================================================================================
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 MARCH 31, 2002.
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
InterCept, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58 - 2237359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 May 9, 2002
Common Stock, no par value 18,176,409
================================================================================
INTERCEPT, INC.
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001
Condensed Consolidated Statements of Operations for the Three Months
ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2002 and 2001
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
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
InterCept, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
March 31, December 31,
2002 2001
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,021 $ 24,917
Short term investments 51,333 50,289
Accounts receivable, less allowance for doubtful accounts of $744
and $946 at March 31, 2002 and December 31, 2001, respectively 19,105 20,271
Advances to SLM 7,108 7,025
Deferred tax assets 1,249 1,470
Inventory, prepaid expenses and other 15,417 8,973
-------- --------
Total current assets 119,233 112,945
Property and equipment, net 29,248 28,108
Intangible assets, net 127,901 128,204
Advances to Netzee 10,528 10,118
Investment in affiliate - 1,462
Other noncurrent assets 2,266 2,431
-------- --------
Total assets $289,176 $283,268
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ - $ -
Accounts payable and accrued liabilities 6,985 10,143
Deferred revenue 10,794 9,315
-------- --------
Total current liabilities 17,779 19,458
Notes payable, less current portion 2,212 465
Deferred revenue 372 445
Deferred tax liability 3,699 2,867
Total liabilities 24,062 23,235
Minority interest in consolidated subsidiary 230 222
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;
18,159,174 and 18,086,766 shares issued and outstanding
at March 31, 2002 and December 31, 2001, respectively 245,138 243,293
Retained earnings 19,799 16,571
Accumulated other comprehensive (loss) (53) (53)
Total shareholders' equity 264,884 259,811
-------- --------
Total liabilities and shareholders' equity $289,176 $283,268
The accompanying notes are an integral part of these condensed consolidated balance sheets.
3
InterCept, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended
March 31,
2002 2001
(unaudited) (unaudited)
Revenues:
Service fee income $33,999 $23,802
Data communications management income 1,974 1,829
Equipment and product sales, services and other 1,703 1,415
------- -------
Total revenues 37,676 27,046
Costs of services:
Costs of service fee income 14,153 8,927
Costs of data communications management income 1,363 1,438
Costs of equipment and product sales, services and other 1,261 1,099
Selling, general and administrative expenses 12,185 9,058
Depreciation and amortization 2,414 2,508
------- -------
Total operating expenses 31,376 23,030
Operating income 6,300 4,016
Other income, net 1,178 728
Income before provision (benefit) for income taxes, equity in loss of affiliate and
minority interest 7,478 4,744
Provision (benefit) for income taxes 2,756 (250)
Equity in loss of affiliate (1,487) (5,719)
Minority interest (7) (7)
Net income (loss) attributable to common shareholders $ 3,228 $ (732)
Net income (loss) per common share:
Basic $ 0.18 $ (0.05)
Diluted $ 0.17 $ (0.05)
Weighted average shares outstanding:
Basic 17,996 13,776
Diluted 19,125 13,776
The accompanying notes are an integral part of these condensed consolidated statements of operations.
4
InterCept, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
2002 2001
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ 3,228 $ (732)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,414 2,508
Loan cost amortization 15 22
Minority interest 7 7
Deferred income tax provision 1,053 (3,375)
Loss on sale of property and equipment 14 -
Gain due to stock issuances of subsidiary (25) (230)
Equity in net loss of affiliate 1,487 5,719
Income tax benefit related to exercise of stock options 624 391
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net 1,166 (8,805)
Inventory, prepaid expenses, and other 77 2,179
Other assets 93 (347)
Accounts payable and accrued expenses (4,678) 1,488
Interest accrued on note receivable (83) -
Deferred revenue 1,406 3,932
------- --------
Net cash provided by operating activities 6,798 2,757
------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (5,376) (58,005)
Purchase of investments, net (1,044) 37,502
(Advances to), repayments from affiliate, net (410) 7,925
Purchases of property and equipment, net (2,474) (2,196)
Increases in capitalized software (358) (390)
------- --------
Net cash used in investing activities (9,662) (15,164)
------- --------
Cash flows from financing activities:
Proceeds from line of credit 6,717 6,762
Payments on notes payable and line of credit (4,970) (19)
Payment of shareholder note - 221
Proceeds from exercise of stock options 1,221 461
------- --------
Net cash provided by financing activities 2,968 7,425
------- --------
Net increase (decrease) in cash and cash equivalents 104 (4,982)
Cash and cash equivalents at beginning of the period 24,917 8,061
------- --------
Cash and cash equivalents at end of the period $25,021 $ 3,079
------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 33 $ 40
Cash paid for income taxes $ 2,010 $ 1,563
The accompanying notes are an integral part of these condensed consolidated statements of cash flows.
