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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, 2001
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
INTERCEPT, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2237359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3150 Holcomb Bridge Road, Suite 200, Norcross, Georgia 30071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 248-9600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of 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. [ ]
As of March 15, 2002, 18,152,006 shares of the registrant's common stock were
outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant was $607,796,634 (based upon the closing sale
price of the registrant's common stock as reported by the Nasdaq National Market
on that date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 2002 annual meeting of
shareholders to be held on May 15, 2002 are incorporated by reference in Part
III of this Form 10-K where indicated.
TABLE OF CONTENTS
Page
Part I
Item 1. Business ........................................................ 1
Item 2. Properties ...................................................... 14
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 ........................................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...... 46
Item 8. Financial Statements and Supplementary Data ..................... 46
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................ 46
Part III
Item 10. Directors and Executive Officers of the Registrant .............. 47
Item 11. Executive Compensation .......................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management .. 47
Item 13. Certain Relationships and Related Transactions .................. 47
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 48
PART I
ITEM 1. BUSINESS.
Special Note Regarding Forward-Looking Statements
We make forward-looking statements in this annual report. These
statements are subject to risks and uncertainties, and we cannot assure you that
they will prove to be correct. Forward-looking statements include assumptions as
to how we may perform in the future. When we use words like "believe," "expect,"
"anticipate," "predict," "project," "potential," "seek," "continue," "will,"
"may," "could," "intend," "plan," "pro forma," "estimate," "goal," "strive" and
similar expressions, we are making forward-looking statements. Forward-looking
statements in this annual report include statements regarding the following:
o our business strategies and goals;
o our future sources of revenues and potential for growth and
profitability;
o expansion and enhancement of our technologies, networks, products and
services;
o the financial impact of our relationship with Netzee;
o other factors concerning our relationship with Netzee;
o trends in activities and industry conditions;
o development and expansion of our sales and marketing efforts;
o our ability to integrate our previous and future acquisitions;
o our ability to close our pending acquisitions; and
o other statements that are not of historical fact made throughout this
annual report, particularly in this Item 1, Business and in Item 7,
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We believe that the expectations reflected in our forward-looking statements are
reasonable, but we cannot be sure that we will actually achieve these
expectations. Projections or estimates of our future performance are necessarily
subject to a high degree of uncertainty and may vary materially from actual
results. In evaluating forward-looking statements and pro forma information, you
should carefully consider various factors, including the risks outlined in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosure Regarding Forward-Looking Statements. These factors may
cause our actual results to differ materially from any forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Overview
We are a leading provider of banking technology products and services
for community financial institutions. Our comprehensive suite of products and
services allows us to act as a single-source provider for the technology and
operating needs of community financial institutions. Our range of products and
services includes core data processing, check processing and imaging, electronic
funds transfer (EFT), data communications management and related products and
services. These products and services work together
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to help community financial institutions manage back-office and customer
activities, create operating efficiencies and provide better customer service,
which enables them to compete more effectively with larger financial
institutions. Most of our customers outsource their processing activities to our
data centers located across the United States, while others install our systems
in-house and perform the processing functions themselves.
2001 Highlights
In January 2001, we completed the largest acquisition in our history
when we acquired some of the assets of SLMsoft.com, Inc. (Canada) and
SLMsoft.com Inc. (Kansas), related providers of data processing services. As
part of this transaction, we acquired their U.S. core data processing, check
imaging and item processing operations, enabling us to add over 10 additional
facilities. As a result of this acquisition, we were able to consolidate our
facilities in Houston, Texas.
In Feburary 2001, we acquired certain assets and liabilities of DPSC
Software, Inc. a division of Netzee, Inc. DPSC is a California-based provider of
asset/liability and regulatory reporting software, including CallReporter, the
nation's leading software used by banks to prepare the periodic call report
forms mandated by the Federal Financial Institutions Examination Council. DPSC
also provides other software programs that help banks analyze their interest
rate risk profile, prepare holding company reports, and manage their budgeting
and financial management reporting.
Two transactions during 2001 enabled us to increase our market share in
the mid-west part of the United States. In March 2001, we acquired C-TEQ, Inc.,
a provider of core data processing and check imaging services in Oklahoma and
Texas. In June 2001, we acquired the community bank core data processing assets
of First Integrated Systems, a division of First National Bank of Omaha, and
entered into a joint marketing agreement with First National.
In September, 2001 we announced the opening of an item and image
processing center in Seattle, Washington. This center will allow us to promote
our full offering of technology solutions to community financial institutions in
Washington.
In October 2001, we acquired substantially all of the assets of Holmes
and Shaw, Inc. and Superior Forms, Ltd. (together, "HSI"), a full service
provider of computer output solutions including data processing, laser document
printing, and automated mailing services. We believe that the acquisition of HSI
will enable us to provide more efficient statement printing and mailing services
to new customers as well as to our current financial institution customers.
Pending Acquisitions
iBill
On March 19, 2002, we signed an agreement to acquire substantially all
of the assets and assume substantially all of the liabilities of Internet
Billing Company, Ltd. and certain of its affiliate entities, or "iBill." iBill
provides secure transaction services that enable Web merchants to accept and
process real-time payments for goods and services purchased over the Internet.
iBill also manages back-office functions including reporting, tracking, customer
service and sales transactions. iBill's service is powered by proprietary
technology that integrates online payment processing, fraud control, affiliate
management and financial reporting and tracking.
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We agreed to pay iBill $112.0 million in cash at closing, plus
additional quarterly earnout payments for a period of six quarters ending
December 31, 2003. The amount of each earnout payment depends on whether the
acquired business achieves certain financial targets. We have an option to buy
out the remaining earnout obligation at any time by paying $8 million per
remaining quarter.
We are not required to close the iBill acquisition unless we receive
necessary Hart-Scott-Rodino approval. If we terminate the acquisition agreement
for anything other than the failure to obtain that approval or a severe service
outage at iBill, we will be required to pay a termination fee of $5.0 million to
iBill. We will pay the initial $112.0 million portion of the purchase price by
(a) using the remaining proceeds of our 2001 public offering of common stock and
(b) drawing on our $50.0 million credit facility.
EPX
On March 19, 2002, we entered into a binding letter agreement to
acquire Electronic Payment Exchange, Inc., or "EPX." EPX is a full-service
electronic payment processing company that specializes in enabling businesses to
accept credit card, debit card and electronic check payments. EPX's system
provides straight-through processing that eliminates a business's need to use a
gateway or invest in front-end technology to process transactions, whether the
transactions take place online, over the telephone or at the point of sale.
Under the terms of the letter agreement, we agreed to issue 1,377,339
shares of our common stock to EPX's stockholders. We will place 20% of these
shares in escrow for a period of eighteen months to secure EPX's obligation to
indemnify us for breaches of the representations and warranties. Upon
disbursement of the escrow shares, we will issue additional shares of our common
stock to the EPX stockholders if the liabilities of EPX at closing are less than
$12.0 million. Conversely, if EPX's liabilities at closing are greater than $12
million, we will reduce the escrow shares that would be otherwise disbursed to
the EPX stockholders. In connection with the acquisition, we also granted
piggyback registration rights to the EPX stockholders.
We are required to close the EPX acquisition unless we (a) fail to
obtain necessary approvals, including approvals as may be required by the
Hart-Scott-Rodino Act, by June 30, 2002, or (b) determine that we are not
satisfied with our due diligence investigation by April 23, 2002. If we do not
close the EPX acquisition by April 23, 2002, we will lend EPX $3.0 million
pursuant to a loan secured by EPX's intellectual property, which will bear
interest at the prime rate plus one percent per annum and will be due on
December 31, 2002.
As a result of our integration of prior acquisitions, we believe that
we have established a model that will enable us to successfully execute our
integration of iBill and EPX. We expect to realize the following benefits from
the acquisitions of iBill and EPX:
o Ability to Offer End-to-End Transaction Processing Services. We will offer
a single-source end-to-end transaction processing solution, eliminating the
need for businesses to establish multiple relationships
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o with banks, front-end system providers, gateways, independent sales
organizations and back-end processing companies.
o Expansion of Merchant Processing Operations. Currently, our merchant
processing division provides services to approximately 160 community banks
with over $1.0 billion in transaction volume. Together, iBill and EPX
currently process approximately $5.5 billion in annual transaction volume
for both traditional brick and mortar companies and online merchants.
o Expansion of Transaction Processing Through Multiple Sales Channels.
Through an experienced sales force, we will offer our processing services
through multiple sales channels, including Internet, point of sale, call
center, mail order and wireless channels.
o Improved Operating Efficiencies. We also intend to migrate to EPX over time
a portion of the processing of transactions that we currently broker
through our existing merchant processing operation. We believe this will
enhance the margins of our combined business and leverage EPX's capacity to
handle additional transactions.
On March 19, 2002, we issued a press release announcing the iBill and
EPX acquisitions and updating our guidance for our financial performance in
2002.
We expect the acquisitions of iBill and EPX to increase our 2002
estimated revenues by $49 - $52 million, and our 2002 estimated earnings before
income taxes, depreciation and amortization, or "EBITDA," by $9 to 10 million.
After giving effect to purchase accounting adjustments, we expect the
acquisitions of iBill and EPX to increase our 2002 estimated diluted earnings
per share by $.02 - $.03. EBITDA is not a measurement of financial performance
under U.S. generally accepted accounting principles. EBITDA should not be
considered as an alternative to cash flow from operating activities, as a
measure of liquidity or as an alternative to net income as a measure of
operating results in accordance with U.S. GAAP.
Our Market Opportunity
The financial services industry is currently undergoing a period of
rapid change due to heightened competition and greater demand for new and
convenient technology-based banking services. New competitors such as brokerage
firms, affinity groups and Internet banks are increasingly targeting traditional
financial institutions' most profitable customers. To compete effectively and
meet the demands of their customers, community financial institutions must
continue to offer new services and integrate new technology and functionality
into their operations.
U.S. banks, including our target market of community financial
institutions, increasingly view technology as critical to retaining and
expanding their customer bases. However, community financial institutions are
often constrained by the design and capacity of their existing systems, limited
in-house technological resources and pressure to control operating costs. As a
result, we believe that community financial institutions will increasingly rely
on third-party providers like us to address their technology needs.
Our Solution
Our products and services help community financial institutions:
4
Rapidly implement advanced technologies. Community financial
institutions generally lack sufficient capital and human resources to internally
develop and implement advanced technologies. We offer numerous advanced
technology products and services, including core data processing, EFT services,
check imaging software and data communications management, that community
financial institutions need to run their businesses in today's competitive
marketplace. By using our products and services, community financial
institutions can quickly gain access to advanced technologies and services they
might not be able to develop and implement themselves.
Focus on customer relationships. We believe that community financial
institutions can compete effectively with larger banks and succeed as
independent institutions by remaining focused on serving the communities in
which they operate. Typically, customers of community financial institutions
rely on these financial institutions because of their ability to provide
personalized, relationship-based service and their focus on local community and
business needs. Our products and services enable community financial
institutions to focus on attracting, maintaining and expanding their customer
relationships while satisfying demand 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 allocating the expenses and resources necessary to develop or maintain
similar systems themselves. Our customers get the benefit of our products and
services 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.
Securely process and transmit large amounts of information. Our data
communications network and management services facilitate the rapid, secure and
reliable transmission and processing of the large amounts of sensitive data that
our customers use in their operations. This network utilizes 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 data communications network will support the rapid
processing and transmission of electronic data required to support our
customers' processing activities.
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:
Building and maintaining long-term customer relationships to increase
recurring revenues. We seek to establish and maintain long-term relationships
with our customers and enter into contracts that typically extend for multiple
years. Most of our products and services require the payment of monthly charges,
which allows us to generate recurring revenues. For the year ended December 31,
2001, recurring revenues accounted for approximately 86% of our total revenues.
Emphasizing direct sales efforts and strategic marketing relationships
to expand our customer base. We plan to expand our customer base and penetrate
new geographic markets by hiring sales personnel who are knowledgeable in
banking technology products and services or have experience working with
community financial institutions. We also intend to continue 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 that 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 advice with
respect to operations, profitability and federal and state regulation. We have
exclusive contractual marketing relationships with eight of the 19 bankers'
banks in the United States regarding some or all of our products and services.
We also have relationships with four additional bankers'
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banks, as well as other banking related organizations, which we leverage in our
sales and marketing efforts. Our relationships with 12 of the 19 bankers' banks
give us access to more than 5,600 financial institutions in the United States.
We also seek to enter into other strategic partnerships that extend our
customer reach and generate additional revenues. In May 2001, we entered into a
strategic alliance with The BISYS Group, Inc., one of the largest providers of
financial technology services in the United States. Under the agreement, we
serve as BISYS' preferred provider of outsourced check processing and imaging
services to its customers. In addition, in June 2001, we entered into a joint
marketing agreement with First National Bank of Omaha. Through this agreement,
First National will promote our core processing services in Kansas, Colorado,
Nebraska and South Dakota.
Acquiring businesses with complementary products, services or
relationships to 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 selective acquisitions of other businesses and technologies. We
intend to continue to acquire other companies with complementary products,
services or relationships to enhance and expand our offering and increase our
market share. We also plan to continue our expansion nationally through the
acquisition of businesses that operate in geographic areas in which we do not
currently have operations.
Cross-selling our products and services to our existing customer base
to maximize our revenues. Once customers contract for one or more of our
products or services, we are often able to increase revenues by providing
additional products and services to them.
Our Products and Services
Core Data Processing
We provide products and services needed to meet our customers' core
processing requirements, including general ledger, loan and deposit operations,
financial accounting and reporting and customer information file maintenance.
Our products and services provide superior flexibility and improve customer
service throughout the financial institution. Most of our customers outsource
their processing activities to our data centers located across the United
States, while others install our systems in-house and perform the processing
functions themselves.
Our core data processing services and software and complementary
products include:
- --------------------------------------------------------------------------------
Category Description
- --------------------------------------------------------------------------------
BancPac(TM) o Client-server enterprise software system that
consists of a series of integrated software
products, with Windows-based, point-and-click
access to an entire customer information
database
o Operates in a Windows NT or Windows 2000
environment
- --------------------------------------------------------------------------------
BancLine(TM) o Client-server core bank processing system that
utilizes an open-system environment
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Category Description
- --------------------------------------------------------------------------------
o Uses a relational database that allows customer
data to be entered once in the system and
manipulated and analyzed for a variety of
business purposes
o Windows graphical user interface that utilizes a
UNIX operating system
- --------------------------------------------------------------------------------
Service Bureau o Allows customers to focus on core competencies
by outsourcing their data processing needs
o Gives customers access to our processing systems
without the expense of maintaining in-house
processing operations
o Services are coordinated through eight host data
centers located in various regions of the United
States
o Each data processing center serves as a back-up
facility if another center experiences a natural
disaster, destruction or other similar event
that eliminates or diminishes its processing
capabilities
o Includes check processing and back-office
services like proofreading and encoding of
checks, clearing and settlement of checks with
the Federal Reserve and bank statement
preparation
- --------------------------------------------------------------------------------
Related Products o AccountFolio(TM), a loan document imaging, loan
and Services collateral management and tracking system
o TellerPlus, an online teller platform system
o Vision(R), an advanced compact report storage
and retrieval system
o CallReporter(R), regulatory reporting software
- --------------------------------------------------------------------------------
Check Imaging
Increased technological development 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
- --------------------------------------------------------------------------------
7
solutions on both an in-house and service bureau basis. Check imaging involves
creating digital images through the use of a camera attached to a sorter. As
each check passes through the sorter, the camera takes its picture. Images of
insufficient checks, stop payments and large dollar checks are presented online
to bank operations staff for review. Financial institutions 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 Imaging o Delivers a comprehensive suite of check imaging
products, including front and back imaging for
customer statements, clearing and settlement,
reconciliation and automated exception
processing
o Prints multiple check images in check sequence
on a single page for inclusion in monthly
statements to reduce postage costs when mailing
to the banks' customers
o Operates in either Microsoft(R)or Novell(R)
network environments utilizing Oracle(R)database
technology
o Allows bank employees to retrieve imaged checks
on personal computers to facilitate signature
verification and speed responses to customer
inquiries
o Allows corporate customers to receive periodic
statement information on CD-ROM to facilitate
financial and cash management objectives
- --------------------------------------------------------------------------------
Service Bureau o Turnkey outsourced solution for check imaging
activities that provides our customers the
ability to offer check imaging without a large
capital expenditure
o 26 check imaging centers located in 15 states as
of December 31, 2001
o Each 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
- --------------------------------------------------------------------------------
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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, we create economies of scale that allow our
customers to price their services competitively.
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 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 or deny 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
processing network, and the network submits the transaction to us, which
facilitates posting and reporting of the transaction with the bank that issued
the debit card. To complete the transaction, the bank that issued the debit card
debits its customer's account for the transaction amount.
Our EFT products and services include:
- --------------------------------------------------------------------------------
Category Description
- --------------------------------------------------------------------------------
EFT Transaction Processing o Provides online processing of EFT transactions
initiated by a consumer at a point of sale
terminal with a debit card, or at an ATM
o Encompasses multiple transactions, including
cash withdrawals, transfers and balance
inquiries
o Provides 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)
o Offers a card-issue-only program, which gives
banks the option to offer ATM services to their
customers without the expense of purchasing and
- --------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
Category Description
- --------------------------------------------------------------------------------
maintaining a complete ATM system
o Offers the Secure Debit(TM) program, which
provides fraud protection services for lost,
stolen or counterfeit debit cards
- --------------------------------------------------------------------------------
o Allows, through the InterCept Switch(TM) ATM
Network, 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
Data Communications Management
We provide efficient, reliable and secure solutions for the data
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 technology products
and services to our customers. We offer a full line of communications services,
including management of equipment, local lines and long distance, and equipment
necessary to support data transfer with our data centers and throughout a
community financial institution's branch structure and headquarters.
Key elements of our data communications management solutions include:
- --------------------------------------------------------------------------------
Category Description
- --------------------------------------------------------------------------------
Data Communications o Serve as single point of contact for our
customers' data communications needs
Management Services o Design and manage various local and wide area
communications networks for our customers
o Provide Internet services, including web hosting
and e-mail services, to the desktops of our
customers' personnel across our frame relay
network
o Ability to support customers' existing
applications and easily add new products and
services to existing infrastructure with minimal
cost and effort
- --------------------------------------------------------------------------------
Frame Relay Network o Accommodates data transmissions of various
sizes and is Relay Network 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
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Category Description
- --------------------------------------------------------------------------------
o Provides efficient switching capabilities for
transferring information across the network,
resulting in rapid response time and secure and
reliable transmission and processing of
transactions
o Uses leased fiber optic networks to provide the
capacity, or bandwidth, capable of supporting
our transaction-intensive services
o 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
o Monitored and maintained 24 hours a day, seven
days a week from a central location in Norcross,
Georgia
- --------------------------------------------------------------------------------
Related Products and Services
To complement our product and service offering described above, we
provide a variety of related services, software products and equipment. We
anticipate that, as revenues from our other operations increase, revenues from
supplying equipment and maintenance and technical support services will decrease
as a percentage of total revenues.
