<PAGE>
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, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to _________
Commission file number: 01-14213
THE INTERCEPT GROUP, INC.
(Exact name of registrant in its charter)
Georgia 58-2237359
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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:
Common Stock, no par value American Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the Registrant: (1) 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. [X]
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of Common Stock on
March 1, 1999, as reported on the American Stock Exchange, was approximately
$84,500,000. As of March 1, 1999, the Registrant had outstanding 9,255,678
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders to be held on June 15, 1999 are incorporated by reference in Part
III of this Form 10-K.
<PAGE>
Index of Form 10-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 12
Item 3. Legal Proceedings.................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................................. 12
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................ 12
Item 6. Selected Consolidated Financial Data................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 16
Item 7A. Quantitative and Qualitative Disclosure About Market Risk............................ 23
Item 8. Consolidated Financial Statements and Supplementary Data............................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................. 24
Part III
Item 10. Directors and Executive Officers of the Registrant................................... 25
Item 11. Executive Compensation............................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 25
Item 13. Certain Relationships and Related Transactions....................................... 25
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 25
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements appear in a number of places in this Annual Report and include
all statements that are not statements of historical fact regarding the intent,
belief or expectations of InterCept and its management. These statements are
based upon a number of assumptions and estimates which are subject to
significant uncertainties, many of which are beyond InterCept's control. Words
such as "may," "would," could," "will," "expect," "anticipate," "believe,"
"intend," "plan," and "estimate" are meant to identify such forward-looking
statements. Such forward-looking statements are not guarantees and actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially include, but are not limited to: InterCept's brief combined operating
history and whether it will be able to maintain profitability; whether it can
obtain and manage growth or execute agreements with new customers; whether it
can successfully locate, acquire and integrate new businesses and products;
customer attrition; whether the market will accept Intercept's new products and
services; increased competition; possible system failures and rapid changes in
technology; and other factors discussed in this Annual Report and in InterCept's
filings with the Securities and Exchange Commission, including its registration
statement on Form S-1 (No. 333-47197) declared effective on June 9, 1998 and the
"Risk Factors" section therein.
General
The InterCept Group, Inc. ("InterCept" or the "Company") designs, develops,
markets and implements a suite of fully integrated electronic commerce products
and services primarily for community financial institutions in the United
States. InterCept's products and services include electronic funds transfer
(EFT), data communications management, client/server enterprise software and
other processing solutions. InterCept serves over 690 financial institutions in
20 states and is the largest third-party processor of financial institutions'
automated teller machines ("ATMs") in the southeastern United States.
InterCept provides numerous EFT products and services, including ATM, point
of sale ("POS") and scrip debit services, debit card transactions including both
MasterMoney(TM) and Visa(R) Check cards, funds transfer and remote banking
services. The Company licenses its PC-based client/server enterprise software,
PC BancPAC(TM), which operates in a Windows NT(R) personal computing
environment. The Company maintains the "InterCept Frame Relay Network," one of
the largest private frame relay networks in the southeastern United States and
the principal conduit through which the Company processes EFT transactions and
manages the data communications needs of its customers. The Company offers its
financial institution customers numerous value-added products and services,
including item processing, branch automation, optical disk record storage and
retrieval, check imaging and on-line signature verification. The Company also
provides maintenance and technical support services, supplies ATMs, proof
machines and other banking related equipment, and offers numerous ancillary
products and services to community financial institutions.
InterCept's top 9 senior officers have an average of over 23 years of
industry experience and have expertise in multiple areas of electronic commerce
(including EFT and data communications management), enterprise software and
transaction processing for financial institutions. The Company's current market
focus is on community financial institutions, which the Company believes rely
heavily on third-party providers for a majority of their EFT, data
communications management, enterprise software and transaction processing
solutions, including the products and services offered by the Company. The
Company believes that its integrated suite of electronic commerce solutions
enables its customers to
1
<PAGE>
compete with larger financial institutions by allowing them to offer their
customers similar products and services on a cost-competitive basis.
Industry Background
Electronic commerce involves the transaction of business through the use of
telecommunications networks and computer systems that transmit and process
commercial information and business documents electronically. Electronic
commerce for the financial services industry includes value-added EFT services
such as ATM, POS, funds transfer, scrip debit services, remote banking and
universal access to funds. The Company believes that the demand of community
financial institutions and their customers for third-party electronic commerce
solutions has increased substantially in recent years and will continue to grow
in the future as a result of numerous financial, strategic and technological
factors. These factors include: (i) the desire by these financial institutions
to remain competitive with larger institutions by using sophisticated
technologies in their operations without the expense and resource commitment
required to maintain in-house systems; (ii) the need for rapid and secure
processing and transmission of large amounts of data to multiple locations;
(iii) the need to accommodate the Year 2000 data rollover problem; (iv) the
efforts of financial institutions to control costs and improve operating
efficiencies through the use of service bureau outsourcing alternatives; and (v)
the desire of financial service providers to focus on their primary product and
service offerings.
EFT Processing Services
EFT transaction processing involves the on-line processing of transactions
initiated by a consumer at a terminal using a debit or credit card issued by the
consumer's financial institution. Various transactions, including cash
withdrawals, transfers and balance inquiries, are initialized, authorized,
completed and recorded against the consumer's accounts. Although larger
financial institutions typically process their EFT transactions in-house, a
large number of community financial institutions traditionally have outsourced
EFT transaction processing to third-party processors. The Company believes that
increased card acceptance and usage, coupled with technological advances in
electronic transaction processing, have created a need for financial service
providers to offer a variety of EFT solutions and value-added services to their
customers. By aggregating the EFT transaction processing of numerous community
financial institutions, third party processors create economies of scale, which
allow them to price their services competitively.
Data Communications Management
EFT transaction processing mandates dependable and automated data
communications connectivity in a secure environment. The technologies involved
in EFT processing are deployed widely in publicly available communications
platforms, including online services, the Internet (including the World Wide
Web) and interactive telephone information systems (such as those provided by
many banks). These communications resources enable individuals to locate and
retrieve large amounts of information from a remote location using standard
devices such as telephones and personal computers. Personal computers have
various communications devices (e.g., modems, ISDN terminal adaptors and network
interface cards) that allow remote communication with other computers. The
growth in the number and types of communications devices has created what
InterCept believes is a large market in data communications management,
transaction processing and information exchange services.
2
<PAGE>
Enterprise Software
Changing technologies, business practices and financial products have
resulted in software-related issues of compatibility, scalability and increased
complexity for many financial institutions. The shift toward the client/server
processing environment has created the need for more user-friendly applications
and on-line support mechanisms and the integration of highly complex systems and
software with various telephony applications. The technology surrounding the
transmission, storage and retrieval of massive amounts of data has further
increased the complexity of data processing for financial institutions. In
addition, many existing software systems have a Year 2000 data rollover problem
because they do not store dates and process data using codes which are written
for four-digit years. These older systems may produce inaccurate information or
may even become inoperable at the turn of the century, and may not otherwise
offer the advanced technological capabilities provided by newer systems. As a
result, InterCept believes that financial institutions are demanding more
complete and flexible data communications, information technology, enterprise
software and processing solutions, as well as complementary products and
services.
Strategy
The Company's goal is to become one of the largest providers of fully
integrated electronic commerce products and services for community financial
institutions in the United States. To attain this goal, the Company plans to
grow significantly by implementing the following key strategies:
(i) Cross-Market to Existing Customer Base and Maximize Recurring Revenues.
InterCept plans to cross-market its EFT, data communications management,
client/server enterprise software and numerous ancillary products and services
to its existing customers, most of which already use the Company's EFT services.
The Company seeks to develop and maintain long-term customer relationships by
providing multiple electronic commerce products and services to community
financial institutions. Many of the Company's products and services generate
recurring revenues, which the Company defines as revenues from services used by
customers each month and year in connection with their ongoing business. The
Company intends to maximize its recurring revenues through these relationships
by enhancing and increasing the use of its various products and services. The
Company also plans to create and acquire additional sources of recurring
revenues to meet the evolving needs of its customers.
(ii) Expand Sales Force and Strategic Marketing Relationships. The Company
plans to expand its customer base and penetrate new geographic markets by hiring
sales personnel with expertise in community financial institutions' operations
and/or electronic commerce products and services similar to those offered by the
Company. InterCept has established relationships with several banking related
business organizations, including 10 of the 18 bankers' banks in the United
States, which provide the Company access to thousands of community financial
institutions nationwide. Bankers' banks are local or regional business
organizations that provide correspondent banking products and services to
financial institutions that could not provide them in an efficient manner
themselves due to cost, location, lack of resources or other circumstances. In
addition, bankers' banks provide financial support and business advice to
financial institutions with respect to various critical areas such as
operations, profitability and federal and state regulation. The Company believes
that the nature of the relationship between bankers' banks and community
financial institutions makes the Company's alliances with bankers' banks an
important part of its marketing strategy. InterCept intends to use its expanded
sales force to market its products and services
3
<PAGE>
directly to community financial institutions and to enhance its indirect
marketing efforts by developing additional strategic marketing relationships
with bankers' banks and various other business organizations.
(iii) Increase Data Communications Management and Optimize the InterCept
Frame Relay Network. InterCept intends to increase its data communications
management services by offering customized, cost-competitive telecommunications
connectivity to its customers and managing their data traffic in a reliable and
secure manner across the InterCept Frame Relay Network. During 1998, the Company
upgraded some of its processing and switching equipment and telecommunications
lines to improve the speed and efficiency of transaction processing across its
networks. The Company intends to enhance use of the InterCept Frame Relay
Network by selling additional communications services to its customers and by
expanding the InterCept Frame Relay Network into new geographic areas as
business warrants.
(iv) Complete Strategic Acquisitions. InterCept intends to acquire other
companies with complementary technologies or services that will enhance and
expand the products and services offered to existing customers, increase its
market share, expand its geographic presence or optimize the InterCept Frame
Relay Network. The Company has acquired several complementary businesses,
products and services and believes that its previous acquisitions have
strengthened its suite of products and services and expanded its geographic
presence into new markets. The Company plans to continue to integrate and
enhance the products and services it has acquired, pursue strategic acquisitions
of additional products and services and cross-market its expanded suite of
solutions to existing and future customers.
(v) Expand and Enhance its Products and Services. The Company has devoted
and will continue to devote resources to developing and enhancing its suite of
products and services. The Company plans to continue to combine its enhanced and
expanded electronic commerce solutions with sophisticated technology to help its
community financial institution customers remain competitive with other
financial service providers.
The InterCept Solution
The InterCept solution to addressing the complex and evolving needs of
community financial institutions is to continue to develop, enhance and provide
a comprehensive and flexible suite of fully integrated electronic commerce
products and services. These products and services include: (i) EFT transaction
services, including ATM, POS, scrip services, debit card transactions, funds
transfer, remote banking and universal access to funds; (ii) data communications
management services across the InterCept Frame Relay Network; (iii) client/
server enterprise software solutions to handle the core processing needs of
community financial institutions; (iv) other value-added products and services,
including item processing, branch automation, optical disk storage products,
check imaging and on-line signature verification; and (v) equipment, maintenance
and technical support and merchant credit card portfolio management services.
The Company seeks to maximize the benefits of available technologies to enable
it to deliver reliable data communications, client/server enterprise software
and transaction processing solutions and related products and services on a
cost-effective basis. The Company believes that each of its products and
services efficiently and effectively supports the various needs of community
financial institutions and that, when combined, its integrated electronic
commerce products and services offer community financial institutions a single
source for comprehensive electronic commerce solutions and allow its community
financial institution customers to remain competitive with larger financial
service providers.
4
<PAGE>
EFT Processing Services
InterCept offers a wide range of EFT transaction services, including ATM,
POS, scrip services, debit card transactions including MasterMoney(TM) and
VISA(R) Check cards, funds transfer, remote banking and universal access to
funds. The Company's EFT transaction processing business is conducted primarily
through its network connections to most regional and all national ATM and POS
switch networks, including HONOR(TM), PULSE(TM), Cirrus(R), PLUS(R), Maestro(R)
and INTERLINK(R). Based on the number of financial institutions that use third
parties to process their ATM transactions, the Company is the largest third-
party processor of financial institutions' ATM transactions in the southeastern
United States. As of December 31, 1998, the Company provided EFT services to
approximately 450 customers. Revenues from these activities were $11.8 million,
or 40.9% of revenues, for the year ended December 31, 1998.
Historically, the national ATM switching networks prohibited member
institutions from charging fees for ATM usage on their networks. In April 1996,
national switching networks Cirrus(R) and PLUS(R) voted to lift the ban on these
ATM surcharges. After the ban lifted, several financial institutions began
charging fees to non-customers for using their ATMs to conduct transactions
across their switching networks. The Company's community financial institution
customers became concerned that their customers would migrate to institutions
with a larger number of ATMs for the availability of a larger number of
surcharge-free ATMs. In response to this concern, the Company formed a wholly-
owned subsidiary, InterCept Switch, Inc., and introduced InterCept Switch, a
surcharge-free ATM network designed to keep its community financial institution
customers competitive with larger banks by allowing them to waive ATM surcharges
for customers of InterCept Switch members, while retaining the ability to
surcharge non-member customers that use their ATMs. The InterCept Switch ATM
network is run by PULSE(TM) for a fee based on the number of ATM transactions
conducted through the InterCept Switch network. InterCept Switch had 134 member
institutions representing 353 ATM machines in 12 states at December 31, 1998.
InterCept gives its financial institution customers the flexibility to
design the ATM program they wish to offer by providing full functional support
of all major ATM hardware. The Company provides ATM support services and
products, including terminal processing, network support, POS and ATM equipment,
and maintenance services. The Company's customers may elect to forego the
purchase of ATM hardware by choosing the Company's card issue only service
option, which permits institutions to offer ATM services to their customers
without the expense of purchasing and maintaining ATM hardware.
The typical ATM transaction processed by the Company begins when a
cardholder inserts a card issued by a financial institution (a "Card Issuer")
into an ATM to withdraw funds, obtain a balance, make other account inquiries or
transfer funds. The transaction is routed from the ATM across the InterCept
Frame Relay Network to the Company's data communications and processing center.
The Company's computer identifies the Card Issuer by the financial institution
identification number contained within the card's magnetic strip. The Company
then either (i) authorizes or denies the requested transaction or (ii) switches
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. For
its customers' clients, the Company updates the cardholder's account information
on a daily basis.
Throughout these steps, the Company charges various fees to the financial
institutions that are in addition to any fees that the Card Issuer might charge
the ATM user. The Company receives a base fee for providing its ATM processing
services and an additional fee for each ATM serviced. Once the number of
5
<PAGE>
transactions exceeds established maximums (typically between 2,000 and 3,000
transactions), the Company charges additional fees for the extra transactions
processed. The Company also receives fees for installation, maintenance and
support of the ATMs it supplies to its customers.
The Company processes debit card transactions for banks issuing such cards,
including MasterMoney(TM) and Visa(R) Check cards, which permit direct payment
debit from POS terminals at locations worldwide against the cardholder's deposit
account. InterCept's POS and scrip services provide instant access to funds
without the expense of installing a traditional ATM. With a relatively small
initial investment in a POS or scrip terminal, the Company's financial
institution customers can support EFT transactions from virtually any merchant
location.
