Exhibit 99.2
NETZEE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 2000 AND 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2000 and
2001................................................... F-3
Consolidated Statements of Operations for the period from
January 1, 1999 to February 28, 1999, for the period
from March 1, 1999 to December 31, 1999 and for the
years ended December 31, 2000 and 2001................. F-4
Consolidated Statements of Changes in Shareholders'
(Deficit) Equity for the period from January 1, 1999 to
February 28, 1999, for the period from March 1, 1999 to
December 31, 1999 and for the years ended December 31,
2000 and 2001.......................................... F-5
Consolidated Statements of Cash Flows for the period from
January 1, 1999 to February 28, 1999, for the period
from March 1, 1999 to December 31, 1999 and for the
years ended December 31, 2000 and 2001................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-7
</Table>
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netzee, Inc.:
We have audited the accompanying consolidated balance sheets of NETZEE,
INC. (a Georgia corporation, formerly Direct Access Interactive, Inc.) AND
SUBSIDIARIES as of December 31, 2000 and 2001 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the period
from March 1, 1999 to December 31, 1999, and for the years ended December 31,
2000 and 2001 and the consolidated statements of operations, shareholders'
deficit, and cash flows of its predecessor (Direct Access Interactive, Inc.) 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 audits 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, 2000 and 2001, the results of its operations and
its cash flows for the years ended December 31, 2000 and 2001 and the period
from March 1, 1999 to December 31, 1999, and the results of operations and cash
flows of its predecessor (Direct Access Interactive, Inc.) 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 15, 2002 (except with respect to Notes 9, 15 and 21, as to which the
date is March 29, 2002)
F-2
NETZEE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 960,231 $ 464,889
Restricted cash........................................... 135,000 325,000
Accounts receivable, net of allowance for doubtful
accounts of $641,447 and $375,202, at December 31, 2000
and 2001, respectively................................. 5,836,904 2,708,227
Leases receivable, current................................ 671,580 630,083
Prepaid and other current assets.......................... 1,130,294 1,091,442
------------- -------------
Total current assets.............................. 8,734,009 5,219,641
Property and equipment, net of accumulated depreciation of
$3,552,971 and $3,007,404 at December 31, 2000 and
2001, respectively..................................... 6,616,804 4,315,900
Intangible assets, net of accumulated amortization of
$47,824,555 and $50,028,727 at December 31, 2000 and
2001, respectively..................................... 89,950,659 22,261,157
Leases receivable, net of current portion................. 1,202,606 638,267
Other non-current assets.................................. 210,942 65,607
------------- -------------
Total assets...................................... $ 106,715,020 $ 32,500,572
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,784,480 $ 1,303,835
Accrued liabilities....................................... 4,372,821 1,354,045
Deferred revenue.......................................... 7,263,099 2,697,894
Note payable, current portion............................. 134,231 --
Other current liabilities................................. 668,151 1,039,996
------------- -------------
Total current liabilities......................... 14,222,782 6,395,770
Related-party borrowings.................................. 20,000,000 13,191,715
Note payable, net of current portion...................... 1,465,590 --
Deferred revenue, net of current portion.................. 1,436,576 1,180,780
------------- -------------
Total liabilities................................. 37,124,948 19,587,485
Commitments and contingencies (Note 20)
Redeemable preferred stock, no par value; 5,000,000 shares
authorized: 8% convertible preferred stock, $13 stated
value; 500,000 shares authorized and outstanding at
December 31, 2000 and 2001................................ 6,500,000 6,500,000
Shareholders' equity:
Common stock, no par value; 70,000,000 shares authorized
at December 31, 2000 and 2001, 3,358,642 and 3,377,911
shares issued and outstanding at December 31, 2000
and 2001, respectively................................. 192,304,886 190,555,255
Notes receivable from shareholders........................ (1,525,467) (579,486)
Deferred stock compensation............................... (3,595,682) (629,234)
Accumulated deficit....................................... (124,093,665) (184,114,228)
------------- -------------
Total shareholders' equity........................ 63,090,072 5,232,307
------------- -------------
Total liabilities and shareholders' equity........ $ 106,715,020 $ 32,500,572
============= =============
</Table>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
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"))
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR NETZEE, INC.
---------------- ----------------------------------------------
FOR THE FOR THE
PERIOD FROM PERIOD FROM
NUARY 1, 1999 TO MARCH 1, 1999 TO YEAR ENDED YEAR ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 2000 2001
---------------- ---------------- ------------ ------------
Revenues:
Monthly maintenance and service............. $ 33,082 $ 1,737,592 $ 17,760,838 $ 23,467,947
License, hardware, implementation and
other..................................... 57,080 522,159 2,150,706 2,296,096
-------- ------------ ------------ ------------
Total revenues........................ 90,162 2,259,751 19,911,544 25,764,043
Operating expenses:
Cost of services, license, hardware,
implementation and maintenance............ 44,358 1,913,960 10,105,570 14,115,008
Selling and marketing....................... 12,350 2,575,257 9,422,085 3,559,257
General and administrative, excluding
amortization of stock-based compensation
and restructuring costs................... 49,399 1,844,629 11,342,280 11,556,547
Amortization of stock-based compensation.... -- 4,591,888 3,192,688 1,255,437
Depreciation................................ 2,476 190,524 1,773,436 2,065,577
Amortization................................ -- 12,863,016 52,802,042 32,969,808
Restructuring costs......................... -- -- 211,200 2,002,139
Long-lived asset impairment charges......... -- -- 26,300,278 12,142,146
Net loss on sales of assets................. -- -- -- 4,719,863
-------- ------------ ------------ ------------
Total operating expenses.............. 108,583 23,979,274 115,149,579 84,385,782
-------- ------------ ------------ ------------
Operating loss................................ (18,421) (21,719,523) (95,238,035) (58,621,739)
Interest expense, net......................... (3,469) (670,503) (1,050,664) (878,824)
-------- ------------ ------------ ------------
Loss before extraordinary item................ (21,890) (22,390,026) (96,288,699) (59,500,563)
Extraordinary loss............................ -- (4,518,760) -- --
-------- ------------ ------------ ------------
Net loss before preferred dividends and
cumulative effect of change in accounting
principle................................... (21,890) (26,908,786) (96,288,699) (59,500,563)
Preferred stock dividends..................... -- (24,200) (520,000) (520,000)
-------- ------------ ------------ ------------
Net loss attributable to common shareholders
before cumulative effect of change in
accounting principle........................ (21,890) (26,932,986) (96,808,699) (60,020,563)
Cumulative effect of change in accounting
principle................................... -- -- (351,980) --
-------- ------------ ------------ ------------
Net loss attributable to common
shareholders................................ $(21,890) $(26,932,986) $(97,160,679) $(60,020,563)
======== ============ ============ ============
Basic and diluted loss per share before
extraordinary item.......................... $ (15.54) $ (34.81) $ (17.89)
Extraordinary loss per share.................. (3.13) -- --
------------ ------------ ------------
Basic and diluted net loss per share before
cumulative effect of change in accounting
principle................................... $ (18.67) $ (34.81) $ (17.89)
Loss per share from cumulative effect of
change in accounting principle.............. -- (0.13) --
------------ ------------ ------------
Basic and diluted loss per share.............. $ (18.67) $ (34.94) $ (17.89)
============ ============ ============
Weighted average common shares outstanding.... 1,442,754 2,781,141 3,354,909
============ ============ ============
</Table>
The accompanying notes are an integral part of these consolidated statements.
