUDITED)
<S> <C> | <C> <C>
Cash flows from operating activities: |
Net loss $ (21,890) | $ (49,705) $ (15,804,317)
Adjustments to reconcile net loss to cash |
used in operating activities: |
Depreciation 2,476 | 13,584 275,278
Amortization 0 | 34,734 11,733,798
Stock-based compensation expense 0 | 0 792,759
Interest income on shareholder notes 0 | 0 (56,058)
Changes in assets and liabilities, net of |
effect of acquisitions: |
Accounts receivable 12,606 | (17,697) (2,060,615)
Leases receivable 0 | 0 (463,372)
Prepaid and other assets 0 | 0 (378,265)
Accounts payable and accrued liabilities (42,889) | (37,616) (1,304,117)
Deferred revenue 41,222 | 12,193 2,514,510
Other liabilities 0 | 0 76,457
------------------- | ------------------- -------------------
Net cash used in operating activities (8,475) | (44,507) (4,673,942)
------------------- | ------------------- -------------------
|
Cash flows from investing activities: |
Purchase of property, equipment and |
capitalized software 0 | (53,809) (931,092)
------------------- | ------------------- -------------------
Net cash used in investing activities 0 | (53,809) (931,092)
------------------- | ------------------- -------------------
|
Cash flows from financing activities: |
Borrowings from shareholder 0 | 0 6,404,661
Repayments to shareholder 0 | 0 (9,611,500)
Repayments of notes payable 0 | (277,473) (2,641,674)
Payments of preferred stock dividends 0 | 0 24,200
Exercise of warrants 0 | 0 1,501,097
Exercise of options for common stock 0 | 0 2,500
Contribution from parent 0 | 385,280 0
Decrease in related-party loans from |
shareholder of predecessor entity (2,000) | 0 0
------------------- | ------------------- -------------------
Net cash used in (provided by) financing |
activities (2,000) | 107,807 (4,320,716)
------------------- | ------------------- -------------------
|
Net (decrease) increase in cash and cash |
equivalents (10,475) | 9,491 (9,925,750)
Cash and cash equivalents, beginning of |
period 13,985 | 3,510 11,255,099
------------------- | ------------------- -------------------
Cash and cash equivalents, end of period $ 3,510 | $ 13,001 $ 1,329,349
=================== | =================== ===================
|
Supplemental disclosure of cash flow information: |
Cash paid for interest $ 2,971 | $ 0 $ 68,727
=================== | =================== ===================
|
Supplemental disclosure of non-cash investing and |
financing activities: |
Stock issued for acquisitions $ 0 | $ 0 $ 19,446,037
=================== | =================== ===================
</TABLE>
5
<PAGE> 6
NETZEE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
ORGANIZATION
Netzee, Inc. is a provider of Internet banking products and services and
Internet commerce solutions to small and mid-sized banks, thrifts and credit
unions, typically with assets of less than $10 billion. We provide solutions
that enable financial institutions to offer their customers a wide array of
financial products and services over the Internet. We also offer financial
institutions custom web site design, implementation and marketing services,
telephone banking products, regulatory reporting and support applications,
financial information and analytical tools, and Internet access services.
Direct Access Interactive, Inc. ("Direct Access" or the "Predecessor") was
incorporated on October 10, 1996. On March 9, 1999, Direct Access was purchased
by The InterCept Group, Inc. ("InterCept"). Direct Access was operated as a
separate subsidiary of InterCept. On August 6, 1999, Direct Access purchased the
remote banking operations of SBS Corporation ("SBS"). Direct Access was later
merged with and into Netzee. On September 3, 1999, we purchased the Internet
banking divisions of TIB The Independent BankersBank ("TIB") and The Bankers
Bank, and we acquired Dyad Corporation and subsidiaries ("Dyad") and Call Me
Bill, LLC ("Call Me Bill"). On December 15, 1999, we purchased DPSC Software,
Inc. ("DPSC"). On March 7, 2000, we purchased Digital Visions, Inc. ("DVI").