5
INTERCEPT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
InterCept, Inc., ("InterCept"), is a single-source provider of a broad
range of technologies, products and services that work together to meet the
electronic commerce and operating needs of community financial institutions
in the United States. Over 1,900 of these community financial institutions
have contracted with InterCept for one or more of our technologies,
products and services, which include electronic funds transfer
transactions, core bank processing systems, check imaging systems, data
communications management networks, laser document printing and automated
mailing services, as well as services related to each of these products and
systems.
In February 2000, InterCept completed a public offering of its common
stock. Proceeds to InterCept from this offering (after deducting expenses
related to the offering) were approximately $65.5 million. Proceeds of this
offering were used to pay certain debt, to fund future acquisitions and
investments, partially to fund Netzee's operations and other general
working capital needs.
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 $107.5 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 InterCept's obligations under its
revolving line of credit to Netzee.
InterCept was incorporated on April 30, 1996 and has made several
acquisitions since inception.
The consolidated financial statements include the accounts of InterCept and
its wholly owned subsidiaries InterCept Communications Technologies, Inc.,
SBS Data Services, Inc., C-TEQ, Inc., InterCept Services, LLC, ICPT
Acquisitions I, LLC, DPSC Acquisition Corp., InterCept TX I, LLC, InterCept
Output Solutions, LP, and InterCept Supply, LP as of March 31, 2002. In
addition, ProImage, Inc., a corporation in which InterCept has a 67%
ownership interest as of March 31, 2002, has been consolidated in
InterCept's consolidated financial statements since its inception, due to
Intercept's control of ProImage. Management of InterCept retains
responsibility for all day-to-day operations of ProImage and has and will
continue to provide complete financial support for ProImage due to legal
limitations on the other shareholder's ability to fund losses. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Minority interest represents the minority shareholder's
proportionate share of the equity and earnings of ProImage. As of March 31,
2002, InterCept owned approximately 28% of the outstanding common stock of
Netzee, Inc. InterCept accounts for its investment in Netzee under the
equity method, which requires it to record Netzee's results of operations
in a single line item in its statement of operations entitled "equity in
loss of affiliate."
2. Net Income Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding. Diluted earnings per share is computed based
on the weighted average number of common shares outstanding plus the effect
of outstanding stock options using the "treasury stock" method, which is
based on the average stock price for the period. The effects of
anti-dilutive options have been excluded. All options were anti-dilutive
for the period ended March 31, 2001 and have been excluded from the
computation of net loss per share.
6
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
----------------------------- -----------------------------
Income Shares EPS Income Shares EPS
---------- -------- ------- --------- -------- -------
Basic EPS $ 3,228 17,996 0.18 $(732) 13,776 $(0.05)
Dilutives: -
Stock options 992 0.01 - - -
Contingently issuable shares 137 -
---------- -------- ------- --------- -------- -------
Diluted EPS $ 3,228 19,125 $0.17 $(732) 13,776 $(0.05)
========== ======== ======= ========= ======== =======
3. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and all other
unrealized losses on securities, net of tax.
