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SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001MARCH 31, 2002
Commission file number 1-9330
INTELLIGENT SYSTEMS CORPORATION
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(Exact name of Registrant as specified in its charter)
GEORGIA 58-1964787
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
of incorporation or organization) Identification No.)
4355 SHACKLEFORD ROAD, NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 381-2900
Indicate by a 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][X] No [ ]
As of September 30, 2001,March 31, 2002, 4,495,530 shares of Common Stock were
outstanding.
===============================================================================THIS FORM 10-Q INCLUDES UN-REVIEWED FINANCIAL STATEMENTS IN LIEU OF REVIEWED
FINANCIAL STATEMENTS BECAUSE THE REGISTRANT ELECTED NOT TO HAVE ARTHUR ANDERSEN
LLP CONDUCT A REVIEW OF THE FINANCIAL STATEMENTS. REFER TO ITEM 1 AND NOTE 1 IN
THIS FORM 10-Q.
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ITEM 1. FINANCIAL STATEMENTS
REFER TO NOTE 1 ON PAGE 5 REGARDING THE FACT THAT THE FINANCIAL
STATEMENTS PRESENTED HAVE NOT BEEN REVIEWED BY AN INDEPENDENT AUDITOR.
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2002 2001
2000
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ASSETS (Unaudited) (Audited)
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ASSETS
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Current assets:
Cash $ 14,01210,172 $ 59412,026
Accounts receivable, net 2,158 1,253
Affiliate notes1,909 2,297
Notes and interest receivable 1,500 4,088
Other notes and interest receivable 352 --1,467 424
Inventories 695 475513 547
Other current assets 481 268286 353
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Total current assets 19,198 6,67814,347 15,647
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Long-term investments 7,340 10,504
Long-term notes receivable 7 3786,021 7,476
Property and equipment, at cost less accumulated depreciation 680 482
Goodwill 2,359 --1,098 664
Intangibles, net 3,261 2,271
Other assets, net 52 1521 31
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Total assets $ 29,63624,748 $ 18,057
===================================================================================================================================26,089
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Short-term borrowingsNotes payable $ 1,415 $ --
$ 1,504
Accounts payable 1,036 357
Accrued payroll 925 2411,186 1,013
Deferred revenue 1,292 1,536
Deferred gain 489 1,328
Accrued expenses and other current liabilities 1,827 1,2811,645 1,564
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Total current liabilities 3,788 3,3836,027 5,441
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Deferred gain 2,105 --------------------------------------------------------------------------------------------------------------------------
Deferred revenue, 562 --
Billings in excessnet of cost 3,368 --current portion 3,182 2,596
Other long-term liabilities 333 --68 80
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Total long-termlong term liabilities 6,368 --3,250 2,676
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Redeemable preferred stock of VISaer 57 --subsidiary 171 114
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 4,495,530
issued and
5,623,874 outstanding at September 30, 2001March 31, 2002 and December 31, 2000, respectively 44 562001 45 45
Paid-in capital 18,438 24,21618,438
Accumulated other comprehensive loss (684) (215)(792) (355)
Accumulated earnings (deficit) 1,625 (9,383)deficit (2,391) (270)
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Total stockholders' equity 19,423 14,67415,300 17,858
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Total liabilities and stockholders' equity $ 29,63624,748 $ 18,057
===================================================================================================================================26,089
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The accompanying notes are an integral part of these consolidated balance
sheets.
Page 2
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2002 2001
2000 2001 2000
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Net salesRevenue
Products $ 2,2571,352 $ 1,630 $ 5,469 $ 5,624
Expenses:1,262
Services 816 432
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Total revenue 2,168 1,694
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Cost of sales
1,218 638 2,492 2,300Products 649 614
Services 527 71
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Total cost of sales 1,176 685
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Gross profit 992 1,009
Expenses
Marketing 621 253 1,301 684587 325
General & administrative 7,220 756 8,805 2,5061,236 664
Research & development 1,548 258 2,043 6682,786 254
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Loss from operations (8,350) (275) (9,172) (534)(3,617) (234)
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Other income:income, net
Interest income (expense), net 167 55 891 14124 437
Investment income, net 305 826 19,948 9,675797 845
Equity losses in affiliatedof affiliate companies (69) (247) (558) (727)(66) (306)
Other income, net 278 2 286 63751 7
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Income (loss) before income tax provision and minority interest (7,669) 361 11,395 8,618(2,111) 749
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Income tax provision 3 213 387 21311 --
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Income (loss) before minority interest (7,672) 148 11,008 8,405
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Minority interest -- 3 -- 8
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Net income (loss) $ (7,672)(2,122) $ 145 $ 11,008 $ 8,397
==============================================================================================================================749
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Basic net income (loss) per share ($ 1.63) $ 0.03(0.47) $ 2.07 $ 1.500.13
Diluted net income (loss) per share ($ 1.63) $ 0.03(0.47) $ 2.07 $ 1.49
==============================================================================================================================0.13
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Basic weighted average shares outstanding 4,693,491 5,582,259 5,312,707 5,608,8984,495,530 5,623,784
Diluted weighted average shares outstanding 4,693,491 5,608,529 5,315,934 5,618,895
==============================================================================================================================4,495,530 5,627,450
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The accompanying notes are an integral part of these consolidated statements.
