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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 SEPTEMBER 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
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 2, 2001
Common Stock, no par value 18,007,559
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THE INTERCEPT GROUP, INC.
INDEX TO FORM 10-Q
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000
Condensed Consolidated Statements of Operations for the Three
and Nine Months ended September 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2001 and 2000
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
September 30, December 31,
2001 2000
-------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 47,490 $ 8,061
Short term investments 49,768 37,484
Accounts receivable, less allowance for doubtful accounts of $697
and $641 at September 30, 2001 and December 31, 2000, respectively 23,357 9,960
Advances to SLM 0 5,000
Deferred tax assets 3,776 1,666
Inventory, prepaid expenses and other 6,358 3,023
------------------------------------
Total current assets 130,749 65,194
Property and equipment, net 24,731 16,883
Intangible assets, net 101,443 24,786
Advances to affiliate 9,950 15,000
Investment in affiliate 3,549 17,729
Other noncurrent assets 2,617 2,534
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Total assets $ 273,039 $ 142,126
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ - $ 45
Accounts payable and accrued liabilities 5,282 3,188
Deferred revenue 10,960 5,054
-------------- -------------
Total current liabilities 16,242 8,287
Notes payable, less current portion 6 4,513
Deferred revenue 463 453
Deferred tax liability 27,649 26,279
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Total liabilities 44,360 39,532
Minority interest in consolidated subsidiary 216 202
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;
17,728,338 and 13,197,139 shares issued and outstanding
at September 30, 2001 and December 31, 2000, respectively 240,193 109,340
Retained earnings (11,671) (6,951)
Accumulated other comprehensive (loss) income (59) 3
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Total shareholders' equity 228,463 102,392
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Total liabilities and shareholders' equity $ 273,039 $ 142,126
====================================
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
---------------------------- ----------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Service fee income $ 29,654 $ 14,310 $ 80,482 $ 39,831
Data communications management income 2,016 1,506 5,582 4,424
Equipment and product sales, services and other 3,158 2,012 6,191 6,637
---------- -------- ---------- ------------
Total revenues 34,828 17,828 92,255 50,892
Costs of services:
Costs of service fee income 10,999 4,236 29,314 11,713
Costs of data communications management income 1,538 1,137 4,334 3,165
Costs of equipment and product sales, services and other 2,345 1,528 4,679 4,954
Selling, general and administrative expenses 10,936 6,884 30,538 19,864
Depreciation and amortization 2,981 1,205 8,375 3,243
---------- -------- ---------- ------------
Total operating expenses 28,799 14,990 77,240 42,939
Operating income 6,029 2,838 15,015 7,953
Other income, net 604 1,777 1,646 10,499
---------- -------- ---------- ------------
Income before provision for income taxes, equity in loss of
affiliate and minority interest 6,633 4,615 16,661 18,452
Provision for income taxes 2,575 1,851 6,610 7,345
Equity in loss of affiliate (6,235) (6,023) (14,756) (17,890)
Minority interest (4) 15 (14) (18)
---------- -------- ---------- ------------
Net loss attributable to common shareholders $ (2,181) $ (3,244) $ (4,719) $ (6,801)
========== ======== ========== ============
Net loss per common share:
Basic $ (0.14) $ (0.25) $ (0.33) $ (0.54)
========== ======== ========== ============
Diluted $ (0.14) $ (0.25) $ (0.33) $ (0.54)
========== ======== ========== ============
Weighted average shares outstanding:
Basic 15,711 13,173 14,467 12,697
Diluted 15,711 13,173 14,467 12,697
The accompanying notes are an integral part of these condensed consolidated
statements of operations.
