<PAGE>
================================================================================
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 SEPTEMBER 30, 1998.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO
____________, 19_____.
Commission file number : 01-14213
------------------------------
THE INTERCEPT GROUP, INC.
(Exact name of registrant as specified in its charter)
Georgia 58 - 2237359
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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 November 10, 1998
Common Stock, no par value 9,248,539
(No. of Shares)
================================================================================
<PAGE>
THE INTERCEPT GROUP, INC.
INDEX TO FORM 10-Q
PAGE
---------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations for
the Three Months and Nine Months ended September 30,
1998 and 1997
Condensed Consolidated Statements of Cash Flows for
the Nine Months ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
<TABLE>
<CAPTION>
September 30 December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,646 $ 2,010
Accounts receivable, less allowance for doubtful accounts of $167
and $157 at September 30, 1998 and December 31, 1997,
respectively 2,777 2,776
Inventory, prepaid expenses and other 674 230
--------------------------
Total current assets 9,097 5,016
Property and equipment, net 5,993 2,516
Deferred tax assets 699 668
Intangible assets, net 3,751 1,683
Notes receivable 37 45
Other noncurrent assets 465 228
--------------------------
Total assets $20,042 $10,156
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 93 $ 581
Line of credit - 200
Accounts payable and accrued liabilities 2,974 2,103
Deferred revenue 1,246 1,140
--------------------------
Total current liabilities 4,313 4,024
Notes payable, less current portion 230 4,716
Deferred compensation - 1,800
--------------------------
Total liabilities 4,543 10,540
Minority interest 48 -
Commitments and contingencies:
Series A redeemable preferred stock 8% cumulative, no par value;
30,000 shares authorized; 0 and 4,000 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively. - 400
Shareholders' equity (deficit):
Preferred stock, no par value; 1,000,000 shares authorized; Series A
reported above - -
Common stock, no par value; 50,000,000 shares authorized;
9,248,539 and 6,750,114 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 17,176 2,764
Accumulated deficit (1,950) (3,548)
Accumulated other comprehensive income 225 -
--------------------------
Total shareholders' equity (deficit) 15,451 (784)
--------------------------
Total liabilities and shareholders' equity (deficit) $20,042 $10,156
==========================
The accompanying notes are an integral part of these condensed consolidated balance sheets.
</TABLE>
<PAGE>
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------- --------- -------- --------
1998 1997 1998 1997
-------- --------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Service fee income $5,518 $4,266 $14,876 $12,069
Data communications management income 977 839 2,735 2,282
Equipment and product sales, services and other 1,082 1,096 2,872 2,388
------ ------ ------- -------
Total revenues 7,577 6,201 20,483 16,739
Costs of services:
Cost of service fee income 1,654 1,282 4,375 3,759
Cost of data communications management income 648 628 1,868 1,773
Cost of equipment and product sales 958 752 2,391 1,783
Selling, general and administrative expenses 2,790 2,591 7,897 7,477
Depreciation and amortization 363 342 962 981
------ ------ ------- -------
Total operating expenses 6,413 5,595 17,493 15,773
Operating income 1,164 606 2,990 966
Other income (expense), net 81 (156) (211) (484)
------ ------ ------- -------
Income before provision for income taxes and minority interest 1,245 450 2,779 482
Provision for income taxes 469 235 1,076 356
Minority interest in (income) loss of consolidated subsidiary (30) 0 (80) 39
------ ------ ------- -------
Net income before preferred dividends 746 215 1,623 165
Preferred dividends 0 (8) (16) (24)
------ ------ ------- -------
Net income attributable to common shareholders $ 746 $ 207 $ 1,607 $ 141
====== ====== ======= =======
Net income per common share:
Basic $ 0.08 $ 0.03 $ 0.21 $ 0.02
====== ====== ======= =======
Diluted $ 0.08 $ 0.03 $ 0.20 $ 0.02
====== ====== ======= =======
Weighted average shares outstanding:
Basic 9,221 6,750 7,749 6,750
Diluted 9,337 6,869 7,867 6,863
The accompanying notes are an integral part of these condensed consolidated statements of operations.
