SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended December 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to _______
Commission file number: 01-14213
The InterCept Group, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58-2237359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3150 Holcomb Bridge Road, 30071
Suite 200, Norcross, Georgia (Zip Code)
(Address of principa executive offices)
(Registrant's telephone number, including area code): (770) 248-9600
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of each class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of Common Stock on March 20
2001, as reported on the Nasdaq Stock Market's National Market, was
approximately $253,032,903. As of March 20, 2001, the Registrant had
outstanding 14,218,725 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Shareholders to be held on May 15, 2001 are incorporated by reference in Part
III of this Annual Report.
Index of Form 10-K
Page
----
Part I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 15
Item 3. Legal Proceedings.................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.................................. 15
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................ 16
Item 6. Selected Financial Data.............................................................. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 25
Item 8. Consolidated Financial Statements and Supplementary Data............................. 25
Item 9. Changes and Disagreements with Accountants in Accounting and Financial Disclosure.... 25
Part III
Item 10. Directors and Executive Officers of the Registrant................................... 26
Item 11. Executive Compensation............................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 26
Item 13. Certain Relationships and Related Transactions....................................... 26
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 26
PART I
ITEM 1. BUSINESS
This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements appear in a number of places in this Annual Report and include
all statements that are not statements of historical fact regarding the intent,
belief or expectations of InterCept and its management. These statements are
based upon a number of assumptions and estimates which are subject to
significant uncertainties, many of which are beyond our control. Words such as
"may," "would," "could," "will," "expect," "anticipate," "believe," "intend,"
"plan," and "estimate" are meant to identify forward-looking statements. These
forward-looking statements are not guarantees, and actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to: our ability to achieve or maintain growth and execute our
business strategy successfully; our ability to achieve our sales objectives,
including our organic growth rates; risks associated with our ownership of a
significant amount of the common stock of Netzee, Inc.; whether we can
successfully locate, acquire and integrate new businesses and products; customer
attrition; increased competition; possible system failures and rapid changes in
technology; and other factors discussed in this Annual Report and in our filings
with the Securities and Exchange Commission, including our registration
statement on Form S-3 (No. 333-94511) as declared effective by the SEC on
February 15, 2000 and the "Risk Factors" section therein.
Overview
We are a single-source provider of a broad range of technologies, products
and services that work together to meet the electronic commerce and operating
needs of financial institutions. We focus on serving community financial
institutions in the U.S. Over 1,800 of these community financial institutions
have contracted with us for one or more of our technologies, products and
services, which include:
Electronic funds transfer. Electronic funds transfer, or EFT, transactions
include ATM withdrawals, balance inquiries and transfers, and debit card
transactions. We process a variety of EFT transactions online through national
and regional electronic networks, including CIRRUS(R), PLUS(R), STAR(TM) and
PULSE(TM). We also offer InterCept Switch(TM), a growing ATM network used by
community financial institutions to offer their customers access to ATMs owned
by other community banks free of charge.
Core data processing. We supply the software systems and services needed to
meet our customers' core data processing requirements, including general ledger,
loan and deposit operations, financial accounting and reporting, and customer
information file maintenance. Many of our customers install our client/server
software system, BancPac(TM) and many of our customers install our BancLine(TM)
software system, in-house to perform these core data processing functions for
themselves, and others outsource their core processing needs to our service
bureau operations. We also provide item processing services, such as statement
preparation and encoding of checks.
Check imaging. Check imaging involves creating computerized images of checks,
deposit slips and related paper documents for electronic storage and retrieval.
We offer check imaging products and services on both an in-house and service
bureau basis to reduce the labor and costs associated with traditional check
processing.
Data communications management. We provide efficient, reliable and secure
solutions for the data
1
communications needs of our customers and maintain nationwide data
communications coverage. We operate a frame relay network, which serves as the
principal conduit through which we deliver our EFT and other electronic commerce
technologies, products and services to our customers. We also provide internet
services, like web hosting and email services, over our frame relay network.
Internet banking. Through our affiliate, Netzee, Inc., we offer internet and
telephone banking products and services as part of our strategy to provide
comprehensive electronic commerce and operating capabilities to our customers.
Regulatory reporting software. We develop and provide software that prepares
and submits FFIEC Call Reports for community banks. Currently used by over 5,500
banks, CallReporter(TM) uses Microsoft(R) Windows(R) to deliver Call Report
programs. The software provides Internet delivery and updates, real-time error
checking using regulatory agency edits, on-line FFIEC instructions, bank
performance ratios and Internet access to peer group regulatory reports.
We were incorporated in Georgia on April 30, 1996. Our principal executive
offices are located at 3150 Holcomb Bridge Road, Suite 200, Norcross, Georgia
30071, and our telephone number is (770) 248-9600. Our corporate website
address is www.intercept.net. We are not incorporating the information on our
-----------------
website into this Annual Report, and we do not intend to make our website a part
of this Annual Report.
Our Industry
According to an industry survey by Grant Thornton LLP, 93% of community
financial institutions believe employing technology is the most important issue
to their continued success. Community financial institutions often have limited
resources and are under pressure to control their operating costs. By using
third-party providers like us for their electronic commerce and operating needs,
we believe community financial institutions can reduce their overhead and gain
access to advanced technologies and services they otherwise might not be able to
afford.
Electronic commerce involves transacting business through the use of
telecommunications networks and computer systems that transmit and process
commercial information and business documents electronically. Electronic
commerce for the financial services industry includes value-added electronic
funds transfer, or EFT, services such as ATM and debit card services, remote
banking and universal access to funds. Electronic commerce is an important part
of an overall technology solution, which also includes core processing, check
imaging, data communications and internet banking products and services, that
community financial institutions need in order to offer their customers the same
products and services provided by larger financial institutions.
Consolidation in the financial services industry has resulted in larger
financial institutions that mass market their products and services to potential
customers. We believe that community financial institutions can compete with
these larger banks and succeed as independent institutions by remaining focused
on serving the needs of the communities in which they operate. In order to
succeed, we believe community financial institutions will need to:
. implement advanced technologies for their customers and use advanced
technologies in their own operations;
. quickly obtain and offer new products and services to their customers;
2
. focus on their primary products and services in order to build strong
customer relationships;
. control their costs and improve their operating efficiency without
passing additional costs on to their customers; and
. process and transmit large amounts of data to multiple locations.
Our Solution
Our comprehensive and flexible suite of integrated technologies, products
and services allows us to act as a single-source provider for the technology and
operating needs of community financial institutions and help these financial
institutions:
Implement advanced technologies. Community financial institutions
generally lack sufficient capital and human resources to implement the latest
technological advancements available in the financial services industry. We
offer advanced technologies, including EFT services, core data processing, check
imaging software, and data communications products and services, as well as our
own ATM network, that community financial institutions need to run their
business in today's competitive marketplace. We continue to enhance and expand
our technologies, products and services, which are integrated and work together
to provide a complete technology solution for community financial institutions.
Rapidly deploy new products and services. Once a community financial
institution is set up on our network, we can quickly add new applications with
minimal effort. This allows our customers to quickly deploy new products and
services to their customers and help them generate additional revenues while
controlling the expenses associated with new products and services.
Focus on offering their primary products and services. We offer a broad
array of technologies, products and services that allow our customers to stay
focused on their primary business while still meeting the demands of their
customers for the latest financial products and services.
Improve operating efficiencies. By taking advantage of our technology and
operating solutions, our customers can improve their operating efficiencies
without committing the expenses and resources necessary to develop or maintain
similar systems in-house. For example, our community financial institutions get
the benefit of access to BancPac or BancLine and our communications network
without having to maintain personnel to develop, update and run these systems
and without having to make large up-front capital expenditures to implement
these advanced technologies. In addition, we offer our products and services on
a service bureau basis which allows financial institutions to outsource their
technology and operating needs to further improve their operating efficiency.
Securely process and transmit large amounts of information. Our data
communications network and services facilitate the rapid and secure transmission
and processing of the large amounts of sensitive financial data used in our
customers' operations. Our network implements the fiber optic networks of some
of the largest telecommunications providers, and we link our network to our
customers' operations with high-capacity communications lines. This ensures
that our network will support the rapid processing and transmission of
electronic data required to support our customers' electronic commerce
operations.
3
Our Strategies
Our goal is to become the leading provider of products and services for the
technology and operating needs of community financial institutions in the United
States by:
Cross-marketing our products and services to our existing customer base.
Once a customer contracts for one or more of our products or services, we strive
to develop and expand our relationship by cross-marketing our other products and
services to that customer. As that relationship continues, we are often able to
increase revenues from our existing customer base with minimal additional
expense by providing multiple products and services to customers already using
our network and systems. Because most of our products and services require the
payment of ongoing monthly charges, we are able to increase our recurring
revenues by enhancing and increasing the use of our various products and
services by cross-marketing to our customers.
Expanding our sales force and our strategic marketing relationships. We
plan to expand our customer base and penetrate new geographic markets by hiring
sales personnel who are knowledgeable in electronic commerce products and
services or have experience working with community financial institutions. We
also intend to leverage our relationships with banking organizations such as
bankers' banks. Bankers' banks are local or regional business organizations
that provide banking products and services for financial institutions who cannot
efficiently offer them due to cost, location, lack of resources or other
circumstances. In addition, bankers' banks provide financial support to
financial institutions and offer business advice with respect to various
critical areas such as operations, profitability and federal and state
regulation. We have exclusive contractual relationships with 8 of the 18
bankers' banks in the United States. We also have relationships with four
additional bankers' banks, as well as other banking related organizations, which
we leverage in our sales and marketing efforts. Our relationships with 12 of
the 18 bankers' banks gives us access to more than 5,600 financial institutions
in the United States.
We believe that the close nature of the relationships between bankers'
banks and community financial institutions described above makes our alliances
with bankers' banks an important part of our marketing strategy. We intend to
use our expanded sales force to continue marketing our products and services
directly to community financial institutions and to enhance our indirect
marketing efforts by developing additional strategic marketing relationships
with bankers' banks and various other business organizations.
Acquiring businesses with complementary technologies, products or services
that will enhance and expand our solutions, increase our market share or expand
our geographic presence. Since our incorporation in 1996, we have grown in part
through acquisitions of other businesses and technologies. We intend to
continue to acquire other companies with complementary technologies or services
that will enhance and expand our products and services and increase our market
share. We also plan to continue our geographic expansion nationally through the
acquisition of businesses that operate in geographic areas in which we do not
currently have operations.
Increasing our data communications management services to optimize our
frame relay network. We intend to increase our data communications management
services by offering customized, cost-competitive telecommunications
connectivity to our customers and managing their data traffic in a reliable and
secure manner across our frame relay network. We believe that our network is
one of the largest private frame relay networks in the southeastern United
States. Our network allows us to support our customers' existing applications
and easily add new products and services to our existing infrastructure with
minimal cost
4
and effort. We have upgraded our processing and switching equipment and
telecommunications lines to improve the speed and efficiency of transaction
processing across our networks. We intend to expand the use of our frame relay
network by selling additional communications services to our customers and by
extending the frame relay network into new geographic areas as business
warrants.
Continuing to expand and enhance our products and services. We have
devoted and will continue to devote resources to expanding and improving our
products and services. For example, we recently received certification as a
competitive local exchange carrier, or CLEC, and as a long distance carrier, or
IXC, in Alabama, Florida, Kentucky and Georgia. These certifications will enable
us to offer telecommunications services to our customers and to potentially
reduce our operating costs. We plan to continue to combine our electronic
commerce and other operating solutions with sophisticated technology to help our
financial institution customers remain competitive with larger financial service
providers.
Our Technologies, Products and Services
Electronic Funds Transfer
We believe that increased use and acceptance of ATM and debit cards,
coupled with technological advances in electronic transaction processing, have
created a need for financial service providers to offer a wide variety of EFT
solutions to their customers. By aggregating the EFT transaction processing of
numerous financial institutions, third party processors like us create economies
of scale, which allows them to price their services competitively.
Our EFT products and services include:
Category Description
- ------------------------------------------------------------------------------------------------------------
EFT transaction processing . Online processing of EFT transactions initiated by a consumer at a
terminal, such as ATM and debit card transactions, including
MasterMoney(TM) and VISA(R) Check cards
. Encompasses multiple transactions, including cash withdrawals,
transfers and balance inquiries
. Network connections to most regional and all national ATM and other
debit card networks, including STAR(TM), PULSE(TM), Cirrus(R), PLUS(R),
Maestro(R) and INTERLINK(R)
. Card-issue-only program, which gives banks the option to offer ATM
services to their customers without the expense of purchasing and
maintaining a complete ATM system
. Receive a base fee for providing ATM processing services and an
additional fee for each ATM serviced. Additional fees received
once the number of monthly transactions exceeds established
maximums, typically between 2,000 and 3,000 transactions
- ------------------------------------------------------------------------------------------------------------
InterCept Switch(TM) . Helps our customers keep consumers who may be drawn to larger
The Surcharge-Free Network(TM) financial institutions with a greater number of surcharge-free ATMs
. Allows our customers to waive ATM surcharges for customers of
InterCept Switch members, while retaining the ability to surcharge
non-member customers who use their ATMs
- ------------------------------------------------------------------------------------------------------------
5
The typical ATM transaction that we process begins when a cardholder
inserts a card issued by a financial institution into an ATM to withdraw funds,
obtain a balance, make other account inquiries or transfer funds. The
transaction is routed from the ATM across our frame relay network to our data
communications and processing center in Norcross, Georgia. We then either (a)
authorize or deny the requested transaction or (b) direct the transaction to the
card issuer or its designated processor for authorization. Once authorization
is received, the authorization message is routed back to the ATM almost
immediately and the transaction is completed. We update the account information
of our customers' cardholders on a daily basis.
The debit card transaction process begins when a consumer presents a debit
card to a merchant who "swipes" the card at a point of sale terminal and enters
the transaction amount. The transaction data is transmitted from the point of
sale terminal through the applicable credit and debit processing networks to our
frame relay network. The data is then routed across our network to our data
communications and processing center in Norcross, Georgia. We then (a) compare
the purchase transaction against the authorization data accessed through our
system, (b) place a hold for the transaction amount, (c) authorize the
transaction and (d) transmit the authorization response almost immediately back
through the network to the point of sale terminal. The appropriate processing
network settles the payment and credits the merchant with the transaction amount
less any discounts. The merchant delivers final transaction information to the
credit processing network and the network submits the transaction to us, which
facilitates posting and reporting of the transaction with the issuing bank. To
complete the transaction, the issuing bank debits its customer's account for the
transaction amount.
For point of sale services, we generally receive a portion of the
interchange fees charged by our bank customers that issue debit cards. We may
charge a monthly fee if our customers do not meet a certain minimum dollar
amount of transactions for a particular month. Our other EFT service contracts
generally provide for an initial term of three to five years and automatically
renew for similar terms unless notice of non-renewal is given prior to
expiration. Most charges due under these agreements are paid monthly.
Core Processing
Changing technologies, business practices and financial products have
resulted in issues of compatibility, scalability and increased complexity for
the software used in many financial institutions. The technology surrounding
the transmission, storage and retrieval of massive amounts of data has further
increased the complexity of data processing for financial institutions. Older
systems may not offer the advanced technological capabilities provided by newer
systems. As a result, we believe that financial institutions are demanding more
complete and flexible core data processing software, as well as complementary
products and services.
