<PAGE>
EXHIBIT 99.3
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
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 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
12
<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
December 13, 2000
<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 $ 3,496 $ 2,145
Accounts receivable, less allowance for doubtful
accounts of $170 and $386 in 1998 and 1999, 3,902 9,099
respectively
Deferred tax assets 80 1,956
Inventory, prepaid expenses, and other 1,358 2,810
------------- -------------
Total current assets 8,836 16,010
PROPERTY AND EQUIPMENT, net 8,188 11,662
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 329 1,220
------------- -------------
$ 22,014 $ 100,895
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
-------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 95 $ 154
Notes payable to related party 300 0
Accounts payable and accrued liabilities 2,138 4,597
Accrued income taxes 99 1,790
Deferred revenue 1,147 5,777
------------- -------------
Total current liabilities 3,779 12,318
NOTES PAYABLE, less current portion 211 12,669
DEFERRED TAX LIABILITY 254 22,633
DEFERRED REVENUE 0 440
------------- -------------
Total liabilities 4,244 48,060
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 0 0
Common stock, no par value; 50,000,000 shares
authorized, 9,581,039 and 10,450,472 shares
issued and outstanding at December 31, 1998 and 17,542 42,657
1999, respectively
(Accumulated deficit) retained earnings (15) 9,911
Accumulated other comprehensive income 186 92
------------- -------------
Total shareholders' equity 17,713 52,660
------------- -------------
$ 22,014 $ 100,895
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
---------- -------- --------
<S> <C> <C> <C>
REVENUES:
Service fee income $ 20,762 $ 25,265 $ 39,677
Data communications management income 3,119 3,772 5,163
Equipment and product sales, services, and other 4,312 4,233 7,519
--------- -------- --------
Total revenues 28,193 33,270 52,359
--------- -------- --------
COSTS OF SERVICES:
Cost of service fee income 6,378 7,465 11,145
Cost of data communications management income 2,412 2,555 3,561
Cost of equipment and product sales, services and other 3,335 3,567 5,746
--------- -------- --------
Total costs of services 12,125 13,587 20,452
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 12,798 13,589 20,992
DEPRECIATION AND AMORTIZATION 1,496 1,579 4,462
LOSS ON IMPAIRMENT OF INTANGIBLES 727 0 0
--------- -------- --------
Total operating expenses 27,146 28,755 45,906
--------- -------- --------
OPERATING INCOME 1,047 4,515 6,453
INTEREST EXPENSE (776) (376) (718)
INTEREST AND OTHER INCOME, net 151 161 39,890
--------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST 422 4,300 45,625
PROVISION FOR INCOME TAXES 721 1,632 20,212
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 (260) 2,579 9,941
PREFERRED DIVIDENDS (32) (16) 0
--------- -------- --------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS (292) 2,563 9,941
--------- -------- --------
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized holding gains (losses) arising during period 0 186 (94)
--------- -------- --------
Total comprehensive (loss) income $ (292) $ 2,749 $ 9,847
========= ======== ========
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (0.04) $ 0.30 $ 0.99
========= ======== ========
Diluted $ (0.04) $ 0.30 $ 0.94
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Unrealized Retained
Holding Earnings
Common Stock Gains on (Accumulated
--------------------
Shares Amount Investments Deficit) Total
-------- -------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 7,082,614 $ 3,142 $ 0 $(1,763) $ 1,379
Distributions for taxes to shareholders of pass-through entities 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 (292) (292)
Pro forma tax provision 0 0 0 152 152
---------- ------- ---- ------- -------
BALANCE, December 31, 1997 7,082,614 3,137 0 (2,489) 648
Net income attributable to common shareholders 0 0 0 2,563 2,563
Common stock dividends 0 0 0 (81) (81)
Distributions for taxes to shareholders of pass-through entities 0 0 0 (8) (8)
Preferred stock premium paid 0 (40) 0 0 (40)
Initial public offering proceeds, net of expenses 2,498,425 14,445 0 0 14,445
Other comprehensive income 0 0 186 0 186
---------- ------- ---- ------- -------
BALANCE, December 31, 1998 9,581,039 17,542 186 (15) 17,713
Issuance of common stock in connection with exercise of stock
options 25,416 74 0 0 74
Net income attributable to common shareholders 0 0 0 9,941 9,941
Common stock dividends 0 0 0 (15) (15)
Other comprehensive loss 0 0 (94) 0 (94)
Issuance of common stock 844,017 11,998 0 0 11,998
Income tax benefits related to exercises of stock options 0 129 0 0 129
Gain related to stock issuance of Netzee subject to put option 0 12,914 0 0 12,914
---------- ------- ---- ------- -------
BALANCE, December 31, 1999 10,450,472 $42,657 $ 92 $ 9,911 $52,660
========== ======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
THE INTERCEPT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income before preferred dividends $ (260) $ 2,579 $ 9,941
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation 740 1,251 1,920
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) 797 14,259
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 97 (350) (2,363)
Inventory, prepaid expenses, and other (23) (678) 619
