<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, 2000.
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 (I.R.S. Employer Identification No.)
incorporation or organization)
3150 Holcomb Bridge Road, Suite 200, Norcross, Georgia 30071
(Address of principal executive offices)
(770) 248-9600
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 10, 2000
Common Stock, no par value 13,197,273
(No. of Shares)
================================================================================
<PAGE>
THE INTERCEPT GROUP, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of
September 30, 2000, and December 31, 1999 3
Condensed Consolidated Statements of Operations for
the Three and Nine Months ended September 30, 2000
and 1999 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 6 Exhibits and Reports on Form 8-K 17
SIGNATURES
2
<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,
2000 1999*
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,237 $ 2,145
Short term investments 40,923 200
Accounts receivable, less allowance for doubtful accounts of $406
and $386 at September 30, 2000 and December 31, 1999, respectively 10,461 9,099
Deferred tax assets 2,111 1,956
Inventory, prepaid expenses and other 4,680 2,610
-------- --------
Total current assets 59,412 16,010
Property and equipment, net 15,387 11,662
Intangible assets, net 24,815 20,600
Advances to affiliate 15,000 10,957
Investment in affiliate 30,283 40,446
Other noncurrent assets 2,667 1,220
-------- --------
Total assets $147,564 $100,895
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 59 $ 154
Accounts payable and accrued liabilities 2,185 6,450
Deferred revenue 5,537 5,777
-------- --------
Total current liabilities 7,781 12,381
Notes payable, less current portion 1,514 12,669
Deferred revenue 381 440
Deferred tax liability 25,516 22,570
-------- --------
Total liabilities 35,192 48,060
Minority interest in consolidated subsidiary 192 175
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;
13,189,806 and 10,467,972 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 109,101 42,657
Retained earnings 3,111 9,911
Accumulated other comprehensive income (32) 92
-------- --------
Total shareholders' equity 112,180 52,660
-------- --------
Total liabilities and shareholders' equity $147,564 $100,895
======== ========
The accompanying notes are an integral part of these condensed consolidated balance sheets.
* All prior period amounts have been restated to reflect the acquisition of
Advanced Computer Enterprises, Inc. in a pooling transaction.
</TABLE>
3
<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,
-------------------------- -----------------------
2000 1999* 2000 1999*
-------------------------- -----------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Service fee income $14,310 $11,345 $ 39,831 $27,620
Data communications management income 1,506 1,349 4,424 3,743
Equipment and product sales, services and other 2,012 2,530 6,637 5,180
-------------------------------------------------------
Total revenues 17,828 15,224 50,892 36,543
Costs of services:
Cost of service fee income 4,236 3,002 11,713 7,538
Cost of data communications management income 1,137 912 3,165 2,573
Cost of equipment and product sales, services and other 1,528 2,075 4,954 4,013
Selling, general and administrative expenses 6,884 6,490 19,864 15,052
Depreciation and amortization 1,205 2,168 3,243 3,408
-------------------------------------------------------
Total operating expenses 14,990 14,647 42,939 32,584
Operating income 2,838 577 7,953 3,959
Other income, net 1,777 16,072 10,499 16,136
-------------------------------------------------------
Income before provision for income taxes and minority interest 4,615 16,649 18,452 20,095
Provision for income taxes 1,851 9,092 7,345 10,384
Equity in loss of affiliate (6,023) (5,541) (17,890) (5,541)
Minority interest in income of consolidated subsidiary 15 (28) (18) (87)
-------------------------------------------------------
Net (loss) income attributable to common shareholders (3,244) 1,988 (6,801) 4,083
=========== ========== ========== ==========
Net (loss) income per common share:
Basic $ (0.25) $ 0.19 $ (0.54) $ 0.41
=========== ========== ========== ==========
Diluted $ (0.25) $ 0.18 $ (0.54) $ 0.39
=========== ========== ========== ==========
Weighted average shares outstanding:
Basic 13,173 10,368 12,697 9,976
Diluted 13,173 10,960 12,697 10,409
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of operations.