Our core processing software and complementary products and services
include:
Category Description
- ------------------------------------------------------------------------------------------------------------
BancPac(TM) . Client/server enterprise software system that consists of a series of
totally integrated software products
6
Category Description
- ------------------------------------------------------------------------------------------------------------
. Client/server computing--using personal computers as workstations
(the "client") and connecting them via a network to another personal
computer or unix server containing the database (the "server")--offers
fast and easy processing on economical computer hardware
. Satisfies our customers' core processing requirements including
general ledger, customer information files, loan and deposit processing,
and financial accounting, budgeting and reporting
. Available for in-house use as well as through our service bureau
operations (described below)
. Windows based, point-and-click access to entire database
- ------------------------------------------------------------------------------------------------------------
BancLine(TM) . Operates in a NT OPEN SYSTEMS environment
. Fast, online inquiry
. Provides superior flexibility and improves customer service
throughout the financial institution
. User defined parameters and tables
. Multiple security codes and levels of access
. Privacy "opt out" capabilities at the customer level
- ------------------------------------------------------------------------------------------------------------
Service bureau . Allows customers to focus on core competencies by outsourcing their
core processing needs to us
. Gives customers access to our processing systems without the expense
of maintaining in-house processing operations
. Services are conducted over our frame relay network, one of the
largest in the nation, and are coordinated through seven host data
processing centers located in various regions of the nation
. Each data processing center serves as a back-up facility in the event
another center experiences a natural disaster, destruction or other
similar event which eliminates or diminishes its processing
capabilities
. Check processing and back office services like proofing and encoding
of checks, clearing and settlement of checks with the Federal Reserve,
and other bank statement preparation
. Related technology services are provided through 26 service centers
throughout the eastern half of the United States as of March 20, 2001
- ------------------------------------------------------------------------------------------------------------
Ancillary products and services . Loan document imaging and tracking, teller software, check printing
software and optical disk storage
- ------------------------------------------------------------------------------------------------------------
7
Check Imaging
Check imaging involves creating digital images through the use of a camera
attached to a sorter. As a check passes through the sorter, its individual
picture is taken. Multiple check images are printed in check sequence on a
single page for inclusion in monthly statements to reduce postage costs when
mailing to the banks' customers. Automated electronic sorting of digital images
allows (a) bank employees to retrieve checks on personal computers, (b)
facilitates signature verification, (c) speeds responses to customer inquiries,
and (d) corporate customers to receive periodic statement information on CD-ROM
to facilitate financial and cash management objectives.
Increased electronic commerce activity and changing banking practices have
created a demand for faster, more efficient electronic handling of bank
documents, including checks and other documents. The need to reduce labor,
research time and the cost of postage has increased the demand for check imaging
solutions on both an in-house as well as service bureau basis. Images of
insufficient checks, stop payments, and large dollar checks, are presented
online to bank operations staff to review. Financial institutions will continue
to employ check imaging as part of their efforts to reduce operating costs and
provide enhanced banking services to their customers.
Our check imaging capabilities include:
- ------------------------------------------------------------------------------------------------------------
Category Description
- ------------------------------------------------------------------------------------------------------------
Renaissance(TM) . Proprietary check imaging software used in-house by our customers
. Allows customers to control the imaging process without paying
recurring monthly fees
- ------------------------------------------------------------------------------------------------------------
Service bureau . Turnkey outsourced solution for check imaging that provides our
customers the ability to offer check imaging and image statements
without a large capital expenditure
. Twenty six check imaging centers located in thirteen states as of
March 20, 2001
- ------------------------------------------------------------------------------------------------------------
Data Communications Management
We believe that the growth in the number and types of communications
devices used in electronic commerce has created a large market for data
communications management, transaction processing and information exchange
services. Key elements of our data communications management solutions include:
- ------------------------------------------------------------------------------------------------------------
Category Description
- ------------------------------------------------------------------------------------------------------------
Communication services . Serve as single point of contact for customers' communication needs
. Design and manage various local and wide area communications networks
for our customers
. Offer a full line of communications services, including end-to-end
management of equipment, local lines and long distance
8
Category Description
- ------------------------------------------------------------------------------------------------------------
. Provide internet services, including web hosting and email services,
to the desktop of our customers' personnel across our frame relay network
. Ability to support customers' existing applications and easily add
new products and services to existing infrastructure with minimal cost
and effort
- ------------------------------------------------------------------------------------------------------------
Frame relay network . Accommodates data transmissions of various sizes and is protocol
independent - not only can any set of data be accepted, switched and
transported across a network, but the specific data is undisturbed in
the process
. Provides efficient switching capabilities for transferring
information across the network, resulting in rapid response time and
secure and reliable transmission and processing of transactions
. Uses the fiber optic networks of MCI Worldcom and BellSouth
Telecommunications to provide the capacity, or bandwidth, capable of
supporting our transaction-intensive services
. Linked to our customers' operations by communication lines that can
handle large amounts of data traffic to ensure adequate bandwidth for
rapid processing of electronically transmitted data
. Monitored and maintained 24 hours a day, 7 days a week from a central
location in Norcross, Georgia
- ------------------------------------------------------------------------------------------------------------
Competitive local exchange . Certified as a CLEC and an IXC in Alabama, Kentucky, Florida and
carrier, or CLEC Georgia
. Will allow us to offer local and long distance communications
Long distance carrier, or IXC services to our customers
. We can purchase for resale all tariffed products and services offered
by the Regional Bell Operating Companies and long distance carriers at
wholesale prices, without having to spend the significant capital
required to install our own network infrastructure
- ------------------------------------------------------------------------------------------------------------
We recently received certification as a CLEC and an IXC in Alabama,
Florida, Kentucky and Georgia. We have negotiated an interconnection/resale
agreement with BellSouth Telecommunications Inc., a RBOC, but have not yet done
so with an IXC. The BellSouth interconnection/resale agreement has been filed
with the public utility commissions in Alabama, Florida, Georgia and Kentucky
and has been approved by those states.
Our ability to succeed as a CLEC or an IXC will be subject to a number of
factors, including:
. our ability to market the new services to our customers;
. the willingness of our customers to use a non-traditional provider for
their telecommunications services;
9
. our ability to implement the necessary billing and collection systems
for these services;
. competition from RBOCs such as BellSouth, from IXCs such as AT&T Corp.
or MCI WorldCom, Inc., and from other CLECs;
. our ability to obtain the services, equipment and facilities that we
need to serve as a CLEC or IXC; and
. the performance of other carriers from whom we purchase services for
resale.
If we are unsuccessful in operating as a CLEC or an IXC, our ability to
control our operating costs would be harmed and we would not receive the
benefits of the costs we have incurred in our efforts to become both a CLEC and
an IXC.
In addition to obtaining state CLEC and IXC certifications, we are also
required to obtain authorization from the Federal Communications Commission to
offer international telecommunications services. We are also required to file
with the FCC and with various state public utility commissions tariffs
describing the rates, terms and conditions of our services and to comply with
local license or permit requirements relating to the installation and operation
of our network. We have incurred some costs in attempting to become a CLEC and
IXC and expect to incur significant costs in maintaining that status. Any of
the following could have a material adverse effect on our operations as a CLEC
or an IXC:
. failure to maintain proper federal and state tariffs;
. failure to maintain proper federal or state certifications;
. failure to comply with federal, state or local laws or regulations;
. failure to obtain and maintain required licenses and permits;
. changes in the laws applicable to CLECs or IXCs; and
. burdensome federal, state or local regulations, license or permit
requirements.
Internet Banking
In March 1999 we acquired internet banking and voice response products and
began marketing these products to our customers as part of our package of
electronic commerce products and services. In August 1999, we acquired SBS
Corporation, an Alabama-based provider of internet and telephone banking
technologies and services to community financial institutions nationwide. In
September 1999, we completed several other business combinations, the result of
which was the creation of Netzee, Inc., an internet banking and technology
company in which we owned approximately 28% as of December 31, 2000. For more
information about these transactions, see "Business - Our Acquisitions" and
"Business - Our Relationship with Netzee, Inc." Through our relationship with
Netzee, we offer leading internet and telephone banking products and services as
part of our strategy to provide superior electronic commerce and operating
capabilities to our customers.
Ancillary Products and Services
To complement the products and services described above, we provide a
variety of ancillary products and services. These include (a) maintenance and
technical support services and (b) specialized equipment including ATMs, proof
machines, teller equipment, vaults and other bank security equipment. Where
applicable, we enter into standard ATM and other equipment maintenance contracts
with our customers that generally provide for a term of between one and three
years. Most of these contracts
10
automatically renew for varying periods at the end of the initial or any renewal
term unless either party elects to cancel the agreement 180 days prior to its
expiration.
We also provide merchant portfolio management services, which are designed
to reduce labor intensive back-office functions for our customers. We can
provide these services at a lower cost than many banks incur in-house by
streamlining processes and taking advantage of economies of scale.
Our customer service and technical support departments provide coverage 24
hours a day, 7 days a week. We believe that well-trained support personnel are
essential to attract and retain financial institution customers. Our trained
customer service and technical support personnel enhance our ability to offer
reliable, secure and automated solutions. Our customer service departments are
responsible for educating and assisting our customers in the use of our services
and for resolving billing related issues. Our technical support group is
generally responsible for consulting with our customers regarding technical
issues and for solving any technical problems brought to their attention by our
customer service department. Our technical support department is also
responsible for maintaining our backup systems and for coordinating the disaster
recovery services maintained by some of our information processing customers.
Our Acquisitions
Since January 1, 1999, we have completed the following transactions:
Date of Transaction Description
- ------------------------------------------------------------------------------------------------------------
January 1999 The purchase of some of the assets and liabilities of Eastern Software,
Inc., the developer of a loan document and portfolio tracking software
located in Georgia
- ------------------------------------------------------------------------------------------------------------
March 1999 A merger with Direct Access Interactive, Inc., a provider of internet
and telephone banking software and services located in Tennessee
- ------------------------------------------------------------------------------------------------------------
May 1999 A merger with L.E. Vickers & Associates, Inc. and Data Equipment
Services, Inc., two related Tennessee-based providers of core data
processing, item capture, check imaging, equipment and maintenance
products and services
- ------------------------------------------------------------------------------------------------------------
August 1999 A merger with SBS Corporation and SBS Data Services, Inc., two related
Alabama-based providers of software systems and services, including
internet banking, core data processing, check imaging, telephone banking
and optical storage products
- ------------------------------------------------------------------------------------------------------------
February 2000 The purchase of some of the assets and liabilities of the Dallas, Texas
item processing center of TIB The Independent BankersBank
- ------------------------------------------------------------------------------------------------------------
March 2000 The purchase of some of the assets and liabilities of the Tampa, Florida
item processing center of M&I Data Services
- ------------------------------------------------------------------------------------------------------------
May 2000 Purchase of Debit Card Program from the Georgia Banker's Bank
- ------------------------------------------------------------------------------------------------------------
June 2000 Purchase of TellerPlus, an online teller platform system, from
CRI-Financial Systems, Inc.
- ------------------------------------------------------------------------------------------------------------
11
- ------------------------------------------------------------------------------------------------------------
August 2000 A merger with Advanced Computer Enterprises, Incorporated, a provider of
core data processing, item capture and check imaging, accounted for as a
pooling of interests
- ------------------------------------------------------------------------------------------------------------
January 2001 The purchase of the U.S. core data processing, check imaging, and item
capture center operations of SLMsoft.com Inc.
- ------------------------------------------------------------------------------------------------------------
February 2001 The purchase of the assets and liabilities of DPSC, Inc. a division of
Netzee, Inc.
- ------------------------------------------------------------------------------------------------------------
March 2001 Purchase of C-TEQ, a provider of core data processing and check and
statement imaging
- ------------------------------------------------------------------------------------------------------------
Our Relationship with Netzee, Inc.
As noted above, on August 6, 1999, we acquired SBS Corp. and SBS Data
Services, Inc., two affiliated Alabama corporations that provided internet and
telephone banking, core data processing, check imaging and optical storage
products and services to community financial institutions. We issued
approximately 192,000 shares of our common stock to the SBS Data shareholders in
connection with our acquisition of that company and its core data processing
operations. At the same time, our wholly-owned subsidiary, Direct Access, Inc.,
merged with SBS Corp. and paid approximately $16.6 million in cash and issued
2,600,000 shares of Direct Access common stock to the former shareholders of SBS
Corp. Direct Access also repaid approximately $4.9 million in debt owed by SBS
Corp. To provide the funds for the SBS Corp. transaction, we borrowed
approximately $21.6 million under our line of credit with First Union National
Bank and then loaned the funds to Direct Access. After the merger, Direct
Access sold all of the assets of SBS Corp., other than its internet and
telephone banking assets, to InterCept in exchange for 450,000 shares of Direct
Access common stock owned by us.
In August 1999, we created a wholly-owned subsidiary, Netzee, Inc., and on
September 3, 1999, we combined it with:
. Direct Access, our internet banking subsidiary;
. the internet banking operations of The Bankers Bank and TIB The
Independent BankersBank;
. Call Me Bill, LLC, an electronic bill payment company; and
. Dyad Corporation, a developer of automated loan origination systems.
As a result of the issuance of shares of Netzee in connection with these
transactions, our ownership in Netzee decreased to approximately 49% as of
September 3, 1999. Following these transactions, we deconsolidated Netzee's
results of operations from our results of operations. To enable Netzee to
complete these transactions, we loaned it approximately $7.3 million. This loan
was in addition to the $21.6 million we loaned Netzee, as the successor to
Direct Access, in connection with the SBS Corp. merger described above. In
November 1999, Netzee completed its initial public offering of common stock and
repaid the amounts it had originally borrowed from us with some of the net
proceeds from that offering.
12
As of December 31, 2000 we owned approximately 28% of Netzee. Four of our
directors also serve as directors of Netzee and one of those directors, Donny
Jackson, is the Chief Executive Officer of Netzee. In addition, we maintain a
strategic relationship with Netzee to cross-market each other's products and
services, which we believe will benefit our business. Our existing and future
agreements and relationships with Netzee have not resulted and will not
necessarily result from arms-length negotiations. When the interests of Netzee
diverge from our interests, Netzee's officers and directors may exercise their
influence in Netzee's best interests. Therefore, our agreements and
relationships with Netzee may be less favorable to us than those that we could
obtain from unaffiliated third parties. Moreover, many of the transactions
between us and Netzee do not lend themselves to precise allocations of costs and
benefits. Thus, the value of these transactions will be left to the discretion
of the parties, who are subject to potentially conflicting interests.
Our relationship with Netzee presents potential conflicts of interest,
which may result in decisions which favor Netzee over our shareholders. Because
we and Netzee are both engaged in the sale of electronic commerce products and
services to community financial institutions, numerous potential conflicts of
interest exist between our companies. We will compete with each other when
offering some products and services to potential customers. Our bylaws contain
provisions addressing potential conflicts of interest between us and Netzee and
the allocation of transactions that, absent such allocation, could constitute
corporate opportunities of both companies. Under these provisions, Netzee may
take advantage of a corporate opportunity rather than presenting that
opportunity to us, absent a clear indication that the opportunity was directed
to us rather than to Netzee.
Because of our significant ownership interest in Netzee, a perception may
exist in the market that our stock price is tied closely to the stock price of
Netzee. The value of our minority interest in Netzee will be based in part on
the fair market value of Netzee's common stock as reported on the Nasdaq
National Market. Some investors may discount the value of our position in
Netzee due to the large, illiquid nature of our ownership in Netzee. We believe
that Netzee will be valued similarly to other companies with internet-based
businesses, and the market values of these companies generally have fluctuated
significantly. Therefore, the value of our interest in Netzee and our
shareholders' equity could fluctuate significantly, which could cause our stock
price to fluctuate significantly as well.
In addition, because we own a large percentage of Netzee's common stock, we
could be subject to various liabilities related to Netzee's business and
operations. For example, if Netzee were sued in a lawsuit, we could be named a
co-defendant as a result of our ownership interest and relationship with Netzee.
Although we do not believe that would be proper cause for us to be liable, any
lawsuit in which we are a named defendant could result in large litigation
expenses and distract us from running our business while we defend our position.
We have agreed to provide Netzee with a $15.0 million revolving line of
credit. The line of credit bears interest at prime plus 2% and accrued interest
is payable monthly. As of March 23, 2001, Netzee had $6.6 million outstanding
under the line of credit. If Netzee does not become profitable, it may not be
able to repay the loans we have made and may make to it in the future.
As of December 31, 2000 we owned approximately 28% of Netzee's common
stock. As of December 31, 2000 our investment in Netzee was $17.7 million which
exceeded the market value as of that date. We believe that this reduction in
value is temporary; however, if this reduction becomes other than temporary, we
may have to write down our investment in Netzee.