</TABLE>
<PAGE>
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
-------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,623 $ 165
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 962 981
Minority interest in income (loss) of consolidated subsidiary 80 (39)
Deferred income tax (benefit) (31) (17)
Pro forma tax expense - 100
Changes in operating assets and liabilities:
Accounts receivable 488 351
Inventory, prepaid expenses, and other (667) (218)
Other assets 6 (113)
Accounts payable and accrued expenses 130 329
Deferred revenue 106 (138)
------- -------
Net cash provided by operating activities 2,697 1,401
------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired (1,851) -
Increase (decrease) in note receivable 17 (875)
Purchases of property and equipment, net (3,639) (718)
Increases in capitalized software (513) -
------- -------
Net cash used in investing activities (5,986) (1,593)
------- -------
Cash flows from financing activities:
Payments on notes payable and line of credit (6,974) (179)
Debt issuance costs (88) -
Retirement of preferred stock (440) -
Distributions for taxes to shareholders of pass through entities (8) (152)
Payment of preferred dividends (16) (18)
Proceeds from issuance of common stock, net of issuance costs 14,451 -
------- -------
Net cash provided by (used in) financing activities 6,925 (349)
Net increase (decrease) in cash and cash equivalents 3,636 (541)
Cash and cash equivalents at beginning of the period 2,010 1,398
------- -------
Cash and cash equivalents at end of the period $ 5,646 $ 857
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 344 $ 579
======= =======
Cash paid for income taxes $ 445 $ 238
======= =======
The accompanying notes are an integral part of these condensed consolidated statements of cash flows.
</TABLE>
<PAGE>
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 and other processing solutions.
The Company is a single source provider of a broad range of flexible
electronic commerce solutions 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, funds transfer services and remote
banking 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 supplies 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 and its wholly owned subsidiaries,
ProVesa, Inc. ("ProVesa") and InterCept Switch, Inc., and ProImage,
Inc.("ProImage"), a corporation in which ProVesa has a 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 Registration Statement on Form S-1
(Registration Number 333-47197) as declared effective by the Securities and
Exchange Commission on June 9, 1998.
<PAGE>
2. NET INCOME PER SHARE
Net income per share is calculated and presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). Basic earnings per share is computed based on the weighted
average number of common shares outstanding. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding stock options using the
"treasury stock" method based on average stock price for the period. All
prior periods are presented under SFAS 128. 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):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
---------------------- ----------------------
Income Shares EPS Income Shares EPS
---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 746 9,221 $ 0.08 $ 207 6,750 $ 0.03
Dilutives:
Stock options - 116 - - 119 -
---------------------- ----------------------
Diluted EPS $ 746 9,337 $ 0.08 $ 207 6,869 $ 0.03
====================== ======================
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
---------------------- ----------------------
Income Shares EPS Income Shares EPS
---------------------- ----------------------
Basic EPS $1,607 7,749 $ 0.21 $ 141 6,750 $ 0.02
Dilutives:
Stock options - 118 (0.01) - 113 -
---------------------- ----------------------
Diluted EPS $1,607 7,867 $ 0.20 $ 141 6,863 $ 0.02
====================== ======================
</TABLE>
3. COMPREHENSIVE INCOME
As of December 31, 1997, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS No. 130 establishes new rules for
the reporting of "comprehensive income", which is the total of net income
and all other non-owner changes in shareholders' equity. The adoption of
SFAS No. 130 had no effect on the Company's net income.
The following table sets forth the calculation of the Company's
comprehensive income for the periods indicated below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------------------- -------------------
Net income, as reported 746 207 1,607 141
Unrealized gain on securities,
net of tax: 225 - 225 -
-------- -------- -------- -------
Accumulated other
comprehensive income 971 207 1,832 141
======== ======== ======== =======
4. INITIAL PUBLIC OFFERING OF 2,387,500 SHARES OF COMMON STOCK
On June 9, 1998, the Company completed its initial public offering of
2,387,500 shares (including 137,500 shares sold by a selling shareholder)
of common stock at an offering price of $7.00 per share. Net proceeds from
the offering were approximately $13.1 million after deducting underwriters
discounts and commissions and expenses of the offering. The Company used a
portion of the proceeds to (i) pay down significantly all of its long-term
debt; (ii) pay amounts owed to an officer of the Company for prior service;
(iii) enhance and expand the InterCept Frame Relay Network; and (iv) redeem
its outstanding preferred stock. The balance of the proceeds will be used
for working capital and general corporate purposes, including possible
acquisitions. On July 10, 1998 the underwriters exercised their over-
allotment option to purchase an additional 248,425 shares at $7.00 per
share. The Company received additional net proceeds of approximately $1.6
million from such sale of shares.
