-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B6c5v3yG5KgNzJN88i+8oqDipGIUTWbiZbs7/mBHGeZNBC28ua1IusHPN2Sjq+Yi ZEVN/mJN+ZN6s5Zse4yKpg== 0000931763-01-501118.txt : 20010726 0000931763-01-501118.hdr.sgml : 20010726 ACCESSION NUMBER: 0000931763-01-501118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010725 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCEPT GROUP INC CENTRAL INDEX KEY: 0001054930 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 582237359 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14213 FILM NUMBER: 1688526 BUSINESS ADDRESS: STREET 1: 3150 HOLCOMB BRIDGE ROAD SUITE 200 CITY: NORCROSS STATE: GA ZIP: 30071 BUSINESS PHONE: 7702489600 MAIL ADDRESS: STREET 1: 3150 HOLCOMB BRIDGE ROAD SUITE 200 CITY: NORCROSS STATE: GA ZIP: 30071 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED JUNE 30, 2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001. Or [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ____________, 19_____. Commission file number : 01-14213 ---------- The InterCept Group, Inc. (Exact name of registrant as specified in its charter) Georgia 58-2237359 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 3150 Holcomb Bridge Road, Suite 200, Norcross, Georgia 30071 (Address of principal executive offices) (770) 248-9600 (Registrant's telephone number including area code) N/A (Former name, former address and former fiscal year, if changed since last report) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 17, 2001 Common Stock, no par value 14,209,005 ================================================================================ THE INTERCEPT GROUP, INC. INDEX TO FORM 10-Q PAGE ---- PART I FINANCIAL INFORMATION 1 Item 1. Financial Statements 1 Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 1 Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2001 and 2000 2 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2000 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II OTHER INFORMATION 15 Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 EXHIBIT INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements The InterCept Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except share amounts)
June 30, December 31, 2001 2000 ----------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,122 $ 8,061 Short term investments 8 37,484 Accounts receivable, less allowance for doubtful accounts of $631 and $641 at June 30, 2001 and December 31, 2000, respectively 18,212 9,960 Advances to SLM 0 5,000 Deferred tax assets 4,033 1,666 Inventory, prepaid expenses and other 6,132 3,023 -------- -------- Total current assets 32,507 65,194 Property and equipment, net 24,500 16,883 Intangible assets, net 102,608 24,786 Advances to affiliate 8,715 15,000 Advances to SLM 12,065 Investment in affiliate 9,722 17,729 Other noncurrent assets 2,888 2,534 -------- -------- Total assets $193,005 $142,126 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of notes payable $ 16 $ 45 Accounts payable and accrued liabilities 4,683 3,188 Deferred revenue 12,858 5,054 -------- -------- Total current liabilities 17,557 8,287 Notes payable, less current portion 26,386 4,513 Deferred revenue 480 453 Deferred tax liability 26,984 26,279 -------- -------- Total liabilities 71,407 39,532 Minority interest 213 202 Shareholders' equity: Preferred stock, no par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock, no par value; 50,000,000 shares authorized; 14,203,007 and 13,197,139 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 130,933 109,340 Retained earnings (9,489) (6,951) Accumulated other comprehensive income (59) 3 -------- -------- Total shareholders' equity 121,385 102,392 -------- -------- Total liabilities and shareholders' equity $193,005 $142,126 ======== ========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 1 The InterCept Group, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, --------------------- ------------------- 2001 2000* 2001 2000* -------- ------- -------- -------- (unaudited) (unaudited) Revenues: Service fee income $27,026 $13,660 $50,828 $ 25,521 Data communications management income 1,737 1,517 3,566 2,918 Equipment and product sales, services and other 1,618 2,108 3,033 4,625 ------- ------- ------- -------- Total revenues 30,381 17,285 57,427 33,064 Costs of services: Cost of service fee income 9,388 4,162 18,315 7,477 Cost of data communications management income 1,358 1,051 2,796 2,028 Cost of equipment and product sales, services and other 1,235 1,606 2,334 3,426 Selling, general and administrative expenses 10,544 6,726 19,602 12,980 Depreciation and amortization 2,886 1,078 5,394 2,038 ------- ------- ------- -------- Total operating expenses 25,411 14,623 48,441 27,949 Operating income 4,970 2,662 8,986 5,115 Other income, net 314 1,440 1,042 8,722 ------- ------- ------- -------- Income before provision for income taxes, equity in loss of affiliate, and minority interest 5,284 4,102 10,028 13,837 Provision for income taxes 2,112 1,688 4,035 5,494 Equity in loss of affiliate (2,802) (6,181) (8,521) (11,867) Minority interest (3) (16) (10) (32) ------- ------- ------- -------- Net income (loss) attributable to common shareholders 367 (3,783) (2,538) (3,556) ======= ======= ======= ======== Net income (loss) per common share: Basic $ 0.03 $ (0.29) $ (0.18) $ (0.29) ======= ======= ======= ======== Diluted $ 0.02 $ (0.29) $ (0.18) $ (0.29) ======= ======= ======= ======== Weighted average shares outstanding: Basic 13,894 13,160 13,835 12,457 Diluted 15,064 13,160 13,835 12,457
* All prior period amounts have been restated to reflect the acquisition of Advanced Computer Enterprises, Inc. in a pooling transaction. The accompanying notes are an integral part of these condensed consolidated statements of operations. 2 The InterCept Group, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands)
Six Months Ended June 30, ------------------- 2001 2000* ---------- ------- (unaudited) Cash flows from operating activities: Net loss attributable to common shareholders $ (2,538) $ (3,556) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 5,394 2,038 Loan cost amortization 45 - Minority interest 10 32 Deferred income tax provision (230) 2,400 Gain on sale of property and equipment (4) Gain due to stock issuances of subsidiary (513) (7,197) Equity in net loss of affiliate 8,520 11,867 Income tax benefit related to exercise of stock options 789 40 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, net (7,354) (1,350) Inventory, prepaid expenses, and other 2,324 (639) Other assets (399) (110) Accounts payable and accrued expenses (1,209) (2,506) Deferred revenue 4,043 610 -------- -------- Net cash provided by operating activities 8,882 1,625 -------- -------- Cash flows from investing activities: Acquisitions, net of cash acquired (62,517) (4,747) Decrease in note receivable - 7 Purchase of investments 37,404 (43,504) Advances to affiliate 6,285 (3,994) Advances to SLM (12,065) - Purchases of property and equipment, net (4,337) (3,893) Increases in capitalized software (816) (409) -------- -------- Net cash used in investing activities (36,046) (56,540) -------- -------- Cash flows from financing activities: Proceeds from line of credit 21,895 12,250 Retirement of common stock - (32) Payments on notes payable and line of credit (51) (21,495) Payment of shareholder note 221 - Proceeds from issuance of common stock, net of related issuance costs - 65,680 Proceeds from exercise of stock options 1,160 245 -------- -------- Net cash provided by financing activities 23,225 56,648 Net (decrease) increase in cash and cash equivalents (3,939) 1,733 Cash and cash equivalents at beginning of the period 8,061 2,145 -------- -------- Cash and cash equivalents at end of the period $ 4,122 $ 3,878 ======== ======== Supplemental disclosures of cash flow information: Cash paid for interest $ 225 $ 100 ======== ======== Cash paid for income taxes $ 4,744 $ 4,285 ======== ========
* All prior period amounts have been restated to reflect the acquisition of Advanced Computer Enterprises, Inc. in a pooling transaction. The accompanying notes are an integral part of these condensed consolidated statements of cash flows. 3 THE INTERCEPT GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation The InterCept Group, Inc. (the "Company" or "InterCept") is a leading provider of banking technology products and services for community financial institutions. InterCept's comprehensive suite of products and services allows it to act as a single-source provider for the technology and operating needs of community financial institutions. InterCept's range of products and services includes core data processing, check processing and imaging, electronic funds transfer (EFT), data communications management and related products and services. These products and services work together to help community financial institutions manage back-office and customer interaction activities, create operating efficiencies and provide better customer service, which enables them to compete more effectively with larger financial institutions. Most of InterCept's customers outsource their processing activities to the Company's data centers located across the United States, while others install the Company's systems in-house and perform the processing functions themselves. The consolidated financial statements include, as of June 30, 2001, InterCept's accounts and the accounts of the following wholly-owned subsidiaries: InterCept Communications Technologies, Inc. SBS Data Services, Inc. DPSC Acquisition Corp. C-TEQ, Inc. ICPT Acquisition I, LLC In addition, InterCept consolidates in its consolidated financial statements the results of ProImage, Inc., a Georgia corporation controlled by the Company and of which the Company owned 67% of the common stock as of June 30, 2001. InterCept maintains all day-to-day operations of ProImage and has provided and intends to continue to provide complete financial support for ProImage due to legal limitations on the other shareholder's ability to fund losses. All significant intercompany accounts and transactions have been eliminated in consolidation. Minority interest represents the minority shareholder's proportionate share of the equity and earnings of ProImage. In the third quarter of 1999, Direct Access Interactive, Inc., one of InterCept's then wholly-owned subsidiaries, issued shares of its common stock in connection with several acquisition. InterCept then merged Direct Access into Netzee, Inc., a wholly-owned subsidiary that InterCept had recently formed. On September 3, 1999, Netzee issued additional shares of common stock, and as a result of that issuance, InterCept's ownership percentage in Netzee decreased to approximately 49%. Since September 3, 1999, InterCept has accounted for its investment in Netzee 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 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 its relative percentage of those losses. Since Netzee completed its initial public offering, InterCept records only its relative percentage of Netzee's net losses. As of June 30, 2001, InterCept owned approximately 28% of Netzee's common stock. During 2000, Netzee issued common stock at a price in excess of its book value which resulted in an increase in InterCept's investment in Netzee. InterCept recognized gains in accordance with Staff Accounting Bulletin No. 51 related to the increase in its investment value of approximately $7.7 million. This gain is included in other income, net in the accompanying statement of operations. 2. New Accounting Pronouncements In June 2001 the Financial Accounting Standards Board approved Statement of Financial Accounting Standard No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business 4 combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill will cease on December 31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below is carrying value. The adoption of SFAS No. 142 will result in InterCept's discontinuation of amortization of its goodwill; however, InterCept will be required to test its goodwill for impairment under the new standard beginning in the first quarter of 2002, which could have an adverse effect on InterCept's future results of operations if an impairment occurs. 3. Net Income Per Share Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock" method which is based on the average stock price for the period. The shares held in escrow to satisfy contingencies relates to the acquisition of SLM and Advanced Computer Enterprises, Inc. The contingently issuable shares subject to earn-out provisions relate to the SLM acquisition and represent shares earned and issuable as of the end of each period. The effects of anti- dilutive options have been excluded. All common stock equivalents were anti-dilutive for the periods ending June 30, 2000 and have been excluded from the computation of net loss per share. The following tables set forth a reconciliation of basic earnings per share to diluted earnings per share (in thousands, except earnings per share ("EPS") amounts):
Three Months Ended Three Months Ended June 30, 2001 June 30, 2000 ------------------------- ------------------------ Income Shares EPS Income Shares EPS ------- ------ ------ ------- ------ ------ Basic EPS $ 367 13,894 $ 0.03 $(3,783) 13,160 $(0.29) Stock Options - 829 Shares held in escrow to satisfy contingencies - 276 - Contingently issuable shares subject to earn- out provisions - 65 ------- ------ ------ ------- ------ ------ Diluted EPS $ 367 15,064 $ 0.02 $(3,783) 13,160 $(0.29) ======= ====== ====== ======= ====== ======
Six Months Ended Six Months Ended June 30, 2001 June 30, 2000 ------------------------- ------------------------ Income Shares EPS Income Shares EPS ------- ------ ------ ------- ------ ------ Basic EPS $(2,538) 13,835 $(0.18) $(3,556) 12,457 $(0.29) ------- ------ ------ ------- ------ ------ Diluted EPS $(2,538) 13,835 $(0.18) $(3,556) 12,457 $(0.29) ======= ====== ====== ======= ====== ======
4. Comprehensive Income Comprehensive income is the total of net income and all other unrealized losses on securities, net of tax. The following table sets forth the calculation of InterCept's comprehensive income for the periods indicated below (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Net income (loss), as reported $367 $(3,783) $(2,538) $(3,556) Unrealized losses on securities, net of tax: (91) (40) (62) (126) ---- ------- ------- ------- Comprehensive income (loss) $276 $(3,823) $(2,600) $(3,682) ==== ======= ======= =======