F-4
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"))
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
COMMON STOCK
------------------------ SHAREHOLDERS' DEFERRED
SHARES(1) AMOUNT WARRANTS NOTES RECEIVABLE COMPENSATION
--------- ------------ ----------- ---------------- ------------
Predecessor:
Balance, December 31, 1998.................. 2,000,000 $ 50,871 $ -- $ -- $ --
Net loss..................................... -- -- -- -- --
--------- ------------ ----------- ----------- ------------
Balance, February 28, 1999.................. 2,000,000 $ 50,871 $ -- $ -- $ --
========= ============ =========== =========== ============
Netzee, Inc.:
Initial InterCept investment, March 9,
1999........................................ 1,000,147 $ 1,379,965 $ -- $ -- $ --
Issuance of common stock for notes
receivable.................................. 194,375 3,110,000 -- (3,110,000) --
Capital contributions........................ -- 1,990,556 -- -- --
Issuance of common stock in connection with
acquisitions................................ 765,280 71,884,011 -- -- --
Issuance of common stock in connection with
marketing agreements........................ 16,077 1,479,096 -- -- --
Deferred stock-based compensation............ 20,000 13,224,100 -- (85,000) (13,139,100)
Amortization of deferred stock-based
compensation................................ -- -- -- -- 4,591,888
Stock options exercised for note
receivable.................................. 3,750 93,300 -- (93,300) --
Payment of shareholder notes................. -- -- -- 85,000 --
Interest on shareholder notes................ -- -- -- (111,499) --
Issuance of warrants to purchase common
stock....................................... -- -- 4,618,760 -- --
Initial public offering proceeds, net of
expenses.................................... 550,000 54,895,583 -- -- --
Net loss attributable to common
shareholders................................ -- -- -- -- --
--------- ------------ ----------- ----------- ------------
Balance, December 31, 1999.................. 2,549,629 148,056,611 4,618,760 (3,314,799) (8,547,212)
--------- ------------ ----------- ----------- ------------
Exercise of warrants to purchase common
stock....................................... 57,735 6,119,857 (4,618,760) -- --
Issuance of common stock and options to
purchase common stock in connection with
acquisitions................................ 705,232 39,834,929 -- -- --
Issuance of common stock in connection with
employer 401k match......................... 47,401 142,204 -- -- --
Forfeiture of restricted shares.............. (3,125) (375,000) -- -- 375,000
Initial public offering expenses............. -- (107,480) -- -- --
Exercise of stock options.................... 1,771 17,607 -- -- --
Interest on shareholder notes................ -- -- -- (214,241) --
Repayment of shareholders' notes............. -- -- -- 2,003,573 --
Amortization of deferred stock-based
compensation................................ -- -- -- -- 3,192,688
Forfeiture of stock options.................. -- (1,383,842) -- -- 1,383,842
Net loss attributable to common
shareholders................................ -- -- -- -- --
--------- ------------ ----------- ----------- ------------
Balance, December 31, 2000.................. 3,358,642 192,304,886 -- (1,525,467) (3,595,682)
--------- ------------ ----------- ----------- ------------
Return of common stock in connection with
acquisitions................................ (23,824) (115,885) -- -- --
Forfeitures of stock options................. -- (1,711,011) -- -- 1,711,011
Repayment of shareholders' notes............. -- -- -- 981,659 --
Exercise of stock options.................... 2,223 177 -- -- --
Issuance of common stock in connection with
acquisitions................................ 28,572 56,573 -- -- --
Interest on shareholder notes................ -- -- -- (35,678) --
Amortization of deferred stock-based
compensation................................ -- -- -- -- 1,255,437
Issuance of common stock in connection with
employer 401(k) match....................... 12,298 20,516 -- -- --
Net loss attributable to common
shareholders................................ -- -- -- -- --
--------- ------------ ----------- ----------- ------------
Balance, December 31, 2001.................. 3,377,911 $190,555,255 $ -- $ (579,486) $ (629,234)
========= ============ =========== =========== ============
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT (DEFICIT) EQUITY
------------- ----------------
Predecessor:
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........................................ $ -- $ 1,379,965
Issuance of common stock for notes
receivable.................................. -- --
Capital contributions........................ -- 1,990,556
Issuance of common stock in connection with
acquisitions................................ -- 71,884,011
Issuance of common stock in connection with
marketing agreements........................ -- 1,479,096
Deferred stock-based compensation............ -- --
Amortization of deferred stock-based
compensation................................ -- 4,591,888
Stock options exercised for note
receivable.................................. -- --
Payment of shareholder notes................. -- 85,000
Interest on shareholder notes................ -- (111,499)
Issuance of warrants to purchase common
stock....................................... -- 4,618,760
Initial public offering proceeds, net of
expenses.................................... -- 54,895,583
Net loss attributable to common
shareholders................................ (26,932,986) (26,932,986)
------------- ------------
Balance, December 31, 1999.................. (26,932,986) 113,880,373
------------- ------------
Exercise of warrants to purchase common
stock....................................... -- 1,501,097
Issuance of common stock and options to
purchase common stock in connection with
acquisitions................................ -- 39,834,929
Issuance of common stock in connection with
employer 401k match......................... -- 142,204
Forfeiture of restricted shares.............. -- --
Initial public offering expenses............. -- (107,480)
Exercise of stock options.................... -- 17,607
Interest on shareholder notes................ -- (214,241)
Repayment of shareholders' notes............. -- 2,003,573
Amortization of deferred stock-based
compensation................................ -- 3,192,688
Forfeiture of stock options.................. -- --
Net loss attributable to common
shareholders................................ (97,160,679) (97,160,679)
------------- ------------
Balance, December 31, 2000.................. (124,093,665) 63,090,072
------------- ------------
Return of common stock in connection with
acquisitions................................ -- (115,885)
Forfeitures of stock options................. -- --
Repayment of shareholders' notes............. -- 981,659
Exercise of stock options.................... -- 177
Issuance of common stock in connection with
acquisitions................................ -- 56,573
Interest on shareholder notes................ -- (35,678)
Amortization of deferred stock based
compensation................................ -- 1,255,437
Issuance of common stock in connection with
employer 401(k) match....................... -- 20,516
Net loss attributable to common
shareholders................................ (60,020,563) (60,020,563)
------------- ------------
Balance, December 31, 2001.................. $(184,114,228) $ 5,232,307
============= ============
</Table>
- ---------------
(1) All shares have been adjusted to reflect the one-for-eight reverse stock
split effected May 16, 2001.
The accompanying notes are an integral part of these consolidated statements.
F-5
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"))
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR NETZEE, INC.
------------------- -----------------------------------------------------------
FOR THE PERIOD FROM FOR THE PERIOD FROM
JANUARY 1, 1999 TO MARCH 1, 1999 TO YEAR ENDED YEAR ENDED
FEBRUARY 28, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001
------------------- ------------------- ----------------- -----------------
Cash flows from operating activities:
Net loss attributable to common
shareholders............................... $(21,890) $(26,932,986) $(97,160,679) $(60,020,563)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of change in accounting
principle................................ -- -- 351,980 --
Depreciation and amortization.............. 2,476 13,053,540 54,575,478 35,035,385
Stock-based compensation expense........... -- 4,591,888 3,192,688 1,255,437
Asset impairment charges................... -- -- 26,300,278 12,142,146
Provision for bad debt..................... -- -- 579,590 10,572
Net loss on sales of assets................ -- -- -- 4,719,858
Extraordinary loss......................... 4,518,760 -- --
Interest income on shareholder notes....... (111,499) (214,241) (35,678)
Changes in assets and liabilities, net of
effect of acquisitions and dispositions:
Accounts receivable...................... 12,606 (2,008,746) (2,946,615) 2,255,972
Leases receivable........................ -- (198,873) (621,207) 605,836
Prepaid and other current assets......... -- (303,528) (387,938) (175,409)
Accounts payable and accrued
liabilities............................ (42,889) 3,238,796 (956,124) (3,205,903)
Accrued restructuring costs.............. -- -- 98,300 (61,292)
Deferred revenue......................... 41,222 1,602,925 990,444 (1,530,326)
Other current liabilities................ -- 24,200 639,085 586,795
-------- ------------ ------------ ------------
Net cash used in operating
activities........................... (8,475) (2,525,523) (15,558,961) (8,417,170)
-------- ------------ ------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired........... -- (48,938,638) -- (420,954)
Purchase of property, equipment and
capitalized software....................... -- (4,233,946) (4,138,335) (2,238,777)
Purchase of short-term investments related to
restricted cash............................ -- -- (135,000) (575,000)
Proceeds from sale of short-term investments
related to restricted cash................. -- -- -- 380,000
Proceeds from the sale of assets............. -- -- -- 16,863,801
-------- ------------ ------------ ------------
Net cash (used in) provided by
investing activities................. -- (53,172,584) (4,273,335) 14,009,070
-------- ------------ ------------ ------------
Cash flows from financing activities:
Contributions from shareholder............... -- 1,240,556 -- --
Related party borrowings..................... -- 41,830,132 27,046,095 10,450,000
Payments on related party borrowings......... -- (31,524,798) (18,003,025) (17,496,706)
Decrease in line-of-credit................... -- (277,473) -- --
Payments on notes payable.................... -- (25,865) (3,403,911) (22,372)
Net proceeds from refinancing of note
payable.................................... -- -- 400,192 --
Re-payment of shareholder notes.............. -- -- 2,003,573 981,659
Payments of preferred stock dividends........ -- -- (24,200) --
Proceeds from exercise of warrants........... -- -- 1,501,097 --
Proceeds from exercise options for common
stock...................................... -- -- 17,607 177
Sale of common stock......................... -- 55,707,144 -- --
Decrease in related party loans from
shareholder of predecessor entity.......... (2,000) -- -- --
-------- ------------ ------------ ------------
Net cash (used in) provided by
financing activities................. (2,000) 66,949,696 9,537,428 (6,087,242)
-------- ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents.................................. (10,475) 11,251,589 (10,294,868) (495,342)
Cash and cash equivalents beginning of
period....................................... 13,985 3,510 11,255,099 960,231
-------- ------------ ------------ ------------
Cash and cash equivalents end of period....... $ 3,510 11,255,099 $ 960,231 $ 464,889
======== ============ ============ ============
</Table>
The accompanying notes are an integral part of these statements.
F-6
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 2000, AND 2001
1. ORGANIZATION AND NATURE OF BUSINESS
ORGANIZATION, FORMATION, CERTAIN ACQUISITIONS AND CERTAIN DISPOSITIONS
Netzee, Inc. ("we," "Netzee" or the "Company") 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 and other
support applications.
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. In March 1999, InterCept, Inc. ("InterCept")
acquired Direct Access as a wholly owned subsidiary. InterCept currently owns
approximately 28% 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 our former parent company,
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 (the "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. Each of
these entities is a "bankers' bank," which is a bank that exclusively serves and
is owned by other financial institutions.
In September 1999, we also acquired all of the ownership interests in Call
Me Bill, LLC ("Call Me Bill") based in Elizabethtown, Kentucky. Call Me Bill
provided 24-hour electronic bill payment services to financial institutions'
customers. Subsequently, we integrated these services into our core Internet
banking product. In May 2001, we sold a portion of these assets which we
considered a non-core component of our business to iPay, LLC ("iPay"), a related
party, which also assumed certain of the liabilities associated with the assets
(see Note 4).
