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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, 2001.
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
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The InterCept Group, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58-2237359
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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
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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 July 17, 2001
Common Stock, no par value 14,209,005
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THE INTERCEPT GROUP, INC.
INDEX TO FORM 10-Q
PAGE
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PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000 1
Condensed Consolidated Statements of Operations for the Three
and Six Months ended June 30, 2001 and 2000 2
Condensed Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,122 $ 8,061
Short term investments 8 37,484
Accounts receivable, less allowance for doubtful accounts of $631
and $641 at June 30, 2001 and December 31, 2000, respectively 18,212 9,960
Advances to SLM 0 5,000
Deferred tax assets 4,033 1,666
Inventory, prepaid expenses and other 6,132 3,023
-------- --------
Total current assets 32,507 65,194
Property and equipment, net 24,500 16,883
Intangible assets, net 102,608 24,786
Advances to affiliate 8,715 15,000
Advances to SLM 12,065
Investment in affiliate 9,722 17,729
Other noncurrent assets 2,888 2,534
-------- --------
Total assets $193,005 $142,126
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 16 $ 45
Accounts payable and accrued liabilities 4,683 3,188
Deferred revenue 12,858 5,054
-------- --------
Total current liabilities 17,557 8,287
Notes payable, less current portion 26,386 4,513
Deferred revenue 480 453
Deferred tax liability 26,984 26,279
-------- --------
Total liabilities 71,407 39,532
Minority interest 213 202
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;
14,203,007 and 13,197,139 shares issued and outstanding
at June 30, 2001 and December 31, 2000, respectively 130,933 109,340
Retained earnings (9,489) (6,951)
Accumulated other comprehensive income (59) 3
-------- --------
Total shareholders' equity 121,385 102,392
-------- --------
Total liabilities and shareholders' equity $193,005 $142,126
======== ========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
1
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
2001 2000* 2001 2000*
-------- ------- -------- --------
(unaudited) (unaudited)
Revenues:
Service fee income $27,026 $13,660 $50,828 $ 25,521
Data communications management income 1,737 1,517 3,566 2,918
Equipment and product sales, services and other 1,618 2,108 3,033 4,625
------- ------- ------- --------
Total revenues 30,381 17,285 57,427 33,064
Costs of services:
Cost of service fee income 9,388 4,162 18,315 7,477
Cost of data communications management income 1,358 1,051 2,796 2,028
Cost of equipment and product sales, services and other 1,235 1,606 2,334 3,426
Selling, general and administrative expenses 10,544 6,726 19,602 12,980
Depreciation and amortization 2,886 1,078 5,394 2,038
------- ------- ------- --------
Total operating expenses 25,411 14,623 48,441 27,949
Operating income 4,970 2,662 8,986 5,115
Other income, net 314 1,440 1,042 8,722
------- ------- ------- --------
Income before provision for income taxes, equity in loss of affiliate,
and minority interest 5,284 4,102 10,028 13,837
Provision for income taxes 2,112 1,688 4,035 5,494
Equity in loss of affiliate (2,802) (6,181) (8,521) (11,867)
Minority interest (3) (16) (10) (32)
------- ------- ------- --------
Net income (loss) attributable to common shareholders 367 (3,783) (2,538) (3,556)
======= ======= ======= ========
Net income (loss) per common share:
Basic $ 0.03 $ (0.29) $ (0.18) $ (0.29)
======= ======= ======= ========
Diluted $ 0.02 $ (0.29) $ (0.18) $ (0.29)
======= ======= ======= ========
Weighted average shares outstanding:
Basic 13,894 13,160 13,835 12,457
Diluted 15,064 13,160 13,835 12,457
* All prior period amounts have been restated to reflect the acquisition of
Advanced Computer Enterprises, Inc. in a pooling transaction.
The accompanying notes are an integral part of these
condensed consolidated statements of operations.
