-----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, G7RBp5lKHymxYpym0NXyMAksc++MYlyS7Ps6ghb8R4EeLeTv1sXNDFuEA1qd6NdL PFgzkH8EHpGHT7oBZ+0c6A== 0000931763-02-001082.txt : 20020415 0000931763-02-001082.hdr.sgml : 20020415 ACCESSION NUMBER: 0000931763-02-001082 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14213 FILM NUMBER: 02598208 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-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________. Commission file number: 01-14213 INTERCEPT, INC. (Exact name of registrant as specified in its charter) Georgia 58-2237359 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3150 Holcomb Bridge Road, Suite 200, Norcross, Georgia 30071 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 248-9600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, no par value (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 15, 2002, 18,152,006 shares of the registrant's common stock were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant was $607,796,634 (based upon the closing sale price of the registrant's common stock as reported by the Nasdaq National Market on that date). DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the registrant's 2002 annual meeting of shareholders to be held on May 15, 2002 are incorporated by reference in Part III of this Form 10-K where indicated. TABLE OF CONTENTS Page Part I Item 1. Business ........................................................ 1 Item 2. Properties ...................................................... 14 Item 3. Legal Proceedings ............................................... 15 Item 4. Submission of Matters to a Vote of Security Holders ............. 15 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ......................................................... 16 Item 6. Selected Financial Data ......................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................... 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...... 46 Item 8. Financial Statements and Supplementary Data ..................... 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................ 46 Part III Item 10. Directors and Executive Officers of the Registrant .............. 47 Item 11. Executive Compensation .......................................... 47 Item 12. Security Ownership of Certain Beneficial Owners and Management .. 47 Item 13. Certain Relationships and Related Transactions .................. 47 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 48 PART I ITEM 1. BUSINESS. Special Note Regarding Forward-Looking Statements We make forward-looking statements in this annual report. These statements are subject to risks and uncertainties, and we cannot assure you that they will prove to be correct. Forward-looking statements include assumptions as to how we may perform in the future. When we use words like "believe," "expect," "anticipate," "predict," "project," "potential," "seek," "continue," "will," "may," "could," "intend," "plan," "pro forma," "estimate," "goal," "strive" and similar expressions, we are making forward-looking statements. Forward-looking statements in this annual report include statements regarding the following: o our business strategies and goals; o our future sources of revenues and potential for growth and profitability; o expansion and enhancement of our technologies, networks, products and services; o the financial impact of our relationship with Netzee; o other factors concerning our relationship with Netzee; o trends in activities and industry conditions; o development and expansion of our sales and marketing efforts; o our ability to integrate our previous and future acquisitions; o our ability to close our pending acquisitions; and o other statements that are not of historical fact made throughout this annual report, particularly in this Item 1, Business and in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. We believe that the expectations reflected in our forward-looking statements are reasonable, but we cannot be sure that we will actually achieve these expectations. Projections or estimates of our future performance are necessarily subject to a high degree of uncertainty and may vary materially from actual results. In evaluating forward-looking statements and pro forma information, you should carefully consider various factors, including the risks outlined in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Disclosure Regarding Forward-Looking Statements. These factors may cause our actual results to differ materially from any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Overview We are a leading provider of banking technology products and services for community financial institutions. Our comprehensive suite of products and services allows us to act as a single-source provider for the technology and operating needs of community financial institutions. Our range of products and services includes core data processing, check processing and imaging, electronic funds transfer (EFT), data communications management and related products and services. These products and services work together 1 to help community financial institutions manage back-office and customer activities, create operating efficiencies and provide better customer service, which enables them to compete more effectively with larger financial institutions. Most of our customers outsource their processing activities to our data centers located across the United States, while others install our systems in-house and perform the processing functions themselves. 2001 Highlights In January 2001, we completed the largest acquisition in our history when we acquired some of the assets of SLMsoft.com, Inc. (Canada) and SLMsoft.com Inc. (Kansas), related providers of data processing services. As part of this transaction, we acquired their U.S. core data processing, check imaging and item processing operations, enabling us to add over 10 additional facilities. As a result of this acquisition, we were able to consolidate our facilities in Houston, Texas. In Feburary 2001, we acquired certain assets and liabilities of DPSC Software, Inc. a division of Netzee, Inc. DPSC is a California-based provider of asset/liability and regulatory reporting software, including CallReporter, the nation's leading software used by banks to prepare the periodic call report forms mandated by the Federal Financial Institutions Examination Council. DPSC also provides other software programs that help banks analyze their interest rate risk profile, prepare holding company reports, and manage their budgeting and financial management reporting. Two transactions during 2001 enabled us to increase our market share in the mid-west part of the United States. In March 2001, we acquired C-TEQ, Inc., a provider of core data processing and check imaging services in Oklahoma and Texas. In June 2001, we acquired the community bank core data processing assets of First Integrated Systems, a division of First National Bank of Omaha, and entered into a joint marketing agreement with First National. In September, 2001 we announced the opening of an item and image processing center in Seattle, Washington. This center will allow us to promote our full offering of technology solutions to community financial institutions in Washington. In October 2001, we acquired substantially all of the assets of Holmes and Shaw, Inc. and Superior Forms, Ltd. (together, "HSI"), a full service provider of computer output solutions including data processing, laser document printing, and automated mailing services. We believe that the acquisition of HSI will enable us to provide more efficient statement printing and mailing services to new customers as well as to our current financial institution customers. Pending Acquisitions iBill On March 19, 2002, we signed an agreement to acquire substantially all of the assets and assume substantially all of the liabilities of Internet Billing Company, Ltd. and certain of its affiliate entities, or "iBill." iBill provides secure transaction services that enable Web merchants to accept and process real-time payments for goods and services purchased over the Internet. iBill also manages back-office functions including reporting, tracking, customer service and sales transactions. iBill's service is powered by proprietary technology that integrates online payment processing, fraud control, affiliate management and financial reporting and tracking. 2 We agreed to pay iBill $112.0 million in cash at closing, plus additional quarterly earnout payments for a period of six quarters ending December 31, 2003. The amount of each earnout payment depends on whether the acquired business achieves certain financial targets. We have an option to buy out the remaining earnout obligation at any time by paying $8 million per remaining quarter. We are not required to close the iBill acquisition unless we receive necessary Hart-Scott-Rodino approval. If we terminate the acquisition agreement for anything other than the failure to obtain that approval or a severe service outage at iBill, we will be required to pay a termination fee of $5.0 million to iBill. We will pay the initial $112.0 million portion of the purchase price by (a) using the remaining proceeds of our 2001 public offering of common stock and (b) drawing on our $50.0 million credit facility. EPX On March 19, 2002, we entered into a binding letter agreement to acquire Electronic Payment Exchange, Inc., or "EPX." EPX is a full-service electronic payment processing company that specializes in enabling businesses to accept credit card, debit card and electronic check payments. EPX's system provides straight-through processing that eliminates a business's need to use a gateway or invest in front-end technology to process transactions, whether the transactions take place online, over the telephone or at the point of sale. Under the terms of the letter agreement, we agreed to issue 1,377,339 shares of our common stock to EPX's stockholders. We will place 20% of these shares in escrow for a period of eighteen months to secure EPX's obligation to indemnify us for breaches of the representations and warranties. Upon disbursement of the escrow shares, we will issue additional shares of our common stock to the EPX stockholders if the liabilities of EPX at closing are less than $12.0 million. Conversely, if EPX's liabilities at closing are greater than $12 million, we will reduce the escrow shares that would be otherwise disbursed to the EPX stockholders. In connection with the acquisition, we also granted piggyback registration rights to the EPX stockholders. We are required to close the EPX acquisition unless we (a) fail to obtain necessary approvals, including approvals as may be required by the Hart-Scott-Rodino Act, by June 30, 2002, or (b) determine that we are not satisfied with our due diligence investigation by April 23, 2002. If we do not close the EPX acquisition by April 23, 2002, we will lend EPX $3.0 million pursuant to a loan secured by EPX's intellectual property, which will bear interest at the prime rate plus one percent per annum and will be due on December 31, 2002. As a result of our integration of prior acquisitions, we believe that we have established a model that will enable us to successfully execute our integration of iBill and EPX. We expect to realize the following benefits from the acquisitions of iBill and EPX: o Ability to Offer End-to-End Transaction Processing Services. We will offer a single-source end-to-end transaction processing solution, eliminating the need for businesses to establish multiple relationships 3 o with banks, front-end system providers, gateways, independent sales organizations and back-end processing companies. o Expansion of Merchant Processing Operations. Currently, our merchant processing division provides services to approximately 160 community banks with over $1.0 billion in transaction volume. Together, iBill and EPX currently process approximately $5.5 billion in annual transaction volume for both traditional brick and mortar companies and online merchants. o Expansion of Transaction Processing Through Multiple Sales Channels. Through an experienced sales force, we will offer our processing services through multiple sales channels, including Internet, point of sale, call center, mail order and wireless channels. o Improved Operating Efficiencies. We also intend to migrate to EPX over time a portion of the processing of transactions that we currently broker through our existing merchant processing operation. We believe this will enhance the margins of our combined business and leverage EPX's capacity to handle additional transactions. On March 19, 2002, we issued a press release announcing the iBill and EPX acquisitions and updating our guidance for our financial performance in 2002. We expect the acquisitions of iBill and EPX to increase our 2002 estimated revenues by $49 - $52 million, and our 2002 estimated earnings before income taxes, depreciation and amortization, or "EBITDA," by $9 to 10 million. After giving effect to purchase accounting adjustments, we expect the acquisitions of iBill and EPX to increase our 2002 estimated diluted earnings per share by $.02 - $.03. EBITDA is not a measurement of financial performance under U.S. generally accepted accounting principles. EBITDA should not be considered as an alternative to cash flow from operating activities, as a measure of liquidity or as an alternative to net income as a measure of operating results in accordance with U.S. GAAP. Our Market Opportunity The financial services industry is currently undergoing a period of rapid change due to heightened competition and greater demand for new and convenient technology-based banking services. New competitors such as brokerage firms, affinity groups and Internet banks are increasingly targeting traditional financial institutions' most profitable customers. To compete effectively and meet the demands of their customers, community financial institutions must continue to offer new services and integrate new technology and functionality into their operations. U.S. banks, including our target market of community financial institutions, increasingly view technology as critical to retaining and expanding their customer bases. However, community financial institutions are often constrained by the design and capacity of their existing systems, limited in-house technological resources and pressure to control operating costs. As a result, we believe that community financial institutions will increasingly rely on third-party providers like us to address their technology needs. Our Solution Our products and services help community financial institutions: 4 Rapidly implement advanced technologies. Community financial institutions generally lack sufficient capital and human resources to internally develop and implement advanced technologies. We offer numerous advanced technology products and services, including core data processing, EFT services, check imaging software and data communications management, that community financial institutions need to run their businesses in today's competitive marketplace. By using our products and services, community financial institutions can quickly gain access to advanced technologies and services they might not be able to develop and implement themselves. Focus on customer relationships. We believe that community financial institutions can compete effectively with larger banks and succeed as independent institutions by remaining focused on serving the communities in which they operate. Typically, customers of community financial institutions rely on these financial institutions because of their ability to provide personalized, relationship-based service and their focus on local community and business needs. Our products and services enable community financial institutions to focus on attracting, maintaining and expanding their customer relationships while satisfying demand for the latest financial products and services. Improve operating efficiencies. By taking advantage of our technology and operating solutions, our customers can improve their operating efficiencies without allocating the expenses and resources necessary to develop or maintain similar systems themselves. Our customers get the benefit of our products and services without having to maintain personnel to develop, update and run these systems and without having to make large up-front capital expenditures to implement these advanced technologies. Securely process and transmit large amounts of information. Our data communications network and management services facilitate the rapid, secure and reliable transmission and processing of the large amounts of sensitive data that our customers use in their operations. This network utilizes the fiber optic networks of some of the largest telecommunications providers, and we link our network to our customers' operations with high-capacity communications lines. This ensures that our data communications network will support the rapid processing and transmission of electronic data required to support our customers' processing activities. Our Strategies Our goal is to become the leading provider of products and services for the technology and operating needs of community financial institutions in the United States by: Building and maintaining long-term customer relationships to increase recurring revenues. We seek to establish and maintain long-term relationships with our customers and enter into contracts that typically extend for multiple years. Most of our products and services require the payment of monthly charges, which allows us to generate recurring revenues. For the year ended December 31, 2001, recurring revenues accounted for approximately 86% of our total revenues. Emphasizing direct sales efforts and strategic marketing relationships to expand our customer base. We plan to expand our customer base and penetrate new geographic markets by hiring sales personnel who are knowledgeable in banking technology products and services or have experience working with community financial institutions. We also intend to continue to leverage our relationships with banking organizations such as bankers' banks. Bankers' banks are local or regional business organizations that provide banking products and services for financial institutions that cannot efficiently offer them due to cost, location, lack of resources or other circumstances. In addition, bankers' banks provide financial support to financial institutions and offer advice with respect to operations, profitability and federal and state regulation. We have exclusive contractual marketing relationships with eight of the 19 bankers' banks in the United States regarding some or all of our products and services. We also have relationships with four additional bankers' 5 banks, as well as other banking related organizations, which we leverage in our sales and marketing efforts. Our relationships with 12 of the 19 bankers' banks give us access to more than 5,600 financial institutions in the United States. We also seek to enter into other strategic partnerships that extend our customer reach and generate additional revenues. In May 2001, we entered into a strategic alliance with The BISYS Group, Inc., one of the largest providers of financial technology services in the United States. Under the agreement, we serve as BISYS' preferred provider of outsourced check processing and imaging services to its customers. In addition, in June 2001, we entered into a joint marketing agreement with First National Bank of Omaha. Through this agreement, First National will promote our core processing services in Kansas, Colorado, Nebraska and South Dakota. Acquiring businesses with complementary products, services or relationships to enhance and expand our solutions, increase our market share or expand our geographic presence. Since our incorporation in 1996, we have grown in part through selective acquisitions of other businesses and technologies. We intend to continue to acquire other companies with complementary products, services or relationships to enhance and expand our offering and increase our market share. We also plan to continue our expansion nationally through the acquisition of businesses that operate in geographic areas in which we do not currently have operations. Cross-selling our products and services to our existing customer base to maximize our revenues. Once customers contract for one or more of our products or services, we are often able to increase revenues by providing additional products and services to them. Our Products and Services Core Data Processing We provide products and services needed to meet our customers' core processing requirements, including general ledger, loan and deposit operations, financial accounting and reporting and customer information file maintenance. Our products and services provide superior flexibility and improve customer service throughout the financial institution. Most of our customers outsource their processing activities to our data centers located across the United States, while others install our systems in-house and perform the processing functions themselves. Our core data processing services and software and complementary products include: - -------------------------------------------------------------------------------- Category Description - -------------------------------------------------------------------------------- BancPac(TM) o Client-server enterprise software system that consists of a series of integrated software products, with Windows-based, point-and-click access to an entire customer information database o Operates in a Windows NT or Windows 2000 environment - -------------------------------------------------------------------------------- BancLine(TM) o Client-server core bank processing system that utilizes an open-system environment - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- Category Description - -------------------------------------------------------------------------------- o Uses a relational database that allows customer data to be entered once in the system and manipulated and analyzed for a variety of business purposes o Windows graphical user interface that utilizes a UNIX operating system - -------------------------------------------------------------------------------- Service Bureau o Allows customers to focus on core competencies by outsourcing their data processing needs o Gives customers access to our processing systems without the expense of maintaining in-house processing operations o Services are coordinated through eight host data centers located in various regions of the United States o Each data processing center serves as a back-up facility if another center experiences a natural disaster, destruction or other similar event that eliminates or diminishes its processing capabilities o Includes check processing and back-office services like proofreading and encoding of checks, clearing and settlement of checks with the Federal Reserve and bank statement preparation - -------------------------------------------------------------------------------- Related Products o AccountFolio(TM), a loan document imaging, loan and Services collateral management and tracking system o TellerPlus, an online teller platform system o Vision(R), an advanced compact report storage and retrieval system o CallReporter(R), regulatory reporting software - -------------------------------------------------------------------------------- Check Imaging Increased technological development and changing banking practices have created a demand for faster, more efficient electronic handling of bank documents, including checks and other documents. The need to reduce labor, research time and the cost of postage has increased the demand for check imaging - -------------------------------------------------------------------------------- 7 solutions on both an in-house and service bureau basis. Check imaging involves creating digital images through the use of a camera attached to a sorter. As each check passes through the sorter, the camera takes its picture. Images of insufficient checks, stop payments and large dollar checks are presented online to bank operations staff for review. Financial institutions employ check imaging as part of their efforts to reduce operating costs and provide enhanced banking services to their customers. Our check imaging capabilities include: - -------------------------------------------------------------------------------- Category Description - -------------------------------------------------------------------------------- Renaissance Imaging o Delivers a comprehensive suite of check imaging products, including front and back imaging for customer statements, clearing and settlement, reconciliation and automated exception processing o Prints multiple check images in check sequence on a single page for inclusion in monthly statements to reduce postage costs when mailing to the banks' customers o Operates in either Microsoft(R)or Novell(R) network environments utilizing Oracle(R)database technology o Allows bank employees to retrieve imaged checks on personal computers to facilitate signature verification and speed responses to customer inquiries o Allows corporate customers to receive periodic statement information on CD-ROM to facilitate financial and cash management objectives - -------------------------------------------------------------------------------- Service Bureau o Turnkey outsourced solution for check imaging activities that provides our customers the ability to offer check imaging without a large capital expenditure o 26 check imaging centers located in 15 states as of December 31, 2001 o Each center serves as a back-up facility in the event another center experiences a natural disaster, destruction or other similar event which eliminates or diminishes its processing capabilities - -------------------------------------------------------------------------------- 8 Electronic Funds Transfer We believe that increased use and acceptance of ATM and debit cards, coupled with technological advances in electronic transaction processing, have created a need for financial service providers to offer a wide variety of EFT solutions to their customers. By aggregating the EFT transaction processing of numerous financial institutions, we create economies of scale that allow our customers to price their services competitively. The typical ATM transaction that we process begins when a cardholder inserts a card issued by a financial institution into an ATM to withdraw funds, obtain a balance, make other account inquiries or transfer funds. The transaction is routed from the ATM across our frame relay network to our data communications and processing center in Norcross, Georgia. We then either (a) authorize or deny the requested transaction or (b) direct the transaction to the card issuer or its designated processor for authorization. Once authorization is received, the authorization message is routed back to the ATM almost immediately and the transaction is completed. We update the account information of our customers' cardholders on a daily basis. The debit card transaction process begins when a consumer presents a debit card to a merchant who "swipes" the card at a point of sale terminal and enters the transaction amount. The transaction data is transmitted from the point of sale terminal through the applicable processing networks to our frame relay network. The data is then routed across our network to our data communications and processing center in Norcross, Georgia. We then (a) compare the purchase transaction against the authorization data accessed through our system, (b) place a hold for the transaction amount, (c) authorize or deny the transaction and (d) transmit the authorization response almost immediately back through the network to the point of sale terminal. The appropriate processing network settles the payment and credits the merchant with the transaction amount less any discounts. The merchant delivers final transaction information to the processing network, and the network submits the transaction to us, which facilitates posting and reporting of the transaction with the bank that issued the debit card. To complete the transaction, the bank that issued the debit card debits its customer's account for the transaction amount. Our EFT products and services include: - -------------------------------------------------------------------------------- Category Description - -------------------------------------------------------------------------------- EFT Transaction Processing o Provides online processing of EFT transactions initiated by a consumer at a point of sale terminal with a debit card, or at an ATM o Encompasses multiple transactions, including cash withdrawals, transfers and balance inquiries o Provides network connections to most regional and all national ATM and other debit card networks, including STAR(TM), PULSE(TM), Cirrus(R), PLUS(R), Maestro(R) and INTERLINK(R) o Offers a card-issue-only program, which gives banks the option to offer ATM services to their customers without the expense of purchasing and - -------------------------------------------------------------------------------- 9 - ------------------------------------------------------------------------------- Category Description - -------------------------------------------------------------------------------- maintaining a complete ATM system o Offers the Secure Debit(TM) program, which provides fraud protection services for lost, stolen or counterfeit debit cards - -------------------------------------------------------------------------------- o Allows, through the InterCept Switch(TM) ATM Network, our customers to waive ATM surcharges for customers of InterCept Switch members, while retaining the ability to surcharge non-member customers who use their ATMs Data Communications Management We provide efficient, reliable and secure solutions for the data communications needs of our customers and maintain nationwide data communications coverage. We operate a frame relay network, which serves as the principal conduit through which we deliver our EFT and other technology products and services to our customers. We offer a full line of communications services, including management of equipment, local lines and long distance, and equipment necessary to support data transfer with our data centers and throughout a community financial institution's branch structure and headquarters. Key elements of our data communications management solutions include: - -------------------------------------------------------------------------------- Category Description - -------------------------------------------------------------------------------- Data Communications o Serve as single point of contact for our customers' data communications needs Management Services o Design and manage various local and wide area communications networks for our customers o Provide Internet services, including web hosting and e-mail services, to the desktops of our customers' personnel across our frame relay network o Ability to support customers' existing applications and easily add new products and services to existing infrastructure with minimal cost and effort - -------------------------------------------------------------------------------- Frame Relay Network o Accommodates data transmissions of various sizes and is Relay Network protocol independent -- not only can any set of data be accepted, switched and transported across a network, but the specific data is undisturbed in the process - -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- Category Description - -------------------------------------------------------------------------------- o Provides efficient switching capabilities for transferring information across the network, resulting in rapid response time and secure and reliable transmission and processing of transactions o Uses leased fiber optic networks to provide the capacity, or bandwidth, capable of supporting our transaction-intensive services o Linked to our customers' operations by communication lines that can handle large amounts of data traffic to ensure adequate bandwidth for rapid processing of electronically transmitted data o Monitored and maintained 24 hours a day, seven days a week from a central location in Norcross, Georgia - -------------------------------------------------------------------------------- Related Products and Services To complement our product and service offering described above, we provide a variety of related services, software products and equipment. We anticipate that, as revenues from our other operations increase, revenues from supplying equipment and maintenance and technical support services will decrease as a percentage of total revenues. We provide merchant portfolio management services, which are designed to reduce labor intensive back-office functions for our customers. We can provide these services at a lower cost than many banks incur in-house by streamlining processes and taking advantage of economies of scale. Our customer service and technical support departments provide coverage 24 hours a day, seven days a week. We believe that well-trained support personnel are essential to attract and retain financial institution customers. Our trained customer service and technical support personnel enhance our ability to offer reliable, secure and automated solutions. Our customer service departments are responsible for educating and assisting our customers in the use of our services. Our technical support department is generally responsible for consulting with our customers regarding technical issues and for solving any technical problems brought to their attention by our customer service department. Our technical support department is also responsible for maintaining our backup systems and for coordinating the disaster recovery services maintained by some of our information processing customers. In addition, we offer Internet banking and voice response products through Netzee. See Our Relationship with Netzee below. Merchant Processing As noted above in Pending Acquisitions, we have agreed to acquire iBill and EPX. iBill provides secure transaction services that enable Web merchants to accept and process real-time payments for goods 11 and services purchased over the Internet. iBill also manages back-office functions including reporting, tracking, customer service and sales transactions. iBill's service is powered by proprietary technology that integrates online payment processing, fraud control, affiliate management and financial reporting and tracking. EPX is a full-service electronic payment processing company that specializes in enabling businesses to accept credit card, debit card and electronic checkpayments. EPX's system provides straight-through processing that eliminates a business's need to use a gateway or invest in front-end technology to process transactions, whether the transactions take place online, over the telephone or at the point of sale. We already process transactions through our existing merchant processing operation that has essentially served as a middleman between the merchant customers of our financial institution customers and other transaction processors. If we acquire both iBill and EPX as we expect, we intend to move to EPX a portion of the processing of transactions that iBill currently sends to other transaction processors. We also intend to migrate to EPX over time a portion of the processing of transactions that we currently broker through our existing merchant processing operation. We believe this will enhance the margins of our combined business and leverage EPX's ability to handle additional transactions. Our Relationship with Netzee We offer Internet banking and voice response products through Netzee and we own approximately 28% of Netzee's common stock. Two of our directors currently serve as directors and are significant shareholders of Netzee. One of those directors, Donny R. Jackson, was our President until October 2000 and is currently the Chief Executive Officer of Netzee. Additionally, John W. Collins, our Chairman and Chief Executive Officer, is the Chairman of the Board of Directors of Netzee. We maintain a strategic relationship with Netzee to cross-market each other's products and services. Our existing and future agreements and relationships with Netzee have not resulted and will not necessarily result from arm's length negotiations. When the interests of Netzee diverge from our interests, Netzee's officers and directors may exercise their influence in Netzee's best interests. Therefore, our agreements and relationships with Netzee may be less favorable to us than those that we could obtain from unaffiliated third parties. Moreover, many of the transactions between Netzee and us do not lend themselves to precise allocations of costs and benefits. Thus, the value of these transactions will be left to the discretion of the parties, who are subject to potentially conflicting interests. We provide to Netzee, jointly with John H. Harland Company, an $18.0 million revolving line of credit secured by substantially all of Netzee's assets. Of the total amount available to Netzee, we provide approximately $14.0 million and Harland provides approximately $4.0 million on a pro rata basis with us provided that we are obligated to advance the last $1.0 million without Harland's participation. The Netzee line of credit matures on April 10, 2003. The line of credit bears interest at an annual rate equal to the prime rate plus 2.0%, and accrued interest is payable monthly. As of December 31, 2001, Netzee owed us $10.1 million for our advances under the line of credit. If Netzee does not become profitable or has any additional adverse events, it may not be able to repay the loans we have made and may make to it in the future. As of December 31, 2001, the book value of our investment in Netzee was $1.5 million, which is less than the market value of $1.6 million as of that date. 12 Effective February 1, 2001, we acquired the business of DPSC from Netzee for approximately $14.1 million in cash and the assumption of $2.4 million of DPSC's net liabilities. Netzee used approximately $8.4 million of the cash proceeds to reduce its borrowings on its line of credit with us. Sales and Marketing At December 31, 2001, our sales force was made up of 43 sales representatives and product specialists who sell all of our products and services to our customers in specified geographic regions. Because they have the ability to sell our full range of products and services, our sales representatives can capitalize on their relationships with community financial institutions. Although the sales representatives are trained on each product line, we also employ several product specialists who are available to assist the direct salesperson in the specifics of certain technical products. We offer products and services on both a stand-alone basis and in combination with one or more of our products and services. If we complete our pending acquisitions of iBill and EPX as we anticipate, we will add approximately 35 sales representatives and product specialists to our combined operations. Our indirect marketing efforts include obtaining referrals and endorsements from our customers and various banking related organizations. We currently have exclusive marketing agreements with eight of the 19 bankers' banks and have other relationships with four additional bankers' banks. Through our relationship with these bankers' banks, we have referral sources to thousands of financial institutions nationwide. In May 2001, we entered into a strategic alliance with BISYS, one of the largest providers of financial technology services in the United States. Under the agreement, we serve as BISYS' preferred provider of outsourced check processing and imaging services to its customers. Employees At December 31, 2001, we had 944 full-time employees. Of these employees, 817 worked in operations, 84 in administration and 43 in sales. None of our employees is represented by a collective bargaining agreement nor have we ever experienced any work stoppage. We believe that our relationships with our employees are satisfactory. If we complete our pending acquisitions of iBill and EPX as we anticipate, we will add approximately 300 employees to our combined operations. Government Regulation Our banking customers are subject to the supervision of several state and federal government regulatory agencies. In addition, various federal and state regulatory agencies examine our data processing operations from time to time. These agencies can make findings or recommendations regarding various aspects of our operations, and we generally must follow these recommendations to continue our data processing operations. Our ATM network operations are subject to federal regulations governing consumers' rights. Fees charged by ATM owners are currently regulated in several states, and legislation regulating ATM fees has been proposed in several other states. Additional legislation may be proposed and enacted in the future or existing consumer protection laws may be expanded to apply to ATM fees. If the number of ATMs decreases, then our EFT revenues may decline. Furthermore, we are subject to the regulations and policies of various ATM and debit card associations and networks. Beginning July 1, 2001, financial institutions are required to comply with privacy regulations imposed under the Gramm-Leach-Bliley Act. These regulations place restrictions on financial institutions' use of non-public personal information. All financial institutions must disclose detailed privacy policies to 13 their customers and offer them the opportunity to direct the financial institution not to share information with third parties. The new regulations, however, permit financial institutions to share information with non-affiliated parties who perform services for the financial institutions. As a provider of services to community financial institutions, we are required to comply with the privacy regulations and are bound by the same limitations on disclosure of the information received from our customers as apply to the financial institutions themselves. Competition The market for companies that provide technology solutions to community financial institutions is intensely competitive and highly fragmented, and we expect increased competition from both existing competitors and companies that enter our existing or future markets. Many of our current and potential competitors have longer operating histories, greater name recognition, larger customer bases and substantially greater financial, personnel, marketing, engineering, technical and other resources than we do. The principal competitive factors affecting the market for our services include price, quality and reliability of service, degree of service integration, ease of use and service features. Numerous companies supply competing products and services, and many of these companies specialize in one or more of the services that we offer or intend to offer to our customers. In our core banking and data processing business, we compete with several national and regional companies including Fiserv, Inc., Jack Henry & Associates, Inc. and BISYS. Our principal EFT competitors include regional ATM networks, regional and local banks that perform processing functions, non-bank processors and other independent technology and data communications organizations including Concord EFS, Inc. and Electronic Data Systems Corporation. In our check imaging and processing business, we compete with a number of national and regional companies including Advanced Financial Solutions, Inc. and Wausau Financial Systems, Inc. If we complete our pending acquisitions of iBill and EPX as we anticipate, we will be subject to competition from large merchant processors like Chase Merchant Systems, National Processing, Paymentech, U.S. Bancorp, First Data, Concord EFS and others. Intellectual Property and Other Proprietary Rights None of our technology is currently patented, although iBill has patent applications pending for its technology. Instead, we rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. We cannot assure you that the steps we have taken will adequately protect our proprietary rights or that our competitors will not independently develop similar technology. ITEM 2. PROPERTIES. Our principal office consists of approximately 46,000 square feet of leased space located in Norcross, Georgia, a suburb of Atlanta. We currently operate full-service data centers, software system development centers or item processing and back-office service centers in the following cities: Birmingham, Alabama; Jonesboro, Arkansas; Colorado Springs, Colorado; Jacksonville, Miami and Tampa, Florida; Macon, Norcross and Thomson, Georgia; Lombard, Illinois; Lenexa, Kansas; Chelmsford and Norwood, Massachusetts; Carlstadt and Thorofare/West Deptford, New Jersey; Greensboro, North Carolina; Oklahoma City Oklahoma; Cayce, South Carolina; Brentwood, Cookeville, Maryville and Nashville, Tennessee; Austin, Dallas, Houston and San Antonio, Texas; Richmond, Virginia and Tukwila, Washington. We lease office 14 space in Calabasas Hills, California, primarily to support our sales and marketing efforts in this area. We own the facilities in Thomson, Georgia and Maryville, Tennessee and lease the remaining locations. We believe our facilities are adequate for our needs and do not anticipate any material difficulty in replacing such facilities or securing facilities for new offices. ITEM 3. LEGAL PROCEEDINGS. Other than as described in this paragraph, we are not a party to, and none of our material properties is subject to, any material litigation other than routine litigation incidental to our business. On March 15, 2002, we brought an action against Midwest Payment Systems, Inc. ("MPS") in the U.S. District Court in the Eastern District of Tennessee. MPS provides EFT/ATM services to customers that we obtained through our purchase of L.E. Vickers and Associates, Inc. We notified MPS in November 2001 that we would not renew our contract with it to provide EFT/ATM services to the Vickers customers and that we would move those customers to our own system. MPS responded to this letter by claiming, among other things, that (a) it has a right of first refusal to continue to provide services to those customers and (b) if we did not continue to use MPS' services, we would owe MPS damages. MPS has also informed several of the Vickers customers that they must pay damages to MPS if they do not continue receiving EFT/ATM services from it and we believe it has told some customers that they will have to sign new contracts with MPS to continue receiving these services. In the lawsuit, we have sought a temporary restraining order requiring MPS to cease its attempts to induce the customer banks to enter into contracts with MPS for EFT/ATM services. We have also asked the court for a declaration as to the rights and legal relations of InterCept, MPS and the customer banks under the contracts that we and the banks have with MPS. MPS has not answered our complaint. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of our shareholders during the fourth quarter of the year ended December 31, 2001. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Market Information Since March 29, 1999 our common stock has been quoted on the Nasdaq National Market under the symbol "ICPT." As of March 15, 2002, we had approximately 70 holders of record of our common stock, representing approximately 2,600 beneficial owners. The table below sets forth for the periods indicated the high and low sales prices of our common stock as reported by the Nasdaq National Market. Price Range High Low ------- ------ Year Ended December 31, 2000: First Quarter $32.03 $20.25 Second Quarter 26.25 13.50 Third Quarter 27.00 18.88 Fourth Quarter 28.69 20.50 Year Ended December 31, 2001: First Quarter $27.13 $21.63 Second Quarter 39.91 23.25 Third Quarter 40.70 24.17 Fourth Quarter 42.00 30.60 We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. Our line of credit from First Union National Bank prohibits us from paying cash dividends without the consent of First Union. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. During the fourth quarter of 2001, we issued no equity securities that were not registered under the Securities Act. 16 ITEM 6. SELECTED FINANCIAL DATA. You should read the following data along with Management's Discussion and Analysis of Financial Condition and Results of Operations, our consolidated financial statements and related notes and the other financial information included in this Annual Report. We derived our selected consolidated financial data presented below from our consolidated financial statements, which have been audited by Arthur Andersen LLP, our independent public accountants. All amounts have been restated to reflect our August 2000 acquisition of Advanced Computer Enterprises, which we accounted for as a pooling of interests transaction and to reflect the revision of our statements as discussed below. The financial data below also include the results of operations of other companies we have acquired since their respective dates of acquisition. See note 3 to our audited financial statements for a discussion of some of our acquisitions. Equity in loss of affiliate represents our share of the reduction in equity, as a result of its net losses, of Netzee. Minority interest represents the minority shareholder's 33.3% share of the equity and earnings of ProImage, Inc., a corporation that provides check imaging services. We own 66.7% of ProImage.
Year Ended December 31, 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (In thousands, except per share data) (as revised) (as revised) Statement of Operations Data: Revenues............................ $ 28,193 $ 33,270 $ 52,359 $ 69,639 $ 130,772 Costs of services................... 12,125 13,587 20,452 26,952 54,997 Selling, general and administrative expenses 12,798 13,589 20,992 27,017 42,504 Depreciation and amortization....... 1,496 1,579 4,462 4,403 11,483 Loss on impairment of intangibles... 728 0 0 0 0 ----------- ---------- ----------- ----------- --------- Total operating expenses............ 27,147 28,755 45,906 58,372 108,984 ----------- ---------- ----------- ----------- --------- Operating income.................... 1,046 4,515 6,453 11,267 21,788 Interest and other (expense) income, net (625) (215) 39,172 11,825 2,667 ----------- ---------- ----------- ----------- --------- Income before provision (benefit) for income taxes, equity in loss of affiliate and minority interest... 421 4,300 45,625 23,092 24,455 Provision (benefit) for income taxes 721 1,632 12,804 (2,454) 3,144 Equity in loss of affiliate......... 0 0 (15,352) (30,710) (16,848) Minority interest .................. 39 (89) (120) (28) (19) ----------- ---------- ----------- ----------- --------- Net (loss) income .................. (261) 2,579 17,349 (5,192) 4,444 Preferred stock dividends........... (32) (16) 0 0 0 ----------- ---------- ----------- ----------- --------- Net (loss) income attributable to common shareholders...................... $ (293) $ 2,563 $ 17,349 $ (5,192) $ 4,444 =========== ========== =========== ========== ========= Net (loss) income per common share: Basic............................... $ (0.04) $ 0.30 $ 1.72 (0.41) $ 0.29 =========== ========== =========== ========== ========= Diluted............................. $ (0.04) $ 0.30 $ 1.64 $ (0.41) $ 0.27 =========== ========== =========== ========== ========= Weighted average common shares outstanding: Basic............................... 7,083 8,465 10,095 12,820 15,434 Diluted............................. 7,083 8,597 10,564 12,820 16,397 As of December 31, 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (as revised) (as revised) Balance Sheet Data: Cash and cash equivalents $ 2,367 $ 3,496 $ 2,145 $ 8,061 $ 24,917 Working capital 1,512 5,057 3,692 56,907 93,487 Total assets 12,045 22,014 100,895 142,126 283,268 Long-term debt, less current maturities 4,717 211 12,669 4,513 465 Shareholders' equity 648 17,713 60,068 121,470 259,811
17 Quarterly Financial Data The following tables set forth certain unaudited consolidated quarterly data. These unaudited consolidated financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our results of operations for the periods shown. All amounts have been restated to reflect our August 2000 acquisition of Advanced Computer Enterprises, which we accounted for as a pooling of interests transaction. The results of operations for any quarter are not necessarily indicative of the results of operations of any future periods. Revision of Financial Statements During 1999 and 2000, Netzee issued shares of common stock at a price above book value. In accordance with Staff Accounting Bulletin No. 51, we recorded corresponding gains to reflect the increase in the value of the shares of Netzee that it owned, which are included in "investment in affiliate" on our balance sheet. Because these gains are not taxable until realized, we recorded a deferred tax liability on our balance sheet to reflect the amount of estimated tax that would be owed upon sale of the shares. Since its initial public offering, Netzee has reported operating losses. Because we used the equity method to account for our investment in Netzee, we recorded our proportionate share of Netzee's losses as a reduction to "investment in affiliate," which reduced the book value of the investment in Netzee. As we recorded our equity in those losses, a deferred tax benefit should have been recorded as a reduction against the deferred tax liability recorded previously. As a result, our previously reported results of operations have been revised to reflect a deferred tax benefit in the quarterly results of 1999, 2000, and 2001 as follows:
Three Months Ended Three Months Ended September 30, September 30, December 31, December 31, 1999 1999 1999 1999 (in thousands, except per share data) As Reported As Revised As Reported As Revised Revenues: Service fee income $ 11,345 $ 11,345 $ 12,057 $ 12,057 Data communications management income 1,349 1,349 1,420 1,420 Equipment and product sales, services and other 2,530 2,530 2,339 2,339 ---------------------------------------------------------- Total revenues 15,224 15,224 15,816 15,816 Costs of services: Costs of service fee income 3,002 3,002 3,607 3,607 Costs of data communications management income 912 912 988 988 Costs of equipment and product sales, services and other 2,075 2,075 1,733 1,733 Selling, general and administrative expenses 6,490 6,490 5,940 5,940 Depreciation and amortization 2,168 2,168 1,054 1,054 ---------------------------------------------------------- Total operating expenses 14,647 14,647 13,322 13,322 Operating income 577 577 2,494 2,494 Other income, net 16,072 16,072 23,036 23,036 ---------------------------------------------------------- Income before provision for income taxes, equity in loss of affiliate and minority interest 16,649 16,649 25,530 25,530 Provision for income taxes 9,092 6,986 9,828 4,526 Equity in loss of affiliate (5,541) (5,541) (9,811) (9,811) Minority interest (28) (28) (33) (33) ---------------------------------------------------------- Net income 1,988 4,094 5,858 (11,160) Net income per common share: Basic $ 0.19 $ 0.40 $ 0.59 $ 1.12 Diluted $ 0.18 $ 0.37 $ 0.56 $ 1.07 Weighted average shares outstanding: Basic 10,368 10,368 9,976 9,976 Diluted 10,960 10,960 10,409 10,409
18
Three Months Ended March 31, March 31, June 30, June 30, September 30, September 30, December 31, December 31, 2000 2000 2000 2000 2000 2000 2000 2000 As Reported As Revised As Reported As Revised As Reported As Revised As Reported As Revised Revenues: Service fee income $ 11,861 $ 11,861 $ 13,660 $ 13,660 $ 14,310 $ 14,310 $ 15,458 $ 15,458 Data communications management income 1,401 1,401 1,517 1,517 1,506 1,506 1,578 1,578 Equipment and product sales, services and other 2,517 2,517 2,108 2,108 2,012 2,012 1,711 1,711 ---------- ------------ ------------- ----------- ----------- ---------- ----------- ----------- Total revenues 15,779 15,779 17,285 17,285 17,828 17,828 18,747 18,747 Costs of services: Costs of service fee income 3,315 3,315 4,162 4,162 4,236 4,236 4,485 4,485 Costs of data communications management income 977 977 1,051 1,051 1,137 1,137 1,239 1,239 Costs of equipment and product sales, services, other 1,820 1,820 1,606 1,606 1,528 1,528 1,396 1,396 Selling, general and administrative expenses 6,254 6,254 6,726 6,726 6,884 6,884 7,153 7,153 Depreciation and amortization 960 960 1,078 1,078 1,205 1,205 1,160 1,160 ---------- ------------ ------------- ----------- ---------- ----------- ----------- ------------ Total operating expenses 13,326 13,326 14,623 14,623 14,990 14,990 15,433 15,433 Operating income 2,453 2,453 2,662 2,662 2,838 2,838 3,314 3,314 Other income, net 7,282 7,282 1,440 1,440 1,777 1,777 1,326 1,326 ---------- ------------ ------------- ----------- ---------- ----------- ----------- ------------ Income before provision (benefit) for income taxes, equity in loss of affiliate and minority interest 9,735 9,735 4,102 4,102 4,615 4,615 4,640 4,640 Provision (benefit) for income taxes 3,806 1,645 1,688 (661) 1,851 (438) 1,871 (3,001) Equity in loss of affiliate (5,686) (5,686) (6,181) (6,181) (6,023) (6,023) (12,820) (12,820) Minority interest (16) (16) (16) (16) 15 15 (11) (11) ---------- ------------ ------------- ----------- ----------- ---------- ----------- ------------ Net income (loss) 227 2,388 (3,783) (1,434) (3,244) (955) (10,062) (5,190) Net income (loss) per common share: Basic $ 0.02 $ 0.20 $ (0.29) $ (0.11) $ (0.25) $ (0.07) $(0.76) $(0.39) Diluted $ 0.02 $ 0.19 $ (0.29) $ (0.11) $ (0.25) $ (0.07) $(0.76) $(0.39) Weighted average shares outstanding: Basic 11,754 11,754 13,160 13,160 13,173 13,173 13,185 13,185 Diluted 12,420 12,420 13,160 13,160 13,173 13,173 13,185 13,185
19
Three Months Ended March 31, March 31, June 30, June 30, September 30, September 30, December 31, 2001 2001 2001 2001 2001 2001 2001 As Reported As Revised As Reported As Revised As Reported As Revised Revenues: Service fee income $ 23,802 $ 23,802 $ 27,026 $ 27,026 $ 29,654 $ 29,654 $ 34,108 Data communications management income 1,829 1,829 1,737 1,737 2,016 2,016 1,842 Equipment and product sales, services and other 1,415 1,415 1,618 1,618 3,158 3,158 2,567 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total revenues 27,046 27,046 30,381 30,381 34,828 34,828 38,517 Costs of services: Costs of service fee income 8,927 8,927 9,388 9,388 10,999 10,999 13,431 Costs of data communications management income 1,438 1,438 1,358 1,358 1,538 1,538 1,194 Costs of equipment and product sales, services and other 1,099 1,099 1,235 1,235 2,345 2,345 2,045 Selling, general and administrative expenses 9,058 9,058 10,544 10,544 10,936 10,936 11,966 Depreciation and amortization 2,508 2,508 2,886 2,886 2,981 2,981 3,108 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total operating expenses 23,030 23,030 25,411 25,411 28,799 28,799 31,744 Operating income 4,016 4,016 4,970 4,970 6,029 6,029 6,773 Other income, net 728 728 314 314 604 604 1,021 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income before provision (benefit) for income taxes, equity in loss of affiliate and minority interest 4,744 4,744 5,284 5,284 6,633 6,633 7,794 Provision (benefit) for income taxes 1,923 (250) 2,112 1,047 2,575 206 2,141 Equity in loss of affiliate (5,719) (5,719) (2,802) (2,802) (6,235) (6,235) (2,092) Minority interest (7) (7) (3) (3) (4) (4) (5) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net (loss) (2,905) (732) 367 1,432 (2,181) 188 3,556 Net (loss) income per common share: Basic $ (0.21) $ (0.05) $ 0.03 $ 0.10 $ (0.14) $ 0.01 $ 0.20 Diluted $ (0.21) $ (0.05) $ 0.02 $ 0.10 $ (0.14) $ 0.01 $ 0.19 Weighted average shares outstanding: Basic 13,776 13,776 13,894 13,894 15,711 15,711 17,890 Diluted 13,776 13,776 15,064 15,064 15,711 16,993 18,965
20 Balance Sheet
September 30 September 30 December 31, December 31, 1999 1999 1999 1999 As Reported As Revised As Reported As Revised Assets Current assets: Cash and cash equivalents $ 2,259 $ 2,259 $ 2,145 $ 2,145 Short term investments - - 200 200 Accounts receivable, net 8,919 8,919 9,099 9,099 Deferred tax assets 1,589 1,589 1,956 1,956 Inventory, prepaid expenses and other 2,727 2,727 2,610 2,610 ------------- -------------- ----------- ---------- Total current assets 15,494 15,494 16,010 16,010 Property and equipment, net 11,253 11,253 11,662 11,662 Intangible assets, net 19,970 19,970 20,600 20,600 Advances to Netzee 31,525 31,525 10,957 10,957 Investment in Netzee 5,457 5,457 40,446 40,446 Other noncurrent assets 2,992 2,992 1,220 1,220 ------------- -------------- ----------- ---------- Total assets 86,691 86,691 100,895 100,895 ============= ============== =========== ========== Liabilities and shareholders' equity Current liabilities: Current maturities of long-term debt 30,481 30,481 154 154 Accounts payable and accrued liabilities 8,565 8,565 6,387 6,387 Deferred revenue 4,635 4,635 5,777 5,777 ------------- -------------- ----------- ---------- Total current liabilities 43,681 43,681 12,318 12,318 Long-term debt, less current maturities 200 200 12,669 12,669 Deferred revenue 455 455 440 440 Deferred tax liability 8,475 6,369 22,633 15,225 ------------- -------------- ----------- ---------- Total liabilities 52,811 50,705 48,060 40,652 Minority interest 143 143 175 175 Commitments and contingencies Shareholders' equity: Preferred stock - - - - Common stock 29,600 29,600 42,657 42,657 Retained earnings 3,897 6,003 9,911 17,319 Accumulated other comprehensive income 240 240 92 92 ------------- -------------- ----------- ---------- Total shareholders' equity 33,737 35,843 52,660 60,068 ------------- -------------- ----------- ---------- Total liabilities and shareholders' equity 86,691 86,691 100,895 100,895 ============= ============== =========== ==========
21 Balance Sheet
March 31, March 31, June 30, June 30, September 30, September 30, 2000 2000 2000 2000 2000 2000 As Reported As Revised As Reported As Revised As Reported As Revised Assets Current assets: Cash and cash equivalents $ 12,215 $ 12,215 $ 3,877 $ 3,877 $ 1,237 $ 1,237 Short term investments 45,450 45,450 42,503 42,503 40,923 40,923 Accounts receivable, net 8,994 8,994 9,015 9,015 10,461 10,461 Advances to SLM Deferred tax assets 2,077 2,077 2,185 2,185 2,111 2,111 Inventory, prepaid expenses and other 3,002 3,002 4,576 4,576 4,680 4,680 -------- -------- ------- ------- ------- ------- Total current assets 71,738 71,738 62,156 62,156 59,412 59,412 Property and equipment, net 12,301 12,301 13,699 13,699 15,387 15,387 Intangible assets, net 21,566 21,566 25,966 25,966 24,815 24,815 Advances to Netzee 7,733 7,733 14,951 14,951 15,000 15,000 Investment in Netzee 41,638 41,638 35,800 35,800 30,283 30,283 Other noncurrent assets 1,391 1,391 2,435 2,435 2,667 2,667 -------- -------- ------- ------- ------- ------- Total assets 156,367 156,367 155,007 155,007 147,564 147,564 ======== ======== ======= ======= ======= ======= Liabilities and shareholders' equity Current liabilities: Current maturities of long-term debt 150 150 3,563 3,563 59 59 Accounts payable and accrued liabilities 4,182 4,182 4,120 4,120 2,185 2,185 Deferred revenue 6,055 6,055 6,502 6,502 5,537 5,537 -------- -------- ------- ------- ------- ------- Total current liabilities 10,387 10,387 14,185 14,185 7,781 7,781 Long-term debt, less current maturities 1,367 1,367 15 15 1,514 1,514 Deferred revenue 406 406 430 430 381 381 Deferred tax liability 25,264 15,696 25,262 13,345 25,516 11,310 -------- -------- ------- ------- ------- ------- Total liabilities 37,424 27,856 39,892 27,975 35,192 20,986 Minority interest 190 190 207 207 192 192 Commitments and contingencies Shareholders' equity: Preferred stock - - - - - - Common stock 108,608 108,608 108,590 108,590 109,101 109,101 Retained earnings 10,138 19,706 6,352 18,269 3,111 17,317 Accumulated other comprehensive income (loss) 7 7 (34) (34) (32) (32) -------- -------- ------- ------- ------- ------- Total shareholders' equity 118,753 128,321 114,908 126,825 112,180 126,386 -------- -------- ------- ------- ------- ------- Total liabilities and shareholders equity 156,367 156,367 155,007 155,007 147,564 147,564 ======== ======== ======= ======= ======= =======
22 Balance Sheet
March 31, March 31, June 30, June 30, September 30, September 30, 2001 2001 2001 2001 2001 2001 As Reported As Revised As Reported As Revised As Reported As Revised Assets Current assets: Cash and cash equivalents $ 3,079 $ 3,079 $ 4,122 $ 4,122 $ 47,490 $ 47,490 Short term investments - - 8 8 49,768 49,768 Accounts receivable, net 19,663 19,663 18,212 18,212 23,357 23,357 Deferred tax assets 4,659 4,659 4,033 4,033 3,776 3,776 Inventory, prepaid expenses and other 6,277 6,277 6,132 6,132 6,358 6,358 ------- ------- ------- ------- -------- -------- Total current assets 33,678 33,678 32,507 32,507 130,749 130,749 Property and equipment, net 23,516 23,516 24,500 24,500 24,731 24,731 Intangible assets, net 99,282 99,282 102,608 102,608 101,443 101,443 Advances to Netzee 7,075 7,075 8,715 8,715 9,950 9,950 Advances to SLM 12,065 12,065 Investment in Netzee 12,240 12,240 9,722 9,722 3,549 3,549 Other noncurrent assets 2,859 2,859 2,888 2,888 2,617 2,617 ------- ------- ------- ------- -------- -------- Total assets 178,650 178,650 193,005 193,005 273,039 273,039 ======= ======= ======= ======= ======== ======== Liabilities and shareholders' equity Current liabilities: Current maturities of long-term debt 32 32 16 16 - - Accounts payable and accrued liabilities 7,330 7,330 4,683 4,683 5,282 5,282 Deferred revenue 12,653 12,653 12,858 12,858 10,960 10,960 ------- ------- ------- ------- -------- -------- Total current liabilities 20,015 20,015 17,557 17,557 16,242 16,242 Long-term debt, less current maturities 11,269 11,269 26,386 26,386 6 6 Deferred revenue 507 507 480 480 463 463 Deferred tax liability 26,638 5,387 26,984 4,668 27,649 2,964 ------- ------- ------- ------- -------- -------- Total liabilities 58,429 37,178 71,407 49,091 44,360 19,675 Minority interest 210 210 213 213 216 216 Commitments and contingencies Shareholders' equity: Preferred stock - - - - - - Common stock 129,836 129,836 130,933 130,933 240,193 240,193 Retained earnings (9,856) 11,395 (9,489) 12,827 (11,671) 13,014 Accumulated other comprehensive income (loss) 31 31 (59) (59) (59) (59) ------- ------- ------- ------- -------- -------- Total shareholders' equity 120,011 141,262 121,385 143,701 228,463 253,148 ------- ------- ------- ------- -------- -------- Total liabilities and shareholders' equity 178,650 178,650 193,005 193,005 273,039 273,039 ======= ======= ======= ======= ======== ========
23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview We derive revenues primarily from the following sources: Service fees for: o core data processing and check imaging systems, support, maintenance and related services and software sales o EFT processing services Data communications management Equipment and product sales, services and other: o sales of banking-related equipment and complementary products o equipment maintenance and technical support services o related products and services. In our service bureau operations, we generate core data processing revenues from service and processing fees based primarily on the asset base of our financial institution customers, the number of transactions we process and the number of accounts we service. We recognize these revenues as we perform the services. We also generate revenues from the licensing of our core data processing systems. We recognize revenues for licensing these systems in accordance with Statement of Position 97-2 on "Software Revenue Recognition," issued by the American Institute of Certified Public Accountants. We recognize software license fees when we have signed a non-cancelable license agreement, shipped the product and satisfied significant obligations to the customer. We license Renaissance Imaging(TM) check imaging software on an in-house basis, and we generate revenues from up-front license fees and recurring annual maintenance fees charged for this system. We recognize revenues from the licensing of Renaissance Imaging in accordance with Statement of Position 97-2, as discussed above. We also provide check processing and imaging in a service bureau environment under which we generate recurring revenues. On a service bureau basis, we generate revenues based on the volume of items processed. We recognize this revenue as we provide the service. We derive EFT revenues principally from processing ATM and debit card transactions. We receive a base fee for providing our ATM processing services and an additional fee for each additional ATM serviced. Once the number of transactions by a financial institution exceeds established levels, typically between 1,500 and 2,500 transactions per month, we charge additional fees for these transactions. For debit card transactions, we currently receive a portion of the interchange fees generated by our financial institution customers, and we charge a monthly fee if our customers do not meet a specified minimum dollar amount of transactions for a particular month. During the second quarter of 2002, we will begin implementation of a new debit card pricing structure, under which we will receive a fee for each transaction processed. Under the new pricing, we will not receive a portion of the interchange fee for processing debit card transactions. We believe that this new pricing structure, once fully implemented, will not materially change our revenues from debit card processing and that it will materially reduce our exposure to any changes in interchange fees that may be implemented by Visa and MasterCard. Most charges due under our EFT service agreements are due and paid monthly. 24 We generate our data communications management service revenues principally from network management and from equipment configuration services and installation. We charge an installation fee and a regular monthly fee on an ongoing basis for providing telecommunications connectivity and network management. We recognize revenues from sales of equipment and complementary products at the time of shipment. We recognize maintenance and technical support service revenues as we provide the service. For the year ended December 31, 2001, approximately 86% of our total revenues were recurring revenues. Recurring revenues result from regular monthly payments by our customers for ongoing services used in connection with their business. These revenues do not include conversion or deconversion fees, initial software license fees, installation fees, hardware sales or similar activities. We offer Internet banking and voice response products through Netzee. We own approximately 28% of Netzee's outstanding common stock. We account for our investment in Netzee under the equity method, which requires us to record Netzee's results of operations in a single line item in our statement of operations titled "equity in loss of affiliate." Until September 1999, however, we owned a majority of Netzee's then outstanding common stock. Our ownership percentage in Netzee decreased to approximately 49% as of September 3, 1999 because of Netzee's issuance of its common stock in connection with transactions that occurred on that date. As a result, we discontinued consolidating Netzee's results of operations with our results of operations. Because we provided unlimited funding to Netzee through the completion of its initial public offering in November 1999, all of Netzee's losses before the completion of the offering were included in that line item rather than our relative percentage of those losses. Since Netzee completed its initial public offering, we record only our relative percentage of Netzee's net losses. In February 2000, we completed a public offering of common stock. Our proceeds from this offering, after deducting expenses related to the offering, were approximately $66.0 million. We used the proceeds of this offering to repay certain debt and fund our acquisitions completed in 2000 and 2001 and for working capital and other general corporate purposes. In August 2000, we completed the Advanced Computer Enterprises acquisition, which we accounted for as a pooling of interests. Except for the August 2000 acquisition, we have accounted for all of our acquisitions since our initial public offering as purchase transactions in our financial statements. On January 4, 2001, we acquired the U.S. core data processing, check imaging and item processing operations, as well as the BancLine software, from SLM. We paid $40.0 million in cash and issued or agreed to issue up to approximately 1.25 million shares of our common stock in the transaction, including up to 385,872 shares that represent contingent consideration. As of December 31, 2001, 78,455 of the contingent shares had been earned and 52,071 shares will never be earned. Effective February 1, 2001, we acquired from Netzee the asset/liability and regulatory reporting software of DPSC for approximately $14.1 million in cash and the assumption of $2.4 million of DPSC's net liabilities. Netzee used approximately $8.4 million of the cash proceeds to reduce its line of credit with us. In August and September 2001, we completed another public offering of common stock. Proceeds to us from this offering including the over allotment option (after deducting expenses related to the offering) were approximately $107.5 million. We used approximately $26.4 million of the proceeds of this offering to pay certain debt and expect to use the remainder for working capital 25 and other general corporate purposes, to fund future acquisitions (particularly our pending acquisition of iBill) and to fulfill our obligations under our revolving line of credit to Netzee. In October 2001, we acquired substantially all of the assets of Holmes and Shaw, Inc. and Superior Forms, Ltd. (together, "HSI"). Based in San Antonio, Texas, HSI is a full service provider of computer output solutions including data processing, laser document printing, and automated mailing services. Consideration for this purchase was approximately $25.2 million cash and assumed liabilities. We also completed three other acquisitions during 2001, for which we paid a total of $8.1 million, net, in cash. One of the agreements includes $206,500 in contingent consideration that will be paid and recorded as purchase price consideration if and when the contingencies are resolved. As noted in Item 1, Business - Pending Acquisitions, we announced after the close of trading on the Nasdaq Stock Market on March 19, 2002 a major expansion in our merchant processing operations. We have entered into a definitive agreement to acquire the assets of Internet Billing Company, Ltd., a Ft. Lauderdale-based provider of transaction processing for Web merchants. Separately, we also signed a binding letter agreement to acquire Electronic Payment Exchange, Inc., a provider of transaction processing services based in New Castle, Delaware. If we close these acquisitions as we anticipate, they will increase our revenues and earnings. We will have to use a substantial portion of our capital resources to close these acquisitions and integrate them into our businesses. We base our expenses to a significant extent on our expectations of future revenues. Most of our expenses are fixed in the short term, and we may not be able to reduce spending quickly if our actual revenues are lower than we expect. To enhance our long-term competitive position, we may also make decisions regarding pricing, marketing, services and technology that could have an adverse near-term effect on our financial condition and operating results. Because of the foregoing factors and other risk factors discussed in this report, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results are likely to fall below the expectations of securities analysts or investors in some future quarter. In that event, the trading price of our common stock would likely decline, perhaps significantly. Results of Operations The following table sets forth the percentage of revenues represented by certain items in our consolidated statements of operations for the indicated periods.
