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, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
COMMISSION FILE NUMBER: 01-14213
THE INTERCEPT GROUP, INC.
(Exact name of registrant as specified in its charter)
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GEORGIA 58-2237359
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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:
NONE NONE
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
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COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [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 20
2000, as reported on the Nasdaq Stock Market's National Market, was
approximately $216,007,828. As of March 20, 2000, the Registrant had outstanding
12,783,167 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE REGISTRANT'S 2000 ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON MAY 15, 2000 ARE INCORPORATED BY REFERENCE IN PART
III OF THIS ANNUAL REPORT. PORTIONS OF THE REGISTRANT'S PROSPECTUS FILED
PURSUANT TO RULE 424(b) CONTAINED IN THE REGISTRATION STATEMENT ON FORM S-3
(NO. 333-94511) AS DECLARED EFFECTIVE BY THE SEC ON FEBRUARY 15, 2000 ARE
INCORPORATED BY REFERENCE IN PARTS I AND II OF THIS ANNUAL REPORT.
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INDEX OF FORM 10-K
Page
PART I
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Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................15
Item 3. Legal Proceedings..............................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters..........................16
Item 6. Selected Financial Data........................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................25
Item 8. Consolidated Financial Statements and Supplementary Data.......................................25
Item 9. Changes and Disagreements with Accountants in Accounting and
Financial Disclosure...........................................................................26
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................26
Item 11. Executive Compensation.........................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................26
Item 13. Certain Relationships and Related Transactions.................................................26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................26
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PART I
ITEM 1. BUSINESS
THIS ANNUAL REPORT CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS ANNUAL REPORT AND INCLUDE
ALL STATEMENTS THAT ARE NOT STATEMENTS OF HISTORICAL FACT REGARDING THE INTENT,
BELIEF OR EXPECTATIONS OF INTERCEPT AND ITS MANAGEMENT. THESE STATEMENTS ARE
BASED UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES WHICH ARE SUBJECT TO
SIGNIFICANT UNCERTAINTIES, MANY OF WHICH ARE BEYOND OUR CONTROL. WORDS SUCH AS
"MAY," "WOULD," "COULD," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "INTEND,"
"PLAN," AND "ESTIMATE" ARE MEANT TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE
NOT LIMITED TO: OUR ABILITY TO ACHIEVE OR MAINTAIN GROWTH AND EXECUTE OUR
BUSINESS STRATEGY SUCCESSFULLY; RISKS ASSOCIATED WITH OUR OWNERSHIP OF A
SIGNIFICANT AMOUNT OF THE COMMON STOCK OF NETZEE, INC.; WHETHER WE CAN
SUCCESSFULLY LOCATE, ACQUIRE AND INTEGRATE NEW BUSINESSES AND PRODUCTS; CUSTOMER
ATTRITION; INCREASED COMPETITION; POSSIBLE SYSTEM FAILURES AND RAPID CHANGES IN
TECHNOLOGY; AND OTHER FACTORS DISCUSSED IN THIS ANNUAL REPORT AND IN OUR FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING OUR REGISTRATION
STATEMENT ON FORM S-3 (NO. 333-94511) AS DECLARED EFFECTIVE BY THE SEC ON
FEBRUARY 15, 2000 AND THE "RISK FACTORS" SECTION THEREIN.
OVERVIEW
We are a single-source provider of a broad range of technologies,
products and services that work together to meet the electronic commerce and
operating needs of financial institutions. We focus on serving financial
institutions in the U.S. with assets of less than $500 million, which we refer
to as community financial institutions. Over 1,400 of these community financial
institutions have contracted with us for one or more of our technologies,
products and services, which include:
ELECTRONIC FUNDS TRANSFER. Electronic funds transfer, or EFT,
transactions include ATM withdrawals, balance inquiries and transfers, and debit
card transactions. We process a variety of EFT transactions online through
national and regional electronic networks, including CIRRUS(R), PLUS(R),
STAR(TM) and PULSE(TM). We also offer InterCept SwitchTM, a growing ATM network
used by community financial institutions to offer their customers access to ATMs
owned by other community banks free of charge.
CORE DATA PROCESSING. We supply the software systems and services
needed to meet our customers' core data processing requirements, including
general ledger, loan and deposit operations, financial accounting and reporting,
and customer information file maintenance. Many of our customers install our
client/server software system, PC BancPAC(TM), in-house to perform these core
data processing functions for themselves, and others outsource their core
processing needs to our service bureau operations. We also provide item
processing services, such as statement preparation and encoding of checks.
CHECK IMAGING. Check imaging involves creating computerized images of
checks, deposit slips and related paper documents for electronic storage and
retrieval. We offer check imaging products and services on both an in-house and
service bureau basis to reduce the labor and costs associated with traditional
check processing.
DATA COMMUNICATIONS MANAGEMENT. We provide efficient, reliable and
secure solutions for the data communications needs of our customers and maintain
nationwide data communications coverage. We
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operate a frame relay network, which serves as the principal conduit through
which we deliver our EFT and other electronic commerce technologies, products
and services to our customers. We also provide internet services, like web
hosting and email services, over our frame relay network.
INTERNET BANKING. Through our affiliate, Netzee, Inc., we offer
internet and telephone banking products and services as part of our strategy to
provide comprehensive electronic commerce and operating capabilities to our
customers.
We were incorporated in Georgia on April 30, 1996. Our principal
executive offices are located at 3150 Holcomb Bridge Road, Suite 200, Norcross,
Georgia 30071, and our telephone number is (770) 248-9600. Our corporate website
address is www.intercept.net. We are not incorporating the information on our
website into this Annual Report, and we do not intend to make our website a part
of this Annual Report.
OUR INDUSTRY
According to a recent industry survey by Grant Thornton LLP, 93% of
community financial institutions believe employing technology is the most
important issue to their continued success. Community financial institutions
often have limited resources and are under pressure to control their operating
costs. By using third-party providers like us for their electronic commerce and
operating needs, we believe community financial institutions can reduce their
overhead and gain access to advanced technologies and services they otherwise
might not be able to afford.
Electronic commerce involves transacting business through the use of
telecommunications networks and computer systems that transmit and process
commercial information and business documents electronically. Electronic
commerce for the financial services industry includes value-added electronic
funds transfer, or EFT, services such as ATM and debit card services, remote
banking and universal access to funds. Electronic commerce is an important part
of an overall technology solution, which also includes core processing, check
imaging, data communications and internet banking products and services, that
community financial institutions need in order to offer their customers the same
products and services provided by larger financial institutions.
Consolidation in the financial services industry has resulted in larger
financial institutions that mass market their products and services to potential
customers. We believe that community financial institutions can compete with
these larger banks and succeed as independent institutions by remaining focused
on serving the needs of the communities in which they operate. In order to
succeed, we believe community financial institutions will need to:
o implement advanced technologies for their customers and use
advanced technologies in their own operations;
o obtain and offer new products and services to their customers
quickly;
o focus on their primary products and services in order to build
strong customer relationships;
o control their costs and improve their operating efficiency without
passing additional costs on to their customers; and
o process and transmit large amounts of data to multiple locations.
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OUR SOLUTION
Our comprehensive and flexible suite of integrated technologies,
products and services allows us to act as a single-source provider for the
technology and operating needs of community financial institutions and help
these financial institutions:
IMPLEMENT ADVANCED TECHNOLOGIES. Community financial institutions
generally lack sufficient capital and human resources to implement the latest
technological advancements available in the financial services industry. We
offer advanced technologies, including EFT services, core data processing,
check imaging software, and data communications products and services, as well
as our own ATM network, that community financial institutions need to run their
business in today's competitive marketplace. We continue to enhance and expand
our technologies, products and services, and they are integrated so they work
together to provide a complete technology solution for community financial
institutions.
RAPIDLY DEPLOY NEW PRODUCTS AND SERVICES. Once a community financial
institution is set up on our network, we can quickly add new applications with
minimal effort. This allows our customers to quickly deploy new products and
services to their customers and help them generate additional revenues while
controlling the expenses associated with new products and services.
FOCUS ON OFFERING THEIR PRIMARY PRODUCTS AND SERVICES. We offer a broad
array of technologies, products and services that allow our customers to stay
focused on their primary business while still meeting the demands of their
customers for the latest financial products and services.
IMPROVE OPERATING EFFICIENCIES. By taking advantage of our technology
and operating solutions, our customers can improve their operating efficiencies
without committing the expenses and resources necessary to develop or maintain
similar systems in-house. For example, our community financial institutions get
the benefit of access to PC BancPAC and our communications network without
having to maintain personnel to develop, update and run these systems and
without having to make large up-front capital expenditures to implement these
advanced technologies. In addition, we offer our products and services on a
service bureau basis which allows financial institutions to outsource their
technology and operating needs to further improve their operating efficiency.
SECURELY PROCESS AND TRANSMIT LARGE AMOUNTS OF INFORMATION. Our data
communications network and services facilitate the rapid and secure transmission
and processing of the large amounts of sensitive financial data used in our
customers' operations. Our network implements the fiber optic networks of some
of the largest telecommunications providers, and we link our network to our
customers' operations with high-capacity communications lines. This ensures that
our network will support the rapid processing and transmission of electronic
data required to support our customers' electronic commerce operations.
OUR STRATEGIES
Our goal is to become the leading provider of products and services for
the technology and operating needs of community financial institutions in the
United States by:
CROSS-MARKETING OUR PRODUCTS AND SERVICES TO OUR EXISTING CUSTOMER
BASE. Once a customer contracts for one or more of our products or services, we
strive to develop and expand our relationship by cross-marketing our other
products and services to that customer. As that relationship continues, we are
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often able to increase revenues from our existing customer base with minimal
additional expense by providing multiple products and services to customers
already using our network and systems. Because most of our products and services
require the payment of ongoing monthly charges, we are able to increase our
recurring revenues by enhancing and increasing the use of our various products
and services by cross-marketing to our customers.
EXPANDING OUR SALES FORCE AND OUR STRATEGIC MARKETING RELATIONSHIPS. We
plan to expand our customer base and penetrate new geographic markets by hiring
sales personnel who are knowledgeable in electronic commerce products and
services or have experience working with community financial institutions. We
also intend to leverage our relationships with banking organizations such as
bankers' banks. Bankers' banks are local or regional business organizations that
provide banking products and services for financial institutions who cannot
efficiently offer them due to cost, location, lack of resources or other
circumstances. In addition, bankers' banks provide financial support to
financial institutions and offer business advice with respect to various
critical areas such as operations, profitability and federal and state
regulation. We have exclusive contractual relationships with 8 of the 18
bankers' banks in the United States. We also have relationships with three
additional bankers' banks, as well as other banking related organizations, which
we leverage in our sales and marketing efforts. Our relationships with 11 of the
18 bankers' banks gives us access to more than 5,000 financial institutions in
the United States.
We believe that the close nature of the relationships between bankers'
banks and community financial institutions described above makes our alliances
with bankers' banks an important part of our marketing strategy. We intend to
use our expanded sales force to continue marketing our products and services
directly to community financial institutions and to enhance our indirect
marketing efforts by developing additional strategic marketing relationships
with bankers' banks and various other business organizations.
ACQUIRING BUSINESSES WITH COMPLEMENTARY TECHNOLOGIES, PRODUCTS OR
SERVICES THAT WILL ENHANCE AND EXPAND OUR SOLUTIONS, INCREASE OUR MARKET SHARE
OR EXPAND OUR GEOGRAPHIC PRESENCE. Since our incorporation in 1996, we have
grown in part through acquisitions of other businesses and technologies. We
intend to continue to acquire other companies with complementary technologies or
services that will enhance and expand our products and services and increase our
market share. We also plan to continue our geographic expansion nationally
through the acquisition of businesses that operate in areas in
which we do not currently have operations.
INCREASING OUR DATA COMMUNICATIONS MANAGEMENT SERVICES TO OPTIMIZE OUR
FRAME RELAY NETWORK. We intend to increase our data communications management
services by offering customized, cost-competitive telecommunications
connectivity to our customers and managing their data traffic in a reliable and
secure manner across our frame relay network. We believe that our network is one
of the largest private frame relay networks in the southeastern United States.
Our network allows us to support our customers' existing applications and easily
add new products and services to our existing infrastructure with minimal cost
and effort. We have upgraded our processing and switching equipment and
telecommunications lines to improve the speed and efficiency of transaction
processing across our networks. We intend to expand use of the frame relay
network by selling additional communications services to our customers and by
extending the frame relay network into new geographic areas as business
warrants.
CONTINUING TO EXPAND AND ENHANCE OUR PRODUCTS AND SERVICES. We have
devoted and will continue to devote resources to expanding and improving our
products and services. For example, we recently received certification as a CLEC
in Alabama, Florida and Georgia and as an IXC in Alabama and Florida. Our
certification for approval as an IXC in Georgia is currently pending.
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These certifications will enable us to offer telecommunications services to our
customers and to potentially reduce our operating costs. We plan to continue to
combine our electronic commerce and other operating solutions with sophisticated
technology to help our financial institution customers remain competitive with
larger financial service providers.
OUR TECHNOLOGIES, PRODUCTS AND SERVICES
ELECTRONIC FUNDS TRANSFER
We believe that increased use and acceptance of ATM and debit cards,
coupled with technological advances in electronic transaction processing, have
created a need for financial service providers to offer a wide variety of EFT
solutions to their customers. By aggregating the EFT transaction processing of
numerous financial institutions, third party processors like us create economies
of scale, which allows them to price their services competitively.
Our EFT products and services include:
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EFT transaction processing o Online processing of EFT transactions initiated by a consumer at a
terminal, such as ATM and debit card transactions, including
MasterMoney(TM) and VISA(R) Check cards
o Encompasses multiple transactions, including cash withdrawals,
transfers and balance inquiries
o Network connections to most regional and all national ATM and
other debit card networks, including STAR(TM), PULSE(TM), Cirrus(R),
PLUS(R), Maestro(R) and INTERLINK(R)
o Card-issue-only program, which gives banks the option to offer
ATM services to their customers without the expense of purchasing
and maintaining a complete ATM system
o Receive a base fee for providing ATM processing services and an
additional fee for each ATM serviced. Additional fees received
once the number of monthly transactions exceeds established
maximums, typically between 2,000 and 3,000 transactions
o Approximately 450 customers as of December 31, 1999
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InterCept Switch(TM) o Helps our customers keep consumers who may be drawn to larger
The Surcharge-Free Network(TM) financial institutions with a greater number of surcharge-free ATMs
o Allows our customers to waive ATM surcharges for customers of
InterCept Switch members, while retaining the ability to
surcharge non-member customers who use their ATMs
o Included approximately 180 active member institutions representing
over 350 ATMs in 12 states at December 31, 1999
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The typical ATM transaction that we process begins when a cardholder
inserts a card issued by a financial institution into an ATM to withdraw funds,
obtain a balance, make other account inquiries or
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transfer funds. The transaction is routed from the ATM across our frame relay
network to our data communications and processing center in Norcross, Georgia.
We then either (a) authorize or deny the requested transaction or (b) direct the
transaction to the card issuer or its designated processor for authorization.
Once authorization is received, the authorization message is routed back to the
ATM almost immediately and the transaction is completed. We update the account
information of our customers' cardholders on a daily basis.
The debit card transaction process begins when a consumer presents a
debit card to a merchant who "swipes" the card at a point of sale terminal and
enters the transaction amount. The transaction data is transmitted from the
point of sale terminal through the applicable credit and debit processing
networks to our frame relay network. The data is then routed across our network
to our data communications and processing center in Norcross, Georgia. We then
(a) compare the purchase transaction against the authorization data accessed
through our system, (b) place a hold for the transaction amount, (c) authorize
the transaction and (d) transmit the authorization response almost immediately
back through the network to the point of sale terminal. The appropriate
processing network settles the payment and credits the merchant with the
transaction amount less any discounts. The merchant delivers final transaction
information to the credit processing network and the network submits the
transaction to us, which facilitates posting and reporting of the transaction
with the issuing bank. To complete the transaction, the issuing bank debits its
customer's account for the transaction amount.
For point of sale services, we generally receive a portion of the
interchange fees charged by our bank customers that issue debit cards. We may
charge a monthly fee if our customers do not meet a certain minimum dollar
amount of transactions for a particular month. Our other EFT service contracts
generally provide for an initial term of three to five years and automatically
renew for similar terms unless notice of non-renewal is given prior to
expiration. Most charges due under these agreements are paid monthly.
CORE PROCESSING
Changing technologies, business practices and financial products have
resulted in issues of compatibility, scalability and increased complexity for
the software used in many financial institutions. The technology surrounding the
transmission, storage and retrieval of massive amounts of data has further
increased the complexity of data processing for financial institutions. Older
systems may not offer the advanced technological capabilities provided by newer
systems. As a result, we believe that financial institutions are demanding more
complete and flexible core data processing software, as well as complementary
products and services.
Our core processing software and complementary products and services
include:
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PC BancPAC(TM) o Client/server enterprise software system that consists of a series of
integrated software products
o Client/server computing--using personal computers as workstations
(the "client") and connecting them via a network to another
personal computer containing the database (the "server")--offers
fast and easy processing on economical computer hardware
o Satisfies our customers' core processing requirements including
general ledger, customer information file maintenance, loan and
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deposit processing, and financial accounting and reporting
o Available for in-house use as well as through our service bureau
operations (described below)
o Operates in a Windows NT environment
o Provides superior flexibility and improves customer service
throughout the financial institution
o Used in-house by approximately 10 customers as of December 31, 1999
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Service bureau o Allows customers to focus on core competencies by outsourcing
their core processing needs to us
o Gives customers access to our processing systems without the
expense of maintaining in-house processing operations
o Services are conducted over our frame relay network and are
coordinated through four host data centers located in Alabama,
Colorado, Georgia and Tennessee
o Each processing center serves as a back-up facility in the event
another center experiences a natural disaster, destruction or other
similar event which eliminates or diminishes its processing
capabilities
o Item processing and back office services like proofing and encoding
of checks, bulk filing and statement preparation are also available
o Item processing conducted from ten service centers in six states
o Provided core data processing services to over 130 financial
institutions as of December 31, 1999
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Ancillary products and services o Include loan document tracking software, teller software, check
printing software and optical disk storage
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CHECK IMAGING
Check imaging involves creating digital images through the use of a
camera attached to a sorter. As an item passes through the sorter, its
individual picture is taken. Multiple item images are printed on a single page
for inclusion in monthly statements to reduce postage costs when mailing to the
banks' customers. Automated electronic sorting of digital images allows bank
employees to retrieve checks on personal computers, facilitates signature
verification and speeds responses to customer inquiries.
Increased electronic commerce activity and changing banking practices
have created a demand for faster, more efficient electronic handling of bank
documents, including checks and other documents. The need to reduce labor,
research time and the cost of postage has increased the demand for check imaging
solutions on both an in-house as well as service bureau basis. We believe that
financial institutions will continue to employ check imaging as part of their
efforts to reduce operating costs and provide enhanced banking services to their
customers.
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Our check imaging capabilities include:
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Renaissance(TM) o Proprietary check imaging software used in-house by our customers
o Allows customers to control the imaging process without paying
recurring monthly fees
o Licensed to approximately 65 customers at December 31, 1999
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Service bureau o Turnkey outsourced solution for check imaging that provides our
customers the ability to offer check imaging without a large capital
expenditure
o Nine check imaging centers located in five states
o Provided service bureau check imaging to approximately 75
customers at December 31, 1999
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DATA COMMUNICATIONS MANAGEMENT
We believe that the growth in the number and types of communications
devices used in electronic commerce has created a large market for data
communications management, transaction processing and information exchange
services. Key elements of our data communications management solutions include:
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Communication services o Serve as single point of contact for customers' communication
needs
o Design and manage various local and wide area communications
networks for our customers
o Offer a full line of communications services, including end-to-end
management of equipment, local lines and long distance
o Provide internet services, including web hosting and email services,
to the desktop of our customers' personnel across our frame relay
network
o Ability to support customers' existing applications and easily
add new products and services to existing infrastructure with
minimal cost and effort
o Provided communications services to approximately 480 customers
at December 31, 1999
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Frame relay network o Accommodates data transmissions of various sizes and is protocol
independent - not only can any set of data be accepted, switched
and transported across a network, but the specific data is
undisturbed in the process
o Provides efficient switching capabilities for transferring information
across the network, resulting in rapid response time and secure and
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CATEGORY DESCRIPTION
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reliable transmission and processing of transactions
o Uses the fiber optic networks of MCI Worldcom and BellSouth
Telecommunications to provide the capacity, or bandwidth, capable
of supporting our transaction-intensive services
o Linked to our customers' operations by communication lines that
can handle large amounts of data traffic to ensure adequate
bandwidth for rapid processing of electronically transmitted data
o Monitored and maintained 24 hours a day, 7 days a week from a central
location in Norcross, Georgia
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Competitive local exchange o Certified during the second half of 1999 as a CLEC and an IXC in
carrier, or CLEC Alabama and Florida and in 2000 as a CLEC in Georgia
o Will allow us to offer local and long distance communications
Long distance carrier, or IXC services to our customers
o We can purchase for resale all tariffed products and services
offered by the Regional Bell Operating Companies and long
distance carriers at wholesale prices, without having to spend
the significant capital required to install our own network
infrastructure
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We recently received certification as a CLEC in Alabama, Florida and
Georgia and as an IXC in Alabama and Florida. Our Certification for approval as
an IXC in Georgia is currently pending. We have negotiated an
interconnection/resale agreement with BellSouth Telecommunications Inc., a RBOC,
but have not yet done so with an IXC. The BellSouth interconnection/resale
agreement has been filed with the public utility commissions in Alabama, Florida
and Georgia and has been approved by those states.
Our ability to succeed as a CLEC or an IXC will be subject to a number
of factors, including:
o our ability to market the new services to our customers;
o the willingness of our customers to use a non-traditional provider
for their telecommunications services;
o our ability to implement the necessary billing and collection
systems for these services;
o competition from RBOCs such as BellSouth, from IXCs such as AT&T
Corp. or MCI WorldCom, Inc., and from other CLECs;
o our ability to obtain the services, equipment and facilities that
we need to serve as a CLEC or IXC; and
o the performance of other carriers from whom we purchase services
for resale.
If we are unsuccessful in operating as a CLEC or an IXC, our ability to
control our operating costs would be harmed and we would not receive the
benefits of the costs we have incurred in our efforts to become both a CLEC and
an IXC.
In addition to obtaining state CLEC and IXC certifications, we are also
required to obtain authorization from the Federal Communications Commission to
offer international telecommunications
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services. We are also required to file with the FCC and with various state
public utility commissions tariffs describing the rates, terms and conditions of
our services and to comply with local license or permit requirements relating to
installation and operation of our network. We have incurred some costs in
attempting to become a CLEC and IXC and expect to incur significant costs in
maintaining that status. Any of the following could have a material adverse
effect on our operations as a CLEC or an IXC:
o failure to maintain proper federal and state tariffs;
o failure to maintain proper federal or state certifications;
o failure to comply with federal, state or local laws or
regulations;
o failure to obtain and maintain required licenses and permits;
o changes in the laws applicable to CLECs or IXCs; and
o burdensome federal, state or local regulations, license or permit
requirements.
INTERNET BANKING
In March 1999 we acquired internet banking and voice response products
and began marketing these products to our customers as part of our package of
electronic commerce products and services. In August 1999, we acquired SBS
Corporation, an Alabama-based provider of internet and telephone banking
technologies and services to community financial institutions nationwide. In
September 1999, we completed several other business combinations, the result of
which was the creation of Netzee, Inc., an internet banking and technology
company in which we owned approximately 37% as of December 31, 1999. For more
information about these transactions, see "Business - Our Acquisitions" and
"Business - Our Relationship with Netzee, Inc." Through our relationship with
Netzee, we offer leading internet and telephone banking products and services as
part of our strategy to provide superior electronic commerce and operating
capabilities to our customers.
ANCILLARY PRODUCTS AND SERVICES
To complement the products and services described above, we provide a
variety of ancillary products and services. These include (a) maintenance and
technical support services and (b) specialized equipment including ATMs, proof
machines, teller equipment, vaults and other bank security equipment. We provide
ATM and various other banking equipment and maintenance services to
approximately 200 customers at December 31, 1999. Where applicable, we enter
into standard ATM and other equipment maintenance contracts with our customers
that generally provide for a term of between one and three years. Most of these
contracts automatically renew for varying periods at the end of the initial or
any renewal term unless either party elects to cancel the agreement 180 days
prior to its expiration.
We also provide merchant portfolio management services, which are
designed to reduce labor intensive back-office functions for our customers. We
can provide these services at a lower cost than many banks incur in-house by
streamlining processes and taking advantage of economies of scale.