2
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
June 30,
-------------------
2001 2000*
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(unaudited)
Cash flows from operating activities:
Net loss attributable to common shareholders $ (2,538) $ (3,556)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 5,394 2,038
Loan cost amortization 45 -
Minority interest 10 32
Deferred income tax provision (230) 2,400
Gain on sale of property and equipment (4)
Gain due to stock issuances of subsidiary (513) (7,197)
Equity in net loss of affiliate 8,520 11,867
Income tax benefit related to exercise of stock options 789 40
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net (7,354) (1,350)
Inventory, prepaid expenses, and other 2,324 (639)
Other assets (399) (110)
Accounts payable and accrued expenses (1,209) (2,506)
Deferred revenue 4,043 610
-------- --------
Net cash provided by operating activities 8,882 1,625
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (62,517) (4,747)
Decrease in note receivable - 7
Purchase of investments 37,404 (43,504)
Advances to affiliate 6,285 (3,994)
Advances to SLM (12,065) -
Purchases of property and equipment, net (4,337) (3,893)
Increases in capitalized software (816) (409)
-------- --------
Net cash used in investing activities (36,046) (56,540)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit 21,895 12,250
Retirement of common stock - (32)
Payments on notes payable and line of credit (51) (21,495)
Payment of shareholder note 221 -
Proceeds from issuance of common stock, net of related issuance costs - 65,680
Proceeds from exercise of stock options 1,160 245
-------- --------
Net cash provided by financing activities 23,225 56,648
Net (decrease) increase in cash and cash equivalents (3,939) 1,733
Cash and cash equivalents at beginning of the period 8,061 2,145
-------- --------
Cash and cash equivalents at end of the period $ 4,122 $ 3,878
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 225 $ 100
======== ========
Cash paid for income taxes $ 4,744 $ 4,285
======== ========
* All prior period amounts have been restated to reflect the acquisition of
Advanced Computer Enterprises, Inc. in a pooling transaction.
The accompanying notes are an integral part of these
condensed consolidated statements of cash flows.
3
THE INTERCEPT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The InterCept Group, Inc. (the "Company" or "InterCept") is a leading
provider of banking technology products and services for community
financial institutions. InterCept's comprehensive suite of products and
services allows it to act as a single-source provider for the technology
and operating needs of community financial institutions. InterCept's range
of products and services includes core data processing, check processing
and imaging, electronic funds transfer (EFT), data communications
management and related products and services. These products and services
work together to help community financial institutions manage back-office
and customer interaction activities, create operating efficiencies and
provide better customer service, which enables them to compete more
effectively with larger financial institutions. Most of InterCept's
customers outsource their processing activities to the Company's data
centers located across the United States, while others install the
Company's systems in-house and perform the processing functions themselves.
The consolidated financial statements include, as of June 30, 2001,
InterCept's accounts and the accounts of the following wholly-owned
subsidiaries:
InterCept Communications Technologies, Inc.
SBS Data Services, Inc.
DPSC Acquisition Corp.
C-TEQ, Inc.
ICPT Acquisition I, LLC
In addition, InterCept consolidates in its consolidated financial
statements the results of ProImage, Inc., a Georgia corporation controlled
by the Company and of which the Company owned 67% of the common stock as of
June 30, 2001. InterCept maintains all day-to-day operations of ProImage
and has provided and intends 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
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
InterCept's then wholly-owned subsidiaries, issued shares of its common
stock in connection with several acquisition. InterCept then merged Direct
Access into Netzee, Inc., a wholly-owned subsidiary that InterCept had
recently formed. On September 3, 1999, Netzee issued additional shares of
common stock, and as a result of that issuance, InterCept's ownership
percentage in Netzee decreased to approximately 49%. Since September 3,
1999, InterCept has accounted for its 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 InterCept 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 its relative percentage of those losses. Since Netzee completed its
initial public offering, InterCept records only its relative percentage of
Netzee's net losses. As of June 30, 2001, InterCept owned approximately 28%
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 InterCept's investment in Netzee.
InterCept recognized gains in accordance with Staff Accounting Bulletin No.
51 related to the increase in its investment value of approximately $7.7
million. This gain is included in other income, net in the accompanying
statement of operations.
2. New Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board approved Statement of
Financial Accounting Standard No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
prospectively prohibits the pooling of interest method of accounting for
business
4
combinations initiated after June 30, 2001. SFAS No. 142 requires companies
to cease amortizing goodwill that existed at June 30, 2001. The
amortization of existing goodwill will cease on December 31, 2001. Any
goodwill resulting from acquisitions completed after June 30, 2001 will not
be amortized. SFAS No. 142 also establishes a new method of testing
goodwill for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below is carrying value. The adoption of SFAS No. 142 will
result in InterCept's discontinuation of amortization of its goodwill;
however, InterCept will be required to test its goodwill for impairment
under the new standard beginning in the first quarter of 2002, which could
have an adverse effect on InterCept's future results of operations if an
impairment occurs.
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 which is
based on the average stock price for the period. The shares held in escrow
to satisfy contingencies relates to the acquisition of SLM and Advanced
Computer Enterprises, Inc. The contingently issuable shares subject to
earn-out provisions relate to the SLM acquisition and represent shares
earned and issuable as of the end of each period. The effects of anti-
dilutive options have been excluded. All common stock equivalents were
anti-dilutive for the periods ending June 30, 2000 and have been excluded
from the computation of net loss per share.