5. ACQUISITIONS
On August 4, 1998, the Company acquired certain assets and assumed certain
liabilities of Nova Financial Corporation, a provider of core data
processing, check imaging and item capture services throughout Georgia. On
September 30, 1998, the Company acquired certain assets and assumed
<PAGE>
certain liabilities of Advance Data, a provider of core data processing,
check imaging and item capture services throughout Arkansas. On August 25,
1998, the Company acquired 33% of ProImage, a check imaging center in which
Intercept previously owned an interest. After the acquisition, InterCept
owned 66% of ProImage. These acquisitions were accounted for as purchases
in accordance with Accounting Principles Board ("APB") Opinion No. 16, and,
accordingly, the purchase prices have been preliminarily allocated to the
net tangible and intangible assets acquired based on their estimated fair
values as of the acquisition dates. The results of operations of Nova and
Advance Data have been included in the Company's results of operation since
the date of acquisition.
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at September 30, 1998 and
December 31, 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------------------
<S> <C> <C>
Note payable to Georgia State Bank, all outstanding amounts
repaid in June, 1998. $ - $ 2,733
Note payable to FNB Commerce, all outstanding amounts repaid
in June, 1998. - 1,378
Note payable to Community Bank of Georgia, all outstanding
amounts repaid in January, 1998. - 403
Mortgage note payable to Allied Bank, all outstanding amounts
repaid in June, 1998. - 389
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. 255 316
Note payable to First Macon Bank & Trust, interest payable at
prime, monthly principal and interest payments, the note is
collaterized by assets of ProImage and a corporate guarantee
by ProVesa of two-thirds of the balance of the debt. 68 78
------------------------------
323 5,297
Less current maturities (93) (581)
------------------------------
$ 230 $ 4,716
==============================
</TABLE>
<PAGE>
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 historical statements of fact regarding the
intent, anticipation, belief or current expectations of the Company, its
directors or its officers with respect to, among other things: (i) the
Company's financing plans; (ii) trends affecting the Company's financial
condition or results of operations; (iii) the Company's growth strategy and
operating strategy and (iv) the declaration and payment of dividends. The words
"may," "would," "could," "will," "expect," "estimate," "anticipate," "believe,"
"intends," "plans," "allows," "strategy," and similar expressions and variations
thereof are intended to identify forward-looking statements. Investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, many of which are beyond the
Company's ability to control. Actual results may differ materially from these
forward-looking statements as a result of many factors, including: the inability
to achieve and maintain profitability; the inability to obtain, continue and
manage growth or execute agreements with new customers; the risks related to
acquisitions and the integration of acquired assets and businesses, customer
attrition, the inability to attract and retain qualified sales and marketing
personnel and enter strategic marketing relationships; market acceptance of new
products and enhancements; growth in the Company's customers; rapid changes in
technology; increased competition; dependence on new products; and the other
factors discussed in the Company's registration statement on Form S-1 as
declared effective on June 9, 1998, including the "Risk Factors" section
contained therein.
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.
<PAGE>
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. It is the
Company's policy to recognize revenues for licensing of PC BancPAC in accordance
with Statement of Position 97-2 on "Software Revenue Recognition" issued by the
American Institute of Certified Public Accountants. 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.
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 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
currently provides service bureau processing services to certain customers using
a processing solution that is not Year 2000 compliant, and the Company is in the
process of converting those customers to its PC BancPAC software, which the
Company believes is Year 2000 compliant, before the end of September 1999. The
Company currently estimates that the cost of such conversion will total
approximately $200,000; however, it is difficult to predict such costs with
certainty, and there can be no assurance that the costs necessary to convert its
customers to PC BancPAC will not have a material adverse effect on the Company's
business, financial condition, or results of operations. Further, any failure
by the Company to complete the conversion of any of its service bureau customers
in a timely manner could significantly interrupt the business operations of such
customers, 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 not completed an assessment of third party products or 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
<PAGE>
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 significantly 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 condensed consolidated statements of
operations for the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0 % 100.0 %
Costs of services 43.0 42.9 42.2 43.7
Selling, general, and administrative
expenses 36.8 41.8 38.6 44.7
Depreciation and amortization 4.8 5.5 4.7 5.9
----- ---- ----- ----
Total operating expenses 84.6 90.2 85.5 94.3
----- ---- ----- ----
Operating income (loss) 15.4 9.8 14.5 5.7
Other income (expense), net 1.1 (2.5) (1.0) (2.8)
----- ---- ----- ----
Income before minority interest and
provision for income taxes 16.5 7.3 13.5 2.9
Minority interest in (income) loss 0.4 0.0 (0.0) 0.0
Provision for income taxes 6.2 3.8 5.3 2.1
----- ---- ----- ----
Net income 9.9% 3.5% 8.2% 0.8%
===== ==== ===== ====
</TABLE>
<PAGE>
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenues. Revenues increased 22.2%, or $1.4 million, to $7.6 million for the
three months ended September 30, 1998 from $6.2 million for the three months
ended September 30, 1997. The $1.4 million increase was primarily attributable
to (i) $700,000 generated by an increase in core data processing services, of
which $410,000 was related to the Company's acquisitions during the third
quarter, (ii) $420,000 generated by an increase in EFT processing services,
(iii) $140,000 generated by an increase in data communication services and (iv)
other increases of $140,000.