Page 3
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited, in thousands)
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31,
CASH PROVIDED BY (USED FOR): 2002 2001
2000
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OPERATIONS:
Net income (loss) $ 11,008(2,122) $ 8,397749
Adjustments to reconcile net income (loss) to net cash used forprovided by
(used for) operating activities, net of effects of acquisitions and
dispositions:
Depreciation and amortization 249 80
Write-down of goodwill 6,003 --
In-process research & development charge 425 --
Gain from sale of assets (19,929) (9,675)220 53
Investment income, net (1,047) (845)
Equity in net loss of affiliates 558 726affiliate companies 66 306
Changes in operating assets and liabilities:liabilities, net of
effects of acquisition
Accounts receivable 107 259388 (38)
Inventories (221) (266)34 (100)
Other current assets (61) (105)177 95
Accounts payable (142) (32)172 (12)
Accrued expenses and other current liabilities 2,018 (10)(304) (108)
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Cash provided by (used for) continuing operations 15 (626)
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INVESTING ACTIVITIES:
Proceeds from salesales of investments 20,525 10,1501,666 904
Acquisition of company, net of cash acquired 8139 --
Acquisitions of long-term investments (1,306) (3,154)
Increase in minority interest -- 7(725)
Repayments ofunder notes and interest receivable 5,044 37914 12
Advances under notes and interest receivable (3,466) (2,514)
Dispositions (purchases)(1,057) (689)
Purchases of property and equipment, net (172) 13(105) (24)
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Cash provided by (used for) investing activities 20,706 4,881
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FINANCING ACTIVITIES:
RepaymentsBorrowings under short-term borrowing arrangements (1,504) (600)
Payment of dividend to stockholders -- (2,956)
Purchase and retirement of stock (5,789) 46210
Foreign currency translation adjustment (10)5 --
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Cash used forprovided by financing activities (7,303) (3,510)
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Net increasedecrease in cash 13,418 745(1,854) (212)
Cash at beginning of period 12,026 594 737
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Cash at end of period $ 14,01210,172 $ 1,482
===================================================================================================================================382
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The accompanying notes are an integral part of these consolidated statements.
Page 4
INTELLIGENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements Not Reviewed - The financial statements have not
been reviewed by the company's independent auditor because the company
elected not to have Arthur Andersen LLP conduct a review of the
financial statements. The financial statements will be reviewed in the
second quarter of 2002 by the new independent auditor that will be
selected in June 2002. No auditor has opined that the unaudited and
unreviewed statements present fairly, in all material respects, the
financial position, the results of operations or cash flows of the
company for the periods reported in accordance with generally accepted
accounting principles.
2. Throughout this report, the terms "we", "us", "ours", "ISC" and
"company" refer to Intelligent Systems Corporation, including its
subsidiaries.
2.3. The unaudited consolidated financial statements presented in this Form
10-Q have been prepared in accordance with accounting principles
generally accepted in the United States applicable to interim
financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In
the opinion of ISC management, these consolidated financial statements
contain all adjustments (which comprise only normal and recurring
accruals) necessary to present fairly the financial position as of
September 30,
2001March 31, 2002 and 2000.2001. The interim results for the ninethree months
ended September
30, 2001March 31, 2002 are not necessarily indicative of the results to
be expected for the full year. These statements should be read in
conjunction with our combined financial statements and notes thereto
for the fiscal year ended December 31, 2000,2001, as filed in our annual
report on Form 10-K.
3.4. Comprehensive Income - In accordance with Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive
Income", comprehensive income is the total of net income and all other
non-owner changes in equity in a period. A summary follows:
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------------March 31,
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2002 2001
2000 2001 2000
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Net income (loss) $(7,672) $145 $11,008 $8,397$(2,122) $ 749
Other comprehensive income (loss):
Foreign currency translation adjustment (10) -- --5 --
Unrealized gain (loss) (763) 1,006 (459) (898)
----------------------------------------------------------------------------------------------------------------------(439) 420
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Comprehensive income (loss) $(8,445) $1,151 $10,549 $7,499
======================================================================================================================$(2,556) $1,169
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4.5. Acquisition of Controlling Interest in Delos Payment Systems, Inc.
("Delos") - In 2001, we loaned $1.5 million to Delos Payment Systems,
Inc. ("Delos"), an affiliate company accounted for under the equity
method. We acquired our 27 percent interest in Delos as a result of
the spin-off of Delos to the shareholders of PaySys prior to its sale
in April 2001. The carrying value of the loan on our balance sheet at
December 31, 2001 was $80,000 due to recording our pro rata share of
Delos losses during 2001 under equity accounting. As a result of the
loan default in January 2002, we acquired control of the Delos board
of directors and began to consolidate the Delos operations in 2002. We
are providing additional borrowings of $1.5 million to Delos under the
loan. The loan eliminates in consolidation. As a result of
consolidating Delos, we recorded intangible assets upon consolidation
in the first quarter of 2002 in accordance with SFAS 141. Of the
intangibles acquired, $642,000 was allocated to our pro rate share of
acquired software which will be amortized over a five-year period and
$289,000 was recorded as goodwill.
Page 5
6. Sale of Interest in Risk Laboratories, LLC ("Risk") - On January 18,
2001,March 14,
2002, we sold 214,273 common units ofour remaining interest in Risk, a former affiliate
company, to American Home Assurance Company ("AHAC") for a total of
$900,000$474,000 cash. We recorded a gain of $893,000$474,000 based on a cost basis of
$7,000,$0, which is included in investment income in the accompanying
statement of operations for the ninethree months ended September 30, 2001. AtMarch 31, 2002.
7. Sale of Interest in Atherogenics, Inc. ("Atherogenics") - During the
same
time,quarter ended March 31, 2002, we acquired 107,137sold on various dates and at various
prices averaging $6.69 per share, 178,350 shares of common units from Risk forstock of
Atherogenics [NASDAQ: AGIX], a company in which we were an early
investor. We received a total acquisition price of $450,000. Concurrent with$1.2 million cash and recorded a gain
of $573,000 on the purchase of these
units, we recaptured $450,000sale transactions, which is included in losses related to our pro rata share
of cumulative unrecorded losses. This loss is recorded in equity loss
in affiliatesinvestment
income in the accompanying consolidated statement of operations for the ninethree
months ended September 30, 2001. On May 3, 2001, we sold
an additional 257,127 common units of Risk to AHAC pursuant to a "put"
option we held. AHAC paid us $1,029,000 in cash for the units, on which
we recorded a second quarter gain of $1,029,000 on a cost basis of
zero. At September 30, 2001, we retain 259,253 common units,
representing approximately 2.7% of Risk.