SBS, TIB, The Bankers Bank, Dyad, Call Me Bill, DPSC and DVI are collectively
referred to as the "Acquired Entities."
BASIS OF PRESENTATION
The accompanying statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all
adjustments, which are of a normal recurring nature, to present fairly our
financial position, results of operations and cash flows at the dates and for
the periods presented. Interim results of operations are not necessarily
indicative of results to be expected for a 12-month period. The interim
financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 1999.
The consolidated statements of operations and statements of cash flows for the
Predecessor and our Company are not comparable in all material respects, since
those financial statements report the 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 three months ended
March 31, 1999 are presented as if the acquisition occurred on the close of
business on February 28, 1999 instead of March 9, 1999. The operations between
March 1, 1999 and March 9, 1999 were not material. The consolidated statements
of operations and statements of cash flows prior to March 1, 1999 present the
results of operations and cash flows of Direct Access, the predecessor to
Netzee.
The unaudited consolidated financial statements include the accounts of our
company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. As we currently do
not engage in the use of derivative instruments or hedging activities, we do not
expect this Statement will have a significant impact on our financial condition
or results of operations.
During December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish
guidelines for revenue recognition and enhance revenue recognition disclosure
requirements. The Bulletin clarifies basic criteria for when revenues are taken
into account for purposes of a company's financial statements. SAB 101 is
effective for the quarter ended June 30, 2000. We are currently assessing the
implications of adopting SAB 101, as revenue for non-refundable, up-front fees
associated with product implementation will be recognized over the term of the
underlying contract, rather than upon the completion of product implementation.
In the period of adoption, the cumulative impact will be reported as a change in
accounting principles as dictated by SAB 101.
6
<PAGE> 7
3. ACQUISITION
ACQUISITION OF DIGITAL VISIONS, INC.
In March 2000, we completed the acquisition of substantially all of the assets
and assumed certain liabilities of DVI. Based in Minneapolis, Minnesota, DVI
provided Internet-based financial and analytical information tools for financial
institutions. As consideration for this acquisition, we issued 838,475 shares of
common stock. We also issued options to purchase 70,419 shares of common stock
in exchange for the cancellation of options to purchase DVI common stock. In
addition, we assumed approximately $3.3 million in debt and $1.2 million in
operating liabilities. DVI also has the right to receive up to 628,272
additional shares of our common stock if certain revenue targets are met in
fiscal years 2000 and 2001.
PRO FORMA RESULTS
The following summary presents unaudited pro forma results of operations
assuming that the acquisitions of the Acquired Entities as discussed in Note 1
occurred on January 1, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 2000
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Total revenue $ 2,501,207 $ 3,140,807
Net loss $ (15,469,486) $ (17,646,413)
Net loss per share $ (0.72) $ (0.83)
</TABLE>
4. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share has been computed in accordance with SFAS
No. 128, "Earnings per Share," using net loss divided by the weighted average
number of shares of common stock outstanding for the period presented.
Potentially dilutive options to purchase 3,077,723 shares of common stock with
a weighted average exercise price of $8.16 per share outstanding at March 31,
2000 were excluded from the presentation of diluted net loss per share, as they
are antidilutive due to the net loss. There were no options or warrants
outstanding as of March 31, 1999.
5. RELATED-PARTY BORROWINGS
In conjunction with the acquisition of DPSC, we received a commitment for a $15
million line of credit from InterCept. Borrowings on the line will bear
interest at a rate of prime plus 2%. On March 24, 2000, pending the
finalization of the line of credit, we issued a promissory note to InterCept in
the principal amount of approximately $7.8 million, which reflects the amount
borrowed under terms consistent with the commitment as of that date. This note
bears interest at a rate of prime plus 2% and is secured by substantially all
of our assets. Accrued interest under this note is payable monthly beginning
May 1, 2000. These borrowings are being used to fund working capital
requirements.