The electronic debit card transaction process begins when a consumer
presents a debit card to the merchant who then "swipes" the card at a POS
terminal and enters the transaction amount. The transaction data is transmitted
from the POS terminal through the applicable credit and debit processing
networks to the InterCept Frame Relay Network. The Company then compares the
purchase transaction against the authorization data accessed through the
Company's system, places a hold for the transaction amount, authorizes the
transaction and transmits the authorization response almost immediately back
through the network to the POS terminal. The appropriate processing network
settles the payment and credits the merchant with the transaction amount less
any discounts. The merchant delivers final transaction information to the
credit processing network and the network submits the transaction to the
Company, which facilitates posting and reporting of the transaction with the
issuing bank. To complete the transaction, the issuing bank debits its
customer's account for the transaction amount. For its POS services, the
Company generally receives a portion of the interchange fees charged by its
community financial institution customers that issue debit cards and charges a
monthly fee if its customers do not meet a certain minimum dollar amount of
transactions for a particular month.
A scrip transaction requires a customer to obtain a cash voucher, using an
ATM card, at a self-service terminal located within the store but not at the
check-out. The customer purchases goods with the voucher and receives any
overage from the transaction in cash (if permitted by the merchant) or in the
form of a voucher from the cashier. InterCept's scrip and POS services include
access to multiple networks, settlement reports, card management support and
administrative terminal support.
The Company markets its EFT services primarily to community financial
institutions in the southeastern and central United States. The Company's EFT
service contracts generally provide for an initial term of three to five years
and automatically renew for similar terms unless notice of non-renewal is given
prior to expiration. Most charges due under these agreements are paid monthly.
The Company generally is permitted to raise prices on an annual basis subject to
certain maximum limits.
Data Communications Management and The InterCept Frame Relay Network
Through the InterCept Frame Relay Network and its telecommunications
connectivity to various other networks, the Company manages data communications
and, in some instances, voice-over-frame
6
<PAGE>
communications, which eliminates certain long distance charges for its
customers. The Company also designs and manages various local and wide area data
communications networks for its customers. The Company offers internet services,
including managed firewall and email services, to the desktop of its customers'
personnel across the InterCept Frame Relay Network. As of December 31, 1998, the
Company provided data communications services to 366 customers. Revenues from
these activities were $3.8 million, or 13.1% of revenues, for the year ended
December 31, 1998.
The Company maintains nationwide data communications coverage and the
InterCept Frame Relay Network, the Company's private frame relay
telecommunications network with approximately 1,400 drops which are located in
16 states, 47 LATAs and all five RBOCs' markets. According to industry data,
based upon the number of drops, the InterCept Frame Relay Network is one of the
largest private frame relay networks in the southeastern United States. The key
advantages of frame relay versus legacy protocols include: (i) the ability to
accommodate data packets of various sizes; and (ii) protocol independence-- not
only can any set of data be accepted, switched and transported across a network,
but the specific data is undisturbed in the process of encapsulation. Intercept
believes that the design of the InterCept Frame Relay Network provides efficient
switching capabilities, which results in rapid response time, as well as secure
and reliable transmission and processing for electronic commerce transactions
conducted across the network.
The InterCept Frame Relay Network uses the fiber optic networks of MCI
WorldCom, Inc. and BellSouth Telecommunications, Inc. to provide the substantial
bandwidth capable of supporting the transaction-intensive services offered by
the Company. The InterCept Frame Relay Network is linked to the Company's
customer operations by T-1 and fractional T-1 communication lines to ensure
adequate bandwidth for rapid processing of electronically transmitted data. As
customer needs change and as technology improves, management believes that it
will be able to adapt and customize the InterCept Frame Relay Network as
necessary to achieve the processing speeds and functionality it desires.
The InterCept Frame Relay Network topology gives the Company the ability to
acquire telecommunications access from providers other than MCI WorldCom.
Management believes that, if necessary or desirable, the Company could utilize
the networks of any major telecommunications access provider to operate the
InterCept Frame Relay Network. Management believes that transferring the
InterCept Frame Relay Network to another telecommunications access provider
could be accomplished without significant service interruption or delay,
although such a transfer may increase the Company's expenses for its
telecommunications services. The Company maintains an automated backup system
for the most critical data circuits in the InterCept Frame Relay Network in the
event of a network outage or other similar occurrence. The Company also provides
shared hub satellite transmission services as well as multi-drop and point-to-
point hard line telecommunication networks. The Company uses Motorola
telecommunications equipment and processing hardware to enable the InterCept
Frame Relay Network to support the various data communications protocols most
commonly used by its customers.
The Company monitors and maintains the InterCept Frame Relay Network's
lines, circuits and equipment functions on a seven-day, 24-hour basis from a
central computer location in Norcross, Georgia. The Company maintains this EFT
processing and data communications switching facility and has established a
limited disaster recovery plan with certain telecommunications providers to
provide alternative communications capabilities in the event the Company
experiences a natural disaster or other interruption at its Norcross facility,
rather than maintaining a "hot site" backup location for its EFT processing and
InterCept Frame Relay Network switching hardware.
7
<PAGE>
Client/Server Enterprise Software and Services
The Company offers client/server enterprise software processing and related
products and services on both an in-house and service bureau basis primarily to
community financial institutions. The Company satisfies its service bureau
customers' core processing requirements, including general ledger and financial
management, customer information file maintenance, loan and deposit processing,
financial accounting and reporting and ATM and automated clearing house ("ACH")
interfaces, through on-line data communications utilizing the InterCept Frame
Relay Network. Historically, InterCept delivered its core data processing
solutions on a service bureau basis using legacy computer system technology.
However, in December 1996 the Company acquired PC BancPAC(TM) and has since
licensed this client/server accounting software system on an in-house basis and
implemented this software in its service bureau operations. Revenues from the
Company's enterprise software and related services and $6.9 million, or 23.9% of
revenues, for the year ended December 31, 1998.
In August 1998, the Company acquired certain assets and liabilities of Nova
Financial Corporation ("Nova"), a Georgia-based provider of core data
processing, item capture and check imaging services. In September 1998, the
Company acquired certain assets and liabilities of Advance Data ("Advance
Data"), an Arkansas-based provider of core data processing, item capture and
check imaging services from Mercantile Corporation. In October 1998, the Company
acquired all of the common stock of Item Processing of America Inc. ("IPA"), a
Florida-based provider of item capture and disaster recovery services. InterCept
believes these acquisitions strengthen its suite of products and services and
that they have expanded its market presence and customer support in several key
states.
PC BancPAC(TM) consists of a series of integrated software modules which,
together, accommodate the core data processing needs of the Company's financial
institution customers, including general ledger and financial management,
customer information file maintenance, loan and deposit processing, financial
accounting and reporting and ATM and ACH interfaces. PC BancPAC(TM) and related
products operate in a Windows NT(R) environment and the Company believes they
are well-suited for both in-house and service bureau core processing for
financial institutions. The Company believes PC BancPAC(TM) is Year 2000
compliant and permits the Company to offer flexible alternatives to its existing
customers and to pursue other segments of the financial institution processing
market. Processing in a client/server environment provides superior flexibility
in tailoring procedures and improves customer service throughout the
institution. Using personal computers as workstations (the "client") and
connecting them via a network to another personal computer containing the
database (the "server"), client/server computing offers fast and easy processing
on economical computer hardware. The Company believes PC BancPAC(TM) is a user-
friendly product with easy-to-learn "point and click" and "drag and drop"
features.
As part of its software processing services, the Company also provides item
processing and back office services including proofing and encoding, bulk
filing, statement preparation and check imaging to accommodate the additional
needs of its financial institution customers. The Company's data processing and
item processing services are typically priced on the basis of account or item
volume. The Company delivers its check imaging and item processing services
from seven service centers located in Georgia, Florida, Arkansas and Colorado.
Fees for check imaging services are generally based upon the volume of
information and images (document pages) processed, stored or retrieved. Fees
for item processing services are generally based upon the volume of items. The
Company also offers a variety of owned and licensed complementary value-added
services and products to its customers to enable them to compete with larger
financial institutions that offer a broad array of services and products to
their customers. These services and products include an integrated voice
response banking system, safe deposit box accounting, cash management services,
check imaging services and optical disk storage.
8
<PAGE>
The Company's data communications, EFT and outsourced client/server
enterprise processing services utilize the InterCept Frame Relay Network and are
coordinated through the Company's three host data centers located in Georgia,
Arkansas and Colorado and seven check imaging and item processing facilities
located in those states and in Florida. The Company continually plans for
testing and implementation of new technology and emphasizes flexibility in
structuring the services it offers using new technology. The Company's data
centers, together with its remote check imaging and item processing centers,
provide the comprehensive and customized data processing services required by
InterCept's service bureau customers. The Company's data processing centers in
Macon, Georgia, Colorado Springs and Denver, Colorado and Jonesboro, Arkansas
each act as a back-up facility for the others in the event another site
experiences a natural disaster, destruction or other similar event which
eliminates or diminishes its processing capabilities.
As of December 31, 1998, the Company provided data processing and/or item
processing services to over 120 financial institutions pursuant to contracts
which generally provide for three year renewable terms. The Company also
provides account processing software support and maintenance to 12 financial
institution customers that implement InterCept's products in-house.
Sales and Marketing
The Company's sales force is made up of 14 sales representatives and
product specialists who are responsible for selling the full suite of products
and services the Company offers to its customers in specified geographic
regions. Having a dedicated sales force selling all products and services
allows the Company's sales representatives to capitalize on their relationships
with the financial institutions. The sales representatives are trained on the
specifics of each product line. Product specialists are available to assist the
direct salesperson in the specifics of certain technical products. The Company
offers its products and services on both a stand alone basis and in combination
with one or more products and services to create customized solutions for each
community financial institution.
The Company's indirect marketing efforts include obtaining referrals and
endorsements from its financial institution customers and various banking
related organizations. InterCept currently has written marketing agreements
with 7 of the 18 bankers' banks and has other relationships with 3 additional
bankers' banks. Bankers' banks are local or regional business organizations
that provide correspondent banking products and services to financial
institutions that could not provide them in an efficient manner themselves due
to cost, location, lack of resources or other similar circumstances. In
addition, bankers' banks provide financial support and business advice to
financial institutions with respect to various critical areas such as
operations, profitability and federal and state regulation. The Company
believes that the essential nature of the relationship between bankers' banks
and community financial institutions makes the Company's alliances with bankers'
banks an important part of its marketing strategy. Through its relationship
with these bankers' banks, the Company has referral sources to thousands of
financial institutions nationwide.
Customer Base
The Company achieves growth in its recurring revenues and customer base
primarily through cross-marketing its integrated products and services. The
Company's customer base consists of more than 690 financial institutions in 20
states the majority of which are community financial institutions located in the
southeastern United States and Colorado. Many of these customers use two or more
of the products and services Intercept offers. As of December 31, 1998, the
Company provided EFT products and services to more than 450 customers, 347 of
which are full-service EFT customers. The Company also
9
<PAGE>
had 195 maintenance customers, some of which also use the Company's EFT
services. In addition, the Company had 130 customers using its core data
processing, item capture and check imaging services. Of the 130 customers,
the Company provided core data processing through its service bureau for 64
customers as well as either item processing or check imaging and 12 were
processing in-house. The Company also processed solely items for 54 customers,
of which 13 were on imaging. The Company also has approximately 45 merchant
portfolio management customers as of December 31, 1998.
Complementary Products and Customer Service
To complement its integrated suite of electronic commerce solutions, the
Company provides maintenance and technical support services, which generate
recurring revenues, and supplies specialized equipment including ATMs, proof
machines, teller equipment, personal computers, vaults and other security
equipment. The Company provides ATM and various other banking equipment and
maintenance services to 195 customers in Georgia, Alabama, Florida, Tennessee
and South Carolina. Where applicable, the Company enters into standard ATM and
other equipment maintenance contracts with its customers that generally provide
for a term of between one and three years. Generally, these contracts
automatically renew for varying periods at the end of the initial or any
renewal term unless either party elects to cancel the agreement 180 days prior
to its expiration. The Company also provides merchant portfolio management
services which perform labor intensive "back-room" functions at a lower cost
than many banks incur in-house by streamlining processes and taking advantage of
economies of scale. Revenues from these activities were $6.4 million, or 22.1%
of revenues, for the year ended December 31, 1998. The Company anticipates that,
as revenues from its other operations increase, revenues from supplying
equipment and maintenance and technical support services will decrease as a
percentage of total revenues.
The Company offers extensive customer services and technical support for
its electronic commerce products and services. InterCept believes that well-
trained support personnel are essential to attract and retain financial
institution customers. InterCept's trained customer service and technical
support personnel employ methodologies to enhance the Company's ability to offer
reliable, secure and automated solutions. The Company's customer service
departments are responsible for educating and assisting its customers in the use
of the Company's integrated services, for resolving billing related issues and,
in consultation with InterCept's technical support personnel, for solving any
technical problems customers may experience. As of December 31, 1998, the
Company employed 18 people in its customer service departments, which provide 24
hour per day, seven days per week coverage to its customers. Customer service
representatives who support vital processing functions are also accessible by a
toll-free telephone number.
The Company employs separate personnel who are responsible for technical
support functions. These employees are generally responsible for consulting with
InterCept's financial institution customers regarding technical issues, and for
solving any technical issues brought to their attention by the customer service
department. The Company's technical support department is also responsible for
maintaining the Company's backup systems and for coordinating the disaster
recovery services maintained by certain of the Company's information processing
customers. As of December 31, 1998, the Company employed 25 technical support
representatives which provide 24 hour per day, seven days per week coverage to
its customers. Technical support representatives who support vital processing
functions are also accessible by a toll-free telephone number.
Competition
The data communications, enterprise software and transaction processing
industries are intensely competitive and highly fragmented, and the Company
expects increased competition from both existing competitors and companies that
enter the Company's existing or future markets. Many of the Company's 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
10
<PAGE>
than the Company. Numerous companies supply competing products and services, and
many of these companies specialize in one or more of the services which the
Company offers or intends to offer to its customers. The Company's market share
represents a small percentage of the total information processing market. The
Company believes that existing competitors are likely to expand their product
and service offerings and that new competitors are likely to enter the market
and attempt to integrate electronic commerce, information processing and other
services, resulting in greater competition for the Company. Such competition
could materially adversely affect the Company's business, financial condition
and results of operations.