5. Sale of Interest in PaySys International, Inc. ("PaySys") - On April
27, 2001, we sold our ownership interest in PaySys, an affiliate
company, to First Data Corporation. In exchange for the sale of our
3,606,382 shares of PaySys common stock, we received cash proceeds of
$17,770,000
Page 5
and recorded a pretax gain of $17,770,000 in the second quarter of
2001. In addition, PaySys repaid $4,329,000 in principal and interest
related to short-term bridge loans. Immediately prior to the sale to
First Data Corporation, PaySys spun off two subsidiaries to its
shareholders. Accordingly, we own approximatelyMarch 31, percent of each of
Delos Payment Systems, Inc. and dbbAPPS, Inc., both development stage
companies that will continue to develop and market a proprietary
software operating platform and application software that has been
under development by PaySys. We did not record a gain on the
distribution to us of an interest in these two companies. Rather, due
to uncertainty regarding the two early stage companies, we booked a
valuation reserve equal to the net asset value and goodwill associated
with our pro rata share of the value of our interest in Delos Payment
Systems and dbbAPPS and therefore these assets are carried at zero on
our balance sheet. In addition, an escrow fund totaling $20 million was
set aside for potential liabilities that may arise after the closing of
the sale. The balance of the fund, after payment of any and all claims,
will be distributed pro rata to PaySys shareholders, including us, as
additional sale proceeds at various time periods over the next four
years.
6. Self-Tender Offer and Share Repurchases - On June 1, 2001, we initiated
a self-tender offer to acquire one million shares of our outstanding
common stock at a cash price of $5.25 per share. The offer expired on
July 12, 2001, with 3,904,086 shares tendered. On July 17, 2001, we
paid $5,250,000 to acquire one million shares (7,034 odd lot shares and
25.48076% of the remaining shares tendered). We also repurchased an
additional 125,688 shares at an average price of $4.20 per share during
the third quarter. All shares acquired were retired.
7. Acquisition of VISaer, Inc. - As of June 30, 2001, we owned 40% of
VISaer, Inc. ("VISaer") and accounted for our investment under the
equity method of accounting. At June 30, 2001, we had a carrying value
of $2,860,000 in long-term investments and $1,681,000 in principal and
interest outstanding under affiliate notes receivable from VISaer.
Effective July 1, 2001, in an unplanned restructuring transaction
involving all preferred shareholders of VISaer, we converted $956,000
of our VISaer note receivable into a new series of preferred stock of
VISaer. In addition, VISaer repaid the balance of $725,000 owed to us
shortly after the restructuring was completed. Following the
transaction, we own approximately 65% of the equity of VISaer. VISaer,
a software company that designs and sells software that automates the
maintenance, repair and overhaul (MRO) operations of airlines, is the
successor company of Visibility, Inc., an enterprise resource planning
(ERP) company whose operations were spun off a year ago in July 2000 in
order to allow VISaer to concentrate on the higher growth aerospace MRO
market.
The debt to equity conversion in July resulted in ISC taking control of
VISaer. Our ownership of VISaer increased from 40% to 65%, and we
account for the transaction as a "step" acquisition. For financial
reporting periods after July 1, 2001, we account for VISaer under the
consolidation method, compared to the equity method of accounting used
to account for VISaer prior to July 1, 2001. The required accounting
treatment for the "step" acquisition and related purchase accounting of
VISaer had the result of immediately creating $8,806,000 in intangible
assets for financial reporting purposes. In accordance with Statement
of Financial Accounting Standards No. 141, "Accounting for Business
Combinations" (SFAS 141) and Statement of Financial Accounting
Standards No. 142, "Accounting for Intangible Assets", based on third
party valuations, we identified and valued the following intangible
assets: existing software technology ($2,000,000), in-process research
and development ($1,700,000) and a favorable lease contract ($200,000).
At the time of the acquisition we recorded 25% of such amounts to
reflect the amount associated with our acquisition of an additional 25%
"step" of VISaer. The recorded amount for existing software technology
($500,000) is being amortized over its estimated useful life of three
years and the recorded amount for the favorable lease contract
($50,000) is being amortized over the remaining term of the lease
(through July 2004). We immediately expensed $425,000 (representing
4.8% of the $8,806,000 of total intangibles) related to purchased
research and
Page 6
development projects that had not reached technological feasibility and
that did not have an alternative future use. This amount is included in
research and development expense for the third quarter. The remaining
excess intangible value in the amount of $7,831,000 was booked as
goodwill at July 1, 2001.2002.
8. Write-down of Goodwill - At September 30, 2001, as a result of the
terrorist attacks on September 11, 2001 which have directly impacted
the aerospace industry into which VISaer sells its software products,
we evaluated the extent to which the reporting unit of VISaer might be
impaired. Among the factors considered were deferrals and reduced value
of anticipated contracts, reduced spending and financial resources of
the airline industry, increased working capital requirements to get to
breakeven, general economic conditions, reduced spending on IT
products, and a significant increase in the general uncertainty
regarding the airline industry. An analysis by a third party based on
an undiscounted cash flow model determined that under SFAS 121, the
long lived assets associated with VISaer were impaired. Based upon a
fair value appraisal by a third party valuation firm, we assessed the
total value of VISaer at September 30, 2001 to be $3.7 million. Based
on our 65% ownership, the value of our ownership was $2.4 million. We
expensed $6,003,000 related to the goodwill, reducing the carrying
value of the residual goodwill to $1,855,000 at September 30, 2001
(exclusive of the $550,000 of identifiable intangible explained in Note
7). The one-time charge is included in general and administrative
expense for the third quarter.
9. Sale of HeadHunter.com Common Stock - In the third quarter ended
September 30, 2001, we sold 90,228 shares of common stock (representing
all of our interest) of HeadHunter.com [NASDAQ:HHNT]. We originally
acquired the shares in exchange for our holdings in privately held
MiracleWorker.com in August 2000. We received $821,000 cash and
recognized a gain of $471,000 on an original cost basis of $350,000.
10. New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards BoardAugust 2001, FASB issued Statement of Financial Accounting Standard
("SFAS")SFAS No.
