<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 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)
<TABLE>
<CAPTION>
Georgia 58-2237359
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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)
================================================================================
<PAGE>
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
<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>
June 30, December 31,
1999 1998
----------------------
(Unaudited)
<S> <C> <C>
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
==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
<PAGE>
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
1999 1998 1999 1998
---------- ---------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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.
</TABLE>
<PAGE>
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
------------------------
(unaudited)
<S> <C> <C>
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
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of cash flows.
<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, 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.
<PAGE>
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):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------------ ------------------------
------------------------ ------------------------
Income Shares EPS Income Shares EPS
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======= ====== ======= ======= ====== ======
</TABLE>
4. Comprehensive Income
The following table sets forth the calculation of the Company's
comprehensive income for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1999 1998 1999 1998
--------------------- --------------------
<S> <C> <C> <C> <C>
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
========== ======== ======== ========
</TABLE>
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.
<PAGE>
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):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------
<S> <C> <C>
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
========================
</TABLE>
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.
<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 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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
<S> <C> <C> <C> <C>
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 %
======= ======== ======== ======
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<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 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
<PAGE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
-------- -----------
<S> <C>
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.
</TABLE>
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.
<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.
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)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
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.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 2,443 2,443
<SECURITIES> 496 496
<RECEIVABLES> 4,444 4,444
<ALLOWANCES> 230 230
<INVENTORY> 305 305
<CURRENT-ASSETS> 9,355 9,355
<PP&E> 12,779 12,779
<DEPRECIATION> 3,522 3,522
<TOTAL-ASSETS> 31,955 31,955
<CURRENT-LIABILITIES> 5,234 5,234
<BONDS> 0 0
0 0
0 0
<COMMON> 25,071 25,071
<OTHER-SE> 1,119 1,119
<TOTAL-LIABILITY-AND-EQUITY> 31,955 31,955
<SALES> 10,087 18,664
<TOTAL-REVENUES> 10,087 18,664
<CGS> 3,908 7,202
<TOTAL-COSTS> 8,322 15,394
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6 14
<INCOME-PRETAX> 1,802 3,333
<INCOME-TAX> 704 1,272
<INCOME-CONTINUING> 1,060 2,003
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,060 2,003
<EPS-BASIC> .11 .21
<EPS-DILUTED> .11 .20
</TABLE>