* All prior period amounts have been restated to reflect the acquisition of
Advanced Computer Enterprises, Inc. in a pooling transaction.
4
<PAGE>
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
--------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income before preferred dividends $ (6,801) $ 4,083
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,243 3,408
Minority interest in income of consolidated subsidiary 18 86
Deferred income tax provision 2,727 8,315
Gain on sale of property and equipment (6) -
Gain due to stock issuances of subsidiary (7,712) (16,044)
Equity in net loss of affiliate 17,890 5,541
Stock compensation charge 480
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net (1,437) (1,337)
Inventory, prepaid expenses, and other (2,070) 146
Other assets (374) (355)
Accounts payable and accrued expenses (4,446) 1,373
Deferred revenue (404) (545)
-------- --------
Net cash provided by operating activities 628 5,151
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (4,875) (488)
Decrease in note receivable 11 14
Purchase of investments (41,920)
Advances to affiliate (4,043) (31,525)
Purchases of property and equipment, net (5,256) (3,882)
Increases in capitalized software (647) (433)
-------- --------
Net cash used in investing activities (56,730) (36,314)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit 13,000 30,331
Income tax benefit related to exercise of stock options 498 -
Retirement of common stock (32) -
Payments on notes payable and line of credit (24,250) (466)
Proceeds from issuance of common stock, net of related issuance costs 65,680 -
Proceeds from exercise of stock options 298 60
-------- --------
Net cash provided by financing activities 55,194 29,925
Net (decrease) increase in cash and cash equivalents (908) (1,238)
Cash and cash equivalents at beginning of the period 2,145 3,496
-------- --------
Cash and cash equivalents at end of the period $ 1,237 $ 2,258
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 113 $ 180
======== ========
Cash paid for income taxes $ 6,130 $ 761
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of cash flows.
* All prior period amounts have been restated to reflect the acquisition of
Advanced Computer Enterpries, Inc. in a pooling transaction.
5
<PAGE>
THE INTERCEPT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
We are a single-source provider of a broad range of technologies, products,
and services that work together to meet the electronic commerce and
operating needs of community financial institutions. We focus on serving
community financial institutions in the United States with assets of less
than $500 million. Over 1,500 of these community financial institutions
have contracted with us for electronic funds transfer transactions, core
bank processing systems, check imaging systems, or data communications
management networks, as well as services related to each of these products
and systems.
In February 2000, we completed a secondary public offering of our common
stock. Our proceeds after deducting offering expenses were approximately
$66.0 million. We used a portion of those proceeds to pay certain debt.
We intend to use the remainder of the proceeds to fund future acquisitions
and investments, and for working capital and other general corporate
purposes.
Basis of Presentation
The consolidated financial statements include, as of September 30, 2000,
our accounts and the accounts of our following wholly-owned subsidiaries:
ProVesa Services, Inc.,
InterCept Switch, Inc.,
LEV Acquisition Corp.
InterCept Communications Technologies, Inc.
SBS Data Services, Inc.
ACE Acquisition Corp.
In addition, because of our control of ProImage, Inc., a corporation in
which, as of September 30, 2000, ProVesa had a 67% ownership interest, we
have consolidated ProImage's results in our consolidated financial
statements since our inception. We retain responsibility for all day-to-
day operations of ProImage and have and intend to continue to provide
complete financial support for ProImage due to legal limitations on the
other shareholder's ability to fund losses. All significant intercompany
accounts and transactions have been eliminated in consolidation. Minority
interest in income represents the minority shareholder's proportionate
share of the equity and earnings of ProImage.
In the third quarter of 1999, Direct Access Interactive, Inc., one of our
wholly-owned subsidiaries, issued shares of its common stock in connection
with several acquisitive transactions. We then merged Direct Access into a
wholly-owned subsidiary that we had recently formed, Netzee, Inc. On
September 3, 1999, Netzee issued additional shares of common stock, and as
a result of that issuance, our ownership percentage in Netzee decreased to
approximately 49%.