133,144 "Accounting for Derivative Instruments and Hedging
Activities"the Impairment of Long-Lived Assets". This Statement establishedSFAS No. 144
addresses financial accounting and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, collectively referred to as
derivatives,the impairment or
disposal of long-lived assets. This Statement is effective for
financial statements issued for fiscal years beginning after December
15, 2001 and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measureinterim periods within those instruments at fair
value. The Company adopted the new statement on January 1, 2001.years. The adoption of this StatementSFAS
No. 144 did not have a significant impact on the
Company'sour financial statements.
In September 2000,9. Industry Segments - Our consolidated subsidiaries are involved in two
industry segments: information technology products and services, and
industrial products. Operations in information technology products and
services include development and sales of software licenses and
related professional services and software maintenance contracts.
Operations in the Financial Accounting Standards Board issued
Statementindustrial product segment include the manufacture
and sale of Financial Accounting Standard No. 140, "Accountingbio-remediating parts washers by our ChemFree subsidiary.
Total revenue by industry segment includes sales to unaffiliated
customers. Sales between our industry segments are not material.
Operating profit (loss) is total revenue less operating expenses. None
of the corporate overhead expense is allocated to the individual
industry segments. Identifiable assets by industry segment are those
assets that are used in our subsidiaries in each industry segment.
Corporate assets are principally cash, notes receivable and
investments. The table following contains segment information for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement No. 125." This Statement
revises the
standards for accounting for securitizations and other
transfers of financial assets and collateral. This statement is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring afterquarters ended March 31, 2001. The
adoption of this Statement did not have a significant impact on the
Company's financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 141, "Business Combinations." This
Statement requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 and eliminates
the pooling-of-interests method. See Note 7 for the impact related to
the acquisition of VISaer, Inc. Also in July 2001, the Financial
Accounting Standards Board issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This Statement requires that goodwill and certain
intangible assets, including those recorded in past business
combinations, no longer be amortized to earnings, but
Page 7
instead be tested for impairment at least annually. SFAS No. 142 will
become effective for fiscal years beginning after December 15, 2001.
The Company is required to adopt SFAS No. 142 on January 1, 2002 and is
currently evaluating the overall impact2001.
Quarter ended March 31,
- --------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------
Information Technology
Revenue $ 1,024 $ 445
Operating Income (loss) (3,241) 49
Industrial Products
Revenue 1,144 1,249
Operating Income (loss) (19) 127
Consolidated Segments
Revenue $ 2,168 $ 1,694
Operating Income (loss) (3,260) 176
Page 6
A reconciliation of SFAS No. 142 on its
financial statements. For acquisitions completed after June 30, 2001,
the Statement requires that goodwill not be amortizedconsolidated segment data above to earnings
beginning immediately. Related to the acquisition of VISaer, Inc. (Note
8) the Company generated $1,855,000 of goodwill, after related charges,
of which no amortization expense is reflected in the statement of
operations.consolidated income
(loss) and assets follows:
- ----------------------------------------------------------------------------------
Quarter ended March 31
(in thousands) 2002 2001
- ----------------------------------------------------------------------------------
Consolidated segments operating income (loss) $(3,260) $ 176
Corporate expenses (357) (410)
- ----------------------------------------------------------------------------------
Consolidated operating loss (3,617) (234)
Interest income 24 437
Investment income 797 845
Equity of affiliates (66) (306)
Other income 751 7
- ----------------------------------------------------------------------------------
Income (loss) before taxes (2,111) 749
- ----------------------------------------------------------------------------------
Income tax provision 11 --
- ----------------------------------------------------------------------------------
Net income (loss) $(2,122) $ 749
==================================================================================
March 31, December 31,
2002 2001
- -------------------------------------------------------------------------------------------
Identifiable Assets
Information Technology $ 5,406 $ 4,792
Industrial Products 1,614 1,730
- -------------------------------------------------------------------------------------------
Consolidated segments identifiable assets 7,020 6,522
Corporate 17,728 19,567
- --------------------------------------------------------------------------------------------
Consolidated assets $24,748 $26,089
============================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
In addition to historical information, this Form 10-Q may contain
forward-looking statements relating to Intelligent Systems Corporation
(ISC). All statements, trend analysis and other information contained in
the following discussion relative to markets for our products and trends
in revenue, gross margins and anticipated expense levels, as well as
other statements including works such as "anticipate", "believe",
"plan", "estimate", "expect", and "intend", and other similar
expressions constitute forward-looking statements. Prospective investors
are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those contemplated by
such forward-looking statements. Among the important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements are delays in product development, undetected
software errors, competitive pressures, technical difficulties, market
acceptance, availability of technical personnel, changes in customer
requirements, changes in financial markets, performance and financial
condition of affiliate companies, and general economic conditions. ISC
undertakes no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events
or changes in future operating results.
RESULTS OF OPERATIONS
SummaryThe following discussion should be read in conjunction with the consolidated
financial statements and the notes to the consolidated financial statements
presented in this Form 10-Q.
Overview - Our consolidated operating subsidiaries during 2002 operate in 2001two industry
segments: Information Technology and Industrial Products. Included in the
Information Technology sector are QS Technologies, Inc. (software for health and
human services), VISaer, Inc. (software for maintenance, repair and overhaul
operations in the aerospace industry) and Delos Payment Systems, Inc. (a
development stage company developing software for the credit card processing
market). The Industrial Products segment includes ChemFree Corporation
(bio-remediating parts washers and fluids), QS Technologies, Inc.
(public health software) and, since July 1, 2001, VISaer, Inc. (softwarewashers).
Page 7
Revenue in the first quarter of 2002 was $2,168,000, an increase of 28 percent
compared to the same period in 2001. Our net loss from operations in the first
quarter of 2002 was $3,617,000 compared to a net loss of $234,000 in the first
quarter of 2001. In the current quarter, we recognized a total of $1,506,000 in
other income that offset in part the loss from operations, resulting in a
consolidated net loss for the aerospace maintenance, repair and overhaul industry). Inquarter of $2,122,000 compared to net income of
$749,000 in the same periodsfirst quarter of 2001.