In September 1999, we also acquired Dyad Corporation ("Dyad"). Based in
Norcross, Georgia, Dyad developed, among other things, proprietary loan
application, approval and fulfillment software.
In November 1999, we completed our initial public offering. We issued
550,000 shares of common stock (including the exercise of a portion of the
underwriter's over-allotment option) at an offering price of $112 per share. Net
proceeds from the offering were approximately $55 million after deducting
underwriters' discounts, commissions and expenses of the offering. We used the
proceeds to repay principal and accrued interest owed to InterCept pursuant to
outstanding promissory notes and previous working capital advances and to
acquire DPSC Software, Inc. ("DPSC") in December 1999.
Located near Los Angeles, California, DPSC provided regulatory reporting
and support applications designed to meet the special needs of community
financial institutions. In February 2001, we sold substantially all of these
assets to InterCept, which also assumed substantially all of the liabilities
associated with the assets (see Note 4).
In March 2000, we acquired certain of the assets and assumed certain
liabilities of Digital Visions, Inc. ("DVI") based in Minneapolis, Minnesota.
DVI provided Internet-based financial information tools for
F-7
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
community financial institutions. In November 2001, we sold substantially all of
these assets to SS&C Technologies, Inc. ("SS&C"), which also assumed certain of
the liabilities associated with the assets (see Note 4).
In July 2000, we acquired certain assets and assumed certain liabilities of
Card Plus, Inc. ("Card Plus"). Located in Norcross, Georgia, Card Plus provided
software and outsourced consultants for systems development.
In November 2000, we acquired certain assets and assumed certain
liabilities of John H. Harland Company ("Harland"). The assets acquired were
principally located in Trumbull, Connecticut and Portland, Oregon and are used
to provide Internet banking and bill payment services. As a result of our
purchase of these assets, Harland now has beneficial ownership of approximately
16% of our common stock.
In March 2001, we purchased certain assets of HomeCom's Internet banking
business and assumed certain of HomeCom's operating liabilities related to the
business. The assets acquired were principally located in Atlanta, Georgia and
are used to provide Internet banking services (see Note 3).
We collectively refer to Call Me Bill, Card Plus, DPSC, DVI, Dyad, HomeCom,
the Internet banking and bill payment assets of Harland, the Internet and
telephone banking operations of SBS and the Divisions as the "Acquired
Operations."
We have incurred net losses since our inception. As of December 31, 2001,
we had an accumulated deficit of approximately $184 million. These losses have
resulted from the costs we have incurred to develop our products and services,
and to increase our customer base and build our infrastructure as well as from
the amortization of intangible assets associated with the Acquired Operations.
We believe that our existing capital resources, together with cash provided by
our operations and borrowings under our credit facility, will be sufficient to
fund our working capital requirements for the next 12 months. If we are unable
to achieve and maintain our cost savings goals, if our working capital
requirements exceed our current expectations, if cash provided by our operations
is less than anticipated, 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
strategy on acceptable terms or at all. Additionally, we may need to further
extend the due dates of our line of credit as well as our preferred stock. If
we cannot obtain this financing or these extensions on terms acceptable to us,
or at all, we may be forced to curtail some planned business expansion, we may
be unable to fund our ongoing operations, or we may have to cease operations
altogether. Alternatively, we may be required to reduce the level of spending on
capital and operating expenses in order to utilize our existing financing and
sources of liquidity to operate the business on a reduced scale.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements of the Predecessor for the period from January 1,
1999 through February 28, 1999, include only the accounts of Direct Access. The
consolidated financial statements for the period from March 1, 1999 to December
31, 1999 and for the years ended December 31, 2000 and 2001 include the accounts
of the 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 the Company
are not comparable in all material respects, since those financial statements
report the financial position, results of operations, and cash flows on a
different basis of accounting. Although Direct Access was acquired on March 9,
1999, the accompanying 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
F-8
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 28, 1999 present the financial position and the results of operations
and cash flows of Direct Access, the predecessor to Netzee.
The Acquired Operations noted above were accounted for using the purchase
method of accounting. Accordingly, the results of operations of the Acquired
Operations have been included in the consolidated financial statements from
their respective dates of acquisition forward.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported 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.
RESTRICTED CASH
Restricted cash at December 31, 2001 is comprised of certificates of
deposit and are related to certain operating stand-by letters of credit, as well
as $125,000 held in escrow related to certain divestitures in 2001 (see Note 4).
Restricted cash at December 31, 2000 related to certain operating stand-by
letters of credit.
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. Effective March 9, 1999, the property and equipment of the
Predecessor were restated to the fair value at the date of acquisition. Major
additions and improvements are charged to the property accounts while
maintenance and repairs, which do not improve or extend the lives of assets, are
expensed in the current period. Estimated useful lives for our assets are as
follows:
<Table>
Leasehold improvements............. Lesser of useful life or term of
lease
Computer equipment................. 3 to 5 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 as a result of the
acquisitions discussed in Note 1 and include acquired technology, workforce,
contracts in progress, marketing agreements and goodwill. The carrying amounts
of the intangible assets are reviewed for impairment when events and
circumstances indicate that the recorded costs may not be recoverable in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of." 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
F-9
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined based on discounted future cash flows. We recorded impairment charges
related to certain intangible assets during 2000 and 2001 (see Note 11).
We have allocated the value of acquired intangible assets to acquired
technology, workforce, contracts in progress, marketing agreements and goodwill.
The value of workforce was determined by reference to the cost of the workforce
retained. Contracts in progress represent existing customer contracts acquired.
The value of contracts in progress was determined by reference to the recurring
revenue generated from existing customers. 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.
Excluding intangible assets acquired from Card Plus, we determined that the
remaining value of intangible assets was related to acquired technology.
Acquired technology also represents internally developed software acquired.
Intangible assets obtained in the Card Plus acquisition in excess of amounts
allocated to workforce were allocated to goodwill. Each of these intangible
assets is amortized on a straight-line basis over the following periods:
<Table>
Workforce................................................... 3 years
Contracts in progress....................................... 3 to 4 years
Marketing agreements........................................ 2 years
Acquired technology......................................... 3 years
Goodwill.................................................... 3 years
</Table>
SOFTWARE DEVELOPMENT COSTS
For certain of our service bureau software applications, we account for
costs incurred to develop software applications in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 98-1, Accounting for the Cost of Computer Software Developed or Obtained
for Internal Use. SOP 98-1 requires that entities capitalize certain internal
use software costs, which includes software design, coding, installation,
configuration and testing, once technical feasibility of the developed software
is attained. Costs incurred in the process of attaining technological
feasibility, which includes the conceptual formulation and evaluation of the
software alternatives, and costs to upgrade and enhance software once developed
are expensed as incurred. Under SOP 98-1, overhead, general and administration
costs, support costs and training costs are not capitalized. Capitalized
software costs are depreciated on a straight-line basis over the estimated
useful life of the application. Depreciation commences when the application is
put into production. We perform an on-going assessment of the carrying value of
our capitalized software cost in accordance with SFAS No. 121.
For certain of our in-house software applications that we sell or lease to
customers, we account for costs to develop software applications in accordance
with SFAS No. 86, "Accounting for Computer Software to be Sold, Leased, or
Otherwise Marketed." Research and development costs are expensed as incurred.
Computer software development costs are charged to research and development
expense until technological feasibility or a detail design document of the
software is established, after which remaining significant software production
costs are capitalized. These costs are amortized on a straight-line basis over
the estimated economic life of the software. Amortization of capitalized
software costs begins when products are made available for sale or when the
related product is put into use. We make on 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.
F-10
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We capitalized approximately $1.6 million, $2.2 million and $1.1 million in
software development costs, respectively, for the years ended December 31, 1999,
2000 and 2001 with an estimated useful of approximately five years. These costs
are classified in property and equipment in the accompanying consolidated
balance sheets.
REVENUE RECOGNITION
For our outsourced suite of products and services, we generally charge a
fixed monthly fee based on the number and type of products and services
purchased by the financial institution. We also charge variable fees that are
based on the number of end users and the number of transactions for certain
products and services. We generally provide products and services under
contracts with terms ranging from three to five years. Revenues from these types
of arrangements are recognized over the term over which the related services are
provided.
We generally charge fees for our in-house products under either a perpetual
license agreement which includes an up-front software fee, implementation fees
and recurring monthly fees based on the number of active users and user
generated transactions, or under a three to five-year subscription that includes
annual subscription and maintenance fees. Revenues from the software and
implementation component of those types of arrangements are recognized in
accordance with SOP No. 97-2, "Software Revenue Recognition" and Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SOP 97-2 software
revenue is recognized when delivery has occurred, contract is signed, the price
is fixed and determinable, and collectibility is assured. The related
implementation revenue is recognized as the implementation is performed.
Recurring fees represent post-contract customer support and are recognized over
the period in which the support services are provided. Subscription contracts
result in fees being recognized over the term of the agreement.
DEFERRED REVENUE AND UNBILLED RECEIVABLES
Deferred revenue represents amounts receivable and collected prior to
revenue recognition. The balance primarily consists of quarterly and annual
billings collected in advance and recognized ratably over the subsequent three
or twelve months, as applicable. Deferred revenues will be recognized as revenue
as the related services are provided.