6. EXERCISE OF WARRANTS
On March 2, 2000, warrants to purchase 461,876 shares of common stock were
exercised. Proceeds from the exercise of the warrants totaled approximately
$1.5 million.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements include all statements that are not statements of historical
fact regarding the intent, belief or expectations of Netzee and its management
with respect to, among other things: (1) whether we can successfully combine
the operations we have acquired, and operations we may acquire, to create or
continue improvements in our financial condition; (2) the anticipated impact of
certain events and circumstances; (3) trends affecting our operations,
financial condition and business; (4) our growth and operating strategies; (5)
our ability to achieve our sales objectives; (6) the continued and future
acceptance of and demand for our products and services by our customers and
their customers; (7) our ability to raise additional capital if and when
needed; and (8) whether our current or future strategic marketing alliances
will be successful in generating sales or in improving our business, results of
operations or financial condition. The words "may," "will," "anticipate,"
"believe," "intend," "plan," "allow," "strategy" and similar expressions are
intended to identify forward-looking statements. Such forward-looking
statements are not guarantees of future performance and actual results may
differ materially from those projected in the forward-looking statements as a
result of risks related to the integration of acquired assets and businesses;
our ability to achieve, manage or maintain growth and execute our business
strategy successfully; our dependence on developing, testing and implementing
enhanced and new products and services; our ability to sell our products and
services to financial institution customers and their customers; our ability to
respond to competition; the volatility associated with Internet-related
companies; and various other factors discussed in detail in this Form 10-Q and
in the section entitled "Factors that May Affect Our Future Results of
Operations or Financial Condition" in our Form 10-K for the fiscal year ended
December 31, 1999, as filed with the Securities and Exchange Commission on
March 29, 2000, as amended on May 1, 2000. Netzee undertakes no obligations to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results.
We are a rapidly growing provider of integrated Internet banking products and
services and Internet commerce solutions to community financial institutions
and their customers. We provide a retail suite of integrated Internet banking
products and services and Internet commerce solutions to community financial
institutions. The retail suite provides cost-effective, outsourced, secure and
scalable Internet banking and Internet commerce solutions that enable community
financial institutions to offer to their customers a wide array of financial
products and services over the Internet. We also market and sell a wholesale
suite of products and services that help fulfill certain operational needs and
regulatory requirements of financial institutions. We began to market and sell
Internet-based financial information tools in March 2000, as a result of our
acquisition of DVI. Our wholesale suite of products and services enables
financial institutions to create internal efficiencies and provides employees
with information to better manage banking operations.
We currently earn substantially all of our revenues from recurring monthly
service fees, monthly per user fees and per transaction charges. We expect to
derive little or no revenue from up-front software or implementation fees.
Although we have experienced significant growth in customers and revenues, we
have incurred substantial operating losses and negative cash flows from
operations due to the changes in our pricing structure, increasing our sales
staff, expanding our data center operations and increasing staff required to
support our rapid growth. We incurred net losses of approximately $72,000 and
$15.8 million and cash losses of approximately $37,000 and $3.3 million for the
three months ended March 31, 1999 and March 31, 2000, respectively.
Depreciation, amortization and the amortization of stock-based compensation
accounted for 81% of the net loss attributed to common shareholders for the
three months ended March 31, 2000. We expect to continue to incur substantial
operating losses and negative cash flows for the foreseeable future.
