-----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, RjRqsJi2MbMOTNfT9W7UJQgQ21enkDsFgPufjP1NPW3aiKFhFh8tvPQal8gsqjbd P1Em5KAvKL8A9qazRpQ5cQ== 0000931763-99-002243.txt : 19990809 0000931763-99-002243.hdr.sgml : 19990809 ACCESSION NUMBER: 0000931763-99-002243 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCEPT GROUP INC CENTRAL INDEX KEY: 0001054930 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 582237359 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14213 FILM NUMBER: 99678952 BUSINESS ADDRESS: STREET 1: 3150 HOLCOMB BRIDGE ROAD SUITE 200 CITY: NORCROSS STATE: GA ZIP: 30071 BUSINESS PHONE: 7702489600 MAIL ADDRESS: STREET 1: 3150 HOLCOMB BRIDGE ROAD SUITE 200 CITY: NORCROSS STATE: GA ZIP: 30071 10-Q 1 FORM 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999. Or [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ____________, 19_____. Commission file number: 01-14213 ------------------------------ The InterCept Group, Inc. (Exact name of registrant as specified in its charter)
Georgia 58-2237359 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3150 Holcomb Bridge Road, Suite 200, Norcross, Georgia 30071 (Address of principal executive offices) (770) 248-9600 (Registrant's telephone number including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X No ; (2) Yes X No --- --- --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 4, 1999 Common Stock, no par value 9,907,388 (No. of Shares) ================================================================================ THE INTERCEPT GROUP, INC. INDEX TO FORM 10-Q PAGE -------- PART I FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II OTHER INFORMATION 17 Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 EXHIBIT INDEX 20 PART I. FINANCIAL INFORMATION Item 1. Financial Statements The InterCept Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands except share amounts)
June 30, December 31, 1999 1998 ---------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,443 $ 3,224 Accounts receivable, less allowance for doubtful accounts of $230 and $170 at June 30, 1999 and December 31, 1998, respectively 4,214 3,503 Deferred tax assets 103 80 Inventory, prepaid expenses and other 2,595 1,267 ------------------ Total current assets 9,355 8,074 Property and equipment, net 9,257 7,093 Intangible assets, net 12,731 4,661 Other noncurrent assets 612 327 ------------------ Total assets $31,955 $20,155 ================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of notes payable $ 99 $ 95 Line of credit 761 - Accounts payable and accrued liabilities 3,223 2,205 Deferred revenue 1,151 1,147 ------------------ Total current liabilities 5,234 3,447 Notes payable, less current portion 157 211 Deferred tax liability 259 182 ------------------ Total liabilities 5,650 3,840 Minority interest in consolidated subsidiary 115 57 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock, no par value; 50,000,000 shares authorized; 9,907,388 and 9,248,539 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively 25,071 17,170 Retained earnings (accumulated deficit) 907 (1,098) Accumulated other comprehensive income 212 186 ------------------ Total shareholders' equity 26,190 16,258 ------------------ Total liabilities and shareholders' equity $31,955 $20,155 ==================
The accompanying notes are an integral part of these condensed consolidated balance sheets. The InterCept Group, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------ 1999 1998 1999 1998 ---------- ---------- -------- -------- (unaudited) (unaudited) Revenues: Service fee income $ 7,650 $ 4,785 14,351 9,358 Data communications management income 1,255 909 2,394 1,758 Equipment and product sales, services and other 1,182 955 1,919 1,790 ---------- ---------- -------- -------- Total revenues 10,087 6,649 18,664 12,906 Costs of services: Cost of service fee income 2,140 1,429 4,020 2,721 Cost of data communications management income 886 591 1,661 1,220 Cost of equipment and product sales 882 720 1,521 1,433 Selling, general and administrative expenses 3,798 2,575 7,083 5,107 Depreciation and amortization 616 314 1,109 599 ---------- ---------- -------- -------- Total operating expenses 8,322 5,629 15,394 11,080 Operating income 1,765 1,020 3,270 1,826 Other income (expense), net 37 (132) 63 (292) ---------- ---------- -------- -------- Income before provision for income taxes and minority interest 1,802 888 3,333 1,534 Provision for income taxes 704 349 1,272 607 Minority interest in income of consolidated subsidiary (38) (46) (58) (50) ---------- ---------- -------- -------- Net income before preferred dividends 1,060 493 2,003 877 Preferred dividends - (8) - (16) ---------- ---------- -------- -------- Net income attributable to common shareholders $ 1,060 $ 485 2,003 861 ========= ========= ======= ======= Net income per common share: Basic $ 0.11 $ 0.07 $ 0.21 $ 0.12 ========= ========= ======= ======= Diluted $ 0.11 $ 0.07 $ 0.20 $ 0.12 ========= ========= ======= ======= Weighted average shares outstanding: Basic 9,594 7,250 9,444 7,000 Diluted 10,035 7,371 9,802 7,119 The accompanying notes are an integral part of these condensed consolidated statements of operations.