Costs of Services. Costs of services increased 22.5%, or $600,000, to $3.3
million for the three months ended September 30, 1998 from $2.7 million for the
three months ended September 30, 1997. The $600,000 increase was primarily
attributable to (ii) $350,000 generated by additional core data processing
sales, of which $190,000 was related to the Company's acquisitions during the
third quarter, (ii) $210,000 generated by additional equipment sales and (iii)
other increases of $40,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 7.7% or $200,000 to $2.8 million for the three
months ended September 30, 1998 from $2.6 million for the three months ended
September 30, 1997. The increase was primarily attributable to $170,000 related
to the Company's acquisitions during the third quarter and $30,000 to support
the continued growth of the Company's business.
Depreciation and Amortization. Depreciation and amortization increased 6.1%,
or $20,000, to $360,000 for the three months ended September 30, 1998 from
$340,000 for the three months ended September 30, 1997. The increase was
primarily attributable to additional property, plant and equipment, partially
offset by a decrease in amortization.
Other Income (Expense). Other income (expense) increased 151.9%, or $240,000,
to income of $80,000 for the three months ended September 30, 1998 from expense
of $(160,000) for the three months ended September 30, 1997. The increase was
primarily due to the reduction of long-term debt with proceeds from the
Company's initial public offering in June 1998.
Minority Interest in Income. Minority interest in income increased to $30,000
for the three months ended September 30, 1998 from no minority interest for the
three months ended September 30, 1997. The increase was attributable to profits
in ProImage's operations.
Provision for Income Taxes. Provision for income taxes increased $230,000 to
$470,000 for the three months ended September 30, 1998 from $240,000 for the
three months ended September 30, 1997. The increase was attributable to
increased profits partially offset by a reduction in nondeductible amortization.
<PAGE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenues. Revenues increased 22.4%, or $3.7 million, to $20.5 million for the
nine months ended September 30, 1998 from $16.7 million for the nine months
ended September 30, 1997. The increase was primarily attributable to (i) $1.6
million generated by an increase in EFT processing services, (ii) $960,000
generated by an increase in core data processing services, of which $410,000 was
related to the Company's acquisitions during the third quarter, (iii) $550,000
generated by an increase in data communications management services, (iv)
$390,000 generated by an increase in equipment sales and (v) other net increases
of $200,000.
Costs of Services. Costs of services increased 18.0%, or $1.3 million, to
$8.6 million for the nine months ended September 30, 1998 from $7.3 million for
the nine months ended September 30, 1997. The $1.3 million increase was
primarily attributable to (i) $610,000 generated by additional equipment sales,
(ii) $450,000 generated by an increase in core data processing services of which
$190,000 was related to the Company's acquisitions during the third quarter and
(iii) other net increases of $260,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 5.6%, or $420,000, to $7.9 million for the
nine months ended September 30, 1998 from $7.5 million for the nine months ended
September 30, 1997. The increase was primarily attributable to $250,000 for
additional personnel and facilities to support the Company's growth and $170,000
related to the Company's acquisitions during 1998.
Depreciation and Amortization. Depreciation and amortization decreased 1.9%,
or $20,000, to $960,000 for the nine months ended September 30, 1998 from
$980,000 for the nine months ended September 30, 1997. The decrease was
primarily attributable to a decrease in amortization of $370,000, partially
offset by increases related to additional property, plant and equipment.