We 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, seven 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. Our technical support department 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.
In addition, we offer Internet banking and voice response products
through Netzee. See Our Relationship with Netzee below.
Merchant Processing
As noted above in Pending Acquisitions, we have agreed to acquire iBill
and EPX. iBill provides secure transaction services that enable Web merchants to
accept and process real-time payments for goods
11
and services purchased over the Internet. iBill also manages back-office
functions including reporting, tracking, customer service and sales
transactions. iBill's service is powered by proprietary technology that
integrates online payment processing, fraud control, affiliate management and
financial reporting and tracking. EPX is a full-service electronic payment
processing company that specializes in enabling businesses to accept credit
card, debit card and electronic checkpayments. EPX's system provides
straight-through processing that eliminates a business's need to use a gateway
or invest in front-end technology to process transactions, whether the
transactions take place online, over the telephone or at the point of sale. We
already process transactions through our existing merchant processing operation
that has essentially served as a middleman between the merchant customers of our
financial institution customers and other transaction processors.
If we acquire both iBill and EPX as we expect, we intend to move to EPX
a portion of the processing of transactions that iBill currently sends to other
transaction processors. We also intend to migrate to EPX over time a portion of
the processing of transactions that we currently broker through our existing
merchant processing operation. We believe this will enhance the margins of our
combined business and leverage EPX's ability to handle additional transactions.
Our Relationship with Netzee
We offer Internet banking and voice response products through Netzee
and we own approximately 28% of Netzee's common stock. Two of our directors
currently serve as directors and are significant shareholders of Netzee. One of
those directors, Donny R. Jackson, was our President until October 2000 and is
currently the Chief Executive Officer of Netzee. Additionally, John W. Collins,
our Chairman and Chief Executive Officer, is the Chairman of the Board of
Directors of Netzee. We maintain a strategic relationship with Netzee to
cross-market each other's products and services. Our existing and future
agreements and relationships with Netzee have not resulted and will not
necessarily result from arm's 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 Netzee and us 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.
We provide to Netzee, jointly with John H. Harland Company, an $18.0
million revolving line of credit secured by substantially all of Netzee's
assets. Of the total amount available to Netzee, we provide approximately $14.0
million and Harland provides approximately $4.0 million on a pro rata basis with
us provided that we are obligated to advance the last $1.0 million without
Harland's participation. The Netzee line of credit matures on April 10, 2003.
The line of credit bears interest at an annual rate equal to the prime rate plus
2.0%, and accrued interest is payable monthly. As of December 31, 2001, Netzee
owed us $10.1 million for our advances under the line of credit. If Netzee does
not become profitable or has any additional adverse events, it may not be able
to repay the loans we have made and may make to it in the future.
As of December 31, 2001, the book value of our investment in Netzee
was $1.5 million, which is less than the market value of $1.6 million as of that
date.
12
Effective February 1, 2001, we acquired the business of DPSC from
Netzee for approximately $14.1 million in cash and the assumption of $2.4
million of DPSC's net liabilities. Netzee used approximately $8.4 million of the
cash proceeds to reduce its borrowings on its line of credit with us.
Sales and Marketing
At December 31, 2001, our sales force was made up of 43 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 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. If we complete our pending acquisitions of
iBill and EPX as we anticipate, we will add approximately 35 sales
representatives and product specialists to our combined operations.
Our indirect marketing efforts include obtaining referrals and
endorsements from our customers and various banking related organizations. We
currently have exclusive marketing agreements with eight of the 19 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. In May 2001, we entered into a
strategic alliance with BISYS, one of the largest providers of financial
technology services in the United States. Under the agreement, we serve as
BISYS' preferred provider of outsourced check processing and imaging services to
its customers.
Employees
At December 31, 2001, we had 944 full-time employees. Of these
employees, 817 worked in operations, 84 in administration and 43 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 relationships with our
employees are satisfactory. If we complete our pending acquisitions of iBill and
EPX as we anticipate, we will add approximately 300 employees to our combined
operations.
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 these 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.
Beginning July 1, 2001, financial institutions are required to comply
with privacy regulations imposed under the Gramm-Leach-Bliley Act. These
regulations place restrictions on financial institutions' use of non-public
personal information. All financial institutions must disclose detailed privacy
policies to
13
their customers and offer them the opportunity to direct the financial
institution not to share information with third parties. The new regulations,
however, permit financial institutions to share information with non-affiliated
parties who perform services for the financial institutions. As a provider of
services to community financial institutions, we are required to comply with the
privacy regulations and are bound by the same limitations on disclosure of the
information received from our customers as apply to the financial institutions
themselves.
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.
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. In our core banking and data processing
business, we compete with several national and regional companies including
Fiserv, Inc., Jack Henry & Associates, Inc. and BISYS. Our principal EFT
competitors include regional ATM networks, regional and local banks that perform
processing functions, non-bank processors and other independent technology and
data communications organizations including Concord EFS, Inc. and Electronic
Data Systems Corporation. In our check imaging and processing business, we
compete with a number of national and regional companies including Advanced
Financial Solutions, Inc. and Wausau Financial Systems, Inc.
If we complete our pending acquisitions of iBill and EPX as we
anticipate, we will be subject to competition from large merchant processors
like Chase Merchant Systems, National Processing, Paymentech, U.S. Bancorp,
First Data, Concord EFS and others.
Intellectual Property and Other Proprietary Rights
None of our technology is currently patented, although iBill has patent
applications pending for its technology. Instead, we 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.
ITEM 2. PROPERTIES.
Our principal office consists of approximately 46,000 square feet of
leased space located in Norcross, Georgia, a suburb of Atlanta. We currently
operate full-service data centers, software system development centers or item
processing and back-office service centers in the following 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
Thorofare/West Deptford, New Jersey; Greensboro, North Carolina; Oklahoma City
Oklahoma; Cayce, South Carolina; Brentwood, Cookeville, Maryville and Nashville,
Tennessee; Austin, Dallas, Houston and San Antonio, Texas; Richmond, Virginia
and Tukwila, Washington. We lease office
14
space in Calabasas Hills, California, primarily to support our sales and
marketing efforts in this area. We own the facilities in Thomson, Georgia and
Maryville, Tennessee and lease the remaining locations. 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 3. LEGAL PROCEEDINGS.
Other than as described in this paragraph, 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. On March 15, 2002, we
brought an action against Midwest Payment Systems, Inc. ("MPS") in the U.S.
District Court in the Eastern District of Tennessee. MPS provides EFT/ATM
services to customers that we obtained through our purchase of L.E. Vickers and
Associates, Inc. We notified MPS in November 2001 that we would not renew our
contract with it to provide EFT/ATM services to the Vickers customers and that
we would move those customers to our own system. MPS responded to this letter by
claiming, among other things, that (a) it has a right of first refusal to
continue to provide services to those customers and (b) if we did not continue
to use MPS' services, we would owe MPS damages. MPS has also informed several of
the Vickers customers that they must pay damages to MPS if they do not continue
receiving EFT/ATM services from it and we believe it has told some customers
that they will have to sign new contracts with MPS to continue receiving these
services. In the lawsuit, we have sought a temporary restraining order requiring
MPS to cease its attempts to induce the customer banks to enter into contracts
with MPS for EFT/ATM services. We have also asked the court for a declaration as
to the rights and legal relations of InterCept, MPS and the customer banks under
the contracts that we and the banks have with MPS. MPS has not answered our
complaint.
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, 2001.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Market Information
Since March 29, 1999 our common stock has been quoted on the Nasdaq
National Market under the symbol "ICPT." As of March 15, 2002, we had
approximately 70 holders of record of our common stock, representing
approximately 2,600 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.
Price Range
High Low
------- ------
Year Ended December 31, 2000:
First Quarter $32.03 $20.25
Second Quarter 26.25 13.50
Third Quarter 27.00 18.88
Fourth Quarter 28.69 20.50
Year Ended December 31, 2001:
First Quarter $27.13 $21.63
Second Quarter 39.91 23.25
Third Quarter 40.70 24.17
Fourth Quarter 42.00 30.60
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. Payment of future
cash dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
During the fourth quarter of 2001, we issued no equity securities that
were not registered under the Securities Act.
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, our consolidated
financial statements and related notes and the other financial information
included in this Annual Report. We derived our selected consolidated financial
data presented below from our consolidated financial statements, which have been
audited by Arthur Andersen LLP, our independent public accountants. All amounts
have been restated to reflect our August 2000 acquisition of Advanced Computer
Enterprises, which we accounted for as a pooling of interests transaction and to
reflect the revision of our statements as discussed below. The financial data
below also include the results of operations of other companies we have acquired
since their respective dates of acquisition. See note 3 to our audited financial
statements for a discussion of some of our acquisitions. Equity in loss of
affiliate represents our share of the reduction in equity, as a result of its
net losses, of Netzee. Minority interest represents the minority shareholder's
33.3% share of the equity and earnings of ProImage, Inc., a corporation that
provides check imaging services. We own 66.7% of ProImage.
Year Ended December 31,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands, except per share data)
(as revised) (as revised)
Statement of Operations Data:
Revenues............................ $ 28,193 $ 33,270 $ 52,359 $ 69,639 $ 130,772
Costs of services................... 12,125 13,587 20,452 26,952 54,997
Selling, general and administrative
expenses 12,798 13,589 20,992 27,017 42,504
Depreciation and amortization....... 1,496 1,579 4,462 4,403 11,483
Loss on impairment of intangibles... 728 0 0 0 0
----------- ---------- ----------- ----------- ---------
Total operating expenses............ 27,147 28,755 45,906 58,372 108,984
----------- ---------- ----------- ----------- ---------
Operating income.................... 1,046 4,515 6,453 11,267 21,788
Interest and other (expense) income, net (625) (215) 39,172 11,825 2,667
----------- ---------- ----------- ----------- ---------
Income before provision (benefit) for
income taxes, equity in loss of
affiliate and minority interest... 421 4,300 45,625 23,092 24,455
Provision (benefit) for income taxes 721 1,632 12,804 (2,454) 3,144
Equity in loss of affiliate......... 0 0 (15,352) (30,710) (16,848)
Minority interest .................. 39 (89) (120) (28) (19)
----------- ---------- ----------- ----------- ---------
Net (loss) income .................. (261) 2,579 17,349 (5,192) 4,444
Preferred stock dividends........... (32) (16) 0 0 0
----------- ---------- ----------- ----------- ---------
Net (loss) income attributable to common
shareholders...................... $ (293) $ 2,563 $ 17,349 $ (5,192) $ 4,444
=========== ========== =========== ========== =========
Net (loss) income per common share:
Basic............................... $ (0.04) $ 0.30 $ 1.72 (0.41) $ 0.29
=========== ========== =========== ========== =========
Diluted............................. $ (0.04) $ 0.30 $ 1.64 $ (0.41) $ 0.27
=========== ========== =========== ========== =========
Weighted average common shares
outstanding:
Basic............................... 7,083 8,465 10,095 12,820 15,434
Diluted............................. 7,083 8,597 10,564 12,820 16,397
As of December 31,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(as revised) (as revised)
Balance Sheet Data:
Cash and cash equivalents $ 2,367 $ 3,496 $ 2,145 $ 8,061 $ 24,917
Working capital 1,512 5,057 3,692 56,907 93,487
Total assets 12,045 22,014 100,895 142,126 283,268
Long-term debt, less current maturities 4,717 211 12,669 4,513 465
Shareholders' equity 648 17,713 60,068 121,470 259,811
17
Quarterly Financial Data
The following tables set forth certain unaudited consolidated quarterly
data. These unaudited consolidated financial statements have been prepared on
the same basis as the annual financial statements and in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly our results of operations for the
periods shown. All amounts have been restated to reflect our August 2000
acquisition of Advanced Computer Enterprises, which we accounted for as a
pooling of interests transaction. The results of operations for any quarter are
not necessarily indicative of the results of operations of any future periods.
Revision of Financial Statements
During 1999 and 2000, Netzee issued shares of common stock at a price
above book value. In accordance with Staff Accounting Bulletin No. 51, we
recorded corresponding gains to reflect the increase in the value of the shares
of Netzee that it owned, which are included in "investment in affiliate" on our
balance sheet. Because these gains are not taxable until realized, we recorded a
deferred tax liability on our balance sheet to reflect the amount of estimated
tax that would be owed upon sale of the shares.
Since its initial public offering, Netzee has reported operating
losses. Because we used the equity method to account for our investment in
Netzee, we recorded our proportionate share of Netzee's losses as a reduction to
"investment in affiliate," which reduced the book value of the investment in
Netzee. As we recorded our equity in those losses, a deferred tax benefit should
have been recorded as a reduction against the deferred tax liability recorded
previously. As a result, our previously reported results of operations have been
revised to reflect a deferred tax benefit in the quarterly results of 1999,
2000, and 2001 as follows:
Three Months Ended Three Months Ended
September 30, September 30, December 31, December 31,
1999 1999 1999 1999
(in thousands, except per share data) As Reported As Revised As Reported As Revised
Revenues:
Service fee income $ 11,345 $ 11,345 $ 12,057 $ 12,057
Data communications management income 1,349 1,349 1,420 1,420
Equipment and product sales, services and other 2,530 2,530 2,339 2,339
----------------------------------------------------------
Total revenues 15,224 15,224 15,816 15,816
Costs of services:
Costs of service fee income 3,002 3,002 3,607 3,607
Costs of data communications management income 912 912 988 988
Costs of equipment and product sales, services and other 2,075 2,075 1,733 1,733
Selling, general and administrative expenses 6,490 6,490 5,940 5,940
Depreciation and amortization 2,168 2,168 1,054 1,054
----------------------------------------------------------
Total operating expenses 14,647 14,647 13,322 13,322
Operating income 577 577 2,494 2,494
Other income, net 16,072 16,072 23,036 23,036
----------------------------------------------------------
Income before provision for income taxes,
equity in loss of affiliate and minority interest 16,649 16,649 25,530 25,530
Provision for income taxes 9,092 6,986 9,828 4,526
Equity in loss of affiliate (5,541) (5,541) (9,811) (9,811)
Minority interest (28) (28) (33) (33)
----------------------------------------------------------
Net income 1,988 4,094 5,858 (11,160)
Net income per common share:
Basic $ 0.19 $ 0.40 $ 0.59 $ 1.12
Diluted $ 0.18 $ 0.37 $ 0.56 $ 1.07
Weighted average shares outstanding:
Basic 10,368 10,368 9,976 9,976
Diluted 10,960 10,960 10,409 10,409
18
Three Months Ended
March 31, March 31, June 30, June 30, September 30, September 30, December 31, December 31,
2000 2000 2000 2000 2000 2000 2000 2000
As Reported As Revised As Reported As Revised As Reported As Revised As Reported As Revised
Revenues:
Service fee income $ 11,861 $ 11,861 $ 13,660 $ 13,660 $ 14,310 $ 14,310 $ 15,458 $ 15,458
Data communications
management income 1,401 1,401 1,517 1,517 1,506 1,506 1,578 1,578
Equipment and product
sales, services
and other 2,517 2,517 2,108 2,108 2,012 2,012 1,711 1,711
---------- ------------ ------------- ----------- ----------- ---------- ----------- -----------
Total revenues 15,779 15,779 17,285 17,285 17,828 17,828 18,747 18,747
Costs of services:
Costs of service fee
income 3,315 3,315 4,162 4,162 4,236 4,236 4,485 4,485
Costs of data
communications
management income 977 977 1,051 1,051 1,137 1,137 1,239 1,239
Costs of equipment
and product sales,
services, other 1,820 1,820 1,606 1,606 1,528 1,528 1,396 1,396
Selling, general and
administrative
expenses 6,254 6,254 6,726 6,726 6,884 6,884 7,153 7,153
Depreciation and
amortization 960 960 1,078 1,078 1,205 1,205 1,160 1,160
---------- ------------ ------------- ----------- ---------- ----------- ----------- ------------
Total operating
expenses 13,326 13,326 14,623 14,623 14,990 14,990 15,433 15,433
Operating income 2,453 2,453 2,662 2,662 2,838 2,838 3,314 3,314
Other income, net 7,282 7,282 1,440 1,440 1,777 1,777 1,326 1,326
---------- ------------ ------------- ----------- ---------- ----------- ----------- ------------
Income before provision
(benefit) for income
taxes, equity in loss
of affiliate and
minority interest 9,735 9,735 4,102 4,102 4,615 4,615 4,640 4,640
Provision (benefit)
for income taxes 3,806 1,645 1,688 (661) 1,851 (438) 1,871 (3,001)
Equity in loss of
affiliate (5,686) (5,686) (6,181) (6,181) (6,023) (6,023) (12,820) (12,820)
Minority interest (16) (16) (16) (16) 15 15 (11) (11)
---------- ------------ ------------- ----------- ----------- ---------- ----------- ------------
Net income (loss) 227 2,388 (3,783) (1,434) (3,244) (955) (10,062) (5,190)
Net income (loss) per
common share:
Basic $ 0.02 $ 0.20 $ (0.29) $ (0.11) $ (0.25) $ (0.07) $(0.76) $(0.39)
Diluted $ 0.02 $ 0.19 $ (0.29) $ (0.11) $ (0.25) $ (0.07) $(0.76) $(0.39)
Weighted average
shares outstanding:
Basic 11,754 11,754 13,160 13,160 13,173 13,173 13,185 13,185
Diluted 12,420 12,420 13,160 13,160 13,173 13,173 13,185 13,185
19
Three Months Ended
March 31, March 31, June 30, June 30, September 30, September 30, December 31,
2001 2001 2001 2001 2001 2001 2001
As Reported As Revised As Reported As Revised As Reported As Revised
Revenues:
Service fee income $ 23,802 $ 23,802 $ 27,026 $ 27,026 $ 29,654 $ 29,654 $ 34,108
Data communications
management income 1,829 1,829 1,737 1,737 2,016 2,016 1,842
Equipment and product
sales, services and other 1,415 1,415 1,618 1,618 3,158 3,158 2,567
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total revenues 27,046 27,046 30,381 30,381 34,828 34,828 38,517
Costs of services:
Costs of service fee income 8,927 8,927 9,388 9,388 10,999 10,999 13,431
Costs of data communications
management income 1,438 1,438 1,358 1,358 1,538 1,538 1,194
Costs of equipment and product
sales, services and other 1,099 1,099 1,235 1,235 2,345 2,345 2,045
Selling, general and
administrative expenses 9,058 9,058 10,544 10,544 10,936 10,936 11,966
Depreciation and amortization 2,508 2,508 2,886 2,886 2,981 2,981 3,108