Many of the Company's competitors have substantial resources and technical
expertise, and could likely develop such comprehensive solutions if they chose
to expend sufficient resources. The Company believes that the principal
competitive factors affecting the market for its services generally are price,
quality and reliability of service, degree of service integration, ease of use
and service features. The Company's principal EFT competitors include major
regional ATM networks, regional and local processing banks, non-bank processors
and other independent electronic commerce and data communications organizations,
many of which have substantially greater capital, management, marketing and
technological resources than those of the Company. There can be no assurance
that the Company will continue to be able to compete effectively with such
competitors. The Company's EFT and outsourced core bank processing services are
transmitted to its customers over telephone lines and the Telecommunications Act
of 1996 (the "Act") lifted certain restrictions on regional telephone companies
and others competing with the Company, which will likely lead to these companies
competing with the Company by packaging information service offerings with other
services and providing them on a wider geographic scale. The competitive pricing
pressures that would result from any increase in competition could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Intellectual Property and Other Proprietary Rights
The Company relies on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. There can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology. The Company does not believe that
any of its products infringe the proprietary rights of third parties. There can
be no assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products, and the Company has agreed
to indemnify many of its customers against such claims. The Company anticipates
that the number of infringement claims will increase as the number of electronic
commerce and information technology products and services increase and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, and may not be resolved on terms acceptable to the Company, or at
all, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Employees
At December 31, 1998, the Company had 223 full-time employees, of which 22
were in sales and marketing, 164 were in operations and 37 were corporate and
general administrative employees. Of these employees, 157 were based in Georgia,
13 were based in Colorado, 25 were based in Florida, 14 were based in Arkansas,
1 was based in New Jersey, 3 were based in Texas and 10 were based in Tennessee.
11
<PAGE>
Additionally there were approximately 40 part-time employees in the Company's
operations centers. None of the Company's employees is represented by a
collective bargaining agreement nor has the Company ever experienced any work
stoppage. Management believes that the Company's relationship with its employees
is satisfactory.
Facilities
The Company's principal office consists of 24,709 square feet of leased
space located in Norcross, Georgia. The Company leases two additional offices
in Norcross that are used for item processing and operations. The Company owns
a facility in Thomson, Georgia that is used as a data and item processing center
for the Company's service bureau operations. A leased facility in Macon, Georgia
serves as an item and image processing center. The Company also leases two
locations in Colorado related to its service bureau operations, including one in
Colorado Springs which serves as a data and item processing center, and another
in Denver used for item processing. The Company leases space is Jonesboro,
Arkansas which serves as a data and item processing center. The company leases
space in Jacksonville and Miami, Florida for its related to service bureau
operations. The Company leases office space in Tennessee, Texas and New Jersey,
primarily to support its sales and marketing efforts in these areas. The
Company believes these facilities are adequate for its needs and does not
anticipate any material difficulty in replacing such facilities or securing
facilities for new offices.
ITEM 2. PROPERTIES
See the information provided in Item 1 above entitled "Business --
Facilities" for information with respect to the Company's facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, and none of its material properties is
subject to, any material legal proceedings, other than routine litigation
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Market Information
Since its initial public offering in June 1998, InterCept's common stock
has traded on the American Stock Exchange under the symbol ICG. As of February
10, 1999, the Company had approximately 889 beneficial holders of its common
stock. Of this total, 68 were shareholders of record.
12
<PAGE>
InterCept has not paid cash dividends on its common stock and does not
anticipate paying cash dividends on its common stock in the near future.
Price Range
High Low
----------- ----------
Year Ended December 31, 1998:
Quarter Ended:
June 30, 1998 $7 3/8 $ 7
September 30, 1998 8 3/8 5
December 31, 1998 7 3/4 4 1/2
Recent Sales of Unregistered Securities.
Not applicable.
Use of Proceeds from Initial Public Offering
On June 9, 1998, the Company completed the Offering of 2,387,500 shares
(including 137,500 shares sold by a selling shareholder) of common stock at an
offering price of $7.00 per share pursuant to a registration statement on
Form S-1 (Commission File No. 333-47197). Net proceeds from the Offering were
approximately $14.4 million (including proceeds from the exercise of the
underwriters' over-allotment option) after deducting underwriters discounts and
commissions and $1,820,000 of expenses related to the Offering. During 1998, the
Company used portions of the proceeds as follows: (i) approximately $4,347,000
to pay down substantially all of its long-term debt; (ii) $1,800,000 to pay
amounts owed to an officer of the Company for prior service; (iii) $1,550,000 to
enhance and expand the InterCept Frame Relay Network; (iv) $440,000 to redeem
its outstanding preferred stock and (v) a total of approximately $3,220,000 to
acquire the business and/or assets of other companies, including Nova, ProImage,
Advance Data and IPA. The balance of the proceeds have been and will be used for
working capital and general corporate purposes, including possible acquisitions.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with the Company's Consolidated
Financial Statements and the related Notes thereto and other financial
information included elsewhere in this Annual Report on Form 10-K, as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below. The selected consolidated financial data of the
Company for each of the four years ended December 31, 1998 were derived from the
Company's Consolidated Financial Statements, which have been audited by Arthur
Andersen LLP, independent public accountants. The selected consolidated
financial data for the year ended December 31, 1994 were derived from unaudited
consolidated financial statements which, in the opinion of management, include
all adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the Company's financial condition and results of
operations. These results may not be indicative of future results.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1994 (1) 1995 1996 (2) (3) 1997 1998 (4)
------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
(In thousands, except share data)
Statements of Operations Data:
Revenues................................ $ 6,076 $ 8,223 $ 14,511 $ 23,260 $ 28,902
Costs of services....................... 2,374 4,607 7,859 10,223 12,031
Selling, general and administrative
expenses............................... 3,490 2,213 6,852 10,105 11,222
Depreciation and amortization........... 172 242 351 1,323 1,337
Loss on impairment of intangibles....... 0 0 0 728 0
Writeoff of purchased research and
development costs...................... 0 0 810 0 0
---------- ---------- ------------ ---------- ----------
Total operating expenses................ 6,036 7,062 15,873 22,379 24,590
---------- ---------- ------------ ---------- ----------
Operating income (loss)................. 40 1,161 (1,362) 881 4,312
Other income (expense), net............. (86) (63) 279 (649) (184)
---------- ---------- ------------ ---------- ----------
Income (loss) before provision for
income taxes and minority interest.... (46) 1,098 (1,641) 232 4,128
Provision (benefit) for income taxes.... (17) 417 (236) 666 1,564
Minority interest in (income) loss...... 0 0 (14) 39 (89)
---------- ---------- ------------ ---------- ----------
Net income (loss)....................... (29) 681 (1,419) (395) 2,475
Preferred stock dividends............... 0 0 (8) (32) (16)
---------- ---------- ------------ ---------- ----------
Net income (loss) attributable to
common shareholders.................... $ (29) $ 681 $ (1,427) $ (427) $ 2,459
========== ========== ============ ========== ==========
Basic and diluted net income (loss) per
common share(5)........................ $(0.01) $0.12 $(0.24) $(0.06) $0.30
========== ========== ============ ========== ==========
Weighted average common shares
outstanding............................ 5,867,400 5,867,400 5,851,347 6,750,114 8,246,513
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ 63 $ 356 $ 1,398 $ 2,010 $ 3,224
Working capital.............................. 334 825 1,509 1,117 4,627
Total assets................................. 1,155 1,980 10,941 10,156 20,155
Long-term debt, net of current portion....... 746 589 5,212 4,717 211
Shareholders' (deficit) equity............... (89) 767 82 (784) 16,258
</TABLE>
14
<PAGE>
(1) On June 4, 1996, Intercept Systems, Inc. ("Systems") merged with the
Company in a share exchange combination by which Systems became a wholly-
owned subsidiary of the Company. The results of operations of Systems have
been included for the periods shown. See Note 3 of Notes to Consolidated
Financial Statements.
(2) On June 4, 1996, the Company acquired Data Services Corp. ("Data Services")
in a transaction accounted for as a purchase and the results of operations
of Data Services have been included since the date of acquisition. On
November 27, 1996, the Company acquired ProVesa, Inc. ("ProVesa") in a
merger transaction accounted for as a purchase and the results of
operations of ProVesa have been included since the date of acquisition. On
December 17, 1996, InterCept acquired FiNet, Inc. ("FiNet") in a merger
transaction accounted for as a purchase and the results of operations of
FiNet have been included since the date of acquisition. On December 31,
1996, InterCept acquired Bank Services Corporation ("Bank Services") in a
merger transaction accounted for as a purchase and the results of
operations of Bank Services have been included since the date of
acquisition. See Note 3 of Notes to Consolidated Financial Statements.
(3) On January 30, 1998, the Company acquired InterCept Communications
Technologies, L.L.C. ("Technologies") in a transaction accounted for as a
pooling of interests, and the results of operations of Technologies have
been included for all periods presented.
(4) On August 4, 1998, InterCept acquired certain assets and assumed certain
liabilities of Nova and the results of operations of Nova have been
included since the date of acquisition. On August 25, 1998, InterCept
acquired 33% of ProImage, Inc. ("ProImage"), raising its ownership interest
in ProImage to 67%. On September 30, 1998, InterCept acquired certain
assets and liabilities of Mercantile Corporation, which assets had been
operated by Advance Data, and the results of operations of Advance Data
have been included since the date of acquisition. On October 19, 1998,
InterCept acquired certain assets and liabilities of Premier Imaging
("Premier"), and the results of operations of Premier have been included
since the date of acquisition. On October 21, 1998, InterCept acquired IPA
in a merger transaction accounted for as a purchase and the results of
operations of IPA have been included since the date of acquisition. See
Note 3 of Notes to Consolidated Financial Statements.
(5) See Notes 2 and 10 of Notes to the Consolidated Financial Statements for a
discussion of the historical computations of net income (loss) per common
share.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is qualified by reference to, and should be read in
conjunction with the Consolidated Financial Statements and the related Notes
thereto and other financial information included elsewhere in this Annual
Report. The following discussion also contains forward-looking statements which
are subject to the risks and uncertainties discussed on page 1 of this Annual
Report.
Overview
The Company derives revenues primarily from the following sources: (i) EFT
processing services; (ii) data communications management; (iii) client/server
enterprise software support, maintenance and related services; and (iv)
maintenance and technical support services, sales of banking related equipment
and complementary products and customer services.
The Company derives EFT revenues principally from processing ATM, POS and
debit card transactions. The Company receives a base fee for providing its ATM
processing services and an additional fee for each ATM serviced. Once the
number of transactions exceeds established levels (typically between 2,000 and
3,000 transactions), the Company charges additional fees for the extra
transactions processed. For its POS services, the Company generally receives a
portion of the interchange fees charged by its community financial institution
customers that issue debit cards and charges a monthly fee if its customers do
not meet a certain minimum dollar amount of transactions for a particular month.
Most charges due under the Company's EFT service agreements are paid monthly.
The Company's data communications management service revenues are
principally derived from network management services, data packet transportation
services across the InterCept Frame Relay Network, consulting, and equipment
configuration, installation and sales. The Company charges a flat monthly fee
for providing telecommunications connectivity and network management as well as
an initial installation charge.
The Company licenses PC BancPAC(TM), the Company's proprietary Windows
NT(R) based client/server software system, on both a service bureau and in-house
basis. On a service bureau basis, the Company derives revenues from license fees
and service and item processing fees based on the volume of transactions
processed. It is the Company's policy to recognize revenues for licensing of PC
BancPAC(TM) in accordance with Statement of Position 97-2 on "Software Revenue
Recognition" issued by the American Institute of Certified Public Accountants.
Software license fees are recognized when a non-cancelable license agreement has
been signed, the product has been shipped and all significant obligations to the
customer have been satisfied. The Company also provides item capture and check
imaging services to its customers. These revenues are recognized as the services
are provided.
The Company's maintenance, support and equipment revenues consist primarily
of revenues from the Company's maintenance and technical support services as
well as sales of equipment. Equipment revenues are recognized at the time of
shipment while maintenance and technical support service revenues are recognized
as the service period elapses.
The Company's quarterly operating results have varied in the past and will
likely vary significantly in the future. Factors that may cause the Company's
future operating results to vary include, without limitation, the timing of new
product and service announcements, changes in pricing policies by the
16
<PAGE>
Company and its competitors, market acceptance of new and enhanced versions of
the Company's products and services, the lengthening of sales cycles for new or
existing customers, customer attrition, changes in operating expenses, changes
in Company strategy, personnel changes, the introduction of alternative
technologies, the Company's products becoming obsolete, failure, delay and
expense in making software, systems and networks utilized in the Company's
business Year 2000 compliant, the effect of acquisitions and general economic
factors. Product and service revenues are difficult to forecast because the
market for electronic commerce products and services is rapidly evolving, and
the Company's sales cycle generally covers an extended period but varies
substantially from customer to customer. InterCept believes that quarter to
quarter comparisons of its results of operations should not be relied upon as
indications of future performance.
Results of Operations
The following table sets forth the percentage of revenues represented by
certain items in the Company's consolidated statements of operations for the
indicated periods.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1996 1997 1998
-------------- ------------ ------------
<S> <C> <C> <C>
Revenues....................................................................... 100.0% 100.0% 100.0%
Costs of services.............................................................. 54.2 44.0 41.6
Selling, general and administrative expenses................................... 47.2 43.4 38.8
Depreciation and amortization.................................................. 2.4 5.7 4.7
Loss on impairment of intangibles.............................................. 0 3.1 0
Writeoff of purchased research and development costs........................... 5.6 0 0
Total operating expenses....................................................... 109.4 96.2 85.1
----- ----- -----
Operating income (loss)........................................................ (9.4) 3.8 14.9
Other income (expense), net.................................................... (1.9) (2.8) (0.6)
----- ----- -----
Income (loss) before minority interest and provision for income taxes.......... (11.3) 1.0 14.3
Minority interest (income) loss................................................ (0.1) 0.2 (0.3)
Provision (benefit) for income taxes........................................... (1.6) 2.9 5.4
----- ----- -----
Net income..................................................................... (9.8)% (1.7)% 8.6%
===== ===== =====
</TABLE>
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Revenues. Revenues increased 24.1%, or $5.6 million, to $28.9 million for
the year ended December 31, 1998 from $23.3 million for the year ended December
31, 1997. The $5.6 million increase was primarily related to (i) $2.5 million
generated by an increase in EFT processing services, (ii) $1.3 million generated
by additional core data processing (iii) $650,000 generated by an increase in
data communications management services, (iv) $380,000 generated by an increase
in merchant portfolio management and (v) other increases of $770,000.
Costs of Services. Costs of services increased 17.7%, or $1.8 million, to
$12.0 million for the year ended December 31, 1998 from $10.2 million for the
year ended December 31, 1997. The $1.8 million increase was primarily
attributable to (i) $1.0 million generated by an increase in core data
processing sales, (ii) an increase of $710,000 related to equipment sales and
maintenance services and (iii) other costs of $90,000.
17
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 11.1%, or $1.1 million, to $11.2 million for
the year ended December 31, 1998 from $10.1 million for the year ended December
31, 1997. The $1.1 million increase was primarily due to additional personnel to
support the Company's growth.
Depreciation and Amortization. Depreciation and amortization remained
constant at approximately $1.3 million for the years ended December 31, 1998 and
1997. An increase of $440,000 in depreciation expense related to fixed asset
additions was offset by reduced amortization due to fully amortized contracts
related to acquisitions which occurred in 1996 and 1997.
Loss on Impairment of Intangibles. There was no loss on impairment of
intangibles for the year ended December 31, 1998. The 1997 loss was due to (i)
the writeoff of $540,000 of goodwill assumed in the Company's acquisition of
FiNet and (ii) the writeoff of $190,000 in purchased software assumed in the
Company's acquisition of ProVesa. These writeoffs were due to permanent
impairment in the related long term assets.