Year Ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Revenues ................................................. 100.0% 100.0% 100.0% Costs of services ........................................ 39.1 38.7 42.1 Selling, general and administrative expenses ............. 40.1 38.8 32.5 Depreciation and amortization ............................ 8.5 6.3 8.8 ----- ----- ----- Total operating expenses ................................. 87.7 83.8 83.4 ----- ----- ----- Operating income ......................................... 12.3 16.2 16.6 Other income, net ........................................ 74.8 17.0 2.0 ----- ----- ----- Income before provision (benefit) for income taxes, equity in loss of affiliate and minority interest ..... 87.1 33.2 18.7 ----- ----- ----- Provision (benefit) for income taxes ..................... 24.5 (3.5) 2.4 Equity in loss of affiliate .............................. (29.3) (44.1) (12.9) Minority interest ........................................ (0.2) (0.1) 0.0 ----- ----- ----- Net income (loss) ........................................ 33.1% (7.5)% 3.4% ===== ===== =====
26 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Revenues. Revenues increased 87.8%, to $130.8 million for the year ended December 31, 2001 from $69.6 million for the year ended December 31, 2000. The $61.1 million increase was primarily related to (a) $59.3 million generated by an increase in service fee income, (b) $1.4 million generated by an increase in data communications management income and (c) $410,000 generated by additional hardware sales. These increases are attributable to both internal growth and acquisitions. The revenue growth is primarily due to volume increases rather than price increases as price increases are generally limited to CPI increases. Costs of Services. Costs of services increased 104.1% to $55.0 million for the year ended December 31, 2001 from $27.0 million for the year ended December 31, 2000. The $28.0 million increase was primarily attributable to (a) an increase of $26.5 million related to service fee income (b) $1.1 million related to data communications management, and (c) $374,000 generated by additional hardware sales. As a percentage of revenues, costs of services increased to 42.1% for the year ended December 31, 2001 from 38.7% for the year ended December 31, 2000, primarily due to the acquisitions of SLM and HSI, which had gross margins which were less than InterCept's historical gross margin percentages. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 57.3% to $42.5 million for the year ended December 31, 2001 from $27.0 million for the year ended December 31, 2000. The $15.5 million increase was primarily due to additional personnel, facilities and infrastructure to support our growth and acquisitions and other miscellaneous expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 32.5% for the year ended December 31, 2001 from 38.8% for the year ended December 31, 2000, which was attributable to (a) increased leverage in our business model and (b) the acquisitions of SLM and HSI, which had lower selling, general and administrative expenses as a percentage of revenues than InterCept. Depreciation and Amortization. Depreciation and amortization increased 160.8% to $11.5 million for the year ended December 31, 2001 from $4.4 million for the year ended December 31, 2000. Operating Income. For the foregoing reasons, operating income increased $10.5 million to $21.8 million for the year ended December 31, 2001 from $11.3 million for the year ended December 31, 2000. As a percentage of revenues, operating income increased to 16.6% for the year ended December 31, 2001 from 16.2% for the year ended December 31, 2000. Interest and Other Income, net. Interest and other income decreased $9.1 million to $2.7 million for the year ended December 31, 2001 from income of $11.8 million for the year ended December 31, 2000. The decrease was primarily because we recognized a $600,000 gain related to the increase in our investment value in Netzee for the year ended December 31, 2001 (in accordance with Staff Accounting Bulletin No. 51), compared to an $8.0 million gain of that nature in 2000. 27 Provision (Benefit) for Income Taxes. The effective tax rate for the year ended December 31, 2001 excluding the tax benefit recorded on the equity in losses of Netzee was 38.9% as compared to 39.9% for the year ended December 31, 2000. The decrease in rate is mainly due to state tax planning initiatives implemented in 2001. Equity in Loss of Affiliate. Equity in loss of affiliate was $16.8 million for the year ended December 31, 2001 and $30.7 million for the year ended December 31, 2000. This amount represents our share of Netzee's losses. Minority Interest. Minority interest in income decreased $10,000 to $20,000 for the year ended December 31, 2001 from $30,000 for the year ended December 31, 2000. The decrease was primarily due to reduced profits in ProImage's operations. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Revenues. Revenues increased 33.0%, to $69.6 million for the year ended December 31, 2000 from $52.4 million for the year ended December 31, 1999. The $17.2 million increase was primarily related to (a) $15.6 million generated by an increase in service fee income, (b) $840,000 generated by an increase in data communications management income and (c) $830,000 generated by additional hardware sales. These increases are attributable to both internal growth and acquisitions. Costs of Services. Costs of services increased 31.8% to $27.0 million for the year ended December 31, 2000 from $20.5 million for the year ended December 31, 1999. The $6.5 million increase was primarily attributable to (a) an increase of $5.1 million related to service fee income (b) $840,000 related to data communications management, and (c) $600,000 generated by additional hardware sales. As a percentage of revenues, costs of services decreased slightly to 38.7% for the year ended December 31, 2001 from 39.1% for the year ended December 31, 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 28.7% to $27.0 million for the year ended December 31, 2000 from $21.0 million for the year ended December 31, 1999. The $6.0 million increase was primarily due to additional personnel we hired to support our growth and acquisitions and other miscellaneous expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 38.8% for the year ended December 31, 2000 from 40.1% for the year ended December 31, 2000. Depreciation and Amortization. Depreciation and amortization remained constant at $4.4 million for the years ended December 31, 2000 and 1999. During 1999 InterCept had a one-time amortization charge related to Netzee of approximately $1.0 million, which was offset by increased intangibles in 2000. Operating Income. For the foregoing reasons, operating income increased $4.8 million to $11.3 million for the year ended December 31, 2000 from $6.5 million for the year ended December 31, 1999. As a percentage of revenues, operating income increased to 16.2% for the year ended December 31, 2000 from 12.3% for the year ended December 31, 1999. Interest and Other Income, Net. Interest and other income decreased $27.3 million to $11.8 million for the year ended December 31, 2000 from income of $39.2 million for the year ended December 31, 1999. The decrease was primarily because we recognized only an $8.0 million gain related to the increase in our investment value in Netzee for the year ended December 31, 2000 (in accordance with Staff Accounting 28 Bulletin No. 51), compared to a $38.9 million gain of that nature in 1999. This decrease was partially offset by interest income of $3.6 million from investments of the proceeds from our public offering of stock in February 2000. For an explanation of the Netzee gain, see note 3 to our financial statements. Provision for Income Taxes. The effective tax rate for the year ended December 31, 2000 excluding the tax benefit recorded on the equity in losses of Netzee was 39.9% as compared to 44.3% for the year ended December 31, 1999. The tax provision in 1999 was higher due to the effect of permanent basis differences, including goodwill. Equity in Loss of Affiliate. Equity in loss of affiliate was $30.7 million for the year ended December 31, 2000 and $15.4 million for the year ended December 31, 1999. This amount represents our share of Netzee losses. Minority Interest. Minority interest decreased $90,000 to $30,000 for the year ended December 31, 2000 from $120,000 for the year ended December 31, 1999. The decrease was primarily due to reduced profits in ProImage's operations. Liquidity and Capital Resources Since our incorporation, we have financed our operations and capital expenditures through cash from operations, borrowings from banks and sales of our common stock. Our initial public offering in June 1998 resulted in net proceeds to us of $14.4 million. We raised $66.0 million through a public offering of common stock in February 2000 and an additional $107.5 million through another public offering of common stock in August and September 2001. Cash and cash equivalents were $24.9 million at December 31, 2001. Short-term investments with a maturity of one year or less were $50.3 million. Net cash provided by operating activities was $17.7 million for the year ended December 31, 2001, $9.0 million for the year ended December 31, 2000 and $4.7 million for the year ended December 31, 1999. The increase in the net cash provided by operating activities in 2001 as compared to 2000 was primarily attributable to an increase in earnings and depreciation and amortization partially offset by an increase in accounts receivable. The increase in the net cash provided by operating activities in 2000 as compared to 1999 was primarily attributable to an increase in earnings, excluding the non-cash effects of our investment in Netzee. Net cash used in investing activities was $106.9 million in 2001, $60.8 million in 2000 and $18.0 million in 1999. The increase in net cash used for investing activities in 2001 as compared to 2000 relates to cash paid for acquisitions and additional loans to Netzee and SLM. The increase in net cash used in investing activities in 2001 as compared to 1999 was attributable to investment of the proceeds from our offering of common stock completed in September 2000 as well as increased capital expenditures and acquisitions during 2001. Similarly, the increase in net cash used in investing activities in 2000 as compared to 1999 was attributable to investment of the proceeds from our offering of common stock completed in February 2000 as well as increased capital expenditures and acquisitions during 2000. Net cash provided by financing activities was $106.1 million for the year ended December 31, 2001, $57.7 million for the year ended December 31, 2000 and $11.9 million for the year ended December 31, 1999. The increase in net cash generated for 2001 compared to 2000 is due to the net proceeds from our offering of common stock completed in September 2001 of $107.5 million, offset by repayments of borrowings under our credit facility using a portion of the offering proceeds. Similarly, the increase in net cash generated for 2000 compared to 1999 is due to the net proceeds from our offering of common stock completed in February 2000 of $65.5 million, offset by repayments of borrowings under our credit facility using a portion of the offering proceeds. 29 Together with John H. Harland Company, we provide a revolving line of credit to Netzee. On March 29, 2002 we amended this facility to reduce the total amount of credit available and to extend the termination date to April 10, 2003. We currently provide to Netzee an $18.0 million revolving line of credit secured by substantially all of Netzee's assets. Of the total $18.0 million available to Netzee, we provide approximately $14.0 million and Harland provides approximately $4.0 million on a pro rata basis with us provided that we are obligated to advance the last $1.0 million without Harland's participation. In February 2001, we paid Netzee $14.1 million in cash and assumed $2.4 million of DPSC's net liabilities in exchange for regulatory reporting software and other assets formerly owned by Netzee's subsidiary, DPSC. Netzee has subsequently borrowed additional funds from us, and as of December 31, 2001, Netzee owed us a total of $10.1 million under this line of credit including accrued interest of approximately $182,000. Borrowings under this line of credit bear interest at prime plus 2%. Total interest on all borrowings for 2000 and 2001 was approximately $1.1 million and $1.1 million, respectively. We finance this line of credit with cash on hand and additional borrowings under our credit facility with First Union. Netzee may require additional funds to support its operations and to repay its borrowings from us. Netzee may seek to raise capital through public or private offerings of debt or equity, the sale of assets or from other sources. No assurance can be given that additional funds will be available on terms favorable to Netzee, if at all. Netzee's ability to continue as a going concern and to meet its obligations as they come due may depend upon its ability to raise additional capital funds. On May 31, 2001, we entered into a loan agreement with SLM under which we loaned SLM $12.0 million subject to various terms and conditions. Borrowings under the loan agreement bore interest at an annual rate equal to the one-month LIBOR plus 2% and were secured by up to approximately 1.25 million shares of our common stock then held or that may be earned by SLM. The loan was scheduled to mature on December 31, 2002. On August 13, 2001, SLM repaid the loan, including accrued interest, in full from the net proceeds of SLM's sale of 610,000 shares of our common stock in our public offering closed on that date. On December 3, 2001, we entered into a loan agreement with SLM under which we agreed to lend SLM $7.0 million subject to various terms and conditions. Borrowings under the loan agreement bear interest, payable upon maturity, at the prime rate and are secured by up to 591,871 shares of InterCept common stock that SLM now holds or may earn. The loan matures on September 30, 2002 and requires mandatory prepayments from the proceeds of sales of our common stock by SLM until the loan is repaid in full. During 2001, we entered into an amended and restated credit facility with First Union National Bank. Under this facility we may borrow up to $50.0 million for working capital and to fund acquisitions and related expenses. The First Union credit facility contains provisions that require us to maintain certain financial ratios and minimum net worth amounts and which restrict our ability to incur additional debt, make certain capital expenditures, enter into agreements for mergers, acquisitions or the sale of substantial assets and pay dividends. This credit facility matures on June 1, 2004. Interest is payable monthly, and outstanding principal amounts accrue interest, at our option, at an annual rate equal to either (a) a floating rate equal to the lender's prime rate minus 0.25% or (b) a fixed rate based upon the 30-day LIBOR rate plus applicable margins. On December 31, 2001, the interest rate under this facility was approximately 3.12% per year, and approximately $460,000 was outstanding under this facility. We funded the cash portion of the purchase price of our acquisitions in 2000 and 2001 through the use of cash on hand and borrowings under our line of credit with First Union National Bank. In the second quarter of 2002, we anticipate using a substantial portion of the capital resources available to us to fund the $112.0 million purchase price of iBill and up to $11.0 million of immediate working capital needs of EPX. To provide the approximately $123 million in cash we need for these purposes, we intend to draw on our First Union credit facility and use the remaining net proceeds from our 2001 public offering of common stock. As a result, our operating cash flows will be our principal source of short-term liquidity. Accordingly, we are unlikely to make any additional acquisitions that require a material amount of cash until we raise additional capital. We believe that to the extent that we rely on cash flows from operations to meet our short-term funding requirements, a decrease in demand for our products and services would not result in a material reduction in the availability of those funds. Because most of our customer contracts require the payment of monthly charges and have original terms of three to five years, we have a high percentage of recurring revenues. We believe that, other than our need for cash to fund our pending acquisitions, funds to be provided by operations will be sufficient to meet our anticipated capital expenditures and liquidity requirements for at least the next 12 months. We intend to grow, in part, through strategic acquisitions. Assuming we are able to raise additional capital, we expect to make additional expenditures to make acquisitions and integrate the acquired companies. We can give no assurances with respect to the actual timing and amount of the capital 30 we raise or of the acquisitions we may make with the capital so raised. In addition, no assurance can be given that we will complete any acquisitions on terms favorable to us, if at all, or that additional sources of financing will be available to us. Critical Accounting Policies Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve the most complex or subjective decisions or assessments and affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue recognition Revenues include service fees, data communication management fees, equipment sales, installation and maintenance, software license fees, and software maintenance. We recognize service fee income and data communication management fees as services are performed. We recognize revenue from equipment sales and installations upon installation of the product, and any related maintenance revenue is recognized ratably over the period during which the services are performed. We also generate revenues from the licensing of our core data processing systems. We recognize revenue for licensing these systems in accordance with Statement of Position 97-2, "Software Revenue Recognition" issued by the American Institute of Certified Public Accountants. Software license, hardware, and installation revenue is recognized after we have a signed non-cancelable license agreement, have installed the products, and have fulfilled all significant obligations to the customer. Maintenance fees are recognized over the term of the maintenance period. We sell certain of our software and hardware products under five-year, sales-type lease agreements through which customers pay five equal advance payments. These leases incorporate the initial installation and ongoing license fee for five years. Revenue for all lease agreements, with the exception of revenue attributable to equipment, which is recognized upon installation, is deferred and recognized ratably over the period of the lease. Allowance for doubtful accounts We record an allowance for doubtful accounts based on estimates of losses related to customer receivables balances. We develop estimates by evaluating specific customer accounts for risk of loss as well as historical credit memo data and other known factors for billing disputes that arise in the normal course of business. Fair value of assets acquired and liabilities assumed in purchase combinations The purchase combinations carried out by us require us to estimate the fair value of the assets acquired and liabilities assumed in our business. In general, we determine the fair value based upon information supplied by the management of the acquired entities and valuations by independent appraisal experts. The valuations have been based primarily upon future cash flow projections for the acquired assets, discounted to present value using a risk-adjusted discount rate. In connection with our acquisitions, we have recorded a significant amount of intangible assets. These assets are being amortized over the expected economic lives of the assets, generally ranging from 7 to 20 years. If we determine that we have over-estimated the economic life of these assets, we will begin to amortize the remaining unamortized carrying value of the assets over the newly estimated life. Accordingly, depreciation and amortization expense could be increased, and the amount of any increase could be material to our results of operations. 31 We also recorded a significant amount of goodwill in connection with our acquisitions. Through the end of 2001, we evaluated goodwill for impairment whenever indicators of impairment existed based on undiscounted projected future cash flows. If the carrying value of the goodwill was less than the undiscounted projected future cash flows, no impairment would be recognized. Beginning January 1, 2002, we adopted a recently issued accounting standard that requires us to evaluate our goodwill for impairment on an annual basis or whenever indicators of impairment exist. The evaluation will be based upon a comparison of the estimated fair value of the unit of our business to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that unit. The fair values used in this evaluation will be estimated based upon discounted future cash flow projections for the unit. These cash flow projections will be based on a number of assumptions as discussed above. If a change in estimate of fair value occurs after one year of the acquisition, the change would be recorded in our statement of operations. To date, we have not recorded an impairment of our goodwill or intangible assets. We believe that assumptions we have made in projecting future cash flows for the evaluations described above are reasonable. However, if future actual results do not meet our expectations, we may be required to record an impairment charge, the amount of which could be material to our results of operations. Investment in and advances to Netzee We currently own approximately 28% of Netzee's common stock. We account for our investment in Netzee using the equity method of accounting, under which the operations of Netzee are recorded on a single line item in our statements of operations, "equity in loss of affiliate." We do not consolidate Netzee's results of operations with our results of operations. Because we provided unlimited funding to Netzee until the completion of their initial public offering in November 1999, all of Netzee's losses prior to the completion of the offering are included in that line item rather than our relative percentage of those losses. Following the completion of the initial public offering, we have recorded only our relative percentage of Netzee's net losses. During 1999 and 2000, Netzee issued shares of common stock at a price above book value. As a result, we increased our investment in Netzee and recorded gains to reflect the increase in the value of our investment. We then decreased our investment for our portion of Netzee's losses described above. We review our investment in Netzee in accordance with Accounting Principles Board ("APB") Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." APB Opinion No. 18 provides that "a loss in value of an investment which is other than a temporary decline should be recognized." We compare our carrying value of the investment to the fair market value of the stock over time in order to determine when a loss in value that is other than temporary has occurred. As of December 31, 2001, our investment in Netzee was $1.5 million. The corresponding fair market value of our shares of Netzee's common stock was approximately $1.6 million, and thus we concluded that our investment was not impaired. Additionally, we have evaluated the business and financial projections of Netzee and have concluded, based on our review, that the amounts due from Netzee are collectible. Therefore, we have not established a reserve for the note as of December 31, 2001. 32 Relationship with Netzee InterCept and Netzee maintain a relationship to cross-market each other's products and services. During 2000 and 2001, we received $375,000 and $131,000, respectively, in commissions related to Netzee sales. We also shared certain facilities with Netzee and provided certain administrative services to Netzee. We charged Netzee approximately $163,000 and $108,000 in 2000 and 2001, respectively, for these shared costs. During 2000 and 2001, Netzee used us to purchase certain hardware and software used to implement Netzee's Internet and telephone banking products. In addition, we assisted Netzee in managing the ordering and inventory process related to this equipment. During 2000 and 2001, Netzee incurred approximately $435,000 and $152,000, respectively, in costs to purchase the equipment, which included a fee to us for their services. Relationship with SLM We provide telecommunications network and operations services and customer support services to SLM, as well as computer programming services. We recorded revenue of approximately $1.8 million related to services provided to SLM in 2001. We also charged SLM approximately $200,000 during 2001 for rent and building expenses related to certain SLM operations maintained at InterCept's facility. We have made two loans to SLM as described above in liquidity and capital resources and one of those loans remains outstanding. Disclosure Regarding Forward-Looking Statements We make forward-looking statements in this annual report. These statements are subject to risks and uncertainties, and we cannot assure you that they will prove to be correct. Forward-looking statements include assumptions as to how we may perform in the future. When we use words like "believe," "expect," "anticipate," "predict," "project," "potential," "seek," "continue," "will," "may," "could," "intend," "plan," "pro forma," "estimate," "goal," "strive" and similar expressions, we are making forward-looking statements. 33 We believe that the expectations reflected in our forward-looking statements are reasonable, but we cannot be sure that we will actually achieve these expectations. Projections or estimates of our future performance are necessarily subject to a high degree of uncertainty and may vary materially from actual results. In evaluating forward-looking statements, you should carefully consider various factors discussed below. Some of the following risks will apply to us only if we close our pending acquisitions of iBill and EPX as we expect. Please see in particular the risks under the heading Risks Related to Our Pending Acquisitions of iBill and EPX. Although we anticipate closing both acquisitions, we cannot assure you that we will in fact do so. If we do not complete the acquisitions of iBill and EPX for any reason, these particular risks will not apply to us, but our failure to close the acquisitions may have adverse consequences for us. For example, the price of our common stock may decline if the current market price of our common stock reflects an assumption that we will complete these acquisitions. In addition, our failure to close these acquisitions after having announced them may negatively affect our ability and prospects for consummating acquisitions in the future. Also, we have already incurred substantial costs related to these acquisitions that we must pay even if we do not close the acquisitions. RISKS RELATED TO OUR OPERATIONS Our rapid growth could strain our managerial, operational and financial resources, and our failure to manage our growth could cause our business to suffer. Our internal growth and acquisitions since our initial public offering in June 1998 have placed great demands on our business, particularly our managerial, operational and financial personnel and systems. For example, we have grown from approximately 170 employees on March 31, 1998 to approximately 1,300 employees on March 31, 2002. If we close the iBill and EPX transactions as we anticipate, we will add approximately 300 employees. Additional internal growth and acquisitions may further strain our resources. We cannot assure you that our systems, procedures, controls and existing facilities will be adequate to support the expansion of our operations, while maintaining adequate levels of customer service and satisfaction. Our future operating results will depend substantially on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. Our failure to respond to and manage changing business conditions as we expand could diminish the quality of our products and services, result in the loss of customers and weaken our operating results. Our acquisitions could result in integration difficulties, unexpected expenses, diversion of management's attention and other negative consequences. As part of our growth strategy, we have made numerous acquisitions since our initial public offering in June 1998, and we have two significant pending acquisitions. We plan to continue to acquire complementary businesses, products and services as a key element of our growth strategy. We must integrate the technology, products and services, operations, systems and personnel of acquired businesses with our own and attempt to grow the acquired businesses as part of our company. The integration of other businesses is a complex process and places significant demands on our management, financial, technical and other resources. The successful integration of businesses we have acquired in the past, are currently in the process of acquiring and may acquire in the future, is critical to our future success. If we are unsuccessful in integrating these businesses, our financial and operating performance could suffer. The risks and challenges associated with the acquisition and integration of acquired businesses include: 34 o we may be unable to centralize and consolidate our financial, operational and administrative functions with those of the businesses we acquire; o our management's attention may be diverted from other business concerns; o we may be unable to retain and motivate key employees of an acquired company; o we may enter markets in which we have little or no prior direct experience; o litigation, indemnification claims and other unforeseen claims and liabilities may arise from the acquisition or operation of acquired businesses; o the costs necessary to complete integration may exceed our expectations or outweigh some of the intended benefits of the transactions we complete; o we may be unable to maintain the customers or goodwill of an acquired business; and o the costs necessary to improve or replace the operating systems, products and services of acquired businesses may exceed our expectations. We may be unable to successfully integrate our acquisitions with our operations on schedule or at all. We cannot assure you that we will not incur large accounting charges or other expenses in connection with acquisitions or that acquisitions will result in cost savings or sufficient revenues or earnings to justify our investment in, or our expenses related to, these acquisitions. If we do not continue to expand our sales force and our marketing relationships, we may be unable to continue our growth. Our ability to expand our business will depend significantly upon our ability to expand our sales and marketing force and our strategic marketing relationships. Competition for experienced sales and marketing personnel is intense, and we may not be able to retain our existing personnel or locate and attract additional qualified personnel in the future. In addition, if we lose any of the relationships with various banking-related organizations for the marketing and endorsement of our products and services or are unable to enter into new ones, growth in our customer base and revenues could be impaired. Competition may impede our ability to acquire other businesses and may inhibit our growth. A significant part of our historic growth has been generated by acquisitions. We anticipate that a portion of our future growth may be accomplished through acquisitions. The success of this strategy depends upon our ability to identify suitable acquisition candidates, reach agreements to acquire these companies and obtain necessary financing on acceptable terms. In pursuing acquisition and investment opportunities, we may compete with other companies that have similar growth strategies. Some of these competitors may be larger and have greater financial and other resources than we have. This competition may render us unable to acquire businesses that could improve our growth or expand our operations. If our stock price drops, our ability to acquire other businesses will be impaired. We have financed the acquisitions we have completed since our initial public offering with a combination of our common stock, cash from common stock offerings, cash from our operations and borrowings made under our line of credit with First Union. If our stock price declines as a result of general market conditions or otherwise, the shareholders of businesses that we seek to acquire may be unwilling to 35 accept our common stock in exchange for their businesses. In that case, we would be required to use larger portions of our line of credit or cash from operations to continue to complete acquisitions, which would decrease our working capital and increase our interest expense. This could have a material negative impact on our financial performance and results of operations. Our credit facility with First Union restricts our ability to complete acquisitions without First Union's consent. We must comply with the financial and other covenants of the credit facility to be able to draw on our credit facility to fund our acquisitions. In addition First Union must approve any acquisition by us which has a purchase price in excess of $10 million. If we are unable to borrow funds under our credit line, we may be unable to make acquisitions that could be helpful to our business. The loss of our chief executive officer could have a material adverse effect on our business. John W. Collins, our chief executive officer, has substantial experience with our operations and our industry and has contributed significantly to our growth. Although we maintain key man life insurance on Mr. Collins and he works for us under the terms of an employment agreement, our customer and marketing relationships would likely be impaired and our business would likely suffer if we lost the services of Mr. Collins for any reason. If our processing centers or communications network suffers a systems failure or interruption, we may face customer service issues and be liable for damage suffered by our customers. Our operations depend upon our ability to protect our processing centers, network infrastructure and equipment. Damage to our systems or equipment or those of third parties that we use may be caused by natural disasters, human error, power and telecommunications failures, intentional acts of vandalism and similar events. Although we do have data and item processing centers in several locations that serve as back-ups for each other, we maintain only a single data communications switching facility and do not maintain a back-up location for our frame relay network hardware. Interruption in our processing or communications services could delay transfers of our customers' data, or damage or destroy the data. Sudden increases in ATM usage or debit card activity could result in slow response times in our network. Any of these occurrences could result in lawsuits or loss of customers, and may also harm our reputation. We depend on other providers for products and services necessary to our business, and if we cannot obtain satisfactory products and services on favorable terms, or at all, our business could suffer. We rely on other providers for Internet and telephone banking products and services, ATM and debit card manufacturing, fiber optic communications and other products and services that are essential to our business. For example, we use and market the Internet and telephone banking services of our affiliate, Netzee. If Netzee or any of our other providers terminates or changes its relationship with us, or if for any reason we are unable to obtain its products and services on favorable terms, we may be unable to meet our customers' needs on a timely basis. Similarly, if any of these providers is permanently or temporarily unable to provide its products and services to us as the result of natural disasters, technical difficulties or otherwise, we may be unable to provide our products and services to our customers. If the performance of these third party products and services does not meet our customers' expectations, it may damage our current customer relationships, harm our reputation and inhibit our ability to obtain new customers. 36 If our products and services contain errors, we may lose customers and revenues and be subject to claims for damages. Our new products and services and enhancements to our existing products and services may have undetected errors or failures, or could fail to achieve market acceptance, despite testing by our current and potential customers and by us. If we discover errors after we have introduced a new or updated product to the marketplace, we could experience, among other things: o delayed or lost revenues while we correct the errors; o a loss of customers or delay in market acceptance; and o additional and unexpected expenses to fund further product development. Our agreements with our customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. These provisions may not be effective because of existing or future federal, state or local laws or ordinances, or unfavorable judicial decisions. If our products and services fail to function properly, we could be subject to product liability claims, which could result in increased litigation expense, damage awards and harm to our business reputation. Because our business involves the electronic storage and transmission of data, security breaches and computer viruses could adversely affect us. Our online transaction processing systems electronically store and transmit sensitive business information of our customers. The difficulty of securely storing confidential information electronically has been a significant issue in conducting electronic transactions. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, such as banking records or credit information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and terminate their agreements with us, and could inhibit our ability to attract new customers. Technological changes may reduce the demand for our products and services or render them obsolete. The introduction of new technologies and financial products and services can render existing technology products and services obsolete. We expect other vendors to continually introduce new products and services, as well as enhancements to their existing products and services, that will compete with our products and services. To be successful, we must anticipate evolving industry trends, continue to apply advances in technology, enhance our existing products and services and develop or acquire new products and services to meet the demands of our customers. We may not be successful in developing, acquiring or marketing new or enhanced products or services that respond to technological change or evolving customer needs. We may also incur substantial costs in developing and employing new technologies. If we fail to adapt to changes in technologies, we could lose customers and revenues, and fail to attract new customers or otherwise realize the benefits of costs we incur. 37 We may not be able to protect our intellectual property rights. We attempt to protect our software, documentation and other written materials under trade secret and copyright laws, confidentiality procedures and contractual provisions, which afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. We cannot be sure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. If others claim that we have infringed their intellectual property rights, we could be liable for significant damages. We do not believe that any of InterCept's products infringe the proprietary rights of third parties. We cannot be sure, however, that third parties will not make infringement claims, and we have agreed to indemnify many of our customers against those claims. We have recently discovered that EPL, Inc., which sells software and services to credit unions, has filed a trademark registration application with the United States Patent and Trademark Office for the name "TellerPlus." The EPL mark and registration could adversely affect our use of the mark "TellerPlus" with respect to banks. We anticipate that the number of infringement claims will increase as the number of products and services increases and the functionality of products in different industry segments overlaps. Any of those claims, whether with or without merit, could be time-consuming, result in costly litigation and may not be resolved on terms favorable to us. Fluctuations in our operating results may negatively affect the trading price of our common stock. Our operating results have varied in the past and may fluctuate significantly in the future as a result of many factors. These factors include: o the possible negative impact of implementing our growth and acquisition strategies, including accounting charges and other expenses associated with our acquisitions; o the loss of customers or strategic relationships; o competition and pricing pressures; o a reduction in recurring revenues as a percentage of total revenues; o increased operating expenses due to launches of new products and services, and sales and marketing efforts; and o changes in interchange and transaction fees of MasterCard(R) and Visa(R). Many factors that affect our operating results are outside of our control. Because of these factors, it is likely that in some future period our financial results will fall below the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline, perhaps significantly. 38 If we fail to comply with privacy regulations imposed on providers of services to financial institutions, our business could be harmed. As a provider of services to community financial institutions, we are required to comply with privacy regulations imposed on financial institutions. We are bound by the same limitations on disclosure of the information received from our customers as apply to the financial institutions themselves. If we fail to comply with these regulations, we could damage our customer relationships, harm our reputation and inhibit our ability to obtain new customers. Our limited combined operating history makes it difficult to evaluate our business. Since our incorporation in May 1996 we have completed numerous acquisitions, including several acquisitions in 2001. The financial information included in this annual report is based in part on the separate pre-acquisition financial results of the companies we have acquired. As a result, your evaluation of us is based on a limited combined operating history. Our historical results of operations and our other financial information may not give you an accurate indication of our future results of operations or prospects. RISKS RELATED TO OUR OWNERSHIP IN NETZEE Because we own a minority interest in Netzee and Netzee is expected to continue to have significant losses, our future financial performance may be adversely affected. In September 1999, we completed a series of transactions that removed from our operations some Internet and telephone banking products and services that we purchased during 1999. Netzee, of which we own approximately 28% of its outstanding common stock, now conducts these operations. Our historical financial results for 1999 therefore include results of operations that we no longer have. Although we no longer include Netzee's operations in our financial results on a combined basis, we record a relative percentage of the operating income and losses of Netzee in a single line item on our statement of operations, "equity in loss of affiliate." Netzee has a history of losses and may never become profitable. The impact of Netzee's results of operations on our financial condition, including our shareholders' equity, is uncertain, and we cannot be sure that we will benefit from our ownership in Netzee. If Netzee does not become profitable, it may not be able to repay the loans we have made and may make to it in the future. We provide to Netzee, jointly with John H. Harland Company, an $18.0 million revolving line of credit secured by substantially all of Netzee's assets. Of the total $18.0 million available to Netzee, we provide approximately $14.0 million and Harland provides approximately $4.0 million on a pro rata basis with us provided that we are obligated to advance the last $1.0 million without Harland's participation. As of March 25, 2002, the total amount outstanding on InterCept's loans to Netzee was approximately $10.5 million. We may lend additional amounts to Netzee to fund its working capital needs or operations. Netzee has a history of losses and may never become profitable. As a result, Netzee may be unable to repay the loans we made to it, which would reduce the value of our investment in Netzee and our shareholders' equity. Our relationship with Netzee presents potential conflicts of interest, which may result in decisions that favor Netzee over our shareholders. Because Netzee and InterCept are both engaged in the sale of technology products and services to community financial institutions, numerous potential conflicts of interest exist between our companies. We compete with each other when offering some products and services to potential customers. Our bylaws contain provisions addressing potential conflicts of interest between us and Netzee and the allocation of 39 transactions that, absent the allocation, could constitute corporate opportunities of both companies. Under these provisions, Netzee may take advantage of a corporate opportunity rather than presenting that opportunity to us, absent a clear indication that the opportunity was directed to us rather than to Netzee. Our existing and future agreements and relationships with Netzee have not resulted and will not necessarily result from arm's length negotiations. Two of our directors serve as directors and are significant shareholders of Netzee. One of those directors, Donny R. Jackson, was our President until October 2000 and is currently the Chief Executive Officer of Netzee. John W. Collins, our Chairman and Chief Executive Officer, is the Chairman of the Board of Directors of Netzee. When the interests of Netzee diverge from our interests, Netzee's officers and directors may exercise their influence in Netzee's best interests. Therefore, our agreements and relationships with Netzee may be less favorable to us than those that we could obtain from unaffiliated third parties. Moreover, many of the transactions between Netzee and us do not lend themselves to precise allocations of costs and benefits. Thus, the value of these transactions will be left to the discretion of the parties, who are subject to potentially conflicting interests. Other than the provisions of our bylaws relating to corporate opportunities, the only mechanism in place to resolve these conflicts of interest is our policy that transactions with affiliated parties be approved by a majority of our disinterested directors. Nevertheless, due to the extensive relationships between Netzee and us, we may make decisions that potentially favor Netzee or its affiliates at the expense of our shareholders. Furthermore, Georgia law may prohibit you from successfully challenging these decisions if the decision receives the affirmative vote of a majority, but not less than two, of our disinterested directors who received full disclosure of the existence and nature of the conflict. The inability of Netzee to continue as a going concern, or its receipt of an audit report from its independent auditors that is qualified to that effect, or to continue trading on the Nasdaq National Market could materially affect the price of our common stock. Because of our significant ownership interest in Netzee, Netzee's low stock price and concerns about its financial viability may affect our stock price. Nasdaq has notified Netzee that it is out of compliance with Nasdaq's $5.0 million minimum market value requirements. If Netzee fails to comply with this requirement, it will be subject to delisting. The value of our minority interest in Netzee is based in part on the fair market value of Netzee's common stock as reported on the Nasdaq National Market. As of December 31, 2001, the carrying value of our investment in Netzee was $1.5 million, which was less than the market value of $1.6 million as of that date. As of March 25, 2002, the market value of our investment in Netzee is approximately $560,000. If Netzee becomes unable to continue as a going concern, we will have to write down the carrying values of our investment in and our outstanding advances to Netzee. If we take these actions, our stock price may be adversely affected. We could face liabilities due to our large stock ownership of Netzee and the number of our directors who also serve as directors of Netzee. Because we own approximately 28% of Netzee's outstanding common stock and two of Netzee's six directors are also directors of InterCept, we could be subject to various liabilities related to Netzee's business and operations. For example, if Netzee were sued in a lawsuit, we could be named a co-defendant as a result of our ownership interest in and director relationships with Netzee. Although we do not believe that would be proper cause for us to be liable, any lawsuit in which we are a named defendant could result in large litigation expenses and distract us from running our business while we defend our position. 40 RISKS RELATED TO OUR INDUSTRY Because many of our competitors have significantly greater resources than we do, we may be unable to gain market share. Because our business includes a variety of products and services, we generally face different competitors within each area of our business. In our core banking and data processing business, we compete with numerous companies that have national operations and significant assets. Our principal EFT competitors include regional ATM networks, regional and local banks that perform processing functions, non-bank processors and other independent technology and data communications organizations. In each of these areas, many of our competitors have longer operating histories, greater name recognition and substantially greater resources than we do. If we compete with them for the same geographic market, their financial strength could prevent us from capturing market share in those areas. In addition, the competitive pricing pressures that would result from an increase in competition from these companies could have a material adverse effect on our business, financial condition and results of operations. Some of our competitors have established cooperative relationships among themselves or with third parties to increase their ability to address customer needs. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We cannot assure you that we will be able to compete successfully with existing or new competitors. If we fail to adapt to emerging market demands or to compete successfully with existing and new competitors, our business, financial condition and results of operations would be materially adversely affected. If current legal actions against Visa and MasterCard result in a reduction of the interchange fees those companies may charge, our revenues may decrease. We generate a significant amount of revenue from interchange fees, which are the interbank fees paid by merchants when they accept credit and debit cards. The interchange fees are set by Visa and MasterCard. Visa and MasterCard have been sued by the Department of Justice, or DOJ, for alleged violation of the Federal antitrust laws arising out of their respective functionally identical policies of (a) allowing members in the respective organization to issue cards participating in the other organization's system, and (b) prohibiting their members from issuing cards in competing systems other than Visa, MasterCard or Citigroup, the largest owner/member of Visa and MasterCard. The potential impact of this litigation on us depends upon whether or not the DOJ is successful, and if it is successful, the relief ordered by the court. Visa and MasterCard also have been sued in a class action case brought by merchants who allege that Visa and MasterCard's tying rules - which require merchants who accept Visa and MasterCard credit cards to accept all cards associated with their logos, including debit cards - violate antitrust laws. The merchants contend that the Visa and MasterCard interchange fees for debit cards are too high and that they should be able to choose whether to accept those debit cards. If this class action lawsuit is successful and the interchange fees that Visa and MasterCard charge merchants are reduced, the revenues that we derive from interchange fees could be materially reduced. 41 Community financial institutions are subject to industry consolidation, and we may lose customers with little notice. We market our products and services primarily to community financial institutions. Many large financial institutions perform their own transaction processing and data communications management and therefore do not use third party providers like us. The banking industry is prone to consolidations that result from mergers and acquisitions. Our existing customers may be acquired by or merged with other financial institutions. Any purchase or merger may result in a lost customer for us because the acquiring financial institution may not use our products and services. Although we have included in most of our contracts a charge for early termination of the contract without cause, these charges would be insufficient to replace the recurring revenues that we would have received if the financial institution had continued as a customer. The banking industry is highly regulated, and changes in banking regulations could negatively affect our business. Our banking customers are subject to the supervision of several state and federal government regulatory agencies. If bank regulations change, or if new regulations are adopted to regulate the products and services offered or used by community financial institutions, we could suffer an increase in the costs of providing our products and services. Moreover, if any new or revised regulations diminish the need for our services, we could lose customers and suffer a decline in revenues. We are subject to government and private regulation, and an increase in regulatory requirements or tax burdens could place a strain on our business. Various federal and state regulatory agencies examine our data processing operations from time to time. These agencies can make findings or recommendations regarding various aspects of our operations, and we generally must follow those recommendations to continue our data processing operations. If we fail to comply with these regulations, our operations and processing revenues could be negatively affected. Our ATM network operations are subject to federal regulations governing consumers' rights. Fees charged by ATM owners are currently regulated in several states, and legislation regulating ATM fees has been proposed in several other states. Additional legislation may be proposed and enacted in the future, or existing consumer protection laws may be expanded to apply to ATM fees. If the number of ATMs decreases as a result of such legislation, then our EFT revenues may decline. Furthermore, we are subject to the regulations and policies of various ATM and debit card associations and networks. If we lost our privileges to provide transaction processing services across these networks, our revenues from ATM and debit card transaction processing would decrease significantly. As a transaction processing company, we may be subject to state taxation of certain portions of the fees charged for our services. Application of this tax is an emerging issue in the industry, and the states have not yet adopted uniform guidelines implementing these regulations. If we are required to bear all or a portion of these costs and are unable to pass these costs through to our customers, our financial condition and results of operations would be adversely affected. 42 RISKS RELATED TO OUR PENDING ACQUISITIONS OF IBILL AND EPX Our revenues from the sale of services to merchants who use Visa and MasterCard are dependent upon our continued Visa and MasterCard certification and financial institution sponsorship, and loss or suspension of this certification and sponsorship could adversely affect our business. To provide our transaction processing services, we must be designated a certified processor by, and be a member service provider of, MasterCard and be designated as an independent sales organization of Visa. This designation depends on our being sponsored by member clearing banks of both organizations and our continuing adherence to the standards of the Visa and MasterCard associations. The member financial institutions of Visa and MasterCard, some of which are our competitors, set the standards with which we must comply. If we fail to comply with these standards, our designation as a certified processor, a member service provider or an independent sales organization could be suspended or terminated. The termination of our member service provider status or our status as a certified processor, or any changes in the Visa and MasterCard rules that prevent our registration, or otherwise limit our ability to provide transaction processing and marketing services for the Visa or MasterCard organizations, would result in the loss of business from Visa or MasterCard issuing customers, and lead to a severe reduction in our revenues. If our charge-back rate becomes excessive, credit card associations can fine us or terminate our ability to accept credit cards for payment. In cases of fraud or disputes between cardholders and merchants, we face charge-backs when cardholders dispute items for which they have been billed. Charge-backs may arise from the unauthorized use of the cardholder's name or bank account information or from a cardholder's claim that a merchant failed to perform. If a billing dispute between a credit card holder and a merchant is not resolved in favor of the merchant, the transaction is normally charged back to the merchant, and the purchase price is refunded to the cardholder. If our charge-back rate becomes excessive, credit card associations can fine us or terminate our ability to accept credit cards for payment. If we are prohibited from accepting credit cards for payment, our ability to compete could be impaired and our business would suffer. In the third quarter of 2001, Visa determined that iBill violated its operating rules by having excessive charge-backs which resulted in fines. We may incur excessive charge-backs in the future that could result in additional fines or the termination of our ability to accept credit cards for payment, either of which would adversely affect our financial condition and results of operations. Changes in card association fees, products or practices could increase our costs or otherwise limit our operations. From time to time, Visa, MasterCard, Discover, American Express and Diners Club increase the organization and/or processing fees (known as interchange fees) that they charge for each transaction using their card. For example, in April 1999 Visa and MasterCard increased their fees by up to 10%. Competitive pressures might force us to absorb a portion of those increases in the future, which would increase our operating costs and reduce our margins. Furthermore, the rules and regulations of the various card associations and networks prescribe certain capital requirements. Any increase in the capital level required would further limit our use of capital. Online payment processing systems might be used for illegal or improper purposes, which could expose us to additional liability and harm our business. Despite our efforts to review and monitor the types of transactions we process, all online payment processing systems remain susceptible to potentially illegal or improper uses. These may include 43 illegal online gaming, fraudulent sales of goods and services, software and other intellectual property piracy, child pornography trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. Our business could suffer if customers use our system for illegal or improper purposes. Our product features may infringe claims of third-party patents, which could affect our business and profitability. We could be sued for patent infringement. If we are unable to defend ourselves successfully against these lawsuits, we could be required to restructure our payment system, stop offering our payment product altogether, or pay substantial damages. If all or any portion of our service were found to infringe a patent and we are unable to obtain a license, or if a preliminary injunction were issued, we could be required to restructure our payment system, stop offering our payment product altogether, or pay substantial damages, which could have a material adverse effect on our business, prospects, results of operations and financial condition. We could be sued at any time in the future by persons claiming patent infringement. iBill is presently defending a patent infringement lawsuit. If all or any portion of our services were found to infringe this patent, we could be required to restructure our payment system, stop offering our payment product altogether or pay substantial damages. Even if we prevail in a lawsuit, litigation can be expensive and can consume substantial amounts of management time and attention. Because some of the transactions iBill processes are for the adult entertainment industry, our reputation with our customers and in the investment community may be harmed and the price of our common stock may decline. iBill processes transactions for merchants in many different industries, including the adult entertainment industry. Certain current and potential customers as well as investors, lenders, and others may be reluctant or refuse to do business with us, participate in the market for our common stock, provide financing, or offer related services because we process transactions for the adult entertainment industry. This may negatively affect our business, financial results, the price of our common stock or limit our ability to raise capital in the future. Our customers may not adopt our online payment methods as soon as we intend, which would limit our growth and may cause our stock price to decline. Our future profitability will depend, in part, on our ability to implement our strategy to increase adoption of our online payment methods. We cannot assure you that the relatively new market for online payment mechanisms will remain viable. We expect to invest substantial amounts to: o drive merchant awareness of electronic payments; o encourage merchants to sign up for and use our electronic payment products; o enhance our infrastructure to handle seamless processing of transactions; o continue to develop our technology; and o diversify our customer base. We may fail to increase the adoption of our electronic payment methods as we intend, which would adversely impact revenues and cause our business to suffer. 44 We face strong competition in the merchant processing and online processing businesses. In our online processing business we will compete with other online processing companies like Global Payment Technologies, Inc. and PayPal, Inc. In our merchant processing business, we will compete with large merchant processors like Chase Merchant Systems, National Processing, Paymentech, U.S. Bancorp, First Data, Concord EFS and others. In each of these areas, many of our competitors have longer operating histories, greater name recognition and substantially greater resources than we do. We cannot assure you that we will be able to compete successfully with these and other existing or new competitors. OTHER RISKS OF OWNING OUR STOCK A few people control a large portion of our stock and may vote their shares in ways contrary to your interests. Our executive officers and directors beneficially own approximately 21.2% of our outstanding common stock as of March 15, 2002. As a result, our executive officers and directors can exercise control over our company and have the power to influence the election of a majority of the directors, the appointment of management and the approval of actions requiring a majority vote of our shareholders. Their interests may conflict with your interest as a shareholder, and they could use their power to delay or prevent a change in control, even if a majority of the shareholders desired a change. Future sales of shares of our common stock may negatively affect our stock price. To carry out our growth strategies, we plan to acquire other businesses and products using a combination of our stock and cash, and we may also sell additional shares of our stock to raise money for expanding our operations. Sales of substantial amounts of common stock in the public market or the prospect of such sales could adversely affect the market for our common stock. These sales also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. As of March 1, 2002, we had 18,143,033 shares of common stock outstanding and options outstanding to acquire an additional 3,088,817 shares of common stock. If SLM earns any portion or all of the 392,140 shares of our common stock potentially issuable to it under our purchase agreement with SLM, your ownership interest in our company would be diluted. Additionally, we have reserved 500,000 shares of common stock for issuance pursuant to our employee stock purchase plan which became effective on July 1, 2001, and any issuance pursuant to this plan would also dilute your ownership interest in our company. The failure to sustain our current growth rates or to achieve expected growth rates could adversely affect the price of our common stock. We have experienced significant growth since our inception. Our revenues have increased from $33.3 million in 1998 to $130.8 million in 2001. This revenue growth is attributed to both the internal growth of our business, as well as revenue growth achieved through acquisitions we have completed. Either our internal growth rate or our total growth rate, or both, may decline significantly in the future due to factors within or beyond our control. Our failure to sustain current growth rates, or achieve growth rates expected by stock market analysts, could have a material adverse impact on the trading price of our common stock. 45 Georgia law, our articles of incorporation and bylaws and some of our employment agreements contain provisions that could discourage a third party from attempting to acquire your shares at a premium to the market price. Some provisions of our articles of incorporation, our bylaws and Georgia law make it more difficult for a third party to acquire control of our company, even if a change in control would be beneficial to our shareholders. Some of our executive officers have entered into employment agreements with us that contain change in control provisions. These provisions may discourage or prevent a tender offer, proxy contest or other attempted takeover. In addition, we have in the past and may in the future create and issue new classes of preferred stock that have greater rights than our common stock. These superior rights may include greater voting rights, entitlement to dividends and preferential treatment in the event of a change in control, liquidation, consolidation or other circumstances. Any shares of preferred stock that we issue may discourage a third party from attempting to acquire our shares of common stock at a premium price. We cannot predict every event and circumstance that may impact our business --------------------------------------------------------------------------- and, therefore, the risks and uncertainties discussed above may not be the only - ------------------------------------------------------------------------------- ones you should consider. The risks and uncertainties discussed above are in - ---------------------------------------------------------------------------- addition to those that apply to most businesses generally. In addition, as we - ----------------------------------------------------------------------------- continue to grow our business, we may encounter other risks of which we are not - ------------------------------------------------------------------------------- aware at this time. These additional risks may cause serious damage to our - -------------------------------------------------------------------------- business in the future, the impact of which we cannot estimate at this time. - --------------------------------------------------------------------------- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We do not use derivative financial instruments in our operations or investments and do not have significant operations subject to fluctuations in foreign currency exchange rates. Borrowings under the First Union credit facility accrue interest at a fluctuating rate based either upon the lender's prime rate or LIBOR. As of March 15, 2002, no borrowings were outstanding under this facility. Any future borrowings will increase our exposure to interest rate fluctuations. Changes in interest rates that increase the interest rate on the credit facility would make it more costly to borrow under that facility and may impede our acquisition and growth strategies if we determine that the costs associated with borrowing funds are too high to implement these strategies. Additional loans to Netzee may increase the amount outstanding under this facility. We have loaned SLM $7.0 million and we have a $14.0 million line of credit to Netzee. As of March 25, 2002, $10.5 million was outstanding on the Netzee line of credit. Changes in interest rates that decrease the interest rates on these loans will decrease our interest income. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. We refer you to our Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Shareholders' Equity, Consolidated Statements of Cash Flows, Notes to Consolidated Financial Statements, and Report of Independent Public Accountants attached hereto as pages F-1 through F-26. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 46 PART III As permitted by applicable SEC rules, we have omitted some information required by Part III from this annual report because we will file a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 not later than 120 days after the end of the financial year covered by this annual report. Some information to be included in that proxy statement is incorporated by reference into this annual report. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 is incorporated by reference from our proxy statement for the 2002 annual meeting of shareholders under the heading "Election of Directors (Proposal 1)." ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is incorporated by reference from our proxy statement for the 2002 annual meeting of shareholders under the heading "Executive Compensation," except for those portions relating to our compensation committee's report on executive compensation and to our comparative performance. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is incorporated by reference from our proxy statement for the 2002 annual meeting of shareholders under the heading "Security Ownership." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is incorporated by reference from our proxy statement for the 2002 annual meeting of shareholders under the heading "Corporate Governance." 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements Our consolidated financial statements as of December 31, 2000 and 2001 and for each of the three years in the period ended December 31, 2001, together with the report thereon of Arthur Andersen LLP, dated February 15, 2002, appear on pages F-1 to F-26 of this Annual Report and are incorporated into this Item by reference. 2001 Financial Statement Schedules REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To InterCept, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of InterCept, Inc. (formerly The InterCept Group, Inc.) included in this Form 10-K and have issued our report thereon dated March 29, 2002. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The foregoing schedule is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Atlanta, Georgia March 29, 2002 The following financial statement schedule of the registrant and related independent auditors' report are included in this Report on Form 10-K: Page ---- Independent Auditors' Report F-2 Schedule II-Valuation and Qualifying Accounts 48 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. The registrant owns 28% of the outstanding common stock of Netzee, Inc. The consolidated financial statements of Netzee, Inc. as of December 31, 2000 and 2001 and for each of the three years in the period ended on December 31, 2001, together with the report thereon of Arthur Andersen LLP, dated February 15, 2002, with the exception of preferred stock and lines of credit in Note 21 which is dated March 29, 2002, are filed as Exhibit 99.2 to this Annual Report. Schedule II Valuation and Qualifying Accounts (in thousands)
Beginning Acquisition Charges to Ending Description Balance reserves Expense Deductions Balance ----------- --------- ----------- ---------- ---------- ------- 1999 Restructuring reserve related to acquisition $110 $100 $ 0 $159 $ 51 2000 Restructuring reserve related to acquisition $ 51 $ 0 $ 0 $ 51 $ 0 2001 Restructuring reserve related to acquisition $ 0 $ 0 $281 $ 52 $229
48
Beginning Acquisition Charges to Ending Description Balance Reserves Expense Writeoffs Balance ----------- --------- ----------- ---------- --------- ------- 1999 Allowance for Doubtful Accounts $170 $190(a) $125 $ (99) $386 2000 Allowance for Doubtful Accounts 386 0 903 (648) 641 2001 Allowance for Doubtful Accounts 641 300(a) 918 (913) 946
(a) Amounts associated with current year acquisitions. (b) Reports on Form 8-K. On December 24, 2001, the registrant reported under Item 5 of Form 8-K a loan to SLMsoft.com Inc. (c) Exhibits The exhibits listed in the accompanying exhibit index are filed as part of this Annual Report on Form 10-K. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. InterCept, Inc. By: /s/ John W. Collins --------------------------------------------- John W. Collins Chairman and Chief Executive Officer Date: March 29, 2002 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, John W. Collins and Scott R. Meyerhoff, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ---- /s/ John W. Collins Chairman of the Board and Chief March 29, 2002 - ------------------------------------------ John W. Collins Executive Officer (principal executive officer) /s/ Scott R. Meyerhoff Senior Vice President, Chief March 29, 2002 - ------------------------------------------ Scott R. Meyerhoff Financial Officer and Secretary (principal financial and accounting officer) /s/ Donny R. Jackson Director March 28, 2002 - ------------------------------------------ Donny R. Jackson /s/ Jon R. Burke Director March 28, 2002 - ------------------------------------------ Jon R. Burke /s/ Boone A. Knox Director April, 1, 2002 - ------------------------------------------ Boone A. Knox
50
/s/ John D. Schneider, Jr. Director March 28, 2002 - ------------------------------------------ John D. Schneider, Jr. /s/ Glenn W. Sturm Director March 29, 2002 - ------------------------------------------ Glenn W. Sturm
51 INTERCEPT, INC. AND SUBSIDIARIES (FORMERLY THE INTERCEPT GROUP, INC.) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 2000 AND 2001 TABLE OF CONTENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 2000 and 2001 (as revised for 2000) Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000, and 2001 (as revised for 1999 and 2000) Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 2000, and 2001 (as revised for 1999 and 2000) Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000, and 2001 (as revised for 1999 and 2000) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To InterCept, Inc.: We have audited the accompanying consolidated balance sheets of InterCept, Inc. (formerly The InterCept Group, Inc.) (a Georgia corporation) AND SUBSIDIARIES as of December 31, 2000 and 2001 (2000 as revised - see Note 2) and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001 (1999 and 2000 as revised - see Note 2). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InterCept, Inc. and subsidiaries as of December 31, 2000 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Atlanta, Georgia March 29, 2002 F-2 INTERCEPT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 2001 (in thousands, except share amounts)
December 31, December 31, ASSETS 2000 2001 - ---------------------------------------------------------------------------- ------------- ------------- (as revised) CURRENT ASSETS: Cash and cash equivalents $ 8,061 $ 24,917 Short-term investments 37,484 50,289 Accounts receivable, less allowance for doubtful accounts of $641 and $946 in 2000 and 2001, respectively 9,960 20,271 Current portion of advances to SLM 5,000 7,025 Deferred tax assets 1,666 1,470 Inventory, prepaid expenses, and other 3,023 8,973 ------------ ------------ Total current assets 65,194 112,945 PROPERTY AND EQUIPMENT, net 16,883 28,108 INTANGIBLE ASSETS, net 24,786 128,204 ADVANCES TO NETZEE, (Note 13) 15,000 10,118 INVESTMENT IN AFFILIATE (Note 4) 17,729 1,462 OTHER NONCURRENT ASSETS 2,534 2,431 ------------ ------------ $142,126 $283,268 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ---------------------------------------------------------------------------- CURRENT LIABILITIES: Current maturities of long-term debt $ 45 $ 0 Accounts payable and accrued liabilities 3,188 10,143 Deferred revenue 5,054 9,315 ------------ ------------ Total current liabilities 8,287 19,458 LONG-TERM DEBT, less current maturities 4,513 465 DEFERRED TAX LIABILITY 7,201 2,867 DEFERRED REVENUE 453 445 ------------ ------------ Total liabilities 20,454 23,235 ------------ ------------ MINORITY INTEREST 202 222 ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, no par value; 1,000,000 shares authorized, none issued and outstanding in 2000 and 2001, respectively 0 0 Common stock, no par value; 50,000,000 shares authorized, 13,197,139 and 18,086,766 shares issued and outstanding in 2000 and 2001, respectively 109,340 243,293 Retained earnings 12,127 16,571 Accumulated other comprehensive income (loss) 3 (53) ------------ ------------ Total shareholders' equity 121,470 259,811 ------------ ------------ $142,126 $283,268 ============ ============ The accompanying notes are an integral part of these consolidated balance sheets.
F-3 INTERCEPT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001 (in thousands, except per share amounts)
Year Ended December 31 --------------------------------------- 1999 2000 2001 ------------ ------------ ---------- (as revised) (as revised) REVENUES: Service fee income $39,677 $ 55,289 $114,590 Data communications management income 5,163 6,002 7,424 Equipment and product sales, services, and other 7,519 8,348 8,758 ------- -------- -------- Total revenues 52,359 69,639 130,772 ------- -------- -------- COSTS OF SERVICES: Cost of service fee income 11,145 16,198 42,745 Cost of data communications management income 3,561 4,404 5,528 Cost of equipment and product sales, services, and other 5,746 6,350 6,724 ------- -------- -------- Total costs of services 20,452 26,952 54,997 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 20,992 27,017 42,504 DEPRECIATION AND AMORTIZATION 4,462 4,403 11,483 ------- -------- -------- Total operating expenses 45,906 58,372 108,984 ------- -------- -------- OPERATING INCOME 6,453 11,267 21,788 INTEREST EXPENSE (718) (202) (540) INTEREST AND OTHER INCOME, NET 39,890 12,027 3,207 ------- -------- -------- INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES, EQUITY IN LOSS OF AFFILIATE, AND MINORITY INTEREST 45,625 23,092 24,455 PROVISION (BENEFIT) FOR INCOME TAXES 12,804 (2,454) 3,144 EQUITY IN LOSS OF AFFILIATE (15,352) (30,710) (16,848) MINORITY INTEREST (120) (28) (19) ------- -------- -------- NET INCOME (LOSS) 17,349 (5,192) 4,444 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Unrealized holding losses arising during period (94) (89) (56) -------- -------- -------- Total comprehensive income (loss) $17,255 $ (5,281) $ 4,388 ======= ======== ======== NET INCOME (LOSS) PER COMMON SHARE: Basic $1.72 $(0.41) $0.29 ======= ======== ======== Diluted $1.64 $(0.41) $0.27 ======= ======== ========
The accompanying notes are an integral part of these consolidated statements. F-4 INTERCEPT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001 (in thousands, except share amounts)
Accumulated Other Retained Common Stock Comprehensive Earnings ---------------------- Income (Accumulated Shares Amount (Loss) Deficit) Total --------- --------- ------------- ------------ --------- BALANCE, December 31, 1998 9,581,039 $ 17,542 $ 186 $ (15) $ 17,713 Issuance of common stock in connection with exercise of stock options 25,416 74 0 0 74 Common stock dividends 0 0 0 (15) (15) Net income (as revised) 0 0 0 17,349 17,349 Unrealized loss on investments, net 0 0 (94) 0 (94) Issuance of common stock in connection with acquisitions 844,017 11,998 0 0 11,998 Income tax benefits related to exercises of stock options 0 129 0 0 129 Gain related to stock issuance of Netzee subject to put option 0 12,914 0 0 12,914 ---------- --------- --------- --------- -------- BALANCE, December 31, 1999 (as revised) 10,450,472 42,657 92 17,319 60,068 Issuance of common stock in connection with exercise of stock options 100,172 707 0 0 707 Note received from shareholder for exercise of stock options 0 (208) 0 0 (208) Interest earned on note receivable from shareholder 0 (8) 0 0 (8) Issuance of common stock, net of expenses 2,650,000 65,528 0 0 65,528 Retirement of stock at cost (3,505) (32) 0 0 (32) Net loss (as revised) 0 0 0 (5,192) (5,192) Unrealized loss on investments, net 0 0 (89) 0 (89) Income tax benefits related to exercises of stock options 0 696 0 0 696 ---------- --------- --------- --------- --------- BALANCE, December 31, 2000 (as revised) 13,197,139 109,340 3 12,127 121,470 Release of shares held in escrow related to acquisition 17,500 0 0 0 0 Issuance of common stock in connection with exercise of stock options 218,310 2,405 0 0 2,405 Interest earned on note receivable from shareholder 0 (5) 0 0 (5) Repayment of note received from shareholder for exercise of stock options 0 221 0 0 221 Income tax benefits related to exercises of stock options 0 1,593 0 0 1,593 Issuance of common stock in connection with acquisitions 946,525 22,032 0 0 22,032 Net income 0 0 0 4,444 4,444 Unrealized loss on investments, net 0 0 (56) 0 (56) Issuance of common stock in connection with the employee stock purchase plan 7,277 207 0 0 207 Issuance of stock to directors 15 1 0 0 1 Issuance of common stock, net of expenses 3,700,000 107,499 0 0 107,499 ---------- --------- --------- --------- --------- BALANCE, December 31, 2001 18,086,766 $243,293 $ (53) $ 16,571 $259,811
The accompanying notes are an integral part of these consolidated statements. F-5 INTERCEPT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, 2001 (in thousands, except share amounts)
Year ended December 31 ------------------------------------ 1999 2000 2001 ---------- -------- --------- (as revised) (as revised) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 17,349 $(5,192) $ 4,444 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 1,920 2,348 4,437 Amortization 2,542 2,055 7,046 Amortization of loan costs 0 68 67 (Gain) loss on disposal of property and equipment 0 (15) 8 Minority interest 120 28 19 Deferred income tax provision 6,851 (7,735) (3,981) Income tax benefit related to the exercise of stock options 129 696 1,593 Gain due to Netzee equity transactions (Note 3) (38,920) (7,993) (581) Equity in loss of affiliate 15,352 30,710 16,848 Stock compensation charge 480 0 0 Changes in operating assets and liabilities, net of effects of purchase acquisitions: Accounts receivable (2,363) (1,075) (10,423) Inventory, prepaid expenses, and other 619 (302) (3,719) Other assets (51) (171) 212 Accounts payable and accrued liabilities 167 (3,252) 2,314 Deferred revenue 538 (1,131) (627) --------- -------- --------- Net cash provided by operating activities 4,733 9,039 17,657 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in note receivable 17 22 0 (Advances to) repayments from SLM for acquisition 0 (5,000) 5,000 (Advances to) repayments from Netzee, net (10,957) (4,043) 4,882 Advances to SLM under notes receivable, net (Note 13) 0 0 (4,114) Capital contributions to affiliate (155) 0 0 Purchases of property and equipment, net (4,937) (7,444) (10,608) Additions to capitalized software (539) (929) (1,236) Purchase of businesses, net of cash acquired (1,222) (5,020) (87,933) Increase in investments, net (240) (38,431) (12,861) --------- -------- --------- Net cash used in investing activities (18,033) (60,845) (106,870) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable and line of credit 45,331 16,098 109,760 Payments on notes payable and line of credit (33,312) (24,363) (113,853) Proceeds from issuance of common stock, net of expenses 74 66,019 110,107 Retirement of common stock 0 (32) 0 Payment of common dividends (15) 0 0 Payment of shareholder note 0 0 221 Payment of debt issuance costs (129) 0 (166) --------- -------- --------- Net cash provided by financing activities 11,949 57,722 106,069 --------- -------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,351) 5,916 16,856 CASH AND CASH EQUIVALENTS, beginning of year 3,496 2,145 8,061 --------- -------- --------- CASH AND CASH EQUIVALENTS, end of year $ 2,145 $ 8,061 $ 24,917 ========= ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 750 $ 157 $ 467 ========= ======== ========= Cash paid for income taxes $ 3,989 $ 6,372 $ 6,465 ========= ======== ========= Non-cash investing activities: InterCept common stock issued for acquisitions, 844,017, 0, and 946,525 shares in 1999, 2000 and 2001, respectively $ 11,998 $ 0 $ 22,032 Netzee common stock issued for acquisitions, 6,016,137 shares in 1999 $ 69,086 $ 0 $ 0 The accompanying notes are an integral part of these consolidated statements.
F-6 INTERCEPT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 2000, AND 2001 1. ORGANIZATION AND NATURE OF BUSINESS InterCept, Inc. ("InterCept"), formerly The InterCept Group, Inc., is a single-source provider of a broad range of technologies, products, and services that work together to meet the electronic commerce and operating needs of community financial institutions in the United States. Over 1,900 of these community financial institutions have contracted with InterCept for one or more of its technologies, products, and services, which include electronic funds transfer transactions, core bank processing systems, check imaging systems, and data communications management networks, laser document printing and automated mailing services, as well as services related to each of these products and systems. In February 2000, InterCept completed a public offering of its common stock. Proceeds to InterCept from this offering (after deducting expenses related to the offering) were approximately $65.5 million. Proceeds of this offering were used to pay certain debt, to fund future acquisitions and investments, partially to fund the operations of Netzee, Inc. ("Netzee") and for other general working capital needs. In August and September 2001, InterCept completed a public offering of its common stock. Proceeds to InterCept from this offering including the overallotment option (after deducting expenses related to the offering) were approximately $107.5 million. Approximately $26.4 million of the proceeds of this offering were used to pay certain debt and the remainder has been or will be used for working capital and other general corporate purposes, to fund future acquisitions, and to fulfill InterCept's obligations under its revolving line of credit to Netzee. InterCept was incorporated on April 30, 1996 and has made several acquisitions since inception. See Note 3 for a discussion of these acquisitions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of InterCept and its wholly-owned subsidiaries InterCept Communications Technologies, Inc., SBS Data Services, Inc., C-TEQ, Inc., InterCept Services, LLC, ICPT Acquisitions I, LLC, DPSC Acquisition Corp., InterCept TX I, LLC, InterCept Output Solutions, LP, and InterCept Supply, LP as of December 31, 2001. In addition, ProImage, Inc. ("ProImage"), a corporation in which InterCept has a 67% ownership interest as of December 31, 2001, has been consolidated in InterCept's financial statements since its inception, due to Intercept's control of ProImage. Management of InterCept retains responsibility for all the day-to-day operations of ProImage and has and will continue to provide complete financial support for ProImage due to legal limitations on the other shareholder's ability to fund losses. All significant intercompany accounts and transactions have been eliminated in consolidation. Minority interest represents the minority shareholder's proportionate share of the equity and earnings of ProImage. In the third quarter of 1999, Direct Access Interactive, Inc. ("Direct Access"), one of InterCept's wholly-owned subsidiaries, issued shares of its common stock in connection with several transactions discussed in Note 3. Direct Access was then merged into a new subsidiary, Netzee, Inc. ("Netzee"), which issued additional shares of common stock on September 3, 1999 as discussed in Note 3. As a result of these transactions, InterCept's ownership percentage in Netzee decreased to approximately 49%. InterCept has accounted for its investment in Netzee after September 3, 1999 under the equity method, under which the operations of Netzee are recorded on a single line item in the statements of operations, "equity in loss of affiliate." Because InterCept provided unlimited funding to Netzee until the completion of Netzee's initial public offering in F-7 November 1999, all of Netzee's losses prior to the completion of the offering are included in that line item rather than InterCept's relative percentage of those losses. Following the completion of the initial public offering, InterCept has recorded only its relative percentage of Netzee's net losses. As of December 31, 2001, InterCept owned approximately 28% of Netzee's common stock. Revision of Financial Statements During 1999 and 2000, Netzee issued shares of common stock at a price above book value. In accordance with Staff Accounting Bulletin No. 51, InterCept recorded corresponding gains to reflect the increase in the value of the shares of Netzee that it owned, which are included in "investment in affiliate" on InterCept's balance sheet. Because these gains are not taxable until realized, InterCept recorded a deferred tax liability on its balance sheet to reflect the amount of estimated tax that would be owed upon sale of the shares. Since its initial public offering, Netzee has reported operating losses. Because InterCept used the equity method to account for its investment in Netzee, InterCept recorded its proportionate share of Netzee's losses as a reduction to "investment in affiliate," which reduced the book value of the investment in Netzee. As InterCept recorded its equity in those losses, a deferred tax benefit should have been recorded as a reduction against the deferred tax liability recorded previously. As a result, InterCept's previously reported results of operations have been revised to reflect a deferred tax benefit in 1999 and 2000 as follows:
1999 2000 ---------------------------- --------------------------- As reported As revised As reported As revised ------------ ---------- ----------- ---------- Provision (benefit) for income taxes $ 20,212 $ 12,804 $ 9,216 $ (2,454) Net income (loss) $ 9,941 $ 17,349 $ (16,862) $ (5,192) Basic earnings (loss) per share $ 0.99 $ 1.72 $ (1.32) $ (0.41) Diluted earnings (loss) per share $ 0.94 $ 1.64 $ (1.32) $ (0.41)