6
<PAGE>
Since September 3, 1999, we have accounted for our investment in Netzee
under the equity method, under which the operations of Netzee are recorded
on a single line item in the statements of operations, "equity in loss of
affiliate." Because we provided unlimited funding to Netzee until
completion of its initial public offering in November 1999, all of Netzee's
losses prior to the completion of the offering are included in that line
item rather than our relative percentage of those losses. Following the
completion of Netzee's initial public offering, we have recorded only our
relative percentage of Netzee's net losses. As of September 30, 2000, we
owned approximately 34% of Netzee's common stock.
During 2000, Netzee issued common stock at a price in excess of its book
value which resulted in an increase in our investment in Netzee. We have
recognized gains in accordance with Staff Accounting Bulletin No. 51
related to the increase in our investment value of approximately $7.7.
This gain is included in other income, net in the accompanying statement of
operations.
2. New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No.
101 does not change existing accounting literature on revenue recognition,
but rather explains the SEC staff's general framework for revenue
recognition. SAB No. 101 states that changes in accounting to apply the
guidance in SAB No. 101 may be accounted for as a change in accounting
principle and must be recorded by the fourth quarter of 2000. We have
reviewed our revenue recognition policy and do not expect the adoption of
SAB No. 101 to have a material impact on our results of operations.
3. Accounting Changes
In July 1999, we announced a letter of intent to merge our internet banking
business with the internet banking business of two other companies. As a
result of these transactions, we have changed the accounting for the Direct
Access acquisition in March of 1999 from a pooling of interest to a
purchase. Our accompanying unaudited interim financial statements for 1999
reflect that change.
4. 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. The
treasury stock method is based on the average stock price for the period.
The contingently issuable shares line item refers to the 5% shares in
escrow to satisfy unknown obligations associated with the August 2000
purchase of Advanced Computer Enterprises, Inc. The effects of anti-
dilutive options have been excluded. All options were anti-dilutive for
the periods ending September 30, 2000, and have been excluded from the
computation of net loss per share.
7
<PAGE>
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, 2000 September 30, 1999
---------------------------------- ----------------------------
Income Shares EPS Income Shares EPS
---------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $(3,244) 13,173 $(0.25) $1,988 10,368 $0.19
Dilutives:
Stock Options - - - - 575 -
Contingently issuable shares 17
---------------------------------- ----------------------------
Diluted EPS $(3,244) 13,173 $(0.25) $1,988 10,960 $0.18
================================== ============================
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
---------------------------------- ----------------------------
Income Shares EPS Income Shares EPS
---------------------------------- ----------------------------
Basic EPS $(6,801) 12,697 $(0.54) $4,083 9,976 $0.41
Dilutives:
Stock options - - - 416 -
Contingently issuable shares 17
---------------------------------- ----------------------------
Diluted EPS $(6,801) 12,697 $(0.54) $4,083 10,409 $0.39
================================== ============================
</TABLE>
5. Comprehensive Income
Comprehensive income is the total of net income and all other non-owner
changes in shareholders' equity.
The following table sets forth the calculation of our comprehensive income
for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, September 30,
---------------------- -------------------
2000 1999 2000 1999
---------------------- -------------------
<S> <C> <C> <C> <C>
Net income, as reported $(3,244) $1,988 (6,801) 4,083
Unrealized gains on securities,
net of tax: (2) (145) (124) (119)
------- ------ ------ -----
Comprehensive income $(3,246) $1,843 (6,925) 3,964
======= ====== ====== =====
</TABLE>
6. Acquisitions
During the first and second quarters of 2000 we completed several
acquisitions. The consideration exchanged for these acquisitions was
approximately $4.7 million. The acquisitions were accounted for as
purchases in accordance with Accounting Principles Board ("APB") Opinion
No. 16, and, accordingly the purchase prices of each acquisition have been
allocated to the net tangible and intangible assets acquired based on their
estimated fair values as of the acquisition date. The results of operations
of the acquired businesses have been included in our consolidated financial
statements from each date of acquisition.