Other assets (67) (4) (51)
Accounts payable and accrued expenses 297 (1,051) 167
Deferred revenue 67 (2) 538
------- ------- --------
Net cash provided by operating activities 2,432 2,994 4,604
------- ------- --------
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 (1,477) (5,095) (4,937)
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 (1,114) (8,618) (18,033)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES, net of effect of purchase acquisitions:
Proceeds from notes payable and line of credit 580 0 45,331
Payments on notes payable and line of credit (574) (7,052) (33,312)
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 exercise of stock options 0 0 129
Retirement of preferred stock 0 (440) 0
Payment of preferred dividends (32) (16) 0
Payment of common dividends 0 (81) (15)
Debt issuance costs 0 (95) (129)
------- ------- --------
Net cash (used in) provided by financing activities (617) 6,753 12,078
------- ------- --------
NET INCREASE (DECREASE) IN CASH 701 1,129 (1,351)
CASH, beginning of year 1,666 2,367 3,496
------- ------- --------
CASH, end of year $ 2,367 $ 3,496 $ 2,145
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 733 $ 397 $ 750
======= ======= ========
Cash paid for income taxes $ 380 $ 1,067 $ 3,989
======= ======= ========
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.
<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, 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, InterCept Communications
Technologies, Inc., and ACE Acquisition Corp 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 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
1
<PAGE>
public offering InterCept has recorded only our 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.
2
<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.
3
<PAGE>
Minimum lease payments receivable
As noted above, InterCept 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):
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
======
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 the acquired company 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.
4
<PAGE>
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.
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
5
<PAGE>
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.
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 Partnership by
approximately $556,000. Of this excess, $38,000 was allocated to contracts
based on a discounted cash flow analysis and is being amortized over a
period of 24 months, and the remaining $518,000 has been allocated to
goodwill and is being amortized over a period of 40 years. The results of
operations of the acquired business have been included in InterCept's
consolidated financial statements from the date of acquisition.
On October 21, 1998, InterCept acquired certain assets and assumed
certain liabilities of Item Processing of America. The transaction was
accounted for as a purchase. The consideration exchanged was approximately
$1.3 million and exceeded the net tangible asset value of Item Processing
of America by approximately $1.1 million. Of this excess, $195,000 was
allocated to contracts based on a discounted cash flow analysis and is
being amortized over a period of 24 months, and the remaining $940,000 has
been allocated to goodwill and is being amortized over a period of 40
years. The results of operations of the acquired business have been
included in InterCept's consolidated financial statements from the date of
acquisition.
InterCept acquired an additional 33% of ProImage in August 1998 and
acquired certain assets and assumed certain liabilities of Premier Imaging
in September 1998. Total purchase price was approximately $290,000. The
purchase price exceeded net tangible assets by approximately $83,000, which
has been allocated to contracts based on a discounted cash flow analysis
and is being amortized over a period of 36 months. The results of
operations of the acquired business have been included in InterCept's
consolidated financial statements from the date of acquisition.
On January 11, 1999, InterCept acquired certain assets and assumed
certain liabilities of Eastern Software, Inc., a provider of loan portfolio
management software. InterCept paid approximately $450,000 which exceeded
the net tangible asset value of Eastern Software by approximately $507,000.
This excess has been allocated to goodwill and is being amortized over a
period of 5 years. The results of operations of the acquired business have
been included in InterCept's consolidated financial statements from the
date of acquisition.
6
<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.
7
<PAGE>
2. Pursuant to an Asset Contribution Agreement between InterCept,
Netzee and The Bankers Bank, a Georgia banking corporation, Netzee acquired
various assets and assumed certain liabilities related to the Internet
banking division of The Bankers Bank. As consideration, Netzee issued
1,361,000 shares of its common stock to The Bankers Bank valued at $11.50
per share. Pursuant to an Asset Contribution Agreement between InterCept,
Netzee and TIB The Independent Banker's Bank, a Texas banking association,
Netzee acquired various assets and assumed certain liabilities related to
the Internet banking division of TIB. As consideration, Netzee issued
1,361,000 shares of its common stock to TIB valued at $11.50 per share.