Our customer service and technical support departments provide coverage
24 hours a day, 7 days a week. We believe that well-trained support personnel
are essential to attract and retain financial institution customers. Our trained
customer service and technical support personnel enhance our ability to offer
reliable, secure and automated solutions. Our customer service departments are
responsible for educating and assisting our customers in the use of our services
and for resolving billing related issues. Our technical support group is
generally responsible for consulting with our customers regarding technical
issues and for
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<PAGE>
solving any technical problems brought to their attention by our customer
service department. Our technical support department is also responsible for
maintaining our backup systems and for coordinating the disaster recovery
services maintained by some of our information processing customers.
OUR ACQUISITIONS
Since January 1, 1999, we have completed the following transactions:
<TABLE>
<CAPTION>
- ---------------------------------------- ----------------------------------------------------------------------------------
DATE OF TRANSACTION DESCRIPTION
- ---------------------------------------- ----------------------------------------------------------------------------------
<S> <C>
January 1999 The purchase of some of the assets and liabilities of Eastern Software, Inc.,
the developer of a loan document and portfolio tracking software located in
Georgia
- ---------------------------------------- ----------------------------------------------------------------------------------
March 1999 A merger with Direct Access Interactive, Inc., a provider of internet and
telephone banking software and services located in Tennessee
- ---------------------------------------- ----------------------------------------------------------------------------------
May 1999 A merger with L.E. Vickers & Associates, Inc. and Data Equipment Services,
Inc., two related Tennessee-based providers of core data processing, item
capture, check imaging, equipment and maintenance products and services
- ---------------------------------------- ----------------------------------------------------------------------------------
August 1999 A merger with SBS Corporation and SBS Data Services, Inc., two related
Alabama-based providers of software systems and services, including internet
banking, core data processing, check imaging, telephone banking and optical
storage products
- ---------------------------------------- ----------------------------------------------------------------------------------
February 2000 The purchase of some of the assets and liabilities of the Dallas, Texas item
processing center of TIB The Independent BankersBank
- ---------------------------------------- ----------------------------------------------------------------------------------
March 2000 The purchase of some of the assets and liabilities of the Tampa, Florida item
processing center of M&I Data Services
- ---------------------------------------- ----------------------------------------------------------------------------------
OUR RELATIONSHIP WITH NETZEE, INC.
As noted above, on August 6, 1999, we acquired SBS Corp. and SBS Data
Services, Inc., two affiliated Alabama corporations that provided internet and
telephone banking, core data processing, check imaging and optical storage
products and services to community financial institutions. We issued
approximately 192,000 shares of our common stock to the SBS Data shareholders in
connection with our
11
<PAGE>
acquisition of that company and its core data processing operations. At the same
time, our wholly-owned subsidiary, Direct Access, Inc., merged with SBS Corp.
and paid approximately $16.6 million in cash and issued 2,600,000 shares of
Direct Access common stock to the former shareholders of SBS Corp. Direct Access
also repaid approximately $4.9 million in debt owed by SBS Corp. To provide the
funds for the SBS Corp. transaction, we borrowed approximately $21.6 million
under our line of credit with First Union National Bank and then loaned the
funds to Direct Access. After the merger, Direct Access sold all of the assets
of SBS Corp., other than its internet and telephone banking assets, to InterCept
in exchange for 450,000 shares of Direct Access common stock owned by us.
In August 1999, we created a wholly-owned subsidiary, Netzee, Inc., and
on September 3, 1999, we combined it with:
o Direct Access, our internet banking subsidiary;
o the internet banking operations of The Bankers Bank and TIB The
Independent BankersBank;
o Call Me Bill, LLC, an electronic bill payment company; and
o Dyad Corporation, a developer of automated loan origination
systems.
As a result of the issuance of shares of Netzee in connection with
these transactions, our ownership in Netzee decreased to approximately 49% as of
September 3, 1999. Following these transactions, we deconsolidated Netzee's
results of operations from our results of operations. To enable Netzee to
complete these transactions, we loaned it approximately $7.3 million. This loan
was in addition to the $21.6 million we loaned Netzee, as the successor to
Direct Access, in connection with the SBS Corp. merger described above. In
November 1999, Netzee completed its initial public offering of common stock and
repaid the amounts it had originally borrowed from us with some of the net
proceeds from that offering.
As of December 31, 1999, we owned approximately 37% of Netzee. Four of
our directors also serve as directors of Netzee and one of those directors,
Glenn W. Sturm, is the Chief Executive Officer of Netzee. In addition, we
maintain a strategic relationship with Netzee to cross-market each other's
products and services, which we believe will benefit our business. Our existing
and future agreements and relationships with Netzee have not resulted and will
not necessarily result from arms-length negotiations. When the interests of
Netzee diverge from our interests, Netzee's officers and directors may exercise
their influence in Netzee's best interests. Therefore, our agreements and
relationships with Netzee may be less favorable to us than those that we could
obtain from unaffiliated third parties. Moreover, many of the transactions
between us and Netzee do not lend themselves to precise allocations of costs and
benefits. Thus, the value of these transactions will be left to the discretion
of the parties, who are subject to potentially conflicting interests.
Our relationship with Netzee presents potential conflicts of interest,
which may result in decisions which favor Netzee over our shareholders. Because
we and Netzee are both engaged in the sale of electronic commerce products and
services to community financial institutions, numerous potential conflicts of
interest exist between our companies. We will compete with each other when
offering some products and services to potential customers. Our bylaws contain
provisions addressing potential conflicts of interest between us and Netzee and
the allocation of transactions that, absent such allocation, could constitute
corporate opportunities of both companies. Under these provisions, Netzee may
take advantage of a
12
<PAGE>
corporate opportunity rather than presenting that opportunity to us, absent a
clear indication that the opportunity was directed to us rather than to Netzee.
Because of our significant ownership interest in Netzee, a perception
may exist in the market that our stock price is tied closely to the stock price
of Netzee. The value of our minority interest in Netzee will be based in part on
the fair market value of Netzee's common stock as reported on the Nasdaq
National Market. Some investors may discount the value of our position in Netzee
due to the large, illiquid nature of our ownership in Netzee. We believe that
Netzee will be valued similarly to other companies with internet-based
businesses, and the market values of these companies generally have fluctuated
significantly. Therefore, the value of our interest in Netzee and our
shareholders' equity could fluctuate significantly, which could cause our stock
price to fluctuate significantly as well.
In addition, because we own a large percentage of Netzee's common
stock, we could be subject to various liabilities related to Netzee's business
and operations. For example, if Netzee were sued in a lawsuit, we could be named
a co-defendant as a result of our ownership interest and relationship with
Netzee. Although we do not believe that would be proper cause for us to be
liable, any lawsuit in which we are a named defendant could result in large
litigation expenses and distract us from running our business while we defend
our position.
We have agreed to provide Netzee with a $15.0 million revolving line of
credit. Pending the completion of the line of credit, we entered into a
promissory note with Netzee, Inc. on March 24, 2000. The promissory note bears
interest at prime plus 2% and accrued interest is payable monthly beginning May
1, 2000. As of March 24, 2000, Netzee had $7.8 million outstanding under the
promissory note. If Netzee does not become profitable, it may not be able to
repay the loans we have made and may make to it in the future.
SALES AND MARKETING
At December 31, 1999 our sales force was made up of 26 sales
representatives and product specialists who sell all of our products and
services to our customers in specified geographic regions. Because they have the
ability to sell our full range of products and services, our sales
representatives can capitalize on their relationships with the community
financial institutions. Although the sales representatives are trained on each
product line, we also employ several product specialists who are available to
assist the direct salesperson in the specifics of certain technical products. We
offer products and services on both a stand-alone basis and in combination with
one or more of our products and services.
Our indirect marketing efforts include obtaining referrals and
endorsements from our customers and various banking related organizations. We
currently have exclusive marketing agreements with 8 of the 18 bankers' banks
and have other relationships with three additional bankers' banks. Through our
relationship with these bankers' banks, we have referral sources to thousands of
financial institutions nationwide.
EMPLOYEES
At December 31, 1999, we had 319 full-time employees and 61 part-time
employees. Of these employees, 290 worked in operations, 50 in administration
and 40 in sales and marketing. None of our employees is represented by a
collective bargaining agreement nor have we ever experienced any work stoppage.
We believe that our relationship with our employees is satisfactory.
13
<PAGE>
GOVERNMENT REGULATION
Our banking customers are subject to the supervision of several state
and federal government regulatory agencies. In addition, various federal and
state regulatory agencies examine our data processing operations from time to
time. These agencies can make findings or recommendations regarding various
aspects of our operations, and we generally must follow such recommendations to
continue our data processing operations.
Our ATM network operations are subject to federal regulations governing
consumers' rights. Fees charged by ATM owners are currently regulated in several
states, and legislation regulating ATM fees has been proposed in several other
states. Additional legislation may be proposed and enacted in the future or
existing consumer protection laws may be expanded to apply to ATM fees. If the
number of ATMs decreases, then our EFT revenues may decline. Furthermore, we are
subject to the regulations and policies of various ATM and debit card
associations and networks.
As a transaction processing company, we may be subject to state
taxation of certain portions of the fees charged for our services. Application
of this tax is an emerging issue in the industry, and the states have not yet
adopted uniform guidelines implementing these regulations.
COMPETITION
The market for companies that provide technology solutions to community
financial institutions is intensely competitive and highly fragmented, and we
expect increased competition from both existing competitors and companies that
enter our existing or future markets. Many of our current and potential
competitors have longer operating histories, greater name recognition, larger
customer bases and substantially greater financial, personnel, marketing,
engineering, technical and other resources than we do. The principal competitive
factors affecting the market for our services include price, quality and
reliability of service, degree of service integration, ease of use and service
features.
Numerous companies supply competing products and services, and many of
these companies specialize in one or more of the services that we offer or
intend to offer to our customers. Our principal EFT competitors include regional
ATM networks, regional and local banks that perform processing functions,
non-bank processors and other independent electronic commerce and data
communications organizations. In our core banking and data processing business,
we compete with several national and regional companies.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
None of our technology is currently patented. Instead, we rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our proprietary technology.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or obtain and use information that we
regard as proprietary. We cannot assure you that the steps we have taken will
adequately protect our proprietary rights or that our competitors will not
independently develop similar technology.
FACILITIES
Our principal office consists of 30,329 square feet of leased space
located in Norcross, Georgia. We lease two additional offices in Norcross that
are used for item processing and operations. We lease two offices in Birmingham,
Alabama that are used for item processing and operations. We own a facility in
14
<PAGE>
Thomson, Georgia that is used as a data and item processing center for our
service bureau operations. We also lease additional facilities in the following
locations in connection with our data and item processing operations: Colorado
Springs, Colorado; Jacksonville and Miami, Florida; Cookeville, White Pine and
Nashville, Tennessee; Jonesboro, Arkansas; and Dallas, Texas. We lease office
space in New Jersey, primarily to support our sales and marketing efforts in
this area. We believe our facilities are adequate for our needs and do not
anticipate any material difficulty in replacing such facilities or securing
facilities for new offices.
ITEM 2. PROPERTIES
See the information provided in Item 1 above entitled "Business -
Facilities" for information with respect to the location and general character
of our facilities.
ITEM 3. LEGAL PROCEEDINGS
Except as described below, we are not a party to, and none of our
material properties is subject to, any material litigation other than routine
litigation incidental to our business. In connection with an acquisition that we
completed in 1999, a licensor of a core processing product to the company we
acquired has claimed that its license agreement was breached by the acquisition.
The company that we acquired uses the disputed software to service approximately
50 customers under written agreements we now have with those customers. The
owner of the software demanded arbitration and is claiming that it should be
entitled to unspecified damages in excess of $50,000, termination of the license
agreement, interest on its damages and reimbursement of its fees and costs. The
arbitration is currently proceeding before the American Arbitration Association.
We intend to vigorously defend these claims. However, if we do not prevail we
could be required to pay a material amount in damages. If we lose all or a
significant number of the customers that currently use the software or are
required to pay large amounts of damages, it could have a material adverse
effect on our revenues and profits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth
quarter of the year ended December 31, 1999.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
From our initial public offering in June 1998 until March 26, 1999, our
common stock traded on the American Stock Exchange under the symbol "ICG." Since
March 29, 1999 our common stock has been quoted on the Nasdaq National Market
under the symbol "ICPT." As of March 20, 2000, we had approximately 83 holders
of record of our common stock, representing approximately 3,088 beneficial
owners.
The table below sets forth for the periods indicated the high and low
sales prices of our common stock as reported by the American Stock Exchange and
the Nasdaq National Market, as the case may be.
PRICE RANGE
HIGH LOW
------------- ---------------
YEAR ENDED DECEMBER 31, 1998:
<S> <C> <C>
Second Quarter (beginning June 9, 1998) $ 7 3/8 $ 7
Third Quarter 8 3/8 5
Fourth Quarter 7 3/4 4 1/2
YEAR ENDED DECEMBER 31, 1999:
First Quarter $ 10 1/4 $ 7 1/16
Second Quarter 17 3/8 8
Third Quarter 30 1/8 14
Fourth Quarter 31 1/4 12 1/2
</TABLE>
We have never paid any cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to
retain future earnings, if any, to fund the development and growth of our
business. Our line of credit from First Union National Bank prohibits us from
paying cash dividends without the consent of First Union.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
You should read the following data along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes. We derived this financial
data from our consolidated financial statements, which have been audited by
Arthur Andersen LLP, our independent public accountants. Equity in loss of
affiliate represents our share of the reduction in equity, as a result of
losses, of Netzee. Minority interest in (income) loss of consolidated subsidiary
represents the minority shareholder's 33.3% share of the equity and earnings of
ProImage, Inc., a corporation that provides check imaging services, of which we
own 66.7%. This financial data includes the results of operations of other
companies we have acquired. Please see Note 3 in the notes to our financial
statements for a discussion of the acquisitions we have made.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 8,223 $ 14,511 $ 23,260 $ 28,902 $ 47,221
Costs of services................... 4,607 7,859 10,223 12,031 18,500
Selling, general and administrative
expenses.......................... 2,213 6,852 10,105 11,222 18,241
Depreciation and amortization....... 242 351 1,323 1,337 4,165
Loss on impairment of intangibles... 0 0 728 0
Writeoff of purchased research and
development costs................. 0 810 0 0 0
--------- --------- --------- ---------- ------------
Total operating expenses............ 7,062 15,873 22,379 24,590 40,906
--------- --------- --------- ---------- ---------
Operating income (loss)............. 1,161 (1,362) 881 4,312 6,315
Other income (expense), net......... (63) (279) (649) (184) 39,159
--------- ---------- --------- ---------- ---------
Income (loss) before provision for
income taxes and minority interest 1,098 (1,641) 232 4,128 45,474
Provision (benefit) for income taxes 417 (236) 666 1,564 20,150
Equity in loss of affiliate......... 0 0 0 0 (15,352)
Minority interest in (income) loss of
consolidated subsidiary.......... 0 (14) 39 (89) (120)
--------- --------- --------- ---------- -------
Net income (loss)................... 681 (1,419) (395) 2,475 9,852
Preferred stock dividends........... 0 (8) (32) (16) 0
--------- --------- --------- ---------- ------------
Net income (loss) attributable to
common shareholders............... $ 681 $ (1,427) $ (427) $ 2,459 $ 9,852
========= ========= ========= ======== ===========
Basic net income (loss) per common
share............................. $ 0.12 $ (0.24) $ (0.06) $ 0.30 $ 1.01
========= ========= ========= ======== ============
Diluted net income (loss) per common
share............................. $ 0.12 $ (0.24) $ (0.06) $ 0.30 $ 0.96
========= ========= ========= ======== ============
Weighted average common shares
outstanding:
Basic............................... 5,867,400 5,851,347 6,750,114 8,132,240 9,762,196
Diluted............................. 5,867,400 5,851,347 6,750,114 8,246,514 10,213,546
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- -------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 356 $ 1,398 $ 2,010 $ 3,224 $ 2,003
Working capital......................... 825 1,509 1,117 4,627 3,134
Total assets............................ 1,980 10,941 10,156 20,155 99,256
Long-term debt, net of current portion.. 589 5,212 4,717 211 12,669
Shareholders' equity (deficit).......... 767 82 (784) 16,258 51,131
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION IS QUALIFIED BY REFERENCE TO, AND SHOULD BE
READ IN CONJUNCTION WITH, OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED
NOTES THERETO AND OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS ANNUAL
REPORT. THE FOLLOWING DISCUSSION ALSO CONTAINS FORWARD-LOOKING STATEMENTS WHICH
ARE SUBJECT TO THE RISKS AND UNCERTAINTIES DISCUSSED ON PAGE 1 OF THIS ANNUAL
REPORT.
OVERVIEW
We derive revenues primarily from the following sources:
o electronic funds transfer, or EFT, processing services;
o core data processing systems, support, maintenance and related
services;
o check imaging systems, support and related services;
o data communications management; and
o ancillary products and services, including maintenance and
technical support services, sales of banking related equipment and
complementary products.
We derive EFT revenues principally from processing ATM and debit card
transactions. We receive a base fee for providing our ATM processing services
and an additional fee for each ATM serviced. Once the number of transactions by
a financial institution exceeds established levels, typically between 2,000 and
3,000 transactions per month, we charge additional fees for the extra
transactions processed. For debit card transactions, we generally receive a
portion of the interchange fees charged by our financial institution customers,
and we charge a monthly fee if our customers do not meet a certain minimum
dollar amount of transactions for a particular month. Most charges due under our
EFT service agreements are paid monthly.
On a service bureau basis, we generate core data processing revenues
from service and processing fees based on the volume of transactions processed.
These revenues are recognized as the services are performed. We also generate
core data processing revenues by licensing PC BancPAC, our proprietary
Windows(R) NT based client/server software system, on an in-house basis. We
recognize revenues for licensing PC BancPAC in accordance with Statement of
Position 97-2 on "Software Revenue Recognition," issued by the American
Institute of Certified Public Accountants. We recognize software license fees
when we have signed a non-cancelable license agreement, shipped the product and
satisfied significant obligations to the customer.
We license on an in-house basis Renaissance(TM) software, our
proprietary check imaging software that we acquired in August 1999 as a result
of our acquisition of SBS Corp. See "Business - Our Acquisitions." We generate
revenues from license fees and recurring annual maintenance fees charged for
this system. Revenues from licensing of Renaissance are recognized in accordance
with Statement of Position 97-2, as discussed above. We also provide check
imaging in a service bureau environment. On a service bureau basis, we generate
revenues based on the volume of items processed. This revenue is recognized as
we provide the service.
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<PAGE>
We generate our data communications management service revenues
principally from network management and data traffic across our frame relay
network and from equipment configuration, installation and sales. We charge a
flat monthly fee for providing telecommunications connectivity and network
management as well as an installation charge.
Our ancillary products and services generate revenues primarily from
our maintenance and technical support services as well as sales of equipment. We
recognize maintenance and technical support service revenues as the service
period elapses. We recognize equipment sales revenues at the time of shipment.
In June 1998, we completed an initial public offering of our common
stock. Since that time, we have completed a number of acquisitions. See
"Business - Our Acquisitions" for a discussion of these acquisitions. We
originally accounted for our acquisition of Direct Access in March 1999 as a
pooling of interest. As a result of the transactions described in "Business -
Our Relationship with Netzee," we have changed the accounting for the Direct
Access acquisition to a purchase. Therefore, all of our acquisitions since our
initial public offering have been accounted for as purchase transactions in our
financial statements.
Due to Netzee's issuance of common stock in connection with
transactions that occurred on September 3, 1999, our ownership percentage in
Netzee decreased to approximately 49% as of that date. As a result, we no longer
consolidate Netzee's results of operations with our results of operations. We
now account for our investment in Netzee under the equity method, which requires
us to record the results of operations of Netzee in a single line item in our
statement of operations titled "Equity in Loss of Affiliate." Because we
provided unlimited funding to Netzee until completion of their initial public
offering in November 1999, all of Netzee's losses prior to the completion of the
offering are included in that line item rather than our relative percentage of
those losses. Following the completion of the initial public offering we have
recorded only our relative percentage of Netzee's net losses. As of December 31,
1999 we owned approximately 37% of Netzee's common stock.
We base our expenses to a significant extent on our expectations of
future revenues. Most of our expenses are fixed in the short term, and we may
not be able to quickly reduce spending if our revenues are lower than we expect.
In an attempt to enhance our long term competitive position, we may also make
decisions regarding pricing, marketing, services and technology that could have
an adverse near-term effect on our financial condition and operating results. In
addition, our EFT revenues are based in large part on various interchange and
transaction fees set by Visa and MasterCard. Any changes in these fees, whether
as a result of a pending dispute or otherwise, could negatively impact our
revenues.
Due to the foregoing factors and other risks discussed in our SEC
filings, we believe that quarter to quarter comparisons of our operating results
are not a good indication of our future performance. It is likely that our
operating results will fall below the expectations of securities analysts or
investors in some future quarter. In such event, the trading price of our common
stock would likely decline, perhaps significantly.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented
by certain items in our consolidated statements of operations for the indicated
periods.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Revenues............................................ 100.0% 100.0% 100.0%
Costs of services................................... 44.0 41.6 39.2
Selling, general and administrative expenses........ 43.4 38.8 38.6
Depreciation and amortization....................... 5.7 4.7 8.8
Loss on impairment of intangibles................... 3.1 0.0 0.0
------------- ------------ -------------
Total operating expenses............................ 96.2 85.1 86.6
------------- ------------ -------------
Operating income ................................... 3.8 14.9 13.4
Other income (expense), net......................... (2.8) (0.6) 82.9
------------- ------------ -------------
Income (loss) before minority interest and
provision for income taxes....................... 1.0 14.3 96.3
Equity in loss of affiliate......................... 0.0 0.0 (32.5)
Minority interest (income) loss..................... 0.2 (0.3) (0.2)
Provision for income taxes.......................... 2.9 5.4 42.7
------------- ------------ -------------
Net income.......................................... (1.7)% 8.6% 20.9%
============= ============ =============
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased 63.4%, to $47.2 million for the year ended
December 31, 1999 from $28.9 million for the year ended December 31, 1998. The
$18.3 million increase was primarily related to (a) $14.1 million generated by
an increase in service fee income, (b) $2.8 million generated by additional
hardware sales and (c) $1.4 million generated by an increase in data
communications management income. These increases are attributable to both
internal growth and acquisitions.
COSTS OF SERVICES. Costs of services increased 53.8% to $18.5 million
for the year ended December 31, 1999 from $12.0 million for the year ended
December 31, 1998. The $6.5 million increase was primarily attributable to (a)
an increase of $3.5 million related to service fee income (b) $2.0 million
generated by additional hardware sales, and (c) $1.0 million related to data
communications management.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 62.5% to $18.2 million for the year ended
December 31, 1999 from $11.2 million for the year ended December 31, 1998. The
$7.0 million increase was primarily due to additional personnel to support our
growth and acquisitions and other miscellaneous expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
211.5% to $4.2 million for the year ended December 31, 1999 from $1.4 million
for the year ended December 31, 1998. The $2.8 million increase was primarily
attributable to (a) $600,000 associated with depreciation expense related to
fixed asset additions and (b) $2.2 million related to additional amortization
expense, $1.9 million of which related to acquisitions completed in 1999.
OPERATING INCOME. For the foregoing reasons, operating income increased
$2.0 million to $6.3 million for the year ended December 31, 1999 from $4.3
million for the year ended December 31, 1998.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
increased $39.4 million to $39.2 million for the year ended December 31, 1999
from expense of $180,000 for the year ended December 31, 1998. The increase was
due primarily to a $38.9 million gain associated with the issuance of common
stock of Netzee, Inc. For an explanation of this gain see Note 3 to our
Financial Statements.
20
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PROVISION (BENEFIT) FOR INCOME TAXES. Provision for income taxes
increased $18.6 million to $20.2 million for the year ended December 31, 1999
from $1.6 million for the year ended December 31, 1998. The increase was
attributable to the pre-tax $38.9 million gain associated with the issuance of
common stock of Netzee and increased pre-tax profits.
EQUITY IN LOSS OF AFFILIATE. Equity in loss of affiliate was $15.4
million for the year ended December 31, 1999. This amount is our share of
Netzee, Inc.'s losses. There was no equity in loss of affiliate for the year
ended December 31, 1998.
MINORITY INTEREST IN LOSS (INCOME) OF CONSOLIDATED SUBSIDIARY. Minority
interest in income increased $30,000 to $120,000 for the year ended December 31,
1999 from $90,000 for the year ended December 31, 1998. The increase was
primarily due to profits in ProImage's operations.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased 24.1% 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 (a) $2.5 million generated by an
increase in EFT processing services, (b) $1.3 million generated by additional
core data processing (c) $650,000 generated by an increase in data
communications management services, (d) $380,000 generated by an increase in
merchant portfolio management and (e) other increases of $770,000.