On August 31, 2000, in a transaction accounted for as a pooling of
interests, we acquired Advanced Computer Enterprises, Inc., a provider of
core data processing, item capture, and check imaging services to community
banks. In connection with the acquisition, we issued approximately 350,000
shares of its common stock in exchange for all of the issued and
outstanding shares of common stock of Advanced Computer Enterprises. An
excrow of 5% of the shares issued or 17,500 was established to satisfy
obligations unknown at the time of closing. Accordingly, our financial
statements have been restated for all periods presented to include the
results of operations of Advanced Computer Enterprises. For the three and
nine months ended September 30, 2000 Advanced Computer Enterprises had
revenue of $1.3 million and $3.9 million, respectively, and net income of
$60,000 and $130,000, respectively. For the three and nine months ended
September 30, 1999 Advanced Computer Enterprises had revenue of $1.3
million and $4.0 million, respectively, and net income of $80,000 and
$170,000, respectively.
8
<PAGE>
7. Long-Term Debt and Capital Lease Obligations
Our long-term debt and capital lease obligations at September 30, 2000, and
December 31, 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION> September 30, December 31,
2000 1999
------------- ------------
<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
Prolmage and a corporate guarantee by ProVesa of two-thirds of
the balance of the debt. $ - $ 158
Note payable to First Macon & Trust, interest payable at
prime, monthly principal and interest payments, payable in full on
October 25, 2002; the note is collaterized by assets of Prolmage
and a corporate guarantee by ProVesa of two-thirds of the balance
of the debt. - 51
$35.0 million line of credit with First Union National Bank, as amended,
interest payable at the option of the Company at (i) prime less 0.25% or
(ii) LIBOR plus applicable margin as defined, payable in full on
June 30, 2002, guaranteed by substantially all assets of the Company. 1,507 12,511
Equipment under capital lease expiring July 2001. 60 103
Other 6
--------- ---------
1,573 12,823
(59) (154)
--------- ---------
Less current maturities $ 1,514 $ 12,669
========= =========
</TABLE>
9
<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 and Section 21E of the Securities Exchange Act of 1934. These statements
appear in a number of places in this quarterly report and include all statements
that are not statements of historical fact regarding our intent, belief, or
expectations. These statements are based upon a number of assumptions and
estimates which are subject to significant uncertainties, many of which are
beyond our control. Words such as "may," "would," could," "will," "expect,"
"anticipate," "believe," "intend," "plan," and "estimate" are meant to identify
these forward-looking statements. These 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:
. our brief combined operating history and whether we will be able to
maintain profitability;
. whether we can obtain and manage growth or execute agreements with
new customers;
. whether we can successfully locate, acquire, and integrate new
businesses and products;
. customer attrition;
. whether the market will accept our new products and services;
. increased competition;
. possible system failures and rapid changes in technology; and
. whether Netzee will be successful in its business strategies.
Our results could also differ materially from those expressed or implied by
forward-looking statements because of the reasons detailed in our filings with
the Securities and Exchange Commission including the "Risk Factors" section in
our Registration Statement on Form S-3 (Registration No. 333-94511), as declared
effective by the Securities and Exchange Commission on February 15, 2000.
We derive revenues primarily from the following sources:
. electronic funds transfer, or EFT, processing services;
. core data processing systems, support, maintenance, and related
services;
. check imaging systems, support, and related services;
. data communications management; and
10
<PAGE>
. ancillary products and services, including maintenance and technical
support services, sales of banking related equipment, and
complementary products.
We derive EFT revenues principally from processing ATM and debit card
transactions. We receive a base fee for providing our ATM processing services
and an additional fee for each additional ATM. Once the number of transactions
by a financial institution exceeds established levels, typically between 2,000
and 3,000 transactions per month, we charge additional fees for these
transactions. For debit card transactions, we generally receive a portion of
the interchange fees charged by our financial institution customers, and we
charge a monthly fee if our customers do not meet a certain minimum dollar
amount of transactions for a particular month. Most charges due under our EFT
service agreements are paid monthly.
On a service bureau basis, we generate core data processing revenues from
service and processing fees based on the volume of transactions processed.