The following table sets forth the calculation of InterCept's comprehensive
income (loss) for the periods indicated below (in thousands):
Three Months Ended
March 31,
-------------------------------
2002 2001
----------- --------------
Net income (loss), as reported $ 3,228 $ (732)
Unrealized gain (loss) on securities, net of tax: - 29
----------- --------------
Comprehensive income (loss) $ 3,228 $ (703)
=========== ==============
4. Acquisitions
During the three months ended March 31, 2002, InterCept made several final
payments totaling approximately $376,000 that were related to 2001
acquisitions.
InterCept adopted Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," as of January 1, 2002. Under this
statement, InterCept no longer amortizes goodwill but assesses it annually or
whenever events or changes in circumstances occur for impairment. Additionally,
InterCept no longer recognizes assembled workforce apart from goodwill in
accordance with the Statement of Financial Accounting Standard No. 141,
"Business Combinations" and has reclassified the cost previously allocated to
workforce of $800,000, less accumulated amortization of $289,000, to goodwill.
InterCept has not yet completed its goodwill impairment analysis. Goodwill and
workforce amortization for the three months ended March 31, 2001 was
approximately $901,000. Excluding this amount, net loss and net loss per share
for the three months ended March 31, 2001 would have been approximately
$(191,000) and $(.01), respectively.
7
5. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations at March 31, 2002 and December
31, 2001 consisted of the following (in thousands):
March 31, December 31,
2002 2001
---------- ------------
$50.0 million line of credit with Wachovia Bank, National Association
(formerly First Union National Bank), as amended, interest payable
at the LIBOR rate plus applicable margin as defined (approximately
3.13% as of March 31, 2002); payable in full on June 1, 2004,
guaranteed by substantially all assets of InterCept. 2,206 $459
Other 6 6
--------------------------
2,212 465
Less current maturities -
--------------------------
$2,212 $465
==========================
6. Advances to SLM
On December 3, 2001, InterCept entered into a loan agreement with SLM under
which InterCept loaned SLM $7.0 million, subject to various terms and
conditions in exchange for cash and settlement of other indemnification
obligations in the acquisition agreement. Borrowings under the loan
agreement bear interest, payable upon maturity, at the prime rate and are
secured by up to 591,871 shares of InterCept common stock with a market
value of approximately $21.7 million at March 31, 2002 that SLM now holds
or may earn. The loan matures on September 30, 2002 and requires mandatory
prepayments from the proceeds of sales of InterCept common stock by SLM
until the loan is repaid in full. At March 31, 2002, the balance on the
loan was $7,108,000, including accrued interest of $108,000.
7. Subsequent Event
We announced, after the close of trading on the Nasdaq Stock Market on
March 19, 2002, a major expansion in its merchant processing operations.
InterCept entered into a definitive agreement to acquire the assets of
Internet Billing Company, Ltd. (iBill), a Ft. Lauderdale-based provider of
transaction processing for Web merchants, and InterCept also signed a
binding letter agreement to acquire Electronic Payment Exchange, Inc.
(EPX), a provider of transaction processing services based in New Castle,
Delaware. Effective April 8, 2002, InterCept closed the iBill transaction.
InterCept paid $112.0 million in cash and is obligated to pay additional
quarterly earnout payments for a period of six quarters ending December 31,
2003. The amount of each earnout payment depends on whether the acquired
business achieves certain financial targets. InterCept used cash on hand,
proceeds from its line of credit with Wachovia Bank, and proceeds from a
CD-secured loan from The Peoples Bank of Winder, Georgia, to fund the
purchase price of iBill.
8
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:
o core data processing and check imaging systems, support,
maintenance and related services and software sales
o EFT processing services
Data communications management
Equipment and product sales, services and other:
o sales of banking-related equipment and complementary
products
o equipment maintenance and technical support services
o related products and services.
In our service bureau operations, we generate core data processing
revenues from service and processing fees based primarily on the asset base of
our financial institution customers, the number of transactions we process and
the number of accounts we service. We recognize these revenues as we perform the
services. We also generate revenues from the licensing of our core data
processing systems. We recognize revenues for licensing these systems in
accordance with Statement of Position 97-2 on "Software Revenue Recognition,"
issued by the American Institute of Certified Public Accountants. We recognize
software license fees when we have signed a non-cancelable license agreement,
shipped the product and satisfied significant obligations to the customer.