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents InterCept considers all short-term, highly liquid investments with an original maturity date of three months or less to be cash equivalents. Short-term Investments Short-term investments totaled $37.5 million and $50.3 million at December 31, 2000 and 2001, respectively. InterCept categorizes all of its investment securities as available for sale, which are recorded at fair value. Unrealized gains and losses on available for sale securities are reported net of tax effects as adjustments to shareholders' equity and as a component of comprehensive income (loss). Realized gains and losses and declines in value judged to be other than temporary are included in InterCept's results of operations. The cost of securities sold is based on the specific identification method. The majority of InterCept's investments represent certificates of deposit, short-term commercial paper and other similar investments. Total realized gains related to these investments were approximately $6,000 for the year ended December 31, 2001. Gross unrealized gains and losses relating to these investments as of December 31, 2001 are not significant. Property and Equipment Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Major additions and improvements are charged to the property accounts, while replacements, maintenance, and repairs which do not improve or extend the lives of respective assets are expensed in the current period. Estimated useful lives for InterCept's assets are as follows: F-8 Building and improvements 3 to 39 years Machinery and equipment 3 to 30 years Furniture and office equipment 3 to 10 years Software licenses 3 to 7 years Intangible Assets Intangible assets include goodwill, customer contracts, capitalized product technology, workforce in place, customer lists and relationships, patents and trademarks, and a marketing agreement. Goodwill Goodwill represents the excess of the purchase price over the net tangible and identifiable intangible assets of acquired businesses. Goodwill is amortized on a straight-line basis over periods of 5 to 40 years. Customer Contracts and Relationships In connection with certain of InterCept's acquisitions, InterCept allocated a portion of the purchase price to acquired customer contracts based on a discounted cash flow analysis of the applicable contracts. The estimated fair values attributed to the contracts are being amortized over a period of 5 years to 20 years, which represented the estimated average remaining life of the contracts. Product Technology Product technology represents software acquired as well as capitalized software development costs for software to be sold. Product technology is amortized on a straight-line basis over five to ten years. InterCept capitalizes software-development costs incurred from the time technological feasibility of the software is established as evidenced by the completion of a detailed program design until the software is saleable. InterCept capitalized $539,000, $929,000 and $1.2 million in capitalized software for 1999, 2000 and 2001, respectively. These costs are amortized at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, generally five years. Amortization of capitalized software development costs begins as products are made available for sale or as the related product is put into use. Amortization expense totaled approximately $140,000, $235,000, and $703,000 in 1999, 2000, and 2001, respectively. Research and development costs and maintenance costs related to software development are expensed as incurred. Customer Lists and Marketing Agreement In conjunction with one of InterCept's 2000 acquisitions and four of InterCept's 2001 acquisitions, InterCept allocated a portion of the purchase price to acquired customer lists and a marketing agreement based on estimated revenue streams to be generated from these assets. The estimated fair values are being amortized over a period of 7 to 20 years. Internally Developed Software Costs InterCept applies the provisions of the American Institute of Certified Public Accounts ("AICPA") Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to the development of internal use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. During 1999, 2000, and 2001, InterCept capitalized approximately $290,000, $644,000, and $888,000 of costs related to the development of internal use software. These costs are included in purchases of property and equipment, net in the accompanying statements of cash flows. As of F-9 December 31, 2001, this development project was still ongoing, and thus amortization of these costs has not yet begun. Segment Reporting InterCept does not disclose segment information as it believes it has only one segment. InterCept offers its multiple products and services to the same customer base of financial institutions. Additionally, management reviews company performance on a consolidated level rather than on a product or service level. Revenue Recognition Revenues include service fees, data communication management fees, equipment sales, installation and maintenance, software license fees, and software maintenance. Service fee income and data communication management fees are recognized as services are performed. Revenue from equipment sales and installations is recognized upon installation of the product, and any related maintenance revenue is recognized ratably over the period during which the services are performed. Revenue from software sales is recognized in accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition." Licensed hardware and installation revenue is recognized upon installation, and maintenance fees are recognized over the term of the maintenance period. InterCept sells certain of its software and hardware products under five-year, sales-type lease agreements through which customers pay five equal advance payments. These leases incorporate the initial installation and ongoing license fee for five years. Revenue for all lease agreements is deferred and recognized over the period of the lease, with the exception of revenue attributable to equipment, which is recognized upon installation. Minimum Lease Payments Receivable As noted above, InterCept sells certain software and hardware products under sales-type leases. At December 31, 2001, future minimum lease payments receivable under non-cancelable leases are as follows (in thousands): 2002 $361 2003 332 2004 183 2005 66 2006 0 ----- Total minimum lease payments receivable 942 Less amount representing interest (131) ----- Present value of net minimum lease payments receivable 811 Less current maturities of lease payments receivable (290) ----- Lease payments receivable, net of current portion $521 ===== The current and noncurrent portion of the lease payments receivable is included in accounts receivable and other assets, respectively, in the accompanying balance sheets. Deferred Revenue Deferred revenue represents the liability for advanced billings to customers primarily related to license fees and maintenance contracts. Such amounts are recognized as revenue when the related services are performed. Impairment of Long-Lived Assets InterCept reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recognized when the undiscounted future cash flows estimated to be generated by the asset are not sufficient to recover the unamortized balance of the asset. An impairment loss would be recognized based on the difference between the carrying values and estimated fair value. The estimated fair value will be determined based on either the discounted future cash flows or other appropriate fair value methods with the amount of any such deficiency F-10 charged to income in the current year. If the asset being tested for recoverability was acquired in a business combination, intangible assets resulting from the acquisition that are related to the asset are included in the assessment. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. The Company also evaluates the amortization periods assigned to its intangible assets to determine whether events or changes in circumstances warrant revised estimates of useful lives. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of InterCept's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for a portion of the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax-planning strategies. Fair Value of Financial Instruments The fair value of financial instruments classified as current assets or liabilities, including cash and cash equivalents, accounts receivable, and accounts payable, approximate carrying value due to the short-term maturity of the instruments. The fair value of short-term and long-term debt amounts approximate carrying value and are based on their effective interest rates compared to current market rates. Advertising Costs InterCept expenses all advertising costs as incurred. Net (Loss) Income Per Common Share Basic earnings per share are computed based on the weighted average number of total common shares outstanding during the respective periods. Diluted earnings per share are computed based on the weighted average number of total shares of common stock outstanding, adjusted for common stock equivalents. Comprehensive Income (Loss) Comprehensive income (loss) is the total of net income (loss) and all other nonowner changes in shareholders' equity. For the years ended December 31, 1999, 2000, and 2001, other comprehensive loss consists of unrealized holding losses on marketable securities of $150,000, $147,000, and $90,000, respectively, net of related tax effects of $56,000, $58,000, and $34,000, respectively. There were no gains realized on marketable securities in net income (loss) for the year ended December 31, 1999, and thus, there were no reclassification adjustments to comprehensive income. Realized gains of approximately $8,000 and $6,000 were recognized and reclassified from comprehensive income (loss) to interest and other income, net in the accompanying statements of operations for the years ended December 31, 2000 and 2001, respectively. F-11 New Accounting Pronouncements In June 2001 the Financial Accounting Standards Board ("FASB") approved Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill ceased on December 31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill and other indefinite life intangible assets for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The adoption of SFAS No. 142 will result in InterCept's discontinuation of amortization of its goodwill; however, InterCept will be required to test its goodwill for impairment under the new standard beginning in the first quarter of 2002, which could have an adverse effect on InterCept's future results of operations if an impairment occurs. InterCept has not yet completed its impairment analysis. Amortization of goodwill for the years ended December 31, 1999, 2000, and 2001 totaled approximately $592,000, $1,137,000, and $4,034,000, respectively. In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for InterCept's 2003 fiscal year and is not expected to have a material effect on InterCept's financial position or results of operations. In August 2001, the FASB approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." The statement establishes a single accounting model for the impairment or disposal of long-lived assets. The statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and supercedes accounting and reporting under Accounting Principles Board Opinion No. 30 for the disposal of a segment of a business. The statement is effective for InterCept's 2002 fiscal year and will be applied prospectively. 3. ACQUISITIONS On January 11, 1999, InterCept acquired certain assets and assumed certain liabilities of Eastern Software, Inc., a provider of loan portfolio management software. InterCept paid approximately $450,000, which exceeded the net tangible asset value of Eastern Software by approximately $507,000. This excess has been allocated to goodwill and is being amortized over a period of five years. The results of operations of the acquired business have been included in InterCept's financial statements from the date of acquisition. The agreement included contingent consideration based on future revenues. During 2000 and 2001, approximately $50,000 and $7,000, respectively, of contingent consideration was paid and was added to goodwill. On March 9, 1999, InterCept acquired Direct Access, a provider of telephone banking and Internet banking services to financial institutions. InterCept issued approximately 151,000 shares of its common stock with a fair market value of approximately $1.4 million and assumed long-term debt of approximately $300,000. The consideration exceeded the net tangible asset value of Direct Access by approximately $1.8 million, which was allocated to goodwill and was being amortized over a period of five years. This acquisition has been accounted for as a purchase. The results of operations of the acquired business have been included in InterCept's consolidated financial statements from the date of acquisition until the date of deconsolidation discussed below. On May 28, 1999, InterCept acquired L.E. Vickers & Associates, Inc. ("LEV") and Data Equipment Services, Inc. LEV was a provider of core data processing and Data Equipment Services was an equipment and maintenance provider. InterCept issued approximately 501,000 shares of its common stock with a fair market value of approximately $6.5 million. The consideration exceeded the net tangible asset value of LEV and Data Equipment Services by approximately $5.4 million, which was allocated to goodwill and is being amortized over a period of 20 years. This acquisition has been accounted for as a purchase. The results of operations of the acquired business have been included in InterCept's financial statements from the date of acquisition. F-12 On August 6, 1999, InterCept acquired SBS Data Services, Inc. ("SBS Data"), an Alabama corporation that provides core data processing services for community financial institutions, in exchange for approximately 192,000 shares of InterCept's common stock with a fair market value of approximately $4.1 million. The consideration exceeded the net tangible asset value of SBS Data by approximately $3.8 million. This excess was allocated to the following intangible assets with the following amortization lives: Contracts $ 400,000 5 years Workforce 100,000 3 years Goodwill 3,300,000 20 years At the same time, Direct Access merged with SBS Corporation, an Alabama corporation which provided Internet and telephone banking, check imaging, and optical storage products and services to community financial institutions. Total consideration paid by Direct Access was approximately $16.6 million in cash, 2.6 million shares of Direct Access common stock valued at $11.50 per share, and repayment of approximately $4.9 million in debt owed by SBS Corporation. The former shareholders of SBS Corporation had the right to put the shares back to Direct Access at $11.50 per share if Direct Access did not complete an initial public offering by August 6, 2001. The put option expired in November 1999 upon completion of Netzee's (formerly Direct Access) initial public offering. To enable Direct Access to complete this transaction, InterCept borrowed $21.6 million under its line of credit and loaned these funds to Direct Access (Note 13). After the merger, Direct Access sold all of the assets of SBS Corporation, other than its Internet and telephone banking assets, to InterCept in exchange for 450,000 shares of Direct Access common stock owned by InterCept. InterCept's consideration exceeded the net tangible asset value of the acquired assets by approximately $5.3 million. This excess was allocated to the following intangible assets with the following amortization lives: Contracts $ 400,000 5 years Workforce 100,000 3 years Goodwill 4,800,000 10 years During 2000, InterCept incurred approximately $192,000 of costs related to the acquisitions of SBS Data and SBS Corporation, which was added to goodwill. In August 1999, InterCept formed Netzee, a wholly-owned subsidiary, for the purpose of combining Direct Access and several other businesses, as discussed below: 1. Pursuant to an agreement and plan of merger between Netzee and Direct Access, Direct Access merged with and into Netzee. The shareholders of Direct Access received one share of Netzee common stock for each share of Direct Access common stock they owned. 2. Pursuant to an asset contribution agreement between InterCept, Netzee, and The Bankers Bank, a Georgia banking corporation, Netzee acquired various assets and assumed certain liabilities related to the Internet banking division of The Bankers Bank. As consideration, Netzee issued 1,361,000 shares of its common stock to The Bankers Bank valued at $11.50 per share. Pursuant to an asset contribution agreement between InterCept, Netzee, and TIB The Independent Banker's Bank ("TIB"), a Texas banking association, Netzee acquired various assets and assumed certain liabilities related to the Internet banking division of TIB. As consideration, Netzee issued 1,361,000 shares of its common stock to TIB valued at $11.50 per share. Additional consideration of 76,000 shares of common stock was issued to a third party for $100,000 in connection with these acquisitions. 3. Pursuant to an agreement and plan of merger by and among Netzee, Dyad Corporation, a Georgia corporation, and certain shareholders of Dyad, Dyad merged with and into Netzee. As consideration, Netzee paid to Dyad's shareholders approximately $900,000 in cash and approximately 618,000 shares of Netzee common stock valued at $11.50 per share. Netzee also repaid approximately $3.5 million in debt of Dyad at the closing. Based in Norcross, Georgia, Dyad develops proprietary loan application and approval and fulfillment software. F-13 4. Netzee also acquired Call Me Bill, LLC, a provider of 24-hour electronic bill payment services to financial institutions' customers, for $3.3 million in cash. To enable Netzee to complete these transactions, InterCept loaned to Netzee approximately $7.3 million. This loan was in addition to the $21.6 million loaned to Netzee, as the successor to Direct Access, in connection with the merger of Direct Access and SBS Corporation in August 1999. As a result of the issuance of the shares of Netzee in connection with these transactions, InterCept's ownership in Netzee decreased to approximately 49% on September 3, 1999. Because Netzee issued stock at a price in excess of its book value during 1999 and 2000, InterCept's net investment in Netzee increased. In 1999, InterCept recognized gains totaling approximately $59.7 million related to the increases in InterCept's investment value in accordance with Staff Accounting Bulletin No. 51. Of this amount, approximately $38.9 million is included in interest and other income in the accompanying statements of operations. The remaining gain of $20.8 million, net of income tax effects of $7.9 million, was recorded directly to equity as it was generated from the issuance of puttable stock to SBS Corporation discussed above. This put option expired in November 1999 upon the completion of Netzee's initial public offering. In 2000 and 2001, InterCept recognized additional gains under SAB No. 51 totaling approximately $8.0 million and $581,000, respectively, which is included in interest and other income in the accompanying statements of operations. During the first and second quarters of 2000, InterCept completed several acquisitions. The consideration exchanged for these acquisitions was approximately $4.8 million. The acquisitions were accounted for as purchases and accordingly, the purchase prices of each acquisition have been allocated to the net tangible and intangible assets acquired based on their estimated fair values as of the acquisition date. The results of operations of the acquired businesses have been included in InterCept's consolidated financial statements from each date of acquisiton. The consideration exceeded the net tangible assets acquired by approximately $5 million. This excess was allocated to the following intangible assets with the following amortization lives: Customer lists and relationships $1,350,000 7 to 20 years Marketing agreement 825,000 20 years Goodwill 2,775,000 7 to 20 years During the second quarter of 2001, InterCept paid approximately $333,000 in additional consideration related to one of the 2000 acquisitions, the payment of which was contingent on future revenue growth. The agreement includes additional contingent consideration of approximately $333,000 that may be payable in 2002 and $834,000 that may be payable in 2003, depending on future revenues. The additional payments will be recorded as purchase price consideration if and when they are earned. During 2001, InterCept also paid the final payment of $275,000 as well as approximately $130,000 in acquisition costs related to 2000 acquisitions. On August 31, 2000, in a transaction accounted for as a pooling of interests, InterCept acquired Advanced Computer Enterprises, Incorporated ("ACE"), a provider of core data processing, item capture, and check imaging services to community banks. In connection with the acquisition, InterCept issued approximately 350,000 shares of its common stock in exchange for all of the issued and outstanding shares of common stock of ACE. An escrow of 5% of the shares issued or 17,500 shares was established to satisfy obligations unknown at the time of closing. These shares were all released from escrow during 2001. InterCept's financial statements have been restated for all periods presented to include the results of operations of ACE. There were no significant changes in accounting policies as a result of the merger, and there were no intercompany transactions prior to the merger. For the year ended December 31, 1999 and the eight months in the period ended August 31, 2000, ACE had revenues of $5.1 million and $3.4 million, respectively, and net income of $89,000 and $68,000, respectively. The following unaudited pro-forma consolidated financial information for the year ended December 31, 1999 assumes that the following events had occurred on January 1, 1999 (in thousands, except per share amounts): o InterCept's acquisitions of Nova, Advance Data, Direct Access, LEV, Data Equipment Services, and SBS Data o InterCept's transfer of 450,000 shares of Direct Access common stock in exchange for the nonremote banking operations of SBS Corporation F-14 o InterCept's recording of compensation expense related to equity securities issued by Direct Access below fair market value in August 1999 o InterCept's creation of Netzee and Netzee's merger with Direct Access o Netzee's acquisitions of the internet banking operations of TIB and The Bankers Bank, Call Me Bill, and Dyad o The deconsolidation of the operations of Netzee from InterCept's operations (unaudited, as revised) 1999 -------- Revenues $ 63,356 -------- Income before income taxes, equity in loss of affiliate and minority interest $ 46,753 -------- Net loss $(7,217) -------- Net loss per common share (diluted) $(0.69) -------- The unaudited pro forma consolidated financial information is not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the period presented or of future operations of the combined entities. The financial results of the businesses acquired in 2000 do not have a material pro forma impact on InterCept's historical results of operations for 1999 and 2000 and thus have not been included above. On January 4, 2001, InterCept acquired certain assets of the check item and back office processing division of SLMsoft.com, Inc. ("SLM"). Total consideration consisted of $40 million in cash and up to 1,253,942 shares of InterCept common stock valued at approximately $28 million. Of the $40 million cash consideration, InterCept advanced $5 million to SLM in December 2000 and paid SLM $32.5 million on January 4, 2001. A total of $2.5 million was placed in escrow to satisfy unresolved contingencies existing at the closing date and as of December 31, 2001 the balance in the escrow is $0. Intercept also paid approximately $548,000 in additional acquisition costs in 2001. Of the 1,253,942 shares of common stock, 609,682 were issued to SLM at closing and 258,388 shares will be kept in escrow for up to two years to satisfy unresolved contingencies existing at the closing date. As of December 31, 2001, 121,594 of the escrow shares had been issued to SLM. The remaining 385,872 shares represent contingent consideration and will be recorded as purchase price consideration if and when the contingencies are resolved. Through December 31, 2001, InterCept has issued an aggregate of 78,455 of those shares as a result of contingencies being resolved; 52,071 of the contingent shares have been foregone. The consideration for the assets InterCept purchased from SLM exceeded their net tangible asset value by approximately $58.2 million, which was allocated as follows: o $31.7 million to goodwill amortized over a period of 20 years o $1.5 million to product technology and amortized over a period of 10 years o $24.5 million to customer relationships and amortized over a period of 20 years o $500,000 to workforce and amortized over a period of 4 years InterCept has accounted for the acquisition as a purchase. InterCept has included the results of operations of the acquired business in its financial statements from the date of acquisition. During the second quarter of 2001, InterCept announced plans to consolidate the operations of its two Houston, Texas, data center facilities, one of which was acquired from SLM, into a new facility. The closing and relocating of both facilities was completed during the second quarter. In connection with the consolidation of the facilities, InterCept recorded a restructuring charge of approximately $405,000 during the quarter ended June 30, 2001, which is included in selling, general, and F-15 administrative expenses in the accompanying statements of operations. The charge includes approximately $93,000 of severance related to several employees terminated during the second quarter and approximately $312,000 of facility closure costs. The facility closure costs include moving expenses and other miscellaneous costs incurred after operations ceased in addition to the noncancelable operating lease obligation on the existing facility. All costs were expensed as incurred with the exception of the lease obligation which was accrued. As of December 31, 2001, $229,000 was accrued for the lease obligation, which is included in accrued liabilities in the accompanying balance sheet. The amount represents the total remaining lease payments, less management's estimate of rental income that may be received by subleasing the facility during the remaining lease term. In February 2001, InterCept acquired DPSC Software, Inc. ("DPSC") from Netzee for consideration, which included approximately $14.1 million in cash, $79,000 in additional acquisition costs, and the assumption of $2.4 million of DPSC's net liabilities. InterCept's purchase price exceeded the net tangible asset value of DPSC by approximately $15.7 million, which was allocated as follows: o $9 million to goodwill and amortized over a period of 16 years o $975,000 to product technology and amortized over a period of 10 years o $5.1 million to customer contracts and amortized over a period of 16 years o $100,000 to workforce and amortized over a period of 4 years o $500,000 to patents and trademarks being amortized over 20 years InterCept accounted for this acquisition as a purchase. During 2001 through June 30, 2001, InterCept completed two other acquisitions for total consideration of $7.5 million, net, in cash. The consideration exceeded the net tangible asset values of these acquisitions by approximately $5.4 million, which was allocated to customer relationships and goodwill and is being amortized over periods of 10 to 16 years and 20 years, respectively. InterCept accounted for these acquisitions as purchases. The results of operations of the acquired assets are included in InterCept's financial statements from the date of acquisition. In October 2001, InterCept acquired substantially all of the assets of Holmes and Shaw, Inc., and Superior Forms, Ltd. (together, "HSI"). Consideration for this purchase was approximately $24.2 million cash and assumed liabilities. The consideration exceeded the tangible asset values of HSI by approximately $23.7 million, which was allocated as follows: o $10.3 million to customer relationships and amortized over a period of 7 years o $13.4 million to goodwill All goodwill is expected to be deductible for tax purposes. In October 2001, InterCept also acquired substantially all of the assets of First Item Processing Corporation ("FIP"), a company which provided item processing services in Florida. Consideration totaled approximately $750,000. The agreement also includes contingent consideration of $206,500 that will be paid and recorded as purchase price consideration if and when the contingencies are resolved. The consideration exceeded the tangible asset values of FIP by approximately $848,000 which was allocated as follows: o $100,000 to customer relationships and amortized over a period of 10 years o $748,000 to goodwill All goodwill is expected to be deductible for tax purposes. F-16 The results of the operations of both HSI and FIP have been included in InterCept's consolidated financial statements from the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisitions (in thousands). HSI FIP ---------- ------------ $ Current assets $ 1,147 0 Property and equipment 500 33 Other assets 10 0 Customer relationships 10,300 100 Goodwill 13,371 748 ---------- ------------ Total assets acquired 25,328 881 Current liabilities (1,118) (131) ---------- ------------ Net assets acquired $ 24,210 $ 750 ========== ============ The purchase price allocations for these 2001 acquisitions are preliminary and will be completed within one year of the acquisition. The following unaudited pro-forma consolidated financial information for the years ended December 31, 2000 and 2001 assumes that all 2001 acquisitions had occurred on January 1, 2000 (in thousands, except per share amounts):
December 31, December 31, 2000 2001 ------------ ------------ Revenues $127,502 $140,096 Income before income taxes, equity in loss of 14,300 28,148 affiliate and minority interest Net (loss) income (10,402) 6,730 Net (loss) income per common share (diluted) $ (0.77) $ 0.41
The unaudited pro-forma consolidated financial information is not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the period presented or of future operations of the combined entities. F-17 4. INVESTMENT IN AFFILIATE Investment in affiliate represents InterCept's interest in Netzee. As of December 31, 2001, InterCept owned approximately 28% (944,000 common shares) of Netzee. Based on the closing market price of Netzee's common stock on December 31, 2001, the investment had a fair market value of approximately $1.6 million. As of December 31, 2001, the book value of InterCept's investment in Netzee was $1.5 million. In addition, InterCept had advances due from Netzee of $10.1 million as of December 31, 2001 (Note 13). Netzee has a history of losses and may never become profitable. InterCept will continue to account for the investment in Netzee under the equity method which will result in additional losses on the investment until Netzee becomes profitable or until the investment and advances are reduced to $0. As of December 31, 2001, Netzee had 500,000 shares of preferred stock outstanding which is convertible to 51,384 split adjusted shares of common stock subject to certain events, and outstanding stock options for 202,973 shares of common stock, all of which could dilute InterCept's ownership of Netzee. Summarized financial information of Netzee as of December 31, 2000 and 2001 is as follows (in thousands): 2000 2001 --------- ------- Net revenue $ 19,912 $25,764 Operating expense 115,150 84,386 Net loss from continuing operations (96,809) (58,622) Net loss (97,161) (60,021) Current assets 8,734 5,220 Noncurrent assets 97,981 27,281 Current liabilities 14,223 6,396 Noncurrent liabilities 22,902 14,373 Redeemable preferred stock 6,500 6,500 5. PROPERTY AND EQUIPMENT Property and equipment at December 31, 2000 and 2001 consisted of the following (in thousands): 2000 2001 --------- -------- Land and building $ 987 $ 1,338 Leasehold improvements 751 1,890 Machinery and equipment 13,919 23,523 Furniture and office equipment 1,535 2,300 Software 2,494 4,389 Construction in progress 4,821 6,515 --------- -------- 24,507 39,955 Less accumulated depreciation (7,624) (11,847) --------- -------- Property and equipment, net $16,883 $28,108 ========= ======== F-18 6. INTANGIBLES Intangibles at December 31, 2000 and 2001 are summarized as follows (in thousands): 2000 2001 ------- --------- Goodwill $22,601 $ 86,011 Product technology 1,936 5,657 Customer contracts 1,634 45,216 Work force in place 200 800 Customer lists and relationships 1,350 0 Marketing agreement 825 825 Patents and trademarks 0 501 ------- --------- 28,546 139,010 Less accumulated amortization (3,760) (10,806) ------- --------- $24,786 $ 128,204 ======= ========= 7. LONG-TERM DEBT Long-term debt at December 31, 2000 and 2001 consisted of the following (in thousands):
2000 2001 ------- ------ $50 million line of credit with First Union National Bank, as amended; interest payable at the LIBOR rate plus applicable margin as defined (approximately 3.12% as of December 31, 2001); payable in full on June 1, 2004; guaranteed by substantially all assets of InterCept $4,507 $459 Equipment under capital lease expiring July 2001 45 0 Other 6 6 ------ ---- 4,558 465 Less current maturities (45) 0 ------ ---- $4,513 $465 ====== ====
Future maturities of notes payable and line of credit at December 31, 2001 are as follows (in thousands): 2002 $ 0 2003 0 2004 465 ----- $ 465 ===== Line of Credit The First Union credit facility contains provisions which require InterCept to maintain certain financial ratios and minimum net worth amounts and which restrict InterCept's ability to incur additional debt, make certain capital expenditures, enter into agreements for mergers, acquisitions or the sale of substantial assets and pay cash dividends, among other restrictions. As of December 31, 2001, InterCept was in compliance with all of its debt covenants. F-19 8. INCOME TAXES The components of income tax provision in the consolidated statements of operations for the years ended December 31, 1999, 2000, and 2001 are as follows (in thousands):
1999 2000 2001 ------------ ----------- --------- (as revised) (as revised) Current expense $ 5,953 $ 5,281 $7,125 Deferred expense 6,851 (7,735) (3,981) -------- ------- ------ Provision (benefit) for income taxes $ 12,804 $(2,454) $3,144 ======== ======= ======
The income tax provision, as reported in the statements of operations, differs from the amounts computed by applying federal statutory rates of 34% due to the following for the years ended December 31, 1999, 2000, and 2001 (in thousands):
1999 2000 2001 ------------ ----------- --------- (as revised) (as revised) Federal income tax provision at statutory rate $15,513 $7,851 $8,315 Permanent tax/book basis differences, primarily goodwill 2,864 398 283 Meals and entertainment 43 58 77 State tax provision, net of federal effect 1,807 914 807 Benefit for undistributed losses of affiliate (7,408) (11,670) (6,366) Other (15) (5) 28 ------- ------- ------ $12,804 $(2,454) $3,144 ======= ======= ======
Benefit for undistributed losses of affiliate represents a deferred tax benefit based upon the reduction of the excess of book basis over tax basis of Intercept's investment in Netzee. Deferred income tax assets and liabilities for 2000 and 2001 reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting and income tax reporting purposes. Temporary differences that give rise to deferred tax assets and liabilities at December 31, 2000 and 2001 are as follows (in thousands): F-20
2000 2001 ------------ --------- (as revised) Deferred tax assets: Deferred revenue $ 1,514 $ 1,009 Accounts receivable reserves 191 359 Other 108 102 --------- --------- Total gross deferred tax assets 1,813 1,470 --------- --------- Deferred tax liabilities: Intangible amortization 0 (58) Accelerated depreciation (600) (1,414) Investment basis difference (6,144) 0 Software development (604) (1,395) ---------- --------- Total gross deferred tax liabilities (7,348) (2,867) --------- --------- Net deferred tax liability (5,535) (1,397) Less current net deferred tax assets 1,666 1,470 --------- --------- Noncurrent net deferred tax liabilities $(7,201) $(2,867) ========= =========
The investment basis difference mainly relates to gains recorded related to stock issuances of Netzee as discussed in Note 3 which are not taxable until realized, offset by decreases in the investment for InterCept's equity in losses of Netzee. 9. Stock option PLANS 1996 Stock Option Plan The board of directors and InterCept's shareholders approved InterCept's Amended and Restated 1996 Stock Option Plan effective as of November 12, 1996. Awards under the 1996 Stock Option Plan are currently granted by a compensation committee composed of two independent directors of the board of directors. Awards issued under the 1996 Stock Option Plan may include incentive stock options ("ISOs") and/or nonqualified stock options ("NQSOs") and/or grants of restricted stock. The compensation committee administers the 1996 Stock Option Plan and generally has the discretion to determine the terms of an option grant, including the number of option shares, option price, term, vesting schedule, the post-termination exercise period, and whether the grant will be an ISO or NQSO. Notwithstanding this discretion, (i) the number of shares subject to options granted to any individual in any fiscal year may not exceed 315,795 shares (subject to certain adjustments), (ii) if an option is intended to be an ISO and is granted to a shareholder holding more than 10% of the combined voting power of all classes of InterCept's stock or the stock of its subsidiary on the date of the grant of the option, the option price per share of common stock may not be less than 110% of the fair market value of such share at the time of grant, and (iii) the term of an ISO may not exceed ten years, or five years if granted to a shareholder owning more than 10% of the total combined voting power of all classes of stock on the date of the grant of the option. The 1996 Stock Option Plan provides for the granting of nonqualified stock options to the directors of InterCept. The board of directors authorized the issuance of common stock under the 1996 Stock Option Plan pursuant to options having an exercise price equal to the fair market value of the common stock on the date the options are granted. The board of directors has approved director grants of (i) options to purchase 35,000 shares to each nonemployee director of InterCept who beneficially owns less than 4% of InterCept's outstanding common stock on the date of such directors' initial election to the board of directors and (ii) options to purchase 10,000 shares, as amended, to each director on each anniversary date of such director's election to the board at an exercise price equal to the fair market value of the common stock on the date the options are granted. Each initial director grant option vests ratably over the director's three-year term of service, and each annual grant vests on the date of grant. Options granted to directors prior to December 31, 2001 expire five years after the date of grant unless canceled sooner as a result of termination of service or death or unless such option is fully exercised prior to the end of the option period. Options granted to directors after December 31, 2001 expire ten years after the date of grant. F-21 As of December 31, 2001, the maximum number of shares of common stock reserved for issuance under the Plan was 3,156,352, and 12,143 shares were available for grant. The 1996 Stock Option Plan provides that the number of shares of common stock available for issuance thereunder shall be automatically increased on the first trading day of each calendar year beginning January 1, 1999 by the lesser of (i) 3% of the number of shares outstanding on the preceding trading day or (ii) 315,795 shares (subject to certain adjustments). Shares of common stock that are attributable to awards which have expired, terminated, or been canceled or forfeited during any calendar year are available for issuance or use in connection with future awards during such calendar year. The 1996 Stock Option Plan will remain in effect until terminated by the board of directors. The 1996 Stock Option Plan may be amended by the board of directors without the consent of the shareholders of InterCept, except that any amendment, although effective when made, will be subject to shareholder approval within one year after approval by the board of directors if the amendment increases the total number of shares issuable pursuant to ISOs (other than the permitted annual increase), changes the class of employees eligible to receive ISOs that may participate in the 1996 Stock Option Plan, or otherwise materially increases the benefits accruing to recipients of ISOs. ProVesa, Inc. 1994 Stock Option Plan InterCept assumed the ProVesa, Inc. 1994 Stock Option Plan ("ProVesa Plan") in November 1996 in conjunction with an acquisition. In 1998, the board of directors determined that no additional options would be issued under the ProVesa Plan. Of the 42,106 options originally issued, 1,813 have been exercised and 40,293 are outstanding as of December 31, 2001. The remaining options outstanding expire in December 2004. A summary status of InterCept's stock option plan as of December 31, 1999, 2000, and 2001 and changes during the years are presented below:
Price Weighted ------------------ Average Option Shares Range Price --------- ------------- -------------- Outstanding at December 31, 1998 984,354 $ 2.16-$7.70 $ 5.78 Granted 554,000 $ 7.50-18.75 $14.89 Exercised (25,416) $ 2.16-7.00 $ 2.92 Terminated (6,000) $ 7.00-18.75 $13.91 --------- Outstanding at December 31, 1999 1,506,938 $ 2.16-18.75 $ 9.09 Granted 783,750 $ 17.00-28.19 $23.72 Exercised (100,172) $ 2.16-18.75 $ 7.06 Terminated (44,166) $ 7.00-18.75 $10.81 --------- Outstanding at December 31, 2000 2,146,350 $ 2.16-28.19 $14.49 Granted 963,750 $ 22.31-33.32 $25.15 Exercised (218,310) $ 2.37-26.88 $11.02 Terminated (49,373) $ 7.50-26.88 $21.28 --------- Outstanding at December 31, 2001 2,842,417 $ 2.16-33.32 $18.27 =========
During 2000, a director of InterCept exercised several options in exchange for a note payable to InterCept for the exercise price of approximately $208,000. The note accrued interest of approximately $8,000 during 2000 and $5,000 and in 2001 and was repaid in full in 2001. The note receivable and related accrued interest are included in common stock in the accompanying balance sheets. On July 1, 2001, InterCept adopted the 2001 Employee Stock Purchase Plan ("ESPP"). The ESPP allows for eligible employees to participate in the purchase of shares of InterCept's common stock at a price equal to the lower of 85% of the closing price at the beginning or end of each quarterly stock purchase period. The Company has authorized 500,000 shares of common stock for issuance under the ESPP and issued 7,277 shares during the year ended December 31, 2001. F-22 Statement of Financial Accounting Standards No. 123 SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting methodology required by APB Opinion No. 25 must make pro forma disclosures of net income and, if presented, earnings per share as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. InterCept has elected to account for its stock-based compensation plans and ESPP under APB Opinion No. 25, under which no compensation cost has been recognized by InterCept. However, InterCept has computed, for pro forma disclosure purposes, the value of all options and stock purchase rights granted since January 1, 1995 to employees of InterCept using the Black-Scholes option pricing model prescribed by SFAS No. 123. The following weighted average assumptions were used to value stock options: 1999 2000 2001 ---- ---- ---- Risk-free interest rate 6.76% 5.05% 4.86% Expected dividend yield 0% 0% 0% Expected lives 7.0 years 8.9 years 7.0 years Expected volatility 83.6% 83.4% 76.2% The weighted average fair value of options for the stock granted to employees of InterCept in 1999, 2000, and 2001 was $11.32, $18.83, and $18.01 per share, respectively. The total value of options for InterCept's stock granted to employees of InterCept during 1999, 2000, and 2001 was computed as approximately $6,146,000, $14,757,000, and $17,302,000, respectively, which would be amortized on a pro forma basis over the vesting period of the options. The weighted average fair value of stock purchase rights granted in 2001 computed using the Black Scholes option pricing model was $9.73 per share. Assumptions include an expected life of three months, weighted-average risk-free interest rate of 2.8% in 2001, and other assumptions that are consistent with those used for the stock option plans described above. If InterCept had accounted for these plans in accordance with SFAS No. 123, InterCept's net income (loss) and net income (loss) per common share for the years ended December 31, 1999, 2000 and 2001 would have been as follows (in thousands, except per share data): 1999 2000 2001 ------------ ------------ -------- (as revised) (as revised) Net income (loss) $15,880 $(477) $(5,444) Net income (loss) per common share--diluted $1.50 $(0.04) $(0.33) F-23 The following table sets forth the exercise price range, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price and grant date:
Options outstanding Options exercisable --------------------------------------------------------------- ------------------------ Weighted Exercise Weighted Average Weighted Price Number Average Contractual Number Average Range of Shares Price Life (in years) of Shares Price --------------- ------------ ------------- --------------- ---------- ---------- $ 2.16-$3.33 247,798 $ 2.19 4.6 247,798 $ 2.19 $ 6.66-$9.99 569,025 $ 7.38 6.4 495,434 $ 7.37 $10.00-$13.33 5,000 $13.00 7.4 0 $ 0.00 $13.34-$16.66 143,669 $15.87 7.5 92,498 $15.86 $16.67-$19.99 315,965 $18.15 7.8 162,633 $17.92 $20.00-$23.32 484,250 $22.36 9.1 56,667 $22.65 $23.33-$26.66 829,343 $24.87 8.9 190,798 $25.18 $26.67-$29.99 68,367 $28.04 8.3 25,902 $28.00 $30.00-$33.32 179,000 $32.04 9.6 38,333 $30.93 ------------- ------------ 2,842,417 1,310,063
At December 31, 1999, 2000, and 2001, 665,254, 910,772, and 1,310,063 options for InterCept's common stock with a weighted average exercise price of $5.95, $7.91, and $12.65 per share, respectively, were exercisable by employees of InterCept. 10. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per share at December 31, 1999, 2000, and 2001 were as follows (in thousands except per share amounts):
1999 2000 2001 -------------- -------------- ------------- (as revised) (as revised) Basic: Net income (loss) $ 17,349 $ (5,192) $ 4,444 ============== ============== ============= Weighted average common shares outstanding 10,094,696 12,820,073 15,433,895 ============== ============== ============= Per share amount $1.72 $(0.41) $0.29 ============== ============== ============= Diluted: Net income (loss) $ 17,349 $ (5,192) $ 4,444 ============== ============== ============= Weighted average common shares outstanding 10,094,696 12,820,073 15,433,895 Shares assumed issued upon exercise of dilutive stock options using the treasury stock method 451,350 0 826,381 Shares held in escrow to satisfy contingencies 17,500 0 136,794 -------------- -------------- ------------- Total 10,563,546 12,820,073 16,397,070 ============== ============== ============= Per share amount $1.64 $(0.41) $0.27 ============== ============== =============
Basic and diluted earnings per common share were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Outstanding stock options, with exercise prices F-24 above the average stock prices for each quarter (approximately 20,000, 294,000, and 81,000 shares in 1999, 2000, and 2001, respectively), were antidilutive and were therefore excluded from the computation of diluted shares above. Additionally, the effect of stock options was excluded in years where a net loss was recorded as they are antidilutive. 11. EMPLOYEE BENEFITS InterCept maintains a separate defined contribution 401(k) savings plan, which covers substantially all employees, subject to certain minimum age and service requirements. Contributions to this plan by employees are voluntary; however, InterCept matches a percentage of the employees' contributions. This percentage is determined annually by InterCept. InterCept's contributions approximated $148,000, $218,000, and $371,000 in 1999, 2000, and 2001, respectively. 12. COMMITMENTS AND CONTINGENCIES InterCept leases various equipment and facilities under noncancelable operating lease agreements. Future minimum annual obligations under these leases as of December 31, 2001 are as follows (in thousands): 2002 $ 3,975 2003 3,157 2004 1,817 2005 1,242 2006 681 Thereafter 942 ------- Total $11,814 ======= Net rental expense was approximately $1,308,000, $1,739,000, and $3,216,000 during 1999, 2000, and 2001, respectively. InterCept is subject to legal proceedings and claims that arise in the ordinary course of business. However, management feels the amount of potential liability with respect to these actions will not materially affect the financial position or results of operations of the Company. 13. RELATED PARTY TRANSACTIONS As discussed in Note 4, InterCept owned approximately 28% of Netzee as of December 31, 2001. Two of InterCept's directors also serve as directors of Netzee, and one of those directors is the Chief Executive Officer of Netzee. In order to enable Netzee to complete its acquisitions in August and September 1999, InterCept borrowed funds under its line of credit and loaned these funds to Netzee. InterCept also made advances to Netzee to fund operations. These amounts were repaid to InterCept upon completion of Netzee's initial public offering in November 1999. Since December 15, 1999, InterCept has provided Netzee with a revolving line of credit. Borrowings on this line bear interest at a rate of prime plus 2%. As amended on March 29, 2002 InterCept provides Netzee a line of credit of approximately $14.0 million. The line of credit expires on April 10, 2003. As of December 31, 2001, Netzee owed approximately $10.1 million to InterCept, including accrued interest of approximately $182,000. Total interest on all borrowings for 2000 and 2001 was approximately $1.1 million and $1.1 million, respectively, and is included in interest and other income in the accompanying statements of operations. Management has evaluated the business and financial projections of Netzee and has concluded, based on this review, that the amounts due from Netzee are collectible. Therefore, a reserve has not been established for the note as of December 31, 2001. InterCept and Netzee maintain a relationship to cross-market each other's products and services. During 2000 and 2001, InterCept received $375,000 and $131,000, respectively, in commissions related to Netzee sales. InterCept also shared certain facilities with Netzee and provided certain administrative services to Netzee. InterCept charged Netzee approximately $163,000 and $108,000 in 2000 and 2001, respectively, for these shared costs. During 2000 and 2001, Netzee used InterCept to purchase certain hardware and software used to implement Netzee's Internet and telephone banking products. In addition, InterCept assisted Netzee in managing the ordering and inventory process related to this equipment. During 2000 and 2001, Netzee incurred approximately $435,000 and $152,000, respectively, in costs to purchase the equipment, which included a fee to InterCept for its services. On May 31, 2001, InterCept entered into a loan agreement with SLM under which InterCept loaned SLM $12 million, subject to various terms and conditions. Borrowings under the loan agreement bore interest at an annual F-25 rate equal to the one-month LIBOR plus 2% and were secured by the shares of InterCept's common stock owned or potentially issuable to SLM. On August 13, 2001 SLM repaid the note, including accrued interest of $140,000, in full. On December 3, 2001, InterCept entered into a loan agreement with SLM under which InterCept loaned SLM $7 million, subject to various terms and conditions in exchange for cash and settlement of other indemnification obligations in the acquisition agreement. Borrowings under the loan agreement bear interest, payable upon maturity, at the prime rate and are secured by up to 591,871 shares of InterCept common stock with a market value of approximately $24.2 million at December 31, 2001 that SLM now holds or may earn. The loan matures on September 30, 2002 and requires mandatory prepayments from the proceeds of sales of InterCept common stock by SLM until the loan is repaid in full. At December 31, 2001, the balance on the loan was $7,025,000, including accrued interest of $25,000. InterCept provides telecommunications network and operations services and customer support services to SLM, as well as computer programming services. InterCept recorded revenue of approximately $1.8 million related to services provided to SLM in 2001. InterCept also charged SLM approximately $200,000 during 2001 for rent and building expenses related to certain SLM operations maintained at InterCept's facility which is included in interest and other income, net. During the years ended December 31, 1999, 2000, and 2001, InterCept incurred fees of approximately $612,000, $745,000, and $1.0 million respectively for legal services to a law firm, a partner of which is also a director of InterCept. InterCept provided telecommunications connectivity to Towne Services, Inc. ("Towne"). InterCept recorded revenue from Towne of approximately $215,000, $236,000, and $173,000 during 1999, 2000, and 2001, respectively, which is included in data communications management income. At December 31, 2000 and 2001, receivables from Towne were approximately $60,000 and $0, respectively . During 1999, InterCept purchased software from Towne for $825,000. Additionally, InterCept owned 10,000 shares of Towne common stock, which was purchased in 1997. In August 2001, Towne entered a merger agreement with Private Business under which InterCept's shares of Towne were exchanged for 9,072 shares of Private Business common stock. Two directors of InterCept served as directors of Towne. However, only one of these directors is a director of Private Business. There have been no transactions between InterCept and Private Business since the merger. 14. SUBSEQUENT TRANSACTIONS On March 19, 2002, InterCept entered into a definitive agreement to acquire the assets of Internet Billing Company, Ltd. ("iBill"), a Ft. Lauderdale-based provider of transaction processing for Web merchants. Separately, InterCept also signed a binding letter agreement to acquire Electronic Payment Exchange, Inc. ("EPX"), a provider of transaction processing services based in New Castle, Delaware. InterCept agreed to pay iBill $112 million in cash plus additional quarterly earnout payments for a period of six quarters ending December 31, 2003. The amount of each earnout payment depends on whether the acquired business achieves certain financial targets and will be recorded as additional purchase price consideration if and when it is earned. InterCept has an option to buy out the remaining contingent earnout obligation at any time by paying $8 million per remaining quarter. InterCept is not required to close the iBill acquisition unless InterCept receives necessary Hart-Scott-Rodino approval. If InterCept terminates the agreement for anything other than the failure to obtain that approval or a severe service outage at iBill, InterCept will be required to pay a termination fee of $5 million to iBill. Under the terms of the EPX letter agreement, InterCept agreed to issue 1,377,339 shares of common stock to EPX's stockholders, 20% of which will be placed in escrow to secure EPX's obligation to indemnify InterCept for breaches of the representations and warranties in the acquisition agreement. The number of shares to be issued assumes that EPX will have approximately $12 million of liabilities at the time of the acquisition; the number of shares will be adjusted depending on the ultimate liabilities assumed. InterCept is required to close the EPX acquisition unless InterCept fails to obtain necessary approvals for the acquisition, including Hart-Scott-Rodino approval or is not satisfied with the results of its due diligence procedures. If InterCept does not close the transaction by April 23, 2002, InterCept will lend EPX $3 million pursuant to a loan secured by EPX's intellectual property. The loan will bear interest at the prime rate plus 1% and will be due on December 31, 2002. F-26 EXHIBIT INDEX - ------------- Exhibit No. Description - ----------- ---------------------------------------------------------------- 2.1 Acquisition and Merger Agreement dated May 28, 1999 by and between The InterCept Group, Inc., LEV Acquisition Corp., L.E. Vickers & Associates, Inc., Data Equipment Services, Inc., and the shareholders of L.E. Vickers & Associates, Inc. and Data Equipment Services, Inc. (incorporated by reference to Exhibit 2.1 to InterCept's Current Report on Form 8-K filed June 11, 1999).++ 2.2 Agreement and Plan of Merger dated August 6, 1999 by and among The InterCept Group, Inc., Zeenet Corporation, SBS Data Services, Inc. and the shareholders of SBS Data Services (incorporated by reference to Exhibit 2.1 to InterCept's Current Report on Form 8-K filed August 20, 1999).++ 2.3 Agreement and Plan of Merger dated August 6, 1999 by and between Direct Access Interactive, Inc., SBS Corporation and the shareholders of SBS Corporation (incorporated by reference to Exhibit 2.2 to InterCept's Current Report on Form 8-K filed August 20, 1999).++ 2.4 Agreement and Plan of Merger dated August 6, 1999 by and among Direct Access Interactive, Inc., SBS Corporation and the shareholders of SBS Corporation (incorporated by reference to Exhibit 2.2 to InterCept's Current Report on Form 8-K filed on August 20, 1999).++ 2.5 Agreement and Plan of Merger dated September 3, 1999 by and between Netzee, Inc. and Direct Access Interactive, Inc. (incorporated by reference to Exhibit 2.1 to InterCept's Current Report on Form 8-K filed September 17, 1999).++ 2.6 Agreement and Plan of Merger dated September 3, 1999 by and between Netzee, Inc., Dyad Corporation and certain of the shareholders of Dyad Corporation (incorporated by reference to Exhibit 2.2 to InterCept's Current Report on Form 8-K filed September 17, 1999).++ 2.7 Asset Contribution Agreement dated September 3, 1999 by and among The InterCept Group, Inc., Netzee, Inc. and The Bankers Bank (incorporated by reference to Exhibit 2.3 to InterCept's Current Report on Form 8-K filed September 17, 1999).++ 2.8 Asset Contribution Agreement dated September 3, 1999 by and among The InterCept Group, Inc., Netzee, Inc. and TIB The Independent BankersBank (incorporated by reference to Exhibit 2.4 to InterCept's Current Report on Form 8-K filed September 17, 1999).++ 1 2.9 Purchase Agreement (amended and restated) dated as of November 29, 2000, between The InterCept Group, Inc. and SLMSoft.com Inc., an Ontario corporation, and SLMsoft.com Inc., a Kansas corporation (incorporated by reference to Exhibit 2.1 to InterCept's Current Report on Form 8-K filed January 19, 2001).++ 2.10 Asset Purchase Agreement dated and effective as of October 1, 2001, by and among The InterCept Group, Inc., InterCept Output Solutions, LP, HSI Holdings, Inc., Superior Forms, Ltd., HSI Properties, Ltd., Holmes & Shaw Limited, Inc., Holmes & Shaw General, Inc., George V. Shaw, III and Vincent Investment Company, Inc. 3.1 Amended and Restated Articles of Incorporation, as deemed filed with the Secretary of the State of Georgia on April 29, 1998 (incorporated by reference to the exhibits to InterCept's Registration Statement on Form 8-A (as amended on October 1, 1999)). 3.2 Amended and Restated Bylaws (incorporated by reference to the exhibits to InterCept's Registration Statement on Form 8-A (as amended on October 1, 1999)). 3.3 Amendment to Amended and Restated Bylaws (incorporated by reference to the exhibits to InterCept's Registration Statement on Form 8-A (as amended on October 1, 1999)). 4.1 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Amended and Restated Articles of Incorporation, Amended and Restated Bylaws and Amendment to Amended and Restated Bylaws defining the rights of the holders of common stock. 10.1 The InterCept Group, Inc. Amended and Restated 1996 Stock Option Plan.*/** 10.2 Form of Stock Option Agreement under The InterCept Group, Inc. Amended and Restated 1996 Stock Option Plan.*/** 10.3 Form of Stock Option Agreement for Directors under The InterCept Group, Inc. Amended and Restated 1996 Stock Option Plan.*/** 10.4 Employment Agreement by and between InterCept and John W. Collins dated as of January 30, 1998.*/** 10.5 Employment Agreement by and between InterCept and Scott R. Meyerhoff dated as of February 1, 1998.*/** 10.6 Stock Option Agreement by and between InterCept and Donny R. Jackson dated January 14, 1997.*/** 10.7 Stock Option Agreement dated as of February 1, 1998 by and between InterCept and Scott R. Meyerhoff.*/** 10.8 Form of Indemnification Agreement entered into between InterCept and its directors and officers.* 10.9 Form of General Marketing Agent Agreement.* 10.10 Channel Services Payment Plan Agreement dated December 22, 1993 between Intercept Systems, Inc. and BellSouth Communications, Inc.* 10.11 Form of Special Service Arrangement Agreement with BellSouth Telecommunications, Inc. for frame relay services.* 2 10.12 Form of SynchroNet Service Agreement with Southern Bell Telephone and Telegraph Company.* 10.13 WorldCom Data Services Agreement dated as of February 27, 1998 by and between WorldCom, Inc. and InterCept Communications Technologies, L.L.C.*+ 10.14 Stock Option Agreement dated as of June 24, 1998 by and between InterCept and John W. Collins (incorporated by reference to Exhibit 10.2 to InterCept's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 filed on August 14, 1998).** 10.15 Stock Option Agreement dated as of June 24, 1998 by and between InterCept and Donny R. Jackson (incorporated by reference to Exhibit 10.3 to InterCept's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 filed on August 14, 1998).** 10.16 Stock Option Agreement dated as of June 24, 1998 by and between InterCept and Scott R. Meyerhoff (incorporated by reference to Exhibit 10.3 to InterCept's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 filed on August 14, 1998).** 10.17 Amended and Restated Credit Agreement dated as of February 2, 2001, by and among Netzee, Inc., John H Harland Company, and The InterCept Group, Inc. (incorporated by reference to Exhibit 10.1 to Netzee's Current Report on Form 8-K dated February 2, 2001 and filed February 16, 2001). 10.18 Software Agreement dated January 4, 2001, between The InterCept Group, Inc., and SLMSoft.com Inc., an Ontario corporation (incorporated by reference to Exhibit 2.2 to InterCept's Current Report on Form 8-K filed January 19, 2001). ++ 10.19 Registration Rights Agreement dated January 4, 2001, between The InterCept Group, Inc., and SLMSoft.com Inc., an Ontario corporation (incorporated by reference to Exhibit 2.3 to InterCept's Current Report on Form 8-K filed January 19, 2001).++ 10.20 Amendment No. 1 to Registration Rights Agreement between InterCept and SLMsoft.com, Inc. dated May 31, 2001 (incorporated by reference to Exhibit 10.4 in InterCept's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). 10.21 Loan Agreement between The InterCept Group, Inc., and SLMsoft.com, Inc. dated December 3, 2001. 10.22 Employment Agreement by and between The InterCept Group, Inc. and G. Lynn Boggs dated as of February 19, 2002. 3 10.23 Loan and Security Agreement dated December 21, 2001, by and among The InterCept Group, Inc., C-TEQ, Inc., SBS Data Services, Inc., DPSC Acquisition Corp., ICPT Acquisition I, LLC, InterCept Communications Technologies, Inc., InterCept Services, LLC, InterCept TX I, LLC, InterCept Output Solutions, LP and InterCept Supply, LP and First Union National Bank. 21.1 Subsidiaries of InterCept. 23.1 Consent of Arthur Andersen LLP. 24.1 Power of Attorney (contained on the signature page hereof). 99.1 Letter from InterCept regarding letter from Arthur Andersen. 99.2 Financial statements of Netzee, Inc. * Incorporated by reference to the exhibits to InterCept's Registration Statement on Form S-1 (No. 333-47197) as declared effective by the Securities and Exchange Commission on June 9, 1998. ** This agreement is a compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). + Confidential treatment has been granted for certain confidential portions of this exhibit pursuant to Rule 406 under the Act. In accordance with Rule 406, these confidential portions have been omitted from this exhibit and filed separately with the Commission. ++ The registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request, as provided in item 601(b)(2) of Regulation S-K. 4 EX-2.10 3 dex210.txt ASSET PURCHASE AGREEMENT DATED OCTOBER 1, 2001 Exhibit 2.10 ASSET PURCHASE AGREEMENT ------------------------ among THE INTERCEPT GROUP, INC., a corporation formed under the laws of the State of Georgia and INTERCEPT OUTPUT SOLUTIONS, LP, a limited partnership formed under the laws of the State of Texas and HSI HOLDINGS, INC. a corporation formed under the laws of the State of Nevada and SUPERIOR FORMS, LTD. a limited partnership formed under the laws of the State of Texas and HSI PROPERTIES, LTD. a limited partnership formed under the laws of the State of Texas and HOLMES & SHAW LIMITED, INC. a corporation formed under the laws of the State of Nevada and HOLMES & SHAW GENERAL, INC. a corporation formed under the laws of the State of Nevada and GEORGE V. SHAW, III a individual residing in the State of Texas and VINCENT INVESTMENT COMPANY, INC. a corporation formed under the laws of the State of Texas October 1, 2001 TABLE OF CONTENTS Page ARTICLE 1 - SALE AND PURCHASE ............................................. 1 1.1 Included Assets ................................................ 1 1.2 Intent of the Parties .......................................... 4 1.3 Title to and Transfer of Assets ................................ 4 1.4 Excluded Assets ................................................ 4 ARTICLE 2 - ASSUMPTION OF LIABILITIES BY THE PURCHASER .................... 5 2.1 Assumed Liabilities ............................................ 5 2.2 Liabilities Not Assumed ........................................ 5 ARTICLE 3 - CLOSING AND PURCHASE PRICE .................................... 8 3.1 Closing ........................................................ 8 3.2 Purchase Price ................................................. 8 3.3 Fair Market Value of Assets .................................... 8 3.4 Establishment of Escrow ........................................ 8 ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF THE SELLER PARTIES ......... 8 4.1 Entity Existence ............................................... 8 4.2 Partnership Power; Authorization; Enforceable Obligations ...... 9 4.3 No Conflict .................................................... 9 4.4 Required Government Consents ................................... 9 4.5 Five Largest Customers ......................................... 10 4.6 Financial Matters .............................................. 10 4.7 Absence of Changes ............................................. 10 4.8 No Undisclosed Liabilities ..................................... 12 4.9 Title to Property .............................................. 12 4.10 Condition of Property .......................................... 12 4.11 Inventory ...................................................... 12 4.12 Contracts - General ............................................ 12 4.13 Intellectual Property .......................................... 13 4.14 Leases ......................................................... 13 4.15 Litigation ..................................................... 13 4.16 Court Orders, Decrees, and Laws ................................ 14 4.16.1 Compliance with Laws .................................... 14 4.16.2 Adequacy of Authorizations .............................. 14 4.16.3 Environmental Matters ................................... 14 4.17 Personnel and Compensation ..................................... 14 4.17.1 List of Personnel ....................................... 14 4.17.2 Employee Relations ...................................... 14 4.17.3 Compliance with Immigration and Labor and Employment Laws .................................................... 15 4.19 Employee Benefit Plans and Arrangements ........................ 15 4.18.1 List of Plans and Obligations ........................... 15 4.18.2 Compliance .............................................. 15 4.18.3 No Liabilities or Obligations ........................... 15 4.18.4 No Payments ............................................. 15 4.18.5 No Multi-Employer Plans ................................. 16 4.19 Insurance Policies ............................................. 16 4.20 Broker's or Finder's Fees ...................................... 16 4.21 Accounts Receivable ............................................ 16 4.22 Vehicles ....................................................... 16 4.23 No Guarantees .................................................. 16 4.24 Tax Matters .................................................... 17 4.24.1 Tax and Social Returns .................................. 17 4.24.2 Inquiries, Investigations, and Audits ................... 17 4.24.3 Returns Furnished ....................................... 17 4.25 Disclosure ..................................................... 17 ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF PURCHASER AND PARENT ........ 18 5.1 Corporate Existence ............................................ 18 5.2 Corporate and Partnership Power and Authorization .............. 18 5.3 No Conflict. ................................................... 18 5.4 Broker's or Finder's Fees ...................................... 19 5.5 Outstanding Stock .............................................. 19 5.6 Financing ...................................................... 19 ARTICLE 6 - CONDITIONS TO CLOSING ......................................... 19 6.1 Conditions to the Sellers' Obligations ......................... 19 6.2 Conditions to the Obligations of the Purchaser and the Parent .. 20 ARTICLE 7 - CLOSING ....................................................... 22 7.1 Actions at Closing ............................................. 22 7.1.1 Copies of Consents ...................................... 22 7.1.2 Deliveries of Documents ................................. 22 7.2 Delivery of Purchase Price ..................................... 22 ARTICLE 8 - COVENANTS OF THE PURCHASER, THE PARENT, AND THE SELLERS ....... 22 8.1 Mutual Cooperation ............................................. 22 8.2 Covenants of the Sellers Regarding the Operation of the Business from the Signing Date to the Closing Date ........... 23 8.3 Post-Closing Settlement ........................................ 24 8.4 Allocation of Purchase Price ................................... 25 8.5 Maintenance of Books and Records ............................... 25 ii 8.6 UCC Matters .................................................... 25 8.7 Offers of Employment by the Parent to the Sellers' Employees ... 25 8.8 Enrollment in Parent's Health Plan ............................. 26 8.9 Assumption by Parent of Sellers' Health Plan ................... 26 8.10 Termination of Holmes & Shaw, Inc. 401(k) Plan ................. 26 8.12 Consents........................................................ 26 ARTICLE 9 - INDEMNIFICATION ............................................... 27 9.1 Indemnification by the Seller Parties .......................... 27 9.1.1 Breach of Obligation .................................... 27 9.1.2 Excluded Liabilities .................................... 27 9.1.3 Violations of Fraudulent Conveyance or Bulk Sales Laws .. 27 9.2 Indemnification by the Purchaser and the Parent ................ 28 9.2.1 Breach of Obligation .................................... 28 9.2.2 Assumed Liabilities ..................................... 28 9.2.3 Post-Closing Operations ................................. 28 9.3 Notice of Claim ................................................ 28 9.4 Defense ........................................................ 28 9.5 Limitations .................................................... 29 9.5.1 Threshold; Maximum ...................................... 29 9.5.2 Time of Assertion ....................................... 29 9.6 Indemnification Exclusive Remedy ............................... 29 9.7 Investigation; Survival of Representations, Warranties, Covenants and Agreements ..................................... 30 ARTICLE 10 - MISCELLANEOUS ................................................ 30 10.1 Sales, Transfer, and Documentary Taxes, etc. ................... 30 10.2 Expenses ....................................................... 30 10.3 Contents of Agreement; Parties in Interest; etc. ............... 30 10.4 Waiver ......................................................... 31 10.5 Notices ........................................................ 31 10.6 Georgia Law to Govern .......................................... 32 10.7 No Benefit to Others ........................................... 32 10.8 Headings, Gender and Certain Terms ............................. 32 10.9 Schedules and Exhibits ......................................... 32 10.10 Severability ................................................... 33 10.11 Counterparts ................................................... 33 10.12 Assistance of Counsel .......................................... 33 10.13 Time of the Essence ............................................ 33 10.14 Actions and Proceedings ........................................ 33 10.15 Execution by Facsimile ......................................... 33 10.16 Confidentiality ................................................ 33 10.17 No Public Announcements ........................................ 34 10.18 Termination .................................................... 34 10.19 Resolution of Certain Disputes ................................. 35 iii ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (the "Agreement"), dated and effective as of October 1, 2001, is made and entered into by and among The InterCept Group, Inc., a Georgia corporation (the "Parent"); InterCept Output Solutions, LP, a Texas limited partnership (the "Purchaser"); HSI Holdings, Inc., a Nevada corporation ("HSI"); Superior Forms, Ltd., a Texas limited partnership ("SFL"); HSI Properties, Ltd., a Texas limited partnership ("HSI Properties"; HSI Properties and SFL are together referred to as the "Sellers"); Holmes & Shaw Limited, Inc., a Nevada corporation ("HSI Limited") and the limited partner of HSI Properties; Holmes & Shaw General, Inc., a Nevada corporation ("HSI General") and the general partner of HSI Properties; George V. Shaw, III ("Shaw"), an individual resident of Texas; and Vincent Investment Company, Inc., a Texas corporation ("Vincent") and the general partner of SFL (HSI, the Sellers, HSI Limited, HSI General, Shaw, and Vincent are collectively referred to as the "Seller Parties"). Recitals: The Sellers are engaged in the business of providing data processing, laser document printing, automated mailing services including postal discounting, record archiving and retrieval, and electronic bill presentment and payment (collectively, the "Business"). The Purchaser desires to purchase, and the Sellers desire to sell, substantially all of the assets of the Sellers associated with the Business, and the Sellers desire to transfer, and the Purchaser desires to assume, certain liabilities of the Sellers arising in connection with the Business, all upon the terms and conditions and subject to the limited exceptions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants, and agreements of the parties hereinafter set forth, the parties to this Agreement, intending to be legally bound, do agree as follows: ARTICLE 1 SALE AND PURCHASE 1.1 Included Assets. Upon the terms and subject to the conditions of --------------- this Agreement, the Purchaser agrees to purchase, accept, and acquire from the Sellers, and the Sellers agree to sell, transfer, assign, convey, and deliver to the Purchaser, at the Closing (as defined in Section 3.1), all of the Sellers' right, title, and interest in and to all of the assets, real, personal, and mixed, tangible or intangible, used directly or indirectly in or otherwise relating primarily to the Business as owned or held by the Sellers, except as expressly noted in Schedule 1.4 and excluded by Section 1.4 below. Subject to such express exclusion and qualification, the foregoing rights and assets shall hereinafter collectively be referred to as the "Assets." Without in any way limiting the generality of the foregoing, the Assets shall include all of the Sellers' right, title, and interest in and to the following, wherever located: 1.1.1 All of the Sellers' service, license, marketing and other similar agreements and sales contracts used directly or indirectly in or otherwise relating primarily to the Business (the "License Agreements"), including the License Agreements disclosed in Schedule 1.1.1; -------------- 1.1.2 All of the Sellers' fixed assets, goods, equipment and other property used directly or indirectly in or otherwise relating primarily to the Business, including the property disclosed in Schedule 1.1.2 (but excluding -------------- the Vehicles as defined in Section 1.1.14); 1.1.3 All inventories of the Sellers and all unused or reusable materials, work in process, damaged or unfinished goods and supplies, in each case to the extent used directly or indirectly in or otherwise relating primarily to the Business (the "Inventory"), including the Inventory disclosed in Schedule 1.1.3; -------------- 1.1.4 All computer software, databases, and all other intellectual property, whether owned or licensed, used directly or indirectly in or otherwise relating primarily to the Business (the "Intellectual Property"), including the software disclosed in Schedule 1.1.4; -------------- 1.1.5 All office furniture and fixtures used directly or indirectly in or otherwise relating primarily to the Business, including all items disclosed in Schedule 1.1.5; -------------- 1.1.6 Sellers' entire leasehold, rental, or other interest arising under or pursuant to leases of: (A) real property, including buildings, structures, and other improvements located thereon, fixtures contained therein, and appurtenances to them, and easements and other rights relative to them; (B) equipment, including computer hardware and associated telecommunications equipment, media, and tools; (C) office furniture; and (D) other personalty, in each case as used directly or indirectly in or otherwise relating primarily to the Business (the "Leases"), including the Leases disclosed in Schedule 1.1.6; -------------- 1.1.7 All contracts, agreements, licenses, commitments, arrangements, and permissions entered into in connection with or otherwise relating primarily to the Business (the 2 "General Contracts"), which items are disclosed in Schedule 1.1.7, to the extent -------------- not otherwise classified as License Agreements, Leases or Insurance Policies (as defined in this Agreement); 1.1.8 All business and marketing records, including accounting and operating records, asset ledgers, inventory records, reports, budgets, personnel and payroll records of employees of the Sellers to be employed by the Purchaser, customer lists, supplier lists, information and data respecting leased or owned equipment, correspondence and mailing lists, advertising materials and brochures, and other business records used directly or indirectly in or otherwise relating primarily to the Business or the Assets, in whatever form they exist; 1.1.9 All governmental approvals, authorizations, certifications, consents, variances, permissions, licenses, and permits to or from, or filings, notices, or recordings to or with, federal, state, and/or local governmental authorities as well as states and jurisdictions outside of the U.S. (the "Authorizations"), directly or indirectly relating primarily to the Business, but subject, as to the reassignability to the Purchaser, to the procurement of the Required Government Consents (as defined in Section 4.4), if any; the Authorizations consist of the items disclosed in Schedule 1.1.9; -------------- 1.1.10 All claims the Sellers may have against any person relating to or arising from the Assets or the Business as of the Closing Date, including rights to recoveries for damages or defective goods, to refunds, insurance claims, and choses in action ("Seller Claims"), but not including any such claims under or in connection with the Excluded Assets or the Excluded Liabilities (as defined in Section 1.4); 1.1.11 Cash in the sum of (a) the amount designated on Schedule 1.1.11, which equals the amount of the Sellers' prepaid expenses - --------------- received by the Sellers from their customers for subsequent expenditure by the Sellers for postage in connection with work to be performed by the Sellers, and thus the Purchaser after the Closing (the "Prepaid Postage"); plus (b) $500,000; 1.1.12 All accounts, trade accounts receivable and all notes, bonds and other evidences of indebtedness of and rights to receive payments arising out of sales occurring in the conduct of the Business, including any rights of the Sellers with respect to any third party collection procedures or any other actions or proceedings that have been commenced in connection therewith (the "Accounts Receivable"), including, to the extent not collected prior to Closing, the Accounts Receivable disclosed in Schedule 1.1.12; --------------- 1.1.13 All prepaid expenses relating to the Business, including, to the extent not used or applied prior to Closing, the items listed in Schedule 1.1.13; --------------- 1.1.14 All motor vehicles owned or leased by the Sellers and used or held for use in the conduct of the Business (the "Vehicles"), including the Vehicles listed in Schedule 1.1.14; and --------------- 3 1.1.15 All security deposits deposited by or on behalf of the Sellers or either of them as lessee or sublessee under any Leases. 1.2 Intent of the Parties. Although the Schedules to this Agreement are --------------------- intended to be complete, to the extent any rights or assets of the Sellers relate exclusively to the Business or are otherwise necessary for the ownership and use of the Assets and the conduct of the Business, but are not properly itemized or do not appear in the applicable Schedules where required, then, unless this Agreement otherwise provides directly for the Purchaser to provide for or obtain such rights or assets in a different way or unless such rights or assets are specifically included in Excluded Assets, the general language of Section 1.1 shall govern, and such rights and assets shall nonetheless be deemed transferred to the Purchaser at Closing. The parties to this Agreement contemplate that it will be executed on the date specified on the first page of this Agreement (the "Signing Date") and closed on a later Closing Date as described and defined in Section 3.1. The representations and warranties in this Agreement are made first on the Signing Date and then again on the Closing Date, and the various schedules required under this Article 1, as well as schedules required under other Articles of this Agreement, are being delivered on the Signing Date and will be supplemented, amended, or replaced as and if necessary on the Closing Date so that they are accurate on each such date. The parties to this Agreement acknowledge, however, that the final amounts of certain assets and liabilities provided on certain schedules to this Agreement as of the Closing Date may not be determined with certainty until after the Closing Date. Accordingly, the parties are providing for the Post-Closing Settlement described in Section 8.3 and the Holdback as described in Section 3.2. 1.3 Title to and Transfer of Assets. The Sellers agree to convey to the ------------------------------- Purchaser title to all of the Assets by appropriate documents of transfer and sale, including such bills of sale, endorsements and assignments, and other good and sufficient instruments of bargain and sale, in such form as shall be approved and deemed appropriate by legal counsel for the Purchaser and the Sellers. 1.4 Excluded Assets. Notwithstanding the foregoing, the Assets shall --------------- not include any of the following: 1.4.1 certificates of incorporation and of limited partnership, minute books, stock books, tax returns, books of account or other records having to do with the corporate or limited partnership organization, qualifications to conduct business as a foreign corporation or limited partnership, agreements with registered agents relating to foreign qualifications, and taxpayer and similar identification numbers, as applicable, of the Sellers, Vincent, HSI General, HSI, and HSI Limited; 1.4.2 the rights that accrue or will accrue to the Sellers under this Agreement or any other agreement between a Seller Party and the Purchaser entered into on or after the date hereof; 4 1.4.3 the rights to any of the Sellers' claims for any federal, state, local, or foreign tax refunds; 1.4.4 except as provided in Section 1.1, the deposits, deposit accounts, and investments plus all other cash, cash equivalents, deposits, deposit accounts, and investments arising from the Business on or before the Closing Date; 1.4.5 all insurance and reinsurance, surety, bonding, or indemnity policies, binders, or contracts, and the benefits of any prior insurance coverage to the extent still available, as established or obtained with respect to the Business or the Assets on or before the Closing Date ("Insurance Policies"); 1.4.6 all obligations owed to the Sellers from any of the Seller Parties or any Affiliate of any Seller Party, or any spouse, child or other relative of any such Affiliate ("Affiliate" when used with reference to the Sellers means any officer, director or owner of 5% or more, directly or indirectly, of the outstanding limited partner interests of HSI Properties or limited partner interests in SFL; "Affiliate" when used with reference to the Purchaser or the Parent means any officer, director or owner of 5% or more of the outstanding shares of the Parent); and 1.4.7 the other assets, properties or rights disclosed in Schedule 1.4 (collectively with the other Assets listed in or pursuant to this Section 1.4, the "Excluded Assets"). ARTICLE 2 ASSUMPTION OF LIABILITIES BY THE PURCHASER 2.1 Assumed Liabilities. At and after the Closing, the Purchaser shall ------------------- assume and pay in a timely fashion and be responsible for (a) each liability and obligation of HSI, the Sellers or any of them set forth on the balance sheet that is part of the Financial Statements (as defined in Section 4.6) and each liability and obligation incurred by HSI, the Sellers or any of them in the ordinary course of business thereafter (but in each case the Purchaser shall assume, with respect to liabilities and obligations of HSI, only those liabilities and obligations that HSI has assigned or transferred to HSI Properties through HSI Limited and HSI General); (b) all liabilities and obligations under the General Contracts, Licenses, Leases and Authorizations; and (c) that certain note (the "NBC Note") payable by HSI to NBC Bank in connection with the financing of certain Xerox equipment and having an outstanding principal balance of approximately $260,000 (collectively, and subject to the express exclusions listed in Section 2.2 below, the "Assumed Liabilities"). 2.2 Liabilities Not Assumed. Notwithstanding the provisions of Section ----------------------- 2.1, the Purchaser shall not assume or be responsible for any of the following liabilities or obligations (the "Excluded Liabilities"): 5 2.2.1 any product liability or similar claim for injury to person, business or property, regardless of when made or asserted, which arises out of or is based upon any express or implied representation, warranty, agreement, or guarantee made by the Seller Parties, or alleged to have been made by the Seller Parties, or which is imposed or asserted to be imposed by operation of law, in connection with any service performed or product sold or leased by or on behalf of the Seller Parties on or before the Closing, including any claim relating to any product delivered in connection with the performance of such service and any claim seeking recovery for consequential damages, lost revenue or income; 2.2.2 any governmental fees, costs, levies, assessments, fines, penalties or interest thereon, including but not limited to sales or use taxes or other taxes, assessments and penalties (A) payable with respect to the operation of the Business or ownership of the Assets by the Seller Parties on or before the Closing, or from other properties or operations of the Seller Parties unrelated to the Business or the Assets, or (B) incident to or arising as a consequence of the negotiation or consummation by the Seller Parties of this Agreement and the transactions contemplated by this Agreement; 2.2.3 any liability or obligation attributable to the Excluded Assets; 2.2.4 any liability or obligation of the Seller Parties of any kind, known or unknown, contingent or otherwise, resulting from any other covenant, agreement, or indemnity of the Seller Parties in this Agreement or the other Purchase Documents to be executed and delivered by the Sellers (the term the "Purchase Documents" means this Agreement and the schedules, exhibits, and other documents, agreements, certificates, and instruments executed and delivered pursuant to or in connection with this Agreement); 2.2.5 any liability or obligation resulting from violations of any laws or regulations applicable to the Business or the Assets by the Seller Parties before the Closing Date or from infringement of third-party rights or interests with respect to the Business before the Closing Date; 2.2.6 except for those liabilities specifically assumed by the Parent pursuant to Sections 8.9 and 8.10, any employee liabilities relating to present and past employees of the Business with respect to Plans (as defined in Section 4.18.1), programs, policies, commitments and other benefit entitlements established or existing on or before Closing (whether or not such liabilities are accrued or payable at Closing, and whether or not such liabilities are contingent in nature), including (A) any liability or obligation for workers' compensation; (B) any current or future liabilities to employees retiring on, before, or after the Closing, and their dependents (excluding employees employed by the Purchaser after the Closing and who subsequently retire); 6 (C) any current or future liabilities for benefits that may have been accrued or earned by any employees associated with the Business on or before Closing under any pension Plans relating to service before the Closing Date; (D) any current or future liabilities for claims incurred before Closing and related expenses with respect to any employees associated with the Business under any welfare or disability plans established or existing at or before Closing, regardless of when filed with the Purchaser, the Sellers, or the claims administrator for any such plan; (E) any retrospective premium on pension, savings, thrift, or profit-sharing Plan contribution relating to any employees associated with the Business incurred or accrued before the Closing Date, regardless of when invoiced or recorded; and (F) any monetary liability for severance payments that may arise at any time in favor of any of the Sellers' employees under any Plan, program, policy, commitment, or any other benefit entitlement of Sellers, provided such monetary liability relates to periods of employment before the Closing; 2.2.7 any Litigation (as defined in Section 4.15) against the Seller Parties or the Assets, if the cause of action or activities giving rise to such litigation arise or accrue before the Closing Date; 2.2.8 any liability or obligation of the Seller Parties arising or incurred in connection with the negotiation, preparation and execution of this Agreement and the transactions contemplated by this Agreement and fees and expenses of counsel, accountants, brokers and other experts employed by the Seller Parties (provided that if the Sellers do not obtain one or more Required Contract Consents (as defined in Section 6.2.7) or the parties fail to obtain any other consent that is required for the assignment by the Sellers and the assumption by the Purchaser of any General Contract, License Agreement, Lease, Authorization, or license of Intellectual Property included within the Assets, and notwithstanding such failure, the Purchaser elects to proceed with the Closing, the Purchaser shall assume and be responsible for any liability or obligation created by the failure to obtain such consents); 2.2.9 any obligation for money borrowed or evidenced by bonds, debentures, notes or similar instruments, and any obligation of another Person that a Seller Party has guaranteed ("Person" means an individual, entity, unincorporated association, or a government or any agency or political subdivisions thereof), other than the NBC Note; 2.2.10 any obligations owed by a Seller Party to any other Seller Party or any Affiliate of any Seller Party, or any spouse, child or other relative of any such Affiliate; and 2.2.11 any obligation under any General Contract, License, Lease or Authorization that is not listed on a schedule to this Agreement on the Closing Date. 7 ARTICLE 3 CLOSING AND PURCHASE PRICE 3.1 Closing. The closing of the purchase and sale of the Assets and the ------- transfer and assumption of the Assumed Liabilities (the "Closing") shall take place at the offices of Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia at 10:00 a.m. on or before October 5, 2001, or at such other time as the parties hereto mutually agree upon (the "Closing Date"). 3.2 Purchase Price. The aggregate purchase price consideration for -------------- all of the Assets shall be $25,000,000 plus the amount of the Assumed Liabilities (collectively, the "Purchase Price"), paid and subject to adjustment as follows: (a) $20,000,000 to be paid to the Sellers in cash or by wire transfer of immediately available funds (less the "Holdback" of $250,000 in cash to facilitate the Post-Closing Settlement as provided for in Section 8.3, the "Cash Payment"); and (b) $5,000,000 to be paid to the Sellers in cash or by wire transfer of immediately available funds (the "Escrow Cash"), to be placed into escrow as provided in Section 3.4 below. 3.3 Fair Market Value of Assets. The parties agree that the Purchase --------------------------- Price represents the fair market value of the Assets. The Purchase Price shall be allocated among the Assets acquired and Assumed Liabilities assumed under this Agreement as disclosed in Schedule 3.3, which shall be agreed upon by the ------------ parties no later than the Closing Date. Each of the Sellers, the Purchaser, and the Parent covenants and agrees that it will not take a position on any income tax return, before any governmental agency charged with the collection of any income tax, or in any judicial proceeding that is in any way inconsistent with the terms of this Article 3. 3.4 Establishment of Escrow. The Escrow Cash shall be delivered at ----------------------- Closing to First Union National Bank (the "Escrow Agent"), which shall hold the Escrow Cash in escrow (the "Escrow") pursuant to the terms of an Escrow Agreement in the form of Exhibit 3.4 (the "Escrow Agreement"). ----------- ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE SELLER PARTIES The Seller Parties represent and warrant, jointly and severally, to the Purchaser and the Parent that, except as set forth on the disclosure schedules attached to this Agreement, each of which exceptions shall specifically identify the relevant subsection of this Article to which it relates, as follows: 8 4.1 Entity Existence. HSI is a corporation duly incorporated, validly ---------------- existing and in good standing under the laws of the State of Nevada, and SFL and HSI Properties are limited partnerships duly organized, validly existing, and in good standing under the laws of the State of Texas. Vincent is the sole general partner of SFL and is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Texas. HSI General is the sole general partner of HSI Properties and is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Nevada. HSI Limited is the sole limited partner of HSI Properties and is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Nevada. The Sellers have the partnership power and authority to conduct the Business and to own and lease all of their properties and assets related to the Business (including the Assets). Each of the Sellers is duly qualified or licensed to do business and is in good standing under each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary, other than in such jurisdictions where the failure to be so qualified to do business or in good standing (individually or in the aggregate) would not have a Material Adverse Effect on such Seller. "Material Adverse Effect" shall mean, with respect to any entity or group of entities, a material adverse effect on the business, operations, assets, liabilities, financial condition, or results of operations of such entity or group of entities taken as a whole, or on the ability of such entity or group of entities to perform in all material respects its or their obligations under this Agreement, or which would prevent or materially delay the consummation of the transactions contemplated by this Agreement. 4.2 Partnership Power; Authorization; Enforceable Obligations. The --------------------------------------------------------- Sellers have the partnership power and authority, as applicable, to execute and deliver this Agreement and the other Purchase Documents and to perform their obligations under this Agreement and under those documents. The Sellers have taken all necessary partnership action to authorize the execution and delivery of this Agreement and the Purchase Documents and the consummation of the transactions contemplated by this Agreement and those documents. This Agreement and the Purchase Documents constitute the legal, valid, and binding obligations of the Sellers, enforceable against the Sellers in accordance with their terms and conditions, except as such enforcement may be subject to or limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect affecting creditors' rights generally, and by general principles of equity. 4.3 No Conflict. Neither the execution and delivery of this Agreement ----------- and the other Purchase Documents, nor the consummation of the transactions contemplated by this Agreement or those documents, will (a) violate any law, regulation, ordinance, governmental restriction, order, judgment, or decree (collectively, "Laws") applicable to the Seller Parties, the Business, or the Assets, (b) violate or conflict with any provision of any articles of incorporation, certificate of limited partnership, bylaw, limited partnership agreement or other governing or organizational instrument of the Sellers, HSI, HSI General, HSI Limited, or Vincent, or (c) conflict with, result in the breach of, or constitute a default under any mortgage, lease, indenture, license, instrument, trust, contract, agreement, or other commitment or arrangement to which any Seller Party is a 9 party or by which the Sellers or any of the Assets are bound, except where such violation, conflict, breach or default would not have a Material Adverse Effect on the Sellers. 