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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, 1998.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______, 19__.
Commission file number : 01-14213
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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. (1) Yes X No ; (2) Yes No X
--- --- --- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 12, 1998
Common Stock, no par value 9,248,539
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(No. of Shares)
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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
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 4
Consolidated Statements of Operations
for the Three Months and Six Months
ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
for the Six Months ended June 30,
1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
EXHIBIT INDEX 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The InterCept Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,943 $ 2,010
Accounts receivable, less allowance for doubtful accounts of $157
both at June 30, 1998 and December 31, 1997 2,592 2,776
Inventory, prepaid expenses and other 494 230
------------ ------------
Total current assets 10,029 5,016
Property and equipment, net 4,509 2,516
Deferred tax assets 664 668
Intangible assets, net 1,888 1,683
Notes receivable 40 45
Other noncurrent assets 228 228
------------ ------------
Total assets $ 17,358 $ 10,156
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 91 $ 581
Line of credit - 200
Accounts payable and accrued liabilities 2,432 2,103
Deferred revenue 1,440 1,140
------------ ------------
Total current liabilities 3,963 4,024
Notes payable, less current portion 260 4,716
Deferred compensation - 1,800
------------ ------------
Total liabilities 4,223 10,540
Minority interest 50 -
Commitments and contingencies:
Series A redeemable preferred stock 8% cumulative, no par value;
30,000 shares authorized; 0 and 4,000 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively - 400
Shareholders' equity:
Preferred stock, no par value; 1,000,000 shares authorized; Series A
reported above - -
Common stock, no par value; 50,000,000 shares authorized;
9,000,114 and 6,750,114 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively 15,780 2,764
Accumulated deficit (2,695) (3,548)
------------ ------------
Total shareholders' equity 13,085 (784)
------------ ------------
Total liabilities and shareholders' equity $ 17,358 $ 10,156
============ ============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
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,
------------------------ -----------------------
1998 1997 1998 1997
------------------------ -----------------------
(unaudited) (unaudited)
Revenues:
Service fee income $ 4,785 $ 3,971 $ 9,358 $ 7,803
Data communications management income 909 761 1,758 1,443
Equipment product sales, services and other 955 690 1,790 1,292
---------- ---------- --------- ----------
Total revenues 6,649 5,422 12,906 10,538
Costs of services:
Cost of service fee income 1,429 1,191 2,721 2,477
Cost of data communications management income 591 600 1,220 1,145
Cost of equipment and product sales 720 588 1,433 1,031
Selling, general and administrative expenses 2,575 2,571 5,107 4,886
Depreciation and amortization 314 330 599 639
---------- ---------- --------- ----------
Total operating expenses 5,629 5,280 11,080 10,178
Operating income 1,020 142 1,826 360
Other expense, net (132) (165) (292) (328)
---------- ---------- --------- ----------
Income (loss) before provision for income taxes and minority interest 888 (23) 1,534 32
Provision for income taxes 349 77 607 121
Minority interest on (income) loss of consolidated subsidiary (46) 13 (50) 39
---------- ---------- --------- ----------
Net income (loss) before preferred dividends 493 (87) 877 (50)
Preferred dividends (8) (8) (16) (16)
---------- ---------- --------- ----------
Net income (loss) attributable to common shareholders $ 485 $ (95) $ 861 $ (66)
========== ========== ========= ==========
Net income (loss) per common share:
Basic $ 0.07 $ (0.01) $ 0.12 $ (0.01)
========== ========== ========= ==========
Diluted $ 0.07 $ (0.01) $ 0.12 $ (0.01)
========== ========== ========= ==========
Weighted average shares outstanding:
Basic 7,250 6,750 7,000 6,750
Diluted 7,371 6,750 7,119 6,750
The accompanying notes are an integral part of these condensed consolidated
statements of operations.