We license Renaissance Imaging(R) check imaging software on an in-house
basis, and we generate revenues from up-front license fees and recurring annual
maintenance fees charged for this system. We recognize revenues from the
licensing of Renaissance Imaging in accordance with Statement of Position 97-2,
as discussed above. We also provide check processing and 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 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 1,500 and 2,500 transactions per month, we charge additional fees for
these transactions. For debit card transactions, we currently 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. During the second quarter of
2002, we will begin implementation of a new debit card pricing structure, under
which we will receive a fee for each transaction processed. Under the new
pricing, we will not receive a portion of the interchange fee for processing
debit card transactions. We believe that this new pricing structure, once fully
implemented, will not materially change our revenues from debit card processing
and that it will materially reduce our exposure to any changes in interchange
fees that may be implemented by Visa and MasterCard. Most charges under our EFT
service agreements are due and paid monthly.
9
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 months ended March 31, 2002, approximately 88% 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.
We offer Internet banking and voice response products through Netzee.
We own approximately 28% of Netzee's outstanding common stock. 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."
We announced, after the close of trading on the Nasdaq Stock Market on
March 19, 2002, a major expansion in our merchant processing operations. We
entered into a definitive agreement to acquire the assets of Internet Billing
Company, Ltd. (iBill), a Ft. Lauderdale-based provider of transaction processing
for Web merchants, and we also signed a binding letter agreement to acquire
Electronic Payment Exchange, Inc. (EPX), a provider of transaction processing
services based in New Castle, Delaware. Effective April 8, 2002, we closed the
iBill transaction. We paid $112.0 million in cash and are obligated to pay
additional quarterly earnout payments for a period of six quarters ending
December 31, 2003. The amount of each earnout payment depends on whether the
acquired business achieves certain financial targets. InterCept used cash on
hand, proceeds from its line of credit with Wachovia Bank, and proceeds from a
CD-secured loan from The Peoples Bank of Winder, Georgia, to fund the purchase
price of iBill.
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 reduce spending quickly 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.
Because of the foregoing factors and other risk factors discussed in
our SEC filings, we believe 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. We face other risks in our
business as described in detail in the section in our 2001 Annual Report on Form
10-K entitled Management's Discussion and Analysis of Financial Condition and
Results of Operations - Disclosure Regarding Forward-Looking Statements.
10
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
March 31,
2002 2001
------ ------
Revenues 100.0% 100.0%
Costs of services 44.6 42.4
Selling, general, and administrative expenses 32.3 33.5
Depreciation and amortization 6.4 9.3
Total operating expenses 83.3 85.2
Operating income 16.7 14.8
Other income, net 3.1 2.7
Income before provision for income taxes, equity in
loss of affiliate and minority interest 19.8 17.5
Provision for income taxes 7.3 (0.9)
Equity in loss of affiliate (3.9) (21.1)
Minority interest 0.0 0.0
Net income (loss) 8.6% (2.7)%
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues. Revenues increased 39.3% to $37.7 million for the three
months ended March 31, 2002 from $27.0 million for the three months ended March
31, 2001. The $10.7 million increase was comprised of (a) a $10.2 million
increase in service fee income, (b) a $288,000 increase in hardware sales, and
(c) a $145,000 increase in data communications management income. 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 46.3% to $16.8 million
for the three months ended March 31, 2002 from $11.5 million for the three
months ended March 31, 2001. The $5.3 million increase was comprised of (a) $5.2
million related to service fee income, (b) $162,000 increase in hardware sales,
offset by (c) a decrease of $75,000 related to data communications management.
The increases are attributable to both internal growth and acquisitions. Gross
margins decreased to 55.5% for the three months ended March 31, 2002 from 57.6%
for the three months ended March 31, 2001. This decrease was primarily a result
of lower margins associated with InterCept Output Solutions (the assets we
acquired from HSI in October of 2001).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 34.5% to $12.2 million for the three months
ended March 31, 2002 from $9.1 million for the three months ended March 31,
2001. The $3.1 million increase was primarily due to personnel added from
acquisitions, additional personnel to support our growth and other miscellaneous
expenses. Selling, general and administrative expenses as a percentage of
revenues decreased to 32.3% for the three months ended March 31, 2002, from
33.5% for the three months ended March 31, 2001.