The InterCept Group, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands)
Six Months Ended June 30, ------------------------ 1999 1998 ------------------------ (unaudited) Cash flows from operating activities: Net income before preferred dividends $ 2,003 $ 877 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,109 599 Minority interest in income of consolidated subsidiary 58 50 Deferred income tax provision 77 4 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, net (67) 183 Inventory, prepaid expenses, and other (1,112) (273) Other assets (409) - Accounts payable and accrued expenses 363 329 Deferred revenue (241) 301 ------- ------- Net cash provided by operating activities 1,781 2,070 ------- ------- Cash flows from investing activities: Acquisitions, net of cash acquired (375) - Decrease in note receivable 6 14 Purchases of property and equipment, net (2,440) (2,400) Increases in capitalized software (202) (308) ------- ------- Net cash used in investing activities (3,011) (2,694) ------- ------- Cash flows from financing activities: Proceeds from line of credit, net 761 - Debt issuance costs - (88) Retirement of preferred stock - (440) Distributions for taxes to shareholders of pass through entities - (8) Payments on notes payable (327) (6,946) Payment of preferred dividends - (16) Proceeds from issuance of common stock, net of related issuance costs - 13,055 Proceeds from exercise of stock options 15 - ------- ------- Net cash provided by financing activities 449 5,557 Net (decrease) increase in cash and cash equivalents (781) 4,933 Cash and cash equivalents at beginning of the period 3,224 2,010 ------- ------- Cash and cash equivalents at end of the period $ 2,443 $ 6,943 ======= ======== Supplemental disclosures of cash flow information: Cash paid for interest $ 28 $ 337 ======= ======= Cash paid for income taxes $ 739 $ 435 ======= =======
The accompanying notes are an integral part of these condensed consolidated statements of cash flows. THE INTERCEPT GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation Organization The InterCept Group, Inc. ("InterCept" or the "Company") designs, develops, markets and implements a suite of fully integrated electronic commerce products and services primarily for community financial institutions in the United States. The Company's products and services include electronic funds transfer ("EFT"), data communications management, client/server enterprise software, internet banking applications and other processing solutions. The Company is a single source provider of a broad range of flexible electronic commerce solutions and supporting value-added products and services. The Company provides numerous EFT products and services, including automated teller machine ("ATM"), point-of-sale ("POS") and scrip debit services, debit card transactions and funds transfer services. The Company licenses client/server enterprise software, which operates in a Windows NT(R) environment, to community financial institutions on both a service bureau and an in-house basis. The Company also provides internet banking software, banking related equipment, provides related maintenance and technical support and offers numerous ancillary products and services to its financial institution customers. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and ProImage, Inc. ("ProImage"), a corporation in which the Company has a controlling 66.6% ownership interest. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, to present fairly the Company's financial position, results of operations, and cash flows at the dates and for the periods presented. Interim results of operations are not necessarily indicative of results to be expected for a 12-month period. The interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 2. Accounting Changes In July 1999, the Company announced a letter of intent to merge its internet banking subsidiary with the internet banking businesses of two other companies. These transactions are subject to negotiations between the parties and the execution of definitive agreements that we currently believe will happen quickly, although there can be no assurance in this regard. This announcement results in the restatement of the Company's acquisition of Direct Access Interactive, Inc. The acquisition of Direct Access was originally accounted for as a pooling-of-interests and is restated to be accounted for as a purchase. Accordingly, the Company has restated its unaudited interim financial statements for 1998 and 1999. 3. Net Income Per Share Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock" method based on the average stock price for the period. The effects of anti-dilutive options have been excluded. The following tables set forth a reconciliation of basic earnings per share to diluted earnings per share (in thousands, except earnings per share ("EPS") amounts):