The results of the first quarter of 2002 are not directly comparable to those of
last year because we also consolidatedconsolidate the results of operations of two companies,
VISaer and Delos Payment Systems, in 2002 that were not consolidated in the
first quarter of 2001. An explanation of the transactions by which we acquired a
controlling interest in each of these companies is explained in more detail in
Notes 2 and 20 of our PsyCare subsidiary (health care
services) priorconsolidated financial statements for the fiscal year
ended December 31, 2001 as filed in our annual report on Form 10-K for 2001.
Both of the new subsidiaries are generating operating losses related to
significant research and development expense to complete new software products.
In the salecase of VISaer, the company is deriving software license fees and support
revenue for its current software products but revenue from the new web-native
product is being deferred until the software is delivered in 2003. In the case
of Delos, the company expects to complete the first marketable version of its
operationssoftware in November 2000.
In the third quarter of 2002 but does not expect to generate revenue
until late 2002 or early 2003. As a result, operating losses are expected to
continue through 2002.
Sales - Total revenue in the first quarter of 2002 was $2,168,000, an increase
of 28 percent compared to revenue of $1,694,000 in the same period last year.
Revenue from products, which includes sales of equipment in our Industrial
Products segment as well as software license fees related to the Information
Technology segment, increased 7 percent period-to-period whereas revenue from
services billed by the Information Technology segment increased 89 percent
period-to-period. The growth in both product and service revenue reflects the
benefit of the 2001 acquisition of VISaer and its contribution to the revenue
generated by our Information Technology segment. The Industrial Product segment
revenue was down 8 percent compared to the first quarter last year, mainly
reflecting lower volume of product sales to customers in Europe. At the end of
March 2002, VISaer has accrued $3,182,000 in deferred revenue related to a
contract with United Parcel Services (UPS) to license its new software product.
UPS has advanced $3,500,000 cash to offset some of the development expenses but
all revenue related to this contract is being deferred under the completed
contracts accounting rules until the software is complete in 2003.
Cost of Sales - In the three months ended March 31, 2002, gross profit was 45.8
percent of revenue, compared to 59 percent in the same period last year. Cost of
service sales (all of which relates to the Information Technology segment)
increased in the first quarter of 2002 compared to last year we recorded significant losses,mainly due to the
inclusion of VISaer costs in 2002 but not in 2001. VISaer professional services
have a higher labor component and cost than do services provided by QS
Technologies and, in the first quarter of 2002, VISaer had some underutilization
of professional service employees due to delays in planned contract
implementations. Cost of product sales was unchanged at approximately 48 percent
of revenue in the first quarters of both 2002 and 2001.
Operating Expenses - In the first quarter of 2002, operating expenses were
higher than in the comparable period last year in large part due to the
acquisitioninclusion of expenses of the VISaer and Delos Payment Systems subsidiaries this
year. Overall, expenses related to QS Technologies, ChemFree and corporate
activities were essentially the same in the first period of 2002 and 2001.
Marketing expenses were up 80 percent period-to-period, reflecting mainly higher
expenses in the Information Technology segment due to the inclusion of VISaer
expenses in 2002 as detailedwell as some minor increase at the QS Technologies
subsidiary. Consolidated general and administrative expenses increased 87
percent in Notes 7the first period of 2002 compared to the first period last year. This
increase reflects the inclusion of expenses related to VISaer and Delos Payment
Systems in 2002 but not in 2001. In addition, we had higher depreciation and
amortization expense in 2002, reflecting amortization of intangible assets
acquired in the VISaer and Delos transactions. Research and development expense
in the first period of 2002 was $2,531,000 higher than for the first period last
year. The significant increase is related to major new product development
initiatives in the Information Technology segment. VISaer and Delos had combined
R&D expenses of approximately $2.5 million in the first quarter of 2002 and we
expect this level of expense to continue for most of 2002.
Interest Income - In the first quarter this year, we recorded $24,000 in
interest income compared to interest income of $437,000 in the first quarter of
2001. The change compared to 2001 is mainly
Page 8
above which
resulted
because we earned significant interest in non-recurring, no-cash charges totaling $6,428,000. VISaer, as an
early stage company, also incurs operating lossesthe first quarter of last year on a
short-term, high-interest $3.5 million note receivable of our PaySys affiliate,
prior to the sale of PaySys in April 2001. In 2002, we are earning much lower
interest income on our cash balances due to significant new
software product development activitieslower bank interest rates, we have
a lower level and delayed recognitioninterest rate for notes receivable and Delos is accruing
interest expense on a loan from a minority shareholder.
Investment Income - In the first quarter of revenue under
applicable accounting standards. In addition, both ChemFree and VISaer have seen
some negative impact related2002, we earned $797,000 net
investment income compared to net investment income of $845,000 in the
terrorist attackscomparable period last year. This year, we recognized gains of September 11th, with
lower revenue levels in September than anticipated and some delay or deferral of
anticipated contracts. The impact on VISaer (which sells its software products
and services to airlines) is likely to be of longer duration than for ChemFree.
Year-to-date net income for 2001 includes a gain of $17,770,000$573,000 on the
sale of 178,350 publicly traded shares of Atherogenics stock; $474,000 on the
private sale of our remaining interest in a former affiliate company, PaySys International, Inc. as describedRisk Labs;
and a reserve of $250,000 to write down the carrying value of our minority
interest in Note 5 above, which was offseta privately held early stage software company. By comparison, in part by the
thirdfirst quarter non-recurring
charges related to the VISaer acquisition. In the year-to-date period last year,of 2001, we recognized a gain of $8,622,000$893,000 on the private sale of
part of our interest in affiliate company, Risk Laboratories, in March 2000, which contributed to net
incomeLabs, offset by a loss of $8,396,000 million for the first nine months of 2000.