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses 23,030 23,030 25,411 25,411 28,799 28,799 31,744
Operating income 4,016 4,016 4,970 4,970 6,029 6,029 6,773
Other income, net 728 728 314 314 604 604 1,021
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income before provision
(benefit) for income taxes,
equity in loss of affiliate
and minority interest 4,744 4,744 5,284 5,284 6,633 6,633 7,794
Provision (benefit) for income taxes 1,923 (250) 2,112 1,047 2,575 206 2,141
Equity in loss of affiliate (5,719) (5,719) (2,802) (2,802) (6,235) (6,235) (2,092)
Minority interest (7) (7) (3) (3) (4) (4) (5)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net (loss) (2,905) (732) 367 1,432 (2,181) 188 3,556
Net (loss) income per common share:
Basic $ (0.21) $ (0.05) $ 0.03 $ 0.10 $ (0.14) $ 0.01 $ 0.20
Diluted $ (0.21) $ (0.05) $ 0.02 $ 0.10 $ (0.14) $ 0.01 $ 0.19
Weighted average shares outstanding:
Basic 13,776 13,776 13,894 13,894 15,711 15,711 17,890
Diluted 13,776 13,776 15,064 15,064 15,711 16,993 18,965
20
Balance Sheet
September 30 September 30 December 31, December 31,
1999 1999 1999 1999
As Reported As Revised As Reported As Revised
Assets
Current assets:
Cash and cash equivalents $ 2,259 $ 2,259 $ 2,145 $ 2,145
Short term investments - - 200 200
Accounts receivable, net 8,919 8,919 9,099 9,099
Deferred tax assets 1,589 1,589 1,956 1,956
Inventory, prepaid expenses and other 2,727 2,727 2,610 2,610
------------- -------------- ----------- ----------
Total current assets 15,494 15,494 16,010 16,010
Property and equipment, net 11,253 11,253 11,662 11,662
Intangible assets, net 19,970 19,970 20,600 20,600
Advances to Netzee 31,525 31,525 10,957 10,957
Investment in Netzee 5,457 5,457 40,446 40,446
Other noncurrent assets 2,992 2,992 1,220 1,220
------------- -------------- ----------- ----------
Total assets 86,691 86,691 100,895 100,895
============= ============== =========== ==========
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt 30,481 30,481 154 154
Accounts payable and accrued liabilities 8,565 8,565 6,387 6,387
Deferred revenue 4,635 4,635 5,777 5,777
------------- -------------- ----------- ----------
Total current liabilities 43,681 43,681 12,318 12,318
Long-term debt, less current maturities 200 200 12,669 12,669
Deferred revenue 455 455 440 440
Deferred tax liability 8,475 6,369 22,633 15,225
------------- -------------- ----------- ----------
Total liabilities 52,811 50,705 48,060 40,652
Minority interest 143 143 175 175
Commitments and contingencies
Shareholders' equity:
Preferred stock - - - -
Common stock 29,600 29,600 42,657 42,657
Retained earnings 3,897 6,003 9,911 17,319
Accumulated other comprehensive income 240 240 92 92
------------- -------------- ----------- ----------
Total shareholders' equity 33,737 35,843 52,660 60,068
------------- -------------- ----------- ----------
Total liabilities and shareholders' equity 86,691 86,691 100,895 100,895
============= ============== =========== ==========
21
Balance Sheet
March 31, March 31, June 30, June 30, September 30, September 30,
2000 2000 2000 2000 2000 2000
As Reported As Revised As Reported As Revised As Reported As Revised
Assets
Current assets:
Cash and cash equivalents $ 12,215 $ 12,215 $ 3,877 $ 3,877 $ 1,237 $ 1,237
Short term investments 45,450 45,450 42,503 42,503 40,923 40,923
Accounts receivable, net 8,994 8,994 9,015 9,015 10,461 10,461
Advances to SLM
Deferred tax assets 2,077 2,077 2,185 2,185 2,111 2,111
Inventory, prepaid expenses
and other 3,002 3,002 4,576 4,576 4,680 4,680
-------- -------- ------- ------- ------- -------
Total current assets 71,738 71,738 62,156 62,156 59,412 59,412
Property and equipment, net 12,301 12,301 13,699 13,699 15,387 15,387
Intangible assets, net 21,566 21,566 25,966 25,966 24,815 24,815
Advances to Netzee 7,733 7,733 14,951 14,951 15,000 15,000
Investment in Netzee 41,638 41,638 35,800 35,800 30,283 30,283
Other noncurrent assets 1,391 1,391 2,435 2,435 2,667 2,667
-------- -------- ------- ------- ------- -------
Total assets 156,367 156,367 155,007 155,007 147,564 147,564
======== ======== ======= ======= ======= =======
Liabilities and shareholders'
equity
Current liabilities:
Current maturities of
long-term debt 150 150 3,563 3,563 59 59
Accounts payable and
accrued liabilities 4,182 4,182 4,120 4,120 2,185 2,185
Deferred revenue 6,055 6,055 6,502 6,502 5,537 5,537
-------- -------- ------- ------- ------- -------
Total current
liabilities 10,387 10,387 14,185 14,185 7,781 7,781
Long-term debt, less
current maturities 1,367 1,367 15 15 1,514 1,514
Deferred revenue 406 406 430 430 381 381
Deferred tax liability 25,264 15,696 25,262 13,345 25,516 11,310
-------- -------- ------- ------- ------- -------
Total liabilities 37,424 27,856 39,892 27,975 35,192 20,986
Minority interest 190 190 207 207 192 192
Commitments and
contingencies
Shareholders' equity:
Preferred stock - - - - - -
Common stock 108,608 108,608 108,590 108,590 109,101 109,101
Retained earnings 10,138 19,706 6,352 18,269 3,111 17,317
Accumulated other
comprehensive income
(loss) 7 7 (34) (34) (32) (32)
-------- -------- ------- ------- ------- -------
Total shareholders'
equity 118,753 128,321 114,908 126,825 112,180 126,386
-------- -------- ------- ------- ------- -------
Total liabilities
and shareholders
equity 156,367 156,367 155,007 155,007 147,564 147,564
======== ======== ======= ======= ======= =======
22
Balance Sheet
March 31, March 31, June 30, June 30, September 30, September 30,
2001 2001 2001 2001 2001 2001
As Reported As Revised As Reported As Revised As Reported As Revised
Assets
Current assets:
Cash and cash equivalents $ 3,079 $ 3,079 $ 4,122 $ 4,122 $ 47,490 $ 47,490
Short term investments - - 8 8 49,768 49,768
Accounts receivable, net 19,663 19,663 18,212 18,212 23,357 23,357
Deferred tax assets 4,659 4,659 4,033 4,033 3,776 3,776
Inventory, prepaid expenses and other 6,277 6,277 6,132 6,132 6,358 6,358
------- ------- ------- ------- -------- --------
Total current assets 33,678 33,678 32,507 32,507 130,749 130,749
Property and equipment, net 23,516 23,516 24,500 24,500 24,731 24,731
Intangible assets, net 99,282 99,282 102,608 102,608 101,443 101,443
Advances to Netzee 7,075 7,075 8,715 8,715 9,950 9,950
Advances to SLM 12,065 12,065
Investment in Netzee 12,240 12,240 9,722 9,722 3,549 3,549
Other noncurrent assets 2,859 2,859 2,888 2,888 2,617 2,617
------- ------- ------- ------- -------- --------
Total assets 178,650 178,650 193,005 193,005 273,039 273,039
======= ======= ======= ======= ======== ========
Liabilities and
shareholders' equity
Current liabilities:
Current maturities of
long-term debt 32 32 16 16 - -
Accounts payable and
accrued liabilities 7,330 7,330 4,683 4,683 5,282 5,282
Deferred revenue 12,653 12,653 12,858 12,858 10,960 10,960
------- ------- ------- ------- -------- --------
Total current
liabilities 20,015 20,015 17,557 17,557 16,242 16,242
Long-term debt, less
current maturities 11,269 11,269 26,386 26,386 6 6
Deferred revenue 507 507 480 480 463 463
Deferred tax liability 26,638 5,387 26,984 4,668 27,649 2,964
------- ------- ------- ------- -------- --------
Total liabilities 58,429 37,178 71,407 49,091 44,360 19,675
Minority interest 210 210 213 213 216 216
Commitments and contingencies
Shareholders' equity:
Preferred stock - - - - - -
Common stock 129,836 129,836 130,933 130,933 240,193 240,193
Retained earnings (9,856) 11,395 (9,489) 12,827 (11,671) 13,014
Accumulated other comprehensive
income (loss) 31 31 (59) (59) (59) (59)
------- ------- ------- ------- -------- --------
Total shareholders' equity 120,011 141,262 121,385 143,701 228,463 253,148
------- ------- ------- ------- -------- --------
Total liabilities and
shareholders' equity 178,650 178,650 193,005 193,005 273,039 273,039
======= ======= ======= ======= ======== ========
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
We derive revenues primarily from the following sources:
Service fees for:
o core data processing and check imaging systems, support, maintenance
and related services and software sales
o EFT processing services
Data communications management
Equipment and product sales, services and other:
o sales of banking-related equipment and complementary products
o equipment maintenance and technical support services
o related products and services.
In our service bureau operations, we generate core data processing revenues
from service and processing fees based primarily on the asset base of our
financial institution customers, the number of transactions we process and the
number of accounts we service. We recognize these revenues as we perform the
services. We also generate revenues from the licensing of our core data
processing systems. We recognize revenues for licensing these systems 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 Renaissance Imaging(TM) check imaging software on an in-house
basis, and we generate revenues from up-front license fees and recurring annual
maintenance fees charged for this system. We recognize revenues from the
licensing of Renaissance Imaging in accordance with Statement of Position 97-2,
as discussed above. We also provide check processing and imaging in a service
bureau environment under which we generate recurring revenues. On a service
bureau basis, we generate revenues based on the volume of items processed. We
recognize this revenue as we provide the service.
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 additional ATM serviced. Once the number of
transactions by a financial institution exceeds established levels, typically
between 1,500 and 2,500 transactions per month, we charge additional fees for
these transactions. For debit card transactions, we currently receive a portion
of the interchange fees generated by our financial institution customers, and we
charge a monthly fee if our customers do not meet a specified minimum dollar
amount of transactions for a particular month. During the second quarter of
2002, we will begin implementation of a new debit card pricing structure, under
which we will receive a fee for each transaction processed. Under the new
pricing, we will not receive a portion of the interchange fee for processing
debit card transactions. We believe that this new pricing structure, once fully
implemented, will not materially change our revenues from debit card processing
and that it will materially reduce our exposure to any changes in interchange
fees that may be implemented by Visa and MasterCard. Most charges due under our
EFT service agreements are due and paid monthly.
24
We generate our data communications management service revenues principally
from network management and from equipment configuration services and
installation. We charge an installation fee and a regular monthly fee on an
ongoing basis for providing telecommunications connectivity and network
management.
We recognize revenues from sales of equipment and complementary products at
the time of shipment. We recognize maintenance and technical support service
revenues as we provide the service.
For the year ended December 31, 2001, approximately 86% of our total
revenues were recurring revenues. Recurring revenues result from regular monthly
payments by our customers for ongoing services used in connection with their
business. These revenues do not include conversion or deconversion fees, initial
software license fees, installation fees, hardware sales or similar activities.
We offer Internet banking and voice response products through Netzee.
We own approximately 28% of Netzee's outstanding common stock. We account for
our investment in Netzee under the equity method, which requires us to record
Netzee's results of operations in a single line item in our statement of
operations titled "equity in loss of affiliate." Until September 1999, however,
we owned a majority of Netzee's then outstanding common stock. Our ownership
percentage in Netzee decreased to approximately 49% as of September 3, 1999
because of Netzee's issuance of its common stock in connection with transactions
that occurred on that date. As a result, we discontinued consolidating Netzee's
results of operations with our results of operations. Because we provided
unlimited funding to Netzee through the completion of its initial public
offering in November 1999, all of Netzee's losses before the completion of the
offering were included in that line item rather than our relative percentage of
those losses. Since Netzee completed its initial public offering, we record only
our relative percentage of Netzee's net losses.
In February 2000, we completed a public offering of common stock. Our
proceeds from this offering, after deducting expenses related to the offering,
were approximately $66.0 million. We used the proceeds of this offering to repay
certain debt and fund our acquisitions completed in 2000 and 2001 and for
working capital and other general corporate purposes.
In August 2000, we completed the Advanced Computer Enterprises acquisition,
which we accounted for as a pooling of interests. Except for the August 2000
acquisition, we have accounted for all of our acquisitions since our initial
public offering as purchase transactions in our financial statements.
On January 4, 2001, we acquired the U.S. core data processing, check
imaging and item processing operations, as well as the BancLine software, from
SLM. We paid $40.0 million in cash and issued or agreed to issue up to
approximately 1.25 million shares of our common stock in the transaction,
including up to 385,872 shares that represent contingent consideration. As of
December 31, 2001, 78,455 of the contingent shares had been earned and 52,071
shares will never be earned.
Effective February 1, 2001, we acquired from Netzee the asset/liability and
regulatory reporting software of DPSC for approximately $14.1 million in cash
and the assumption of $2.4 million of DPSC's net liabilities. Netzee used
approximately $8.4 million of the cash proceeds to reduce its line of credit
with us.
In August and September 2001, we completed another public offering of
common stock. Proceeds to us from this offering including the over allotment
option (after deducting expenses related to the offering) were approximately
$107.5 million. We used approximately $26.4 million of the proceeds of this
offering to pay certain debt and expect to use the remainder for working capital
25
and other general corporate purposes, to fund future acquisitions (particularly
our pending acquisition of iBill) and to fulfill our obligations under our
revolving line of credit to Netzee.
In October 2001, we acquired substantially all of the assets of Holmes and
Shaw, Inc. and Superior Forms, Ltd. (together, "HSI"). Based in San Antonio,
Texas, HSI is a full service provider of computer output solutions including
data processing, laser document printing, and automated mailing services.
Consideration for this purchase was approximately $25.2 million cash and assumed
liabilities.
We also completed three other acquisitions during 2001, for which we paid a
total of $8.1 million, net, in cash. One of the agreements includes $206,500 in
contingent consideration that will be paid and recorded as purchase price
consideration if and when the contingencies are resolved.
As noted in Item 1, Business - Pending Acquisitions, we announced after the
close of trading on the Nasdaq Stock Market on March 19, 2002 a major expansion
in our merchant processing operations. We have entered into a definitive
agreement to acquire the assets of Internet Billing Company, Ltd., a Ft.
Lauderdale-based provider of transaction processing for Web merchants.
Separately, we also signed a binding letter agreement to acquire Electronic
Payment Exchange, Inc., a provider of transaction processing services based in
New Castle, Delaware. If we close these acquisitions as we anticipate, they will
increase our revenues and earnings. We will have to use a substantial portion of
our capital resources to close these acquisitions and integrate them into our
businesses.
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 reduce spending quickly if our actual revenues are lower than we expect.
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.
Because of the foregoing factors and other risk factors discussed in this
report, we believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. Our operating results are
likely to fall below the expectations of securities analysts or investors in
some future quarter. In that event, the trading price of our common stock would
likely decline, perhaps significantly.
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,
-----------------------
1999 2000 2001
---- ---- ----
Revenues ................................................. 100.0% 100.0% 100.0%
Costs of services ........................................ 39.1 38.7 42.1
Selling, general and administrative expenses ............. 40.1 38.8 32.5
Depreciation and amortization ............................ 8.5 6.3 8.8
----- ----- -----
Total operating expenses ................................. 87.7 83.8 83.4
----- ----- -----
Operating income ......................................... 12.3 16.2 16.6
Other income, net ........................................ 74.8 17.0 2.0
----- ----- -----
Income before provision (benefit) for income taxes,
equity in loss of affiliate and minority interest ..... 87.1 33.2 18.7
----- ----- -----
Provision (benefit) for income taxes ..................... 24.5 (3.5) 2.4
Equity in loss of affiliate .............................. (29.3) (44.1) (12.9)
Minority interest ........................................ (0.2) (0.1) 0.0
----- ----- -----
Net income (loss) ........................................ 33.1% (7.5)% 3.4%
===== ===== =====
26
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Revenues increased 87.8%, to $130.8 million for the year ended
December 31, 2001 from $69.6 million for the year ended December 31, 2000. The
$61.1 million increase was primarily related to (a) $59.3 million generated by
an increase in service fee income, (b) $1.4 million generated by an increase in
data communications management income and (c) $410,000 generated by additional
hardware sales. These increases are attributable to both internal growth and
acquisitions. The revenue growth is primarily due to volume increases rather
than price increases as price increases are generally limited to CPI increases.
Costs of Services. Costs of services increased 104.1% to $55.0 million for
the year ended December 31, 2001 from $27.0 million for the year ended December
31, 2000. The $28.0 million increase was primarily attributable to (a) an
increase of $26.5 million related to service fee income (b) $1.1 million related
to data communications management, and (c) $374,000 generated by additional
hardware sales. As a percentage of revenues, costs of services increased to
42.1% for the year ended December 31, 2001 from 38.7% for the year ended
December 31, 2000, primarily due to the acquisitions of SLM and HSI, which had
gross margins which were less than InterCept's historical gross margin
percentages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 57.3% to $42.5 million for the year ended
December 31, 2001 from $27.0 million for the year ended December 31, 2000. The
$15.5 million increase was primarily due to additional personnel, facilities and
infrastructure to support our growth and acquisitions and other miscellaneous
expenses. Selling, general and administrative expenses as a percentage of
revenues decreased to 32.5% for the year ended December 31, 2001 from 38.8% for
the year ended December 31, 2000, which was attributable to (a) increased
leverage in our business model and (b) the acquisitions of SLM and HSI, which
had lower selling, general and administrative expenses as a percentage of
revenues than InterCept.
Depreciation and Amortization. Depreciation and amortization increased
160.8% to $11.5 million for the year ended December 31, 2001 from $4.4 million
for the year ended December 31, 2000.
Operating Income. For the foregoing reasons, operating income increased
$10.5 million to $21.8 million for the year ended December 31, 2001 from $11.3
million for the year ended December 31, 2000. As a percentage of revenues,
operating income increased to 16.6% for the year ended December 31, 2001 from
16.2% for the year ended December 31, 2000.
Interest and Other Income, net. Interest and other income decreased $9.1
million to $2.7 million for the year ended December 31, 2001 from income of
$11.8 million for the year ended December 31, 2000. The decrease was primarily
because we recognized a $600,000 gain related to the increase in our investment
value in Netzee for the year ended December 31, 2001 (in accordance with Staff
Accounting Bulletin No. 51), compared to an $8.0 million gain of that nature in
2000.
27
Provision (Benefit) for Income Taxes. The effective tax rate for the year
ended December 31, 2001 excluding the tax benefit recorded on the equity in
losses of Netzee was 38.9% as compared to 39.9% for the year ended December 31,
2000. The decrease in rate is mainly due to state tax planning initiatives
implemented in 2001.
Equity in Loss of Affiliate. Equity in loss of affiliate was $16.8 million
for the year ended December 31, 2001 and $30.7 million for the year ended
December 31, 2000. This amount represents our share of Netzee's losses.
Minority Interest. Minority interest in income decreased $10,000 to $20,000
for the year ended December 31, 2001 from $30,000 for the year ended December
31, 2000. The decrease was primarily due to reduced profits in ProImage's
operations.