5. Acquisitions On January 4, 2001, InterCept acquired certain assets of the check item and back office processing division of SLMSoft.com Inc ("SLM"). Total consideration consisted of $40 million and up to 1,253,942 shares of InterCept common stock valued at approximately $28 million. Of the $40 million cash consideration, InterCept advanced $5 million to SLM in December 2000 and paid SLM $32.5 million on January 4, 2001. A total of $2.5 million is in escrow to satisfy unresolved contingencies existing at the closing date. Of the 1,253,942 shares of common stock, 609,682 were issued to SLM at closing and 258,388 shares will be kept in escrow for up to two years to satisfy unresolved contingencies existing at the closing date. The remaining 385,872 shares represent contingent consideration and will be recorded as purchase price consideration if and when the contingencies are resolved. The consideration for the assets InterCept purchased from SLM exceeded their net tangible asset value by approximately $58.2 million, which was allocated as follows: . $31.7 million to goodwill amortized over a period of 20 years, . $1.5 million to product technology and amortized over a period of 10 years, . $24.5 million to customer relationships and amortized over a period of 20 years and . $500,000 to workforce and amortized over a period of 4 years. 5 InterCept has accounted for the acquisition as a purchase. InterCept has included the results of operations of the acquired business in its consolidated financial statements from the date of acquisition. During the second quarter of 2001, InterCept recorded a restructuring charge related to the acquisition of SLM of approximately $405,000. During the second quarter of 2001, InterCept announced plans to consolidate the operations of its two Houston, Texas data center facilities, one of which was acquired from SLM, into a new facility. The closing and relocating of both facilities was completed during the quarter. In connection with the closure of the Houston facility that was not acquired from SLM, InterCept recorded a restructuring charge of approximately $405,000 during the quarter ended June 30, 2001 which is included in selling, general, and administrative expenses in the accompanying statement of operations. The charge includes approximately $93,000 of severance related to several employees terminated during the quarter and approximately $312,000 of facility closure costs. The facility closure costs include moving expenses and other miscellaneous costs incurred after operations ceased in addition to the noncancelable operating lease obligation on the existing facility. All costs have been incurred as of June 30, 2001 with the exception of $275,000 related to the lease obligation which is included in accrued liabilities in the accompanying balance sheet. The amount represents the total remaining lease payments, less management's estimate of rental income that may be received by subleasing the facility during the remaining lease term. The following unaudited pro-forma consolidated financial information for the three-month and six-month period ended June 30, 2000 assumes the acquisition of SLM had occurred on January 1, 2000 (in thousands, except per share amounts):
3 months ended 6 months ended June 30, 2000 June 30, 2000 -------------- -------------- Revenues 25,991 49,941 Net income before income taxes and minority interest 1,635 7,848 Net income attributable to common shareholders (5,216) (7,190) Net income per common share (diluted) $ (0.38) $ (0.55)
The unaudited pro-forma consolidated financial information is not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the period presented or of future operations of the combined entities. In February 2001, InterCept acquired DPSC Software, Inc. from Netzee, Inc. for consideration which included approximately $14.1 million in cash, and the assumption of $2.4 million of DPSC's net liabilities. InterCept's purchase price exceeded the net tangible asset value of DPSC by approximately $15.7 million, which was allocated as follows: . $9.0 million to goodwill and amortized over a period of 16 years, . $975,000 to product technology and amortized over a period of 10 years, . $5.1 million to customer contracts and amortized over a period of 16 years, . $100,000 to workforce and amortized over a period of 4 years, and . $500,000 to patents and trademarks being amortized over 20 years. InterCept accounted for this acquisition as a purchase. During 2001, InterCept completed several acquisitions for total consideration of $7.4 million, net, in cash. The consideration exceeded the net tangible asset values of these acquisitions by approximately $5.4 million, which was allocated to customer relationships and goodwill and is being amortized over a period of 20 years. InterCept accounted for these acquisitions as a purchase. The results of operations of the acquired assets are included in InterCept's consolidated financial statements from the date of acquisition. 6 The purchase price allocations for these acquisitions are preliminary and will be completed during 2001. During the second quarter of 2001, InterCept paid approximately $333,000 in additional consideration related to a 2000 acquisition, the payment of which was contingent on future revenue growth. The agreement includes additional contingent consideration of approximately $333,000 and $834,000 that may be payable in 2002 and 2003, respectively, depending on future revenues. The additional payments will be recorded as purchase price consideration if and when they are earned. InterCept also paid the final payment of $275,000 related to a 2000 acquisition during the second quarter of 2001. 6. Long-Term Debt and Capital Lease Obligations Long-term debt and capital lease obligations at June 30, 2001 and December 31, 2000 consisted of the following (in thousands):
June 30, December 31, 2001 2000 -------- ------------ $35.0 million line of credit with First Union National Bank, as amended, interest payable at the option of the Company at (i) prime less 0.25% or (ii) LIBOR plus applicable margin as defined, payable in full on June 30, 2002, guaranteed by substantially all assets of the Company 26,386 4,507 Equipment under capital lease expiring July 2001 16 45 Other - 6 ------- ------ 26,402 4,558 Less current maturities (16) (45) ------- ------ $26,386 $4,513 ======= ======
Pursuant to a letter of intent with First Union National Bank dated July 24, 2001, the Company will increase availability under the line of credit to $50 million and extend the maturity date to June 1, 2004. Thus, the entire balance outstanding under the line of credit has been classified as noncurrent as of June 30, 2001. 7. Advances to SLM On May 31,2001, InterCept entered into a loan agreement with SLM under which InterCept loaned SLM $12 million subject to various terms and conditions. Borrowings under the loan agreement bear interest at an annual rate equal to the one-month LIBOR plus 2% and are secured by the shares of InterCept's common stock owned or potentially issuable to SLM. The loan matures on December 31, 2002 and requires mandatory prepayments from the proceeds of sales of InterCept's common stock by SLM until the loan is repaid in full. As of June 30, 2001, SLM owed InterCept approximately $12.1 million under the agreement. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We derive revenues primarily from the following sources: . Service fees for: . core data processing and check imaging systems, support, maintenance and related services and software sales . EFT processing services . Data communications management . Equipment and product sales, services and other: . sales of banking related equipment and complementary products . equipment maintenance and technical support services . related products and services In our service bureau operations, we generate core data processing revenues from service and processing fees based primarily on the asset base of our financial institution customers, the number of transactions we process and the number of accounts we service. We recognize these revenues as we perform the services. We also generate revenues from the licensing of our core data processing systems. We recognize revenues for licensing these systems in accordance with Statement of Position 97-2 on "Software Revenue Recognition," issued by the American Institute of Certified Public Accountants. We recognize software license fees when we have signed a non-cancelable license agreement, shipped the product and satisfied significant obligations to the customer. We license Renaissance Imaging/R/ check imaging software on an in-house basis, and we generate revenues from up-front license fees and recurring annual maintenance fees charged for this system. We recognize revenues from the licensing of Renaissance Imaging in accordance with Statement of Position 97-2, as discussed above. We also provide check imaging in a service bureau environment under which we generate recurring revenues. On a service bureau basis, we generate revenues based on the volume of items processed. We recognize this revenue as we provide the service. We derive EFT revenues principally from processing ATM and debit card transactions. We receive a monthly base fee for providing our ATM processing services and an additional fee for each additional ATM serviced. Once the number of transactions by a financial institution exceeds established levels, typically between 2,000 and 3,000 transactions per month, we charge additional fees for these transactions. For debit card transactions, we generally receive a portion of the interchange fees generated by our financial institution customers, and we charge a monthly fee if our customers do not meet a specified minimum dollar amount of transactions for a particular month. Most charges under our EFT service agreements are due and paid monthly. We generate our data communications management service revenues principally from network management and from equipment configuration services and installation. We charge an installation fee and a regular monthly fee on an ongoing basis for providing telecommunications connectivity and network management. We recognize revenues from sales of equipment and complementary products at the time of shipment. We recognize maintenance and technical support service revenues as we provide the service. For the three and six months ended June 30, 2001, approximately 86% of our total revenues were recurring revenues. Recurring revenues result from regular monthly payments by our customers for ongoing services used in connection with their business. These revenues do not include conversion or deconversion fees, initial software license fees, installation fees, hardware sales or similar activities. Our ownership percentage in Netzee decreased to approximately 49% as of September 3, 1999 because of 8 Netzee's issuance of its common stock in connection with transactions that occurred on that date. As a result, we discontinued consolidating Netzee's results of operations with our results of operations. We account for our investment in Netzee under the equity method, which requires us to record Netzee's results of operations in a single line item in our statement of operations titled "equity in loss of affiliate." Because we provided unlimited funding to Netzee through the completion of its initial public offering in November 1999, all of Netzee's losses before the completion of the offering were included in that line item rather than our relative percentage of those losses. Since Netzee completed its initial public offering, we record only our relative percentage of Netzee's net losses. As of June 30, 2001, we owned approximately 28% of Netzee's outstanding common stock. In February 2000, we completed another public offering of common stock. Our proceeds from this offering, after deducting expenses related to the offering, were approximately $66.0 million. We used the proceeds of this offering to repay certain debt and fund our acquisitions completed in 2000 and 2001 and for working capital and other general corporate purposes. In August 2000, we completed the acquisition of Advanced Computer Enterprises, which we accounted for as a pooling of interests. Except for this acquisition, we have accounted for all of our acquisitions since our initial public offering as purchase transactions in our financial statements. On January 4, 2001, we acquired the U.S. core data processing, check imaging and item processing operations, as well as the BancLine software system, from SLM. We paid $40.0 million in cash and issued or agreed to issue up to approximately 1.25 million shares of our common stock in the transaction. Effective February 1, 2001, we acquired from Netzee the asset/liability and regulatory reporting software of DPSC for approximately $14.1 million in cash and the assumption of $2.4 million of DPSC's net liabilities. Netzee used approximately $8.4 million of the cash proceeds to reduce its line of credit with us. During 2001, we completed several acquisitions. We paid $7.4 million net cash in connection with these acquisitions. 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 actual revenues are lower than we expect. To enhance our long-term competitive position, we may also make decisions regarding pricing, marketing, services and technology that could have an adverse near-term effect on our financial condition and operating results. In addition, our EFT revenues are based in large part on various interchange and transaction fees that Visa and MasterCard set. Any changes in these fees, whether as a result of a pending dispute or otherwise, could negatively impact our revenues. We believe, because of the foregoing factors and other risks discussed in our SEC filings, that quarter to quarter comparisons of our operating results are not a good indication of our future performance. Our operating results are likely to fall below the expectations of securities analysts or investors in some future quarter. In that event, the trading price of our common stock would likely decline, perhaps significantly. Results of Operations The following table sets forth the percentage of revenues represented by certain line items in our condensed consolidated statements of operations for the periods indicated.