5
The InterCept Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
June 30,
------------------------------
1998 1997
------------------------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 877 $ (50)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 599 639
Minority interest in income (loss) of consolidated subsidiary 50 (39)
Deferred income tax provision (benefit) 4 (7)
Pro forma tax expense - 37
Changes in operating assets and liabilities:
Accounts receivable 183 573
Inventory, prepaid expenses, and other (273) (144)
Other assets (308) (117)
Accounts payable and accrued expenses 329 (5)
Deferred revenue 301 (8)
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Net cash provided by operating activities 1,762 879
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Cash flows from investing activities:
Increase (decrease) in note receivable 14 (611)
Purchases of property and equipment, net (2,400) (710)
------------- ------------
Net cash used in investing activities (2,386) (1,321)
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Cash flows from financing activities:
Payments on notes payable and line of credit (6,946) (52)
Debt issuance costs (88) -
Retirement of preferred stock (440) -
Distributions for taxes to shareholders of pass through entities (8) (52)
Payment of preferred dividends (16) (16)
Proceeds from issuance of common stock, net of related issuance costs 13,055 6
------------- ------------
Net cash provided by (used in) financing activities 5,557 (114)
Net increase (decrease) in cash and cash equivalents 4,933 (556)
Cash and cash equivalents at beginning of the period 2,010 1,398
------------- ------------
Cash and cash equivalents at end of the period $ 6,943 $ 842
============= ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 337 $ 368
============= ============
Cash paid for income taxes $ 435 $ 132
============= ============
The accompanying notes are an integral part of these consolidated cash flows.
6
THE INTERCEPT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
The InterCept Group, Inc. ("InterCept" or the "Company") designs, develops,
markets and implements a suite of fully integrated electronic commerce
products and services primarily for community financial institutions in the
United States. The Company's products and services include electronic
funds transfer ("EFT"), data communications management, client/server
enterprise software and other processing solutions.
The Company is a single source provider of a broad range of flexible
electronic commerce solutions supporting value-added products and services.
The Company provides numerous EFT products and services, including
automated teller machine ("ATM"), point-of-sale ("POS") and scrip debit
services, debit card transactions, funds transfer services and remote
banking services. The Company licenses client/server enterprise software,
which operates in a Windows NT(R) environment, to community financial
institutions on both a service bureau and an in-house basis. The Company
also supplies banking related equipment, provides related maintenance and
technical support and offers numerous ancillary products and services to
its financial institution customers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries,
ProVesa, Inc. and InterCept Switch, Inc. Additionally, ProImage,
Inc.("ProImage"), a corporation in which ProVesa has a 33.3% ownership
interest, has been consolidated in the accompanying financial statements
since its inception, due to InterCept's control of ProImage. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, which are of a normal recurring nature,
to present fairly the Company's financial position, results of operations,
and cash flows at the dates and for the periods presented. Interim results
of operations are not necessarily indicative of results to be expected for
a 12-month period. The interim financial statements should be read in
conjunction with the Company's Registration Statement on Form S-1
(Registration Number 333-47197) as declared effective by the Securities and
Exchange Commission on June 9, 1998.
2. NET INCOME PER SHARE
Net income per share is calculated and presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). Basic
7
earnings per share is computed based on the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options using the "treasury stock" method based
on average stock price for the period. All prior periods are presented
under SFAS 128.
The 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, 1998 June 30, 1997
------------------------------------ -------------------------------------
Income Shares EPS Income Shares EPS
------------------------------------ -------------------------------------
Basic EPS $ 485 7,250 $ 0.07 $ (95) 6,750 $ (0.01)
Dilutives:
Stock options - 121 - - - -
------------------------------------ -------------------------------------
Diluted EPS $ 485 7,371 $ 0.07 $ (95) 6,750 $ (0.01)
==================================== =====================================
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
------------------------------------ -------------------------------------
Income Shares EPS Income Shares EPS
------------------------------------ -------------------------------------
Basic EPS $ 861 7,000 $ 0.12 $ (66) 6,750 $ (0.01)
Dilutives:
Stock options - 119 - - - -
------------------------------------ -------------------------------------
Diluted EPS $ 861 7,119 $ 0.12 $ (66) 6,750 $ (0.01)
==================================== =====================================
3. INITIAL PUBLIC OFFERING OF 2,387,500 SHARES OF COMMON STOCK
On June 9, 1998, the Company completed its initial public offering of
2,387,500 shares (including 137,500 shares sold by a selling shareholder)
of common stock at an offering price of $7.00 per share. Net proceeds from
the offering were approximately $13.1 million after deducting underwriters
discounts and commissions and expenses of the offering. The Company used a
portion of the proceeds to (i) pay down significantly all of its long-term