Depreciation and Amortization. Depreciation and amortization decreased
$94,000 to $2.4 million for the three months ended March 31, 2002 from $2.5
million for the three months ended March 31, 2001. The decrease was primarily
attributable to the reduction of amortization due to the adoption of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," partially offset by additional property, plant and equipment
depreciation.
Other Income, Net. Other income, net increased to $1.2 million for the
three months ended March 31, 2002 from $728,000 for the three months ended March
31, 2001. The $450,000 increase was primarily due to an increase in interest
income and a decrease in interest expense due to the receipt of the proceeds
from our August 2001 common stock offering, which were partially used to pay
down debt.
Provision (benefit) for Income Taxes The effective tax rate for the
three months ended March 31, 2002 was 36.9% as compared to 40.5% for the three
months ended March 31, 2001, excluding $2.2 million of a tax benefit recorded on
the equity in losses of Netzee in 2001. The decrease in the effective rate is
mainly due to state tax planning initiatives implemented in the fourth quarter
of 2001. During the three months ended March 31, 2002, the tax basis of the
investment in Netzee exceeded the book basis. As such, InterCept recorded a
valuation
11
allowance against the tax benefits for the equity method losses in Netzee due to
uncertainty of future realizability of the asset.
Equity in Loss of Affiliate. Equity in loss of affiliate decreased to a
loss of $1.5 million for the three months ended March 31, 2002 from a loss of
$5.7 million for the three months ended March 31, 2001. For the three months
ended March 31, 2002, this amount represents the recording of equity losses to
the extent of the remaining balance of the investment in Netzee. In all prior
quarters, this amount represented our share of Netzee's net loss.
Minority Interest. Minority interest remained constant at a loss of
$7,000 for the three months ended March 31, 2002 and 2001.
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
$107.5 million.
Cash and cash equivalents were $25.0 million at March 31, 2002 and
$24.9 million at December 31, 2001. Short term investments with a maturity of
one year or less were $51.3 million at March 31, 2002 and $50.3 million at
December 31, 2001. Net cash provided by operating activities was $6.8 million
for the three months ended March 31, 2002 and $2.8 million for the three months
ended March 31, 2001. The increase in the net cash provided by operating
activities was primarily attributable to increased net income.
Net cash used in investing activities was $9.7 million for the three
months ended March 31, 2002 and $15.2 million for the three months ended March
31, 2001. The decrease in net cash used in investing activities was primarily
due to the acquisition of SLMsoft.com, Inc. in the first quarter 2001, offset
slightly by the $5.0 million advance payment to an escrow account for the iBill
acquisition completed in April 2002.
Net cash provided by financing activities was $3.0 million for the
three months ended March 31, 2002 and $7.4 million for the three months ended
March 31, 2001. The decrease in net cash provided by financing activities was
primarily due to lower net borrowings.
Together with John H. Harland Company, we provide a revolving line of
credit to Netzee. On March 29, 2002 we amended this facility to reduce the total
amount of credit available and to extend the termination date to April 10, 2003.
Along with Harland, we currently provide to Netzee an $18.0 million revolving
line of credit secured by substantially all of Netzee's assets. Of the total
$18.0 million available to Netzee, we provide approximately $14.0 million and
Harland provides approximately $4.0 million on a pro rata basis with us,
provided that we are obligated to advance the last $1.0 million without
Harland's participation. 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 has subsequently borrowed additional funds from us, and as of March 31,
2002, Netzee owed us a total of $10.5 million under this line of credit.
Borrowings under this line of credit bear interest at prime plus 2%. We finance
this line of credit with cash on hand and additional borrowings under our credit
facility with Wachovia Bank. 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 come due may depend upon
its ability to raise additional capital funds.