Unbilled receivables were approximately $1.4 million and $700,000 at
December 31, 2000 and 2001, respectively. These receivables relate to end users
and transaction fees that are billed in arrears.
INCOME TAXES
We account for our income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. 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 our ability
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, restricted cash, accounts
receivable, accounts payable and preferred stock, approximate carrying value due
to the short-term maturity of the instruments. The fair values of short-term and
long-term debt
F-11
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts approximate carrying value and are based on their effective interest
rates compared to current market rates.
COMPREHENSIVE LOSS
Comprehensive loss for the period from January 1, 1999 to February 28,
1999, for the period from March 1, 1999 to December 31, 1999 and for the years
ended December 31, 2000 and 2001 is the same as the net loss as presented in the
accompanying statements of operations.
SEGMENT REPORTING
We currently operate in only one segment, and as such, no additional
disclosure is required. Additionally, we did not have any operations, net assets
or liabilities in foreign locations.
STOCK SPLIT
All share, per share calculations, and references to historical share
prices have been adjusted to reflect the one-for-eight reverse stock split
effected May 16, 2001.
RECLASSIFICATIONS
Certain amounts in prior period financial statements have been reclassified
to conform to the current year presentation. These reclassifications had no
impact on previously reported results of operations.
CONCENTRATION OF RISK
During 2001, Bank of America accounted for approximately 15% of our total
revenue related to certain of our non-core operating contracts that will
terminate during the first half of fiscal 2002. No other individual customer
accounted for more than 10% of our total revenues. There is no material impact
from the termination of these operating contracts on our continuing operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") approved
SFAS No. 141, "Business Combinations." SFAS No. 141 prospectively prohibits the
pooling of interest method of accounting for business combinations initiated
after June 30, 2001. Additionally, SFAS No. 141 requires additional disclosure
regarding the reasons for a business combination and the allocation of the
purchase price for business combinations accounted for as a purchase subsequent
to June 30, 2001.
In June 2001, the FASB also approved SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires companies to cease the amortization of
goodwill that existed at June 30, 2001. SFAS No. 142 established a new method of
testing goodwill for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would change the fair value of
goodwill from its carrying value. SFAS No. 142 becomes effective for our fiscal
year beginning January 1, 2002. We are currently assessing the impact of
adopting SFAS No. 142 to determine the effect, if any, it may have on the
F-12
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated results of operations and financial position as amortization of
goodwill will cease for our fiscal year beginning January 1, 2002 and periodic
impairment losses may be recognized. The cumulative impact of adopting SFAS No.
142 will be reported as a change in accounting principle in our fiscal 2002
consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, and
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. In contrast to SFAS No. 121, this statement requires the
exclusion of goodwill from its scope and, therefore, eliminates the requirement
of SFAS No. 121 to allocate goodwill to long-lived assets to be tested for
impairment. SFAS No. 144 also requires that the depreciable life of a long-lived
asset to be abandoned be revised in accordance with the Accounting Principles
Board Opinion ("APB") No. 20, "Accounting Changes." APB No. 20 requires that a
change in estimate be accounted for in the period of change if the change only
affects that period or the period of change and future periods if the change
affects both. APB No. 20 does not require restatement or pro forma information
for prior periods. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. We are required to adopt SFAS No. 144 on January 1, 2002. We
believe that the adoption of SFAS No. 144 will not have a material impact on our
financial position or results of operations.
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 for these operations included 325,000 shares of Direct
Access common stock at the estimated fair market value of $92.00 per share and
$21,534,625 in cash. Only the remote Internet and telephone banking operations
of SBS were retained by the Company and the remaining operations were sold to
InterCept in exchange for 56,250 shares of Direct Access common stock valued at
$92.00 per share, for a total sales price of $5,175,000. The Company recorded no
gain or loss on the sale of assets to InterCept, as the sale 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>
Acquired technology......................................... $45,041,300 3 years
Contracts in progress....................................... 1,340,000 4 years
Workforce................................................... 440,000 3 years
</Table>
ACQUISITIONS OF THE DIVISIONS
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 340,250 shares of our common stock valued at $92.00 per
share. 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 acquired
technology, marketing agreements, workforce and contracts in progress were
amortized over 2 to 3 years. Certain of these intangible assets were written
down in 2000 (see Note 11).
ACQUISITION OF DYAD CORPORATION
On September 3, 1999, we purchased Dyad. The purchase price of Dyad
included 77,268 shares of our common stock valued at $92.00 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
F-13
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $12,314,000 and was allocated to acquired
technology with a three-year amortization life. The unamortized balances of
these intangible assets were written off during 2000 (see Note 11).
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. 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 $3,635,000 and was allocated to acquired
technology with a three-year amortization life. Certain of these assets were
sold in 2001 (see Note 4).
ACQUISITION OF DPSC SOFTWARE, INC.
On December 15, 1999, we purchased DPSC. The purchase price of DPSC
included 52,282 shares of Netzee common stock, as adjusted to reflect shares of
common stock that were returned to us to satisfy certain indemnification claims,
valued at $115.00 per share, 500,000 shares of preferred stock valued at $13.00
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 financial statements from the date of acquisition until the assets
were sold in 2001. The excess of the purchase price over the net tangible assets
acquired totaled $35,760,000 and was allocated to acquired technology with a
three-year amortization life. Certain of these assets were sold in 2001 (see
Note 4).
ACQUISITION OF DVI
On March 7, 2000, we purchased DVI. The purchase price of DVI included
94,329 shares of our common stock, as adjusted to reflect shares of common stock
that were returned to us to satisfy certain indemnification claims, valued at
$177.00 per share and options to purchase 8,803 shares of common stock in
exchange for the cancellation of options to purchase DVI common stock. In
addition, we assumed approximately $3,300,000 in outstanding debt of DVI and
$1,200,000 in operating liabilities and other acquisition costs. We also granted
DVI the right to receive up to 78,534 additional shares of our common stock upon
the attainment of certain revenue targets in fiscal years 2000 and 2001. None of
these shares were issued based on fiscal 2000 and 2001 performance. The
acquisition was accounted for as a purchase. The results of operations of DVI
have been included in the consolidated financial statements from the date of the
acquisition until the assets were sold in 2001. The excess of purchase price
over the net tangible assets acquired was allocated to acquired technology and
workforce with a three-year life. Certain of these assets were written down and
subsequently sold in 2001 (see Notes 4 and 11).
ACQUISITION OF CARD PLUS
Effective July 1, 2000, we purchased Card Plus. The purchase price included
40,000 shares of our common stock valued at $56.00 per share and options to
purchase 4,445 shares of common stock in exchange for the cancellation of Card
Plus phantom stock units. Additionally, we granted Card Plus the right to
receive up to 28,572 shares of common stock upon the attainment of certain
revenue and employee retention goals for the period from July 1, 2000 to June
30, 2001. However, we were required to issue all of these shares if the closing
price of a share of our common stock was less than $36.00 on June 29, 2001.
Because our closing stock price on June 29, 2001 was $4.20, we issued all of
these shares and recorded the amount within equity. The acquisition was
accounted for as a purchase. The results of operations of Card Plus have been
included in the Consolidated Financial Statements
F-14
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
since the effective date of the acquisition. The excess of purchase price over
the net tangible assets acquired was allocated to goodwill and workforce with a
three-year life. The unamortized balances of these intangible assets were
written off during 2001 (see Note 11).
ACQUISITION OF ASSETS FROM HARLAND
Effective November 1, 2000, we purchased Harland's Internet banking and
bill payment businesses and assumed certain liabilities related to those
businesses. The purchase price included 550,000 shares of our common stock
valued at $32.00 per share. As a result of this issuance, Harland owns
approximately 16% of our common stock. The acquisition was accounted for as a
purchase. The results of operations of Harland have been included in the
consolidated financial statements from the effective date of the acquisition.
The excess of the purchase price over the net tangible assets acquired was
allocated to the following intangible assets with a three-year life:
<Table>
Acquired technology......................................... $17,747,000
Workforce................................................... 950,000
</Table>
ACQUISITION OF HOMECOM
On March 15, 2001, we purchased certain assets of HomeCom's Internet
banking business and assumed certain of HomeCom's operating liabilities related
to the business. The purchase price was approximately $420,000 in cash and
related acquisition expenses. The transaction was accounted for as a purchase.
The excess of purchase price over the net tangible assets acquired was allocated
to acquired technology and is being amortized over three years. The results of
operations of HomeCom have been included in the consolidated financial
statements from the effective date of the acquisition and are not material to
the results of our operations.
We will continue to evaluate the carrying amounts of these assets and
liabilities for 12 months following the date of their acquisition and may adjust
the allocations to intangible assets based on this evaluation. See Note 4 for
pro forma consolidated financial information related to these acquisitions.
4. DISPOSITIONS
DISPOSITION OF DPSC ASSETS
On February 2, 2001, we sold to InterCept certain of the regulatory
reporting assets acquired from DPSC in 1999, and InterCept assumed certain of
the related operating liabilities, for total consideration of approximately
$16.5 million, including liabilities assumed of approximately $2.4 million. We
received cash proceeds of approximately $14.1 million. In connection with the
sale of these assets, we recorded a non-cash loss of approximately $5.7 million.