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. As a percentage of revenues, costs of services decreased
slightly to 38.7% for the year ended December 31, 2001 from 39.1% for the year
ended December 31, 2000.
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 we hired to
support our growth and acquisitions and other miscellaneous expenses. Selling,
general and administrative expenses as a percentage of revenues decreased to
38.8% for the year ended December 31, 2000 from 40.1% for the year ended
December 31, 2000.
Depreciation and Amortization. Depreciation and amortization remained
constant at $4.4 million for the years ended December 31, 2000 and 1999. During
1999 InterCept had a one-time amortization charge related to Netzee of
approximately $1.0 million, which was offset by increased intangibles in 2000.
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. As a percentage of revenues,
operating income increased to 16.2% for the year ended December 31, 2000 from
12.3% for the year ended December 31, 1999.
Interest and Other Income, 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 primarily
because we recognized only an $8.0 million gain related to the increase in our
investment value in Netzee for the year ended December 31, 2000 (in accordance
with Staff Accounting
28
Bulletin No. 51), compared to a $38.9 million gain of that nature in 1999. This
decrease was partially 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 gain, see note 3 to our financial statements.
Provision for Income Taxes. The effective tax rate for the year ended
December 31, 2000 excluding the tax benefit recorded on the equity in losses of
Netzee was 39.9% as compared to 44.3% for the year ended December 31, 1999. The
tax provision in 1999 was higher due to the effect of permanent basis
differences, including goodwill.
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 losses.
Minority Interest. Minority interest 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.
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. Our initial public offering in June 1998 resulted in net
proceeds to us of $14.4 million. We raised $66.0 million through a public
offering of common stock in February 2000 and an additional $107.5 million
through another public offering of common stock in August and September 2001.
Cash and cash equivalents were $24.9 million at December 31, 2001.
Short-term investments with a maturity of one year or less were $50.3 million.
Net cash provided by operating activities was $17.7 million for the year ended
December 31, 2001, $9.0 million for the year ended December 31, 2000 and $4.7
million for the year ended December 31, 1999. The increase in the net cash
provided by operating activities in 2001 as compared to 2000 was primarily
attributable to an increase in earnings and depreciation and amortization
partially offset by an increase in accounts receivable. 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.
Net cash used in investing activities was $106.9 million in 2001, $60.8
million in 2000 and $18.0 million in 1999. The increase in net cash used for
investing activities in 2001 as compared to 2000 relates to cash paid for
acquisitions and additional loans to Netzee and SLM. The increase in net cash
used in investing activities in 2001 as compared to 1999 was attributable to
investment of the proceeds from our offering of common stock completed in
September 2000 as well as increased capital expenditures and acquisitions during
2001. Similarly, 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.
Net cash provided by financing activities was $106.1 million for the year
ended December 31, 2001, $57.7 million for the year ended December 31, 2000 and
$11.9 million for the year ended December 31, 1999. The increase in net cash
generated for 2001 compared to 2000 is due to the net proceeds from our offering
of common stock completed in September 2001 of $107.5 million, offset by
repayments of borrowings under our credit facility using a portion of the
offering proceeds. Similarly, 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 proceeds.
29
Together with John H. Harland Company, we provide a revolving line of
credit to Netzee. On March 29, 2002 we amended this facility to reduce the total
amount of credit available and to extend the termination date to April 10, 2003.
We currently provide to Netzee an $18.0 million revolving line of credit secured
by substantially all of Netzee's assets. Of the total $18.0 million available to
Netzee, we provide approximately $14.0 million and Harland provides
approximately $4.0 million on a pro rata basis with us provided that we are
obligated to advance the last $1.0 million without Harland's participation. In
February 2001, we paid Netzee $14.1 million in cash and assumed $2.4 million of
DPSC's net liabilities in exchange for regulatory reporting software and other
assets formerly owned by Netzee's subsidiary, DPSC. Netzee has subsequently
borrowed additional funds from us, and as of December 31, 2001, Netzee owed us a
total of $10.1 million under this line of credit including accrued interest of
approximately $182,000. Borrowings under this line of credit bear interest at
prime plus 2%. Total interest on all borrowings for 2000 and 2001 was
approximately $1.1 million and $1.1 million, respectively. We 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
and to repay its borrowings from us. Netzee may seek to raise capital through
public or private offerings 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 its obligations as they come due may depend upon its ability
to raise additional capital funds.
On May 31, 2001, we entered into a loan agreement with SLM under which we
loaned SLM $12.0 million subject to various terms and conditions. Borrowings
under the loan agreement bore interest at an annual rate equal to the one-month
LIBOR plus 2% and were secured by up to approximately 1.25 million shares of our
common stock then held or that may be earned by SLM. The loan was scheduled to
mature on December 31, 2002. On August 13, 2001, SLM repaid the loan, including
accrued interest, in full from the net proceeds of SLM's sale of 610,000 shares
of our common stock in our public offering closed on that date.
On December 3, 2001, we entered into a loan agreement with SLM under which
we agreed to lend SLM $7.0 million subject to various terms and conditions.
Borrowings under the loan agreement bear interest, payable upon maturity, at the
prime rate and are secured by up to 591,871 shares of InterCept common stock
that SLM now holds or may earn. The loan matures on September 30, 2002 and
requires mandatory prepayments from the proceeds of sales of our common stock by
SLM until the loan is repaid in full.
During 2001, we entered into an amended and restated credit facility with
First Union National Bank. Under this facility we may borrow up to $50.0 million
for working capital and to fund acquisitions and related expenses. The First
Union credit facility contains provisions that 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 dividends.
This credit facility matures on June 1, 2004. Interest is payable monthly, and
outstanding principal amounts accrue interest, at our option, at an annual rate
equal to either (a) a floating rate equal to the lender's prime rate minus 0.25%
or (b) a fixed rate based upon the 30-day LIBOR rate plus applicable margins. On
December 31, 2001, the interest rate under this facility was approximately 3.12%
per year, and approximately $460,000 was outstanding under this facility.
We funded the cash portion of the purchase price of our acquisitions in
2000 and 2001 through the use of cash on hand and borrowings under our line of
credit with First Union National Bank.
In the second quarter of 2002, we anticipate using a substantial portion of
the capital resources available to us to fund the $112.0 million purchase price
of iBill and up to $11.0 million of immediate working capital needs of EPX. To
provide the approximately $123 million in cash we need for these purposes, we
intend to draw on our First Union credit facility and use the remaining net
proceeds from our 2001 public offering of common stock.
As a result, our operating cash flows will be our principal source of
short-term liquidity. Accordingly, we are unlikely to make any additional
acquisitions that require a material amount of cash until we raise additional
capital. We believe that to the extent that we rely on cash flows from
operations to meet our short-term funding requirements, a decrease in demand for
our products and services would not result in a material reduction in the
availability of those funds. Because most of our customer contracts require the
payment of monthly charges and have original terms of three to five years, we
have a high percentage of recurring revenues.
We believe that, other than our need for cash to fund our pending
acquisitions, funds to be provided by operations 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.
Assuming we are able to raise additional capital, we expect to make additional
expenditures to make acquisitions and integrate the acquired companies. We can
give no assurances with respect to the actual timing and amount of the capital
30
we raise or of the acquisitions we may make with the capital so raised. 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
be available to us.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Actual results may differ materially from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies involve the most
complex or subjective decisions or assessments and affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue recognition
Revenues include service fees, data communication management fees,
equipment sales, installation and maintenance, software license fees, and
software maintenance. We recognize service fee income and data communication
management fees as services are performed. We recognize revenue from equipment
sales and installations upon installation of the product, and any related
maintenance revenue is recognized ratably over the period during which the
services are performed. We also generate revenues from the licensing of our core
data processing systems. We recognize revenue for licensing these systems in
accordance with Statement of Position 97-2, "Software Revenue Recognition"
issued by the American Institute of Certified Public Accountants. Software
license, hardware, and installation revenue is recognized after we have a signed
non-cancelable license agreement, have installed the products, and have
fulfilled all significant obligations to the customer. Maintenance fees are
recognized over the term of the maintenance period. We sell certain of our
software and hardware 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.
Allowance for doubtful accounts
We record an allowance for doubtful accounts based on estimates of losses
related to customer receivables balances. We develop estimates by evaluating
specific customer accounts for risk of loss as well as historical credit memo
data and other known factors for billing disputes that arise in the normal
course of business.
Fair value of assets acquired and liabilities assumed in purchase combinations
The purchase combinations carried out by us require us to estimate the fair
value of the assets acquired and liabilities assumed in our business. In
general, we determine the fair value based upon information supplied by the
management of the acquired entities and valuations by independent appraisal
experts. The valuations have been based primarily upon future cash flow
projections for the acquired assets, discounted to present value using a
risk-adjusted discount rate. In connection with our acquisitions, we have
recorded a significant amount of intangible assets. These assets are being
amortized over the expected economic lives of the assets, generally ranging from
7 to 20 years. If we determine that we have over-estimated the economic life of
these assets, we will begin to amortize the remaining unamortized carrying value
of the assets over the newly estimated life. Accordingly, depreciation and
amortization expense could be increased, and the amount of any increase could be
material to our results of operations.
31
We also recorded a significant amount of goodwill in connection with our
acquisitions. Through the end of 2001, we evaluated goodwill for impairment
whenever indicators of impairment existed based on undiscounted projected future
cash flows. If the carrying value of the goodwill was less than the undiscounted
projected future cash flows, no impairment would be recognized. Beginning
January 1, 2002, we adopted a recently issued accounting standard that requires
us to evaluate our goodwill for impairment on an annual basis or whenever
indicators of impairment exist. The evaluation will be based upon a comparison
of the estimated fair value of the unit of our business to which the goodwill
has been assigned to the sum of the carrying value of the assets and liabilities
of that unit. The fair values used in this evaluation will be estimated based
upon discounted future cash flow projections for the unit. These cash flow
projections will be based on a number of assumptions as discussed above. If a
change in estimate of fair value occurs after one year of the acquisition, the
change would be recorded in our statement of operations.
To date, we have not recorded an impairment of our goodwill or intangible
assets. We believe that assumptions we have made in projecting future cash flows
for the evaluations described above are reasonable. However, if future actual
results do not meet our expectations, we may be required to record an impairment
charge, the amount of which could be material to our results of operations.
Investment in and advances to Netzee
We currently own approximately 28% of Netzee's common stock. We account for
our investment in Netzee using the equity method of accounting, under which the
operations of Netzee are recorded on a single line item in our statements of
operations, "equity in loss of affiliate." We do not consolidate Netzee's
results of operations with our results of operations. Because we provided
unlimited funding to Netzee until the 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. During 1999 and
2000, Netzee issued shares of common stock at a price above book value. As a
result, we increased our investment in Netzee and recorded gains to reflect the
increase in the value of our investment. We then decreased our investment for
our portion of Netzee's losses described above.
We review our investment in Netzee in accordance with Accounting Principles
Board ("APB") Opinion No. 18, "The Equity Method of Accounting for Investments
in Common Stock." APB Opinion No. 18 provides that "a loss in value of an
investment which is other than a temporary decline should be recognized." We
compare our carrying value of the investment to the fair market value of the
stock over time in order to determine when a loss in value that is other than
temporary has occurred. As of December 31, 2001, our investment in Netzee was
$1.5 million. The corresponding fair market value of our shares of Netzee's
common stock was approximately $1.6 million, and thus we concluded that our
investment was not impaired. Additionally, we have evaluated the business and
financial projections of Netzee and have concluded, based on our review, that
the amounts due from Netzee are collectible. Therefore, we have not established
a reserve for the note as of December 31, 2001.
32
Relationship with Netzee
InterCept and Netzee maintain a relationship to cross-market each other's
products and services. During 2000 and 2001, we received $375,000 and $131,000,
respectively, in commissions related to Netzee sales. We also shared certain
facilities with Netzee and provided certain administrative services to Netzee.
We charged Netzee approximately $163,000 and $108,000 in 2000 and 2001,
respectively, for these shared costs. During 2000 and 2001, Netzee used us to
purchase certain hardware and software used to implement Netzee's Internet and
telephone banking products. In addition, we assisted Netzee in managing the
ordering and inventory process related to this equipment. During 2000 and 2001,
Netzee incurred approximately $435,000 and $152,000, respectively, in costs to
purchase the equipment, which included a fee to us for their services.
Relationship with SLM
We provide telecommunications network and operations services and customer
support services to SLM, as well as computer programming services. We recorded
revenue of approximately $1.8 million related to services provided to SLM in
2001. We also charged SLM approximately $200,000 during 2001 for rent and
building expenses related to certain SLM operations maintained at InterCept's
facility. We have made two loans to SLM as described above in liquidity and
capital resources and one of those loans remains outstanding.
Disclosure Regarding Forward-Looking Statements
We make forward-looking statements in this annual report. These statements
are subject to risks and uncertainties, and we cannot assure you that they will
prove to be correct. Forward-looking statements include assumptions as to how we
may perform in the future. When we use words like "believe," "expect,"
"anticipate," "predict," "project," "potential," "seek," "continue," "will,"
"may," "could," "intend," "plan," "pro forma," "estimate," "goal," "strive" and
similar expressions, we are making forward-looking statements.
33
We believe that the expectations reflected in our forward-looking statements are
reasonable, but we cannot be sure that we will actually achieve these
expectations. Projections or estimates of our future performance are necessarily
subject to a high degree of uncertainty and may vary materially from actual
results. In evaluating forward-looking statements, you should carefully consider
various factors discussed below.
Some of the following risks will apply to us only if we close our pending
acquisitions of iBill and EPX as we expect. Please see in particular the risks
under the heading Risks Related to Our Pending Acquisitions of iBill and EPX.
Although we anticipate closing both acquisitions, we cannot assure you that we
will in fact do so. If we do not complete the acquisitions of iBill and EPX for
any reason, these particular risks will not apply to us, but our failure to
close the acquisitions may have adverse consequences for us. For example, the
price of our common stock may decline if the current market price of our common
stock reflects an assumption that we will complete these acquisitions. In
addition, our failure to close these acquisitions after having announced them
may negatively affect our ability and prospects for consummating acquisitions in
the future. Also, we have already incurred substantial costs related to these
acquisitions that we must pay even if we do not close the acquisitions.
RISKS RELATED TO OUR OPERATIONS
Our rapid growth could strain our managerial, operational and financial
resources, and our failure to manage our growth could cause our business to
suffer.
Our internal growth and acquisitions since our initial public offering in
June 1998 have placed great demands on our business, particularly our
managerial, operational and financial personnel and systems. For example, we
have grown from approximately 170 employees on March 31, 1998 to approximately
1,300 employees on March 31, 2002. If we close the iBill and EPX transactions as
we anticipate, we will add approximately 300 employees. Additional internal
growth and acquisitions may further strain our resources. We cannot assure you
that our systems, procedures, controls and existing facilities will be adequate
to support the expansion of our operations, while maintaining adequate levels of
customer service and satisfaction. Our future operating results will depend
substantially on the ability of our officers and key employees to manage
changing business conditions and to implement and improve our technical,
administrative, financial control and reporting systems. Our failure to respond
to and manage changing business conditions as we expand could diminish the
quality of our products and services, result in the loss of customers and weaken
our operating results.
Our acquisitions could result in integration difficulties, unexpected expenses,
diversion of management's attention and other negative consequences.
As part of our growth strategy, we have made numerous acquisitions since
our initial public offering in June 1998, and we have two significant pending
acquisitions. We plan to continue to acquire complementary businesses, products
and services as a key element of our growth strategy. We must integrate the
technology, products and services, operations, systems and personnel of acquired
businesses with our own and attempt to grow the acquired businesses as part of
our company. The integration of other businesses is a complex process and places
significant demands on our management, financial, technical and other resources.
The successful integration of businesses we have acquired in the past, are
currently in the process of acquiring and may acquire in the future, is critical
to our future success. If we are unsuccessful in integrating these businesses,
our financial and operating performance could suffer. The risks and challenges
associated with the acquisition and integration of acquired businesses include:
34
o we may be unable to centralize and consolidate our financial,
operational and administrative functions with those of the businesses
we acquire;
o our management's attention may be diverted from other business
concerns;
o we may be unable to retain and motivate key employees of an acquired
company;
o we may enter markets in which we have little or no prior direct
experience;
o litigation, indemnification claims and other unforeseen claims and
liabilities may arise from the acquisition or operation of acquired
businesses;
o the costs necessary to complete integration may exceed our
expectations or outweigh some of the intended benefits of the
transactions we complete;
o we may be unable to maintain the customers or goodwill of an acquired
business; and
o the costs necessary to improve or replace the operating systems,
products and services of acquired businesses may exceed our
expectations.
We may be unable to successfully integrate our acquisitions with our
operations on schedule or at all. We cannot assure you that we will not incur
large accounting charges or other expenses in connection with acquisitions or
that acquisitions will result in cost savings or sufficient revenues or earnings
to justify our investment in, or our expenses related to, these acquisitions.
If we do not continue to expand our sales force and our marketing relationships,
we may be unable to continue our growth.
Our ability to expand our business will depend significantly upon our
ability to expand our sales and marketing force and our strategic marketing
relationships. Competition for experienced sales and marketing personnel is
intense, and we may not be able to retain our existing personnel or locate and
attract additional qualified personnel in the future. In addition, if we lose
any of the relationships with various banking-related organizations for the
marketing and endorsement of our products and services or are unable to enter
into new ones, growth in our customer base and revenues could be impaired.
Competition may impede our ability to acquire other businesses and may inhibit
our growth.
A significant part of our historic growth has been generated by
acquisitions. We anticipate that a portion of our future growth may be
accomplished through acquisitions. The success of this strategy depends upon our
ability to identify suitable acquisition candidates, reach agreements to acquire
these companies and obtain necessary financing on acceptable terms. In pursuing
acquisition and investment opportunities, we may compete with other companies
that have similar growth strategies. Some of these competitors may be larger and
have greater financial and other resources than we have. This competition may
render us unable to acquire businesses that could improve our growth or expand
our operations.
If our stock price drops, our ability to acquire other businesses will be
impaired.
We have financed the acquisitions we have completed since our initial
public offering with a combination of our common stock, cash from common stock
offerings, cash from our operations and borrowings made under our line of credit
with First Union. If our stock price declines as a result of general market
conditions or otherwise, the shareholders of businesses that we seek to acquire
may be unwilling to
35
accept our common stock in exchange for their businesses. In that case, we would
be required to use larger portions of our line of credit or cash from operations
to continue to complete acquisitions, which would decrease our working capital
and increase our interest expense. This could have a material negative impact on
our financial performance and results of operations.
Our credit facility with First Union restricts our ability to complete
acquisitions without First Union's consent.
We must comply with the financial and other covenants of the credit
facility to be able to draw on our credit facility to fund our acquisitions. In
addition First Union must approve any acquisition by us which has a purchase
price in excess of $10 million. If we are unable to borrow funds under our
credit line, we may be unable to make acquisitions that could be helpful to our
business.