8
<PAGE> 9
RESULTS OF OPERATIONS
The following tables set forth the results of our operations and statement of
cash flows and statement of cash flows for the three months ended March 31, 1999
and 2000. These operating results are not necessarily indicative of our future
results.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------------------------------------------
% OF % OF
MARCH 31, 1999(1) REVENUE MARCH 31, 2000 REVENUE
-------------------- ------- ------------------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Service fee revenue $ 165,084 100% $ 2,858,044 100%
Cost of services 86,893 53% 1,590,902 56%
------------------- ------- ------------------- -------
Gross profit 78,191 47% 1,267,142 44%
Selling and marketing 19,019 12% 2,242,075 78%
General and administrative 76,076 46% 1,828,822 64%
------------------- ------- ------------------- -------
Total selling, general and administrative 95,095 58% 4,070,897 142%
Depreciation 16,060 10% 275,278 10%
Interest expense 3,897 2% 68,727 2%
Preferred stock dividends -- 0% 130,000 5%
------------------- ------- ------------------- -------
Subtotal other cash expenses 19,957 12% 474,005 17%
------------------- -------------------
Cash loss(2) (36,861) (3,277,760)
------------------- -------------------
Amortization 34,734 11,733,798
Amortization of stock-based compensation -- 792,759
------------------- -------------------
Net loss attributable to common shareholders $ (71,595) $ (15,804,317)
=================== ===================
Basic and diluted net loss per share $ (0.01) $ (0.76)
=================== ===================
Cash loss per share(2) $ (0.00) $ (0.16)
=================== ===================
Weighted average common shares outstanding 8,000,000 20,780,927
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31, 1999(1) MARCH 31, 2000
-------------------- --------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash used in operating activities: $ (52,982) $ (4,673,942)
Cash used in investing activities: (53,809) (931,092)
Cash provided by (used in) financing activities: 105,807 (4,320,716)
------------------- -------------------
Net decrease in cash and cash equivalents $ (984) $ (9,925,750)
=================== ===================
</TABLE>
(1) The results of operations and statement of cash flows for the Predecessor
from January 1, 1999 to February 28, 1999 and the results of operations for
Netzee for the period from March 1, 1999 to March 31, 1999 have been
combined for comparative purposes.
(2) Cash loss is defined as net loss attributable to common shareholders,
excluding the effect of amortization of intangibles and stock-based
compensation. Cash loss and cash loss per share are not measures of
financial performance under generally accepted accounting principles and
should not be considered as an alternative either to net loss attributable
to common shareholders as an indicator of our operating performance, or to
cash flow as a measure of our liquidity.
9
<PAGE> 10
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues
Total revenues increased approximately $2.7 million or 1,658% from
approximately $165,000 for the three months ended March 31, 1999 to
approximately $2.9 million for the three months ended March 31, 2000. This
increase consisted primarily of an increase in monthly maintenance and service
revenues due primarily to the increase in the number of financial institution
customers obtained from the Acquired Entities and additional product offerings.
Costs of service, license, hardware, implementation and maintenance
Our costs of service, license, hardware, implementation and maintenance are
comprised of the initial equipment and personnel costs required to implement
Internet and telephone banking for the financial institutions, ongoing
personnel and system maintenance costs associated with our data centers,
production and shipping costs associated with our regulatory reporting
software, as well as royalties to information providers for our Internet based
financial and analytical tools. The total of these costs increased
approximately $1.5 million or 1,739% from approximately $87,000 for the three
months ended March 31, 1999 to approximately $1.6 million for the three months
ended March 31, 2000. The increase in the costs of service, license, hardware
implementation and maintenance was due primarily to an increase in the number
of new institutional customers for which we have implemented our products.
Additionally, we experienced increased data center costs required to support
the increase in the total number of institutions to which we provided services.
Selling and marketing expenses
Selling and marketing expenses include marketing expenses, sales commissions
and costs, and sales employee compensation and benefits. Commissions are paid
to sales personnel based on products and services sold. Total selling and
marketing expenses increased approximately $2.2 million from approximately
$19,000 for the three months ended March 31, 1999 to approximately $2.2 million
for the three months ended March 31, 2000. The increase in selling and
marketing expenses was primarily due to an increase in sales personnel and
sales commissions due to additional sales and an increase in our advertising
expenditures as we continue to build infrastructure for our rapid growth.
General and administrative expenses
General and administrative expenses include employee compensation and benefits
and general office expenses incurred in the ordinary course of business.
General and administrative expenses increased approximately $1.7 million or
2,268% from approximately $76,000 for the three months ended March 31, 1999 to
approximately $1.8 million for the three months ended March 31, 2000. The
increase in general and administrative expenses was due to increases in overall
business and operating activities, an increase in the number of employees
obtained primarily from the Acquired Entities and an increase in management and
support staff to sufficiently support our rapid growth.