These revenues are recognized as the services are performed. We also generate
core data processing revenues by licensing PC BancPAC, our proprietary
Windows/R/ NT based client/server software system, on an in-house basis. We
recognize revenues for licensing PC BancPAC in accordance with Statement of
Position 97-2 on "Software Revenue Recognition," issued by the American
Institute of Certified Public Accountants. We recognize software license fees
when we have signed a non-cancelable license agreement, shipped the product, and
satisfied significant obligations to the customer.
We license on an in-house basis Renaissance/TM/ software, our proprietary
check imaging software that we acquired in August 1999 as a result of our
acquisition of SBS Corp. We generate revenues from license fees and recurring
annual maintenance fees charged for this system. Revenues from the licensing of
Renaissance are recognized in accordance with Statement of Position 97-2, as
discussed above. We also provide check imaging in a service bureau environment.
On a service bureau basis, we generate revenues based on the volume of items
processed. We recognize this revenue as we provide the service.
We generate our data communications management service revenues
principally from network management and data traffic across our frame relay
network and from equipment configuration, installation, and sales. We charge a
flat monthly fee for providing telecommunications connectivity and network
management as well as an installation charge.
Our ancillary products and services generate revenues primarily from our
maintenance and technical support services as well as sales of equipment. We
recognize maintenance and technical support service revenues as the service
period elapses. We recognize equipment sales revenues at the time of shipment.
In June 1998, we completed an initial public offering of our common
stock. Since that time, we have completed a number of acquisitions. We
originally accounted for our acquisition of Direct Access in March 1999 as a
pooling of interest. As a result of subsequent transactions with Netzee, we
have changed the accounting for the Direct Access acquisition to a purchase. In
August 2000, we completed an acquisition that has been accounted for as a
pooling of interests. Except for the August 2000 acquisition, all of our
acquisitions since our initial public offering have been accounted for as
purchase transactions in our financial statements.
11
<PAGE>
Our ownership percentage in Netzee decreased to approximately 49% as of
September 3, 1999 because of Netzee's issuance of its common stock in connection
with transactions that occurred on that date. As a result, we discontinued
consolidating Netzee's results of operations with our results of operations. We
account for our investment in Netzee under the equity method, which requires us
to record Netzee's results of operations in a single line item in our statement
of operations titled "Equity in Loss of Affiliate." Because we provided
unlimited funding to Netzee through the completion of its initial public
offering in November 1999, all of Netzee's losses prior to the completion of the
offering were included in that line item rather than our relative percentage of
those losses. After Netzee completed its initial public offering, we recorded
only our relative percentage of Netzee's net losses. As of September 30, 2000,
we owned approximately 34% of Netzee's common stock.
We base our expenses to a significant extent on our expectations of
future revenues. Most of our expenses are fixed in the short term, and we may
not be able to quickly reduce spending if our actual revenues are lower than we
expect. To enhance our long term competitive position, we may also make
decisions regarding pricing, marketing, services, and technology that could have
an adverse near-term effect on our financial condition and operating results.
In addition, our EFT revenues are based in large part on various interchange and
transaction fees that Visa and MasterCard set. Any changes in these fees,
whether as a result of a pending dispute or otherwise, could negatively impact
our revenues.
In February 2000, we completed a secondary public offering of common
stock. Proceeds from this offering (after deducting expenses related to the
offering) were approximately $66.0 million. Proceeds of this offering were used
to pay certain debt and will be used to fund future acquisitions and
investments, and for working capital and other general corporate purposes.
We believe that, because of the foregoing factors and other risks discussed
in our SEC filings, quarter to quarter comparisons of our operating results are
not a good indication of our future performance. It is likely that our
operating results will fall below the expectations of securities analysts or
investors in some future quarter. In that event, the trading price of our
common stock would likely decline, perhaps significantly.