Additional consideration of 76,000 shares of common stock was issued to a
third party for $100,000 in connection with these acquisitions.
3. Pursuant to an Agreement and Plan of Merger by and among Netzee,
Dyad Corporation, a Georgia corporation, and certain shareholders of Dyad,
Dyad merged with and into Netzee. As consideration, Netzee paid to Dyad's
shareholders approximately $900,000 in cash and approximately 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):
. InterCept's acquisitions of Nova, Advance Data, Direct Access
Interactive, Inc., L.E. Vickers & Associates, Data Equipment Services,
and SBS Data Services;
. InterCept's transfer of 450,000 shares of Direct Access common stock
in exchange for the non-remote banking operations of SBS Corp.;
. InterCept's recording of compensation expense related to equity
securities issued by Direct Access below fair market value in August
1999;
. InterCept's creation of Netzee and Netzee's merger with Direct Access
. Netzee's acquisitions of the internet banking operations of TIB The
Independent BankersBank and The Bankers Bank, Call Me Bill, and Dyad;
and
. The deconsolidation of the operations of Netzee from InterCept's
operations;
8
<PAGE>
(unaudited)
1998 1999
------- --------
Revenues $54,876 $63,356
======= =======
Net income before income taxes and
minority interest 4,710 46,753
======= =======
Net loss per common share $ (2.92) $ (1.40)
======= =======
The unaudited pro forma consolidated financial information is not
necessarily indicative of the actual results that would have occurred had
the acquisitions been consummated at the beginning of the periods presented
or of future operations of the combined entities.
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
9
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1999
---------- --------
<S> <C> <C>
Land and building $ 961 $ 984
Leasehold improvements 168 345
Machinery and equipment 9,954 12,202
Furniture and office equipment 444 769
Software 1,874 2,322
Construction in progress 387 2,262
---------- --------
13,788 18,884
Less accumulated depreciation (5,600) (7,222)
---------- --------
Property and equipment, net $ 8,188 $ 11,662
========== ========
</TABLE>
6. INTANGIBLES
Intangibles at December 31, 1998 and 1999 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
10
<PAGE>
7. LONG-TERM DEBT
Long term debt at December 31, 1998 and 1999 consisted of the following (in
thousands):
<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
Note payable to related party, due on demand, repaid in 1999 300 0
Equipment under capital lease expiring July 2001 0 103
------ ----------
606 12,823
Less current maturities (395) (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:
<TABLE>
<S> <C>
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
=====
</TABLE>
11
<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 $584 $ 835 $ 5,953
Deferred (benefit) expense (15) 797 14,259
Pro forma tax expense 152 0 0
------- -------- ---------
Provision for income taxes $721 $1,632 $20,212
======= ======== =========
</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>
1997 1998 1999
-------- ------- ---------
<S> <C> <C> <C>
Federal income tax provision at statutory rate $ 140 $1,426 $ 15,513
Permanent tax/book basis differences, primarily goodwill 494 41 900
Gain related to transfer of assets from subsidiary 0 0 1,964
Meals and entertainment 17 24 43
State tax provision, net of federal effect 80 166 1,807
Other (10) (25) (15)
-------- ------- --------
$ 721 $1,632 $ 21,212
-------- ------- --------
</TABLE>
12
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <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 (258) (517)
Investment basis difference 0 (22,192)
Other (11) 0
------- ---------
Total gross deferred tax liabilities (269) (22,709)
------- ---------
Net deferred tax liability (174) (20,677)
Less current net deferred tax assets 80 1,956
------- ---------
Noncurrent net deferred tax liabilities $ (254) $ (22,633)
======= =========
</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")
13
<PAGE>
and/or nonqualified stock options ("NQSOs") and/or grants of restricted
stock. The compensation committee administers the 1996 Stock Option Plan
and generally has the discretion to determine the terms of an option grant,
including the number of option shares, option price, term, vesting
schedule, the post-termination exercise period, and whether the grant will
be an ISO or NQSO. Notwithstanding this discretion, (i) the number of
shares subject to options granted to any individual in any fiscal year may
not exceed 315,795 shares (subject to certain adjustments), (ii) if an
option is intended to be an ISO and is granted to a shareholder holding
more than 10% of the combined voting power of all classes of InterCept's
stock or the stock of its subsidiary on the date of the grant of the
option, the option price per share of common stock may not be less than
110% of the fair market value of such share at the time of grant, and (iii)
the term of an ISO may not exceed ten years, or five years if granted to a
shareholder owning more than 10% of the total combined voting power of all
classes of stock on the date of the grant of the option.