COSTS OF SERVICES. Costs of services increased 17.7% 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 (a)
$1.0 million generated by an increase in core data processing sales, (b) an
increase of $710,000 related to equipment sales and maintenance services and (c)
other costs of $90,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 11.1% 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 our
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 (a)
the writeoff of $540,000 of goodwill assumed in the acquisition of FiNet, Inc.
and (b) the writeoff of $190,000 in purchased software assumed in the
acquisition of ProVesa. These writeoffs were due to permanent impairment in the
related long term assets.
OPERATING INCOME. 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.
21
<PAGE>
INTEREST AND 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 long-term debt with the proceeds
from our 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 our acquisition of an
additional 33% stake in ProImage 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.
LIQUIDITY AND CAPITAL RESOURCES
Since our incorporation, we have financed our operations and capital
expenditures through cash from operations, borrowings from banks and sales of
our common stock, including our initial public offering in June 1998, which
resulted in net proceeds to us of $14.4 million, and our public
offering in February 2000, which resulted in net proceeds to us of $66.0
million.
Cash and cash equivalents were $2.0 million at December 31, 1999. Net
cash provided by operating activities was $4.2 million, $2.7 million and $2.1
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
increase in the net cash provided by operating activities in 1999 as compared to
1998 was primarily attributable to an increase in earnings. 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.
Net cash used in investing activities was $17.8 million, $8.4 million
and $630,000 in 1999, 1998 and 1997, respectively. The increase in net cash used
in investing activities in 1999 as compared to 1998 was primarily due to a
receivable created from the funding of Netzee's operations and acquisitions
during the 1999 period. The increase in net cash used in investing activities in
1998 as compared to 1997 was attributable to increased capital expenditures and
acquisitions during 1998.
Net cash provided by (used in) financing activities was $12.4 million,
$6.9 million and $(860,000) for the years ended December 31, 1999, 1998 and
1997, respectively. The increase in net cash for 1999 compared to 1998 was
primarily due to increased borrowings under our credit facility due to the
funding of Netzee's operations and acquisitions during the 1999 period. The
increase for 1998 as compared to 1997 was due to the completion of our initial
public offering partially offset by the paydown of $5.2 million of long-term
debt and $1.8 million of deferred compensation.
During 1998, we entered into a credit facility with First Union
National Bank. Under this facility, as amended, we may borrow up to $35.0
million for working capital and to fund acquisitions and pay expenses related to
acquisitions. During 1999, we extended the term of the facility from April 28,
2001 to June 30, 2002. The First Union credit facility contains provisions which
require us to maintain certain financial ratios and minimum net worth amounts
and which restrict our ability to incur additional debt, make certain
22
<PAGE>
capital expenditures, enter into agreements for mergers, acquisitions or the
sale of substantial assets and pay cash dividends. Interest is payable monthly,
and outstanding principal amounts accrue interest at an annual rate equal to
either (a) a floating rate equal to the lender's prime rate minus 0.25% or (b) a
floating rate equal to the LIBOR Market Index Rate. On December 31, 1999, the
interest rate under this facility was approximately 7.38%.
In connection with our acquisition of SBS Corp. and SBS Data Services,
Inc., we borrowed $21.6 million from First Union and loaned that amount to our
subsidiary, Direct Access, to pay a portion of the purchase price for SBS Corp.
and to pay some outstanding liabilities of SBS Corp. In September 1999, we
borrowed an additional $7.3 million under the First Union credit facility and
loaned that amount to Netzee to pay a portion of the purchase price for
acquisitions of other companies. Netzee repaid these loans with some of the net
proceeds from its initial public offering, which was completed November 1999.
Netzee has borrowed additional monies from us and we have committed,
subject to some conditions, to provide to Netzee a $15.0 million line of credit
for its working capital needs. Pending the completion of the line of credit, we
entered into a promissory note with Netzee, Inc. on March 24, 2000. As of March
24, 2000, a total of $7.8 million was due from Netzee under this promissory
note. We plan to finance this line of credit with cash on hand and additional
borrowings under our credit facility with First Union.
We no longer consolidate Netzee's results of operations with our
results of operations. We now account for our investment in Netzee under the
equity method, which requires us to record the results of operations of Netzee
in a single line item in our statement of operations titled "Equity in Loss of
Affiliate." Because we provided unlimited funding to Netzee until completion of
its initial public offering in November 1999, all of Netzee's losses prior to
the completion of the offering are included in that line item rather than our
relative percentage of those losses. Following the completion of Netzee's
offering we have recorded only our relative percentage of Netzee's net losses.
As of December 31, 1999 we owned approximately 37% of Netzee's common stock. In
addition, Netzee has a history of losses and may never become profitable. The
impact of Netzee's results of operations on our financial condition, including
our shareholders' equity, is uncertain, and we cannot guarantee we will benefit
from our ownership in Netzee.
While there can be no assurance, we believe that the net proceeds to us
from our recently completed secondary offering, together with funds currently on
hand, funds to be provided by operations and funds available for working capital
purposes under the First Union credit facility, will be sufficient to meet our
anticipated capital expenditures and liquidity requirements for at least the
next 12 months. We intend to grow, in part, through strategic acquisitions and
expect to make additional expenditures to negotiate and consummate acquisition
transactions and integrate the acquired companies. No assurance can be made with
respect to the actual timing and amount of the expenditures and acquisitions. In
addition, no assurance can be given that we will complete any acquisitions on
terms favorable to us, if at all, or that additional sources of financing will
not be required.
YEAR 2000 READINESS
Our business and relationships with our customers depend significantly
on a number of computer software programs, internal operating systems and
connections to other regional and national telecommunications and processing
networks. If any of these software programs, systems or networks are not
programmed to recognize and properly process dates after December 31, 1999,
significant system
23
<PAGE>
failures or errors may result. We have experienced no such problems to date,
although it is still possible that we could experience such problems in the
future. These matters are commonly referred to as the year 2000 problem and they
could have a material adverse effect on our operations and those of our
customers.
OUR COMPLIANCE PROGRAM
We have successfully converted all of our non-year 2000 compliant
service bureau processing customers to our PC BancPAC software, which is year
2000 compliant. We incurred costs of approximately $175,000 related to the
conversions. We have experienced no significant year 2000 problems with these
programs, systems or network connections to date.
We currently provide core data processing and check imaging services
through eleven centers located in Georgia, Florida, Tennessee, Arkansas,
Colorado and Texas. The equipment at each of these locations is year 2000
compliant. The total cost to make the equipment year 2000 compliant was
approximately $75,000. In the event that the upgraded equipment does not
function properly in the future, we believe that we can purchase equipment that
will allow processing to continue. It is difficult to estimate the potential
expense involved or delays which may result from a failure of the upgraded
equipment at our service bureau processing centers.
EFT processing depends upon coordinating the operations of other ATM
networks and our systems. We have not experienced any material year 2000 issues
in our EFT processing operations. If other ATM networks have not successfully
addressed the year 2000 problem in their operations and if we are unable to
route the transactions over another network or another provider that has year
2000 compliant systems, our operations may be affected. It is difficult to
estimate the cost of our efforts to certify these operations as the majority of
expenditures related to existing programmers and support staff required to
review the financial institutions' networks and equipment. It is difficult to
estimate the potential expenses involved or delays which may result from a
failure or delay of these institutions and third parties in resolving their year
2000 issues.
With regard to our data communications operations, we believe that our
internal equipment as well as third party products and systems used in our
operations are year 2000 compliant. We also believe our data communications
equipment and services, which are primarily provided by companies such as
Motorola, BellSouth, MCI WorldCom and Qwest Communications, are year 2000
compliant. If these companies have not successfully addressed the year 2000
problem in their operations and if we are unable to successfully transfer our
business operations to another provider that has year 2000 compliant systems,
our data communications operations may be interrupted, hindered or delayed,
which would have a material adverse effect on our business, financial condition
and results of operations.
THIRD PARTY COMPLIANCE
Other companies interact electronically with us and our customers, and
we must coordinate our EFT processing, ATM network, data communications and data
processing operations with these other companies and our customers. We have not
experienced any material year 2000 problems with any third
24
<PAGE>
party products and systems upon which our business depends. The financial
institutions, third party vendors and network processors with whom we do
business, including our customers, vendors and processors, have not reported any
year 2000 issues to us. However, we cannot assure you that these other companies
have identified or resolved year 2000 issues in their operations, and our
business could suffer greatly if our customers' and vendors' operations are
halted or diminished even temporarily to address or correct these issues. It is
difficult 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. We cannot assure you that such expenses, failures or delays will
not have a material adverse effect on our business, financial condition or
results of operations.
CONTINGENCY PLANS
Although we have not incurred any material year 2000 issues with our
products, services or operating systems, or those of third parties with whom we
do business, we continue to retain contingency plans for handling any year 2000
problems that may occur. Our contingency plans include:
o accelerated replacement of affected equipment or software;
o the emergency allocation of personnel and resources to analyze,
assess and direct remediation efforts;
o the use of backup systems, including those that do not rely on
computers; and
o alternative sources of power and communications.
It is difficult to estimate the potential expenses involved or delays
which may result if we are required to implement any contingency plans to
address year 2000 issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates. Borrowings under the First Union credit
facility accrue interest at a fluctuating rate based either upon the lender's
prime rate or LIBOR. As of March 20, 2000, there was $760,000 outstanding under
this facility. Any future borrowings will increase our exposure to interest rate
fluctuations. Changes in interest rates which dramatically increase the interest
rate on the credit facility would make it more costly to borrow under that
facility and may impede our acquisition and growth strategies if we determine
that the costs associated with borrowing funds are too high to implement these
strategies. Additional loans to Netzee may increase the amount outstanding under
this facility.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We refer you to our "Consolidated Balance Sheets," "Consolidated
Statements of Operations," "Consolidated Statements of Changes in Shareholders'
Equity (Deficit)," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements," and "Report of Independent Public
Accountants" attached hereto as pages F-1 through F-24.
25
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
Some information required by Part III is omitted from this Annual
Report because we will file a definitive Proxy Statement pursuant to Regulation
14A of the Securities Exchange Act of 1934 not later than 120 days after the end
of the financial year covered by this Report. Some information to be included in
that Proxy Statement is incorporated by reference into this Annual Report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from
our Proxy Statement for the 2000 Annual Meeting of Shareholders under the
heading "Election of Directors (Proposal 1)."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
our Proxy Statement for the 2000 Annual Meeting of Shareholders under the
heading "Executive Compensation," except for those portions relating to our
compensation committee's report on executive compensation and to our comparative
performance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
our Proxy Statement for the 2000 Annual Meeting of Shareholders under the
heading "Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
our Proxy Statement for the 2000 Annual Meeting of Shareholders under the
heading "Corporate Governance."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are filed as part of this Report and
are attached hereto as pages F-1 to F-24:
26
<PAGE>
Report of Independent Public Accountants;
Consolidated Balance Sheets as of December 31, 1998 and 1999;
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999;
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999;
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999; and
Notes to Consolidated Financial Statements
The following financial statements of Netzee, Inc. as required by
Regulation S-X, Rule 3-09 are filed herewith as Exhibit 99.1:
Report of Independent Public Accountants;
Consolidated Balance Sheets as of December 31, 1998 and 1999;
Consolidated Statements of Operations for the years ended December 31,
1997 and 1998, for the period from January 1, 1999 to February
28, 1999 and for the period from March 1, 1999 to December 31,
1999;
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended December 31, 1997, 1998, for the period
from January 1, 1999 to February 28, 1999 and for the period
from March 1, 1999 to December 31, 1999;
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998, for the period from January 1, 1999 to February
28, 1999 and for the period from March 1, 1999 to December 31,
1999; and
Notes to Financial Statements.
(a) 2. Financial Statement Schedules
Financial statement schedules I, III and VI are omitted because they
are either: (a) not applicable or not required, or (b) the information
is presented in our consolidated financial statements or notes thereto.
Schedule II Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Beginning Acquisition Ending
Description Balance reserves Deductions Balance
------------------ ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1998 Restructuring
reserve related to
acquisition $ 0 $178,169 $ 68,646 (a) $109,523
1999 Restructuring
reserve related to
acquisition $109,523 $100,000 $158,862 $50,661
</TABLE>
(a) Amount includes $50,968 of lease costs charged against reserve and
$17,678 adjusted against goodwill to reflect revised estimates of exit
costs.
27
<PAGE>
<TABLE>
<CAPTION>
Charge to
beginning
costs Acquisition Ending
Description and balance reserves Expense Writeoffs Balance
------------------- -------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997 Allowance for
Doubtful Accounts $157,772 $ 0 $ 0 $ (1,156) $156,616
1998 Allowance for
Doubtful Accounts 156,616 0 20,000 (6,864) 169,752
1999 Allowance for
Doubtful Accounts 169,752 190,000(a) 125,000 (98,600) 386,152
</TABLE>
(a) Amounts associated with current year acquisitions charged to
goodwill.
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 25, 2000. 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 Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen
Atlanta, Georgia
February 25, 2000
(a) 3. Exhibits
Exhibit No. Description
------------ --------------
2.1 Acquisition and Merger Agreement dated May 28, 1999 by
and between The InterCept Group, Inc., LEV Acquisition
Corp., L.E. Vickers & Associates, Inc., Data Equipment
Services, Inc., and the shareholders of L.E. Vickers &
Associates, Inc. and Data Equipment Services, Inc.
(incorporated by reference to Exhibit 2.1 to InterCept's
Current Report on Form 8-K filed June 11, 1999).++
2.2 Agreement and Plan of Merger dated August 6, 1999 by and
among The InterCept Group, Inc., Zeenet Corporation, SBS
Data Services, Inc. and the shareholders of SBS Data
Services (incorporated by reference to Exhibit 2.1 to
InterCept's Current Report on Form 8-K filed August 20,
1999).++
2.3 Agreement and Plan of Merger dated August 6, 1999 by and
between Direct Access Interactive, Inc., SBS Corporation
and the shareholders of SBS Corporation (incorporated by
reference to Exhibit 2.2 to InterCept's Current Report
on Form 8-K filed August 20, 1999).++
2.4 Agreement and Plan of Merger dated August 6, 1999 by and
among Direct Access Interactive, Inc., SBS Corporation
and the shareholders of SBS Corporation (incorporated by
reference to Exhibit 2.2 to InterCept's Current Report
on Form 8-K filed on August 20, 1999).++
2.5 Agreement and Plan of Merger dated September 3, 1999 by
and between Netzee, Inc. and Direct Access Interactive,
Inc. (incorporated by reference to Exhibit 2.1 to
InterCept's Current Report on Form 8-K filed September
17, 1999).++
28
<PAGE>
2.6 Agreement and Plan of Merger dated September 3, 1999 by
and between Netzee, Inc., Dyad Corporation and certain
of the shareholders of Dyad Corporation (incorporated by
reference to Exhibit 2.2 to InterCept's Current Report
on Form 8-K filed September 17, 1999).++
2.7 Asset Contribution Agreement dated September 3, 1999 by
and among The InterCept Group, Inc., Netzee, Inc. and
The Bankers Bank (incorporated by reference to Exhibit
2.3 to InterCept's Current Report on Form 8-K filed
September 17, 1999).++
2.8 Asset Contribution Agreement dated September 3, 1999 by
and among The InterCept Group, Inc., Netzee, Inc. and
TIB The Independent BankersBank (incorporated by
reference to Exhibit 2.4 to InterCept's Current Report
on Form 8-K filed September 17, 1999).++
3.1 Amended and Restated Articles of Incorporation, as
deemed filed with the Secretary of the State of Georgia
on April 29, 1998 (incorporated by reference to the
exhibits to InterCept's Registration Statement on Form
8-A (as amended on October 1, 1999)).
3.2 Amended and Restated Bylaws (incorporated by reference
to the exhibits to InterCept's Registration Statement on
Form 8-A (as amended on October 1, 1999)).
3.3 Amendment to Amended and Restated Bylaws (incorporated
by reference to the exhibits to InterCept's Registration
Statement on Form 8-A (as amended on October 1, 1999)).
4.1 See Exhibits 3.1, 3.2 and 3.3 for provisions of the
Amended and Restated Articles of Incorporation, Amended
and Restated Bylaws and Amendment to Amended and
Restated Bylaws defining the rights of the holders of
common stock.
10.1 The InterCept Group, Inc. Amended and Restated 1996
Stock Option Plan.*/**
10.2 Form of Stock Option Agreement under The InterCept
Group, Inc. Amended and Restated 1996 Stock Option
Plan.*/**
10.3 Form of Stock Option Agreement for Directors under The
InterCept Group, Inc. Amended and Restated 1996 Stock
Option Plan.*/**
10.4 Employment Agreement by and between InterCept and John
W. Collins dated as of January 30, 1998.*/**
10.5 Employment Agreement by and between InterCept and Donny
R. Jackson dated as of January 30, 1998.*/**
10.6 Employment Agreement by and between InterCept and Scott
R. Meyerhoff dated as of February 1, 1998.*/**
10.7 Stock Option Agreement by and between InterCept and
Donny R. Jackson dated January 14, 1997.*/**
10.8 Stock Option Agreement dated as of February 1, 1998 by
and between InterCept and Scott R. Meyerhoff.*/**
10.9 Stock Option Agreement dated as of February 24, 1997 by
and between InterCept and Michael R. Boian.*/**
10.10 Form of Indemnification Agreement entered into between
InterCept and its directors and officers.*
10.11 Form of General Marketing Agent Agreement.*
10.12 Form of Master Electronic Funds Transfer Services
Agreement.*
10.13 Form of Data Processing Agreement.*
29
<PAGE>
10.14 Form of Service Agreement for Data Communications.*
10.15 Form of Software License Agreement for PC BancPAC(TM).*
10.16 Channel Services Payment Plan Agreement dated December
22, 1993 between Intercept Systems, Inc. and BellSouth
Communications, Inc.*
10.17 Form of Special Service Arrangement Agreement with
BellSouth Telecommunications, Inc. for frame relay
services.*
10.18 Form of SynchroNet Service Agreement with Southern Bell
Telephone and Telegraph Company.*
10.19 WorldCom Data Services Agreement dated as of February
27, 1998 by and between WorldCom, Inc. and Intercept
Communications Technologies, L.L.C.*+
10.20 Loan and Security Agreement dated April 28, 1998 by and
among InterCept, its wholly-owned subsidiaries and First
Union National Bank.*
10.21 First Amendment to Loan and Security Agreement dated
October 9, 1998 by and among InterCept, its wholly-owned
subsidiaries and First Union National Bank (incorporated
by reference to Exhibit 10.26 to InterCept's Annual
Report on Form 10-K for the year ended December 31,
1998).
10.22 Third Amendment to Loan and Security Agreement and
Joinder Agreement dated August 6, 1999 by and among
First Union National Bank and The InterCept Group, Inc.
and its subsidiaries, (incorporated by reference to
Exhibit 10.1 to InterCept's Current Report on Form 8-K
filed August 20, 1999).
10.23 Fourth Amendment to Loan and Security Agreement and
Joinder Agreement dated August 6, 1999 by and among
First Union National Bank and The InterCept Group, Inc.
and its subsidiaries.
10.24 Stock Option Agreement dated as of June 24, 1998 by and
between InterCept and John W. Collins (incorporated by
reference to Exhibit 10.2 to InterCept's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
filed on August 14, 1998).**
10.25 Stock Option Agreement dated as of June 24, 1998 by and
between InterCept and Donny R. Jackson (incorporated by
reference to Exhibit 10.3 to InterCept's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
filed on August 14, 1998).**
10.26 Stock Option Agreement dated as of June 24, 1998 by and
between InterCept and Scott R. Meyerhoff (incorporated
by reference to Exhibit 10.3 to InterCept's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
filed on August 14, 1998).**
10.27 Employment Agreement by and between LEV Acquisition
Corp. and Kenneth Kudrey dated as of May 28, 1999.**
10.28 Promissory note dated March 24, 2000 from Netzee, Inc.
to InterCept.
21.1 Subsidiaries of InterCept.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (contained on the signature page
hereof).
30
<PAGE>
27.1 Financial Data Schedule for the periods ending December
31, 1998 and 1999 (for SEC use only).
99.1 Financial statements of Netzee, Inc.
* Incorporated by reference to the exhibits to InterCept's Registration
Statement on Form S-1 (No. 333-47197) as declared effective by the
Securities and Exchange Commission on June 9, 1998.
** This agreement is a compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
+ Confidential treatment has been granted for certain confidential portions
of this exhibit pursuant to Rule 406 under the Act. In accordance with Rule
406, these confidential portions have been omitted from this exhibit and
filed separately with the Commission.
++ The registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon request,
as provided in item 601(b)(2) of Regulation S-K.
(b) Reports on Form 8-K
Form 8-K/A filed November 8, 1999
Amending Form 8-K filed on August 20, 1999, as amended on September 30,
1999, to replace in their entirety the financial statements of SBS
Corp. and the pro forma consolidated financial statements.
Form 8-K/A filed on November 8, 1999
Amending Form 8-K filed on August 20, 1999, as amended on September 30,
1999, to replace in their entirety the financial statements of TIB The
Independent BankersBank and the pro forma condensed consolidated
financial statements.
31
<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 29, 2000 By: /s/ John W. Collins
- ------------------------------------ ------------------------------------
Date John W. Collins
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, John W. Collins
and 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
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ------------ ----- ----
<S> <C> <C>
/s/ John W. Collins Chairman of the Board and Chief March 29, 2000
- --------------------------------------------- Executive Officer (principal
John W. Collins executive officer)
/s/ Scott R. Meyerhoff Vice President - Finance and Chief March 29, 2000
- -------------------------------------------- Financial Officer (principal
Scott R. Meyerhoff financial and accounting officer)
/s/ Donny R. Jackson President, Chief Operating Officer March 29, 2000
- --------------------------------------------- and Director
Donny R. Jackson
/s/ Jon R. Burke Director March 29, 2000
- ------------------------------------------------
Jon R. Burke
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
- ------------ ----- ----
<S> <C> <C>
/s/ Boone A. Knox Director March 29, 2000
- --------------------------------------------
Boone A. Knox
/s/ John D. Schneider, Jr. Director March 29, 2000
- ---------------------------------------------
John D. Schneider, Jr.