Three Months Ended Three Months Ended June 30, 1999 June 30, 1998 ------------------------ ------------------------ ------------------------ ------------------------ Income Shares EPS Income Shares EPS ------------------------ ------------------------ Basic $1,060 9,594 $0.11 $ 485 7,250 $0.07 Stock options - 441 - - 121 - ----------------------- ------------------------ Diluted $1,060 10,035 $0.11 $ 485 7,371 $0.07 ======= ====== ====== ======= ====== ====== Six Months Ended Six Months Ended June 30, 1999 June 30, 1998 ------------------------ ------------------------ ------------------------ ------------------------ Income Shares EPS Income Shares EPS ------------------------ ------------------------ Basic $2,003 9,444 $0.21 $ 861 7,000 $0.12 Stock options - 358 - - 119 - ------------------------ ------------------------ Diluted $2,003 9,802 $0.20 $ 861 7,119 $0.12 ======= ====== ======= ======= ====== ======
4. Comprehensive Income The following table sets forth the calculation of the Company's comprehensive income for the periods indicated below (in thousands):
Three Months Ended Six Months Ended June 30, June 30, --------------------- -------------------- 1999 1998 1999 1998 --------------------- -------------------- Net income $ 1,060 $ 485 $ 2,003 $ 861 Unrealized (loss) gain on securities, net of tax: (55) 0 26 0 ---------- -------- -------- -------- Comprehensive income $ 1,005 $ 485 $ 2,029 $ 861 ========== ======== ======== ========
5. Acquisitions On January 11, 1999, the Company acquired certain assets and assumed certain liabilities of Eastern Software, Inc., a provider of loan portfolio management software. The consideration exchanged was approximately $450,000. This acquisition was accounted for as a purchase in accordance with Accounting Principles Board ("APB") Opinion No. 16, and, accordingly, the purchase price has 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 business have been included in the Company's consolidated financial statements from the date of acquisition. On March 9, 1999, the Company acquired Direct Access Interactive, Inc., a provider of telephone banking and Internet banking services to financial institutions. The consideration exchanged was approximately 150,000 shares of common stock of the Company with a fair market value of approximately $1,400,000 and assumption of long-term debt of approximately $300,000. This acquisition has been accounted for as a purchase in the accompanying financial statements in accordance with Accounting Principles Board ("APB") Opinion No. 16, as discussed in Note 2 and, accordingly, the purchase price has 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 business have been included in the Company's consolidated financial statements from the date of acquisition. On May 28, 1999, the Company acquired L.E. Vickers & Associates, Inc. and Data Equipment Services, Inc. L.E. Vickers & Associates is a provider of core data processing and Data Equipment Services is an equipment and maintenance provider. The consideration exchanged was approximately 500,000 shares of common stock of the Company with a fair market value of approximately $6,500,000. This acquisition has been accounted for as a purchase in the accompanying financial statements in accordance with Accounting Principles Board ("APB") Opinion No. 16, as discussed in Note 2 and, accordingly, the purchase price has 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 business have been included in the Company's consolidated financial statements from the date of acquisition. 6. Facility Closing Reserve In conjunction with the acquisition of Nova Financial Corporation in August 1998, the Company established a reserve of approximately $160,000 for estimated costs to close the existing Nova facility. The costs mainly consisted of the remaining noncancelable obligation under the lease on the facility. During 1998, approximately $51,000 of lease costs were charged against the reserve and during the first six months of 1999 approximately $64,000 of lease costs were charged against the reserve. 7. Long-Term Debt Long-term debt at June 30, 1999 and December 31, 1998 consisted of the following (in thousands):
June 30, December 31, 1999 1998 ------------------------ Note payable to First Macon Bank & Trust, interest payable at prime; monthly principal and interest payments, payable in full on September 15, 2001; the note is collaterized by assets of ProImage and a corporate guarantee by ProVesa of two-thirds of the balance of the debt. 200 242 Note payable to First Macon Bank & Trust, interest payable at prime, monthly principal and interest payments,payable in full on October 25, 2002; the note is collaterized by assets of ProImage and a corporate guarantee by ProVesa of two-thirds of the balance of the debt. 56 64 Line of Credit with First Union National Bank, interest payable at the option of the Company at (i) prime less 0.25% or (ii) LIBOR plus applicable margin as defined, payable in full on November 1, 2001, guaranteed by substantially all assets of the Company. - - ------------------------ 256 306 Less current maturities (99) (95) ------------------------ 157 211 ========================