4.4 Required Government Consents. Listed in Schedule 4.4 (such ---------------------------- ------------ scheduled items being referred to in this Agreement as the "Required Government Consents") is each approval, authorization, certification, consent, variance, permission, license, or permit to or from any government or governmental authority held by the Sellers that is related to the operation of the Business. Other than the obtaining by the Purchaser of such Required Government Consents in its own name, no notice, filing, or recording to or with any government or governmental authority is necessary for the execution and delivery of this Agreement and the Purchase Documents by the Sellers or the consummation by the Sellers of the transactions contemplated by this Agreement or those documents, or the ownership and use of the Assets and the conduct of the Business by the Sellers. 4.5 Five Largest Customers. Listed in Schedule 4.5 are the Sellers' ---------------------- ------------ combined five largest customers in terms of revenue received from September 1, 2000 through August 31, 2001. 4.6 Financial Matters. The unaudited combined balance sheet of the ----------------- Sellers (or their predecessors, as applicable) as of August 31, 2001 and the related unaudited combined statements of operations and cash flow for the period ending August 31, 2001 (the "Financial Statements") fairly present the combined financial position of the Sellers (or their predecessors, as applicable) as of the date of those statements and the results of their operations for the period of those statements. Except as disclosed on Schedule 4.6, the Financial Statements were prepared in accordance with generally accepted accounting principles consistently applied ("GAAP"); provided, however, that the Purchaser acknowledges that the Financial Statements have not been audited. Except as disclosed on Schedule 4.6 (for liabilities not required to be disclosed under ------------ GAAP), the Financial Statements contain all of the liabilities incurred in operating the Business as of the date of such Financial Statements. The Adjusted Net Assets of the Sellers as of the Signing Date and as of Closing Date, as applicable, is not less than $1,700,000. "Adjusted Net Assets" shall be calculated as specified in Schedule 4.6A. ------------- 4.7 Absence of Changes. Except for the execution and delivery of this ------------------ Agreement and the transactions to take place pursuant to this Agreement on or before the Closing Date, since the date of the balance sheet included in the Financial Statements there has not been any event or development which, individually or together with other such events, could reasonably be expected to result in a Material Adverse Effect on the Sellers. Without limiting the foregoing, except as disclosed in Schedule 4.7, there has not occurred, between ------------ the date of the date of the balance sheet included in the Financial Statements and the Signing Date or the Closing Date, as applicable, any of the following: 4.7.1 (a) any increase in the salary, wages or other compensation of, or any payment of severance benefits to, any employee of any Seller Party whose annual salary is, or after giving effect to such change would be, $25,000 or more; (b) any establishment or modification of (A) targets, goals, pools or similar provisions in respect of any fiscal year 10 under any Plan or any employment-related contract or other compensation arrangement with or for such employees or (B) salary ranges, increase guidelines or similar provisions in respect of any Plan or any employment-related contract or other compensation arrangement with or for such employees; or (c) any adoption, entering into or becoming bound by any Plan, employment-related contract or collective bargaining agreement, or amendment, modification or termination (partial or complete) of any Plan (other than pursuant to Section 8.10), employment-related contract or collective bargaining agreement, except to the extent required by applicable Law; 4.7.2 (a) incurrences by the Sellers of indebtedness with respect to the conduct of the Business in an aggregate principal amount exceeding $25,000 (net of any amounts discharged during such period), or (b) any voluntary purchase, cancellation, prepayment or complete or partial discharge in advance of a scheduled payment date with respect to, or waiver of any right of either Seller under, any indebtedness of or owing to either Seller with respect to the conduct of the Business (other than as contemplated in Section 4.7 above); 4.7.3 any physical damage, destruction or other casualty loss (whether or not covered by insurance) affecting any of the plant, real or personal property or equipment of the Sellers used or held for use in the conduct of the Business in an aggregate amount exceeding $25,000; 4.7.4 any material change in (a) any pricing, investment, accounting, financial reporting, inventory, credit, allowance or tax practice or policy of the Business or (b) any method of calculating any bad debt, contingency or other reserve of the Business for accounting, financial reporting or tax purposes; 4.7.5 (a) any acquisition or disposition of any assets and properties used or held for use in the conduct of the Business, other than Inventory in the ordinary course of business consistent with past practice and other acquisitions or dispositions not exceeding in either case $25,000 in the aggregate; or (b) any creation or incurrence of a Lien (other than Permitted Liens) on any assets and properties used or held in the conduct of the Business (the terms "Lien" and "Permitted Lien" are defined in Section 4.9); 4.7.6 any entering into, amendment, modification, termination (partial or complete) or granting of a waiver under or giving any consent with respect to any General Contract, Lease, License Agreement or Insurance Policy that is required (or had it been in effect on the date hereof would have been required) to be disclosed under Section 1.1 above; 4.7.7 capital expenditures or commitments for additions to property, plant or equipment used or held for use in the conduct of the Business constituting capital assets in an aggregate amount exceeding $25,000; 11 4.7.8 any transaction with any Affiliate of the Sellers or with any spouse, child or other relative of any such Affiliate (a) outside the ordinary course of business consistent with past practice or (b) other than on an arm's-length basis; 4.7.9 any entering into of a contract to do or engage in any of the foregoing after the date hereof; or 4.7.10 any other transaction involving or development affecting the Business or the Assets outside the ordinary course of business consistent with past practice. 4.8 No Undisclosed Liabilities. Except as reflected or reserved against -------------------------- in the balance sheet included in the Financial Statements or in the notes to them or as disclosed Schedule 4.8, there are no liabilities against, relating to ------------ or affecting the Business or any of the Assets, other than liabilities incurred in the ordinary course of business consistent with past practice which in the aggregate could not reasonably be expected to result in a Material Adverse Effect on the Sellers. 4.9 Title to Property. The Purchaser at Closing shall obtain good and ----------------- marketable title to all of the Assets free and clear of all Liens whatsoever, other than (a) the Leases disclosed in Schedule 1.1.6, (b) Permitted Liens, and -------------- (c) as disclosed on Schedule 4.9. "Lien" means any mortgage, pledge, assessment, ------------ ecurity interest, lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or any conditional sale contract, title retention contract or other contract to give any of the foregoing, and "Permitted Lien" means (a) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP; (b) any statutory Lien arising in the ordinary course of business by operation of Law with respect to a liability that is not yet due or delinquent; (c) any minor imperfection of title or similar Lien which individually or in the aggregate with other such Liens does not materially impair the value of the property subject to such Lien or the use of such property in the conduct of the Business; (d) zoning, building code and other land use Laws and agreements relating to the use or occupancy of property or the activities conducted thereon and (e) liens securing the NBC Note. 4.10 Condition of Property. All of the tangible Assets are in good --------------------- operating order, condition, and repair, ordinary wear and tear excepted, and are suitable for use in the Business in the ordinary course, as presently operated. 4.11 Inventory. All inventory reflected on the balance sheet included -------------- s part of the Financial Statements as of the date of such balance sheet was, and all inventory transferred to the Purchaser as of the Closing Date will be, in a quantity and quality usable or salable in the ordinary course of business of the Sellers consistent with past practice. The Financial Statements reflect appropriate write-offs and mark-downs for inventory that is used, obsolete, unusable or unable to be sold in the ordinary course of business of the Sellers. 12 4.12 Contracts - General. The License Agreements listed in Schedule ------------------- -------- 1.1.1, the Leases listed in Schedule 1.1.6, and the General Contracts disclosed - ----- -------------- in Schedule 1.1.7 constitute all contracts, agreements, licenses, leases and -------------- other commitments and arrangements of the Sellers in effect as of the Signing Date and the Closing Date, as applicable, and included in the Assets. All such contracts are valid, binding, and enforceable against the Sellers in accordance with their terms and are in full force and effect; provided that if the Sellers do not obtain one or more Required Contract Consents, and notwithstanding such failure, the Purchaser elects to proceed with the Closing, any breach of such contracts that results from the failure to obtain such consent shall not be deemed to be a breach of this representation and warranty. Except as noted on Schedule 4.12, to the knowledge of the Seller Parties, there are no existing - ------------- defaults by the Sellers under any such contracts and no act, event, or omission has occurred that, whether with or without notice, lapse of time, or both, would constitute a default under those contracts. 4.13 Intellectual Property. --------------------- 4.13.1 Schedule 1.1.4 lists and describes all Intellectual -------------- Property necessary to the conduct of the Business and specifies which items are owned and to which items the Sellers have rights as a licensee or otherwise. 4.13.2 The Intellectual Property constitutes or represents all of the intellectual property used in the Business as presently conducted by the Sellers, and the Sellers' ownership and use rights with respect to the Intellectual Property are free and clear of Liens other than Permitted Liens. The Sellers either own, have a valid license to use, or otherwise have such rights as may be necessary to use all of the Intellectual Property, and, except as provided on Schedule 1.1.4, all such rights can be transferred to the -------------- Purchaser. 4.13.3 The Sellers have, and immediately after the Closing the Purchaser will have, rights to use all computer software and databases that are used in the Business as presently conducted by the Sellers and all documentation relating to all such computer software and databases. 4.14 Leases. The Leases disclosed in Schedule 1.1.6 constitute all ------ -------------- leasing or rental contracts, agreements, and other commitments and arrangements in effect as of the Closing Date and included in the Assets. All Leases are valid, binding, and enforceable against a Seller in accordance with their terms and are in full force and effect. To the knowledge of the Seller Parties, there are no existing defaults by the Sellers thereunder and no act, event, or omission has occurred that, whether with or without notice, lapse of time, or both, would constitute a default thereunder. 4.15 Litigation. No claim, action, suit, proceeding, inquiry, hearing, ---------- arbitration, administrative proceeding, or investigation (collectively, "Litigation") is pending, or, to the knowledge of the Seller Parties, threatened against the Sellers, or their present or former directors, officers, or employees, affecting, involving, or relating to the Business or any of the Assets. The Seller Parties do not know of any basis for Litigation against the Sellers (or the 13 Purchaser upon acquisition of the Business), their present or former directors, officers, or employees, affecting, involving, or relating to the Business or the Assets. 4.16 Court Orders, Decrees, and Laws. ------------------------------- 4.16.1 Compliance with Laws. There is no outstanding or, to -------------------- the knowledge of the Seller Parties, threatened order, writ, injunction, or decree of any court, governmental agency, or arbitration tribunal against the Sellers affecting, involving, or relating in an adverse manner to the Business or the Assets. The Sellers are not in violation of any Laws affecting, involving, or relating to the Business or the Assets, except where noncompliance has no Material Adverse Effect on the Business or the Assets, and the Sellers have received no notices of any such alleged violation. 4.16.2 Adequacy of Authorizations. The Authorizations -------------------------- constitute all approvals, authorizations, certifications, consents, variances, permissions, licenses, or permits to or from, or filings, notices, or recordings to or with, U.S. or non-U.S., federal, state, or local governmental authorities that are required for the ownership and use of the Assets and the conduct of the Business under all applicable Laws. The Sellers are in compliance with all material terms and conditions of such required Authorizations. All of the Authorizations are in full force and effect, and, to the Seller Parties' knowledge, no suspension or cancellation of any of them is being threatened, nor will any of the Authorizations be affected by the consummation of the transactions described in this Agreement, except to the extent any such Authorizations are assignable or transferable only upon receipt of the Required Government Consents. 4.16.3 Environmental Matters. The operations of the Sellers --------------------- forming a part of the Business comply, and have complied, in all material respects with all applicable Laws relating to pollution or protection of the environment ("Environmental Laws"). The Sellers have not received any notice of any pending or threatened investigation, proceeding or claim with respect to the Business or the Assets to the effect that the Sellers are or may be liable to any person or entity, or responsible or potentially responsible for the costs of any remedial or removal action or other cleanup costs, as a result of noncompliance with any Environmental Laws. Except as set forth on Schedule 4.16.3 attached hereto, to the knowledge of the Seller Parties, there is no past or present action, activity, condition or circumstance that could be expected to give rise to any such liability on the part of the Sellers to any person or entity or for any such cleanup costs. 4.17 Personnel and Compensation. -------------------------- 4.17.1 List of Personnel. Schedule 4.17 is a true and complete ----------------- ------------- list of the names and current compensation levels of (a) all salaried or annual employees and (b) all independent contractors and/or consultants (excluding vendors and suppliers) involved in the Business. 4.17.2 Employee Relations. There is no labor strike, dispute, ------------------ slowdown, stoppage, or similar activity pending or, to the knowledge of the Seller Parties, threatened against 14 the Sellers pertaining to the Business or the employees involved in the Business. There are no charges, investigations, administrative proceedings, or formal complaints of discrimination (including discrimination based upon sex, age, marital status, race, national origin, sexual preference, handicap or veteran status) pending or, to the knowledge of the Seller Parties, threatened before the Equal Employment Opportunity Commission or any federal, state, or local agency or court against the Sellers pertaining to the Business or the employees of the Business, and, to the knowledge of the Seller Parties, no basis for any such charge, investigation, administrative proceeding, or complaint exists. 4.17.3 Compliance with Immigration and Labor and Employment ---------------------------------------------------- Laws. The Sellers have conducted a review of their Employment Eligibility - ---- Verification forms (Form I-9) and various personnel and payroll records and represent there are no violations of applicable Laws, with respect to immigration matters. 4.18 Employee Benefit Plans and Arrangements. --------------------------------------- 4.18.1 List of Plans and Obligations. The employee benefit ----------------------------- plans and arrangements set forth in Schedule 4.18 is a complete and accurate ------------- list and description of all plans, arrangements, agreements, commitments, promises and other benefit or compensatory obligations of the Sellers (other than any de minimis fringe benefit as defined in Section 132(e) of the Internal Revenue Code of 1986, as amended (the "Code")), including pension, retirement, profit-sharing, deferred compensation, stock option, employee stock ownership, severance pay, vacation, sick leave without compensation, bonus and other incentive plans, every medical, vision, dental and other health plan, every life insurance plan and every other written or unwritten employee program, arrangement, agreement or understanding, commitment or method of contribution or compensation, whether formal or informal, whether funded or unfunded, and other obligations under which the Sellers have been, are or will be obligated to provide benefits to any current or former employee, retiree, director, independent contractor, shareholder, officer, consultant or other beneficiary, or dependent, spouse or other family member or beneficiary of such Employee, retiree, director, independent contractor, shareholder, officer, consultant, or other beneficiary of the Sellers, whether during their employment with the Sellers or after the termination of such employment (the "Plans" and the "Beneficiaries," respectively). 4.18.2 Compliance. All of the Plans have been maintained, ---------- funded and administered in compliance, in all material respects, with all Laws, including the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code, and all regulations and rulings related to those Laws. There are no penalties, interest, taxes related to any of the Plans due to any federal or state authority, and there is no pending or threatened litigation or other contests related to any of the Plans. 4.18.3 No Liabilities or Obligations. The Sellers have made ----------------------------- full and timely payment of all amounts required under the terms of each of the Plans to have been paid as contributions to such Plans, and all amounts that have accrued but have not yet been paid have been accurately reflected on the Financial Statements. 15 4.18.4 No Payments. The consummation of the sale and purchase ----------- of the Assets pursuant to this Agreement will not (a) entitle any Beneficiary to any severance pay or any other payment contingent upon a change in control or ownership of the Sellers or the assets of either of them, or (b) accelerate the time of payment or vesting or increase the amount of any compensation or benefit due to any Beneficiary other than as required by Section 411(d)(3) of the Code. 4.18.5 No Multi-Employer Plans. None of the Plans is a ----------------------- multi-employer plan, as defined in section 3(37) of ERISA. 4.19 Insurance Policies. There are no pending material claims against ------------------ insurance established or obtained with respect to the Business by the Sellers as to which insurers have denied liability or are defending under any reservation of rights, and, to the knowledge of the Seller Parties, there exists no material claim under such insurance that has not been properly filed by the Sellers. 4.20 Broker's or Finder's Fees. Other than The Montana Group, whose fee ------------------------- will be paid by the Sellers, the Seller Parties have not authorized any person to act as broker or finder or in any other similar capacity in connection with the transactions contemplated by this Agreement. 4.21 Accounts Receivable. Except as set forth in Schedule 4.21, the ------------------- ------------- Accounts Receivable (a) arose from bona fide transactions in the ordinary course of business and are payable on ordinary trade terms, (b) are not subject to any valid set-off or counterclaim, (c) do not represent obligations for goods sold on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return arrangement, (d) are collectible in the ordinary course of business consistent with past practice in their aggregate recorded amounts, net of any applicable reserve reflected in the balance sheet included in the Financial Statements, and (e) are not the subject of any actions or proceedings brought by or on behalf of the Sellers. 4.22 Vehicles. Schedule1.1.14 contains a true and complete list of all -------- -------------- motor vehicles owned or leased by the Sellers and used or held for use in the conduct of the Business. Except as disclosed in Schedule1.1.14, the Sellers have -------------- good and valid title to, or has valid leasehold interests in or valid rights under contract to use, each Vehicle, free and clear of all Liens other than Permitted Liens. 4.23 No Guarantees. None of the liabilities of the Business or of the ------------- Sellers incurred in connection with the conduct of the Business is guaranteed by or subject to a similar contingent obligation of any other Person, nor has either Seller guaranteed or become subject to a similar contingent obligation in respect of the liabilities of any customer, supplier or other Person to whom either Seller sells goods or provides services in the conduct of the Business or with whom such Seller otherwise has significant business relationships in the conduct of the Business. 16 4.24 Tax Matters. ----------- 4.24.1 Tax and Social Returns. The Sellers have correctly and ---------------------- timely (a) filed all Tax and Social returns required to be filed in the manner required by Tax and Social authorities, (b) responded to information requested by said authorities and (c) made all Tax and Social payments at due dates. "Tax" or "Taxes" means all forms of levies, taxes, customs and other duties normally deemed to be of a fiscal or customs nature, including (a) all taxes levied, imposed or assessed under the Code, or any other statute, rule, ordinance or Law, in the United States or elsewhere; (b) taxes in the nature of sales tax, consumption tax, value added tax, payroll tax, group tax, undistributed profits tax, fringe benefits tax, recoupment tax, withholding tax, land tax, water rates, municipal rates, stamp duties, gift duties or other state, territorial, provincial or municipal charges or impositions levied, imposed or collected by any governmental body; and (c) any additional tax, interest, penalty, charge, fee or other amount of any kind assessed, charged or imposed in relation to the non-, late, short or incorrect payment of the same or the failure to file any return. "Social" refers to employment-related obligations of the Sellers, including all actual or contingent liabilities relating to unemployment, health, injury, death and retirement as well as any and all items of a similar nature. 4.24.2 Inquiries, Investigations, and Audits. Except as set ------------------------------------- forth in Schedule 4.24.2, neither Seller is the subject matter of any inquiry, investigation or audit relating to Tax or Social matters and has not been informed of any proposed audit. 4.24.3 Returns Furnished. Schedule 4.24.3 contains true and ----------------- --------------- complete copies of (a) income tax audit reports, statements of deficiencies or audit response letters relating to Taxes, if any, and (b) all Tax returns for the Sellers for all periods since January 1, 1998. 4.25 Disclosure. No representation, warranty, or statement made by the ---------- Seller Parties in this Agreement, the Purchase Documents or in any document or certificate furnished or to be furnished to the Purchaser or the Parent pursuant to this Agreement contains or will contain any untrue statement or omits or will omit to state any fact necessary to make the statements contained in this Agreement or in those documents, under the circumstances in which they were made, not materially misleading. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND PARENT The Purchaser and the Parent represent and warrant, jointly and severally, to the Sellers as follows: 5.1 Corporate Existence. The Parent is a corporation duly organized, ------------------- validly existing and in good standing under the Laws of the State of Georgia. The Purchaser is a limited partnership duly organized, validly existing, and in good standing under the Laws of the State of Texas. InterCept TX I, LLC, a Georgia limited liability company, is the sole general 17 partner of the Purchaser and is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Georgia. The Parent and the Purchaser have the corporate and partnership power and authority, as applicable, to own and operate their businesses and assets. 5.2 Corporate and Partnership Power and Authorization. The Parent and ------------------------------------------------- the Purchaser have the corporate and partnership power, authority, and legal right to execute and deliver this Agreement and the other Purchase Documents and to perform their obligations under this Agreement and under those documents. The execution, delivery, and performance of this Agreement and the Purchase Documents by the Parent and the consummation of the transactions contemplated by this Agreement and those other documents have been duly authorized by all necessary corporate action of the Parent. The execution, delivery, and performance of this Agreement and the Purchase Documents by the Purchaser and the consummation of the transactions contemplated by this Agreement and those other documents have been duly authorized by all necessary partnership action of the Purchaser. This Agreement and the Purchase Documents constitute the legal, valid, and binding obligations of the Purchaser and the Parent, enforceable against each of them, as applicable, in accordance with their terms and conditions, except as such enforcement may be subject to or limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer, or other similar Laws now or hereafter in effect affecting creditors' rights generally, and by general principles of equity. 5.3 No Conflict. Neither the execution and delivery of this Agreement ----------- and the other Purchase Documents, nor the consummation of the transactions contemplated by this Agreement or by those documents, will (a) violate any Laws applicable to the Parent or the Purchaser; (b) violate or conflict with any provision of any articles of incorporation, charter, bylaw, partnership agreement, partnership certificate, or other governing or organizational instrument of the Parent or the Purchaser; or (c) conflict with, result in the breach of, or constitute a default under any mortgage, lease, indenture, license, instrument, trust, contract, agreement, or other commitment or arrangement to which the Parent or the Purchaser is a party or by which the Parent or the Purchaser or any of their respective Assets are bound, except where such violation, conflict, breach or default would not have a Material Adverse Effect on the Parent and the Purchaser. 5.4 Broker's or Finder's Fees. Neither the Purchaser nor the ------------------------- Parent has authorized any person to act as broker, finder, or in any other similar capacity in connection with the transactions contemplated by this Agreement. 5.5 Outstanding Stock. The Parent indirectly owns all of the ----------------- outstanding general partner and limited partner interests in the Purchaser. The Parent owns all of the outstanding member interests in InterCept Services, LLC, a Georgia limited liability company that is (a) the sole member and manager of InterCept TX I, LLC, a Georgia limited liability company that is the sole general partner of the Purchaser; and (b) the sole limited partner of the Purchaser. 18 5.6 Financing. As of the Signing Date and the Closing Date, the --------- Purchaser and the Parent have secured adequate financing to purchase the Assets in accordance with this Agreement and to fulfill their obligations hereunder and under the Purchase Documents. ARTICLE 6 CONDITIONS TO CLOSING 6.1 Conditions to the Sellers' Obligations. Each of the obligations of -------------------------------------- the Sellers to be performed hereunder shall be subject to the satisfaction (or waiver by the Sellers) at or prior to the Closing Date of each of the following conditions: 6.1.1 The representations and warranties of the Purchaser and the Parent contained in this Agreement shall be true on and as of the Closing Date (other than representations and warranties that speak as of a specified date). 6.1.2 The Purchaser and the Parent shall have performed and complied with all agreements, obligations, covenants, and conditions required by this Agreement to be performed or complied with by them on or prior to the Closing. 6.1.3 No Litigation shall be threatened or pending against the Parent or the Purchaser before any court or governmental agency that, in the reasonable opinion of counsel for the Sellers, could result in the restraint or prohibition of any such party, or the obtaining of damages or other relief from such party, in connection with this Agreement or the consummation of the transactions contemplated by this Agreement. 6.1.4 The execution, delivery, and performance of this Agreement by the Purchaser shall have been duly authorized by the Board of Directors of the Parent. The execution, delivery, and performance of this Agreement by the Purchaser shall have been duly authorized by the board of managers of InterCept TX I, LLC for itself and the Purchaser. The Sellers shall have received copies of all resolutions pertaining to such authorizations, certified by the applicable corporate secretary. 6.1.5 The Purchaser shall have delivered to the Sellers a certificate to the effect that each of the conditions specified in Sections 6.1.1 through 6.1.4 above is satisfied in all material respects. 6.1.6 The Parent and the Purchaser, as applicable, shall have delivered or caused to be delivered to the Sellers or Shaw, as applicable, all of the following agreements: (A) the Non-solicitation Agreement substantially in the form attached to this Agreement as Exhibit 6.1.6(A) (the ---------------- "Non-solicitation Agreement"); (B) the Escrow Agreement; 19 (C) the Stock Option Agreement for Shaw substantially in the form attached to this Agreement as Exhibit 6.1.6(C) (the "Shaw ---------------- Stock Option Agreement"); (D) the Stock Option Agreements for certain employees of the Sellers substantially in the form attached to this Agreement as Exhibit 6.1.6(D) (the "Employee Stock Option Agreements"); --------------- (E) the Assignment and Assumption Agreement substantially in the form attached to this Agreement as Exhibit 6.1.6 ------------- (E) as required to assign the lease for the premises of the Business to the Purchaser (the "Lease Assignment"); and (F) the Bill of Sale and Assumption substantially in the form attached to this Agreement as Exhibit 6.1.6(F), pursuant to ---------------- which the Sellers sell the Assets to the Purchaser and the Purchaser assumes and agrees to pay and perform the Assumed Liabilities (the "Bill of Sale and Assumption Agreement"). 6.1.7 The Sellers shall have received the opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to the Parent and the Purchaser, dated the Closing Date, substantially in the form and to the effect of Exhibit ------- 6.1.7 to this Agreement. - ----- 6.2 Conditions to the Obligations of the Purchaser and the Parent. Each ------------------------------------------------------------- of the obligations of the Purchaser and the Parent to be performed hereunder shall be subject to the satisfaction (or the waiver by the Purchaser and the Parent) at or prior to the Closing Date of each of the following conditions: 6.2.1 The representations and warranties contained of the Seller Parties in this Agreement shall be true on and as of the Closing Date (other than representations and warranties that speak as of a specified date). 6.2.2 The Sellers shall have performed and complied with all agreements, obligations, covenants and conditions required by this Agreement to be performed or complied with by them on or prior to the Closing. 6.2.3 No Litigation shall be threatened or pending against the Sellers before any court or governmental agency that, in the reasonable opinion of counsel for the Purchaser, could result in the restraint or prohibition of any such party, or the obtaining of damages or other relief from such party, in connection with this Agreement or the consummation of the transactions contemplated by this Agreement. 6.2.4 The execution, performance, and delivery of this Agreement by the Sellers shall have been duly authorized by the Board of Directors of HSI, HSI General (for itself and as to HSI General for HSI Properties), and Vincent (for itself and as to Vincent for SFL). The Purchaser shall have received copies of all resolutions pertaining to such authorizations, 20 certified by the corporate secretaries of HSI, HSI General, HSI Limited, and Vincent, respectively. 6.2.5 The Seller Parties shall have delivered to the Purchaser a certificate to the effect that each of the conditions specified in Sections 6.2.1 through 6.2.4 above is satisfied in all material respects. 6.2.6 The Sellers shall have provided to the Purchaser (a) payoff letters for all Liens, encumbrances, and liabilities with respect to the Assets (other than Permitted Liens) and shall have paid all amounts required to be paid by the Sellers with respect to those Liens, encumbrances, and liabilities; (b) evidence satisfactory to the Purchaser that all amounts owed by or to the Sellers to or from any of the Seller Parties or any Affiliate of any Seller Party, or any spouse, child or other relative of any such Affiliate, have been repaid in full or will be repaid out of the Cash Payment on the Closing Date; and (c) evidence satisfactory to the Purchaser that the Assets transferred to the Purchaser at Closing include cash in an amount equal to the sum of (x) the Prepaid Postage reasonably estimated by the Sellers for that date; and (y) $500,000. 6.2.7 The Sellers shall have obtained the written consent of the parties listed on Schedule 4.5 (the "Required Contract Consents") to the ------------ assignment of the General Contracts of such parties to the Purchaser. 6.2.8 The Sellers or Shaw, as applicable, shall have delivered or caused to be delivered to the Purchaser and the Parent, as applicable, all of the following agreements: (A) the Non-solicitation Agreement; (B) the Escrow Agreement; (C) the Shaw Stock Option Agreement; (D) the Employee Stock Option Agreements; (E) the Lease Assignment; and (F) the Bill of Sale and Assumption Agreement. 6.2.9 The Purchaser and the Parent shall have received the opinion of Haynes and Boone, L.L.P., counsel to the Sellers, dated the Closing Date, substantially in the form and to the effect of Exhibit 6.2.9 to this ------------- Agreement. 21 ARTICLE 7 CLOSING 7.1 Actions at Closing. At Closing, the Purchaser, the Parent, and the ------------------ Sellers shall take the following actions, in addition to such other actions as may otherwise be required under this Agreement: 7.1.1 Copies of Consents. The Sellers shall deliver to the ------------------ Purchaser copies of all Required Contract Consents. 7.1.2 Deliveries of Documents. The Seller Parties shall ----------------------- deliver to the Purchaser and the Parent, and the Purchaser and the Parent shall deliver to the Seller Parties, such the documents and instruments referenced in Section 6.1.7 and Section 6.2.8 and such additional instruments of conveyance and transfer as the Purchaser may reasonably request to effect the transfer and assignment to the Purchaser of the Assets. 7.2 Delivery of Purchase Price. The Purchaser shall deliver the Cash -------------------------- Payment to the Sellers and the Escrow Cash to the Escrow Agent, which shall have entered into the Escrow Agreement. ARTICLE 8 COVENANTS OF THE PURCHASER, THE PARENT, AND THE SELLERS 8.1 Mutual Cooperation. Subject to the other provisions of this ------------------ Agreement, before, at, and after the Closing, without further consideration, each of the parties to this Agreement shall use reasonable efforts in good faith to procure or execute, acknowledge, and deliver all such further certificates, conveyance instruments, consents, and other documents as the other parties or their counsel may reasonably request (a) to vest in the Purchaser, and perfect and protect the Purchaser's right, title, and interest in, and enjoyment of, the Assets and the Business, (b) to effect the Purchaser's assumption, payment of discharge of all Assumed Liabilities, and/or (c) to ensure more effectively the compliance of each party with its agreements, covenants, warranties, and representations under this Agreement. Specifically and without limitation, the Purchaser and the Parent shall use their reasonable efforts to provide the Sellers such assistance as they may reasonably request in connection with matters relating to taxes. The Purchaser shall retain and provide the Sellers with records or information which may be relevant to any such tax return, audit, examination, proceeding, or determination, and the Purchaser shall retain all such books and records for so long as necessary in keeping with applicable statutes of limitations. 8.2 Covenants of the Sellers Regarding the Operation of the Business ---------------------------------------------------------------- from the Signing Date to the Closing Date. The Sellers hereby agree that from - ----------------------------------------- the Signing Date to the Closing Date they will continue to operate the Business in the ordinary course of business. Without limiting the foregoing, the Sellers will not permit or suffer any of the following to occur during such period, unless the Sellers obtain the prior written consent of the Purchaser: 22 8.2.1 (a) any increase in the salary, wages or other compensation of, or any payment of severance benefits to, any employee of the Seller Parties whose annual salary is, or after giving effect to such change would be, $25,000 or more; (b) any establishment or modification of (A) targets, goals, pools or similar provisions in respect of any fiscal year under any Plan or any employment-related contract or other compensation arrangement with or for such employees or (B) salary ranges, increase guidelines or similar provisions in respect of any Plan or any employment-related contract or other compensation arrangement with or for such employees; or (c) any adoption, entering into or becoming bound by any Plan, employment-related contract or collective bargaining agreement, or amendment, modification or termination (partial or complete) of any Plan (other than pursuant to Section 8.10), employment-related contract or collective bargaining agreement, except to the extent required by applicable Law; 8.2.2 (a) incurrences by the Sellers of indebtedness with respect to the conduct of the Business in an aggregate principal amount exceeding $25,000 (net of any amounts discharged during such period), or (b) any voluntary purchase, cancellation, prepayment or complete or partial discharge in advance of a scheduled payment date with respect to, or waiver of any right of either Seller under, any indebtedness of or owing to either Seller with respect to the conduct of the Business (other than as contemplated in Section 4.7 above); 8.2.3 any physical damage, destruction or other casualty loss (whether or not covered by insurance) affecting any of the plant, real or personal property or equipment of the Sellers used or held for use in the conduct of the Business in an aggregate amount exceeding $25,000; 8.2.4 any material change in (a) any pricing, investment, accounting, financial reporting, inventory, credit, allowance or tax practice or policy of the Business or (b) any method of calculating any bad debt, contingency or other reserve of the Business for accounting, financial reporting or tax purposes; 8.2.5 (a) any acquisition or disposition of any assets and properties used or held for use in the conduct of the Business, other than Inventory in the ordinary course of business consistent with past practice and other acquisitions or dispositions not exceeding in either case $25,000 in the aggregate; or (b) any creation or incurrence of a Lien (other than Permitted Liens) on any assets and properties used or held in the conduct of the Business; 8.2.6 any entering into, amendment, modification, termination (partial or complete) or granting of a waiver under or giving any consent with respect to any General Contract, Lease, License Agreement or Insurance Policy that is required (or had it been in effect on the date hereof would have been required) to be disclosed under Section 1.1 above; other than in the ordinary course of business; 23 8.2.7 capital expenditures or commitments for additions to property, plant or equipment used or held for use in the conduct of the Business constituting capital assets in an aggregate amount exceeding $25,000; 8.2.8 any transaction with any Affiliate of the Sellers or with any spouse, child or other relative of any such Affiliate (a) outside the ordinary course of business consistent with past practice or (b) other than on an arm's-length basis; 8.2.9 any entering into of a contract to do or engage in any of the foregoing after the date hereof; or 8.2.10 any other transaction involving or development affecting the Business or the Assets outside the ordinary course of business consistent with past practice. 8.3 Post-Closing Settlement. ----------------------- 8.3.1 The books of the Business shall be closed as of the Closing Date, and the Purchaser shall prepare, with the Sellers' assistance as needed and appropriate, a schedule as of the Closing Date that will accurately reflect the Adjusted Net Assets of the Sellers as of the Closing Date. The Purchaser shall deliver this schedule to the Sellers no later than 30 days after the Closing. The Sellers and the Purchaser shall seek in good faith to reach agreement on the final form of such schedule not later than 15 days after receiving it from the Purchaser. If the Purchaser and the Sellers fail to reach agreement as contemplated in the previous sentence, either of them may commence dispute resolution proceedings under Section 10.19. 8.3.2 When the schedule of Adjusted Net Assets is determined as contemplated in Section 8.3.1, then the following shall occur, as applicable (the "Post-Closing Settlement"): (A) If the Adjusted Net Assets are equal to or greater than $1,700,000, then the Purchaser shall pay the full amount of the Holdback to the Sellers, with interest thereon calculated at an annual rate equal to the prime rate as published in the Wall Street Journal. (B) If the Adjusted Net Assets are less than $1,700,000 (the "Minimum Adjusted Net Assets") but greater than $1,450,000 (the Minimum Adjusted Net Assets minus the Holdback), then the Purchaser shall pay the Sellers an amount equal to (x) the Holdback, minus (y) the amount by which the Adjusted Net Assets are less than the Minimum Adjusted Net Assets, with interest on the amount paid to the Sellers calculated at an annual rate equal to the prime rate as published in the Wall Street Journal, and the Purchaser shall retain the remaining amount of the Holdback. (C) If the Adjusted Net Assets are less than $1,450,000 (the Minimum Adjusted Net Assets minus the Holdback), then the Purchaser shall retain the entire amount of the Holdback, and the Sellers shall pay the Purchaser an amount equal to (x) the Minimum Adjusted Net Assets minus the Holdback, minus (y) the Adjusted Net Assets. 24 8.4 Allocation of Purchase Price. The Purchase Price shall be allocated ---------------------------- as disclosed in Schedule 3.3, and all tax returns and reports filed by the ------------ Sellers, the Parent, and the Purchaser with respect to the transactions contemplated by this Agreement shall be consistent with that allocation. 8.5 Maintenance of Books and Records. Each of the Sellers and the -------------------------------- Purchaser shall preserve until the fifth anniversary of the Closing Date all records possessed or to be possessed by such party relating to any of the Assets, Assumed Liabilities, or Business of the Sellers before the Closing Date. Such records may nevertheless be destroyed by a party if such party sends to the other party written notice of its intent to destroy records, specifying with particularity the contents of the records to be destroyed. Such records may then be destroyed after the 30th day after such notice is given unless another party objects to the destruction, in which case the party seeking to destroy the records shall deliver such records to the objecting party. 8.6 UCC Matters. From and after the Closing Date, the Sellers will ----------- promptly refer all inquiries with respect to ownership of the Assets or the Business to the Purchaser. In addition, the Sellers will execute such documents, assignments and financing statements as the Purchaser may request from time to time to evidence transfer of the Assets to the Purchaser, including any necessary assignments of financing statements, assignment of rights or other similar documents. 8.7 Offers of Employment by the Parent to the Sellers' Employees. The ------------------------------------------------------------ Parent agrees that after the Closing (a) except as noted on Schedule 8.7, it ------------ will offer employment to all employees of the Sellers who meet the conditions of employment generally required of all other employees of the Parent (the "Transferred Employees") effective on the Closing Date; provided, however, that any Transferred Employee who is not actively employed with a Seller on the Closing Date because of a temporary leave of absence or short-term disability shall be offered employment by the Parent effective as of the date such person is able to return to active work, (b) subject to Section 8.8 and Section 8.9 with respect to enrollment in the Parent's Health Plans and Sellers' Health Plans (as such terms are defined in Section 8.8), and the Transferred Employees will be entitled to the standard benefits made available as of such date to the Parent's other employees, (c) it shall treat prior service with a Seller as service with the Parent for purposes of determining eligibility to participate, vesting, benefit service, and matching or profit sharing contribution benefits, if any, with respect to all employee benefit plans covering Transferred Employees, and, to the extent legally permissible, shall amend all such employee benefit plans to the extent necessary to do so, and (d) the Transferred Employees will be given credit for years or months of service for purposes of vacation and similar benefits offered by the Parent, provided that any Transferred Employee who has accrued vacation hours as of the Closing Date must use those vacation hours before January 1, 2002, when any accrued and unused vacation hours shall expire. 25 8.8 Enrollment in Parent's Health Plan. Effective on or before January ---------------------------------- 1, 2002, the Parent (a) shall make enrollment available to all Transferred Employees and their eligible dependents, without any waiting period, proof of insurability, or a physical examination, in the Parent's plan or plans providing medical and dental benefits (the "Parent's Health Plan") to the extent such individuals were enrolled in a Seller's medical and dental plan (the "Seller's Health Plan"); (b) shall waive any restrictions or limitations for pre-existing conditions for all Transferred Employees and their eligible dependents, to the extent such restrictions did not apply under the Seller's Health Plan; and (c) shall give credit to each Transferred Employee and their eligible dependents for any deductibles, co-pay, and out of pocket expenses paid during the current year of the Sellers' Health Plans by such Transferred Employee or dependent under the Sellers' Health Plans. Such enrollment for the Transferred Employees and their eligible dependents in the Parent's Health Plans shall be effective no later than January 1, 2002. 8.9 Assumption by Parent of Sellers' Health Plan. Upon the Closing, the -------------------------------------------- Parent shall assume the Sellers' Health Plan, provide coverage thereunder to the Transferred Employees and their eligible dependents, and keep it in effect without modification until the Parent's Health Plan is available to the Transferred Employees as provided in Section 8.8. 8.10 Termination of Holmes & Shaw, Inc. 401(k) Plan. The Sellers shall ---------------------------------------------- cause the Holmes & Shaw, Inc. 401(k) Plan (the "Sellers' 401(k) Plan") to be terminated on or before the Closing Date. Each Transferred Employee who receives a distribution of such Transferred Employee's account balance from the Sellers' 401(k) Plan shall be entitled to rollover such distributed account balance directly to the InterCept 401(k) Plan (the "Parent's 401(k) Plan"), provided that the plan administrator of the Parent's 401(k) Plan receives reasonably satisfactory evidence indicating that the Sellers' 401(k) Plan meets the applicable qualification provisions of the Code. Subject to the preceding sentence, the Parent shall take all legally permissible action, including the adoption of any necessary amendment to the Parent's 401(k) Plan, to ensure that the Parent's 401(k) Plan will accept such direct rollovers from the Sellers' 401(k) Plan. 8.12 Consents. The Sellers will use commercially reasonable efforts to -------- acquire the Required Contract Consents and any other consents required to effect the transactions contemplated by this Agreement, and the Purchaser and the Parent shall cooperate with the Sellers in acquiring such consents. To the extent that the rights of a Seller under any License Agreement, Intellectual Property, Lease, General Contract or Authorization or other asset to be assigned to the Purchaser hereunder may not be assigned without the consent of another person which has not been obtained, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful. If any such consent shall not be obtained or if any attempted assignment would be ineffective or would impair the Purchaser's rights to the asset in question so that the Purchaser would not in effect acquire the benefit of all such rights, the applicable Seller, to the maximum extent permitted by law, shall act after the Closing as the Purchaser's agent to obtain for the Purchaser the benefits thereunder and shall cooperate, to the maximum extent permitted by 26 law, with the Purchaser in any other reasonable arrangement designed to provide such benefits to the Purchaser. ARTICLE 9 INDEMNIFICATION 9.1 Indemnification by the Seller Parties. Each of the Seller Parties ------------------------------------- shall indemnify, defend, and hold harmless the Purchaser, the Parent, and their subsidiaries, successors and permitted assigns, and the directors, officers, employees and agents of each (collectively, the "Purchaser Indemnitees"), at, and at any time after, the Closing, from and against any and all demands, claims, actions, or causes of action, assessments, losses, damages, liabilities, costs, and expenses, including reasonable fees and expenses of counsel, other expenses of investigation, handling, and litigation, and settlement amounts, together with interest and penalties (collectively, a "Loss" or "Losses"), asserted against, resulting to, imposed upon, or incurred by the Purchaser Indemnitees, directly or indirectly, by reason of, resulting from, incident to or arising in connection with any of the following: 9.1.1 Breach of Obligation. Any breach of any representation, -------------------- warranty, or agreement of any of the Seller Parties contained in or made pursuant to this Agreement and the other Purchase Documents, including the agreements and other instruments contemplated by this Agreement and those documents; 9.1.2 Excluded Liabilities. Any liabilities or obligations -------------------- of any kind or nature whatsoever, whether accrued, absolute, contingent, or otherwise, known or unknown, arising out of or in connection with any Excluded Assets, or the conduct of the Business or the ownership or use of the Assets before the Closing Date, except for the Assumed Liabilities; or 9.1.3 Violations of Fraudulent Conveyance or Bulk Sales Laws. ------------------------------------------------------ Any failure to comply with any fraudulent conveyance or similar Laws relating to notices to creditors, or with any applicable bulk sales Laws. 9.2 Indemnification by the Purchaser and the Parent. Each of the ----------------------------------------------- Purchaser and the Parent shall, jointly and severally, indemnify, defend, and hold harmless the Sellers, each director, officer, employee and agent of the Sellers, and their respective heirs, successors, and permitted assigns, Shaw, Vincent, and HSI General (collectively, the "Seller Indemnitees"), at, and at any time after, the Closing, from and against any and all Losses asserted against, resulting to, imposed upon, or incurred by the Seller Indemnitees, directly or indirectly, by reason of, resulting from, incident to or arising in connection with any of the following: 9.2.1 Breach of Obligation. Any breach of any representation, -------------------- warranty, or agreement of the Purchaser or the Parent contained in or made pursuant to this Agreement or the other Purchase Documents, including the agreements and other instruments contemplated by this Agreement and those documents; 27 9.2.2 Assumed Liabilities. Any of the Assumed Liabilities; and ------------------- 9.2.3 Post-Closing Operations. The ownership and operation of ----------------------- the Assets and Business from and after the Closing Date. 9.3 Notice of Claim. The party entitled to indemnification under this --------------- Agreement (the "Claimant") shall promptly deliver to the party liable for such indemnification under this Agreement (the "Obligor") notice in writing (the "Required Notice") of any claim for recovery under Section 9.1 or Section 9.2, specifying in reasonable detail the nature of the Loss, and, if known, the amount, or an estimate of the amount, of the liability arising therefrom (the "Claim"). The Claimant shall provide to the Obligor as promptly as practicable thereafter information and documentation reasonably requested by the Obligor to support and verify the claim asserted, provided that, in so doing, it may restrict or condition any disclosure in the interest of preserving privileges of importance in any foreseeable litigation. If the Obligor notifies the Claimant that it does not dispute the claim described in the Required Notice or fails to notify the Claimant within 30 days after receiving the Required Notice that the Obligor disputes the claim described in the Required Notice, as the case may be, the Loss specified in the Required Notice will be conclusively deemed to have been incurred by the Claimant. If the Obligor has timely disputed the claim described in the Required Notice, the Obligor and the Claimant will proceed in good faith to resolve the dispute under Section 10.19. 9.4 Defense. If the facts pertaining to the Loss arise out of the claim ------- of any third party (other than a member of the Purchaser Indemnitees or the Seller Indemnitees, whichever is entitled to indemnification for such matter) and indemnification is available by virtue of the circumstances of the Loss, the Obligor must assume the defense or the prosecution of that claim, including the employment of counsel or accountants, at its cost and expense. If representation of both the Obligor and the Claimant by such counsel would be inappropriate due to actual or potential differing interests between the Obligor and the Claimant in such proceeding (such as the availability of defenses to the Claimant), the Claimant (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the Obligor. The Claimant shall have the right to determine and adopt (or, in the case of a proposal by the Obligor, to approve) a settlement of such matter in its reasonable discretion, except that Claimant need not consent to any settlement that (a) imposes any non-monetary obligation or (b) the Obligor does not agree to pay in full. The Obligor shall not be liable for any settlement of any such claim effected without its prior written consent, which shall not be unreasonably withheld, delayed, or conditioned. Whether or not the Obligor chooses to so defend or prosecute such claim, all the parties to this Agreement shall cooperate in the defense or prosecution of that claim and shall furnish such records, information, and testimony, and attend such conferences, discovery proceedings, hearings, trials, and appeals, as may be reasonably requested in connection with it. 28 9.5 Limitations. Notwithstanding anything in this Article 9 to the ----------- contrary: 9.5.1 Threshold; Maximum. No indemnification or any other ------------------ claim for damages under this Agreement or any other instrument or agreement to be executed and delivered by the parties to this Agreement in connection with the transactions contemplated by this Agreement shall be payable by any party to any other party until (and then only to the extent that) the total of all Losses equals or exceeds $100,000, in which event the Purchaser Indemnitees or Seller Indemnitees, as the case may be, shall be entitled to claim indemnity for the full amount of such aggregate Losses in excess of $100,000; provided, however, that the foregoing limitations shall not apply to damages payable for Losses, if any, arising out of a misrepresentation in Section 4.16.3, or to the Sellers' obligation to pay the Purchaser under Section 8.3.2(C). In no event shall the liability of either the Seller Indemnitees or the Purchaser Indemnitees under this Article 9 exceed $5,000,000. 9.5.2 Time of Assertion. No indemnification shall be payable ----------------- by any party with respect to matters as to which it has not received notice from the Claimant within 18 months after the Closing Date, after which time, if no Losses have been asserted against a party, then that party shall have no further liability under this Agreement; provided, however, that there shall be no limitation on the time during which indemnification may be sought or obtained for (x) Losses based on a misrepresentation or breach of warranty in Section 4.2; or (y) any instance of fraud or any knowing and willful breach by any party of any provision of this Agreement or any other instrument or agreement to be executed and delivered by such party in connection with the transactions contemplated by this Agreement. While the Escrow Agreement is in effect, the indemnity set forth in this Article 9 shall be restricted to the Escrow. 9.6 Indemnification Exclusive Remedy. If the Closing occurs, -------------------------------- indemnification pursuant to the provisions of this Article 9 shall be the sole and exclusive remedy of the parties for any breach of any representation, warranty, covenant, agreement, or other provision contained in this Agreement or any other Purchase Document, except for: (a) claims based on fraud, (b) non-monetary equitable relief, and (c) matters to be submitted to arbitration under Section 8.3.1, this Article 9, and the Escrow Agreement. 9.7 Investigation; Survival of Representations, Warranties, Covenants ----------------------------------------------------------------- and Agreements. Notwithstanding any right of the Purchaser (whether or not - -------------- exercised) to investigate the Business or any right of any party (whether or not exercised) to investigate the accuracy of the representations and warranties of the other party contained in this Agreement, the Seller Parties on one hand, and the Purchaser and the Parent on the other hand, have the right to rely fully upon the representations, warranties, covenants and agreements of the other contained in this Agreement. The representations, warranties, covenants, and agreements of the Seller Parties, the Purchaser, and the Parent contained in this Agreement will survive the Closing: (a) indefinitely with respect to the representations and warranties contained in Sections 4.1, 4.2, 5.1, 5.2 and the covenants and agreements contained in 29 Sections 10.2 and 10.17, and (b) for 18 months after the Closing Date in the case of all other representations and warranties and any covenant or agreement. ARTICLE 10 MISCELLANEOUS 10.1 Sales, Transfer, and Documentary Taxes, etc. The Sellers shall pay ------------------------------------------- all federal, state and local sales, documentary and other transfer taxes, if any, due as a result of the purchase, sale or transfer of the Assets in accordance herewith whether imposed by law on the Sellers, the Purchaser, or the Parent, and the Sellers shall indemnify, reimburse and hold harmless the Purchaser and the Parent in respect of the liability for payment of or failure to pay any such taxes or the filing of or failure to file any reports required in connection therewith. 10.2 Expenses. Except as otherwise provided in this Agreement, each of -------- the Purchaser and the Parent on one hand, and the Sellers on the other hand, shall pay their own expenses incidental to the preparation of this Agreement, the carrying out of the provisions of this Agreement and the consummation of the transactions contemplated by this Agreement. 10.3 Contents of Agreement; Parties in Interest; etc. The Purchase ----------------------------------------------- Documents set forth the entire understanding and agreement of the parties to this Agreement with respect to the transactions contemplated by this Agreement. This Agreement shall not be assigned, amended, or modified except by written instrument duly executed by each of the parties to this Agreement. Any and all prior or contemporaneous negotiations, agreements, representations, warranties, and understandings between or among the parties regarding the subject matter hereof, whether written or oral, are superseded in their entirety by this Agreement and the other Purchase Documents and shall not create any liability on the part of any party to this Agreement in favor of any other party (or parties), except as otherwise expressly set forth in this Agreement and in the other Purchase Documents. 10.4 Waiver. Any term or provision of this Agreement may be waived at ------ any time by the party entitled to the benefit of that term of provision by a written instrument duly executed by such party. 10.5 Notices. Any notice, request, demand, waiver, consent, approval or ------- other communication which is required or permitted under this Agreement shall be in writing and shall be deemed given only if delivered personally or sent by telecopier, air courier, telegram or by registered or certified mail, postage prepaid, as follows: 30 if to the Purchaser: The InterCept Group, Inc. 3150 Holcomb Bridge Road, Suite 200 Norcross, Georgia 30071 Attention: John W. Collins, Chief Executive Officer Fax: (770) 840-2521 With a copy to: Charles D. Vaughn, Esq. Nelson Mullins Riley & Scarborough, L.L.P. First Union Plaza, Suite 1400 999 Peachtree Street, N.E. Atlanta, Georgia 30309 (404) 817-6189 (404) 817-6150 (facsimile) If to any Seller Party, to: George V. Shaw, III to his home address as shown on the records of the Purchaser With a copy to: George G. Young III, Esq. Haynes and Boone, L.L.P. 1000 Louisiana Street Suite 4300 Houston, Texas 77002-5012 (713) 547-2081 (713) 236-5699 (facsimile) or to such other address as the addressee may have specified in a notice duly given to the sender as provided in this Agreement. Such notice, request, demand, waiver, consent, approval or other communication will be deemed to have been given as of the date so delivered, transmitted by facsimile, telegraphed, or mailed, as the case may be. 10.6 Georgia Law to Govern. THIS AGREEMENT SHALL BE GOVERNED BY AND --------------------- INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO ITS CONFLICT OF LAW PRINCIPLES. 31 10.7 No Benefit to Others. The representations, warranties, covenants, -------------------- and agreements contained in this Agreement are for the sole benefit of the parties to this Agreement and their respective heirs, executors, administrators, legal representatives, successors, and assigns, and nothing contained in this Agreement or the other Purchase Documents shall be construed as conferring any rights on any other persons. 10.8 Headings, Gender and Certain Terms. All section headings contained ---------------------------------- in this Agreement are for convenience of reference only, do not form a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement. Words used in this Agreement, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine, or neuter, as the context requires. Any reference to a "person" in this Agreement shall include an individual, firm, corporation, partnership, trust, governmental authority or body, association, unincorporated organization or any other entity. The "knowledge" of a person shall include the current actual awareness of such person, such person's officers charged with the responsibility for the matters qualified by the use of the term "knowledge" and such matters as would be revealed by a review of such person's records. The term "including" shall be deemed to mean "including, but not limited to." 10.9 Schedules and Exhibits. All exhibits and schedules referred to in ---------------------- this Agreement are incorporated in this Agreement by reference and are intended to be and by this reference are specifically made a part of this Agreement. 10.10 Severability. The invalidity or unenforceability of any provision ------------ of this Agreement in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.11 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 10.12 Assistance of Counsel. The Seller Parties on one hand, and the --------------------- Purchaser and the Parent on the other hand, acknowledge that they have had the assistance of counsel in negotiating and preparing the terms of this Agreement; therefore, this Agreement shall be construed without regard to any presumption or other rule requiring construction against the party causing the Agreement to be drafted. 10.13 Time of the Essence. Time is of the essence of this Agreement. ------------------- 10.14 Actions and Proceedings. The Seller Parties consent to the ----------------------- exclusive jurisdiction and venue of the courts of any county in the State of Georgia and the United States District Court for any District of Georgia in any action or judicial proceeding brought to enforce, construe or interpret this Agreement or the other Purchase Documents. The Seller Parties agree that any forum other than the State of Georgia is an inconvenient forum and that 32 a suit (or non-compulsory counterclaim) brought by the Seller Parties against the Purchaser, the Parent, or any member of the Purchaser Indemnitees in a court of any state other than the State of Georgia should be forthwith dismissed or transferred to a court located in the State of Georgia. 10.15 Execution by Facsimile. Any party may deliver an executed copy of ---------------------- this Agreement and any documents contemplated by this Agreement by facsimile transmission to another party, and such delivery shall have the same force and effect as any other delivery of a manually signed copy of this Agreement or of such other documents. 10.16 Confidentiality. --------------- 10.16.1 The Seller Parties on one hand and the Purchaser and the Parent on the other hand shall hold in confidence all Confidential Information (as defined in Section 10.16.2) about the other and shall not make any copies of, distribute, or use any such Confidential Information except as necessary to prepare for the completion of the contemplated transactions. After the Closing, neither the Seller Parties on one hand nor the Purchaser and the Parent on the other hand shall make any unauthorized disclosure of Confidential Information about the other. Each such party, upon the first request in writing from the other, shall return to the other all Confidential Information in its possession, without retaining any copies of it. Notwithstanding the foregoing, any party may disclose Confidential Information to the extent disclosure is mandated by the legal requirements of such party, the Nasdaq Stock Market, or the SEC, as well as to professional advisors, directors and senior executives as necessary. This Agreement may also be disclosed to third parties if reasonably necessary to secure consents or approvals to consummate the contemplated transactions. The parties will cooperate to draft a press release for the announcement of this Agreement as soon as possible after the execution of this Agreement by all parties. 10.16.2 As used in this Section 10.16, "Confidential Information" means all information relating to the Business, the Purchaser's business (current or future), any Affiliate of the Purchaser, which information is reasonably regarded as confidential or being information not in the public domain including, without limitation: all Inventions (as defined in this Section); technical data; research and development information; business records, information and notes; products; "know-how"; Trade Secrets (as defined in this Section); engineering or other data; designs, specifications, processes and formulae; manufacturing or planning procedures, techniques or information; marketing plans, strategies and forecasts; business and product development plans, strategies and forecasts; financial statements, budgets, prices, costs and financial projections; accounting procedures or financial information; names and details of consumers, customers, suppliers and agents; employee details. "Trade Secrets" means any information of the Seller Parties, the Purchaser or an Affiliate of any of them (including but not limited to technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers) which (x) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (y) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. "Invention" means any invention, drawing, 33 design, model, contrivance, structure, specification, improvement, discovery, creation, idea, concept, formula, process and other work or contribution however developed, created, made discovered or conceived, and whether or not patented or patentable (whether by renewal or otherwise), protected by copyright, or otherwise protected or capable of protection by law anywhere. 10.17 No Public Announcements. Except as provided in Section 10.16.1, ----------------------- without the prior written consent of the other parties, neither the Seller Parties on one hand, nor the Purchaser and the parent on the other hand, shall make any press release or other public disclosure, or make any statement to any customer, supplier, employee, or other person with regard to the contemplated transactions. 10.18 Termination. This Agreement may be terminated as follows: ----------- (a) at any time by mutual written consent of the Purchaser, the Parent, and the Seller Parties; (b) by either the Purchaser and the Parent on one hand, or the Seller Parties on the other hand, by giving written notice to the other parties at any time before Closing if such other party has breached any material representation, warranty, or covenant in this Agreement in any material respect; or (c) by either the Purchaser and the Parent on one hand, or the Seller Parties on the other hand, for any reason after October 31, 2001 by giving written notice to the other party. 10.19 Resolution of Certain Disputes. The parties agree that any and ------------------------------ all claims, controversies, or disputes between them that arise under Section 8.3.1, Article 9, and the Escrow Agreement ("Special Claims") shall be addressed by them solely and exclusively in the following manner: 10.19.1 First, the parties shall consider participating in a confidential mediation, although they are not required to mediate any Special Claims arising between them. If the parties agree to mediate a Special Claim, but are unable to agree on the selection of the mediator, either party may contact the American Arbitration Association (the "AAA"), which shall appoint a mediator. The parties shall share all costs of the mediation equally. Unless the parties otherwise agree in writing, the mediation shall be held in Atlanta, Georgia. Both parties may be represented at the mediation by legal counsel, and each party shall have present at the mediation one or more representatives who have full authority to bind the party to any resolution or settlement that may be mediated. 10.19.2 Second, if the Special Claim is not resolved at a mediation or if no mediation is held, the Special Claim shall be conclusively resolved through a binding arbitration conducted in accordance with the AAA's Commercial Arbitration Rules. A final judgment upon the award that is rendered by the arbitrators may be entered by any court with 34 jurisdiction. Unless the parties agree in writing to a different site, the arbitration hearing shall be held in Atlanta, Georgia, before a panel of three independent arbitrators. The parties shall select all arbitrators for this panel, which may include individuals who are not licensed attorneys. If within 30 days from the date that an arbitration proceeding is initiated, however, the parties cannot reach agreement as to any of the arbitrators to serve on the panel, the arbitrators who are needed to complete the panel shall be appointed by the AAA under its applicable rules. The costs of the arbitrators and all of the legal fees incurred as a result of the arbitration proceeding shall be awarded to the prevailing party as determined by the arbitrators. 10.19.3 Third, in any arbitration proceeding that is initiated as provided in this Section 10.19, the parties agree that: the substantive law of Georgia shall govern their disputes and each party shall be permitted to obtain all of the following discovery, at a minimum, before the final hearing is held: (a) three depositions of fact witnesses, (b) depositions of all designated expert witnesses, (c) one set of written discovery requests (one set each of interrogatories, requests for production and requests for admission) and (c) disclosure of the full identity all fact witnesses who have any personal knowledge of facts relevant to their disputes. The parties intend to limit discovery to the specific parameters set forth above unless they later agree in writing to permit additional discovery or the panel determines that some additional discovery is warranted. 10.19.4 Nothing contained in these dispute resolution provisions shall preclude either of the parties from seeking injunctive relief from a state or federal court located in Atlanta, Georgia for the sole purpose of enforcing the terms of this Agreement or any other Purchase Document, or of the specific duties, obligations or rights that are created by this Agreement or any other Purchase Document. [Signatures begin on next page] 35 IN WITNESS WHEREOF, the parties to this Agreement have duly executed this Asset Purchase Agreement on the date first written above: The "Parent" The InterCept Group, Inc., a Georgia corporation By: /s/ Scott R. Meyerhoff ----------------------------------------- Scott R. Meyerhoff, Senior Vice President and Chief Financial Officer The "Purchaser" InterCept Output Solutions, LP, a Texas limited partnership By: InterCept TX I, LLC, its general partner, a Georgia limited liability corporation By: /s/ Scott R. Meyerhoff -------------------------------- Name: Scott R. Meyerhoff Title: Chief Financial Officer The "Seller Parties" HSI Holdings, Inc., a Nevada corporation By: /s/ George V. Shaw, III ----------------------------------------- Name: George V. Shaw, III Title: President 36 HSI Properties, Ltd., a Texas limited partnership By: Holmes & Shaw General, Inc., its general partner, a Nevada corporation By: /s/ George V. Shaw, III -------------------------------- Name: George V. Shaw, III Title: President /s/ George V. Shaw, III -------------------------------------------- George V. Shaw, III, personally Holmes & Shaw General, Inc., a Nevada corporation By: /s/ George V. Shaw, III ----------------------------------------- Name: George V. Shaw, III Title: President Holmes & Shaw Limited, Inc., a Nevada corporation By: George V. Shaw, III ----------------------------------------- Name: George V. Shaw, III Title: President 37 Superior Forms, Ltd., a Texas limited partnership By: Vincent Investment Company, Inc., its general partner, a Texas corporation By: /s/ George V. Shaw, III --------------------------------- Name: George V. Shaw, III Title: President Vincent Investment Company, Inc., a Texas corporation By: /s/ George V. Shaw, III ----------------------------------------- Name: George V. Shaw III Title: President 38 EX-10.21 4 dex1021.txt LOAN AGREEMENT WITH SLMSOFT.COM Exhibit 10.21 LOAN AGREEMENT among THE INTERCEPT GROUP, INC., a corporation formed under the laws of the State of Georgia and SLMsoft.com Inc., a corporation formed under the laws of the Province of Ontario and SLMsoft.com INC., a corporation formed under the laws of the State of Kansas December 3, 2001 LOAN AGREEMENT This Loan Agreement (the "Agreement") dated as of December 3, 2001 is by and among SLMsoft.com Inc., a corporation formed under the laws of the Province of Ontario ("Shareholder"), SLMsoft.com Inc., a corporation formed under the laws of the State of Kansas and a wholly-owned subsidiary of Shareholder (the "Company" and together with Shareholder, "Borrowers"), and The InterCept Group, Inc., a Georgia corporation ("InterCept"). RECITALS: -------- (1) Borrowers have requested that InterCept make available to Borrowers a term loan in the original principal amount of Seven Million and no/100ths Dollars (the "Loan") on the terms and conditions hereinafter set forth, and for the purpose(s) hereinafter set forth. (2) To induce InterCept to make the Loan to Borrowers, Borrowers have made certain representations to InterCept; (3) InterCept and Borrowers acknowledge that Borrowers intend to repay the Loan, from, among other things, proceeds obtained from the sale of Pledged Collateral (as defined in the Pledge Agreement); and (4) InterCept, in reliance upon the representations and inducements of Borrowers, has agreed to make the Loan upon the terms and conditions hereinafter set forth. In consideration of the mutual representations, warranties, covenants and agreements, and upon and subject to the terms and the conditions hereinafter set forth in this Agreement, the parties agree as follows: Section 1. The Loan. 1.1 Evidence of Loan Indebtedness and Repayment. Subject to the terms ------------------------------------------- and conditions contained herein, InterCept shall make the Loan to Borrowers by wire transfer to the bank account specified in the Disclosure Memorandum in immediately available funds. The Loan shall be evidenced by a Secured Promissory Note in the original principal amount of Seven Million and no/100ths Dollars ($7,000,000.00), dated as of the date hereof, executed by Borrowers in favor of InterCept (the "Note"). The Loan shall be payable in accordance with the terms of the Note. The Note, this Agreement and any other instruments and documents executed by Borrowers or any subsidiary or affiliate of Borrowers ("Affiliates"), now or hereafter evidencing, securing or in any way related to the indebtedness evidenced by the Note are herein individually referred to as a "Loan Document" and collectively referred to as the "Loan Documents." The term "Obligations" as used herein shall refer to (a) the Loan to be made concurrently or in connection with this Agreement, as evidenced by the Note, and any renewals or extensions thereof, (b) the full and prompt payment and performance of any and all other indebtednesses and other obligations of Borrowers to InterCept, direct or contingent (including but not limited to obligations incurred as endorser, guarantor or surety), however evidenced or denominated, and however and whenever incurred, that relate to the Loan and (c) all future advances made by InterCept for taxes, levies, insurance and preservation of the collateral and all attorneys' fees, court costs and expenses of whatever kind incident to the collection of any of said indebtedness or other obligations and the enforcement and protection of the security interest created hereby or by the other Loan Documents. Notwithstanding any other term or condition contained in this Agreement, the Loan Documents and Obligations shall not include or extend to the Purchase Agreement (amended and restated) dated November 29, 2000 between the Borrowers and InterCept (the "Purchase Agreement"), the agreements delivered pursuant to the Purchase Agreement including, without limitation, the Registration Rights Agreement and Employee Services Agreement, both as may be amended from time to time, and the obligations and liabilities of the Borrowers thereunder. 1.2 Partial Prepayment. Borrowers may prepay the indebtedness ------------------ evidenced by the Note in whole or in part at any time and from time to time, without penalty or premium. 1.3 Purposes of Loan and Use of Proceeds. The purposes of the ------------------------------------ Loan shall be as described on the Disclosure Memorandum. Section 2. The Closing The Closing shall take place, subject to the satisfaction or waiver of the conditions set forth in this Agreement, at 9:00 a.m., December 3, 2001, in the offices of InterCept. If the conditions to closing contained in this Agreement, have not been obtained prior to 9:00 a.m. on December 3, 2001, the Closing shall take place after such conditions have been satisfied or waived, at a time mutually agreed upon by the parties, provided that the parties agree to use commercially reasonable efforts to close by December 10, 2001. Secton 3. Representations and Warranties of Borrowers To induce InterCept to make the Loan, and in acknowledgement of InterCept's reliance on the following representations and warranties, Shareholder and the Company hereby represent and warrant to InterCept as follows as of the date hereof and as of the Closing: 3.1 Organization and Authority; Validity and Binding Effect. ------------------------------------------------------- (a) Shareholder is a corporation duly organized and validly existing under the laws of the Province of Ontario, and the Company is a corporation duly organized and validly existing under the laws of the State of Kansas. Each of Shareholder and the Company has all requisite power and authority, corporate or otherwise, to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets. (b) Approval by the shareholders of Shareholder is not required to consummate the Loan. (c) The Disclosure Memorandum contains a copy of the true, valid and correct Charter Documents of the Company and Shareholder in effect as of the date hereof and as of the Closing. (d) The execution, delivery and performance of this Agreement have been duly and validly authorized by all necessary action, corporate or otherwise, on the part of the Company and Shareholder required to take such action and will not, without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions of their respective Charter Document; (ii) violate, conflict with, or result in a breach or default under or cause termination of any term or condition of any mortgage, indenture, contract, license, permit, instrument, trust document, or other agreement, document or instrument to which the Company or Shareholder is a party or by which the Company, Shareholder, or any of their properties may be bound; (iii) violate any Rule; or (iv) result in the creation or imposition of any Encumbrance upon any asset of the Company or Shareholder (other than the shares of InterCept pledged by Shareholder or agreed to be pledged by Shareholder or the Company to secure the Loan (the "Pledged Collateral") pursuant to that certain Pledge Agreement (the "Pledge Agreement") executed and delivered by Shareholder to InterCept along with this Agreement). (e) This Agreement and the other Loan Documents are the legal, valid and binding obligations of each Borrower, enforceable against each of them in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. 3.2 Indebtedness and Similar Matters. Except as set forth in the -------------------------------- Disclosure Memorandum, neither the Company nor Shareholder is in default with respect to any indebtedness for borrowed money, and the making of the Loan to the Borrowers as contemplated herein will not cause such a default to occur. Except for the HBSC Bank performance bond in the maximum principal amount of $100,000, neither Borrower has currently in effect a loan agreement or credit facility with a financial institution. Both Borrowers are current in the payment of their accounts payable. 3.3 Litigation. Except as set forth in the Disclosure Memorandum, there ---------- is no action, suit, investigation or proceeding involving a claim or counterclaim of more than $500,000 pending or, to the best knowledge of the Company or Shareholder, threatened against or affecting the Company, Shareholder, or the assets of the Company or Shareholder before any court or by or before any governmental body or arbitration board or tribunal, nor, to the best knowledge of the Company or Shareholder, is there a basis for any such action, suit, investigation or proceeding. 3.4 The Pledged Collateral. ---------------------- As of the date of this Agreement, Shareholder has good, valid and marketable title to all of the Pledged Collateral that has been issued to date, free and clear of any and all Encumbrances other than the restrictions on the transfer thereof as provided in preexisting agreements with InterCept. 3.5 Value of Assets. Giving effect to the Loan, the fair market value --------------- of the Company's assets exceeds the Company's total liabilities, whether accrued, absolute, contingent, or otherwise. Giving effect to the Loan, the fair market value of Shareholder's assets exceeds Shareholder's total liabilities, whether accrued, absolute, contingent, or otherwise. The Company's assets do not and, immediately following the making of the Loan, will not, constitute unreasonably small capital to carry out the Company's business as conducted or as proposed to be conducted. Shareholder's assets do not and, immediately following the making of the Loan, will not, constitute unreasonably small capital to carry out Shareholder's business as conducted or as proposed to be conducted. 3.6 Debt. The Company does not intend to, and does not believe that it ---- will, incur debt or liabilities (including contingent liabilities and other commitments) beyond its ability to pay such debt or liabilities as they mature. Shareholder does not intend to, and does not believe that it will, incur debt or liabilities (including contingent liabilities and other commitments) beyond its ability to pay such debt or liabilities as they mature. 3.7 No Bankruptcy. Except as set forth in the Disclosure Memorandum, no ------------- petition in bankruptcy has been filed against either the Company, Shareholder or any Affiliate of either of them during the last seven years, and neither the Company, Shareholder nor any Affiliate of either of them in the last seven years has ever made an assignment for the benefit of creditors or taken advantage of any insolvency act for the benefit of debtors. Neither the Company, Shareholder, nor any Affiliate of either of them is contemplating the filing of a petition by it under any state or federal bankruptcy or insolvency laws. Neither the Company nor Shareholder has any knowledge of any person contemplating the filing of any such petition against it or an Affiliate. 3.8 Agreements. Since May 1, 2001, the Company has not entered into any ---------- contracts under which the Company: (a) paid $50,000 or more or committed itself to pay $50,000 or more, or (b) received $50,000 or more or expects to receive $50,000 or more, except for the collection of outstanding accounts receivable. 3.9 Repayment. Notwithstanding anything to the contrary herein, --------- Borrowers shall prepay the Obligations upon the sale of any Pledged Collateral in an amount equal to the lesser of (i) the net proceeds of such sale, on the one hand, or (ii) the outstanding principal balance of the Obligations, together with all accrued and unpaid interest and charges thereon, on the other hand, which prepayment shall be made no later than one (1) day following the consummation of such sale and the payment and delivery of the net proceeds. Section 4. Representations and Warranties of InterCept To induce Shareholder and the Company to execute, deliver and perform this Agreement, and in acknowledgement of Shareholder's and the Company's reliance on the following representations and warranties, InterCept hereby represents and warrants to Shareholder and Company as follows as of the date hereof and as of the Closing: 4.1 Organization and Authority. -------------------------- InterCept is a publicly traded corporation trading on the Nasdaq Stock Market, and, to InterCept's best knowledge, is not in default with respect to any of Nasdaq's listing requirements. InterCept is a corporation duly organized and validly existing under the laws of the State of Georgia and has all requisite power and authority, corporate or otherwise, to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets. 4.2 No Insolvency. ------------- InterCept has not been and is not now (i) subject to any insolvency related procedure in respect of part or all of its assets, or (ii) involuntarily liquidated. 4.3 Corporate Authority; No Violation. --------------------------------- The execution, delivery and performance of this Agreement, and the making of the Loan, have been duly and validly authorized by all necessary action, corporate or otherwise, on the part of InterCept required to take such action and will not, with the giving of notice or the lapse of time, or both (i) violate or conflict with any of the provisions of any its Charter Documents; (ii) violate, conflict with or result in a breach or default under or cause termination of any term or condition of any mortgage, indenture, contract, license, permit, instrument, trust document, or other agreement, document or instrument to which InterCept is a party or by which InterCept or any of its properties may be bound; (iii) violate any Rule; or (iv) result in the creation or imposition of any Encumbrance upon any asset of InterCept. This Agreement and the other Loan Documents are the legal, valid and binding obligations of InterCept, enforceable against it in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. 4.4 Required Consents. ----------------- Except for approval and consent from First Union Bank and InterCept's Board of Directors (which approvals and consents have been obtained), InterCept is not required to obtain the consent, approval, authorization or estoppel of any other Person to authorize and permit the making of the Loan. 4.5 Reasonable Assistance. --------------------- InterCept agrees to provide customary and reasonable assistance to Shareholder in its sale of shares of InterCept common stock pursuant to Rule 144 so that Shareholder may prepay the indebtedness or other amounts outstanding pursuant to the Loan Documents in accordance with Section 3.9. Section 5. Covenants of Borrowers Borrowers covenant and agree, jointly and severally, that during the term of this Agreement: 5.1 Payment of Obligations. Borrowers shall pay the indebtedness ---------------------- evidenced by the Note according to the terms thereof, and shall timely pay or perform, as the case may be, all of the other obligations of Borrowers to InterCept, direct or contingent, however evidenced or denominated, and however and whenever incurred, that relate to the Loan. 5.2 Financial Statements and Reports. Shareholder shall furnish to -------------------------------- InterCept (a) as soon as practicable and in any event on the earlier of (i) 140 days after the end of Shareholder's fiscal year and (ii) Shareholder's delivery of same to its shareholders, consolidated balance sheets of Shareholder and its Subsidiaries as of the close of such fiscal year, consolidated statements of operations of Shareholder and its Subsidiaries for such fiscal year and consolidated statements of cash flows for Shareholder and its Subsidiaries for such fiscal year, prepared in accordance with Canadian generally accepted accounting principles consistently applied and, as to such consolidated statements, accompanied by an unqualified audit report prepared by Shareholder's current independent auditors or other independent certified public accountants that are recognized as one of the "Big Five" accounting firms as of the date of this Agreement, and (b) within the earlier of (i) 60 days after the end of each quarter and (ii) the Shareholder's delivery of same to its shareholders, consolidated balance sheets of Shareholder and its Subsidiaries as of the close of such quarter and consolidated statements of operations of Shareholder and its Subsidiaries for such quarter and prepared in accordance with Canadian generally accepted accounting principles consistently applied (except for the absence of footnotes and subject to normal and customary year-end adjustments). 5.3 Corporate Existence. Each Borrower shall maintain its corporate ------------------- existence and good standing in the state of its incorporation; save and except that the Company shall be liquidated, wound up and dissolved under the applicable Kansas corporation statutes in the manner contemplated in the Purchase Agreement. 5.4 Notice of Default. Borrowers shall give written notice to InterCept ----------------- of the occurrence of any default, event of default or Event of Default under this Agreement or any other Loan Document promptly upon the occurrence thereof. 5.5 Notice of Litigation. Borrowers shall give notice, in writing, to -------------------- InterCept of (a) any actions, suits or proceedings, instituted by any persons whomsoever against Borrowers or affecting any of the assets of Borrowers, in either case meeting or exceeding the threshold set forth in Section 3.3 above, and (b) any dispute, not resolved within sixty (60) days of the commencement thereof, between any Borrower on the one hand and any governmental regulatory body on the other hand, which actions, suits or proceedings or dispute might materially adversely interfere with the normal operations of any Borrower. Section 6. Conditions to Obligations of Borrowers The obligations of Shareholder and the Company to enter into this Agreement shall be subject to the satisfaction (or waiver by Shareholder and the Company) at or prior to the Closing Date of each of the following conditions: 6.1 Representations, Warranties and Covenants. Each of the ----------------------------------------- representations and warranties of InterCept contained in this Agreement shall be true in all respects as of the time of the Closing; and InterCept shall have performed and complied in all respects with the respective covenants and agreements set forth herein to be performed or complied with by it at or before the Closing. 6.2 Litigation. No suit, investigation, action or other proceeding ---------- shall be pending or overtly threatened before any court or governmental agency, which has resulted in the restraint or prohibition of Shareholder or the Company from obtaining the Loan, or in the reasonable opinion of counsel for Shareholder or the Company could result in the obtaining of material damages or other relief from Shareholder or the Company, in connection with this Agreement or the obtaining of the Loan. 6.3 [Intentionally omitted.] 