The loss of our chief executive officer could have a material adverse effect on
our business.
John W. Collins, our chief executive officer, has substantial experience
with our operations and our industry and has contributed significantly to our
growth. Although we maintain key man life insurance on Mr. Collins and he works
for us under the terms of an employment agreement, our customer and marketing
relationships would likely be impaired and our business would likely suffer if
we lost the services of Mr. Collins for any reason.
If our processing centers or communications network suffers a systems failure or
interruption, we may face customer service issues and be liable for damage
suffered by our customers.
Our operations depend upon our ability to protect our processing centers,
network infrastructure and equipment. Damage to our systems or equipment or
those of third parties that we use may be caused by natural disasters, human
error, power and telecommunications failures, intentional acts of vandalism and
similar events. Although we do have data and item processing centers in several
locations that serve as back-ups for each other, we maintain only a single data
communications switching facility and do not maintain a back-up location for our
frame relay network hardware. Interruption in our processing or communications
services could delay transfers of our customers' data, or damage or destroy the
data. Sudden increases in ATM usage or debit card activity could result in slow
response times in our network. Any of these occurrences could result in lawsuits
or loss of customers, and may also harm our reputation.
We depend on other providers for products and services necessary to our
business, and if we cannot obtain satisfactory products and services on
favorable terms, or at all, our business could suffer.
We rely on other providers for Internet and telephone banking products and
services, ATM and debit card manufacturing, fiber optic communications and other
products and services that are essential to our business. For example, we use
and market the Internet and telephone banking services of our affiliate, Netzee.
If Netzee or any of our other providers terminates or changes its relationship
with us, or if for any reason we are unable to obtain its products and services
on favorable terms, we may be unable to meet our customers' needs on a timely
basis. Similarly, if any of these providers is permanently or temporarily unable
to provide its products and services to us as the result of natural disasters,
technical difficulties or otherwise, we may be unable to provide our products
and services to our customers. If the performance of these third party products
and services does not meet our customers' expectations, it may damage our
current customer relationships, harm our reputation and inhibit our ability to
obtain new customers.
36
If our products and services contain errors, we may lose customers and revenues
and be subject to claims for damages.
Our new products and services and enhancements to our existing products and
services may have undetected errors or failures, or could fail to achieve market
acceptance, despite testing by our current and potential customers and by us. If
we discover errors after we have introduced a new or updated product to the
marketplace, we could experience, among other things:
o delayed or lost revenues while we correct the errors;
o a loss of customers or delay in market acceptance; and
o additional and unexpected expenses to fund further product
development.
Our agreements with our customers generally contain provisions designed to
limit our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. These provisions may not be effective because of existing or
future federal, state or local laws or ordinances, or unfavorable judicial
decisions. If our products and services fail to function properly, we could be
subject to product liability claims, which could result in increased litigation
expense, damage awards and harm to our business reputation.
Because our business involves the electronic storage and transmission of data,
security breaches and computer viruses could adversely affect us.
Our online transaction processing systems electronically store and transmit
sensitive business information of our customers. The difficulty of securely
storing confidential information electronically has been a significant issue in
conducting electronic transactions. We may be required to spend significant
capital and other resources to protect against the threat of security breaches
and computer viruses, or to alleviate problems caused by breaches or viruses. To
the extent that our activities or the activities of our customers involve the
storage and transmission of confidential information, such as banking records or
credit information, security breaches and viruses could expose us to claims,
litigation and other possible liabilities. Any inability to prevent security
breaches or computer viruses could also cause existing customers to lose
confidence in our systems and terminate their agreements with us, and could
inhibit our ability to attract new customers.
Technological changes may reduce the demand for our products and services or
render them obsolete.
The introduction of new technologies and financial products and services
can render existing technology products and services obsolete. We expect other
vendors to continually introduce new products and services, as well as
enhancements to their existing products and services, that will compete with our
products and services. To be successful, we must anticipate evolving industry
trends, continue to apply advances in technology, enhance our existing products
and services and develop or acquire new products and services to meet the
demands of our customers. We may not be successful in developing, acquiring or
marketing new or enhanced products or services that respond to technological
change or evolving customer needs. We may also incur substantial costs in
developing and employing new technologies. If we fail to adapt to changes in
technologies, we could lose customers and revenues, and fail to attract new
customers or otherwise realize the benefits of costs we incur.
37
We may not be able to protect our intellectual property rights.
We attempt to protect our software, documentation and other written
materials under trade secret and copyright laws, confidentiality procedures and
contractual provisions, which afford only limited protection. 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 be sure that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology.
If others claim that we have infringed their intellectual property rights, we
could be liable for significant damages.
We do not believe that any of InterCept's products infringe the proprietary
rights of third parties. We cannot be sure, however, that third parties will not
make infringement claims, and we have agreed to indemnify many of our customers
against those claims. We have recently discovered that EPL, Inc., which sells
software and services to credit unions, has filed a trademark registration
application with the United States Patent and Trademark Office for the name
"TellerPlus." The EPL mark and registration could adversely affect our use of
the mark "TellerPlus" with respect to banks. We anticipate that the number of
infringement claims will increase as the number of products and services
increases and the functionality of products in different industry segments
overlaps. Any of those claims, whether with or without merit, could be
time-consuming, result in costly litigation and may not be resolved on terms
favorable to us.
Fluctuations in our operating results may negatively affect the trading price of
our common stock.
Our operating results have varied in the past and may fluctuate
significantly in the future as a result of many factors. These factors include:
o the possible negative impact of implementing our growth and
acquisition strategies, including accounting charges and other
expenses associated with our acquisitions;
o the loss of customers or strategic relationships;
o competition and pricing pressures;
o a reduction in recurring revenues as a percentage of total revenues;
o increased operating expenses due to launches of new products and
services, and sales and marketing efforts; and
o changes in interchange and transaction fees of MasterCard(R) and
Visa(R).
Many factors that affect our operating results are outside of our control.
Because of these factors, it is likely that in some future period our financial
results will fall below the expectations of securities analysts or investors. In
that event, the trading price of our common stock would likely decline, perhaps
significantly.
38
If we fail to comply with privacy regulations imposed on providers of services
to financial institutions, our business could be harmed.
As a provider of services to community financial institutions, we are
required to comply with privacy regulations imposed on financial institutions.
We are bound by the same limitations on disclosure of the information received
from our customers as apply to the financial institutions themselves. If we fail
to comply with these regulations, we could damage our customer relationships,
harm our reputation and inhibit our ability to obtain new customers.
Our limited combined operating history makes it difficult to evaluate our
business.
Since our incorporation in May 1996 we have completed numerous
acquisitions, including several acquisitions in 2001. The financial information
included in this annual report is based in part on the separate pre-acquisition
financial results of the companies we have acquired. As a result, your
evaluation of us is based on a limited combined operating history. Our
historical results of operations and our other financial information may not
give you an accurate indication of our future results of operations or
prospects.
RISKS RELATED TO OUR OWNERSHIP IN NETZEE
Because we own a minority interest in Netzee and Netzee is expected to continue
to have significant losses, our future financial performance may be adversely
affected.
In September 1999, we completed a series of transactions that removed from
our operations some Internet and telephone banking products and services that we
purchased during 1999. Netzee, of which we own approximately 28% of its
outstanding common stock, now conducts these operations. Our historical
financial results for 1999 therefore include results of operations that we no
longer have. Although we no longer include Netzee's operations in our financial
results on a combined basis, we record a relative percentage of the operating
income and losses of Netzee in a single line item on our statement of
operations, "equity in loss of affiliate." Netzee has a history of losses and
may never become profitable. The impact of Netzee's results of operations on our
financial condition, including our shareholders' equity, is uncertain, and we
cannot be sure that we will benefit from our ownership in Netzee.
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.
We provide to Netzee, jointly with John H. Harland Company, an $18.0
million revolving line of credit secured by substantially all of Netzee's
assets. Of the total $18.0 million available to Netzee, we provide approximately
$14.0 million and Harland provides approximately $4.0 million on a pro rata
basis with us provided that we are obligated to advance the last $1.0 million
without Harland's participation. As of March 25, 2002, the total amount
outstanding on InterCept's loans to Netzee was approximately $10.5 million. We
may lend additional amounts to Netzee to fund its working capital needs or
operations. Netzee has a history of losses and may never become profitable. As a
result, Netzee may be unable to repay the loans we made to it, which would
reduce the value of our investment in Netzee and our shareholders' equity.
Our relationship with Netzee presents potential conflicts of interest, which may
result in decisions that favor Netzee over our shareholders.
Because Netzee and InterCept are both engaged in the sale of technology
products and services to community financial institutions, numerous potential
conflicts of interest exist between our companies. We 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
39
transactions that, absent the 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.
Our existing and future agreements and relationships with Netzee have not
resulted and will not necessarily result from arm's length negotiations. Two of
our directors serve as directors and are significant shareholders of Netzee. One
of those directors, Donny R. Jackson, was our President until October 2000 and
is currently the Chief Executive Officer of Netzee. John W. Collins, our
Chairman and Chief Executive Officer, is the Chairman of the Board of Directors
of Netzee. 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 Netzee and us do not lend themselves to precise
allocations of costs and benefits. Thus, the value of these transactions will be
left to the discretion of the parties, who are subject to potentially
conflicting interests.
Other than the provisions of our bylaws relating to corporate
opportunities, the only mechanism in place to resolve these conflicts of
interest is our policy that transactions with affiliated parties be approved by
a majority of our disinterested directors. Nevertheless, due to the extensive
relationships between Netzee and us, we may make decisions that potentially
favor Netzee or its affiliates at the expense of our shareholders. Furthermore,
Georgia law may prohibit you from successfully challenging these decisions if
the decision receives the affirmative vote of a majority, but not less than two,
of our disinterested directors who received full disclosure of the existence and
nature of the conflict.
The inability of Netzee to continue as a going concern, or its receipt of an
audit report from its independent auditors that is qualified to that effect, or
to continue trading on the Nasdaq National Market could materially affect the
price of our common stock.
Because of our significant ownership interest in Netzee, Netzee's low stock
price and concerns about its financial viability may affect our stock price.
Nasdaq has notified Netzee that it is out of compliance with Nasdaq's $5.0
million minimum market value requirements. If Netzee fails to comply with this
requirement, it will be subject to delisting. The value of our minority interest
in Netzee is based in part on the fair market value of Netzee's common stock as
reported on the Nasdaq National Market. As of December 31, 2001, the carrying
value of our investment in Netzee was $1.5 million, which was less than the
market value of $1.6 million as of that date. As of March 25, 2002, the market
value of our investment in Netzee is approximately $560,000. If Netzee becomes
unable to continue as a going concern, we will have to write down the carrying
values of our investment in and our outstanding advances to Netzee. If we take
these actions, our stock price may be adversely affected.
We could face liabilities due to our large stock ownership of Netzee and the
number of our directors who also serve as directors of Netzee.
Because we own approximately 28% of Netzee's outstanding common stock and
two of Netzee's six directors are also directors of InterCept, 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 in and director relationships 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.
40
RISKS RELATED TO OUR INDUSTRY
Because many of our competitors have significantly greater resources than we do,
we may be unable to gain market share.
Because our business includes a variety of products and services, we
generally face different competitors within each area of our business. In our
core banking and data processing business, we compete with numerous companies
that have national operations and significant assets. Our principal EFT
competitors include regional ATM networks, regional and local banks that perform
processing functions, non-bank processors and other independent technology and
data communications organizations. In each of these areas, many of our
competitors have longer operating histories, greater name recognition and
substantially greater resources than we do. If we compete with them for the same
geographic market, their financial strength could prevent us from capturing
market share in those areas. In addition, the competitive pricing pressures that
would result from an increase in competition from these companies could have a
material adverse effect on our business, financial condition and results of
operations. Some of our competitors have established cooperative relationships
among themselves or with third parties to increase their ability to address
customer needs. Accordingly, new competitors or alliances among competitors may
emerge and rapidly acquire significant market share.
We cannot assure you that we will be able to compete successfully with
existing or new competitors. If we fail to adapt to emerging market demands or
to compete successfully with existing and new competitors, our business,
financial condition and results of operations would be materially adversely
affected.
If current legal actions against Visa and MasterCard result in a reduction of
the interchange fees those companies may charge, our revenues may decrease.
We generate a significant amount of revenue from interchange fees, which
are the interbank fees paid by merchants when they accept credit and debit
cards. The interchange fees are set by Visa and MasterCard. Visa and MasterCard
have been sued by the Department of Justice, or DOJ, for alleged violation of
the Federal antitrust laws arising out of their respective functionally
identical policies of (a) allowing members in the respective organization to
issue cards participating in the other organization's system, and (b)
prohibiting their members from issuing cards in competing systems other than
Visa, MasterCard or Citigroup, the largest owner/member of Visa and MasterCard.
The potential impact of this litigation on us depends upon whether or not the
DOJ is successful, and if it is successful, the relief ordered by the court.
Visa and MasterCard also have been sued in a class action case brought by
merchants who allege that Visa and MasterCard's tying rules - which require
merchants who accept Visa and MasterCard credit cards to accept all cards
associated with their logos, including debit cards - violate antitrust laws. The
merchants contend that the Visa and MasterCard interchange fees for debit cards
are too high and that they should be able to choose whether to accept those
debit cards. If this class action lawsuit is successful and the interchange fees
that Visa and MasterCard charge merchants are reduced, the revenues that we
derive from interchange fees could be materially reduced.
41
Community financial institutions are subject to industry consolidation, and we
may lose customers with little notice.
We market our products and services primarily to community financial
institutions. Many large financial institutions perform their own transaction
processing and data communications management and therefore do not use third
party providers like us. The banking industry is prone to consolidations that
result from mergers and acquisitions. Our existing customers may be acquired by
or merged with other financial institutions. Any purchase or merger may result
in a lost customer for us because the acquiring financial institution may not
use our products and services. Although we have included in most of our
contracts a charge for early termination of the contract without cause, these
charges would be insufficient to replace the recurring revenues that we would
have received if the financial institution had continued as a customer.
The banking industry is highly regulated, and changes in banking regulations
could negatively affect our business.
Our banking customers are subject to the supervision of several state and
federal government regulatory agencies. If bank regulations change, or if new
regulations are adopted to regulate the products and services offered or used by
community financial institutions, we could suffer an increase in the costs of
providing our products and services. Moreover, if any new or revised regulations
diminish the need for our services, we could lose customers and suffer a decline
in revenues.
We are subject to government and private regulation, and an increase in
regulatory requirements or tax burdens could place a strain on our business.
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 those recommendations to continue our data processing operations. If
we fail to comply with these regulations, our operations and processing revenues
could be negatively affected.
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 as a result of such legislation, then our EFT revenues
may decline. Furthermore, we are subject to the regulations and policies of
various ATM and debit card associations and networks. If we lost our privileges
to provide transaction processing services across these networks, our revenues
from ATM and debit card transaction processing would decrease significantly.
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. If we are required to bear
all or a portion of these costs and are unable to pass these costs through to
our customers, our financial condition and results of operations would be
adversely affected.
42
RISKS RELATED TO OUR PENDING ACQUISITIONS OF IBILL AND EPX
Our revenues from the sale of services to merchants who use Visa and MasterCard
are dependent upon our continued Visa and MasterCard certification and financial
institution sponsorship, and loss or suspension of this certification and
sponsorship could adversely affect our business.
To provide our transaction processing services, we must be designated a
certified processor by, and be a member service provider of, MasterCard and be
designated as an independent sales organization of Visa. This designation
depends on our being sponsored by member clearing banks of both organizations
and our continuing adherence to the standards of the Visa and MasterCard
associations. The member financial institutions of Visa and MasterCard, some of
which are our competitors, set the standards with which we must comply. If we
fail to comply with these standards, our designation as a certified processor, a
member service provider or an independent sales organization could be suspended
or terminated. The termination of our member service provider status or our
status as a certified processor, or any changes in the Visa and MasterCard rules
that prevent our registration, or otherwise limit our ability to provide
transaction processing and marketing services for the Visa or MasterCard
organizations, would result in the loss of business from Visa or MasterCard
issuing customers, and lead to a severe reduction in our revenues.
If our charge-back rate becomes excessive, credit card associations can fine us
or terminate our ability to accept credit cards for payment.
In cases of fraud or disputes between cardholders and merchants, we face
charge-backs when cardholders dispute items for which they have been billed.
Charge-backs may arise from the unauthorized use of the cardholder's name or
bank account information or from a cardholder's claim that a merchant failed to
perform. If a billing dispute between a credit card holder and a merchant is not
resolved in favor of the merchant, the transaction is normally charged back to
the merchant, and the purchase price is refunded to the cardholder. If our
charge-back rate becomes excessive, credit card associations can fine us or
terminate our ability to accept credit cards for payment. If we are prohibited
from accepting credit cards for payment, our ability to compete could be
impaired and our business would suffer.
In the third quarter of 2001, Visa determined that iBill violated its
operating rules by having excessive charge-backs which resulted in fines. We may
incur excessive charge-backs in the future that could result in additional fines
or the termination of our ability to accept credit cards for payment, either of
which would adversely affect our financial condition and results of operations.
Changes in card association fees, products or practices could increase our costs
or otherwise limit our operations.
From time to time, Visa, MasterCard, Discover, American Express and Diners
Club increase the organization and/or processing fees (known as interchange
fees) that they charge for each transaction using their card. For example, in
April 1999 Visa and MasterCard increased their fees by up to 10%. Competitive
pressures might force us to absorb a portion of those increases in the future,
which would increase our operating costs and reduce our margins. Furthermore,
the rules and regulations of the various card associations and networks
prescribe certain capital requirements. Any increase in the capital level
required would further limit our use of capital.
Online payment processing systems might be used for illegal or improper
purposes, which could expose us to additional liability and harm our business.
Despite our efforts to review and monitor the types of transactions we
process, all online payment processing systems remain susceptible to potentially
illegal or improper uses. These may include
43
illegal online gaming, fraudulent sales of goods and services, software and
other intellectual property piracy, child pornography trafficking, prohibited
sales of alcoholic beverages and tobacco products and online securities fraud.
Our business could suffer if customers use our system for illegal or improper
purposes.
Our product features may infringe claims of third-party patents, which could
affect our business and profitability.
We could be sued for patent infringement. If we are unable to defend
ourselves successfully against these lawsuits, we could be required to
restructure our payment system, stop offering our payment product altogether, or
pay substantial damages. If all or any portion of our service were found to
infringe a patent and we are unable to obtain a license, or if a preliminary
injunction were issued, we could be required to restructure our payment system,
stop offering our payment product altogether, or pay substantial damages, which
could have a material adverse effect on our business, prospects, results of
operations and financial condition. We could be sued at any time in the future
by persons claiming patent infringement. iBill is presently defending a patent
infringement lawsuit. If all or any portion of our services were found to
infringe this patent, we could be required to restructure our payment system,
stop offering our payment product altogether or pay substantial damages. Even if
we prevail in a lawsuit, litigation can be expensive and can consume substantial
amounts of management time and attention.