Operating Income (Loss). For the foregoing reasons, operating income
increased $3.4 million to $4.3 million for the year ended December 31, 1998 from
$880,000 for the year ended December 31, 1997. Exclusive of the nonrecurring
loss on impairment of intangibles in 1997, operating income would have been $1.6
million in 1997.
Other Income (Expense). Other expense decreased $470,000 to $180,000 for
the year ended December 31, 1998 from $650,000 for the year ended December 31,
1997. The decrease was due primarily to a decrease in interest expense resulting
from the payment of the Company's long-term debt with the proceeds from the
Company's initial public offering which was completed in June 1998.
Minority Interest in Income (Loss). Minority interest in income increased
$130,000 to $90,000 for the year ended December 31, 1998 from a loss of
$(40,000) for the year ended December 31, 1997. The increase was primarily due
to profits in ProImage's operations partially offset by the Company's
acquisition of an additional 33% stake in the entity purchased in August 1998.
Provision (Benefit) For Income Taxes. Provision for income taxes increased
$900,000 to $1.6 million for the year ended December 31, 1998 from $670,000 for
the year ended December 31, 1997. The increase was primarily due to increased
profits partially offset by a reduction in nondeductible amortization.
Year Ended December 31, 1997 Compared To Year Ended December 31, 1996
Revenues. Revenues increased 60.3%, or $8.7 million, to $23.3 million for
the year ended December 31, 1997 from $14.5 million for the year ended December
31, 1996. The $8.7 million increase was primarily attributable to (i) $4.0
million generated by ProVesa as it was included for the full year in 1997 as
compared to one month in 1996, (ii) $1.3 million generated by an increase in EFT
processing services, (iii) $1.3 million generated by Bank Services since its
acquisition on December 31, 1996, (iv) $1.2 million generated by Data Services
as it has been included for a full year in 1997 and (v) $930,000 generated by
additional data communications management services.
18
<PAGE>
Costs of Services. Costs of services increased 30.0%, or $2.3 million, to
$10.2 million for the year ended December 31, 1997 from $7.9 million for the
year ended December 31, 1996. The $2.3 million increase was primarily due to
(i) an increase of $1.1 million related to the service bureau operations at
ProVesa as the operations were included for the full year in 1997 as compared to
one month in 1996, (ii) an increase of $570,000 related to data communications
management services, (iii) an increase of $310,000 related to service bureau
operations at Bank Services which were included for the full year in 1997 and
(iv) $320,000 related to additional equipment sales and maintenance. Costs of
services as a percentage of sales decreased to 44.0% from 54.2% in 1996,
primarily due to additional higher margin EFT revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 47.5%, or $3.3 million, to $10.1 million for
the year ended December 31, 1997 from $6.8 million for the year ended December
31, 1996. The $3.3 million increase was primarily attributable to (i) $1.3
million related to ProVesa as a full year of operations was included in 1997 as
compared to one month in 1996, (ii) $980,000 related to Bank Services since its
acquisition on December 31, 1996, of which approximately $500,000 was related to
research and development activities, (iii) $840,000 related to Data Services as
a full year of operations was included in 1997, (iv) $520,000 related to FiNet
as a full year of operations was included in 1997 as compared to one month in
1996, (v) $1.3 million related to additional personnel and facilities to support
the Company's growth and (vi) other expenses of $120,000 partially offset by a
$1.8 million nonrecurring charge in 1996 related to a deferred compensation
agreement with an officer of the Company.
Depreciation and Amortization. Depreciation and amortization increased
$970,000 to $1.3 million for the year ended December 31, 1997 from $350,000 for
the year ended December 31, 1996. This increase was primarily due to (i) the
amortization of $620,000 of goodwill and contracts related to the Company's
purchase of ProVesa which was included for a full year in 1997 as opposed to one
month in 1996, (ii) amortization of $90,000 of goodwill and contracts related to
the Company's purchase of Data Services which was included for a full year in
1997, (iii) an increase in depreciation expense of $160,000 related primarily to
acquisition and (iv) other net increases of $100,000.
Loss on Impairment of Intangibles. Loss on impairment of intangibles
totaled $730,000 for the year ended December 31, 1997. This was due to (i) the
writeoff of $540,000 of goodwill assumed in the Company's acquisition of FiNet
and (ii) the writeoff of $190,000 in purchased software assumed in the Company's
acquisition of ProVesa. These writeoffs were due to permanent impairment in the
related long term assets.
Writeoff of Purchased Research and Development Costs. The $810,000 in
writeoff of purchased research and development costs in 1996 was due to
allocation of a component of the purchase price of Bank Services to incomplete
research and development costs at the time of purchase as the development of
certain projects had not yet reached technological feasibility and the
technology had no alternative use and required substantial additional
development.
Operating Income (Loss). For the foregoing reasons, operating income
increased $2.2 million to $880,000 for the year ended December 31, 1997 from an
operating loss of $1.4 million for the year ended December 31, 1996. Exclusive
of the nonrecurring loss on impairment of intangibles, operating income would
have been $1.6 million in 1997.
Other Income (Expense). Other expense increased $370,000 to $650,000 for
the year ended December 31, 1997 from $280,000 for the year ended December 31,
1996. This increase was primarily
19
<PAGE>
due to interest on new debt to fund the Company's acquisitions during 1996 which
was recorded for a full year in 1997.
Minority Interest Income (Loss). Minority interest income decreased
$50,000 to $(40,000) for the year ended December 31, 1997 from income of $10,000
for the year ended December 31, 1996. The decrease was primarily due to losses
in ProImage's operations.
Provision (Benefit) For Income Taxes. Provision for income taxes increased
$900,000 to $670,000 for the year ended December 31, 1997 from a benefit of
$(230,000) for the year ended December 31, 1996. The increase was primarily due
to increased pre-tax income partially offset by deductible losses in 1996
primarily related to a deferred compensation agreement with an officer of the
Company.
Liquidity and Capital Resources
In June 1998, the Company completed the initial public offering of its
common stock (the "Offering"). Proceeds to the Company from the Offering (after
deducting expenses related to the Offering) were approximately $14.4 million
(including proceeds from the underwriters' overallotment option which was
exercised in July 1998). Proceeds of the Offering were used to pay down certain
debt, pay obligations owed to a former officer of the Company, enhance and
expand the InterCept Frame Relay Network, redeem shares of preferred stock and
for general working capital needs, including acquisitions.
Net cash provided by operating activities was $2.7 million, $2.1 million
and $1.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase in net cash provided by operating activities in 1998
as compared to 1997 was attributable primarily to an increase in net income
partially offset by an increase in accounts receivable and other assets. The
increase in net cash provided by operating activities in 1997 as compared to
1996 was due primarily to a decrease in accounts receivable.
Net cash (used in) investing activities was $(8.4) million, $(630,000) and
$(300,000) in 1998, 1997 and 1996, respectively. The increase in net cash used
in investing activities in 1998 as compared to 1997 was attributable to
increased capital expenditures levels and acquisitions during 1998. The
increase in net cash used in investing activities in 1997 as compared to 1996
was primarily due to increased fixed asset purchases, partially offset by the
collection of a related party receivable.
Net cash provided by (used in) financing activities was $6.9 million,
$(860,000) and $(470,000) for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase for 1998 as compared to 1997 was due to the
completion of the Company's initial public offering partially offset by the
paydown of $5.2 million of long-term debt and $1.8 million of deferred
compensation. In 1997, this amount was related primarily to net payments on
long term debt while the amounts in 1996 were related primarily to S corporation
distributions to certain shareholders of Systems and Data Services.
During 1998, the Company entered into a credit facility with First Union
National Bank, ("First Union Credit Facility"), under which the Company may
borrow up to $20.0 million to fund acquisitions and pay expenses related to
acquisitions. In addition, at the Company's election, $2.0 million of the First
Union Credit facility may become available for working capital purposes. The
First Union Credit Facility contains provisions which require the Company to
maintain certain financial ratios and minimum net worth amounts and which
restrict the Company's ability to incur additional debt, make certain capital
expenditures, enter into agreements for mergers, acquisitions or the sale of
substantial assets and pay dividends. The First Union Credit Facility matures
on November 1, 2001. As of December 31, 1998,
20
<PAGE>
there were no amounts outstanding under this facility. Interest is payable
monthly and outstanding principal amounts accrue interest, at the Company's
option, at an annual rate equal to either (i) a floating rate equal to the
lender's prime rate minus one quarter of one percent or (ii) a fixed rate based
upon the 30-day LIBOR rate plus applicable margins. The Company is negotiating
to amend the First Union Credit Facility to allow for use of all of the proceeds
for working capital needs. No assurances can be made that any such amendments
will occur.
While there can be no assurance, management believes that the remaining
proceeds of the Offering, funds currently on hand, funds to be provided by
operations and funds available for working capital purposes under the First
Union Credit Facility will be sufficient to meet the Company's anticipated
capital expenditure and liquidity requirements for its operations through at
least the end of 1999. The Company intends to grow, in part, through strategic
acquisitions and will make additional expenditures to negotiate and consummate
acquisition transactions and integrate the acquired companies. While there can
be no assurance, management currently believes that the proceeds of the Offering
and funds from the First Union Credit Facility, together with the issuance of
Common Stock and other securities, will be sufficient to fund its acquisition
needs for the next 12 months. No assurance can be made with respect to the
actual timing and amount of the expenditures and acquisitions. In addition, no
assurance can be given that the Company will complete any acquisitions on terms
favorable to the Company, if at all, or that additional sources of financing
will not be required during these time periods or thereafter. The Company's
estimates are forward-looking statements that are subject to risks and
uncertainties as discussed on page 1 of this Annual Report.
Possible Effects of the Year 2000
The Company's business and relationships with its customers depend
significantly on a number of computer software programs, internal operating
systems and connections to other regional and national networks. If any of these
software programs, systems or networks are not programmed to recognize and
properly process dates after December 31, 1999 (the "Year 2000" issue),
significant system failures or errors may result which could have a material
adverse effect on the business, financial condition, or results of operations of
both the effected customers and the Company. The Company has conducted a
preliminary review of its internal accounting and operating programs and systems
and currently believes that these programs and systems and the network
connections it maintains are adequately programmed to address the Year 2000
issue or can be modified or replaced to address the Year 2000 issue without
incurring costs or delays which would have a material adverse effect on the
Company's financial condition.
The Company currently provides service bureau processing services to
certain customers using a processing solution that is not Year 2000 compliant,
and the Company is in the process of converting those customers to its PC
BancPAC(TM) software, which the Company believes is Year 2000 compliant. At
December 31, 1998, there were four institutions running a non-compliant
processing solution. The Company believes they will be converted to PC
BancPac(TM) before the end of June 1999. The Company has incurred costs of
approximately 160,000 related to the conversions in 1998 and estimates that the
completion of the four remaining conversions will cost 25,000; however it is
difficult to predict such costs with certainity and there can be no assurance
that the costs necessary to convert its customers to PC BancPac(TM) will not
have a material adverse effect on the Company's business, financial condition,
or results of operations. Further, any failure by the Company to complete the
conversion of any of its service bureau customers in a timely manner could
significantly interrupt the business operations of such customers, which could
have a material adverse effect on the business, financial condition, or results
of operations of both the effected customers and the Company.
The Company currently provides service bureau processing services through
six centers located in Georgia, Florida and Colorado. The Company has completed
a detailed review of the equipment at each of these locations. The Company
estimates the total costs required to make the equipment Year 2000 compliant
will cost approximately $75,000. The Company believes the upgrades to existing
equipment will be complete no later than June 30, 1999. In the event the
equipment is not upgradeable, the Company believes it can purchase equipment
that will allow processing to continue. It is impossible to estimate the
potential expenses involved or delays which may result from a failure or delay
in upgrading the equipment at the Company's service bureau processing centers.
21
<PAGE>
In regard to the Company's EFT operations, the Company believes the
majority of internal coding required for its products has been completed.
However, EFT processing is dependent upon coordinated testing between the ATM
networks and the Company's systems. The Company has purchased software to
coordinate the testing of its operations with that of the networks. The Company
believes this testing will be complete and certified by June 30, 1999. If the
networks do not successfully address Year 2000 issues in their operation and if
the Company is unable to route the transaction volume over another network or
another provider that has Year 2000 compliant systems, the Company's processing
operations may be interrupted, hindered, or delayed which would have a material
adverse effect on its business, financial condition and results of operations.
In regard to the Company's ATM network and services, InterCept is in the
process of certifying its connections to other ATM networks as well as examining
some of its customer's ATMs and other equipment. InterCept believes this testing
will be substantially completed by June 30, 1999. It is difficult to estimate
the cost of the effort as the majority of expenditures relate to existing
programmers and support staff required to review the financial institutions
networks and equipment. It is impossible to estimate the potential expenses
involved or delays which may result from a failure or delay by these
institutions and third parties in resolving their Year 2000 issues.
In regard to the Company's data communications operations, the Company has
completed a review of its internal equipment as well as third party products and
systems used in its operations. It is the Company's belief that its data
communications equipment and services, which are primarily provided by companies
such as Motorola, Bell South and MCI WorldCom are compliant. If these companies
do not successfully address Year 2000 issues in their operations and if the
Company is unable to successfully transfer its business operations to another
provider that has Year 2000 compliant systems, the Company's processing
operations may be interrupted, hindered or delayed, which would have a material
adverse effect on its business, financial condition and results of operations.
The Company has completed a preliminary assessment of third party products
and systems used in its business. Other companies interact electronically with
the Company and its customers, and the Company must coordinate its EFT, data
communications and enterprise software processing with such other companies and
its customers. If these other companies or the Company's customers do not
successfully address Year 2000 issues in their operations and if the Company is
unable to successfully transfer its business operations to another provider that
has Year 2000 compliant systems, the Company's processing operations may be
interrupted, hindered or delayed, which would have a material adverse effect on
its business, financial condition and results of operations. Furthermore, the
Company believes that many financial institutions and third party vendors and
network processors (including customers, vendors and processors of the Company)
are still in the preliminary stages of analyzing their software and network
applications to address Year 2000 issues. It is impossible to estimate the
potential expenses involved or delays which may result from the failure of these
institutions and third parties to resolve their Year 2000 issues in a timely
manner and there can be no assurance that such expenses, failures or delays will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
22
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
InterCept does not use derivative financial instruments in its operations
or investments and does not have significant operations subject to fluctuations
in foreign currency exchange rates. The Company's $20 million credit facility
has an interest rate which is based (at the Company's election) upon either the
lender's prime rate less an applicable margin or the 30-day LIBOR rate plus
applicable margins. As of March 1, 1999, the total
23
<PAGE>
amount outstanding under this credit facility was less than $1.0 million and,
therefore, the Company believes it does not have a significant risk due to
potential fluctuations in interest rates at this time. Changes in interest rates
which dramatically increase the interest rate on the Company's credit facility
would make it more costly to borrow proceeds under that facility and may impede
InterCept's acquisition and growth strategies if management determines that the
costs associated with borrowing funds are too high to implement these
strategies.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including the
Company's consolidated balance sheet as of December 31, 1998 and 1997 and
consolidated statements of income, consolidated statements of cash flows and
consolidated statements of changes in shareholders' equity for the years ended
December 31, 1998, 1997 and 1996, together with the report thereto of Arthur
Andersen LLP dated February 19, 1999, and the schedule containing certain
supporting information are attached hereto as pages F-1 through F-19.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
24
<PAGE>
PART III
Certain information required by Part III is omitted from this Report
because the Registrant will file a definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy Statement")
not later than 120 days after the end of the financial year covered by this
Report, and certain information included therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
from the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Proxy Statement, except for those portions relating to the Compensation
Committee's Report on Executive Compensation and to the Company's Comparative
Performance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of The InterCept Group,
Inc. and Subsidiaries are filed as part of this Report and are attached hereto
as pages F-1 to F-19:
Report of Independent Public Accountants
Consolidated Balance Sheets of December 31, 1997 and 1998
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the years ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
25
<PAGE>
(a)(2) Financial Statement Schedules
Financial statement schedules I and III through VI are omitted because they
are either: (i) not applicable or not requires; or (ii) the information is
contained in the consolidated financial statements or notes thereto.