The following tables set forth a reconciliation of basic earnings per share
to diluted earnings per share (in thousands, except earnings per share
("EPS") amounts):
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
------------------------- ------------------------
Income Shares EPS Income Shares EPS
------- ------ ------ ------- ------ ------
Basic EPS $ 367 13,894 $ 0.03 $(3,783) 13,160 $(0.29)
Stock Options - 829
Shares held in escrow to
satisfy contingencies - 276 -
Contingently issuable
shares subject to earn-
out provisions - 65
------- ------ ------ ------- ------ ------
Diluted EPS $ 367 15,064 $ 0.02 $(3,783) 13,160 $(0.29)
======= ====== ====== ======= ====== ======
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
------------------------- ------------------------
Income Shares EPS Income Shares EPS
------- ------ ------ ------- ------ ------
Basic EPS $(2,538) 13,835 $(0.18) $(3,556) 12,457 $(0.29)
------- ------ ------ ------- ------ ------
Diluted EPS $(2,538) 13,835 $(0.18) $(3,556) 12,457 $(0.29)
======= ====== ====== ======= ====== ======
4. Comprehensive Income
Comprehensive income is the total of net income and all other unrealized
losses on securities, net of tax.
The following table sets forth the calculation of InterCept's comprehensive
income for the periods indicated below (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss), as reported $367 $(3,783) $(2,538) $(3,556)
Unrealized losses on securities,
net of tax: (91) (40) (62) (126)
---- ------- ------- -------
Comprehensive income (loss) $276 $(3,823) $(2,600) $(3,682)
==== ======= ======= =======
5. Acquisitions
On January 4, 2001, InterCept acquired certain assets of the check item and
back office processing division of SLMSoft.com Inc ("SLM"). Total
consideration consisted of $40 million and up to 1,253,942 shares of
InterCept common stock valued at approximately $28 million. Of the $40
million cash consideration, InterCept advanced $5 million to SLM in
December 2000 and paid SLM $32.5 million on January 4, 2001. A total of
$2.5 million is in escrow to satisfy unresolved contingencies existing at
the closing date. Of the 1,253,942 shares of common stock, 609,682 were
issued to SLM at closing and 258,388 shares will be kept in escrow for up
to two years to satisfy unresolved contingencies existing at the closing
date. The remaining 385,872 shares represent contingent consideration and
will be recorded as purchase price consideration if and when the
contingencies are resolved. The consideration for the assets InterCept
purchased from SLM exceeded their net tangible asset value by approximately
$58.2 million, which was allocated as follows:
. $31.7 million to goodwill amortized over a period of 20 years,
. $1.5 million to product technology and amortized over a period of 10
years,
. $24.5 million to customer relationships and amortized over a period
of 20 years and
. $500,000 to workforce and amortized over a period of 4 years.
5
InterCept has accounted for the acquisition as a purchase. InterCept has
included the results of operations of the acquired business in its
consolidated financial statements from the date of acquisition. During the
second quarter of 2001, InterCept recorded a restructuring charge related
to the acquisition of SLM of approximately $405,000. During the second
quarter of 2001, InterCept announced plans to consolidate the operations of
its two Houston, Texas data center facilities, one of which was acquired
from SLM, into a new facility. The closing and relocating of both
facilities was completed during the quarter. In connection with the closure
of the Houston facility that was not acquired from SLM, InterCept recorded
a restructuring charge of approximately $405,000 during the quarter ended
June 30, 2001 which is included in selling, general, and administrative
expenses in the accompanying statement of operations. The charge includes
approximately $93,000 of severance related to several employees terminated
during the quarter and approximately $312,000 of facility closure costs.
The facility closure costs include moving expenses and other miscellaneous
costs incurred after operations ceased in addition to the noncancelable
operating lease obligation on the existing facility. All costs have been
incurred as of June 30, 2001 with the exception of $275,000 related to the
lease obligation which is included in accrued liabilities in the
accompanying balance sheet. The amount represents the total remaining lease
payments, less management's estimate of rental income that may be received
by subleasing the facility during the remaining lease term.
The following unaudited pro-forma consolidated financial information for
the three-month and six-month period ended June 30, 2000 assumes the
acquisition of SLM had occurred on January 1, 2000 (in thousands, except
per share amounts):
3 months ended 6 months ended
June 30, 2000 June 30, 2000
-------------- --------------
Revenues 25,991 49,941
Net income before income taxes and minority interest 1,635 7,848
Net income attributable to common shareholders (5,216) (7,190)
Net income per common share (diluted) $ (0.38) $ (0.55)
The unaudited pro-forma consolidated financial information is not
necessarily indicative of the actual results that would have occurred had
the acquisitions been consummated at the beginning of the period presented
or of future operations of the combined entities.
In February 2001, InterCept acquired DPSC Software, Inc. from Netzee, Inc.
for consideration which included approximately $14.1 million in cash, and
the assumption of $2.4 million of DPSC's net liabilities. InterCept's
purchase price exceeded the net tangible asset value of DPSC by
approximately $15.7 million, which was allocated as follows:
. $9.0 million to goodwill and amortized over a period of 16 years,
. $975,000 to product technology and amortized over a period of 10
years,
. $5.1 million to customer contracts and amortized over a period of 16
years,
. $100,000 to workforce and amortized over a period of 4 years, and
. $500,000 to patents and trademarks being amortized over 20 years.