Effective February 1, 2001 InterCept acquired DPSC, Inc. from Netzee, Inc. in
an arms length transaction. InterCept paid $14.1 million and assumed certain
liabilities.
13
Sales and Marketing
At December 31, 2000 our sales force was made up of approximately 30 sales
representatives and product specialists who sell all of our products and
services to our customers in specified geographic regions. Because they have
the ability to sell our full range of products and services, our sales
representatives can capitalize on their relationships with the community
financial institutions. Although the sales representatives are trained on each
product line, we also employ several product specialists who are available to
assist the direct salesperson in the specifics of certain technical products.
We offer products and services on both a stand-alone basis and in combination
with one or more of our products and services.
Our indirect marketing efforts include obtaining referrals and endorsements
from our customers and various banking related organizations. We currently have
exclusive marketing agreements with 8 of the 18 bankers' banks and have other
relationships with four additional bankers' banks. Through our relationship
with these bankers' banks, we have referral sources to thousands of financial
institutions nationwide.
Employees
At December 31, 2000, we had 466 full-time employees and 61 part-time
employees. Of these employees, 427 worked in operations, 70 in administration
and 30 in sales. None of our employees is represented by a collective
bargaining agreement nor have we ever experienced any work stoppage. We believe
that our relationship with our employees is satisfactory.
Government Regulation
Our banking customers are subject to the supervision of several state and
federal government regulatory agencies. In addition, various federal and state
regulatory agencies examine our data processing operations from time to time.
These agencies can make findings or recommendations regarding various aspects of
our operations, and we generally must follow such recommendations to continue
our data processing operations.
Our ATM network operations are subject to federal regulations governing
consumers' rights. Fees charged by ATM owners are currently regulated in
several states, and legislation regulating ATM fees has been proposed in several
other states. Additional legislation may be proposed and enacted in the future
or existing consumer protection laws may be expanded to apply to ATM fees. If
the number of ATMs decreases, then our EFT revenues may decline. Furthermore,
we are subject to the regulations and policies of various ATM and debit card
associations and networks.
As a transaction processing company, we may be subject to state taxation of
certain portions of the fees charged for our services. Application of this tax
is an emerging issue in the industry, and the states have not yet adopted
uniform guidelines implementing these regulations.
Competition
The market for companies that provide technology solutions to community
financial institutions is intensely competitive and highly fragmented, and we
expect increased competition from both existing competitors and companies that
enter our existing or future markets. Many of our current and potential
competitors have longer operating histories, greater name recognition, larger
customer bases and substantially greater financial, personnel, marketing,
engineering, technical and other resources than we do. The principal
competitive factors affecting the market for our services include price, quality
and reliability of service, degree of service integration, ease of use and
service features.
14
Numerous companies supply competing products and services, and many of
these companies specialize in one or more of the services that we offer or
intend to offer to our customers. Our principal EFT competitors include
regional ATM networks, regional and local banks that perform processing
functions, non-bank processors and other independent electronic commerce and
data communications organizations. In our core banking and data processing
business, we compete with several national and regional companies.
Intellectual Property and Other Proprietary Rights
None of our technology is currently patented. We also rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our proprietary technology.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or obtain and use information that we
regard as proprietary. We cannot assure you that the steps we have taken will
adequately protect our proprietary rights or that our competitors will not
independently develop similar technology.
Facilities
Our principal office consists of 36,000 square feet of leased space located
in Norcross, Georgia. We currently operate full-service data centers, software
system development centers and item processing and back-office service centers
in 29 cities: Birmingham, Alabama; Jonesboro, Arkansas; Colorado Springs,
Colorado; Jacksonville, Miami, and Tampa, Florida; Macon, Norcross and Thomson,
Georgia; Lombard, Illinois; Lenexa, Kansas; Chelmsford and Norwood,
Massachusetts; Carlstadt and Westmont, New Jersey; Greensboro, North Carolina;
Oklahoma City, Oklahoma; Cayce, South Carolina; Brentwood, Cookeville,
Maryville, Nashville and White Pine, Tennessee; Austin, Dallas and Houston,
Texas; and Richmond, Virginia. We lease office space in Calabasas Hills,
California and Westminster, Colorado, primarily to support our sales and
marketing efforts in these areas. We own the facilities in Thomson, Georgia and
Maryville, Tennessee and lease the remaining. We believe our facilities are
adequate for our needs and do not anticipate any material difficulty in
replacing such facilities or securing facilities for new offices.
ITEM 2. PROPERTIES
See the information provided in Item 1 above entitled "Business -
Facilities" for information with respect to the location and general character
of our facilities.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to, and none of our material properties is subject to,
any material litigation other than routine litigation incidental to our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth
quarter of the year ended December 31, 2000.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Market Information
From our initial public offering in June 1998 until March 26, 1999, our
common stock traded on the American Stock Exchange under the symbol "ICG." Since
March 29, 1999 our common stock has been quoted on the Nasdaq National Market
under the symbol "ICPT." As of March 20, 2001, we had approximately 71 holders
of record of our common stock, representing approximately 2,300 beneficial
owners.
The table below sets forth for the periods indicated the high and low sales
prices of our common stock as reported by the Nasdaq National Market, as the
case may be.
Price Range
High Low
--------------------
Year Ended December 31, 1999:
First Quarter $10 1/4 $ 7 1/16
Second Quarter 17 3/8 8
Third Quarter 30 1/8 14
Fourth Quarter 31 1/4 12 1/2
Year Ended December 31, 2000:
First Quarter $32 1/32 $ 20 1/4
Second Quarter 26 1/4 13 1/2
Third Quarter 27 18 7/8
Fourth Quarter 28 11/16 20 1/2
We have never paid any cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to
retain future earnings, if any, to fund the development and growth of our
business. Our line of credit from First Union National Bank prohibits us from
paying cash dividends without the consent of First Union.
16
ITEM 6. SELECTED FINANCIAL DATA
You should read the following data along with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes. We derived this financial data from our
consolidated financial statements, which have been audited by Arthur Andersen
LLP, our independent public accountants. All amounts have been restated to
reflect the August 2000 acquisition of Advanced Computer Enterprises
Incorporated, which we accounted for as a pooling of interests transaction.
Equity in loss of affiliate represents our share of the reduction in equity, as
a result of losses, of Netzee. Minority interest in (income) loss of
consolidated subsidiary represents the minority shareholder's 33.3% share of the
equity and earnings of ProImage, Inc., a corporation that provides check imaging
services, of which we own 66.7%. This financial data includes the results of
operations of other companies we have acquired. Please see Note 3 in the notes
to our financial statements for a discussion of the acquisitions we have made.
Year Ended December 31,
1996 1997 1998 1999 2000
(In thousands, except share data)
Statement of Operations Data:
Revenues....................................... $ 19,269 $ 28,193 $ 33,270 $ 52,359 $ 69,639
Costs of services.............................. 9,338 12,125 13,587 20,452 26,952
Selling, general and administrative expenses... 9,748 12,798 13,589 20,992 27,017
Depreciation and amortization.................. 537 1,496 1,579 4,462 4,403
Loss on impairment of intangibles.............. 0 728 0 0 0
Writeoff of purchased research and development
costs......................................... 810 0 0 0 0
---------- ---------- ---------- ------------ ------------
Total operating expenses....................... 20,433 27,147 28,755 45,906 58,372
---------- ---------- ---------- ------------ ------------
Operating income (loss)........................ (1,164) 1,046 4,515 6,453 11,267
Interest and other income (expense), net....... (252) (625) (215) 39,172 11,825
---------- ---------- ---------- ------------ ------------
Income (loss) before equity in loss of
affiliate, provision for income taxes
and minority interest......................... (1,416) 421 4,300 45,625 23,092
Provision (benefit) for income taxes........... (141) 721 1,632 20,212 9,216
Equity in loss of affiliate.................... 0 0 0 (15,352) (30,710)
Minority interest.............................. (14) 39 (89) (120) (28)
----------- ---------- ---------- ---------- ----------
Net income (loss).............................. (1,289) (261) 2,579 9,941 (16,862)
Preferred stock dividends...................... (8) (32) (16) 0 0
---------- ---------- ---------- ---------- ----------
Net income (loss) attributable to common
shareholders.................................. $ (1,297) $ (293) $ 2,563 $ 9,941 $ (16,862)
========== ========== ========== =========== ===========
Basic net income (loss) per common
share......................................... $ (0.21) $ (0.04) $ 0.30 $ 0.99 $ (1.32)
========== ========== ========== =========== ==========
Diluted net income (loss) per common
share......................................... $ (0.21) $ (0.04) $ 0.30 $ 0.94 $ (1.32)
========== ========== ========== =========== ===========
Weighted average common shares outstanding:
Basic.......................................... 6,183,847 7,082,614 8,464,740 10,094,696 12,820,073
Diluted........................................ 6,183,847 7,082,614 8,596,514 10,563,546 12,820,073
Year Ended December 31,
1996 1997 1998 1999 2000
Balance Sheet Data:
Cash and cash equivalents...................... $ 1,666 $ 2,367 $ 3,496 $ 2,145 $ 8,061
Working capital................................ 2,142 1,512 5,057 3,692 56,907
Total assets................................... 12,447 12,045 22,014 100,895 142,126
Long-term debt, net of current portion......... 5,272 4,717 211 12,669 4,513
Shareholders' equity........................... 1,379 648 17,713 52,660 102,392
17
QUARTERLY FINANCIAL DATA
Year Ended December 31, 1999
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
(In thousands, except share data)
Statement of Operations Data:
Revenues..................................... $9,893 $11,426 $15,224 $15,816 $52,359
Costs of revenues............................ 3,747 4,388 5,989 6,328 20,452
------ ------- ------- ------- -------
Gross profit................................. 6,146 7,038 9,235 9,488 31,907
Net income (loss) attributable to common
shareholders................................ ====== ======= ======= ======= =======
$1,011 $ 1,084 $ 1,988 $ 5,858 $ 9,941
====== ======= ======= ======= =======
Diluted net income (loss) per common $ .10 $ .10 $ 0.18 $ 0.56 $ .94
share........................................ ====== ======= ======= ======= =======
Year Ended December 31, 2000
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
(In thousands, except share data)
Statement of Operations Data:
Revenues..................................... $15,779 $17,285 $17,828 $ 18,747 $ 69,639
Costs of revenues............................ 6,112 6,819 6,901 7,120 26,952
------- ------- ------- -------- --------
Gross profit................................. 9,667 10,466 10,927 11,627 42,687
Net income (loss) attributable to common
shareholders................................ ======= ======= ======= ======== ========
$ 227 $(3,783) $(3,244) $(10,062) $(16,862)
======= ======= ======= ======== ========
Diluted net income (loss) per common $ .02 $ (0.29) $ (0.25) $ 0.76 $ (1.32)
share........................................ ======= ======= ======= ======== ========
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is qualified by reference to, and should be read
in conjunction with, our consolidated financial statements and the related notes
thereto and other financial information included elsewhere in this Annual
Report. The following discussion also contains forward-looking statements which
are subject to the risks and uncertainties discussed on page 1 of this Annual
Report.
Overview
We derive revenues primarily from the following sources:
. electronic funds transfer, or EFT, processing services;
. core data processing systems, support, maintenance and related
services;
. check imaging systems, support and related services;
. data communications management; and
. ancillary products and services, including maintenance and technical
support services, sales of banking related equipment and complementary
products.
We derive EFT revenues principally from processing ATM and debit card
transactions. We receive a base fee for providing our ATM processing services
and an additional fee for each ATM serviced. Once the number of transactions by
a financial institution exceeds established levels, typically between 2,000 and
3,000 transactions per month, we charge additional fees for the extra
transactions processed. For debit card transactions, we generally receive a
portion of the interchange fees charged by our financial institution customers,
and we charge a monthly fee if our customers do not meet a certain minimum
dollar amount of transactions for a particular month. Most charges due under
our EFT service agreements are paid monthly.
On a service bureau basis, we generate core data processing revenues from
service and processing fees based on the volume of transactions processed.
These revenues are recognized as the services are performed. We also generate
core data processing revenues by licensing BancPac or BancLine, our proprietary
Windows(R) NT based client/server software systems, on an in-house basis. We
recognize revenues for licensing BancPac and BancLine in accordance with
Statement of Position 97-2 on "Software Revenue Recognition," issued by the
American Institute of Certified Public Accountants. We recognize software
license fees when we have signed a non-cancelable license agreement, shipped the
product and satisfied significant obligations to the customer.
We license on an in-house basis Renaissance(TM) software, our proprietary
check imaging software that we acquired in August 1999 as a result of our
acquisition of SBS Corp. See "Business - Our Acquisitions." We generate
revenues from license fees and recurring annual maintenance fees charged for
this system. Revenues from licensing of Renaissance are recognized in
accordance with Statement of Position 97-2, as discussed above. We also provide
check imaging in a service bureau environment. On a service bureau basis, we
generate revenues based on the volume of items processed. This revenue is
recognized as we provide the service.
19
We generate our data communications management service revenues
principally from network management and data traffic across our frame relay
network and from equipment configuration, installation and sales. We charge a
flat monthly fee for providing telecommunications connectivity and network
management as well as an installation charge.
Our ancillary products and services generate revenues primarily from our
maintenance and technical support services as well as sales of equipment. We
recognize maintenance and technical support service revenues as the service
period elapses. We recognize equipment sales revenues at the time of shipment.
In June 1998, we completed an initial public offering of our common
stock. Since that time, we have completed a number of acquisitions. See
"Business - Our Acquisitions" for a discussion of these acquisitions. We
originally accounted for our acquisition of Direct Access in March 1999 as a
pooling of interest. As a result of the transactions described in "Business -
Our Relationship with Netzee," we have changed the accounting for the Direct
Access acquisition to a purchase. Our acquisition of Advanced Computer
Enterprises ("ACE") in August 2000 was accounted for as a pooling of interests.
All of our acquisitions since our initial public offering, with the exception of
ACE, have been accounted for as purchases. Our financial results have been
restated to include the results of ACE for all periods presented.
Due to Netzee's issuance of common stock in connection with transactions
that occurred on September 3, 1999, our ownership percentage in Netzee decreased
to approximately 49% as of that date. As a result, we no longer consolidate
Netzee's results of operations with our results of operations. We now account
for our investment in Netzee under the equity method, which requires us to
record the results of operations of Netzee in a single line item in our
statement of operations titled "Equity in Loss of Affiliate." Because we
provided unlimited funding to Netzee until completion of their initial public
offering in November 1999, all of Netzee's losses prior to the completion of the
offering are included in that line item rather than our relative percentage of
those losses. Following the completion of the initial public offering we have
recorded only our relative percentage of Netzee's net losses. As of December
31, 2000 we owned approximately 28% of Netzee's common stock.
We base our expenses to a significant extent on our expectations of
future revenues. Most of our expenses are fixed in the short term, and we may
not be able to quickly reduce spending if our revenues are lower than we expect.
In an attempt to enhance our long term competitive position, we may also make
decisions regarding pricing, marketing, services and technology that could have
an adverse near-term effect on our financial condition and operating results.
In addition, our EFT revenues are based in large part on various interchange and
transaction fees set by Visa and MasterCard. Any changes in these fees, whether
as a result of a pending dispute or otherwise, could negatively impact our
revenues.
Due to the foregoing factors and other risks discussed in our SEC filings,
we believe that quarter to quarter comparisons of our operating results are not
a good indication of our future performance. It is likely that our operating
results will fall below the expectations of securities analysts or investors in
some future quarter. In such event, the trading price of our common stock would
likely decline, perhaps significantly.
20
Results of Operations
The following table sets forth the percentage of revenues represented by
certain items in our consolidated statements of operations for the indicated
periods.