Schedule II Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance Balance
Description 12/31/97 Purchase reserves Deductions 12/31/98
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restructuring
reserve related
to acquisition $ 0 $178,169 $68,646 (i) $ 109,523
- -------------------------------------------------------------------------------------------------
</TABLE>
(i) Amount includes $50,968 of lease costs charged against reserve and
$17,678 adjusted against goodwill to reflect revised estimates of exit
costs.
<TABLE>
<CAPTION>
Charge to
beginning Costs Ending
Description and balance Expense Writeoffs Balance
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 Allowance for
Doubtful Accounts $ 84,787 134,153 (61,168) 157,772
1997 Allowance for
Doubtful Accounts 157,772 -- (1,156) 156,616
1998 Allowance for
Doubtful Accounts 156,616 20,000 (6,864) 169,752
- -------------------------------------------------------------------------------------------------
</TABLE>
Report of Independent Public Accountants on Financial Statement Schedules is
attached hereto as page F-20.
(b) Exhibits
Exhibit
No. Description
- ------- -----------
2.1 Asset Purchase Agreement dated August 4, 1998 by and between The
Intercept Group, Inc., Nova Financial Corporation and Broadnet, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's Report on
Form 8-K filed on August 19, 1998).
2.2 Asset Purchase Agreement dated September 30, 1998 by and between
ProVesa, Inc., Mercantile Corporation and Dale May (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
filed on October 14, 1998).
2.3 Acquisition and Merger Agreement dated October 30, 1998 by and between
ProVesa, Inc., IPA Acquisition Corp., Item Processing of America, Inc.
("IPA") and certain shareholders of IPA (incorporated by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K filed on
November 13, 1998).
3.1 Amended and Restated Articles of Incorporation, as filed with the
Secretary of the State of Georgia on April 29, 1998.*
3.2 Amended and Restated Bylaws.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws defining the
rights of the holders of Common Stock of the Company.
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.*/**
26
<PAGE>
10.4 Employment Agreement by and between the Company and John W. Collins
dated as of January 30, 1998.*/**
10.5 Employment Agreement by and between the Company and Donny R. Jackson
dated as of January 30, 1998.*/**
10.6 Employment Agreement by and between the Company and Scott R. Meyerhoff
dated as of February 1, 1998.*/**
10.7 Employment Agreement by and between the Company, Vir Nanda and
Intercept Systems, Inc. dated June 4, 1996.*/**
10.8 Stock Option Agreement by and between the Company and Donny R. Jackson
dated January 14, 1997.*/**
10.9 Stock Option Agreement dated as of February 1, 1998 by and between the
Company and Scott R. Meyerhoff.*/**
10.10 Stock Option Agreement dated as of February 24, 1997 by and between
the Company and Michael R. Boian.*/**
10.11 Form of Indemnification Agreement entered into between the Company and
its directors and officers.*
10.12 Form of General Marketing Agent Agreement.*
10.13 Form of Master Electronic Funds Transfer Services Agreement.*
10.14 Form of Data Processing Agreement.*
10.15 Form of Service Agreement for Data Communications.*
10.16 Form of Software License Agreement for PC BancPAC(TM).*
10.17 Channel Services Payment Plan Agreement dated December 22, 1993
between Intercept Systems, Inc. and BellSouth Communications, Inc.*
10.18 Form of Special Service Arrangement Agreement with BellSouth
Telecommunications, Inc. for frame relay services.*
10.19 Form of SynchroNet Service Agreement with Southern Bell Telephone and
Telegraph Company.*
10.20 WorldCom Data Services Agreement dated as of February 27, 1998 by and
between WorldCom, Inc. and Intercept Communications Technologies,
L.L.C.*+
10.21 Form of Stock Option Agreement for Directors under The InterCept
Group, Inc. Amended and Restated 1996 Stock Option Plan.*/**
10.22 Loan and Security Agreement dated April 28, 1998 by and among the
Company, its wholly-owned subsidiaries and First Union National Bank.*
10.23 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and John W. Collins (incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 filed with the Securities and Exchange Commission on
August 14, 1998 (the "Second Quarter 1998 Report")).**
10.24 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and Donny R. Jackson (incorporated by reference to Exhibit
10.2 of the Second Quarter 1998 Report).**
10.25 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and Scott R. Meyerhoff (incorporated by reference to Exhibit
10.3 of the Second Quarter 1998 Report).**
10.26 First Amendment to the Loan and Security Agreement dated October 9,
1998 by and among the Company, its wholly-owned subsidiaries and First
Union National Bank.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
27
<PAGE>
24.1 Power of Attorney (contained on the signature page hereof).
27.1 Financial Data Schedule for the periods ending December 31, 1997 and
1998 (for SEC use only).
________________
* Incorporated by reference to the exhibits to the Company'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.
(c) Reports on Form 8-K
Form 8-K filed August 19, 1998
Reporting under Item 2 that the Company entered into a definitive Asset Purchase
Agreement to purchase certain assets and assume certain liabilities of Nova
Financial Corporation (the "Nova Agreement").
Form 8-K filed October 14, 1998
Reporting under Item 2 that ProVesa, Inc., a wholly owned subsidiary of the
Company, entered into a definitive Asset Purchase Agreement to purchase certain
assets and assume certain liabilities of Advance Data (the "Advance Data
Agreement").
Form 8-K/A filed October 17, 1998
Reporting under Item 7 the Financial Statements, Pro Forma Financial Information
and Exhibits with respect to the Nova Agreement.
Form 8-K filed November 13, 1998
Reporting under Item 2 that ProVesa, Inc., a wholly-owned subsidiary of the
Company, entered into a definitive Acquisition and Merger Agreement to acquire
Item Processing of America, Inc. by merger.
Form 8-K/A filed December 11, 1998
Reporting under Item 7 the Financial Statements, Pro Forma Financial Information
and Exhibits with respect to the Advance Data Agreement.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereto duly authorized.
The InterCept Group, Inc.
March 2, 1999 By: /s/ John W. Collins
- ------------- --------------------
Date John W. Collins
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, John W. Collins
and Donny R. Jackson, and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report (Form 10-K) and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchanges Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------------------- ---------------------------- ---------------
<S> <C> <C>
/s/ John W. Collins Chairman of the Board and March 2, 1999
- ------------------------------------------- Chief Executive Officer
John W. Collins (principal executive
officer)
/s/ Scott R. Meyerhoff Chief Financial Officer March 2, 1999
- ------------------------------------------- (principal financial and
Scott R. Meyerhoff accounting officer)
/s/ Donny R. Jackson
- ------------------------------------------- President, Chief Operating March 2, 1999
Donny R. Jackson Officer and Director
/s/ Jon R. Burke Director March 2, 1999
- -------------------------------------------
Jon R. Burke
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------------------- ---------------------------- ---------------
<S> <C> <C>
/s/ Boone A. Knox Director March 2, 1999
- -------------------------------------------
Boone A. Knox
/s/ Bruce P. Leonard Director March 2, 1999
- -------------------------------------------
Bruce P. Leonard
/s/ Glenn W. Sturm Director March 2, 1999
- -------------------------------------------
Glenn W. Sturm
</TABLE>
30
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
TABLE OF CONTENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997, and 1998
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the Years Ended December 31, 1996, 1997, and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997, and 1998
NOTES TO FINANCIAL STATEMENTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The InterCept Group, Inc.:
We have audited the accompanying consolidated balance sheets of THE INTERCEPT
GROUP, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997 and
1998 and the related consolidated statements of operations, changes in
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The InterCept Group, Inc. and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 19, 1999
F-1
<PAGE>
THE INTERCEPT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
ASSETS 1997 1998
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,010,236 $ 3,224,313
Accounts receivable, less allowance for
doubtful accounts of $156,616 and
$169,752 in 1997 and 1998, respectively 2,775,608 3,503,071
Deferred tax assets 75,016 80,007
Inventory, prepaid expenses, and other 279,969 1,266,839
----------- -----------
Total current assets 5,140,829 8,074,230
PROPERTY AND EQUIPMENT, net 2,515,868 7,093,255
DEFERRED TAX ASSETS 593,315 0
INTANGIBLE ASSETS, net 1,683,097 4,660,969
OTHER NONCURRENT ASSETS 223,353 326,868
----------- -----------
$10,156,462 $20,155,322
=========== ===========
LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY
-----------------------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 580,590 $ 94,851
Line of credit 200,000 0
Accounts payable and accrued liabilities 1,871,209 2,105,732
Accrued income taxes 232,359 99,397
Deferred revenue 1,139,614 1,147,191
----------- -----------
Total current liabilities 4,023,772 3,447,171
----------- -----------
NOTES PAYABLE, less current portion 4,716,511 210,825
----------- -----------
DEFERRED TAX LIABILITY 0 182,162
----------- -----------
DEFERRED COMPENSATION 1,800,000 0
----------- -----------
Total liabilities 10,540,283 3,840,158
----------- -----------
MINORITY INTEREST 0 57,191
----------- -----------
COMMITMENTS AND CONTINGENCIES
SERIES A REDEEMABLE PREFERRED STOCK,
8% cumulative, no par value; 30,000 shares
authorized, 4,000 and 0 shares issued and
outstanding in 1997 and 1998, respectively 400,000 0
SHAREHOLDERS' (DEFICIT) EQUITY:
Preferred stock, no par value; 1,000,000
shares authorized, Series A
reported above 0 0
Common stock, no par value; 50,000,000 shares
authorized, 6,750,114 and 9,248,539 shares
issued and outstanding in 1997 and 1998,
respectively 2,764,405 17,169,585
Accumulated deficit (3,548,226) (1,097,612)
Accumulated other comprehensive income 0 186,000
----------- -----------
Total shareholders' (deficit) equity (783,821) 16,257,973
----------- -----------
$10,156,462 $20,155,322
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
F-2
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
REVENUES:
Service fee income $ 9,215,549 $16,841,276 $21,463,518
Data communications management income 2,194,766 3,119,318 3,772,145
Equipment and product sales, services, and other 3,100,380 3,299,488 3,665,941
----------- ----------- -----------
Total revenues 14,510,695 23,260,082 28,901,604
----------- ----------- -----------
COSTS OF SERVICES:
Cost of service fee income 3,196,893 5,215,251 6,321,055
Cost of data communications management income 1,908,551 2,411,508 2,555,521
Cost of equipment and product sales, services and other 2,753,891 2,595,892 3,154,956
----------- ----------- -----------
Total costs of services 7,859,335 10,222,651 12,031,532
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 6,852,444 10,105,317 11,222,008
DEPRECIATION AND AMORTIZATION 350,991 1,323,771 1,336,620
LOSS ON IMPAIRMENT OF INTANGIBLES 0 727,500 0
WRITE-OFF OF PURCHASED RESEARCH AND DEVELOPMENT COSTS 810,000 0 0
----------- ----------- -----------
Total operating expenses 15,872,770 22,379,239 24,590,160
----------- ----------- -----------
OPERATING (LOSS) INCOME (1,362,075) 880,843 4,311,444
INTEREST EXPENSE (320,431) (770,175) (344,163)
INTEREST AND OTHER INCOME, net 41,686 121,535 160,718
----------- ----------- -----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR
INCOME TAXES AND MINORITY INTEREST (1,640,820) 232,203 4,127,999
(BENEFIT) PROVISION FOR INCOME TAXES (236,379) 666,125 1,564,242
MINORITY INTEREST IN LOSS (INCOME) OF CONSOLIDATED SUBSIDIARY (14,558) 38,564 (88,908)
----------- ----------- -----------
NET (LOSS) INCOME BEFORE PREFERRED DIVIDENDS (1,418,999) (395,358) 2,474,849
PREFERRED DIVIDENDS (8,000) (32,000) (16,000)
----------- ----------- -----------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS (1,426,999) (427,358) 2,458,849
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized holding gains arising during period 0 0 186,000
----------- ----------- -----------
Total comprehensive (loss) income $(1,426,999) $ (427,358) $ 2,644,849
=========== =========== ===========
NET (LOSS) INCOME PER COMMON SHARE:
Basic $(0.24) $(0.06) $0.30
=========== =========== ===========
Diluted $(0.24) $(0.06) $0.30
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unrealized Realized
Common Stock Holding Earnings
----------------------- Gains on (Accumulated
Shares Amount Investments Deficit) Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 5,867,400 $ 106,128 $ 0 $ 660,631 $ 766,759
Distributions for taxes to shareholders of
pass-through entities 0 0 0 (1,579,045) (1,579,045)
Reclassification of accumulated deficit upon conversion
to a C corporation 0 (369,969) 0 369,969 0
Acquisition and retirement of treasury stock (694,750) (8,916) 0 (991,084) (1,000,000)
Issuance of common stock in connection with the acquisition
of Data Services Corporation 610,537 878,700 0 0 878,700
Issuance of common stock in connection with the acquisition
of ProVesa 221,057 505,303 0 0 505,303
Issuance of common stock in connection with the acquisition
of FiNet 244,741 576,000 0 0 576,000
Issuance of common stock in connection with the acquisition
of Bank Services Corporation 501,129 1,083,276 0 0 1,083,276
Net loss attributable to common shareholders 0 0 0 (1,426,999) (1,426,999)
Pro forma tax provision 0 0 0 278,228 278,228
--------- ----------- -------- ----------- -----------
BALANCE, December 31, 1996 6,750,114 2,770,522 0 (2,688,300) 82,222
Distributions for taxes to shareholders of
pass-through entities 0 0 0 (596,796) (596,796)
Reclassification of accumulated deficit upon conversion to
a C corporation 0 (11,717) 0 11,717 0
Issuance of common stock 0 5,600 0 0 5,600
Net loss attributable to common shareholders 0 0 0 (427,358) (427,358)
Pro forma tax provision 0 0 0 152,511 152,511
--------- ----------- -------- ----------- -----------
BALANCE, December 31, 1997 6,750,114 2,764,405 0 (3,548,226) (783,821)
Net income attributable to common shareholders 0 0 0 2,458,846 2,458,846
Distributions for taxes to shareholders of
pass-through entities 0 0 0 (8,232) (8,232)
Preferred stock premium paid 0 (40,000) 0 0 (40,000)
Initial public offering proceeds, net of expenses 2,498,425 14,445,180 0 0 14,445,180
Other comprehensive income 0 0 186,000 0 186,000
--------- ----------- -------- ----------- -----------
BALANCE, December 31, 1998 9,248,539 $17,169,585 $186,000 $(1,097,612) $16,257,973
========= =========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income before preferred dividends $(1,418,999) $ (395,358) $ 2,474,846
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 157,212 567,761 1,009,264
Amortization 193,779 756,010 327,356
Write-off of purchased research and development 810,000 0 0
Loss on impairment of intangibles 0 727,500 0
Loss on disposal of property and equipment 0 0 34,950
Minority interest in income (loss) of consolidated subsidiary 14,558 (38,564) 88,908
Deferred income tax (benefit) provision (706,075) (15,095) 770,486
Pro forma tax expense 278,228 152,511 0
Changes in operating assets and liabilities, net of effects
of purchase acquisitions:
Accounts receivable (790,494) 60,356 (310,931)
Inventory, prepaid expenses, and other 234,049 (4,992) (674,689)
Other assets (25,968) (65,415) (6,357)
Accounts payable and accrued expenses 941,754 286,372 (1,030,007)
Deferred revenue 331,899 67,861 (1,723)
Deferred compensation 1,800,000 0 0
----------- ---------- -----------
Net cash provided by operating activities 1,819,943 2,098,947 2,682,103
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES, net of effects of
purchase acquisitions:
(Decrease) increase in note receivable (556,326) 412,688 19,684
Purchases of property and equipment, net (137,124) (992,331) (4,839,365)
Additions to capitalized software 0 0 (322,924)
Purchase of businesses, net of cash acquired 388,751 0 (3,219,536)
Increase in investments 0 (50,000) 0
----------- ---------- -----------
Net cash used by investing activities (304,699) (629,643) (8,362,141)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES, net of effect of
purchase acquisitions:
Proceeds from notes payable and line of credit 3,000,000 280,000 0
Payments on notes payable and line of credit (860,639) (513,990) (6,991,425)
Distributions for taxes to shareholders of pass-through entities (1,579,045) (596,796) (8,232)
Issuance of common stock, net of expenses 0 5,600 14,445,180
Retirement of preferred stock (25,000) 0 (440,000)
Payment of preferred dividends (8,000) (32,000) (16,000)
Purchase and retirement of treasury stock (1,000,000) 0 0
Debt issuance costs 0 0 (95,408)
----------- ---------- -----------
Net cash (used in) provided by financing activities (472,684) (857,186) 6,894,115
----------- ---------- -----------
NET INCREASE IN CASH 1,042,560 612,118 1,214,077
CASH, beginning of year 355,558 1,398,118 2,010,236
----------- ---------- -----------
CASH, end of year $ 1,398,118 $2,010,236 $ 3,224,313
=========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 382,240 $ 725,923 $ 365,265
=========== ========== ===========
Cash paid for income taxes $ 146,184 $ 341,604 $ 1,020,968
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
1. ORGANIZATION AND NATURE OF BUSINESS
The InterCept Group, Inc. ("Intercept" or the "Company") (a Georgia
corporation) designs, develops, markets and implements a suite of fully
integrated electronic commerce products and services primarily for community
financial institutions in the United States. The Company's products and
services include electronic funds transfer ("EFT"), data communications
management, client/server enterprise software and other processing
solutions.