Amortization of stock-based compensation
Stock-based compensation consists of amortization of deferred compensation for
certain stock options granted with an exercise price below the initial public
offering price and compensation expense for stock sold to an employee at a
price below the initial public offering price. Stock-based compensation expense
increased to approximately $790,000 for the three months ended March 31, 2000
from $0 for the three months ended March 31, 1999 as there were no options
issued with an exercise price below fair market value as of that date.
Depreciation
Depreciation consists of depreciation of property and equipment. Total
depreciation increased approximately $259,000, or 1,619% from approximately
$16,000 for the three months ended March 31, 1999 to approximately $275,000 for
the three months ended March 31, 2000. This increase was due primarily to the
depreciation of acquired assets and from depreciation associated with capital
acquisitions used to support our growth.
Amortization
Amortization of intangible assets relates to purchase accounting resulting from
our acquisitions. Intangible assets are being amortized over lives ranging from
two to five years. Amortization increased to approximately $11.7 million for
the three months ended March 31, 2000 from approximately $34,000 for the three
months ended March 31, 1999.
Interest expense, net
Total net interest expense increased approximately $65,000 from approximately
$4,000 for the three months ended March 31, 1999 to approximately $69,000 for
the three months ended March 31, 2000. The increase was due primarily to
additional debt incurred to fund our operations.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Our operating activities used cash of approximately $53,000 and $4.7 million
for the period from January 1, 1999 to March 31, 1999 and the period from
January 1, 2000 to March 31, 2000, respectively. Cash used in operating
activities for the period from January 1, 1999 to March 31, 1999 and the period
from January 1, 2000 to March 31, 1999 resulted primarily from our net losses.
Our investing activities used cash of approximately $54,000 and $931,000 for the
period from January 1, 1999 to March 31, 1999 and the period from January 1,
2000 to March 31, 2000, respectively. Cash used in investing activities from
January 1, 2000 to March 31, 2000 primarily resulted from the continued
investment in hardware for our data centers to support our growth.
Our financing activities generated cash of approximately $106,000 and used cash
of approximately $4.3 million for the period from January 1, 1999 to March 31,
1999 and the period from January 1, 2000 to March 31, 2000, respectively. Cash
generated for the period from January 1, 1999 to March 31, 1999 was primarily
due to a capital contribution from InterCept, who at the time was the parent of
our Predecessor. Cash used in financing activities for the period from January
1, 2000 to March 31, 2000 resulted primarily from repayment in part of our
borrowings and repayment of certain debt assumed from DVI.
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.
In December 1999, the Company received a commitment for a $15 million line of
credit from InterCept. The line of credit will bear interest at prime plus 2%
with a term of three years and will be secured by substantially all assets of
the Company. The proceeds will be used primarily to fund working capital needs.
Obtaining the line of credit is subject to the completion and execution of
definitive legal documentation. As of March 31, 2000, approximately $7.2
million is available on this line of credit.
The period from January 1 to March 31, 2000 showed a decline of approximately
$9.9 million in cash and cash equivalents. This decline is due primarily to our
operating losses, the continued expansion of our data centers and our repayment
in part of our borrowings from InterCept.
On March 2, 2000, warrants to purchase 461,876 share of common stock were
exercised. Proceeds from the exercise of the warrants totaled approximately
$1.5 million.
We believe that our existing capital resources and our financing commitments,
together with cash provided by our operations, will be sufficient to fund our
working capital requirements for the next 12 months. If we expand more rapidly
than currently anticipated, if our working capital requirements exceed our
current expectations, if we do not achieve our forecasted revenue, or if we make
additional acquisitions, we may need to raise additional capital either through
debt or equity sources before that time. We cannot be sure that we will be able
to obtain the additional financing necessary to satisfy these additional capital
requirements or to implement our growth strategy on acceptable terms or at all.