Year Ended December 31,
------------------------------------------------------
1998 1999 2000
--------------- -------------- ---------------
Revenues............................................... 100.0% 100.0% 100.0
Costs of services...................................... 40.8 39.1 38.7
Selling, general and administrative expenses........... 40.8 40.1 38.8
Depreciation and amortization.......................... 4.7 8.5 6.3
--------------- -------------- ---------------
Total operating expenses............................... 86.4 87.7 83.8
--------------- -------------- ---------------
Operating income....................................... 13.6 12.3 16.2
Other income (expense), net............................ (0.6) 74.8 17.0
--------------- -------------- ---------------
Income (loss) before minority interest and
provision for income taxes........ 12.9 87.1 33.2
Equity in loss of affiliate............................ 0.0 (29.3) (44.1)
Minority interest (income) loss........................ (0.3) (0.2) (0.1)
Provision for income taxes............................. 4.9 38.6 13.2
--------------- -------------- ---------------
Net income............................................. 7.7% 19.0% (24.2)%
=============== ============== ===============
Year Ended December 31, 2000 Compared To Year Ended December 31, 1999
Revenues. Revenues increased 33.0%, to $69.6 million for the year ended
December 31, 2000 from $52.4 million for the year ended December 31, 1999. The
$17.2 million increase was primarily related to (a) $15.6 million generated by
an increase in service fee income, (b) $840,000 generated by an increase in data
communications management income and (c) $830,000 generated by additional
hardware sales These increases are attributable to both internal growth and
acquisitions.
Costs of Services. Costs of services increased 31.8% to $27.0 million for
the year ended December 31, 2000 from $20.5 million for the year ended December
31, 1999. The $6.5 million increase was primarily attributable to (a) an
increase of $5.1 million related to service fee income (b) $840,000 related to
data communications management, and (c) $600,000 generated by additional
hardware sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.7% to $27.0 million for the year ended
December 31, 2000 from $21.0 million for the year ended December 31, 1999. The
$6.0 million increase was primarily due to additional personnel to support our
growth and acquisitions and other miscellaneous expenses.
Depreciation and Amortization. Depreciation and amortization remained
constant at $4.4 million for the year ended December 31, 2000. During 1999
InterCept had a one time amortization charge for Netzee of approximately $1.0
million which did not occur in 2000, but which is offset by increased
intangibles in 2000.
21
Operating Income. For the foregoing reasons, operating income increased
$4.8 million to $11.3 million for the year ended December 31, 2000 from $6.5
million for the year ended December 31, 1999.
Interest and Other Income (Expense), net. Interest and other income
decreased $27.3 million to $11.8 million for the year ended December 31, 2000
from income of $39.2 million for the year ended December 31, 1999. The decrease
was due primarily to a $30.9 million decrease in gains recognized associated
with changes in the ownership of Netzee, Inc. offset by interest income of $3.6
million from investments of the proceeds from our public offering of stock in
February 2000. For an explanation of the Netzee, Inc. loss see Note 3 to our
Financial Statements.
Provision (Benefit) For Income Taxes. Provision for income taxes decreased
$11.0 million to $9.2 million for the year ended December 31, 2000 from $20.2
million for the year ended December 31, 1999. The decrease was attributable to
the taxable component of the gains created by the issuance of common stock of
Netzee during 1999 offset by increased pre-tax profits.
Equity in Loss of Affiliate. Equity in loss of affiliate was $30.7 million
for the year ended December 31, 2000 and $15.4 million for the year ended
December 31, 1999. This amount represents our share of Netzee, Inc.'s losses.
Minority Interest in Loss (Income) of Consolidated Subsidiary. Minority
interest in income decreased $90,000 to $30,000 for the year ended December 31,
2000 from $120,000 for the year ended December 31, 1999. The decrease was
primarily due to reduced profits in ProImage's operations.
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
Revenues. Revenues increased 57.4%, to $52.4 million for the year ended
December 31, 1999 from $33.3 million for the year ended December 31, 1998. The
$19.1 million increase was primarily related to (a) $14.4 million generated by
an increase in service fee income, (b) $3.3 million generated by additional
hardware sales and (c) $1.4 million generated by an increase in data
communications management income. These increases are attributable to both
internal growth and acquisitions.
Costs of Services. Costs of services increased 50.5% to $20.5 million for
the year ended December 31, 1999 from $13.6 million for the year ended December
31, 1998. The $6.9 million increase was primarily attributable to (a) an
increase of $3.7 million related to service fee income (b) $2.2 million
generated by additional hardware sales, and (c) $1.0 million related to data
communications management.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 54.5% to $21.0 million for the year ended
December 31, 1999 from $13.6 million for the year ended December 31, 1998. The
$7.4 million increase was primarily due to additional personnel to support our
growth and acquisitions and other miscellaneous expenses.
Depreciation and Amortization. Depreciation and amortization increased
182.6% to $4.5 million for the year ended December 31, 1999 from $1.6 million
for the year ended December 31, 1998. The $2.9 million increase was primarily
attributable to (a) $700,000 associated with depreciation expense related to
fixed asset additions and (b) $2.2 million related to additional amortization
expense, $1.9 million of which related to acquisitions completed in 1999.
22
Operating Income. For the foregoing reasons, operating income increased
$2.0 million to $6.5 million for the year ended December 31, 1999 from $4.5
million for the year ended December 31, 1998.
Interest and Other Income (Expense), net. Interest and other income
increased $39.4 million to $39.2 million for the year ended December 31, 1999
from expense of $220,000 for the year ended December 31, 1998. The increase was
due primarily to a $38.9 million gain associated with the issuance of common
stock of Netzee, Inc. For an explanation of this gain see Note 3 to our
Financial Statements.
Provision (Benefit) For Income Taxes. Provision for income taxes increased
$18.6 million to $20.2 million for the year ended December 31, 1999 from $1.6
million for the year ended December 31, 1998. The increase was attributable to
the pre-tax $38.9 million gain associated with the issuance of common stock of
Netzee and increased pre-tax profits.
Equity in Loss of Affiliate. Equity in loss of affiliate was $15.4 million
for the year ended December 31, 1999. This amount is our share of Netzee's
losses. There was no equity in loss of affiliate for the year ended December
31, 1998.
Minority Interest in Loss (Income) of Consolidated Subsidiary. Minority
interest in income increased $30,000 to $120,000 for the year ended December 31,
1999 from $90,000 for the year ended December 31, 1998. The increase was
primarily due to profits in ProImage's operations.
Liquidity and Capital Resources
Since our incorporation, we have financed our operations and capital
expenditures through cash from operations, borrowings from banks and sales of
our common stock, including our initial public offering in June 1998, which
resulted in net proceeds to us of $14.4 million, and our public offering in
February 2000, which resulted in net proceeds to us of $66.0 million.
Cash and cash equivalents were $8.1 million at December 31, 2000. Net cash
provided by operating activities was $9.0 million, $4.7 million and $3.0 million
for the years ended December 31, 2000, 1999 and 1998, respectively. The increase
in the net cash provided by operating activities in 2000 as compared to 1999 was
primarily attributable to an increase in earnings, excluding the non-cash
effects of our investment in Netzee. The increase in the net cash provided by
operating activities in 1999 as compared to 1998 was primarily attributable to
an increase in earnings.
Net cash used in investing activities was $60.8 million, $18.0 million and
$8.6 million in 2000, 1999 and 1998, respectively. The increase in net cash used
in investing activities in 2000 as compared to 1999 was attributable to
investment of the proceeds from our offering of common stock completed in
February 2000 as well as increased capital expenditures and acquisitions during
2000. The increase in net cash used in investing activities in 1999 as compared
to 1998 was primarily due to a receivable created from the funding of Netzee's
operations and acquisitions during the 1999 period.
Net cash provided by financing activities was $57.7 million, $11.9 million
and $6.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The increase in net cash generated for 2000 compared to 1999 is
due to the net proceeds from our offering of common stock completed in February
2000 of $65.5 million, offset by repayments of borrowings under our credit
facility using a portion of the offering
23
proceeds. The increase in net cash for 1999 compared to 1998 was primarily due
to increased borrowings under our credit facility due to the funding of Netzee's
operations and acquisitions during the 1999 period.
During 1998, we entered into a credit facility with First Union National
Bank. Under this facility, as amended, we may borrow up to $35.0 million for
working capital and to fund acquisitions and pay expenses related to
acquisitions. During 1999, we extended the term of the facility from April 28,
2001 to June 30, 2002. The First Union credit facility contains provisions which
require us to maintain certain financial ratios and minimum net worth amounts
and which restrict our ability to incur additional debt, make certain capital
expenditures, enter into agreements for mergers, acquisitions or the sale of
substantial assets and pay cash dividends. Interest is payable monthly, and
outstanding principal amounts accrue interest at an annual rate equal to either
(a) a floating rate equal to the lender's prime rate minus 0.25% or (b) a
floating rate equal to the LIBOR Market Index Rate. On December 31, 2000, the
interest rate under this facility was approximately 6.66%.
In connection with our acquisition of SBS Corp. and SBS Data Services,
Inc., we borrowed $21.6 million from First Union and loaned that amount to our
subsidiary, Direct Access, to pay a portion of the purchase price for SBS Corp.
and to pay some outstanding liabilities of SBS Corp. In September 1999, we
borrowed an additional $7.3 million under the First Union credit facility and
loaned that amount to Netzee to pay a portion of the purchase price for
acquisitions of other companies. Netzee repaid these loans with some of the net
proceeds from its initial public offering, which was completed in November 1999.
Netzee has borrowed additional monies from us and we have committed,
subject to some conditions, to provide to Netzee a $15.0 million line of credit
for its working capital needs. In February 2001, we acquired DPSC Software, Inc.
from Netzee for approximately $14.1 million which reduced the balance
outstanding on the line of credit. Netzee has subsequently borrowed additional
funds from us, and as of March 20, 2001, a total of $6.6 million was due from
Netzee under this line of credit. We plan to finance this line of credit with
cash on hand and additional borrowings under our credit facility with First
Union. Netzee may require additional funds to support its operations. Netzee may
seek to raise capital through public or private offering of debt or equity, the
sale of assets, or from other sources. No assurance can be given that additional
funds will be available, on terms favorable to Netzee, if at all. Netzee's
ability to continue as a going concern and to meet it's obligations as they may
come due may be dependent upon their ability to raise additional capital funds.
We no longer consolidate Netzee's results of operations with our results of
operations. We now account for our investment in Netzee under the equity
method, which requires us to record the results of operations of Netzee in a
single line item in our statement of operations titled "Equity in Loss of
Affiliate." Because we provided unlimited funding to Netzee until completion of
its initial public offering in November 1999, all of Netzee's losses prior to
the completion of the offering are included in that line item rather than our
relative percentage of those losses. Following the completion of Netzee's
offering we have recorded only our relative percentage of Netzee's net losses.
As of December 31, 2000 we owned approximately 28% of Netzee's common stock. As
of December 31, 2000 our investment in Netzee was $17.7 million which exceeded
the market value of $2.8 million as of that date. We believe that this reduction
in value is temporary; however, if this reduction becomes other than temporary,
we may have to write down our investment in Netzee. In addition, Netzee has a
history of losses and may never become profitable. We will continue to account
for our investment in Netzee under the equity method which will result in
additional losses on our investment until Netzee becomes profitable. The impact
of Netzee's results of operations on our financial condition, including our
shareholders' equity, is uncertain, and we cannot guarantee we will benefit from
our ownership in Netzee.
On January 4, 2001, we acquired the core data processing, check imaging,
and item capture center operations of SLMsoft.com Inc., a Kansas corporation,
and certain software from SLMsoft.com Inc. an Ontario corporation. We paid $40
million in cash and issued or agreed to issue up to 1,253,942 shares of our
common stock in the transaction.
On March 12, 2001, we acquired C-TEQ, Inc., an Oklahoma corporation that is
a provider of data processing and check and statement imaging to approximately
40 community financial institutions located in Oklahoma and Texas. We paid $3.6
million in cash in connection with the acquisition.
The cash portion of the acquisition of SLMSoft.com, and the acquisition of
DPSC and C-TEQ were financed through the use of cash on hand and an increase in
amounts outstanding under our line of credit with First Union National Bank.
24
While there can be no assurance, we believe that the net proceeds to us
from our offering of common stock in February 2000, together with funds
currently on hand, funds to be provided by operations and funds available for
working capital purposes under the First Union credit facility, will be
sufficient to meet our anticipated capital expenditures and liquidity
requirements for at least the next 12 months. We intend to grow, in part,
through strategic acquisitions and expect to make additional expenditures to
negotiate and consummate acquisition transactions and integrate the acquired
companies. No assurance can be made with respect to the actual timing and amount
of the expenditures and acquisitions. In addition, no assurance can be given
that we will complete any acquisitions on terms favorable to us, if at all, or
that additional sources of financing will not be required.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates. Borrowings under the First Union credit
facility accrue interest at a fluctuating rate based either upon the lender's
prime rate or LIBOR. As of March 20, 2001, there was $10.0 million outstanding
under this facility. Any future borrowings will increase our exposure to
interest rate fluctuations. Changes in interest rates which dramatically
increase the interest rate on the credit facility would make it more costly to
borrow under that facility and may impede our acquisition and growth strategies
if we determine that the costs associated with borrowing funds are too high to
implement these strategies. Additional loans to Netzee may increase the amount
outstanding under this facility.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We refer you to our "Consolidated Balance Sheets," "Consolidated Statements
of Operations," "Consolidated Statements of Changes in Shareholders' Equity,"
"Consolidated Statements of Cash Flows," "Notes to Consolidated Financial
Statements," and "Report of Independent Public Accountants" attached hereto as
pages F-1 through F-24.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
Some information required by Part III is omitted from this Annual Report
because we will file a definitive Proxy Statement pursuant to Regulation 14A of
the Securities Exchange Act of 1934 not later than 120 days after the end of the
financial year covered by this Report. Some information to be included in that
Proxy Statement is incorporated by reference into this Annual Report.
25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from our
Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading
"Election of Directors (Proposal 1)."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our
Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading
"Executive Compensation," except for those portions relating to our compensation
committee's report on executive compensation and to our comparative performance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from our
Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading
"Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from our
Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading
"Corporate Governance."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are filed as part of this Report and are
attached hereto as pages F-1 to F-19:
Report of Independent Public Accountants;
Consolidated Balance Sheets as of December 31, 1999 and 2000;
Consolidated Statements of Operations for the years ended December 31,
1998, 1999 and 2000;
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1999 and 2000;
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000; and
Notes to Consolidated Financial Statements
The following financial statements of Netzee, Inc. as required by
Regulation S-X, Rule 3-09 are filed herewith as Exhibit 99.1:
26
Report of Independent Public Accountants;
Consolidated Balance Sheets as of December 31, 1999 and 2000;
Consolidated Statements of Operations for the years ended December 31,
1998, for the period from January 1, 1999 to February 28, 1999 and for
the period from March 1, 1999 to December 31, 1999, and the year ended
December 31, 2000;
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the years ended December 31, 1998, for the period from January 1, 1999
to February 28, 1999 and for the period from March 1, 1999 to December
31, 1999 and for the period ended December 31, 2000;
Consolidated Statements of Cash Flows for the years ended December 31,
1998, for the period from January 1, 1999 to February 28, 1999 and for
the period from March 1, 1999 to December 31, 1999 and for the period
ended December 31, 2000; and
Notes to Financial Statements.
(a) 2. Financial Statement Schedules
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE
To The InterCept Group, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of The InterCept Group, Inc.
included in this Form 10-K and have issued our report thereon dated March
2, 2001. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The foregoing schedule is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Atlanta, Georgia
March 2, 2001
Financial statement schedules I, III and VI are omitted because they are
either: (a) not applicable or not required, or (b) the information is
presented in our consolidated financial statements or notes thereto.
Schedule II Valuation and Qualifying Accounts
Beginning Acquisition Ending
Description Balance reserves Deductions Balance
- --------------------------------- ------------- ----------- ------------- -------------
1998 Restructuring reserve
related to acquisition $ 0 $178,169 $ 68,646 (a) $109,523
1999 Restructuring reserve
related to acquisition $109,523 $100,000 $158,862 $ 50,661
2000 Restructuring reserve
related to acquisition $ 50,661 $ 0 $ 50,661 $ 0
(a) Amount includes $50,968 of lease costs charged against reserve and
$17,678 adjusted against goodwill to reflect revised estimates of
exit costs.