Because some of the transactions iBill processes are for the adult entertainment
industry, our reputation with our customers and in the investment community may
be harmed and the price of our common stock may decline.
iBill processes transactions for merchants in many different industries,
including the adult entertainment industry. Certain current and potential
customers as well as investors, lenders, and others may be reluctant or refuse
to do business with us, participate in the market for our common stock, provide
financing, or offer related services because we process transactions for the
adult entertainment industry. This may negatively affect our business, financial
results, the price of our common stock or limit our ability to raise capital in
the future.
Our customers may not adopt our online payment methods as soon as we intend,
which would limit our growth and may cause our stock price to decline.
Our future profitability will depend, in part, on our ability to implement
our strategy to increase adoption of our online payment methods. We cannot
assure you that the relatively new market for online payment mechanisms will
remain viable. We expect to invest substantial amounts to:
o drive merchant awareness of electronic payments;
o encourage merchants to sign up for and use our electronic payment
products;
o enhance our infrastructure to handle seamless processing of
transactions;
o continue to develop our technology; and
o diversify our customer base.
We may fail to increase the adoption of our electronic payment methods as
we intend, which would adversely impact revenues and cause our business to
suffer.
44
We face strong competition in the merchant processing and online processing
businesses.
In our online processing business we will compete with other online
processing companies like Global Payment Technologies, Inc. and PayPal, Inc. In
our merchant processing business, we will compete with large merchant processors
like Chase Merchant Systems, National Processing, Paymentech, U.S. Bancorp,
First Data, Concord EFS and others. In each of these areas, many of our
competitors have longer operating histories, greater name recognition and
substantially greater resources than we do. We cannot assure you that we will be
able to compete successfully with these and other existing or new competitors.
OTHER RISKS OF OWNING OUR STOCK
A few people control a large portion of our stock and may vote their shares in
ways contrary to your interests.
Our executive officers and directors beneficially own approximately 21.2%
of our outstanding common stock as of March 15, 2002. As a result, our executive
officers and directors can exercise control over our company and have the power
to influence the election of a majority of the directors, the appointment of
management and the approval of actions requiring a majority vote of our
shareholders. Their interests may conflict with your interest as a shareholder,
and they could use their power to delay or prevent a change in control, even if
a majority of the shareholders desired a change.
Future sales of shares of our common stock may negatively affect our stock
price.
To carry out our growth strategies, we plan to acquire other businesses and
products using a combination of our stock and cash, and we may also sell
additional shares of our stock to raise money for expanding our operations.
Sales of substantial amounts of common stock in the public market or the
prospect of such sales could adversely affect the market for our common stock.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. As of March 1,
2002, we had 18,143,033 shares of common stock outstanding and options
outstanding to acquire an additional 3,088,817 shares of common stock. If SLM
earns any portion or all of the 392,140 shares of our common stock potentially
issuable to it under our purchase agreement with SLM, your ownership interest in
our company would be diluted. Additionally, we have reserved 500,000 shares of
common stock for issuance pursuant to our employee stock purchase plan which
became effective on July 1, 2001, and any issuance pursuant to this plan would
also dilute your ownership interest in our company.
The failure to sustain our current growth rates or to achieve expected growth
rates could adversely affect the price of our common stock.
We have experienced significant growth since our inception. Our revenues
have increased from $33.3 million in 1998 to $130.8 million in 2001. This
revenue growth is attributed to both the internal growth of our business, as
well as revenue growth achieved through acquisitions we have completed. Either
our internal growth rate or our total growth rate, or both, may decline
significantly in the future due to factors within or beyond our control. Our
failure to sustain current growth rates, or achieve growth rates expected by
stock market analysts, could have a material adverse impact on the trading price
of our common stock.
45
Georgia law, our articles of incorporation and bylaws and some of our employment
agreements contain provisions that could discourage a third party from
attempting to acquire your shares at a premium to the market price.
Some provisions of our articles of incorporation, our bylaws and Georgia
law make it more difficult for a third party to acquire control of our company,
even if a change in control would be beneficial to our shareholders. Some of our
executive officers have entered into employment agreements with us that contain
change in control provisions. These provisions may discourage or prevent a
tender offer, proxy contest or other attempted takeover. In addition, we have in
the past and may in the future create and issue new classes of preferred stock
that have greater rights than our common stock. These superior rights may
include greater voting rights, entitlement to dividends and preferential
treatment in the event of a change in control, liquidation, consolidation or
other circumstances. Any shares of preferred stock that we issue may discourage
a third party from attempting to acquire our shares of common stock at a premium
price.
We cannot predict every event and circumstance that may impact our business
---------------------------------------------------------------------------
and, therefore, the risks and uncertainties discussed above may not be the only
- -------------------------------------------------------------------------------
ones you should consider. The risks and uncertainties discussed above are in
- ----------------------------------------------------------------------------
addition to those that apply to most businesses generally. In addition, as we
- -----------------------------------------------------------------------------
continue to grow our business, we may encounter other risks of which we are not
- -------------------------------------------------------------------------------
aware at this time. These additional risks may cause serious damage to our
- --------------------------------------------------------------------------
business in the future, the impact of which we cannot estimate at this time.
- ---------------------------------------------------------------------------
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 15, 2002, no borrowings were outstanding under
this facility. Any future borrowings will increase our exposure to interest rate
fluctuations. Changes in interest rates that 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.
We have loaned SLM $7.0 million and we have a $14.0 million line of credit
to Netzee. As of March 25, 2002, $10.5 million was outstanding on the Netzee
line of credit. Changes in interest rates that decrease the interest rates on
these loans will decrease our interest income.
ITEM 8. 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-26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
46
PART III
As permitted by applicable SEC rules, we have omitted some information
required by Part III 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
annual report. Some information to be included in that proxy statement is
incorporated by reference into this annual report.
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 2002 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 2002 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 2002 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 2002 annual meeting of shareholders under the heading
"Corporate Governance."
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
Our consolidated financial statements as of December 31, 2000 and 2001
and for each of the three years in the period ended December 31, 2001,
together with the report thereon of Arthur Andersen LLP, dated
February 15, 2002, appear on pages F-1 to F-26 of this Annual Report
and are incorporated into this Item by reference.
2001 Financial Statement Schedules
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT
SCHEDULE
To InterCept, Inc.:
We have audited in accordance with auditing standards generally
accepted in the United States, the financial statements of InterCept,
Inc. (formerly The InterCept Group, Inc.) included in this Form 10-K
and have issued our report thereon dated March 29, 2002. 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.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 29, 2002
The following financial statement schedule of the registrant and
related independent auditors' report are included in this Report on
Form 10-K:
Page
----
Independent Auditors' Report F-2
Schedule II-Valuation and Qualifying Accounts 48
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
The registrant owns 28% of the outstanding common stock of Netzee,
Inc. The consolidated financial statements of Netzee, Inc. as of
December 31, 2000 and 2001 and for each of the three years in the
period ended on December 31, 2001, together with the report thereon of
Arthur Andersen LLP, dated February 15, 2002, with the exception of
preferred stock and lines of credit in Note 21 which is dated
March 29, 2002, are filed as Exhibit 99.2 to this Annual Report.
Schedule II Valuation and Qualifying Accounts (in thousands)
Beginning Acquisition Charges to Ending
Description Balance reserves Expense Deductions Balance
----------- --------- ----------- ---------- ---------- -------
1999 Restructuring
reserve related to
acquisition $110 $100 $ 0 $159 $ 51
2000 Restructuring
reserve related to
acquisition $ 51 $ 0 $ 0 $ 51 $ 0
2001 Restructuring
reserve related to
acquisition $ 0 $ 0 $281 $ 52 $229
48
Beginning Acquisition Charges to Ending
Description Balance Reserves Expense Writeoffs Balance
----------- --------- ----------- ---------- --------- -------
1999 Allowance for
Doubtful Accounts $170 $190(a) $125 $ (99) $386
2000 Allowance for
Doubtful Accounts 386 0 903 (648) 641
2001 Allowance for
Doubtful Accounts 641 300(a) 918 (913) 946
(a) Amounts associated with current year acquisitions.
(b) Reports on Form 8-K.
On December 24, 2001, the registrant reported under Item 5 of Form 8-K a
loan to SLMsoft.com Inc.
(c) Exhibits
The exhibits listed in the accompanying exhibit index are filed as part of
this Annual Report on Form 10-K.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
InterCept, Inc.
By: /s/ John W. Collins
---------------------------------------------
John W. Collins
Chairman and Chief Executive Officer
Date: March 29, 2002
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 on 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 Chief March 29, 2002
- ------------------------------------------
John W. Collins Executive Officer (principal
executive officer)
/s/ Scott R. Meyerhoff Senior Vice President, Chief March 29, 2002
- ------------------------------------------
Scott R. Meyerhoff Financial Officer and Secretary
(principal financial and
accounting officer)
/s/ Donny R. Jackson Director March 28, 2002
- ------------------------------------------
Donny R. Jackson
/s/ Jon R. Burke Director March 28, 2002
- ------------------------------------------
Jon R. Burke
/s/ Boone A. Knox Director April, 1, 2002
- ------------------------------------------
Boone A. Knox
50
/s/ John D. Schneider, Jr. Director March 28, 2002
- ------------------------------------------
John D. Schneider, Jr.
/s/ Glenn W. Sturm Director March 29, 2002
- ------------------------------------------
Glenn W. Sturm
51
INTERCEPT, INC.
AND SUBSIDIARIES
(FORMERLY THE INTERCEPT GROUP, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 2000 AND 2001
TABLE OF CONTENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2000 and 2001 (as
revised for 2000)
Consolidated Statements of Operations for the Years Ended December 31,
1999, 2000, and 2001 (as revised for 1999 and 2000)
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1999, 2000, and 2001 (as revised for 1999 and
2000)
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 2000, and 2001 (as revised for 1999 and 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterCept, Inc.:
We have audited the accompanying consolidated balance sheets of InterCept, Inc.
(formerly The InterCept Group, Inc.) (a Georgia corporation) AND SUBSIDIARIES as
of December 31, 2000 and 2001 (2000 as revised - see Note 2) 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, 2001 (1999
and 2000 as revised - see Note 2). 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 InterCept, Inc. and
subsidiaries as of December 31, 2000 and 2001 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 29, 2002
F-2
INTERCEPT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(in thousands, except share amounts)
December 31, December 31,
ASSETS 2000 2001
- ---------------------------------------------------------------------------- ------------- -------------
(as revised)
CURRENT ASSETS:
Cash and cash equivalents $ 8,061 $ 24,917
Short-term investments 37,484 50,289
Accounts receivable, less allowance for doubtful accounts of $641 and
$946 in 2000 and 2001, respectively 9,960 20,271
Current portion of advances to SLM 5,000 7,025
Deferred tax assets 1,666 1,470
Inventory, prepaid expenses, and other 3,023 8,973
------------ ------------
Total current assets 65,194 112,945
PROPERTY AND EQUIPMENT, net 16,883 28,108
INTANGIBLE ASSETS, net 24,786 128,204
ADVANCES TO NETZEE, (Note 13) 15,000 10,118
INVESTMENT IN AFFILIATE (Note 4) 17,729 1,462
OTHER NONCURRENT ASSETS 2,534 2,431
------------ ------------
$142,126 $283,268
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 45 $ 0
Accounts payable and accrued liabilities 3,188 10,143
Deferred revenue 5,054 9,315
------------ ------------
Total current liabilities 8,287 19,458
LONG-TERM DEBT, less current maturities 4,513 465
DEFERRED TAX LIABILITY 7,201 2,867
DEFERRED REVENUE 453 445
------------ ------------
Total liabilities 20,454 23,235
------------ ------------
MINORITY INTEREST 202 222
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000 shares authorized, none
issued and outstanding in 2000 and 2001, respectively 0 0
Common stock, no par value; 50,000,000 shares authorized, 13,197,139
and 18,086,766 shares issued and outstanding in 2000 and 2001,
respectively 109,340 243,293
Retained earnings 12,127 16,571
Accumulated other comprehensive income (loss) 3 (53)
------------ ------------
Total shareholders' equity 121,470 259,811
------------ ------------
$142,126 $283,268
============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
F-3
INTERCEPT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(in thousands, except per share amounts)
Year Ended December 31
---------------------------------------
1999 2000 2001
------------ ------------ ----------
(as revised) (as revised)
REVENUES:
Service fee income $39,677 $ 55,289 $114,590
Data communications management income 5,163 6,002 7,424
Equipment and product sales, services, and other 7,519 8,348 8,758
------- -------- --------
Total revenues 52,359 69,639 130,772
------- -------- --------
COSTS OF SERVICES:
Cost of service fee income 11,145 16,198 42,745
Cost of data communications management income 3,561 4,404 5,528
Cost of equipment and product sales, services, and other 5,746 6,350 6,724
------- -------- --------
Total costs of services 20,452 26,952 54,997
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 20,992 27,017 42,504
DEPRECIATION AND AMORTIZATION 4,462 4,403 11,483
------- -------- --------
Total operating expenses 45,906 58,372 108,984
------- -------- --------
OPERATING INCOME 6,453 11,267 21,788
INTEREST EXPENSE (718) (202) (540)
INTEREST AND OTHER INCOME, NET 39,890 12,027 3,207
------- -------- --------
INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES, EQUITY IN LOSS
OF AFFILIATE, AND MINORITY INTEREST 45,625 23,092 24,455
PROVISION (BENEFIT) FOR INCOME TAXES 12,804 (2,454) 3,144
EQUITY IN LOSS OF AFFILIATE (15,352) (30,710) (16,848)
MINORITY INTEREST (120) (28) (19)
------- -------- --------
NET INCOME (LOSS) 17,349 (5,192) 4,444
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding losses arising during period (94) (89) (56)
-------- -------- --------
Total comprehensive income (loss) $17,255 $ (5,281) $ 4,388
======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $1.72 $(0.41) $0.29
======= ======== ========
Diluted $1.64 $(0.41) $0.27
======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-4
INTERCEPT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(in thousands, except share amounts)
Accumulated
Other Retained
Common Stock Comprehensive Earnings
---------------------- Income (Accumulated
Shares Amount (Loss) Deficit) Total
--------- --------- ------------- ------------ ---------
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 (as revised) 0 0 0 17,349 17,349
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 (as revised) 10,450,472 42,657 92 17,319 60,068
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 0 (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 (as revised) 0 0 0 (5,192) (5,192)
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 (as revised) 13,197,139 109,340 3 12,127 121,470
Release of shares held in escrow related to acquisition 17,500 0 0 0 0
Issuance of common stock in connection with exercise of
stock options 218,310 2,405 0 0 2,405
Interest earned on note receivable from shareholder 0 (5) 0 0 (5)
Repayment of note received from shareholder for exercise
of stock options 0 221 0 0 221
Income tax benefits related to exercises of stock options 0 1,593 0 0 1,593
Issuance of common stock in connection with acquisitions 946,525 22,032 0 0 22,032
Net income 0 0 0 4,444 4,444
Unrealized loss on investments, net 0 0 (56) 0 (56)
Issuance of common stock in connection with the employee
stock purchase plan 7,277 207 0 0 207
Issuance of stock to directors 15 1 0 0 1
Issuance of common stock, net of expenses 3,700,000 107,499 0 0 107,499
---------- --------- --------- --------- ---------
BALANCE, December 31, 2001 18,086,766 $243,293 $ (53) $ 16,571 $259,811
The accompanying notes are an integral part of these consolidated statements.
F-5
INTERCEPT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, 2001
(in thousands, except share amounts)
Year ended December 31
------------------------------------
1999 2000 2001
---------- -------- ---------
(as revised) (as revised)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 17,349 $(5,192) $ 4,444
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 1,920 2,348 4,437
Amortization 2,542 2,055 7,046
Amortization of loan costs 0 68 67
(Gain) loss on disposal of property and equipment 0 (15) 8
Minority interest 120 28 19
Deferred income tax provision 6,851 (7,735) (3,981)
Income tax benefit related to the exercise of stock options 129 696 1,593
Gain due to Netzee equity transactions (Note 3) (38,920) (7,993) (581)
Equity in loss of affiliate 15,352 30,710 16,848
Stock compensation charge 480 0 0
Changes in operating assets and liabilities, net of effects
of purchase acquisitions:
Accounts receivable (2,363) (1,075) (10,423)
Inventory, prepaid expenses, and other 619 (302) (3,719)
Other assets (51) (171) 212
Accounts payable and accrued liabilities 167 (3,252) 2,314
Deferred revenue 538 (1,131) (627)
--------- -------- ---------
Net cash provided by operating activities 4,733 9,039 17,657
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in note receivable 17 22 0
(Advances to) repayments from SLM for acquisition 0 (5,000) 5,000
(Advances to) repayments from Netzee, net (10,957) (4,043) 4,882
Advances to SLM under notes receivable, net (Note 13) 0 0 (4,114)
Capital contributions to affiliate (155) 0 0
Purchases of property and equipment, net (4,937) (7,444) (10,608)
Additions to capitalized software (539) (929) (1,236)
Purchase of businesses, net of cash acquired (1,222) (5,020) (87,933)
Increase in investments, net (240) (38,431) (12,861)
--------- -------- ---------
Net cash used in investing activities (18,033) (60,845) (106,870)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and line of credit 45,331 16,098 109,760
Payments on notes payable and line of credit (33,312) (24,363) (113,853)
Proceeds from issuance of common stock, net of expenses 74 66,019 110,107
Retirement of common stock 0 (32) 0
Payment of common dividends (15) 0 0
Payment of shareholder note 0 0 221
Payment of debt issuance costs (129) 0 (166)
--------- -------- ---------
Net cash provided by financing activities 11,949 57,722 106,069
--------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,351) 5,916 16,856
CASH AND CASH EQUIVALENTS, beginning of year 3,496 2,145 8,061
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 2,145 $ 8,061 $ 24,917
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 750 $ 157 $ 467
========= ======== =========
Cash paid for income taxes $ 3,989 $ 6,372 $ 6,465
========= ======== =========
Non-cash investing activities:
InterCept common stock issued for acquisitions, 844,017, 0, and
946,525 shares in 1999, 2000 and 2001, respectively $ 11,998 $ 0 $ 22,032
Netzee common stock issued for acquisitions, 6,016,137 shares in
1999 $ 69,086 $ 0 $ 0
The accompanying notes are an integral part of these consolidated statements.
F-6
INTERCEPT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 2000, AND 2001
1. ORGANIZATION AND NATURE OF BUSINESS
InterCept, Inc. ("InterCept"), formerly The InterCept Group, Inc., 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 in the United States. Over 1,900
of these community financial institutions have contracted with InterCept
for one or more of its technologies, products, and services, which include
electronic funds transfer transactions, core bank processing systems, check
imaging systems, and data communications management networks, laser
document printing and automated mailing services, as well as services
related to each of these products and systems.
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, partially to fund the operations of Netzee, Inc. ("Netzee")
and for other general working capital needs.