Results of Operations
The following table sets forth the percentage of revenues represented by
certain line items in our condensed consolidated statements of operations for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
-------------------- -------------------
<S> <C> <C> <C> <C>
Revenues 100.0 100.0 100.0 100.0%
Costs of services 38.7 39.3 39.0 38.7
Selling, general, and administrative expenses 38.6 42.6 39.0 41.2
Depreciation and amortization 6.8 14.3 6.4 9.3
------- ----- ----- -----
Total operating expenses 84.1 96.2 84.4 89.2
------- ----- ----- -----
Operating income 15.9 3.8 15.6 10.8
Other income (expense), net 10.0 105.6 20.6 44.2
------- ----- ----- -----
Income before minority interest and
provision for income taxes 25.9 109.4 36.2 55.0
Provision for income taxes 10.4 59.7 14.4 28.4
Equity in loss of affiliate (33.8) (36.4) (35.2) (15.2)
Minority interest in income of consolidated subsidiary 0.0 0.0 0.0 0.0
------- ----- ----- -----
Net income (18.3)% 13.3% (13.4)% 11.4%
======= ===== ===== =====
</TABLE>
12
<PAGE>
Three Months Ended September 30, 2000, Compared to Three Months Ended September
30, 1999
Revenues. Revenues increased 17.1% to $17.8 million for the three months
ended September 30, 2000, from $15.2 million for the three months ended
September 30, 1999. This $2.6 million increase was primarily attributable to
(i) $3.0 million generated by an increase in service fee income, (ii) $160,000
generated by additional data communications management income, and (iii) offset
by a $510,000 decrease in hardware sales. These increases are attributable to
our internal growth and acquisitions.
Costs of Services. Costs of services increased 15.2% to $6.9 million for the
three months ended September 30, 2000, from $6.0 million for the three months
ended September 30, 1999. The $900,000 increase was primarily attributable to
(i) $1.2 million related to service fee income, and (ii) $220,000 related to
data communications management, and (iii) offset by a $550,000 decrease in
hardware sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 6.1% to $6.9 million for the three months
ended September 30, 2000, from $6.5 million for the three months ended September
30, 1999. The $400,000 increase was primarily due to the hiring of additional
personnel to support our growth and acquisitions and other miscellaneous
expenses. Selling, general and administrative expenses decreased as a
percentage of revenues during the third quarter of 2000 as compared to the third
quarter of 1999 due to a one-time stock compensation charge during the third
quarter of 1999 associated with Netzee, Inc.
Depreciation and Amortization. Depreciation and amortization decreased
44.0% to $1.2 million for the three months ended September 30, 2000, from $2.2
for the three months ended September 30, 1999. This $1.0 million decrease was
primarily attributable to Netzee's amortization expense during the third quarter
of 1999 which was included in our consolidated financial statements.
Other Income (Expense). Other income (expense) decreased to $1.8 million
for the three months ended September 30, 2000, from $16.1 million for the three
months ended September 30, 1999. The $14.3 million decrease was primarily due to
a decrease of $15.5 million in the gain associated with the issuance of common
stock of Netzee, which was offset by the increase of $1.2 million in interest
income. This increase in interest income was generated from the investment of
the approximately $66.0 million proceeds from the secondary public offering in
February, 2000.
Provision for Income Taxes. Provision for income taxes decreased to $1.9
million for the three months ended September 30, 2000, from $9.1 million for the
three months ended September 30, 1999. This $7.2 million decrease was
attributable to the taxable component of the one time gain on the issuance of
common stock of Netzee during the third quarter of 1999.
Equity in Loss of Affiliate. Equity in loss of affiliate was $6.0 million
for the three months ended September 30, 2000, and $5.5 million for the three
months ended September 30, 1999. This amount represents our 34% share of
Netzee's net loss.
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Minority Interest in Income of Consolidated Subsidiary. Minority interest in
income of consolidated subsidiary decreased to a loss of $15,000 for the three
months ended September 30, 2000, from income of $30,000 for the three months
ended September 30, 1999.
Nine Months Ended September 30, 2000, Compared to Nine Months Ended September
30, 1999
Revenues. Revenues increased 39.3% to $50.9 million for the nine months
ended September 30, 2000, from $36.5 million for the nine months ended September
30, 1999. This $14.4 million increase was primarily attributable to (i) $12.2
million generated by an increase in service fee income, (ii) $1.5 million
generated by additional hardware sales, and (iii) $680,000 generated by an
increase in data communications management income. These increases are
attributable to our internal growth and acquisitions.