On December 3, 2001, we entered into a loan agreement with SLM under
which we agreed to lend SLM $7.0 million subject to various terms and
conditions. Borrowings under the loan agreement bear interest, payable
12
upon maturity, at the prime rate and are secured by up to 591,871 shares of
InterCept common stock that SLM now holds or may earn. The loan matures on
September 30, 2002 and requires mandatory prepayments from the proceeds of sales
of our common stock by SLM until the loan is repaid in full.
During 2001, we entered into an amended and restated credit facility
with Wachovia Bank (formerly First Union National Bank). Under this facility we
may borrow up to $50.0 million for working capital and to fund acquisitions and
related expenses. The Wachovia credit facility contains provisions that require
us to maintain certain financial ratios and minimum net worth amounts and that
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. This credit facility matures on June 1,
2004. 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 0.25% or (b) a fixed rate based upon the
30-day LIBOR rate plus applicable margins. On March 31, 2002, the interest rate
under this facility was approximately 3.13% per year, and approximately $2.2
million was outstanding under this facility.
We funded the cash portion of the purchase price of our acquisitions in
2001 through the use of cash on hand and borrowings under our bank credit
facility.
We have used a substantial portion of the remaining capital resources
available to us to fund the purchase of iBill, and we anticipate using up to an
additional $13.0 million to fund immediate working capital needs of EPX. To
provide the cash needed for these purposes, we have drawn on our bank credit
facility with Wachovia Bank, borrowed additional funds from The Peoples Bank of
Winder secured by certificates of deposit that we own, and plan to use the
remaining net proceeds from our 2001 public offering of common stock.
Because we have exhausted or shortly will exhaust the capital resources
available to us from our 2001 public offering and our bank credit facility, our
operating cash flows will be our principal source of short-term liquidity.
Accordingly, we are unlikely to make any additional acquisitions that require a
material amount of cash until we raise additional capital or extend and enhance
our current borrowing facilities. We believe that to the extent that we rely on
cash flows from operations to meet our short-term funding requirements, a
decrease in demand for our products and services would not result in a material
reduction in the availability of those funds. Because most of our customer
contracts require the payment of monthly charges and have original terms of
three to five years, we have a high percentage of recurring revenues.
We believe that, other than our need for cash to fund our pending EPX
acquisition, funds to be provided by operations 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.
Assuming we are able to raise additional capital, we expect to make additional
expenditures to make acquisitions and integrate the acquired companies. We can
give no assurances with respect to the actual timing and amount of the capital
we raise or of the acquisitions we may make with the capital so raised. In
addition, we can give no assurance that we will complete any acquisitions on
terms favorable to us, if at all, or that additional sources of financing will
be available to us.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. Actual results may differ materially from
these estimates under different assumptions or conditions.
13
We believe the following critical accounting policies involve the most
complex or subjective decisions or assessments and affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
a) Revenue recognition
-------------------
Revenues include service fees, data communication management fees,
equipment sales, installation and maintenance, software license fees and
software maintenance. We recognize service fee income and data communication
management fees as services are performed. We recognize revenue from equipment
sales and installations upon installation of the product, and we recognize any
related maintenance revenue ratably over the period during which the services
are performed. We also generate revenues from the licensing of our core data
processing systems. We recognize revenue for licensing these systems in
accordance with Statement of Position 97-2, "Software Revenue Recognition,"
issued by the American Institute of Certified Public Accountants. We recognize
software license, hardware and installation revenue after we have a signed
non-cancelable license agreement, have installed the products and have fulfilled
all significant obligations to the customer. We recognize maintenance fees over
the term of the maintenance period. We sell some of our software and hardware
products under five-year, sales-type lease agreements under which customers make
annual installment payments. These annual payments include the initial
installation and ongoing license fee. Revenue attributable to installation fees
and the sale of equipment is recognized upon installation. License fees are
deferred and recognized ratably over the period of the lease.
b) Allowance for doubtful accounts
-------------------------------
We record an allowance for doubtful accounts based on estimates of
losses related to customer receivables balances. We develop estimates by
evaluating specific customer accounts for risk of loss as well as historical
credit memo data and other known factors for billing disputes that arise in the
normal course of business.