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended
September 30,
--------------------------------
2001 2000
--------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (4,719) $ (6,801)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 8,375 3,232
Loan cost amortization 46 11
Minority interest 14 18
Deferred income tax provision 692 2,727
Gain on sale of property and equipment - (6)
Gain due to stock issuances of subsidiary (576) (7,712)
Equity in net loss of affiliate 14,756 17,890
Income tax benefit related to exercise of stock options 1,320 498
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net (10,779) (1,437)
Inventory, prepaid expenses, and other 489 (2,070)
Other assets (132) (374)
Accounts payable and accrued expenses (722) (4,446)
Deferred revenue 2,066 (404)
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Net cash provided by operating activities 10,830 1,126
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Cash flows from investing activities:
Acquisitions, net of cash acquired (62,628) (4,875)
Decrease in note receivable - 11
Purchase of investments, net (12,356) (41,920)
Repayments from (advances to) affiliate, net 5,053 (4,043)
Purchases of property and equipment, net (5,863) (5,256)
Proceeds received from property disposals 52 -
Increases in capitalized software (1,217) (647)
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Net cash used in investing activities (76,959) (56,730)
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Cash flows from financing activities:
Proceeds from line of credit 21,895 13,000
Retirement of common stock - (32)
Payments on notes payable and line of credit (26,447) (24,250)
Proceeds from issuance of common stock, net of related issuance costs 107,899 65,680
Proceeds from employee stock purchase plan 86 -
Payment of shareholder note 221 -
Proceeds from exercise of stock options 1,904 298
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Net cash provided by financing activities 105,558 54,696
Net increase (decrease) in cash and cash equivalents 39,429 (908)
Cash and cash equivalents at beginning of the period 8,061 2,145
----------- -----------
Cash and cash equivalents at end of the period $ 47,490 $ 1,237
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Supplemental disclosures of cash flow information:
Cash paid for interest $ 276 $ 113
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Cash paid for income taxes $ 6,395 $ 6,130
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The accompanying notes are an integral part of these condensed
consolidated statements of cash flows.
THE INTERCEPT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
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 InterCept 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 September 30, 2001,
InterCept's accounts and the accounts of its following wholly-owned
subsidiaries:
InterCept Communications Technologies, Inc.
SBS Data Services, Inc.
DPSC Acquisition Corp.
C-TEQ, Inc.
ICPT Acquisition I, LLC
InterCept Services, LLC
InterCept TX I, LLC
InterCept Supply, L.P.
InterCept Output Solutions, L.P.
In addition, InterCept consolidates in its consolidated financial
statements the results of ProImage, Inc., a Georgia corporation. InterCept
controls ProImage and as of September 30, 2001 owned 67% of its outstanding
common stock. 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 in consolidated
subsidiary 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 acquisitions. 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 September 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
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 and other indefinite life intangible assets 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.
In June 2001 the Financial Accounting Standards Board approved Statement of
Financial Accounting Standard No. 143, "Accounting for Asset Retirement
Obligations." The statement addresses financial accounting and reporting
for legal obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is
effective for InterCept's 2003 fiscal year and is not expected to have a
material effect on InterCept's financial position or results of operations.
In August 2001 the Financial Accounting Standards Board approved Statement
of Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." The statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets and establishes a single accounting model for the impairment or
disposal of long-lived assets. The statement supersedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and supercedes accounting and reporting under APB
Opinion No. 30 for the disposal of a segment of a business. The statement
is effective for InterCept's 2002 fiscal year and is not expected to have a
material effect on InterCept's financial position or results of operations.
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. Common stock equivalents
were anti-dilutive for all periods presented and have been excluded from
the computation of net loss per share. Thus basic and diluted earnings per
share are equal for all periods presented.
4. Comprehensive Loss
Comprehensive loss is the total of net loss and all other unrealized losses
on securities, net of tax.
The following table sets forth the calculation of InterCept's comprehensive
loss for the periods indicated below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
------------------------- ------------------------
Net loss, as reported $ (2,181) $ (3,244) $ (4,719) $ (6,801)
Unrealized loss on securities,
net of tax: - (2) (62) (124)
--------- --------- --------- ---------
Comprehensive loss $ (2,181) $ (3,246) $ (4,781) $ (6,925)
========= ========= ========= =========
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 in cash 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 was placed in escrow to satisfy unresolved contingencies
existing at the closing date and remains in escrow as of September 30,
2001. 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. Through September 30, 2001, InterCept has issued an aggregate of
32,488 of those shares as a result of contingencies being 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
eriod of 20 years and
. $500,000 to workforce and amortized over a period of 4 years.
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 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 second quarter.
In connection with the consolidation of the facilities 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 second 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 September 30, 2001 with the exception of $250,000
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 nine-month periods ended September 30, 2000
assumes the acquisition of SLM had occurred on January 1, 2000 (in
thousands, except per share amounts):
3 months ended 9 months ended
September 30, 2000 September 30, 2000
------------------ ------------------
Revenues $ 26,122 $ 76,063
Net income before income taxes, equity in loss of affiliate and minority interest 1,296 9,144
Net loss attributable to common shareholders (5,230) (12,420)
Net loss per common share (diluted) $ (0.38) $ (0.93)
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 through September 30, InterCept completed several other
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
purchases. The results of operations of the acquired assets are included in
InterCept's consolidated financial statements from the date of acquisition.
The purchase price allocations for these acquisitions are preliminary and
will be completed within one year of the acquisition.