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ Revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs of services 39.4 39.5 40.8 39.1 Selling, general and administrative expenses 34.7 38.9 34.2 39.3 Depreciation and amortization 9.5 6.2 9.4 6.2 ----- ----- ----- ----- Total operating expenses 83.6 84.6 84.4 84.6 ----- ----- ----- ----- Operating income 16.4 15.4 15.6 15.4 Other income, net 1.0 8.3 1.8 26.4 ----- ----- ----- ----- Income before provision for income taxes, equity in loss of affiliate and minority interest 17.4 23.7 17.4 41.8 Provision for income taxes 7.0 9.8 7.0 16.6 Equity in loss of affiliate (9.2) (35.7) (14.8) (35.9) Minority interest in income of consolidated subsidiary (0.0) (0.1) (0.0) (0.1) ----- ----- ----- ----- Net income 1.2 % (21.9)% (4.4)% (10.8)% ===== ===== ===== =====
9 Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Revenues. Revenues increased 75.8% to $30.4 million for the three months ended June 30, 2001 from $17.3 million for the three months ended June 30, 2000. The $13.1 million increase was primarily attributable to (a) $13.4 million generated by an increase in service fee income, and (b) a $220,000 increase in data communications management income, offset by (c) a $490,000 decrease in hardware sales. The increases are attributable to both internal growth and acquisitions and not to any significant increases in prices. Costs of Services. Costs of services increased 75.7% to $12.0 million for the three months ended June 30, 2001 from $6.8 million for the three months ended June 30, 2000. The $5.2 million increase was primarily attributable to (a) $5.2 million related to service fee income and (b) $310,000 related to data communications management, offset by (c) $370,000 decrease in hardware sales. The increases are attributable to both internal growth and acquisitions. Gross margins remained constant at 60.6% for the three months ended June 30, 2001, compared to 60.5% for the three months ended June 30, 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 56.8% to $10.5 million for the three months ended June 30, 2001 from $6.7 million for the three months ended June 30, 2000. The $3.8 million increase was primarily due to personnel added from acquisitions, additional personnel to support our growth and acquisitions and other miscellaneous expenses. As a result of the acquisitions of SLM and C-TEQ, selling, general and administrative expenses as a percentage of revenues decreased to 34.7% for the three months ended June 30, 2001, from 38.9% for the three months ended June 30, 2000. During the second quarter of 2001, we announced plans to consolidate the operations of our two Houston, Texas data center facilities, one of which was acquired from SLM, into a new facility. The closing and relocating of both facilities was completed during the quarter. In connection with the closure of the Houston facility that was not acquired from SLM, we recorded a restructuring charge of approximately $405,000 during the quarter ended June 30, 2001, which is included in selling, general, and administrative expenses in the accompanying statement of operations. The charge includes approximately $93,000 of severance related to several employees terminated during the quarter and approximately $312,000 of facility closure costs. The facility closure costs include moving expenses and other miscellaneous costs incurred after operations ceased in addition to the noncancelable operating lease obligation on the existing facility. All costs have been incurred as of June 30, 2001 with the exception of $275,000 related to the lease obligation which is included in accrued liabilities in the accompanying balance sheet. The amount represents the total remaining lease payments, less our estimate of rental income that we may receive by subleasing the facility during the remaining lease term. 10 Depreciation and Amortization. Depreciation and amortization increased 167.7% to $2.9 million for the three months ended June 30, 2001 from $1.1 million for the three months ended June 30, 2000. The $1.8 million increase was primarily attributable to additional property, plant and equipment and additional amortization from acquisitions. Other Income, Net. Other income, net decreased to $314,000 for the three months ended June 30, 2001 from $1.4 million for the three months ended June 30, 2000. The $1.4 million decrease was primarily due to a decrease in interest income and an increase in interest expense which corresponds to the decrease in short-term investments and increased borrowings. Provision for Income Taxes. Provision for income taxes increased to $2.1 million for the three months ended June 30, 2001 from $1.7 million for the three months ended June 30, 2000. The $400,000 increase was attributable to increased pre-tax profits. Equity in Loss of Affiliate. Equity in loss of affiliate decreased to $2.8 million for the three months ended June 30, 2001 from a loss of $6.2 million for the three months ended June 30, 2000. This amount is our share of Netzee's net loss. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Revenues. Revenues increased 73.7% to $57.4 million for the six months ended June 30, 2001 from $33.1 million for the six months ended June 30, 2000. The $24.4 million increase was primarily attributable to (a) $25.3 million generated by an increase in service fee income and (b) $650,000 generated by an increase in data communications management income, offset by (c) a $1.6 million decrease in hardware sales. These increases are attributable to both internal growth and acquisitions and not to any significant increases in prices. Costs of Services. Costs of services increased 81.3% to $23.4 million for the six months ended June 30, 2001 from $12.9 million for the six months ended June 30, 2000. The $10.5 million increase was primarily attributable to (a) $10.8 million related to service fee income and (b) $770,000 related to data communications management offset by (c) a decrease of $1.1 million in hardware sales. Gross margins decreased to 59.2% for the six months ended June 30, 2001, from 60.9% for the six months ended June 30, 2000 due to our acquisitions during 2001 of SLM and C-TEQ, which had lower margins than we did prior to these acquisitions. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 51.0% to $19.6 million for the six months ended June 30, 2001 from $12.0 million for the six months ended June 30, 2000. The $7.6 million increase was primarily due to additional personnel to support our growth and acquisitions and other miscellaneous expenses. As a result of the acquisitions of SLM and C-TEQ, selling, general and administrative expenses as a percentage of revenues decreased to 34.2% for the six months ended June 30, 2001, from 39.3% for the six months ended June 30, 2000. During the second quarter of 2001, we announced plans to consolidate the operations of our two Houston, Texas data center facilities, one of which was acquired from SLM, into a new facility. The closing and relocating of both facilities was completed during the quarter. In connection with the closure of the Houston facility that was not acquired from SLM, we recorded a restructuring charge of approximately $405,000 during the quarter ended June 30, 2001 which is included in selling, general, and administrative expenses in the accompanying statement of operations. The charge includes approximately $93,000 of severance related to several employees terminated during the quarter and approximately $312,000 of facility closure costs. The facility closure costs include moving expenses and other miscellaneous costs incurred after operations ceased in addition to the noncancelable operating lease obligation on the existing facility. All costs have been incurred as of June 30, 2001 with the exception of $275,000 related to the lease obligation which is included in accrued liabilities in the accompanying balance sheet. The amount represents the total remaining lease payments, less our estimate of rental income that we may receive by subleasing the facility during the remaining lease term. 11 Depreciation and Amortization. Depreciation and amortization increased 164.7% to $5.4 million for the six months ended June 30, 2001 from $2.0 million for the six months ended June 30, 2000. The $3.4 million increase was primarily attributable to additional property, plant and equipment and additional amortization from acquisitions. Other Income, Net. Other income, net decreased to $760,000 for the six months ended June 30, 2001 from $8.7 million for the six months ended June 30, 2000. The decrease was primarily due to decreases in the taxable component of the gain associated with the issuance of common stock of Netzee and to decreases in interest income. Provision for Income Taxes. Provision for income taxes decreased to $4.0 million for the six months ended June 30, 2001 from $5.5 million for the six months ended June 30, 2000. The decrease was attributable to a decrease in taxable gains associated with the issuance of common stock of Netzee offset by an increase associated with increased pre-tax profits. Equity in Loss of Affiliate. Equity in loss of affiliate was $8.5 million for the six months ended June 30, 2001 and $11.9 million for the six months ended June 30, 2000. This amount is our share of Netzee's net loss. 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. In July 2001, we filed a registration statement on Form S-3 with the SEC covering the offering of 4.0 million shares of our common stock, including 3.1 million shares to be offered by us and 900,000 shares by some of our shareholders. We estimate the sale of shares by us will result in approximately $93.0 million in net proceeds if the offering is completed. Cash and cash equivalents were $4.1 million at June 30, 2001 and $8.1 million at December 31, 2000. Short term investments with a maturity of one year or less were $8,000. Net cash provided by operating activities was $8.9 million for the six months ended June 30, 2001 compared to $1.6 million for the six months ended June 30, 2000. The increase in the net cash provided by operating activities was primarily attributable to an increase in net income. Net cash used in investing activities was $36.0 million for the six months ended June 30, 2001 compared to $56.5 million for the six months ended June 30, 2000. The decrease in net cash used in investing activities was primarily due to a decrease in our investments resulting from our acquisitions during 2001. Net cash provided by financing activities was $23.2 million for the six months ended June 30, 2001 compared to $56.6 million for the six months ended June 30, 2000. The decrease in net cash provided by financing activities was primarily due to the first quarter 2000 net proceeds from our public stock offering. During 1998, we entered into a credit facility with First Union National Bank. Under this facility, as amended during the third quarter of 1999, we may borrow up to $35.0 million for working capital and to fund acquisitions and related expenses. The First Union credit facility contains provisions which require us to maintain certain financial ratios and minimum net worth amounts and which restrict our ability to incur additional debt, make certain capital expenditures, enter into agreements for mergers, acquisitions or the sale of substantial assets and pay dividends. The First Union credit facility matures on June 30, 2002. Interest is payable monthly and outstanding principal amounts accrue interest, at our option, at an annual rate equal to either (a) a floating rate equal to the