c) Fair value of assets acquired and liabilities assumed in purchase
-----------------------------------------------------------------
combinations
------------
Our purchase combinations require us to estimate the fair value of the
assets acquired and liabilities assumed in our business. In general, we
determine the fair value based upon information supplied by the management of
the acquired entities and valuations by independent appraisal experts. The
valuations have been based primarily upon future cash flow projections for the
acquired assets, discounted to present value using a risk-adjusted discount
rate. In connection with our acquisitions, we have recorded a significant amount
of intangible assets. These assets are being amortized over the expected
economic lives of the assets, generally ranging from 7 to 20 years. If we
determine that we have over-estimated the economic life of these assets, we will
begin to amortize the remaining unamortized carrying value of the assets over
the newly estimated life. Accordingly, depreciation and amortization expense
could be increased, and the amount of any increase could be material to our
results of operations.
We also recorded a significant amount of goodwill in connection with
our acquisitions. Through the end of 2001, we evaluated goodwill for impairment
whenever indicators of impairment existed based on undiscounted projected future
cash flows. If the carrying value of the goodwill was less than the undiscounted
projected future cash flows, no impairment would be recognized. Beginning
January 1, 2002, we adopted a recently issued accounting standard that requires
us to evaluate our goodwill for impairment on an annual basis or whenever
indicators of impairment exist. The evaluation will be based upon a comparison
of the estimated fair value of the unit of our business to which the goodwill
has been assigned to the sum of the carrying value of the assets and liabilities
of that unit. The fair values used in this evaluation will be estimated based
upon discounted future cash flow projections for the unit. These cash flow
projections will be based on a number of assumptions as discussed above. If a
change in estimate of fair value occurs after one year of the acquisition, the
change would be recorded in our statement of operations.
14
To date, we have not completed our analyis and thus have not recorded
an impairment of our goodwill or intangible assets. We believe that assumptions
we have made in projecting future cash flows for the evaluations described above
are reasonable. However, if future actual results do not meet our expectations,
we may be required to record an impairment charge, the amount of which could be
material to our results of operations.
d) Investment in and Advances to Netzee
------------------------------------
We currently own approximately 28% of Netzee's common stock. We account
for our investment in Netzee using the equity method of accounting, under which
the operations of Netzee are recorded on a single line item in our statements of
operations, "equity in loss of affiliate." We do not consolidate Netzee's
results of operations with our results of operations.
We have reviewed our investment in Netzee in accordance with Accounting
Principles Board ("APB") Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." APB Opinion No. 18 provides that "a loss in value
of an investment which is other than a temporary decline should be recognized."
We compare our carrying value of the investment to the fair market value of the
stock over time in order to determine when a loss in value that is other than
temporary has occurred. For the three months ended March 31, 2002, InterCept
continued to record equity method losses in Netzee, resulting in the reduction
of its investment in common stock of Netzee to zero. The corresponding fair
market value of our shares of Netzee's common stock was approximately $651,000.
We then applied EITF 99-10, "Percentage Used to Determine the Amount of
Equity Method Losses," which addresses the percentage of ownership that an
investor should use to compute equity method losses when the investment in
common stock has been reduced to zero and the investor holds other securities of
the investee such as preferred stock or advances to the investee. Netzee has
$6.5 million preferred stock outstanding, of which InterCept has no ownership
percentage, and an $18 million line of credit in which InterCept holds an
interest of approximately 78%. Under EITF 99-10, we would not record any
additional equity method losses until the preferred stockholders have reduced
their investments to zero. We will then use our relative ownership percentage in
the next most senior level of capital (i.e. line of credit) to record its share
of Netzee's losses. As InterCept owns 0% of the preferred stock, InterCept will
not record additional equity method losses until the preferred stockholder has
absorbed $6.5 million of losses. After that point, InterCept will record equity
method losses based on its 78% interest in the line of credit.