27
Charge to
beginning
costs Acquisition Ending
Description and balance reserves Expense Writeoffs Balance
- -------------------------------- -------------- --------------- ------------- ----------------- ---------------
1997 Allowance for Doubtful
Accounts $156,616 $ 0 $ 20,000 $ (6,864) $169,752
1998 Allowance for Doubtful
Accounts 169,752 190,000 (a) 125,000 (98,600) 386,152
1999 Allowance for Doubtful
Accounts 386,152 902,818 (648,190) 640,780
(a) Amounts associated with current year acquisitions charged to goodwill.
(a) 3. Exhibits
Exhibit No. Description
- ----------- ------------------------------------------------------------------------------------------
2.1 Acquisition and Merger Agreement dated May 28, 1999 by and between The InterCept Group,
Inc., LEV Acquisition Corp., L.E. Vickers & Associates, Inc., Data Equipment Services, Inc.,
and the shareholders of L.E. Vickers & Associates, Inc. and Data Equipment Services, Inc.
(incorporated by reference to Exhibit 2.1 to InterCept's Current Report on Form 8-K filed
June 11, 1999).++
2.2 Agreement and Plan of Merger dated August 6, 1999 by and among The InterCept Group, Inc.,
Zeenet Corporation, SBS Data Services, Inc. and the shareholders of SBS Data Services
(incorporated by reference to Exhibit 2.1 to InterCept's Current Report on Form 8-K filed
August 20, 1999).++
2.3 Agreement and Plan of Merger dated August 6, 1999 by and between Direct Access Interactive,
Inc., SBS Corporation and the shareholders of SBS Corporation (incorporated by reference to
Exhibit 2.2 to InterCept's Current Report on Form 8-K filed August 20, 1999).++
2.4 Agreement and Plan of Merger dated August 6, 1999 by and among Direct Access Interactive,
Inc., SBS Corporation and the shareholders of SBS Corporation (incorporated by reference to
Exhibit 2.2 to InterCept's Current Report on Form 8-K filed on August 20, 1999).++
2.5 Agreement and Plan of Merger dated September 3, 1999 by and between Netzee, Inc. and Direct
Access Interactive, Inc. (incorporated by reference to Exhibit 2.1 to InterCept's Current
Report on Form 8-K filed September 17, 1999).++
2.6 Agreement and Plan of Merger dated September 3, 1999 by and between Netzee, Inc., Dyad
Corporation and certain of the shareholders of Dyad Corporation (incorporated by reference
to Exhibit 2.2 to InterCept's Current Report on Form 8-K filed September 17, 1999).++
2.7 Asset Contribution Agreement dated September 3, 1999 by and among The InterCept Group, Inc.,
Netzee, Inc. and The Bankers Bank (incorporated by reference to Exhibit 2.3 to InterCept's
Current Report on Form 8-K filed September 17, 1999).++
28
2.8 Asset Contribution Agreement dated September 3, 1999 by and among The InterCept Group, Inc.,
Netzee, Inc. and TIB The Independent BankersBank (incorporated by reference to Exhibit 2.4
to InterCept's Current Report on Form 8-K filed September 17, 1999).++
2.9 Purchase Agreement (amended and restated) dated as of November 29, 2000, between The
InterCept Group, Inc. and SLMSoft.com Inc., an Ontario corporation, and SLMsoft.com Inc., a
Kansas corporation (incorporated by reference to Exhibit 2.1 to InterCept's Current Report
on Form 8-K filed January 19, 2001). ++
2.10 Software Agreement dated January 4, 2001, between The InterCept Group, Inc., and SLMSoft.com
Inc., an Ontario corporation (incorporated by reference to Exhibit 2.2 to InterCept's
Current Report on Form 8-K filed January 19, 2001). ++
2.11 Registration Rights Agreement dated January 4, 2001, between The InterCept Group, Inc., and
SLMSoft.com Inc., an Ontario corporation (incorporated by reference to Exhibit 2.3 to
InterCept's Current Report on Form 8-K filed January 19, 2001). ++
3.1 Amended and Restated Articles of Incorporation, as deemed filed with the Secretary of the
State of Georgia on April 29, 1998 (incorporated by reference to the exhibits to InterCept's
Registration Statement on Form 8-A (as amended on October 1, 1999)).
3.2 Amended and Restated Bylaws (incorporated by reference to the exhibits to InterCept's
Registration Statement on Form 8-A (as amended on October 1, 1999)).
3.3 Amendment to Amended and Restated Bylaws (incorporated by reference to the exhibits to
InterCept's Registration Statement on Form 8-A (as amended on October 1, 1999)).
4.1 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Amended and Restated Articles of
Incorporation, Amended and Restated Bylaws and Amendment to Amended and Restated Bylaws
defining the rights of the holders of common stock.
10.1 The InterCept Group, Inc. Amended and Restated 1996 Stock Option Plan.*/**
10.2 Form of Stock Option Agreement under The InterCept Group, Inc. Amended and Restated 1996
Stock Option Plan.*/**
10.3 Form of Stock Option Agreement for Directors under The InterCept Group, Inc. Amended and
Restated 1996 Stock Option Plan.*/**
10.4 Employment Agreement by and between InterCept and John W. Collins dated as of January 30,
1998.*/**
10.5 Employment Agreement by and between InterCept and Donny R. Jackson dated as of January 30,
1998.*/**
10.6 Employment Agreement by and between InterCept and Scott R. Meyerhoff dated as of February 1,
1998.*/**
10.7 Stock Option Agreement by and between InterCept and Donny R. Jackson dated January 14,
1997.*/**
29
10.8 Stock Option Agreement dated as of February 1, 1998 by and between InterCept and Scott R.
Meyerhoff.*/**
10.9 Stock Option Agreement dated as of February 24, 1997 by and between InterCept and Michael R.
Boian.*/**
10.10 Form of Indemnification Agreement entered into between InterCept and its directors and
officers.*
10.11 Form of General Marketing Agent Agreement.*
10.12 Form of Master Electronic Funds Transfer Services Agreement.*
10.13 Form of Data Processing Agreement.*
10.14 Form of Service Agreement for Data Communications.*
10.15 Form of Software License Agreement for BancPac(TM).*
10.16 Channel Services Payment Plan Agreement dated December 22, 1993 between Intercept Systems,
Inc. and BellSouth Communications, Inc.*
10.17 Form of Special Service Arrangement Agreement with BellSouth Telecommunications, Inc. for
frame relay services.*
10.18 Form of SynchroNet Service Agreement with Southern Bell Telephone and Telegraph Company.*
10.19 WorldCom Data Services Agreement dated as of February 27, 1998 by and between WorldCom, Inc.
and Intercept Communications Technologies, L.L.C.*+
10.20 Loan and Security Agreement dated April 28, 1998 by and among InterCept, its wholly-owned
subsidiaries and First Union National Bank.*
10.21 First Amendment to Loan and Security Agreement dated October 9, 1998 by and among InterCept,
its wholly-owned subsidiaries and First Union National Bank (incorporated by reference to
Exhibit 10.26 to InterCept's Annual Report on Form 10-K for the year ended December 31,
1998).
10.22 Third Amendment to Loan and Security Agreement and Joinder Agreement dated August 6, 1999 by
and among First Union National Bank and The InterCept Group, Inc. and its subsidiaries,
(incorporated by reference to Exhibit 10.1 to InterCept's Current Report on Form 8-K filed
August 20, 1999).
10.23 "Fourth Amendment to Loan and Security Agreement dated September 1, 1999 byand among First
Union National Bank and The InterCept Group, Inc. and itssubsidiaries, (incorporated by
reference to Exhibit 10.23 of InterCept'sCurrent Report on Form 10-K filed March 30, 2000)."
10.24 Stock Option Agreement dated as of June 24, 1998 by and between InterCept and John W.
Collins (incorporated by reference to Exhibit 10.2 to InterCept's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 filed on August 14, 1998).**
10.25 Stock Option Agreement dated as of June 24, 1998 by and between InterCept and Donny R.
Jackson (incorporated by reference to Exhibit 10.3 to InterCept's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 filed on August 14, 1998).**
10.26 Stock Option Agreement dated as of June 24, 1998 by and between InterCept and Scott R.
Meyerhoff (incorporated by reference to Exhibit 10.3 to InterCept's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 filed on August 14, 1998).**
30
10.27 Employment Agreement by and between LEV Acquisition Corp. and Kenneth Kudrey dated as of
May 28, 1999 (incorpoorated by reference to Exhibit 10.27 to InterCept's Annual Report on
Form 10-K for the year ended December 31, 1999 filed on March 30, 2000).**
10.28 Promissory note dated March 24, 2000 from Netzee, Inc. to InterCept (incorporated by
reference to Exhibit 10.28 to InterCept's Annual Report on Form 10-K for the year ended
December 31, 1999 filed on March 30, 2000).
10.29 Credit Agreement, dated May 31, 2000, by and between Netzee, Inc. and The InterCept Group,
Inc. (incorporated by reference to Exhibit 10.1 to InterCept's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed August 11, 2000).
21.1 Subsidiaries of InterCept.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (contained on the signature page hereof).
99.1 Financial statements of Netzee, Inc.
* Incorporated by reference to the exhibits to InterCept's Registration
Statement on Form S-1 (No. 333-47197) as declared effective by the
Securities and Exchange Commission on June 9, 1998.
** This agreement is a compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K pursuant to Item 14(c).
+ Confidential treatment has been granted for certain confidential portions of
this exhibit pursuant to Rule 406 under the Act. In accordance with Rule
406, these confidential portions have been omitted from this exhibit and
filed separately with the Commission.
++ The registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon request,
as provided in item 601(b)(2) of Regulation S-K.
(b) Reports on Form 8-K
Form 8-K filed October 16, 2000
Filing under Item 5 regarding the resignation of Donny R. Jackson as an
officer of InterCept.
Form 8-K filed on December 8, 2000
Filing under Item 5 regarding the agreement of InterCept to purchase the
core data processing division of SLMsoft.com. Inc., a Kansas corporation.
Form 8-K filed on December 18, 2000
Filing under Items 5 and 7 regarding the acquisition by InterCept of
Advanced Computer Enterprises, Incorporated which was accounted for as a
pooling of interests.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereto duly authorized.
The InterCept Group, Inc.
March 29, 2001 By: /s/ John W. Collins
- -------------- -------------------------------------
Date John W. Collins
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, John W. Collins
and Scott R. Meyerhoff, and each one of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any and
all amendments to this Annual Report (Form 10-K) and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact, or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ John W. Collins Chairman of the Board and March 29, 2001
- ------------------------------------- Chief Executive Officer
John W. Collins (principal executive
officer)
/s/ Scott R. Meyerhoff Senior Vice President - March 29, 2001
- ------------------------------------- Finance and Chief Financial
Scott R. Meyerhoff Officer (principal
financial and accounting
officer)
/s/ Donny R. Jackson Director March 29, 2001
- ------------------------------------
Donny R. Jackson
/s/ Jon R. Burke Director March 29, 2001
- ------------------------------------
Jon R. Burke
32
/s/ Boone A. Knox Director March 29, 2001
- ------------------------------------
Boone A. Knox
/s/ John D. Schneider, Jr. Director March 29, 2001
- ------------------------------------
John D. Schneider, Jr.
/s/ Glenn W. Sturm Director March 29, 2001
- ------------------------------------
Glenn W. Sturm
33
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1999, and 2000
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1998, 1999, and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999, and 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The InterCept Group, Inc.:
We have audited the accompanying consolidated balance sheets of THE INTERCEPT
GROUP, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1999 and
2000 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The InterCept Group, Inc. and
subsidiaries as of December 31, 1999 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 2, 2001
F-2
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, December 31,
ASSETS 1999 2000
------ ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 2,145 $ 8,061
Short term investments 200 37,484
Accounts receivable, less allowance for doubtful accounts of $386
and $641 in 1999 and 2000, respectively 9,099 9,960
Advances to SLM (Note 15) 0 5,000
Deferred tax assets 1,956 1,666
Inventory, prepaid expenses, and other 2,610 3,023
-------- --------
Total current assets 16,010 65,194
PROPERTY AND EQUIPMENT, net 11,662 16,883
INTANGIBLE ASSETS, net 20,600 24,786
ADVANCES TO AFFILIATE (Note 14) 10,957 15,000
INVESTMENT IN AFFILIATE (Note 4) 40,446 17,729
OTHER NONCURRENT ASSETS 1,220 2,534
-------- --------
$100,895 $142,126
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 154 $ 45
Accounts payable and accrued liabilities 4,597 3,188
Accrued income taxes 1,790 0
Deferred revenue 5,777 5,054
-------- --------
Total current liabilities 12,318 8,287
NOTES PAYABLE, less current portion 12,669 4,513
DEFERRED TAX LIABILITY 22,633 26,279
DEFERRED REVENUE 440 453
-------- --------
Total liabilities 48,060 39,532
MINORITY INTEREST 175 202
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000 shares authorized, none
issued and outstanding at December 31, 1999 and 2000 0 0
Common stock, no par value; 50,000,000 shares authorized,
10,450,472 and 13,197,139 shares issued and outstanding at
December 31, 1999 and 2000, respectively 42,657 109,340
(Accumulated deficit) retained earnings 9,911 (6,951)
Accumulated other comprehensive income 92 3
-------- --------
Total shareholders' equity 52,660 102,392
-------- --------
$100,895 $142,126
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
F-3
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
-----------------------
1998 1999 2000
------- -------- --------
REVENUES:
Service fee income $25,265 $ 39,677 $ 55,289
Data communications management income 3,772 5,163 6,002
Equipment and product sales, services, and other 4,233 7,519 8,348
------- -------- --------
Total revenues 33,270 52,359 69,639
------- -------- --------
COSTS OF SERVICES:
Cost of service fee income 7,465 11,145 16,198
Cost of data communications management income 2,555 3,561 4,404
Cost of equipment and product sales, services and other 3,567 5,746 6,350
------- -------- --------
Total costs of services 13,587 20,452 26,952
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 13,589 20,992 27,017
DEPRECIATION AND AMORTIZATION 1,579 4,462 4,403
------- -------- --------
Total operating expenses 28,755 45,906 58,372
------- -------- --------
OPERATING INCOME 4,515 6,453 11,267
INTEREST EXPENSE (376) (718) (202)
INTEREST AND OTHER INCOME, net 161 39,890 12,027
------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES, EQUITY
IN LOSS OF AFFILIATE AND MINORITY INTEREST 4,300 45,625 23,092
PROVISION FOR INCOME TAXES 1,632 20,212 9,216
EQUITY IN LOSS OF AFFILIATE 0 (15,352) (30,710)
MINORITY INTEREST (89) (120) (28)
------- -------- --------
NET INCOME (LOSS) BEFORE PREFERRED DIVIDENDS 2,579 9,941 (16,862)
PREFERRED DIVIDENDS (16) 0 0
------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS 2,563 9,941 (16,862)
------- -------- --------
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized holding gains (losses) on short-term investments
arising during period 186 (94) (89)
------- -------- --------
Total comprehensive income (loss) $ 2,749 $ 9,847 $(16,951)
======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $0.30 $0.99 $(1.32)
======= ======== ========
Diluted $0.30 $0.94 $(1.32)
======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-4
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
Accumulated Retained
Common Stock Other Earnings
------------------ Comprehensive (Accumulated
Shares Amount Income Deficit) Total
--------- -------- ----------- ------------ ------
BALANCE, December 31, 1997 7,082,614 $ 3,137 $ 0 $ (2,489) $ 648
Net income attributable to common shareholders 0 0 0 2,563 2,563
Common stock dividends 0 0 0 (81) (81)
Distributions for taxes to shareholders of pass-through entities 0 0 0 (8) (8)
Preferred stock premium paid 0 (40) 0 0 (40)
Initial public offering proceeds, net of expenses 2,498,425 14,445 0 0 14,445
Unrealized gain on investments, net 0 0 186 0 186
---------- -------- ---- -------- --------
BALANCE, December 31, 1998 9,581,039 17,542 186 (15) 17,713
Issuance of common stock in connection with exercise of stock
options 25,416 74 0 0 74
Common stock dividends 0 0 0 (15) (15)
Net income attributable to common shareholders 0 0 0 9,941 9,941
Unrealized loss on investments, net 0 0 (94) 0 (94)
Issuance of common stock in connection with acquisitions 844,017 11,998 0 0 11,998
Income tax benefits related to exercises of stock options 0 129 0 0 129
Gain related to stock issuance of Netzee subject to put option 0 12,914 0 0 12,914
---------- -------- ---- -------- --------
BALANCE, December 31, 1999 10,450,472 $ 42,657 $ 92 $ 9,911 $ 52,660
Issuance of common stock in connection with exercise of stock
options 100,172 707 0 0 707
Note received from shareholder for exercise of stock options 0 (208) 0 0 (208)
Interest earned on note receivable from shareholder (8) 0 0 (8)
Issuance of common stock, net of expenses 2,650,000 65,528 0 0 65,528
Retirement of stock at cost (3,505) (32) 0 0 (32)
Net loss attributable to common shareholders 0 0 0 (16,862) (16,862)
Unrealized loss on investments, net 0 0 (89) 0 (89)
Income tax benefits related to exercises of stock options 0 696 0 0 696
---------- -------- ---- -------- --------
BALANCE, December 31, 2000 13,197,139 $109,340 $ 3 $ (6,951) $102,392
========== ======== ==== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-5
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1998 1999 2000
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred dividends $ 2,579 $ 9,941 $(16,862)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation 1,251 1,920 2,348
Amortization 328 2,542 2,055
Amortization of loan costs 0 0 68
Loss (gain) on disposal of property and equipment 35 0 (15)
Minority interest 89 120 28
Deferred income tax provision 797 14,259 3,935
Income tax benefit related to the exercise of stock options 0 129 696
Gain due to Netzee equity transactions (Note 3) 0 (38,920) (7,993)
Equity in loss of affiliate 0 15,352 30,710
Stock compensation charge 0 480 0
Changes in operating assets and liabilities, net of effects of purchase acquisitions:
Accounts receivable (350) (2,363) (1,075)
Inventory, prepaid expenses, and other (678) 619 (302)
Other assets (4) (51) (171)
Accounts payable and accrued liabilities (1,051) 167 (3,252)
Deferred revenue (2) 538 (1,131)
------- -------- --------
Net cash provided by operating activities 2,994 4,733 9,039
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in note receivable 20 17 22
Advances to affiliate, net 0 (10,957) (4,043)
Advance to SLM (Note 15) 0 0 (5,000)
Capital contributions to affiliate 0 (155) 0
Purchases of property and equipment, net (5,095) (4,937) (7,444)
Additions to capitalized software (323) (539) (929)
Purchase of businesses, net of cash acquired (3,220) (1,222) (5,020)
Increase in investments 0 (240) (38,431)
------- -------- --------
Net cash used in investing activities (8,618) (18,033) (60,845)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and line of credit 0 45,331 16,098
Payments on notes payable and line of credit (7,052) (33,312) (24,363)
Distributions for taxes to shareholders of pass-through entities (8) 0 0
Proceeds from issuance of common stock, net of expenses 14,445 74 66,019
Retirement of preferred stock (440) 0 0
Retirement of common stock 0 0 (32)
Payment of preferred dividends (16) 0 0
Payment of common dividends (81) (15) 0
Debt issuance costs (95) (129) 0
------- -------- --------
Net cash provided by financing activities 6,753 11,949 57,722
------- -------- --------
NET INCREASE (DECREASE) IN CASH 1,129 (1,351) 5,916
CASH, beginning of year 2,367 3,496 2,145
------- -------- --------
CASH, end of year $ 3,496 $ 2,145 $ 8,061
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 397 $ 750 $ 157
======= ======== ========
Cash paid for income taxes $ 1,067 $ 3,989 $ 6,372
======= ======== ========
Non-cash investing activities:
InterCept common stock issued for acquisitions $ 0 $ 11,998 $ 0
Netzee common stock issued for acquisitions $ 0 $ 69,086 $ 0
The accompanying notes are an integral part of these consolidated statements.