debt; (ii) pay amounts owed to an officer of the Company for prior service;
(iii) enhance and expand the InterCept Frame Relay Network; and (iv) redeem
its outstanding preferred stock. The balance of the proceeds will be used
for working capital and general corporate purposes, including possible
acquisitions. On July 10, 1998 the underwriters exercised their over-
allotment option to purchase an additional 248,425 shares at $7.00 per
share. The Company received additional net proceeds of approximately $1.6
million from such sale of shares.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at June 30, 1998 and December
31, 1997 consisted of the following (in thousands):
June 30, December 31,
1998 1997
----------------------------------------
Note payable to Georgia State Bank, all outstanding amounts
repaid in June, 1998. $ - $ 2,733
Note payable to FNB Commerce, all outstanding amounts repaid
in June, 1998. - 1,378
Note payable to Community Bank of Georgia, all outstanding
amounts repaid in January, 1998. - 403
Mortgage note payable to Allied Bank, all outstanding amounts
repaid in June, 1998. - 389
Note payable to First Macon Bank & Trust interest payable at
prime; monthly principal and interest payments, payable in full on
September 15, 2001; the note is collaterized by assets of
ProImage, and a corporate guarantee by ProVesa of one-third of
the balance of the debt. 280 316
Note payable to First Macon Bank & Trust, interest payable at
prime, monthly principal and interest payments, the note is
collaterized by assets of ProImage, and a corporate guarantee
by ProVesa of one-third of the balance of the debt. 71 78
----------------------------------------
351 5,297
Less current maturities (91) (581)
----------------------------------------
$ 260 $ 4,716
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8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The following discussion contains statements which constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements appear in a number of places in this Quarterly Report
and include all statements that are not historical statements of fact regarding
the intent, anticipation, belief or current expectations of the Company, its
directors or its officers with respect to, among other things: (i) the Company's
financing plans; (ii) trends affecting the Company's financial condition or
results of operations; (iii) the Company's growth strategy and operating
strategy and (iv) the declaration and payment of dividends. The words "may,"
"would," "could," "will," "expect," "estimate," "anticipate," "believe,"
"intends," "plans," and similar expressions and variations thereof are intended
to identify forward-looking statements. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, many of which are beyond the Company's ability to
control. Actual results may differ materially from these forward-looking
statements as a result of many factors, including: the inability to achieve and
maintain profitability; the inability to obtain, continue and manage growth or
execute agreements with new customers; the risks related to acquisitions, the
inability to attract and retain qualified sales and marketing personnel and
enter strategic marketing relationships; market acceptance of new products and
enhancements; growth in the Company's customers; rapid changes in technology;
increased competition; dependence on new products; and the other factors
discussed in the Company's registration statement on Form S-1
(SEC No. 333-47197) as declared effective on June 9, 1998, including the "Risk
Factors" section contained therein.
The Company derives revenues primarily from the following sources: (i) EFT
processing services; (ii) data communications management; (iii) client/server
enterprise software support, maintenance and related services; and (iv)
maintenance and technical support services, sales of banking related equipment
and complementary products and customer services.
The Company derives EFT revenues principally from processing ATM, POS and
debit card transactions. The Company receives a base fee for providing its ATM
processing services and an additional fee for each ATM serviced. Once the number
of transactions exceeds established levels, the Company charges additional fees
for the extra transactions processed. For its POS services, the Company
generally receives a portion of the interchange fees charged by its community
financial institution customers that issue debit cards and charges a monthly fee
if its customers do not meet a certain minimum dollar amount of transactions for
a particular month. Most charges due under the Company's EFT service agreements
are paid monthly.
The Company's data communications management service revenues are
principally derived from network management services, data packet transportation
services across The InterCept Frame Relay Network, consulting and equipment
configuration, installation and sales. The Company charges a flat monthly fee
for providing telecommunications connectivity and network management as well as
an installation charge.
The Company licenses PC BancPAC, its proprietary Windows NT(R) based
client/server software system on both an in-house and service bureau basis. The
Company recognizes service revenues as the services are provided. It is the
Company's policy to recognize revenues for licensing of PC BancPAC in accordance
with Statement of Position 97-2 on "Software Revenue Recognition" issued by the
American Institute of Certified Public Accountants. Software license fees are
recognized when a noncancellable license agreement
9
has been signed, the product has been shipped, and all significant obligations
to the customer have been satisfied.
The Company's maintenance, support and equipment revenues consist primarily
of revenues from the Company's maintenance and technical support services as
well as sales of equipment. Equipment revenues are recognized at the time of
shipment while maintenance and technical support service revenues are recognized
as the service period elapses.