During 1998, the Company entered into a Line of Credit with First Union National Bank, interest is payable to First Union at the option of the Company at (i) prime less 0.25% or (ii) LIBOR plus an applicable margin as defined, the Line of Credit is payable in full on November 1, 2001, and is guaranteed by substantially all assets of the Company. The amount outstanding under this facility was $760,000 and $0 as of June 30, 1999 and December 31, 1998, respectively. 8. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The following discussion contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements appear in a number of places in this Quarterly Report and include all statements that are not statements of historical fact regarding the intent, belief or expectations of InterCept and its management. These statements are based upon a number of assumptions and estimates which are subject to significant uncertainties, many of which are beyond InterCept's control. Words such as "may," "would," could," "will," "expect," "anticipate," "believe," "intend," "plan," and "estimate" are meant to identify such forward- looking statements. Such forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to: InterCept's brief combined operating history and whether it will be able to maintain profitability; whether it can obtain and manage growth or execute agreements with new customers; whether it can successfully locate, acquire and integrate new businesses and products; customer attrition; whether the market will accept InterCept's new products and services; increased competition; possible system failures and rapid changes in technology; and the other risk factors discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The Company derives revenues primarily from the following sources: (i) EFT processing services; (ii) data communications management; (iii) client/server enterprise software, support, maintenance and related services; and (iv) maintenance and technical support services, sales of banking related equipment and complementary products and customer services. The Company derives EFT revenues principally from processing ATM, POS and debit card transactions. The Company receives a base fee for providing its ATM processing services and an additional fee for each ATM serviced. Once the number of transactions exceeds established levels, the Company charges additional fees for the extra transactions processed. For its POS services, the Company generally receives a portion of the interchange fees charged by its community financial institution customers that issue debit cards and charges a monthly fee if its customers do not meet a certain minimum dollar amount of transactions for a particular month. Most charges due under the Company's EFT service agreements are paid monthly. The Company's data communications management service revenues are principally derived from network management services, data packet transportation services across The InterCept Frame Relay Network, consulting and equipment configuration, installation and sales. The Company charges a flat monthly fee for providing telecommunications connectivity and network management as well as an installation charge. The Company licenses PC BancPAC, its proprietary Windows NT(R) based client/server software system, on both an in-house and service bureau basis. The Company recognizes service revenues as the services are provided. Software license fees are recognized when a noncancellable license agreement has been signed, the product has been shipped, and all significant obligations to the customer have been satisfied. The Company's maintenance, support and equipment revenues consist primarily of revenues from the Company's maintenance and technical support services as well as sales of equipment. Equipment revenues are recognized at the time of shipment while maintenance and technical support service revenues are recognized as the service period elapses. Year 2000 The Company's business and relationships with its customers depend significantly on a number of computer software programs, internal operating systems and connections to other regional and national networks. If any of these software programs, systems or networks are not programmed to recognize and properly process dates after December 31, 1999 (the "Year 2000" issue), significant system failures or errors may result which could have a material adverse effect on the business, financial condition, or results of operations of both the affected customers and the Company. The Company has conducted a preliminary review of its internal accounting and operating programs and systems and currently believes that these programs and systems and the network connections it maintains are adequately programmed to address the Year 2000 issue or can be modified or replaced to address the Year 2000 issue without incurring costs or delays which would have a material adverse effect on the Company's financial condition. The Company has successfully converted all of its non Year 2000 compliant customers that are currently provided service bureau processing services to its PC BancPac software, which the Company believes is Year 2000 compliant. The Company has incurred costs of approximately $175,000 related to the conversions. The Company currently provides service bureau processing services through eleven centers located in Georgia, Florida, Tennessee, Arkansas and Colorado. The company has completed the upgrade of the equipment at each of these locations to be Year 2000 compliant. The total cost to make the equipment Year 2000 compliant was approximately $75,000. In the event that the