InterCept accounted for this acquisition as a purchase.
During 2001, InterCept completed several acquisitions for total
consideration of $7.4 million, net, in cash. The consideration exceeded the
net tangible asset values of these acquisitions by approximately $5.4
million, which was allocated to customer relationships and goodwill and is
being amortized over a period of 20 years. InterCept accounted for these
acquisitions as a purchase. The results of operations of the acquired
assets are included in InterCept's consolidated financial statements from
the date of acquisition.
6
The purchase price allocations for these acquisitions are preliminary and
will be completed during 2001.
During the second quarter of 2001, InterCept paid approximately $333,000 in
additional consideration related to a 2000 acquisition, the payment of
which was contingent on future revenue growth. The agreement includes
additional contingent consideration of approximately $333,000 and $834,000
that may be payable in 2002 and 2003, respectively, depending on future
revenues. The additional payments will be recorded as purchase price
consideration if and when they are earned. InterCept also paid the final
payment of $275,000 related to a 2000 acquisition during the second quarter
of 2001.
6. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations at June 30, 2001 and December
31, 2000 consisted of the following (in thousands):
June 30, December 31,
2001 2000
-------- ------------
$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 26,386 4,507
Equipment under capital lease expiring July 2001 16 45
Other - 6
------- ------
26,402 4,558
Less current maturities (16) (45)
------- ------
$26,386 $4,513
======= ======
Pursuant to a letter of intent with First Union National Bank dated July
24, 2001, the Company will increase availability under the line of credit
to $50 million and extend the maturity date to June 1, 2004. Thus, the
entire balance outstanding under the line of credit has been classified as
noncurrent as of June 30, 2001.
7. Advances to SLM
On May 31,2001, InterCept entered into a loan agreement with SLM under
which InterCept loaned SLM $12 million subject to various terms and
conditions. Borrowings under the loan agreement bear interest at an annual
rate equal to the one-month LIBOR plus 2% and are secured by the shares of
InterCept's common stock owned or potentially issuable to SLM. The loan
matures on December 31, 2002 and requires mandatory prepayments from the
proceeds of sales of InterCept's common stock by SLM until the loan is
repaid in full. As of June 30, 2001, SLM owed InterCept approximately $12.1
million under the agreement.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We derive revenues primarily from the following sources:
. Service fees for:
. core data processing and check imaging systems, support, maintenance
and related services and software sales
. EFT processing services
. Data communications management
. Equipment and product sales, services and other:
. sales of banking related equipment and complementary products
. equipment maintenance and technical support services
. related products and services
In our service bureau operations, we generate core data processing revenues
from service and processing fees based primarily on the asset base of our
financial institution customers, the number of transactions we process and the
number of accounts we service. We recognize these revenues as we perform the
services. We also generate revenues from the licensing of our core data
processing systems. We recognize revenues for licensing these systems in
accordance with Statement of Position 97-2 on "Software Revenue Recognition,"
issued by the American Institute of Certified Public Accountants. We recognize
software license fees when we have signed a non-cancelable license agreement,
shipped the product and satisfied significant obligations to the customer.
We license Renaissance Imaging/R/ check imaging software on an in-house
basis, and we generate revenues from up-front license fees and recurring annual
maintenance fees charged for this system. We recognize revenues from the
licensing of Renaissance Imaging in accordance with Statement of Position 97-2,
as discussed above. We also provide check imaging in a service bureau
environment under which we generate recurring revenues. On a service bureau
basis, we generate revenues based on the volume of items processed. We
recognize this revenue as we provide the service.
We derive EFT revenues principally from processing ATM and debit card
transactions. We receive a monthly base fee for providing our ATM processing
services and an additional fee for each additional ATM serviced. Once the
number of transactions by a financial institution exceeds established levels,
typically between 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 generated by our financial institution
customers, and we charge a monthly fee if our customers do not meet a specified
minimum dollar amount of transactions for a particular month. Most charges
under our EFT service agreements are due and paid monthly.
We generate our data communications management service revenues principally
from network management and from equipment configuration services and
installation. We charge an installation fee and a regular monthly fee on an
ongoing basis for providing telecommunications connectivity and network
management.
We recognize revenues from sales of equipment and complementary products at
the time of shipment. We recognize maintenance and technical support service
revenues as we provide the service.
For the three and six months ended June 30, 2001, approximately 86% of our
total revenues were recurring revenues. Recurring revenues result from regular
monthly payments by our customers for ongoing services used in connection with
their business. These revenues do not include conversion or deconversion fees,
initial software license fees, installation fees, hardware sales or similar
activities.