lender's prime rate minus .25%, or (b) a fixed rate based upon the 30-day LIBOR rate plus applicable margins. On June 30, 2001, the interest rate under this facility was approximately 5.1125% per year, and approximately $26.4 million was outstanding under the facility. On July 24, 2001, we signed a letter of intent with First Union to increase availability under the line of credit to $50 million and to extend the maturity date to June 1, 2004. We provide to Netzee, jointly with John H. Harland Company, a $20.0 million revolving line of credit secured by substantially all of Netzee's assets. Of the total $20.0 million available to Netzee, we provide $15.0 12 million and Harland provides $5.0 million on a pro rata basis with us. In February 2001, we paid Netzee $14.1 million in cash and assumed $2.4 million of DPSC's net liabilities in exchange for regulatory reporting software and other assets formerly owned by Netzee's subsidiary, DPSC. Netzee used approximately $8.4 million of the cash proceeds to pay down its line of credit with us. Netzee has subsequently borrowed additional funds from us, and as of June 30, 2001, Netzee owed us a total of $8.7 million under this line of credit. We finance this line of credit with cash on hand and additional borrowings under our credit facility with First Union. Netzee may require additional funds to support its operations and to repay its borrowings from us. Netzee may seek to raise capital through public or private offerings of debt or equity, the sale of assets or from other sources. No assurance can be given that additional funds will be available on terms favorable to Netzee, if at all. Netzee's ability to continue as a going concern and to meet its obligations as they may come due may depend upon its ability to raise additional capital funds. We do not 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. Since Netzee completed its initial public offering, we record only our relative percentage of Netzee's net losses. As of June 30, 2001, we owned approximately 28% of Netzee's outstanding common stock. Also, as of June 30, 2001, the carrying value of our investment in Netzee was $9.7 million which exceeded the market value of $4.0 million as of that date. We believe that this reduction in value is temporary. We believe that this reduction in value is temporary. However, we may in the future conclude that this reduction is other than temporary, such as if Netzee becomes unable to continue as a going concern. In that event we would have to write down the carrying values of our investment in and our advances to Netzee. In addition, Netzee has a history of losses and may never become profitable. We will continue to account for our investment in Netzee under the equity method, which will result in additional losses on our investment in and advances to Netzee until Netzee becomes profitable. The impact of Netzee's results of operations on our financial condition, including our shareholders' equity, is uncertain, and we may not benefit from our ownership in Netzee. On May 31, 2001, we entered into a loan agreement with SLM, the owner of approximately 6% of our common stock, under which we loaned SLM $12.0 million subject to various terms and conditions. Borrowings under the loan agreement bear interest at an annual rate equal to the one-month LIBOR plus 2% and are secured by up to approximately 1.25 million shares of our common stock now held or that may be earned by SLM. The loan matures on December 31, 2002 and requires mandatory prepayments from the proceeds of sales of our common stock by SLM until the loan is repaid in full. As of June 30, 2001, SLM owed us approximately $12.1 million under this loan agreement. SLM will repay the loan in full by using the proceeds of its sale of our common stock in the pending offering described above. We funded the cash portion of the purchase price of our acquisitions through the use of cash on hand and borrowings under our line of credit with First Union. While there can be no assurance, we believe that 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. Recent Accounting Pronouncements In June 2001 the Financial Accounting Standards Board approved Statement of Financial Accounting Standard No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill will cease on December 31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below is carrying value. The adoption of SFAS No. 142 will result in 13 our discontinuation of amortization of our goodwill; however, we will be required to test our goodwill for impairment under the new standard beginning in the first quarter of 2002, which could have an adverse effect on our future results of operations if an impairment occurs. Item 3. 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 June 30, 2001, we had $26.4 million outstanding under this facility, and, therefore we face risks of interest rate fluctuations. Changes in interest rates which dramatically increase the interest rate on the credit facility would make it more costly for us 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. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings We are not a party to, nor is any of our property subject to, any material legal proceedings, other than routine litigation incidental to our business. Item 2. Changes in Securities and Use of Proceeds Recent Sales of Unregistered Securities On January 4, 2001, we acquired certain assets of SLMsoft.com, Inc. In addition to cash and shares issued at closing, we also agreed to issue up to 385,872 shares as contingent consideration, to be issued if and when the contingencies are resolved. SLM has satisfied certain contingencies and now owns an additional 32,488 shares of our common stock. Approximately 353,384 shares remain available for issuance if SLM satisfies the remaining contingencies. We issued the securities in a private offering in reliance on the exemptions from registration under the Securities Act of 1933 provided by Section 4(2) and by Regulation D. The recipients of the common stock were SLM Canada, a publicly held Canadian company, and SLM Kansas, its wholly-owned subsidiary. SLM Canada and SLM Kansas represented their intention to acquire the securities for investment purposes only and not with a view to or for the sale in connection with any distribution of those shares, and appropriate legends were affixed to the share certificates issued in the transaction. The recipients of these securities were represented by counsel and had adequate access to information about InterCept. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On May 15, 2001, we held our annual meeting of shareholders. The results of the proposals submitted for vote at this meeting were as follows: 1. Election of two Directors (there were no abstentions or broker non-votes in connection with the election of directors). For Withheld John W. Collins 9,639,077 4,295 Donny R. Jackson 9,639,077 4,295 2. Ratification of Arthur Andersen LLP as our independent public accountants for the year ended December 31, 2001 (there were no broker non-votes in connection with the ratification of Arthur Andersen LLP). For 9,586,637 Against 55,185 Abstain 1,550 3. Approval of The InterCept Group, Inc. 2001 Employee Stock Purchase Plan (there were no broker non-votes in connection with the approval of the Plan). For 9,309,972 Against 332,080 Abstain 1,320 15 Item 5. Other Information The registrant hereby amends its report on Form 8-K filed on January 19, 2001, as amended on March 20, 2001, by deleting the text under Item 7 and replacing it with the following text: (a) Financial Statements of Business Acquired. Included as Exhibit 99.1 hereto and incorporated herein by reference. (b) Pro Forma Financial Information. Included as Exhibit 99.2 hereto and incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K. Exhibit No. Description ------- ----------- 10.1 Loan Agreement between The InterCept Group, Inc. and SLMsoft.com, Inc. dated May 31, 2001.* 10.2 Secured Promissory Note by and between InterCept and SLMsoft.com, Inc. dated May 31, 2001.* 10.3 Pledge Agreement by and between InterCept and SLMsoft.com, Inc. dated May 31, 2001* 10.4 Amendment No. 1 to Registration Rights Agreement between InterCept and SLMsoft.com, Inc. dated May 31, 2001.* 99.1 Financial Statements of SLMsoft.com, Inc. 99.2 Pro Forma Financial Statements of SLMsoft.com, Inc. * Incorporated by reference to Exhibits 99.1 through 99.4, respectively, in the registrant's Current Report on Form 8-K dated May 31, 2001 and filed with the SEC on July 2, 2001. (b) Reports on Form 8-K filed during the three months ended June 30, 2001. None. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE INTERCEPT GROUP, INC. July 25, 2001 /s/ John W. Collins - ------------- --------------------------- Date John W. Collins Chairman of the Board, Chief Executive Officer and President (principal executive officer) July 25, 2001 /s/ Scott R. Meyerhoff - ------------- --------------------------- Date Scott R. Meyerhoff Senior Vice President, Chief Financial Officer and Secretary (principal financial and accounting officer) 17 EX-99.1 2 dex991.txt FINANCIAL STATEMENTS OF SLMSOFT.COM, INC. EXHIBIT 99.1 SLMSoft.com, Inc. (Formerly Bankline Holding, Inc.) (a Kansas corporation and a subsidiary of SLMSoft.com, Inc., an Ontario corporation) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To SLMSoft.com, Inc.: We have audited the accompanying balance sheets of SLMSOFT.COM, INC. (a Kansas Corporation and a subsidiary of SLMSoft.com, Inc., an Ontario corporation) as of December 31, 1999 and 2000 and the related statements of operations, shareholders' equity (deficit), and cash flows for the period from January 1, 1998 to October 31, 1998, the period from November 1, 1998 to December 31, 1998, and the years ended December 31, 1999 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SLMSoft.com, Inc. as of December 31, 1999 and 2000 and the results of its operations and its cash flows for the period from January 1, 1998 to October 31, 1998, the period from November 1, 1998 to December 31, 1998, and the years ended December 31, 1999 and 2000 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia March 20, 2001 SLMSOFT.COM, INC. (A KANSAS CORPORATION) (A SUBSIDIARY OF SLMSOFT.COM, INC., AN ONTARIO CORPORATION) (Formerly Bankline Holding, Inc.) (in thousands) BALANCE SHEETS
ASSETS December 31, 1999 2000 ----------- --------- CURRENT ASSETS: Cash $ 0 $ 89 Accounts receivable, net of allowance for doubtful accounts of $613 and $989 in 1999 and 2000, respectively 4,858 3,194 Prepaid and other current assets 553 937 Deferred tax asset 0 5,340 -------- -------- Total current assets 5,411 9,560 DUE FROM PARENT - SOFTWARE 5,260 8,888 PROPERTY AND EQUIPMENT, net 7,663 5,547 INTANGIBLE ASSETS, net of accumulated amortization of $1,927 and $4,554 in 1999 and 2000, respectively 4,905 2,379 OTHER NONCURRENT ASSETS 135 178 -------- -------- Total assets $ 23,374 $ 26,552 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt $ 1,001 $ 2,961 Current portion of capital lease obligations 1,422 259 Line of credit 4,333 0 Due to parent 1,669 25,225 Accounts payable and accrued expenses 8,604 8,263 Deferred revenues 1,567 1,490 ------- -------- Total current liabilities 18,596 38,198 ------- -------- LONG-TERM DEBT, NET OF CURRENT MATURITIES 4,330 0 CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 2,730 125 ------- -------- Total liabilities 25,656 38,323 ------- -------- SHAREHOLDERS' EQUITY (DEFICIT): Cumulative convertible preferred stock; par value $.01; authorized 1,750,000 shares, issued 750 750 and outstanding 750,000 shares Common stock, $.01 par value; authorized 2,000,000 shares; issued 1,290,306 shares, 13 13 outstanding 1,149,311 shares in 1999 and 2000 Treasury Stock (391) (391) Additional paid-in capital 10,697 10,780 Accumulated deficit (13,351) (22,923) -------- -------- Total shareholders' equity (deficit) (2,282) (11,771) -------- -------- $ 23,374 $ 26,552 ======== ========