upgraded equipment does not function properly, the Company believes that it can purchase equipment that will allow processing to continue. It is impossible to estimate the potential expense involved or delays which may result from a failure of the upgraded equipment at the Company's service bureau processing centers. In regard to the Company's EFT operations, the Company believes the majority of internal coding required for its products to be Year 2000 compliant has been completed. However, EFT processing is dependent upon coordinated testing between the ATM networks and the Company's systems. The Company has purchased software to coordinate the testing of its operations with that of the networks. The Company believes this testing will be complete and certified by September 30, 1999. If the networks do not successfully address Year 2000 issues in their operation and if the Company is unable to route the transaction volume over another network or another provider that has Year 2000 compliant systems, the Company's processing operations may be interrupted, hindered, or delayed which would have a material adverse effect on its business, financial condition and results of operations. In regard to the Company's ATM network and services, InterCept is in the process of certifying its connections to other ATM networks as well as examining some of its customer's ATMs and other equipment. InterCept believes this testing will be substantially completed by September 30, 1999. It is difficult to estimate the cost of the effort as the majority of expenditures relate to existing programmers and support staff required to review the financial institutions networks and equipment. It is impossible to estimate the potential expenses involved or delays which may result from a failure or delay of these institutions and third parties in resolving their Year 2000 issues. In regard to the Company's data communications operations, the Company has completed a review of its internal equipment as well as third party products and systems used in its operations. It is the Company's belief that its data communications equipment and services, which are primarily provided by companies such as Motorola, BellSouth, MCI WorldCom and Qwest Communications are Year 2000 compliant. If these companies do not successfully address Year 2000 issues in their operations and if the Company is unable to successfully transfer its business operations to another provider that has Year 2000 compliant systems, the Company's processing operations may be interrupted, hindered or delayed, which would have a material adverse effect on its business, financial condition and results of operations. The Company has completed a preliminary assessment of third party products and systems used in its business. Other companies interact electronically with the Company and its customers, and the Company must coordinate its EFT, data communications and enterprise software processing with such other companies and its customers. If these other companies or the Company's customers do not successfully address Year 2000 issues in their operations and if the Company is unable to successfully transfer its business operations to another provider that has Year 2000 compliant systems, the Company's processing operations may be interrupted, hindered or delayed, which would have a material adverse effect on its business, financial condition and results of operations. Furthermore, the Company believes that many financial institutions and third party vendors and network processors (including customers, vendors and processors of the Company) are still in the preliminary stages of analyzing their software and network applications to address Year 2000 issues. It is impossible to estimate the potential expenses involved or delays which may result from the failure of these institutions and third parties to resolve their Year 2000 issues in a timely manner and there can be no assurance that such expenses, failures or delays will not have a material adverse effect on the Company's business, financial condition or results of operations. The Company's quarterly operating results have varied in the past and will likely vary in the future. Factors that may cause the Company's future operating results to vary include, without limitation: the timing of new product and service announcements; changes in pricing policies by the Company and its competitors; market acceptance of new and enhanced versions of the Company's products and services; the lengthening of sales cycles for new or existing products or services; customer attrition; changes in operating expenses; changes in Company strategy; personnel changes; the introduction of alternative technologies; the Company's products becoming obsolete; failure, delay and expenses in making software, systems and networks utilized in the Company's business Year 2000 compliant; the effect of acquisitions; and general economic factors. Product and service revenues are difficult to forecast because the market for electronic commerce products and services is rapidly evolving, and the Company's sales cycle generally covers an extended period but varies substantially from customer to customer. Intercept believes that quarter