In August and September 2001, InterCept completed a public offering of its
common stock. Proceeds to InterCept from this offering including the
overallotment option (after deducting expenses related to the offering)
were approximately $107.5 million. Approximately $26.4 million of the
proceeds of this offering were used to pay certain debt and the remainder
has been or will be used for working capital and other general corporate
purposes, to fund future acquisitions, and to fulfill InterCept's
obligations under its revolving line of credit to Netzee.
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 InterCept Communications Technologies, Inc.,
SBS Data Services, Inc., C-TEQ, Inc., InterCept Services, LLC, ICPT
Acquisitions I, LLC, DPSC Acquisition Corp., InterCept TX I, LLC, InterCept
Output Solutions, LP, and InterCept Supply, LP as of December 31, 2001. In
addition, ProImage, Inc. ("ProImage"), a corporation in which InterCept has
a 67% ownership interest as of December 31, 2001, has been consolidated in
InterCept's financial statements since its inception, due to Intercept's
control of ProImage. Management of InterCept retains responsibility for all
the 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 represents the minority shareholder's proportionate share of the
equity and earnings of ProImage. In the third quarter of 1999, Direct
Access Interactive, Inc. ("Direct Access"), 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. ("Netzee"), 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 the statements of
operations, "equity in loss of affiliate." Because InterCept provided
unlimited funding to Netzee until the completion of Netzee's initial public
offering in
F-7
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, 2001, InterCept owned approximately 28% of
Netzee's common stock.
Revision of Financial Statements
During 1999 and 2000, Netzee issued shares of common stock at a price above
book value. In accordance with Staff Accounting Bulletin No. 51, InterCept
recorded corresponding gains to reflect the increase in the value of the
shares of Netzee that it owned, which are included in "investment in
affiliate" on InterCept's balance sheet. Because these gains are not
taxable until realized, InterCept recorded a deferred tax liability on its
balance sheet to reflect the amount of estimated tax that would be owed
upon sale of the shares.
Since its initial public offering, Netzee has reported operating losses.
Because InterCept used the equity method to account for its investment in
Netzee, InterCept recorded its proportionate share of Netzee's losses as a
reduction to "investment in affiliate," which reduced the book value of the
investment in Netzee. As InterCept recorded its equity in those losses, a
deferred tax benefit should have been recorded as a reduction against the
deferred tax liability recorded previously. As a result, InterCept's
previously reported results of operations have been revised to reflect a
deferred tax benefit in 1999 and 2000 as follows:
1999 2000
---------------------------- ---------------------------
As reported As revised As reported As revised
------------ ---------- ----------- ----------
Provision (benefit) for income taxes $ 20,212 $ 12,804 $ 9,216 $ (2,454)
Net income (loss) $ 9,941 $ 17,349 $ (16,862) $ (5,192)
Basic earnings (loss) per share $ 0.99 $ 1.72 $ (1.32) $ (0.41)
Diluted earnings (loss) per share $ 0.94 $ 1.64 $ (1.32) $ (0.41)
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 $37.5 million and $50.3 million at December
31, 2000 and 2001, 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 (loss). 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 certificates of deposit, short-term commercial paper and other
similar investments. Total realized gains related to these investments were
approximately $6,000 for the year ended December 31, 2001. Gross unrealized
gains and losses relating to these investments as of December 31, 2001 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:
F-8
Building and improvements 3 to 39 years
Machinery and equipment 3 to 30 years
Furniture and office equipment 3 to 10 years
Software licenses 3 to 7 years
Intangible Assets
Intangible assets include goodwill, customer contracts, capitalized product
technology, workforce in place, customer lists and relationships, patents
and trademarks, and a marketing agreement.
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 and Relationships
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 are being amortized over a period
of 5 years to 20 years, which represented the estimated average remaining
life of the contracts.
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 to ten years.
InterCept capitalizes software-development costs incurred from the time
technological feasibility of the software is established as evidenced by
the completion of a detailed program design until the software is saleable.
InterCept capitalized $539,000, $929,000 and $1.2 million in capitalized
software for 1999, 2000 and 2001, respectively. These costs are amortized
at the greater of the ratio of current product revenue to the total of
current and anticipated product revenue or on a straight-line basis over
the estimated economic life of the software, generally five years.
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 $140,000, $235,000, and $703,000
in 1999, 2000, and 2001, 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 and four of
InterCept's 2001 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.
Internally Developed Software Costs
InterCept applies the provisions of the American Institute of Certified
Public Accounts ("AICPA") Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires all costs related to the development of
internal use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized
over the estimated useful life of the software. During 1999, 2000, and
2001, InterCept capitalized approximately $290,000, $644,000, and $888,000
of costs related to the development of internal use software. These costs
are included in purchases of property and equipment, net in the
accompanying statements of cash flows. As of
F-9
December 31, 2001, this development project was still ongoing, and thus
amortization of these costs has not yet begun.
Segment Reporting
InterCept does not disclose segment information as it believes it has 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." Licensed hardware and installation revenue is recognized upon
installation, and maintenance fees are recognized over the term of the
maintenance period. InterCept sells certain of its software and hardware
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 is deferred and recognized over the period of the
lease, with the exception of revenue attributable to equipment, which is
recognized upon installation.
Minimum Lease Payments Receivable
As noted above, InterCept sells certain software and hardware products
under sales-type leases. At December 31, 2001, future minimum lease
payments receivable under non-cancelable leases are as follows (in
thousands):
2002 $361
2003 332
2004 183
2005 66
2006 0
-----
Total minimum lease payments receivable 942
Less amount representing interest (131)
-----
Present value of net minimum lease payments receivable 811
Less current maturities of lease payments receivable (290)
-----
Lease payments receivable, net of current portion $521
=====
The current and noncurrent portion of the lease payments receivable is
included in accounts receivable and other assets, respectively, in the
accompanying balance sheets.
Deferred Revenue
Deferred revenue represents the liability for advanced billings to
customers primarily related to license fees and maintenance contracts. 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 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
F-10
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. The Company also evaluates the amortization periods
assigned to its intangible assets to determine whether events or changes in
circumstances warrant revised estimates of useful lives.
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 assets when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. In assessing the realizability of
the deferred tax assets, management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income, and tax-planning
strategies.
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, 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.
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 (Loss)
Comprehensive income (loss) is the total of net income (loss) and all other
nonowner changes in shareholders' equity. For the years ended December 31,
1999, 2000, and 2001, other comprehensive loss consists of unrealized
holding losses on marketable securities of $150,000, $147,000, and $90,000,
respectively, net of related tax effects of $56,000, $58,000, and $34,000,
respectively. There were no gains realized on marketable securities in net
income (loss) for the year ended December 31, 1999, and thus, there were no
reclassification adjustments to comprehensive income. Realized gains of
approximately $8,000 and $6,000 were recognized and reclassified from
comprehensive income (loss) to interest and other income, net in the
accompanying statements of operations for the years ended December 31, 2000
and 2001, respectively.
F-11
New Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board ("FASB") approved
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 prospectively prohibits the pooling of interest method of
accounting for business combinations initiated after June 30, 2001. SFAS
No. 142 requires companies to cease amortizing goodwill that existed at
June 30, 2001. The amortization of existing goodwill ceased on December 31,
2001. Any goodwill resulting from acquisitions completed after June 30,
2001 will not be amortized. SFAS No. 142 also establishes a new method of
testing goodwill and other indefinite life intangible assets for impairment
on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit
below its carrying value. The adoption of SFAS No. 142 will result in
InterCept's discontinuation of amortization of its goodwill; however,
InterCept will be required to test its goodwill for impairment under the
new standard beginning in the first quarter of 2002, which could have an
adverse effect on InterCept's future results of operations if an impairment
occurs. InterCept has not yet completed its impairment analysis.
Amortization of goodwill for the years ended December 31, 1999, 2000, and
2001 totaled approximately $592,000, $1,137,000, and $4,034,000,
respectively.
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." The statement addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The statement
is effective for InterCept's 2003 fiscal year and is not expected to have a
material effect on InterCept's financial position or results of operations.
In August 2001, the FASB approved SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." The statement establishes a
single accounting model for the impairment or disposal of long-lived
assets. The statement supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and supercedes accounting and reporting under Accounting
Principles Board Opinion No. 30 for the disposal of a segment of a
business. The statement is effective for InterCept's 2002 fiscal year and
will be applied prospectively.
3. ACQUISITIONS
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 five years. The results of operations of the acquired business
have been included in InterCept's financial statements from the date of
acquisition. The agreement included contingent consideration based on
future revenues. During 2000 and 2001, approximately $50,000 and $7,000,
respectively, of contingent consideration was paid and was added to
goodwill.
On March 9, 1999, InterCept acquired Direct Access, 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 five 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. ("LEV")
and Data Equipment Services, Inc. LEV was a provider of core data
processing and Data Equipment Services was 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 tangible asset value of LEV 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 financial statements from the date of
acquisition.
F-12
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 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, 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 Corporation. The former shareholders of SBS Corporation
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 13). After the
merger, Direct Access sold all of the assets of SBS Corporation, 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 the
acquired assets 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 Corporation, which was added to
goodwill.
In August 1999, InterCept formed Netzee, 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 ("TIB"), 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 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.
F-13
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
these transactions, 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 Corporation in August 1999.
As a result of the issuance of the 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 Corporation discussed above. This put option expired
in November 1999 upon the completion of Netzee's initial public offering.
In 2000 and 2001, InterCept recognized additional gains under SAB No. 51
totaling approximately $8.0 million and $581,000, respectively, which is
included in interest and other income in the accompanying statements 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 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 acquisiton. The
consideration exceeded the net tangible assets acquired by approximately $5
million. This excess was allocated to the following intangible assets with
the following amortization lives:
Customer lists and relationships $1,350,000 7 to 20 years
Marketing agreement 825,000 20 years
Goodwill 2,775,000 7 to 20 years
During the second quarter of 2001, InterCept paid approximately $333,000 in
additional consideration related to one of the 2000 acquisitions, the
payment of which was contingent on future revenue growth. The agreement
includes additional contingent consideration of approximately $333,000 that
may be payable in 2002 and $834,000 that may be payable in 2003, depending
on future revenues. The additional payments will be recorded as purchase
price consideration if and when they are earned. During 2001, InterCept
also paid the final payment of $275,000 as well as approximately $130,000
in acquisition costs related to 2000 acquisitions.
On August 31, 2000, in a transaction accounted for as a pooling of
interests, InterCept acquired Advanced Computer Enterprises, Incorporated
("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 its 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. These shares were
all released from escrow during 2001. InterCept's financial statements
have been restated for all periods presented to include the results of
operations of ACE. There were no significant changes in accounting policies
as a result of the merger, and there were no intercompany transactions
prior to the merger.
For the year ended December 31, 1999 and the eight months in the period
ended August 31, 2000, ACE had revenues of $5.1 million and $3.4 million,
respectively, and net income of $89,000 and $68,000, respectively.
The following unaudited pro-forma consolidated financial information for
the year ended December 31, 1999 assumes that the following events had
occurred on January 1, 1999 (in thousands, except per share amounts):
o InterCept's acquisitions of Nova, Advance Data, Direct Access,
LEV, Data Equipment Services, and SBS Data
o InterCept's transfer of 450,000 shares of Direct Access common
stock in exchange for the nonremote banking operations of SBS
Corporation
F-14
o InterCept's recording of compensation expense related to equity
securities issued by Direct Access below fair market value in
August 1999
o InterCept's creation of Netzee and Netzee's merger with Direct
Access
o Netzee's acquisitions of the internet banking operations of TIB
and The Bankers Bank, Call Me Bill, and Dyad
o The deconsolidation of the operations of Netzee from InterCept's
operations
(unaudited, as revised)
1999
--------
Revenues $ 63,356
--------
Income before income taxes, equity in loss of affiliate
and minority interest $ 46,753
--------
Net loss $(7,217)
--------
Net loss per common share (diluted) $(0.69)
--------
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 period 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.
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 in cash and up to 1,253,942 shares
of InterCept common stock valued at approximately $28 million. Of the $40
million cash consideration, InterCept advanced $5 million to SLM in
December 2000 and paid SLM $32.5 million on January 4, 2001. A total of
$2.5 million was placed in escrow to satisfy unresolved contingencies
existing at the closing date and as of December 31, 2001 the balance in the
escrow is $0. Intercept also paid approximately $548,000 in additional
acquisition costs in 2001. Of the 1,253,942 shares of common stock, 609,682
were issued to SLM at closing and 258,388 shares will be kept in escrow for
up to two years to satisfy unresolved contingencies existing at the closing
date. As of December 31, 2001, 121,594 of the escrow shares had been issued
to SLM. The remaining 385,872 shares represent contingent consideration and
will be recorded as purchase price consideration if and when the
contingencies are resolved. Through December 31, 2001, InterCept has issued
an aggregate of 78,455 of those shares as a result of contingencies being
resolved; 52,071 of the contingent shares have been foregone. The
consideration for the assets InterCept purchased from SLM exceeded their
net tangible asset value by approximately $58.2 million, which was
allocated as follows:
o $31.7 million to goodwill amortized over a period of 20 years
o $1.5 million to product technology and amortized over a period of
10 years
o $24.5 million to customer relationships and amortized over a
period of 20 years
o $500,000 to workforce and amortized over a period of 4 years
InterCept has accounted for the acquisition as a purchase. InterCept has
included the results of operations of the acquired business in its
financial statements from the date of acquisition. During the second
quarter of 2001, InterCept announced plans to consolidate the operations of
its two Houston, Texas, data center facilities, one of which was acquired
from SLM, into a new facility. The closing and relocating of both
facilities was completed during the second quarter. In connection with the
consolidation of the facilities, InterCept recorded a restructuring charge
of approximately $405,000 during the quarter ended June 30, 2001, which is
included in selling, general, and
F-15
administrative expenses in the accompanying statements of operations.
The charge includes approximately $93,000 of severance related to several
employees terminated during the second quarter and approximately $312,000
of facility closure costs. The facility closure costs include moving
expenses and other miscellaneous costs incurred after operations ceased in
addition to the noncancelable operating lease obligation on the existing
facility. All costs were expensed as incurred with the exception of the
lease obligation which was accrued. As of December 31, 2001, $229,000 was
accrued for the lease obligation, which is included in accrued liabilities
in the accompanying balance sheet. The amount represents the total
remaining lease payments, less management's estimate of rental income that
may be received by subleasing the facility during the remaining lease term.
In February 2001, InterCept acquired DPSC Software, Inc. ("DPSC") from
Netzee for consideration, which included approximately $14.1 million in
cash, $79,000 in additional acquisition costs, and the assumption of $2.4
million of DPSC's net liabilities. InterCept's purchase price exceeded the
net tangible asset value of DPSC by approximately $15.7 million, which was
allocated as follows:
o $9 million to goodwill and amortized over a period of 16 years
o $975,000 to product technology and amortized over a period of
10 years
o $5.1 million to customer contracts and amortized over a period of
16 years
o $100,000 to workforce and amortized over a period of 4 years
o $500,000 to patents and trademarks being amortized over 20 years
InterCept accounted for this acquisition as a purchase.
During 2001 through June 30, 2001, InterCept completed two other
acquisitions for total consideration of $7.5 million, net, in cash. The
consideration exceeded the net tangible asset values of these acquisitions
by approximately $5.4 million, which was allocated to customer
relationships and goodwill and is being amortized over periods of 10 to
16 years and 20 years, respectively. InterCept accounted for these
acquisitions as purchases. The results of operations of the acquired
assets are included in InterCept's financial statements from the date of
acquisition.
In October 2001, InterCept acquired substantially all of the assets of
Holmes and Shaw, Inc., and Superior Forms, Ltd. (together, "HSI").
Consideration for this purchase was approximately $24.2 million cash and
assumed liabilities. The consideration exceeded the tangible asset values
of HSI by approximately $23.7 million, which was allocated as follows:
o $10.3 million to customer relationships and amortized over a
period of 7 years
o $13.4 million to goodwill
All goodwill is expected to be deductible for tax purposes.
In October 2001, InterCept also acquired substantially all of the assets of
First Item Processing Corporation ("FIP"), a company which provided item
processing services in Florida. Consideration totaled approximately
$750,000. The agreement also includes contingent consideration of $206,500
that will be paid and recorded as purchase price consideration if and when
the contingencies are resolved. The consideration exceeded the tangible
asset values of FIP by approximately $848,000 which was allocated as
follows:
o $100,000 to customer relationships and amortized over a period
of 10 years
o $748,000 to goodwill
All goodwill is expected to be deductible for tax purposes.
F-16
The results of the operations of both HSI and FIP have been included in
InterCept's consolidated financial statements from the date of acquisition.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of the acquisitions (in
thousands).
HSI FIP
---------- ------------
$
Current assets $ 1,147 0
Property and equipment 500 33
Other assets 10 0
Customer relationships 10,300 100
Goodwill 13,371 748
---------- ------------
Total assets acquired 25,328 881
Current liabilities (1,118) (131)
---------- ------------
Net assets acquired $ 24,210 $ 750
========== ============
The purchase price allocations for these 2001 acquisitions are preliminary
and will be completed within one year of the acquisition.
The following unaudited pro-forma consolidated financial information for
the years ended December 31, 2000 and 2001 assumes that all 2001
acquisitions had occurred on January 1, 2000 (in thousands, except per
share amounts):
December 31, December 31,
2000 2001
------------ ------------
Revenues $127,502 $140,096
Income before income taxes, equity in loss of 14,300 28,148
affiliate and minority interest
Net (loss) income (10,402) 6,730
Net (loss) income per common share (diluted) $ (0.77) $ 0.41
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 period presented
or of future operations of the combined entities.