If we cannot obtain this financing on terms acceptable to us, we may be forced
to curtail some planned business expansion and may be unable to fund our ongoing
operations.
YEAR 2000 ISSUE
The year 2000 issue refers to the problems that may have arisen from the
improper processing of dates and date-sensitive calculations by computers and
embedded microprocessors as the year 2000 was reached. These problems generally
arose from the fact that most computer hardware and software components
historically have been programmed to use only two digits to identify the year
in a date. For example, the computer would recognize a code of "00" as the year
1900 rather than the year 2000.
Effect of Year 2000 on Operations
As of May 10, 2000, we had not encountered any significant year 2000 business
interruptions or losses, either from our own systems or from those of our
suppliers or customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our operations and do not have
operations subject to fluctuations in foreign currency exchange rates. We have
issued a promissory note to InterCept that has an interest rate that fluctuates
based on the prime rate. As of March 31, 2000, we had approximately $7,800,000
outstanding under this promissory note which exposes us to interest rate risk.
Changes in interest rates which increase the interest rate on our borrowings
would make it more costly to borrow funds thereunder and may impede our
acquisition and growth strategies if we determine the costs associated with
borrowing funds are too high to implement these strategies.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUANCES PURSUANT TO THE ACQUISITION OF DIGITAL VISIONS, INC.
On March 7, 2000, we issued 838,475 shares of common stock in connection with
the acquisition of substantially all the assets and certain liabilities of DVI.
Of these shares, 83,847 shares were placed in escrow for indemnification and
other purposes. In connection with the acquisition of DVI, we issued an
additional 8,377 shares of our common stock to a financial advisor.
Additionally, we granted to DVI the right to receive up to 628,272 shares of
common stock upon the attainment of certain revenue targets in fiscal years
2000 and 2001.
OTHER ISSUANCES
On October 18, 1999, we issued an immediately exercisable warrant to purchase
up to 461,876 shares of common stock at an exercise price of $3.25 per share.
We issued this warrant as consideration for extending a $3,000,000 three-year
line of credit to us, which was terminated as of December 15, 1999. On March 2,
2000, the holders of this warrant exercised it in full and received in the
aggregate 461,876 shares of common stock.
The shares of common stock issued in all of the transactions described above
were not registered under the Securities Act of 1933, as amended, in reliance
upon the exemption provided by section 4(2) thereof and Rule 506 of Regulation
D promulgated thereunder, as a transaction by an issuer not involving any
public offering. Appropriate legends were affixed to the share certificates
issued by the Company in this transaction and the Company did not engage in any
general solicitation or advertising in connection with offers or sales of these
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the period
covered by this report.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
2.1* Agreement and Plan of Merger, dated August 6, 1999, by and among
Direct Access Interactive, Inc., SBS Corporation and the shareholders
of SBS Corporation.
2.2* Agreement and Plan of Merger, dated September 3, 1999, by and among
Netzee, Inc., Dyad Corporation and certain of the shareholders of Dyad
Corporation.
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
2.3* Asset Contribution Agreement, dated September 3, 1999, by and among
The InterCept Group, Inc., Netzee, Inc. and The Bankers Bank.
2.4* Asset Contribution Agreement, dated September 3, 1999, by and among
The InterCept Group, Inc., Netzee, Inc. and TIB The Independent
BankersBank.
2.5* Acquisition Agreement, dated September 3, 1999, by and among Netzee,
Inc., Call Me Bill, LLC and each of the members of Call Me Bill, LLC.
2.6* Asset Transfer Agreement, dated August 6, 1999, by and between The
InterCept Group, Inc. and Direct Access Interactive, Inc.
2.7* Agreement and Plan of Merger, dated September 3, 1999, by and between
Netzee, Inc. and Direct Access Interactive, Inc.
2.8** Asset Purchase Agreement, dated December 15, 1999, by and among
Netzee, Inc., Netcal, Inc. and DPSC Software, Inc.