F-6
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
1. ORGANIZATION AND NATURE OF BUSINESS
The InterCept Group, Inc., ("InterCept"), is a single-source provider
of a broad range of technologies, products and services that work together
to meet the electronic commerce and operating needs of community financial
institutions. InterCept focuses on serving community financial institutions
in the U.S. Over 1,800 of these community financial institutions have
contracted with InterCept for one or more of InterCept's technologies,
products and services, which include electronic funds transfer
transactions, core bank processing systems, check imaging systems and data
communications management networks and regulatory reporting software, as
well as services related to each of these products and systems.
In June 1998, InterCept completed the initial public offering of its
common stock. Proceeds to InterCept from the offering (after deducting
expenses related to the offering) were approximately $14.4 million
(including proceeds from the underwriters' overallotment option which was
exercised in July 1998). Proceeds of the offering were used to pay certain
debt, pay obligations owed to a former officer of InterCept, enhance and
expand InterCept's frame relay network, and redeem shares of preferred
stock and for general working capital needs, including acquisitions.
In February 2000, InterCept completed a public offering of its common
stock. Proceeds to InterCept from this offering (after deducting expenses
related to the offering) were approximately $65.5 million. Proceeds of
this offering were used to pay certain debt, to fund future acquisitions
and investments, to partially fund Netzee, Inc., and for working capital
and other general corporate purposes.
InterCept was incorporated on April 30, 1996 and has made several
acquisitions since inception. See Note 3 for a discussion of these
acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of
InterCept and its wholly owned subsidiaries as of December 31, 2000. In
December of 2000, the following wholly-owned subsidiaries were managed
into InterCept: ACE Acquisition Corp., InterCept Switch, Inc., Item
Processing of America, Inc., LEV Acquisition Corp., ProVesa Inc., and
ProVesa Services, Inc. As of December 31, 2000, InterCept has the following
wholly owned subsidiaries: InterCept Communications Technologies, Inc., and
SBS Data Services, Inc. The financial statements have been restated to
reflect the August 2000 acquisition of Advanced Computer Enterprises
Incorporated ("ACE") which was accounted for as a pooling of interests
transaction (Note 3). In addition, ProImage, Inc., a corporation in which
InterCept has a 67% ownership interest as of December 31, 2000, has been
consolidated in InterCept's consolidated financial statements since its
inception, due to Intercept's control of ProImage. Management of InterCept
retains responsibility for all day-to-day operations of ProImage and has
and will continue to provide complete financial support for ProImage due to
legal limitations on the other shareholder's ability to fund losses. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Minority interest in income represents the minority
shareholder's proportionate share of the equity in earnings of ProImage. In
the third quarter of 1999, Direct Access Interactive, Inc., one of
InterCept's wholly owned subsidiaries, issued shares of its common stock in
connection with several transactions discussed in Note 3. Direct Access was
then merged into a new subsidiary, Netzee, Inc., which issued additional
shares of common stock on September 3, 1999 as discussed in Note 3. As a
result of these transactions, InterCept's ownership percentage in Netzee
decreased to approximately 49%. InterCept has accounted for its investment
in Netzee after September 3, 1999 under the equity method, under which the
operations of Netzee are recorded on a single line item in
F-7
the statements of operations, "equity in loss of affiliate." Because
InterCept provided unlimited funding to Netzee until completion of their
initial public offering in November 1999, all of Netzee's losses prior to
the completion of the offering are included in that line item rather than
InterCept's relative percentage of those losses. Following the completion
of the initial public offering InterCept has recorded only its relative
percentage of Netzee's net losses. As of December 31, 2000 InterCept owned
approximately 28% of Netzee's common stock.
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 amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents
InterCept considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents.
Short Term Investments
Short term investments totaled $200,000 and $37.5 million at December
31, 1999 and 2000, respectively. InterCept categorizes all of its
investment securities as available-for-sale, which are recorded at fair
value. Unrealized gains and losses on available-for-sale securities are
reported net of tax effects as adjustments to shareholders' equity and as a
component of comprehensive income. Realized gains and losses and declines
in value judged to be other than temporary are included in InterCept's
results of operations. The cost of securities sold is based on the specific
identification method. The majority of InterCept's investments represent
short-term commercial paper and other similar investments. Total realized
gains related to these investments were approximately $8,000 for the year
ended December 31, 2000. Gross unrealized gains and losses relating to
these investments as of December 31, 2000 are not significant.
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. Major additions and improvements are charged
to the property accounts, while replacements, maintenance and repairs which
do not improve or extend the lives of respective assets are expensed in the
current period. Estimated useful lives for InterCept's assets are as
follows:
Building and improvements 5 to 31 years
Machinery and equipment 3 to 30 years
Furniture and office equipment 5 to 10 years
Software licenses 3 to 5 years
Intangible Assets
Intangible assets include goodwill, customer contracts, capitalized
product technology, workforce in place, customer lists and a marketing
agreement.
F-8
Goodwill
Goodwill represents the excess of the purchase price over the net
tangible and identifiable intangible assets of acquired businesses.
Goodwill is amortized on a straight-line basis over periods of 5 to 40
years.
Customer Contracts
In connection with certain of InterCept's acquisitions, InterCept
allocated a portion of the purchase price to acquired customer contracts
based on a discounted cash flow analysis of the applicable contracts. The
estimated fair values attributed to the contracts is being amortized over a
period of 5 years.
Product Technology
Product technology represents software acquired as well as capitalized
software development costs for software to be sold. Product technology is
amortized on a straight-line basis over five years.
InterCept capitalizes software-development costs incurred from the
time technological feasibility of the software is established until the
software is available for general release. These costs are amortized on
a straight-line basis over five years, the estimated economic life of the
software. Amortization of capitalized software development costs begins as
products are made available for sale or as the related product is put into
use.
Amortization expense totaled approximately $54,000, $140,000 and
$235,000 in 1998, 1999, and 2000, respectively. Research and development
costs and maintenance costs related to software development are expensed as
incurred.
Customer Lists and Marketing Agreement
In conjunction with one of InterCept's 2000 acquisitions, InterCept
allocated a portion of the purchase price to acquired customer lists and a
marketing agreement based on estimated revenue streams to be generated from
these assets. The estimated fair values are being amortized over a period
of 7 to 20 years.
Segment Reporting
InterCept does not disclose segment information as it believes it
operates in only one segment. InterCept offers its multiple products and
services to the same customer base of financial institutions. Additionally,
management reviews company performance on a consolidated level rather than
on a product or service level.
Revenue Recognition
Revenues include service fees, data communication management fees,
equipment sales, installation and maintenance, software license fees, and
software maintenance. Service fee income and data communication management
fees are recognized as services are performed. Revenue from equipment
sales and installations is recognized upon installation of the product, and
any related maintenance revenue is recognized ratably over the period
during which the services are performed. Revenue from software sales is
recognized in accordance with AICPA Statement of Position 97-2, "Software
Revenue Recognition." Hardware, installation and license revenue is
recognized upon installation and maintenance fees are recognized over the
term of the maintenance period. InterCept sells certain of its software
products under five-year, sales-type lease agreements through which
customers pay five equal advance payments. These leases incorporate the
initial installation and ongoing license fee for five years. Revenue for
all lease agreements, with the exception of revenue attributable to
equipment, which is recognized upon installation, is deferred and
recognized ratably over the period of the lease.
F-9
Minimum lease payments receivable
As noted above, the Company sells certain software products under
sales-type leases. At December 31, 2000, future minimum lease payments
receivable under non-cancelable leases are as follows (in thousands):
2001 $ 282
2002 281
2003 267
2004 208
2005 64
------
Total minimum lease payments receivable 1,102
Less amount representing interest (301)
------
Present value of net minimum lease payments receivable 801
Less current maturities of lease payments receivable (221)
------
Capital lease payments receivable $ 580
======
The current and noncurrent portion of the lease payments receivable is
included in accounts receivable and other assets, respectively, in the
accompanying consolidated balance sheets.
Deferred Revenue
Deferred revenue represents the liability for advanced billings to
customers primarily related to license fees, maintenance contracts and
software leases. Such amounts are recognized as revenue when the related
services are performed.
Impairment of Long-Lived Assets
InterCept reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the asset or assets are not
sufficient to recover the unamortized balance of the asset. An impairment
loss would be recognized based on the difference between the carrying
values and estimated fair value. The estimated fair value will be
determined based on either the discounted future cash flows or other
appropriate fair value methods with the amount of any such deficiency
charged to income in the current year. If the asset being tested for
recoverability was acquired in a business combination, intangible assets
resulting from the acquisition that are related to the asset are included
in the assessment. Estimates of future cash flows are based on many
factors, including current operating results, expected market trends and
competitive influences.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis. 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 InterCept's assets and
liabilities result in deferred tax assets, an evaluation of the probability
of being able to realize the future benefits indicated by such asset is
required. A valuation allowance is provided for a portion of the deferred
tax asset when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In assessing the realizability of
the deferred tax assets, management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income and tax-planning
strategies.
F-10
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets
or liabilities, including cash and cash equivalents, accounts receivable,
and accounts payable, approximate carrying value due to the short-term
maturity of the instruments. The fair value of short-term and long-term
debt amounts approximate carrying value and are based on their effective
interest rates compared to current market rates.
Advertising Costs
InterCept expenses all advertising costs as incurred.
Sources of Supplies
InterCept voluntarily uses a single vendor for routing equipment
used in InterCept's communications network. However, if the vendor were
unable to meet InterCept's needs, management believes that other sources
for this equipment exist on similar terms and that operating results would
not be affected.
Net (Loss) Income Per Common Share
Basic earnings per share are computed based on the weighted average
number of total common shares outstanding during the respective periods.
Diluted earnings per share are computed based on the weighted average
number of total shares of common stock outstanding, adjusted for common
stock equivalents.
Comprehensive Income
Comprehensive income is the total of net income and all other non-
owner changes in shareholders' equity. For the years ended December 31,
1998, 1999, and 2000, other comprehensive income consists of unrealized
holding gains (losses) on marketable securities of $300,000, $(150,000),
and $(147,000), respectively, net of related tax effects of $114,000,
$(56,000), and $(58,000), respectively. There were no gains realized on
marketable securities in net (loss) income for the years ended December 31,
1998 and 1999, and thus there were no reclassification adjustments to
comprehensive income. Realized gains of approximately $8,000 were
recognized and reclassified from comprehensive income to other income
(expense) in the accompanying statement of operations for the year ended
December 31, 2000.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in a derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. InterCept adopted the
new statement on January 1, 2001. SFAS No. 133 did not have a significant
impact on the financial statements.
3. ACQUISITIONS
On January 31, 1998, InterCept acquired all of the outstanding shares
of InterCept Communications Technologies in exchange for 2,741,029 shares
of common stock of InterCept. The transaction was accounted for as a
pooling of interests. The results of operations of InterCept
Communications Technologies have been included in the accompanying
financial statements for all periods presented.
F-11
On August 4, 1998, InterCept acquired certain assets and assumed
certain liabilities of Nova Financial Corporation. The transaction was
accounted for as a purchase. InterCept paid approximately $1.1 million.
The consideration exchanged exceeded the net tangible asset value of Nova
by approximately $1.2 million. This amount was allocated to goodwill and
is being amortized over a period of 40 years. The results of operations of
the acquired business have been included in InterCept's consolidated
financial statements from the date of acquisition. In conjunction with the
acquisition, InterCept established a reserve of approximately $160,000 for
estimated costs to close the existing Nova facility. However, InterCept's
costs have been higher than anticipated. During the third quarter of 1999,
InterCept adjusted goodwill and accrued an additional $100,000 to cover
these costs. The costs mainly consist of the remaining noncancelable
obligation under the lease on the facility. During 1998, 1999 and 2000,
approximately $51,000 ,$159,000 and $51,000, respectively, of lease costs
were charged against the reserve.