/s/ Glenn W. Sturm Director March 29, 2000
- ---------------------------------------------
Glenn W. Sturm
</TABLE>
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998, and 1999
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1998, and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998, and 1999
NOTES TO FINANCIAL STATEMENTS
F-1
<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, 1998 and
1999 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, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The InterCept Group, Inc. and
subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 25, 2000
F-2
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1998 1999
- ---------------------------------------------------------- ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,224 $ 2,003
Accounts receivable, less allowance for doubtful
accounts of $170 and $386 in 1998 and 1999,
respectively 3,503 8,708
Deferred tax assets 80 1,956
Inventory, prepaid expenses, and other 1,267 2,738
------------ -------------
Total current assets 8,074 15,405
PROPERTY AND EQUIPMENT, net 7,093 10,628
INTANGIBLE ASSETS, net 4,661 20,600
ADVANCES TO AFFILIATE (NOTE 14) 0 10,957
INVESTMENT IN AFFILIATE (NOTE 4) 0 40,446
OTHER NONCURRENT ASSETS 327 1,220
------------ -------------
$20,155 $99,256
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 95 $ 154
Accounts payable and accrued liabilities 2,106 4,569
Accrued income taxes 99 1,776
Deferred revenue 1,147 5,772
------------ -------------
Total current liabilities 3,447 12,271
NOTES PAYABLE, LESS CURRENT PORTION 211 12,669
DEFERRED TAX LIABILITY 182 22,570
DEFERRED REVENUE 0 440
------------ -------------
Total liabilities 3,840 47,950
MINORITY INTEREST 57 175
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000 shares
authorized, none issued and outstanding at
December 31, 1998 and 1999, respectively 0 0
Common stock, no par value; 50,000,000 shares
authorized, 9,248,539 and 10,117,972 shares
issued and outstanding at December 31, 1998 and
1999, respectively 17,170 42,285
(Accumulated deficit) retained earnings (1,098) 8,754
Accumulated other comprehensive income 186 92
------------ -------------
Total shareholders' equity 16,258 51,131
------------ -------------
$20,155 $99,256
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
================================================================================
F-3
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
Year Ended December 31,
-----------------------
1997 1998 1999
---------- ------------ ----------
REVENUES:
Service fee income $16,841 $21,464 $35,614
Data communications management income 3,119 3,772 5,163
Equipment and product sales, services, and other 3,300 3,666 6,444
---------- ------------ ----------
Total revenues 23,260 28,902 47,221
---------- ------------ ----------
COSTS OF SERVICES:
Cost of service fee income 5,215 6,321 9,867
Cost of data communications management income 2,412 2,555 3,561
Cost of equipment and product sales, services and other 2,596 3,155 5,072
---------- ------------ ----------
Total costs of services 10,223 12,031 18,500
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 10,105 11,222 18,241
DEPRECIATION AND AMORTIZATION 1,324 1,337 4,165
LOSS ON IMPAIRMENT OF INTANGIBLES 727 0 0
---------- ------------ ----------
Total operating expenses 22,379 24,590 40,906
---------- ------------ ----------
OPERATING INCOME 881 4,312 6,315
INTEREST EXPENSE (770) (344) (701)
INTEREST AND OTHER INCOME, NET 121 160 39,860
---------- ------------ ----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST 232 4,128 45,474
PROVISION FOR INCOME TAXES 666 1,564 20,150
EQUITY IN LOSS OF AFFILIATE 0 0 (15,352)
MINORITY INTEREST IN LOSS (INCOME) OF CONSOLIDATED SUBSIDIARY 39 (89) (120)
---------- ------------ ----------
NET (LOSS) INCOME BEFORE PREFERRED DIVIDENDS (395) 2,475 9,852
PREFERRED DIVIDENDS (32) (16) 0
---------- ------------ ----------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS (427) 2,459 9,852
---------- ------------ ----------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains (losses) arising during period 0 186 (94)
---------- ------------ ----------
Total comprehensive (loss) income $ (427) $ 2,645 $9,758
========== ============ ==========
NET (LOSS) INCOME PER COMMON SHARE:
Basic $(0.06) $0.30 $1.01
========== ============ ==========
Diluted $(0.06) $0.30 $0.96
========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED RETAINED
COMMON STOCK HOLDING EARNINGS
----------------------- GAINS ON (ACCUMULATED
SHARES AMOUNT INVESTMENTS DEFICIT) TOTAL
--------- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 6,750,114 $2,770 $0 $(2,688) $82
Distributions for taxes to shareholders of
pass-through entities 0 0 0 (597) (597)
Reclassification of accumulated deficit upon
conversion to a C corporation 0 (11) 0 11 0
Issuance of common stock 0 6 0 0 6
Net loss attributable to common shareholders 0 0 0 (427) (427)
Pro forma tax provision 0 0 0 152 152
---------- ----------- ---------- ---------- --------
BALANCE, DECEMBER 31, 1997 6,750,114 2,765 0 (3,549) (784)
Net income attributable to common shareholders 0 0 0 2,459 2,459
Distributions for taxes to shareholders of
pass-through entities 0 0 0 (8) (8)
Preferred stock premium paid 0 (40) 0 0 (40)
Initial public offering proceeds, net of expenses 2,498,425 14,445 0 0 14,445
Other comprehensive income 0 0 186 0 186
---------- ----------- ---------- ---------- --------
BALANCE, DECEMBER 31, 1998 9,248,539 17,170 186 (1,098) 16,258
Issuance of common stock in connection with
exercise of stock options 25,416 74 0 0 74
Net income attributable to common
shareholders 0 0 0 9,852 9,852
Other comprehensive loss 0 0 (94) 0 (94)
Issuance of common stock in connection with
acquisitions 844,017 11,998 0 0 11,998
Income tax benefits related to exercises of
stock options 0 129 0 0 129
Gain related to stock issuance of Netzee
subject to put option 0 12,914 0 0 12,914
---------- ----------- ---------- ---------- --------
BALANCE, DECEMBER 31, 1999 10,117,972 $42,285 $92 $8,754 $51,131
=========== =========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
-------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income before preferred dividends $ (395) $2,475 $9,852
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation 568 1,009 1,623
Amortization 756 328 2,542
Loss on impairment of intangibles 727 0 0
Loss on disposal of property and equipment 0 35 0
Minority interest in income (loss) of consolidated subsidiary (39) 89 120
Deferred income tax (benefit) provision (15) 770 14,268
Pro forma tax expense 152 0 0
Gain due to Netzee equity transactions (Note 3) 0 0 (38,920)
Equity in loss of affiliate 0 0 15,352
Stock compensation charge 0 0 480
Changes in operating assets and liabilities, net of effects
of purchase acquisitions:
Accounts receivable 60 (311) (2,372)
Inventory, prepaid expenses, and other (5) (675) 598
Other assets (65) (6) (51)
Accounts payable and accrued liabilities 287 (1,030) 157
Deferred revenue 68 (2) 533
-------------- ------------ --------------
Net cash provided by operating activities 2,099 2,682 4,182
CASH FLOWS FROM INVESTING ACTIVITIES, NET OF EFFECTS OF PURCHASE ACQUISITIONS:
Decrease in note receivable 413 20 17
Advances to affiliate, net 0 0 (10,957)
Capital contributions to affiliate 0 0 (155)
Purchases of property and equipment, net (993) (4,839) (4,700)
Additions to capitalized software 0 (323) (539)
Purchase of businesses, net of cash acquired 0 (3,220) (1,222)
Increase in investments (50) 0 (240)
-------------- ------------- -------------
Net cash used in investing activities (630) (8,362) (17,796)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES, NET OF EFFECT OF PURCHASE ACQUISITIONS:
Proceeds from notes payable and line of credit 280 0 45,331
Payments on notes payable and line of credit (514) (6,992) (33,012)
Distributions for taxes to shareholders of pass-through entities (597) (8) 0
Proceeds from issuance of common stock, net of expenses 6 14,445 74
Income tax benefit related to the exercise of stock options 0 0 129
Retirement of preferred stock 0 (440) 0
Payment of preferred dividends (32) (16) 0
Debt issuance costs 0 (95) (129)
-------------- ------------- -------------
Net cash (used in) provided by financing activities (857) 6,894 12,393
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 612 1,214 (1,221)
CASH, BEGINNING OF YEAR 1,398 2,010 3,224
-------------- ------------ --------------
CASH, END OF YEAR $2,010 $3,224 $2,003
============== ============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 726 $ 365 $ 733
============== ============ ==============
Cash paid for income taxes $ 342 $1,021 $3,933
============== ============ ==============
Non-cash investing activities:
InterCept common stock issued for acquisitions, 844,017 shares $0 $0 $11,998
Netzee common stock issued for acquisitions, 6,016,137 shares $0 $0 $69,086
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. ORGANIZATION AND NATURE OF BUSINESS
The InterCept Group, Inc. ("InterCept") is a single-source
provider of a broad range of technologies, products and services that
work together to meet the electronic commerce and operating needs of
community financial institutions. InterCept focuses on serving
community financial institutions in the U.S. with assets of less than
$500 million. Over 1,400 of these community financial institutions have
contracted with InterCept for one or more of our technologies, products
and services, which include electronic funds transfer transactions,
core bank processing systems, check imaging systems and data
communications management networks, as well as services related to each
of these products and systems.
In June 1998, InterCept completed the initial public offering
of its common stock. Proceeds to InterCept from the offering (after
deducting expenses related to the offering) were approximately $14.4
million (including proceeds from the underwriters' overallotment option
which was exercised in July 1998). Proceeds of the offering were used
to pay certain debt, pay obligations owed to a former officer of
InterCept, enhance and expand InterCept's frame relay network, and
redeem shares of preferred stock and for general working capital needs,
including acquisitions.
InterCept was incorporated on April 30, 1996 and has made
several acquisitions since inception. See Note 3 for a discussion of
these acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
InterCept and its wholly owned subsidiaries ProVesa Services, Inc.,
InterCept Switch, Inc. LEV Acquisition Corp. and InterCept
Communications Technologies, Inc. as of December 31, 1999. In addition,
ProImage, Inc., a corporation in which ProVesa has a 67% ownership
interest as of December 31, 1999, has been consolidated in InterCept's
consolidated financial statements since its inception, due to
Intercept's control of ProImage. Management of InterCept retains
responsibility for all day-to-day operations of ProImage and has and
will continue to provide complete financial support for ProImage due to
legal limitations on the other shareholder's ability to fund losses.
All significant intercompany accounts and transactions have been
eliminated in consolidation. Minority interest in income represents the
minority shareholder's proportionate share of the equity and earnings
of ProImage. In the third quarter of 1999, Direct Access Interactive,
Inc., one of InterCept's wholly owned subsidiaries, issued shares of
its common stock in connection with several transactions discussed in
Note 3. Direct Access was then merged into a new subsidiary, Netzee,
Inc., which issued additional shares of common stock on September 3,
1999 as discussed in Note 3. As a result of these transactions,
InterCept's ownership percentage in Netzee decreased to approximately
49%. InterCept has accounted for its investment in Netzee after
September 3, 1999 under the equity method, under which the operations
of Netzee are recorded on a single line item in
F-7
<PAGE>
the statements of operations, "equity in loss of affiliate." Because
InterCept provided unlimited funding to Netzee until completion of
their initial public offering in November 1999, all of Netzee's losses
prior to the completion of the offering are included in that line item
rather than InterCept's relative percentage of those losses. Following
the completion of the initial public offering InterCept has recorded
only their relative percentage of Netzee's net losses. As of December
31, 1999 InterCept owned approximately 37% of Netzee's common stock.
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 EQUIVALENTS
InterCept 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 $350,000 and $200,000 at
December 31, 1998 and 1999, respectively, and are included in
inventory, prepaid expenses, and other current assets on the
accompanying consolidated balance sheets. InterCept categorizes all of
its investment securities as available-for-sale, which are recorded at
fair value. Unrealized gains and losses on available-for-sale
securities are reported net of tax effects as adjustments to
shareholders' equity (deficit) and as a component of comprehensive
income. Realized gains and losses and declines in value judged to be
other than temporary are included in InterCept's results of operations.
The cost of securities sold is based on the specific identification
method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are
depreciated using the straight-line method over the estimated useful
lives of the assets for financial reporting purposes. Major additions
and improvements are charged to the property accounts, while
replacements, maintenance and repairs which do not improve or extend
the lives of respective assets are expensed in the current period.
Estimated useful lives for InterCept's assets are as follows:
Building and improvements 5 to 31 years
Machinery and equipment 3 to 30 years
Furniture and office equipment 5 to 10 years
Software licenses 3 to 5 years
INTANGIBLE ASSETS
Intangible assets include goodwill, customer contracts,
capitalized product technology, and workforce in place.
InterCept 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 future cash flow.
GOODWILL
Goodwill represents the excess of the purchase price over the
net tangible and identifiable intangible assets of acquired businesses.
Goodwill is amortized on a straight-line basis over periods of 5 to 40
years.
F-8
<PAGE>
CUSTOMER CONTRACTS
In connection with certain of InterCept's acquisitions,
InterCept allocated a portion of the purchase price to acquired
customer contracts based on a discounted cash flow analysis of the
applicable contracts. The estimated fair values attributed to the
contracts is being amortized over a period of 18 months to 5 years,
which represents the estimated average remaining life of the contracts.
PRODUCT TECHNOLOGY
Product technology represents software acquired as well as
capitalized software development costs for software to be sold. Product
technology is amortized on a straight-line basis over five years.
InterCept 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 a straight-line
basis over five years, the estimated economic life of the software.
Amortization of capitalized software development costs begins as
products are made available for sale or as the related product is put
into use.
Amortization expense totaled approximately $30,000, $54,000
and $140,000 in 1997, 1998, and 1999, respectively. Research and
development costs and maintenance costs related to software development
are expensed as incurred.
SEGMENT REPORTING
InterCept does not disclose segment information as it believes
it has only one segment. InterCept offers its multiple products and
services to the same customer base of financial institutions.
Additionally, management reviews company performance on a consolidated
level rather than on a product or service level.
REVENUE RECOGNITION
Revenues include service fees, data communication management
fees, equipment sales, installation and maintenance, software license
fees, and software maintenance. Service fee income and data
communication management fees are recognized as services are performed.
Revenue from equipment sales and installations is recognized upon
installation of the product, and any related maintenance revenue is
recognized ratably over the period during which the services are
performed. Revenue from software sales is recognized in accordance with
AICPA Statement of Position 97-2, "Software Revenue Recognition."
Hardware and installation revenue is recognized upon installation, and
license and maintenance fees are recognized over the term of the
license and maintenance period. InterCept sells certain of its software
products under five-year, sales-type lease agreements through which
customers pay five equal advance payments. These leases incorporate the
initial installation and ongoing license fee for five years. Revenue
for all lease agreements, with the exception of revenue attributable to
equipment, which is recognized upon installation, is deferred and
recognized ratably over the period of the lease.
MINIMUM LEASE PAYMENTS RECEIVABLE
As noted above, the Company sells certain software products
under sales-type leases. At December 31, 1999, future minimum lease
payments receivable under non-cancelable leases are as follows (in
thousands):
F-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $138
2001 138
2002 138
2003 115
-------
Total minimum lease payments receivable 529
Less amount representing interest (77)
-------
Present value of net minimum lease payments receivable 452
Less current maturities of lease payments receivable (104)
-------
Capital lease payments receivable $ 348
=======
</TABLE>
The current and noncurrent portion of the lease payments
receivable is included in accounts receivable and other assets,
respectively, in the accompanying consolidated balance sheets.
DEFERRED REVENUE
Deferred revenue represents the liability for advanced
billings to customers primarily related to license fees and maintenance
contracts. Such amounts are recognized as revenue when the related
services are performed.
LONG-LIVED ASSETS
InterCept 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.
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.
In December 1997, InterCept wrote off the costs of certain
product technology totaling $191,000, as the software was not Year 2000
compliant and InterCept decided not to further develop or support the
software. InterCept also reviewed the realizability of goodwill
recorded on a 1996 acquisition as this acquisition had operating losses
for 1997 that significantly exceeded budgeted amounts. This acquired
company was unsuccessful in implementing its sales plan to targeted
customers, and InterCept anticipated that they would continue to incur
operating losses for the foreseeable future. Based on the current and
projected losses, InterCept determined that the goodwill was impaired
and, accordingly, recorded a $536,000 charge to operating income.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
In the event the future tax consequences of differences
between the financial reporting bases and the tax bases of InterCept's
assets and liabilities result in deferred tax assets, an evaluation of
the probability of being able to realize the future benefits indicated
by such asset is required. A valuation allowance is provided for a
portion of the deferred tax asset when it is more likely than not that
some portion or all of the deferred tax asset will not be realized. In
assessing the realizability of the deferred tax assets, management
considers the scheduled reversals of deferred tax liabilities,
projected future taxable income and tax-planning strategies.
The income or loss of InterCept Communications Technologies
was included in the income tax returns of the members of the limited
liability company until October 31, 1997, in accordance with the
provisions of the Internal Revenue Code. The income tax provision for
the year ended December 31, 1997 includes pro forma taxes of $152,000
as if InterCept Communications Technologies had been a C corporation
for the entire period. In connection with the change in tax status of
InterCept Communications Technologies in 1997 to a C corporation, an
accumulated deficit of $11,000 was reclassified from accumulated
deficit to common stock in the accompanying statement of shareholders'
equity (deficit).
F-10
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments classified as current
assets or liabilities, including cash and cash equivalents, accounts
receivable, and accounts payable, approximate carrying value due to the
short-term maturity of the instruments. The fair value of short-term
and long-term debt amounts approximate carrying value and are based on
their effective interest rates compared to current market rates.
ADVERTISING COSTS
InterCept expenses all advertising costs as incurred.
SOURCES OF SUPPLIES
InterCept voluntarily uses a single vendor for routing
equipment issued in InterCept's communications network. However, if the
vendor were unable to meet InterCept's needs, management believes that
other sources for this equipment exist on similar terms and that
operating results would not be affected.
NET (LOSS) INCOME PER COMMON SHARE
Basic earnings per share are computed based on the weighted
average number of total common shares outstanding during the respective
periods. Diluted earnings per share are computed based on the weighted
average number of total shares of common stock outstanding, adjusted
for common stock equivalents.
COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other
non-owner changes in shareholders' (deficit) equity. For the year ended
December 31, 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. For the
year ended December 31, 1999, other comprehensive income consists of
unrealized holding losses on marketable securities of $150,000, net of
related tax effects of $56,000. There were no gains realized on
marketable securities in net (loss) income for the years ended December
31, 1997, 1998, and 1999, and thus there were no reclassification
adjustments to comprehensive income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. InterCept
will be required to adopt the new statement on January 1, 2001.
InterCept does not expect SFAS No. 133 to have a significant impact on
the financial statements.
F-11
<PAGE>
3. ACQUISITIONS
On January 31, 1998, InterCept acquired all of the outstanding
shares of InterCept Communications Technologies in exchange for
2,741,029 shares of common stock of InterCept. The transaction was
accounted for as a pooling of interests. The results of operations of
InterCept Communications Technologies have been included in the
accompanying financial statements for all periods presented.
On August 4, 1998, InterCept acquired certain assets and
assumed certain liabilities of Nova Financial Corporation. The
transaction was accounted for as a purchase. InterCept paid
approximately $1.1 million. The consideration exchanged exceeded the
net tangible asset value of Nova by approximately $1.2 million. This
amount was allocated to goodwill and is being amortized over a period
of 40 years. The results of operations of the acquired business have
been included in InterCept's consolidated financial statements from the
date of acquisition. In conjunction with the acquisition, InterCept
established a reserve of approximately $160,000 for estimated costs to
close the existing Nova facility. However, InterCept's costs have been
higher than anticipated. During the third quarter of 1999, InterCept
adjusted goodwill and accrued an additional $100,000 to cover these
costs. The costs mainly consist of the remaining noncancelable
obligation under the lease on the facility. During 1998 and 1999,
approximately $51,000 and $159,000, respectively, of lease costs were
charged against the reserve.
On September 30, 1998, InterCept acquired certain assets and
assumed certain liabilities of Advance Data Partnership. The
transaction was accounted for as a purchase. InterCept paid
approximately $1.1 million and exceeded the net tangible asset value of
Advance Data by approximately $556,000. Of this excess, $38,000 was
allocated to contracts based on a discounted cash flow analysis and is
being amortized over a period of 24 months, and the remaining $518,000
has been allocated to goodwill and is being amortized over a period of
40 years. The results of operations of the acquired business have been
included in InterCept's consolidated financial statements from the date
of acquisition.
On October 21, 1998, InterCept acquired certain assets and
assumed certain liabilities of Item Processing of America. The
transaction was accounted for as a purchase. The consideration
exchanged was approximately $1.3 million and exceeded the net tangible
asset value of Item Processing of America by approximately $1.1
million. Of this excess, $195,000 was allocated to contracts based on a
discounted cash flow analysis and is being amortized over a period of
24 months, and the remaining $940,000 has been allocated to goodwill
and is being amortized over a period of 40 years. The results of
operations of the acquired business have been included in InterCept's
consolidated financial statements from the date of acquisition.
InterCept acquired an additional 33% of ProImage in August
1998 and acquired certain assets and assumed certain liabilities of
Premier Imaging in September 1998. Total purchase price was
approximately $290,000. The purchase price exceeded net tangible assets
by approximately $83,000, which has been allocated to contracts based
on a discounted cash flow analysis and is being amortized over a period
of 36 months. The results of operations of the acquired business have
been included in InterCept's consolidated financial statements from the
date of acquisition.
On January 11, 1999, InterCept acquired certain assets and
assumed certain liabilities of Eastern Software, Inc., a provider of
loan portfolio management software. InterCept paid approximately
$450,000 which exceeded the net tangible asset value of Eastern
Software by approximately $507,000. This excess has been allocated to
goodwill and is being amortized over a period of 5 years. The results
of operations of the acquired business have been included in
InterCept's consolidated financial statements from the date of
acquisition.
F-12
<PAGE>
On March 9, 1999, InterCept acquired Direct Access
Interactive, Inc., a provider of telephone banking and Internet banking
services to financial institutions. InterCept issued approximately
150,000 shares of its common stock with a fair market value of
approximately $1.4 million and assumed of long-term debt of
approximately $300,000. The consideration exceeded the net tangible
asset value of Direct Access by approximately $1.8 million, which was
allocated to goodwill and was being amortized over a period of 5 years.
This acquisition has been accounted for as a purchase. The results of
operations of the acquired business have been included in InterCept's
consolidated financial statements from the date of acquisition until
the date of deconsolidation discussed below.
On May 28, 1999, InterCept acquired L.E. Vickers &
Associates, Inc. and Data Equipment Services, Inc. L.E. Vickers &
Associates is a provider of core data processing and Data Equipment
Services is an equipment and maintenance provider. InterCept issued
approximately 500,000 shares of its common stock with a fair market
value of approximately $6.5 million. The consideration exceeded the net
tangible asset value of Vickers and Data Equipment Services by
approximately $5.4 million, which was allocated to goodwill and is
being amortized over a period of 20 years. This acquisition has been
accounted for as a purchase. The results of operations of the acquired
business have been included in InterCept's consolidated financial
statements from the date of acquisition.
On August 6, 1999, InterCept acquired SBS Data Services, Inc.,
an Alabama corporation that provides core data processing services for
community financial institutions in exchange for approximately 192,000
shares of InterCept's common stock with a fair market value of
approximately $4.1 million. The consideration exceeded the net tangible
asset value of SBS Data Services by approximately $3.8 million. This
excess was allocated to the following intangible assets with the
following amortization lives:
Contracts $ 400,000 5 years
Workforce 100,000 3 years
Goodwill 3,300,000 20 years
At the same time, Direct Access merged with SBS Corporation,
an Alabama corporation which provided Internet and telephone banking,
check imaging and optical storage products and services to community
financial institutions. Total consideration paid by Direct Access was
approximately $16.6 million in cash, 2.6 million shares of Direct
Access common stock valued at $11.50 per share and repayment of
approximately $4.9 million in debt owed by SBS Corp. The former
shareholders of SBS Corp. had the right to put the shares back to
Direct Access at $11.50 per share if Direct Access did not complete an
initial public offering by August 6, 2001. The put option expired in
November 1999 upon completion of Netzee's (formerly Direct Access)
initial public offering. To enable Direct Access to complete this
transaction, InterCept borrowed $21.6 million under its line of credit
and loaned these funds to Direct Access (Note 14). After the merger,
Direct Access sold all of the assets of SBS Corp, other than its
Internet and telephone banking assets, to InterCept in exchange for
450,000 shares of Direct Access common stock owned by InterCept.
InterCept's consideration exceeded the net tangible asset value of SBS
Corp. by approximately $5.3 million. This excess was allocated to the
following intangible assets with the following amortization lives:
Contracts $ 400,000 5 years
Workforce 100,000 3 years
Goodwill 4,800,000 10 years
In August 1999, InterCept formed Netzee, Inc., a wholly-owned
subsidiary, for the purpose of combining Direct Access and several
other businesses, as discussed below:
1. Pursuant to an Agreement and Plan of Merger between
Netzee and Direct Access, Direct Access merged with and into Netzee.
The shareholders of Direct Access received one share of Netzee common
stock for each share of Direct Access common stock they owned.
2. Pursuant to an Asset Contribution Agreement between
InterCept, Netzee and The Bankers Bank, a Georgia banking corporation,
Netzee acquired various assets and assumed certain liabilities
F-13
<PAGE>
related to the Internet banking division of The Bankers Bank. As
consideration, Netzee issued 1,361,000 shares of its common stock to
The Bankers Bank valued at $11.50 per share. Pursuant to an Asset
Contribution Agreement between InterCept, Netzee and TIB The
Independent Banker's Bank, a Texas banking association, Netzee acquired
various assets and assumed certain liabilities related to the Internet
banking division of TIB. As consideration, Netzee issued 1,361,000
shares of its common stock to TIB valued at $11.50 per share.
Additional consideration of 76,000 shares of common stock was issued to
a third party for $100,000 in connection with these acquisitions.
3. Pursuant to an Agreement and Plan of Merger by and
among Netzee, Dyad Corporation, a Georgia corporation, and certain
shareholders of Dyad, Dyad merged with and into Netzee. As
consideration, Netzee paid to Dyad's shareholders approximately
$900,000 in cash and approximately 618,000 shares of Netzee common
stock valued at $11.50 per share. Netzee also repaid approximately $3.5
million in debt of Dyad at the closing. Based in Norcross, Georgia,
Dyad develops proprietary loan application and approval and fulfillment
software.
4. Netzee also acquired Call Me Bill, LLC, a provider of
24-hour electronic bill payment services to financial institutions'
customers, for $3.3 million in cash. To enable Netzee to complete this
transactions, InterCept loaned to Netzee approximately $7.3 million.
This loan was in addition to the $21.6 million loaned to Netzee, as the
successor to Direct Access, in connection with the merger of Direct
Access and SBS Corp. in August 1999.