The Company is a single-source provider of a broad range of flexible and
customized electronic commerce solutions and supporting value-added products
and services. The Company provides numerous EFT products and services,
including automated teller machine ("ATM"), point-of-sale ("POS"), and scrip
debit services; debit card transactions; funds transfer services and remote
banking services. The Company licenses client/server enterprise software,
which operates in a Windows NT(R) environment, to community financial
institutions on both a service-bureau and in-house basis. The Company also
supplies banking-related equipment, provides related maintenance and
technical support, and offers numerous ancillary products and services to
its financial institution customers.
In June 1998, the Company completed the initial public offering of its
common stock (the "Offering"). Proceeds to the Company from the Offering
(after deducting expenses related to the Offering) were approximately $14.4
million (including proceeds from the underwriters' overallotment option
which was exercised in July 1998). Proceeds of the Offering were used to pay
certain debt, pay obligations owed to a former officer of the Company,
enhance and expand the InterCept frame relay network, and redeem shares of
preferred stock and for general working capital needs, including
acquisitions.
The Company was incorporated on April 30, 1996 as a shell entity. On June 4,
1996, InterCept Systems, Inc. ("Systems") was combined with the Company.
Systems provided EFT services through multiyear contracts.
The Company has made several acquisitions since inception. See Note 3 where
discussed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries ProVesa Services, Inc. ("ProVesa"),
InterCept Switch, Inc., Item Processing of America, Inc. and InterCept
Communications Technologies, Inc. as of December 31, 1998. In addition,
ProImage, Inc. ("ProImage"), a corporation in which ProVesa has a 67%
ownership interest as of December 31, 1998, has been consolidated in the
accompanying consolidated financial statements since its inception, due to
Intercept's control of
F-6
<PAGE>
ProImage. Management of InterCept retains responsibility for all day-to-day
operations of ProImage, and has and will continue to provide complete
financial support for ProImage subsequent to its formation due to legal
limitations on the other investors' ability to fund losses. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Minority interest represents the minority shareholders'
proportionate share of the equity and earnings of ProImage.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents.
Marketable Securities
Marketable securities totaled $50,000 and $350,000 at December 31, 1997 and
1998, respectively, and are included in inventory, prepaid expenses, and
other current assets on the accompanying consolidated balance sheets. The
Company 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' (deficit) equity and as a component of comprehensive income.
Realized gains and losses (and declines in value judged to be other than
temporary) are included in the Company's results of operations. The cost of
securities sold is based on the specific identification method.
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 the Company's assets are as
follows:
Building and improvements 5 to 31 years
Machinery and equipment 3 to 30 years
Furniture and office equipment 5 to 10 years
Software licenses 3 to 5 years
Software Development Costs
The Company capitalizes software-development costs incurred from the time
technological feasibility of the software is established until the software
is saleable. These costs are amortized on the straight-line basis over five
years, the estimated economic life of the software. Amortization expense
totaled $0, $30,000, and $53,617 in 1996, 1997, and 1998, respectively.
Research and development costs and maintenance costs related to software
development are expensed as incurred. Amortization of capitalized software
development costs begins as products are made available for sale or as the
related product is put into use with annual amortization equal to the
greater of the amount computed using the ratio that current gross revenues
bear to the total of current and anticipated future gross revenues for the
product or the straight-line method over the remaining estimated economic
life of the product, which is a maximum of five years.
F-7
<PAGE>
Intangible Assets
Intangible assets include goodwill, customer contracts, capitalized product
technology and organizational costs. The Company periodically evaluates the
realizability of intangible assets based on estimates of undiscounted future
cash flows over the remaining useful life of the related asset. If the
amount of such estimated undiscounted future cash flow is less than the net
book value of the asset, the asset is written down to the amount of the
estimated undiscounted cash flows.
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 15 to 40 years.
Customer Contracts
In connection with certain of the Company's acquisitions, the Company
allocated a portion of the purchase price to customer contracts acquired
based on a discounted cash flow analysis of the applicable contracts. The
estimated fair values attributed to the contract are being amortized over
a period of 18 months to 3 years, which represents the estimated average
remaining life of the contracts.
Product Technology
Product technology represents internally developed software acquired.
Product technology is amortized on a straight-line basis over five years.
Segment Reporting
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This Statement is effective for financial statements for periods
beginning after December 15, 1997. The Company does not disclose segment
information as it believes it has only one segment. The Company 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 fee income, data-processing fees, data-
communication management fees, equipment sales, installation and
maintenance, software-license fees, and software maintenance. Service-fee
income, data-processing fees, data-communication management fees, and
installation revenues are recognized as services are performed. Revenue from
software and equipment sales are recognized upon shipment of the product to
customers, provided that there are no significant obligations remaining and
collectibility of the revenues is probable. Any postcontract support
included in the contract is separately priced and deferred and recognized
over the period of the postcontract support in accordance with AICPA
Statement of Position No. 97-2. The Company recognizes revenue from software
license fees, services, and maintenance ratably over the period during which
the license fees, services, and maintenance are performed.
Deferred Revenue
Deferred revenue represents the liability for advanced billings to customers
primarily related to maintenance contracts. Such amounts are recognized as
revenue when the related services are performed.
Long-Lived Assets
The Company reviews its long-lived assets for impairment at each balance
sheet date or whenever events or changes in circumstances indicate that the
carrying amount of an asset should be assessed.
F-8
<PAGE>
Management periodically evaluates the intangible assets related to each
acquisition individually to determine whether an impairment has occurred. An
impairment is recognized when the discounted future cash flows estimated to
be generated by the acquired business are not sufficient to recover the
unamortized balance of the intangible asset with the amount of any such
deficiency charged to income in the current year. Estimates of future cash
flows are based on many factors, including current operating results,
expected market trends and competitive influences.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities result in deferred tax assets, an evaluation of the probability
of being able to realize the future benefits indicated by such asset is
required. A valuation allowance is provided for a portion of the deferred
tax asset when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In assessing the realizability of
the deferred tax assets, management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income and tax-planning
strategies.
Through May 15, 1996, Systems had elected by consent of its shareholders to
be taxed under the provisions of Subchapter S of the Internal Revenue Code.
Under those provisions, the shareholders included their respective shares of
the company's earnings or losses in their individual income tax returns.
From January 1, 1996 to October 31, 1997, in accordance with the provisions
of the Internal Revenue Code, the income or loss of Technologies was
included in the income tax returns of the members of the limited liability
company.
The income tax provision reflects pro forma income taxes as if Systems and
Technologies had been C corporations for all periods presented. The
provision includes pro forma taxes of $278,228 and $152,511 for the years
ended December 31, 1996 and 1997.
In connection with the change in tax status of Systems in 1996 and
Technologies in 1997 to C corporations, accumulated deficits of $369,969 and
$11,717 were reclassified from accumulated deficit to common stock in the
accompanying statement of shareholders' equity (deficit).
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 and
deferred compensation amounts approximate carrying value and are based on
their effective interest rates compared to current market rates.
F-9
<PAGE>
Advertising Costs
The Company expenses all advertising costs as incurred.
Sources of Supplies
The Company voluntarily uses a single vendor for routing equipment issued in
the Company's network. However, if the vendor were unable to meet the
Company's needs, management believes that other sources for this equipment
exist on commensurate terms and that operating results would not be
affected.
Net (Loss) Income Per Common Share
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128 effective December 31, 1997. Basic earnings per share are computed based
on the weighted average number of total common shares outstanding during the
respective years. Diluted earnings per share are computed based on the
weighted average number of total shares of common stock outstanding,
adjusted for common stock equivalents.
On February 4, 1998, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 98 "Computation of Earnings Per Share." SAB
No. 98 requires the retroactive inclusion of nominal issuances of common
stock and common stock equivalents in earnings per share calculation for all
periods presented and precludes the use of the treasury stock method for
these issuances. Management believes that all issuances of common stock and
stock options have been made at the current market value at the time of
issuance and that there have been no nominal issuances.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting
of comprehensive income, which is the total of net income and all other
nonowner changes in shareholders' (deficit) equity. The adoption of SFAS No.
130 had no effect on the Company's net (loss) income.
For the years ended December 31, 1996 and 1997, there were no non-owner
changes in shareholders' (deficit) equity. For the year ended December 31,
1998, other comprehensive income consists of unrealized holding gains on
marketable securities of $300,000, net of related tax effects of $114,000.
There were no gains realized on marketable securities in net (loss) income
for the years ended December 31, 1996, 1997, and 1998, and thus there were
no reclassification adjustments to comprehensive income.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
3. ACQUISITIONS
On June 4, 1996, Systems merged with the Company in a share exchange
combination whereby Systems became a wholly owned subsidiary of the Company.
The merger was effected by the exchange of 721 out of the 927 outstanding
shares of common stock of Systems for 2,431,622 shares
F-10
<PAGE>
of common stock of the Company. The remaining 206 common shares of Systems
(equivalent to 694,750 shares of the Company) were acquired for $1,000,000
and retired.
On June 4, 1996, the Company acquired all of the outstanding shares of
common stock of Data Services for 610,537 shares of common stock of the
Company, valued at $1.44 per share, with a total value of $878,700. The
transaction was accounted for as a purchase. The consideration exceeded the
net tangible asset value of Data Services by approximately $917,750. Of this
excess, $360,000 was allocated to customer contracts based on a discounted
cash flow analysis and amortized over a period of 18 months and the
remaining $468,000 was allocated to goodwill and is being amortized over a
period of 20 years. The results of operations of the acquired businesses
have been included in the Company's consolidated financial statements from
the date of acquisition.
On November 27, 1996, the Company acquired all of the outstanding shares of
common and Series A preferred stock of ProVesa in exchange for 221,057
shares of common stock, valued at $2.29 per share, and 4,250 shares of
Series A preferred stock, valued at $100 per share, of the Company with a
total fair value of approximately $905,303. The transaction was accounted
for as a purchase. The consideration exchanged exceeded the net tangible
asset value of ProVesa by approximately $1,304,700. Of this excess, $441,600
was allocated to customer contracts based on a discounted cash flow analysis
and amortized over a period of 18 months, $300,000 was allocated to existing
product technology and is being amortized over a period of 3 years, and the
remaining $563,100 was allocated to goodwill and is being amortized over a
period of 40 years. The results of operations of the acquired business have
been included in the Company's consolidated financial statements from the
date of acquisition. In December 1997, the Company made a decision to write
off the costs allocated to product technology, as the software was not Year
2000 compliant, and the Company made a decision not to further develop or
support the software. The Company took a charge of $191,000 in arriving at
operating income in its accompanying financial statements during the fourth
quarter of 1997. Customers using the software are being migrated to other
software products of the Company which are Year 2000 compliant.
On December 17, 1996, the Company acquired all of the outstanding shares of
FiNet in exchange for 244,741 shares of common stock of the Company, valued
at $2.35 per share, with a total fair value of approximately $576,000. The
transaction was accounted for as a purchase. The consideration exchanged
exceeded the net tangible asset value of FiNet by approximately $575,800.
This amount was allocated to goodwill and is being amortized over a period
of 15 years. The results of operations of the acquired business have been
included in the Company's consolidated financial statements from the date of
acquisition.
During 1997, the operating losses of FiNet significantly exceeded budgeted
amounts. In addition, FiNet was not successful in implementing its sales
plan to targeted customers, and the Company anticipated that FiNet would
continue to incur operating losses for the foreseeable future. Based on the
current and projected losses, the Company determined in December 1997 that
the goodwill recorded on the purchase of FiNet was impaired and,
accordingly, recorded a $536,000 charge to operating income. In addition, in
January 1998, the Company canceled certain performance stock options which
had been granted to the officers of FiNet.