The 1996 Stock Option Plan provides for the granting of nonqualified
stock options to the directors of InterCept. The board of directors 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.
14
<PAGE>
A summary status of InterCept's stock option plan as of December 31,
1997, 1998, and 1999 and changes during the year are presented below:
<TABLE>
<CAPTION>
Weighted
Price Average Option
Shares Range Price
------------ ---------------- --------------
<S> <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 years Seven 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:
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
---------- --------- -------
(in thousands, except per share data)
<S> <C> <C> <C>
Net (loss) income $(338) $1,991 $8,472
Net (loss) income per common
share - diluted $(0.05) $ 0.23 $ 0.80
</TABLE>
The following table sets forth the exercise price range, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date:
<TABLE>
<CAPTION>
Weighted
Exercise Weighted Average
Price Number Average Contractual
Range of Shares Price Life (in years)
------------- --------- ---------- ---------------
<S> <C> <C> <C>
$ 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 $ (260) $2,579 $9,941
Less preferred stock dividends (32) (16) 0
------ ------ ------
Net (loss attributable) income available to
common shareholders $ (292) $2,563 $9,941
====== ====== ======
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C>
Weighted average common shares outstanding 7,082,614 8,464,740 10,094,696
=========== ========== ===========
Per share amount $ (0.04) $ 0.30 $ .99
=========== ========== ===========
Diluted:
Net (loss) income $ (260) $ 2,579 $ 9,941
Less preferred stock dividends (32) (16) 0
----------- ---------- -----------
Net (loss attributable) income available to
common shareholders $ (292) $ 2,563 $ 9,941
=========== ========== ===========
Weighted average common shares outstanding 7,082,614 8,464,740 10,094,696
Shares assumed issued upon exercise of dilutive
stock options using the treasury stock method 0 114,274 451,350
Contingently issuable shares 0 17,500 17,500
----------- ---------- -----------
Total 7,082,614 8,596,514 10,563,546
=========== ========== ===========
Per share amount $ (0.04) $ 0.30 $ 0.94
=========== ========== ===========
</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.
Contingently issuable shares represents 5% of the shares issued in
conjunction with the Advanced Computer Enterprises, Inc. acquisition in
August 2000 which are in escrow to satisfy unknown obligations (See Note
16).
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 $88,000, $130,000, and $148,000 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
======
17
<PAGE>
Net rental expense was approximately $1,070,000, $902,000, and
$1,308,000 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 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.
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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. As of May 31,
2000, we have committed, subject to some conditions, to provide to Netzee a
$15.0 million line of credit for its working capital needs. As of September
30, 2000, a total of $15.0 million was due from Netzee under this
promissory note. Netzee may require additional funds to support its
operations. Netzee may seek to raise such funds through public or private
offering of debt or equity, the sale of assets, or from other sources. No
assurance can be given that additional funds will be available, such funds
will be available on terms favorable to Netzee or their shareholders. Their
ability to continue as a going concern and to meet their obligations as
they come due may be dependent upon their ability to raise additional
capital funds.
16. SUBSEQUENT EVENTS
On August 29, 2000, the Company acquired Advanced Computer
Enterprises, Inc., a provider of core data processing, item capture, and
check imaging services to community banks, in a transaction accounted for
as a pooling of interest. In connection with the acquisition, the Company
issued approximately 350,000 shares of common stock in exchange for all of
the issued and outstanding shares of common stock of Advanced Computer
Enterprises. An escrow of 5% of the shares issued, or 17,500 shares, was
established to satisfy obligations unknown at the time of closing.
Accordingly, the financial statements have been restated for all periods
presented to include the results of operations of Advanced Computer
Enterprises. For the years ended December 31, 1997, 1998, and 1999,
Advanced Computer Enterprises had revenue of $4.9 million, $4.4 million,
and $5.1 million, respectively, and net income attributable to common
shareholders of $135,000, $104,000, and $89,000, respectively.
On November 29, 2000, the Company entered into an agreement to
purchase the assets of the U.S. data center operations of SLMsoft.com, Inc
for consideration of $40 million and approximately 1,254,000 shares of
common stock.
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