6.4 Execution and Delivery of Documents. InterCept shall have executed ----------------------------------- and delivered all the documents required by this Agreement; and all other agreements, certificates, and other documents delivered by InterCept to the Company and Shareholder hereunder shall be in form and substance satisfactory to counsel for the Company and Shareholder. 6.5 Other Necessary Consents. Shareholder and the Company shall have ------------------------ obtained all consents, approvals, and estoppels listed in the Disclosure Memorandum. 6.6 Delivery of Documents. InterCept shall have executed and delivered --------------------- or caused to be delivered to Shareholder the Pledge Agreement in the form attached hereto as Exhibit 6.6(a). Section 7. Conditions to Obligations of InterCept The obligations of InterCept to be performed hereunder shall be subject to the satisfaction (or waiver by InterCept) at or before the Closing of each of the following conditions: 7.1 Representations, Warranties and Covenants. Each of the ----------------------------------------- representations and warranties of Shareholder and the Company contained in this Agreement shall be true in all respects as of the time of the Closing; and the Company and Shareholder shall have performed and complied in all respects with the respective covenants and agreements set forth herein to be performed or complied with by them at or before the Closing. 7.2 Litigation. No suit, investigation, action or other proceeding ---------- shall be pending or overtly threatened before any court or governmental agency, which has resulted in the restraint or prohibition of InterCept from making the Loan, or in the reasonable opinion of counsel for InterCept could result in the obtaining of material damages or other relief from InterCept, in connection with this Agreement or the making of the Loan. 7.3 Opinions of Counsel to the Company and Shareholder. InterCept shall -------------------------------------------------- have received from counsel to Shareholder and the Company opinion letters reasonably acceptable to InterCept. 7.4 Execution and Delivery of Documents. The Company and Shareholder ----------------------------------- shall have executed and delivered all the documents required herein (including the Disclosure Memorandum); and all other agreements, certificates, and other documents delivered by the Company and Shareholder to InterCept hereunder shall be in form and substance satisfactory to counsel for InterCept. 7.5 Other Necessary Consents. Shareholder and the Company shall ------------------------ have obtained all consents, approvals, and estoppels necessary for the making of the Loan, including those listed in the Disclosure Memorandum. 7.6 Delivery of Documents. The Company and Shareholder shall have --------------------- executed and delivered or caused to be delivered to InterCept all of the following agreements: (a) the Note in the form attached hereto as Exhibit 7.6(a); and -------------- (b) Pledge Agreement in the form attached hereto as Exhibit ------- 6.6(a), together with the stock powers required therein. - ------------------------------------------------------- Section 8. Default and Remedies 8.1 Events of Default. The occurrence of any of the following shall ----------------- constitute an Event of Default hereunder: (a) Default in the payment of the principal of or interest on the indebtedness evidenced by the Note in accordance with the terms of the Note, which default is not cured within five (5) business days; (b) Any misrepresentation by Borrowers as to any material matter hereunder or under any of the other Loan Documents; or delivery thereunder by Borrowers of any schedule, statement, resolution, report, certificate, notice or writing to InterCept in respect of the Loan that is untrue in any material respect on the date as of which the facts set forth therein are stated or certified; (c) Failure of either Borrower to perform any of their obligations, covenants or agreements under this Agreement (as such Agreement may be amended, modified or restated from time to time); (d) Either Borrower (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding as a debtor under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within ninety (90) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of ninety (90) days or more; (e) Either Borrower shall be liquidated, dissolved, partitioned, or terminated, or its charter shall expire or be revoked; save and except for the liquidation, winding up and dissolution of the Company under applicable Kansas corporation statutes pursuant to the Purchase Agreement; and (f) A default or event of default shall occur under any of the other Loan Documents and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period. With respect to any Event of Default described above that is capable of being cured and that does not already provide its own cure procedure (a "Curable Default"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if such Curable Default is fully cured and/or corrected within thirty (30) days (provided that there shall be no cure period if such Curable Default can be cured by payment of a sum of money) after notice thereof to Borrowers given in accordance with the provisions hereof; provided, however, that this provision shall not require notice to Borrowers and an opportunity to cure any Curable Default of which any Borrower has had actual knowledge for the requisite number of days set forth. 8.2 Acceleration of Maturity; Remedies. Upon the occurrence of any ---------------------------------- Event of Default described in subsection 8.1(d), the indebtedness evidenced by the Note shall be immediately due and payable in full; and upon the occurrence of, and during the continuance of, any other Event of Default described above, InterCept at any time may at its option accelerate the maturity of the indebtedness evidenced by the Note, all without notice of any kind. Upon the occurrence of any such Event of Default and the acceleration of the maturity of the indebtedness evidenced by the Note: (a) InterCept shall be immediately entitled to exercise any and all rights and remedies possessed by InterCept pursuant to the terms of the Note and all of the other Loan Documents; and (b) InterCept shall have any and all other rights and remedies that InterCept may now or hereafter possess at law, in equity or by statute. Notwithstanding any other term contained in this Agreement, the Note, the Pledge Agreement or the Loan Documents, InterCept's remedies against the Borrowers with respect to the Obligations shall be limited solely to the Pledged Collateral. 8.3 Remedies Cumulative; No Waiver. No right, power or remedy conferred ------------------------------ upon or reserved to InterCept by this Agreement or any of the other Loan Documents is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder, under any of the other Loan Documents or now or hereafter existing at law, in equity or by statute. No delay or omission by InterCept to exercise any right, power or remedy accruing upon the occurrence of any Event of Default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every right, power and remedy given by this Agreement and the other Loan Documents to InterCept may be exercised from time to time and as often as may be deemed expedient by InterCept. 8.4 Proceeds of Remedies. Any or all proceeds resulting from the -------------------- exercise of any or all of the foregoing remedies shall be applied as set forth below: First, to the costs and expenses, including without limitation reasonable attorneys' fees and disbursements, incurred by InterCept in connection with the exercise of its remedies; Second, to the expenses of curing the default that has occurred, in the event that InterCept elects, in its sole discretion, to cure the default that has occurred; Third, to the payment of the Obligations of Borrowers, including but not limited to the payment of the principal of and interest on the indebtedness evidenced by the Note, in such order of priority as InterCept shall determine in its sole discretion; and Fourth, the remainder, if any, to Borrowers or to any other person lawfully thereunto entitled. Section 9. Termination This Agreement shall remain in full force and effect until the payment in full by Borrowers of the Obligations, at which time InterCept shall cancel the Note and deliver it to Borrowers; provided, however, that the indemnity provided below shall survive the termination of this Agreement. Section 10. Miscellaneous 10.1 Notices. All notices, requests, demands, consents and other ------- communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered by overnight courier or express mail service or by postage pre-paid certified or registered mail, return receipt requested (the return receipt constituting prima facie evidence of ----------- the giving of such notice, request, demand or other communication), by personal delivery, or by fax with confirmation of receipt to the following address or such other address of which a party subsequently may give notice to all the other parties: To the Company or Shareholder: SLMsoft.com Inc. 1 Yorkdale Road, Suite 600 Toronto, Ontario M6A 3A1 Attention: Dev Misir Fax No. (416) 789-9078 With a copy to: Gowling, Lafleur & Henderson LLP Suite 4900 Commerce Court West Toronto, Ontario M5L 1J3 Attention: Howie C. Wong Fax No. (416) 862-7661 To InterCept: The InterCept Group, Inc. 3150 Holcomb Bridge Road, Suite 200 Norcross, GA 30071 Attention: John Collins and Scott R. Meyerhoff Fax: (770) 840-2521 and Nelson Mullins Riley & Scarborough, L.L.P. First Union Building, Suite 1400 999 Peachtree Street Atlanta, Georgia 30309 Attention: Charles D. Vaughn, Esq. Fax: (404) 817-6150 10.2 Parties Bound by Agreement; Successors and Assigns. This -------------------------------------------------- Agreement, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of InterCept and to all holders of the indebtedness secured hereby and their respective successors and permitted assigns and to the Borrowers and the Borrowers' successors, legal representatives and assigns, except that the Borrowers shall not be permitted to assign this Agreement or any interest herein or in the Pledged Collateral, or any part thereof (except as permitted under the terms of this Agreement), or any cash or property held by InterCept as collateral under this Agreement. InterCept shall only assign all or a portion of its rights and obligations hereunder and under the other Loan Documents either (a) in connection with a Corporate Restructuring, or (b) if consented to by Shareholder in writing, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, Shareholder consents to and acknowledges that InterCept will be collaterally assigning to First Union National Bank all of its rights and remedies with respect to this Agreement, the Note and the other Loan Documents pursuant to the Collateral Assignment. InterCept may, in connection with any assignment or proposed assignment, disclose to the assignee or proposed participant any information relating to the Borrowers furnished to InterCept by or on behalf of the Borrowers. Furthermore, the Borrowers acknowledge that InterCept will be providing information relating to the Borrowers furnished to InterCept by or on behalf of the Borrowers to First Union National Bank on a regular basis. No notice to or demand on the Borrowers shall entitle the Borrowers to any other or further notice or demand in the same, similar or other circumstances. 10.3 Entire Agreement. This Agreement, the Disclosure Memorandum and ---------------- all other certificates, schedules and other documents delivered pursuant to this Agreement constitute the entire agreement between the parties with respect to the Loan, and supersede and are in full substitution of any and all prior agreements and understandings, both oral and written, between the parties relating to such transaction. In the event of any conflict between the terms of this Agreement, on the one hand, and the terms of the Note, the Pledge Agreement and the other Loan Documents, on the other hand, then this Agreement shall be paramount and prevail to the extent of the conflict. 10.4 Descriptive Headings. The descriptive headings of the -------------------- Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 10.5 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Receipt of a facsimile version of an executed signature page by a party to this Agreement shall constitute satisfactory evidence of execution of this Agreement by such party. 10.6 Amendments and Waivers. No modification, termination, extension, ---------------------- renewal, or waiver of any provision of this Agreement shall be binding upon a party unless made in writing and signed by such party. A waiver on one occasion shall not be construed as a waiver of any right on any future occasion. No delay or omission by a party in exercising any of its rights hereunder shall operate as a waiver of such rights. 10.7 Governing Law, Jurisdiction and Venue. This Agreement is executed ------------------------------------- by InterCept in, and shall be construed in accordance with and governed by the laws of the State of Georgia, without regard to its conflict of law principles. Shareholder consents to exclusive jurisdiction by the state and federal courts sitting in Fulton County in the State of Georgia. 10.8 No Third-Party Beneficiaries. With the exception of the parties to ---------------------------- this Agreement and the Indemnified Persons, there shall exist no right of any person to claim a beneficial interest in this Agreement or any rights accruing by virtue of this Agreement. 10.9 Gender and Number. Where the context requires, the use of a ----------------- pronoun of one gender or the neuter is to be deemed to include a pronoun of the appropriate gender, singular words are to be deemed to include the plural, and vice versa. 10.10 Expenses. Each of the expenses incurred by InterCept, the Company -------- and Shareholder in connection with the authorization, preparation, execution and performance of this Agreement, including without limitation all fees, commissions, and expenses of agents, representatives, counsel, accountants, investment bankers, brokers and finders, shall be paid by the party that incurred such expenses. 10.11 Survival of Warranties. The respective representations and ---------------------- warranties of the Company, Shareholder and InterCept under this Agreement shall not merge, but will survive the Closing for the earlier of a period of two years and the termination of this Agreement. 10.12 Indemnification. --------------- (a) By Shareholder and the Company. For a period of two years ------------------------------ following the Closing Date, Shareholder and the Company shall jointly and severally indemnify, reimburse and hold harmless InterCept, its Affiliates and any successor or assigns (the "Indemnified Persons") for any and all direct or --------------------- indirect claims, losses, liabilities (actual or contingent), damages (including special and consequential damages), costs (including court costs) and expenses (including all attorneys' and accountants' fees and expenses) (hereinafter a "Loss" or "Losses"), as a result of or in connection with (i) any breach, - ------ -------- inaccuracy or untruth of any warranty or covenant by Shareholder or the Company contained in this Agreement, whether such breach, inaccuracy or untruth exists or is made on the date of this Agreement or as of the Closing, or (ii) any fees, commissions or expenses of any broker or finder engaged by the Company or Shareholder in connection with the Loan or this Agreement or any other Loan Document. (b) Limitations with Respect to Minimum Amount. Neither ------------------------------------------ Shareholder nor the Company shall have liability (for indemnification or otherwise) to InterCept with respect to the matters described in this Section 10.12 unless and until the total of all damages incurred by the Indemnified Persons with respect to such matters exceeds $50,000. The indemnification obligations of Shareholder and the Company shall be subject to the survival limitations set forth in Section 10.11, after which time, if no Losses have been asserted against a party, then that party shall have no further liability hereunder. (c) Notification. InterCept hereby undertakes to notify ------------ Shareholder without delay of the occurrence of any event that constitutes or may with the passage of time constitute an event entitling any Indemnified Person to indemnification under this Section. (d) Notice of Claim. To seek indemnification hereunder, an --------------- Indemnified Person shall notify the Borrowers of any claim for indemnification, specifying in reasonable detail the nature of the Loss and the amount or an estimate of the amount thereof. (e) Litigation Assumption. The party against whom indemnity is --------------------- being sought by the Indemnified Person shall have the right to assume the litigation, defense and settlement, as the case may be, of a purported Loss which arises from a claim from a third party and the Indemnified Person shall co-operate with the party in such litigation, defense and settlement, as the case may be. 10.13 No Public Announcements. Prior to Closing, without the prior ----------------------- written consent of the other parties, neither InterCept, Shareholder, nor the Company shall make any press release or other public disclosure, or make any statement to any customer, supplier, employee or other person with regard to the Loan, except as required by law. After Closing, without the prior written consent of each other, neither InterCept nor Shareholder or the Company shall make any press release or other public disclosure with regard to the Loan, except as required by law or applicable SEC or Canadian securities laws. Both parties acknowledge that InterCept shall file a Form 8-K with the Securities and Exchange Commission describing the transactions contemplated by the Loan Documents, and that the Shareholder shall file a Material Change Report with the Canadian securities regulators. 10.14 Time of the Essence. Time is of the essence with respect to each ------------------- and every covenant, agreement, and obligation of Borrowers hereunder and under all of the other Loan Documents. 10.15 Severability. If any provision(s) of this Agreement or the ------------ application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 10.16 Interest and Loan Charges Not to Exceed Maximum Allowed by Law. -------------------------------------------------------------- This Agreement, the Note and the other Loan Documents are expressly limited so that in no event whatsoever, whether by reason of advancement of proceeds of the Loan, acceleration of the maturity of the unpaid balance of the Loan or otherwise, shall the amount paid or agreed to be paid to InterCept for the use of the money advanced or to be advanced hereunder exceed the maximum rate permitted by law (the "Maximum Rate"). If, for any circumstances whatsoever, the fulfillment of any provision of this Agreement, the Note or the other Loan Documents now or hereafter evidencing, securing or in any way relating to the debt evidenced by the Note shall involve the payment of interest in excess of the Maximum Rate, then, ipso facto, the obligation to pay interest under the Note shall be reduced to the Maximum Rate; and if for any circumstance whatsoever, InterCept shall ever receive interest, the amount of which would exceed the amount collectible at the Maximum Rate, such amount as would be excessive interest shall be applied to the reduction of the principal balance remaining unpaid hereunder and not to the payment of interest. 10.17 Construction and Interpretation. Should any provision of this ------------------------------- Agreement require judicial interpretation, the parties hereto agree that the court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be more strictly construed against the party that itself or through its agent prepared the same, it being agreed that Borrowers, InterCept and their respective agents have participated in the preparation hereof. 10.18 Pledged Collateral Remains Restricted Under Purchase Agreement. -------------------------------------------------------------- Under the Purchase Agreement, InterCept issued shares of InterCept Common Stock to Shareholder and the Company in a transaction exempt from registration under the Securities Act of 1933 by reason of Section 4(2) thereof, Regulation D promulgated thereunder, or other private offering exemptions, as well as an appropriate exemption under the Canadian National Territorial Provincial Rule. Under the Purchase Agreement, a specified legend was placed on the certificates evidencing the shares issued at the closing of the Purchase Agreement and will be placed on up to 385,872 shares to be earned by and issued to Shareholder, as nominee for the Company, subject to the terms and conditions set forth in the Purchase Agreement. Notwithstanding any other discussions or correspondence among the parties hereto, they reaffirm their mutual understanding and agreement that placing the legend on all share certificates issued under the Purchase Agreement is necessary and appropriate until such legends are eligible to be removed either pursuant to registration of such shares or the availability of an exemption for the transfer of such shares. 10.19 Definitions. For purposes of this Agreement, the following ----------- terms shall have the following meanings: "Affiliates" of a particular Person means other Persons controlled by, ------------ controlling, or under common control with, such Person. "Charter Documents" means the articles of incorporation and bylaws of ------------------- the Company, Shareholder, or InterCept, as the context requires. "Closing" means the consummation of the making of the Loan under the --------- terms of this Agreement. "Closing Date" means the date on which the Closing occurs. -------------- "Collateral Assignment" means the Collateral Assignment of Rights under ----------------------- SLM Loan Documents between InterCept and First Union National Bank dated December __, 2001. "Corporate Restructuring" means (a) that InterCept or an affiliated ------------------------- subsidiary of InterCept is a party to a merger, consolidation, spin-off, corporate reorganization, or corporate restructuring, (b) the sale, transfer, conveyance, or lease by InterCept of all or any substantial part of InterCept's assets taken as a whole including the assets of InterCept's subsidiaries, or (c) any transaction of InterCept that results in a majority of InterCept's directors immediately subsequent to such transaction being individuals who were not directors of InterCept immediately prior to such transaction. "Disclosure Memorandum" means the memorandum signed and delivered by ----------------------- Shareholder and the Company on the Closing Date containing information required to be disclosed under this Agreement. "Encumbrance" means any mortgage, charge (whether fixed or floating), ------------- security interest, pledge, claim, right of first refusal, lien (including, without limitation any unpaid vendor's lien), option, option, hypothecation, title retention or conditional sale agreement, lease, option, restriction as to transfer, use or possession, easement, subordination to any right of any other person, and any other encumbrance on the absolute and unfettered use and ownership of any asset or property. "Person" means a corporation, partnership, trust, limited liability -------- company, other business entity or an individual. "Rule" means any law, statute, rule, regulation, order, court decision, ------ judgment or decree of any federal, state, territorial, provincial or municipal authority or body, and, when it is commonly proper to follow them, non-compulsory recommendations of any such public authorities and bodies. "Subsidiary" means any commercial company or other business entity ------------ controlled by Shareholder or the Company or any subsidiary of the Company, including any entity (whether or not deemed to have an independent legal personality) in which the shareholder's liability is not limited to its contribution. Each of the parties hereto has caused this Loan Agreement to be duly executed on its behalf as of the date indicated on the first page hereof and this Loan Agreement has been delivered on December 3, 2001. INTERCEPT: THE INTERCEPT GROUP, INC., a Georgia corporation By: /s/ Scott R. Meyerhoff ------------------------------------------------ Name: Scott R. Meyerhoff Title: Chief Financial Officer SHAREHOLDER: SLMSOFT.COM INC., a corporation formed under the laws of the Province of Ontario By: /s/ Dev Misir -------------------------------------------------- Name: Dev Misir Title: Chief Financial Officer and Executive Vice President THE COMPANY: SLMSOFT.COM INC., a Kansas corporation By: /s/ Dev Misir -------------------------------------------------- Name: Dev Misir Title:Chief Financial Officer and Executive Vice President EX-10.22 5 dex1022.txt EMPLOYMENT AGREEMENT WITH G. LYNN BOGGS Exhibit 10.22 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (this "Agreement") is made by and between The InterCept Group, Inc., a Georgia corporation (the "Company"), and G. Lynn Boggs, an individual resident of Tennessee (the "Executive"), as of the 19th day of February 2002 (the "Effective Date"). The Company seeks to employ the Executive as its President of the Company. The Board of Directors of the Company (the "Board") expects that the Executive's contribution to the growth and success of the Company will be substantial. The Board desires to encourage the dedication of the Executive to the Company, which will promote the best interests of the Company and its shareholders. The Executive is willing to serve the Company on the terms and conditions herein provided. Certain capitalized terms used in this Agreement are defined in Section 18. In consideration of the foregoing, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree (as of the Effective Date) that: 1. Employment. The Company shall employ the Executive, and the ---------- Executive shall serve the Company, as President of the Company upon the terms and conditions set forth herein. The Executive shall have such authority and responsibilities as are consistent with his position and which may be set forth in the Bylaws or assigned by the CEO from time to time. The Executive shall devote his full business time, attention, skill and efforts to the performance of his duties hereunder, except during periods of illness or periods of vacation and leaves of absence consistent with Company policy. The Executive may devote reasonable periods of time to serve as a director or advisor to other organizations, to perform charitable and other community activities, and to manage his personal investments; provided, however, that such activities are ----------------- approved by the CEO, do not materially interfere with the performance of his duties hereunder and are not in conflict or competitive with, or adverse to, the interests of the Company. 2. Term. Unless earlier terminated as provided herein, the Executive's ---- employment under this Agreement shall be for a continuing term of two (2) years (the "Term"), which shall be extended automatically (without further action of the Company or the Executive) each day for an additional day so that the remaining term shall continue to be two years; provided, however, that either -------- ------- party may at any time, by written notice to the other, fix the Term to a finite term of two years, without further automatic extension, commencing with the date of such notice. 3. Compensation and Benefits. ------------------------- a. The Company shall pay the Executive a minimum salary of $400,000 per annum in accordance with the salary payment practices of the Company. The Board (or the Compensation Committee) shall review the Executive's salary at least annually. 1 b. The Executive shall be eligible to participate in any management incentive programs established by the Company and to receive incentive compensation based upon achievement of targeted levels of performance and such other criteria as the CEO, Board or Compensation Committee may establish from time to time. In addition, the CEO, Board or the Compensation Committee shall annually consider the Executive's performance and determine if any additional bonus is appropriate. c. The Executive may participate in the Plan and shall be eligible for the grant of stock options, restricted stock and other awards thereunder. Within thirty (30) days of the Effective Date, the Company shall grant the Executive options to purchase 150,000 shares of the Company's common stock under the Plan. d. The Executive shall participate in and the Company shall pay all retirement, welfare, deferred compensation, life and health insurance (including health insurance for Executive's spouse and his dependents), and other benefit plans or programs of the Company now or hereafter applicable to the Executive or applicable generally to Executives of the Company or to a class of Executives that includes senior executives of the Company; provided, however, that during ----------------- any period during the Term that the Executive is subject to a Disability, and during the 180-day period of physical or mental infirmity leading up to the Executive's Disability, the amount of the Executive's compensation provided under this Section 3 shall be reduced by the sum of the amounts, if any, paid to the Executive for the same period under any disability benefit or pension plan of the Company or any of its subsidiaries. e. At the discretion of the CEO, the Company may provide to the Executive an automobile owned or leased by the Company of a make and model appropriate to the Executive's status (in the reasonable opinion of the CEO) or, in lieu thereof, may provide the Executive with an annual allowance to partially cover the cost of the business use of an automobile owned or leased by the Executive. f. The Company shall, upon approval by the CEO, reimburse the Executive's reasonable expenses for relocating, including temporary living expenses, to the Atlanta metropolitan area, where the Company's principal executive office is located, for a period of one (1) year in an amount not to exceed $22,500 per three (3) month period. g. The Company shall reimburse the Executive for travel, seminar and other expenses related to the Executive's duties that are incurred and accounted for in accordance with the practices of the Company. 4. Termination. ------------ a. The Executive's employment under this Agreement may be terminated prior to the end of the Term only as follows: (i) upon the death of the Executive; 2 (ii) by the Company due to the Disability of the Executive upon delivery of a Notice of Termination to the Executive; (iii) by the Company for Cause upon delivery of a Notice of Termination to the Executive; (iv) prior to a Change in Control, by the Company without Cause upon no less than ninety (90) days written notice to the Executive, provided the Company satisfies the provisions of Section 4(d); and (v) by the Executive for any reason upon delivery of a Notice of Termination to the Company within a 90-day period beginning on the 30th day after any occurrence of a Change in Control or within a 90-day period beginning on the one year anniversary of the occurrence of any Change in Control. b. If the Executive's employment with the Company shall be terminated during the Term (i) by reason of the Executive's death, or (ii) by the Company for Disability or Cause, the Company shall pay to the Executive (or in the case of his death, the Executive's estate) within 15 days after the Termination Date, a lump sum cash payment equal to the Accrued Compensation and, if such termination is other than by the Company for Cause, the Pro Rata Bonus. c. If the Executive's employment with the Company shall be terminated after a Change in Control either (i) by the Company without Cause or (ii) by the Executive for any reason, in addition to other rights and remedies available in law or equity, the Executive shall be entitled to the following: (i) the Company shall pay the Executive in cash within 15 days of the Termination Date an amount equal to all Accrued Compensation and the Pro Rata Bonus; (ii) the Company shall pay to the Executive in cash at the end of each of the twenty-four (24) consecutive thirty (30) day periods following the Termination Date an amount equal to one-twelfth of the sum of the Base Amount and the Bonus Amount. (iii) for the two (2) year period following the Termination Date (the "Continuation Period"), the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization benefits provided (x) to the Executive at any time during the 90-day period prior to the Change in Control or at any time thereafter or (y) to other similarly situated executives who continue in the employ of the Company during the Continuation Period, if permitted, in either case, by the applicable benefit plan. The coverage and benefits (including deductibles and costs) provided in this Section 4(c)(iii) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries than the most 3 favorable of such coverages and benefits during any of the periods referred to in clauses (x) and (y) above. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the combined benefit plans is no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive or his dependents or beneficiaries may be entitled under any of the Company's Executive benefit plans, programs or practices following the Executive's termination of employment, including without limitation, retiree medical and life insurance benefits; and (iv) the restrictions on any outstanding incentive awards (including stock options) granted to the Executive under the Plan or under any other incentive plan or arrangement shall lapse and such incentive award shall become 100% vested, and all stock options and stock appreciation rights granted to the Executive shall become immediately exercisable, shall become 100% vested and shall remain in effect until the expiration of their respective terms notwithstanding that the Executive has left the Company's employment. d. If, prior to a Change in Control, the Company terminates the Executive without Cause, the Company shall pay the Executive in cash: (i) within fifteen (15) days of the Termination Date, an amount equal to all Accrued Compensation and the Pro Rata Bonus; (ii) at the end of each of the twenty four (24) consecutive thirty (30) day periods following the Termination Date, an amount equal to (1/12) of the sum of the Base Amount and the Bonus Amount; and (iii) for the twenty four (24) consecutive thirty (30) day periods following the Termination Date, the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization benefits provided (x) to the Executive at any time or (y) to other similarly situated executives who continue in the employ of the Company, if permitted, in either case, by the applicable benefit plan. The coverage and benefits (including deductibles and costs) provided in this Section 4(d)(iii) shall be no less favorable to the Executive and his dependents and beneficiaries than the most favorable of such coverages and benefits during any of the periods referred to in clauses (x) and (y) above. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the 4 combined benefit plans is no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive or his dependents or beneficiaries may be entitled under any of the Company's Executive benefit plans, programs or practices following the Executive's termination of employment, including without limitation, retiree medical and life insurance benefits. e. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment except as provided in Section 4(c)(iii). f. The severance pay and benefits provided for in this Section 4 shall be in lieu of any other severance or termination pay to which the Executive may be entitled under any Company severance or termination plan, program, practice or arrangement. The Executive's entitlement to any other compensation or benefits shall be determined in accordance with the Company's Executive benefit plans and other applicable programs, policies and practices then in effect. 5. Protection of Trade Secrets and Confidential Information. -------------------------------------------------------- a. Through exercise of his rights and performance of his obligations under this Agreement, Executive will be exposed to Trade Secrets and Confidential Business Information. Executive agrees to cooperate with any and all confidentiality requirements of the Company and Executive shall immediately notify the Company of any unauthorized disclosure or use of any Trade Secrets of which Executive becomes aware. b. Except as required to perform his obligations under this Agreement or except with Company's prior written permission, Executive shall not use, redistribute, market, publish, disclose or divulge to any other person or entity any Trade Secrets of the Company. The Executive's obligations under this provision shall remain in force (during or after the Term) for so long as such information or data shall continue to constitute a "trade secret" under applicable law. c. The Executive agrees to maintain in strict confidence and, except as necessary to perform his duties for the Company, not to use or disclose any Confidential Business Information at any time, either during the term of his employment or for a period of two (2) years after the Executive's last date of employment. d. Upon termination of employment, the Executive shall leave with the Company all business records relating to the Company and its affiliates including, without limitation, all contracts, calendars, and other materials or business records concerning its business or customers, including all physical, electronic, and computer copies thereof, whether or not the Executive prepared such materials or records himself. Upon such termination, the Executive shall retain no copies of any such materials. 5 e. Nothing in this Section 5 shall prevent the Executive from disclosing Trade Secrets or Confidential Business Information pursuant to a court order or court-issued subpoena, so long as the Executive first notifies the Company of said order or subpoena in sufficient time to allow the Company to seek an appropriate protective order. The Executive agrees that if he receives any formal or informal discovery request, court order, or subpoena requesting that he disclose Trade Secrets or Confidential Business Information, he will immediately notify the Company and provide the Company with a copy of said request, court order, or subpoena. 6. Non-Solicitation and Related Matters. ------------------------------------ a. If the Executive is terminated for Cause or if the Executive resigns without Adequate Justification, then for a period of two (2) years following the date of termination, the Executive shall not (except on behalf of or with the prior written consent of the Company) either directly or indirectly, on the Executive's own behalf or in the service or on behalf of others, (i) solicit, divert, or appropriate to or for a Competing Business, or (ii) attempt to solicit, divert, or appropriate to or for a Competing Business, any person or entity that was a customer or prospective customer of the Company on the date of termination and with whom the Executive had direct material contact within six months of the Executive's last date of employment. b. If the Executive is terminated for Cause or if the Executive resigns without Adequate Justification, then for a period of two (2) years following the date of termination, the Executive will not, either directly or indirectly, on the Executive's own behalf or in the service or on behalf of others, (i) solicit, divert, or hire away, or (ii) attempt to solicit, divert, or hire away any employee of or consultant to the Company or any of its affiliates engaged or experienced in the Business, regardless of whether the employee or consultant is full-time or temporary, the employment or engagement is pursuant to written agreement, or the employment is for a determined period or is at will. c. The Executive acknowledges and agrees that great loss and irreparable damage would be suffered by the Company if the Executive should breach or violate any of the terms or provisions of the covenants and agreements set forth in this Section 6. The Executive further acknowledges and agrees that each of these covenants and agreements is reasonably necessary to protect and preserve the interests of the Company. The parties agree that money damages for any breach of clauses (a) and (b) of this Section 6 will be insufficient to compensate for any breaches thereof, and that the Executive or any of the Executive's affiliates, as the case may be, will, to the extent permitted by law, waive in any proceeding initiated to enforce such provisions any claim or defense that an adequate remedy at law exists. The existence of any claim, demand, action, or cause of action against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants or agreements in this Agreement; provided, however, that nothing in this Agreement shall be deemed to deny the - ----------------- Executive the right to defend against this enforcement on the basis that the Company has no right to its enforcement under the terms of this Agreement. 6 d. The Executive acknowledges and agrees that: (i) the covenants and agreements contained in clauses (a) through (e) of this Section 6 are the essence of this Agreement; (ii) the Executive has received good, adequate and valuable consideration for each of these covenants; and (iii) each of these covenants is reasonable and necessary to protect and preserve the interests and properties of the Company. The Executive also acknowledges and agrees that: (i) irreparable loss and damage will be suffered by the Company should the Executive breach any of these covenants and agreements; (ii) each of these covenants and agreements in clauses (a) and (b) of this Section 6 is separate, distinct and severable not only from the other covenants and agreements but also from the remaining provisions of this Agreement; and (iii) the unenforceability of any covenants or agreements shall not affect the validity or enforceability of any of the other covenants or agreements or any other provision or provisions of this Agreement. The Executive acknowledges and agrees that if any of the provisions of clauses (a) and (b) of this Section 6 shall ever be deemed to exceed the time, activity, or geographic limitations permitted by applicable law, then such provisions shall be and hereby are reformed to the maximum time, activity, or geographical limitations permitted by applicable law. e. The Executive and the Company hereby acknowledge that it may be appropriate from time to time to modify the terms of this Section 6 and the definition of the term "Business" to reflect changes in the Company's business and affairs so that the scope of the limitations placed on the Executive's activities by this Section 6 accomplishes the parties' intent in relation to the then current facts and circumstances. Any such amendment shall be effective only when completed in writing and signed by the Executive and the Company. 7. Non-Competition and Related Matters. ----------------------------------- a. If the Executive is terminated for Cause or if the Executive resigns without Adequate Justification, then for a period of two (2) years following the date of termination, the Executive shall not (except on behalf of or with the prior written consent of the Company) either directly or indirectly, on the Executive's own behalf or in the service or on behalf of others, serve as an officer or senior manager in any Competing Business within a seventy-five (75) mile radius of the Company's principal executive office in Norcross, Georgia. b. The Executive acknowledges and agrees that great loss and irreparable damage would be suffered by the Company if the Executive should breach or violate any of the terms or provisions of the covenants and agreements set forth in this Section 7. The Executive further acknowledges and agrees that each of these covenants and agreements is reasonably necessary to protect and preserve the interests of the Company. The parties agree that money damages for any breach of clause (a) of this Section 7 will be insufficient to compensate for any breaches thereof, and that the Executive or any of the Executive's affiliates, as the case may be, will, to the extent permitted by law, waive in any proceeding initiated to enforce such provisions any claim or defense that an adequate remedy at law exists. The existence of any claim, demand, action, or cause of action against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants or agreements in this Agreement; provided, however, that ----------------- nothing in this Agreement shall be deemed to deny the 7 Executive the right to defend against this enforcement on the basis that the Company has no right to its enforcement under the terms of this Agreement. c. The Executive acknowledges and agrees that: (i) the covenants and agreements contained in clause (a) of this Section 7 are the essence of this Agreement; (ii) the Executive has received good, adequate and valuable consideration for each of these covenants; and (iii) each of these covenants is reasonable and necessary to protect and preserve the interests and properties of the Company. The Executive also acknowledges and agrees that: (i) irreparable loss and damage will be suffered by the Company should the Executive breach any of these covenants and agreements; (ii) each of these covenants and agreements in clause (a) of this Section 7 is separate, distinct and severable not only from the other covenants and agreements but also from the remaining provisions of this Agreement; and (iii) the unenforceability of any covenants or agreements shall not affect the validity or enforceability of any of the other covenants or agreements or any other provision or provisions of this Agreement. The Executive acknowledges and agrees that if any of the provisions of clause (a) of this Section 7 shall ever be deemed to exceed the time, activity, or geographic limitations permitted by applicable law, then such provisions shall be and hereby are reformed to the maximum time, activity, or geographical limitations permitted by applicable law. d. The Executive and the Company hereby acknowledge that it may be appropriate from time to time to modify the terms of this Section 7 and the definition of the term "Business" to reflect changes in the Company's business and affairs so that the scope of the limitations placed on the Executive's activities by this Section 7 accomplishes the parties' intent in relation to the then current facts and circumstances. Any such amendment shall be effective only when completed in writing and signed by the Executive and the Company. 8. Successors; Binding Agreement. ----------------------------- a. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. b. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 9. Fees and Expenses The Company shall pay all reasonable legal fees ----------------- and related expenses (including but not limited to the costs of experts, accountants and counsel) incurred by the Executive as they become due as a result of (a) the termination of the Executive's employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment) and (b) the Executive seeking to obtain or enforce any right or 8 benefit provided by this Agreement; provided, however, that the circumstances ----------------- set forth in clauses (a) and (b) above occurred on or after a Change in Control. 10. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in this Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other; provided, however, that all notices to the Company shall be ----------------- directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof. 11. Settlement of Claims. The Company's obligation to make the payments -------------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. The Company may, however, withhold from any benefits payable under this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 12. Modification and Waiver. No provisions of this Agreement may be ----------------------- modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by any party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 13. Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the laws of the State of Georgia without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in State of Georgia. 14. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 15. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. 16. Headings. The headings of Sections herein are included solely for -------- convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 9 18. Definitions. For purposes of this Agreement, the following terms ----------- shall have the following meanings: "Accrued Compensation" shall mean an amount which shall include all amounts earned or accrued through the Termination Date but not paid as of the Termination Date including (i) base salary, and (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date. "Act" shall mean the Securities Act of 1933, as amended. "Adequate Justification" shall mean the occurrence after a Change in Control of any of the following events or conditions: (i) a material failure of the Company to comply with the terms of this Agreement; (ii) any relocation of the Executive outside the Atlanta, Georgia metropolitan area that is not approved by the Executive; or (iii) other than as provided for herein, the removal of the Executive from his position hereunder or any other substantial diminution in the Executive's authority or the Executive's responsibilities that is not approved by members of the Incumbent Board. "Agreement" shall have the meaning set forth in the recitals. "Base Amount" shall mean the greater of the Executive's annual base salary (i) at the rate in effect on the Termination Date or (ii) at the highest rate in effect at any time during the 90-day period prior to the Change in Control, and shall include all amounts of his base salary that are deferred under the qualified and non-qualified employee benefit plans of the Company or any other agreement or arrangement. "Board" shall have the meaning set forth in the recitals. "Bonus Amount" shall mean the greater of (i) the most recent annual bonus paid or payable to the Executive, or, if greater, the annual bonus paid or payable for the full fiscal year ended prior to the fiscal year during which a Change in Control occurred or (ii) the average of the annual bonuses paid or payable during the three full fiscal years ended prior to the Termination Date or, if greater, the three full fiscal years ended prior to the Change in Control (or, in each case, such lesser period for which annual bonuses were paid or payable to the Executive). "Business" shall mean the design, development, marketing and implementation of banking technology products and services for community financial institutions. "Bylaws" shall mean the Amended and Restated Bylaws of the Company, as amended, supplemented or otherwise modified from time to time. "Cause" shall mean the result of: 10 (i) any act that (X) constitutes, on the part of the Executive, fraud, dishonesty, or gross malfeasance of duty, and (Y) is demonstrably likely to lead to material injury to the Company or resulted or was intended to result in direct or indirect gain to or personal enrichment of the Executive; provided, however, that such ----------------- conduct shall not constitute Cause: (A) unless (1) there shall have been delivered to the Executive a written notice setting forth with specificity the reasons that the Board believes the Executive's conduct constitutes the criteria set forth in clause (i), (2) the Executive shall have been provided the opportunity, if such behavior is susceptible to cure, to cure the specific inappropriate behavior within 30 days following written notice, (3) after such 30-day period, the Board of Directors determines that the behavior has not been cured, and (4) the termination is evidenced by a resolution adopted in good faith by a majority of the members of the Board (other than the Executive if the Executive is on the Board at the time); or (B) if such conduct (1) was believed by the Executive in good faith to have been in or not opposed to the interests of the Company, and (2) was not intended to and did not result in the direct or indirect gain to or personal enrichment of the Executive; or (ii) the conviction (from which no appeal may be or is timely taken) of the Executive of a felony. "Change in Control" shall mean the occurrence during the Term of any the following events: (i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 34% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a ----------------- Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary"), (2) the Company or any Subsidiary, or (3) any Person in connection with a "Non-Control Transaction" (as hereinafter defined); 11 (ii) The individuals who, as of the date of this Agreement, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if ----------------- the election, or nomination for election by the Company's shareholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, -------- further, however, that no individual shall be considered a member of ---------------- the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (iii) Approval by shareholders of the Company of: (A) A merger, consolidation or reorganization involving the Company, unless (1) the shareholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, and (2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least a majority of the members of the board of directors of the Surviving Corporation. (A) transaction described in clauses (1) and (2) shall herein be referred to as a "Non-Control Transaction"). (B) A complete liquidation or dissolution of the Company; or (C) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). 12 (iv) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the Executive reasonably demonstrates that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control (a "Third Party") or (B) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, then for all purposes of this Agreement, the date of a Change in Control with respect to the Executive shall mean the date immediately prior to the date of such termination of the Executive's employment. "CEO" shall initially mean John W. Collins or the person currently serving as the chief executive officer of the Company. "Company "shall have the meaning set forth in the recitals. "Compensation Committee" shall mean the compensation committee of the Board. "Competing Business" shall mean any business that, in whole or in part, is the same or substantially the same as the Business. "Confidential Business Information" shall mean any non-public information of a competitively sensitive or personal nature, other than Trade Secrets, acquired by the Executive, directly or indirectly, in connection with the Executive's employment (including his employment with the Company prior to the date of this Agreement), including (without limitation) oral and written information concerning the Company or its affiliates relating to financial position and results of operations (revenues, margins, assets, net income, etc.), annual and long-range business plans, marketing plans and methods, account invoices, oral or written customer information, and personnel information. Confidential Business Information also includes information recorded in manuals, memoranda, projections, minutes, plans, computer programs, and records, whether or not legended or otherwise identified by the Company and its affiliates as Confidential Business Information, as well as information which is the subject of meetings and discussions and not so recorded; provided, however, that Confidential Business Information shall not include information that is generally available to the public, other than as a result of disclosure, directly or indirectly, by the Executive, or was available to the Executive on a non-confidential basis prior to its disclosure to the Executive. "Continuation Period" shall have the meaning ascribed to it in Section 4(c)(iii). "Disability" shall mean the inability of the Executive to perform substantially all of his current duties as required hereunder for a continuous period of 90 days because of mental or physical condition, illness or injury. "Effective Date" shall mean the date set forth in the recitals. "Executive" shall have the meaning set forth in the recitals. 13 "Notice of Termination" shall mean a written notice of termination from the Company or the Executive which specifies an effective date of termination, indicates the specific termination provision in this Agreement relied upon, and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. "Plan" shall mean The InterCept Group, Inc. Amended and Restated 1996 Stock Option Plan, and any additional, successor or replacement stock option plan adopted by the Company. "Pro Rata Bonus" shall mean an amount equal to the Bonus Amount multiplied by a fraction the numerator of which is the number of days in the fiscal year through the Termination Date and the denominator of which is 365. "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement), whether by operation of law or otherwise. "Term" shall have the meaning set forth in Section 2 of this Agreement. "Termination Date" shall mean, in the case of the Executive's death, his date of death, and in all other cases, the date specified in the Notice of Termination. "Trade Secrets" shall mean information or data of or about the Company or any affiliated entity, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, products plans, or lists of actual or potential customers, clients, distributors, or licensees, that: (i) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. To the extent that the foregoing definition is inconsistent with a definition of "trade secret" mandated under applicable law, the latter definition shall govern for purposes of interpreting Executive's obligations under this Agreement. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its officers thereunto duly authorized, and the Executive has signed and sealed this Agreement, effective as of the date first above written. [End of page] 14 THE INTERCEPT GROUP, INC. By: /s/ John W. Collins ----------------------------------- Name: John W. Collins --------------------------------- Title:Chief Executive Officer --------------------------------- (CORPORATE SEAL) EXECUTIVE /s/ G. Lynn Boggs --------------------------------------- G. Lynn Boggs 15 EX-10.23 6 dex1023.txt AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 10.23 AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 21, 2001 =============================================================================== among THE INTERCEPT GROUP, INC., C-TEQ, INC., SBS DATA SERVICES, INC. DPSC ACQUISITION CORP., ICPT ACQUISITION I, LLC, INTERCEPT COMMUNICATIONS TECHNOLOGIES, INC., INTERCEPT SERVICES, LLC, INTERCEPT TX I, LLC, INTERCEPT OUTPUT SOLUTIONS, LP, AND INTERCEPT SUPPLY, LP as Borrowers, and FIRST UNION NATIONAL BANK, as Lender =============================================================================== TABLE OF CONTENTS Page ---- 1. AMOUNT AND TERMS OF CREDIT...............................................2 1.1 CREDIT FACILITY.....................................................2 --- --------------- 1.2 LETTERS OF CREDIT...................................................3 --- ----------------- 1.3 PREPAYMENTS.........................................................3 --- ----------- 1.4 USE OF PROCEEDS.....................................................4 --- --------------- 1.5 INTEREST............................................................4 --- -------- 1.6 [INTENTIONALLY RESERVED]............................................6 1.7 [INTENTIONALLY RESERVED]............................................6 1.8 CASH MANAGEMENT SYSTEMS.............................................6 --- ----------------------- 1.9 FEES................................................................6 --- ---- 1.10 RECEIPT OF PAYMENTS...............................................6 ---- ------------------- 1.11 APPLICATION AND ALLOCATION OF PAYMENTS............................6 ---- -------------------------------------- 1.12 LOAN ACCOUNT AND ACCOUNTING.......................................7 ---- --------------------------- 1.13 INDEMNITY.........................................................8 ---- --------- 1.14 ACCESS............................................................8 ---- ------ 1.15 TAXES.............................................................9 ---- ----- 1.16 CAPITAL ADEQUACY; INCREASED COSTS; ILLEGALITY.....................9 ---- --------------------------------------------- 1.17 SINGLE LOAN......................................................10 ---- ----------- 2. CONDITIONS PRECEDENT....................................................10 2.1 CONDITIONS TO THE INITIAL LOANS.....................................10 --- ------------------------------ 2.2 FURTHER CONDITIONS TO EACH LOAN.....................................11 --- ------------------------------ 3. REPRESENTATIONS AND WARRANTIES..........................................11 3.1 CORPORATE EXISTENCE; COMPLIANCE WITH LAW...........................11 --- ---------------------------------------- 3.2 EXECUTIVE OFFICES, COLLATERAL LOCATIONS, FEIN......................12 --- --------------------------------------------- 3.3 CORPORATE POWER, AUTHORIZATION, ENFORCEABLE OBLIGATIONS............12 --- ------------------------------------------------------- 3.4 FINANCIAL STATEMENTS...............................................12 --- -------------------- 3.5 MATERIAL ADVERSE EFFECT............................................13 --- ----------------------- 3.6 OWNERSHIP OF PROPERTY; LIENS.......................................13 --- ---------------------------- 3.7 LABOR MATTERS......................................................14 --- ------------- 3.8 VENTURES, SUBSIDIARIES AND AFFILIATES; OUTSTANDING --- -------------------------------------------------- STOCK AND INDEBTEDNESS...........................................14 ---------------------- 3.9 GOVERNMENT REGULATION..............................................14 --- --------------------- 3.10 MARGIN REGULATIONS...............................................14 ---- ------------------ 3.11 TAXES............................................................15 ---- ----- 3.12 ERISA............................................................15 ---- ----- 3.13 NO LITIGATION....................................................16 ---- ------------- 3.14 BROKERS..........................................................16 ---- ------- 3.15 INTELLECTUAL PROPERTY............................................16 ---- --------------------- 3.16 FULL DISCLOSURE..................................................17 ---- --------------- 3.17 ENVIRONMENTAL MATTERS............................................17 ---- --------------------- 3.19 DEPOSIT AND DISBURSEMENT ACCOUNTS................................18 ---- --------------------------------- 3.20 GOVERNMENT CONTRACTS.............................................18 ---- -------------------- 3.21 CUSTOMER AND TRADE RELATIONS.....................................18 ---- ---------------------------- 3.22 AGREEMENTS AND OTHER DOCUMENTS...................................18 ---- ------------------------------ 3.23 SOLVENCY.........................................................18 ---- -------- 3.24 [INTENTIONALLY RESERVED].........................................18 3.25 [INTENTIONALLY RESERVED].........................................18 3.26 [INTENTIONALLY RESERVED].........................................18 i 4. FINANCIAL STATEMENTS AND INFORMATION....................................18 4.1 REPORTS AND NOTICES................................................18 --- ------------------- 4.2 COMMUNICATION WITH ACCOUNTANTS.....................................18 --- ------------------------------ 5. AFFIRMATIVE COVENANTS...................................................19 5.1 MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS...................19 --- ------------------------------------------------ 5.2 PAYMENT OF CHARGES.................................................19 --- ------------------ 5.3 BOOKS AND RECORDS..................................................20 --- ----------------- 5.4 INSURANCE; DAMAGE TO OR DESTRUCTION OF COLLATERAL..................20 --- ------------------------------------------------- 5.5 COMPLIANCE WITH LAWS...............................................20 --- -------------------- 5.6 SUPPLEMENTAL DISCLOSURE............................................21 --- ----------------------- 5.7 INTELLECTUAL PROPERTY..............................................21 --- --------------------- 5.8 ENVIRONMENTAL MATTERS..............................................21 --- --------------------- 5.9 LANDLORDS'AGREEMENTS, MORTGAGEE AGREEMENTS, BAILEE --- -------------------------------------------------- LETTERS AND REAL ESTATE PURCHASES................................22 --------------------------------- 5.10 [INTENTIONALLY RESERVED].........................................22 5.11 FURTHER ASSURANCES...............................................22 ---- ------------------ 6. NEGATIVE COVENANTS......................................................23 6.1 MERGERS, SUBSIDIARIES, ETC.........................................23 --- -------------------------- 6.2 INVESTMENTS; LOANS AND ADVANCES....................................24 --- ------------------------------- 6.3 INDEBTEDNESS.......................................................24 --- ------------ 6.4 EMPLOYEE LOANS AND AFFILIATE TRANSACTIONS..........................25 --- ----------------------------------------- 6.5 CAPITAL STRUCTURE AND BUSINESS.....................................25 --- ------------------------------ 6.6 GUARANTEED INDEBTEDNESS............................................26 --- ----------------------- 6.7 LIENS..............................................................26 --- ----- 6.8 SALE OF STOCK AND ASSETS...........................................26 --- ------------------------ 6.9 ERISA..............................................................27 --- ----- 6.10 FINANCIAL COVENANTS..............................................27 ---- ------------------- 6.11 HAZARDOUS MATERIALS..............................................27 ---- ------------------ 6.12 SALE-LEASEBACKS..................................................27 ---- --------------- 6.13 CANCELLATION OF INDEBTEDNESS.....................................27 ---- ---------------------------- 6.14 RESTRICTED PAYMENTS..............................................27 ---- ------------------- 6.15 CHANGE OF CORPORATE NAME OR LOCATION; CHANGE OF FISCAL YEAR......27 ---- ----------------------------------------------------------- 6.16 NO IMPAIRMENT OF INTERCOMPANY TRANSFERS..........................28 ---- --------------------------------------- 6.17 NO SPECULATIVE TRANSACTIONS......................................28 ---- --------------------------- 6.18 LEASES; REAL ESTATE PURCHASES....................................28 ---- ----------------------------- 6.19 NEGATIVE PLEDGE..................................................28 ---- --------------- 7. TERM....................................................................28 7.1 TERMINATION........................................................28 --- ----------- 7.2 SURVIVAL OF OBLIGATIONS UPON TERMINATION --- ---------------------------------------- OF FINANCING ARRANGEMENTS.......................................28 ------------------------- 8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES..................................29 8.1 EVENTS OF DEFAULT..................................................29 --- ----------------- 8.2 REMEDIES...........................................................30 --- -------- 8.3 WAIVERS BY BORROWERS...............................................31 --- -------------------- 9. [INTENTIONALLY RESERVED]................................................31 10. SUCCESSORS AND ASSIGNS..................................................31 11. MISCELLANEOUS...........................................................31 11.1 COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT....................31 ---- --------------------------------------------- 11.2 AMENDMENTS AND WAIVERS...........................................32 ---- ---------------------- ii 11.3 FEES AND EXPENSES................................................32 ---- ----------------- 11.4 NO WAIVER........................................................33 ---- --------- 11.5 REMEDIES.........................................................33 ---- -------- 11.6 SEVERABILITY.....................................................33 ---- ------------ 11.7 CONFLICT OF TERMS................................................34 ---- ----------------- 11.8 CONFIDENTIALITY..................................................34 ---- --------------- 11.9 GOVERNING LAW....................................................34 ---- ------------- 11.10 NOTICES..........................................................35 ----- ------- 11.11 SECTION TITLES...................................................35 ----- -------------- 11.12 COUNTERPARTS.....................................................35 ----- ------------ 11.13 WAIVER OF JURY TRIAL.............................................35 ----- ------------------- 11.14 PRESS RELEASES AND RELATED MATTERS...............................36 ----- ---------------------------------- 11.15 REINSTATEMENT....................................................36 ----- ------------- 11.16 ADVICE OF COUNSEL................................................36 ----- ----------------- 11.17 NO STRICT CONSTRUCTION...........................................36 ----- ---------------------- 12. CROSS-GUARANTY..........................................................36 12.1 CROSS-GUARANTY...................................................36 ---- -------------- 12.2 WAIVERS BY BORROWERS.............................................37 ---- -------------------- 12.3 BENEFIT OF GUARANTY..............................................37 ---- ------------------- 12.4 SUBORDINATION OF SUBROGATION, ETC................................37 ---- --------------------------------- 12.5 ELECTION OF REMEDIES.............................................38 ---- -------------------- 12.6 LIMITATION.......................................................38 ---- ---------- 12.7 CONTRIBUTION WITH RESPECT TO GUARANTY OBLIGATIONS................38 ---- ------------------------------------------------- 12.8 LIABILITY CUMULATIVE.............................................39 ---- -------------------- iii INDEX OF APPENDICES ------------------- Annex A (Recitals) - Definitions Annex B (Section 1.2) - Letters of Credit ----------- Annex C (Section 1.8) - [Intentionally Reserved] Annex D (Section 2.1(a)) - Closing Checklist -------------- Annex E (Section 4.1(a)) - Financial Statements and -------------- Projections -- Reporting Annex F (Section 4.1(b)) - Collateral Reports -------------- Annex G (Section 6.10) - Financial Covenants ------------ Annex H (Section 9.9(a)) - [Intentionally Reserved] -------------- Annex I (Section 11.10) - Notice Addresses ------------- Exhibit 1.1(a)(i) - Form of Notice of Revolving Credit Advance Exhibit 1.1(a)(ii) - Form of Revolving Note Schedule 1.1 - Lender's Representatives Disclosure Schedule 3.1 - Type of Entity; State of Organization Disclosure Schedule 3.2 - Executive Offices, Collateral Locations, FEIN Disclosure Schedule 3.6 - Real Estate and Leases Disclosure Schedule 3.7 - Labor Matters Disclosure Schedule 3.8 - Ventures, Subsidiaries and Affiliates; Outstanding Stock Disclosure Schedule 3.11 - Tax Matters Disclosure Schedule 3.12 - ERISA Plans Disclosure Schedule 3.13 - Litigation Disclosure Schedule 3.15 - Intellectual Property Disclosure Schedule 3.17 - Hazardous Materials Disclosure Schedule 3.18 - Insurance Disclosure Schedule 3.19 - Deposit and Disbursement Accounts Disclosure Schedule 3.20 - Government Contracts Disclosure Schedule 5.1 - Trade Names Disclosure Schedule 6.3 - Indebtedness Disclosure Schedule 6.4(a) - Transactions with Affiliates Disclosure Schedule 6.7 - Existing Liens iv This AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement"), dated as of December 21, 2001, is made and entered into among THE INTERCEPT GROUP, INC., a Georgia corporation ("InterCept"), C-TEQ, INC., an Oklahoma --------- corporation ("CTEQ"), SBS DATA SERVICES, INC., an Alabama corporation ("SBS") ---- --- DPSC ACQUISITION CORP., a Georgia corporation ("DPSC"), ICPT ACQUISITION I, ---- LLC, a Georgia limited liability company ("ICPT"), INTERCEPT COMMUNICATIONS ---- TECHNOLOGIES, INC., a Georgia corporation ("ICT"), INTERCEPT SERVICES, LLC, a --- Georgia limited liability company ("ICPT Services"), INTERCEPT TX I, LLC, a ------------- Georgia limited liability company ("ICPT TX"), INTERCEPT OUTPUT SOLUTIONS, LP, ------- a Texas limited partnership ("ICPT Output"), and INTERCEPT SUPPLY, LP, a Texas ----------- limited partnership ("ICPT Supply") (InterCept, CTEQ, SBS, DPSC, ICPT, ICT, ----------- ICPT Services, ICPT TX, ICPT Output and ICPT Supply are sometimes collectively referred to herein as the "Borrowers" and individually as a "Borrower"), and --------- -------- FIRST UNION NATIONAL BANK, a national banking association ("Lender"). ------ RECITALS -------- WHEREAS, Borrowers and Lender entered into that certain Loan and Security Agreement, dated April 28, 1998 (as amended, the "Original Loan Agreement"), ----------------------- wherein Lender agreed to provide to Borrowers a senior secured revolving credit facility of up to Twenty Million Dollars ($20,000,000.00) in the aggregate (the "Original Facility"); and ----------------- WHEREAS, Borrowers have requested that Lender increase the Original Facility to an amount up to Fifty Million Dollars ($50,000,000.00) in the aggregate; and WHEREAS, Borrowers have requested that Lender increase the Original Facility for the purpose of providing (a) working capital financing for Borrowers, (b) funds for other general corporate purposes of Borrowers and (c) funds for other purposes permitted hereunder; and for these purposes, Lender is willing to increase the Original Facility, make certain loans and other extensions of credit to Borrowers up to such amount upon the terms and conditions set forth herein; and WHEREAS, Borrowers have agreed to secure all of their obligations under the Loan Documents by granting to Lender, a security interest in and lien upon all of their existing and after-acquired personal property; and WHEREAS, capitalized terms used in this Agreement shall have the meanings ascribed to them in Annex A and, for purposes of this Agreement and the other ------- Loan Documents, the rules of construction set forth in Annex A shall govern. ------- All Annexes, Disclosure Schedules, Exhibits and other attachments (collectively, "Appendices") hereto, or expressly identified to this Agreement, ---------- are incorporated herein by reference, and taken together with this Agreement, shall constitute but a single agreement. These Recitals shall be construed as part of the Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, and for other good and valuable consideration, the parties hereto agree as follows: 1. AMOUNT AND TERMS OF CREDIT 1.1 Credit Facility. ---------------- (a) Revolving Credit Facility. ------------------------- (i) Subject to the terms and conditions hereof, Lender agrees to make available to Borrowers from time to time until the Commitment Termination Date certain advances (each, a "Revolving Credit ---------------- Advance"). Until the Commitment Termination Date, Borrowers may borrow, repay - ------- and reborrow under this Section 1.1(a); provided, that the amount of any -------- ---- Revolving Credit Advance to be made at any time shall not exceed Borrowing Availability at such time. Borrowing Availability may be reduced by Reserves imposed by Lender in its reasonable credit judgment. Each Revolving Credit Advance shall be made either (a) by automatic advance in accordance with procedures established by Lender by Lender crediting the amount thereof to the regular checking account of Borrower maintained with the Lender or (b) on notice by Borrower Representative on behalf of the applicable Borrower to one of the representatives of Lender identified in Schedule 1.1 at the address ------------ specified therein. Any such notice must be given no later than noon (Atlanta time) on the Business Day of the proposed Revolving Credit Advance. Each such notice (a "Notice of Revolving Credit Advance") must be given in writing (by ---------------------------------- telecopy or overnight courier) substantially in the form of Exhibit 1.1(a)(i), ----------------- and shall include the information required in such Exhibit and such other information as may be required by Lender. (ii) Except as provided in Section 1.12, each Borrower ------------ shall execute and deliver to Lender a note to evidence the Revolving Loan. The note shall be in the principal amount of the Revolving Loan, dated the Closing Date and substantially in the form of Exhibit 1.1(a)(ii) (the "Revolving ------------------ --------- Note"). The Revolving Note shall represent the obligation of the applicable - ---- Borrower to pay the amount of the Revolving Loan or, if less, the aggregate unpaid principal amount of all Revolving Credit Advances to such Borrower together with interest thereon as prescribed in Section 1.5. The entire unpaid ----------- balance of the aggregate Revolving Loan and all other non-contingent Obligations shall be immediately due and payable in full in immediately available funds on the Commitment Termination Date. (iii) [Intentionally Reserved] (b) [Intentionally Reserved] (c) [Intentionally Reserved] (d) Reliance on Notices; Appointment of Borrower Representative. ----------------------------------------------------------- Lender shall be entitled to rely upon, and shall be fully protected in relying upon, any Notice of Revolving Credit Advance or similar notice believed by Lender to be genuine. Lender may assume that each Person executing and delivering any notice in accordance herewith was duly authorized, unless the responsible individual acting thereon for Lender has actual knowledge to the contrary. Each Borrower hereby designates InterCept as its representative and agent on its behalf for the purposes of issuing Notices of Revolving Credit Advances, giving instructions 2 with respect to the disbursement of the proceeds of the Loans, giving and receiving all other notices and consents hereunder or under any of the other Loan Documents and taking all other actions (including in respect of compliance with covenants) on behalf of any Borrower or Borrowers under the Loan Documents. Intercept in its capacity as Borrower Representative hereby accepts such appointment. Lender may regard any notice or other communication pursuant to any Loan Document from Borrower Representative as a notice or communication from all Borrowers, and may give any notice or communication required or permitted to be given to any Borrower or Borrowers hereunder to Borrower Representative on behalf of such Borrower or Borrowers. Each Borrower agrees that each notice, election, representation and warranty, covenant, agreement and undertaking made on its behalf by Borrower Representative shall be deemed for all purposes to have been made by such Borrower and shall be binding upon and enforceable against such Borrower to the same extent as if the same had been made directly by such Borrower. 1.2 Letters of Credit. Subject to and in accordance with the terms and ----------------- conditions contained herein and in Annex B, Borrower Representative, on behalf -------- of the applicable Borrower, shall have the right to request, and Revolving Lenders agree to incur, or purchase participations in, Letter of Credit Obligations in respect of each Borrower. 1.3 Prepayments. Voluntary Prepayments. Borrowers may at any time on at ----------- --------------------- least 10 days prior written notice by Borrower Representative to Lender terminate the Revolving Loan Commitment; provided that upon such termination, all Loans and other Obligations (including the payment of any breakage fees under swap agreements, if any) shall be immediately due and payable in full. Upon any such prepayment and termination of the Revolving Loan Commitment, each Borrower's right to request Revolving Credit Advances shall simultaneously be terminated. (b) Mandatory Prepayments. --------------------- (i) If at any time the aggregate outstanding balance of the Revolving Loan exceeds the Borrowing Availability, Borrowers shall immediately repay the Loans to the extent required to eliminate such excess. (ii) Immediately upon receipt by any Borrower of proceeds of any asset disposition (excluding proceeds of asset dispositions permitted by Section 6.8 (a)) or any sale of Stock of any Subsidiary of any --------------- Borrower, Borrowers shall prepay the Loans in an amount equal to all such proceeds, net of (A) commissions and other reasonable and customary transaction costs, fees and expenses properly attributable to such transaction and payable by Borrowers in connection therewith (in each case, paid to non-Affiliates), (B) transfer taxes, (C) amounts payable to holders of senior Liens (to the extent such Liens constitute Permitted Encumbrances hereunder), if any, and (D) an appropriate reserve for income taxes in accordance with GAAP in connection therewith. Any such prepayment shall be applied in accordance with Section ------- 1.3(c). - ------ (iii) If any Borrower issues Stock in a primary offering of its own shares for cash, no later than the first Business Day following the date of receipt of the proceeds thereof, the issuing Borrower shall prepay the Loans in an amount equal to the lesser of (A) all such proceeds, net of underwriting discounts and commissions and other reasonable costs 3 paid to non-Affiliates in connection therewith; or (B) the maximum amount payable under Section 1.3(b). Any such prepayment shall be applied in accordance with Section 1.3(b). -------------- (iv) [Intentionally Reserved] (c) Application of Certain Mandatory Prepayments. Any prepayments -------------------------------------------- made by any Borrower pursuant to Sections 1.3(a)(ii), (a)(iii), or (a)(iv) ---------------------------------------- above shall be applied as follows: first, to Fees and reimbursable expenses of Lender then due and payable pursuant to any of the Loan Documents; second, to interest then due and payable on Revolving Credit Advances made to that Borrower; third, to the principal balance of Revolving Credit Advances outstanding to that Borrower until the same has been paid in full; fourth, to interest then due and payable on the Revolving Credit Advances outstanding to each other Borrower, pro rata; and, last, the principal balance of the Revolving Credit Advances made to each other Borrower, pro rata, until the same has been paid in full. The Commitment shall not be permanently reduced by the amount of any such prepayments. (d) [Intentionally Reserved] (e) No Implied Consent. Nothing in this Section 1.3 shall be ------------------ ----------- construed to constitute Lender's consent to any transaction that is not permitted by other provisions of this Agreement or the other Loan Documents. 1.4 Use of Proceeds. Borrowers shall utilize the proceeds of the --------------- Revolving Loan solely for the financing of Borrowers' ordinary working capital and general corporate needs, including, without limitation, the funding of Permitted Acquisitions. 1.5 Interest. Borrowers shall pay interest to Lender in arrears on each -------- applicable Interest Payment Date, at a floating rate equal to the LIBOR Market Index Rate plus the Applicable Margin, based on the aggregate Revolving Credit ---- Advances outstanding from time to time. The Applicable Margin shall be adjusted (up or down) prospectively on a quarterly basis as determined by Borrowers' consolidated financial performance, commencing with the first day of the first calendar month that occurs more than 5 days after delivery of Borrowers' quarterly Financial Statements to Lender for the Fiscal Quarter ending September 30, 2001. Adjustments in Applicable Margin shall be determined by reference to the following grids: --------------------------------------------------------- If Ratio of Funded Debt to EBITDA is: Applicable Margin ------------------------------------ --------------------------------------------------------- ***.50 1.00% --------------------------------------------------------- ** .50, but***1.0 1.25% --------------------------------------------------------- ** 1.0, but***2.0 1.50% --------------------------------------------------------- ** 2.0, but***3.0 2.00% --------------------------------------------------------- All adjustments in the Applicable Margin after September 30, 2001 shall be implemented quarterly on a prospective basis, for each calendar month commencing at least 5 days after the date of delivery to Lender of the quarterly unaudited or annual audited (as applicable) Financial Statements evidencing the need for an adjustment. Concurrently with the delivery of those Financial Statements, Borrower Representative shall deliver to Lender a certificate, signed by its chief financial officer, setting forth in reasonable detail the basis for the continuance of, or any ** represents greater than *** represents less than or equal to 4 change in, the Applicable Margin. Failure to timely deliver such Financial Statements shall, in addition to any other remedy provided for in this Agreement, result in an increase in the Applicable Margin to the highest level set forth in the foregoing grid, until the first day of the first calendar month following the delivery of those Financial Statements demonstrating that such an increase is not required. If a Default or Event of Default has occurred and is continuing at the time any reduction in the Applicable Margin is to be implemented, that reduction shall be deferred until the first day of the first calendar month following the date on which such Default or Event of Default is waived or cured. (a) If any payment on any Loan becomes due and payable on a day other than a Business Day, the maturity thereof will be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. (b) All computations of Fees calculated on a per annum basis and interest shall be made by Lender on the basis of a 360-day year, in each case for the actual number of days occurring in the period for which such interest and Fees are payable. (c) So long as an Event of Default has occurred and is continuing under Section 8.1(a), (h) or (i) or so long as any other Default or Event of -------------------------- Default has occurred and is continuing and at the election of Lender confirmed by written notice from Lender to Borrower Representative, the interest rate applicable to the Loans shall be increased by two percentage points (2%) per annum above the rate of interest or the rate of such Fees otherwise applicable hereunder ("Default Rate"), and all outstanding Obligations shall bear interest ---------------- at the Default Rate applicable to such Obligations. Interest at the Default Rate shall accrue from the initial date of such Default or Event of Default until that Default or Event of Default is cured or waived and shall be payable upon demand. (d) Notwithstanding anything to the contrary set forth in this Section 1.5, if a court of competent jurisdiction determines in a final order - ----------- that the rate of interest payable hereunder exceeds the highest rate of interest permissible under law (the "Maximum Lawful Rate"), then so long as the Maximum ------------------- Lawful Rate would be so exceeded, the rate of interest payable hereunder shall be equal to the Maximum Lawful Rate; provided, however, that if at any time -------- ------- thereafter the rate of interest payable hereunder is less than the Maximum Lawful Rate, Borrowers shall continue to pay interest hereunder at the Maximum Lawful Rate until such time as the total interest received by Lender is equal to the total interest that would have been received had the interest rate payable hereunder been (but for the operation of this paragraph) the interest rate payable since the Closing Date as otherwise provided in this Agreement. Thereafter, interest hereunder shall be paid at the rate of interest and in the manner provided in Sections 1.5(a) through (e), unless and until the rate of --------------------------- interest again exceeds the Maximum Lawful Rate, and at that time this paragraph shall again apply. In no event shall the total interest received by Lender pursuant to the terms hereof exceed the amount that Lender could lawfully have received had the interest due hereunder been calculated for the full term hereof at the Maximum Lawful Rate. If the Maximum Lawful Rate is calculated pursuant to this paragraph, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in 5 the year in which such calculation is made. If, notwithstanding the provisions of this Section 1.5(f), a court of competent jurisdiction shall finally -------------- determine that Lender has received interest hereunder in excess of the Maximum Lawful Rate, Lender shall, to the extent permitted by applicable law, promptly apply such excess in the order specified in Section 1.11 and thereafter shall ------------ refund any excess to Borrowers or as a court of competent jurisdiction may otherwise order. 1.6 [Intentionally Reserved] 1.7 [Intentionally Reserved] 1.8 Cash Management Systems. Borrowers will establish, and will ----------------------- maintain until the Termination Date, Borrower's primary bank accounts with Lender. 1.9 Fees. ---- (a) On the Closing Date, Borrowers shall pay to Lender a closing fee in an amount equal to $130,000 (the "Closing Fee"), which Closing Fee shall ----------- be deemed fully earned and non-refundable on the Closing Date. (b) As additional compensation for Lender, Borrowers shall pay to Lender in arrears, on the first Business Day of each calendar quarter prior to the Commitment Termination Date and on the Commitment Termination Date, a Fee for Borrowers' non-use of available funds in an amount equal to one-quarter of one percent (0.25%) per annum, calculated on the basis of a 360 day year for actual days elapsed (or one-sixteenth of one percent per quarter (0.0625%)) multiplied by the difference between (x) the Maximum Amount (as it may be reduced from time to time) and (y) the average for the period of the daily closing balances of the aggregate Revolving Loan outstanding during the period for which such Fee is due. (c) [Intentionally Reserved] (d) [Intentionally Reserved] 1.10 Receipt of Payments. Borrowers shall make each payment under this ------------------- Agreement not later than 2:00 p.m. (Atlanta time) on the day when due in immediately available funds in Dollars. Payments received after 2:00 p.m. Atlanta time on any Business Day or on a day that is not a Business Day shall be deemed to have been received on the following Business Day. 1.11 Application and Allocation of Payments. -------------------------------------- (a) So long as no Default or Event of Default has occurred and is continuing, (i) payments consisting of proceeds of Accounts received in the ordinary course of business shall be applied to the Revolving Loan; (ii) payments matching specific scheduled payments then due shall be applied to those scheduled payments; (iii) voluntary prepayments shall be applied as determined by Borrower Representative, subject to the provisions of Section 1.3(a); and (iv) mandatory prepayments shall be applied as set forth -------------- in Sections 1.3(b) and 1.3(c). As to any other payment, and as to all payments -------------------------- made when a Default or Event of Default has occurred and is continuing or following the Commitment Termination Date, each Borrower hereby irrevocably 6 waives the right to direct the application of any and all payments received from or on behalf of such Borrower, and each Borrower hereby irrevocably agrees that Lender shall have the continuing exclusive right to apply any and all such payments against the Obligations of Borrowers as Lender may deem advisable notwithstanding any previous entry by Lender in the Loan Account or any other books and records. In the absence of a specific determination by Lender with respect thereto, payments shall be applied to amounts then due and payable in the following order: (1) to Fees and Lender's expenses reimbursable hereunder; (2) to interest on the Revolving Loan; (3) to principal payments on the Revolving Loan; and (4) to all other Obligations, including expenses of Lender to the extent reimbursable under Section 11.3. ------------ (b) Lender is authorized to, and at its sole election may, charge to the Revolving Loan balance on behalf of each Borrower and cause to be paid all Fees, expenses, Charges, costs (including insurance premiums in accordance with Section 5.4(a)) and interest and principal, other than principal of the --------------- Revolving Loan, owing by Borrowers under this Agreement or any of the other Loan Documents if and to the extent Borrowers fail to pay promptly any such amounts as and when due, even if the amount of such charges would exceed Borrowing Availability at such time. At Lender's option and to the extent permitted by law, any charges so made shall constitute part of the Revolving Loan hereunder. 