Costs of Services. Costs of services increased 40.4% to $19.8 million for
the nine months ended September 30, 2000, from $14.1 million for the nine months
ended September 30, 1999. This $5.7 million increase was primarily attributable
to (i) $4.2 million related to service fee income, (ii) $940,000 generated by
additional hardware sales, and (iii) $590,000 related to data communications
management.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 32% to $19.9 million for the nine months ended
September 30, 2000, from $15.1 million for the nine months ended September 30,
1999. This $4.8 million increase was primarily due to additional personnel to
support our growth and acquisitions and other miscellaneous expenses.
Depreciation and Amortization. Depreciation and amortization decreased 5.1%
to $3.2 million for the nine months ended September 30, 2000, from $3.4 million
for the nine months ended September 30, 1999. This $200,000 increase was
primarily attributable to Netzee's amortization expense during the third quarter
of 1999 which was included in our consolidated financial statements.
Other Income (Expense). Other income (expense) decreased to $10.5 million
for the nine months ended September 30, 2000, from $16.1 for the nine months
ended September 30, 1999. The decrease was primarily due to a $8.3 million
decrease in gains associated with the issuance of common stock of Netzee, offset
by an increase of $2.5 million in interest income, due to the investment of the
approximately $66.0 million proceeds from the secondary offering and a $200,000
decrease in interest expense.
Provision for Income Taxes. Provision for income taxes decreased to $7.3
million for the nine months ended September 30, 2000, from $10.4 million for the
nine months ended September 30, 1999. This decrease was attributable to the
taxable component of the one time gain on the issuance of common stock of Netzee
during the third quarter of 1999.
Equity in Loss of Affiliate. Equity in loss of affiliate was $17.9 million
for the nine months ended September 30, 2000, and $5.5 million for the three
months ended September 30, 1999. This amount is our share of Netzee's net loss.
Minority Interest in Income of Consolidated Subsidiary. Minority interest
in income of consolidated subsidiary decreased to $18,000 for the nine months
ended September 30, 2000, from $90,000 for the nine months ended September 30,
1999.
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Liquidity and Capital Resources
Cash and cash equivalents were $1.2 million at September 30, 2000. Short
term investments with a maturity of one year or less were $40.9 million. Net
cash provided by operating activities was $630,000 for the nine months ended
September 30, 2000, and net cash provided by operating activities was $5.2
million for the nine months ended September 30, 1999. The decrease in the net
cash provided by operating activities was primarily attributable to an increase
in net income before the impact of our investment in Netzee, and was offset by
(i) the impact of the loss incurred by Netzee, and (ii) a decrease in accounts
payable.
Net cash used in investing activities was $21.0 million for the nine months
ended September 30, 2000, as compared to net cash used in investing activities
of $56.7 million for the nine months ended September 30, 1999. The increase in
net cash used in investing activities was primarily due to an increase in our
investments resulting from our secondary public offering of common stock in
February 2000.
Net cash provided by financing activities was $55.2 million for the nine
months ended September 30, 2000, compared to net cash provided by financing
activities $29.9 for the nine months ended September 30, 1999, respectively.
The increase in net cash provided by financing activities was primarily due to
the completion of our secondary public offering of common stock in February 2000
offset by payments of debt obligations.
During 1998, we entered into a credit facility with First Union National
Bank. Under this facility, as amended during the third quarter of 1999, we may
borrow up to $35.0 million for working capital and to fund acquisitions and
related expenses. The First Union credit facility contains provisions which
require us to maintain certain financial ratios and minimum net worth amounts
and which restrict our ability to incur additional debt, make certain capital
expenditures, enter into agreements for mergers, acquisitions or the sale of
substantial assets, and pay dividends. The First Union credit facility matures
on June 30, 2002. Interest is payable monthly and outstanding principal amounts
accrue interest, at our option, at an annual rate equal to either (a) a floating
rate equal to the lender's prime rate minus .25%, or (b) a fixed rate based upon
the 30-day LIBOR rate plus applicable margins. On September 30, 2000, the
interest rate under this facility was approximately 6.62%.