On September 30, 1998, InterCept acquired certain assets and assumed
certain liabilities of Advance Data Partnership. The transaction was
accounted for as a purchase. InterCept paid approximately $1.1 million and
exceeded the net tangible asset value of Advance Data Partnership by
approximately $556,000. Of this excess, $38,000 was allocated to contracts
based on a discounted cash flow analysis and is being amortized over a
period of 24 months, and the remaining $518,000 has been allocated to
goodwill and is being amortized over a period of 40 years. The results of
operations of the acquired business have been included in InterCept's
consolidated financial statements from the date of acquisition.
On October 21, 1998, InterCept acquired certain assets and assumed
certain liabilities of Item Processing of America. The transaction was
accounted for as a purchase. The consideration exchanged was approximately
$1.3 million and exceeded the net tangible asset value of Item Processing
of America by approximately $1.1 million. Of this excess, $195,000 was
allocated to contracts based on a discounted cash flow analysis and is
being amortized over a period of 24 months, and the remaining $940,000 has
been allocated to goodwill and is being amortized over a period of 40
years. The results of operations of the acquired business have been
included in InterCept's consolidated financial statements from the date of
acquisition.
InterCept acquired an additional 33% of ProImage in August 1998 and
acquired certain assets and assumed certain liabilities of Premier Imaging
in September 1998. Total purchase price was approximately $290,000. The
purchase price exceeded net tangible assets by approximately $83,000, which
has been allocated to contracts based on a discounted cash flow analysis
and is being amortized over a period of 36 months. The results of
operations of the acquired business have been included in InterCept's
consolidated financial statements from the date of acquisition.
On January 11, 1999, InterCept acquired certain assets and assumed
certain liabilities of Eastern Software, Inc., a provider of loan portfolio
management software. InterCept paid approximately $450,000 which exceeded
the net tangible asset value of Eastern Software by approximately $507,000.
This excess has been allocated to goodwill and is being amortized over a
period of 5 years. The results of operations of the acquired business have
been included in InterCept's consolidated financial statements from the
date of acquisition. The agreement included contingent consideration based
on future revenues. During 2000, approximately $50,000 of contingent
consideration was paid and was added to goodwill.
On March 9, 1999, InterCept acquired Direct Access Interactive,
Inc., a provider of telephone banking and Internet banking services to
financial institutions. InterCept issued approximately 151,000 shares of
its common stock with a fair market value of approximately $1.4 million and
assumed long-term debt of approximately $300,000. The consideration
exceeded the net tangible asset value of Direct Access by approximately
$1.8 million, which was allocated to goodwill and was being amortized over
a period of 5 years. This acquisition has been accounted for as a
purchase. The results of operations of the acquired business have been
included in InterCept's consolidated financial statements from the date of
acquisition until the date of deconsolidation discussed below.
On May 28, 1999, InterCept acquired L.E. Vickers & Associates, Inc.
and Data Equipment Services, Inc. L.E. Vickers & Associates is a provider
of core data processing and Data Equipment Services is an equipment and
maintenance provider. InterCept issued approximately 501,000 shares of its
common stock with a fair market value of approximately $6.5 million. The
consideration exceeded the net
F-12
tangible asset value of Vickers and Data Equipment Services by
approximately $5.4 million, which was allocated to goodwill and is being
amortized over a period of 20 years. This acquisition has been accounted
for as a purchase. The results of operations of the acquired business have
been included in InterCept's consolidated financial statements from the
date of acquisition.
On August 6, 1999, InterCept acquired SBS Data Services, Inc. ("SBS
Data"), an Alabama corporation that provides core data processing services
for community financial institutions in exchange for approximately 192,000
shares of InterCept's common stock with a fair market value of
approximately $4.1 million. The consideration exceeded the net tangible
asset value of SBS Data Services by approximately $3.8 million. This excess
was allocated to the following intangible assets with the following
amortization lives:
Contracts $ 400,000 5 years
Workforce 100,000 3 years
Goodwill 3,300,000 20 years
At the same time, Direct Access merged with SBS Corporation ("SBS
Corp."), an Alabama corporation which provided Internet and telephone
banking, check imaging and optical storage products and services to
community financial institutions. Total consideration paid by Direct Access
was approximately $16.6 million in cash, 2.6 million shares of Direct
Access common stock valued at $11.50 per share and repayment of
approximately $4.9 million in debt owed by SBS Corp. The former
shareholders of SBS Corp. had the right to put the shares back to Direct
Access at $11.50 per share if Direct Access did not complete an initial
public offering by August 6, 2001. The put option expired in November 1999
upon completion of Netzee's (formerly Direct Access) initial public
offering. To enable Direct Access to complete this transaction, InterCept
borrowed $21.6 million under its line of credit and loaned these funds to
Direct Access (Note 14). After the merger, Direct Access sold all of the
assets of SBS Corp, other than its Internet and telephone banking assets,
to InterCept in exchange for 450,000 shares of Direct Access common stock
owned by InterCept. InterCept's consideration exceeded the net tangible
asset value of SBS Corp. by approximately $5.3 million. This excess was
allocated to the following intangible assets with the following
amortization lives:
Contracts $ 400,000 5 years
Workforce 100,000 3 years
Goodwill 4,800,000 10 years
During 2000, InterCept incurred approximately $192,000 of costs
related to the acquisitions of SBS Data and SBS Corp which was added to
goodwill.
In August 1999, InterCept formed Netzee, Inc., a wholly-owned
subsidiary, for the purpose of combining Direct Access and several other
businesses, as discussed below:
1. Pursuant to an Agreement and Plan of Merger between Netzee
and Direct Access, Direct Access merged with and into Netzee. The
shareholders of Direct Access received one share of Netzee common stock for
each share of Direct Access common stock they owned.
2. Pursuant to an Asset Contribution Agreement between
InterCept, Netzee and The Bankers Bank, a Georgia banking corporation,
Netzee acquired various assets and assumed certain liabilities related to
the Internet banking division of The Bankers Bank. As consideration, Netzee
issued 1,361,000 shares of its common stock to The Bankers Bank valued at
$11.50 per share. Pursuant to an Asset Contribution Agreement between
InterCept, Netzee and TIB The Independent Banker's Bank, a Texas banking
association, Netzee acquired various assets and assumed certain liabilities
related to the Internet banking division of TIB. As consideration, Netzee
issued 1,361,000 shares of its common stock to TIB valued at $11.50 per
share. Additional consideration of 76,000 shares of common stock was issued
to a third party for $100,000 in connection with these acquisitions.
3. Pursuant to an Agreement and Plan of Merger by and among
Netzee, Dyad Corporation, a Georgia corporation, and certain shareholders
of Dyad, Dyad merged with and into Netzee. As consideration, Netzee paid to
Dyad's shareholders approximately $900,000 in cash and approximately
F-13
618,000 shares of Netzee common stock valued at $11.50 per share. Netzee
also repaid approximately $3.5 million in debt of Dyad at the closing.
Based in Norcross, Georgia, Dyad develops proprietary loan application and
approval and fulfillment software.
4. Netzee also acquired Call Me Bill, LLC, a provider of 24-hour
electronic bill payment services to financial institutions' customers, for
$3.3 million in cash. To enable Netzee to complete this transaction,
InterCept loaned to Netzee approximately $7.3 million. This loan was in
addition to the $21.6 million loaned to Netzee, as the successor to Direct
Access, in connection with the merger of Direct Access and SBS Corp. in
August 1999.
As a result of the issuance of shares of Netzee in connection with
these transactions, InterCept's ownership in Netzee decreased to
approximately 49% on September 3, 1999. Because Netzee issued stock at a
price in excess of its book value during 1999 and 2000, InterCept's net
investment in Netzee increased. In 1999, InterCept recognized gains
totaling approximately $59.7 million related to the increases in
InterCept's investment value in accordance with Staff Accounting Bulletin
No. 51. Of this amount, approximately $38.9 million is included in
interest and other income in the accompanying statements of operations.
The remaining gain of $20.8 million, net of income tax effects of $7.9
million, was recorded directly to equity as it was generated from the
issuance of puttable stock to SBS Corp. discussed above. This put option
expired in November 1999 upon completion of Netzee's initial public
offering. In 2000, InterCept recognized similar gains totaling
approximately $8.0 million which is included in interest and other income
in the accompanying statement of operations.
During the first and second quarters of 2000 InterCept completed
several acquisitions. The consideration exchanged for these acquisitions
was approximately $4.8 million. The acquisitions were accounted for as
purchases in accordance with Accounting Principles Board ("APB") Opinion
No. 16, and, accordingly the purchase prices of each acquisition have been
allocated to the net tangible and intangible assets acquired based on their
estimated fair values as of the acquisition date. The results of operations
of the acquired businesses have been included in InterCept's consolidated
financial statements from each date of acquisition. The consideration
exceeded the net tangible assets acquired by approximately $5.0 million.
This excess was allocated to the following intangible assets with the
following amortization lives:
Customer list and relationships $ 1,350,000 7 to 20 years
Marketing agreement 825,000 20 years
Goodwill 2,775,000 7 to 20 years
On August 31, 2000, in a transaction accounted for as a pooling of
interests, InterCept acquired ACE, a provider of core data processing, item
capture, and check imaging services to community banks. In connection with
the acquisition, InterCept issued approximately 350,000 shares of common
stock in exchange for all of the issued and outstanding shares of common
stock of ACE. An escrow of 5% of the shares issued or 17,500 shares was
established to satisfy obligations unknown at the time of closing.
InterCept's financial statements have been restated for all periods
presented to include the results of operations of ACE. For the years ended
December 31, 1998 and 1999 and the eight months in the period ended August
31, 2000, ACE had revenue of $4.4 million, $5.1 million and $3.4 million,
respectively, and net income of $104,000, $89,000 and $68,000,
respectively. There were no significant changes in accounting policies as a
result of the merger and there were no intercompany transactions prior to
the merger.
The following unaudited pro-forma consolidated financial information
for the years ended December 31, 1998 and 1999 assume that the following
events had occurred on January 1, 1998 (in thousands, except per share
amounts):
. InterCept acquisitions of Nova, Advance Data, Direct Access Interactive,
Inc., L.E. Vickers & Associates, Data Equipment Services, and SBS Data
Services;
. InterCept transfer of 450,000 shares of Direct Access common
stock in exchange for the non-remote banking operations of SBS Corp.;
. InterCept recording of compensation expense related to equity securities
issued by Direct Access below fair market value in August 1999;
. InterCept creation of Netzee and Netzee's merger with Direct Access
. Netzee's acquisitions of the internet banking operations of TIB The
Independent BankersBank and the Bankers Bank, Call Me Bill, and Dyad; and
. The deconsolidation of the operations of Netzee from operations;
F-14
(unaudited)
1998 1999
--------- ---------
Revenues $54,876 $63,356
======= =======
Net income before income taxes and
minority interest 4,710 46,753
======= =======
Net loss attributable to
common shareholders (27,200) (14,625)
======= =======
Net loss per common share $ (2.92) $ (1.40)
======= =======
The unaudited pro forma consolidated financial information is not
necessarily indicative of the actual results that would have occurred had
the acquisitions been consummated at the beginning of the periods presented
or of future operations of the combined entities. The financial results of
the businesses acquired in 2000 do not have a material pro-forma impact
on InterCept's historical results of operations for 1999 and 2000 and thus
have not been included above.
4. INVESTMENT IN AFFILIATE
Investment in affiliate represents InterCept's interest in Netzee. As
of December 31, 2000, InterCept owned approximately 28% of Netzee. Based on
the closing market price of Netzee's common stock on December 31, 2000, the
investment had a value of approximately $2.8 million. As of December 31,
2000 InterCept's investment in Netzee was $17.7 million which exceeded the
market value. In addition, InterCept had advances due from Netzee of $15
million as of December 31, 2000 (Note 14). InterCept believes that this
reduction in value is temporary; however, if this reduction becomes other
than temporary, InterCept may in later periods have to write down the
investment in Netzee. In addition, Netzee has a history of losses and may
never become profitable. InterCept will continue to account for the
investment in Netzee under the equity method which will result in
additional losses on the investment until Netzee becomes profitable. As of
December 31, 2000, Netzee had 500,000 shares of preferred stock outstanding
which is convertible to 411,067 shares of common stock subject to certain
events, and outstanding stock options for 4,292,972 shares of common stock,
all of which could dilute InterCept's ownership of Netzee. Summarized
financial information of Netzee as of December 31, 1999 and 2000 and for
the period from March 1, 1999 to December 31, 1999 and the year ended
December 31, 2000 is as follows (in thousands):
1999 2000
--------- ---------
Net revenue $ 2,260 $ 19,912
Operating expense 23,979 115,150
Net loss from continuing operations (22,390) (96,809)
net loss (26,933) (97,161)
1999 2000
--------- ---------
Current assets $ 14,585 $ 8,734
Noncurrent assets 128,659 97,981
Current liabilities 9,787 14,223
Noncurrent liabilities 13,077 22,902
Redeemable preferred stock 6,500 6,500
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 2000 consisted of the
following (in thousands):
F-15
1999 2000
------- -------
Land and building $ 984 $ 987
Leasehold improvements 345 751
Machinery and equipment 12,202 13,919
Furniture and office equipment 769 1,535
Software 2,322 2,494
Construction in progress 2,262 4,821
------- -------
18,884 24,507
Less accumulated depreciation (7,222) (7,624)
------- -------
Property and equipment, net $11,662 $16,883
======= =======
6. INTANGIBLES
Intangibles of December 31, 1999 and 2000 are summarized as follows
(in thousands):
1999 2000
--------- --------
Goodwill $19,562 $22,601
Product technology 1,009 1,936
Customer contracts 1,634 1,634
Work force in place 200 200
Customer lists and relationships 0 1,350
Marketing Agreement 0 825
------- -------
22,405 28,546
Less accumulated amortization (1,805) (3,760)
------- -------
$20,600 $24,786
======= =======
F-16
7. LONG-TERM DEBT
Long term debt at December 31, 1999 and 2000 consisted of the
following (in thousands):
1999 2000
------- ------
Notes payable to First Macon Bank & Trust, repaid
in 2000 $ 209 $ 0
$35 million line of credit with First Union National
Bank, as amended; interest payable monthly at the
option of InterCept at (i) prime rate less .25% or (ii)
LIBOR rate plus applicable margin as defined
(approximately 6.66% as of December 31, 2000); payable
in full on June 30, 2002; guaranteed by substantially
all assets of InterCept 12,511 4,507
Equipment under capital lease expiring July 2001 103 45
Other 0 6
------- ------
12,823 4,558
Less current maturities (154) (45)
------- ------
$12,669 $4,513
======= ======
Future maturities of notes payable and lein of credit at December 31,
2000 are as follows (in thousands):
2001 0
2002 4,513
2003 0
------
$4,513
======
Future minimum payments under the capital lease are as follows (in
thousands) at December 31, 2000:
Total minimum lease payments due in 2001 52
Executory costs & imputed interest (7)
---
Present value of net minimum lease payments 45
Less current portion 45
---
Long-term capital lease obligation $ 0
===
F-17
Line of Credit
The First Union credit facility contains provisions which require
InterCept to maintain certain financial ratios and minimum net worth
amounts and which restrict InterCept's ability to incur additional debt,
make certain capital expenditures, enter into agreements for mergers,
acquisitions or the sale of substantial assets and pay cash dividends,
among other restrictions.
8. INCOME TAXES
The components of income tax (benefit) provision in the
consolidated statements of operations for the years ended December 31,
1998, 1999, and 2000 are as follows (in thousands):
1998 1999 2000
------ ------- ------
Current expense $ 835 $ 5,953 $5,281
Deferred expense 797 14,259 3,935
------ ------- ------
Provision for income taxes $1,632 $20,212 $9,216
====== ======= ======
The income tax provision, as reported in the statements of
operations, differs from the amounts computed by applying federal
statutory rate (34%) due to the following for the years ended December 31,
1998, 1999, and 2000 (in thousands):
1998 1999 2000
------ ------- ------
Federal income tax provision at statutory rate $1,462 $15,513 $7,851
Permanent tax/book basis differences, primarily goodwill 41 900 398
Gain related to transfer of assets from subsidiary 0 1,964 0
Meals and entertainment 24 43 58
State tax provision, net of federal effect 166 1,807 914
Other (61) (15) (5)
------ ------- ------
$1,632 $20,212 $9,216
====== ======= ======
InterCept is not providing a tax benefit on the undistributed losses
of Netzee.