The Company's business and relationships with its customers depend
significantly on a number of computer software programs, internal operating
systems and connections to other networks. If any of these software programs,
systems or networks are not programmed to recognize and properly process dates
after December 31, 1999 (the "Year 2000" issue), significant system failures or
errors may result which could have a material adverse effect on the business,
financial condition, or results of operations of both the effected customers and
the Company. The Company has conducted a preliminary review of its internal
accounting and operating programs and systems and has been subject to the review
of certain federal bank regulatory agencies with respect to some of its
operations in light of the Year 2000 issue. No significant Year 2000 problems
with the Company's products and services have yet been identified during such
reviews and the Company currently believes that its programs and systems and the
network connections it maintains are adequately programmed to address the Year
2000 issue or can be modified or replaced to address the Year 2000 issue without
incurring costs or delays which would have a material adverse effect on the
Company's financial condition. The Company currently provides service bureau
processing services to certain customers using a processing solution that is not
Year 2000 compliant, and the Company is in the process of converting those
customers to its PC BancPAC software, which the Company believes is Year 2000
compliant, before the end of September 1999. The Company currently estimates
that the cost of such conversion will total approximately $200,000; however, it
is difficult to predict such costs with certainty, and there can be no assurance
that the costs necessary to convert its customers to PC BancPAC will not have a
material adverse effect on the Company's business, financial condition, or
results of operations. Further, any failure by the Company to complete the
conversion of any of its service bureau customers or address any problems that
may arise during reviews conducted by bank regulatory agencies or otherwise in a
timely manner could significantly interrupt the business operations of such
customers and the Company, which could have a material adverse effect on the
business, financial condition, or results of operations of both the effected
customers and the Company.
The Company has not completed an assessment of third party products or
systems used in its business. Other companies interact electronically with the
Company and its customers, and the Company must coordinate its EFT, data
communications and enterprise software processing with such other companies and
its customers. If these other companies or the Company's customers do not
successfully address Year 2000 issues in their operations and if the Company is
unable to successfully transfer its business operations to another provider that
has Year 2000 compliant systems, the Company's processing operations may be
interrupted, hindered or delayed, which would have a material adverse effect on
its business, financial condition and results of operations. The Company has had
to help some of its customers to implement Year 2000 changes or replace
deficient equipment related to the services the Company provides. Furthermore,
the Company believes that many financial institutions and third party vendors
and network processors (including customers, vendors and processors of the
Company) are still in the preliminary stages of analyzing their software and
network applications to address Year 2000 issues. It is impossible to estimate
the potential expenses involved or delays which may result from the failure of
these institutions and third parties to resolve their Year 2000 issues in a
timely manner and there can be no assurance that such expenses, failures or
delays will not have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company's quarterly operating results have varied in the past and will
likely vary significantly in the future. Factors that may cause the Company's
future operating results to vary include, without limitation: the timing of new
product and service announcements; changes in pricing policies by the Company
and its competitors; market acceptance of new and enhanced versions of the
Company's products and services; the lengthening of sales cycles for new or
existing products or services; customer attrition; changes in operating
expenses; changes in Company strategy; personnel changes; the introduction of
alternative technologies; the Company's products becoming obsolete; failure,
delay and expenses in
10
making software, systems and networks utilized in the Company's business Year
2000 compliant; the effect of acquisitions; and general economic factors.
Product and service revenues are difficult to forecast because the market for
electronic commerce products and services is rapidly evolving, and the Company's
sales cycle generally covers an extended period but varies substantially from
customer to customer. Intercept believes that quarter to quarter comparisons of
its results of operations should not be relied upon as indications of future
performance.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain line items in the Company's condensed consolidated statements of
operations for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------------------------------ ----------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Costs of services 41.2 43.9 41.6 44.2
Selling, general, and administrative expenses 38.7 47.4 39.6 46.4
Depreciation and amortization 4.7 6.1 4.6 6.1
-------------- ------------ ----------- ------------
Total operating expenses 84.6 97.4 85.8 96.7
-------------- ------------ ----------- ------------
Operating income 15.4 2.6 14.2 3.3
Other expense, net (2.0) (3.0) (2.3) (3.1)
-------------- ------------ ----------- ------------
Income (loss) before minority interest and
provision for income taxes 13.4 (0.4) 11.9 0.2
Minority interest (income) loss (0.8) 0.2 (0.4) 0.4
Provision for income taxes 5.2 1.4 4.7 1.1
-------------- ------------ ----------- ------------
Net income 7.4% (1.6)% 6.8% (0.5)%
============== ============ =========== ============
11
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenues. Revenues increased 22.6%, or $1.2 million, to $6.6 million for
the three months ended June 30, 1998 from $5.4 million for the three months
ended June 30, 1997. The $1.2 million increase was primarily attributable to (i)
$520,000 generated by an increase in EFT processing services, (ii) $150,000
generated by an increase in data communications management services, (iii)
$260,000 generated by an increase in equipment sales and (iv) other net
increases of $300,000.