1.12 Loan Account and Accounting. Lender shall maintain a loan account --------------------------- (the "Loan Account") on its books to record: all Advances, all payments made by ------------- Borrowers, and all other debits and credits as provided in this Agreement with respect to the Loans or any other Obligations. All entries in the Loan Account shall be made in accordance with Lender's customary accounting practices as in effect from time to time. The balance in the Loan Account, as recorded on Lender's most recent printout or other written statement, shall, absent manifest error, be presumptive evidence of the amounts due and owing to Lender by each Borrower; provided that any failure to so record or any error in so -------- recording shall not limit or otherwise affect any Borrower's duty to pay the Obligations. Lender shall render to Borrower Representative a monthly accounting of transactions with respect to the Loans setting forth the balance of the Loan Account as to each Borrower for the immediately preceding month. Unless Borrower Representative notifies Lender in writing of any objection to any such accounting (specifically describing the basis for such objection), within 30 days after the date thereof, each and every such accounting shall (absent manifest error) be deemed final, binding and conclusive on Borrowers in all respects as to all matters reflected therein. Only those items expressly objected to in such notice shall be deemed to be disputed by Borrowers. Notwithstanding any provision herein contained to the contrary, Lender may elect (which election may be revoked) to dispense with the issuance of a Note to Lender and may rely on the Loan Account as evidence of the amount of Obligations from time to time owing to it. 7 1.13 Indemnity. --------- (a) Each Borrower shall jointly and severally indemnify and hold harmless Lender and its Affiliates, and each such Person's respective officers, directors, employees, attorneys, agents and representatives (each, an "Indemnified Person"), from and against any and all suits, actions, ------------------ proceedings, claims, damages, losses, liabilities and expenses (including reasonable attorneys'fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) that may be instituted or asserted against or incurred by any such Indemnified Person as the result of credit having been extended, suspended or terminated under this Agreement and the other Loan Documents and the administration of such credit, and in connection with or arising out of the transactions contemplated hereunder and thereunder and any actions or failures to act in connection therewith, including any and all Environmental Liabilities and legal costs and expenses arising out of or incurred in connection with disputes between or among any parties to any of the Loan Documents (collectively, "Indemnified Liabilities"); ----------------------- provided, that no Borrower shall be liable for any indemnification to an - -------- Indemnified Person to the extent that any such suit, action, proceeding, claim, damage, loss, liability or expense results from that Indemnified Person's gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY LOAN DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER ANY LOAN DOCUMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER. (b) [Intentionally Reserved] 1.14 Access. Each Borrower shall, during normal business hours, from ------ time to time upon one Business Day 's prior notice as frequently as Lender determines to be appropriate: (a) provide Lender and any of its officers, employees and agents access to its properties, facilities, advisors and employees (including officers) of each Borrower and to the Collateral, (b) permit Lender, and any of its officers, employees and agents, to inspect, audit and make extracts from any Borrower's books and records, and (c) permit Lender, and its officers, employees and agents, to inspect, review, evaluate and make test verifications and counts of the Accounts, Inventory and other Collateral of any Borrower. If a Default or Event of Default has occurred and is continuing or if access is necessary to preserve or protect the Collateral as reasonably determined by Lender, each such Borrower shall provide such access to Lender at all times and without advance notice. Furthermore, so long as any Event of Default has occurred and is continuing, Borrowers shall provide Lender with access to their suppliers and customers. Each Borrower shall make available to Lender and its counsel, as quickly as is possible under the circumstances, originals or copies of all books and records that Lender may reasonably request. Each Borrower shall deliver any document or instrument necessary for Lender, as it may from time to time reasonably request, to obtain records from any service bureau or other Person that maintains records for such Borrower, and shall maintain duplicate records or supporting documentation on media, including computer tapes and discs owned by such Borrower. 8 1.15 Taxes. ----- (a) Any and all payments by each Borrower hereunder (including any payments made pursuant to Section 12) or under the Note shall be made, in ---------- accordance with this Section 1.15, free and clear of and without deduction for ------------ any and all present or future Taxes. If any Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder (including any sum payable pursuant to Section 12) or under the Note, (i) the sum payable ---------- shall be increased as much as shall be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 1.15) Lender receives an amount equal to the sum it would ------------ have received had no such deductions been made, (ii) such Borrower shall make such deductions, and (iii) such Borrower shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. Within 30 days after the date of any payment of Taxes, Borrower Representative shall furnish to Lender the original or a certified copy of a receipt evidencing payment thereof. Lender shall not be obligated to return or refund any amounts received pursuant to this Section. (b) Each Borrower that is a signatory hereto shall jointly and severally indemnify and, within 10 days of demand therefor, pay Lender for the full amount of Taxes (including any Taxes imposed by any jurisdiction on amounts payable under this Section 1.15) paid by Lender and any liability ------------- (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. (c) [Intentionally Reserved] 1.16 Capital Adequacy; Increased Costs; Illegality. --------------------------------------------- (a) If Lender shall have determined that any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by Lender with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law), in each case, adopted after the Closing Date, from any central bank or other Governmental Authority increases or would have the effect of increasing the amount of capital, reserves or other funds required to be maintained by Lender and thereby reducing the rate of return on Lender's capital as a consequence of its obligations hereunder, then Borrowers shall from time to time upon demand by Lender pay to Lender additional amounts sufficient to compensate Lender for such reduction. A certificate as to the amount of that reduction and showing the basis of the computation thereof submitted by Lender to Borrower Representative shall, absent manifest error, be final, conclusive and binding for all purposes. (b) If, due to either (i) the introduction of or any change in any law or regulation (or any change in the interpretation thereof) or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), in each case adopted after the Closing Date, there shall be any increase in the cost to Lender of agreeing to make or making, funding or maintaining any Loan, then Borrowers shall from time to time, upon demand by Lender, pay to Lender additional amounts sufficient to compensate Lender for such increased cost. A certificate as to the amount of such increased cost, 9 submitted to Borrower Representative by Lender, shall be conclusive and binding on Borrowers for all purposes, absent manifest error. Lender agrees that, as promptly as practicable after it becomes aware of any circumstances referred to above which would result in any such increased cost, Lender shall, to the extent not inconsistent with Lender's internal policies of general application, use reasonable commercial efforts to minimize costs and expenses incurred by it and payable to it by Borrowers pursuant to this Section 1.16(b). --------------- (c) [Intentionally Reserved] (d) [Intentionally Reserved] 1.17 Single Loan. All Loans to each Borrower and all of the other ----------- Obligations of each Borrower arising under this Agreement and the other Loan Documents shall constitute one general obligation of that Borrower secured, until the Termination Date, by all of the Collateral. 2. CONDITIONS PRECEDENT 2.1 Conditions to the Initial Loans. Lender shall not be obligated to ------------------------------- make any Loan on the Closing Date, or to take, fulfill, or perform any other action hereunder, until the following conditions have been satisfied or provided for in a manner satisfactory to Lender, or waived in writing by Lender: (a) Credit Agreement; Loan Documents. This Agreement or -------------------------------- counterparts hereof shall have been duly executed by, and delivered to, Borrowers and Lender; and Lender shall have received such documents, instruments, agreements and legal opinions as Lender shall reasonably request in connection with the transactions contemplated by this Agreement and the other Loan Documents, including all those listed in the Closing Checklist attached hereto as Annex D, each in form and substance reasonably satisfactory ------- to Lender. (b) [Intentionally Reserved] (c) Approvals. Lender shall have received (i) satisfactory --------- evidence that the Borrowers have obtained all required consents and approvals of all Persons including all requisite Governmental Authorities, to the execution, delivery and performance of this Agreement and the other Loan Documents or (ii) an officer's certificate of Intercept in form and substance reasonably satisfactory to Lender affirming that no such consents or approvals are required. (d) [Intentionally Reserved] (e) Payment of Fees. Borrowers shall have paid the Fees required --------------- to be paid on the Closing Date in the respective amounts specified in Section ------- 1.9, and shall have reimbursed Lender for all fees, costs and expenses of - --- closing presented as of the Closing Date. (f) Capital Structure: Other Indebtedness. The capital structure ------------------------------------- of each Borrower and the terms and conditions of all Indebtedness of each Borrower shall be acceptable to Lender in its sole discretion. 10 (g) Due Diligence. Lender shall have completed its business and ------------- legal due diligence, including a roll forward of its previous Collateral audit, with results reasonably satisfactory to Lender. (h) [Intentionally Reserved] 2.2 Further Conditions to Each Loan. Except as otherwise expressly ------------------------------- provided herein, Lender shall not be obligated to fund any Advance, if, as of the date thereof: (a) any representation or warranty by any Borrower contained herein or in any other Loan Document is untrue or incorrect as of such date (except (i) to the extent that such representation or warranty expressly relates to an earlier date and (ii) for changes therein expressly permitted or expressly contemplated by this Agreement) and Lender has determined not to make such Advance as a result of the fact that such warranty or representation is untrue or incorrect; (b) any event or circumstance having a Material Adverse Effect has occurred since the date hereof as determined by Lender or Lender has determined not to make such Advance as a result of the fact that such event or circumstance has occurred; (c) any Default or Event of Default has occurred and is continuing or would result after giving effect to any Advance, and Lender shall have determined not to make any Advance as a result of that Default or Event of Default; or (d) after giving effect to any Advance, the outstanding principal amount of the aggregate Revolving Loan would exceed the Maximum Amount. The request and acceptance by any Borrower of the proceeds of any Advance shall be deemed to constitute, as of the date thereof, (i) a representation and warranty by Borrowers that the conditions in this Section 2.2 have been ----------- satisfied and (ii) a reaffirmation by Borrowers of the cross-guaranty provisions set forth in Section 12 and of the granting and continuance of ---------- Lender's Liens pursuant to the Collateral Documents. 3. REPRESENTATIONS AND WARRANTIES To induce Lender to make the Loans, the Borrowers executing this Agreement, jointly and severally, make the following representations and warranties to Lender with respect to all Borrowers, each and all of which shall survive the execution and delivery of this Agreement. 3.1 Corporate Existence; Compliance with Law. Each Borrower (a) is a ---------------------------------------- corporation, limited liability company or limited partnership duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation or organization set forth in Disclosure Schedule ------------------- (3.1); (b) is duly qualified to conduct business and is in good standing in - ----- each other jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not result in exposure to losses, damages or liabilities in excess of $500,000; (c) has the requisite power and authority and the legal right to own, pledge, mortgage or otherwise encumber and operate its 11 properties, to lease the property it operates under lease and to conduct its business as now, heretofore and proposed to be conducted; (d) subject to specific representations regarding Environmental Laws, has all material licenses, permits, consents or approvals from or by, and has made all material filings with, and has given all material notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct; (e) is in compliance with its articles of incorporation, charter and bylaws or partnership or operating agreement, as applicable; and (f) subject to specific representations set forth herein regarding ERISA, Environmental Laws, tax and other laws, is in compliance with all applicable provisions of law, except where the failure to comply, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. The exact name, as of the Closing Date, of each Borrower, as each such name is set forth in official filings in the respective jurisdiction of their incorporation or organization is set forth on Disclosure Schedule (3.1). ------------------------- 3.2 Executive Offices, Collateral Locations, FEIN. As of the Closing --------------------------------------------- Date, the current location of each Borrower's chief executive office and the warehouses and premises at which any Collateral is located are set forth in Disclosure Schedule (3.2), and none of such locations has changed within the 12 - ------------------------- months preceding the Closing Date (provided that certain Borrowers or their assets have been acquired by InterCept or another Borrower within such period). In addition, Disclosure Schedule (3.2) lists the federal employer ------------------------- identification number and organizational identification number, if any, issued by the state of organization of each Borrower. 3.3 Corporate Power, Authorization, Enforceable Obligations. The ------------------------------------------------------- execution, delivery and performance by each Borrower of the Loan Documents to which it is a party and the creation of all Liens provided for therein: (a) are within such Person's power; (b) have been duly authorized by all necessary corporate, limited liability company or limited partnership action; (c) do not contravene any provision of such Person's charter, articles of incorporation, bylaws or partnership or operating agreement as applicable; (d) do not violate any law or regulation, or any order or decree of any court or Governmental Authority; (e) do not conflict with or result in the breach or termination of, constitute a default under or accelerate or permit the acceleration of any performance required by, any indenture, mortgage, deed of trust, lease, agreement or other instrument to which such Person is a party or by which such Person or any of its property is bound; (f) do not result in the creation or imposition of any Lien upon any of the property of such Person other than those in favor of Lender, pursuant to the Loan Documents; and (g) do not require the consent or approval of any Governmental Authority or any other Person, except those referred to in Section 2.1(c), all of which will have been duly obtained, ------------- made or complied with prior to the Closing Date. Each of the Loan Documents shall be duly executed and delivered by each Borrower that is a party thereto and each such Loan Document shall constitute a legal, valid and binding obligation of such Borrower enforceable against it in accordance with its terms. 3.4 Financial Statements. All Financial Statements concerning Borrowers -------------------- and their respective Subsidiaries that are referred to below have been prepared in accordance with GAAP consistently applied throughout the periods covered (except as disclosed therein and except, with respect to unaudited Financial Statements, for the absence of footnotes and normal year-end audit adjustments) and present fairly in all material respects the financial position of the Persons 12 covered thereby as at the dates thereof and the results of their operations and cash flows for the periods then ended. (a) The following Financial Statements have been delivered on the date hereof: (i) The audited consolidated and consolidating balance sheets at December 31, 2000 and the related statements of income and cash flows of Borrowers and their Subsidiaries for the Fiscal Years then ended, certified by Arthur Anderson, LLP. (ii) The unaudited balance sheet(s) at September 30, 2001 and the related statement(s) of income and cash flows of Borrowers and their Subsidiaries for the three (3) Fiscal Quarters then ended. 3.5 Material Adverse Effect. Between December 31, 2000 and the Closing ----------------------- Date: (a) no Borrower has incurred any obligations, contingent or noncontingent liabilities, liabilities for Charges, long-term leases or unusual forward or long-term commitments that, alone or in the aggregate, could reasonably be expected to have a Material Adverse Effect, (b) no contract, lease or other agreement or instrument has been entered into by any Borrower or has become binding upon any Borrower's assets and no law or regulation applicable to any Borrower has been adopted that has had or could reasonably be expected to have a Material Adverse Effect, and (c) no Borrower is in default and to the best of Borrowers'knowledge no third party is in default under any material contract, lease or other agreement or instrument, that alone or in the aggregate could reasonably be expected to have a Material Adverse Effect. Between December 31, 2000 and the Closing Date no event has occurred, that alone or together with other events, could reasonably be expected to have a Material Adverse Effect. 3.6 Ownership of Property; Liens. As of the Closing Date, the real ---------------------------- estate ("Real Estate") listed in Disclosure Schedule (3.6) constitutes all of ----------- ------------------------- the real property owned, leased, subleased, or used by any Borrower. Each Borrower owns good and marketable fee simple title to all of its owned Real Estate, and valid and marketable leasehold interests in all of its leased Real Estate, all as described on Disclosure Schedule (3.6). Disclosure Schedule ------------------------- ------------------- (3.6) further describes any Real Estate with respect to which any Borrower is a - ----- lessor, sublessor or assignor as of the Closing Date. Each Borrower also has good and marketable title to, or valid leasehold interests in, all of its personal property and assets. As of the Closing Date, none of the properties and assets of any Borrower are subject to any Liens other than Permitted Encumbrances, and there are no facts, circumstances or conditions known to any Borrower that may result in any Liens (including Liens arising under Environmental Laws) other than Permitted Encumbrances. Disclosure Schedule ------------------- (3.6) also describes any purchase options, rights of first refusal or other - ----- similar contractual rights executed by any Borrower pertaining to any Real Estate. As of the Closing Date, no portion of any Borrower's Real Estate has suffered any material damage by fire or other casualty loss that has not heretofore been repaired and restored in all material respects to its original condition or otherwise remedied. As of the Closing Date, all material permits required to have been issued or appropriate to enable the Real Estate to be lawfully occupied and used for all of the purposes for which it is currently occupied and used have been lawfully issued and are in full force and effect. 13 3.7 Labor Matters. As of the Closing Date (a) no strikes or other ------------- material labor disputes against any Borrower are pending or, to any Borrower's knowledge, threatened; (b) hours worked by and payment made to employees of each Borrower comply with the Fair Labor Standards Act and each other federal, state, local or foreign law applicable to such matters; (c) all payments due from any Borrower for employee health and welfare insurance have been paid or accrued as a liability on the books of such Borrower; (d) (intentionally reserved); (e) there is no organizing activity involving any Borrower pending or, to any Borrower's knowledge, threatened by any labor union or group of employees; (f) there are no representation proceedings pending or, to any Borrower's knowledge, threatened with the National Labor Relations Board, and no labor organization or group of employees of any Borrower has made a pending demand for recognition; and (g) except as set forth in Disclosure Schedule ------------------- (3.7), there are no material complaints or charges against any Borrower pending - ----- or, to the knowledge of any Borrower, threatened to be filed with any Governmental Authority or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment by any Borrower of any individual. 3.8 Ventures, Subsidiaries and Affiliates; Outstanding Stock and ------------------------------------------------------------ Indebtedness. Except as set forth in Disclosure Schedule (3.8), as of the - ------------ ------------------------- Closing Date, no Borrower has any Subsidiaries that are not Borrowers under this Agreement, and no Borrower is engaged in any joint venture or partnership with any other Person. All of the issued and outstanding Stock of each Borrower (other than InterCept, a majority of whose stock is publicly held) is owned either by InterCept or by another Borrower all of whose issued and outstanding Stock is owned directly or indirectly by InterCept. Except as set forth in Disclosure Schedule (3.8), there are no outstanding rights to purchase, - ------------------------- options, warrants or similar rights or agreements pursuant to which any Borrower may be required to issue, sell, repurchase or redeem any of its Stock or other equity securities or any Stock or other equity securities of its Subsidiaries. All outstanding Indebtedness and Guaranteed Indebtedness of each Borrower as of the Closing Date (except for the Obligations) is described in Section 6.3 (including Disclosure Schedule (6.3)). - ----------- -------------------------- 3.9 Government Regulation. No Borrower is an "investment company" or an --------------------- "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940. No Borrower is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, or any other federal or state statute that restricts or limits its ability to incur Indebtedness or to perform its obligations hereunder. The making of the Loans by Lender to Borrowers, will not violate any provision of any such statute or any rule, regulation or order issued by the Securities and Exchange Commission. 3.10 Margin Regulations. No Borrower is engaged, nor will it engage, ------------------ principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" as such terms are defined in Regulation U of the Federal Reserve Board as now and from time to time hereafter in effect (such securities being referred to herein as "Margin Stock"). No Borrower owns any Margin Stock, and none of the proceeds of ------------ the Loans or other extensions of credit under this Agreement will be used, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock, for the purpose of reducing or retiring any Indebtedness that was originally incurred to purchase or carry any Margin Stock or 14 for any other purpose that might cause any of the Loans or other extensions of credit under this Agreement to be considered a "purpose credit" within the meaning of Regulations T, U or X of the Federal Reserve Board. No Borrower will take or permit to be taken any action that might cause any Loan Document to violate any regulation of the Federal Reserve Board. 3.11 Taxes. All tax returns, reports and statements, including ----- information returns, required by any Governmental Authority to be filed by any Borrower have been filed with the appropriate Governmental Authority and all Charges have been paid prior to the date on which any fine, penalty, interest or late charge may be added thereto for nonpayment thereof (or any such fine, penalty, interest, late charge or loss has been paid), excluding Charges or other amounts being contested in accordance with Section 5.2(b). Proper and -------------- accurate amounts have been withheld by each Borrower from its respective employees for all periods in full and complete compliance with all applicable federal, state, local and foreign laws and such withholdings have been timely paid to the respective Governmental Authorities. Disclosure Schedule (3.11) -------------------------- sets forth as of the Closing Date those taxable years for which any Borrower's tax returns are currently being audited by the IRS or any other applicable Governmental Authority, and any assessments or threatened assessments in connection with such audit, or otherwise currently outstanding. Except as described in Disclosure Schedule (3.11), no Borrower has executed or filed with -------------------------- the IRS or any other Governmental Authority any agreement or other document extending, or having the effect of extending, the period for assessment or collection of any Charges. None of the Borrowers and their respective predecessors are liable for any Charges: (a) under any agreement (including any tax sharing agreements) or (b) to each Borrower's knowledge, as a transferee. As of the Closing Date, no Borrower has agreed or been requested to make any adjustment under IRC Section 481(a), by reason of a change in accounting method or otherwise, which would have a Material Adverse Effect. 3.12 ERISA. ------ (a) Disclosure Schedule (3.12) lists (i) all ERISA Affiliates and -------------------------- (ii) all Plans and separately identifies all Pension Plans, including Title IV Plans, Multiemployer Plans, ESOPs and Welfare Plans, including all Retiree Welfare Plans. Copies of all such listed Plans requested by Lender, together with a copy of the latest IRS/DOL 5500-series form for each such Plan, have been delivered to Lender. Except with respect to Multiemployer Plans, each Qualified Plan has been determined by the IRS to qualify under Section 401 of the IRC, the trusts created thereunder have been determined to be exempt from tax under the provisions of Section 501 of the IRC, and nothing has occurred that would cause the loss of such qualification or tax-exempt status. Each Plan is in compliance with the applicable provisions of ERISA and the IRC, including the timely filing of all reports required under the IRC or ERISA, including the statement required by 29 CFR Section 2520.104-23. Neither any Borrower nor ERISA Affiliate has failed to make any contribution or pay any amount due as required by either Section 412 of the IRC or Section 302 of ERISA or the terms of any such Plan. Neither any Borrower nor ERISA Affiliate has engaged in a "prohibited transaction," as defined in Section 406 of ERISA and Section 4975 of the IRC, in connection with any Plan, that would subject any Borrower to a material tax on prohibited transactions imposed by Section 502(i) of ERISA or Section 4975 of the IRC. 15 (b) Except as set forth in Disclosure Schedule (3.12): (i) no -------------------------- Title IV Plan has any Unfunded Pension Liability; (ii) no ERISA Event or event described in Section 4062(e) of ERISA with respect to any Title IV Plan has occurred or is reasonably expected to occur; (iii) there are no pending, or to the knowledge of any Borrower, threatened claims (other than claims for benefits in the normal course), sanctions, actions or lawsuits, asserted or instituted against any Plan or any Person as fiduciary or sponsor of any Plan; (iv) no Borrower or ERISA Affiliate has incurred or reasonably expects to incur any liability as a result of a complete or partial withdrawal from a Multiemployer Plan; (v) within the last five years no Title IV Plan of any Borrower or ERISA Affiliate has been terminated, whether or not in a "standard termination" as that term is used in Section 4041(b)(1) of ERISA, nor has any Title IV Plan of any Borrower or any ERISA Affiliate (determined at any time within the last five years) with Unfunded Pension Liabilities been transferred outside of the "controlled group" (within the meaning of Section 4001(a)(14) of ERISA) of any Borrower or ERISA Affiliate (determined at such time); (vi) except in the case of any ESOP, Stock of all Borrowers and their ERISA Affiliates makes up, in the aggregate, no more than 10% of fair market value of the assets of any Plan measured on the basis of fair market value as of the latest valuation date of any Plan; and (vii) no liability under any Title IV Plan has been satisfied with the purchase of a contract from an insurance company that is not rated AAA by the Standard & Poor's Corporation or an equivalent rating by another nationally recognized rating agency. 3.13 No Litigation. No action, claim, lawsuit, demand, investigation or ------------- proceeding is now pending or, to the knowledge of any Borrower, overtly threatened against any Borrower by a written communication to such Borrower, before any Governmental Authority or before any arbitrator or panel of arbitrators (collectively, "Litigation"), (a) that challenges any Borrower's right or power to enter into or perform any of its obligations under the Loan Documents to which it is a party, or the validity or enforceability of any Loan Document or any action taken thereunder, or (b) that has a reasonable risk of being determined adversely to any Borrower and that if so determined, could be reasonably be expected to have a Material Adverse Effect. Except as set forth on Disclosure Schedule (3.13), as of the Closing Date there is no Litigation pending or, to any Borrower's knowledge, overtly threatened by written communication to a Borrower, that seeks damages in excess of $100,000 or injunctive relief against, or alleges criminal misconduct of, any Borrower. 3.14 Brokers. No broker or finder brought about the obtaining, making or ------- closing of the Loans, and no Borrower or Affiliate thereof has any obligation to any Person in respect of any finder's or brokerage fees in connection therewith. 3.15 Intellectual Property. As of the Closing Date, each Borrower owns --------------------- or has rights to use all Intellectual Property necessary to continue to conduct its business as now or heretofore conducted by it or proposed to be conducted by it, and each Patent, Trademark, Copyright and License is listed, together with application or registration numbers, as and if applicable, in Disclosure Schedule (3.15). Each Borrower conducts its business and affairs without infringement of or interference with any Intellectual Property of any other Person in any material respect. Except as set forth in Disclosure Schedule (3.15), no Borrower is aware of any infringement claim by any other Person with respect to any Intellectual Property. 16 3.16 Full Disclosure. No information contained in this Agreement, any of --------------- the other Loan Documents, any Financial Statements or Collateral Reports or other written reports from time to time delivered hereunder or any written statement furnished by or on behalf of any Borrower to Lender pursuant to the terms of this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. The Liens granted to Lender pursuant to the Collateral Documents will at all times be fully perfected first priority Liens in and to the Collateral described therein, subject, as to priority, only to Permitted Encumbrances. 3.17 Environmental Matters. --------------------- (a) Except as set forth in Disclosure Schedule (3.17), as of the -------------------------- Closing Date: (i) the Real Estate is free of contamination from any Hazardous Material except for such contamination that would not adversely impact the value or marketability of such Real Estate and that would not result in Environmental Liabilities that could reasonably be expected to exceed $500,000.00; (ii) no Borrower has caused or suffered to occur any Release of Hazardous Materials on, at, in, under, above, to, from or about any of its Real Estate; (iii) the Borrowers are and have been in compliance with all Environmental Laws, except for such noncompliance that would not result in Environmental Liabilities which could reasonably be expected to exceed $500,000.00; (iv) the Borrowers have obtained, and are in compliance with, all Environmental Permits required by Environmental Laws for the operations of their respective businesses as presently conducted or as proposed to be conducted, except where the failure to so obtain or comply with such Environmental Permits would not result in Environmental Liabilities that could reasonably be expected to exceed $500,000.00, and all such Environmental Permits are valid, uncontested and in good standing; (v) no Borrower is involved in operations or knows of any facts, circumstances or conditions, including any Releases of Hazardous Materials, that are likely to result in any Environmental Liabilities of such Borrower which could reasonably be expected to exceed $500,000.00, and no Borrower has permitted any current or former tenant or occupant of the Real Estate to engage in any such operations; (vi) there is no Litigation arising under or related to any Environmental Laws, Environmental Permits or Hazardous Material that seeks damages, penalties, fines, costs or expenses in excess of $25,000 or injunctive relief against, or that alleges criminal misconduct by, any Borrower; (vii) no notice has been received by any Borrower identifying it as a "potentially responsible party" or requesting information under CERCLA or analogous state statutes, and to the knowledge of the Borrowers, there are no facts, circumstances or conditions that may result in any Borrower being identified as a "potentially responsible party" under CERCLA or analogous state statutes; and (viii) the Borrowers have provided to Lender copies of all existing environmental reports, reviews and audits and all written information pertaining to actual or potential Environmental Liabilities, in each case relating to any Borrower. (b) Each Borrower hereby acknowledges and agrees that Lender (i) is not now, and has not ever been, in control of any of the Real Estate or any Borrower's affairs, and (ii) does not have the capacity through the provisions of the Loan Documents or otherwise to influence any Borrower's conduct with respect to the ownership, operation or management of any of its Real Estate or compliance with Environmental Laws or Environmental Permits. 17 3.19 Deposit and Disbursement Accounts. Disclosure Schedule (3.18) lists --------------------------------- all banks and other financial institutions at which any Borrower maintains deposit or other accounts as of the Closing Date, including any Disbursement Accounts, and such Schedule correctly identifies the name, address and telephone number of each depository and the complete account number therefor. 3.20 Government Contracts. Except as set forth in Disclosure Schedule -------------------- (3.20), as of the Closing Date, no Borrower is a party to any contract or agreement with any Governmental Authority and no Borrower's Accounts are subject to the Federal Assignment of Claims Act (31 U.S.C. Section 3727) or any similar state or local law. 3.21 Customer and Trade Relations. As of the Closing Date, there exists ---------------------------- no actual or, to the knowledge of any Borrower, threatened termination or cancellation (by a written communication to a Borrower) of, or any material adverse modification or change in: the business relationship of any Borrower with any customer whose purchases during the preceding 12 months were more than 5% of the gross revenues of InterCept during such period. 3.22 Agreements and Other Documents. ICPT is a public company and is ------------------------------ required to file all of its material contracts with the Securities and Exchange Commission. 3.23 Solvency. Both before and after giving effect to (a) the Loans to -------- be made on the Closing Date or such other date as Loans requested hereunder are made, (b) the disbursement of the proceeds of such Loans pursuant to the instructions of Borrower Representative; and (c) the payment and accrual of all transaction costs in connection with the foregoing, each Borrower is and will be Solvent. 3.24 [Intentionally Reserved] 3.25 [Intentionally Reserved] 3.26 [Intentionally Reserved] 4. FINANCIAL STATEMENTS AND INFORMATION 4.1 Reports and Notices. -------------------- (a) Each Borrower executing this Agreement hereby agrees that from and after the Closing Date and until the Termination Date, it shall deliver to Lender, the Financial Statements, notices and other information at the times, to the Persons and in the manner set forth in Annex E. ------- (b) Each Borrower executing this Agreement hereby agrees that, from and after the Closing Date and until the Termination Date, it shall deliver to Lender the various Collateral Reports at the times, to the Persons and in the manner set forth in Annex F. ------- 4.2 Communication with Accountants. Each Borrower executing this ------------------------------ Agreement authorizes Lender to communicate directly with its independent certified public accountants, including Arthur Anderson, LLP, and authorizes and, at Lender's request, shall instruct those accountants and advisors to disclose and make available to Lender any and all Financial 18 Statements and other supporting financial documents, schedules and information relating to any Borrower (including copies of any issued management letters) with respect to the business, financial condition and other affairs of any Borrower. 5. AFFIRMATIVE COVENANTS Each Borrower executing this Credit Agreement jointly and severally agrees as to all Borrowers that from and after the date hereof and until the Termination Date: 5.1 Maintenance of Existence and Conduct of Business. Each ------------------------------------------------ Borrower shall: do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and its rights and franchises; continue to conduct its business substantially as now conducted or as otherwise permitted hereunder; at all times maintain, preserve and protect all of its material assets and properties used or useful in the conduct of its business, and keep the same in good repair, working order and condition in all reasonable respects (taking into consideration ordinary wear and tear) and from time to time make, or cause to be made, all necessary or appropriate repairs, replacements and improvements thereto consistent with industry practices; and transact business only in such corporate and trade names as are set forth in Disclosure Schedule (5.1). - ------------------------- 5.2 Payment of Charges. ------------------ (a) Subject to Section 5.2(b), each Borrower shall pay and ------------------------- discharge or cause to be paid and discharged promptly all Charges payable by it, including (i) Charges imposed upon it, its income and profits, or any of its property (real, personal or mixed) and all Charges with respect to tax, social security and unemployment withholding with respect to its employees, (ii) lawful claims for labor, materials, supplies and services or otherwise, and (iii) all storage or rental charges payable to warehousemen or bailees, in each case, before any thereof shall become past due. (b) Each Borrower may in good faith contest, by appropriate proceedings, the validity or amount of any Charges, Taxes or claims described in Section 5.2(a); provided, that (i) adequate reserves with respect to such --------------- -------- contest are maintained on the books of such Borrower, in accordance with GAAP; (ii) no Lien shall be imposed to secure payment of such Charges (other than payments to warehousemen and/or bailees) that is superior to any of the Liens securing the Obligations and such contest is maintained and prosecuted continuously and with diligence and operates to suspend collection or enforcement of such Charges; (iii) none of the Collateral becomes subject to forfeiture or loss as a result of such contest; (iv) such Borrower shall promptly pay or discharge such contested Charges, Taxes or claims and all additional charges, interest, penalties and expenses, if any, and shall deliver to Lender evidence reasonably acceptable to Lender of such compliance, payment or discharge, if such contest is terminated or discontinued adversely to such Borrower or the conditions set forth in this Section 5.2(b) are no longer met; -------------- and (v) Lender has not advised Borrowers in writing that Lender reasonably believes that nonpayment or nondischarge thereof could have or result in a Material Adverse Effect. 19 5.3 Books and Records. Each Borrower shall keep adequate books and ----------------- records with respect to its business activities in which proper entries, reflecting all financial transactions, are made in accordance with GAAP and on a basis consistent with the Financial Statements attached as Disclosure ---------- Schedule (3.4(a)). - ------------------ 5.4 Insurance; Damage to or Destruction of Collateral. ------------------------------------------------- (a) The Borrowers shall, at their sole cost and expense, maintain the policies of insurance as in effect on the date hereof or otherwise in form and amounts and with insurers reasonably acceptable to Lender. Such policies of insurance (or the loss payable and additional insured endorsements delivered to Lender) shall contain provisions pursuant to which the insurer agrees to provide 30 days prior written notice to Lender in the event of any non-renewal, cancellation or amendment of any such insurance policy. If any Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above, or to pay all premiums relating thereto, Lender may at any time or times thereafter obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto that Lender deems advisable. Lender shall have no obligation to obtain insurance for any Borrower or pay any premiums therefor. By doing so, Lender shall not be deemed to have waived any Default or Event of Default arising from any Borrower's failure to maintain such insurance or pay any premiums therefor. All sums so disbursed, including reasonable attorneys'fees, court costs and other charges related thereto, shall be payable on demand by Borrowers to Lender and shall be additional Obligations hereunder secured by the Collateral. (b) Each Borrower shall deliver to Lender, in form and substance reasonably satisfactory to Lender, endorsements to (i) all "All Risk" and business interruption insurance naming Lender as loss payee, and (ii) all general liability and other liability policies naming Lender as additional insured. Each Borrower irrevocably makes, constitutes and appoints Lender (and all officers, employees or agents designated by Lender), so long as any Default or Event of Default has occurred and is continuing, as such Borrower's true and lawful agent and attorney-in-fact for the purpose of making, settling and adjusting claims under such "All Risk" policies of insurance, endorsing the name of such Borrower on any check or other item of payment for the proceeds of such "All Risk" policies of insurance and for making all determinations and decisions with respect to such "All Risk" policies of insurance. Lender shall have no duty to exercise any rights or powers granted to it pursuant to the foregoing power-of-attorney. Borrower Representative shall promptly notify Lender of any loss, damage, or destruction to the Collateral in the amount of $500,000 or more, whether or not covered by insurance. After deducting from such proceeds the expenses, if any, incurred by Lender in the collection or handling thereof, if permitted hereunder, Lender may, at its option, permit or require the applicable Borrower to use such money, or any part thereof, to replace, repair, restore or rebuild the Collateral in a diligent and expeditious manner with materials and workmanship of substantially the same quality as existed before the loss, damage or destruction. 5.5 Compliance with Laws. Each Borrower shall comply with all federal, -------------------- state, local and foreign laws and regulations applicable to it, including those relating to ERISA and labor matters and Environmental Laws and Environmental Permits, except to the extent that the failure 20 to comply, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 5.6 Supplemental Disclosure. From time to time as may be reasonably ----------------------- requested by Lender (which request will not be made more frequently than once each year absent the occurrence and continuance of a Default or an Event of Default), the Borrowers shall supplement each Disclosure Schedule hereto, or any representation herein or in any other Loan Document, with respect to any matter hereafter arising that, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such Disclosure Schedule or as an exception to such representation or that is necessary to correct any information in such Disclosure Schedule or representation which has been rendered inaccurate thereby (and, in the case of any supplements to any Disclosure Schedule, such Disclosure Schedule shall be appropriately marked to show the changes made therein); provided that (a) no -------- such supplement to any such Disclosure Schedule or representation shall amend, supplement or otherwise modify any Disclosure Schedule or representation, or be or be deemed a waiver of any Default or Event of Default resulting from the matters disclosed therein, except as consented to by Lender in writing, and (b) no supplement shall be required or permitted as to representations and warranties that relate solely to the Closing Date. 5.7 Intellectual Property. Each Borrower will conduct its business and --------------------- affairs without infringement of or interference with any Intellectual Property of any other Person in any material respect. 5.8 Environmental Matters. Each Borrower shall and shall cause each --------------------- Person within its control to: (a) conduct its operations and keep and maintain its Real Estate in compliance with all Environmental Laws and Environmental Permits other than noncompliance that could not reasonably be expected to have a Material Adverse Effect; (b) implement any and all investigation, remediation, removal and response actions that are appropriate or necessary to maintain the value and marketability of the Real Estate or to otherwise comply with Environmental Laws and Environmental Permits pertaining to the presence, generation, treatment, storage, use, disposal, transportation or Release of any Hazardous Material on, at, in, under, above, to, from or about any of its Real Estate; (c) notify Lender promptly after such Borrower becomes aware of any violation of Environmental Laws or Environmental Permits or any Release on, at, in, under, above, to, from or about any Real Estate that is reasonably likely to result in Environmental Liabilities in excess of $25,000.00; and (d) promptly forward to Lender a copy of any order, notice, request for information or any communication or report received by such Borrower in connection with any such violation or Release or any other matter relating to any Environmental Laws or Environmental Permits that could reasonably be expected to result in Environmental Liabilities in excess of $1,000,000.00, in each case whether or not the Environmental Protection Agency or any Governmental Authority has taken or threatened any action in connection with any such violation, Release or other matter. If Lender at any time has a reasonable basis to believe that there may be a violation of any Environmental Laws or Environmental Permits by any Borrower or any Environmental Liability arising thereunder, or a Release of Hazardous Materials on, at, in, under, above, to, from or about any of its Real Estate, that, in each case, could reasonably be expected to have a Material Adverse Effect, then each Borrower shall, upon Lender's written request (i) cause the performance of such environmental 21 audits including subsurface sampling of soil and groundwater, and preparation of such environmental reports, at Borrowers'expense, as Lender may from time to time reasonably request, which shall be conducted by reputable environmental consulting firms reasonably acceptable to Lender and shall be in form and substance reasonably acceptable to Lender, and (ii) permit Lender or its representatives to have access to all Real Estate for the purpose of conducting such environmental audits and testing as Lender reasonably deems appropriate, including subsurface sampling of soil and groundwater. Borrowers shall reimburse Lender for the costs of such audits and tests and the same will constitute a part of the Obligations secured hereunder. 5.9 Landlords'Agreements, Mortgagee Agreements, Bailee Letters and Real ------------------------------------------------------------------- Estate Purchases. As requested by Lender, each Borrower shall obtain a - ---------------- landlord's agreement, mortgagee agreement or bailee letter, as applicable, from the lessor of each leased property, mortgagee of owned property or bailee with respect to any warehouse, processor or converter facility or other location where Collateral with a net book value in excess of $500,000.00, is stored or located, which agreement or letter shall contain a waiver or subordination of all Liens or claims that the landlord, mortgagee or bailee may assert against the Collateral at that location, and shall otherwise be reasonably satisfactory in form and substance to Lender. With respect to such locations or warehouse space leased or owned as of the Closing Date and thereafter, if Lender has not received a landlord or mortgagee agreement or bailee letter as of the Closing Date (or, if later, as of the date such location is acquired or leased), the Borrowing Availability may be subject to such Reserves as may be established by Lender in its reasonable credit judgment. After the Closing Date, no real property or warehouse space shall be leased by any Borrower and no Inventory shall be shipped to a processor or converter under arrangements established after the Closing Date without the prior written consent of Lender (which consent, in Lender's discretion, may be conditioned upon the establishment of Reserves acceptable to Lender) or, unless and until a reasonably satisfactory landlord agreement or bailee letter, as appropriate, shall first have been obtained with respect to such location. Each Borrower shall timely and fully pay and perform its obligations under all leases and other agreements with respect to each leased location or public warehouse where any Collateral is or may be located. 5.10 [Intentionally Reserved] 5.11 Further Assurances. Each Borrower executing this Agreement agrees ------------------ that it shall and shall cause each other Borrower to, at such Borrower's expense and upon request of Lender, duly execute and deliver, or cause to be duly executed and delivered, to Lender such further instruments and do and cause to be done such further acts as may be necessary or proper in the reasonable opinion of Lender to carry out more effectively the provisions and purposes of this Agreement or any other Loan Document. 22 6. NEGATIVE COVENANTS Each Borrower executing this Agreement jointly and severally agrees as to all Borrowers that from and after the date hereof until the Termination Date: 6.1 Mergers, Subsidiaries, Etc. No Borrower shall directly or -------------------------- indirectly, by operation of law or otherwise, (a) acquire any Subsidiary, or (b) merge with, consolidate with, acquire all or substantially all of the assets or Stock of, or otherwise combine with or acquire, any Person. Notwithstanding the foregoing, any Borrower may acquire all or substantially all of the assets or Stock of any Person (the "Target") (in each case, if the ------ following conditions are satisfied, a "Permitted Acquisition") subject to the --------------------- satisfaction of each of the following conditions: (i) Lender shall receive at least three (3) Business Days'prior written notice of such proposed Permitted Acquisition; (ii) such Permitted Acquisition shall only involve assets located in the United States or Canada and comprising a business, or those assets of a business, of the type engaged in by Borrowers as of the Closing Date or a business reasonably related thereto, and which business would not subject Lender to regulatory or third party approvals in connection with the exercise of its rights and remedies under this Agreement or any other Loan Documents other than approvals applicable to the exercise of such rights and remedies with respect to Borrowers prior to such Permitted Acquisition; (iii) such Permitted Acquisition shall be consensual and shall have been approved by the Target's board of directors; (iv) no additional Indebtedness, Guaranteed Indebtedness, contingent obligations or other liabilities shall be incurred, assumed or otherwise be reflected on a consolidated balance sheet of Borrowers and Target after giving effect to such Permitted Acquisition, except (A) Loans made hereunder and (B) ordinary course trade payables, accrued expenses and unsecured Indebtedness of the Target to the extent no Default or Event of Default has occurred and is continuing or would result after giving effect to such Permitted Acquisition; (v) the sum of all amounts payable in connection with all Permitted Acquisitions (including all transaction costs and all Indebtedness, liabilities and contingent obligations incurred or assumed in connection therewith or otherwise reflected in a consolidated balance sheet of Borrowers and Target) shall not exceed $20,000,000 during any Fiscal Year; (vi) the business and assets acquired in such Permitted Acquisition shall be free and clear of all Liens (other than Permitted Encumbrances); (vii) at or promptly after the closing of any Permitted Acquisition, Lender will be granted a first priority perfected Lien (subject to Permitted Encumbrances) in all assets acquired pursuant thereto or in the assets and Stock of the Target, and Borrowers and the Target shall have executed such documents and taken such actions as may be required by Lender in connection therewith; 23 (viii) Borrowers shall have delivered to Lender, in form and substance reasonably satisfactory to Lender, financial information related to the acquisition: (ix) at the request of Lender, InterCept shall provide, in form and substance reasonably satisfactory to Lender, copies of the acquisition agreement and related agreements and instruments, and all opinions, certificates, lien search results and other documents reasonably requested by Lender; (x) at the time of such Permitted Acquisition and after giving effect thereto, no Default or Event of Default has occurred and is continuing; and (xi) on or prior to the date of such Permitted Acquisition, in the case of any Permitted Acquisition, the consideration for which equals or exceeds $10,000,000, Lender shall have consented in writing to such Permitted Acquisition. 6.2 Investments; Loans and Advances. Except as otherwise expressly ------------------------------- permitted by this Section 6, no Borrower shall make or permit to exist any --------- investment in, or make, accrue or permit to exist loans or advances of money to, any Person other than a Borrower, through the direct or indirect lending of money, holding of securities or otherwise, except that: (a) Borrowers may hold investments comprised of notes payable, or stock or other securities issued by Account Debtors to any Borrower pursuant to negotiated agreements with respect to settlement of such Account Debtor's Accounts in the ordinary course of business, so long as the aggregate amount of such Accounts so settled by Borrowers does not exceed $1,000,000.00; (b) each Borrower may maintain its existing investments in its Subsidiaries as of the Closing Date and make new investments in its Subsidiaries as of the Closing Date and in newly formed Subsidiaries that become Borrowers under this Agreement; (c) so long as Lender has not delivered an Activation Notice, no Default or Event of Default has occurred and is continuing and there is no outstanding Revolving Loan balance, Borrowers may make investments, in (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof maturing within one year from the date of acquisition thereof, (ii) commercial paper maturing no more than one year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc., (iii) certificates of deposit maturing no more than one year from the date of creation thereof issued by commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits of not less than $300,000,000 and having a senior unsecured rating of "A" or better by a nationally recognized rating agency (an "A Rated Bank"), (iv) time deposits ------------ maturing no more than 30 days from the date of creation thereof with A Rated Banks and (v) mutual funds that invest solely in one or more of the investments described in clauses (i) through (iv) above, and (d) other investments not exceeding $100,000 in the aggregate at any time outstanding. 6.3 Indebtedness. ------------ (a) No Borrower shall create, incur, assume or permit to exist any Indebtedness, except (without duplication) (i) Indebtedness secured by purchase money security interests and Capital Leases permitted in Section ------- 6.7(c), (ii) the Loans and the other Obligations, - ------ 24 (iii) unfunded pension fund and other employee benefit plan obligations and liabilities to the extent they are permitted to remain unfunded under applicable law, (iv) existing Indebtedness described in Disclosure Schedule ------------------- (6.3) and refinancings thereof or amendments or modifications thereto that do - ----- not have the effect of increasing the principal amount thereof or changing the amortization thereof (other than to extend the same) and that are otherwise on terms and conditions no less favorable to any Borrower, Lender or any Lender, as reasonably determined by Lender, than the terms of the Indebtedness being refinanced, amended or modified, (v) Indebtedness specifically permitted under Section 6.1; (vi) Indebtedness specifically permitted under Section 6.17; and - ----------- ------------ (vii) Indebtedness consisting of intercompany loans and advances made by any Borrower to any other Borrower. (b) No Borrower shall, directly or indirectly, voluntarily purchase, redeem, defease or prepay any principal of, premium, if any, interest or other amount payable in respect of any Indebtedness, other than (i) the Obligations; (ii) Indebtedness secured by a Permitted Encumbrance if the asset securing such Indebtedness has been sold or otherwise disposed of in accordance with Sections 6.8(b) or (c); (iii) Indebtedness permitted by Section 6.3(a)(iv) ---------------------- ---------- upon any refinancing thereof in accordance with Section 6.3(a)(iv). ------------------ 6.4 Employee Loans and Affiliate Transactions. ----------------------------------------- (a) Borrowers may use the proceeds of the Revolving Credit Advances for working capital in the ordinary course of their business, including without limitation, loans to Affiliates and other entities otherwise permitted pursuant to the terms hereof; provided, however, the aggregate of -------- ------- Revolving Credit Advances used for working capital purposes shall not exceed $15,000,000.00 at any one time; provided, further, however, that in the event -------- ------- ------- the proceeds of the Revolving Credit Advances are used by Borrowers to make loans to Affiliates or other entities, such loans to Affiliates or such entities shall be made (i) pursuant to documents satisfactory to Lender in its reasonable discretion, which documents shall be collaterally assigned to Lender in a manner satisfactory to Lender in its reasonable discretion, and (ii) with the written consent of Lender thereto which shall not be unreasonably withheld. All such transactions existing as of the date hereof are described in Disclosure Schedule (6.4(a)). - ---------------------------- (b) No Borrower shall enter into any lending or borrowing transaction with any employees of any Borrower, except loans to its respective employees in the ordinary course of business consistent with past practices for travel and entertainment expenses, relocation costs and similar purposes and stock option financing up to a maximum of $100,000.00 to any employee and up to a maximum of $500,000.00 in the aggregate at any one time outstanding. (c) [Intentionally Reserved] 6.5 Capital Structure and Business. No Borrower shall (a) make any ------------------------------ changes in any of its business objectives, purposes or operations that could reasonably be expected to adversely affect the repayment of the Loans or any of the other Obligations or could reasonably be expected to have or result in a Material Adverse Effect, (b) make any change in its capital structure as described in Disclosure Schedule (3.8), other than the issuance or sale of any ------------------------ shares of Stock, warrants or other securities convertible into Stock or (c) amend its charter or bylaws in a manner 25 that would adversely affect Lender or such Borrower's duty or ability to repay the Obligations. No Borrower shall engage in any business other than the businesses currently engaged in by it or businesses reasonably related thereto. 6.6 Guaranteed Indebtedness. No Borrower shall create, incur, assume or ----------------------- permit to exist any Guaranteed Indebtedness except (a) by endorsement of instruments or items of payment for deposit to the general account of any Borrower, and (b) for Guaranteed Indebtedness incurred for the benefit of any other Borrower if the primary obligation is expressly permitted by this Agreement other than Indebtedness, if any, of a Target existing at the time such Target is acquired. 6.7 Liens. No Borrower shall create, incur, assume or permit to exist ----- any Lien on or with respect to its Accounts or any of its other properties or assets (whether now owned or hereafter acquired) except for (a) Permitted Encumbrances; (b) Liens in existence on the date hereof and summarized on Disclosure Schedule (6.7) securing the Indebtedness described on Disclosure - ------------------------- ---------- Schedule (6.3) and permitted refinancings, extensions and renewals thereof, - -------------- including extensions or renewals of any such Liens; provided that the principal -------- amount of the Indebtedness so secured is not increased and the Lien does not attach to any other property; (c) Liens created after the date hereof by conditional sale or other title retention agreements (including Capital Leases) or in connection with purchase money Indebtedness with respect to Equipment and Fixtures acquired by any Borrower in the ordinary course of business, involving the incurrence of an aggregate amount of purchase money Indebtedness and Capital Lease Obligations of not more than $5,000,000.00 outstanding at any one time for all such Liens (provided that such Liens attach only to the assets -------- subject to such purchase money debt and such Indebtedness is incurred within 20 days following such purchase and does not exceed 100% of the purchase price of the subject assets); and (d) other Liens securing Indebtedness not exceeding $5,000,000.00 in the aggregate at any time outstanding, so long as such Liens do not attach to any Accounts or Inventory. In addition, no Borrower shall become a party to any agreement, note, indenture or instrument, or take any other action, that would prohibit the creation of a Lien on any of its properties or other assets in favor of Lender as additional collateral for the Obligations, except operating leases, Capital Leases or Licenses which prohibit Liens upon the assets that are subject thereto. 6.8 Sale of Stock and Assets. No Borrower shall sell, transfer, convey, ------------------------ assign or otherwise dispose of any of its properties or other assets, including the Stock of any of its Subsidiaries (whether in a public or a private offering or otherwise) or any of its Accounts, other than (a) the sale of Inventory in the ordinary course of business, and (b) the sale, transfer, conveyance or other disposition by a Borrower of Equipment, Fixtures or Real Estate in the ordinary cause of business; and (c) other Equipment and Fixtures having a value not exceeding $500,000.00 in any single transaction or $1,000,000.00 in the aggregate in any Fiscal Year. With respect to any disposition of assets or other properties permitted pursuant to clauses (b) and (c) above, subject to Section 1.3(b), Lender agrees on reasonable prior written notice to release its - -------------- Lien on such assets or other properties in order to permit the applicable Borrower to effect such disposition and shall execute and deliver to Borrowers, at Borrowers'expense, appropriate Uniform Commercial Code amendments, statements and other releases as reasonably requested by Borrowers. 26 6.9 ERISA. No Borrower shall, or shall cause or permit any ERISA ----- Affiliate to, cause or permit to occur an event that could result in the imposition of a Lien under Section 412 of the IRC or Section 302 or 4068 of ERISA or cause or permit to occur an ERISA Event to the extent such ERISA Event could reasonably be expected to have a Material Adverse Effect. 6.10 Financial Covenants. Borrowers shall not breach or fail to comply ------------------- with any of the Financial Covenants set forth in Annex G hereto. ------- 6.11 Hazardous Materials. No Borrower shall cause or permit a Release of ------------------- any Hazardous Material on, at, in, under, above, to, from or about any of the Real Estate where such Release would (a) violate in any respect, or form the basis for any Environmental Liabilities under, any Environmental Laws or Environmental Permits or (b) otherwise adversely impact the value or marketability of any of the Real Estate or any of the Collateral, other than such violations or Environmental Liabilities that could not reasonably be expected to have a Material Adverse Effect. 6.12 Sale-Leasebacks. No Borrower shall engage in any sale-leaseback, --------------- synthetic lease or similar transaction involving any of its assets. 6.13 Cancellation of Indebtedness. No Borrower shall cancel any claim or ---------------------------- debt owing to it, except for reasonable consideration negotiated on an arm's length basis and in the ordinary course of its business consistent with past practices. 6.14 Restricted Payments. No Borrower shall make any Restricted Payment, ------------------- except (a) intercompany loans and advances between Borrowers to the extent permitted by Section 6.3, (b) dividends and distributions by Subsidiaries of ----------- any Borrower paid to such Borrower, and (c) employee loans permitted under Section 6.4(b), provided, that no Default or Event of Default has occurred and - -------------- -------- is continuing or would result after giving effect to any Restricted Payment. 6.15 Change of Corporate Name or Location; Change of Fiscal Year. No ----------------------------------------------------------- Borrower shall (a) change its name as it appears in official filings in the state of its incorporation or other organization, (b) change its chief executive office, principal place of business, corporate offices or warehouses or locations at which Collateral is held or stored, or the location of its records concerning the Collateral, (c) change the type of entity that it is, (d) change its organization identification number, if any, issued by its state of incorporation or other organization, or (e) change its state of incorporation or organization, in each case without at least 30 days prior written notice to Lender and after Lender's written acknowledgment that any reasonable action requested by Lender in connection therewith, including to continue the perfection of any Liens in favor of Lender, in any Collateral, has been completed or taken, and provided that any such new location shall be in -------- the continental United States. Without limiting the foregoing, no Borrower shall change its name, identity or corporate structure in any manner that might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of Section 9-402(7) of the Code or any other then applicable provision of the Code except upon prior written notice to Lender and after Lender's written acknowledgment that any reasonable action requested by Lender in connection therewith, including to continue the 27 perfection of any Liens in favor of Lender, in any Collateral, has been completed or taken. No Borrower shall change its Fiscal Year. 6.16 No Impairment of Intercompany Transfers. No Borrower shall --------------------------------------- directly or indirectly enter into or become bound by any agreement, instrument, indenture or other obligation (other than this Agreement and the other Loan Documents) that could directly or indirectly restrict, prohibit or require the consent of any Person with respect to the payment of dividends or distributions or the making or repayment of intercompany loans by a Subsidiary of any Borrower to any Borrower or between Borrowers. 6.17 No Speculative Transactions. No Borrower shall engage in any --------------------------- transaction involving commodity options, futures contracts or similar transactions, except solely to hedge against fluctuations in the prices of commodities owned or purchased by it and the values of foreign currencies receivable or payable by it and interest swaps, caps or collars. 6.18 Leases; Real Estate Purchases. No Borrower shall enter into any ----------------------------- operating lease for Equipment or Real Estate, if the aggregate of all such operating lease payments payable in any year for all Borrowers on a consolidated basis would exceed $10,000,000.00. Except as permitted under Section 6.1 in connection with a Permitted Acquisition, no Borrower shall - ----------- purchase a fee simple ownership interest in Real Estate with an aggregate purchase price in excess of $5,000,000.00. 6.19 Negative Pledge. No Borrower shall create or suffer to exist any --------------- Lien other than Permitted Encumbrances on all or any portion of the Real Estate. 7. TERM 7.1 Termination. The financing arrangements contemplated hereby shall ----------- be in effect until the Commitment Termination Date, and the Loans and all other Obligations shall be automatically due and payable in full on such date. 7.2 Survival of Obligations Upon Termination of Financing Arrangements. ------------------------------------------------------------------ Except as otherwise expressly provided for in the Loan Documents, no termination or cancellation (regardless of cause or procedure) of any financing arrangement under this Agreement shall in any way affect or impair the obligations, duties and liabilities of the Borrowers or the rights of Lender relating to any unpaid portion of the Loans or any other Obligations, due or not due, liquidated, contingent or unliquidated, or any transaction or event occurring prior to such termination, or any transaction or event, the performance of which is required after the Commitment Termination Date. Except as otherwise expressly provided herein or in any other Loan Document, all undertakings, agreements, covenants, warranties and representations of or binding upon the Borrowers, and all rights of Lender, all as contained in the Loan Documents, shall not terminate or expire, but rather shall survive any such termination or cancellation and shall continue in full force and effect until the Termination Date; provided, that the provisions of Section 11, the -------- ---------- payment obligations under Sections 1.15 and 1.16, and the indemnities contained ------------- ---- in the Loan Documents shall survive the Termination Date. 28 8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES 8.1 Events of Default. The occurrence of any one or more of the ----------------- following events (regardless of the reason therefor) shall constitute an "Event ----- of Default" hereunder: - ---------- (a) Any Borrower (i) fails to make any payment of principal of, or interest on, or Fees owing in respect of, the Loans or any of the other Obligations when due and payable, or (ii) fails to pay or reimburse Lender for any expense reimbursable hereunder or under any other Loan Document within 10 days following Lender's demand for such reimbursement or payment of expenses. (b) Any Borrower fails or neglects to perform, keep or observe any of the provisions of Sections 1.4, 1.8, 5.4(a) or 6, or any of the ------------------------------ provisions set forth in Annexes C or G, respectively. -------------- (c) Any Borrower fails or neglects to perform, keep or observe any of the provisions of Section 4 or any provisions set forth in Annexes E or --------- ------------ F, respectively, and the same shall remain unremedied for 15 days or more. - - (d) Any Borrower fails or neglects to perform, keep or observe any other provision of this Agreement or of any of the other Loan Documents (other than any provision embodied in or covered by any other clause of this Section 8.1) and the same shall remain unremedied for 20 days or more. - ----------- (e) A default or breach occurs under any other agreement, document or instrument to which any Borrower is a party that is not cured within any applicable grace period therefor, and such default or breach (i) involves the failure to make any payment when due in respect of any Indebtedness or Guaranteed Indebtedness (other than the Obligations) of any Borrower in excess of $500,000 in the aggregate (including (x) undrawn committed or available amounts and (y) amounts owing to all creditors under any combined or syndicated credit arrangements), or (ii) causes, or permits any holder of such Indebtedness or Guaranteed Indebtedness or a trustee to cause, Indebtedness or Guaranteed Indebtedness or a portion thereof in excess of $500,000 in the aggregate to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, or cash collateral in respect thereof to be demanded. (f) Any material information contained in, or any material representation or warranty herein or in any Loan Document or in any written statement, report, financial statement or certificate made or delivered to Lender by any Borrower is untrue or incorrect in any material respect as of the date when made or deemed made. (g) Assets of any Borrower with a fair market value of $25,000.00 or more are attached, seized, levied upon or subjected to a writ or distress warrant, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors of any Borrower and such condition continues for 30 days or more. (h) A case or proceeding is commenced against any Borrower seeking a decree or order in respect of such Borrower (i) under the Bankruptcy Code, or any other 29 applicable federal, state or foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for such Borrower or for any substantial part of any such Borrower's assets, or (iii) ordering the winding-up or liquidation of the affairs of such Borrower, and such case or proceeding shall remain undismissed or unstayed for 60 days or more or a decree or order granting the relief sought in such case or proceeding shall be entered by a court of competent jurisdiction. (i) Any Borrower (i) files a petition seeking relief under the Bankruptcy Code, or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) consents to or fails to contest in a timely and appropriate manner the institution of proceedings thereunder or the filing of any such petition or the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for such Borrower or for any substantial part of any such Borrower's assets, (iii) makes an assignment for the benefit of creditors, (iv) takes any action in furtherance of any of the foregoing; or (v) admits in writing its inability to, or is generally unable to, pay its debts as such debts become due. (j) A final judgment or judgments for the payment of money in excess of $250,000 in the aggregate at any time are outstanding against one or more of the Borrowers and the same are not, within 30 days after the entry thereof, discharged or execution thereof stayed or bonded pending appeal, or such judgments are not discharged prior to the expiration of any such stay. (k) Any material provision of any Loan Document for any reason ceases to be valid, binding and enforceable in accordance with its terms (or any Borrower shall challenge the enforceability of any Loan Document or shall assert in writing, or engage in any action or inaction based on any such assertion, that any provision of any of the Loan Documents has ceased to be or otherwise is not valid, binding and enforceable in accordance with its terms), or any Lien created under any Loan Document ceases to be a valid and perfected first priority Lien (except as otherwise permitted herein or therein) in any of the Collateral purported to be covered thereby, provided in any such case that the Collateral at issue is material to the business of the applicable Borrower. (l) Any Change of Control occurs. (m) Any event occurs, whether or not insured or insurable, as a result of which revenue-producing activities cease or are substantially curtailed at any facility of Borrowers generating more than 10% of Borrowers' consolidated revenues for the Fiscal Year preceding such event and such cessation or curtailment continues for more than 20 days, provided that Borrowers may consolidate facilities or operations and replace or relocate facilities or operations, in each case in the ordinary course of their businesses. 8.2 Remedies. -------- (a) If any Default or Event of Default has occurred and is continuing, Lender may, without notice, suspend the Revolving Loan facility with respect to additional Advances, whereupon any additional Advances shall be made or incurred in Lender's sole discretion so long 30 as such Default or Event of Default is continuing. If any Default or Event of Default has occurred and is continuing, Lender may, without notice except as otherwise expressly provided herein, increase the rate of interest applicable to the Loans to the Default Rate. (b) If any Event of Default has occurred and is continuing, Lender may, without notice: (i) terminate the Revolving Loan facility with respect to further Advances; (ii) declare all or any portion of the Obligations, including all or any portion of any Loan to be forthwith due and payable, all without presentment, demand, protest or further notice of any kind, all of which are expressly waived by Borrowers; or (iii) exercise any rights and remedies provided to Lender under the Loan Documents or at law or equity, including all remedies provided under the Code; provided, that upon the -------- occurrence of an Event of Default specified in Sections 8.1(h) or (i), the ---------------------- Revolving Loan facility shall be immediately terminated and all of the Obligations, including the aggregate Revolving Loan, shall become immediately due and payable without declaration, notice or demand by any Person. 8.3 Waivers by Borrowers. Except as otherwise provided for in this -------------------- Agreement or by applicable law, each Borrower waives (including for purposes of Section 12): (a) presentment, demand and protest and notice of presentment, - ---------- dishonor, notice of intent to accelerate, notice of acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Lender on which any Borrower may in any way be liable, and hereby ratifies and confirms whatever Lender may do in this regard and (b) the benefit of all valuation, appraisal, marshaling and exemption laws. 9. [INTENTIONALLY RESERVED] 10. SUCCESSORS AND ASSIGNS This Agreement and the other Loan Documents shall be binding on and shall inure to the benefit of each Borrower, Lender and their respective successors and assigns (including, in the case of any Borrower, a debtor-in-possession on behalf of such Borrower), except as otherwise provided herein or therein. No Borrower may assign, transfer, hypothecate or otherwise convey its rights, benefits, obligations or duties hereunder or under any of the other Loan Documents without the prior express written consent of Lender. Any such purported assignment, transfer, hypothecation or other conveyance by any Borrower without the prior express written consent of Lender shall be void. The terms and provisions of this Agreement are for the purpose of defining the relative rights and obligations of each Borrower and Lender with respect to the transactions contemplated hereby and no Person shall be a third party beneficiary of any of the terms and provisions of this Agreement or any of the other Loan Documents. 11. MISCELLANEOUS 11.1 Complete Agreement; Modification of Agreement. The Loan Documents ---------------------------------------------- constitute the complete agreement between the parties with respect to the subject matter thereof and may not be modified, altered or amended except as set forth in Section 11.2. Any letter of interest, commitment letter, or ------------ confidentiality agreement, if any, between any Borrower and 31 Lender or any of their respective Affiliates, predating this Agreement and relating to a financing of substantially similar form, purpose or effect shall be superseded by this Agreement. 11.2 Amendments and Waivers (a) Except for actions expressly permitted ---------------------- to be taken by Lender, no amendment, modification, termination or waiver of any provision of this Agreement or any other Loan Document, or any consent to any departure by any Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by Lender and Borrowers. (b) Upon payment in full in cash and performance of all of the Obligations (other than indemnification Obligations), termination of the Commitments and a release of all claims against Lender, and so long as no suits, actions, proceedings or claims are pending or threatened against any Indemnified Person asserting any damages, losses or liabilities that are Indemnified Liabilities, Lender shall deliver to Borrowers amendment statements, and other documents necessary or appropriate to evidence the termination of the Liens securing payment of the Obligations. 11.3 Fees and Expenses. Borrowers shall reimburse Lender for all fees, ----------------- costs and expenses (including the reasonable fees and expenses of all of its counsel, advisors, consultants and auditors) actually incurred in connection with the negotiation and preparation of the Loan Documents and actually incurred in connection with: (a) the forwarding to Borrowers or any other Person on behalf of Borrowers by Lender of the proceeds of any Loan (including a wire transfer fee of $15 per wire transfer); (b) any amendment, modification or waiver of, consent with respect to, or termination of, any of the Loan Documents or advice in connection with the syndication and administration of the Loans made pursuant hereto or its rights hereunder or thereunder; (c) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender any Borrower or any other Person and whether as a party, witness or otherwise) in any way relating to the Collateral, any of the Loan Documents or any other agreement to be executed or delivered in connection herewith or therewith, including any litigation, contest, dispute, suit, case, proceeding or action, and any appeal or review thereof, in connection with a case commenced by or against any or all of the Borrowers or any other Person that may be obligated to Lender by virtue of the Loan Documents; including any such litigation, contest, dispute, suit, proceeding or action arising in connection with any work-out or restructuring of the Loans during the pendency of one or more Events of Default; provided, that no Person shall be entitled to -------- reimbursement under this clause (c) in respect of any litigation, contest, dispute, suit, proceeding or action to the extent any of the foregoing results from such Person's gross negligence or willful misconduct; (d) any attempt to enforce any remedies of Lender against any or all of the Borrowers or any other Person that may be obligated to Lender by virtue of any of the Loan Documents, including any such attempt to enforce any such remedies in the course of any workout or restructuring of the Loans during the pendency of one or more Events of Default; 32 (e) any workout or restructuring of the Loans during the pendency of one or more Events of Default; and (f) efforts to (i) monitor the Loans or any of the other Obligations, (ii) evaluate, observe or assess any of the Borrowers or their respective affairs, and (iii) verify, protect, evaluate, assess, appraise, collect, sell, liquidate or otherwise dispose of any of the Collateral; including, as to each of clauses (a) through (f) above, all reasonable attorneys'and other professional and service providers'fees arising from such services and other advice, assistance or other representation, including those in connection with any appellate proceedings, and all expenses, costs, charges and other fees incurred by such counsel and others in connection with or relating to any of the events or actions described in this Section 11.3, all of ------------- which shall be payable, on demand, by Borrowers to Lender, provided that Lender expressly waives any statutory right to recover attorneys'fees calculated by reference to a percentage of the debt sought to be repaid. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: fees, costs and expenses of accountants, environmental advisors, appraisers, investment bankers, management and other consultants and paralegals; court costs and expenses; photocopying and duplication expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges; telegram or telecopy charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal or other advisory services. 11.4 No Waiver. Lender's failure, at any time or times, to require --------- strict performance by the Borrowers of any provision of this Agreement or any other Loan Document shall not waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver of an Event of Default shall not suspend, waive or affect any other Event of Default whether the same is prior or subsequent thereto and whether the same or of a different type. Subject to the provisions of Section 11.2, none of the undertakings, agreements, warranties, covenants ------------ and representations of any Borrower contained in this Agreement or any of the other Loan Documents and no Default or Event of Default by any Borrower shall be deemed to have been suspended or waived by Lender, unless such waiver or suspension is by an instrument in writing signed by an officer of or other authorized employee of Lender, and directed to Borrowers specifying such suspension or waiver. 11.5 Remedies. Lender's rights and remedies under this Agreement shall -------- be cumulative and nonexclusive of any other rights and remedies that Lender may have under any other agreement, including the other Loan Documents, by operation of law or otherwise. Recourse to the Collateral shall not be required. 11.6 Severability. Wherever possible, each provision of this Agreement ------------ and the other Loan Documents shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement or any other Loan Document shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement or such other Loan Document. 33 11.7 Conflict of Terms. Except as otherwise provided in this Agreement ----------------- or any of the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement conflicts with any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.8 Confidentiality. Lender agrees to use commercially reasonable --------------- efforts (equivalent to the efforts Lender applies to maintaining the confidentiality of its own confidential information) to maintain as confidential all confidential information provided to it by the Borrowers and designated as confidential, and all information received by Lender or any agent of Lender pursuant to Section 11.4 or Section 4.2 hereof, for a period of 2 years following receipt thereof, except that Lender may disclose such information (a) to Persons employed or engaged by Lender; (b) to any bona fide assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 11.8 (and any such bona fide ------------ assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) ---------- above); (c) as required or requested by any Governmental Authority or reasonably believed by Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advice of Lender's counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any Litigation to which Lender is a party; or (f) that ceases to be confidential through no fault of Lender. 11.9 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE ------------- LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF GEORGIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. EACH BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN CITY OF ATLANTA, COUNTY OF FULTON, GEORGIA SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE BORROWERS AND LENDER PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT LENDER AND THE BORROWERS ACKNOWLEDGE THAT ANY APPEALS -------- FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF FULTON COUNTY; PROVIDED FURTHER, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR -------- ------- OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. EACH BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH BORROWER HEREBY WAIVES ANY OBJECTION THAT SUCH 34 BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. - ----- --- ---------- 11.10 Notices. Except as otherwise provided herein, whenever it is ------- provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other parties, or whenever any of the parties desires to give or serve upon any other parties any communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be deemed to have been validly served, given or delivered: (a) upon the earlier of actual receipt and 5 Business Days after deposit in the United States Mail, registered or certified mail, return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by telecopy or other similar facsimile transmission (with such telecopy or facsimile promptly confirmed by delivery of a copy by personal delivery or United States Mail as otherwise provided in this Section ------- 11.10); (c) 1 Business Day after deposit with a reputable overnight courier - ----- with all charges prepaid or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address or facsimile number indicated in Annex I or to such other address (or ------- facsimile number) as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to any Person (other than Borrower Representative or Lender) designated in Annex I to receive copies shall in no way adversely affect the ------- effectiveness of such notice, demand, request, consent, approval, declaration or other communication. 11.11 Section Titles. The Section titles and Table of Contents contained -------------- in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 11.12 Counterparts. This Agreement may be executed in any number of ------------ separate counterparts, each of which shall collectively and separately constitute one agreement. 11.13 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH -------------------- COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG LENDER, LENDERS AND ANY BORROWER ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. 35 11.14 Press Releases and Related Matters. Each Borrower executing this ---------------------------------- Agreement agrees that it will not in the future issue any press releases or other public disclosure using the name of Lender or its affiliates or referring to this Agreement or the other Loan Documents without at least 2 Business Days'prior notice to Lender and without the prior written consent of Lender unless (and only to the extent that) such Borrower is required to do so under law. Each Borrower consents to the publication by Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement. Lender reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements. 11.15 Reinstatement. This Agreement shall remain in full force and ------------- effect and continue to be effective should any petition be filed by or against any Borrower for liquidation or reorganization, should any Borrower become insolvent or make an assignment for the benefit of any creditor or creditors or should a receiver or trustee be appointed for all or any significant part of any Borrower's assets, and shall continue to be effective or to be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations, whether as a "voidable preference," "fraudulent conveyance," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 11.16 Advice of Counsel. Each of the parties represents to each other ----------------- party hereto that it has discussed this Agreement and, specifically, the provisions of Sections 11.9 and 11.13, with its counsel. ------------- ----- 11.17 No Strict Construction. The parties hereto have participated ---------------------- jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. 12. CROSS-GUARANTY 12.1 Cross-Guaranty. Each Borrower hereby agrees that such Borrower is -------------- jointly and severally liable for, and hereby absolutely and unconditionally guarantees to Lender and its successors and assigns, the full and prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of, all Obligations owed or hereafter owing to Lender by each other Borrower. Each Borrower agrees that its guaranty obligation hereunder is a continuing guaranty of payment and performance and not of collection, that its obligations under this Section 12 shall not be discharged until payment and ---------- performance, in full, of the Obligations has occurred, and that its obligations under this Section 12 shall be absolute and unconditional, irrespective of, and ---------- unaffected by, 36 (a) the genuineness, validity, regularity, enforceability or any future amendment of, or change in, this Agreement, any other Loan Document or any other agreement, document or instrument to which any Borrower is or may become a party; (b) the absence of any action to enforce this Agreement (including this Section 12) or any other Loan Document or the waiver or consent ---------- by Lender with respect to any of the provisions thereof; (c) the existence, value or condition of, or failure to perfect its Lien against, any security for the Obligations or any action, or the absence of any action, by Lender in respect thereof (including the release of any such security); (d) the insolvency of any Borrower; or (e) any other action or circumstances that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor. Each Borrower shall be regarded, and shall be in the same position, as principal debtor with respect to the Obligations guaranteed hereunder. 12.2 Waivers by Borrowers. Each Borrower expressly waives all rights it -------------------- may have now or in the future under any statute, or at common law, or at law or in equity, or otherwise, to compel Lender to marshall assets or to proceed in respect of the Obligations guaranteed hereunder against any other Borrower, any other party or against any security for the payment and performance of the Obligations before proceeding against, or as a condition to proceeding against, such Borrower. It is agreed among each Borrower and Lender that the foregoing waivers are of the essence of the transaction contemplated by this Agreement and the other Loan Documents and that, but for the provisions of this Section ------- 12 and such waivers, Lender would decline to enter into this Agreement. - -- 12.3 Benefit of Guaranty. Each Borrower agrees that the provisions of ------------------- this Section 12 are for the benefit of Lender and its successors, transferees, ---------- endorsees and assigns, and nothing herein contained shall impair, as between any other Borrower and Lender, the obligations of such other Borrower under the Loan Documents. 12.4 Subordination of Subrogation, Etc. Notwithstanding anything to the --------------------------------- contrary in this Agreement or in any other Loan Document, and except as set forth in Section 12.7, each Borrower hereby expressly and irrevocably ------------ subordinates to payment of the Obligations any and all rights at law or in equity to subrogation, reimbursement, exoneration, contribution, indemnification or set off and any and all defenses available to a surety, guarantor or accommodation co-obligor until the Obligations are indefeasibly paid in full in cash. Each Borrower acknowledges and agrees that this subordination is intended to benefit Lender and shall not limit or otherwise affect such Borrower's liability hereunder or the enforceability of this Section 12, and that Lender and its successors and assigns are intended third - ---------- party beneficiaries of the waivers and agreements set forth in this Section ------- 12.4. - ----- 37 12.5 Election of Remedies. If Lender may, under applicable law, proceed -------------------- to realize its benefits under any of the Loan Documents giving Lender a Lien upon any Collateral, whether owned by any Borrower or by any other Person, either by judicial foreclosure or by non-judicial sale or enforcement, Lender may, at its sole option, determine which of its remedies or rights it may pursue without affecting any of its rights and remedies under this Section 12. ---------- Any election of remedies that results in the denial or impairment of the right of Lender to seek a deficiency judgment against any Borrower shall not impair any other Borrower's obligation to pay the full amount of the Obligations. In the event Lender shall bid at any foreclosure or trustee's sale or at any private sale permitted by law or the Loan Documents, Lender may bid all or less than the amount of the Obligations and the amount of such bid need not be paid by Lender but shall be credited against the Obligations. 