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 that may be
payable in 2002 and $834,000 that may be payable in 2003, depending on
future revenues. The additional payments will be recorded as purchase price
consideration if and when they are earned. During the second quarter of
2001, InterCept also paid the final payment of $275,000 related to a 2000
acquisition.
6. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations at September 30, 2001 and
December 31, 2000 consisted of the following (in thousands):
September 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. - 4,507
Equipment under capital lease expiring July 2001. - 45
Other 6 6
-----------------------------
6 4,558
Less current maturities - (45)
-----------------------------
$ 6 $ 4,513
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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.
7. Advances to SLM
On May 31, 2001, InterCept entered into a loan agreement with SLM under
which InterCept loaned SLM $12.0 million subject to various terms and
conditions. Borrowings under the loan agreement bore interest at an annual
rate equal to the one-month LIBOR plus 2% and were secured by the shares of
InterCept's common stock owned or potentially issuable to SLM. On August
13, 2001 SLM repaid the note, including accrued interest, in full.
8. Stock Offering
In August and September 2001, InterCept completed a public offering of its
common stock. Proceeds to InterCept from this offering including the over
allotment option (after deducting expenses related to the offering) were
approximately $108.5 million. Approximately $26.4 million of the proceeds
of this offering were used to pay certain debt and the remainder will be
used for working capital and other general corporate purposes, to fund
future acquisitions and to fulfill our obligations under our $15.0 million
revolving line of credit to Netzee.
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(TM) 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 nine months ended September 30, 2001, approximately
83% and 86%, respectively, 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
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 September 30, 2001, we owned
approximately 28% of Netzee's outstanding common stock.
In February 2000, we completed a 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.
In August and September 2001, we completed another public offering of
common stock. We sold 3,100,000 shares in August for net proceeds of $90.9
million, and we sold 600,000 additional shares in September for net proceeds of
$17.6 million when the underwriters exercised their over-allotment option in
full. We used approximately $26.4 million to repay in full the outstanding
balance on our First Union revolving credit facility. We expect to use the
remaining proceeds for working capital purposes, to fulfill our obligations
under our $15.0 million revolving line of credit to Netzee, and to fund future
acquisitions.
During 2001 through September 30, we completed several other
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 Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
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Revenues 100.0% 100.0% 100.0% 100.0%
Costs of services 42.7 38.7 41.5 39.0
Selling, general, and administrative expenses 31.4 38.6 33.1 39.0
Depreciation and amortization 8.6 6.8 9.1 6.4
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Total operating expenses 82.7 84.1 83.7 84.4
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Operating income 17.3 15.9 16.3 15.6
Other income, net 1.7 10.0 1.8 20.6
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Income before provision for income taxes, equity in
loss of affiliate and minority interest 19.0 25.9 18.1 36.2
Provision for income taxes 7.4 10.4 7.2 14.4
Equity in loss of affiliate (17.9) (33.8) (16.0) (35.2)
Minority interest 0.0 0.0 0.0 0.0
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Net loss (6.3)% (18.3)% (5.1)% (13.4)%
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Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Revenues. Revenues increased 95.4% to $34.8 million for the three
months ended September 30, 2001 from $17.8 million for the three months ended
September 30, 2000. The $17.0 million increase was comprised of (a) a $15.3
million increase in service fee income, (b) a $510,000 increase in data
communications management income, and (c) a $1.2 million increase 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 115.6% to $14.9 million
for the three months ended September 30, 2001 from $6.9 million for the three
months ended September 30, 2000. The $8.0 million increase was comprised of (a)
$6.8 million related to service fee income, (b) $401,000 related to data
communications management, and (c) a $817,000 increase in hardware sales. The
increases are attributable to both internal growth and acquisitions. Gross
margins decreased to 57.2% for the three months ended September 30, 2001 from
61.3% for the three months ended September 30, 2000. This decrease was primarily
a result of increased equipment sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 58.9% to $10.9 million for the three months
ended September 30, 2001 from $6.9 million for the three months ended September
30, 2000. The $4.1 million increase was primarily due to personnel added from
acquisitions, additional personnel to support our growth and other miscellaneous
expenses. As a result of the acquisitions of SLM and C-TEQ and improved
operating efficiencies, selling, general and administrative expenses as a
percentage of revenues decreased to 31.5% for the three months ended September
30, 2001, from 38.6% for the three months ended September 30, 2000.
Depreciation and Amortization. Depreciation and amortization increased
147.4% to $3.0 million for the three months ended September 30, 2001 from $1.2
million for the three months ended September 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 $604,000 for the
three months ended September 30, 2001 from $1.8 million for the three months
ended September 30, 2000. The $1.2 million decrease was primarily due to a
decrease in interest income. The three months ended September 2000 included
interest income on most of the proceeds from our February 2000 stock offering,
while the proceeds from the August and September 2001 offering were not
invested for the full quarter.