As a result of the issuance of shares of Netzee in
connection with these transactions, InterCept's ownership in Netzee
decreased to approximately 49% on September 3, 1999. Because Netzee
issued stock at a price in excess of its book value, InterCept's net
investment in Netzee increased. InterCept has recognized gains totaling
approximately $59.7 million related to the increases in InterCept's
investment value in accordance with Staff Accounting Bulletin No. 51.
Of this amount, approximately $38.9 million is included in interest and
other income in the accompanying statements of operations. The
remaining gain of $20.8 million, net of income tax effects of $7.9
million, has been recorded directly to equity as it was generated from
the issuance of puttable stock to SBS Corp. discussed above. This put
option expired in November 1999 upon completion of Netzee's initial
public offering.
The following unaudited pro-forma consolidated financial
information for the years ended December 31, 1998 and 1999 assume that
the following events had occurred on January 1, 1998 (in thousands,
except per share amounts):
o InterCept's acquisitions of Nova, Advance Data, Direct Access
Interactive, Inc., L.E. Vickers & Associates, Data Equipment
Services, and SBS Data Services;
o InterCept's transfer of 450,000 shares of Direct Access common
stock in exchange for the non-remote banking operations of SBS
Corp.;
o InterCept's recording of compensation expense related to equity
securities issued by Direct Access below fair market value in
August 1999;
o InterCept's creation of Netzee and Netzee's merger with Direct
Access
o Netzee's acquisitions of the internet banking operations of TIB
The Independent BankersBank and The Bankers Bank, Call Me Bill,
and Dyad; and
o The deconsolidation of the operations of Netzee from InterCept's
operations
F-14
<PAGE>
<TABLE>
<CAPTION>
(unaudited)
1998 1999
============= ============
<S> <C> <C>
Revenues $50,508 $58,218
============= ============
Net income before income taxes
and minority interest 4,538 46,602
============= ============
Net loss per common share $(3.04) $(1.46)
============= ============
</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. INVESTMENT IN AFFILIATE
Investment in affiliate represents InterCept's interest in
Netzee. As of December 31, 1999, InterCept owned approximately 37% of
Netzee. Based on the closing market price of Netzee's common stock on
December 31, 1999, the investment had a value of approximately $125.5
million. As of December 31, 1999, Netzee had 500,000 shares of
preferred stock outstanding which is convertible to 411,067 shares of
common stock subject to certain events, outstanding warrants to
purchase 461,876 shares of common stock, and outstanding stock options
for 2,815,500 shares of common stock, all of which could dilute
InterCept's ownership of Netzee. Summarized financial information of
Netzee as of December 31, 1999 and for the period from March 1, 1999 to
December 31, 1999 is as follows (in thousands):
Net revenue $ 2,260
Operating expense 23,979
Net loss from continuing operations (26,933)
Net loss (26,933)
Current assets $ 14,585
Noncurrent assets 128,659
Current liabilities 9,787
Noncurrent liabilities 13,077
Redeemable preferred stock 6,500
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consisted of the following
(in thousands):
F-15
<PAGE>
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Land and building $ 622 $ 622
Leasehold improvements 141 318
Machinery and equipment 7,040 9,260
Furniture and office equipment 310 648
Software 1,421 1,859
Construction in progress 387 2,262
-------- ---------
9,921 14,969
Less accumulated depreciation (2,828) (4,341)
-------- ---------
Property and equipment, net $7,093 $10,628
======== ==========
</TABLE>
6. INTANGIBLES
Intangibles at December 31, 1998 and 1999 are summarized as follows (in
thousands):
1998 1999
--------- ---------
Goodwill $4,270 $19,562
Product technology 474 1,009
Customer contracts 675 1,634
Work force in place 0 200
Organizational costs 23 0
--------- ---------
5,442 22,405
Less accumulated amortization (781) (1,805)
--------- ---------
$4,661 $20,600
========= =========
7. LONG-TERM DEPT
Long term debt at December 31, 1998 and 1999 consisted of the following (in
thousands):
F-16
<PAGE>
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
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 InterCept and a
corporate guarantee by ProVesa of two-thirds of the balance of the debt $242 $158
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 InterCept and a corporate
guarantee by ProVesa of two-thirds of the balance of the debt 64 51
$35 million line of credit with First Union National Bank, as amended;
interest payable monthly at the option of InterCept at (i) prime rate less
.25% or (ii) LIBOR rate plus applicable margin as defined (approximately
7.38% as of December 31, 1999); payable in full on June 30, 2002;
guaranteed by substantially all assets of InterCept 0 12,511
Equipment under capital lease expiring July 2001 0 103
--------- ----------
306 12,823
Less current maturities (95) (154)
--------- ----------
$211 $12,669
========= ==========
</TABLE>
Future maturities of notes payable and line of credit at
December 31, 1999 are as follows (in thousands):
2000 99
2001 93
2002 12,528
------
$12,720
=======
Future minimum payments under the capital lease are as follows (in
thousands) at December 31, 1999:
2000 $ 64
2001 52
-------
Total minimum lease payments 116
Executory costs & imputed interest (13)
-------
Present value of net minimum lease payments 103
Less current portion (55)
-------
Capital lease obligation $ 48
=======
F-17
<PAGE>
LINE OF CREDIT
The First Union credit facility contains provisions which
require InterCept to maintain certain financial ratios and minimum net
worth amounts and which restrict InterCept's ability to incur
additional debt, make certain capital expenditures, enter into
agreements for mergers, acquisitions or the sale of substantial assets
and pay cash dividends.
8. INCOME TAXES
The components of income tax (benefit) provision in the
consolidated statements of operations for the years ended December 31,
1997, 1998, and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- ----------- ----------
<S> <C> <C> <C>
Current expense $529 $ 794 $ 5,882
Deferred (benefit) expense (15) 770 14,268
Pro forma tax expense 152 0 0
-------- ----------- ----------
Provision for income taxes $666 $1,564 $20,150
======== =========== ==========
</TABLE>
The income tax provision reflects pro forma income taxes as if
InterCept Communications Technologies had been a C corporation for all
periods presented.
The income tax provision, as reported in the statements of
operations, differs from the amounts computed by applying federal
statutory rates due to the following for the years ended December 31,
1997, 1998, and 1999 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1998 1999
-------- ----------- ----------
Federal income tax provision at statutory rate $ 79 $1,373 $ 15,461
Permenant tax/book basis differences, primarily goodwill 494 41 900
Gain related to transfer of assets from subsidiary 0 0 1,964
Meals and entertainment 16 22 41
State tax provision, net of federal effect 73 160 1,801
Other 4 (32) (17)
-------- ----------- ----------
$666 $1,564 $20,150
========= =========== =========-
</TABLE>
Deferred income tax assets and liabilities for 1998 and 1999
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, 1998 and 1999 are as follows (in
thousands):
F-18
<PAGE>
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenue $ 0 $ 1,822
Accounts receivable reserves 64 147
Net operating loss carryforwards 34 0
Other 31 63
----------- ------------
Total gross deferred tax assets 129 2,032
Less valuation allowance (34) 0
----------- ------------
Net deferred tax assets 95 2,032
----------- ------------
Deferred tax liabilities:
Accelerated depreciation (186) (454)
Investment basis difference 0 (22,192)
Other (11) 0
----------- ------------
Total gross deferred tax liabilities (197) (22,646)
----------- ------------
Net deferred tax liability (102) (20,614)
Less current net deferred tax assets 80 1,956
----------- ------------
Noncurrent net deferred tax liabilities $(182) $(22,570)
=========== ============
</TABLE>
In 1998, InterCept recorded a deferred tax asset of $39,000 in
connection with the acquisition of Item Processing of America, related
to the net operating loss carryforwards of Item Processing of America
of approximately $103,000. All of the losses were used by InterCept in
1998 and 1999. Due to the deconsolidation of Netzee, InterCept will not
receive a future tax benefit for any of Netzee's losses. The investment
basis difference mainly relates to gains recorded related to stock
issuances of Netzee as discussed in Note 3 which are not taxable until
realized.
9. SHAREHOLDERS' EQUITY
On February 25, 1998, the board of directors declared a stock
split on InterCept's common stock. The stock split was effected in the
form of a stock dividend of 1.1053 shares of common stock issued for
each share of common stock held by shareholders of record on February
28, 1998. The effect of the stock split has been retroactively
reflected as of December 31, 1996 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.
10. STOCK OPTION PLANS
1996 STOCK OPTION PLAN
The Board of Directors and InterCept's shareholders approved
InterCept's Amended and Restated 1996 Stock Option Plan effective as of
November 12, 1996. Awards under the 1996 Stock Option Plan are
currently granted by a compensation committee composed of two
independent directors of the Board of Directors. Awards issued under
the 1996 Stock Option Plan may include incentive stock options ("ISOs")
and/or nonqualified stock options ("NQSOs") and/or grants of restricted
stock. The compensation committee administers the 1996 Stock Option
Plan and generally has the discretion to determine the terms of an
option grant, including the number of option shares, option price,
term, vesting schedule, the post-termination exercise period, and
whether the grant will be an ISO or NQSO. Notwithstanding this
discretion, (i) the number of shares subject to options granted to any
individual in any fiscal year may not exceed 315,795 shares (subject to
certain adjustments), (ii) if an option is intended to be an ISO and is
granted to a shareholder holding more than 10% of the combined voting
power of all classes of InterCept's stock or the stock of its
subsidiary on the date of the grant of the option, the option price per
share of common stock may not be less than 110% of the fair market
value of such share at the time of grant, and
F-19
<PAGE>
(iii) the term of an ISO may not exceed ten years, or five years if
granted to a shareholder owning more than 10% of the total combined
voting power of all classes of stock on the date of the grant of the
option.
The 1996 Stock Option Plan provides for the granting of
nonqualified stock options to the directors of InterCept. The board of
directors has authorized the issuance of up to 175,000 shares of common
stock under the 1996 Stock Option Plan pursuant to options having an
exercise price equal to the fair market value of the common stock on
the date the options are granted. The board of directors has approved
Director Grants of (i) options to purchase 35,000 shares to each
nonemployee director of InterCept who beneficially owns less than 4% of
InterCept's outstanding common stock on the date of such directors'
initial election to the board of directors and (ii) options to purchase
5,000 shares to each director on each anniversary date of such
director's election to the board at an exercise price equal to the fair
market value of the common stock on the date the options are granted.
Each initial director grant option vests ratably over the director's
three-year term of service, and each annual grant vests on the date of
grant. Each director grant expires five years after the date of grant
unless canceled sooner as a result of termination of service or death
or unless such option is fully exercised prior to the end of the option
period.
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, 1999, is 1,521,218 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 InterCept, except that any amendment, although
effective when made, will be subject to shareholder approval within one
year after approval by the Board of Directors if the amendment
increases the total number of shares issuable pursuant to ISOs (other
than the permitted annual increase), changes the class of employees
eligible to receive ISOs that may participate in the 1996 Stock Option
Plan or otherwise materially increases the benefits accruing to
recipients of ISOs.
F-20
<PAGE>
A summary status of InterCept's stock option plan as of
December 31, 1997, 1998, and 1999 and changes during the year is
presented below:
<TABLE>
<CAPTION>
PRICE WEIGHTED AVERAGE
SHARES RANGE OPTION PRICE
------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996 613,171 $2.16-$2.37 $ 2.17
Granted 178,951 $2.16 $ 2.16
-------------
Outstanding at December 31, 1997 792,122 $2.16-$2.37 $ 2.17
Granted 1,036,378 $6.38-$7.70 $ 7.34
Terminated (844,146) $2.16-$7.70 $ 4.31
-------------
Outstanding at December 31, 1998 984,354 $2.16-$7.70 $ 5.78
Granted 543,500 $7.50-$18.75 $14.89
Exercised (25,416) $2.16 - $ 7.00 $ 2.92
Terminated (6,000) $7.00 - $18.75 $13.91
-------------
Outstanding at December 31, 1999 1,496,438 $2.16 - $18.75 $ 9.10
=============
</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 price of $7.00 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.
InterCept has elected to account for its stock-based
compensation plans under APB Opinion No. 25, under which no
compensation cost has been recognized by InterCept. However, InterCept
has computed, for pro forma disclosure purposes, the value of all
options granted since January 1, 1995 to employees of InterCept using
the Black-Scholes option pricing model prescribed by SFAS No. 123 and
the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Risk-free interest rate 6.15% - 6.29% 5.34%-5.56% 6.76%
Expected dividend yield 0% 0% 0%
Expected lives Five years Three to four Seven years
years
Expected volatility 0% 35% 83.6%
</TABLE>
The weighted average fair value of options for the stock
granted to employees of InterCept in 1997, 1998 and 1999 was $1.19,
$2.35 and $11.32 per share, respectively. The total value of options
for InterCept's stock granted to employees of InterCept during 1997,
1998 and 1999 was computed as approximately $101,000, $1,668,000 and
$6,146,000, respectively, which would be amortized on a pro forma basis
over the vesting period of the options. If InterCept had accounted for
these plans in accordance with SFAS No. 123, InterCept's net (loss)
income and net (loss) income per common share for the years ended
December 31, 1997, 1998 and 1999 would have been as follows:
F-21
<PAGE>
Year Ended December 31,
-----------------------
1997 1998 1999
-------------- -------------- ---------
(in thousands, except per share data)
Net (loss) income $ (473) $1,887 $ 8,383
Net (loss) income per common
share - diluted $(0.07) $ 0.23 $ 0.82
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> <C>
$1.88 - $3.75 256,749 $ 2.19 6.6
5.63 - 7.50 598,689 7.08 8.2
7.50 - 9.38 220,000 7.78 8.5
11.25 - 13.13 15,000 13.00 9.4
13.13 - 15.00 10,000 14.94 9.4
15.00 - 16.88 158,000 15.88 9.5
16.88 - 18.75 238,000 17.83 9.6
</TABLE>
At December 31, 1997, 1998 and 1999, 77,896, 447,043, and
665,254 options for InterCept's common stock with a weighted average
exercise price of $2.27, $5.79, and $5.95 per share, respectively, were
exercisable by employees of InterCept.
11. NET (LOSS) INCOME PER COMMON SHARE
Net (Loss) Income per share at December 31, 1997, 1998, and
1999 were as follows (in thousands except share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------ -----------
<S> <C> <C> <C>
Basic:
Net (loss) income $(395) $2,475 $9,852
Less preferred stock dividends (32) (16) 0
------------- ------------ -----------
Net (loss attributable) income available to
common shareholders $(427) $2,459 $9,852
============= ============ ============
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------ -----------
<S> <C> <C> <C>
Weighted average common shares outstanding 6,750,114 8,132,240 9,762,196
------------ ------------- ------------
Per share amount $(0.06) $0.30 $1.01
============ ============= ============
Diluted:
Net (loss) income $(395) $2,475 $9,852
Less preferred stock dividends (32) (16) 0
------------ ------------- ------------
Net (loss attributable) income available to
common shareholders $(427) $2,459 $9,852
============ ============= ============
Weighted average common shares outstanding 6,750,114 8,132,240 9,762,196
Shares assumed issued upon exercise of dilutive
stock options using the treasury stock method 0 114,274 451,350
------------ ------------- ------------
Total 6,750,114 8,246,514 10,213,546
============ ============= ============
Per share amount $(0.06) $0.30 $0.96
============ ============= ============
</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,
with exercise prices above the average stock prices for each quarter,
were antidilutive and were therefore excluded from the computation of
diluted shares above.
12. EMPLOYEE BENEFITS
InterCept maintains a separate defined contribution 401(k)
savings plan, which covers substantially all employees, subject to
certain minimum age and service requirements. Contributions to this
plan by employees are voluntary; however, InterCept matches a
percentage of the employees' contributions. This percentage is
determined annually by InterCept. InterCept's contributions
approximated $38,000, $80,000, and $98,000 in 1997, 1998, and 1999,
respectively.
13. COMMITMENTS AND CONTINGENCIES
InterCept leases various equipment and facilities under
operating lease agreements. Future minimum annual obligations under
these leases as of December 31, 1999 are as follows (in thousands):
2000 $1,360
2001 1,168
2002 1,096
2003 573
2004 41
Thereafter 16
-------
Total $4,254
=======
Net rental expense was approximately $1,030,000, $865,000, and
$1,271,000 during 1997, 1998, and 1999, respectively.
In connection with an acquisition that we completed in 1999, a
licensor of a core processing product to the company we acquired has
claimed that its license agreement was breached by the acquisition. The
company that we acquired uses the disputed software to service
approximately 50 customers under written agreements we now have with
those customers. The owner of the software
F-23
<PAGE>
demanded arbitration and is claiming that it should be entitled to
unspecified damages in excess of $50,000, termination of the license
agreement, interest on its damages and reimbursement of its fees and
costs. The arbitration is currently proceeding before the American
Arbitration Association. We intend to vigorously defend these claims.
However, if we do not prevail we could be required to pay a material
amount in damages. If we lose all or a significant number of the
customers that currently use the software or are required to pay large
amounts of damages, it could have a material adverse effect on our
revenues and profits.
14. RELATED PARTY TRANSACTIONS
As discussed in Note 4, InterCept owned approximately 37% of
Netzee as of December 31, 1999. Four of InterCept's directors also
serve as directors of Netzee, and one of those directors is the Chief
Executive Officer of Netzee. In order to enable Netzee to complete its
acquisitions in August and September of 1999, InterCept borrowed funds
under its line of credit and loaned these funds to Netzee. InterCept
also made advances to Netzee to fund operations. These amounts were
repaid to InterCept upon completion of Netzee's initial public offering
in November 1999. On December 15, 1999, InterCept agreed to provide
Netzee with a $15 million revolving line of credit. Borrowings on this
line will bear interest at a rate of prime plus 2%. As of December 31,
1999, Netzee owed approximately $11.0 million to InterCept. Total
interest on all borrowings for 1999 was approximately $677,000 and is
included in interest and other income in the accompanying statement of
operations.
InterCept and Netzee maintain a relationship to cross-market
each other's products and services. During 1999, InterCept received
$188,000 in commissions related to Netzee sales. InterCept also shared
certain facilities with Netzee and provided certain administrative
services to Netzee for a portion of 1999. InterCept charged Netzee
approximately $124,000 for these shared costs.
During the years ended December 31, 1997, 1998, and 1999,
InterCept incurred fees of approximately $31,000, $814,000, and
$612,000, respectively for legal services to the law firm in which one
of its partners is also a director of InterCept and Netzee.
InterCept provides telecommunications connectivity to Towne
Services, Inc. ("Towne"). InterCept recorded revenue from Towne of
approximately $128,000 during 1998 and $215,000 during 1999, which is
classified in data communications management income. At December 31,
1998 and 1999, receivables from Towne were approximately $28,000 and
$27,000, respectively. During 1999, InterCept purchased software from
Towne Services for $825,000. The amount is included in accounts payable
as of December 31, 1999. Additionally, InterCept owns 50,000 shares of
Towne common stock, which was purchased in 1997. Two directors of
InterCept serve as directors of Towne.
15. SUBSEQUENT TRANSACTIONS
In February 2000, InterCept completed the acquisition of the
assets of the Dallas, Texas item processing center of TIB-The
Independent BankersBank. The consideration exchanged was approximately
$750,000 in cash. This acquisition was accounted for as a purchase.
In February 2000, InterCept completed a public offering of its
common stock. Proceeds to InterCept from this offering (after deducting
expenses related to the offering) were approximately $66.0 million.
Proceeds of this offering will be used to pay certain debt, to fund
future acquisitions and investments, and for working capital and other
general corporate purposes.
In March, 2000, InterCept acquired the assets of the Tampa,
Florida item processing operations of M&I Data Services. The
consideration exchanged was approximately $500,000 in cash. This
acquisition was accounted for as a purchase.
On March 24, 2000, pending the finalization of the line of
credit, InterCept entered into a promissory note with Netzee, Inc. in
the principal amount of approximately $7.8 million, which reflects the
amount borrowed under terms consistent with the commitments as of that
date.
F-24
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------------------------------------------------------
10.23 Fourth Amendment to Loan and Security Agreement and Joinder
Agreement dated August 6, 1999 by and among First Union
National Bank and The InterCept Group, Inc. and its
subsidiaries.
10.27 Employment Agreement by and between LEV Acquisition Corp.
and Kenneth Kudrey dated as of May 28, 1999.
10.28 Promissory note dated March 24, 2000 from Netzee, Inc. to
InterCept.
21.1 Subsidiaries of InterCept.
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 periods ending December 31,
1998 and 1999 (for SEC use only).
99.1 Financial statements of Netzee, Inc.
FOURTH AMENDMENT TO LOAN AND
SECURITY AGREEMENT
This FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment")
is made and entered into as of September 1, 1999, 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 Corporation ("PSI"), LEV ACQUISITION CORP.,a
Georgia corporation ("LEV"), DIRECT ACCESS INTERACTIVE, INC., a Georgia
corporation ("DAI"), SBS DATA SERVICES, INC., an Alabama corporation ("SBS
Data") (InterCept, ISI, ProVesa, PSI, LEV, DAI and SBS Data 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").
WITNESSETH:
-----------
WHEREAS, Borrowers and Bank are party to that certain Loan and Security
Agreement, dated as of April 28, 1998 (as the same has been amended from time to
time, "Agreemeent");
WHEREAS, Borrowers and Bank desire to amend the Loan Agreement as set
forth herein;
WHEREAS, Bank hereby acknowledges and agrees that immediately following
the execution hereof and on the same date hereof, DAI will be released from its
obligations under the Agreement pursuant to the terms and conditions of that
certain Assignment of Rights Agreement, dated of even date herewith, among,
InterCept, DAI and Bank;
NOW, THEREFORE, for and in consideration of the premises and mutual
promises and covenants contained herein, and other good and valuable
consideration, the receipt, adequacy and sufficiency of which are hereby
acknowledged by the parties hereto, the parties hereto, intending to be and
being legally bound hereby, agree as follows:
1. Capitalized terms, as used herein, shall have the meaning set forth
in the Agreement, unless the context otherwise requires.
2. Section 8.07 of Article VIII of the Agreement is hereby amended by
deleting therefrom the reference to the number "$5,000,000" and inserting in
lieu thereof the number "$7,500,000."
3. From and after the date hereof, the Agreement shall be deemed to
mean the Agreement, as amended.
<PAGE>
4. Each Borrower hereby reaffirms each of the agreements, covenants,
and undertakings set forth in the Agreement, and each and every other agreement,
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.
5. This Amendment represents a modification only and is not, and should
not be construed as, a novation.
6. Except as hereinabove set forth, the Agreement 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.
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.
By: /s/ Scott R. Meyerhoff
- ---------------------- -----------------------------------
Secretary Title: CFO
--------------------------------
[CORPORATE SEAL]
Attest: INTERCEPT SWITCH, INC.
By: /s/ Scott R. Meyerhoff
- ---------------------- -----------------------------------
Secretary Title: CFO
--------------------------------
[CORPORATE SEAL]
Attest: PROVESA, INC.
By: /s/ Scott R. Meyerhoff
- ---------------------- -----------------------------------
Secretary Title: CFO
--------------------------------
[CORPORATE SEAL]
Attest: PROVESA SERVICES, INC.
By: /s/ Scott R. Meyerhoff
- ---------------------- -----------------------------------
Secretary Title: CFO
--------------------------------
[CORPORATE SEAL]
2
<PAGE>
Attest: LEV ACQUISITION CORP.
By: /s/ Scott R. Meyerhoff
- ---------------------- -----------------------------------
Secretary Title: CFO
--------------------------------
[CORPORATE SEAL]
Attest: DIRECT ACCESS INTERACTIVE, INC.
By: /s/ Scott R. Meyerhoff
- ---------------------- -----------------------------------
Secretary Title: CFO
--------------------------------
[CORPORATE SEAL]
Attest: SBS DATA SERVICES, INC.
By: /s/ Scott R. Meyerhoff
- ---------------------- -----------------------------------
Secretary Title: CFO
--------------------------------
[CORPORATE SEAL]
BANK:
FIRST UNION NATIONAL BANK
By: /s/ Chad A. Brown
-----------------------------------
Title: Bank Officer
--------------------------------
3
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into the 28th
day of May, 1999 (the "Effective Date"), by and between Kenneth Kudrey (the
"Employee"), and LEV Acquisition Corp., a Georgia corporation (the "Company").
W I T N E S S E T H :
--------------------
WHEREAS, the Company's parent corporation, The InterCept Group, Inc.