Sales - In 2001, we generate revenue from domestic and international sales of
parts washers and related chemicals at the ChemFree subsidiary, from domestic
sales of software licenses and maintenance agreements at the QS Technologies
subsidiary and, since July 1, 2001, from domestic and international sales of
software licenses, maintenance agreements and professional services at the
VISaer subsidiary. For the three month period ended September 30, 2001, net
sales were $2,257,000, an increase of 38 percent compared to the third quarter
in 2000. For the nine months ended September 30, 2001, revenue was $5,469,000,$50,000 loss on a
decline of three percent compared to the same period last year. The major factor
contributing to increased revenue for the three month period this year is the
inclusion of revenue of the VISaer subsidiary since July 1, 2001. In addition to
the revenue recognized by VISaer during the quarter, the company also has $3.9
million in deferred revenue and billings in excess of cost which will be
recognized in future periods on either a percentage of completion or completed
contracts basis. Revenue related to ChemFree's operations was down slightly in
the third quarter (attributable to a slowdown after the terrorist attacks in
September) and up approximately 4 percent for the year-to-date periods in 2001
compared to the same periods in 2000. Sales of new software licenses at QS
Technologies declined in both the three and nine month periods this year
compared to last year although maintenance revenue was relatively consistent
year-to-year. Another factor impacting the period-to-period comparisons is the
fact that last year's results include revenue of
Page 8
$211,000 and $891,000 for the three and nine months, respectively, related to
our PsyCare operations prior to its sale last year.
Cost of sales - Cost of sales as a percentage of revenue was 54% and 46% in the
three and nine month periods this year compared to 39% and 41% in the comparable
periods last year. The acquisition of VISaer this year and the sale of PsyCare
last year make direct comparisons of the consolidated cost of sales misleading.
ChemFree's cost of sales consistently represented approximately 55 percent of
revenue for the year-to-date period this year and both quarter and year-to-date
periods last year. However, it was higher in the third quarter this year due to
higher transportation costs and a reconciliation of demonstration inventory.
VISaer's cost of sales in the third quarter was higher as a percentage of
revenue than its historical levels because the revenue mix was skewed toward
services rather than new license fees. Cost of sales in 2000 includes costs of
delivering the health care services associated with the PsyCare subsidiary prior
to its sale in November 2000.
Operating Expenses - Marketing expenses increased in both absolute dollars and
as a percentage of revenue in the three and nine month periods of 2001 compared
to the same periods last year. The difference is attributable in part to the
inclusion of the marketing expenses of the VISaer subsidiary. In addition, there
were greater expenditures at the ChemFree operation for sales personnel, travel,
and trade show programs that are intended to attract new customers and to
support its established customer base. General and administrative expenses were
higher in the third quarter and nine month period for 2001 compared to the same
periods last year. The difference is largely attributable to a non-recurring
charge in the third quarter of $6,003,000 for impairment of goodwill associated
with VISaer (refer to Note 8). In addition, third quarter expenses were higher
than the comparable period last year due to the inclusion of VISaer operating
expenses this year and increased legal and accounting expenses at the corporate
level. Included in the nine month expenses for 2001 is non-recurring bonus
expense of $187,000 related to the successful completion of the PaySys
transaction. By comparison, in the nine month period ended June 30, 2000, there
is non-recurring bonus expense of $150,000 related to the successful completion
of the sale of the majority of the company'sminority interest in Risk Labs. Research and
development expense increased in the three and nine month periods of 2001
compared to the same periods in 2000. Part of the increase is due to a non-recurring charge of $425,000 for purchased research and development projects
of VISaer that had not reached technological feasibility and that did not have
an alternative future use (refer to Note 7) and the inclusion of other VISaer
R&D expenses since July 1, 2001 as well. A small part of the increase in the
year-to-date numbers is related to more aggressive new product development
activities at the QS Technologies subsidiary.
Interest Income - We had net interest income of $167,000 and $891,000 in the
third quarter and year-to-date periods, respectively, in 2001. This compares
with net interest income of $55,000 and $141,000, respectively, for the same
periods in 2000. During the three and nine month periods this year, we earned
interest on a higher level of notes receivables (through April 2001) and cash
balances (since April 2001), compared to the same periods in 2000. The interest
earned year-to-date 2001 includes $829,000 related to the short-term bridge loan
to PaySys which was repaid in late April. Since then, most of the interest
earned is related to bank deposits.
Investment Income - In the three and nine month periods ended September 30,
2001, we recorded investment income of $305,000 and $19,948,000, respectively.
The main component of investment income in the third quarter is a gain of
$471,000 related to the sale of HeadHunter stock (refer to Note 9) offset by
reserves totaling $185,000 to write off two small software investments.
Year-to-date investment income also includes a second quarter gain of
$17,770,000 on the PaySys transaction (refer to Note 5), and gains of $893,000
and $1,029,000 in the first and second quarters of 2001, respectively, on sales
related to Risk Labs (refer to Note 4). By comparison, in the nine month period
ended September 30, 2000, we realized investment income of $9,675,000,
consisting mainly of $8,622,000 realized on the sale of equity units in Risk
Labs in a private transaction in March 2000.
Page 9
privately held start-up technology company.
Equity Losses inof Affiliates - On a quarterly basis, we recognize our pro rata
share of the earnings or losses of several affiliate companies that we record on the
equity method. These companies are typically early stage companies that typically incur
losses during their development and early revenue stages. For the three
and nine month periods ended September 30, 2001, weWe recorded equity losses
totaling $69,000 and $558,000, respectively. For the comparable periods in 2000,
we recorded equity losses$66,000 of
$247,000 and $727,000, respectively. Thenet equity losses in priorthe first quarter of 2001, compared to $306,000 in net
equity losses in the same period last year. The difference between periods included losses relatedis
mainly the result of fewer companies accounted for on the equity method this
year compared to last year, mainly due to the change from equity method to
consolidation accounting for VISaer prior to its "step"
acquisition on July 2, 2001.this year.
Other Income - Other income/expense in the quarter ended March 31, 2002 includes
$751,000 of deferred gain related to a VISaer product line sale in July 2000.