Additionally, we have evaluated the business and financial projections
of Netzee and have concluded, based on our review, that the amounts due from
Netzee are collectible. Therefore, we have not established a reserve for the
note as of March 31, 2002.
April 2002 Acquisition
In April 2002, we closed the transaction to acquire substantially all
of the assets of Internet Billing Company (iBill). Based in Ft. Lauderdale,
Florida, iBill provides secure transaction services that enable Web merchants to
accept and process real-time payments for goods and services purchased over the
Internet. iBill also manages all back-office functions including reporting,
tracking, customer service and sales transactions. We paid $112.0 million in
cash and are obligated to pay additional quarterly earnout payments for a period
of six quarters ending December 31, 2003. We will account for this acquisition
as a purchase.
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 Wachovia credit facility
accrue interest at a fluctuating rate based either upon the lender's prime rate
or LIBOR. As of March 31, 2002, $2.2 million was outstanding under this
facility. Any future borrowings will increase our exposure to interest rate
fluctuations. Changes in interest rates that increase the interest rate on the
credit facility would make it
15
more costly to borrow under that facility and may impede our acquisition and
growth strategies if we determine that the costs associated with borrowing funds
are too high to implement these strategies. Additional loans to Netzee may
increase the amount outstanding under this facility.
We have loaned SLM $7.0 million and we have a $14.0 million line of
credit to Netzee. As of March 31, 2002, $10.5 million was outstanding on the
Netzee line of credit. Changes in interest rates that decrease the interest
rates on these loans will decrease our interest income.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described in this paragraph, we are not a party to, and
none of our material properties is subject to, any material litigation other
than routine litigation incidental to our business.
On March 15, 2002, we brought an action against Midwest Payment
Systems, Inc. ("MPS") in the U.S. District Court in the Eastern District of
Tennessee seeking a declaration as to the rights and legal relations of
InterCept, MPS and the customer banks under the contracts that we and the banks
have with MPS and asserting a claim for tortious interference with contractual
relations. MPS has not answered our complaint. On April 3, 2002, InterCept and
MPS agreed to a consent order pursuant to which MPS agreed to continue to
provide services on a month to month basis so that InterCept can continue to
service its customers who use MPS for ATM/EFT services. Both InterCept and MPS
agreed not to solicit the ATM/EFT business of the customer banks until final
resolution of the lawsuit, and both companies agreed to limited communications
with the customers regarding the lawsuit.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended March 31, 2002, we opened an escrow account
for the iBill acquisition. We used $5.0 million to open this escrow.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In April 2002, InterCept acquired Internet Billing Company, Ltd. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit
No. Description
------ -----------
2.1 Asset Purchase Agreement dated March 19, 2002, by and among InterCept,
Inc.; InterCept Billing Company, LLC; Internet Billing Company, Ltd.;
iBill California, LLC; (incorporated by reference to InterCept's
Current Report on Form 8-K dated April 9, 2002 and filed April 23,
2002).
16
10.1 Amendment No. 1 to Amended and Restated Credit Agreement, dated
March 29, 2002, by and among Netzee, Inc., InterCept, Inc. and John H.
Harland Company (incorporated by reference Exhibit 10.12.4 to Netzee's
Annual Report on Form 10-K for the year ended December 31, 2001 filed
April 1, 2002).
(b) Reports on Form 8-K filed during the three months ended March 31, 2002
Form 8-K dated February 25, 2002, filed on March 4, 2002, reporting
under Item 5 the corporate name change from The InterCept Group, Inc.
to InterCept, Inc.
Form 8-K dated March 19, 2002, filed on March 22, 2002, reporting under
Item 5 the press release announcing a major expansion of our merchant
processing division.
17
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.
INTERCEPT, INC.
May 14, 2002 /s/ John W. Collins
------------ ---------------------------------------------
Date John W. Collins
Chairman of the Board, President and Chief
Executive Officer
(principal executive officer)
May 14, 2002 /s/ Scott R. Meyerhoff
------------ ---------------------------------------------
Date Scott R. Meyerhoff
Chief Financial Officer
(principal financial and accounting officer)