("InterCept"), has acquired all outstanding capital stock of L. E. Vickers &
Associates, Inc. ("Vickers") and Data Equipment Services, Inc. ("Data") pursuant
to an Acquisition and Merger Agreement dated May 28th, 1999;
WHEREAS, the Company recognizes Employee's contributions in connection with
his former employment with Vickers and desires to provide for the employment of
Employee by the Company;
WHEREAS, Employee is willing to serve the Company and InterCept on the terms
and conditions herein provided.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Employee and the Company,
including, without limitation, the premises and covenants contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
Section 1. Scope of Employment
1.1 Employment. Subject to the terms hereof, the Company hereby agrees
to employ Employee, and Employee hereby accepts such employment. Employee shall
report to and assist the President of the Company (the "Reporting Officer") in
performing data center operational and management functions substantially
similar to the function Employee performed for Vickers prior to InterCept's
acquisition (such duties and services referred to as the "Services"). The
Reporting Officer may, in his or her discretion, request that Employee perform
other or additional services as are consistent with the position of Employee and
such other or additional services shall also be considered Services. The
Reporting Officer may, in his or her discretion, assign to Employee such
additional or different title or titles, having equivalent stature to those
titles currently held, as are appropriate to the Services being performed by
Employee. At the request and in the discretion of the Reporting Officer,
Employee shall serve as an officer or director of any subsidiary or affiliate of
the Company, and shall perform services for any such subsidiary or affiliate as
are appropriate to and consistent with the Services being performed by Employee
for the Company. Employee shall devote substantially all of Employee's
productive business time, energy and skill (except on vacation days and
holidays) to performing his obligations hereunder and shall perform his
obligations hereunder diligently, faithfully and to the best of Employee's
abilities.
<PAGE>
1.2 Place of Performance. During the term of his employment hereunder (the
"Term"), Employee shall be based at the offices of the Company in Cookeville,
Tennessee, except for reasonably required business travel.
1.3 Compliance with Policies. Subject to the terms of this Agreement, during
the Term, Employee shall comply in all material respects with all policies and
procedures applicable to similarly situated employees of the Company and
InterCept generally and specifically to Employee as may be established by the
Company and InterCept.
Section 2. Term. The term shall be for the period from the Effective Date
until May 27th, 2001 (the "Term"), subject, however, to prior termination as
provided for in Section 5 of this Agreement. The term of employment shall
automatically extended by twelve (12) months upon expiration of the initial term
and each anniversary thereafter unless the Company gives written notice to the
other prior to the beginning of the term.
Section 3. Compensation; Expenses.
3.1 (a) Base Salary. Employee shall be paid a base salary (the "Base
Salary") during the Term at the rate of $125,000 per year. The Base Salary and
expense reimbursements pursuant to this Section 3 shall be (i) payable bi-
monthly on the schedule that the Company may implement for similarly situated
employees from time to time for such payments, and (ii) subject to any
withholdings and deductions required by applicable law. In the event of
termination of this Agreement by either party for any reason other than a
termination of the Employee by the Company for cause, the Company shall pay to
the employee severance compensation and benefits in the amount equal to the
Employee's then current monthly base salary each month plus benefits for six (6)
months from the date of such termination.
3.2 Expense Reimbursement. The Company shall pay or reimburse Employee for
all reasonable business expenses incurred or paid by Employee in the course of
performing his duties hereunder and in accordance with the Company policy. As a
condition to such payment or reimbursement, however, Employee shall maintain and
provide to the Company, upon the Company's request, reasonable documentation and
receipts for such expenses. In addition, for the term of this agreement, Company
shall pay employee $750 per month or provide an automobile of similar value as
an automobile allowance.
Section 4. Employee Benefits.
4.1 Benefit Plans. During the Term, Employee shall be entitled to
participate in such of the Company's retirement, supplemental retirement, profit
sharing and pension plans, life, health, disability and other insurance
programs, as well as other benefit programs, which are generally available to
other similarly situated employees of the Company, subject to the Company's
policies with respect to all such benefits or insurance programs or plans.
Employee acknowledges that such benefits may be provided by or through
InterCept. Neither the Company nor InterCept shall, by virtue of this
provision, be under any obligation to Employee to continue to maintain any
particular plan or program or any particular benefit level under any plan or
program.
2
<PAGE>
4.2 Vacation. Employee shall be entitled to vacation during the Term, to be
accrued and taken in accordance with a policy that is no less favorable for
Employee than the Company's normal vacation policy applicable to similarly
situated employees; provided that Employee shall be entitled to at least 3 weeks
(15) days vacation each year during the Term.
Section 5. Termination.
5.1 Death or Total Disability. Employee's employment hereunder shall
terminate upon Employee's death. The Company may, in accordance with applicable
state and federal laws and regulations, terminate Employee's employment
hereunder in the event of Employee's total disability (total disability meaning
the inability of Employee to perform substantially all of his current duties as
required hereunder for a continuous period of 90 days because of mental or
physical condition, illness or injury).
5.2 Cause. The Company may terminate Employee's employment hereunder for
"Cause." "Cause" shall mean (a) Employee's default, willful malfeasance, fraud
or dishonesty in the performance of his obligations hereunder; (b) the
commission or omission of an act, or a willful or negligent act by Employee
which causes harm to the Company; (c) the conviction of Employee for the
commission or perpetration by Employee of any felony or any act of fraud; (d)
the failure of Employee to devote his full time and attention to the business as
provided in Section 1; (e) Employee's breach of or failure to observe the terms
of this Agreement in any material respect; (f) the failure of Employee to
perform his duties hereunder in a manner satisfactory to the Reporting Officer,
as determined in his sole discretion; provided, however, that Employee shall
have 30 days (or such lesser amount of time as is necessary) to cure such
failure after receiving notice from the Company; provided, further that the
Company shall be obligated to provide only one notice to Employee pursuant to
this clause 5.2(f) and, thereafter, the Company may terminate Employee, without
Employee having a right to cure, if Employee fails to perform his duties in a
manner satisfactory to the Reporting Officer, as determined in his sole
discretion; or (g) Employee's engaging in conduct or activities involving moral
turpitude that is or are reasonably likely to cause material damage to the
business or reputation of the Company, any affiliate of the Company (including
InterCept), or any personnel thereof.
5.3 Termination Date and Notice of Termination. Any termination of
Employee's employment by the Company (other than termination upon the death of
Employee) shall be communicated by written notice to Employee, and the date of
termination shall be the date on which such notice is given.
Section 6. Pay or Play. Nothing herein shall be deemed to obligate the
Company or InterCept to use Employee's services pursuant hereto or otherwise,
and the Company and InterCept shall have fully discharged their obligations, if
any, to Employee by providing Employee with the compensation and benefits
specified hereunder.
Section 7. Representations.
7.1 Of Employee. Employee represents and warrants to the Company that
(a) his execution, delivery and performance of this Agreement do not and will
not conflict with, violate, or constitute a breach of or default under any
provision of law or regulation applicable to him or
3
<PAGE>
any provision of any agreement, contract or other instrument to which he is a
party or otherwise bound; (b) this Agreement constitutes the legal, valid and
binding obligation of Employee, enforceable against Employee in accordance with
its terms; and (c) Employee has not received any legal advice contrary to his
representations or warranties set forth in this Section 7.1.
7.2 Of the Company. The Company represents and warrants to Employee that (a)
this Agreement has been duly executed and delivered by the Company; (b) the
execution, delivery and performance of this Agreement by the Company has been
duly authorized by all necessary corporate action; (c) this Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms; (d) the execution, delivery
and performance of this Agreement by the Company do not and will not conflict
with, violate, or constitute a breach of the Articles of Incorporation or By-
laws of the Company or any of its subsidiaries or any law or regulation
applicable to the Company or any of its subsidiaries; and (e) the Company has
not received any legal advice contrary to the Company's representations and
warranties set forth in this Section 7.2.
Section 8. Non-Solicitation of Customers. During the Term of his employment
with the Company, and for a period of two (2) years thereafter, Employee shall
not directly or indirectly, through one or more intermediaries or otherwise,
solicit, direct or appropriate, or attempt to solicit, direct or appropriate any
individual or entity which is, at any time during such period, a customer or
client of the Company and with whom Employee had material contact during the
Term or at any time during which Employee performed services on behalf of the
Company for the purpose of providing a service or product to such customer or
client which is the same type of service or product offered or provided by the
Company.
Section 9. Non-Solicitation of Personnel. During the Term of his employment
with the Company, and for a period of two (2) years thereafter, Employee shall
not, directly or indirectly, through one or more intermediaries or otherwise,
employ, induce, solicit for employment, or assist others in employing, inducing
or soliciting for employment any individual who is at any time during such
period an employee or consultant of the Company for the purpose of providing
services that are the same or similar to the types of services offered to or
engaged in by the Company.
Section 10. Rights to Work Product. Except as expressly provided in this
Agreement, the Company (and its related entities) alone shall be entitled to all
benefits, profits and results arising from or incidental to Employee's
performance of the Services. To the greatest extent possible, any work product,
property, data, documentation or information or materials prepared, conceived,
discovered, developed or created by Employee in connection with performing the
Services or any other of his employment responsibilities during the Term ("Work
Product") shall be deemed to be "work made for hire" as defined in the Copyright
Act, 17 U.S.C.A. (S) 101 et seq., as amended, and owned exclusively and
perpetually by the Company. Employee hereby unconditionally and irrevocably
transfers and assigns to the Company all intellectual property or other rights,
title and interest Employee may currently have (or in the future may have) by
operation of law or otherwise in or to any Work Product. Employee agrees to
execute and deliver to the Company any transfers, assignments, documents or
other instruments that the Company may deem necessary or appropriate to vest
complete and perpetual title and ownership of any
4
<PAGE>
Work Product and all associated rights exclusively in the Company. The Company
shall have the right to adapt, change, revise, delete from, add to and/or
rearrange the Work Product or any part thereof written or created by Employee,
and to combine the same with other works to any extent, and to change or
substitute the title thereof, and in this connection Employee hereby waives the
"moral rights" of authors as that term is commonly understood throughout the
world including, without limitation, any similar rights or principles of law
which Employee may now or later have by virtue of the law of any locality,
state, nation, treaty, convention or other source. Unless otherwise specifically
agreed, Employee shall not be entitled to any compensation in addition to that
provided for in Section 3 of this Agreement for any exercise by the Company of
its rights set forth in the preceding sentence.
Section 11. Nondisclosure Covenant. Through exercise of his rights and
performance of his obligations under this Agreement, Employee will be exposed to
"Trade Secrets" and "Confidential Information" (as those terms are defined in
the next sentences). "Trade Secrets" shall mean information or data of or about
the Company or any affiliated entity, including, but not limited to, technical
or nontechnical data, formulas, patterns, compilations, programs, devices,
methods, techniques, drawings, processes, financial data, financial plans,
products plans, or lists of actual or potential customers, clients,
distributors, or licensees, that: (i) derive economic value, actual or
potential, from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can obtain economic value
from their disclosure or use; and (ii) are the subject of efforts that are
reasonable under the circumstances to maintain their secrecy. To the extent the
foregoing definition is inconsistent with a definition of "trade secrets"
mandated under applicable law, the latter definition shall govern for purposes
of interpreting Employee's obligations under this Agreement. "Confidential
Information" shall mean valuable, non-public, competitively sensitive data and
information relating to the business of the Company or any affiliated entity,
other than Trade Secrets. Employee acknowledges and agrees that any
unauthorized disclosure or use of any Trade Secrets or Confidential Information
would be wrongful and would likely result in immediate and irreparable injury to
the Company. Except as required to perform his obligations under this Agreement
or except with Company's prior written permission, Employee shall not, without
the express prior written consent of the Company, redistribute, market, publish,
disclose or divulge to any other person or entity, or use or modify for use,
directly or indirectly in any way for any person or entity: (i) any Trade
Secrets at any time (during or after the Term) during which such information or
data shall continue to constitute a "trade secret" under applicable law; and
(ii) any Confidential Information during the Term and for a period of two (2)
years after termination. Employee agrees to cooperate with any reasonable
confidentiality requirements of the Company. Employee shall immediately notify
the Company of any unauthorized disclosure or use of any Trade Secrets or
Confidential information of which Employee becomes aware.
Section 12. Return of Materials. At any point during the Term at the
specific request of the Company, or, in any event, as promptly as practicable
after Employee's employment hereunder has been terminated, Employee will return
to the Company all Work Product (including any copies or reproductions thereof
and any materials constituting or containing Trade Secrets or Confidential
Information of the Company) that are in Employee's possession or control.
5
<PAGE>
Section 13. Acknowledgment. The parties acknowledge and agree that the
covenants of Employee in Sections 8, 9, 10, 11 and 12 (collectively, the
"Protective Covenants") are reasonable as to time, scope and territory given the
Company's need to protect its substantial investment in its Confidential
information, Trade Secrets and customer relationships, and particularly given
(a) the compensation and benefits that are to be provided Employee, (b) the
Company's investment of time, effort and capital in enhancing Employee's
business skills and opportunities, (c) the complexity and competitive nature of
the Company, and (d) that Employee has sufficient skills to find alternative,
commensurate employment or consulting work in Employee's field of expertise that
would not entail a violation of the Protective Covenants. Notwithstanding
Section 14 below, the parties further acknowledge that any breach or threatened
breach of a Protective Covenant by Employee is likely to result in irreparable
injury to the Company, and therefore, in addition to all remedies provided at
law or in equity (which remedies shall be cumulative and not mutually
exclusive), Employee agrees that the Company shall be entitled to file suit in a
court of competent jurisdiction to seek a temporary restraining order and a
permanent injunction to prevent a breach or contemplated breach of the
Protective Covenant.
Section 14. Arbitration. Any controversy or claim brought by any person or
entity against the Employee, the Company or any of its officers, directors,
employees or agents arising from, out of or relating to this Agreement, the
breach thereof (other than controversies or claims arising from, out of or
relating to the provisions in Sections 8, 9, 10, 11 and 12 with respect to which
either party may upon 24 hours notice to the other seek injunctive and/or other
equitable relief in a court of competent jurisdiction as set forth in Section
15.2), or the employment or termination thereof of Employee by the Company which
would give rise to a claim under federal, state or local law (including but not
limited to claims based in tort or contract, claims for discrimination under
state or federal law, and/or claims for violation of any federal, state or local
law, statute or regulation) ("Claims") shall be submitted to an impartial
mediator ("Mediator") selected jointly by the parties. Both parties shall
attend a mediation conference and attempt to resolve any and all Claims. If
they are not able to resolve all Claims, any unresolved Claims, including any
dispute as to whether a matter constitutes a Claim which must be submitted to
arbitration, shall be determined by final and binding arbitration in Atlanta,
Georgia in accordance with the Model Employment Dispute Resolution Rules
("Rules") of the American Arbitration Association, by an experienced employment
arbitrator licensed to practice law in the State of Georgia in accordance with
the Rules, except as herein specified. The arbitrator shall be selected by
alternate striking from a list of six arbitrators, half of which shall be
supplied by the Company and half by Employee. The party not initiating the
arbitration shall strike first. The process shall be repeated twice until an
arbitrator is selected. If an arbitrator is still not selected, the Mediator
shall provide a list of three names which will be alternately struck, with the
party initiating the arbitration striking first, until a selection is made.
A demand for arbitration shall be made within a reasonable time after the
Claim has arisen. In no event shall the demand for arbitration be made after
the date when institution of legal and/or equitable proceedings based on such
Claim would be barred by the applicable statute of limitations. Each party to
the arbitration will be entitled to be represented by counsel. The parties
shall formulate a written plan of pre-hearing discovery by agreement, or, if no
agreement can be reached, a plan of discovery shall be formulated by the parties
in collaboration with the Mediator, whose decision shall be final. By mutual
agreement of the parties, additional
6
<PAGE>
depositions may be taken. The arbitrator shall have the authority to hear and
grant a motion to dismiss and/or for summary judgment, applying the standards
governing such motions under the Federal Rules of Civil Procedure. Each party
shall have the right to subpoena witnesses and documents for the arbitration
hearing. A court reporter shall record all arbitration proceedings.
With respect to any Claim brought to arbitration hereunder, either party may
be entitled to recover whatever damages would otherwise be available to that
party in any legal proceeding based on the federal and/or state law applicable
to the matter and as specified by Section 15.2. The decision of the arbitrator
may be entered and enforced in any court of competent jurisdiction by either the
Company or Employee. Unless otherwise awarded by the Mediator, each party shall
pay the fees of their respective attorneys, the expenses of their witnesses and
any other expenses connected with presenting their Claim or defense, and shall
pay that party's pro rata share of other costs of the arbitration, including the
fees of the Mediator, the arbitrator, the cost of any record or transcript of
the arbitration, administrative fees, and other fees and costs. Should Employee
or the Company pursue any dispute or matter covered by this Section by any
method other than said arbitration, the responding party shall be entitled to
recover from the other party all damages, costs, expenses, and attorneys' fees
incurred as a result of such action. The provisions contained in this Section
14 shall survive the termination and/or expiration of this Agreement.
The parties indicate their acceptance of the foregoing arbitration requirement
by initialing below:
/s/ DRJ /s/ KEK
---------------------------- ------------------------------
For the Company Employee
Section 15. Miscellaneous.
15.1 Binding Effect. This Agreement shall inure to the benefit of and
shall be binding upon Employee and his executor, administrator, heirs, personal
representative and assigns, and the Company and its successors and assigns;
provided, however, that neither party hereto shall be entitled to assign any of
its rights, or delegate any of its duties (except, in the case of Employee,
customary delegation of authority not inconsistent with this Agreement; and
except, in the case of the Company, to any person or entity acquiring all or
substantially all of the assets of the Company or to any entity controlling,
controlled by or under common control with the Company), hereunder without the
prior written consent of the other party. Any attempted assignment or
delegation in violation of this provision shall be null and void.
15.2 Governing Law. This Agreement shall be deemed to be made in, and in all
respects shall be interpreted, construed and governed by and in accordance with,
the laws of the State of Georgia. The parties hereto agree that the state or
federal courts in the State of Georgia shall have personal jurisdiction over
them with respect to, and shall be the exclusive forum for the resolution of,
any matter or controversy arising from or with respect to Sections 8, 9, 10, 11
and 12 of this Agreement. Service of a summons and complaint concerning any
such matter or controversy may, in addition to any other lawful means, be
effected by sending a copy of such
7
<PAGE>
summons and complaint by certified mail to the party to be served as specified
in Section 15.4 hereof.
15.3 Headings. The section and subsection headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
15.4 Notices. Unless otherwise agreed to in writing by the Parties hereto,
all communications provided for hereunder shall be in writing and shall be
deemed to be given when delivered if delivered in person or by telecopy or three
(3) business days after being sent by first-class mail, registered or certified,
return receipt requested, with proper postage prepaid, and
(a) If to the Employee, addressed to;
Kenneth Kudrey
-------------------------------------
, Tennessee
---------------- --------
(b) If to the Company, addressed to:
LEV Acquisition Corp.
3150 Holcomb Bridge Road, Suite 200
Norcross, Georgia 30071
Attn: Donny R. Jackson, President
with a copy to:
Susan L. Spencer, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree St., N.E., Suite 1400
Atlanta, Georgia 30309
or to such other person or address as shall be furnished in writing by any party
to the other prior to the giving of the applicable notice or communication.
15.5 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
15.6 Entire Agreement. This Agreement is intended by the parties to be the
final expression of their agreement with respect to the subject matter hereof
and is the complete and exclusive statement of the terms thereof,
notwithstanding any representations, statements or agreements to the contrary
heretofore made. This Agreement may be modified only by a written instrument
signed by each of the parties hereto.
15.7 Severability. All provisions of this Agreement are severable from one
another, and the unenforceability or invalidity of any provision of this
Agreement shall not affect the
8
<PAGE>
validity or enforceability of the remaining provisions of this Agreement;
provided, however, that should any judicial body interpreting this Agreement
deem any provision to be unreasonably broad in time, territory, scope or
otherwise, the Company and Employee intend for the judicial body, to the
greatest extent possible, to reduce the breadth of the provision to the maximum
legally allowable parameters rather than deeming such provision totally
unenforceable or invalid.
15.8 Modification and Waiver. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
in writing and duly executed by the party to be charged with the waiver or
modification. The waiver by either the Company or Employee of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
prior or subsequent breach of the same provision by the other party or a waiver
of a breach of another provision of this Agreement by the other party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
"Company"
LEV Acquisition Corp.
By: /s/ Donny R. Jackson
---------------------------------
Name: Donny R. Jackson
Title: President
"Employee"
/s/ Kenneth Kudrey
------------------------------------
Name: Kenneth Kudrey
9
EXHIBIT 10.28
PROMISSORY NOTE
$7,800,000 MARCH 24, 2000
NETZEE, INC., successor to Direct Access Interactive, Inc. (hereinafter
referred to as "Maker"), for value received, hereby promises to pay to the order
of THE INTERCEPT GROUP, INC., a Georgia corporation (hereinafter referred to as
"Payee"), the aggregate principal amount of SEVEN MILLION EIGHT HUNDRED THOUSAND
DOLLARS ($ 7,800,000) together with interest on the unpaid principal balance and
all other outstanding amounts and fees owed hereunder for which interest may
accrue under applicable law from the date hereof at the rate of Prime Rate +
2.0% (a total of 11.0% at the date of this Note) per annum (computed on the
basis of a 360-day year). The Prime Rate shall be equal to the prime rate as
published in The Wall Street Journal (Eastern Edition). All amounts owed
hereunder, including principal, interest, costs, fees and expenses, shall be
immediately due and payable to Payee upon the earlier to occur of (a) March 31,
2002, (b) a change in control of Maker from that which exists on the date
hereof, including but not limited to by reason of stock purchase or sale,
merger, reorganization, voting agreement, or other transaction or agreement
involving Maker and its subsidiaries or any of them whereby the current
shareholders of Maker cease to own at least 75% of the voting securities of
Maker or its successor or combined entity, or the sale or all or substantially
all of the assets of Maker and its subsidiaries, or by reason of a change in the
membership of Maker's board of directors such that the present members of such
board cease to represent at least 2/3 of the members of the board, or (c) a
default by Maker under this Note, the Security Agreement (defined below) or any
material agreement between Maker or any of its subsidiaries, on the one hand,
and Payee and any of its subsidiaries, on the other hand, which default
continues beyond any applicable cure period.
Interest only on the outstanding principal balance hereof shall be due
and payable monthly, in arrears, with the first installment being payable on the
first (1st) day of May, 2000 and subsequent installments being payable on the
first (1st) day of each succeeding month thereafter until the Maturity Date, at
which time the entire outstanding principal balance, together with all accrued
and unpaid interest and all other sums owed hereunder, shall be immediately due
and payable in full. All amounts due under this Note are payable at 3150 Holcomb
Bridge Road, Suite 200, Norcross, GA 30071 or at such other place as Payee may
from time to time designate to Maker in writing, in coin or currency of the
United States of America.
This Note shall be binding upon the Maker and its successors and
assigns and shall inure to the benefit of Payee and its successors and assigns.
The indebtedness evidenced hereby may be prepaid in whole or in part, at any
time and from time to time, without penalty. Any such prepayments shall be
credited first to any accrued and unpaid interest and then to the outstanding
principal balance hereof.
This Note is with full recourse to any assets of Maker. The proceeds of
this Note are to be used by Maker for its working capital needs. This Note is
secured by a lien and security interest to Maker's assets and properties,
wherever located, now or hereafter acquired, as further described and evidenced
by the Security Agreement dated on or about August 6, 1999 executed
<PAGE>
by Maker for the benefit of Payee (the "Security Agreement"). All obligations of
Maker under this Promissory Note shall be secured by such Security Agreement.
If any of the following events (an "Event of Default") shall occur and
be continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise), then this Note shall thereupon be and become, forthwith due and
payable, without any further notice or demand of any kind whatsoever, all of
which are hereby expressly waived:
(a) If Maker defaults in the payment of principal or interest
on this Note when and as the same shall become due and payable and such
default continues for 20 days after Maker receives notice from Payee of
such default; or
(b) If Maker makes an assignment for the benefit of creditors
or admits in writing an inability to pay his or its debts generally as
they become due;
(c) If an order, judgment or decree is entered adjudicating
Maker bankrupt or insolvent;
(d) If Maker petitions or applies to any tribunal for the
appointment of a trustee or receiver of Maker, or of any substantial
part of the assets of Maker, or commences any proceedings relating to
Maker under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect;
(e) If any such petition or application is filed, or any such
proceedings are commenced, against Maker, and Maker by any act
indicates its approval thereof, consent thereto, or acquiescence
therein, or an order is entered appointing any such trustee or
receiver, or approving the petition in any such proceedings, and such
order remains unstayed and in effect for more than 90 days;
(f) If Maker breaches any of its representations, warranties,
covenants, agreements or other obligations under the Security
Agreement, which breach is not cured within ten (10) days of such
breach;
(g) If Maker defaults on any other obligations owed to Payee
under any now existing or hereafter arising agreement, promissory note,
contract or other document; or
(h) If Maker dissolves or otherwise ceases to conduct business
in the ordinary course as presently conducted.