This non-cash loss is included in the net loss on sales of assets in our
Consolidated Statement of Operations.
DISPOSITION OF CERTAIN BILL PAYMENT ASSETS
Effective May 1, 2001, we sold to iPay certain assets related to a portion
of our bill payment operations including contracts for bill payment only
services that were not considered to be a part of our core business, and iPay
assumed certain of the related operating liabilities. Gross proceeds from the
sale were approximately $1.3 million in cash, of which $50,000 was placed in
escrow for indemnification and other purposes. In connection with the sale of
these assets, we recorded a gain of approximately $1.2 million. This gain is
included in the net loss on sales of assets in our Consolidated Statement of
Operations.
F-15
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISPOSITION OF DVI ASSETS
On November 15, 2001, we sold substantially all the assets acquired from
DVI to SS&C and SS&C assumed substantially all the related operating
liabilities. Gross proceeds from the sale were approximately $1.35 million in
cash, of which $75,000 was placed in escrow for indemnification and other
purposes. Prior to the sale, certain of the intangible assets were written down
in 2001 (see Note 11). In connection with the sale of these assets, we recorded
a non-cash loss on sale assets of approximately $206,000. This loss is included
in the net loss on sales of assets in our Consolidated Statements of Operations.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information for
the years ended December 31, 2000 and 2001 assume that the acquisitions or
dispositions occurred as of January 1, 2000.
<Table>
<Caption>
FOR THE YEAR ENDED
-------------------------------------
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
Total revenue....................................... $ 26,936,942 $ 22,303,390
Net loss attributable to common shareholders........ $(68,863,292) $(35,730,498)
Basic and diluted loss per share.................... $ (33.24) $ (11.22)
</Table>
The unaudited pro forma consolidated financial information does not purport
to represent what our results of operations would have been had the acquisitions
or dispositions occurred as of such date, nor what results will be for any
future period.
5. LEASES RECEIVABLE
We have sold certain of our telephone banking products under sales-type
leases. At December 31, 2001, future minimum lease payments under non-cancelable
leases are as follows:
Total minimum lease payments receivable:
<Table>
2002...... $ 630,083
2003...... 415,876
2004...... 307,984
2005...... 69,798
----------
1,423,741
Less amount representing interest........................... (155,392)
----------
Present value of net minimum lease payments receivable...... 1,268,350
Less current maturities of lease payments receivable........ (630,083)
----------
Leases receivable, net of current portion................... $ 638,267
==========
</Table>
F-16
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 2001 consisted of the
following:
<Table>
<Caption>
2000 2001
----------- ----------
Leasehold improvements...................................... $ 1,138,369 $1,163,964
Computer equipment.......................................... 4,132,127 3,108,391
Furniture and fixtures...................................... 424,339 254,232
Machinery and other equipment............................... 2,614,118 446,425
Software.................................................... 1,860,822 2,350,292
----------- ----------
10,169,775 7,323,304
Less accumulated depreciation............................... (3,552,971) (3,007,404)
----------- ----------
Property and equipment, net................................. $ 6,616,804 $4,315,900
=========== ==========
</Table>
7. INTANGIBLE ASSETS
Intangible assets at December 31, 2000 and 2001 consisted of the following:
<Table>
<Caption>
2000 2001
------------ ------------
Goodwill................................................. $ 1,903,393 $ --
Workforce................................................ 4,427,000 1,780,000
Contracts in progress.................................... 1,880,000 1,880,000
Marketing agreements..................................... 4,135,104 --
Acquired technology...................................... 125,429,717 68,629,884
------------ ------------
137,775,214 72,289,884
Less accumulated amortization............................ (47,824,555) (50,028,727)
------------ ------------
Intangible assets, net................................... $ 89,950,659 $ 22,261,157
============ ============
</Table>
8. 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 bore interest at LIBOR plus 2% per
year and outstanding principal under the loan was due in 60 monthly installments
starting November 1, 1999. On August 22, 2000 the loan was revalued and
refinanced due to equipment upgrades. The loan amount was thereby increased to
$1,650,000 resulting in net proceeds of $400,192. The loan was secured by
equipment and a personal guaranty by two directors of Netzee. On March 1, 2001,
the note payable was assumed by the directors providing the guarantee, in
exchange for the equipment that was purchased with the proceeds of the loan. We
no longer have any liability under the loan.
9. RELATED-PARTY TRANSACTIONS
As discussed in Note 3 and Note 4, we completed several acquisitions and
dispositions during 2000 and 2001. In some of these transactions, persons who
were previously officers, directors or shareholders of the acquired companies
became executive officers or directors of Netzee, or beneficial owners of more
than 5% of our common stock.
Related Party Borrowings
Prior to our initial public offering, InterCept loaned us money to fund the
cash portions of the acquisitions of Dyad and Call Me Bill discussed in Note 3
and to fund our operations. All pre-offering borrowings were
F-17
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paid off with proceeds from the initial public offering. On December 15, 1999,
we received a commitment for a $15 million line of credit from InterCept in
connection with the acquisition of DPSC. During 1999, we incurred approximately
$677,000 of interest expense associated with these borrowings. In May 2000, the
$15 million line of credit agreement with InterCept was finalized. At that time,
the outstanding principal balance due on the borrowings was transferred to the
line of credit. The line of credit bore interest at a yearly rate of prime plus
2% and was secured by substantially all of our assets. Accrued interest under
the line of credit was payable quarterly beginning July 1, 2000. The principal
balance was payable at maturity on May 31, 2003. The line of credit agreement
provided for earnings, tangible net worth and other affirmative and negative
covenants with which we were required to comply, and provided for various other
conditions and restrictions. These borrowings were used to fund working capital
requirements. As of December 31, 2000, we were out of compliance with certain of
these covenants. However, InterCept waived such non-compliance as of December
31, 2000. As of December 31, 2000, the outstanding balance on the credit
facility was $15 million. We incurred approximately $1.1 million of interest
expense associated with our borrowings from InterCept for the year ended
December 31, 2000.
On September 29, 2000, we entered into an acquisition agreement with
Harland to acquire Harland's Internet banking and bill payment businesses.
Simultaneously with the signing of the acquisition agreement, we borrowed $5.0
million from Harland pursuant to a promissory note. The note bore interest at a
rate of prime plus 2% per year and was secured by substantially all of our
assets. Such security was pari passu in priority to the security given to
InterCept with respect to the line of credit. The principal balance was payable
at maturity on September 29, 2005, or upon demand with 30 days notice after
September 29, 2002. We incurred approximately $148,000 in interest associated
with this borrowing in 2000. In conjunction with the sale of the DPSC assets to
InterCept in February 2001, we converted the $15 million line of credit with
InterCept and our $5 million promissory note to Harland into a joint $20 million
credit facility that matured on November 2, 2002 ($15 million to be funded by
InterCept and $5 million to be funded by Harland). The terms of the credit
facility remained consistent with the terms of the former InterCept line of
credit and Harland promissory note except that both InterCept and Harland had
the right (instead of just InterCept) to enforce the covenants contained in the
line of credit agreement. On February 2, 2001, we sold to InterCept certain of
the regulatory reporting assets acquired from DPSC in 1999 and InterCept assumed
certain of the related operating liabilities, for total consideration of
approximately $16.5 million, including liabilities assumed of approximately $2.4
million. The proceeds from the sale of the DPSC assets were used to pay down
this credit facility by approximately $11.8 million.
On May 8, 2001, we sold certain assets related to a portion of our bill
payment operations. Gross proceeds from the sale were approximately $1.3 million
in cash and the majority of these proceeds were used to pay down our joint
credit facility. As a result of this sale, Harland's portion of the joint credit
facility was permanently reduced by $225,000. The total credit facility was
reduced to $19,775,000 and the ratio of available borrowings was adjusted to
approximately 76% from InterCept and approximately 24% from Harland.
On November 15, 2001, we sold certain assets acquired from DVI. Gross
proceeds from the sale were approximately $1.35 million in cash and the majority
of these proceeds were used to pay down our joint credit facility. As a result
of this sale, Harland's portion of the joint credit facility was permanently
reduced by $220,000. The total credit facility was reduced to $19,555,000 and
the ratio of available borrowings was adjusted to approximately 77% from
InterCept and approximately 23% from Harland.
As of December 31, 2001, the balance on this joint credit facility was
$13,192,000 with InterCept's and Harland's portion totaling $10,118,000 and
$3,074,000, respectively. We incurred interest expense associated with our
borrowings from InterCept and Harland of approximately $824,000 and $265,000,
respectively, during 2001, and we were in compliance with all the covenants of
the credit agreement. These loans require us to maintain certain levels of
EBITDA (as defined). We were in compliance with this covenant at December 31,
2001. Subsequent to
F-18
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2001, we extended the maturity date of the credit facility to April
10, 2003 and reduced the total credit facility to $18 million (see Note 21).
On October 18, 1999, we entered into a $3,000,000 line of credit facility
with a company, and in connection therewith, an affiliate of that company was
appointed as one of our directors. In connection with this line of credit, we
issued to that company a warrant to purchase 57,735 shares of our common stock.
The line of credit was terminated in December 1999 (see Note 13). This warrant
was exercised in full in March 2000.