The accompanying notes are an integral part of these balance sheets. The purchase method of accounting was used to record assets acquired and liabilities assumed by SLMSoft.com, Inc. Such accounting generally results in increased depreciation and amortization reported in future periods. Accordingly, the accompanying financial statements of the Predecessor and SLMSoft.com, Inc. are not comparable in all material respects since those financial statements report financial position, results of operations, and cash flows of these two separate entities. 3 SLMSOFT.COM, INC. (A KANSAS CORPORATION) (A SUBSIDIARY OF SLMSOFT.COM, INC., AN ONTARIO CORPORATION) (Formerly Bankline Holding, Inc.) (in thousands)
STATEMENTS OF OPERATIONS Predecessor ----------- For the For the Period From Period From January 1, 1998 to November 1, 1998 to October 31, 1998 December 31, 1998 1999 2000 ------------------ ------------------- --------- --------- REVENUES: Service fee income $11,768 $4,297 $ 28,898 $ 30,676 Equipment, product, and other income 4,771 1,208 3,526 2,311 ------- ------ -------- -------- Total revenues 16,539 5,505 32,424 32,987 ------- ------ -------- -------- COSTS AND EXPENSES: Cost of installation, maintenance, and usage 13,594 4,356 23,558 22,931 Net royalties to related party 0 275 4,646 4,646 Selling, general and administrative expenses 2,865 645 14,282 15,190 Depreciation and amortization 718 163 3,718 5,202 ------- ------ -------- -------- Total costs and expenses 17,177 5,439 46,204 47,969 ------- ------ -------- -------- OPERATING (LOSS) INCOME (638) 66 (13,780) (14,982) INTEREST EXPENSE (248) (31) (490) (704) INTEREST INCOME-RELATED PARTY 0 97 774 774 ------- ------ -------- -------- (LOSS) EARNINGS BEFORE INCOME TAXES (886) 132 (13,496) (14,912) (BENEFIT) FOR INCOME TAXES 0 0 0 (5,340) MINORITY INTEREST 0 (52) 65 0 ------- ------ -------- -------- NET (LOSS) INCOME $ (886) $ 80 $(13,431) $ (9,572) ======= ====== ======== ========
The accompanying notes are an integral part of these statements. The purchase method of accounting was used to record assets acquired and liabilities assumed by SLMSoft.com, Inc. Such accounting generally results in increased depreciation and amortization reported in future periods. Accordingly, the accompanying financial statements of the Predecessor and SLMSoft.com, Inc. are not comparable in all material respects since those financial statements report financial position, results of operations, and cash flows of these two separate entities. 4 SLMSOFT.COM, INC. (A KANSAS CORPORATION) (A SUBSIDIARY OF SLMSOFT.COM, INC., AN ONTARIO CORPORATION) (Formerly Bankline Holding, Inc.) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (in thousands, except shares)
Preferred Stock Common Stock ---------------------- ---------------- Treasury Shares Amount Shares Amount Stock --------- ------ ------ ------ --------- PREDECESSOR: Balance, December 31, 1997 0 $ 0 1,290,306 $13 $ (51) Sale of 750,000 shares of cumulative convertible preferred stock 750,000 750 0 0 0 Purchase of 100,995 shares of common stock for the treasury 0 0 0 0 (340) Dividends on cumulative convertible preferred stock 0 23 0 0 0 Net loss 0 0 0 0 0 ------- ---- --------- --- ----- Balance, October 31, 1998 750,000 $773 1,290,306 $13 $(391) ======= ==== ========= === ===== SLMSOFT.COM, INC. (A SUBSIDIARY OF SLMSOFT.COM, INC.): Initial parent investment, November 13, 1998 750,000 $750 743,297 $ 7 $(391) Net loss 0 0 0 0 0 ------- ---- --------- --- ----- Balance, December 31, 1998 750,000 750 743,297 7 (391) Additional parent investment, March 31, 1999 0 0 547,009 6 0 Amortization of deferred stock compensation 0 0 0 0 0 Net loss 0 0 0 0 0 ------- ---- --------- --- ----- Balance, December 31, 1999 750,000 750 1,290,306 13 (391) Amortization of deferred stock compensation 0 0 0 0 0 Net loss 0 0 0 0 0 ------- ---- --------- --- ----- Balance, December 31, 2000 750,000 $750 1,290,306 $13 $(391) ======= ==== ========= === =====
Total Shareholders' Accumulated Equity APIC Deficit (Deficit) -------- ----------- ------------ PREDECESSOR: Balance, December 31, 1997 $ 1,955 $ (815) $ 1,102 Sale of 750,000 shares of cumulative convertible preferred stock 0 0 750 Purchase of 100,995 shares of common stock for the treasury 0 0 (340) Dividends on cumulative convertible preferred stock 0 (23) 0 Net loss 0 (886) (886) ------- -------- -------- Balance, October 31, 1998 $ 1,955 $ (1,724) $ 626 ======= ======== ======== SLMSOFT.COM, INC. (A SUBSIDIARY OF SLMSOFT.COM, INC.): Initial parent investment, November 13, 1998 $ 3,716 $ 0 $ 4,082 Net loss 0 80 80 ------- -------- -------- Balance, December 31, 1998 3,716 80 4,162 Additional parent investment, March 31, 1999 6,885 0 6,891 Amortization of deferred stock compensation 96 0 96 Net loss 0 (13,431) (13,431) ------- -------- -------- Balance, December 31, 1999 10,697 (13,351) (2,282) Amortization of deferred stock compensation 83 0 83 Net loss 0 (9,572) (9,572) ------- -------- -------- Balance, December 31, 2000 $10,780 $(22,923) $(11,771) ======= ======== ========
The accompanying notes are an integral part of these statements. The purchase method of accounting was used to record assets acquired and liabilities assumed by SLMSoft.com, Inc. Such accounting generally results in increased depreciation and amortization reported in future periods. Accordingly, the accompanying financial statements of the Predecessor and SLMSoft.com, Inc. are not comparable in all material respects since those financial statements report financial position, results of operations, and cash flows of these two separate entities. 5 SLMSOFT.COM, INC. (A KANSAS CORPORATION) (A SUBSIDIARY OF SLMSOFT.COM, INC.) (Formerly Bankline Holding, Inc.) (in thousands) STATEMENTS OF CASH FLOWS
Predecessor ------------------- For the For the Period From Period From January 1, 1998 to November 1, 1998 to October 31, 1998 December 31, 1998 1999 2000 ------------------ ------------------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (886) $ 80 $(13,431) $(9,572) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 718 163 3,718 5,202 Amortization of deferred compensation 0 0 96 83 Deferred tax benefit 0 0 0 (5,340) Non cash royalty expense 0 275 4,646 4,646 Non cash interest income 0 (97) (774) (774) Changes in assets and liabilities: Accounts receivable (1,918) (943) (721) 1,664 Accounts payable and accrued expenses 270 1,686 5,405 (342) Prepaid expenses (396) (110) 751 (425) Deferred revenues 268 212 101 (77) Other assets 53 0 0 0 Minority interest 0 52 (65) 0 ------- ------ ----- ------ Net cash (used in) provided by operating activities (1,891) 1,318 (274) (4,935) ------- ------ ----- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid /received in acquisitions 1,419 0 (320) (101) Capitalized software development (57) 0 0 0 Due from Parent 0 (4,770) (1,670) 7,747 Purchase of property and equipment (507) (508) (956) (358) ------- ------ ----- ------ Net cash provided by (used in) investing activities 855 (5,278) (2,946) 7,288 ------- ------ ----- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long term debt 805 5,673 4,407 9 Payments on long term debt (1,137) (1,475) (419) (1,765) Payments on capital lease obligations (374) (156) (940) (508) Purchase of treasury stock (340) 0 0 0 Payment of preferred dividends 0 (23) 0 0 Sale of preferred stock 750 0 0 0 Collection of stock subscription 750 0 0 0 ------- ------ ----- ------ Net cash provided by (used in) financing activities 454 4,019 3,048 (2,264) ------- ------ ----- ------ NET (DECREASE) INCREASE IN CASH (582) 59 (172) 89 CASH, beginning of period 695 113 172 0 ------- ------ ----- ------ CASH, end of period $ 113 $ 172 $ 0 $ 89 ======= ======= ===== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 259 $ 73 $ 457 $ 723 ======= ======= ===== =======
The accompanying notes are an integral part of these statements. The purchase method of accounting was used to record assets acquired and liabilities assumed by SLMSoft.com, Inc. Such accounting generally results in increased depreciation and amortization reported in future periods. Accordingly, the accompanying financial statements of the Predecessor and SLMSoft.com, Inc. are not comparable in all material respects since those financial statements report financial position, results of operations, and cash flows of these two separate entities. 6 SLMSOFT.COM, INC. (A KANSAS CORPORATION) (A SUBSIDIARY OF SLMSOFT.COM, INC.) (formerly Bankline Holding, Inc.) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, 1999, AND 2000 1. ORGANIZATION AND NATURE OF BUSINESS Bankline Holding, Inc. ("Predecessor" or "Bankline"), a Kansas corporation, provided data processing services, computer hardware, and internally developed software and maintenance to financial institutions located throughout the United States through its data centers. On November 13, 1998, Bankline's stockholders entered into an agreement with SLMSoft.com, Inc., an Ontario corporation (formerly SLM Software, Inc.) ("SLM Parent") whereby all of the outstanding convertible preferred stock and a portion of the common stock of Bankline was acquired by SLM Parent for 938,467 shares of SLM Parent common stock valued at approximately $3.3 million and cash of $750,000. The purchase price was determined by reference to the fair market value of the SLM Parent stock issued in the acquisition based on the trading value on the Toronto Stock Exchange of $3.55 per share on November 13, 1998. The acquisition of Bankline was accounted for as a purchase. The results of Bankline have been consolidated with SLM Parent's operations since October 31, 1998. Minority interest in income (loss) on the accompanying financial statements represents the minority shareholder's proportionate share of the equity and earnings of the Company for the period from acquisition to March 31, 1999, at which time the remaining common stock of Bankline was purchased by SLM Parent for cash of approximately $6.9 million. The excess of the purchase price over the minority interest totaling approximately $6.6 million was allocated to goodwill and is being amortized over approximately 3 years. In 1999, Bankline's name was changed to SLMSoft.com, Inc., a Kansas corporation ("SLM") or ("the Company") and operated as a wholly owned subsidiary of SLM Parent. The excess of the purchase price over the net assets acquired was allocated to purchased software. The software was then immediately sold to SLM Parent on the acquisition date. The Company sold the software for approximately $9.7 million and recorded a receivable from SLM Parent in the same amount. The Company had a book value of the software in the amount of $1.2 million. As a result, the Company recorded a deferred gain in the amount of $8.5 million that will be amortized to net royalties related parties over the three year term of the software license agreement. The receivable, net of the deferred gain, is included in the accompanying balance sheet in Due from Parent- software. The receivable bears interest at 8%. Interest income on the receivable of $97,000, $774,000, and $774,000 was recorded for the two months ended December 31, 1998 and the years ended December 31, 1999 and 2000, respectively. Total amortization of the deferred gain for the years ended December 31, 1999 and 2000 was $357,000 and $2.9 million, respectively. SLM pays royalties to SLM Parent for the use of the software. Royalties totaled approximately $632,000, $7.5 million, and $7.5 million for the period from November 1, 1998 to December 31, 1998, and the years ended December 31, 1999 and 2000, respectively, and are included in net royalties related parties in the accompanying financial statements. The acquisition included contingently issuable shares of SLM Parent stock which were to be earned upon achievement of 7 specified earnings goals in 1999 through 2001. As of December 31, 2000, none of the contingent shares had been earned or issued. History of Losses SLM has incurred substantial operating losses and negative cash flows from operations due to: a pricing structure of little or no up-front fees, increased sales staff, expansion of data center operations and increased staff required to support growth. The Company incurred net losses of approximately $886,000, $13.4 million and $9.6 million for the period from January 1, 1998 to October 31, 1998, and the years ended December 31, 1999 and 2000, respectively. The Company had net income of approximately $80,000 for the period from November 1, 1998 to December 31, 1998. The Company's operations used cash of approximately $1.9 million, $274,000 and $4.9 million for the period from January 1, 1998 to October 31, 1998 and the years ended December 31, 1999 and 2000, respectively. For the period November 1, 1998 to December 31, 1998 operations provided cash of approximately $1.3 million. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements of the Predecessor for the period from January 1, 1998 to October 31, 1998 include the accounts of Bankline and its wholly- owned subsidiaries, Interdyne Computer Concepts, Inc., Bankline, Inc., Bankline Texas, Inc., Bankline New England, Inc., Bankline Mid-America, Inc., and Questpoint, Inc. All significant intercompany accounts have been eliminated in consolidation. On the date of the acquisition by SLM Parent, these subsidiaries were merged into the Company. The financial statements of the Company for the period from November 1, 1998 to December 31, 2000 have been derived from the statements of SLM and have been prepared to present the financial position, results of operations, and cash flows on a stand-alone basis. A portion of the operating expenses in the accompanying financial statements have been allocated to SLM by SLM Parent. These costs have been specifically identified and represent administrative salaries of employees of SLM Parent devoting time to the Company. These allocations represent management's best estimate of what costs would have been had the Company been operated as a separate entity. SLM Parent has funded the operations of the Company since November 13, 1998. All funding has been included in the Due From/Due to Parent in the accompanying financial statements. As of December 31, 1999 and 2000, the Company had a receivable of $5,260,000 and $8,888,000, respectively, from its parent. This amount relates to the sale of software discussed in Note 1. At December 31, 1999 and 2000, the Company owed its parent $1,669,000 and $25,225,000, respectively, which relates primarily to the assumption of debt by its parent (Note 5) and accrual of royalties due on software as discussed in Note 1. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues 8 and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. 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. Unbilled receivables Unbilled receivables represent revenues earned but not billed as of each period end and are included in accounts receivable in the accompanying financial statements. Unbilled receivables totaled $2,097,000 and $205,000 as of December 31, 1999 and 2000, respectively. Property and Equipment Property and equipment are stated at cost. Major property additions, replacements, and betterments are capitalized, while maintenance and repairs which do not extend the useful lives of these assets are expensed as incurred. Depreciation is provided using the straight-line method over the useful life of the asset. Estimated useful lives for the Company's assets are as follows: Computer equipment 3 to 5 years Computer software 3 to 5 years Furniture and fixtures 5 to 7 years Leasehold improvements shorter of life of the lease or life of the asset, generally 5 years Intangible Assets The Company's intangible assets include goodwill associated with certain acquisitions discussed in Note 3. Amortization expense for the period from January 1, 1998 to October 31, 1998, for the period from November 30, 1998 to December 31, 1998, and for the years ended December 31, 1999 and 2000 was $16,000, $0, $1,927,000 and $2,627,000, respectively. The carrying amount of the intangible assets are reviewed for impairment when events and circumstances indicate that their 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 is expected to be less than the recorded amount of the intangible, the Company' s carrying value of the intangible asset will be reduced to its estimated fair value. 9 Capitalized Software Development Costs Capitalized software development costs represents software acquired as well as capitalized software development costs for software to be sold. Computer software development costs are charged to research and development expense until technological feasibility of the software is established, after which remaining 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." Amortization of capitalized software development costs begins as products are made available for sale or as the related product is put into use with annual amortization equal to the greater of the amount computed using the ratio that current gross revenues bear to the total of current and anticipated future gross revenues for the product or the straight-line method over the remaining economic life of the product which is five to seven years. The Company capitalized $57,000 in 1998 and subsequent to the sale of the software to SLM Parent in 1998 (Note 1), the Company ceased capitalization as the primary focus of the development department was primarily repairs and maintenance related. Amortization expense recorded by the Predecessor for the period from January 1, 1998 to October 31, 1998 was approximately $176,000. The software products were sold to SLM Parent after acquisition of Bankline. See Note 1 to the financial statements. Segment Reporting The Company does not disclose segment information as it believes it has only one segment. The Company offers 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 The Company's revenues include core and item processing fees, software license fees, software maintenance, and hardware sales, installation and maintenance. Core and item processing fee income is recognized as services are performed. Revenue from software license fees, hardware 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, typically 12 months. Revenue from software sales is recognized in accordance with the American Institute of Certified Public Accountants Statement of Position No. 97-2, "Software Revenue Recognition." Long-Lived Assets The Company periodically reviews the values assigned to long-lived assets to determine if any impairments have occurred. Management believes that the long-lived assets on the accompanying balance sheets are appropriately valued. 10 Income Taxes The Company uses the liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred tax assets or liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to be settled or realized. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. Fair Value of Financial Instruments The fair value of financial instruments classified as current assets or liabilities, including cash, accounts receivable, and accounts payable, approximate carrying value due to the short-term maturity of the instruments. The fair value of the line of credit approximates carrying value as the interest rates attached to this line of credit are based on current market rates. Advertising Costs The Company expenses all advertising costs as incurred. Comprehensive Income (Loss) Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in shareholders' equity (deficit). For the period from January 1, 1998 to October 31, 1998, the period from November 1, 1998 to December 31, 1998, and the years ended December 31, 1999 and 2000, comprehensive income (loss) is the same as the net loss as presented in the accompanying statements of operations. New Accounting Pronouncements In June of 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 statement of financial position and measure those instruments at fair value. The Company adopted the new statement on January 1, 2001. The Statement did not have a significant impact on the Company's 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 when revenues are taken into account for purposes of a company's financial statements. The Company adopted SAB 101 in all periods presented. 11 3. ACQUISITIONS In July 1998, Bankline purchased Blackstone Financial, a data processing company operating primarily in Massachusetts, for approximately $33,000. The acquisition was accounted for as a purchase. The consideration exchanged exceeded the fair value of the net assets received by approximately $47,000. The amount was allocated to goodwill and was being amortized over a period of 4 years. The results of operations of the acquired business have been included in Bankline's financial statements from the date of acquisition. The agreement also included contingent consideration equal to 40% of net profits of Blackstone Financial for the three months ended December 31, 1998 and 2% of the gross monthly revenues for the nine months ended September 30, 1999. The final amount of contingent consideration paid was immaterial to the results of operations of the Company. The fair value of the net assets was redetermined in the acquisition of Bankline by SLM in 1998. Effective October 1, 1998, Bankline purchased Questpoint Holdings, Inc. and Questpoint Check Services, E.P. ("Questpoint"), a data processing company operating six centers in New Jersey, for a cash payment of approximately $215,000. In consideration of assuming the assets and liabilities of Questpoint, the Company received $1,751,000 of cash from the seller in connection with the acquisition, resulting in net cash proceeds of approximately $1,536,000. The acquisition has been accounted for using the purchase method of accounting. Under this method, the purchase price has been allocated among the assets and liabilities of the acquiree at their fair values as of the acquisition date. The excess of the fair value over the costs of net assets acquired represents negative goodwill. All long term assets were reduced to zero and negative goodwill of Questpoint as of the acquisition date was being accreted to earnings on a straight-line basis over a period of four years. The operations of the Company include the operations of the acquiree from the acquisition date. The fair value of the net assets associated with this acquisition was redetermined in the acquisition of Bankline by SLM in 1998. Effective January 4, 1999, the Company purchased the assets of Systems Analysis, Inc., ("SAI") a data processing company operating primarily in Washington, for approximately $320,000. The acquisition was accounted for as a purchase. The consideration exchanged exceeded the fair value of the assets received by approximately $194,000. The amount was allocated to goodwill and is being amortized over a period of 7 years. The results of operations of the acquired business have been included in the Company's consolidated financial statements from the date of acquisition. The agreement also included contingent consideration equal to 30% of net profits of SAI for the first 24 months following the acquisition, up to a maximum of $250,000. No additional contingent consideration has been paid. During 2000, the Company made a payment of approximately $101,000 which represented a contingent payment related to a 1996 acquisition completed by Bankline. Goodwill is being amortized over 4 years. 12 4. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1999 and 2000 consist of the following:
1999 2000 ------------ ----------- Computer equipment $ 5,470,000 $ 5,759,000 Computer equipment under capital lease 1,685,000 1,786,000 Computer software 1,192,000 1,201,000 Furniture and fixtures 500,000 529,000 Leasehold improvements 801,000 801,000 Less accumulated depreciation (1,985,000) (4,529,000) ----------- ----------- Property and equipment, net $ 7,663,000 $ 5,547,000 =========== ===========
Depreciation expense for the period from January 1, 1998 to October 31, 1998, for the period from November 1, 1998 to December 31, 1998, and for the years ended December 31, 1999 and 2000 was approximately $702,000, $161,000, $1,791,000 and $2,575,000, respectively. 13 5. LONG-TERM DEBT Long-term debt at December 31, 1999 and 2000 consists of the following:
1999 2000 ---------- ---------- Term loan payable to bank, maturing November 2003, payable in 60 monthly installments of principal and interest of $77,000, bearing interest at 8.5%; secured by all assets of the Company and guaranteed by SLM Parent; repaid in 2000 $3,444,000 $ 0 Term loan payable to bank, maturing August 2004, payable in 60 monthly installments of principal and interest of $41,000, bearing interest at 8.5%; secured by all assets of the Company and guaranteed by SLM Parent; repaid in 2000 1,887,000 0 $5.5 million revolving line of credit payable to bank, as amended; repaid in 2000 4,333,000 0 Term loan payable to bank, maturing September 2001, payable in 14 monthly installments of principal and interest of $113,000, bearing interest at prime plus .5%; secured by certain assets of the Company; repaid in full in 2001 0 2,961,000 ---------- ---------- Total 9,664,000 2,961,000 Less current maturities 5,334,000 2,961,000 ---------- ---------- Long-term debt $4,330,000 $ 0 ========== ==========
In 2000, SLM Parent entered into a new financing arrangement with a bank. The remaining balance of the 1999 term loans outstanding as well as the revolving line of credit were paid off with this facility. The repayment has been reflected in the accompanying financial statements in the due to /from Parent. The Parent's new facility is secured by substantially all assets of SLM Parent as well as the Company. Also in 2000, the Company renegotiated certain of its capital lease obligations and converted them into the above term loan payable to bank. 6. INCOME TAXES The Company has incurred net operating losses ("NOL") since inception. As of December 31, 2000, the Company has NOL carryforwards of approximately $29.3 million available to offset its future income tax liability. The NOL carryforwards begin to expire in 2017. Due to the uncertainty of the realizability of the net operating losses, the Company has not reflected in the accompanying statements of operations an income tax benefit for the periods ending December 31, 1998 or 1999 and recorded a valuation allowance equal to the net deferred tax 14 assets of the Company at December 31, 1999. Additionally, the Company's net operating loss carryforward could be limited by Section 382 of the Internal Revenue Code upon a change in the ownership of the Company of greater than 50%. The components of the deferred tax assets and liabilities are as follows as of December 31, 1999 and 2000:
1999 2000 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 4,119,000 $11,121,000 Deferred gain on sale of software 2,010,000 925,000 Accounts receivable 233,000 376,000 Other 29,000 29,000 ----------- ----------- Total deferred tax assets 6,391,000 12,451,000 Deferred tax liabilities: Accelerated depreciation (639,000) (1,039,000) ----------- ----------- Valuation allowance (5,752,000) (6,072,000) ----------- ----------- Net deferred tax assets $ 0 $ 5,340,000 =========== ===========
The components of the Company's benefit for income taxes was primarily deferred federal and state benefits. The Company's effective tax rate differed from the statutory rate primarily due to the establishment of a valuation allowance against the deferred tax assets, as well as nondeductible meals and entertainment which represents less than 1% of the difference between the statutory rate and the effective rate for all periods presented. State taxes were approximately 4% per year. The Company has reduced the valuation allowance at December 31, 2000 and established a deferred tax asset as the Company expects to be able to utilize a portion of it's net operating loss carryforward to offset the gain related to the sale of certain of the Company's assets to The InterCept Group, Inc. (Note 12). 7. STOCK OPTIONS During 1998, 1999, and 2000, options to purchase shares of SLM Parent common stock were issued to various employees of the Company. The options vest ratably over 3 to 4 years and expire after 10 years. 15 A summary status of the outstanding stock options and changes during the year is presented below:
Price Weighted Average Shares Range Option Price ----------- ------------- ----------------- Outstanding at November 1, 1998 0 Granted 588,117 $ 3.13 $3.13 ------- Outstanding at December 31, 1998 588,117 $ 3.13 $3.13 Granted 351,500 $4.43- $4.82 $4.71 ------- Outstanding at December 31, 1999 939,617 $ 3.13-$4.82 $3.72 Granted 4,000 $ 3.90 $3.90 Terminated (4,000) $ 4.43 $4.43 ------- Outstanding at December 31, 2000 939,617 $3.13- $4.82 $3.72 =======
Statement of Financial Accounting Standards No. 123 During 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting methodology required by APB Opinion No. 25 must make pro forma disclosures of net income and, if presented, earnings per share as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock based compensation plans under APB Opinion No. 25. Certain options were issued at a price less than fair value. The Company is recognizing the difference between the fair value and the exercise price as stock compensation expense ratably over the vesting period in accordance with APB Opinion No. 25. Approximately $96,000 and $83,000 of stock compensation expense was recorded in 1999 and 2000, respectively for options issued at less than fair market value. The Company has also computed, for pro forma disclosure purposes, the value of all options issued to its employees using the Black-Scholes option pricing model prescribed by SFAS No. 123 and the following weighted-average assumptions:
1998 1999 2000 ----------- ---------- ---------- Risk-free interest rate 4.5% 5.2% 5.8% Expected dividend yield 0% 0% 0% Expected lives Five years Five years Five years Expected volatility 83.6% 83.6% 83.6%
The weighted average fair value of options for the stock granted to employees of the Company in 1998, 1999 and 2000 was $2.52, $2.75 and $3.23 per share, respectively. The total value of options for the SLM Parent common stock granted to employees of the 16 Company during 1998, 1999 and 2000 was computed as approximately $1,480,000, $965,000 and $13,000, respectively, which would be amortized on a pro forma basis over the vesting period of the options. If the Company had accounted for these plans in accordance with SFAS No. 123, the Company's net loss would have been $2,000, $14,020,000, and $10,082,000 for the two months ended December 31, 1998 and the years ended December 31, 1999 and 2000, respectively. 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:
Weighted Exercise Weighted Average Price Number Average Contractual Range of Shares Price Life (in years) ----------- ----------- ------------- ----------------- $3.13-$4.43 689,617 $3.32 8.0 4.82- 4.82 250,000 4.82 8.9
At December 31, 2000, 525,161 options for SLM Parent common stock with a weighted average exercise price of $3.52 were exercisable by employees of the Company. In connection with the acquisition discussed in Note 12, these options were fully vested and were not assumed by The InterCept Group, Inc. 8. SHAREHOLDERS' EQUITY In 1998, one of Bankline's major shareholders who is also a customer purchased 750,000 of cumulative convertible preferred stock. The stock paid dividends at the prime rate and was convertible into shares of common stock at the greater of the liquidation value ($1.00 per share), plus accrued unpaid dividends divided by $3.19, or an amount based on multiple of earnings. The Company recorded related dividends of $23,000 during 1998. Dividends ceased at the purchase of Bankline in November of 1998. 9. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases various equipment and facilities under operating lease agreements. Rental expense for the period from January 1, 1998 to October 31, 1998, for the period from November 30, 1998 to December 31, 1998, and for the years ended December 31, 1999 and 2000 was $558,000, $276,000, $1.5 million and $1.6 million, respectively. Future minimum annual obligations under these leases as of December 31, 2000 are as follows: 17
2001 $1,354,000 2002 1,200,000 2003 817,000 2004 488,000 2005 397,000 Thereafter 194,000 ---------- Total $4,450,000 ==========
The Company also leases equipment under capital leases. Future minimum lease payments as of December 31, 2000 are as follows:
2001 $ 282,000 2002 78,000 2003 30,000 2004 25,000 --------- Total future minimum lease payments 415,000 Less amount representing interest (31,000) --------- Present value of future minimum lease payments 384,000 --------- Less current portion (259,000) --------- Noncurrent portion $ 125,000 =========