Deferred income tax assets and liability for 1999 and 2000 reflect
the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes.
Temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1999 and 2000 are as follows (in thousands):
F-18
1999 2000
-------- --------
Deferred tax assets:
Deferred revenue $ 1,822 $ 1,514
Accounts receivable reserves 147 191
Other 63 108
-------- --------
Total gross deferred tax assets 2,032 1,813
Deferred tax liabilities:
Accelerated depreciation (517) (600)
Investment basis difference (22,192) (25,222)
Software development 0 (604)
Total gross deferred tax liabilities (22,709) (26,426)
-------- --------
Net deferred tax liability (20,677) (24,613)
Less current net deferred tax assets 1,956 1,666
-------- --------
Noncurrent net deferred tax liabilities $(22,633) $(26,279)
======== ========
Due to the deconsolidation of Netzee, InterCept will not receive a
future tax benefit for any of Netzee's losses. The investment basis
difference mainly relates to gains recorded related to stock issuances of
Netzee as discussed in Note 3 which are not taxable until realized.
9. SHAREHOLDERS' EQUITY
On February 25, 1998, the board of directors declared a stock split on
InterCept's common stock. The stock split was effected in the form of a
stock dividend of 1.1053 shares of common stock issued for each share of
common stock held by shareholders of record on February 28, 1998. The
effect of the stock split was retroactively reflected in the statements of
changes in shareholders' equity and for all periods presented. All
references to the per share amounts and elsewhere in the financial
statements and related footnotes have been restated as appropriate to
reflect the effect of the stock split.
10. STOCK OPTION PLANS
1996 Stock Option Plan
The Board of Directors and InterCept's shareholders approved
InterCept's Amended and Restated 1996 Stock Option Plan effective as of
November 12, 1996. Awards under the 1996 Stock Option Plan are currently
granted by a compensation committee composed of two independent directors
of the Board of Directors. Awards issued under the 1996 Stock Option Plan
may include incentive stock options ("ISOs"), nonqualified stock options
("NQSOs"), and grants of restricted stock. The compensation committee
administers the 1996 Stock Option 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. Notwithstanding this
discretion, (i) the number of shares subject to options granted to any
individual in any fiscal year may not exceed 315,795 shares (subject to
certain adjustments), (ii) if an option is intended to be an ISO and is
granted to a shareholder holding more than 10% of the combined voting power
of all classes of InterCept's stock or the stock of its subsidiary on the
date of the grant of the option, the option price per share of common stock
may not be less than 110% of the fair market value of such share at the
time of grant, and (iii) the term of an ISO may not exceed ten years, or
five years if granted to a shareholder owning more than 10% of the total
combined voting power of all classes of stock on the date of the grant of
the option.
F-19
The 1996 Stock Option Plan provides for the granting of nonqualified
stock options to the directors of InterCept. The board of directors has
authorized the issuance of up to 175,000 shares of common stock under the
1996 Stock Option Plan pursuant to options having an exercise price equal
to the fair market value of the common stock on the date the options are
granted. The board of directors has approved Director Grants of (i) options
to purchase 35,000 shares to each nonemployee director of InterCept who
beneficially owns less than 4% of InterCept's outstanding common stock on
the date of such directors' initial election to the board of directors and
(ii) options to purchase 5,000 shares to each director on each anniversary
date of such director's election to the board at an exercise price equal to
the fair market value of the common stock on the date the options are
granted. Each initial director grant option vests ratably over the
director's three-year term of service, and each annual grant vests on the
date of grant. Each director grant expires five years after the date of
grant unless canceled sooner as a result of termination of service or death
or unless such option is fully exercised prior to the end of the option
period.
As of December 31, 2000, the maximum number of shares of common stock
reserved for issuance under the Plan was 2,815,557 shares as amended at the
May 2000 shareholders meeting, and 543,619 shares were available for grant.
The 1996 Stock Option Plan provides that the number of shares of common
stock available for issuance thereunder shall be automatically increased on
the first trading day of each calendar year beginning January 1, 1999 by
the lesser of (i) 3% of the number of shares outstanding on the preceding
trading day or (ii) 315,795 shares (subject to certain adjustments). Shares
of common stock that are attributable to awards which have expired,
terminated, or been canceled or forfeited during any calendar year are
available for issuance or use in connection with future awards during such
calendar year.
The 1996 Stock Option Plan will remain in effect until terminated by
the Board of Directors. The 1996 Stock Option Plan may be amended by the
Board of Directors without the consent of the shareholders of InterCept,
except that any amendment, although effective when made, will be subject to
shareholder approval within one year after approval by the Board of
Directors if the amendment increases the total number of shares issuable
pursuant to ISOs (other than the permitted annual increase), changes the
class of employees eligible to receive ISOs that may participate in the
1996 Stock Option Plan or otherwise materially increases the benefits
accruing to recipients of ISOs.
A summary status of InterCept's stock option plan as of December 31,
1998, 1999, and 2000 and changes during the year are presented below:
Weighted
Average
Price Option
Shares Range Price
--------- ------------- --------
Outstanding at December 31, 1997 792,122 $ 2.16-$ 2.37 $ 2.17
Granted 1,036,378 $ 6.38-$ 7.70 $ 7.34
Terminated (844,146) $ 2.16-$ 7.70 $ 4.31
---------
Outstanding at December 31, 1998 984,354 $ 2.16-$ 7.70 $ 5.78
Granted 554,000 $ 7.50-$18.75 $14.89
Exercised (25,416) $ 2.16-$ 7.00 $ 2.92
Terminated (6,000) $ 7.00-$18.75 $13.91
---------
Outstanding at December 31, 1999 1,506,938 $ 2.16-$18.75 $ 9.09
Granted 783,750 $17.00-$28.19 $23.72
Exercised (100,172) $ 2.16-$18.75 $ 7.06
Terminated (44,166) $ 7.00-$18.75 $10.81
---------
Outstanding at December 31, 2000 2,146,350 $ 2.16-$28.19 $14.49
=========
Grants and terminations listed above for 1998 include 317,689 options
granted on February 1, 1998 to certain employees and directors. These
options were issued at $7.70 per share but were later canceled and reissued
at the initial public offering price of $7.00 per share, the fair market
value of the stock at the reissue date.
During 2000, a director of InterCept exercised several options in
exchange for a note payable to InterCept for the exercise price of
approximately $208,000. The note accrued interest of approximately $8,000
during 2000 and was repaid in full in 2001. The note receivable and related
accrued interest are included in common stock in the accompanying balance
sheet.
F-20
Statement of Financial Accounting Standards No. 123
SFAS No. 123, "Accounting for Stock-Based Compensation," 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 remain with 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.
InterCept has elected to account for its stock-based compensation
plans under APB Opinion No. 25, under which no compensation cost has been
recognized by InterCept. However, InterCept has computed, for pro forma
disclosure purposes, the value of all options granted since January 1, 1995
to employees of InterCept using the Black-Scholes option pricing model
prescribed by SFAS No. 123 and the following weighted average assumptions:
1998 1999 2000
------------------- ----------- --------------------
Risk-free interest rate 5.48% 6.76% 5.05%
Expected dividend yield 0% 0% 0%
Expected lives 3.9 years 7.0 years 8.9 years
Expected volatility 35% 83.6% 83.4%
The weighted average fair value of options for the stock granted to
employees of InterCept in 1998, 1999 and 2000 was $2.35, $11.32 and $18.83
per share, respectively. The total value of options for InterCept's stock
granted to employees of InterCept during 1998, 1999 and 2000 was computed
as approximately $1,668,000, $6,146,000 and $14,757,000, respectively,
which would be amortized on a pro forma basis over the vesting period of
the options. If InterCept had accounted for these plans in accordance with
SFAS No. 123, InterCept's net (loss) income and net (loss) income per
common share for the years ended December 31, 1998, 1999 and 2000 would
have been as follows:
Year Ended December 31,
-----------------------------
1998 1999 2000
------ ------ ------
(in thousands, except per share data)
Net (loss) income $1,991 $8,472 $(12,147)
Net (loss) income per common
share-diluted $ 0.23 $ 0.80 $ (0.95)
The following table sets forth the exercise price range, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date:
Outstanding Options Options Exercisable
----------------------------------------------------------- --------------------------
Weighted
Exercise Weighted Average Weighted
Price Number Average Contractual Number Average
Range of Shares Price Life (in years) of Shares Price
------------- ----------- -------- --------------- ----------- ----------
$ 2.16-$ 2.82 249,611 $ 2.19 5.6 213,820 $ 2.20
5.63- 8.46 687,990 7.27 7.4 515,443 $ 7.23
8.47- 11.28 25,000 8.63 8.1 25,000 $ 8.63
11.29- 14.09 15,500 13.03 8.4 5,334 $13.05
14.10- 16.91 151,499 15.88 8.5 49,171 $15.88
16.92- 19.73 375,000 17.77 8.7 77,004 $17.80
19.74- 22.55 95,000 22.38 9.9 0 --
22.56- 25.37 265,000 24.36 9.8 25,000 $23.00
25.38- 28.19 281,750 26.26 9.1 0 --
--------- ------------
2,146,350 910,772
F-21
At December 31, 1998, 1999 and 2000, 447,043, 665,254, and 910,772
options for InterCept's common stock with a weighted average exercise price
of $5.79, $5.95, and $7.91 per share, respectively, were exercisable by
employees of InterCept.
11. NET INCOME (LOSS) PER COMMON SHARE
Net Income (Loss) per share at December 31, 1998, 1999, and 2000 were
as follows (in thousands except share amounts):
1998 1999 2000
--------- ---------- ----------
Basic:
Net income (loss) $2,579 $9,941 $(16,862)
Less preferred stock dividends (16) 0 0
--------- ---------- ----------
Net income (loss) attributable to
common shareholders $2,563 $9,941 $(16,862)
========= ========== ==========
Weighted average common shares outstanding 8,464,740 10,094,696 12,820,073
========= ========== ==========
Per share amount $0.30 $0.99 $(1.32)
========= ========== ==========
Diluted:
Net income (loss) $2,579 $9,941 $(16,862)
Less preferred stock dividends (16) 0 0
--------- ---------- ----------
Net income (loss) attributable to
common shareholders $2,563 $9,941 $(16,862)
========= ========== ==========
Weighted average common shares outstanding 8,464,740 10,094,696 12,820,073
Shares assumed issued upon exercise of dilutive
stock options using the treasury stock method 114,274 451,350 0
Contingently issuable shares 17,500 17,500 0
--------- ---------- ----------
Total 8,596,514 10,563,546 12,820,073
========= ========== ==========
Per share amount $0.30 $0.94 $(1.32)
========= ========== ==========
Basic and diluted earnings per common share were computed by dividing
net (loss) income by the weighted average number of shares of common stock
outstanding during the year. Outstanding stock options with exercise prices
above the average stock prices for each quarter (approximately 706,000,
20,000, and 294,000 shares in 1998, 1999, and 2000, respectively), were
antidilutive and were therefore excluded from the computation of diluted
shares above. Additionally, the effect of stock options was excluded in
years where a net loss was recorded as they are antidilutive.
12. EMPLOYEE BENEFITS
InterCept maintains a separate defined contribution 401(k) savings
plan, which covers substantially all employees, subject to certain minimum
age and service requirements. Contributions to this plan by employees are
voluntary; however, InterCept matches a percentage of the employees'
F-22
contributions. This percentage is determined annually by InterCept.
InterCept's contributions approximated $130,000, $148,000, and $218,000 in
1998, 1999, and 2000, respectively.
13. COMMITMENTS AND CONTINGENCIES
InterCept leases various equipment and facilities under operating
lease agreements. Future minimum annual obligations under these leases as
of December 31, 2000 are as follows (in thousands):
2001 $1,649
2002 1,572
2003 1,051
2004 329
Thereafter 147
------
Total $4,748
======
Net rental expense was approximately $902,000, $1,308,000, and
$1,739,000 during 1998, 1999, and 2000, respectively.
14. RELATED PARTY TRANSACTIONS
As discussed in Note 4, InterCept owned approximately 28% of Netzee as
of December 31, 2000. Four of InterCept's directors also serve as directors
of netzee, and one of those directors is the Chief Executive Officer of
Netzee. In order to enable Netzee to complete its acquisitions in August
and September of 1999, InterCept borrowed funds under its line of credit
and loaned these funds to netzee. InterCept also made advances to Netzee to
fund operations. These amounts were repaid to InterCept upon completion of
Netzee's initial public offering in November 1999. On December 15, 1999,
InterCept agreed to provide Netzee with a $15 million revolving line of
credit. Borrowings on this line will bear interest at a rate of prime plus
2%. The principal balance is payable at maturity on May 31, 2003 and is
secured by substantially all of Netzee's assets. The line of credit
includes earnings, tangible net worth and other affirmative and negative
covenants, among other conditions and restrictions. As of December 31,
2000, Netzee was out of compliance with certain of these covenants.
However, InterCept waived such noncompliance as of December 31, 2000. As of
December 31, 2000, Netzee owed approximately $15.0 million to InterCept.
Total interest on all borrowings for 1999 and 2000 was approximately
$677,000 and $1.1 million, respectively, and is included in interest and
other income in the accompanying statements of operations.
InterCept and Netzee maintain a relationship to cross-market each
other's products and services. During 1999 and 2000, InterCept received
$188,000 and $357,000, respectively, in commissions related to Netzee
sales. InterCept also shared certain facilities with Netzee and provided
certain administrative services to Netzee. InterCept charged Netzee
approximately $124,000 and $163,000 in 1999 and 2000, respectively, for
these shared costs. During 2000, Netzee used InterCept to purchase certain
hardware and software used to implement Netzee's internet and telephone
banking products. In addition, Intercept assisted netzee in managing the
ordering and inventory process related to this equipment. during 2000,
Netzee incurred approximately $435,000 in costs to purchase the equipment,
which included a fee to InterCept for their services.
During the years ended December 31, 1998, 1999, and 2000, InterCept
incurred fees of approximately $814,000, $612,000, and $745,000
respectively for legal services to the law firm in which one of its
partners is also a director of InterCept and Netzee.
InterCept provides telecommunications connectivity to Towne Services,
Inc. ("Towne"). InterCept recorded revenue from Towne of approximately
$128,000, $215,000, and $236,000 during 1998, 1999 and 2000, respectively,
which is classified in data communications management income. December 31,
1999 and 2000, receivables from Towne were approximately $27,000 and
$60,000, respectively. During 1999, InterCept purchased software from Towne
Services for $825,000, which was paid in 2000. Additionally, InterCept owns
10,000 shares of Towne common stock, which was purchased in 1997. Two
directors of InterCept serve as directors of Towne.
F-23
15. SUBSEQUENT TRANSACTIONS
On January 4, 2001, InterCept acquired certain assets of the check
item and back office processing division of SLMSoft.com, Inc. ("SLM").
Total consideration consisted of $40 million and up to 1,254,000 shares of
InterCept common stock valued at approximately $28 million. Of the $40
million, $5 million had been advanced to SLM in December 2000, $32.5
million was paid on January 4, 2001, and $2.5 million will be kept in
escrow to satisfy unresolved contingencies existing at the closing date. Of
the 1,254,000 shares of common stock, 609,000 were issued to SLM at
closing and 258,000 shares will be kept in escrow to satisfy unresolved
contingencies existing at the closing date. The remaining 386,000 shares
represent contingent consideration and are subject to continuation of the
revenue stream associated with certain customers.
In February 2001, InterCept acquired DPSC Software, Inc. from Netzee,
Inc. The consideration exchanged was approximately $14.1 million in cash
and assumption of debt. This acquisition was accounted for as a purchase.
The purchase price reduced the advances to affiliate discussed in Note 14.
Subsequent to this transaction, Netzee's availability under the line of
credit increased.
In March 2001, InterCept completed the acquisition of the C-TEQ Inc.
The consideration exchanged was approximately $3.6 million in cash. This
acquisition was accounted for as a purchase.
F-24