12.6 Limitation. Notwithstanding any provision herein contained to the ---------- contrary, each Borrower's liability under this Section 12 (which liability is ---------- in any event in addition to amounts for which such Borrower is primarily liable under Section 1) shall be limited to an amount not to exceed as of any date of --------- determination the greater of: (a) the net amount of all Loans advanced to any other Borrower under this Agreement and then re-loaned or otherwise transferred to, or for the benefit of, such Borrower; and (b) the amount that could be claimed by Lender from such Borrower under this Section 12 without rendering such claim voidable or avoidable under ---------- Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law after taking into account, among other things, such Borrower's right of contribution and indemnification from each other Borrower under Section 12.7. ------------ 12.7 Contribution with Respect to Guaranty Obligations. ------------------------------------------------- (a) To the extent that any Borrower shall make a payment under this Section 12 of all or any of the Obligations (other than Loans made to that ---------- Borrower for which it is primarily liable) (a "Guarantor Payment") that, taking ----------------- into account all other Guarantor Payments then previously or concurrently made by any other Borrower, exceeds the amount that such Borrower would otherwise have paid if each Borrower had paid the aggregate Obligations satisfied by such Guarantor Payment in the same proportion that such Borrower's "Allocable Amount" (as defined below) (as determined immediately prior to such Guarantor Payment) bore to the aggregate Allocable Amounts of each of the Borrowers as determined immediately prior to the making of such Guarantor Payment, then, following indefeasible payment in full in cash of the Obligations and termination of the Revolving Loan and this Agreement, such Borrower shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Borrower for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Guarantor Payment. (b) As of any date of determination, the "Allocable Amount" of ---------------- any Borrower shall be equal to the maximum amount of the claim that could then be recovered from such 38 Borrower under this Section 12 without rendering such claim voidable or ---------- avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law. (c) This Section 12.7 is intended only to define the relative ------------ rights of Borrowers and nothing set forth in this Section 12.7 is intended to ------------ or shall impair the obligations of Borrowers, jointly and severally, to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement, including Section 12.1. Nothing contained in this ------------ Section 12.7 shall limit the liability of any Borrower to pay the Loans made - ------------ directly or indirectly to that Borrower and accrued interest, Fees and expenses with respect thereto for which such Borrower shall be primarily liable. (d) The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of the Borrower to which such contribution and indemnification is owing. (e) The rights of the indemnifying Borrowers against other Borrowers under this Section 12.7 shall be exercisable upon the full and ------------ indefeasible payment of the Obligations and the termination of the Commitments. 12.8 Liability Cumulative. The liability of Borrowers under this -------------------- Section 12 is in addition to and shall be cumulative with all liabilities of - ---------- each Borrower to Lender under this Agreement and the other Loan Documents to which such Borrower is a party or in respect of any Obligations or obligation of the other Borrower, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. Borrowers: --------- Attest: THE INTERCEPT GROUP, INC. /s/ Scott R. Meyerhoff By: /s/ John W. Collins - ------------------------------------- --------------------------------- Secretary Title Chairman & CEO ------------------------------- [CORPORATE SEAL] Attest: INTERCEPT COMMUNICATIONS TECHNOLOGIES, INC. By: /s/ Scott R. Meyerhoff - ------------------------------------- --------------------------------- Secretary Title: CFO, Treasurer and Secretary ------------------------------ [CORPORATE SEAL] 39 SBS DATA SERVICES, INC. Attest: By: /s/ Scott R. Meyerhoff - ------------------------------------- --------------------------------- Secretary Title: CFO, Treasurer and Secretary ------------------------------ [CORPORATE SEAL] C-TEQ, INC. Attest: By: /s/ Scott R. Meyerhoff - ------------------------------------- --------------------------------- Secretary Title: CFO, Treasurer and Secretary ------------------------------ [CORPORATE SEAL] DPSC ACQUISITION CORP. Attest: By: /s/ Scott R. Meyerhoff - ------------------------------------- --------------------------------- Secretary Title: CFO, Treasurer and Secretary ------------------------------ [CORPORATE SEAL] ICPT ACQUISITION I, LLC Attest: By: The InterCept Group, Inc., sole member and manager /s/ Jonathan R. Coe By:/s/ Scott R. Meyerhoff (Seal) - ------------------------------------- -------------------------- Witness Title: SVP, CFO ----------------------- INTERCEPT SERVICES, LLC /s/ Jonathan R. Coe By:/s/ Scott R. Meyerhoff (Seal) - ------------------------------------- -------------------------- Witness Name: Scott R. Meyerhoff Title: Chief Financial Officer 40 INTERCEPT TX I, LLC /s/ Jonathan R. Coe By: /s/ Scott R. Meyerhoff (Seal) - ------------------------------------- --------------------------- Witness Name: Scott R. Meyerhoff Title: Chief Financial Officer INTERCEPT OUTPUT SOLUTIONS, LP By: InterCept TX I, LLC, its general partner /s/ Jonathan R. Coe By: /s/ Scott R. Meyerhoff (Seal) - ------------------------------------- --------------------------- Witness Name: Scott R. Meyerhoff Title: Chief Financial Officer INTERCEPT SUPPLY, LP By: InterCept TX I, LLC, its general partner /s/ Jonathan R. Coe By: /s/ Scott R. Meyerhoff (Seal) - ------------------------------------- -------------------------- Witness Name: Scott R. Meyerhoff Title: Chief Financial Officer Lender: ------ FIRST UNION NATIONAL BANK By: /s/ Jim Ulmer ------------------------ Title: Vice President 41 ANNEX A (Recitals) -------- to CREDIT AGREEMENT ---------------- DEFINITIONS ----------- Capitalized terms used in the Loan Documents shall have (unless otherwise provided elsewhere in the Loan Documents) the following respective meanings, and all references to Sections, Exhibits, Schedules or Annexes in the following definitions shall refer to Sections, Exhibits, Schedules or Annexes of or to the Agreement: "Account Debtor" means any Person who may become obligated to any Borrower -------------- under, with respect to, or on account of, an Account, Chattel Paper or General Intangibles (including a payment intangible). "Accounting Changes" has the meaning ascribed thereto in Annex G. ------------------ ------- "Accounts" means all "accounts," as such term is defined in the Code, now -------- owned or hereafter acquired by any Borrower, including (a) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, or Instruments), (including any such obligations that may be characterized as an account or contract right under the Code), (b) all of each Borrower's rights in, to and under all purchase orders or receipts for goods or services, (c) all of each Borrower's rights to any goods represented by any of the foregoing (including unpaid sellers'rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (d) all rights to payment due to any Borrower for property sold, leased, licensed, assigned or otherwise disposed of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or other contract, arising out of the use of a credit card or charge card, or for services rendered or to be rendered by such Borrower or in connection with any other transaction (whether or not yet earned by performance on the part of such Borrower), (e) all health care insurance receivables and (f) all collateral security of any kind, given by any Account Debtor or any other Person with respect to any of the foregoing. "Advance" means any Revolving Credit Advance. ------- "Affiliate" means, with respect to any Person, (a) each Person that, ---------- directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, 10% or more of the Stock having ordinary voting power in the election of directors of such Person, (b) each Person that controls, is controlled by or is under common control with such Person, and (c) - -------- each of such Person's executive officers, directors, joint venturers and partners. For the purposes of this definition, "control" of a Person shall ------- mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise; provided, however, that the term -------- ------- "Affiliate" shall specifically exclude Lender, ProImage, Inc., Netzee, Inc. and --------- any other entity A-1 having one or more directors (or persons having a comparable role) in common with InterCept unless such entity is a subsidiary. "Agreement" means the Amended and Restated Credit Agreement by and among --------- Borrowers, the other Borrowers party hereto, and Lender, as the same may be amended, supplemented, restated or otherwise modified from time to time. "Appendices" has the meaning ascribed to it in the recitals to the ---------- Agreement. "Applicable Margin" means the percentage per annum set forth in Section ----------------- 1.5 hereof. "Bankruptcy Code" means the provisions of Title 11 of the United States --------------- Code, 11 U.S.C. [sec][sec]101 et seq. ------ "Borrower Representative" means InterCept, in its capacity as Borrower ----------------------- Representative pursuant to the provisions of Section 1.1(d). -------------- "Borrowers" and "Borrower" have the respective meanings ascribed thereto --------- -------- in the preamble to the Agreement. "Borrowing Availability" means as of any date of determination the Maximum --------------------- Amount less the sum of the aggregate Revolving Loan then outstanding. ---- "Business Day" means any day that is not a Saturday, a Sunday or a day on ------------ which banks are required or permitted to be closed in the State of Georgia. "Capital Expenditures" means, with respect to any Person, all expenditures -------------------- (by the expenditure of cash or the incurrence of Indebtedness), including, without limitation, expenditures in connection with Permitted Acquisitions, by such Person during any measuring period for any fixed assets or improvements or for replacements, substitutions or additions thereto that have a useful life of more than one year and that are required to be capitalized under GAAP. "Capital Lease" means, with respect to any Person, any lease of any ------------- property (whether real, personal or mixed) by such Person as lessee that, in accordance with GAAP, would be required to be classified and accounted for as a capital lease on a balance sheet of such Person. "Capital Lease Obligation" means, with respect to any Capital Lease of any ------------------------ Person, the amount of the obligation of the lessee thereunder that, in accordance with GAAP, would appear on a balance sheet of such lessee in respect of such Capital Lease. "Cash Collateral Account" has the meaning ascribed to it Annex B. ----------------------- ------- "Cash Equivalents" has the meaning ascribed to it in Annex B. ---------------- ------- "Change of Control" means any of the following: (a) any person or group ----------------- of persons (within the meaning of the Securities Exchange Act of 1934,) shall have acquired in a single A-2 transaction or series of related transactions beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934,) of 40% or more of the issued and outstanding shares of capital Stock of InterCept having the right to vote for the election of directors of InterCept under ordinary circumstances; (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the board of directors of InterCept (together with any new directors whose election by the board of directors of InterCept or whose nomination for election by the Stockholders of InterCept was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office; or (c) InterCept ceases to own and control all of the economic and voting rights associated with all of the outstanding capital Stock of any of its Subsidiaries. "Charges" means all federal, state, county, city, municipal, local, ------- foreign or other governmental taxes (including taxes owed to the PBGC at the time due and payable), levies, assessments, charges, liens, claims or encumbrances upon or relating to (a) the Collateral, (b) the Obligations, (c) the employees, payroll, income or gross receipts of any Borrower, (d) any Borrower's ownership or use of any properties or other assets, or (e) any other aspect of any Borrower's business. "Chattel Paper" means any "chattel paper," as such term is defined in the ------------- Code, including electronic chattel paper, now owned or hereafter acquired by any Borrower. "Closing Date" means December ____, 2001. ------------ "Closing Checklist" means the schedule, including all appendices, exhibits ----------------- or schedules thereto, listing certain documents and information to be delivered in connection with the Agreement, the other Loan Documents and the transactions contemplated thereunder, substantially in the form attached hereto as Annex D. ------- "Code" means the Uniform Commercial Code as the same may, from time to ---- time, be enacted and in effect in the State of Georgia; provided, that to the -------- extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory -------- ------- provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Lender's Lien on any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of Georgia, the term "Code" shall mean the Uniform Commercial Code as ---- enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions. "Collateral" means the property covered by the Security Agreement, and the ---------- other Collateral Documents and any other property, real or personal, tangible or intangible, now A-3 existing or hereafter acquired, that may at any time be or become subject to a security interest or Lien in favor of Lender to secure the Obligations. "Collateral Documents" means the Security Agreement, the Pledge Agreement, -------------------- the Intercept Membership Interest Pledge Agreements, the Trademark Security Agreement, the Intercept Services Partnership Pledge Agreement and all similar agreements entered into guaranteeing payment of, or granting a Lien upon property as security for payment of, the Obligations. "Collateral Reports" means the reports with respect to the Collateral ------------------ referred to in Annex F. ------- "Commitment Termination Date" means the earliest of (a) June 1, 2004, (b) --------------------------- the date of termination of Lender's obligations to make Advances or permit existing Loans to remain outstanding pursuant to Section 8.2(b), and (c) the -------------- date of indefeasible prepayment in full by Borrowers of the Loans, and the permanent reduction of the Commitment to zero dollars ($0). "Commitment" means as to Lender the commitment of Fifty Million Dollars ---------- ($50,000,000.00) on the Closing Date, as such Commitment may be reduced, amortized or adjusted from time to time in accordance with the Agreement. "Contracts" means all "contracts," as such term is defined in the Code, --------- now owned or hereafter acquired by any Borrower, in any event, including all contracts, undertakings, or agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which any Borrower may now or hereafter have any right, title or interest, including any agreement relating to the terms of payment or the terms of performance of any Account. "Copyright License" means any and all rights now owned or hereafter ----------------- acquired by any Borrower under any written agreement granting any right to use any Copyright or Copyright registration. "Copyright Security Agreements" means the Copyright Security Agreements ----------------------------- made in favor of Lender by each applicable Borrower, if any. "Copyrights" means all of the following now owned or hereafter adopted or ---------- acquired by any Borrower: (a) all copyrights and General Intangibles of like nature (whether registered or unregistered), all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Copyright Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof, and (b) all reissues, extensions or renewals thereof. "Default" means any event that, with the passage of time or notice or ------- both, would, unless cured or waived, become an Event of Default. "Default Rate" has the meaning ascribed to it in Section 1.5(d). ------------ -------------- A-4 "Deposit Accounts" means all "deposit accounts" as such term is defined in ---------------- the Code, now or hereafter held in the name of any Borrower. "Disclosure Schedules" means the Schedules prepared by Borrowers and -------------------- denominated as Disclosure Schedules (1.4) through (6.7) in the Index to the --------------- ---- Agreement. "Documents" means all "documents," as such term is defined in the Code, --------- now owned or hereafter acquired by any Borrower, wherever located. "Dollars" or "$" means lawful currency of the United States of America. ------- - "EBITDA" means, with respect to any Person for any fiscal period, without ------ duplication, an amount equal to earnings before interest, taxes, depreciation and amortization, as calculated in accordance with GAAP. "Environmental Laws" means all applicable federal, state, local and ------------------ foreign laws, statutes, ordinances, codes, rules, standards and regulations, now or hereafter in effect, and any applicable judicial or administrative interpretation thereof, including any applicable judicial or administrative order, consent decree, order or judgment, imposing liability or standards of conduct for or relating to the regulation and protection of human health, safety, the environment and natural resources (including ambient air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation). Environmental Laws include the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. [sec][sec] 9601 et seq.) ("CERCLA"); the Hazardous Materials ------ ------ Transportation Authorization Act of 1994 (49 U.S.C. [sec][sec] 5101 et -- seq.); the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. - --- [sec][sec] 136 et seq.); the Solid Waste Disposal Act (42 U.S.C. ------ [sec][sec] 6901 et seq.); the Toxic Substance Control Act (15 U.S.C. ------ [sec][sec] 2601 et seq.); the Clean Air Act (42 U.S.C. [sec][sec] 7401 ------ et seq.); the Federal Water Pollution Control Act (33 U.S.C. [sec][sec] - ------ 1251 et seq.); the Occupational Safety and Health Act (29 U.S.C. [sec][sec] ------ 651 et seq.); and the Safe Drinking Water Act (42 U.S.C. [sec][sec] 300(f) ------ et seq.), and any and all regulations promulgated thereunder, and all analogous - ------- state, local and foreign counterparts or equivalents and any transfer of ownership notification or approval statutes. "Environmental Liabilities" means, with respect to any Person, all ------------------------- liabilities, obligations, responsibilities, response, remedial and removal costs, investigation and feasibility study costs, capital costs, operation and maintenance costs, losses, damages, punitive damages, property damages, natural resource damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts and consultants), fines, penalties, sanctions and interest incurred as a result of or related to any claim, suit, action, investigation, proceeding or demand by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law, including any arising under or related to any Environmental Laws, Environmental Permits, or in connection with any Release or threatened Release or presence of a Hazardous Material whether on, at, in, under, from or about or in the vicinity of any real or personal property. A-5 "Environmental Permits" means all permits, licenses, authorizations, --------------------- certificates, approvals or registrations required by any Governmental Authority under any Environmental Laws. "Equipment" means all "equipment," as such term is defined in the Code, --------- now owned or hereafter acquired by any Borrower, wherever located and, in any event, including all such Borrower's machinery and equipment, including processing equipment, conveyors, machine tools, data processing and computer equipment, including embedded software and peripheral equipment and all engineering, processing and manufacturing equipment, office machinery, furniture, materials handling equipment, tools, attachments, accessories, automotive equipment, trailers, trucks, forklifts, molds, dies, stamps, motor vehicles, rolling stock and other equipment of every kind and nature, trade fixtures and fixtures not forming a part of real property, together with all additions and accessions thereto, replacements therefor, all parts therefor, all substitutes for any of the foregoing, fuel therefor, and all manuals, drawings, instructions, warranties and rights with respect thereto, and all products and proceeds thereof and condemnation awards and insurance proceeds with respect thereto. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time, and any regulations promulgated thereunder. "ERISA Affiliate" means, with respect to any Borrower, any trade or --------------- business (whether or not incorporated) that, together with such Borrower, are treated as a single employer within the meaning of Sections 414(b), (c), (m) or (o) of the IRC. "ERISA Event" means, with respect to any Borrower or any ERISA Affiliate, ----------- (a) any event described in Section 4043(c) of ERISA with respect to a Title IV Plan; (b) the withdrawal of any Borrower or ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (c) the complete or partial withdrawal of any Borrower or any ERISA Affiliate from any Multiemployer Plan; (d) the filing of a notice of intent to terminate a Title IV Plan or the treatment of a plan amendment as a termination under Section 4041 of ERISA; (e) the institution of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC; (f) the failure by any Borrower or ERISA Affiliate to make when due required contributions to a Multiemployer Plan or Title IV Plan unless such failure is cured within 30 days; (g) any other event or condition that might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Title IV Plan or Multiemployer Plan or for the imposition of liability under Section 4069 or 4212(c) of ERISA; (h) the termination of a Multiemployer Plan under Section 4041A of ERISA or the reorganization or insolvency of a Multiemployer Plan under Section 4241 or 4245 of ERISA; or (i) the loss of a Qualified Plan's qualification or tax exempt status; or (j) the termination of a Plan described in Section 4064 of ERISA. "ESOP" means a Plan that is intended to satisfy the requirements of ---- Section 4975(e)(7) of the IRC. "Event of Default" has the meaning ascribed to it in Section 8.1. ---------------- ----------- A-6 "Fair Labor Standards Act" means the Fair Labor Standards Act, 29 U.S.C. ------------------------ [sect.]201 et seq. ------ "Federal Reserve Board" means the Board of Governors of the Federal --------------------- Reserve System. "Fees" means any and all fees payable to Lender pursuant to the Agreement ---- or any of the other Loan Documents. "Financial Covenants" means the financial covenants set forth in Annex G. ------------------- ------- "Financial Statements" means the consolidated and consolidating income -------------------- statements, statements of cash flows and balance sheets of Borrowers delivered in accordance with Section 3.4 and Annex E. ----------- ------- "Fiscal Month" means any of the monthly accounting periods of Borrowers. ------------ "Fiscal Quarter" means any of the quarterly accounting periods of -------------- Borrowers ending on March 31, June 30, September 30 and December 31 of each year. "Fiscal Year" means any of the annual accounting periods of Borrowers ----------- ending on December 31 of each year. "Fixtures" means all "fixtures" as such term is defined in the Code, now -------- owned or hereafter acquired by any Borrower. "Funded Debt" means, with respect to any Person, without duplication, all ----------- Indebtedness for borrowed money evidenced by notes, bonds, debentures, or similar evidences of Indebtedness that by its terms matures more than one year from, or is directly or indirectly renewable or extendible at such Person's option under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of more than one year from the date of creation thereof, and specifically including Capital Lease Obligations, current maturities of long-term debt, revolving credit and short-term debt extendible beyond one year at the option of the debtor, and also including, in the case of Borrowers, the Obligations and, without duplication, Guaranteed Indebtedness consisting of guaranties of Funded Debt of other Persons. "GAAP" means generally accepted accounting principles in the United States ---- of America consistently applied, as such term is further defined in Annex G to ------- the Agreement. "General Intangibles" means all "general intangibles," as such term is ------------------- defined in the Code, now owned or hereafter acquired by any Borrower, including all right, title and interest that such Borrower may now or hereafter have in or under any Contract, all payment intangibles, customer lists, Licenses, Copyrights, Trademarks, Patents, and all applications therefor and reissues, extensions or renewals thereof, rights in Intellectual Property, interests in partnerships, joint ventures and other business associations, licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, goodwill (including the goodwill associated with any Trademark or Trademark License), all rights and A-7 claims in or under insurance policies (including insurance for fire, damage, loss and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key man and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit, checking and other bank accounts, rights to receive tax refunds and other payments, rights to receive dividends, distributions, cash, Instruments and other property in respect of or in exchange for pledged Stock and Investment Property, rights of indemnification, all books and records, correspondence, credit files, invoices and other papers, including without limitation all tapes, cards, computer runs and other papers and documents in the possession or under the control of such Borrower or any computer bureau or service company from time to time acting for such Borrower. "Goods" means all "goods" as defined in the Code, now owned or hereafter ----- acquired by any Borrower, wherever located, including embedded software to the extent included in "goods" as defined in the Code, manufactured homes, standing timber that is cut and removed for sale and unborn young of animals. "Governmental Authority" means any nation or government, any state or ---------------------- other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranteed Indebtedness" means as to any Person, any obligation of such ----------------------- Person guaranteeing, providing comfort or otherwise supporting any Indebtedness, lease, dividend, or other obligation ("primary obligation") of ------------------ any other Person (the "primary obligor") in any manner, including any --------------- obligation or arrangement of such Person to (a) purchase or repurchase any such primary obligation, (b) advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet condition of the primary obligor, (c) purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, (d) protect the beneficiary of such arrangement from loss (other than product warranties given in the ordinary course of business) or (e) indemnify the owner of such primary obligation against loss in respect thereof. The amount of any Guaranteed Indebtedness at any time shall be deemed to be an amount equal to the lesser at such time of (x) the stated or determinable amount of the primary obligation in respect of which such Guaranteed Indebtedness is incurred and (y) the maximum amount for which such Person may be liable pursuant to the terms of the instrument embodying such Guaranteed Indebtedness, or, if not stated or determinable, the maximum reasonably anticipated liability (assuming full performance) in respect thereof. "Hazardous Material" means any substance, material or waste that is ------------------ regulated by, or forms the basis of liability now or hereafter under, any Environmental Laws, including any material or substance that is (a) defined as a "solid waste," "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste," "restricted hazardous waste," "pollutant," "contaminant," "hazardous constituent," "special waste," "toxic substance" or other similar term or phrase under any Environmental Laws, or (b) petroleum or any fraction or by-product thereof, asbestos, polychlorinated biphenyls (PCB's), or any radioactive substance. A-8 "Indebtedness" means, with respect to any Person, without duplication, (a) ------------ all indebtedness of such Person for borrowed money or for the deferred purchase price of property payment for which is deferred 6 months or more, but excluding obligations to trade creditors incurred in the ordinary course of business that are unsecured and not overdue by more than 6 months unless being contested in good faith, (b) all reimbursement and other obligations with respect to letters of credit, bankers'acceptances and surety bonds, whether or not matured, (c) all obligations evidenced by notes, bonds, debentures or similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Capital Lease Obligations and the present value (discounted at the LIBOR Market Index Rate as in effect on the Closing Date) of future rental payments under all synthetic leases, (f) all obligations of such Person under commodity purchase or option agreements or other commodity price hedging arrangements, in each case whether contingent or matured, (g) all obligations of such Person under any foreign exchange contract, currency swap agreement, interest rate swap, cap or collar agreement or other similar agreement or arrangement designed to alter the risks of that Person arising from fluctuations in currency values or interest rates, in each case whether contingent or matured, (h) all Indebtedness referred to above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property or other assets (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, and (i) the Obligations. "Indemnified Liabilities" has the meaning ascribed to it in Section 1.13. ----------------------- ------------ "Indemnified Person" has the meaning ascribed to in Section 1.13. ------------------ ------------ "Instruments" means all "instruments," as such term is defined in the ----------- Code, now owned or hereafter acquired by any Borrower, wherever located, and, in any event, including all certificated securities, all certificates of deposit, and all promissory notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "Intellectual Property" means any and all Licenses, Patents, Copyrights, --------------------- Trademarks, and the goodwill associated with such Trademarks. "InterCept" shall have the meaning ascribed to such term in the preamble --------- hereof. "InterCept Membership Pledge Agreements" means the (i) Membership Interest -------------------------------------- Pledge Agreement of even date herewith executed by InterCept in favor of Lender and (ii) Membership Interest Pledge Agreement of even date herewith, executed by ICPT Services, pledging all membership interests of their respective Subsidiaries. "InterCept Pledge Agreement" means the Pledge Agreement of even date -------------------------- herewith executed by InterCept in favor of Lender, pledging all Stock of its Subsidiaries, if any, and all Intercompany Notes owing to or held by it. A-9 "Intercompany Notes" has the meaning ascribed to it in Section 6.3. ------------------ ----------- "Interest Payment Date" means, the first Business Day of each month to --------------------- occur while such Loan is outstanding, provided, that, in addition to the -------- foregoing, each of (x) the date upon which the Commitment has been terminated and the Loans have been paid in full and (y) the Commitment Termination Date shall be deemed to be an "Interest Payment Date" with respect to any interest that has then accrued under the Agreement. "Inventory" means all "inventory," as such term is defined in the Code, --------- now owned or hereafter acquired by any Borrower, wherever located, and in any event including inventory, merchandise, goods and other personal property that are held by or on behalf of any Borrower for sale or lease or are furnished or are to be furnished under a contract of service, or that constitute raw materials, work in process, finished goods, returned goods, or materials or supplies of any kind, nature or description used or consumed or to be used or consumed in such Borrower's business or in the processing, production, packaging, promotion, delivery or shipping of the same, including all supplies and embedded software. "Investment Property" means all "investment property" as such term is ------------------- defined in the Code now owned or hereafter acquired by any Borrower, wherever located, including (i) all securities, whether certificated or uncertificated, including stocks, bonds, interests in limited liability companies, partnership interests, treasuries, certificates of deposit, and mutual fund shares; (ii) all securities entitlements of any Borrower, including the rights of any Borrower to any securities account and the financial assets held by a securities intermediary in such securities account and any free credit balance or other money owing by any securities intermediary with respect to that account; (iii) all securities accounts of any Borrower; (iv) all commodity contracts of any Borrower; and (v) all commodity accounts held by any Borrower. "IRC" means the Internal Revenue Code of 1986 and all regulations --- promulgated thereunder. "IRS" means the Internal Revenue Service. --- "Lender" means First Union National Bank and such term shall include any ------ assignee of such Lender. "Letter-of-Credit Rights" means "letter-of-credit rights" as such term is ----------------------- defined in the Code, now owned or hereafter acquired by any Borrower, including rights to payment or performance under a letter of credit, whether or not such Borrower, as beneficiary, has demanded or is entitled to demand payment or performance. "LIBOR Market Index Rate" shall mean, for any day, the rate for 1 month ----------------------- U.S. dollar deposits as reported on Telerate page 3750 as of 11:00 a.m., London time, on such day, or if such day is not a London business day, then the immediately preceding London business day (or if not so reported, then as determined by Bank from a recognized source or interbank quotation). "License" means any Copyright License, Patent License, Trademark License ------- or other license of rights or interests now held or hereafter acquired by any Borrower. A-10 "Lien" means any mortgage or deed of trust, pledge, hypothecation, ---- assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction). "Litigation" has the meaning ascribed to it in Section 3.13. ---------- ------------ "Loan Account" has the meaning ascribed to it in Section 1.12. ------------ ------------ "Loan Documents" means the Agreement, the Note, the Collateral Documents, -------------- and all other agreements, instruments, documents and certificates identified in the Closing Checklist executed and delivered to, or in favor of, Lender and including all other pledges, powers of attorney, consents, assignments, contracts, notices, and all other written matter whether heretofore, now or hereafter executed by or on behalf of any Borrower, or any employee of any Borrower, and delivered to Lender in connection with the Agreement or the transactions contemplated thereby. Any reference in the Agreement or any other Loan Document to a Loan Document shall include all appendices, exhibits or schedules thereto, and all amendments, restatements, supplements or other modifications thereto, and shall refer to the Agreement or such Loan Document as the same may be in effect at any and all times such reference becomes operative. "Loans" means the Revolving Loan Advances. ----- "Margin Stock" has the meaning ascribed to in Section 3.10. ------------ ------------ "Material Adverse Effect" means a material adverse effect on (a) the ----------------------- business, assets, operations, prospects or financial or other condition of the Borrowers considered as a whole, (b) any Borrower's ability to pay any of the Loans or any of the other Obligations in accordance with the terms of the Agreement, (c) any material portion of the Collateral or Lender's Liens on the Collateral or the priority of such Liens, or (d) Lender's rights and remedies under the Agreement and the other Loan Documents. "Maximum Amount" means Fifty Million Dollars ($50,000,000). -------------- "Multiemployer Plan" means a "multiemployer plan" as defined in Section ------------------ 4001(a)(3) of ERISA, and to which any Borrower or ERISA Affiliate is making, is obligated to make or has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Net Profit" means the excess of a Person's total revenues over its total ---------- expenses after giving effect to Taxes, as calculated in accordance with GAAP. "Net Worth" means, with respect to any Person as of any date of --------- determination, the book value of the assets of such Person, minus the sum of ----- (a) reserves applicable thereto, and (b) all of A-11 such Person's liabilities on a consolidated basis (including accrued and deferred income taxes), all as determined in accordance with GAAP. "Note" means the Revolving Note. ---- "Notice of Revolving Credit Advance" has the meaning ascribed to it in ---------------------------------- Section 1.1(a). - -------------- "Obligations" means all loans, advances, debts, liabilities and ----------- obligations for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or such amounts are liquidated or determinable) owing by any Borrower to Lender, and all covenants and duties regarding such amounts, of any kind or nature, present or future, whether or not evidenced by any note, agreement or other instrument, arising under the Agreement or any of the other Loan Documents. This term includes all principal, interest (including all interest that accrues after the commencement of any case or proceeding by or against any Borrower in bankruptcy, whether or not allowed in such case or proceeding), Fees, Charges, expenses, attorneys'fees and any other sum chargeable to any Borrower under the Agreement or any of the other Loan Documents. "Partnership Pledge Agreements" means the (i) Partnership Pledge Agreement ----------------------------- of even date herewith executed by InterCept Services in favor of Lender and (ii) Partnership Pledge Agreement of even date herewith executed by ICPT TX in favor of Lender, pledging all partnership interests of its Subsidiaries. "Patent License" means rights under any written agreement now owned or -------------- hereafter acquired by any Borrower granting any right with respect to any invention on which a Patent is in existence. "Patent Security Agreements" means the Patent Security Agreements made in -------------------------- favor of Lender by each applicable Borrower. "Patents" means all of the following in which any Borrower now holds or ------- hereafter acquires any interest: (a) all letters patent of the United States or of any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or of any other country, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State, or any other country, and (b) all reissues, continuations, continuations-in-part or extensions thereof. "PBGC" means the Pension Benefit Guaranty Corporation. ---- "Pension Plan" means a Plan described in Section 3(2) of ERISA. ------------ "Permitted Encumbrances" means the following encumbrances: (a) Liens for ---------------------- taxes or assessments or other governmental Charges not yet due and payable or which are being contested in accordance with Section 5.2(b); (b) pledges or ------------- deposits of money securing statutory obligations under workmen's compensation, unemployment insurance, social security or public liability laws or similar legislation (excluding Liens under ERISA); (c) pledges or deposits of money securing bids, tenders, contracts (other than contracts for the payment of money) or leases A-12 to which any Borrower is a party as lessee made in the ordinary course of business; (d) inchoate and unperfected workers', mechanics'or similar liens arising in the ordinary course of business, so long as such Liens attach only to Equipment, Fixtures and/or Real Estate; (e) carriers', warehousemen's, suppliers'or other similar possessory liens arising in the ordinary course of business and securing liabilities in an outstanding aggregate amount not in excess of $100,000.00 at any time, so long as such Liens attach only to Inventory; (f) deposits securing, or in lieu of, surety, appeal or customs bonds in proceedings to which any Borrower is a party; (g) any attachment or judgment lien not constituting an Event of Default under Section 8.1(j); (h) -------------- zoning restrictions, easements, licenses, or other restrictions on the use of any Real Estate or other minor irregularities in title (including leasehold title) thereto, so long as the same do not materially impair the use, value, or marketability of such Real Estate; (i) presently existing or hereafter created Liens in favor of Lender; and (j) Liens expressly permitted under clauses (b) ----------- and (c) of Section 6.7 of the Agreement. --- "Person" means any individual, sole proprietorship, partnership, joint ------ venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, other entity or government (whether federal, state, county, city, municipal, local, foreign, or otherwise, including any instrumentality, division, agency, body or department thereof). "Plan" means, at any time, an "employee benefit plan", as defined in ---- Section 3(3) of ERISA, that any Borrower or ERISA Affiliate maintains, contributes to or has an obligation to contribute to or has maintained, contributed to or had an obligation to contribute to at any time within the past 7 years on behalf of participants who are or were employed by any Borrower or ERISA Affiliate. "Pledge Agreement" means the InterCept Pledge Agreement. ---------------- "Proceeds" means "proceeds," as such term is defined in the Code, -------- including (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to any Borrower from time to time with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to any Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any Person acting under color of governmental authority), (c) any claim of any Borrower against third parties (i) for past, present or future infringement of any Patent or Patent License, or (ii) for past, present or future infringement or dilution of any Copyright, Copyright License, Trademark or Trademark License, or for injury to the goodwill associated with any Trademark or Trademark License, (d) any recoveries by any Borrower against third parties with respect to any litigation or dispute concerning any of the Collateral including claims arising out of the loss or nonconformity of, interference with the use of, defects in, or infringement of rights in, or damage to, Collateral, (e) all amounts collected on, or distributed on account of, other Collateral, including dividends, interest, distributions and Instruments with respect to Investment Property and pledged Stock, and (f) any and all other amounts, rights to payment or other property acquired upon the sale, lease, license, exchange or other disposition of Collateral and all rights arising out of Collateral. A-13 "Qualified Plan" means a Pension Plan that is intended to be tax-qualified -------------- under Section 401(a) of the IRC. "Real Estate" has the meaning ascribed to it in Section 3.6. ----------- ----------- "Release" means any release, threatened release, spill, emission, leaking, ------- pumping, pouring, emitting, emptying, escape, injection, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Material in the indoor or outdoor environment, including the movement of Hazardous Material through or in the air, soil, surface water, ground water or property. "Reserves" means reserves established by Lender from time to time against -------- or Borrowing Availability that Lender may, in its reasonable credit judgment, establish from time to time. Without limiting the generality of the foregoing, Reserves established to ensure the payment of accrued Interest Expenses or Indebtedness shall be deemed to be a reasonable exercise of Lender's credit judgment. "Restricted Payment" means, with respect to any Borrower (a) the ------------------ declaration or payment of any dividend or the incurrence of any liability to make any other payment or distribution of cash or other property or assets in respect of Stock; (b) any payment on account of the purchase, redemption, defeasance, sinking fund or other retirement of such Borrower's Stock or any other payment or distribution made in respect thereof, either directly or indirectly; (c) (intentionally reserved) (d) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire Stock of such Borrower now or hereafter outstanding; (e) any payment of a claim for the rescission of the purchase or sale of, or for material damages arising from the purchase or sale of, any shares of such Borrower's Stock or of a claim for reimbursement, indemnification or contribution arising out of or related to any such claim for damages or rescission; (f) any payment, loan, contribution, or other transfer of funds or other property to any Stockholder of such Borrower other than payment of compensation and reimbursement of business expenses in the ordinary course of business to Stockholders who are employees of such Person; and (g) any payment of management fees (or other fees of a similar nature) by such Borrower to any Stockholder of such Borrower or its Affiliates. "Retiree Welfare Plan" means, at any time, a Welfare Plan that provides -------------------- for continuing coverage or benefits for any participant or any beneficiary of a participant after such participant's termination of employment, other than continuation coverage provided pursuant to Section 4980B of the IRC and at the sole expense of the participant or the beneficiary of the participant. "Revolving Credit Advance" has the meaning ascribed to it in Section ------------------------ ------- 1.1(a)(i). - --------- "Revolving Loan" means, at any time the aggregate amount of Revolving -------------- Credit Advances outstanding to Borrowers. "Revolving Note" has the meaning ascribed to it in Section 1.1(a)(ii). -------------- ------------------ "Security Agreement" means the Security Agreement of even date herewith ------------------ entered into by and among Lender, and each Borrower that is a signatory thereto. A-14 "Software" means all "software" as such term is defined in the Code, now -------- owned or hereafter acquired by any Borrower, other than software embedded in any category of Goods, including all computer programs and all supporting information provided in connection with a transaction related to any program. "Solvent" means, with respect to any Person on a particular date, that on ------- such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person; (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities (such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can be reasonably be expected to become an actual or matured liability. "Stock" means all shares, options, warrants, general or limited ----- partnership interests, membership interests or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934). "Stockholder" means, with respect to any Person, each holder of Stock of ----------- such Person. "Subsidiary" means, with respect to any Person, (a) any corporation of ---------- which an aggregate of more than 50% of the outstanding Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person or one or more Subsidiaries of such Person, or with respect to which any such Person has the right to vote or designate the vote of 50% or more of such Stock whether by proxy, agreement, operation of law or otherwise, and (b) any partnership or limited liability company in which such Person and/or one or more Subsidiaries of such Person shall have an interest (whether in the form of voting or participation in profits or capital contribution) of more than 50% or of which any such Person is a general partner or may exercise the powers of a general partner. Unless the context otherwise requires, each reference to a Subsidiary shall be a reference to a Subsidiary of a Borrower. ProImage, Inc. shall not be considered a Subsidiary. "Supporting Obligations" means all "supporting obligations" as such term ---------------------- is defined in the Code, including letters of credit and guaranties issued in support of Accounts, Chattel Paper, Documents, General Intangibles, Instruments, or Investment Property. A-15 "Taxes" means taxes, levies, imposts, deductions, Charges or ----- withholdings, and all liabilities with respect thereto, excluding taxes imposed on or measured by the net income of Lender or a Lender by the jurisdiction under the laws of which Lender is organized or conduct business or any political subdivision thereof. "Termination Date" means the date on which (a) the Loans have been ---------------- indefeasibly repaid in full, (b) all other Obligations under the Agreement and the other Loan Documents have been completely discharged, and (c) none of Borrowers shall have any further right to borrow any monies under the Agreement. "Title IV Plan" means a Pension Plan (other than a Multiemployer Plan), ------------- that is covered by Title IV of ERISA, and that any Borrower or ERISA Affiliate maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Total Capitalization" means Funded Debt plus Net Worth. -------------------- ---- "Trademark Security Agreements" means the Trademark Security Agreements ----------------------------- made in favor of Lender by each applicable Borrower. "Trademark License" means rights under any written agreement now owned or ----------------- hereafter acquired by any Borrower granting any right to use any Trademark. "Trademarks" means all of the following now owned or hereafter existing or ---------- adopted or acquired by any Borrower: (a) all trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature (whether registered or unregistered), all registrations and recordings thereof, and all applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof; (b) all reissues, extensions or renewals thereof; and (c) all goodwill associated with or symbolized by any of the foregoing. "Unfunded Pension Liability" means, at any time, the aggregate amount, if -------------------------- any, of the sum of (a) the amount by which the present value of all accrued benefits under each Title IV Plan exceeds the fair market value of all assets of such Title IV Plan allocable to such benefits in accordance with Title IV of ERISA, all determined as of the most recent valuation date for each such Title IV Plan using the actuarial assumptions for funding purposes in effect under such Title IV Plan, and (b) for a period of 5 years following a transaction which might reasonably be expected to be covered by Section 4069 of ERISA, the liabilities (whether or not accrued) that could be avoided by any Borrower or any ERISA Affiliate as a result of such transaction. "Welfare Plan" means a Plan described in Section 3(i) of ERISA. ------------ Rules of construction with respect to accounting terms used in the Agreement or the other Loan Documents shall be as set forth in Annex G. All ------- other undefined terms contained in any of the Loan Documents shall, unless the context indicates otherwise, have the meanings provided A-16 for by the Code to the extent the same are used or defined therein; in the event that any term is defined differently in different Articles or Divisions of the Code, the definition contained in Article or Division 9 shall control. Unless otherwise specified, references in the Agreement or any of the Appendices to a Section, subsection or clause refer to such Section, subsection or clause as contained in the Agreement. The words "herein," "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole, including all Annexes, Exhibits and Schedules, as the same may from time to time be amended, restated, modified or supplemented, and not to any particular section, subsection or clause contained in the Agreement or any such Annex, Exhibit or Schedule. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter genders. The words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation"; the word "or" is not exclusive; references to Persons include their respective successors and assigns (to the extent and only to the extent permitted by the Loan Documents) or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. Whenever any provision in any Loan Document refers to the knowledge (or an analogous phrase) of any Borrower, such words are intended to signify that such Borrower has actual knowledge or awareness of a particular fact or circumstance or that such Borrower, if it had exercised reasonable diligence, would have known or been aware of such fact or circumstance. A-17 ANNEX B (SECTION 1.2) ----------- TO CREDIT AGREEMENT ---------------- LETTERS OF CREDIT ----------------- (a) Issuance. Subject to the terms and conditions of the Agreement, -------- Lender agrees to incur, from time to time prior to the Commitment Termination Date, upon the request of Borrowers on behalf of the applicable Borrower and for such Borrower's account, Letter of Credit Obligations by causing Letters of Credit to be issued by Lender for such Borrower's account. The aggregate amount of all such Letter of Credit Obligations shall not at any time exceed the least of (i) One Million and no/100 Dollars ($1,000,000.00) (the "L/C Sublimit") and ------------ (ii) the Maximum Amount less the aggregate outstanding principal balance of the Revolving Credit Advances. No such Letter of Credit shall have an expiry date that is more than one year following the date of issuance thereof, unless otherwise determined by the Lender, in its sole discretion. (b) (i) Advances Automatic. In the event that Lender shall make any ------------------ payment on or pursuant to any Letter of Credit Obligation, such payment shall then be deemed automatically to constitute a Revolving Credit Advance to the Borrowers under Section 1.1(a) of the Agreement regardless of whether a Default ------------- or Event of Default has occurred and is continuing and notwithstanding any Borrower's failure to satisfy the conditions precedent set forth in Section 2. --------- (c) Cash Collateral. --------------- (i) If Borrowers are required to provide cash collateral for any Letter of Credit Obligations pursuant to this Annex B prior to the Commitment Termination Date, Borrowers will pay to Lender cash or cash equivalents acceptable to Lender ("Cash Equivalents") in an amount equal to ---------------- 105% of the maximum amount then available to be drawn under each applicable Letter of Credit outstanding for the benefit of such Borrower. Such funds or Cash Equivalents shall be held by Lender in a cash collateral account (the "Cash Collateral Account") maintained by Lender. The Cash Collateral Account ----------------------- shall be in the name of the applicable Borrower and shall be pledged to, and subject to the control of, Lender, in a manner satisfactory to Lender. Borrowers hereby pledge and grant to Lender a security interest in all such funds and Cash Equivalents held in the Cash Collateral Account from time to time and all proceeds thereof, as security for the payment of all amounts due in respect of the Letter of Credit Obligations and other Obligations, whether or not then due. The Agreement, including this Annex B, shall constitute a ------- security agreement under applicable law. (ii) If any Letter of Credit Obligations, whether or not then due and payable, shall for any reason be outstanding on the Commitment Termination Date, Borrowers shall either (A) provide cash collateral therefor in the manner described above, or (B) cause all such Letters of Credit and guaranties thereof, if any, to be canceled and returned, or (C) deliver a stand-by letter (or letters) of credit in guaranty of such Letter of Credit Obligations, which stand-by letter (or letters) of credit shall be of like tenor and duration (plus 30 additional days) as, and in an amount equal to 105% of, the aggregate maximum amount then available to be drawn B-1 under, the Letters of Credit to which such outstanding Letter of Credit Obligations relate and shall be issued by a Person, and shall be subject to such terms and conditions, as are be satisfactory to Lender in its sole discretion. (iii) From time to time after funds are deposited in the Cash Collateral Account by any Borrower, whether before or after the Commitment Termination Date, Lender may apply such funds or Cash Equivalents then held in the Cash Collateral Account to the payment of any amounts, and in such order as Lender may elect, as shall be or shall become due and payable by such Borrower to Lender with respect to such Letter of Credit Obligations of such Borrower and, upon the satisfaction in full of all Letter of Credit Obligations of such Borrower, to any other Obligations of any Borrower then due and payable. (iv) No Borrower nor any Person claiming on behalf of or through any Borrower shall have any right to withdraw any of the funds or Cash Equivalents held in the Cash Collateral Account, except that upon the termination of all Letter of Credit Obligations and the payment of all amounts payable by Borrowers to Lender in respect thereof, any funds remaining in the Cash Collateral Account shall be applied to other Obligations then due and owing and upon payment in full of such Obligations, any remaining amount shall be paid to Borrowers or as otherwise required by law. Interest earned on deposits in the Cash Collateral Account shall be for the account of InterCept. (d) Fees and Expenses. Borrowers agree to pay to Lender, as ----------------- compensation to Lender for Letter of Credit Obligations incurred hereunder, (i) all costs and expenses incurred by Lender on account of such Letter of Credit Obligations, and (ii) for each month during which any Letter of Credit Obligation shall remain outstanding, a fee (the "Letter of Credit Fee") in an -------------------- amount equal to one percent (1%) per annum multiplied by the maximum amount available from time to time to be drawn under the applicable Letter of Credit. Such fee shall be paid to Lender s, on the first day of each month and on the Commitment Termination Date. In addition, Borrowers shall pay to Lender, on demand, such reasonable charges and expenses of Lender in respect of the issuance, negotiation, acceptance, amendment, transfer and payment of such Letter of Credit or otherwise payable pursuant to the application and related documentation under which such Letter of Credit is issued. (e) Request for Incurrence of Letter of Credit Obligations. Borrowers ------------------------------------------------------ shall give Lender at least 2 Business Days'prior written notice requesting the incurrence of any Letter of Credit Obligation. The notice shall be accompanied by the form of the Letter of Credit (which shall be acceptable to the Lender) and a completed Application for Standby Letter of Credit or Application. Notwithstanding anything contained herein to the contrary, Letter of Credit applications by Borrowers and approvals by Lender may be made and transmitted pursuant to electronic codes and security measures mutually agreed upon and established by and among Borrowers and Lender. (f) Obligation Absolute. The obligation of Borrowers to reimburse ------------------- Lender for payments made with respect to any Letter of Credit Obligation shall be absolute, unconditional and irrevocable, without necessity of presentment, demand, protest or other formalities. Such B-2 obligations of Borrowers shall be paid strictly in accordance with the terms hereof under all circumstances including the following: (i) any lack of validity or enforceability of any Letter of Credit or the Agreement or the other Loan Documents or any other agreement; (ii) the existence of any claim, setoff, defense or other right that any Borrower or any of their respective Affiliates or Lender may at any time have against a beneficiary or any transferee of any Letter of Credit (or any Persons or entities for whom any such transferee may be acting), or any other Person, whether in connection with the Agreement, the Letter of Credit, the transactions contemplated herein or therein or any unrelated transaction (including any underlying transaction between any Borrower or any of their respective Affiliates and the beneficiary for which the Letter of Credit was procured); (iii) any draft, demand, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by Lender (except as otherwise expressly provided in paragraph (g)(ii)(C) below) under any Letter of Credit or guaranty thereof against presentation of a demand, draft or certificate or other document that does not comply with the terms of such Letter of Credit or such guaranty; (v) any other circumstance or event whatsoever, that is similar to any of the foregoing; or (vi) the fact that a Default or an Event of Default has occurred and is continuing. (g) Indemnification; Nature of Lenders'Duties. ----------------------------------------- (i) In addition to amounts payable as elsewhere provided in the Agreement, Borrowers hereby agree to pay and to protect, indemnify, and save harmless Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys'fees actually incurred) that Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or guaranty thereof, or (B) the failure of Lender seeking indemnification to honor a demand for payment under any Letter of Credit or guaranty thereof as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority, in each case other than to the extent solely as a result of the gross negligence or willful misconduct of Lender (as finally determined by a court of competent jurisdiction). (ii) As between Lender and Borrowers, Borrowers assume all risks of the acts and omissions of, or misuse of any Letter of Credit by, beneficiaries of any Letter of Credit. In furtherance and not in limitation of the foregoing, to the fullest extent permitted by law, Lender shall not be responsible for: (A) the form, validity, sufficiency, accuracy, B-3 genuineness or legal effect of any document issued by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) failure of the beneficiary of any Letter of Credit to comply fully with conditions required in order to demand payment under such Letter of Credit; provided, that in the case of any payment by Lender under any Letter of Credit - -------- or guaranty thereof, Lender shall be liable to the extent such payment was made solely as a result of its gross negligence or willful misconduct (as finally determined by a court of competent jurisdiction) in determining that the demand for payment under such Letter of Credit or guaranty thereof complies on its face with any applicable requirements for a demand for payment under such Letter of Credit or guaranty thereof; (D) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise; (E) errors in interpretation of technical terms; (F) any loss or delay in the transmission or otherwise of any document required in order to make a payment under any Letter of Credit or guaranty thereof or of the proceeds thereof; (G) the credit of the proceeds of any drawing under any Letter of Credit or guaranty thereof; and (H) any consequences arising from causes beyond the control of Lender. None of the above shall affect, impair, or prevent the vesting of any of Lender's rights or powers hereunder or under the Agreement. (iii) Nothing contained herein shall be deemed to limit any waivers, covenants or indemnities made by Borrowers in favor of any Lender in any letter of credit application, reimbursement agreement or similar document, instrument or agreement between or among Borrowers and Lender. B-4 ANNEX C (SECTION 1.8) ----------- TO CREDIT AGREEMENT ---------------- CASH MANAGEMENT SYSTEM ---------------------- [INTENTIONALLY RESERVED] C-1 ANNEX D (SECTION 2.1(A)) ------------- TO CREDIT AGREEMENT ---------------- CLOSING CHECKLIST ----------------- In addition to, and not in limitation of, the conditions described in Section ------- 2.1 of the Agreement, pursuant to Section 2.1(a), the following items must be - --- -------------- received by Lender in form and substance satisfactory to Lender on or prior to the Closing Date (each capitalized term used but not otherwise defined herein shall have the meaning ascribed thereto in Annex A to the Agreement): ------- A. Appendices. All Appendices to the Agreement, in form and substance ---------- satisfactory to Lender. B. Revolving Note. Duly executed original of the Revolving Note, dated -------------- the Closing Date. C. Security Agreement. A duly executed original of the Security ------------------ Agreement, dated the Closing Date, and all instruments, documents and agreements executed pursuant thereto. D. Insurance. Satisfactory evidence that the insurance policies --------- required by Section 5.4 are in full force and effect, together with appropriate ----------- evidence showing loss payable and/or additional insured clauses or endorsements, as requested by Lender, in favor of Lender. E. Security Interests and Code Filings. ----------------------------------- (a) Evidence satisfactory to Lender that Lender has a valid and perfected first priority security interest in the Collateral, including (i) such documents duly executed by each Borrower (including financing statements under the Code and other applicable documents under the laws of any jurisdiction with respect to the perfection of Liens) as Lender may request in order to perfect its security interests in the Collateral and (ii) copies of Code search reports listing all effective financing statements that name any Borrower as debtor, together with copies of such financing statements, none of which shall cover the Collateral. (b) Evidence satisfactory to Lender, including copies, of all financing statements filed in favor of any Borrower with respect to each location, if any, at which Inventory may be consigned. (c) [Intentionally Reserved] F. [Intentionally Reserved] G. Intellectual Property Security Agreements. Duly executed originals ----------------------------------------- of Trademark Security Agreements, Copyright Security Agreements and Patent Security Agreements, each dated the Closing Date and signed by each Borrower which owns Trademarks, Copyrights and/or Patents, as applicable, all in form and substance reasonably satisfactory to Lender, together with all instruments, documents and agreements executed pursuant thereto. D-1 H. [Intentionally Reserved] I. [Intentionally Reserved] J. [Intentionally Reserved] K. [Intentionally Reserved] L. [Intentionally Reserved] M. [Intentionally Reserved] N. Charter and Good Standing. For each Borrower, such Person's (a) ------------------------- charter and all amendments thereto, (b) good standing certificates (including verification of tax status) in its state of incorporation and (c) good standing certificates (including verification of tax status) and certificates of qualification to conduct business in each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, each dated a recent date prior to the Closing Date and certified by the applicable Secretary of State or other authorized Governmental Authority. O. Bylaws and Resolutions. For each Borrower, (a) such Person's ---------------------- bylaws, together with all amendments thereto and (b) resolutions of such Person's Board of Directors, approving and authorizing the execution, delivery and performance of the Loan Documents to which such Person is a party and the transactions to be consummated in connection therewith, each certified as of the Closing Date by such Person's corporate secretary or an assistant secretary as being in full force and effect without any modification or amendment. P. Incumbency Certificates. For each Borrower, signature and ----------------------- incumbency certificates of the officers of each such Person executing any of the Loan Documents, certified as of the Closing Date by such Person's corporate secretary or an assistant secretary as being true, accurate, correct and complete. Q. Opinions of Counsel. Duly executed originals of opinions of Nelson, ------------------- Mullins, Riley & Scarborough, counsel for the Borrowers, together with any local counsel opinions reasonably requested by Lender, each in form and substance reasonably satisfactory to Lender and its counsel, dated the Closing Date, and each accompanied by a letter addressed to such counsel from the Borrowers, authorizing and directing such counsel to address its opinion to Lender, and to include in such opinion an express statement to the effect that Lender is authorized to rely on such opinion. R. Pledge Agreement. A duly executed original of the InterCept Pledge ---------------- Agreement accompanied by, if applicable, share certificates representing all of the outstanding Stock being pledged pursuant to such Pledge Agreement and stock powers for such share certificates executed in blank. S. Membership Pledge Agreements. Duly executed originals of the ---------------------------- Membership Pledge Agreements. D-2 T. Partnership Pledge Agreements. Duly executed original of the ----------------------------- Partnership Pledge Agreements. U. [Intentionally Reserved] V. [Intentionally Reserved] W. Officer's Certificate. Lender shall have received duly executed --------------------- originals of a certificate of each Borrower, signed by the Chief Executive Officer or Chief Financial Officer of such Borrower, dated the Closing Date, stating that, since December 31, 2000 (a) no event or condition has occurred or is existing which could reasonably be expected to have a Material Adverse Effect; (b) there has been no material adverse change in the industry in which any Borrower operates; (c) no Litigation has been commenced which, if successful, would have a Material Adverse Effect or could challenge any of the transactions contemplated by the Agreement and the other Loan Documents; (d) there have been no Restricted Payments made by any Borrower; and (e) there has been no material increase in liabilities, liquidated or contingent, and no material decrease in assets of any Borrower or any of its Subsidiaries. X. Waivers. Lender shall have received landlord waivers and consents, ------- bailee letters and mortgagee agreements in form and substance reasonably satisfactory to Lender, in each case as required pursuant to Section 5.9. ----------- Y. [Intentionally Reserved] Z. [Intentionally Reserved] AA. [Intentionally Reserved] BB. [Intentionally Reserved] CC. Audited Financials; Financial Condition. Lender shall have received --------------------------------------- the Financial Statements and other materials set forth in Section 3.4, in each case in form and substance reasonably satisfactory to Lender, and Lender shall be satisfied, in its sole discretion, with all of the foregoing. Lender shall have further received a certificate of each Borrower, signed by the Chief Executive Officer and/or the Chief Financial Officer of each Borrower, to the effect that such Borrower will be Solvent upon the consummation of the transactions contemplated herein. DD. [Intentionally Reserved] EE. Other Documents. Such other certificates, documents and agreements --------------- respecting any Borrower as Lender may, in its sole discretion, request. D-3 ANNEX E (SECTION 4.1(a)) --------------- TO CREDIT AGREEMENT ---------------- FINANCIAL STATEMENTS AND REPORTING ---------------------------------- Borrowers shall deliver or cause to be delivered to Lender, the following: (a) Quarterly Financials. Within 45 days after the end of each Fiscal -------------------- Quarter, consolidated and consolidating financial information regarding Borrowers and their Subsidiaries, including (i) unaudited balance sheets as of the close of such Fiscal Quarter and the related statements of income and cash flow for that portion of the Fiscal Year ending as of the close of such Fiscal Quarter and (ii) unaudited statements of income and cash flows for such Fiscal Quarter, in each case setting forth in comparative form the figures for the corresponding period in the prior year, all prepared in accordance with GAAP (subject to normal year-end adjustments). Such financial information shall be accompanied by (A) a Compliance Certificate in respect of each of the Financial Covenants that is tested on a quarterly basis and (B) the certification of the Borrower Representative that (i) such financial information presents fairly in accordance with GAAP (subject to normal year-end adjustments) the financial position, results of operations and statements of cash flows of Borrowers and their Subsidiaries, on both a consolidated and consolidating basis, as at the end of such Fiscal Quarter and for that portion of the Fiscal Year then ended, (ii) any other information presented is true, correct and complete in all material respects and that there was no Default or Event of Default in existence as of such time or, if a Default or Event of Default has occurred and is continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event of Default. (c) (Intentionally Reserved) ------------------------ (d) Annual Audited Financials. Within 90 days after the end of each ------------------------- Fiscal Year, audited Financial Statements for Borrowers and their Subsidiaries on a consolidated and (unaudited) consolidating basis, consisting of balance sheets and statements of income and retained earnings and cash flows, setting forth in comparative form in each case the figures for the previous Fiscal Year, which Financial Statements shall be prepared in accordance with GAAP and certified without qualification, by an independent certified public accounting firm of national standing or otherwise acceptable to Lender. Such Financial Statements shall be accompanied by (i) a statement prepared in reasonable detail showing the calculations used in determining compliance with each of the Financial Covenants, (ii) a report from such accounting firm to the effect that, in connection with their audit examination, nothing has come to their attention to cause them to believe that a Default or Event of Default has occurred (or specifying those Defaults and Events of Default that they became aware of), it being understood that such audit examination extended only to accounting matters and that no special investigation was made with respect to the existence of Defaults or Events of Default, (iii) a letter addressed to Lender in form and substance reasonably satisfactory to Lender and subject to standard qualifications required by nationally recognized accounting firms, signed by such accounting firm acknowledging that Lender is entitled to rely upon such accounting firm's certification of such audited Financial Statements, and (iv) the certification of the Borrowers that all such E-1 Financial Statements present fairly in accordance with GAAP the financial position, results of operations and statements of cash flows of Borrowers and their Subsidiaries on a consolidated and consolidating basis, as at the end of such Fiscal Year and for the period then ended, and that there was no Default or Event of Default in existence as of such time or, if a Default or Event of Default has occurred and is continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event of Default. (e) Management Letters. Within 5 Business Days after receipt thereof by ------------------ any Borrower, copies of all management letters, exception reports or similar letters or reports received by such Borrower from its independent certified public accountants. (f) Default Notices. As soon as practicable, and in any event within 5 --------------- Business Days after an executive officer of any Borrower has actual knowledge of the existence of any Default, Event of Default or other event that has had a Material Adverse Effect, telephonic or telecopied notice specifying the nature of such Default or Event of Default or other event, including the anticipated effect thereof, which notice, if given telephonically, shall be promptly confirmed in writing on the next Business Day. (g) SEC Filings and Press Releases. At Lender's request, copies of: (i) ------------------------------ all Financial Statements, reports, notices and proxy statements made publicly available by any Borrower to its security holders; (ii) all regular and periodic reports and all registration statements and prospectuses filed by any Borrower with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority; and (iii) all press releases and other statements made available by any Borrower to the public concerning material changes or developments in the business of any such Person. (h) (Intentionally Reserved) ------------------------ (i) Supplemental Schedules. Supplemental disclosures, if any, required ---------------------- by Section 5.6. ----------- (j) Litigation. In writing, promptly upon learning thereof, notice of ---------- any Litigation commenced or threatened against any Borrower that (i) combined with other threatened litigation, seeks damages in excess of $1,000,000.00, (ii) seeks injunctive relief, (iii) is asserted or instituted against any Plan, its fiduciaries or its assets or against any Borrower or ERISA Affiliate in connection with any Plan, (iv) alleges criminal misconduct by any Borrower, (v) alleges the violation of any law regarding, or seeks remedies in connection with, any Environmental Liabilities or (vi) involves any product recall. (k) Insurance Notices. Disclosure of losses or casualties required by ----------------- Section 5.4. - ----------- (l) Lease Default Notices. Within 2 Business Days after receipt --------------------- thereof, copies of (i) any and all default notices received under or with respect to any leased location or public warehouse where Collateral valued at more then $500,000.00 is located, and (ii) such other notices or documents as Lender may reasonably request. E-2 (m) Other Documents. Such other financial and other information --------------- respecting any Borrower's business or financial condition as Lender shall from time to time reasonably request. E-3 ANNEX F (SECTION 4.1(b)) -------------- TO CREDIT AGREEMENT ---------------- COLLATERAL REPORTS ------------------ Borrowers shall deliver or cause to be delivered such reports, statements and reconciliations with respect to the Collateral or Obligations of any or all Borrowers as Lender shall from time to time request in its reasonable discretion. F-1 ANNEX G (SECTION 6.10) ------------ TO CREDIT AGREEMENT ---------------- FINANCIAL COVENANTS ------------------- Borrowers covenant and agree with Lender that from and after the date hereof, and so long as the Obligations remain outstanding or this Agreement remains in effect, that: (a) Funded Debt/EBITDA. Borrowers shall maintain a ratio of their ------------------ consolidated Funded Debt to EBITDA, as calculated on a rolling four-quarter basis, of less than or equal to 3.0 to 1.0, as measured at the end of each Fiscal Quarter. (b) Funded Debt/Total Capitalization. Borrowers shall maintain a -------------------------------- ratio of their consolidated Funded Debt to Total Capitalization, as calculated on a rolling four-quarter basis, of no greater than 0.50 to 1.0, as measured at the end of each Fiscal Quarter. (c) Net Worth. Borrowers shall have a consolidated Net Worth as of --------- September 30, 2001 of at least $215,000,000.00, and such minimum Net Worth shall increase by an amount equal to (i) 75% of Borrower's consolidated Net Profit for each Fiscal Quarter thereafter plus (ii) the amount of the net ---- proceeds, if any, of any secondary or other Stock offerings by InterCept occurring during such Fiscal Quarter. Unless otherwise specifically provided herein, any accounting term used in the Agreement shall have the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed in accordance with GAAP consistently applied. That certain items or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. If any "Accounting Changes" (as defined below) occur and such changes result in a change in the calculation of the financial covenants, standards or terms used in the Agreement or any other Loan Document, then Borrowers and Lender agree to enter into negotiations in order to amend such provisions of the Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating Borrowers' and their Subsidiaries' financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made. "Accounting Changes" means (i) changes in accounting principles required by the ------------------ promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants (or successor thereto or any agency with similar functions), (ii) changes in accounting principles concurred in by any Borrower's certified public accountants; (iii) purchase accounting adjustments under A.P.B. 16 or 17 and EITF 88-16, and the application of the accounting principles set forth in FASB 109, including the establishment of reserves pursuant thereto and any subsequent reversal (in whole or in part) of such reserves; and (iv) the reversal of any reserves established as a result of purchase accounting adjustments. All such adjustments resulting from expenditures made subsequent to the Closing Date (including capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made and deducted as part of the G-1 calculation of EBITDA in such period. If Lender and Borrowers agree upon the required amendments, then after appropriate amendments have been executed and the underlying Accounting Change with respect thereto has been implemented, any reference to GAAP contained in the Agreement or in any other Loan Document shall, only to the extent of such Accounting Change, refer to GAAP, consistently applied after giving effect to the implementation of such Accounting Change. If Lender and Borrowers cannot agree upon the required amendments within 30 days following the date of implementation of any Accounting Change, then all Financial Statements delivered and all calculations of financial covenants and other standards and terms in accordance with the Agreement and the other Loan Documents shall be prepared, delivered and made without regard to the underlying Accounting Change. G-2 ANNEX H (SECTION 9.9(a)) -------------- TO CREDIT AGREEMENT ---------------- [INTENTIONALLY RESERVED] H-1 ANNEX I (SECTION 11.10) ------------- TO CREDIT AGREEMENT ---------------- NOTICE ADDRESSES ---------------- (A) If to Lender, at First Union National Bank 999 Peachtree Street, 6th Floor Atlanta, Georgia 30309 Attention: Mr. Jim Ulmer Telecopier No.: 404-225-4066 Telephone No.: 404-827-7360 with copies to: Smith, Gambrell & Russell, LLP 1230 Peachtree Street, N.E., Suite 3100 Promenade II Atlanta, Georgia 30309-3592 Attention: Greta L. Thomasson, Esq. Telecopier No.: 404-815-3509 Telephone No.: 404-815-3500 (B) If to any Borrower, to Borrower Representative, at The InterCept Group, Inc. 3150 Holcomb Bridge Road, Suite 200 Norcross, Georgia 30071 Attention: Mr. Scott Meyerhoff Telecopier No.: 770-242-6803 Telephone No.: 770-840-2430 with copies to: Nelson, Mullins, Riley & Scarborough, LLP First Union Plaza, Suite 1400 999 Peachtree Street, NE Atlanta, Georgia 30309 Attention: Charles D. Vaughn, Esq. Telecopier No.: 404-817-6050 Telephone No.: 404-817-6189 I-1 SCHEDULE 1.1 LENDER'S REPRESENTATIVES Jim Ulmer First Union National Bank 999 Peachtree Street 6/th/ Floor Atlanta, Georgia 30309 DISCLOSURE SCHEDULE 3.1 TYPE OF ENTITY; STATE OF ORGANIZATION THE INTERCEPT GROUP, INC., a Georgia corporation C-TEQ, INC., an Oklahoma corporation SBS DATA SERVICES, INC., an Alabama corporation DPSC ACQUISITION CORP., a Georgia corporation ICPT ACQUISITION I, LLC, a Georgia limited liability company INTERCEPT COMMUNICATIONS TECHNOLOGIES, INC., a Georgia corporation INTERCEPT SERVICES, LLC, a Georgia limited liability company INTERCEPT TX I, LLC, a Georgia limited liability company INTERCEPT OUTPUT SOLUTIONS, LP, a Texas limited partnership INTERCEPT SUPPLY, LP, a Texas limited partnership DISCLOSURE SCHEDULE 3.2 EXECUTIVE OFFICES, COLLATERAL LOCATIONS, FEIN THE INTERCEPT GROUP INC. FEIN: 58-2237359 Chief Executive Office: Other Locations: - ---------------------- --------------- 3150 Holcomb Bridge Road, Suite 200 See Attached Spreadsheet Norcross, Georgia 30071 C-TEQ, INC. FEIN: 73-1282145 Chief Executive Office: Other Locations: - ---------------------- --------------- 6111 NW 2nd Street None Oklahoma City, Oklahoma 73127 SBS DATA SERVICES, INC. FEIN: 63-1116434 Chief Executive Office: Other Locations: - ---------------------- --------------- 2084 Valleydale Road None Birmingham, AL 35242 DPSC ACQUISITION CORP. FEIN: 58-2603653 Chief Executive Office: Other Locations: - ---------------------- --------------- 3150 Holcomb Bridge Road, Suite 200 27200 Agoura Road, Suite 100 Norcross, Georgia 30071 Calabasas Hills, CA 91301 ICPT ACQUISITION I, LLC FEIN: None Chief Executive Office: Other Locations: - ---------------------- --------------- 3150 Holcomb Bridge Road, Suite 200 None Norcross, Georgia 30071 INTERCEPT COMMUNICATIONS TECHNOLOGIES, INC. FEIN: 58-2456007 Chief Executive Office: Other Locations: - ---------------------- --------------- 3150 Holcomb Bridge Road, Suite 200 None Norcross, Georgia 30071 INTERCEPT SERVICES, LLC FEIN: 58-2653381 Chief Executive Office: Other Locations: - ---------------------- --------------- 3150 Holcomb Bridge Road, Suite 200 None Norcross, Georgia 30071 INTERCEPT TX I, LLC FEIN: None Chief Executive Office: Other Locations: - ---------------------- --------------- 3150 Holcomb Bridge Road, Suite 200 None Norcross, Georgia 30071 INTERCEPT OUTPUT SOLUTIONS, LP FEIN: 74-3020857 Chief Executive Office: Other Locations: - ---------------------- --------------- 981 Isom Road None San Antonio, Texas 78216 INTERCEPT SUPPLY, LP FEIN: 74-3020858 Chief Executive Office: Other Locations: - ---------------------- --------------- 981 Isom Road None San Antonio, Texas 78216 DISCLOSURE SCHEDULE 3.6 REAL ESTATE AND LEASES (1) See Disclosure Schedule 3.2 for all properties, owned and leased. (2) InterCept owns a 60,000 sq. ft. building at 202 Broadway, Maryville, TN and leases approximately 25,000 sq. ft. of this building to other parties. (3) There are no purchase options, rights of first refusal or other similar contractual rights executed by any Borrower pertaining to any Real Estate. DISCLOSURE SCHEDULE 3.7 LABOR MATTERS None DISCLOSURE SCHEDULE 3.8 VENTURES, SUBSIDIARIES AND AFFILIATES; OUTSTANDING STOCK Other than stock option plans and stock purchase plans of InterCept listed on Disclosure Schedule 3.12, there are no outstanding rights to purchase, options, warrants or similar rights or agreements pursuant to which any Borrower may be required to issue, sell, repurchase or redeem any of its Stock or other equity securities or any Stock or other equity securities of its Subsidiaries. DISCLOSURE SCHEDULE 3.11 TAX MATTERS None DISCLOSURE SCHEDULE 3.12 ERISA PLANS The InterCept Group, Inc. Amended and Restated 1996 Stock Option Plan The InterCept Group, Inc. Employee Stock Purchase Plan Other Employee Benefit Plans - ---------------------------- UNUM Self Insured Short Term Disability UNUM New Jersey Short Term Disability (TDB) UNUM Long Term Disability and Basic Life/AD&D (Company Provided) UNUM Lifestyle Life/AD&D (Voluntary) CIGNA Self Insured HMO Health Insurance (EPP) CIGNA Self Insured PPO Health Insurance CIGNA Self Insured Dental Indemnity Insurance EYEMed Vision Care (Voluntary) 1) FlexServe - Flexible Spending Account Plan 2) COBRAServe - COBRA Administration 401(k) Plan DISCLOSURE SCHEDULE 3.13 LITIGATION None DISCLOSURE SCHEDULE 3.15 INTELLECTUAL PROPERTY Registered Trademarks - --------------------- (1) CallReporter III Serial Number 75232355; Filing Date January 28, 1997; Registration Number 2218129 (2) RiskReporter I Serial Number 74153642; Filing Date April 3, 1991; Registration Number 1672497 (3) Vision Serial Number 74630630; Filing Date February 6, 1995; Registration Number 2031464 (4) Renaissance Imaging Serial Number 75257075; Filing Date March 14, 1997; Registration Number 2265380 Other than the above registered trademarks, there are no Patents, Trademarks, Copyrights or Licenses. No Borrower is aware of any infringement claim by any Person with respect to any Intellectual Property. DISCLOSURE SCHEDULE 3.17 HAZARDOUS MATERIALS None. DISCLOSURE SCHEDULE 3.19 DEPOSIT AND DISBURSEMENT ACCOUNTS See attached schedule. DISCLOSURE SCHEDULE 3.20 GOVERNMENT CONTRACTS None. DISCLOSURE SCHEDULE 5.1 TRADE NAMES Corporate Names - --------------- THE INTERCEPT GROUP, INC. C-TEQ, INC. SBS DATA SERVICES, INC. DPSC ACQUISITION CORP. ICPT ACQUISITION I, LLC INTERCEPT COMMUNICATIONS TECHNOLOGIES, INC. INTERCEPT SERVICES, LLC INTERCEPT TX I, LLC INTERCEPT OUTPUT SOLUTIONS, LP INTERCEPT SUPPLY, LP Trade Names - ----------- InterCept DPSC Software ProVesa DISCLOSURE SCHEDULE 6.3 INDEBTEDNESS None. DISCLOSURE SCHEDULE 6.4(a) TRANSACTIONS WITH AFFILIATES Amended and Restated Credit Agreement, dated February 2, 2001, by and among Netzee, Inc., The InterCept Group, Inc. and John H. Harland Company. Loan Agreement dated December 3, 2001 among The InterCept Group, Inc. SLMsoft.com, Inc, an Ontario corporation, and SLMsoft.com, Inc., a Kansas corporation. DISCLOSURE SCHEDULE 6.7 EXISTING LIENS None. EX-21.1 7 dex211.txt SUBSIDIARIES OF INTERCEPT, INC. Exhibit 21.1 Subsidiaries of InterCept, Inc. InterCept Communications Technologies Inc. SBS Data Services, Inc. DPSC Acquisition Corp. C-TEQ, Inc. ICPT Acquisition I, LLC InterCept Services, LLC InterCept TX I, LLC InterCept Output Solutions, LP InterCept Supply, LP InterCept Billing Company, LLC (newly formed - no operations yet) ProImage, Inc. Unconsolidated Subsidiary: Netzee, Inc. EX-23.1 8 dex231.txt CONSENT OF ARTHUR ANDERSEN Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into InterCept, Inc.'s previously filed Registration Statements on Form S-8 (File No. 333-70237 and File No. 333-63530). /s/ Arthur Andersen Atlanta, Georgia March 29, 2002 EX-99.1 9 dex991.txt LETTER FROM INTERCEPT REGARDING ARTHUR ANDERSEN Exhibit 99.1 InterCept, Inc. 3150 Holcomb Bridge Road, Suite 200 Norcross, Georgia 30071 March 29, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: Arthur Andersen LLP ("Andersen") has represented to InterCept, Inc. that its audit of the financial statements contained in InterCept, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001 was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on the audit and availability of national office consultation. InterCept, Inc. By: /s/ Scott R. Meyerhoff -------------------------- Name: Scott R. Meyerhoff Title: Senior Vice President, Chief Financial Officer, and Secretary EX-99.2 10 dex992.txt FINANCIAL STATEMENT OF NETZEE, INC. Exhibit 99.2 NETZEE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 2000 AND 2001 TABLE OF CONTENTS
PAGE ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 2000 and 2001................................................... F-3 Consolidated Statements of Operations for the period from January 1, 1999 to February 28, 1999, for the period from March 1, 1999 to December 31, 1999 and for the years ended December 31, 2000 and 2001................. F-4 Consolidated Statements of Changes in Shareholders' (Deficit) Equity for the period from January 1, 1999 to February 28, 1999, for the period from March 1, 1999 to December 31, 1999 and for the years ended December 31, 2000 and 2001.......................................... F-5 Consolidated Statements of Cash Flows for the period from January 1, 1999 to February 28, 1999, for the period from March 1, 1999 to December 31, 1999 and for the years ended December 31, 2000 and 2001................. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Netzee, Inc.: We have audited the accompanying consolidated balance sheets of NETZEE, INC. (a Georgia corporation, formerly Direct Access Interactive, Inc.) AND SUBSIDIARIES as of December 31, 2000 and 2001 and the related consolidated statements of operations, shareholders' equity, and cash flows for the period from March 1, 1999 to December 31, 1999, and for the years ended December 31, 2000 and 2001 and the consolidated statements of operations, shareholders' deficit, and cash flows of its predecessor (Direct Access Interactive, Inc.) for the period from January 1, 1999 to February 28, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Netzee, Inc. and subsidiaries as of December 31, 2000 and 2001, the results of its operations and its cash flows for the years ended December 31, 2000 and 2001 and the period from March 1, 1999 to December 31, 1999, and the results of operations and cash flows of its predecessor (Direct Access Interactive, Inc.) for the period from January 1, 1999 to February 28, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Atlanta, Georgia February 15, 2002 (except with respect to Notes 9, 15 and 21, as to which the date is March 29, 2002) F-2 NETZEE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 DECEMBER 31, 2001 ----------------- ----------------- ASSETS Current assets: Cash and cash equivalents................................. $ 960,231 $ 464,889 Restricted cash........................................... 135,000 325,000 Accounts receivable, net of allowance for doubtful accounts of $641,447 and $375,202, at December 31, 2000 and 2001, respectively................................. 5,836,904 2,708,227 Leases receivable, current................................ 671,580 630,083 Prepaid and other current assets.......................... 1,130,294 1,091,442 ------------- ------------- Total current assets.............................. 8,734,009 5,219,641 Property and equipment, net of accumulated depreciation of $3,552,971 and $3,007,404 at December 31, 2000 and 2001, respectively..................................... 6,616,804 4,315,900 Intangible assets, net of accumulated amortization of $47,824,555 and $50,028,727 at December 31, 2000 and 2001, respectively..................................... 89,950,659 22,261,157 Leases receivable, net of current portion................. 1,202,606 638,267 Other non-current assets.................................. 210,942 65,607 ------------- ------------- Total assets...................................... $ 106,715,020 $ 32,500,572 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,784,480 $ 1,303,835 Accrued liabilities....................................... 4,372,821 1,354,045 Deferred revenue.......................................... 7,263,099 2,697,894 Note payable, current portion............................. 134,231 -- Other current liabilities................................. 668,151 1,039,996 ------------- ------------- Total current liabilities......................... 14,222,782 6,395,770 Related-party borrowings.................................. 20,000,000 13,191,715 Note payable, net of current portion...................... 1,465,590 -- Deferred revenue, net of current portion.................. 1,436,576 1,180,780 ------------- ------------- Total liabilities................................. 37,124,948 19,587,485 Commitments and contingencies (Note 20) Redeemable preferred stock, no par value; 5,000,000 shares authorized: 8% convertible preferred stock, $13 stated value; 500,000 shares authorized and outstanding at December 31, 2000 and 2001................................ 6,500,000 6,500,000 Shareholders' equity: Common stock, no par value; 70,000,000 shares authorized at December 31, 2000 and 2001, 3,358,642 and 3,377,911 shares issued and outstanding at December 31, 2000 and 2001, respectively................................. 192,304,886 190,555,255 Notes receivable from shareholders........................ (1,525,467) (579,486) Deferred stock compensation............................... (3,595,682) (629,234) Accumulated deficit....................................... (124,093,665) (184,114,228) ------------- ------------- Total shareholders' equity........................ 63,090,072 5,232,307 ------------- ------------- Total liabilities and shareholders' equity........ $ 106,715,020 $ 32,500,572 ============= =============