Taxes - In the thirdfirst quarter of 2002, we recorded income tax expense of $11,000
representing a subsidiary's state tax liability. We had no income tax expense in
the first quarter of 2001 other income is mainly related to
VISaer's realization of approximately $271,000 related to deferredbecause investment gains on the
sale of the Visibility business in July 2000.
Income Taxes - We recorded a year-to-date income tax liability of $387,000
related to the gain on the PaySys transaction. For ordinary income tax purposes,
all of the investment gain was shelteredwere offset by net operatingcapital loss
carryforwards.
However, the investment gain is subject to alternative minimum tax since only
ninety percent of the gain can be sheltered by net operating loss carryforwards.
Last year, the year-to-date figures include income taxes payable on gains on the
Risk transaction in March 2000.
Minority Interest - In 2000, this amount represents the pro rata ownership share
of minority shareholders in our PsyCare subsidiary, before it was sold in
November 2000.
Common Shares - The average number of basic shares outstanding during the three
and nine month periods ended September 30, 2001 was 4,693,491 and 5,312,707,
respectively. The decline in the thirdfirst
quarter average reflectsof 2002 is 20 percent lower than in the repurchasefirst quarter of 1,125,6882001 because we
repurchased 1,132,000 shares of our common stock during the third quarter, including
1,000,000 in the self tendersecond half of 2001,
including one million shares repurchased in the company's self-tender offer
completed July 12, 2001.
FINANCIAL CONDITION
InLIQUIDITY AND CAPITAL RESOURCES
For the first nine months ofquarter ended March 31, 2001, our principal sources of cash were
$17,770,000$1.2 million from the sale of 178,350 shares of Atherogenics stock and $474,000
from the sale of our interest in PaySys, $1,928,000 fromremaining Risk Labs interest. During the sale of Risk units,
$4,329,000 from repayment ofthree month
period, our principal and interest related to a bridge loan to
PaySys, and $821,000 from the sale of our HeadHunter.com stock. Our main uses of cash were $5,789,000 to acquire and retire shares of our common stock,
$1,504,000 to repay in full our outstanding bank debt, $1,306,000 for follow-on
investments in technology companies, $1,800,000 for bridge loans (mainlya $1,500,000 secured loan to Delos Payment Systemsto
fund operating losses, loan advances of $850,000 to VISaer to fund operating
losses and a $1,000,000 secured loan to a private software company in which we
may acquire an equity interest in the third quarter).
Long-term investments decreasedfuture. The increase in notes receivable
at September 30, 2001March 31, 2002 compared to December 31, 2000 by $3,164,000.2001 is related to this $1 million
loan.
Notes payable increased to $1,415,000 at March 31, 2002 compared to zero at
year-end December 31, 2001 as a result of consolidating Delos as of January
2002. The main componentsnote reflects a loan to Delos from a minority shareholder of this amount include reclassificationDelos and
Intelligent Systems does not have any corporate liability for the Delos
obligation. Long-term investments decreased $1,455,000 at March 31, 2002
compared to the prior year-end. Of the decrease, $1.1 million reflects the sale
of $2,860,000 ofAtherogenics stock and $250,000 reflects a reduction in the carrying value of
VISaer, $1,306,000our minority interest in follow-on
investments in early stage technology companies, equity losses of $559,000 in
affiliate companies, $643,000a private software company. During the period,
property, plant and equipment increased by $434,000 mainly due to the sale of our holdings in HeadHunter.com
and a decline of $174,000consolidating
Delos this quarter. Intangibles increased by $990,000 in the market valuefirst quarter of
our holdings in Daw
Technologies, Inc. [NASDAQ: DAWK] due to lower trading price of the stock at the
period end.
As2002, principally as a result of intangible assets recorded in the step acquisitionconsolidation
accounting for Delos. Of the intangibles acquired, $642,000 was allocated to our
pro rata share of acquired software which will be amortized over a five-year
period and $289,000 was recorded as goodwill.
Subsequent to the period end, we entered into a secured, $3.0 million bridge
loan with a private company which will be repaid in August 2002 and also
increased the amount of our $1.0 million loan made in the first quarter to a
private software company by $500,000. Since the terrorist attacks of
Page 9
September 11, 2001, our Information Technology segment, in particular VISaer,
has experienced delays in contract awards and implementations which, if they
continue, may have a negative impact on results of operations and increase the
segment's cash requirements, which we now consolidate the assetsintend to fund or arrange funding for.
However, we believe we have adequate cash reserves to meet any such needs. We
do not have off-balance sheet arrangements, relationships, transactions or
guarantees with third parties or related parties that would affect our
liquidity or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and liabilities of VISaer. Much of the increase since December 31, 2000 in accounts
receivables, property and equipment, accounts payable, accrued payroll and
accrued other liabilities are directly related to consolidating the VISaer
accounts since July 1, 2001. In addition, the following liability accounts have
not been partanalysis of our financial condition and results of operations
are based upon our consolidated financial statements for prior periods but are relevant to
the VISaer operations. A brief explanation of each is outlined below:
- - Deferred Gain - When VISaer spun off the Visibility ERP software
product line in July 2000, the buyer assumed certain liabilities and
contracts related to the acquired operations. VISaer did not obtain
releases from creditors for a portion of these liabilities and
contracts and, accordingly,
Page 10
remains contingently liable for these obligations and therefore has
classified them as "deferred gain". As the obligations are paid by the
buyer, VISaer recognizes additional income on the sale of the product
line. ISC is not a guarantor or contingently liable for the VISaer
subsidiary obligations.
- - Deferred Revenue - These amounts relate to revenue from annual software
maintenance and support contracts for which VISaer customers have paid
the annual fee. Such amounts are recognized ratably over the term of
the contract.
- - Billings in Excess of Costs - These amounts relate to VISaer billings
that are not yet recognizablebeen prepared in
accordance with auditing standardsaccounting principles generally accepted in the United States.