Related-party loans from shareholders at December 31, 2000 and 2001
consisted of the following:
<Table>
<Caption>
2000 2001
----------- ------------
Line of credit from InterCept, interest payable quarterly
at prime plus 2% per year; principal payable in full on
May 31, 2003; the line of credit was secured by
substantially all our assets, pari passu with the
promissory note below..................................... $15,000,000 $ --
Promissory note from Harland, interest payable quarterly
at prime plus 2% per year; payable in full upon maturity
on September 29, 2005 or upon demand with 30 days notice
after September 29, 2002; the note was secured by
substantially all our assets, pari passu with the line of
credit above.............................................. 5,000,000 --
Joint line of credit from InterCept and Harland (InterCept
funds 76.7%, Harland funds 23.3%), interest payable
quarterly at prime plus 2% per year; payable in full on
November 2, 2002 (subsequently extended to April 10, 2003,
see Note 21); the facility is secured by substantially
all our assets............................................ -- 13,191,715
----------- ------------
20,000,000 13,191,715
Less current maturities................................... -- --
----------- ------------
$20,000,000 $ 13,191,715
=========== ============
</Table>
Other Relationships with InterCept
Our Chairman of the Board of Directors is the Chairman and Chief Executive
Officer of InterCept. Our Chief Executive Officer is a director of InterCept.
Our former Chief Executive Officer and former Vice Chairman of the Board of
Directors is a director of InterCept. A former non-employee director of Netzee
is also a director of InterCept.
In September 1999, we entered into a marketing agreement with InterCept
under which InterCept sells our products and services. Under this agreement, we
pay a commission to InterCept for each sale of our products and services made by
InterCept and for each referral to our sales force that results in a sale. We
paid InterCept approximately $357,000 and $141,000 in 2000 and 2001,
respectively, as a result of this agreement.
During 2000 and 2001, we shared some of our facilities with InterCept. We
paid approximately $163,000 and $112,000 related to those shared costs during
2000 and 2001, respectively.
During 2000 and 2001, we used InterCept's vendor relationships to purchase
certain hardware and software used to implement our Internet and telephone
banking products. By utilizing these vendor relationships, we were able to take
advantage of discounts that we would have been unable to obtain on our own. In
addition, InterCept assisted us in managing the ordering and inventory process
related to this
F-19
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equipment. During 2000 and 2001, we paid approximately $435,000 and $123,000,
respectively, in costs to purchase the equipment, which included a fee to
InterCept for its services.
InterCept also licenses certain of our telephone banking products for sales
to their customers. Under this agreement, InterCept pays us an initial license
fee along with an annual maintenance fee. We received approximately $286,000 and
$248,000 in payments from InterCept related to this agreement during 2000 and
2001, respectively.
Other Relationships with Harland
In connection with the acquisition of assets from Harland, beginning in
November 2000, we subleased certain of our Connecticut and Oregon facilities
from Harland. We paid approximately $135,000 and $356,000 in expenses during
2000 and 2001, respectively, associated with these subleases. Additionally, we
incurred costs totaling approximately $322,000 and $122,000 during 2000 and
2001, respectively, related to the usage of certain of their employees and
certain administrative support and equipment lease costs during the post-
acquisition transition.
In May 2001, we entered into a marketing agreement with Harland under which
Harland sells certain of our Internet-based products and services. Under this
agreement we pay a commission for sales of our products and services made by
Harland and for each referral to our sales force that results in a sale. We
incurred expenses of approximately $76,000 in 2001 as a result of this
agreement.
Our Other Relationships
Our former Chief Executive Officer and former Vice Chairman of the Board of
Directors is a partner at Nelson Mullins Riley & Scarborough, L.L.P., a law firm
that provided legal services to us. We paid approximately $425,000 and $62,000
during fiscal 2000 and 2001, respectively, to this firm for these legal
services.
On July 1, 1999, certain officers and directors of Netzee and InterCept
entered into full-recourse promissory notes with Direct Access as lender. These
notes totaled $3,110,000 and were given as consideration for the issuance of
shares of Direct Access common stock to these individuals. Each of the notes
bears interest at 7% per year and matures on June 30, 2002. During fiscal 2000
and 2001, principal payments on the notes were made in the amount of $1,766,500
and $952,745, respectively, and interest payments were made in the amount of
$237,073 and $28,914, respectively. The outstanding principal balances totaled
$1,343,500 and $400,000 as of December 31, 2000 and 2001, respectively. Accrued
interest on the notes as of December 31, 2000 and 2001 totaled approximately
$79,000 and $70,000, respectively.
On August 5, 1999, an officer of Netzee entered into a full-recourse
promissory note with Netzee as lender. The note totaled $93,300 and the proceeds
were used to exercise options to purchase shares of our common stock. Accrued
interest on this note as of December 31, 2000 and 2001 was approximately $10,000
and $16,000, respectively. The interest on these promissory notes has been
included in the principal amount and is, therefore, classified as a component of
stockholders' equity. The loan bears interest at a rate of 7% and matures on
August 4, 2002.
In May 2001, we sold a portion of our non-core business to iPay, LLC
("iPay"), a related party, which also assumed certain of the liabilities
associated with the assets (see Note 4). Certain of the owners of iPay were
former officers of Netzee.
Management believes that these transactions were made on terms no less
favorable to us than could have been obtained with unaffiliated third parties.
F-20
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RESTRUCTURING COSTS
In the fourth quarter of 2000, we initiated a restructuring of management
with the termination of certain management employees. Consequently, a
restructuring charge of $586,200 was recorded in accordance with Emerging Issues
Task Force ("EITF") 94-3, "Liability Recognition for Cost to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." This amount was
comprised of $375,000 in non-cash stock-based compensation associated with the
accelerated vesting of restricted stock, which is included in amortization of
stock-based compensation in the Consolidated Statements of Operations, and
$211,200 in severance and payroll-related items.
During fiscal 2001, we finalized and announced restructuring plans to
reduce expenses through the consolidation of our Internet and bill payment
operations. This restructuring has resulted in the closure of our offices in
Alabama, Kentucky, Texas and Tennessee, as well as the downsizing of offices in
Connecticut. Total staff reductions were approximately 195 employees.
Consequently, a restructuring charge of approximately $2,002,000 was recorded
for the year ended December 31, 2001 in accordance with EITF 94-3. This amount
was comprised of approximately $1,350,000 in severance and payroll-related items
and approximately $652,000 in lease and other contract termination costs.
In connection with this restructuring, we have accrued approximately
$1,109,000 as additional purchase price for the acquisition of assets from
Harland as a result of the termination of employees and the closing of offices
obtained in that acquisition in accordance with EITF 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." This amount is
comprised of approximately $1,060,000 for severance and payroll-related items
and approximately $50,000 for office lease and other contract termination costs.
As of December 31, 2001, we had paid approximately $3,535,000 in
restructuring costs consisting of approximately $2,858,000 in severance and
payroll related costs and approximately $677,000 in contract and lease
termination costs. As of December 31, 2001, we had terminated approximately 190
employees out of an anticipated total of 195 employees to be terminated as the
result of the restructuring plan. At December 31, 2001, approximately $162,000
in restructuring costs remained as an accrued liability, consisting of
approximately $137,000 in future severance benefits and other payroll-related
costs and $25,000 in additional contract and lease termination costs.
The following table summarizes our restructuring charges accrued and paid
in 2000 and 2001:
SEVERANCE AND LEASE AND OTHER
PAYROLL CONTRACT
RELATED ITEMS TERMINATION COSTS TOTAL
------------- ----------------- -----------
Restructuring charges accrued in 2000...... $ 586,000 $ -- $ 586,000
Restructuring charges recorded in
connection with the acquisition
of assets from Harland................... 773,000 200,000 973,000
Paid in 2000............................... (487,000) -- (487,000)
----------- --------- -----------
Balance at December 31, 2000............... 872,000 200,000 1,072,000
Restructuring charges accrued in 2001...... 1,350,000 652,000 2,002,000
Restructuring charges recorded in
connection with the acquisition of
assets from Harland...................... 286,000 (150,000) 136,000
Paid in 2001............................... (2,371,000) (677,000) (3,048,000)
----------- --------- -----------
Balance at December 31, 2001............... $ 137,000 $ 25,000 $ 162,000
=========== ========= ===========
</Table>
F-21
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ASSET IMPAIRMENT CHARGES
In accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets," we perform an impairment test with regards to
a long-lived asset when a "triggering event" occurs which may indicate that the
carrying value of the asset is unrealizable. Our policy for the completion of
such analysis is to compare the undiscounted cash flows expected to be generated
from the long-lived asset over its useful life to the carrying value of the
asset. SFAS No. 121 also requires that when a group of assets being tested for
impairment was acquired as part of a business combination using the purchase
method of accounting, any cost in excess of net assets acquired that arose as
part of the transaction must be included as part of the asset group. During
fiscal 2000, management determined that a triggering event had occurred with
respect to certain acquired software applications as a result of our management
restructuring and realigned strategic focus.
Additionally, during 2001 we determined that a triggering event had
occurred related to our decision to sell certain assets related to the DVI
acquisition, as well as the termination of a customer associated with our Card
Plus acquisition. An analysis of the estimated future cash flows expected to be
generated by these acquired assets was determined to be less than the carrying
amount, and allocated cost was determined to be in excess of net assets
acquired. Therefore, these acquired assets were determined to be impaired in
accordance with SFAS No. 121. Consequently, the original cost bases of these
assets were reduced to reflect the fair market value of such assets at the date
of the analysis.