2.9*** Asset Purchase Agreement, dated February 28, 2000, by and among
Netzee, Inc., Digital Visions, Inc. and certain shareholders of
Digital Visions, Inc.
3.1**** Amended Articles of Incorporation of Netzee, Inc., as amended to date.
3.2**** Amended and Restated Bylaws of Netzee, Inc., as amended.
4.1* Form of Netzee, Inc. common stock certificate.
4.2** Form of Netzee, Inc. Series A 8% Convertible Preferred Stock
certificate.
4.3* Registration Rights Agreement, dated August 6, 1999, by and among
Netzee, Inc. (as successor to Direct Access Interactive, Inc.) and
each of the former shareholders of SBS Corporation.
4.4* Registration Rights Agreement, dated September 3, 1999, by and among
Netzee, Inc., The Bankers Bank and TIB The Independent BankersBank.
4.5* Registration Rights Agreement, dated August 31, 1999, by and among
Netzee, Inc. and each of the former shareholders of Dyad Corporation.
4.6* Agreement, dated September 3, 1999, by and between Netzee, Inc. and
Sirrom Investments, Inc., regarding registration rights of Sirrom.
4.7* Registration Rights Agreement, dated October 18, 1999, by and between
Netzee, Inc. and Kellett Partners, L.P.
4.8* Warrant, dated October 18, 1999, issued to Kellett Partners, L.P.
4.9** Registration Rights Agreement, dated December 15, 1999, by and between
Netzee, Inc. and each of the former shareholders of DPSC Software,
Inc.
4.10*** Registration Rights Agreement, dated March 7, 2000, by and between
Netzee, Inc. and Digital Visions, Inc.
10.1* Netzee, Inc. 1999 Stock Option and Incentive Plan.
10.2* Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as
successor to Direct Access Interactive, Inc.) and Glenn W. Sturm.
10.3* Option Agreement, dated July 1, 1999, by and between Netzee, Inc. (as
successor to Direct Access Interactive, Inc.) and John W. Collins.
10.4* Option Agreement, dated August 5, 1999, by and between Netzee, Inc.
(as successor to Direct Access Interactive, Inc.) and Richard S.
Eiswirth.
10.5* Employment Agreement, dated September 1, 1999, by and between Netzee,
Inc. and Glenn W. Sturm.
10.6* Employment Agreement, dated September 1, 1999, by and between Netzee,
Inc. and C. Michael Bowers.
10.7**** Employment Agreement, dated March 1, 2000, by and between Netzee, Inc.
and Richard S. Eiswirth.
10.8* Form of Indemnification Agreement to be entered into between Netzee,
Inc. and each of its executive officers and directors.
10.9* Promissory Note, dated August 6, 1999, from Netzee, Inc. as maker to
The InterCept Group, Inc. as payee, in the principal amount of
$21,534,625.
10.10* Promissory Note, dated September 1, 1999, from Netzee, Inc. as maker
to The InterCept Group, Inc. as payee, in the principal amount of
$4,399,639.22.
10.11* Promissory Note, dated September 1, 1999, from Netzee, Inc. as maker,
to The InterCept Group, Inc. as payee, in the principal amount of
$2,882,200.
10.12* Promissory Note, dated September 1, 1999, from John W. Collins as
maker, to Netzee, Inc. (as successor to Direct Access Interactive,
Inc.).
10.13* Promissory Note, dated September 1, 1999, from Glenn W. Sturm as
maker, to Netzee, Inc. (as successor to Direct Access Interactive,
Inc.).
10.14* Promissory Note, dated September 1, 1999, from Donny R. Jackson as
maker, to Netzee, Inc. (as successor to Direct Access Interactive,
Inc.).
10.15* Promissory Note, dated September 1, 1999, from Richard S. Eiswirth as
maker, to Netzee, Inc. (as successor to Direct Access Interactive,
Inc.).
10.16* Line of Credit Agreement, dated October 18, 1999, by and between
Netzee, Inc. and Kellett Partners, L.P.