Any failure on the part of Payee at any time to require the performance
by Maker of any of the terms or provisions hereof, even if known, shall in no
way affect the right thereafter to enforce the same, nor shall any failure of
Payee to insist on strict compliance with the terms and
2
<PAGE>
conditions hereof be taken or held to be a waiver of any succeeding breach or of
the right of Payee to insist on strict compliance with the terms and conditions
hereof.
Time is of the essence with respect to this Note.
This Note shall be governed by, and enforced and interpreted in
accordance with, the laws of the State of Georgia without regard to the
principles of conflict of laws.
In the event this note, or any part hereof, is collected by or through
an attorney-at-law, Maker agrees to pay all costs of collection including, but
not limited to, attorneys' fees equal to 15% of the principal and interest then
due. In the event that Maker fails to make any payment when due, Payee shall
provide written notice of default to Maker, which notice shall allow Maker ten
(10) days from the date of receipt of such notice in which to cure such default.
If such default is not cured within the time allowed, the balance hereof shall
be deemed to be immediately accelerated without further notice to Maker.
IN WITNESS WHEREOF, Maker has executed this Note under seal as of the
date first set forth above.
MAKER:
Netzee, Inc.
/s/ Richard Eiswirth
---------------------------
By: Richard Eiswirth
Chief Financial Officer
[CORPORATE SEAL]
3
Exhibit 21.1
SUBSIDIARIES OF THE INTERCEPT GROUP, INC.
Consolidated subsidiaries
ProVesa Inc., a Georgia corporation ("ProVesa") and wholly-owned subsidiary of
InterCept, doing business as "ProVesa" and "InterCept."
ProVesa Services, Inc., a Georgia corporation and wholly owned
subsidiary of ProVesa, doing business as "ProVesa" and "InterCept."
ProImage, Inc., a Georgia corporation two-thirds owned by ProVesa,
doing business as "ProVesa" and "InterCept."
Item Processing of America, Inc., a Florida corporation and wholly
owned subsidiary of ProVesa, doing business as "ProVesa" and
"InterCept."
InterCept Switch, Inc., a Georgia corporation and wholly-owned subsidiary of
InterCept, doing business as "InterCept Switch."
InterCept Communications Technologies, Inc., a Georgia corporation and
wholly-owned subsidiary of InterCept, doing business as "InterCept."
LEV Acquisition Corp., a Georgia corporation and wholly-owned subsidiary of
InterCept, doing business as "InterCept."
Unconsolidated subsidiaries
Netzee, Inc., a Georgia corporation in which InterCept owned approximately 37%
as of December 31, 1999, doing business as "Netzee."
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 Statements File No. 333-70237, 333-88321 and 333-94511.
Atlanta, Georgia
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 3,224 2,003
<SECURITIES> 350 200
<RECEIVABLES> 3,673 9,442
<ALLOWANCES> 170 386
<INVENTORY> 147 759
<CURRENT-ASSETS> 8,074 15,405
<PP&E> 9,921 14,969
<DEPRECIATION> 2,828 4,341
<TOTAL-ASSETS> 20,155 99,256
<CURRENT-LIABILITIES> 3,447 12,271
<BONDS> 0 0
0 0
0 0
<COMMON> 17,170 42,285
<OTHER-SE> (912) 8,846
<TOTAL-LIABILITY-AND-EQUITY> 20,155 99,256
<SALES> 28,902 47,221
<TOTAL-REVENUES> 28,902 47,221
<CGS> 12,031 18,500
<TOTAL-COSTS> 24,590 40,906
<OTHER-EXPENSES> 35 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 344 701
<INCOME-PRETAX> 4,128 45,474
<INCOME-TAX> 1,564 20,150
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,459 9,852
<EPS-BASIC> 0.30 1.01
<EPS-DILUTED> 0.30 0.96
</TABLE>
EXHIBIT 99.1
NETZEE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ....................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and 1999 ................................ F-3
Consolidated Statements of Operations for the years ended December 31, 1997 and 1998,
for the period from January 1, 1999 to February 28, 1999 and for the period from
March 1, 1999 to December 31, 1999 ........................................................ F-4
Consolidated Statements of Changes in Shareholders' (Deficit) Equity for the years ended
December 31, 1997 and 1998, for the period from January 1, 1999 to February 28, 1999
and for the period from March 1, 1999 to December 31, 1999 ................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1998,
for the period from January 1, 1999 to February 28, 1999 and for the period from
March 1, 1999 to December 31, 1999 ........................................................ F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netzee, Inc.:
We have audited the accompanying consolidated balance sheet of NETZEE,
INC. (a Georgia corporation, formerly Direct Access Interactive, Inc.) AND
SUBSIDIARIES as of December 31, 1999 and the related consolidated statement of
operations, shareholders' equity, and cash flows for the period from March 1,
1999 to December 31, 1999, and the consolidated balance sheet of the predecessor
(Direct Access Interactive, Inc.) as of December 31, 1998 and the related
consolidated statements of operations, shareholders' (deficit) and cash flows
for the years ended December 31, 1997 and 1998 and for the period from January
1, 1999 to February 28, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Netzee, Inc. and
subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for the period from March 1, 1999 to December 31, 1999, and the
financial position of the predecessor (Direct Access Interactive, Inc.) as of
December 31, 1998 and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1998 and for the period from January 1, 1999
to February 28, 1999 in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 8, 2000 (except with respect to the matters
discussed in Note 16, as to which the date is
March 24, 2000)
F-2
<PAGE>
The purchase method of accounting was used to record assets acquired
and liabilities assumed by Netzee, Inc. Under the purchase method, assets and
liabilities are recorded at their estimated fair value at the date of purchase.
Accordingly, the accompanying consolidated financial statements of the
Predecessor and Netzee, Inc. are not comparable in all material respects, since
those financial statements report financial position, results of operations, and
cash flows on a different basis of accounting.
NETZEE, INC.
(Formerly Direct Access Interactive, Inc. ("Predecessor"))
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Predecessor Netzee, Inc.
----------- ------------
<S> <C> <C> <C> <C>
December 31, 1998 December 31, 1999
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 13,985 $ 11,255,099
Accounts receivable, net of allowance for doubtful accounts of $10,000 and
$242,750 at December 31, 1998 and 1999, respectively ................... 35,780 2,496,953
Leases receivable, current ............................................... 0 330,191
Prepaid and other current assets ......................................... 0 503,364
------------ ------------
Total current assets .............................................. 49,765 14,585,607
Property and equipment, net ................................................. 43,892 6,938,710
Intangible assets, net of accumulated amortization of $0 and $12,756,780 at
December 31, 1998 and 1999, respectively ................................. 0 120,611,688
Leases receivable, net of current portion ................................... 0 922,788
Other non-current assets .................................................... 0 185,463
------------ ------------
Total assets ...................................................... $ 93,657 $143,244,256
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................. $ 165,089 $ 4,234,307
Line of credit ........................................................... 199,973 0
Current portion of related-party loans from shareholder .................. 79,500 0
Deferred revenue ......................................................... 103,913 5,425,278
Note payable ............................................................. 0 103,462
Other current liabilities ................................................ 0 24,200
------------ ------------
Total current liabilities ......................................... 548,475 9,787,247
Related-party borrowings .................................................... 0 10,956,930
Note payable, net of current portion ........................................ 0 1,215,673
Deferred revenue, net of current portion .................................... 0 904,032
------------ ------------
Total liabilities ................................................. 548,475 22,863,882
============ ============
Commitments and contingencies
Shareholders' (deficit) equity:
Preferred stock, no par value; 5,000,000 shares authorized:
Series A 8% convertible preferred stock, no par value, $13 stated value; 0
shares and 500,000 shares authorized at December 31, 1998 and 1999,
respectively; 0 and 500,000 shares issued and outstanding at
December 31, 1998 and 1999, respectively ................................ 0 6,500,000
Common stock, no par value; 40,000,000 shares authorized, 8,000,000 shares
issued and outstanding at December 31, 1998; 70,000,000 shares
authorized, 20,395,855 shares issued and outstanding at December 31,
1999 ...................................................................... 50,871 148,056,611
Notes receivable from shareholders .......................................... 0 (3,314,799)
Deferred stock compensation ................................................. 0 (8,547,212)
Warrants outstanding for the purchase of 0 shares and 461,876 shares at
December 31, 1998 and 1999, respectively .................................. 0 4,618,760
Accumulated deficit ......................................................... (505,689) (26,932,986)
------------ ------------
Total shareholders' (deficit) equity ................................. (454,818) 120,380,374
------------ ------------
Total liabilities and shareholders' (deficit) equity ................. $ 93,657 $143,244,256
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
The year ended December 31, 1999 is presented in two columns below due
to the acquisition of the predecessor on March 9, 1999, which established a new
basis of accounting for certain assets and liabilities of Netzee, Inc. The
purchase method of accounting was used to record assets acquired and liabilities
assumed by Netzee, Inc. Such accounting generally results in increased
amortization reported in future periods. Accordingly, the accompanying
consolidated financial statements of the Predecessor and Netzee, Inc. are not
comparable in all material respects, since those financial statements report
financial position, results of operations, and cash flows on a different basis
of accounting.
NETZEE, INC.
(Formerly Direct Access Interactive, Inc. ("Predecessor"))
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Netzee, Inc
Predecessor ----------------
----------------------------------------------------- For the
For the Period from
Year Ended Year Ended Period from March 1, 1999 to
December 31, December 31, January 1, 1999 to December 31,
1997 1998 February 28, 1999 1999
------------ ------------ ------------------ ----------------
Revenues:
<S> <C> <C> <C> <C>
Monthly maintenance and service ........ $ 59,013 $ 136,141 $ 33,082 $ 1,737,592
License, hardware and implementation ... 583,086 454,871 57,080 522,159
------------ ------------ ------------ ------------
Total revenues .................. 642,099 591,012 90,162 2,259,751
------------ ------------ ------------ ------------
Operating expenses:
Costs of service, license, hardware,
implementation and maintenance ....... 422,375 465,577 44,358 1,913,960
Selling and marketing .................. 77,050 110,603 12,350 2,575,257
General and administrative, excluding
amortization of stock-based
compensation ......................... 231,147 331,810 49,399 1,844,629
Amortization of stock-based
compensation ......................... 0 0 0 4,591,888
Depreciation ........................... 10,547 14,736 2,476 190,524
Amortization ........................... 0 0 0 12,863,016
------------ ------------ ------------ ------------
Total operating expenses ........ 741,119 922,726 108,583 23,979,274
------------ ------------ ------------ ------------
Operating loss ............................ (99,020) (331,714) (18,421) (21,719,523)
Interest expense, net ..................... (117) (20,147) (3,469) (670,503)
------------ ------------ ------------ ------------
Loss before extraordinary loss ............ (99,137) (351,861) (21,890) (22,390,026)
Extraordinary loss ........................ 0 0 0 (4,518,760)
------------ ------------ ------------ ------------
Net loss before preferred dividends ....... (99,137) (351,861) (21,890) (26,908,786)
Preferred dividends ....................... 0 0 0 (24,200)
------------ ------------ ------------ ------------
Net loss attributable to common
shareholders ........................... $ (99,137) $ (351,861) $ (21,890) $(26,932,986)
============ ============ ============ ============
Basic and diluted loss per share before
extraordinary item ..................... $ (0.01) $ (0.04) $ (1.94)
Extraordinary loss per share .............. 0 0 (0.40)
------------ ------------ ------------
Basic and diluted net loss per share ...... $ (0.01) $ (0.04) $ (2.34)
============ ============ ============
Weighted average common shares
outstanding ............................ 8,000,000 8,000,000 11,542,034
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
The purchase method of accounting was used to record assets acquired
and liabilities assumed by Netzee, Inc. Such accounting generally results in
increased amortization reported in future periods. Accordingly, the accompanying
consolidated financial statements of the Predecessor and Netzee, Inc. are not
comparable in all material respects, since those financial statements report
financial position, results of operations, and cash flows on a different basis
of accounting.
NETZEE, INC.
(Formerly Direct Access Interactive, Inc. ("Predecessor"))
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Preferred Stock Common Stock Shareholders'
--------------------------- ------------------------- Notes
Shares Amount Shares Amount Warrants Receivable
----------- ------------- --------- ------------- ------------- -------------
Predecessor:
Balance, December 31,
1996 ................ 0 $ 0 2,000,000 $ 50,871 $ 0 $ 0
----------- ------------- --------- ------------- ------------- -------------
Net loss ............ 0 0 0 0 0 0
Balance, December 31,
1997 ................ 0 0 2,000,000 50,871 0 0
Net loss ............ 0 0 0 0 0 0
----------- ------------- --------- ------------- ------------- -------------
Balance, December 31,
1998 ................ 0 0 2,000,000 50,871 0 0
Net loss ............ 0 0 0 0 0 0
----------- ------------- --------- ------------- ------------- -------------
Balance, February 28,
1999 ................ 0 $ 0 2,000,000 $ 50,871 $ 0 $ 0
=========== ============= ========= ============= ============= =============
- ----------------------------------------------------------------------------------------------------------------------------
Netzee, Inc.:
Initial InterCept
investment, March 9,
1999 ................ 0 $ 0 8,000,000 $ 1,379,965 $ 0 $ 0
Issuance of common
stock for notes
receivable .......... 0 0 1,555,000 3,110,000 0 (3,110,000)
Capital contributions .. 0 0 0 1,990,556 0 0
Issuance of common
stock in connection
with acquisitions .. 0 0 6,122,238 71,884,011 0 0
Issuance of common
stock in connection
with marketing
agreements .......... 0 0 128,617 1,479,096 0 0
Deferred stock-based
compensation ........ 0 0 160,000 13,224,100 0 (85,000)
Amortization of deferred
stock-based
compensation ........ 0 0 0 0 0 0
Stock options exercised
for note receivable.. 0 0 30,000 93,300 0 (93,300)
Payment of shareholder
note ................ 0 0 0 0 0 85,000
Interest on shareholder
notes ............... 0 0 0 0 0 (111,499)
Issuance of warrants to
purchase common
stock ............... 0 0 0 0 4,618,760 0
Initial public offering
proceeds, net of
expenses ............ 0 0 4,400,000 54,895,583 0 0
Issuance of preferred
stock in connection
with acquisition .... 500,000 6,500,000 0 0 0 0
Net loss attributable to
common shareholders . 0 0 0 0 0 0
----------- ------------- --------- ------------- ------------- -------------
Balance, December 31,
1999 ................ 500,000 $ 6,500,000 20,395,855 $ 148,056,611 $ 4,618,760 $ (3,314,799)
=========== ============= ========= ============= ============= =============
Deferred Total
Stock Accumulated Shareholders'
Compensation Deficit (Deficit)Equity
------------- ------------- ---------------
Predecessor:
Balance, December 31,
1996 ................ $ 0 $ (54,691) $ (3,820)
------------- ------------- -------------
Net loss ............ 0 (99,137) (99,137)
Balance, December 31,
1997 ................ 0 (153,828) (102,957)
Net loss ............ 0 (351,861) (351,861)
------------- ------------- -------------
Balance, December 31,
1998 ................ 0 (505,689) (454,818)
Net loss ............ 0 (21,890) (21,890)
------------- ------------- -------------
Balance, February 28,
1999 ................ $ 0 $ (527,579) $ (476,708)
============= ============= =============
- ----------------------------------------------------------------------------
Netzee, Inc.:
Initial InterCept
investment, March 9,
1999 ................ $ 0 $ 0 $ 1,379,965
Issuance of common
stock for notes
receivable .......... 0 0 0
Capital contributions .. 0 0 1,990,556
Issuance of common
stock in connection
with acquisitions ... 0 0 71,884,011
Issuance of common
stock in connection
with marketing
agreements .......... 0 0 1,479,096
Deferred stock-based
compensation ........ (13,139,100) 0 0
Amortization of deferred
stock-based
compensation ........ 4,591,888 0 4,591,888
Stock options exercised
for note receivable . 0 0 0
Payment of shareholder
note ................ 0 0 85,000
Interest on shareholder
notes ............... 0 0 (111,499)
Issuance of warrants to
purchase common
stock ............... 0 0 4,618,760
Initial public offering
proceeds, net of
expenses ............ 0 0 54,895,583
Issuance of preferred
stock in connection
with acquisition .... 0 0 6,500,000
Net loss attributable to
common shareholders . 0 (26,932,986) (26,932,986)
------------- ------------- -------------
Balance, December 31,
1999 ................ $ (8,547,212) $ (26,932,986) $ 120,380,374
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
The year ended December 31, 1999 is presented in two columns below due
to the acquisition of the predecessor on March 9, 1999, which established a new
basis of accounting for certain assets and liabilities of Netzee, Inc. The
purchase method of accounting was used to record assets acquired and liabilities
assumed by Netzee, Inc. Such accounting generally results in increased
amortization reported in future periods. Accordingly, the accompanying
consolidated financial statements of the Predecessor and Netzee, Inc. are not
comparable in all material respects, since those financial statements report
financial position, results of operations, and cash flows on a different basis
of accounting.
NETZEE, INC.
(Formerly Direct Access Interactive, Inc. ("Predecessor"))
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor Netzee, Inc.
------------------------------------------------- -----------------
For the For the For the For the
Year Ended Year Ended Period from Period from
December 31, December 31, January 1, 1999 to March 1, 1999 to
1997 1998 February 28, 1999 December 31, 1999
------------ ------------ ----------------- -----------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss ............................................ $ (99,137) $ (351,861) $ (21,890) $(26,932,986)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ..................... 10,547 14,736 2,476 13,053,540
Stock-based compensation expense ................ 0 0 0 4,591,888
Extraordinary loss ................................ 0 0 0 4,518,760
Interest income on shareholder notes .............. 0 0 0 (111,499)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable ............................ (9,222) (16,558) 12,606 (2,008,746)
Leases receivable .............................. 0 0 0 (198,873)
Prepaid and other current assets ............... 0 0 0 (303,528)
Accounts payable and accrued liabilities ....... 13,783 92,794 (42,889) 3,238,796
Deferred revenue ............................... 50,953 35,375 41,222 1,602,925
Other current liabilities ...................... 0 0 0 24,200
------------ ------------ ------------ ------------
Net cash used in operating activities ........ (33,076) (225,514) (8,475) (2,525,523)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired .................. 0 0 0 (48,938,638)
Purchase of property, equipment and
capitalized software .............................. (1,969) (18,031) 0 (4,233,946)
------------ ------------ ------------ ------------
Net cash used in investing activities ........ (1,969) (18,031) 0 (53,172,584)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Contributions from shareholder ...................... 0 0 0 1,240,556
Borrowings from shareholder ......................... 0 0 0 41,830,132
Payments on borrowings from shareholder ............. 0 0 0 (31,524,798)
Increase (decrease) in line of credit ............... 0 199,973 0 (277,473)
Payments on note payable ............................ 0 0 0 (25,865)
Sale of common stock ................................ 0 0 0 55,707,144
Increase (decrease) in related-party loans
from shareholder of predecessor entity ............ 50,000 29,500 (2,000) 0
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities ...................... 50,000 229,473 (2,000) 66,949,696
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ......................................... 14,955 (14,072) (10,475) 11,251,589
Cash and cash equivalents, beginning of period ......... 13,102 28,057 13,985 3,510
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ............... $ 28,057 $ 13,985 $ 3,510 $ 11,255,099
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
1. ORGANIZATION AND NATURE OF BUSINESS
Netzee, Inc. is a provider of Internet banking products and services
and Internet commerce solutions to small and mid-sized banks, thrifts and credit
unions, typically with assets of less than $10 billion. We provide solutions
that enable financial institutions to offer their customers a wide array of
financial products and services over the Internet. We also offer financial
institutions custom web site design, implementation and marketing services,
telephone banking products, regulatory reporting and support applications, and
Internet access services.
Direct Access Interactive, Inc. ("Direct Access" or the
"Predecessor") was incorporated on October 10, 1996. On March 9, 1999, Direct
Access was purchased by The InterCept Group, Inc. ("InterCept"). Direct Access
was operated as a separate subsidiary of InterCept. On August 6, 1999, Direct
Access purchased the remote banking operations of SBS Corporation ("SBS").
Direct Access was later merged with and into Netzee. On September 3, 1999, we
purchased the Internet banking divisions (collectively, the "Divisions") of
TIB The Independent BankersBank ("TIB") and The Bankers Bank, and we acquired
Dyad Corporation and subsidiaries ("Dyad") and Call Me Bill, LLC ("Call Me
Bill"). On December 15, 1999, we purchased DPSC Software, Inc. ("DPSC"). SBS,
TIB, The Bankers Bank, Dyad, Call Me Bill and DPSC are collectively referred to
as the "Acquired Entities."
In November 1999, we completed our initial public offering. We issued
4,400,000 shares of common stock (including the exercise of a portion of the
underwriter's over-allotment option) at an offering price of $14 per share. Net
proceeds from the offering were approximately $54.9 million after deducting
underwriters' discounts, commissions and expenses of the offering. We used the
proceeds to repay principal and accrued interest owed to InterCept, to repay
working capital advances and accrued interest to InterCept and to acquire DPSC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements for the period from March 1, 1999
to December 31, 1999 include the accounts of our company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated financial statements of the Predecessor and our
company are not comparable in all material respects, since those financial
statements report the financial position, results of operations, and cash flows
on a different basis of accounting. Although Direct Access was acquired on March
9, 1999, the accompanying financial statements for the year ended December 31,
1999 are presented as if the acquisition occurred on the close of business on
February 28, 1999 instead of March 9, 1999. The operations between March 1, 1999
and March 9, 1999 were not material. The accompanying financial statements prior
to February 28, 1999 present the financial position and the results of
operations and cash flows of Direct Access, the predecessor to our company.
The Acquired Entities noted above were accounted for using the purchase
method of accounting. Accordingly, the results of operations of the Acquired
Entities have been included in the consolidated financial statements from their
respective dates of acquisition.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-7
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
We consider all short-term, highly liquid investments with an original
maturity date of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets for
financial reporting purposes. Subsequent to March 9, 1999, acquisition property
and equipment are stated at fair value at the date of acquisition. Major
additions and improvements are charged to the property accounts while
replacements, maintenance and repairs which do not improve or extend the lives
of respective assets are expensed in the current period. Estimated useful lives
for our assets are as follows:
Leasehold improvements ......................... 2 to 3 years
Computer equipment ............................. 3 to 7 years
Furniture and fixtures ......................... 10 years
Machinery and other equipment .................. 3 to 15 years
Software ....................................... 3 to 5 years
INTANGIBLE ASSETS
Intangible assets consist of the intangibles recorded in the
acquisitions discussed in Note 1 and include acquired technology, workforce,
contracts in process and marketing agreements. The carrying amounts of the
intangible assets are reviewed for impairment when events and circumstances
indicate that the recorded costs may not be recoverable. If the review indicates
that the undiscounted cash flows from operations of the related intangible
assets over the remaining amortization period are expected to be less than the
recorded amount of the intangible, our carrying value of the intangible asset
would be reduced to its estimated fair value.
We have allocated the value of acquired intangible assets to workforce,
contracts in process and acquired technology. The value of the workforce was
determined by reference to the cost of the workforce retained and is amortized
on a straight-line basis over a period of three years. Contracts in process
represent existing customers acquired. The value of the contracts in process was
determined by reference to the recurring revenue generated from the existing
customers and is amortized on a straight-line basis over a period of three to
four years. We determined that the remaining value of intangible assets acquired
related to acquired technology. Acquired technology also represents
internally-developed software acquired and is amortized on a straight-line basis
over a period of three to five years.
Marketing agreements represent agreements with several bankers' banks
to use their best efforts to promote and market our products and services to
community financial institutions on an exclusive basis. Marketing agreements are
amortized on a straight-line basis over a period of two years.
SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Computer
software development costs are charged to research and development expense until
technological feasibility of the software is established, after which remaining
significant software production costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
Computer Software to Be Sold, Leased, or Otherwise Marketed." These costs are
amortized on the straight-line basis over the estimated economic life of the
software. Amortization of capitalized software development costs begins when
products are made
F-8
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
available for sale or when the related product is put into use. We make an
ongoing assessment of recoverability of our capitalized software projects by
comparing the amount capitalized for each product to the estimated net
realizable value ("NRV") of the product. If the NRV is less than the amount
capitalized, a write-down of the amount capitalized is recorded.