Provision for Income Taxes. Provision for income taxes increased to
$2.6 million for the three months ended September 30, 2001 from $1.9 million for
the three months ended September 30, 2000. The $760,000 increase was
attributable to increased pre-tax profits.
Equity in Loss of Affiliate. Equity in loss of affiliate increased to a
loss of $6.2 million for the three months ended September 30, 2001 from a loss
of $6.0 million for the three months ended September 30, 2000. This amount
represents our share of Netzee's net loss.
Minority Interest. Minority interest increased to $4,000 for the three
months ended September 30, 2001 from a loss of $15,000 for the three months
ended September 30, 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Revenues. Revenues increased 81.3% to $92.3 million for the nine months
ended September 30, 2001 from $50.9 million for the nine months ended September
30, 2000. The $41.4 million increase was primarily attributable to (a) a $40.7
million increase in service fee income and (b) $1.2 million generated by an
increase in data communications management income, offset by (c) a $446,000
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 93.3% to $38.3 million
for the nine months ended September 30, 2001 from $19.8 million for the nine
months ended September 30, 2000. The $18.5 million increase was comprised of (a)
$17.6 million related to service fee income and (b) $1.2 million related to data
communications management, offset by (c) a decrease of $275,000 in hardware
sales. Gross margins decreased to 58.5% for the nine months ended September 30,
2001 from 61.0% for the nine months ended September 30, 2000. This decrease is
primarily a result of increased equipment sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 53.8% to $30.5 million for the nine months
ended September 30, 2001 from $19.9 million for the nine months ended September
30, 2000. The $10.7 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 and improved operating efficiencies,
selling, general and administrative expenses as a percentage of revenues
decreased to 33.1% for the nine months ended September 30, 2001, from 39.0% for
the nine months ended September 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 second
quarter. In connection with the closure of the existing Houston facility, 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 second quarter and approximately $312,000 of facility closure costs.
The facility closure costs include employee costs and other exit costs incurred
after operations ceased, in addition to the noncancelable operating lease
obligation on the existing facility. All costs have been incurred as of
September 30, 2001 with the exception of $250,000 related to the lease
obligation, which is included in accrued liabilities in the accompanying balance
sheet. The amount represents our best estimate of the remaining obligation, less
potential rental income to be received by subleasing the facility during the
remaining lease term.
Depreciation and Amortization. Depreciation and amortization increased
158.2% to $8.4 million for the nine months ended September 30, 2001 from $3.2
million for the nine months ended September 30, 2000. The $5.1 million increase
was primarily attributable to additional property, plant and equipment and
additional amortization from acquisitions.
Other Income, Net. Other income, net decreased to $1.6 million for the
nine months ended September 30, 2001 from $10.5 million for the nine months
ended September 30, 2000. The decrease was primarily due to decreases in the
taxable component of the gain associated with the issuance of common stock by
Netzee and to decreases in interest income.
Provision for Income Taxes. Provision for income taxes decreased to
$6.6 million for the nine months ended September 30, 2001 from $7.3 million for
the nine months ended September 30, 2000. The decrease was attributable to a
decrease in taxable gains associated with the issuance of common stock by Netzee
offset by an increase in pre-tax profits.
Equity in Loss of Affiliate. Equity in loss of affiliate was $14.8
million for the nine months ended September 30, 2001 and $17.9 million for the
nine months ended September 30, 2000. This amount represents our share of
Netzee's net loss.
Minority Interest. Minority interest decreased to $14,000 for the nine
months ended September 30, 2001 from $18,000 for the nine months ended September
30, 2000.
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, our public offering in February
2000, which resulted in net proceeds to us of $66.0 million, and our public
offering in August and September 2001, which resulted in net proceeds to us of
$108.5 million.
Cash and cash equivalents were $47.5 million at September 30, 2001 and
$8.1 million at December 31, 2000. Short term investments with a maturity of one
year or less were $49.8 million at September 30, 2001. Net cash provided by
operating activities was $10.8 million for the nine months ended September 30,
2001 and was $1.1 million for the nine months ended September 30, 2000. The
increase in the net cash provided by operating activities was primarily
attributable to a reduction in the net loss, addbacks of depreciation and
amortization partially offset by additional accounts receivable balances.