Litigation The Company is subject to litigation related to matters arising in the normal course of business. As of December 31, 2000, management is not aware of any unasserted, asserted, or pending material litigation or claims against the Company. 10. EMPLOYEE BENEFITS The Company maintains a defined contribution 401(k) savings plan. Employees may participate in the plan after completing 90 days of employment. The Company matches 25% of the first 5% of eligible wages contributed by employees. Contributions to the plan for the period from January 1, 1998 to October 31, 1998, for the period from November 1, 1998 to December 31, 1998, and for the years ended December 31, 1999 and 2000 were $35,000, $15,000, $271,000 and $93,000, respectively. 11. RELATED PARTY TRANSACTIONS The Company leases office space from an entity owned by an officer and former shareholder of Bankline. The lease requires monthly payments of approximately $33,000 through November 2006, with four five-year options to renew. Rent expense paid to the affiliate for the period from January 1, 1998 to October 31, 1998, for the period from 18 November 1, 1998 to December 31, 1998, and for the years ended December 31, 1999 and 2000 was $201,000, $66,000, $397,000 and $397,000, respectively. On January 1, 1998, the Company purchased the minority interest of Bankline MidAmerica, Inc. held personally by one of the Company's stockholders in exchange for approximately $73,000. 12. SUBSEQUENT EVENTS On January 4, 2001 SLM Parent and the Company divested certain assets of the check item and back office processing portion of the Company. Total proceeds consisted of $40 million and 1,254,000 shares of the purchaser, The InterCept Group, Inc. ("InterCept"), valued at approximately $28.0 million. Of the $40 million, $5 million was advanced to SLM Parent in December 2000, $32.5 million was paid on January 4, 2001, and $2.5 million will be kept in escrow to satisfy unresolved contingencies existing at the closing date. Of the 1,254,000 shares, 609,000 were issued to SLM Parent at closing and 258,000 shares will be kept in escrow to satisfy unresolved contingencies existing at the closing date. The remaining 386,000 shares represent contingent consideration and are subject to continuation of the revenue stream associated with certain customers. The Company licenses core processing software, to InterCept for certain of its financial institutions. Revenues related to InterCept for the period from January 1, 1998 to October 1, 1998, the period from November 1, 1998 to December 31, 1998, and the years ended December 31, 1999 and 2000 totaled $167,000, $41,000, $182,000, and $148,000, respectively. As of December 31, 1999 and 2000, InterCept owed approximately $76,000 and $76,000, respectively, to the Company which is included in accounts receivable in the accompanying financial statements. Deferred revenue of the Company as of December 31, 1999 and 2000 included approximately $0 and $89,000, respectively, representing payments for future services to InterCept. In connection with the acquisition of the Company by InterCept, the Company entered into a settlement agreement with one of its major customers which resulted in a net payment of approximately $421,000. All related amounts were fully accrued for as of December 31, 2000. 19 EX-99.2 3 dex992.txt PRO FORMA FINANCIAL STATEMENTS OF SLMSOFT.COM, INC Exhibit 99.2 The InterCept Group, Inc. Unaudited Pro Forma Condensed Consolidated Statement of Income As of December 31, 1999
(a) (b) Historical US Operations Pro Forma Pro Forma Consolidated SLMsoft.com Adjustments Consolidated ------------ ------------- ----------- ------------ Revenues $ 52,359 $ 32,424 $ (182) (c) $ 84,601 Cost of services 20,452 28,204 (182) (c) - - (4,646) (d) 43,828 Selling, general and administrative expense 20,992 14,282 35,274 Depreciation and amortization 4,462 3,718 3,145 (e) 11,325 -------- -------- ------- -------- Total operating expense 45,906 46,204 (1,683) 90,427 Operating income 6,453 (13,780) 1,501 (5,826) Interest and other income, net 39,172 284 - 39,456 -------- -------- ------- -------- Income before provision for income taxes and minority interest 45,625 (13,496) 1,501 33,630 Provision for income taxes 20,212 - (4,858) (f) 15,354 Equity in loss of affiliate (15,352) - - (15,352) Minority interest (120) 65 - (55) -------- -------- ------- -------- Net loss before preferred dividends 9,941 (13,431) 6,359 2,869 Preferred dividends - - - -------- -------- ------- -------- Net loss attributable to common shareholders $ 9,941 $(13,431) $ 6,359 $ 2,869 ======== ======== ======= ======== Pro forma net loss per share $ 0.94 $ 0.25 ======== ======== Pro forma weighted average common and common equivalent shares outstanding 10,564 11,431
Exhibit 99.2 The InterCept Group, Inc. Unaudited Pro Forma Condensed Consolidated Statement of Income As of December 31, 2000
(a) (b) Historical US Operations Pro Forma Pro Forma Consolidated SLMsoft.com Adjustments Consolidated ------------ ------------- ----------- ------------ Revenues $ 69,639 $ 32,987 $ (148) (c) $102,478 Cost of services 26,952 27,577 (148) (c) - - (4,646) (d) 49,735 Selling, general and administrative expense 27,017 15,190 - 42,207 Depreciation and amortization 4,403 5,202 3,145 (e) 12,750 -------- -------- ------- -------- Total operating expense 58,372 47,969 (1,649) 104,692 Operating income 11,267 (14,982) 1,501 (2,214) Interest and other income, net 11,825 70 - 11,895 -------- -------- ------- -------- Income before provision for income taxes and minority interest 23,092 (14,912) 1,501 9,681 Provision for income taxes 9,216 (5,340) (91) (f) (3,785) Equity in loss of affiliate (30,710) - - (30,710) Minority interest (28) - - (28) -------- -------- ------- -------- Net loss before preferred dividends (16,862) (9,572) 1,592 (24,842) Preferred dividends - - - - -------- -------- ------- -------- Net loss attributable to common shareholders $(16,862) $ (9,572) $ 1,592 $(24,842) ======== ======== ======== ======== Pro forma net loss per share $ (1.32) $ (1.85) ======== ======== Pro forma weighted average common and common equivalent shares outstanding 12,820 13,429
Exhibit 99.2 The InterCept Group, Inc. Unaudited Pro Forma Condensed Balance Sheet As of December 31, 2000
(a) (b) Historical US Operations Pro Forma Pro Forma Consolidated SLMsoft.com Adjustments Consolidated ASSETS Current assets: Cash and cash equivalents $ 8,061 $ 89 $ (8,061) (c) $ (89) (d) - Short term investments 37,484 - (26,939) (c) 10,545 Accounts receivable, net 9,960 3,194 (3,194) (d) 9,960 Advances to SLM 5,000 - (5,000) (c) 0 Inventory, prepaid expenses and other 4,689 937 5,626 Deferred tax assets - 5,340 (5,340) - -------- -------- -------- -------- Total current assets 65,194 9,560 (48,623) 26,131 Property and equipment, net 16,883 5,547 - 22,430 Intangible assets, net 24,786 2,379 (2,379) (c) - - 55,992 80,778 Accounts receivable - affiliate 15,000 8,888 (8,888) (d) 15,000 Investment in affiliate 19,196 - - 19,196 Other assets 1,067 178 - 1,245 -------- -------- -------- -------- Total assets $142,126 $ 26,552 $ (3,898) $164,780 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 45 $ 3,220 $ (3,220) (d) $ 45 Accounts payable and accrued expenses 3,188 8,263 (8,088) (d) 5,363 - - 2,000 (c) - Due to SLM Parent - 25,225 (25,225) (d) - Deferred revenue 5,054 1,490 (423) (d) 6,121 -------- -------- -------- -------- Total current liabilities 8,287 38,198 (34,956) 11,529 Long-term debt, net of current portion 4,513 125 (125) (d) 4,513 Deferred revenue 453 - - 453 Deferred taxes 26,279 - - 26,279 Deferred compensation - - - - -------- -------- -------- -------- Total liabilities 39,532 38,323 (35,081) 42,774 Minority interest 202 - - 202 Redeemable preferred stock - - - - Shareholders' equity: Common stock 109,340 13 19,399 (c) 128,752 Preferred stock - 750 (750) (d) - Treasury stock - (391) 391 (d) - Additional Paid in Capital - 10,780 (10,780) (d) - Retained earnings (6,951) (22,923) 22,923 (d) (6,951) Unrealized gain on securities 3 - - 3 -------- -------- -------- -------- Total shareholders equity 102,392 (11,771) 31,183 121,804 -------- -------- -------- -------- Total liabilities and shareholders' equity $142,126 $ 26,552 $ (3,898) $164,780 ======== ======== ======== ========
A more detailed description of this acquisition may be found under Item 2 of the Form 8-K InterCept filed on January 19, 2001, and in InterCept's press release incorporated and filed herein. Effective January 1, 2001, SLMSoft.com, Inc., (a Kansas Corporation) (the Company) was acquired by The InterCept Group, Inc. ("InterCept"). The consideration exchanged was approximately $40 million and 1,254,000 shares of InterCept common stock valued at approximately $28.0 million. Of the $40 million, $5 million was advanced to the parent company of SLMSoft.com, Inc. in December 2000, $32.5 million was paid on January 4, 2001, and $2.5 million will be kept in escrow to satisfy unresolved contingencies existing at the closing date. Of the 1,254,000 shares, 609,000 were issued to the parent of SLMSoft.com. Inc. at closing and 258,000 shares will be kept in escrow to satisfy unresolved contingencies existing at the closing date. The remaining 386,000 shares represent contingent consideration and are subject to continuation of the revenue stream associated with certain customers. The unaudited pro forma financial data have been prepared using the purchase method of accounting, whereby the total cost of the acquisition is allocated to tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the effective date of the acquisition. For purposes of the unaudited pro forma financial data, such allocations have been made based upon currently available information and management's estimates. The final allocation of the purchase price may differ. The unaudited proforma financial data does not include the affect of any synergies or operating cost reductions expected to be associated with the purchase by The Intercept Group, Inc., as management is not currently able to reasonably estimate any synergies or cost savings. The unaudited pro forma balance sheet as of December 31, 2000 reflects the following adjustments as if they occurred on December 31, 2000: (a) Represents the historical condensed balance sheets of The InterCept Group, Inc. ("InterCept" or the "Company") for the year ended December 31, 2000 contained in the Company's Current Report on Form 8-K filed on January 19, 2001. (b) Represents the historical balance sheets of SLMSoft.com., a Kansas Corporation. (c) The payment of cash and the issuance of common stock and the recording of intangible assets associated with the purchase of certain assets and assumption of certain liabilities of the SLMsoft.com, Inc., a Kansas Corporation. The purchase price included cash of $40.0 million and 1,254,000 shares of The InterCept Group, Inc. common shares valued at $22.375 per share. The $40.0 million of cash consideration was satisfied through $8.1 million from cash and cash equivalents, $5.0 million from the reduction in the advances to SLM-Parent previously advanced in December 2000, and $26.9 million from the reduction of InterCept's short term investments. Transaction costs of approximately $2.0 million were incurred as a result of the purchase. The excess of the purchase price over net tangible assets acquired totaled $56.0 million and was allocated to the core processing software, customer relationships, employees and goodwill and will be amortized over periods ranging from three to twenty years. In addition to the purchase price indicated above the agreement includes contingent purchase price related to the continuation of revenue from certain customers. This additional consideration will be recorded to goodwill when the contingency is resolved. Based on the price of $22.375 this contingent consideration will revert in additional goodwill in the amount of $8.6 million. (d) Certain assets and liabilities were excluded in the purchase agreement discussed in a. above. The unaudited pro forma statements of operations for the years ended December 31, 1999 and 2000 reflect the following adjustments as if they occurred on January 1, 1999 and are based on the historical statements of operations, adjusted to reflect the following: (a) Represents the historical Condensed Statements of Income of The InterCept Group, Inc. ("InterCept" or the "Company") for the year ended December 31, 2000 contained in the Company's Current Report on Form 8-K filed on January 19, 2001. (b) Represents the historical Condensed Statements of Income of SLMSoft.com., a Kansas Corporation (c) The reduction in intercompany amounts due between SLMSoft.com, a Kansas Corporation and the InterCept Group, Inc. (d) The reduction in intercompany amounts due between SLMSoft.com, a Canadian company, and SLMSoft.com, a Kansas Corporation (e) The additional amortization of the intangible assets recognized upon the acquisition of SLMSoft.com of $3.1 million for the twelve months ended December 31, 1999 and 2000. (f) The tax benefit realized based on the additional losses of SLMSoft.com for the twelve months ended December 31, 1999 and 2000. -----END PRIVACY-ENHANCED MESSAGE-----