As of May 31, 2000, we have committed, subject to some conditions, to
provide to Netzee a $15.0 million line of credit for its working capital needs.
As of September 30, 2000, a total of $15.0 million was due from Netzee under
this promissory note. Netzee may require additional funds to support its
operations. Netzee may seek to raise such funds through public or private
offering of debt or equity, the sale of assets, or from other sources. No
assurance can be given that additional funds will be available, such funds will
be available on terms favorable to Netzee or their shareholders. Their ability
to continue as a going concern and to meet their obligations as they come due
may be dependent upon their ability to raise additional capital funds.
While there can be no assurance, we believe that funds currently on hand,
funds to be provided by operations, and funds available for working capital
purposes under the First Union credit facility will be sufficient to meet our
anticipated capital expenditures and liquidity requirements for the next 12
months. While there is no agreement presently in place, we may loan additional
monies to Netzee to fund its working capital needs or operations. We intend to
grow, in part, through strategic acquisitions. We will make additional
expenditures to negotiate and consummate acquisition transactions and integrate
the acquired companies. No assurance can be made with respect to the actual
timing and amount of expenditures and acquisitions. In addition, we can give no
assurance that we will complete any acquisitions on terms favorable to us, if at
all, or that additional sources of financing will not be required during these
time periods or thereafter.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates. Borrowings under the First Union credit
facility accrue interest at a fluctuating rate based either upon the lender's
prime rate or LIBOR. As of September 30, 2000, we had $1.5 million outstanding
under this facility, and, therefore we face risks of interest rate fluctuations.
Changes in interest rates which dramatically increase the interest rate on the
credit facility would make it more costly for us to borrow under that facility
and may impede our acquisition and growth strategies if we determine that the
costs associated with borrowing funds are too high to implement these
strategies. Additional loans to Netzee may increase the amount outstanding
under this facility.
Proceeds from our secondary public offering during February 2000 were
approximately $66.0 million. We have invested certain of these funds in various
short term interest bearing facilities. Changes in interest rates which
dramatically decrease the interest rate on these facilities would reduce our
interest income from these facilities.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to, nor is any of our property subject to, any material
legal proceedings, other than routine litigation incidental to our business.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
No. Description
--- -----------
3.1 Amended and Restated Articles of Incorporation, as deemed filed with
the Secretary of the State of Georgia on April 29, 1998 (incorporated
by reference to the exhibits to InterCept's Registration Statement on
Form 8-A (as amended on October 1, 1999)).
3.2 Amended and Restated Bylaws (incorporated by reference to the exhibits
to InterCept's Registration Statement on Form 8-A (as amended on
October 1, 1999)).
3.3 Amendment to Amended and Restated Bylaws (incorporated by reference to
the exhibits to InterCept's Registration Statement on Form 8-A (as
amended on October 1, 1999)).
4.1 See Exhibits 3.1 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 InterCept.
10.1 Credit Agreement, dated May 31, 2000, by and between Netzee, Inc. and
The InterCept Group, Inc. (incorporated by reference to Exhibit 10.1
to InterCept's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 filed on August 11, 2000).
27.1 Financial Data Schedule for the three and nine months ended
September 30, 2000.
b) Reports on Form 8-K
Form 8-K filed on September 15, 2000.
Reporting under Item 5 the acquisition of the debit card program of the
Bankers Bank by us as well as the acquisition of Advanced Computer
Enterprises, Inc. by us.
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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 14, 2000 /s/ John W. Collins
----------------- -------------------------------------------------
Date John W. Collins
Chairman of the Board and Chief Executive Officer
(principal executive officer)
November 14, 2000 /s/ Scott R. Meyerhoff
----------------- -------------------------------------------------
Date Scott R. Meyerhoff
Chief Financial Officer
(principal financial and accounting officer)
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