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