to quarter comparisons of its results of operations should not be relied upon as indications of future performance. Results of Operations The following table sets forth the percentage of revenues represented by certain line items in the Company's consolidated statements of operations for the periods indicated:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1999 1998 1999 1998 ------------------ ---------------- Revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs of services 38.7 41.2 38.6 41.6 Selling, general, and administrative expenses 37.7 38.7 38.0 39.6 Depreciation and amortization 6.1 4.7 5.9 4.6 -------- -------- -------- ------- Total operating expenses 82.5 84.6 82.5 85.8 -------- -------- -------- ------- Operating income 17.5 15.4 17.5 14.2 Other income (expense), net 0.4 (2.0) 0.3 (2.3) -------- -------- -------- ------ Income before minority interest and provision for income taxes 17.9 13.4 17.8 11.9 Minority interest in income (0.4) (0.8) (0.3) (0.4) Provision for income taxes 7.0 5.2 6.8 4.7 -------- -------- -------- ------ Net income 10.5 % 7.4 % 10.7 % 6.8 % ======= ======== ======== ======
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Revenues. Revenues increased 51.7%, or $3.4 million, to $10.1 million for the three months ended June 30, 1999 from $6.6 million for the three months ended June 30, 1998. The $3.4 million increase was primarily attributable to (i) $1.4 million generated by an increase in core data processing services, (ii) $1.3 million generated by an increase in EFT processing services, (iii) $360,000 generated by an increase in data communication services, (iv) increases of $220,000 generated by software and other product sales and (v) other increases of $120,000. Costs of Services. Costs of services increased 42.6%, or $1.2 million, to $3.9 million for the three months ended June 30, 1999 from $2.7 million for the three months ended June 30, 1998. The $1.2 million increase was primarily attributable to (i) $450,000 generated by the Company's core data processing services, (ii) 350,000 generated by additional communications sales, (iii) $100,000 generated by additional equipment sales, and (iv) other increases of $300,000. Cost of services as a percentage of sales decreased from 41.2% for the three months ended June 30, 1998 to 38.7% for the three months ended June 30, 1999, primarily due to additional higher margin EFT revenues and synergies from the Company's acquisitions. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 47.5%, or $1.2 million, to $3.8 million for the three months ended June 30, 1999 from $2.6 million for the three months ended June 30, 1998. The increase was primarily attributable to $720,000 to support the continued growth of the Company's business and $480,000 related to the Company's acquisitions. Selling, general and administrative expenses as a percentage of sales decreased from 38.7% for the three months ended June 30, 1998 to 37.7% for the three months ended June 30, 1999. Depreciation and Amortization. Depreciation and amortization increased 96.2%, or $300,000, to $620,000 for the three months ended June 30, 1999 from $310,000 for the three months ended June 30, 1998. The increase was primarily attributable to additional property, plant and equipment obtained through acquisitions as well as internal growth, amortization of intangible assets related to the Company's acquisitions, partially offset by a decrease in amortization of other intangibles. Other Income (Expense). Other income (expense) increased $170,000, to income of $40,000 for the three months ended June 30, 1999 from expense of $(130,000) for the three months ended June 30, 1998. The increase was primarily due to the reduction of long-term debt with proceeds from the Company's initial public offering in June 1998 which in turn reduced interest expense. Minority Interest in Income. Minority interest in income decreased to $40,000 for the three months ended June 30, 1999 from $50,000 for the three months ended June 30, 1998. The decrease was attributable to the Company's acquisition of an additional 33% stake in ProImage purchased in August 1998. Provision for Income Taxes. Provision for income taxes increased $360,000 to $700,000 for the three months ended June 30, 1999 from $350,000 for the three months ended June 30, 1998. The increase was attributable to increased profits and an increase in nondeductible amortization. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Revenues. Revenues increased 44.6%, or $5.8 million, to $18.7 million for the six months ended June 30, 1999 from $12.9 million for the six months ended June 30, 1998. The $5.8 million increase was primarily attributable to (i) $2.5 million generated by an increase in core data processing services, (ii) $2.0 million generated by an increase in EFT processing services, (iii) $640,000 generated by an increase in data communication services, (iv) increases of $280,000 generated by software and other product sales and (v)other increases of $380,000. Costs of Services. Costs of services increased 34.0%, or $1.8 million, to $7.2 million for the six months ended June 30, 1999 from $5.4 million for the six months ended June 30, 1998. The $1.8 million increase was primarily attributable to (i) $700,000 generated by the Company's core data processing services, (ii) $440,000 generated by additional communications sales, (iii) $200,000 generated by an increase in EFT processing services, (iv) $100,000 generated by software and other product sales and (v) other increases of $360,000. Costs of services as a percentage of sales decreased from 41.6% for the six months ended June 30, 1998 to 38.6% for the six months ended June 30, 1999, primarily due to additional higher margin EFT revenues and synergies from the Company's acquisitions. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 38.7%, or $2.0 million, to $7.1 million for the six months ended June 30, 1999 from $5.1 million for the six months ended June 30, 1998. The increase was primarily attributable to $1.1 million to support the continued growth of the Company's business and $870,000 related to the Company's acquisitions. Selling, general and administrative expenses as a percentage of sales decreased from 39.6% for the six months ended June 30, 1998 to 38.0% for the six months ended June 30, 1999. Depreciation and Amortization. Depreciation and amortization increased 85.1%, or $510,000, to $1.1 million for the six months ended June 30, 1999 from $600,000 for the six months ended June 30, 1998. The increase was primarily attributable to additional property, plant and equipment obtained through acquisitions as well as internal growth, amortization of intangible assets related to the Company's acquisitions, partially offset by a decrease in amortization of other intangibles. Other Income (Expense). Other income (expense) increased $360,000, to income of $60,000 for the six months ended June 30, 1999 from expense of $290,000 for the six months ended June 30, 1998. The increase was primarily due to the reduction of long-term debt with proceeds from the Company's initial public offering in June 1998 which in turn reduced interest expense. Minority Interest in Income. Minority interest in income increased to $60,000 for the six months ended June 30, 1999 from $50,000 for the six months ended June 30, 1998. The increase was attributable to profits in ProImage's operations. Provision for Income Taxes. Provision for income taxes increased $670,000 to $1.3 million for the six months ended June 30, 1999 from $610,000 for the six months ended June 30, 1998. The increase was attributable to increased profits and an increase in nondeductible amortization. Liquidity and Capital Resources Cash and cash equivalents were $2.4 million at June 30, 1999. Net cash provided by operating activities was $1.8 million and $2.1 million for the six months ended June 30, 1999 and 1998, respectively. Net cash used in investing activities was $3.0 million and $2.7 million for the six months ended June 30, 1999 and 1998, respectively. The increase in net cash used in investing activities was primarily due to the Company's acquisitions and an increase in capital expenditures. Net cash provided by financing activities was $450,000 and $5.6 million for the six months ended June 30, 1999 and 1998, respectively. The decrease in cash provided by financing activities was primarily due to completion of the Company's initial public offering in the second quarter of 1998. During 1998, the Company entered into the First Union Credit Facility, under which the Company may borrow up to $20.0 million to fund acquisitions and pay expenses related to acquisitions. In addition, at the Company's election, $5.0 million of the First Union Credit facility may become available for working capital purposes. The First Union Credit Facility contains provisions which require the Company to maintain certain financial ratios and minimum net worth amounts which restrict the Company's ability to incur additional debt, make certain capital expenditures, enter into agreements for mergers, acquisitions or the sale of substantial assets and pay dividends. The First Union Credit Facility matures on November 1, 2001. As of June 30, 1999, there was $760,000 outstanding under this facility. Interest is payable monthly and outstanding principal amounts accrue interest, at the Company's option, at an annual rate equal to either (i) a floating rate equal to the lender's prime rate minus one quarter of one percent or (ii) a fixed rate based upon the 30-day LIBOR rate plus applicable margins. The Company is negotiating to amend the First Union Credit Facility to allow for use of a greater portion of the proceeds for working capital needs. No assurances can be made that any such amendments will occur. While there can be no assurances, the Company believes that the cash on hand, funds to be provided by operations, and funds which may be available for working capital purposes under the First Union Credit Facility will be sufficient to meet the Company's anticipated capital expenditure and liquidity requirements for its operations through at least June 2000. The Company intends to grow, in part, through strategic acquisitions and will make additional expenditures to negotiate and consummate acquisition transactions and integrate the acquired companies. While there can be no assurance, management currently believes that cash on hand and funds from the First Union Credit Facility, together with the issuance of Common Stock and other securities, will be sufficient to fund its acquisition needs for the next 12 months. No assurance can be made with respect to the actual timing and the amount of the expenditures or acquisitions. The Company's estimates are forward-looking statements that are subject to risks and uncertainties discussed above. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to, nor is any of its property subject to, any material legal proceedings, other than routine litigation incidental to its business. Item 2. Changes in Securities and Use of Proceeds On March 9, 1999, the Company issued approximately 150,000 shares of common stock to the five shareholders of Direct Access Interactive, Inc. in connection with its acquisition by the Company. On May 28, 1999, the Company issued approximately 500,000 shares of common stock to the sole shareholder of L. E. Vickers & Associates, Inc. and the sole shareholder of Data Equipment Services, Inc. in connection with its acquisition of those companies. The Company issued the securities described above in reliance on one or more exemptions from registration provided by Sections (4)2 and 4(6) of the Securities Act and Regulation D promulgated by the SEC under the Securities Act of 1933. Recipients of securities in these transactions represented their intention to acquire the securities for investment purposes only and not with a view to or for the sale in connection with any distribution of those securities, and the Company affixed appropriate legends to the share certificates issued in those transactions. All recipients of these securities had adequate access, through their relationships with the Company or otherwise, to information about the Company. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On June 15, 1999, the Company held its Annual Meeting of Shareholders. The results of the proposals submitted for vote at such meeting were as follows: 1. Election of two Directors (there were no abstentions or broker non-votes in connection with the election of directors). For Withhold Jon R. Burke 7,845,285 3,382 Glenn W. Sturm 7,845,285 3,382 2. Ratification of Arthur Andersen LLP as the independent public accountants of the Registrant for the year ended December 31, 1999. Number of Shares For 7,464,781 Against 1,482 Abstain 382,404 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a) Exhibits
Exhibit No. Description -------- ----------- 2.1 Acquisition and Merger Agreement dated May 28, 1999 by and between The InterCept Group, Inc., LEV Acquisition Corp., L.E. Vickers & Associates, Inc., Data Equipment Services, Inc., and certain shareholders of L.E. Vickers & Associates, Inc. and Data Equipment Services, Inc, (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed June 11, 1999). 3.1 Amended and Restated Articles of Incorporation, as filed with the Secretary of the State of Georgia on April 29, 1998 (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (No. 333-47197) as declared effective by the SEC on June 9, 1998 (the "Registration Statement")). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Registration Statement). 4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws defining the rights of the holders of Common Stock of the Company. 27.1 Financial Data Schedule for the three and six months ended June 30, 1999 and 1998.
b) Reports on Form 8-K Form 8-K filed June 11, 1999 Reporting under Item 5 that the Company entered into a merger agreement to acquire L.E. Vickers and Associates, Inc. and Data Equipment Services, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE INTERCEPT GROUP, INC. August 5, 1999 /s/ John W. Collins - --------------- ------------------- Date John W. Collins Chairman of the Board and Chief Executive Officer (principal executive officer) August 5, 1998 /s/ Scott R. Meyerhoff - -------------- ---------------------- Date Scott R. Meyerhoff Chief Financial Officer, Vice President--Finance and Secretary (principal financial and accounting officer) 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 certain shareholders of L.E. Vickers & Associates, Inc. and Data Equipment Services, Inc, (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed June 11, 1999). 3.1 Amended and Restated Articles of Incorporation, as filed with the Secretary of State of Georgia on April 29, 1998 (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (No. 333-47197) as declared effective by the SEC on June 9, 1998 (the "Registration Statement")). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Registration Statement) 4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws defining the rights of the holders of Common Stock of the Company. 27.1 Financial Data Schedule for the three and six months ended June 30, 1998 and 1999.
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-30-1999 2,443 2,443 496 496 4,444 4,444 230 230 305 305 9,355 9,355 12,779 12,779 3,522 3,522 31,955 31,955 5,234 5,234 0 0 0 0 0 0 25,071 25,071 1,119 1,119 31,955 31,955 10,087 18,664 10,087 18,664 3,908 7,202 8,322 15,394 0 0 0 0 6 14 1,802 3,333 704 1,272 1,060 2,003 0 0 0 0 0 0 1,060 2,003 .11 .21 .11 .20
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