REVENUE RECOGNITION
Our revenue historically resulted from (1) fees for software for
Internet banking and telephone banking, (2) implementation of the Internet
banking and telephone banking software, (3) sale of hardware, and (4)
maintenance and support services for the Internet banking and telephone banking
software. We historically charged a nonrefundable license, hardware, and
implementation fee, with an annual maintenance fee, which is typically renewed
every 12 months. The revenue from software license fees was recognized in
accordance with SOP No. 97-2, "Software Revenue Recognition," in 1997, 1998
and 1999. We recognized the one-time nonrefundable software, hardware, and
implementation fee upon completion of the implementation of software and
hardware. The maintenance fee was recognized ratably over the term maintenance
period, typically 12 months.
Subsequent to June 30, 1999, we have entered into contracts pursuant to
which we collect license and maintenance fees for services rendered, typically
on a monthly basis. The revenue from these arrangements is recognized as the
services are rendered. We also collect fees based on the number of end users
which are recognized on a monthly basis.
Our regulatory reporting and support application subscriptions are
billed on a monthly, quarterly, or annual basis. These subscriptions are
recognized ratably over the contract period, as services are provided.
DEFERRED REVENUE
Deferred revenue represents accounts receivable and amounts collected
prior to revenue recognition. The balance primarily consists of annual billings
collected in advance and recognized ratably over the subsequent twelve months.
LONG-LIVED ASSETS
We periodically review the values assigned to long-lived assets to
determine whether any impairments have occurred. Management believes that the
long-lived assets on the accompanying balance sheet are appropriately valued.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of our assets and liabilities
results in deferred tax assets, an evaluation of the probability of being able
to realize the future benefits indicated by such asset is required. A valuation
allowance is provided for a portion of the deferred tax asset when it is more
likely than not that some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of the deferred tax assets, management
considers the scheduled reversals of deferred tax liabilities, projected future
taxable income and tax-planning strategies.
F-9
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments classified as current assets
or liabilities, including cash and cash equivalents, accounts receivable and
accounts payable, approximate carrying value due to the short-term maturity of
the instruments. The fair values of short-term and long-term debt amounts
approximate carrying value and are based on their effective interest rates
compared to current market rates.
COMPREHENSIVE LOSS
Comprehensive loss for the years ended December 31, 1997 and 1998, for
the period from January 1, 1999 to February 28, 1999 and for the period from
March 1, 1999 to December 31, 1999 is the same as the net loss as presented in
the accompanying statements of operations.
SEGMENT REPORTING
We have adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," effective January 1, 1998. SFAS No. 131
establishes standards for the way that public business enterprises report
selected information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographical areas and major customers. SFAS No. 131 requires the
use of the "management approach" in disclosing segment information; based
largely on how senior management generally analyzes the business operations. We
currently operate in only one segment, and as such, no additional disclosure is
required. Additionally, we did not have any operations or net assets or
liabilities in foreign locations.
RECLASSICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. The statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The statement is not expected to have a
significant impact on our financial statements.
During December 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish
guidelines for revenue recognition and enhance revenue recognition disclosure
requirements. The Bulletin clarifies basic criteria for the culmination of the
earnings process. SAB 101 is effective for the quarter ended June 30, 2000. We
are currently assessing the implications of adopting SAB 101, as revenue for
non-refundable, up-front fees associated with product implementation will be
recognized over the term of the underlying contract, rather than upon the
completion of product implementation. In the period of adoption, the cumulative
impact will be reported as a change in accounting principles as dictated by SAB
101.
3. ACQUISITIONS
ACQUISITION OF THE REMOTE INTERNET AND TELEPHONE BANKING DIVISION OF SBS
CORPORATION
On August 6, 1999, Direct Access purchased the remote banking
operations of SBS. The purchase price of SBS included 2,600,000 shares of our
common stock at the estimated fair market value of $11.50 per share
F-10
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and $21,534,625 in cash. Only the remote Internet and telephone banking
operations of SBS were retained by our company and the remaining operations were
sold to InterCept for 450,000 shares of our common stock valued at $11.50 per
share, for a total sales price of $5,175,000. No gain or loss was recorded on
the transaction by our company, as the transaction was a related party
transaction. The acquisition of SBS was accounted for as a purchase. The results
of operations of SBS have been included in the consolidated financial statements
from the date of acquisition. The excess of the purchase price over the net
tangible assets acquired was allocated to the following intangible assets with
the following amortization lives:
Acquired technology ............... $45,041,300 3 years
Contracts in process .............. 1,340,000 4 years
Workforce ......................... 440,000 3 years
ACQUISITIONS OF THE INTERNET BANKING DIVISIONS OF TIB THE INDEPENDENT
BANKERS BANK AND THE BANKERS BANK
On September 3, 1999, we purchased the Divisions. The acquisitions of the
Divisions were accounted for as purchases. The purchase price of the Divisions
included a total of 2,722,000 shares of our common stock valued at $11.50 per
share, options to purchase a total of 55,000 shares of common stock at an
exercise price of $5.00 per share granted to management and directors of the
Divisions, and 76,000 shares of common stock sold to a third party for $100,000.
The results of operations of the Divisions have been included in the
consolidated financial statements from the date of acquisition. The excess of
the purchase price over the tangible net assets was allocated to the following
intangible assets with the following amortization lives:
Acquired technology ....................... $28,353,000 3 years
Marketing agreements ...................... 3,056,000 2 years
Workforce ................................. 330,000 3 years
Contracts in process ...................... 150,000 3 years
ACQUISITION OF DYAD CORPORATION
On September 3, 1999, we purchased Dyad. The purchase price of Dyad included
618,137 shares of our common stock valued at $11.50 per share and approximately
$900,000 in cash. We also assumed debt owed by Dyad of approximately $3,500,000.
The acquisition of Dyad was accounted for as a purchase. The results of
operations of Dyad have been included in the consolidated financial statements
from the date of acquisition. The excess of the purchase price over the net
tangible assets acquired totaled approximately $12,290,000 and was allocated to
acquired technology with a three-year amortization life.
ACQUISITION OF CALL ME BILL, LLC
On September 3, 1999, we purchased Call Me Bill. The purchase price of Call Me
Bill included cash of approximately $3,288,000 and approximately 31,000 shares
of our common stock sold to former owners of Call Me Bill for $10.50 per share.
These shares were valued at $11.50 per share. The acquisition of Call Me Bill
was accounted for as a purchase. The results of operations of Call Me Bill have
been included in the consolidated financial statements from the date of
acquisition. The excess of the purchase price over the net tangible assets
acquired totaled approximately $3,530,000 and was allocated to acquired
technology with a three-year amortization life.
ACQUISITION OF DPSC SOFTWARE, INC.
On December 15, 1999, we purchased DPSC. The purchase price of DPSC included
525,000 shares of our common stock, 500,000 shares of preferred stock with a
stated value of $13 per share, $18,500,000 in cash and the payment of other
acquisition costs of approximately $1,000,000. The acquisition of DPSC was
accounted for as a purchase. The results of operations of DPSC have been
included in the consolidated
F-11
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
financial statements from the date of acquisition. The excess of the purchase
price over the net tangible assets acquired totaled $35,521,000 and was
allocated to acquired technology with a three-year amortization life.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information
for the years ended December 31, 1998 and 1999 assume that the acquisitions
discussed above occurred as of January 1, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1999
------------ ------------
Total revenue ............................................ $ 7,429,272 $ 9,183,780
============ ============
Loss before extraordinary loss ........................... (51,898,855) (49,213,173)
Extraordinary loss ....................................... 0 (4,518,760)
------------ ------------
Net loss attributable to common shareholders ............. $(51,898,855) $(53,749,933)
============ ============
Basic and diluted loss per share before extraordinary loss $ (2.55) $ (2.42)
Extraordinary loss per share ............................. 0 (0.22)
------------ ------------
Basic and diluted net loss per share ..................... $ (2.55) $ (2.64)
============ ============
</TABLE>
The unaudited pro forma consolidated financial information does not
purport to represent what our results of operations would have been had the
acquisitions occurred as of such date, or what the results will be for any
future period.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consisted of the
following:
Predecessor Netzee
----------- -----------
1998 1999
----------- -----------
Leasehold improvements ...... $ 0 $ 739,241
Computer equipment .......... 0 2,667,190
Furniture and fixtures ...... 20,000 155,733
Machinery and other equipment 0 1,686,017
Software .................... 50,871 1,831,667
----------- -----------
70,871 7,079,848
Less accumulated depreciation (26,979) (141,138)
----------- -----------
Property and equipment, net . $ 43,892 $ 6,938,710
=========== ===========
5. INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1999 consisted of the
following:
Predecessor Netzee
------------- -------------
1998 1999
------------- -------------
Workforce ................... $ 0 $ 830,000
Contracts in progress ....... 0 1,880,000
Marketing agreements ........ 0 4,135,104
Acquired technology ......... 0 126,523,364
------------- -------------
0 133,368,468
Less accumulated amortization 0 (12,756,780)
------------- -------------
Intangible assets, net ...... $ 0 $ 120,611,688
============= =============
F-12
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Intangible amortization expense for the years ended December 31, 1997 and 1998,
the period from January 1, 1999 to February 28, 1999 and the period from March
1, 1999 to December 31, 1999 was $0, $0, $0, and $12,763,016, respectively.
6. NOTE PAYABLE
On October 18, 1999, we entered into a $1,345,000 term loan with a bank
to secure the purchase of equipment. The loan bears interest at LIBOR plus 2%
per annum and is due in 60 monthly installments starting November 1, 1999. The
loan matures on October 1, 2004, and a balloon payment of approximately $936,300
is due at that time. The loan is secured by equipment and a personal guaranty by
certain officers of our company. As of December 31, 1999, the outstanding loan
balance was $1,319,135.
7. RELATED-PARTY TRANSACTIONS
As discussed in Note 3, we completed several acquisitions in 1999. In
some of these transactions, persons who were previously officers, directors or
shareholders of the acquired companies became executive officers or one of our
directors or beneficial owners of more than 5% of our common stock. Management
believes that these transactions were made on terms no less favorable to us than
could have been obtained with unaffiliated third parties on an arm's length
basis.
Our Chairman of the Board of Directors is the Chairman and Chief
Executive Officer of InterCept, and one of our directors is the President, Chief
Operating Officer and a director of InterCept. A non-employee director of our
company is also a director of InterCept.
Our Chief Executive Officer is a director of InterCept and is a partner
at Nelson Mullins Riley & Scarborough, L.L.P. This firm provided legal services
to us totaling approximately $98,000 during 1999.
On July 1, 1999, certain officers and directors of our company entered
into full-recourse promissory notes with our Predecessor as lender. We became
the lender under these notes upon the merger of the Predecessor into Netzee.
These notes totaled $3,110,000 and were given as consideration for the issuance
of shares of our Predecessor's common stock to these individuals. Each of the
notes bears interest at 7% per year and matures on June 30, 2002.
On August 5, 1999, one of our officers entered into a full-recourse
promissory note with our Predecessor as lender. We became the lender under this
note upon the merger of the Predecessor into Netzee. The note totaled $93,300
and the proceeds were used to exercise options to purchase shares of our
Predecessor's common stock. The loan bears interest at a rate of 7% and matures
on August 4, 2002.
In 1999, we leased our former headquarters in Atlanta, Georgia from The
Bankers Bank. We paid a total of $32,400 to The Bankers Bank in 1999 under this
lease.
We shared some of our facilities with InterCept and received
administrative support during 1999. We incurred expenses of approximately
$124,000 related to these shared costs.
In September 1999, we entered into a marketing agreement with InterCept
under which our salespeople will sell InterCept products and services and
InterCept salespeople will sell our products and services. Under this agreement,
we pay a commission to InterCept for each sale of our products and services made
by InterCept salespersons and for each referral to our sales force that results
in a sale. InterCept correspondingly pays us for sales and referrals by our
salespersons. We paid Intercept $188,000 in 1999 as a result of this agreement.
Management believes that the transactions will be made on terms no less
favorable than could be obtained from unaffiliated third parties on an arm's
length basis.
F-13
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Related-party loans from shareholders at December 31, 1998 and 1999
consisted of the following:
<TABLE>
<CAPTION>
Predecessor Netzee
----------- ------
1998 1999
----------- ------
<S> <C> <C>
Loan from shareholders, interest payable monthly at 8.5%; the loan was
repaid on March 9, 1999 $ 77,500 $ 0
Loan from shareholders, noninterest-bearing note; the loan was repaid
on January 8, 1999 2,000 0
Borrowings from InterCept, interest payable monthly at prime plus 2%
beginning May 1, 2000; principal payable in full on March 31, 2002;
the note is collateralized by substantially all of our assets 0 10,956,930
--------- -----------
79,500 $10,956,930
Less current maturities (79,500) 0
--------- -----------
$ 0 $10,956,930
========= ===========
</TABLE>
Prior to our initial public offering, InterCept loaned us money to fund
the cash portions of the acquisitions discussed in Note 3 and to fund our
operations. All pre-offering borrowings were paid o with proceeds from the
offering. On December 15, 1999, we received a commitment for a $15 million line
of credit from InterCept. Borrowings on this line will bear interest at a rate
of prime plus 2%. As of December 31, 1999, we had borrowed approximately $11.0
million from InterCept on terms consistent with this commitment. During 1999, we
incurred approximately $677,000 of interest expense associated with these
borrowings. After December 31, 1999, we repaid a portion of these borrowings
with cash on hand. See Note 16 for discussion of financing completed subsequent
to year end.
8. EXTRAORDINARY ITEM
On October 18, 1999, we entered into a $3,000,000 line of credit
facility with a company, an affiliate of which was appointed as one of our
directors. The line of credit facility bore interest at the prime rate. In
conjunction with the line of credit facility, we issued warrants to purchase
461,876 shares of common stock at an exercise price of $3.25 per share. We
recorded deferred financing costs for the difference between the fair value of
common stock and the exercise price of the warrants. The deferred financing
costs were to be recognized over the three-year term of the line of credit. The
line of credit facility was terminated in December 1999 in connection with the
receipt of a commitment from InterCept discussed above. The termination resulted
in the recognition of an extraordinary non-cash loss of approximately $4,519,000
for the period from March 1, 1999 to December 31, 1999.
9. INCOME TAXES
We have incurred net operating losses (""NOL'') since inception. As of
December 31, 1998, the Predecessor had $350,000 in NOL carryforwards available
to offset its future income tax liability. These NOL carryforwards will not be
utilized as a result of InterCept's acquisition of the Predecessor and Netzee's
subsequent formation. As of December 31, 1999, we had NOL carryforwards of
approximately $2,960,000 available to offset our future income tax liability.
The NOL carryforwards begin to expire in 2014. Due to the uncertainty of the
realizability of the net operating losses, we have not reflected an income tax
benefit in the accompanying statements of operations for any period presented
and has recorded a valuation allowance equal to the net deferred tax assets at
December 31, 1998 and 1999.
F-14
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The components of the deferred tax assets and liabilities are as follows as of
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Predecessor Netzee
----------- ----------
1998 1999
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 133,191 $ 1,124,895
Deferred revenue 39,487 2,405,020
Accrued liabilities 6,506 68,780
Accounts receivable 3,800 108,965
Stock compensation 0 1,744,960
Intangibles 0 280,440
Total deferred tax assets 182,984 5,733,060
Valuation allowance (182,984) (5,733,060)
Net deferred tax assets $ 0 $ 0
</TABLE>
The components of the income tax benefit for the years ended December
31, 1997, 1998 and the period from March 1, 1999 to December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Predecessor Netzee
--------------------- -----------
1997 1998 1999
---------- --------- -----------
<S> <C> <C> <C>
Current benefit:
Federal $ 0 $ 0 $(1,006,485)
State 0 0 (117,226)
---------- --------- ------------
0 0 (1,123,711)
---------- --------- ------------
Deferred benefit:
Federal (33,707) (119,633) (4,128,377)
State (3,965) (14,075) (480,972)
---------- -------- ------------
(37,672) (133,708) (4,609,349)
---------- -------- ------------
Total benefit (37,672) (133,708) (5,733,060)
Valuation allowance 37,672 133,708 5,733,060
---------- -------- ------------
Total $ 0 $ 0 $ 0
========== ======== ============
</TABLE>
The following is a summary of the items which resulted in recorded
income taxes that differ from taxes computed using the statutory federal income
tax rate for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Predecessor Netzee
--------------------- -----------
1997 1998 1999
---- ---- -----------
<S> <C> <C> <C>
Tax provision at federal statutory rate 34% 34% 34%
Tax provision at state statutory rate 4 4 4
Nondeductible amortization 0 0 (17)
Effect of valuation allowance (38) (38) (21)
--- --- ---
Income tax benefit 0% 0% 0%
=== === ===
</TABLE>
The income tax benefit for the period from January 1, 1999 to February 28, 1999
was not material.
10. PREFERRED STOCK
In December 1999, we issued 500,000 shares of Series A 8% Convertible
Preferred Stock ("Preferred Stock") with a stated value of $13 per share as part
of our acquisition of DPSC. The Preferred Stock is
F-15
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
convertible at the option of the shareholder, in whole or in part, into 411,067
shares of common stock. In addition, if the average closing stock price of our
common stock equals or exceeds $26.00 per share for any four week period, we may
redeem the Preferred Stock for cash or 411,067 shares of common stock upon at
least 10 but not more than 90 days' written notice. If we elect to redeem the
Preferred Stock in cash, the preferred shareholder has the option to receive
payment in common stock by providing notice of such election within 5 days of
the notice of redemption. Preferred Stock dividends are cumulative and are paid
when declared by the Board of Directors at the rate of $1.04 per share. We have
accrued $24,200 in Preferred Stock dividends for the period from March 1, 1999
to December 31, 1999.
11. STOCK OPTION PLAN
During 1999, we adopted, and our shareholders approved, the 1999 Stock
Option and Incentive Plan (the ""Plan''). Awards under the Plan are granted by
the Board of Directors or by a committee composed of two members (the
"Committee") of the Board of Directors. Awards issued under the Plan may include
incentive stock options (""ISOs''), nonqualified stock options ("NQSs"),
restricted stock, or stock appreciation rights. The Committee administers the
Plan and generally has the discretion to determine the terms of an option grant,
including the number of option shares, option price, term, vesting schedule, the
post-termination exercise period, and whether the grant will be an ISO or NQS.
The board of directors has approved grants of options to purchase
40,000 shares to each of our directors, 10,000 of which vest immediately and the
remainder which vest in equal portions over three years.
The maximum number of shares of common stock that may be issued under
the Plan as of January 1, 2000 is 4,816,768. The Plan provides that the number
of shares of common stock available for issuance thereunder shall be
automatically increased on January 1 of each year to an amount equal to 20% of
the fully diluted shares of stock outstanding on December 31 of the previous
year, provided that the shares available for issuance shall not be less than
3,500,000.
The Plan will remain in effect until terminated by the Board of
Directors. The Plan may generally be amended by the Board of Directors without
the consent of our shareholders.
A summary of stock options granted and related information as of
December 31, 1999 is presented below:
<TABLE>
<CAPTION>
Shares Price Range
------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1998 0
Granted 2,815,500 $2.00 - $14.75
Exercised 0
-------------
Outstanding at December 31, 1999 2,815,500 $2.00 - $14.75
=============
Exercisable at December 31, 1999 712,166 $2.00 - $14.00
=============
</TABLE>
The following summarizes information about the stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- --------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1999 Life Price 1999 Price
- ---------------- -------------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$ 2.00 - $ 3.11 830,000 9.58 years $ 2.68 318,000 $ 2.81
$ 5.00 1,021,000 9.69 years $ 5.00 123,333 $ 5.00
$14.00 - $14.75 964,500 9.87 years $14.12 270,833 $14.00
--------- -------
2,815,500 9.72 years $ 7.47 712,166 $ 7.45
========= =======
</TABLE>
F-16
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
During 1999, we issued 75,000 shares of restricted stock under the
Plan. The restricted shares vest ratably over three years. The weighted average
fair value of these shares at grant date was $15.00.
During 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to use the accounting
methodology required by APB Opinion No. 25 must make pro forma disclosures of
net income, and, if presented, earnings per share, as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied.
We have elected to account for our stock-based compensation plan under
APB Opinion No. 25. We have computed, for pro forma disclosure purposes, the
value of all options for shares of our common stock granted in 1999 to our
employees using the Black-Scholes option pricing model prescribed in SFAS No.
123 and the following weighted-average assumptions: risk-free interest rates of
5.80 to 6.17%, expected dividend yield of 0%, expected lives of four years, and
expected volatility of 69%.
The weighted average fair value of options for the stock granted to our
employees in 1999 was $11.32 per share. The total value of the options for stock
granted to these employees during 1999 was computed as approximately $21.0
million, which would be amortized on a pro forma basis over the three-year
vesting period of the options. If we had accounted for the Plan in accordance
with SFAS No. 123, our combined net income with our predecessor for the year
ended December 31, 1999 would have been as follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
---------------- -------------
<S> <C> <C>
Net loss attributable to common shareholders for the year ended
December 31, 1999 $(26,954,876) $(28,212,750)
Basic and diluted net loss per share for the year ended
December 31, 1999 $ (2.34) $ (2.44)
</TABLE>
12. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share have been computed in accordance
with SFAS No. 128, "Earnings per Share," using net loss divided by the weighted
average number of shares of common stock outstanding for the period presented.
Potentially dilutive options to purchase 2,815,500 shares of common stock with a
weighted average exercise price of $7.44 per share outstanding at December 31,
1999, 411,067 common shares issuable upon conversion of the preferred stock and
461,876 outstanding warrants to purchase common stock were excluded from the
presentation of diluted net loss per share, as they are antidilutive due to the
net loss. There were no potentially dilutive securities outstanding for the
years ended December 31, 1997 and 1998.
13. EMPLOYEE BENEFITS
In 1999, we established a defined contribution 401(k) savings plan,
which covers substantially all employees, subject to certain minimum age and
service requirements. Contributions to this plan are voluntary; however, we
match 100% of the first 6% of an employee's contribution.
F-17
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Predecessor Netzee
----------------------------------------- -------------
For the For the
Period From Period From
For the Year For the Year January 1, March 1,
Ended Ended 1999 to 1999 to
December 31, December 31, February 28, December 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash paid for interest $0 $14,034 $2,971 $ 740,638
Supplemental disclosure of non-cash investing and
financing activities:
Stock issued for acquisitions 0 0 0 71,557,450
Warrants issued for the purchase of common stock 0 0 0 4,618,760
Stock issued for notes receivable 0 0 0 3,110,000
Purchase of property and equipment with note
payable 0 0 0 1,345,000
Stock issued as deferred compensation 0 0 0 1,125,000
Stock issued in connection with marketing
agreements, net of cash paid 0 0 0 1,079,096
Capital contribution for property and equipment
from shareholder 0 0 0 750,000
Exercise of stock options for note receivable 0 0 0 93,300
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
We lease various equipment and facilities under operating lease
agreements. Future minimum annual obligations under these leases as of December
31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 617,314
2001 638,283
2002 462,714
2003 173,240
2004 173,725
Thereafter 188,890
Total $2,254,166
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998, the period
from January 1, 1999 and February 28, 1999 and the period from March 1, 1999 to
December 31, 1999 was $20,241, $53,604, $8,934 and $138,874, respectively.
Litigation
We are party to various claims and legal proceedings that arise in the
normal course of business. Management, on the advice of legal counsel, does not
believe that a negative outcome of any known pending litigation would have a
material adverse effect on us or our financial position and results of
operations.
16. SUBSEQUENT EVENTS
Acquisition of Digital Visions, Inc.
On March 7, 2000, we acquired certain assets and assumed certain
liabilities of Digital Visions, Inc. ("DVI"), for a purchase price of 838,475
shares of our common stock, options to purchase 70,419 shares of common stock
that were received in exchange for the cancellation of options to purchase DVI
common stock,
F-18
<PAGE>
NETZEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the assumption of approximately $3,300,000 in outstanding debt, and the
assumption of operating liabilities and payment of other acquisition costs of
approximately $1,200,000. A portion of the shares of common stock issued in this
transaction was placed in escrow for indemnification and other purposes. DVI
also has the right to receive up to 628,272 additional shares of our common
stock if certain revenue targets are met in fiscal years 2000 and 2001.
Exercise of Warrants to Purchase Common Stock
On March 2, 2000, warrants to purchase 461,876 shares of common stock
were exercised. Proceeds from the exercise of the warrants totaled approximately
$1.5 million.
Promissory Note to Intercept
On March 24, 2000, pending finalization of the line of credit discussed
in Note 7, we issued a promissory note to InterCept in the principal amount of
approximately $7.8 million, which reflects the amount borrowed under terms
consistent with the commitments as of that date. This note bears interest at a
rate of prime plus 2% and is secured by substantially all of our assets. Accrued
interest is payable monthly beginning May 1, 2000.