On December 31, 1996, the Company acquired all of the outstanding shares of
Bank Services in exchange for 501,129 shares of common stock of the Company,
valued at $2.16 per share, with a total fair value of approximately
$1,087,300. The transaction was accounted for as a purchase. The
consideration exchanged exceeded the net tangible asset value of Bank
Services by approximately $1,310,000. Of this excess, $810,000 was allocated
to incomplete research and development projects
F-11
<PAGE>
based on a third-party appraisal report, and expensed in the statement of
operations on the acquisition date. The incomplete research and development
projects had not reached technological feasibility, had no alternative use,
and required substantial additional development by the Company. Of the
remaining excess, $150,000 was allocated to product technology and amortized
over a period of 3 years and the remaining $350,000 was allocated to
goodwill and amortized over a period of 20 years. The results of operations
of the acquired business have been included in the consolidated financial
statements from the date of acquisition.
On January 31, 1998, the Company acquired all of the outstanding shares of
Technologies in exchange for 2,741,029 shares of common stock of the
Company. The transaction was accounted for as a pooling of interests. The
results of operations of Technologies have been included in the accompanying
financial statements for all periods presented.
On August 4, 1998, the Company acquired certain assets and assumed certain
liabilities of Nova. The transaction was accounted for as a purchase. The
consideration exchanged was approximately $1,100,000. The consideration
exchanged exceeded the net tangible asset value of Nova by approximately
$1,200,000. This amount was allocated to goodwill and is being amortized
over a period of 40 years. The results of operations of the acquired
business have been included in the Company's consolidated financial
statements from the date of acquisition. In conjunction with the
acquisition, the Company established a reserve of approximately $160,000 for
estimated costs to close the existing Nova facility. The costs mainly
consisted of the remaining noncancelable obligation under the lease on the
facility. During 1998, approximately $51,000 of lease costs were charged
against the reserve.
On September 30, 1998, the Company acquired certain assets and assumed
certain liabilities of Advance Data. The transaction was accounted for as a
purchase. The consideration exchanged was approximately $1,100,000 and
exceeded the net tangible asset value of Advance Data by approximately
$556,000. Of this excess, $38,000 was allocated to contracts based on a
discounted cash flow analysis and is being amortized over a period of 24
months, and the remaining $518,000 has been allocated to goodwill and is
being amortized over a period of 40 years. The results of operations of the
acquired business have been included in the Company's consolidated financial
statements from the date of acquisition.
On October 21, 1998, the Company acquired certain assets and assumed certain
liabilities of Item Processing of America, ("IPA"). The transaction was
accounted for as a purchase. The consideration exchanged was approximately
$1,255,000 and exceeded the net tangible asset value of IPA by approximately
$1,135,000. Of this excess, $195,000 was allocated to contracts based on a
discounted cash flow analysis and is being amortized over a period of 24
months, and the remaining $940,000 has been allocated to goodwill and is
being amortized over a period of 40 years. The results of operations of the
acquired business have been included in the Company's consolidated financial
statements from the date of acquisition.
The Company acquired an additional 33% of ProImage in August 1998 and
acquired certain assets and assumed certain liabilities of Premier Imaging
in September 1998. Total purchase price was approximately $290,000. The
purchase price exceeded net tangible assets by approximately $83,000, which
has been allocated to contracts based on a discounted cash flow analysis and
is being amortized over a period of 36 months. The results of operations of
the acquired business have been included in the Company's consolidated
financial statements from the date of acquisition.
The following unaudited pro forma consolidated financial information for the
year ended December 31, 1995 and 1996 assume the acquisitions of Data
Services, ProVesa, FiNet, and Bank Services had occurred as of January 1,
1995. The unaudited pro forma consolidated financial information for the
years ended December 31, 1997 and 1998 assume the acquisitions of Nova,
Advance Data, and IPA had occurred as of January 1, 1997.
<TABLE>
<CAPTION>
1995 1996 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $15,131,938 $21,556,149 $27,093,634 $31,537,741
=========== =========== =========== ===========
Net income (loss) before
income taxes and
minority interest 936,009 (227,480) 11,185 3,944,474
=========== =========== =========== ===========
Net income (loss) per
common share $0.16 $(0.04) $(0.11) $0.27
=========== =========== =========== ===========
</TABLE>
The unaudited pro forma consolidated financial information is not
necessarily indicative of the actual results that would have occurred had
the acquisitions been consummated at the beginning of the periods presented
or of future operations of the combined entities.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1998
----------- -----------
Land and building $ 622,114 $ 622,114
Leasehold improvements 94,472 141,383
Machinery and equipment 3,248,941 7,040,139
Furniture and office equipment 391,298 310,235
Software 484,697 1,420,657
Construction in progress 0 386,422
----------- -----------
4,841,522 9,920,950
Less accumulated depreciation (2,325,654) (2,827,695)
----------- -----------
Property and equipment, net $ 2,515,868 $ 7,093,255
=========== ===========
</TABLE>
5. INTANGIBLES
Intangibles at December 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Goodwill $ 1,536,085 $ 4,270,473
Product technology 150,000 473,856
Customer contracts 801,600 674,600
Organizational costs 20,000 23,120
----------- -----------
2,507,685 5,442,049
Less accumulated amortization (824,588) (781,080)
----------- -----------
$ 1,683,097 $ 4,660,969
=========== ===========
</TABLE>
F-12
<PAGE>
6. NOTES PAYABLE AND LINE OF CREDIT
Notes payable at December 31, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
---------- --------
<S> <C> <C>
Note payable to Georgia State Bank,
interest payable monthly at prime plus 2.5%;
paid in full June 1998 $2,732,974 $ 0
Note payable to FNB Commerce, interest
payable monthly at prime plus 2%; paid in
full June 1998 1,377,522 0
Note payable to Community Bank of Georgia,
interest payable monthly at prime
plus 1%; paid in full January 1998 402,963 0
Mortgage note payable to Allied Bank,
interest payable at prime; paid in full
June 1998 389,493 0
Note payable to First Macon Bank & Trust
interest payable at prime; monthly principal
and interest installments, payable in full
on September 15, 2001; the note is
collateralized by assets of the Company,
and a corporate guarantee by ProVesa
of two-thirds of the balance of the debt 316,123 241,697
Note payable to First Macon Bank & Trust,
interest payable at prime, monthly principal
and interest payments, payable in full on
October 25, 2002; the note is collateralized
by assets of the Company, and a corporate
guarantee by ProVesa of two-thirds of the
balance of the debt 78,026 63,979
---------- --------
5,297,101 305,676
Less current maturities (580,590) (94,851)
---------- --------
$4,716,511 $210,825
========== ========
</TABLE>
Future maturities of notes payable at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 94,851
2000 103,261
2001 91,704
2002 15,860
--------
$305,676
========
</TABLE>
Note Payable
During 1998, the Company entered into a credit facility with First Union
National Bank , the ("First Union Credit Facility"), under which the Company
may borrow up to $20 million to fund acquisitions
F-13
<PAGE>
and pay expenses related to acquisitions. In addition, at the Company's
election, $2 million of the First Union Credit Facility may become available
for working capital purposes. The First Union Credit Facility contains
provisions which require the Company to maintain certain financial ratios
and minimum net worth amounts and which restrict the Company's ability to
incur additional debt; make certain capital expenditures; enter into
agreements for mergers, acquisitions, or the sale of substantial assets; and
pay dividends. The First Union Credit Facility matures on November 1, 2001.
Interest is payable monthly and outstanding principal amounts accrue
interest, at the Company's option, at an annual rate equal to either (i) a
floating rate equal to the lender's prime rate minus one quarter of 1% or
(ii) a fixed rate based on the 30-day LIBOR rate plus applicable margins.
7. INCOME TAXES
The components of income tax (benefit) provision in the consolidated
statement of operations for the years ended December 31, 1996, 1997, and
1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- -------- ----------
<S> <C> <C> <C>
Current expense $ 191,468 $528,709 $ 793,756
Deferred (benefit) expense (706,075) (15,095) 770,486
Pro forma tax expense 278,228 152,511 0
--------- -------- ----------
(Benefit) provision for income taxes $(236,379) $666,125 $1,564,242
========= ======== ==========
</TABLE>
The income tax (benefit) provision reflects pro forma income taxes as if
Systems and Technologies had been C corporations for all periods presented.
The income tax (benefit) provision, as reported in the statements of income,
differs from the amounts computed by applying federal statutory rates due to
the following for the years ended December 31, 1996, 1997, and 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1997 1998
--------- -------- ----------
Federal income tax (benefit)
provision at statutory rate $(557,879) $ 78,949 $1,373,361
Tax/book basis differences,
primarily goodwill 62,411 493,671 40,914
Purchased research and development 275,400 0 0
Meals and entertainment 5,613 16,562 22,110
State taxes (benefit) provision,
net of federal effect (59,825) 72,594 159,956
Net effect of an S corporation
conversion to a C corporation 36,563 0 0
Other 1,338 4,349 (32,099)
--------- -------- ----------
$(236,379) $666,125 $1,564,242
========= ======== ==========
</TABLE>
In May 1996, Systems converted from S corporation status to C corporation
status. On the conversion date, the Company recorded an expense through its
tax provision to record the effect of cumulative temporary differences
through such date. In November 1997, Technologies converted
F-14
<PAGE>
from limited liability company status to C corporation status. The effect of
recording cumulative temporary differences was immaterial.
Deferred income tax assets and liabilities for 1997 and 1998 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, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 683,281 $ 0
Accounts receivable reserves 59,451 64,505
Net operating loss carryforwards 0 33,943
Other 40,338 30,702
--------- ---------
Total gross deferred tax assets 783,070 129,150
Less valuation allowance 0 (33,943)
--------- ---------
Net deferred tax assets 783,070 95,207
--------- ---------
Deferred tax liabilities:
Accelerated depreciation (114,739) (186,008)
Other 0 (11,354)
--------- ---------
Total gross deferred tax liabilities (114,739) (197,362)
--------- ---------
Net deferred tax asset (liability) $ 668,331 $(102,155)
========= =========
Less noncurrent net deferred tax assets
(liabilities) 593,315 (182,162)
--------- ---------
Current net deferred tax assets 75,016 80,007
========= =========
</TABLE>
In 1998, the Company recorded a deferred tax asset of $39,106 in connection
with the acquisition of IPA, related to the net operating loss carryforwards
of IPA of approximately $103,000. These net operating loss carryforwards
expire in 2008-2009. Approximately $14,000 of the losses were used by the
Company in 1998. The Company has established a valuation allowance against
the remaining deferred tax assets related to the losses of $33,943 as of
December 31, 1998 due to uncertainity of realization.
8. SHAREHOLDERS' EQUITY
On February 25, 1998, the board of directors declared a stock split on the
Company's common stock. The stock split was effected in the form of a stock
dividend of 1.1053 shares of common stock issued for each share of common
stock held by shareholders of record on February 28, 1998. The effect of the
stock split has been retroactively reflected as of December 31, 1994 in the
statements of changes in shareholders' (deficit) equity and for all periods
presented. All references to the per share amounts and elsewhere in the
financial statements and related footnotes have been restated as appropriate
to reflect the effect of the stock split.
F-15
<PAGE>
9. STOCK OPTION PLANS
1996 Stock Option Plan
The Board of Directors and the Company's shareholders approved the Company's
Amended and Restated 1996 Stock Option Plan ("1996 Stock Option Plan")
effective as of November 12, 1996. Awards under the 1996 Stock Option Plan
are currently granted by a committee composed of two independent directors
(the "Committee") 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
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 the Company's stock or the stock of its parent or
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 the Company ("Director Grants"). The board of
directors has authorized the issuance of up to 175,000 shares of common
stock under the 1996 Stock Option Plan pursuant to options having an
exercise price equal to the fair market value of the common stock on the
date the options are granted. The board of directors has approved Director
Grants of (i) options to purchase 35,000 shares to each nonemployee director
of the Company who beneficially owns less than 4% of the Company's
outstanding common stock on the date of such directors' initial election to
the board of directors and (ii) options to purchase 5,000 shares to each
director on each anniversary date of such director's election to the board
at an exercise price equal to the fair market value of the common stock on
the date the options are granted. Each initial Director Grant option vests
ratably over the director's three-year term of service, and each annual
grant vests on the date of grant. Each Director Grant expires five years
after the date of grant unless canceled sooner as a result of termination of
service or death or unless such option is fully exercised prior to the end
of the option period.
The maximum number of shares of common stock that currently may be subject
to outstanding options, determined immediately after the grant of any option
at December 31, 1998, is 1,263,180 shares (subject to certain adjustments).
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 the Company, 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
F-16
<PAGE>
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.
The Onmibus Budget Reconciliation Act of 1993 added Section 162(m) to the
Internal Revenue Code of 1986, as amended. Section 162(m) generally
disallows a public company's tax deduction for compensation to the chief
executive officer and four other most highly compensated executive officers
in excess of $1,000,000 in any tax year beginning on or after January 1,
1994. Compensation that qualifies as "performance-based compensation" is
excluded from the $1,000,000 deductibility cap and therefore remains fully
deductible by the company that pays it. The Company intends that options
granted with an exercise price at least equal to 100% of fair market value
of the underlying stock at the date of grant will qualify as such
"performance-based compensation," although other awards under the 1996 Stock
Option Plan may not so qualify.
A summary status of the Company's stock option plan as of December 31, 1996,
1997, and 1998 and changes during the year is presented below:
<TABLE>
<CAPTION>
Price
Shares Range
--------- -----------
<S> <C> <C>
Outstanding at December 31, 1996 613,171 $2.16-$2.37
Granted 178,951 $ 2.16
---------
Outstanding at December 31, 1997 792,122 $2.16-$2.37
Granted 1,036,378 $6.38-$7.70
Terminated (844,146) $2.16-$7.70
---------
Outstanding at December 31, 1998 984,354 $2.16-$7.70
=========
</TABLE>
Grants and terminations listed above for 1998 include 317,689 options
granted on February 1, 1998 to certain employees and directors. These
options were issued at $7.70 per share but were later canceled and reissued
at the initial public offering date at $7 per share, the fair market value
of the stock at the reissue date.
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using the
method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to 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.
The Company has elected to account for its stock based compensation plans
under APB Opinion No. 25, under which no compensation cost has been
recognized by the Company. However, the Company has computed, for pro forma
disclosure purposes, the value of all options for shares of its common stock
granted since January 1, 1995 to employees of the Company using the Black-
Scholes option pricing model prescribed by SFAS No. 123 and the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998
----------- -------------------
<S> <C> <C>
Risk-free interest rate 6.15%-6.29% 5.34%-5.56%
Expected dividend yield 0% 0%
Expected lives Five years Three to four years
Expected volatility 0% 35%
</TABLE>
The weighted average fair value of options for the stock granted to
employees of the Company in 1997 and 1998 was $1.19 and $2.35 per share,
respectively. The total value of options for the Company's stock granted to
employees of the Company during 1997 and 1998 was computed as approximately
$101,447 and $1,668,034, respectively, which would be amortized on a pro
forma basis over the five-year vesting period of the options. If the Company
had accounted for these plans in accordance with SFAS No. 123, the Company's
net income for the years ended December 31, 1997 and 1998 would have been as
follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
----------- ----------
<S> <C> <C>
Net loss for the year ended
December 31, 1997 $ (427,358) $ (473,302)
Net income for the year ended
December 31, 1998 2,458,846 1,886,825
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted
Exercise Weighted Average
Price Number Average Contractual
Range of Shares Price Life (in years)
--------- --------- -------- ---------------
<S> <C> <C> <C>
$2.16 236,059 $2.16 6.83
2.37 42,106 2.37 6.00
7.00 506,189 7.00 8.11
7.70 200,000 7.70 4.50
</TABLE>
At December 31, 1997, 77,896 options for the Company's common stock with a
weighted average exercise price of $2.27 per share were exercisable by
employees of the Company. At December 31, 1998, 447,043 options of the
Company's common stock with a weighted average exercise price of $5.79 per
share were exercisable by employees of the Company.