These triggering events resulted in a $26.3 million and $12.1 million asset
impairment loss for the years ended December 31, 2000 and 2001, respectively. In
determining the fair market value of these assets, we considered recent
transactions and market trends involving similar assets.
12. CHANGE IN ACCOUNTING PRINCIPLE
In the fourth quarter of fiscal 2000, we adopted SAB No. 101, which
establishes guidelines for revenue recognition and enhances revenue recognition
disclosure requirements. Pursuant to this guideline, up-front fees associated
with certain product implementations are now being recognized over the term of
the underlying agreement, rather than upon the completion of product
implementation. The cumulative impact of adopting SAB No. 101 was recorded as of
January 1, 2000 and is reported as a change in accounting principle for our year
ended December 31, 2000.
The following unaudited pro forma consolidated financial information for
the years ended December 31, 1999, 2000 and 2001 assumes that the change in
accounting principle occurred as of January 1, 1999.
1999 2000 2001
------------ ------------ ------------
Loss attributable to common shareholders before
cumulative effect of change in accounting
principle........................................ $(26,954,876) $(96,808,699) $(60,020,563)
Cumulative effect of change in accounting
principle........................................ (351,980) -- --
------------ ------------ ------------
Pro forma net loss attributable to common
shareholders..................................... $(27,306,856) $(96,808,699) $(60,020,563)
============ ============ ============
Basic and diluted loss per share before change in
accounting principle............................. $ (18.67) $ (34.81) $ (17.89)
Cumulative effect of change in accounting principle
per share........................................ (0.24) -- --
------------ ------------ ------------
Basic and diluted net loss per share............... $ (18.92) $ (34.81) $ (17.89)
============ ============ ============
Basic and diluted weighted average shares
outstanding...................................... 1,442,754 2,781,141 3,354,909
============ ============ ============
</Table>
F-22
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the pro forma effects of SAB No. 101 have been allocated to 1999 as
we did not charge any up front fees for services in prior periods.
13. EXTRAORDINARY ITEM
On October 18, 1999, we entered into a $3,000,000 line of credit facility
with a company, and in connection therewith, an affiliate of that company 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 57,735 shares of common stock at an exercise price of
$26.00 per share. We recorded deferred financing costs for the difference
between the fair value of common stock, valued at $106.00 per share, 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 the
commitment from InterCept discussed in Note 9 above. The termination resulted in
the recognition of an extraordinary non-cash loss of $4,518,760 for the period
from March 1, 1999 to December 31, 1999 related to the write off of the
unamortized deferred financing fees.
14. INCOME TAXES
We have incurred net operating losses ("NOL") since inception. As of
December 31, 2000 and 2001, we had NOL carryforwards of approximately $25.8
million and $47.2 million, respectively, available to offset our future income
tax liability. The NOL carryforwards will 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 have recorded a valuation allowance equal to the net
deferred tax assets at December 31, 2000 and 2001.
The components of the deferred tax assets and liabilities are as follows as
of December 31, 2000 and 2001:
DECEMBER 31,
-------------------------
2000 2001
----------- -----------
Deferred tax assets:
Net operating loss carryforwards.......................... $12,231,914 $18,029,840
Deferred revenue.......................................... 3,305,877 1,172,699
Accounts receivable reserve............................... 243,750 142,577
Stock-based compensation.................................. 2,958,139 3,292,705
Intangible assets......................................... 418,000 505,963
Other..................................................... 427,872 213,057
----------- -----------
Total deferred tax assets......................... 19,585,552 23,356,841
Deferred tax liabilities
Property and equipment.................................... (283,322) (283,322)
Unbilled accounts receivable.............................. (712,191) 0
----------- -----------
Total deferred tax liabilities.................... (995,513) (283,322)
----------- -----------
Net deferred tax assets..................................... 18,590,039 23,073,519
Valuation allowance......................................... (18,590,039) (23,073,519)
----------- -----------
Net......................................................... $ -- $ --
=========== ===========
</Table>
F-23
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the income tax benefit for the period from March 1, 1999
to December 31, 1999, and for the years ended December 31, 2000 and 2001 are as
follows:
<Table>
<Caption>
DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- ----------------- -----------------
Current benefit
Federal........................... $ -- $ -- $ --
State............................. -- -- --
----------- ------------ -----------
Deferred benefit
Federal........................... (5,134,862) (11,503,613) (3,374,311)
State............................. (598,198) (1,353,366) (396,978)
----------- ------------ -----------
(5,733,060) (12,856,979) (3,771,289)
Total benefit............. (5,733,060) (12,856,979) (3,771,289)
Valuation allowance................. 5,733,060 12,856,979 3,771,289
----------- ------------ -----------
Total..................... $ -- $ -- $ --
=========== ============ ===========
</Table>
The following is a summary of the items, which resulted in recorded income
taxes that differ from taxes, computed using the statutory income tax rates for
the period from March 1, 1999 to December 31, 1999, and for the years ended
December 31, 2000 and 2001, respectively:
<Table>
<Caption>
1999 2000 2001
---- ---- ----
Tax benefit at federal statutory rates...................... 34% 34% 34%
Tax benefit at state statutory rate......................... 4 4 4
Permanent tax differences................................... (59) (51) (44)
Effect of valuation allowance............................... 21 13 6
--- --- ---
Effective tax rate.......................................... --% --% --%
=== === ===
</Table>
The income tax benefit for the period from January 1, 1999 to February 28,
1999 was not material.
15. PREFERRED STOCK
In December 1999, we issued 500,000 shares of Series A 8% Convertible
Preferred Stock, no par value, with a $13.00 per share stated value. The Series
A Preferred Stock was convertible at the option of the shareholder, in whole or
in part, into 51,384 split-adjusted shares of common stock. In addition, if the
average closing price of our common stock had equaled or exceeded a
split-adjusted price of $208.00 per share for any four-week period, we would
have been permitted to redeem all of the Series A Preferred Stock for cash or
51,384 split-adjusted shares of common stock. If we had elected to redeem the
Series A Preferred Stock for cash, the holder had the option to receive payment
in common stock. Series A Preferred Stock dividends were cumulative and were
payable when declared by the Board of Directors, at the rate of $1.04 per share
per year. We accrued $24,200 in dividends on the shares of Series A Preferred
Stock for the period from December 15, 1999 to December 31, 1999. During 2000,
we paid $24,200 in accrued dividends on these shares.
In September 2000, we exchanged all 500,000 shares of Series A 8%
Convertible Preferred Stock for 500,000 shares of Series B 8% Convertible
Preferred Stock, no par value. The rights, preferences and limitations of the
Series B Preferred Stock are substantially identical to those of the Series A
Preferred Stock, except that upon conversion of the Series B Preferred Stock or
upon the liquidation of Netzee, a holder of the Series B Preferred Stock is
entitled to receive all accrued but unpaid dividends thereupon.
In connection with a registration rights agreement entered into with the
former shareholders of DPSC, the shares were subject to the right, as of June
15, 2002, of the holders of the Series B Preferred Stock to require us to
repurchase
F-24
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
all of such shares at a price of $13.00 per share, plus all accrued and unpaid
dividends thereupon. Subsequent to December 31, 2001, we extended the repurchase
requirement date to April 10, 2003 (see Note 21).
We have accrued $1,040,000 in dividends on the shares of Series B Preferred
Stock for the year ended December 31, 2001 and have included that amount in the
other current liabilities in the accompanying balance sheets. Additionally, we
have included the preferred dividends for each year in the calculation of net
income attributable to common shareholders.
16. 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 to
eligible officers, directors, employees and other persons by the Board of
Directors or by our Compensation Committee, which is composed of the entire
Board of Directors. Awards issued under the Plan may include incentive stock
options ("ISOs"), nonqualified stock options ("NQSOs"), restricted stock or
stock appreciation rights. The Compensation 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 NQSO,
except that the Board of Directors must approve all awards to our executive
officers and directors.
The maximum number of shares of common stock that may be issued under the
Plan as of January 1, 2002 is 790,404. The Plan provides that the number of
shares of common stock available for issuance 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 437,500, and no more than
437,500 shares shall be issuable with respect to ISOs.
The Plan will remain in effect until terminated by the Board of Directors.
The Board of Directors may generally amend the Plan without the consent of our
shareholders.
During 1999, we issued options with exercise prices below the initial
public offering price. Accordingly, we recorded approximately $13.1 million in
deferred compensation and included such amount in common stock. This amount is
being amortized over the respective vesting periods of the options. We recorded
$3.2 million and $1.3 million in compensation expense for these options during
2000 and 2001, respectively.