F-17
4. INVESTMENT IN AFFILIATE
Investment in affiliate represents InterCept's interest in Netzee. As of
December 31, 2001, InterCept owned approximately 28% (944,000 common
shares) of Netzee. Based on the closing market price of Netzee's common
stock on December 31, 2001, the investment had a fair market value of
approximately $1.6 million. As of December 31, 2001, the book value of
InterCept's investment in Netzee was $1.5 million. In addition, InterCept
had advances due from Netzee of $10.1 million as of December 31, 2001 (Note
13). 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 or until the investment and advances are
reduced to $0. As of December 31, 2001, Netzee had 500,000 shares of
preferred stock outstanding which is convertible to 51,384 split adjusted
shares of common stock subject to certain events, and outstanding stock
options for 202,973 shares of common stock, all of which could dilute
InterCept's ownership of Netzee. Summarized financial information of Netzee
as of December 31, 2000 and 2001 is as follows (in thousands):
2000 2001
--------- -------
Net revenue $ 19,912 $25,764
Operating expense 115,150 84,386
Net loss from continuing operations (96,809) (58,622)
Net loss (97,161) (60,021)
Current assets 8,734 5,220
Noncurrent assets 97,981 27,281
Current liabilities 14,223 6,396
Noncurrent liabilities 22,902 14,373
Redeemable preferred stock 6,500 6,500
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 2001 consisted of the
following (in thousands):
2000 2001
--------- --------
Land and building $ 987 $ 1,338
Leasehold improvements 751 1,890
Machinery and equipment 13,919 23,523
Furniture and office equipment 1,535 2,300
Software 2,494 4,389
Construction in progress 4,821 6,515
--------- --------
24,507 39,955
Less accumulated depreciation (7,624) (11,847)
--------- --------
Property and equipment, net $16,883 $28,108
========= ========
F-18
6. INTANGIBLES
Intangibles at December 31, 2000 and 2001 are summarized as follows (in
thousands):
2000 2001
------- ---------
Goodwill $22,601 $ 86,011
Product technology 1,936 5,657
Customer contracts 1,634 45,216
Work force in place 200 800
Customer lists and relationships 1,350 0
Marketing agreement 825 825
Patents and trademarks 0 501
------- ---------
28,546 139,010
Less accumulated amortization (3,760) (10,806)
------- ---------
$24,786 $ 128,204
======= =========
7. LONG-TERM DEBT
Long-term debt at December 31, 2000 and 2001 consisted of the following (in
thousands):
2000 2001
------- ------
$50 million line of credit with First Union
National Bank, as amended; interest payable
at the LIBOR rate plus applicable margin as
defined (approximately 3.12% as of
December 31, 2001); payable in full on
June 1, 2004; guaranteed by substantially all
assets of InterCept $4,507 $459
Equipment under capital lease expiring July 2001 45 0
Other 6 6
------ ----
4,558 465
Less current maturities (45) 0
------ ----
$4,513 $465
====== ====
Future maturities of notes payable and line of credit at December 31, 2001
are as follows (in thousands):
2002 $ 0
2003 0
2004 465
-----
$ 465
=====
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. As of December 31, 2001, InterCept was in compliance with all
of its debt covenants.
F-19
8. INCOME TAXES
The components of income tax provision in the consolidated statements of
operations for the years ended December 31, 1999, 2000, and 2001 are as
follows (in thousands):
1999 2000 2001
------------ ----------- ---------
(as revised) (as revised)
Current expense $ 5,953 $ 5,281 $7,125
Deferred expense 6,851 (7,735) (3,981)
-------- ------- ------
Provision (benefit) for income taxes $ 12,804 $(2,454) $3,144
======== ======= ======
The income tax provision, as reported in the statements of operations,
differs from the amounts computed by applying federal statutory rates of
34% due to the following for the years ended December 31, 1999, 2000, and
2001 (in thousands):
1999 2000 2001
------------ ----------- ---------
(as revised) (as revised)
Federal income tax provision at statutory rate $15,513 $7,851 $8,315
Permanent tax/book basis differences, primarily
goodwill 2,864 398 283
Meals and entertainment 43 58 77
State tax provision, net of federal effect 1,807 914 807
Benefit for undistributed losses of affiliate (7,408) (11,670) (6,366)
Other (15) (5) 28
------- ------- ------
$12,804 $(2,454) $3,144
======= ======= ======
Benefit for undistributed losses of affiliate represents a deferred tax
benefit based upon the reduction of the excess of book basis over tax
basis of Intercept's investment in Netzee.
Deferred income tax assets and liabilities for 2000 and 2001 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, 2000 and 2001 are as follows (in thousands):
F-20
2000 2001
------------ ---------
(as revised)
Deferred tax assets:
Deferred revenue $ 1,514 $ 1,009
Accounts receivable reserves 191 359
Other 108 102
--------- ---------
Total gross deferred tax assets 1,813 1,470
--------- ---------
Deferred tax liabilities:
Intangible amortization 0 (58)
Accelerated depreciation (600) (1,414)
Investment basis difference (6,144) 0
Software development (604) (1,395)
---------- ---------
Total gross deferred tax liabilities (7,348) (2,867)
--------- ---------
Net deferred tax liability (5,535) (1,397)
Less current net deferred tax assets 1,666 1,470
--------- ---------
Noncurrent net deferred tax liabilities $(7,201) $(2,867)
========= =========
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, offset by decreases in the investment for InterCept's
equity in losses of Netzee.
9. 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") and/or nonqualified stock options
("NQSOs") and/or 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.
The 1996 Stock Option Plan provides for the granting of nonqualified stock
options to the directors of InterCept. The board of directors authorized
the issuance 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
10,000 shares, as amended, 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. Options granted to directors prior to December 31, 2001 expire 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. Options granted to directors after
December 31, 2001 expire ten years after the date of grant.
F-21
As of December 31, 2001, the maximum number of shares of common stock
reserved for issuance under the Plan was 3,156,352, and 12,143 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.
ProVesa, Inc. 1994 Stock Option Plan
InterCept assumed the ProVesa, Inc. 1994 Stock Option Plan ("ProVesa Plan")
in November 1996 in conjunction with an acquisition. In 1998, the board of
directors determined that no additional options would be issued under the
ProVesa Plan. Of the 42,106 options originally issued, 1,813 have been
exercised and 40,293 are outstanding as of December 31, 2001. The remaining
options outstanding expire in December 2004.
A summary status of InterCept's stock option plan as of December 31, 1999,
2000, and 2001 and changes during the years are presented below:
Price Weighted
------------------ Average Option
Shares Range Price
--------- ------------- --------------
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
Granted 963,750 $ 22.31-33.32 $25.15
Exercised (218,310) $ 2.37-26.88 $11.02
Terminated (49,373) $ 7.50-26.88 $21.28
---------
Outstanding at December 31, 2001 2,842,417 $ 2.16-33.32 $18.27
=========
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
$5,000 and in 2001 and was repaid in full in 2001. The note receivable and
related accrued interest are included in common stock in the accompanying
balance sheets.
On July 1, 2001, InterCept adopted the 2001 Employee Stock Purchase Plan
("ESPP"). The ESPP allows for eligible employees to participate in the
purchase of shares of InterCept's common stock at a price equal to the
lower of 85% of the closing price at the beginning or end of each quarterly
stock purchase period. The Company has authorized 500,000 shares of common
stock for issuance under the ESPP and issued 7,277 shares during the year
ended December 31, 2001.
F-22
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 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 and
ESPP 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 and stock purchase rights
granted since January 1, 1995 to employees of InterCept using the
Black-Scholes option pricing model prescribed by SFAS No. 123. The
following weighted average assumptions were used to value stock options:
1999 2000 2001
---- ---- ----
Risk-free interest rate 6.76% 5.05% 4.86%
Expected dividend yield 0% 0% 0%
Expected lives 7.0 years 8.9 years 7.0 years
Expected volatility 83.6% 83.4% 76.2%
The weighted average fair value of options for the stock granted to
employees of InterCept in 1999, 2000, and 2001 was $11.32, $18.83, and
$18.01 per share, respectively. The total value of options for InterCept's
stock granted to employees of InterCept during 1999, 2000, and 2001 was
computed as approximately $6,146,000, $14,757,000, and $17,302,000,
respectively, which would be amortized on a pro forma basis over the
vesting period of the options. The weighted average fair value of stock
purchase rights granted in 2001 computed using the Black Scholes option
pricing model was $9.73 per share. Assumptions include an expected life of
three months, weighted-average risk-free interest rate of 2.8% in 2001, and
other assumptions that are consistent with those used for the stock option
plans described above. If InterCept had accounted for these plans in
accordance with SFAS No. 123, InterCept's net income (loss) and net income
(loss) per common share for the years ended December 31, 1999, 2000 and
2001 would have been as follows (in thousands, except per share data):
1999 2000 2001
------------ ------------ --------
(as revised) (as revised)
Net income (loss) $15,880 $(477) $(5,444)
Net income (loss) per common
share--diluted $1.50 $(0.04) $(0.33)
F-23
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:
Options outstanding 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-$3.33 247,798 $ 2.19 4.6 247,798 $ 2.19
$ 6.66-$9.99 569,025 $ 7.38 6.4 495,434 $ 7.37
$10.00-$13.33 5,000 $13.00 7.4 0 $ 0.00
$13.34-$16.66 143,669 $15.87 7.5 92,498 $15.86
$16.67-$19.99 315,965 $18.15 7.8 162,633 $17.92
$20.00-$23.32 484,250 $22.36 9.1 56,667 $22.65
$23.33-$26.66 829,343 $24.87 8.9 190,798 $25.18
$26.67-$29.99 68,367 $28.04 8.3 25,902 $28.00
$30.00-$33.32 179,000 $32.04 9.6 38,333 $30.93
------------- ------------
2,842,417 1,310,063
At December 31, 1999, 2000, and 2001, 665,254, 910,772, and 1,310,063
options for InterCept's common stock with a weighted average exercise price
of $5.95, $7.91, and $12.65 per share, respectively, were exercisable by
employees of InterCept.
10. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share at December 31, 1999, 2000, and 2001 were as
follows (in thousands except per share amounts):
1999 2000 2001
-------------- -------------- -------------
(as revised) (as revised)
Basic:
Net income (loss) $ 17,349 $ (5,192) $ 4,444
============== ============== =============
Weighted average common shares outstanding 10,094,696 12,820,073 15,433,895
============== ============== =============
Per share amount $1.72 $(0.41) $0.29
============== ============== =============
Diluted:
Net income (loss) $ 17,349 $ (5,192) $ 4,444
============== ============== =============
Weighted average common shares outstanding 10,094,696 12,820,073 15,433,895
Shares assumed issued upon exercise of dilutive
stock options using the treasury stock method 451,350 0 826,381
Shares held in escrow to satisfy contingencies 17,500 0 136,794
-------------- -------------- -------------
Total 10,563,546 12,820,073 16,397,070
============== ============== =============
Per share amount $1.64 $(0.41) $0.27
============== ============== =============
Basic and diluted earnings per common share were computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. Outstanding stock options, with exercise
prices
F-24
above the average stock prices for each quarter (approximately 20,000,
294,000, and 81,000 shares in 1999, 2000, and 2001, 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.
11. 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'
contributions. This percentage is determined annually by InterCept.
InterCept's contributions approximated $148,000, $218,000, and $371,000 in
1999, 2000, and 2001, respectively.
12. COMMITMENTS AND CONTINGENCIES
InterCept leases various equipment and facilities under noncancelable
operating lease agreements. Future minimum annual obligations under these
leases as of December 31, 2001 are as follows (in thousands):
2002 $ 3,975
2003 3,157
2004 1,817
2005 1,242
2006 681
Thereafter 942
-------
Total $11,814
=======
Net rental expense was approximately $1,308,000, $1,739,000, and $3,216,000
during 1999, 2000, and 2001, respectively.
InterCept is subject to legal proceedings and claims that arise in the
ordinary course of business. However, management feels the amount of
potential liability with respect to these actions will not materially
affect the financial position or results of operations of the Company.
13. RELATED PARTY TRANSACTIONS
As discussed in Note 4, InterCept owned approximately 28% of Netzee as of
December 31, 2001. Two 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 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. Since December 15, 1999,
InterCept has provided Netzee with a revolving line of credit. Borrowings
on this line bear interest at a rate of prime plus 2%. As amended on March
29, 2002 InterCept provides Netzee a line of credit of approximately $14.0
million. The line of credit expires on April 10, 2003. As of December 31,
2001, Netzee owed approximately $10.1 million to InterCept, including
accrued interest of approximately $182,000. Total interest on all
borrowings for 2000 and 2001 was approximately $1.1 million and $1.1
million, respectively, and is included in interest and other income in the
accompanying statements of operations. Management has evaluated the
business and financial projections of Netzee and has concluded, based on
this review, that the amounts due from Netzee are collectible. Therefore, a
reserve has not been established for the note as of December 31, 2001.
InterCept and Netzee maintain a relationship to cross-market each other's
products and services. During 2000 and 2001, InterCept received $375,000
and $131,000, 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
$163,000 and $108,000 in 2000 and 2001, respectively, for these shared
costs. During 2000 and 2001, 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 and
2001, Netzee incurred approximately $435,000 and $152,000, respectively, in
costs to purchase the equipment, which included a fee to InterCept for its
services.
On May 31, 2001, InterCept entered into a loan agreement with SLM under
which InterCept loaned SLM $12 million, subject to various terms and
conditions. Borrowings under the loan agreement bore interest at an annual
F-25
rate equal to the one-month LIBOR plus 2% and were secured by the shares of
InterCept's common stock owned or potentially issuable to SLM. On August
13, 2001 SLM repaid the note, including accrued interest of $140,000, in
full.
On December 3, 2001, InterCept entered into a loan agreement with SLM under
which InterCept loaned SLM $7 million, subject to various terms and
conditions in exchange for cash and settlement of other indemnification
obligations in the acquisition agreement. Borrowings under the loan
agreement bear interest, payable upon maturity, at the prime rate and are
secured by up to 591,871 shares of InterCept common stock with a market
value of approximately $24.2 million at December 31, 2001 that SLM now
holds or may earn. The loan matures on September 30, 2002 and requires
mandatory prepayments from the proceeds of sales of InterCept common stock
by SLM until the loan is repaid in full. At December 31, 2001, the balance
on the loan was $7,025,000, including accrued interest of $25,000.
InterCept provides telecommunications network and operations services and
customer support services to SLM, as well as computer programming services.
InterCept recorded revenue of approximately $1.8 million related to
services provided to SLM in 2001. InterCept also charged SLM approximately
$200,000 during 2001 for rent and building expenses related to certain SLM
operations maintained at InterCept's facility which is included in interest
and other income, net.
During the years ended December 31, 1999, 2000, and 2001, InterCept
incurred fees of approximately $612,000, $745,000, and $1.0 million
respectively for legal services to a law firm, a partner of which is also
a director of InterCept.
InterCept provided telecommunications connectivity to Towne Services, Inc.
("Towne"). InterCept recorded revenue from Towne of approximately $215,000,
$236,000, and $173,000 during 1999, 2000, and 2001, respectively, which is
included in data communications management income. At December 31, 2000 and
2001, receivables from Towne were approximately $60,000 and $0,
respectively . During 1999, InterCept purchased software from Towne for
$825,000. Additionally, InterCept owned 10,000 shares of Towne common
stock, which was purchased in 1997. In August 2001, Towne entered a merger
agreement with Private Business under which InterCept's shares of Towne
were exchanged for 9,072 shares of Private Business common stock. Two
directors of InterCept served as directors of Towne. However, only one of
these directors is a director of Private Business. There have been no
transactions between InterCept and Private Business since the merger.
14. SUBSEQUENT TRANSACTIONS
On March 19, 2002, InterCept entered into a definitive agreement to acquire
the assets of Internet Billing Company, Ltd. ("iBill"), a Ft.
Lauderdale-based provider of transaction processing for Web merchants.
Separately, InterCept also signed a binding letter agreement to acquire
Electronic Payment Exchange, Inc. ("EPX"), a provider of transaction
processing services based in New Castle, Delaware.
InterCept agreed to pay iBill $112 million in cash plus additional
quarterly earnout payments for a period of six quarters ending December 31,
2003. The amount of each earnout payment depends on whether the acquired
business achieves certain financial targets and will be recorded as
additional purchase price consideration if and when it is earned. InterCept
has an option to buy out the remaining contingent earnout obligation at any
time by paying $8 million per remaining quarter. InterCept is not required
to close the iBill acquisition unless InterCept receives necessary
Hart-Scott-Rodino approval. If InterCept terminates the agreement for
anything other than the failure to obtain that approval or a severe service
outage at iBill, InterCept will be required to pay a termination fee of $5
million to iBill.
Under the terms of the EPX letter agreement, InterCept agreed to issue
1,377,339 shares of common stock to EPX's stockholders, 20% of which will
be placed in escrow to secure EPX's obligation to indemnify InterCept for
breaches of the representations and warranties in the acquisition
agreement. The number of shares to be issued assumes that EPX will have
approximately $12 million of liabilities at the time of the acquisition;
the number of shares will be adjusted depending on the ultimate liabilities
assumed. InterCept is required to close the EPX acquisition unless
InterCept fails to obtain necessary approvals for the acquisition,
including Hart-Scott-Rodino approval or is not satisfied with the results
of its due diligence procedures. If InterCept does not close the
transaction by April 23, 2002, InterCept will lend EPX $3 million pursuant
to a loan secured by EPX's intellectual property. The loan will bear
interest at the prime rate plus 1% and will be due on December 31, 2002.
F-26
EXHIBIT INDEX
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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).++
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).++
1
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 Asset Purchase Agreement dated and effective as of October 1,
2001, by and among The InterCept Group, Inc., InterCept Output
Solutions, LP, HSI Holdings, Inc., Superior Forms, Ltd., HSI
Properties, Ltd., Holmes & Shaw Limited, Inc., Holmes & Shaw
General, Inc., George V. Shaw, III and Vincent Investment
Company, Inc.
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 Scott R.
Meyerhoff dated as of February 1, 1998.*/**
10.6 Stock Option Agreement by and between InterCept and Donny R.
Jackson dated January 14, 1997.*/**
10.7 Stock Option Agreement dated as of February 1, 1998 by and
between InterCept and Scott R. Meyerhoff.*/**
10.8 Form of Indemnification Agreement entered into between InterCept
and its directors and officers.*
10.9 Form of General Marketing Agent Agreement.*
10.10 Channel Services Payment Plan Agreement dated December 22, 1993
between Intercept Systems, Inc. and BellSouth Communications,
Inc.*
10.11 Form of Special Service Arrangement Agreement with BellSouth
Telecommunications, Inc. for frame relay services.*
2
10.12 Form of SynchroNet Service Agreement with Southern Bell
Telephone and Telegraph Company.*
10.13 WorldCom Data Services Agreement dated as of February 27, 1998
by and between WorldCom, Inc. and InterCept Communications
Technologies, L.L.C.*+
10.14 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).**
10.15 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).**
10.16 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).**
10.17 Amended and Restated Credit Agreement dated as of February 2,
2001, by and among Netzee, Inc., John H Harland Company, and The
InterCept Group, Inc. (incorporated by reference to Exhibit 10.1
to Netzee's Current Report on Form 8-K dated February 2, 2001 and
filed February 16, 2001).
10.18 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). ++
10.19 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).++
10.20 Amendment No. 1 to Registration Rights Agreement between
InterCept and SLMsoft.com, Inc. dated May 31, 2001 (incorporated
by reference to Exhibit 10.4 in InterCept's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001).
10.21 Loan Agreement between The InterCept Group, Inc., and
SLMsoft.com, Inc. dated December 3, 2001.
10.22 Employment Agreement by and between The InterCept Group, Inc.
and G. Lynn Boggs dated as of February 19, 2002.
3
10.23 Loan and Security Agreement dated December 21, 2001, by and
among The InterCept Group, Inc., C-TEQ, Inc., SBS Data Services,
Inc., DPSC Acquisition Corp., ICPT Acquisition I, LLC, InterCept
Communications Technologies, Inc., InterCept Services, LLC,
InterCept TX I, LLC, InterCept Output Solutions, LP and InterCept
Supply, LP and First Union National Bank.
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 Letter from InterCept regarding letter from Arthur Andersen.
99.2 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.
4