Our ownership percentage in Netzee decreased to approximately 49% as of
September 3, 1999 because of
8
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 before the completion of the offering were
included in that line item rather than our relative percentage of those losses.
Since Netzee completed its initial public offering, we record only our relative
percentage of Netzee's net losses. As of June 30, 2001, we owned approximately
28% of Netzee's outstanding common stock.
In February 2000, we completed another public offering of common stock. Our
proceeds from this offering, after deducting expenses related to the offering,
were approximately $66.0 million. We used the proceeds of this offering to repay
certain debt and fund our acquisitions completed in 2000 and 2001 and for
working capital and other general corporate purposes.
In August 2000, we completed the acquisition of Advanced Computer
Enterprises, which we accounted for as a pooling of interests. Except for this
acquisition, we have accounted for all of our acquisitions since our initial
public offering as purchase transactions in our financial statements.
On January 4, 2001, we acquired the U.S. core data processing, check
imaging and item processing operations, as well as the BancLine software system,
from SLM. We paid $40.0 million in cash and issued or agreed to issue up to
approximately 1.25 million shares of our common stock in the transaction.
Effective February 1, 2001, we acquired from Netzee the asset/liability and
regulatory reporting software of DPSC for approximately $14.1 million in cash
and the assumption of $2.4 million of DPSC's net liabilities. Netzee used
approximately $8.4 million of the cash proceeds to reduce its line of credit
with us.
During 2001, we completed several acquisitions. We paid $7.4 million net
cash in connection with these acquisitions.
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.
We believe, because of the foregoing factors and other risks discussed in
our SEC filings, that quarter to quarter comparisons of our operating results
are not a good indication of our future performance. Our operating results are
likely to fall below the expectations of securities analysts or investors in
some future quarter. In that event, the trading price of our common stock would
likely decline, perhaps significantly.
Results of Operations
The following table sets forth the percentage of revenues represented by
certain line items in our condensed consolidated statements of operations for
the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
------ ------ ------ ------
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Costs of services 39.4 39.5 40.8 39.1
Selling, general and administrative expenses 34.7 38.9 34.2 39.3
Depreciation and amortization 9.5 6.2 9.4 6.2
----- ----- ----- -----
Total operating expenses 83.6 84.6 84.4 84.6
----- ----- ----- -----
Operating income 16.4 15.4 15.6 15.4
Other income, net 1.0 8.3 1.8 26.4
----- ----- ----- -----
Income before provision for income taxes, equity in
loss of affiliate and minority interest 17.4 23.7 17.4 41.8
Provision for income taxes 7.0 9.8 7.0 16.6
Equity in loss of affiliate (9.2) (35.7) (14.8) (35.9)
Minority interest in income of consolidated subsidiary (0.0) (0.1) (0.0) (0.1)
----- ----- ----- -----
Net income 1.2 % (21.9)% (4.4)% (10.8)%
===== ===== ===== =====
9
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Revenues. Revenues increased 75.8% to $30.4 million for the three months
ended June 30, 2001 from $17.3 million for the three months ended June 30, 2000.
The $13.1 million increase was primarily attributable to (a) $13.4 million
generated by an increase in service fee income, and (b) a $220,000 increase in
data communications management income, offset by (c) a $490,000 decrease in
hardware sales. The increases are attributable to both internal growth and
acquisitions and not to any significant increases in prices.
Costs of Services. Costs of services increased 75.7% to $12.0 million for
the three months ended June 30, 2001 from $6.8 million for the three months
ended June 30, 2000. The $5.2 million increase was primarily attributable to (a)
$5.2 million related to service fee income and (b) $310,000 related to data
communications management, offset by (c) $370,000 decrease in hardware sales.
The increases are attributable to both internal growth and acquisitions. Gross
margins remained constant at 60.6% for the three months ended June 30, 2001,
compared to 60.5% for the three months ended June 30, 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 56.8% to $10.5 million for the three months
ended June 30, 2001 from $6.7 million for the three months ended June 30, 2000.
The $3.8 million increase was primarily due to personnel added from
acquisitions, additional personnel to support our growth and acquisitions and
other miscellaneous expenses. As a result of the acquisitions of SLM and C-TEQ,
selling, general and administrative expenses as a percentage of revenues
decreased to 34.7% for the three months ended June 30, 2001, from 38.9% for the
three months ended June 30, 2000. During the second quarter of 2001, we
announced plans to consolidate the operations of our two Houston, Texas data
center facilities, one of which was acquired from SLM, into a new facility. The
closing and relocating of both facilities was completed during the quarter. In
connection with the closure of the Houston facility that was not acquired from
SLM, we recorded a restructuring charge of approximately $405,000 during the
quarter ended June 30, 2001, which is included in selling, general, and
administrative expenses in the accompanying statement of operations. The charge
includes approximately $93,000 of severance related to several employees
terminated during the quarter and approximately $312,000 of facility closure
costs. The facility closure costs include moving expenses and other
miscellaneous costs incurred after operations ceased in addition to the
noncancelable operating lease obligation on the existing facility. All costs
have been incurred as of June 30, 2001 with the exception of $275,000 related to
the lease obligation which is included in accrued liabilities in the
accompanying balance sheet. The amount represents the total remaining
lease payments, less our estimate of rental income that we may receive by
subleasing the facility during the remaining lease term.