A summary of stock options granted and related information for the years
ended December 31, 1999, 2000 and 2001 is presented below:
SHARES PRICE RANGE
-------- ----------------
Outstanding at December 31, 1998......................... --- ---
-------- ----------------
Granted................................................ 351,938 $16.00 - $118.00
Exercised.............................................. --- ---
Outstanding at December 31, 1999......................... 351,938 $16.00 - $118.00
-------- ----------------
Granted................................................ 297,802 $ 0.08 - $177.04
Exercised.............................................. (1,771) $ 0.08 - $ 40.00
Forfeited.............................................. (111,347) $40.00 - $177.04
--------
Outstanding at December 31, 2000......................... 536,622 $ 0.08 - $136.64
Granted................................................ 48,700 $ 3.84 - $ 4.00
Exercised.............................................. (2,223) $ 0.08
Forfeited.............................................. (380,126) $ 0.08 - $177.04
Outstanding at December 31, 2001......................... 202,973 $ 3.84 - $122.00
========
Exercisable at December 31, 2001......................... 119,871 $10.00 - $122.00
========
</Table>
F-25
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes information about the stock options outstanding as
of December 31, 2001:
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 2001 LIFE PRICE 2001 PRICE
- ---------------- -------------- ----------- --------- -------------- ---------
$ 3.84 - $ 10.00.. 40,212 9.34 $ 5.04 2,820 $ 10.00
$16.00 - $ 38.75.. 80,750 7.58 $20.68 60,996 $ 20.57
$40.00 - $ 62.24.. 35,344 7.71 $40.31 25,358 $ 40.14
$78.00 - $122.00.. 46,667 8.01 $98.04 30,697 $102.91
------- -------
202,973 8.05 $38.79 119,871 $ 45.55
======= =======
</Table>
During 1999, we issued 9,375 shares of restricted stock under the Plan. In
conjunction with our management restructuring (see discussion in Note 10), we
accelerated the vesting period of 3,125 of these shares in exchange for the
forfeiture of 3,125 shares. As of December 31, 2001, there were 6,250 shares
issued and outstanding related to this grant, all of which are vested. The
weighted average fair value of these shares at grant date was $120.00 per share.
During 1995, the FASB 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 to purchase shares of our common stock granted in 1999, 2000 and
2001 to our employees using the Black-Scholes option pricing model prescribed in
SFAS No. 123 and the following weighted-average assumptions: for 1999, 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%; for 2000, risk-free interest
rates of 6.03% to 6.21%, expected dividend yield of 0%, expected lives of four
years, and expected volatility of 132%; and for 2001, risk-free interest rates
of 3.49% to 5.02%, expected dividend yield of 0%, expected lives of four years,
and expected volatility of 185%.
The weighted average fair value of options granted to employees of Netzee
in 1999, 2000 and 2001 was $90.64, $52.08 and $3.79 per share, respectively. The
total value of the options granted to these employees during 1999, 2000 and 2001
was computed as approximately $21.0 million, $15.9 million and $185,000,
respectively, 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 net loss for the years ended December 31, 1999, 2000 and
2001 would have been as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
------------ ------------ ------------
Net loss attributable to common shareholders as
reported................................................ $(26,954,876) $(97,160,679) $(60,020,563)
Pro forma net loss........................................ $(28,212,750) $(107,169,281) $(58,581,010)
Loss per share (basic and diluted) as reported............ $ (18.72) $ (34.94) $ (17.89)
Loss per share (basic and diluted) pro forma.............. $ (19.52) $ (38.53) $ (17.46)
</Table>
F-26
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. 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 351,938, 536,622, and 202,973 shares of
common stock with a weighted average exercise price of $59.76, $51.92 and $38.79
per share were outstanding at December 31, 1999, 2000 and 2001, respectively,
approximately 51,384 common shares issuable upon conversion of the preferred
stock for the years ended December 31, 1999, 2000, and 2001, 57,735 outstanding
warrants to purchase common stock for the year ended December 31, 1999, and
107,106 common shares issuable upon the achievement of certain performance
targets associated with the DVI and Card Plus acquisitions for the year ended
December 31, 2000 were excluded from the presentation of diluted net loss per
share, as they are antidilutive due to the net loss.
18. 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, for 1999 we
matched in cash 100% of the first 6% of an employee's compensation contributed.
For the year ended December 31, 2000, we matched in cash 100% of the first 4% of
compensation contributed, and in our common stock 100% of the next 2% of
compensation contributed. For the year ended December 31, 2001, we matched in
cash 50% of the first 4% of compensation contributed and in our common stock,
50% of the next 2% contributed. The stock will be issued to those employees who
contributed in excess of 4% and were still employed by us as of December 31,
2000 and 2001, respectively. The number of shares was determined by taking the
total dollar value of the matching contribution divided by the share closing
price on the last trading day of the year. We contributed approximately 47,400
and 12,300 shares valued at approximately $142,000 and $21,000 at December 31,
2000 and 2001, respectively. Our cash contributions were approximately $577,000
and $187,000 for the years ended December 31, 2000 and 2001, respectively.
F-27
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
PREDECESSOR NETZEE, INC.
--------------- ------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM JANUARY 1, FROM MARCH 1,
1999 TO 1999 YEAR ENDED YEAR ENDED
FEBRUARY 28, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 2000 2001
--------------- ------------------ ------------ ------------
Cash paid for interest.................. $2,971 $ 740,638 $ 908,132 $1,379,936
Supplemental disclosure of non-cash
investing and financing activities:
Stock issued for acquisitions......... -- 71,884,011 39,834,929 --
Warrants issued for the purchase of
common stock....................... -- 4,618,760 -- --
Stock issued for notes receivable..... -- 3,110,000 -- --
Purchase of property and equipment
with note payable.................. -- 1,345,000 -- --
Stock issued as deferred
compensation....................... -- 1,125,000 -- --
Stock issued in connection with
marketing agreements, net of cash
paid............................... -- 1,079,096 -- --
Capital contribution for property and
equipment from shareholder......... -- 750,000 -- --
Exercise of stock options for note
receivable......................... -- 93,300 -- --
Stock issued for employer 401(k)
match.............................. -- -- 142,204 20,516
Stock reclaimed from escrow........... -- -- -- (68,713)
</Table>
20. COMMITMENTS AND CONTINGENCIES
PROPERTY LEASES
We lease various facilities under non-cancelable property lease agreements.
Future minimum annual obligations under these leases as of December 31, 2001 are
as follows:
2002........................................................ $ 571,210
2003........................................................ 325,962
2004........................................................ 362,781
2005........................................................ 378,056
2006........................................................ 189,024
----------
Total............................................. $1,827,034
==========
</Table>
Rent expense for the period from January 1, 1999 to February 28, 1999, the
period from March 1, 1999 to December 31, 1999, and the years ended December 31,
2000 and 2001 was $8,934, $138,874, $1,111,384, and $1,373,932, respectively.
LITIGATION
We are party to various claims and legal proceedings that arise in the
normal course of business (see Note 21). 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 condition
or results of operations.
F-28
NETZEE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SUBSEQUENT EVENTS
NASDAQ NOTIFICATION
On February 14, 2002, we received notification from The Nasdaq Stock Market
indicating that we were out of compliance with the $5 million minimum market
value requirement for our publicly held shares, as stated in Marketplace Rule
4450(a)(2). This rule provides us with 90 calendar days, or until May 15, 2002,
to come into compliance with this rule, which would require our publicly held
shares to maintain a minimum market value of $5 million for a minimum of 10
consecutive trading days during that period. If we fail to meet this
requirement, we will become subject to delisting from The Nasdaq National
Market, at which time we can appeal the delisting to the Nasdaq Listing
Qualifications Panel. It is likely that we will be delisted from the Nasdaq
National Market. In addition, we also have the option of applying to transfer
our common stock to The Nasdaq SmallCap Market, where we also would have to
satisfy continued inclusion requirements for that market. These requirements
include maintaining certain levels of shareholders equity and market value,
which may be unable to achieve.
LITIGATION
As reported in our Form 10-Q for the quarter ended June 30, 2001, on
November 1, 1999, Independent Banker's Bank of Florida ("IBBF") filed a lawsuit
against Netzee in the U.S. District Court for the Middle District of Florida. In
this lawsuit, IBBF claimed that we violated the terms of a marketing agreement
between IBBF and SBS, a company acquired by our predecessor. We terminated this
marketing agreement after the acquisition of SBS in August 1999. In the lawsuit,
IBBF claimed that the marketing agreement did not permit Netzee to terminate the
agreement and that Netzee breached certain exclusivity provisions of the
agreement. In March 2002, we settled this litigation for $750,000. This amount
was recorded in the first quarter of 2002 upon settlement of the litigation, as
the amount was not reasonably estimable at December 31, 2001.
RELATED PARTY BORROWINGS
On March 29, 2002, our joint credit facility with InterCept and Harland was
amended. The maturity date of the credit facility was extended to April 10, 2003
and the total credit facility was reduced from approximately $19.6 million to
$18 million. The first $17 million, to the extent borrowed, will be funded
approximately 76.7% by InterCept and 23.3% by Harland. The remaining $1 million
if borrowed, will be funded solely by InterCept. In connection with this
amendment, InterCept will be paid a fee of $100,000 and Harland will be paid a
fee of $20,000.
PREFERRED STOCK
On March 29, 2002, the Registration Rights Agreement with the former
shareholders of DPSC was amended to defer, until April 10, 2003, the right of
the holders of the Series B Preferred Stock to require Netzee to repurchase the
preferred stock. In connection with this amendment, Netzee paid an extension
fee of approximately $500,000.
MEMORANDUM OF UNDERSTANDING
In the first quarter of 2002, we entered into a Memorandum of Understanding
("MOU") with the Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, and the Georgia State Banking Department. The MOU
addresses several operational tasks which we believe we have now substantially
completed, imposes continuing reporting requirements and prohibits us from
declaring or paying cash or stock dividends on any shares of our capital stock
without the approval of the banking regulators. No civil or monetary penalties
have been imposed on us as a result of this MOU.
F-29