Costs of Services. Costs of services increased 15.2%, or $360,000, to $2.7
million for the three months ended June 30, 1998 from $2.4 million for the three
months ended June 30, 1997. The $360,000 increase was primarily attributable to
(i) $130,000 generated by additional equipment sales, (ii) $70,000 generated
from additional maintenance services and (iii) other increases of $160,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 0.2% to $2.6 million for the three months
ended June 30, 1998 from $2.6 million for the three-months ended June 30, 1997.
Depreciation and Amortization. Depreciation and amortization decreased
4.8%, or $20,000, to $310,000 for the three months ended June 30, 1998 from
$330,000 for the three months ended June 30, 1997. The decrease was primarily
attributable to a reduction of amortization for fully amortized intangibles
partially offset by additional depreciation expense related to capital
expenditures to upgrade and expand the InterCept Frame Relay Network.
Other Expense. Other expense decreased 20.1%, or $40,000, to $130,000 for
the three months ended June 30, 1998 from $170,000 for the three months ended
June 30, 1997. The decrease was primarily due to the reduction of long-term
debt.
Minority Interest Income (Loss). Minority interest income (loss) decreased
$60,000 to a loss of $50,000 for the three months ended June 30, 1998 from
$10,000 for the three months ended June 30, 1997. The decrease was attributable
to profits in ProImage's operations.
Provision for Income Taxes. Provision for income taxes increased $270,000
to $350,000 for the three months ended June 30, 1998 from $80,000 for the three
months ended June 30, 1997. The increase was attributable to increased profits
partially offset by a reduction in nondeductible amortization.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. Revenues increased 22.5%, or $2.4 million, to $12.9 million for
the six months ended June 30, 1998 from $10.5 million for the six months ended
June 30, 1997. The $2.4 million increase was primarily attributable to (i) $1.1
million generated by an increase in EFT processing services, (ii) $320,000
generated by an increase in data communications management services, (iii)
$500,000 generated by an increase in equipment and (iv) other net increases of
$440,000.
Costs of Services. Costs of services increased 15.5%, or $720,000, to $5.4
million for the six months ended June 30, 1998 from $4.7 million for the six
months ended June 30, 1997. The $720,000 increase was primarily attributable to
(i) $400,000 generated by an increase in equipment sales, (ii) $80,000 generated
by an increase in data communications management, (iii) $70,000 generated from
additional maintenance services and (iv) other increases of $170,000.
12
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 4.5%, or $220,000, to $5.1 million for the six
months ended June 30, 1998 from $4.9 million for the six months ended June 30,
1997. The increase was primarily attributable to an increase in additional sales
and administrative personnel to support the Company's growth.
Depreciation and Amortization. Depreciation and amortization decreased
6.2%, or $40,000, to $600,000 for the six months ended June 30, 1998 from
$640,000 for the six months ended June 30, 1997. The decrease was primarily
attributable to a reduction of amortization of fully amortized intangibles
partially offset by additional depreciation expense related to capital
expenditures to upgrade the InterCept Frame Relay Network.
Other Expense. Other expense decreased 11.0%, or $40,000, to $290,000 for
the six months ended June 30, 1998 from $330,000 for the six months ended June
30, 1997. The decrease was primarily due to the reduction of long term debt.
Minority Interest Income (Loss). Minority interest income (loss) decreased
$90,000, to a loss of $50,000 for the six months ended June 30, 1998 from
$40,000 for the six months ended June 30, 1997. The decrease was attributable to
profits in ProImage's operations.
Provision for Income Taxes. Provision for income taxes increased
$490,000, to $610,000 for the six months ended June 30, 1998 from $120,000 for
the six months ended June 30, 1997. The increase was attributable to increased
profits partially offset by a reduction in nondeductible amortization.
Liquidity and Capital Resources
Cash and cash equivalents were $6.9 million at June 30, 1998. Net cash
provided by operating activities was $1.8 million and $900,000 for the six
months ended June 30, 1998 and 1997, respectively. The increase in the net cash
provided by operating activities was primarily attributable to an increase in
earnings.
Net cash used in investing activities was $2.4 million and $1.3 million for
the six months ended June 30, 1998 and 1997, respectively. The increase in net
cash used in investing activities was primarily due to capital expenditures of
$1.6 million to upgrade and expand the InterCept Frame Relay Network in 1998,
partially offset by $600,000 related to the collection of a note receivable in
1997.