10
Depreciation and Amortization. Depreciation and amortization increased
167.7% to $2.9 million for the three months ended June 30, 2001 from $1.1
million for the three months ended June 30, 2000. The $1.8 million increase was
primarily attributable to additional property, plant and equipment and
additional amortization from acquisitions.
Other Income, Net. Other income, net decreased to $314,000 for the three
months ended June 30, 2001 from $1.4 million for the three months ended June 30,
2000. The $1.4 million decrease was primarily due to a decrease in interest
income and an increase in interest expense which corresponds to the decrease in
short-term investments and increased borrowings.
Provision for Income Taxes. Provision for income taxes increased to $2.1
million for the three months ended June 30, 2001 from $1.7 million for the three
months ended June 30, 2000. The $400,000 increase was attributable to increased
pre-tax profits.
Equity in Loss of Affiliate. Equity in loss of affiliate decreased to $2.8
million for the three months ended June 30, 2001 from a loss of $6.2 million for
the three months ended June 30, 2000. This amount is our share of Netzee's net
loss.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Revenues. Revenues increased 73.7% to $57.4 million for the six months
ended June 30, 2001 from $33.1 million for the six months ended June 30, 2000.
The $24.4 million increase was primarily attributable to (a) $25.3 million
generated by an increase in service fee income and (b) $650,000 generated by an
increase in data communications management income, offset by (c) a $1.6 million
decrease in hardware sales. These increases are attributable to both internal
growth and acquisitions and not to any significant increases in prices.
Costs of Services. Costs of services increased 81.3% to $23.4 million for
the six months ended June 30, 2001 from $12.9 million for the six months ended
June 30, 2000. The $10.5 million increase was primarily attributable to (a)
$10.8 million related to service fee income and (b) $770,000 related to data
communications management offset by (c) a decrease of $1.1 million in hardware
sales. Gross margins decreased to 59.2% for the six months ended June 30, 2001,
from 60.9% for the six months ended June 30, 2000 due to our acquisitions during
2001 of SLM and C-TEQ, which had lower margins than we did prior to these
acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 51.0% to $19.6 million for the six months
ended June 30, 2001 from $12.0 million for the six months ended June 30, 2000.
The $7.6 million increase was primarily due to additional personnel to support
our growth and acquisitions and other miscellaneous expenses. As a result of the
acquisitions of SLM and C-TEQ, selling, general and administrative expenses as a
percentage of revenues decreased to 34.2% for the six months ended June 30,
2001, from 39.3% for the six months ended June 30, 2000. During the second
quarter of 2001, we announced plans to consolidate the operations of our two
Houston, Texas data center facilities, one of which was acquired from SLM, into
a new facility. The closing and relocating of both facilities was completed
during the quarter. In connection with the closure of the Houston facility that
was not acquired from SLM, we recorded a restructuring charge of approximately
$405,000 during the quarter ended June 30, 2001 which is included in selling,
general, and administrative expenses in the accompanying statement of
operations. The charge includes approximately $93,000 of severance related to
several employees terminated during the quarter and approximately $312,000 of
facility closure costs. The facility closure costs include moving expenses and
other miscellaneous costs incurred after operations ceased in addition to the
noncancelable operating lease obligation on the existing facility. All costs
have been incurred as of June 30, 2001 with the exception of $275,000 related to
the lease obligation which is included in accrued liabilities in the
accompanying balance sheet. The amount represents the total remaining lease
payments, less our estimate of rental income that we may receive by subleasing
the facility during the remaining lease term.
11
Depreciation and Amortization. Depreciation and amortization increased
164.7% to $5.4 million for the six months ended June 30, 2001 from $2.0 million
for the six months ended June 30, 2000. The $3.4 million increase was primarily
attributable to additional property, plant and equipment and additional
amortization from acquisitions.
Other Income, Net. Other income, net decreased to $760,000 for the six
months ended June 30, 2001 from $8.7 million for the six months ended June 30,
2000. The decrease was primarily due to decreases in the taxable component of
the gain associated with the issuance of common stock of Netzee and to decreases
in interest income.