10. NET (LOSS) INCOME PER COMMON SHARE
Net (Loss) Income per share at December 31, 1996, 1997, and 1998 were as
follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Basic:
Net (loss) income $(1,418,999) $ (395,358) $2,474,846
Less preferred stock dividends (8,000) (32,000) (16,000)
----------- ---------- ----------
Net (loss attributable) income available to common shareholders $(1,426,999) $ (427,358) $2,458,846
=========== ========== ==========
Weighted average common shares outstanding 5,851,347 6,750,114 8,132,240
=========== ========== ==========
Per share amount $ (0.24) $ (0.06) $ 0.30
=========== ========== ==========
Diluted:
Net (loss) income $(1,418,999) $ (395,358) $2,474,846
Less preferred stock dividends (8,000) (32,000) (16,000)
----------- ---------- ----------
Net (loss attributable) income available to common shareholders $(1,426,999) $ (427,358) $2,458,846
=========== ========== ==========
1996 1997 1998
----------- ---------- ----------
Weighted average common shares outstanding $ 5,851,347 $6,750,114 $8,132,240
Shares assumed issued upon exercise of stock options using
the treasury stock method 0 0 114,274
----------- ---------- ----------
Total $ 5,851,347 $6,750,114 $8,246,514
=========== ========== ==========
Per share amount $ (0.24) $ (0.06) $ 0.30
=========== ========== ==========
</TABLE>
Basic and diluted earnings per common share were computed by dividing net
(loss) income by the weighted average number of shares of common stock
outstanding during the year. Outstanding stock options, totaling 613,171,
792,122, and 706,189 shares for the years ended December 31, 1996, 1997, and
1998, respectively, were antidilutive and were therefore excluded from the
computation of diluted shares above.
11. EMPLOYEE BENEFITS
The Company 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, the Company matches a percentage of the employees' contributions.
This percentage is determined annually by the Company. The Company's
contributions approximated $13,000, $38,000, and $80,000 in 1996, 1997, and
1998, respectively.
F-18
<PAGE>
12. COMMITMENTS
The Company leases various equipment and facilities under operating lease
agreements. Future minimum annual obligations under these leases as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 871,484
2000 816,504
2001 689,209
2002 613,940
2003 428,381
Thereafter 74,436
----------
Total $3,493,954
==========
</TABLE>
Net rental expense was approximately $621,000, $1,030,000, and $865,000
during 1996, 1997, and 1998, respectively.
13. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996, the Company incurred costs for
supplies and services in the amount of $125,296 with ATM Source, Inc., a
corporation owned 100% by a director and shareholder of the Company.
During the years ended December 31, 1996, 1997, and 1998, the Company
incurred fees of $137,967, $31,489, and $813,921, respectively for legal
services to the law firm in which one its partners is also a director and
shareholder of the Company.
For the period January 1, 1996 to May 31, 1996, the Company incurred costs
of $44,775 from Data Services related to equipment maintenance services.
Such amounts are included in selling, general, and administrative expenses
in the accompanying statements of operations.
The Company provided EFT services to ProVesa, a company partially owned by
certain shareholders of the Company prior to its acquisition on November 27,
1996, totaling $166,572 for the period from January 1, 1996 to November 27,
1996.
The Company and Phoenix International Ltd., Inc. ("Phoenix") have entered
into software license and development agreements dated December 31, 1997
(the "December Agreement") and January 15, 1998 (the "January Agreement").
Under the December Agreement, the Company licensed ATM and voice response
software from Phoenix and obtained the rights to develop the software and
integrate it with the Company's existing software programs. Under the
January Agreement, Phoenix licensed EFT software from the Company and
obtained the rights to develop the software and integrate it with Phoenix's
existing programs. A director and shareholder of the Company is also a
director of Phoenix.
The Company had a note receivable of $466,941 at December 31, 1996 and of
$20,443 at December 31, 1998 from Dyad Corporation, a company partially
owned by certain shareholders of the Company. There was no amount
outstanding at December 31, 1997. The Company also owns 2% of the
outstanding common stock of Dyad, Inc. which is reflected at its cost and is
included in other assets in the accompanying consolidated balance sheets.
The Company provided telecommunications connectivity to Towne Services, Inc.
("Towne"). The Company recorded revenue of $127,917 during 1998, which is
classified in data communications management income. At December 31, 1998,
receivables from Towne were $28,054. Additionally, the Company owns 50,000
shares of Towne common stock, which was purchased in 1997. A director and
shareholder of InterCept serves as a director of Towne.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To The InterCept Group, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of The InterCept Group, Inc. included in this Form 10-K and
have issued our report thereon dated February 19, 1999. 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
Commissions 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
Atlanta, Georgia
February 19, 1999
F-20
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
2.1 Asset Purchase Agreement dated August 4, 1998 by and between The
Intercept Group, Inc., Nova Financial Corporation and Broadnet, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's Report on
Form 8-K filed on August 19, 1998).
2.2 Asset Purchase Agreement dated September 30, 1998 by and between
ProVesa, Inc., Mercantile Corporation and Dale May (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
filed on October 14, 1998).
2.3 Acquisition and Merger Agreement dated October 30, 1998 by and between
ProVesa, Inc., IPA Acquisition Corp., Item Processing of America, Inc.
("IPA") and certain shareholders of IPA (incorporated by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K filed on
November 13, 1998).
3.1 Amended and Restated Articles of Incorporation, as filed with the
Secretary of the State of Georgia on April 29, 1998.*
3.2 Amended and Restated Bylaws.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws defining the
rights of the holders of Common Stock of the Company.
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 the Company and John W. Collins
dated as of January 30, 1998.*/**
10.5 Employment Agreement by and between the Company and Donny R. Jackson
dated as of January 30, 1998.*/**
10.6 Employment Agreement by and between the Company and Scott R. Meyerhoff
dated as of February 1, 1998.*/**
10.7 Employment Agreement by and between the Company, Vir Nanda and
Intercept Systems, Inc. dated June 4, 1996.*/**
10.8 Stock Option Agreement by and between the Company and Donny R. Jackson
dated January 14, 1997.*/**
10.9 Stock Option Agreement dated as of February 1, 1998 by and between the
Company and Scott R. Meyerhoff.*/**
10.10 Stock Option Agreement dated as of February 24, 1997 by and between
the Company and Michael R. Boian.*/**
10.11 Form of Indemnification Agreement entered into between the Company and
its directors and officers.*
10.12 Form of General Marketing Agent Agreement.*
10.13 Form of Master Electronic Funds Transfer Services Agreement.*
10.14 Form of Data Processing Agreement.*
10.15 Form of Service Agreement for Data Communications.*
10.16 Form of Software License Agreement for PC BancPAC(TM).*
31
<PAGE>
Exhibit
No. Description
- ------- -----------
10.17 Channel Services Payment Plan Agreement dated December 22, 1993
between Intercept Systems, Inc. and BellSouth Communications, Inc.*
10.18 Form of Special Service Arrangement Agreement with BellSouth
Telecommunications, Inc. for frame relay services.*
10.19 Form of SynchroNet Service Agreement with Southern Bell Telephone and
Telegraph Company.*
10.20 WorldCom Data Services Agreement dated as of February 27, 1998 by and
between WorldCom, Inc. and Intercept Communications Technologies,
L.L.C.*+
10.21 Form of Stock Option Agreement for Directors under The InterCept
Group, Inc. Amended and Restated 1996 Stock Option Plan.*/**
10.22 Loan and Security Agreement dated April 28, 1998 by and among the
Company, its wholly-owned subsidiaries and First Union National Bank.*
10.23 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and John W. Collins (incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 filed with the Securities and Exchange Commission on
August 14, 1998 (the "Second Quarter 1998 Report")).**
10.24 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and Donny R. Jackson (incorporated by reference to Exhibit
10.2 of the Second Quarter 1998 Report).**
10.25 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and Scott R. Meyerhoff (incorporated by reference to Exhibit
10.3 of the Second Quarter 1998 Report).**
10.26 First Amendment to the Loan and Security Agreement dated October 9,
1999 by and among the Company, its wholly-owned subsidiaries and First
Union National Bank.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (contained on the signature page hereof).*
27.1 Financial Data Schedule for the period ending December 31, 1997 and
1998 (for SEC use only).
- ---------------
32
<PAGE>
EXHIBIT 10.26
FIRST AMENDMENT TO LOAN AND SECURITY
AGREEMENT AND CONDITIONS SUBSEQUENT RIDER
-----------------------------------------
This FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT AND CONDITIONS
SUBSEQUENT RIDER (the "Amendment") is made and entered into as of October 9,
1998, by and among THE INTERCEPT GROUP, INC., a Georgia Corporation
("InterCept"), INTERCEPT SWITCH, INC., a Georgia Corporation ("ISI"), PROVESA,
INC., a Georgia Corporation ("ProVesa"), PROVESA SERVICES, INC., a Georgia
Corpration ("PSI"), (InterCept, ISI, ProVesa and PSI is each sometimes
individually referred to herein as a "Borrower" and collectively as the
"Borrowers"), and FIRST UNION NATIONAL BANK, a national banking association
("Bank").
For the purpose of conforming the same to the intention of the parties and
for other value received, it is hereby agreed (i) that certain Loan and Security
Agreement, dated April 28, 1998 (the "Agreement"), among Borrowers and Bank, and
(ii) that certain Conditions Subsequent Rider to Loan and Security Agreement by
and among First Union National Bank, The InterCept Group, Inc., InterCept
Switch, Inc., ProVesa, Inc. and ProVesa Services, Inc., dated April 28, 1998
(the "Conditions Subsequent Rider"), among Borrowers and Bank, shall be amended
and modified in the following particulars:
1. Capitalized terms, as used herein, shall have the meaning set forth
in the Agreement, unless the context otherwise requires.
2. Sections 4.02 of Article IV of the Agreement is hereby amended by
adding thereto the phrase "$4,000,000.00 individually or" following the phrase
"Revolving Loans in excess of" in the third line thereof.
3. Section 8.02 of Article VIII of the Agreement is hereby amended by
deleting therefrom the number "$6,000,000" and inserting in lieu thereof the
phrase and numbers "$4,000,000.00 in any single transaction or $6,000,000.00 in
the aggregate for any transactions consummated in the same fiscal year."
4. Section 9.03 of Article IX of the Agreement is hereby amended by
deleting therefrom the number of "$16,000,000" and inserting in lieu thereof the
number and phrase "$10,250,000.00 as of June 3,1998."
5. Section 2.a. of the Conditions Subsequent Rider is hereby amended by
deleting therefrom the number "$20,000,000.00" and inserting in lieu thereof the
number "15,000,000.00."
6. From and after the date hereof, the Agreement shall be deemed to mean
the Agreement, as amended, and the Conditions Subsequent Rider shall be deemed
to mean the Conditions Subsequent Rider, as amended.
7. Each Borrower hereby reaffirms each of the agreements, covenants, and
undertakings set forth in the Agreement, the Conditions Subsequent Rider and
each and every other agreement,
<PAGE>
instrument and document executed in connection therewith or pursuant thereto as
if each Borrower were making said agreements, covenants and undertakings on the
date hereof.
8. This Amendment represents a modification only and is not, and should
not be construed as, a novation.
9. Except as hereinabove set forth, the Agreement and the Conditions
Subsequent Rider shall remain otherwise unmodified and in full force and effect,
and all other documents, instruments and agreements executed in connection
therewith or pursuant thereto shall remain in full force and effect.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment under
hand and seal as of the date first above written.
Borrowers:
---------
Attest: THE INTERCEPT GROUP, INC.
/s/ Scott R. Meyerhoff By: /s/ John W. Collins
- ----------------------------- ------------------------------------
Secretary Title:
---------------------------------
[CORPORATE SEAL]
Attest: INTERCEPT SWITCH, INC.
/s/ Scott R. Meyerhoff By: /s/ John W. Collins
- ----------------------------- -------------------------------------
Secretary Title:
----------------------------------
[CORPORATE SEAL]
Attest: PROVESA, INC.
/s/ Scott R. Meyerhoff By: /s/ John W. Collins
- ----------------------------- ------------------------------------
Secretary Title:
---------------------------------
[CORPORATE SEAL]
Attest: PROVESA SERVICES, INC.
/s/ Scott R. Meyerhoff By: /s/ John W. Collins
- ----------------------------- ------------------------------------
Secretary Title:
---------------------------------
[CORPORATE SEAL]
Bank:
----
FIRST UNION NATIONAL BANK
By: /s/ Richard Davis
------------------------------------
Title:
---------------------------------
3
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE INTERCEPT GROUP, INC.
ProVesa Inc., a Georgia corporation ("ProVesa") and wholly-owned subsidiary of
InterCept, doing business under the name "ProVesa."
ProVesa Services , Inc., a Georgia corporation and wholly owned subsidiary
of ProVesa, doing business under the name "ProVesa."
ProImage, Inc., a Georgia corporation two-thirds owned by ProVesa, doing
business under the name "ProVesa."
Item Processing of America, Inc., a Florida corporation and wholly owned
subsidiary of ProVesa, doing business under the name "ProVesa."
InterCept Switch, Inc., a Georgia corporation and wholly-owned subsidiary of
InterCept, doing business under the name "InterCept Switch."
Intercept Communications Technologies, Inc., a Georgia corporation and
wholly-owned subsidiary of InterCept.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into The InterCept Group, Inc.'s previously
filed Registration Statement File No. 333-70237.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Atlanta, Georgia
March 3, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 3,224,313 2,010,236
<SECURITIES> 350,000 50,000
<RECEIVABLES> 3,672,823 2,775,608
<ALLOWANCES> 169,752 157,772
<INVENTORY> 146,558 221,124
<CURRENT-ASSETS> 8,074,230 5,015,813
<PP&E> 9,920,950 4,841,522
<DEPRECIATION> 2,827,695 2,325,654
<TOTAL-ASSETS> 20,155,322 10,156,462
<CURRENT-LIABILITIES> 3,447,171 4,023,772
<BONDS> 0 0
0 0
0 400,000
<COMMON> 17,169,585 2,764,405
<OTHER-SE> (911,612) (3,548,226)
<TOTAL-LIABILITY-AND-EQUITY> 20,155,322 10,156,462
<SALES> 28,901,604 0
<TOTAL-REVENUES> 28,901,604 23,260,082
<CGS> 12,031,532 0
<TOTAL-COSTS> 24,590,163 10,222,651
<OTHER-EXPENSES> 34,950 10,105,317
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 344,163 648,640
<INCOME-PRETAX> 4,039,088 232,203
<INCOME-TAX> 1,564,242 (666,125)
<INCOME-CONTINUING> 2,474,846 (395,358)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,458,846 (395,358)
<EPS-PRIMARY> .30 (0.06)
<EPS-DILUTED> .30 (0.06)
</TABLE>