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C>
10.17*+ General Marketing Agent Agreement, dated September 3, 1999, as
amended, by and between Netzee, Inc. and TIB The Independent
BankersBank.
10.18*+ General Marketing Agent Agreement, dated September 3, 1999, as
amended, by and between Netzee, Inc. and The Bankers Bank.
10.19* Sublease, dated September 1, 1999, by and between The Bankers Bank and
Netzee, Inc.
10.20* Commercial Lease, dated January 9, 1998, by and between DMB, LLC and
Netzee, Inc. (as successor to Direct Access Interactive, Inc. (as
successor to SBS Corporation)).
10.21**** Employment Agreement, dated February 28, 2000, by and between Netzee,
Inc. and Michael E. Murphy.
10.22**** Promissory Note, dated March 24, 2000, from Netzee, Inc. as maker, to
The InterCept Group, Inc., as payee, in the principal amount of
$7,800,000.
10.23++ Master Agreement, dated March 1, 2000 by and between Netzee, Inc. and
The Bankers Bank
10.24++ Maintenance Agreement, dated March 1, 2001, by and between Netzee,
Inc. and The Bankers Bank
27.1 Financial Data Schedule (For SEC use only).
- ---------------
* Previously filed as an exhibit to Netzee, Inc.'s Registration
Statement on Form S-1 (File No. 333-87089), and hereby incorporated by
reference herein.
** Previously filed as an exhibit to Netzee, Inc.'s Form 10-Q for the
quarter ended September 30, 1999, as filed with the Securities and
Exchange Commission on December 22, 1999, and hereby incorporated by
reference herein.
*** Previously filed as an exhibit to Netzee, Inc.'s Form 8-K dated March
7, 2000, as filed with the Securities and Exchange Commission on March
22, 2000, and hereby incorporated by reference herein.
**** Previously filed as an exhibit to Netzee, Inc.'s Form 10-K for the
fiscal year ended December 31, 1999 as filed with the Securities and
Exchange Commission on March 29, 1999, and as amended May 1, 2000, and
hereby incorporated by reference herein.
+ Portions of this exhibit were previously omitted pursuant to a
confidential treatment request granted by the Securities and Exchange
Commission on November 8, 1999.
++ Portions of this exhibit were previously omitted pursuant to a
confidential treatment request that Netzee, Inc. has filed with the
Securities and Exchange Commission simultaneously with the filing of
Amendment No. 1 to Form 10-K for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission on May 1, 2000.
</TABLE>
(b) Reports on Form 8-K
(1) On February 28, 2000, we filed Amendment No. 1 to our Form 8-K, dated
December 15, 1999, as filed with the SEC on December 30, 1999, to file
financial statements of DPSC Software, Inc. which we acquired on
December 15, 1999.
(2) On March 22, 2000, we filed a Form 8-K, dated March 7, 2000, to report
our acquisition of DVI. No financial statements were filed with this
report.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETZEE, INC.
Date: May 15, 2000 /s/ Richard S. Eiswirth
-----------------------------------------------
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer and
Duly Authorized Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NETZEE INC. FOR THE QUARTER ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,329,349
<SECURITIES> 0
<RECEIVABLES> 5,027,315
<ALLOWANCES> 380,321
<INVENTORY> 0
<CURRENT-ASSETS> 7,307,165
<PP&E> 8,335,913
<DEPRECIATION> 409,555
<TOTAL-ASSETS> 148,767,512
<CURRENT-LIABILITIES> 12,416,239
<BONDS> 0
6,500,000
0
<COMMON> 173,565,005
<OTHER-SE> (53,862,613)
<TOTAL-LIABILITY-AND-EQUITY> 148,767,512
<SALES> 2,858,044
<TOTAL-REVENUES> 2,858,044
<CGS> 1,590,902
<TOTAL-COSTS> 18,463,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,727
<INCOME-PRETAX> (15,674,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,674,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 130,000
<CHANGES> 0
<NET-INCOME> (15,804,317)
<EPS-BASIC> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