Provision for Income Taxes. Provision for income taxes decreased to $4.0
million for the six months ended June 30, 2001 from $5.5 million for the six
months ended June 30, 2000. The decrease was attributable to a decrease in
taxable gains associated with the issuance of common stock of Netzee offset by
an increase associated with increased pre-tax profits.
Equity in Loss of Affiliate. Equity in loss of affiliate was $8.5 million
for the six months ended June 30, 2001 and $11.9 million for the six months
ended June 30, 2000. This amount is our share of Netzee's net loss.
Liquidity and Capital Resources
Since our incorporation, we have financed our operations and capital
expenditures through cash from operations, borrowings from banks and sales of
our common stock, including our initial public offering in June 1998, which
resulted in net proceeds to us of $14.4 million, and our public offering in
February 2000, which resulted in net proceeds to us of $66.0 million. In July
2001, we filed a registration statement on Form S-3 with the SEC covering the
offering of 4.0 million shares of our common stock, including 3.1 million shares
to be offered by us and 900,000 shares by some of our shareholders. We estimate
the sale of shares by us will result in approximately $93.0 million in net
proceeds if the offering is completed.
Cash and cash equivalents were $4.1 million at June 30, 2001 and $8.1
million at December 31, 2000. Short term investments with a maturity of one year
or less were $8,000. Net cash provided by operating activities was $8.9 million
for the six months ended June 30, 2001 compared to $1.6 million for the six
months ended June 30, 2000. The increase in the net cash provided by operating
activities was primarily attributable to an increase in net income.
Net cash used in investing activities was $36.0 million for the six months
ended June 30, 2001 compared to $56.5 million for the six months ended June 30,
2000. The decrease in net cash used in investing activities was primarily due to
a decrease in our investments resulting from our acquisitions during 2001.
Net cash provided by financing activities was $23.2 million for the six
months ended June 30, 2001 compared to $56.6 million for the six months ended
June 30, 2000. The decrease in net cash provided by financing activities was
primarily due to the first quarter 2000 net proceeds from our public stock
offering.
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 June 30, 2001, the interest
rate under this facility was approximately 5.1125% per year, and approximately
$26.4 million was outstanding under the facility. On July 24, 2001, we signed a
letter of intent with First Union to increase availability under the line of
credit to $50 million and to extend the maturity date to June 1, 2004.
We provide to Netzee, jointly with John H. Harland Company, a $20.0 million
revolving line of credit secured by substantially all of Netzee's assets. Of the
total $20.0 million available to Netzee, we provide $15.0
12
million and Harland provides $5.0 million on a pro rata basis with us. In
February 2001, we paid Netzee $14.1 million in cash and assumed $2.4 million of
DPSC's net liabilities in exchange for regulatory reporting software and other
assets formerly owned by Netzee's subsidiary, DPSC. Netzee used approximately
$8.4 million of the cash proceeds to pay down its line of credit with us. Netzee
has subsequently borrowed additional funds from us, and as of June 30, 2001,
Netzee owed us a total of $8.7 million under this line of credit. We finance
this line of credit with cash on hand and additional borrowings under our credit
facility with First Union. Netzee may require additional funds to support its
operations and to repay its borrowings from us. Netzee may seek to raise capital
through public or private offerings of debt or equity, the sale of assets or
from other sources. No assurance can be given that additional funds will be
available on terms favorable to Netzee, if at all. Netzee's ability to continue
as a going concern and to meet its obligations as they may come due may depend
upon its ability to raise additional capital funds.
We do not consolidate Netzee's results of operations with our results of
operations. We now account for our investment in Netzee under the equity
method, which requires us to record the results of operations of Netzee in a
single line item in our statement of operations titled "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. Since Netzee completed its initial public
offering, we record only our relative percentage of Netzee's net losses. As of
June 30, 2001, we owned approximately 28% of Netzee's outstanding common stock.
Also, as of June 30, 2001, the carrying value of our investment in Netzee was
$9.7 million which exceeded the market value of $4.0 million as of that date. We
believe that this reduction in value is temporary. We believe that this
reduction in value is temporary. However, we may in the future conclude that
this reduction is other than temporary, such as if Netzee becomes unable to
continue as a going concern. In that event we would have to write down the
carrying values of our investment in and our advances to Netzee. In addition,
Netzee has a history of losses and may never become profitable. We will continue
to account for our investment in Netzee under the equity method, which will
result in additional losses on our investment in and advances to Netzee until
Netzee becomes profitable. The impact of Netzee's results of operations on our
financial condition, including our shareholders' equity, is uncertain, and we
may not benefit from our ownership in Netzee.