Net cash provided by (used in) financing activities was $5.6 million and
$(100,000) for the six months ended June 30, 1998 and 1997, respectively. The
increase in net cash provided by financing activities was primarily due to net
proceeds from the completion of the Company's initial public offering.
13
On April 28, 1998, the Company entered into a loan agreement with First
Union National Bank (the "First Union Credit Facility"), under which the Company
may borrow up to $20.0 million to fund acquisitions and pay expenses related to
acquisitions. In addition, at the Company's election, $2.0 million of the First
Union Credit Facility may become available for working capital purposes. Before
making any borrowings under the loan, InterCept shall have satisfied certain
conditions set forth in the loan agreement. The First Union Credit Facility
contains provisions which require the Company to maintain certain financial
ratios and minimum net worth amounts and which restrict the Company's ability to
incur additional debt, make certain capital expenditures, enter into agreements
for mergers, acquisitions or the sale of substantial assets and pay dividends.
The First Union Credit Facility matures on April 28, 2001. Interest is payable
monthly and outstanding principal amounts accrue interest, at the Company's
option, at an annual rate equal to either (i) a floating rate equal to the
lender's prime rate minus one quarter of one percent or (ii) a fixed rate based
upon the 30-day LIBOR rate plus applicable margins.
While there can be no assurances, the Company believes that the cash on
hand, funds to be provided by operations, and funds which may be available for
working capital purposes under the First Union Credit Facility will be
sufficient to meet the Company's anticipated capital expenditure and liquidity
requirements for its operations through at least June 1999. The Company intends
to grow, in part, through strategic acquisitions and will make additional
expenditures to negotiate, and consummate acquisition transactions and integrate
the acquired companies. While there can be no assurance, management currently
believes that cash on hand and funds from the First Union Credit Facility,
together with the issuance of Common Stock and other securities, will be
sufficient to fund its acquisition needs for the next 12 months. No assurance
can be made with respect to the actual timing and the amount of the expenditures
or acqusitions. The Company's estimates are forward-looking statements that are
subject to risks and uncertainties discussed above.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to, any
material legal proceedings, other than routine litigation incidental to its
business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote by the Company's security holders during
the second quarter ended June 30, 1998.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
No. Description
------ -----------
3.1 Amended and Restated Articles of Incorporation, as filed with the
Secretary of the State of Georgia on April 29, 1998, (incorporated
by reference to Exhibit 3.1 of the Company's Registration Statement
on Form S-1 (No. 333-47197) as declared effective by the SEC on June
9, 1998 (the "Registration Statement")).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 of the Registration Statement).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws defining
the rights of the holders of Common Stock of the Company.
10.1 Loan and Security Agreement dated April 28, 1998 by and among the
Company, its wholly-owned subsidiaries and First Union National Bank
(incorporated by reference to Exhibit 10.25 of the Registration
Statement).
10.2 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and John W. Collins.
10.3 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and Donny R. Jackson.
10.4 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and Scott R. Meyerhoff.
27.1 Financial Data Schedule for the three and six months ended June 30,
1998.
27.2 Financial Data Schedule for the three and six months ended June 30,
1997.
15
b) Reports on Form 8-K
None.
________________
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE INTERCEPT GROUP, INC.
August 14, 1998 /s/ John W. Collins
- --------------- ---------------------------
Date John W. Collins
Chairman of the Board
and Chief Executive Officer
(principal executive officer)
August 14, 1998 /s/ Scott R. Meyerhoff
- --------------- ---------------------------
Date Scott R. Meyerhoff
Chief Financial Officer
(principal financial and
accounting officer)
17
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3.1 Amended and Restated Articles of Incorporation, as filed with the
Secretary of the State of Georgia on April 29, 1998 (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1 (No. 333-47197) as declared effective by the SEC on June 9,
1998 (the "Registration Statement")).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
of the Registration Statement)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws
defining the rights of the holders of Common Stock of the Company.
10.1 Loan and Security Agreement dated April 28, 1998 by and among the
Company, its wholly-owned subsidiaries and First Union National Bank
(incorporated by reference to Exhibit 10.25 of the Registration
Statement).
10.2 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and John W. Collins.
10.3 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and Donny R. Jackson.
10.4 Stock Option Agreement dated as of June 24, 1998 by and between the
Company and Scott R. Meyerhoff.
27.1 Financial Data Schedule for the three and six months ended June 30,
1998.
27.2 Financial Data Schedule for the three and six months ended June 30,
1997.
_____________________
18