Other Expense. Other expense decreased 56.4%, or $270,000, to $210,000 for
the nine months ended September 30, 1998 from $480,000 for the nine months ended
September 30, 1997. The decrease was primarily due to the reduction of long
term debt with proceeds from the Company's initial public offering in June 1998.
Minority Interest in Income. Minority interest in income increased $120,000,
to $80,000 for the nine months ended September 30, 1998 from a minority interest
in loss of $40,000 for the nine months ended September 30, 1997. The increase
was attributable to profits in ProImage's operations.
Provision for Income Taxes. Provision for income taxes increased $720,000,
to $1.1 million for the nine months ended September 30, 1998 from $360,000 for
the nine months ended September 30, 1997. The increase was attributable to
increased profits partially offset by a reduction in nondeductible amortization.
Liquidity and Capital Resources
Cash and cash equivalents were $5.6 million at September 30, 1998. Net cash
provided by operating activities was $2.7 million and $1.4 million for the nine
months ended September 30, 1998 and 1997, respectively. The increase in the net
cash provided by operating activities was primarily attributable to an increase
in earnings.
<PAGE>
Net cash used in investing activities was $6.0 million and $1.6 million for
the nine months ended September 30, 1998 and 1997, respectively. The increase
in net cash used in investing activities was primarily due to an increase in
capital expenditures and the acquisitions of Nova Financial Corporation and
Advance Data.
Net cash provided by (used in) financing activities was $6.9 million and
($350,000) for the nine months ended September 30, 1998 and 1997, respectively.
The increase in net cash provided by financing activities was primarily due to
net proceeds from the completion of the Company's initial public offering.
On April 28, 1998, the Company entered into a loan agreement with First Union
National Bank (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, $2.0 million of the First
Union Credit Facility may become available for working capital purposes. Before
making any borrowings under the loan, the Company shall have satisfied certain
conditions set forth in the loan agreement. The First Union Credit Facility
contains provisions which require the Company to maintain certain financial
ratios and minimum net worth amounts and 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 April 28, 2001. 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. No amounts were outstanding
under the First Union Credit Facility during the three or nine months ended
September 30, 1998.
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 September 1999. 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.
<PAGE>
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote by the Company's security holders during the
third quarter ended September 30, 1998.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
No. Description
------ -----------
2.1 Asset Purchase Agreement dated August 4, 1998 by and between The
Intercept Group, Inc., Nova Financial Corporation and Broadnet, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K filed on August 19, 1998).
2.2 Asset Purchase Agreement dated September 30, 1998 by and between
ProVesa, Inc., Mercantile Corporation and Dale May (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
filed on October 14, 1998).
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 Securities and
Exchange Commission 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 nine months ended
September 30, 1998.
27.2 Financial Data Schedule for the three and nine months ended
September 30, 1997.
<PAGE>
b) Reports on Form 8-K
Form 8-K filed August 19, 1998
Reporting under Item 2 that the Company entered into a definitive
Asset Purchase Agreement to purchase certain assets and assume certain
liabilities of Nova Financial Corporation, the Nova Agreement.
Form 8-K filed October 14, 1998
Reporting under Item 2 that ProVesa, Inc., a wholly owned
subsidiary of the Company, entered into a definitive Asset Purchase
Agreement to purchase certain assets and assume certain liabilities of
Advance Data.
Form 8-K/A filed October 17, 1998
Reporting under Item 7 the Financial Statements, Pro Forma
Financial Information and Exhibits with respect to the Nova Agreement.
__________________
<PAGE>
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.
November 12, 1998 /s/ John W. Collins
- ------------------ ---------------------------
Date John W. Collins
Chairman of the Board and Chief Executive Officer
(principal executive officer)
November 12, 1998 /s/ Scott R. Meyerhoff
- ------------------ ---------------------------
Date Scott R. Meyerhoff
Chief Financial Officer
(principal financial and accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------ -----------
2.1 Asset Purchase Agreement dated August 4, 1998 by and between The
Intercept Group, Inc., Nova Financial Corporation and Broadnet, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K filed on August 19, 1998).
2.2 Asset Purchase Agreement dated September 30, 1998 by and between
ProVesa, Inc., Mercantile Corporation and Dale May (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
filed on October 14, 1998).
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 Securities and
Exchange Commission 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 nine months ended
September 30, 1998.
27.2 Financial Data Schedule for the three and nine months ended
September 30, 1997.
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