The accompanying notes are an integral part of these consolidated balance sheets. F-3 The year ended December 31, 1999 is presented in two columns below due to the acquisition of the predecessor on March 9, 1999, which established a new basis of accounting for certain assets and liabilities of Netzee, Inc. The purchase method of accounting was used to record assets acquired and liabilities assumed by Netzee, Inc. Such accounting generally results in increased amortization reported in future periods. Accordingly, the accompanying consolidated financial statements of the Predecessor and Netzee, Inc. are not comparable in all material respects, since those financial statements report financial position, results of operations, and cash flows on a different basis of accounting. NETZEE, INC. (FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR")) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR NETZEE, INC. ---------------- ---------------------------------------------- FOR THE FOR THE PERIOD FROM PERIOD FROM NUARY 1, 1999 TO MARCH 1, 1999 TO YEAR ENDED YEAR ENDED FEBRUARY 28, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1999 2000 2001 ---------------- ---------------- ------------ ------------ Revenues: Monthly maintenance and service............. $ 33,082 $ 1,737,592 $ 17,760,838 $ 23,467,947 License, hardware, implementation and other..................................... 57,080 522,159 2,150,706 2,296,096 -------- ------------ ------------ ------------ Total revenues........................ 90,162 2,259,751 19,911,544 25,764,043 Operating expenses: Cost of services, license, hardware, implementation and maintenance............ 44,358 1,913,960 10,105,570 14,115,008 Selling and marketing....................... 12,350 2,575,257 9,422,085 3,559,257 General and administrative, excluding amortization of stock-based compensation and restructuring costs................... 49,399 1,844,629 11,342,280 11,556,547 Amortization of stock-based compensation.... -- 4,591,888 3,192,688 1,255,437 Depreciation................................ 2,476 190,524 1,773,436 2,065,577 Amortization................................ -- 12,863,016 52,802,042 32,969,808 Restructuring costs......................... -- -- 211,200 2,002,139 Long-lived asset impairment charges......... -- -- 26,300,278 12,142,146 Net loss on sales of assets................. -- -- -- 4,719,863 -------- ------------ ------------ ------------ Total operating expenses.............. 108,583 23,979,274 115,149,579 84,385,782 -------- ------------ ------------ ------------ Operating loss................................ (18,421) (21,719,523) (95,238,035) (58,621,739) Interest expense, net......................... (3,469) (670,503) (1,050,664) (878,824) -------- ------------ ------------ ------------ Loss before extraordinary item................ (21,890) (22,390,026) (96,288,699) (59,500,563) Extraordinary loss............................ -- (4,518,760) -- -- -------- ------------ ------------ ------------ Net loss before preferred dividends and cumulative effect of change in accounting principle................................... (21,890) (26,908,786) (96,288,699) (59,500,563) Preferred stock dividends..................... -- (24,200) (520,000) (520,000) -------- ------------ ------------ ------------ Net loss attributable to common shareholders before cumulative effect of change in accounting principle........................ (21,890) (26,932,986) (96,808,699) (60,020,563) Cumulative effect of change in accounting principle................................... -- -- (351,980) -- -------- ------------ ------------ ------------ Net loss attributable to common shareholders................................ $(21,890) $(26,932,986) $(97,160,679) $(60,020,563) ======== ============ ============ ============ Basic and diluted loss per share before extraordinary item.......................... $ (15.54) $ (34.81) $ (17.89) Extraordinary loss per share.................. (3.13) -- -- ------------ ------------ ------------ Basic and diluted net loss per share before cumulative effect of change in accounting principle................................... $ (18.67) $ (34.81) $ (17.89) Loss per share from cumulative effect of change in accounting principle.............. -- (0.13) -- ------------ ------------ ------------ Basic and diluted loss per share.............. $ (18.67) $ (34.94) $ (17.89) ============ ============ ============ Weighted average common shares outstanding.... 1,442,754 2,781,141 3,354,909 ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. F-4 The purchase method of accounting was used to record assets acquired and liabilities assumed by Netzee, Inc. Such accounting generally results in increased amortization reported in future periods. Accordingly, the accompanying consolidated financial statements of the Predecessor and Netzee, Inc. are not comparable in all material respects, since those financial statements report financial position, results of operations, and cash flows on a different basis of accounting. NETZEE, INC. (FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR")) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
COMMON STOCK ------------------------ SHAREHOLDERS' DEFERRED SHARES(1) AMOUNT WARRANTS NOTES RECEIVABLE COMPENSATION --------- ------------ ----------- ---------------- ------------ Predecessor: Balance, December 31, 1998.................. 2,000,000 $ 50,871 $ -- $ -- $ -- Net loss..................................... -- -- -- -- -- --------- ------------ ----------- ----------- ------------ Balance, February 28, 1999.................. 2,000,000 $ 50,871 $ -- $ -- $ -- ========= ============ =========== =========== ============ Netzee, Inc.: Initial InterCept investment, March 9, 1999........................................ 1,000,147 $ 1,379,965 $ -- $ -- $ -- Issuance of common stock for notes receivable.................................. 194,375 3,110,000 -- (3,110,000) -- Capital contributions........................ -- 1,990,556 -- -- -- Issuance of common stock in connection with acquisitions................................ 765,280 71,884,011 -- -- -- Issuance of common stock in connection with marketing agreements........................ 16,077 1,479,096 -- -- -- Deferred stock-based compensation............ 20,000 13,224,100 -- (85,000) (13,139,100) Amortization of deferred stock-based compensation................................ -- -- -- -- 4,591,888 Stock options exercised for note receivable.................................. 3,750 93,300 -- (93,300) -- Payment of shareholder notes................. -- -- -- 85,000 -- Interest on shareholder notes................ -- -- -- (111,499) -- Issuance of warrants to purchase common stock....................................... -- -- 4,618,760 -- -- Initial public offering proceeds, net of expenses.................................... 550,000 54,895,583 -- -- -- Net loss attributable to common shareholders................................ -- -- -- -- -- --------- ------------ ----------- ----------- ------------ Balance, December 31, 1999.................. 2,549,629 148,056,611 4,618,760 (3,314,799) (8,547,212) --------- ------------ ----------- ----------- ------------ Exercise of warrants to purchase common stock....................................... 57,735 6,119,857 (4,618,760) -- -- Issuance of common stock and options to purchase common stock in connection with acquisitions................................ 705,232 39,834,929 -- -- -- Issuance of common stock in connection with employer 401k match......................... 47,401 142,204 -- -- -- Forfeiture of restricted shares.............. (3,125) (375,000) -- -- 375,000 Initial public offering expenses............. -- (107,480) -- -- -- Exercise of stock options.................... 1,771 17,607 -- -- -- Interest on shareholder notes................ -- -- -- (214,241) -- Repayment of shareholders' notes............. -- -- -- 2,003,573 -- Amortization of deferred stock-based compensation................................ -- -- -- -- 3,192,688 Forfeiture of stock options.................. -- (1,383,842) -- -- 1,383,842 Net loss attributable to common shareholders................................ -- -- -- -- -- --------- ------------ ----------- ----------- ------------ Balance, December 31, 2000.................. 3,358,642 192,304,886 -- (1,525,467) (3,595,682) --------- ------------ ----------- ----------- ------------ Return of common stock in connection with acquisitions................................ (23,824) (115,885) -- -- -- Forfeitures of stock options................. -- (1,711,011) -- -- 1,711,011 Repayment of shareholders' notes............. -- -- -- 981,659 -- Exercise of stock options.................... 2,223 177 -- -- -- Issuance of common stock in connection with acquisitions................................ 28,572 56,573 -- -- -- Interest on shareholder notes................ -- -- -- (35,678) -- Amortization of deferred stock-based compensation................................ -- -- -- -- 1,255,437 Issuance of common stock in connection with employer 401(k) match....................... 12,298 20,516 -- -- -- Net loss attributable to common shareholders................................ -- -- -- -- -- --------- ------------ ----------- ----------- ------------ Balance, December 31, 2001.................. 3,377,911 $190,555,255 $ -- $ (579,486) $ (629,234) ========= ============ =========== =========== ============ TOTAL ACCUMULATED SHAREHOLDERS' DEFICIT (DEFICIT) EQUITY ------------- ---------------- Predecessor: Balance, December 31, 1998.................. $ (505,689) $ (454,818) Net loss..................................... (21,890) (21,890) ------------- ------------ Balance, February 28, 1999.................. $ (527,579) $ (476,708) ============= ============ Netzee, Inc.: Initial InterCept investment, March 9, 1999........................................ $ -- $ 1,379,965 Issuance of common stock for notes receivable.................................. -- -- Capital contributions........................ -- 1,990,556 Issuance of common stock in connection with acquisitions................................ -- 71,884,011 Issuance of common stock in connection with marketing agreements........................ -- 1,479,096 Deferred stock-based compensation............ -- -- Amortization of deferred stock-based compensation................................ -- 4,591,888 Stock options exercised for note receivable.................................. -- -- Payment of shareholder notes................. -- 85,000 Interest on shareholder notes................ -- (111,499) Issuance of warrants to purchase common stock....................................... -- 4,618,760 Initial public offering proceeds, net of expenses.................................... -- 54,895,583 Net loss attributable to common shareholders................................ (26,932,986) (26,932,986) ------------- ------------ Balance, December 31, 1999.................. (26,932,986) 113,880,373 ------------- ------------ Exercise of warrants to purchase common stock....................................... -- 1,501,097 Issuance of common stock and options to purchase common stock in connection with acquisitions................................ -- 39,834,929 Issuance of common stock in connection with employer 401k match......................... -- 142,204 Forfeiture of restricted shares.............. -- -- Initial public offering expenses............. -- (107,480) Exercise of stock options.................... -- 17,607 Interest on shareholder notes................ -- (214,241) Repayment of shareholders' notes............. -- 2,003,573 Amortization of deferred stock-based compensation................................ -- 3,192,688 Forfeiture of stock options.................. -- -- Net loss attributable to common shareholders................................ (97,160,679) (97,160,679) ------------- ------------ Balance, December 31, 2000.................. (124,093,665) 63,090,072 ------------- ------------ Return of common stock in connection with acquisitions................................ -- (115,885) Forfeitures of stock options................. -- -- Repayment of shareholders' notes............. -- 981,659 Exercise of stock options.................... -- 177 Issuance of common stock in connection with acquisitions................................ -- 56,573 Interest on shareholder notes................ -- (35,678) Amortization of deferred stock based compensation................................ -- 1,255,437 Issuance of common stock in connection with employer 401(k) match....................... -- 20,516 Net loss attributable to common shareholders................................ (60,020,563) (60,020,563) ------------- ------------ Balance, December 31, 2001.................. $(184,114,228) $ 5,232,307 ============= ============
- --------------- (1) All shares have been adjusted to reflect the one-for-eight reverse stock split effected May 16, 2001. The accompanying notes are an integral part of these consolidated statements. F-5 The year ended December 31, 1999 is presented in two columns below due to the acquisition of the predecessor on March 9, 1999, which established a new basis of accounting for certain assets and liabilities of Netzee, Inc. The purchase method of accounting was used to record assets acquired and liabilities assumed by Netzee, Inc. Such accounting generally results in increased amortization reported in future periods. Accordingly, the accompanying consolidated financial statements of the Predecessor and Netzee, Inc. are not comparable in all material respects, since those financial statements report financial position, results of operations, and cash flows on a different basis of accounting. NETZEE, INC. (FORMERLY DIRECT ACCESS INTERACTIVE, INC. ("PREDECESSOR")) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR NETZEE, INC. ------------------- ----------------------------------------------------------- FOR THE PERIOD FROM FOR THE PERIOD FROM JANUARY 1, 1999 TO MARCH 1, 1999 TO YEAR ENDED YEAR ENDED FEBRUARY 28, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001 ------------------- ------------------- ----------------- ----------------- Cash flows from operating activities: Net loss attributable to common shareholders............................... $(21,890) $(26,932,986) $(97,160,679) $(60,020,563) Adjustments to reconcile net loss to net cash used in operating activities: Cumulative effect of change in accounting principle................................ -- -- 351,980 -- Depreciation and amortization.............. 2,476 13,053,540 54,575,478 35,035,385 Stock-based compensation expense........... -- 4,591,888 3,192,688 1,255,437 Asset impairment charges................... -- -- 26,300,278 12,142,146 Provision for bad debt..................... -- -- 579,590 10,572 Net loss on sales of assets................ -- -- -- 4,719,858 Extraordinary loss......................... 4,518,760 -- -- Interest income on shareholder notes....... (111,499) (214,241) (35,678) Changes in assets and liabilities, net of effect of acquisitions and dispositions: Accounts receivable...................... 12,606 (2,008,746) (2,946,615) 2,255,972 Leases receivable........................ -- (198,873) (621,207) 605,836 Prepaid and other current assets......... -- (303,528) (387,938) (175,409) Accounts payable and accrued liabilities............................ (42,889) 3,238,796 (956,124) (3,205,903) Accrued restructuring costs.............. -- -- 98,300 (61,292) Deferred revenue......................... 41,222 1,602,925 990,444 (1,530,326) Other current liabilities................ -- 24,200 639,085 586,795 -------- ------------ ------------ ------------ Net cash used in operating activities........................... (8,475) (2,525,523) (15,558,961) (8,417,170) -------- ------------ ------------ ------------ Cash flows from investing activities: Acquisitions, net of cash acquired........... -- (48,938,638) -- (420,954) Purchase of property, equipment and capitalized software....................... -- (4,233,946) (4,138,335) (2,238,777) Purchase of short-term investments related to restricted cash............................ -- -- (135,000) (575,000) Proceeds from sale of short-term investments related to restricted cash................. -- -- -- 380,000 Proceeds from the sale of assets............. -- -- -- 16,863,801 -------- ------------ ------------ ------------ Net cash (used in) provided by investing activities................. -- (53,172,584) (4,273,335) 14,009,070 -------- ------------ ------------ ------------ Cash flows from financing activities: Contributions from shareholder............... -- 1,240,556 -- -- Related party borrowings..................... -- 41,830,132 27,046,095 10,450,000 Payments on related party borrowings......... -- (31,524,798) (18,003,025) (17,496,706) Decrease in line-of-credit................... -- (277,473) -- -- Payments on notes payable.................... -- (25,865) (3,403,911) (22,372) Net proceeds from refinancing of note payable.................................... -- -- 400,192 -- Re-payment of shareholder notes.............. -- -- 2,003,573 981,659 Payments of preferred stock dividends........ -- -- (24,200) -- Proceeds from exercise of warrants........... -- -- 1,501,097 -- Proceeds from exercise options for common stock...................................... -- -- 17,607 177 Sale of common stock......................... -- 55,707,144 -- -- Decrease in related party loans from shareholder of predecessor entity.......... (2,000) -- -- -- -------- ------------ ------------ ------------ Net cash (used in) provided by financing activities................. (2,000) 66,949,696 9,537,428 (6,087,242) -------- ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents.................................. (10,475) 11,251,589 (10,294,868) (495,342) Cash and cash equivalents beginning of period....................................... 13,985 3,510 11,255,099 960,231 -------- ------------ ------------ ------------ Cash and cash equivalents end of period....... $ 3,510 11,255,099 $ 960,231 $ 464,889 ======== ============ ============ ============
The accompanying notes are an integral part of these statements. F-6 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 2000, AND 2001 1. ORGANIZATION AND NATURE OF BUSINESS ORGANIZATION, FORMATION, CERTAIN ACQUISITIONS AND CERTAIN DISPOSITIONS Netzee, Inc. ("we," "Netzee" or the "Company") is a provider of Internet banking products and services and Internet commerce solutions to small and mid-sized banks, thrifts and credit unions, typically with assets of less than $10 billion. We provide solutions that enable financial institutions to offer their customers a wide array of financial products and services over the Internet. We also offer financial institutions custom web site design, implementation and marketing services, telephone banking products and other support applications. Netzee was formed as a Georgia corporation in August 1999 to be merged with Direct Access Interactive, Inc. ("Direct Access" or the "Predecessor"), a company that was formed in October 1996 to provide Internet and telephone banking products and services. In March 1999, InterCept, Inc. ("InterCept") acquired Direct Access as a wholly owned subsidiary. InterCept currently owns approximately 28% of our common stock. In August 1999, Direct Access acquired SBS Corporation ("SBS") in a merger. Immediately after the merger, Direct Access sold all of the assets of SBS, other than its Internet and telephone banking assets, to our former parent company, InterCept. Based in Birmingham, Alabama, SBS provided automated technology products and services, including Internet and telephone banking systems, to community financial institutions nationwide. In September 1999, Direct Access was merged into Netzee, with Netzee being the surviving corporation. On that same day, Netzee acquired the Internet banking divisions (the "Divisions") of each of TIB The Independent BankersBank ("TIB"), a Texas state chartered and Federal Reserve member bank, and The Bankers Bank, a Georgia state chartered and Federal Reserve member bank. Each of these entities is a "bankers' bank," which is a bank that exclusively serves and is owned by other financial institutions. In September 1999, we also acquired all of the ownership interests in Call Me Bill, LLC ("Call Me Bill") based in Elizabethtown, Kentucky. Call Me Bill provided 24-hour electronic bill payment services to financial institutions' customers. Subsequently, we integrated these services into our core Internet banking product. In May 2001, we sold a portion of these assets which we considered a non-core component of our business to iPay, LLC ("iPay"), a related party, which also assumed certain of the liabilities associated with the assets (see Note 4). In September 1999, we also acquired Dyad Corporation ("Dyad"). Based in Norcross, Georgia, Dyad developed, among other things, proprietary loan application, approval and fulfillment software. In November 1999, we completed our initial public offering. We issued 550,000 shares of common stock (including the exercise of a portion of the underwriter's over-allotment option) at an offering price of $112 per share. Net proceeds from the offering were approximately $55 million after deducting underwriters' discounts, commissions and expenses of the offering. We used the proceeds to repay principal and accrued interest owed to InterCept pursuant to outstanding promissory notes and previous working capital advances and to acquire DPSC Software, Inc. ("DPSC") in December 1999. Located near Los Angeles, California, DPSC provided regulatory reporting and support applications designed to meet the special needs of community financial institutions. In February 2001, we sold substantially all of these assets to InterCept, which also assumed substantially all of the liabilities associated with the assets (see Note 4). In March 2000, we acquired certain of the assets and assumed certain liabilities of Digital Visions, Inc. ("DVI") based in Minneapolis, Minnesota. DVI provided Internet-based financial information tools for F-7 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) community financial institutions. In November 2001, we sold substantially all of these assets to SS&C Technologies, Inc. ("SS&C"), which also assumed certain of the liabilities associated with the assets (see Note 4). In July 2000, we acquired certain assets and assumed certain liabilities of Card Plus, Inc. ("Card Plus"). Located in Norcross, Georgia, Card Plus provided software and outsourced consultants for systems development. In November 2000, we acquired certain assets and assumed certain liabilities of John H. Harland Company ("Harland"). The assets acquired were principally located in Trumbull, Connecticut and Portland, Oregon and are used to provide Internet banking and bill payment services. As a result of our purchase of these assets, Harland now has beneficial ownership of approximately 16% of our common stock. In March 2001, we purchased certain assets of HomeCom's Internet banking business and assumed certain of HomeCom's operating liabilities related to the business. The assets acquired were principally located in Atlanta, Georgia and are used to provide Internet banking services (see Note 3). We collectively refer to Call Me Bill, Card Plus, DPSC, DVI, Dyad, HomeCom, the Internet banking and bill payment assets of Harland, the Internet and telephone banking operations of SBS and the Divisions as the "Acquired Operations." We have incurred net losses since our inception. As of December 31, 2001, we had an accumulated deficit of approximately $184 million. These losses have resulted from the costs we have incurred to develop our products and services, and to increase our customer base and build our infrastructure as well as from the amortization of intangible assets associated with the Acquired Operations. We believe that our existing capital resources, together with cash provided by our operations and borrowings under our credit facility, will be sufficient to fund our working capital requirements for the next 12 months. If we are unable to achieve and maintain our cost savings goals, if our working capital requirements exceed our current expectations, if cash provided by our operations is less than anticipated, or if we make additional acquisitions, we may need to raise additional capital either through debt or equity sources before that time. We cannot be sure that we will be able to obtain the additional financing necessary to satisfy these additional capital requirements or to implement our strategy on acceptable terms or at all. Additionally, we may need to further extend the due dates of our line of credit as well as our preferred stock. If we cannot obtain this financing or these extensions on terms acceptable to us, or at all, we may be forced to curtail some planned business expansion, we may be unable to fund our ongoing operations, or we may have to cease operations altogether. Alternatively, we may be required to reduce the level of spending on capital and operating expenses in order to utilize our existing financing and sources of liquidity to operate the business on a reduced scale. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The financial statements of the Predecessor for the period from January 1, 1999 through February 28, 1999, include only the accounts of Direct Access. The consolidated financial statements for the period from March 1, 1999 to December 31, 1999 and for the years ended December 31, 2000 and 2001 include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements of the Predecessor and the Company are not comparable in all material respects, since those financial statements report the financial position, results of operations, and cash flows on a different basis of accounting. Although Direct Access was acquired on March 9, 1999, the accompanying financial statements for the year ended December 31, 1999 are presented as if the acquisition occurred on the close of business on February 28, 1999 instead of March 9, 1999. The operations between March 1, 1999 and March 9, 1999 were not material. The accompanying financial statements prior to F-8 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) February 28, 1999 present the financial position and the results of operations and cash flows of Direct Access, the predecessor to Netzee. The Acquired Operations noted above were accounted for using the purchase method of accounting. Accordingly, the results of operations of the Acquired Operations have been included in the consolidated financial statements from their respective dates of acquisition forward. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS We consider all short-term, highly liquid investments with an original maturity date of three months or less to be cash equivalents. RESTRICTED CASH Restricted cash at December 31, 2001 is comprised of certificates of deposit and are related to certain operating stand-by letters of credit, as well as $125,000 held in escrow related to certain divestitures in 2001 (see Note 4). Restricted cash at December 31, 2000 related to certain operating stand-by letters of credit. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Effective March 9, 1999, the property and equipment of the Predecessor were restated to the fair value at the date of acquisition. Major additions and improvements are charged to the property accounts while maintenance and repairs, which do not improve or extend the lives of assets, are expensed in the current period. Estimated useful lives for our assets are as follows: Leasehold improvements............. Lesser of useful life or term of lease Computer equipment................. 3 to 5 years Furniture and fixtures............. 10 years Machinery and other equipment...... 3 to 15 years Software........................... 3 to 5 years
INTANGIBLE ASSETS Intangible assets consist of the intangibles recorded as a result of the acquisitions discussed in Note 1 and include acquired technology, workforce, contracts in progress, marketing agreements and goodwill. The carrying amounts of the intangible assets are reviewed for impairment when events and circumstances indicate that the recorded costs may not be recoverable in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." If the review indicates that the undiscounted cash flows from operations of the related intangible assets over the remaining amortization period are expected to be less than the recorded amount of the intangible, our carrying value of the intangible asset would be reduced to its estimated fair value F-9 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) determined based on discounted future cash flows. We recorded impairment charges related to certain intangible assets during 2000 and 2001 (see Note 11). We have allocated the value of acquired intangible assets to acquired technology, workforce, contracts in progress, marketing agreements and goodwill. The value of workforce was determined by reference to the cost of the workforce retained. Contracts in progress represent existing customer contracts acquired. The value of contracts in progress was determined by reference to the recurring revenue generated from existing customers. Marketing agreements represent agreements with several bankers' banks to use their best efforts to promote and market our products and services to community financial institutions on an exclusive basis. Excluding intangible assets acquired from Card Plus, we determined that the remaining value of intangible assets was related to acquired technology. Acquired technology also represents internally developed software acquired. Intangible assets obtained in the Card Plus acquisition in excess of amounts allocated to workforce were allocated to goodwill. Each of these intangible assets is amortized on a straight-line basis over the following periods: Workforce................................................... 3 years Contracts in progress....................................... 3 to 4 years Marketing agreements........................................ 2 years Acquired technology......................................... 3 years Goodwill.................................................... 3 years
SOFTWARE DEVELOPMENT COSTS For certain of our service bureau software applications, we account for costs incurred to develop software applications in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires that entities capitalize certain internal use software costs, which includes software design, coding, installation, configuration and testing, once technical feasibility of the developed software is attained. Costs incurred in the process of attaining technological feasibility, which includes the conceptual formulation and evaluation of the software alternatives, and costs to upgrade and enhance software once developed are expensed as incurred. Under SOP 98-1, overhead, general and administration costs, support costs and training costs are not capitalized. Capitalized software costs are depreciated on a straight-line basis over the estimated useful life of the application. Depreciation commences when the application is put into production. We perform an on-going assessment of the carrying value of our capitalized software cost in accordance with SFAS No. 121. For certain of our in-house software applications that we sell or lease to customers, we account for costs to develop software applications in accordance with SFAS No. 86, "Accounting for Computer Software to be Sold, Leased, or Otherwise Marketed." Research and development costs are expensed as incurred. Computer software development costs are charged to research and development expense until technological feasibility or a detail design document of the software is established, after which remaining significant software production costs are capitalized. These costs are amortized on a straight-line basis over the estimated economic life of the software. Amortization of capitalized software costs begins when products are made available for sale or when the related product is put into use. We make on ongoing assessment of recoverability of our capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value ("NRV") of the product. If the NRV is less than the amount capitalized, a write-down of the amount capitalized is recorded. F-10 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We capitalized approximately $1.6 million, $2.2 million and $1.1 million in software development costs, respectively, for the years ended December 31, 1999, 2000 and 2001 with an estimated useful of approximately five years. These costs are classified in property and equipment in the accompanying consolidated balance sheets. REVENUE RECOGNITION For our outsourced suite of products and services, we generally charge a fixed monthly fee based on the number and type of products and services purchased by the financial institution. We also charge variable fees that are based on the number of end users and the number of transactions for certain products and services. We generally provide products and services under contracts with terms ranging from three to five years. Revenues from these types of arrangements are recognized over the term over which the related services are provided. We generally charge fees for our in-house products under either a perpetual license agreement which includes an up-front software fee, implementation fees and recurring monthly fees based on the number of active users and user generated transactions, or under a three to five-year subscription that includes annual subscription and maintenance fees. Revenues from the software and implementation component of those types of arrangements are recognized in accordance with SOP No. 97-2, "Software Revenue Recognition" and Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SOP 97-2 software revenue is recognized when delivery has occurred, contract is signed, the price is fixed and determinable, and collectibility is assured. The related implementation revenue is recognized as the implementation is performed. Recurring fees represent post-contract customer support and are recognized over the period in which the support services are provided. Subscription contracts result in fees being recognized over the term of the agreement. DEFERRED REVENUE AND UNBILLED RECEIVABLES Deferred revenue represents amounts receivable and collected prior to revenue recognition. The balance primarily consists of quarterly and annual billings collected in advance and recognized ratably over the subsequent three or twelve months, as applicable. Deferred revenues will be recognized as revenue as the related services are provided. Unbilled receivables were approximately $1.4 million and $700,000 at December 31, 2000 and 2001, respectively. These receivables relate to end users and transaction fees that are billed in arrears. INCOME TAXES We account for our income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of our ability to realize the future benefits indicated by such asset is required. A valuation allowance is provided for a portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax-planning strategies. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments classified as current assets or liabilities, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and preferred stock, approximate carrying value due to the short-term maturity of the instruments. The fair values of short-term and long-term debt F-11 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounts approximate carrying value and are based on their effective interest rates compared to current market rates. COMPREHENSIVE LOSS Comprehensive loss for the period from January 1, 1999 to February 28, 1999, for the period from March 1, 1999 to December 31, 1999 and for the years ended December 31, 2000 and 2001 is the same as the net loss as presented in the accompanying statements of operations. SEGMENT REPORTING We currently operate in only one segment, and as such, no additional disclosure is required. Additionally, we did not have any operations, net assets or liabilities in foreign locations. STOCK SPLIT All share, per share calculations, and references to historical share prices have been adjusted to reflect the one-for-eight reverse stock split effected May 16, 2001. RECLASSIFICATIONS Certain amounts in prior period financial statements have been reclassified to conform to the current year presentation. These reclassifications had no impact on previously reported results of operations. CONCENTRATION OF RISK During 2001, Bank of America accounted for approximately 15% of our total revenue related to certain of our non-core operating contracts that will terminate during the first half of fiscal 2002. No other individual customer accounted for more than 10% of our total revenues. There is no material impact from the termination of these operating contracts on our continuing operations. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") approved SFAS No. 141, "Business Combinations." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. Additionally, SFAS No. 141 requires additional disclosure regarding the reasons for a business combination and the allocation of the purchase price for business combinations accounted for as a purchase subsequent to June 30, 2001. In June 2001, the FASB also approved SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires companies to cease the amortization of goodwill that existed at June 30, 2001. SFAS No. 142 established 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 change the fair value of goodwill from its carrying value. SFAS No. 142 becomes effective for our fiscal year beginning January 1, 2002. We are currently assessing the impact of adopting SFAS No. 142 to determine the effect, if any, it may have on the F-12 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) consolidated results of operations and financial position as amortization of goodwill will cease for our fiscal year beginning January 1, 2002 and periodic impairment losses may be recognized. The cumulative impact of adopting SFAS No. 142 will be reported as a change in accounting principle in our fiscal 2002 consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. In contrast to SFAS No. 121, this statement requires the exclusion of goodwill from its scope and, therefore, eliminates the requirement of SFAS No. 121 to allocate goodwill to long-lived assets to be tested for impairment. SFAS No. 144 also requires that the depreciable life of a long-lived asset to be abandoned be revised in accordance with the Accounting Principles Board Opinion ("APB") No. 20, "Accounting Changes." APB No. 20 requires that a change in estimate be accounted for in the period of change if the change only affects that period or the period of change and future periods if the change affects both. APB No. 20 does not require restatement or pro forma information for prior periods. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We are required to adopt SFAS No. 144 on January 1, 2002. We believe that the adoption of SFAS No. 144 will not have a material impact on our financial position or results of operations. 3. ACQUISITIONS ACQUISITION OF THE REMOTE INTERNET AND TELEPHONE BANKING DIVISION OF SBS CORPORATION On August 6, 1999, Direct Access purchased the remote banking operations of SBS. The purchase price for these operations included 325,000 shares of Direct Access common stock at the estimated fair market value of $92.00 per share and $21,534,625 in cash. Only the remote Internet and telephone banking operations of SBS were retained by the Company and the remaining operations were sold to InterCept in exchange for 56,250 shares of Direct Access common stock valued at $92.00 per share, for a total sales price of $5,175,000. The Company recorded no gain or loss on the sale of assets to InterCept, as the sale was a related party transaction. The acquisition of SBS was accounted for as a purchase. The results of operations of SBS have been included in the consolidated financial statements from the date of acquisition. The excess of the purchase price over the net tangible assets acquired was allocated to the following intangible assets with the following amortization lives: Acquired technology......................................... $45,041,300 3 years Contracts in progress....................................... 1,340,000 4 years Workforce................................................... 440,000 3 years
ACQUISITIONS OF THE DIVISIONS On September 3, 1999, we purchased the Divisions. The acquisitions of the Divisions were accounted for as purchases. The purchase price of the Divisions included a total of 340,250 shares of our common stock valued at $92.00 per share. The results of operations of the Divisions have been included in the consolidated financial statements from the date of acquisition. The excess of the purchase price over the tangible net assets was allocated to acquired technology, marketing agreements, workforce and contracts in progress were amortized over 2 to 3 years. Certain of these intangible assets were written down in 2000 (see Note 11). ACQUISITION OF DYAD CORPORATION On September 3, 1999, we purchased Dyad. The purchase price of Dyad included 77,268 shares of our common stock valued at $92.00 per share and approximately $900,000 in cash. We also assumed debt owed by Dyad of approximately $3,500,000. The acquisition of Dyad was accounted for as a purchase. The results of F-13 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operations of Dyad have been included in the consolidated financial statements from the date of acquisition. The excess of the purchase price over the net tangible assets acquired totaled $12,314,000 and was allocated to acquired technology with a three-year amortization life. The unamortized balances of these intangible assets were written off during 2000 (see Note 11). ACQUISITION OF CALL ME BILL, LLC On September 3, 1999, we purchased Call Me Bill. The purchase price of Call Me Bill included cash of approximately $3,288,000. The acquisition of Call Me Bill was accounted for as a purchase. The results of operations of Call Me Bill have been included in the consolidated financial statements from the date of acquisition. The excess of the purchase price over the net tangible assets acquired totaled approximately $3,635,000 and was allocated to acquired technology with a three-year amortization life. Certain of these assets were sold in 2001 (see Note 4). ACQUISITION OF DPSC SOFTWARE, INC. On December 15, 1999, we purchased DPSC. The purchase price of DPSC included 52,282 shares of Netzee common stock, as adjusted to reflect shares of common stock that were returned to us to satisfy certain indemnification claims, valued at $115.00 per share, 500,000 shares of preferred stock valued at $13.00 per share, $18,500,000 in cash and the payment of other acquisition costs of approximately $1,000,000. The acquisition of DPSC was accounted for as a purchase. The results of operations of DPSC have been included in the consolidated financial statements from the date of acquisition until the assets were sold in 2001. The excess of the purchase price over the net tangible assets acquired totaled $35,760,000 and was allocated to acquired technology with a three-year amortization life. Certain of these assets were sold in 2001 (see Note 4). ACQUISITION OF DVI On March 7, 2000, we purchased DVI. The purchase price of DVI included 94,329 shares of our common stock, as adjusted to reflect shares of common stock that were returned to us to satisfy certain indemnification claims, valued at $177.00 per share and options to purchase 8,803 shares of common stock in exchange for the cancellation of options to purchase DVI common stock. In addition, we assumed approximately $3,300,000 in outstanding debt of DVI and $1,200,000 in operating liabilities and other acquisition costs. We also granted DVI the right to receive up to 78,534 additional shares of our common stock upon the attainment of certain revenue targets in fiscal years 2000 and 2001. None of these shares were issued based on fiscal 2000 and 2001 performance. The acquisition was accounted for as a purchase. The results of operations of DVI have been included in the consolidated financial statements from the date of the acquisition until the assets were sold in 2001. The excess of purchase price over the net tangible assets acquired was allocated to acquired technology and workforce with a three-year life. Certain of these assets were written down and subsequently sold in 2001 (see Notes 4 and 11). ACQUISITION OF CARD PLUS Effective July 1, 2000, we purchased Card Plus. The purchase price included 40,000 shares of our common stock valued at $56.00 per share and options to purchase 4,445 shares of common stock in exchange for the cancellation of Card Plus phantom stock units. Additionally, we granted Card Plus the right to receive up to 28,572 shares of common stock upon the attainment of certain revenue and employee retention goals for the period from July 1, 2000 to June 30, 2001. However, we were required to issue all of these shares if the closing price of a share of our common stock was less than $36.00 on June 29, 2001. Because our closing stock price on June 29, 2001 was $4.20, we issued all of these shares and recorded the amount within equity. The acquisition was accounted for as a purchase. The results of operations of Card Plus have been included in the Consolidated Financial Statements F-14 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) since the effective date of the acquisition. The excess of purchase price over the net tangible assets acquired was allocated to goodwill and workforce with a three-year life. The unamortized balances of these intangible assets were written off during 2001 (see Note 11). ACQUISITION OF ASSETS FROM HARLAND Effective November 1, 2000, we purchased Harland's Internet banking and bill payment businesses and assumed certain liabilities related to those businesses. The purchase price included 550,000 shares of our common stock valued at $32.00 per share. As a result of this issuance, Harland owns approximately 16% of our common stock. The acquisition was accounted for as a purchase. The results of operations of Harland have been included in the consolidated financial statements from the effective date of the acquisition. The excess of the purchase price over the net tangible assets acquired was allocated to the following intangible assets with a three-year life: Acquired technology......................................... $17,747,000 Workforce................................................... 950,000
ACQUISITION OF HOMECOM On March 15, 2001, we purchased certain assets of HomeCom's Internet banking business and assumed certain of HomeCom's operating liabilities related to the business. The purchase price was approximately $420,000 in cash and related acquisition expenses. The transaction was accounted for as a purchase. The excess of purchase price over the net tangible assets acquired was allocated to acquired technology and is being amortized over three years. The results of operations of HomeCom have been included in the consolidated financial statements from the effective date of the acquisition and are not material to the results of our operations. We will continue to evaluate the carrying amounts of these assets and liabilities for 12 months following the date of their acquisition and may adjust the allocations to intangible assets based on this evaluation. See Note 4 for pro forma consolidated financial information related to these acquisitions. 4. DISPOSITIONS DISPOSITION OF DPSC ASSETS On February 2, 2001, we sold to InterCept certain of the regulatory reporting assets acquired from DPSC in 1999, and InterCept assumed certain of the related operating liabilities, for total consideration of approximately $16.5 million, including liabilities assumed of approximately $2.4 million. We received cash proceeds of approximately $14.1 million. In connection with the sale of these assets, we recorded a non-cash loss of approximately $5.7 million. This non-cash loss is included in the net loss on sales of assets in our Consolidated Statement of Operations. DISPOSITION OF CERTAIN BILL PAYMENT ASSETS Effective May 1, 2001, we sold to iPay certain assets related to a portion of our bill payment operations including contracts for bill payment only services that were not considered to be a part of our core business, and iPay assumed certain of the related operating liabilities. Gross proceeds from the sale were approximately $1.3 million in cash, of which $50,000 was placed in escrow for indemnification and other purposes. In connection with the sale of these assets, we recorded a gain of approximately $1.2 million. This gain is included in the net loss on sales of assets in our Consolidated Statement of Operations. F-15 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DISPOSITION OF DVI ASSETS On November 15, 2001, we sold substantially all the assets acquired from DVI to SS&C and SS&C assumed substantially all the related operating liabilities. Gross proceeds from the sale were approximately $1.35 million in cash, of which $75,000 was placed in escrow for indemnification and other purposes. Prior to the sale, certain of the intangible assets were written down in 2001 (see Note 11). In connection with the sale of these assets, we recorded a non-cash loss on sale assets of approximately $206,000. This loss is included in the net loss on sales of assets in our Consolidated Statements of Operations. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma consolidated financial information for the years ended December 31, 2000 and 2001 assume that the acquisitions or dispositions occurred as of January 1, 2000.
FOR THE YEAR ENDED ------------------------------------- DECEMBER 31, 2000 DECEMBER 31, 2001 ----------------- ----------------- Total revenue....................................... $ 26,936,942 $ 22,303,390 Net loss attributable to common shareholders........ $(68,863,292) $(35,730,498) Basic and diluted loss per share.................... $ (33.24) $ (11.22)
The unaudited pro forma consolidated financial information does not purport to represent what our results of operations would have been had the acquisitions or dispositions occurred as of such date, nor what results will be for any future period. 5. LEASES RECEIVABLE We have sold certain of our telephone banking products under sales-type leases. At December 31, 2001, future minimum lease payments under non-cancelable leases are as follows: Total minimum lease payments receivable: 2002...... $ 630,083 2003...... 415,876 2004...... 307,984 2005...... 69,798 ---------- 1,423,741 Less amount representing interest........................... (155,392) ---------- Present value of net minimum lease payments receivable...... 1,268,350 Less current maturities of lease payments receivable........ (630,083) ---------- Leases receivable, net of current portion................... $ 638,267 ==========
F-16 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PROPERTY AND EQUIPMENT Property and equipment at December 31, 2000 and 2001 consisted of the following:
2000 2001 ----------- ---------- Leasehold improvements...................................... $ 1,138,369 $1,163,964 Computer equipment.......................................... 4,132,127 3,108,391 Furniture and fixtures...................................... 424,339 254,232 Machinery and other equipment............................... 2,614,118 446,425 Software.................................................... 1,860,822 2,350,292 ----------- ---------- 10,169,775 7,323,304 Less accumulated depreciation............................... (3,552,971) (3,007,404) ----------- ---------- Property and equipment, net................................. $ 6,616,804 $4,315,900 =========== ==========
7. INTANGIBLE ASSETS Intangible assets at December 31, 2000 and 2001 consisted of the following:
2000 2001 ------------ ------------ Goodwill................................................. $ 1,903,393 $ -- Workforce................................................ 4,427,000 1,780,000 Contracts in progress.................................... 1,880,000 1,880,000 Marketing agreements..................................... 4,135,104 -- Acquired technology...................................... 125,429,717 68,629,884 ------------ ------------ 137,775,214 72,289,884 Less accumulated amortization............................ (47,824,555) (50,028,727) ------------ ------------ Intangible assets, net................................... $ 89,950,659 $ 22,261,157 ============ ============
8. NOTE PAYABLE On October 18, 1999, we entered into a $1,345,000 term loan with a bank to secure the purchase of equipment. The loan bore interest at LIBOR plus 2% per year and outstanding principal under the loan was due in 60 monthly installments starting November 1, 1999. On August 22, 2000 the loan was revalued and refinanced due to equipment upgrades. The loan amount was thereby increased to $1,650,000 resulting in net proceeds of $400,192. The loan was secured by equipment and a personal guaranty by two directors of Netzee. On March 1, 2001, the note payable was assumed by the directors providing the guarantee, in exchange for the equipment that was purchased with the proceeds of the loan. We no longer have any liability under the loan. 9. RELATED-PARTY TRANSACTIONS As discussed in Note 3 and Note 4, we completed several acquisitions and dispositions during 2000 and 2001. In some of these transactions, persons who were previously officers, directors or shareholders of the acquired companies became executive officers or directors of Netzee, or beneficial owners of more than 5% of our common stock. Related Party Borrowings Prior to our initial public offering, InterCept loaned us money to fund the cash portions of the acquisitions of Dyad and Call Me Bill discussed in Note 3 and to fund our operations. All pre-offering borrowings were F-17 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) paid off with proceeds from the initial public offering. On December 15, 1999, we received a commitment for a $15 million line of credit from InterCept in connection with the acquisition of DPSC. During 1999, we incurred approximately $677,000 of interest expense associated with these borrowings. In May 2000, the $15 million line of credit agreement with InterCept was finalized. At that time, the outstanding principal balance due on the borrowings was transferred to the line of credit. The line of credit bore interest at a yearly rate of prime plus 2% and was secured by substantially all of our assets. Accrued interest under the line of credit was payable quarterly beginning July 1, 2000. The principal balance was payable at maturity on May 31, 2003. The line of credit agreement provided for earnings, tangible net worth and other affirmative and negative covenants with which we were required to comply, and provided for various other conditions and restrictions. These borrowings were used to fund working capital requirements. As of December 31, 2000, we were out of compliance with certain of these covenants. However, InterCept waived such non-compliance as of December 31, 2000. As of December 31, 2000, the outstanding balance on the credit facility was $15 million. We incurred approximately $1.1 million of interest expense associated with our borrowings from InterCept for the year ended December 31, 2000. On September 29, 2000, we entered into an acquisition agreement with Harland to acquire Harland's Internet banking and bill payment businesses. Simultaneously with the signing of the acquisition agreement, we borrowed $5.0 million from Harland pursuant to a promissory note. The note bore interest at a rate of prime plus 2% per year and was secured by substantially all of our assets. Such security was pari passu in priority to the security given to InterCept with respect to the line of credit. The principal balance was payable at maturity on September 29, 2005, or upon demand with 30 days notice after September 29, 2002. We incurred approximately $148,000 in interest associated with this borrowing in 2000. In conjunction with the sale of the DPSC assets to InterCept in February 2001, we converted the $15 million line of credit with InterCept and our $5 million promissory note to Harland into a joint $20 million credit facility that matured on November 2, 2002 ($15 million to be funded by InterCept and $5 million to be funded by Harland). The terms of the credit facility remained consistent with the terms of the former InterCept line of credit and Harland promissory note except that both InterCept and Harland had the right (instead of just InterCept) to enforce the covenants contained in the line of credit agreement. On February 2, 2001, we sold to InterCept certain of the regulatory reporting assets acquired from DPSC in 1999 and InterCept assumed certain of the related operating liabilities, for total consideration of approximately $16.5 million, including liabilities assumed of approximately $2.4 million. The proceeds from the sale of the DPSC assets were used to pay down this credit facility by approximately $11.8 million. On May 8, 2001, we sold certain assets related to a portion of our bill payment operations. Gross proceeds from the sale were approximately $1.3 million in cash and the majority of these proceeds were used to pay down our joint credit facility. As a result of this sale, Harland's portion of the joint credit facility was permanently reduced by $225,000. The total credit facility was reduced to $19,775,000 and the ratio of available borrowings was adjusted to approximately 76% from InterCept and approximately 24% from Harland. On November 15, 2001, we sold certain assets acquired from DVI. Gross proceeds from the sale were approximately $1.35 million in cash and the majority of these proceeds were used to pay down our joint credit facility. As a result of this sale, Harland's portion of the joint credit facility was permanently reduced by $220,000. The total credit facility was reduced to $19,555,000 and the ratio of available borrowings was adjusted to approximately 77% from InterCept and approximately 23% from Harland. As of December 31, 2001, the balance on this joint credit facility was $13,192,000 with InterCept's and Harland's portion totaling $10,118,000 and $3,074,000, respectively. We incurred interest expense associated with our borrowings from InterCept and Harland of approximately $824,000 and $265,000, respectively, during 2001, and we were in compliance with all the covenants of the credit agreement. These loans require us to maintain certain levels of EBITDA (as defined). We were in compliance with this covenant at December 31, 2001. Subsequent to F-18 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 2001, we extended the maturity date of the credit facility to April 10, 2003 and reduced the total credit facility to $18 million (see Note 21). On October 18, 1999, we entered into a $3,000,000 line of credit facility with a company, and in connection therewith, an affiliate of that company was appointed as one of our directors. In connection with this line of credit, we issued to that company a warrant to purchase 57,735 shares of our common stock. The line of credit was terminated in December 1999 (see Note 13). This warrant was exercised in full in March 2000. Related-party loans from shareholders at December 31, 2000 and 2001 consisted of the following:
2000 2001 ----------- ------------ Line of credit from InterCept, interest payable quarterly at prime plus 2% per year; principal payable in full on May 31, 2003; the line of credit was secured by substantially all our assets, pari passu with the promissory note below..................................... $15,000,000 $ -- Promissory note from Harland, interest payable quarterly at prime plus 2% per year; payable in full upon maturity on September 29, 2005 or upon demand with 30 days notice after September 29, 2002; the note was secured by substantially all our assets, pari passu with the line of credit above.............................................. 5,000,000 -- Joint line of credit from InterCept and Harland (InterCept funds 76.7%, Harland funds 23.3%), interest payable quarterly at prime plus 2% per year; payable in full on November 2, 2002 (subsequently extended to April 10, 2003, see Note 21); the facility is secured by substantially all our assets............................................ -- 13,191,715 ----------- ------------ 20,000,000 13,191,715 Less current maturities................................... -- -- ----------- ------------ $20,000,000 $ 13,191,715 =========== ============
Other Relationships with InterCept Our Chairman of the Board of Directors is the Chairman and Chief Executive Officer of InterCept. Our Chief Executive Officer is a director of InterCept. Our former Chief Executive Officer and former Vice Chairman of the Board of Directors is a director of InterCept. A former non-employee director of Netzee is also a director of InterCept. In September 1999, we entered into a marketing agreement with InterCept under which InterCept sells our products and services. Under this agreement, we pay a commission to InterCept for each sale of our products and services made by InterCept and for each referral to our sales force that results in a sale. We paid InterCept approximately $357,000 and $141,000 in 2000 and 2001, respectively, as a result of this agreement. During 2000 and 2001, we shared some of our facilities with InterCept. We paid approximately $163,000 and $112,000 related to those shared costs during 2000 and 2001, respectively. During 2000 and 2001, we used InterCept's vendor relationships to purchase certain hardware and software used to implement our Internet and telephone banking products. By utilizing these vendor relationships, we were able to take advantage of discounts that we would have been unable to obtain on our own. In addition, InterCept assisted us in managing the ordering and inventory process related to this F-19 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) equipment. During 2000 and 2001, we paid approximately $435,000 and $123,000, respectively, in costs to purchase the equipment, which included a fee to InterCept for its services. InterCept also licenses certain of our telephone banking products for sales to their customers. Under this agreement, InterCept pays us an initial license fee along with an annual maintenance fee. We received approximately $286,000 and $248,000 in payments from InterCept related to this agreement during 2000 and 2001, respectively. Other Relationships with Harland In connection with the acquisition of assets from Harland, beginning in November 2000, we subleased certain of our Connecticut and Oregon facilities from Harland. We paid approximately $135,000 and $356,000 in expenses during 2000 and 2001, respectively, associated with these subleases. Additionally, we incurred costs totaling approximately $322,000 and $122,000 during 2000 and 2001, respectively, related to the usage of certain of their employees and certain administrative support and equipment lease costs during the post- acquisition transition. In May 2001, we entered into a marketing agreement with Harland under which Harland sells certain of our Internet-based products and services. Under this agreement we pay a commission for sales of our products and services made by Harland and for each referral to our sales force that results in a sale. We incurred expenses of approximately $76,000 in 2001 as a result of this agreement. Our Other Relationships Our former Chief Executive Officer and former Vice Chairman of the Board of Directors is a partner at Nelson Mullins Riley & Scarborough, L.L.P., a law firm that provided legal services to us. We paid approximately $425,000 and $62,000 during fiscal 2000 and 2001, respectively, to this firm for these legal services. On July 1, 1999, certain officers and directors of Netzee and InterCept entered into full-recourse promissory notes with Direct Access as lender. These notes totaled $3,110,000 and were given as consideration for the issuance of shares of Direct Access common stock to these individuals. Each of the notes bears interest at 7% per year and matures on June 30, 2002. During fiscal 2000 and 2001, principal payments on the notes were made in the amount of $1,766,500 and $952,745, respectively, and interest payments were made in the amount of $237,073 and $28,914, respectively. The outstanding principal balances totaled $1,343,500 and $400,000 as of December 31, 2000 and 2001, respectively. Accrued interest on the notes as of December 31, 2000 and 2001 totaled approximately $79,000 and $70,000, respectively. On August 5, 1999, an officer of Netzee entered into a full-recourse promissory note with Netzee as lender. The note totaled $93,300 and the proceeds were used to exercise options to purchase shares of our common stock. Accrued interest on this note as of December 31, 2000 and 2001 was approximately $10,000 and $16,000, respectively. The interest on these promissory notes has been included in the principal amount and is, therefore, classified as a component of stockholders' equity. The loan bears interest at a rate of 7% and matures on August 4, 2002. In May 2001, we sold a portion of our non-core business to iPay, LLC ("iPay"), a related party, which also assumed certain of the liabilities associated with the assets (see Note 4). Certain of the owners of iPay were former officers of Netzee. Management believes that these transactions were made on terms no less favorable to us than could have been obtained with unaffiliated third parties. F-20 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. RESTRUCTURING COSTS In the fourth quarter of 2000, we initiated a restructuring of management with the termination of certain management employees. Consequently, a restructuring charge of $586,200 was recorded in accordance with Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Cost to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." This amount was comprised of $375,000 in non-cash stock-based compensation associated with the accelerated vesting of restricted stock, which is included in amortization of stock-based compensation in the Consolidated Statements of Operations, and $211,200 in severance and payroll-related items. During fiscal 2001, we finalized and announced restructuring plans to reduce expenses through the consolidation of our Internet and bill payment operations. This restructuring has resulted in the closure of our offices in Alabama, Kentucky, Texas and Tennessee, as well as the downsizing of offices in Connecticut. Total staff reductions were approximately 195 employees. Consequently, a restructuring charge of approximately $2,002,000 was recorded for the year ended December 31, 2001 in accordance with EITF 94-3. This amount was comprised of approximately $1,350,000 in severance and payroll-related items and approximately $652,000 in lease and other contract termination costs. In connection with this restructuring, we have accrued approximately $1,109,000 as additional purchase price for the acquisition of assets from Harland as a result of the termination of employees and the closing of offices obtained in that acquisition in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." This amount is comprised of approximately $1,060,000 for severance and payroll-related items and approximately $50,000 for office lease and other contract termination costs. As of December 31, 2001, we had paid approximately $3,535,000 in restructuring costs consisting of approximately $2,858,000 in severance and payroll related costs and approximately $677,000 in contract and lease termination costs. As of December 31, 2001, we had terminated approximately 190 employees out of an anticipated total of 195 employees to be terminated as the result of the restructuring plan. At December 31, 2001, approximately $162,000 in restructuring costs remained as an accrued liability, consisting of approximately $137,000 in future severance benefits and other payroll-related costs and $25,000 in additional contract and lease termination costs. The following table summarizes our restructuring charges accrued and paid in 2000 and 2001:
SEVERANCE AND LEASE AND OTHER PAYROLL CONTRACT RELATED ITEMS TERMINATION COSTS TOTAL ------------- ----------------- ----------- Restructuring charges accrued in 2000...... $ 586,000 $ -- $ 586,000 Restructuring charges recorded in connection with the acquisition of assets from Harland................... 773,000 200,000 973,000 Paid in 2000............................... (487,000) -- (487,000) ----------- --------- ----------- Balance at December 31, 2000............... 872,000 200,000 1,072,000 Restructuring charges accrued in 2001...... 1,350,000 652,000 2,002,000 Restructuring charges recorded in connection with the acquisition of assets from Harland...................... 286,000 (150,000) 136,000 Paid in 2001............................... (2,371,000) (677,000) (3,048,000) ----------- --------- ----------- Balance at December 31, 2001............... $ 137,000 $ 25,000 $ 162,000 =========== ========= ===========
F-21 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. ASSET IMPAIRMENT CHARGES In accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets," we perform an impairment test with regards to a long-lived asset when a "triggering event" occurs which may indicate that the carrying value of the asset is unrealizable. Our policy for the completion of such analysis is to compare the undiscounted cash flows expected to be generated from the long-lived asset over its useful life to the carrying value of the asset. SFAS No. 121 also requires that when a group of assets being tested for impairment was acquired as part of a business combination using the purchase method of accounting, any cost in excess of net assets acquired that arose as part of the transaction must be included as part of the asset group. During fiscal 2000, management determined that a triggering event had occurred with respect to certain acquired software applications as a result of our management restructuring and realigned strategic focus. Additionally, during 2001 we determined that a triggering event had occurred related to our decision to sell certain assets related to the DVI acquisition, as well as the termination of a customer associated with our Card Plus acquisition. An analysis of the estimated future cash flows expected to be generated by these acquired assets was determined to be less than the carrying amount, and allocated cost was determined to be in excess of net assets acquired. Therefore, these acquired assets were determined to be impaired in accordance with SFAS No. 121. Consequently, the original cost bases of these assets were reduced to reflect the fair market value of such assets at the date of the analysis. These triggering events resulted in a $26.3 million and $12.1 million asset impairment loss for the years ended December 31, 2000 and 2001, respectively. In determining the fair market value of these assets, we considered recent transactions and market trends involving similar assets. 12. CHANGE IN ACCOUNTING PRINCIPLE In the fourth quarter of fiscal 2000, we adopted SAB No. 101, which establishes guidelines for revenue recognition and enhances revenue recognition disclosure requirements. Pursuant to this guideline, up-front fees associated with certain product implementations are now being recognized over the term of the underlying agreement, rather than upon the completion of product implementation. The cumulative impact of adopting SAB No. 101 was recorded as of January 1, 2000 and is reported as a change in accounting principle for our year ended December 31, 2000. The following unaudited pro forma consolidated financial information for the years ended December 31, 1999, 2000 and 2001 assumes that the change in accounting principle occurred as of January 1, 1999.
1999 2000 2001 ------------ ------------ ------------ Loss attributable to common shareholders before cumulative effect of change in accounting principle........................................ $(26,954,876) $(96,808,699) $(60,020,563) Cumulative effect of change in accounting principle........................................ (351,980) -- -- ------------ ------------ ------------ Pro forma net loss attributable to common shareholders..................................... $(27,306,856) $(96,808,699) $(60,020,563) ============ ============ ============ Basic and diluted loss per share before change in accounting principle............................. $ (18.67) $ (34.81) $ (17.89) Cumulative effect of change in accounting principle per share........................................ (0.24) -- -- ------------ ------------ ------------ Basic and diluted net loss per share............... $ (18.92) $ (34.81) $ (17.89) ============ ============ ============ Basic and diluted weighted average shares outstanding...................................... 1,442,754 2,781,141 3,354,909 ============ ============ ============
F-22 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) All of the pro forma effects of SAB No. 101 have been allocated to 1999 as we did not charge any up front fees for services in prior periods. 13. EXTRAORDINARY ITEM On October 18, 1999, we entered into a $3,000,000 line of credit facility with a company, and in connection therewith, an affiliate of that company was appointed as one of our directors. The line of credit facility bore interest at the prime rate. In conjunction with the line of credit facility, we issued warrants to purchase 57,735 shares of common stock at an exercise price of $26.00 per share. We recorded deferred financing costs for the difference between the fair value of common stock, valued at $106.00 per share, and the exercise price of the warrants. The deferred financing costs were to be recognized over the three-year term of the line of credit. The line of credit facility was terminated in December 1999 in connection with the receipt of the commitment from InterCept discussed in Note 9 above. The termination resulted in the recognition of an extraordinary non-cash loss of $4,518,760 for the period from March 1, 1999 to December 31, 1999 related to the write off of the unamortized deferred financing fees. 14. INCOME TAXES We have incurred net operating losses ("NOL") since inception. As of December 31, 2000 and 2001, we had NOL carryforwards of approximately $25.8 million and $47.2 million, respectively, available to offset our future income tax liability. The NOL carryforwards will begin to expire in 2014. Due to the uncertainty of the realizability of the net operating losses, we have not reflected an income tax benefit in the accompanying statements of operations for any period presented and have recorded a valuation allowance equal to the net deferred tax assets at December 31, 2000 and 2001. The components of the deferred tax assets and liabilities are as follows as of December 31, 2000 and 2001:
DECEMBER 31, ------------------------- 2000 2001 ----------- ----------- Deferred tax assets: Net operating loss carryforwards.......................... $12,231,914 $18,029,840 Deferred revenue.......................................... 3,305,877 1,172,699 Accounts receivable reserve............................... 243,750 142,577 Stock-based compensation.................................. 2,958,139 3,292,705 Intangible assets......................................... 418,000 505,963 Other..................................................... 427,872 213,057 ----------- ----------- Total deferred tax assets......................... 19,585,552 23,356,841 Deferred tax liabilities Property and equipment.................................... (283,322) (283,322) Unbilled accounts receivable.............................. (712,191) 0 ----------- ----------- Total deferred tax liabilities.................... (995,513) (283,322) ----------- ----------- Net deferred tax assets..................................... 18,590,039 23,073,519 Valuation allowance......................................... (18,590,039) (23,073,519) ----------- ----------- Net......................................................... $ -- $ -- =========== ===========
F-23 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the income tax benefit for the period from March 1, 1999 to December 31, 1999, and for the years ended December 31, 2000 and 2001 are as follows:
DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001 ----------------- ----------------- ----------------- Current benefit Federal........................... $ -- $ -- $ -- State............................. -- -- -- ----------- ------------ ----------- Deferred benefit Federal........................... (5,134,862) (11,503,613) (3,374,311) State............................. (598,198) (1,353,366) (396,978) ----------- ------------ ----------- (5,733,060) (12,856,979) (3,771,289) Total benefit............. (5,733,060) (12,856,979) (3,771,289) Valuation allowance................. 5,733,060 12,856,979 3,771,289 ----------- ------------ ----------- Total..................... $ -- $ -- $ -- =========== ============ ===========
The following is a summary of the items, which resulted in recorded income taxes that differ from taxes, computed using the statutory income tax rates for the period from March 1, 1999 to December 31, 1999, and for the years ended December 31, 2000 and 2001, respectively:
1999 2000 2001 ---- ---- ---- Tax benefit at federal statutory rates...................... 34% 34% 34% Tax benefit at state statutory rate......................... 4 4 4 Permanent tax differences................................... (59) (51) (44) Effect of valuation allowance............................... 21 13 6 --- --- --- Effective tax rate.......................................... --% --% --% === === ===
The income tax benefit for the period from January 1, 1999 to February 28, 1999 was not material. 15. PREFERRED STOCK In December 1999, we issued 500,000 shares of Series A 8% Convertible Preferred Stock, no par value, with a $13.00 per share stated value. The Series A Preferred Stock was convertible at the option of the shareholder, in whole or in part, into 51,384 split-adjusted shares of common stock. In addition, if the average closing price of our common stock had equaled or exceeded a split-adjusted price of $208.00 per share for any four-week period, we would have been permitted to redeem all of the Series A Preferred Stock for cash or 51,384 split-adjusted shares of common stock. If we had elected to redeem the Series A Preferred Stock for cash, the holder had the option to receive payment in common stock. Series A Preferred Stock dividends were cumulative and were payable when declared by the Board of Directors, at the rate of $1.04 per share per year. We accrued $24,200 in dividends on the shares of Series A Preferred Stock for the period from December 15, 1999 to December 31, 1999. During 2000, we paid $24,200 in accrued dividends on these shares. In September 2000, we exchanged all 500,000 shares of Series A 8% Convertible Preferred Stock for 500,000 shares of Series B 8% Convertible Preferred Stock, no par value. The rights, preferences and limitations of the Series B Preferred Stock are substantially identical to those of the Series A Preferred Stock, except that upon conversion of the Series B Preferred Stock or upon the liquidation of Netzee, a holder of the Series B Preferred Stock is entitled to receive all accrued but unpaid dividends thereupon. In connection with a registration rights agreement entered into with the former shareholders of DPSC, the shares were subject to the right, as of June 15, 2002, of the holders of the Series B Preferred Stock to require us to repurchase F-24 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) all of such shares at a price of $13.00 per share, plus all accrued and unpaid dividends thereupon. Subsequent to December 31, 2001, we extended the repurchase requirement date to April 10, 2003 (see Note 21). We have accrued $1,040,000 in dividends on the shares of Series B Preferred Stock for the year ended December 31, 2001 and have included that amount in the other current liabilities in the accompanying balance sheets. Additionally, we have included the preferred dividends for each year in the calculation of net income attributable to common shareholders. 16. STOCK OPTION PLAN During 1999, we adopted, and our shareholders approved, the 1999 Stock Option and Incentive Plan (the "Plan"). Awards under the Plan are granted to eligible officers, directors, employees and other persons by the Board of Directors or by our Compensation Committee, which is composed of the entire Board of Directors. Awards issued under the Plan may include incentive stock options ("ISOs"), nonqualified stock options ("NQSOs"), restricted stock or stock appreciation rights. The Compensation Committee administers the Plan and generally has the discretion to determine the terms of an option grant, including the number of option shares, option price, term, vesting schedule, the post-termination exercise period, and whether the grant will be an ISO or NQSO, except that the Board of Directors must approve all awards to our executive officers and directors. The maximum number of shares of common stock that may be issued under the Plan as of January 1, 2002 is 790,404. The Plan provides that the number of shares of common stock available for issuance shall be automatically increased on January 1 of each year to an amount equal to 20% of the fully diluted shares of stock outstanding on December 31 of the previous year, provided that the shares available for issuance shall not be less than 437,500, and no more than 437,500 shares shall be issuable with respect to ISOs. The Plan will remain in effect until terminated by the Board of Directors. The Board of Directors may generally amend the Plan without the consent of our shareholders. During 1999, we issued options with exercise prices below the initial public offering price. Accordingly, we recorded approximately $13.1 million in deferred compensation and included such amount in common stock. This amount is being amortized over the respective vesting periods of the options. We recorded $3.2 million and $1.3 million in compensation expense for these options during 2000 and 2001, respectively. A summary of stock options granted and related information for the years ended December 31, 1999, 2000 and 2001 is presented below:
SHARES PRICE RANGE -------- ---------------- Outstanding at December 31, 1998......................... --- --- -------- ---------------- Granted................................................ 351,938 $16.00 - $118.00 Exercised.............................................. --- --- Outstanding at December 31, 1999......................... 351,938 $16.00 - $118.00 -------- ---------------- Granted................................................ 297,802 $ 0.08 - $177.04 Exercised.............................................. (1,771) $ 0.08 - $ 40.00 Forfeited.............................................. (111,347) $40.00 - $177.04 -------- Outstanding at December 31, 2000......................... 536,622 $ 0.08 - $136.64 Granted................................................ 48,700 $ 3.84 - $ 4.00 Exercised.............................................. (2,223) $ 0.08 Forfeited.............................................. (380,126) $ 0.08 - $177.04 Outstanding at December 31, 2001......................... 202,973 $ 3.84 - $122.00 ======== Exercisable at December 31, 2001......................... 119,871 $10.00 - $122.00 ========
F-25 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes information about the stock options outstanding as of December 31, 2001:
OPTIONS OUTSTANDING ---------------------------------------- OPTIONS EXERCISABLE WEIGHTED- -------------------------- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 2001 LIFE PRICE 2001 PRICE - ---------------- -------------- ----------- --------- -------------- --------- $ 3.84 - $ 10.00.. 40,212 9.34 $ 5.04 2,820 $ 10.00 $16.00 - $ 38.75.. 80,750 7.58 $20.68 60,996 $ 20.57 $40.00 - $ 62.24.. 35,344 7.71 $40.31 25,358 $ 40.14 $78.00 - $122.00.. 46,667 8.01 $98.04 30,697 $102.91 ------- ------- 202,973 8.05 $38.79 119,871 $ 45.55 ======= =======
During 1999, we issued 9,375 shares of restricted stock under the Plan. In conjunction with our management restructuring (see discussion in Note 10), we accelerated the vesting period of 3,125 of these shares in exchange for the forfeiture of 3,125 shares. As of December 31, 2001, there were 6,250 shares issued and outstanding related to this grant, all of which are vested. The weighted average fair value of these shares at grant date was $120.00 per share. During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to use the accounting methodology required by APB Opinion No. 25 must make pro forma disclosures of net income, and, if presented, earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. We have elected to account for our stock-based compensation plan under APB Opinion No. 25. We have computed, for pro forma disclosure purposes, the value of all options to purchase shares of our common stock granted in 1999, 2000 and 2001 to our employees using the Black-Scholes option pricing model prescribed in SFAS No. 123 and the following weighted-average assumptions: for 1999, risk-free interest rates of 5.80% to 6.17%, expected dividend yield of 0%, expected lives of four years, and expected volatility of 69%; for 2000, risk-free interest rates of 6.03% to 6.21%, expected dividend yield of 0%, expected lives of four years, and expected volatility of 132%; and for 2001, risk-free interest rates of 3.49% to 5.02%, expected dividend yield of 0%, expected lives of four years, and expected volatility of 185%. The weighted average fair value of options granted to employees of Netzee in 1999, 2000 and 2001 was $90.64, $52.08 and $3.79 per share, respectively. The total value of the options granted to these employees during 1999, 2000 and 2001 was computed as approximately $21.0 million, $15.9 million and $185,000, respectively, which would be amortized on a pro forma basis over the three-year vesting period of the options. If we had accounted for the Plan in accordance with SFAS No. 123, our net loss for the years ended December 31, 1999, 2000 and 2001 would have been as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 2000 2001 ------------ ------------ ------------ Net loss attributable to common shareholders as reported................................................ $(26,954,876) $(97,160,679) $(60,020,563) Pro forma net loss........................................ $(28,212,750) $(107,169,281) $(58,581,010) Loss per share (basic and diluted) as reported............ $ (18.72) $ (34.94) $ (17.89) Loss per share (basic and diluted) pro forma.............. $ (19.52) $ (38.53) $ (17.46)
F-26 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. BASIC AND DILUTED NET LOSS PER SHARE Basic and diluted net loss per share have been computed in accordance with SFAS No. 128, "Earnings per Share," using net loss divided by the weighted average number of shares of common stock outstanding for the period presented. Potentially dilutive options to purchase 351,938, 536,622, and 202,973 shares of common stock with a weighted average exercise price of $59.76, $51.92 and $38.79 per share were outstanding at December 31, 1999, 2000 and 2001, respectively, approximately 51,384 common shares issuable upon conversion of the preferred stock for the years ended December 31, 1999, 2000, and 2001, 57,735 outstanding warrants to purchase common stock for the year ended December 31, 1999, and 107,106 common shares issuable upon the achievement of certain performance targets associated with the DVI and Card Plus acquisitions for the year ended December 31, 2000 were excluded from the presentation of diluted net loss per share, as they are antidilutive due to the net loss. 18. EMPLOYEE BENEFITS In 1999, we established a defined contribution 401(k) savings plan, which covers substantially all employees, subject to certain minimum age and service requirements. Contributions to this plan are voluntary; however, for 1999 we matched in cash 100% of the first 6% of an employee's compensation contributed. For the year ended December 31, 2000, we matched in cash 100% of the first 4% of compensation contributed, and in our common stock 100% of the next 2% of compensation contributed. For the year ended December 31, 2001, we matched in cash 50% of the first 4% of compensation contributed and in our common stock, 50% of the next 2% contributed. The stock will be issued to those employees who contributed in excess of 4% and were still employed by us as of December 31, 2000 and 2001, respectively. The number of shares was determined by taking the total dollar value of the matching contribution divided by the share closing price on the last trading day of the year. We contributed approximately 47,400 and 12,300 shares valued at approximately $142,000 and $21,000 at December 31, 2000 and 2001, respectively. Our cash contributions were approximately $577,000 and $187,000 for the years ended December 31, 2000 and 2001, respectively. F-27 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
PREDECESSOR NETZEE, INC. --------------- ------------------------------------------------ FOR THE PERIOD FOR THE PERIOD FROM JANUARY 1, FROM MARCH 1, 1999 TO 1999 YEAR ENDED YEAR ENDED FEBRUARY 28, TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1999 2000 2001 --------------- ------------------ ------------ ------------ Cash paid for interest.................. $2,971 $ 740,638 $ 908,132 $1,379,936 Supplemental disclosure of non-cash investing and financing activities: Stock issued for acquisitions......... -- 71,884,011 39,834,929 -- Warrants issued for the purchase of common stock....................... -- 4,618,760 -- -- Stock issued for notes receivable..... -- 3,110,000 -- -- Purchase of property and equipment with note payable.................. -- 1,345,000 -- -- Stock issued as deferred compensation....................... -- 1,125,000 -- -- Stock issued in connection with marketing agreements, net of cash paid............................... -- 1,079,096 -- -- Capital contribution for property and equipment from shareholder......... -- 750,000 -- -- Exercise of stock options for note receivable......................... -- 93,300 -- -- Stock issued for employer 401(k) match.............................. -- -- 142,204 20,516 Stock reclaimed from escrow........... -- -- -- (68,713)
20. COMMITMENTS AND CONTINGENCIES PROPERTY LEASES We lease various facilities under non-cancelable property lease agreements. Future minimum annual obligations under these leases as of December 31, 2001 are as follows: 2002........................................................ $ 571,210 2003........................................................ 325,962 2004........................................................ 362,781 2005........................................................ 378,056 2006........................................................ 189,024 ---------- Total............................................. $1,827,034 ==========
Rent expense for the period from January 1, 1999 to February 28, 1999, the period from March 1, 1999 to December 31, 1999, and the years ended December 31, 2000 and 2001 was $8,934, $138,874, $1,111,384, and $1,373,932, respectively. LITIGATION We are party to various claims and legal proceedings that arise in the normal course of business (see Note 21). Management, on the advice of legal counsel, does not believe that a negative outcome of any known pending litigation would have a material adverse effect on us or our financial condition or results of operations. F-28 NETZEE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. SUBSEQUENT EVENTS NASDAQ NOTIFICATION On February 14, 2002, we received notification from The Nasdaq Stock Market indicating that we were out of compliance with the $5 million minimum market value requirement for our publicly held shares, as stated in Marketplace Rule 4450(a)(2). This rule provides us with 90 calendar days, or until May 15, 2002, to come into compliance with this rule, which would require our publicly held shares to maintain a minimum market value of $5 million for a minimum of 10 consecutive trading days during that period. If we fail to meet this requirement, we will become subject to delisting from The Nasdaq National Market, at which time we can appeal the delisting to the Nasdaq Listing Qualifications Panel. It is likely that we will be delisted from the Nasdaq National Market. In addition, we also have the option of applying to transfer our common stock to The Nasdaq SmallCap Market, where we also would have to satisfy continued inclusion requirements for that market. These requirements include maintaining certain levels of shareholders equity and market value, which may be unable to achieve. LITIGATION As reported in our Form 10-Q for the quarter ended June 30, 2001, on November 1, 1999, Independent Banker's Bank of Florida ("IBBF") filed a lawsuit against Netzee in the U.S. District Court for the Middle District of Florida. In this lawsuit, IBBF claimed that we violated the terms of a marketing agreement between IBBF and SBS, a company acquired by our predecessor. We terminated this marketing agreement after the acquisition of SBS in August 1999. In the lawsuit, IBBF claimed that the marketing agreement did not permit Netzee to terminate the agreement and that Netzee breached certain exclusivity provisions of the agreement. In March 2002, we settled this litigation for $750,000. This amount was recorded in the first quarter of 2002 upon settlement of the litigation, as the amount was not reasonably estimable at December 31, 2001. RELATED PARTY BORROWINGS On March 29, 2002, our joint credit facility with InterCept and Harland was amended. The maturity date of the credit facility was extended to April 10, 2003 and the total credit facility was reduced from approximately $19.6 million to $18 million. The first $17 million, to the extent borrowed, will be funded approximately 76.7% by InterCept and 23.3% by Harland. The remaining $1 million if borrowed, will be funded solely by InterCept. In connection with this amendment, InterCept will be paid a fee of $100,000 and Harland will be paid a fee of $20,000. PREFERRED STOCK On March 29, 2002, the Registration Rights Agreement with the former shareholders of DPSC was amended to defer, until April 10, 2003, the right of the holders of the Series B Preferred Stock to require Netzee to repurchase the preferred stock. In connection with this amendment, Netzee paid an extension fee of approximately $500,000. MEMORANDUM OF UNDERSTANDING In the first quarter of 2002, we entered into a Memorandum of Understanding ("MOU") with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Georgia State Banking Department. The MOU addresses several operational tasks which we believe we have now substantially completed, imposes continuing reporting requirements and prohibits us from declaring or paying cash or stock dividends on any shares of our capital stock without the approval of the banking regulators. No civil or monetary penalties have been imposed on us as a result of this MOU. F-29 -----END PRIVACY-ENHANCED MESSAGE-----