On May 31, 2001, we entered into a loan agreement with SLM, the owner of
approximately 6% of our common stock, under which we loaned SLM $12.0 million
subject to various terms and conditions. Borrowings under the loan agreement
bear interest at an annual rate equal to the one-month LIBOR plus 2% and are
secured by up to approximately 1.25 million shares of our common stock now held
or that may be earned by SLM. The loan matures on December 31, 2002 and
requires mandatory prepayments from the proceeds of sales of our common stock by
SLM until the loan is repaid in full. As of June 30, 2001, SLM owed us
approximately $12.1 million under this loan agreement. SLM will repay the loan
in full by using the proceeds of its sale of our common stock in the pending
offering described above.
We funded the cash portion of the purchase price of our acquisitions
through the use of cash on hand and borrowings under our line of credit with
First Union.
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 at least the
next 12 months. We intend to grow, in part, through strategic acquisitions and
expect to 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 the expenditures and
acquisitions. In addition, no assurance can be given that we will complete any
acquisitions on terms favorable to us, if at all, or that additional sources of
financing will not be required.
Recent Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board approved Statement of
Financial Accounting Standard No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 142 requires companies to cease
amortizing goodwill that existed at June 30, 2001. The amortization of existing
goodwill will cease on December 31, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below is carrying value. The
adoption of SFAS No. 142 will result in
13
our discontinuation of amortization of our goodwill; however, we will be
required to test our goodwill for impairment under the new standard beginning in
the first quarter of 2002, which could have an adverse effect on our future
results of operations if an impairment occurs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates. Borrowings under the First Union credit
facility accrue interest at a fluctuating rate based either upon the lender's
prime rate or LIBOR. As of June 30, 2001, we had $26.4 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.
14
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 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On January 4, 2001, we acquired certain assets of SLMsoft.com, Inc. In
addition to cash and shares issued at closing, we also agreed to issue up to
385,872 shares as contingent consideration, to be issued if and when the
contingencies are resolved. SLM has satisfied certain contingencies and now owns
an additional 32,488 shares of our common stock. Approximately 353,384 shares
remain available for issuance if SLM satisfies the remaining contingencies.
We issued the securities in a private offering in reliance on the
exemptions from registration under the Securities Act of 1933 provided by
Section 4(2) and by Regulation D. The recipients of the common stock were SLM
Canada, a publicly held Canadian company, and SLM Kansas, its wholly-owned
subsidiary. SLM Canada and SLM Kansas 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 shares, and appropriate
legends were affixed to the share certificates issued in the transaction. The
recipients of these securities were represented by counsel and had adequate
access to information about InterCept.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2001, we held our annual meeting of shareholders. The results of
the proposals submitted for vote at this 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 Withheld
John W. Collins 9,639,077 4,295
Donny R. Jackson 9,639,077 4,295
2. Ratification of Arthur Andersen LLP as our independent public accountants
for the year ended December 31, 2001 (there were no broker non-votes in
connection with the ratification of Arthur Andersen LLP).
For 9,586,637
Against 55,185
Abstain 1,550
3. Approval of The InterCept Group, Inc. 2001 Employee Stock Purchase Plan
(there were no broker non-votes in connection with the approval of the
Plan).
For 9,309,972
Against 332,080
Abstain 1,320
15
Item 5. Other Information
The registrant hereby amends its report on Form 8-K filed on January 19,
2001, as amended on March 20, 2001, by deleting the text under Item 7 and
replacing it with the following text:
(a) Financial Statements of Business Acquired. Included as Exhibit 99.1
hereto and incorporated herein by reference.
(b) Pro Forma Financial Information. Included as Exhibit 99.2 hereto and
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit
No. Description
------- -----------
10.1 Loan Agreement between The InterCept Group, Inc. and SLMsoft.com,
Inc. dated May 31, 2001.*
10.2 Secured Promissory Note by and between InterCept and SLMsoft.com,
Inc. dated May 31, 2001.*
10.3 Pledge Agreement by and between InterCept and SLMsoft.com, Inc. dated
May 31, 2001*
10.4 Amendment No. 1 to Registration Rights Agreement between InterCept
and SLMsoft.com, Inc. dated May 31, 2001.*
99.1 Financial Statements of SLMsoft.com, Inc.
99.2 Pro Forma Financial Statements of SLMsoft.com, Inc.
* Incorporated by reference to Exhibits 99.1 through 99.4, respectively, in the
registrant's Current Report on Form 8-K dated May 31, 2001 and filed with the
SEC on July 2, 2001.
(b) Reports on Form 8-K filed during the three months ended June 30, 2001.
None.
16
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.
July 25, 2001 /s/ John W. Collins
------------- ---------------------------
Date John W. Collins
Chairman of the Board, Chief Executive
Officer and President (principal
executive officer)
July 25, 2001 /s/ Scott R. Meyerhoff
------------- ---------------------------
Date Scott R. Meyerhoff
Senior Vice President, Chief Financial
Officer and Secretary (principal
financial and accounting officer)
17