Net cash used in investing activities was $77.0 million for the nine
months ended September 30, 2001 and 56.7 million for the nine months ended
September 30, 2000. The increase in net cash used in investing activities was
primarily due to an increase in cash paid for acquisitions offset by decreases
in our investments to fund those acquisitions.
Net cash provided by financing activities was $105.6 million for the
nine months ended September 30, 2001 and $54.7 million for the nine months ended
September 30, 2000. The increase in net cash provided by financing activities
was primarily due to the greater net proceeds from our public stock offering in
the third quarter of 2001 compared to the net proceeds from our public stock
offering in the first quarter of 2000.
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, 2001, the
interest rate under this facility was approximately 3.88% and no amount 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, and we expect to
conclude an amendment and restatement of the credit facility in the fourth
quarter of 2001.
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 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 September 30, 2001,
Netzee owed us a total of $9.9 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
September 30, 2001, we owned approximately 28% of Netzee's outstanding common
stock. Also, as of September 30, 2001, the carrying value of our investment in
Netzee was $3.5 million, which exceeded the market value of $755,000 as of that
date. 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 under which
we loaned SLM $12.0 million subject to various terms and conditions. Borrowings
under the loan agreement bore interest at an annual rate equal to the one-month
LIBOR plus 2% and were secured by up to approximately 1.25 million shares of our
common stock then held or that may be earned by SLM. The loan was scheduled to
mature on December 31, 2002. On August 13, 2001, SLM repaid the loan, including
accrued interest, in full.
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 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.
October 2001 Acquisition
In October 2001, we acquired substantially all of the assets of Holmes
and Shaw, Inc., and Superior Forms, Ltd. (together, "HSI"). Based in San
Antonio, Texas, HSI is a full service provider of computer output solutions
including data processing, laser document printing, and automated mailing
services. HSI has a strong focus in the financial services industry and also
provides products and services to government agencies, utility and
telecommunication companies and medical institutions. Consideration for this
purchase was approximately $25.2 million cash and assumed liabilities. For
further information, please see the press releases attached as Exhibits 99.1
and 99.2.
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 and other indefinite life
intangible assets 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 its carrying value. The adoption of SFAS No. 142 will
result in 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.
In June 2001 the Financial Accounting Standards Board approved
Statement of Financial Accounting Standard No. 143, "Accounting for Asset
Retirement Obligations." The statement addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The statement is
effective for InterCept's 2003 fiscal year and is not expected to have a
material effect on our financial position or results of operations.
In August 2001 the Financial Accounting Standards Board approved
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." The statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
establishes a single accounting model for the impairment or disposal of
long-lived assets. The statement supersedes FASB Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and supercedes accounting and reporting under APB Opinion No. 30 for the
disposal of a segment of a business. The statement is effective for InterCept's
2002 fiscal year and is not expected to have a material effect on our financial
position or results of operations.
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 September 30, 2001, no amount was outstanding under
this facility, and, therefore we do not face risks of interest rate fluctuations
related to borrowings. Changes in interest rates which increase the interest
rate on the credit facility would make it more costly for us to borrow under
that facility and might impede our acquisition and growth strategies if we
determine that the costs associated with borrowing funds are too high to
implement these strategies.
Proceeds from our public offering which closed in August and September
2001 were approximately $108.6 million. We have invested most of these funds in
various short-term interest bearing instruments. Changes in interest rates which
decrease the interest rate on these instruments would reduce our interest
income.
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
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In October 2001, InterCept acquired Holmes and Shaw, Inc., and Superior
Forms, Ltd. See Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - October
2001 Acquisition, as well as the press releases attached as Exhibits 99.1 and
99.2.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit
No. Description
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99.1 Press Release dated October 1, 2001.
99.2 Press Release dated October 10, 2001.
(b) Reports on Form 8-K filed during the three months endeds
September 30, 2001
Form 8-K dated May 30, 2001, filed on July 2, 2001, reporting under
Item 5 the loan agreement between The InterCept Group, Inc. and
SLMsoft.com.
Form 8-K dated July 25, 2001, filed on July 25, 2001, reporting under
Item 5 the press release announcing earnings for the second quarter of
2001.
Form 8-K dated August 7, 2001, filed on August 9, 2001, reporting under
Item 5 the Underwriting Agreement for the follow on offering of The
InterCept Group, Inc. common stock completed in August and September
2001.
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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 12, 2001 /S/ JOHN W. COLLINS
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Date John W. Collins
Chairman of the Board, President and Chief
Executive Officer (principal executive officer)
November 12, 2001 /S/ SCOTT R. MEYERHOFF
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Date Scott R. Meyerhoff
Chief Financial Officer
(principal financial and accounting officer)