Revenue is recognizedThe preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets, liabilities, revenues and
expenses. We consider certain accounting policies related to revenue
recognition, valuation of acquired intangibles and impairment of long-lived
assets, and valuation of investments to be critical policies due to the
estimation processes involved in accordance with Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition", eithereach. For a detailed description on the
application of these and other accounting policies, see Note 1 to the
Consolidated Financial Statements contained in our annual report on Form 10-K
for 2001.
Revenue Recognition. Our product revenue consists of fees from software licenses
and sales of equipment and supplies. Our service revenue consists of fees for
implementation, consulting, training, maintenance and support for software
products. A portion of our revenue is derived from software contracts that
contain significant production, modification and/or customization requirements
and license fees for such contracts are recognized using contract accounting. We
recognize revenue on a percentage of completion methodbasis that involves estimating
our progress on the contract based on input measures. We recognize revenue and
the related costs in the same proportion that the amount of labor hours incurred
to date bears to the total estimated hours required for contract completion. If
reliable estimates cannot be determined or completed contracts method, depending uponif there is an acceptance clause in
the specific termscontract, all revenue is deferred until the customer has accepted the
software and any refund rights have expired. If we do not accurately estimate
the resources required or the scope of work to be performed, or we do not manage
the contract properly, in future periods we may need to restate revenues or to
incur additional cost which would impact our margins and reported results.
Valuation of Intangibles. Purchase accounting for an acquisition requires use of
accounting estimates and judgments to allocate the purchase price to the fair
market value of the software license sold.
- - Redeemable Preferred Stock of VISaer - This amount relates to VISaer's
obligation to the minority shareholder of VISaer pursuant to the
redemption provision of the preferred stock of VISaer.assets and liabilities purchased. Our business acquisitions
typically result in goodwill and other intangible assets. The amount
related to the VISaer obligation to Intelligent Systems pursuant to the
redemption provision is eliminated in consolidation. The redemption
liability is an obligation of VISaer, not of the parent company
Intelligent Systems.
We believe we have adequate cash and access to capital to support the company's
operations and plans for the foreseeable future.
INVESTMENT COMPANY ACT
The Investment Company Act of 1940 broadly defines an investment company
generally as any issuer that is primarily engaged in, or proposes to engage in,
the business of investing, reinvesting, owning, holding or trading in securities
and owns or proposes to acquire investment securities having a value exceeding
40% of the issuer's total assets. We do not intend to be and do not consider
Intelligent Systems to be an investment company and have relied on Rule 3a-1 of
the 1940 Act which provides that a company is not deemed to be an investment
company if no more than 45 percentdetermination of
the value of itssuch intangible assets requires management to make estimates and
no moreassumptions that affect the amount of future period amortization expenses and
possible impairment expense that we will incur. Periodically we review the
values assigned to long-lived assets using an estimate of the undiscounted cash
flows of the entity over the remaining life of the asset. Any resulting
impairment could require a write-down that would have a material adverse impact
on our financial condition or results of operations.
Valuation of Investments. We hold minority interests in non-publicly traded
companies whose values are difficult to determine and are based on management's
estimate of realizability of the carrying value of the investment. Future
adverse changes in market conditions, poor operating results or lack of progress
of the underlying investment could result in losses or an inability to recover
the current carrying value of the investment. Our policy is to record an
impairment charge when we believe an investment has experienced a decline in
value that is other than 45 percenttemporary. In the March 31, 2002 quarter, we recorded
an impairment charge of its net income$250,000 related to one investment. Other such charges
could have a material adverse impact on our financial condition or results of
operations. We also hold minority interests in several publicly-traded companies
whose shares experience price volatility and are thinly traded. The carrying
value of these investments reflects the market value of the shares at the
balance sheet date. Future values could increase or decrease and we may not be
able to realize the current carrying value due to changes in the last four quartersmarket price of
the stock or limited liquidity of the stock.
Page 10
FACTORS THAT MAY AFFECT FUTURE OPERATIONS
Future operations in both the Information Technology and Industrial Products
segments are subject to risks and uncertainties that may negatively impact our
results or projected cash requirements. In addition, the value of our
investments are impacted by a number of factors beyond our control. Among the
factors that may affect our consolidated results of operations are delays in
product development, undetected software errors, competitive pressures,
technical difficulties, market acceptance of our products, availability of
technical personnel, changes in customer requirements, delays in customer
payments, changes in financial markets, performance and financial condition of
affiliate or investee companies, and general economic conditions.
In early January 2002, we acquired control of the Delos Payment Systems board of
directors as result of a default under a secured loan and, consequently, we are
consolidating the Delos operations and our 27 percent ownership of common stock
of Delos in 2002. We provided additional borrowings of $1.5 million to Delos
under the loan and are considering investing funds to increase our ownership to
a significant majority position. It will incur operating losses that we are
consolidating and it will require cash to operate in 2002. While we have no
contractual requirement to provide additional funding, we are likely to use part
of our available cash balances to support the Delos operations in the near-term.
If Delos is derived from
securities of companies it does not control. In the quarter ended March 31,
2001,unsuccessful or if we decide to suspend funding, we may technically have triggerednot recover
all of these funds.
Furthermore, Delos is subject to a number of risks that may impact negatively
its future performance, including significant non-competition restrictions
entered into at the definition related to net income
becausetime of gains generated from the sale of non-control securitiesPaySys in April 2001 that limit who
Delos can sell its products to for varying time periods through 2006, risks
associated with completing and testing the past
four quarters. However, at that timeinitial software application, lack of
a proven business model and to the extent necessary to do so, we
elected to rely on the safe harbor from the definition of an investment company
for transient investment companies contained in Rule 3a-2 under the Investment
Company Act. Rule 3a-2 providescustomers, a conditional one year exclusion from the
investment company definition for an issuer that, among other things, has a bona
fide intent not to be an investment company as soon as is reasonably practical.
We believe we will be back in compliance with the requirements of Rule 3a-1limited operating history, and unproven
market acceptance of the 1940 Act within the one-year exemption period.
Page 11
Delos software features and architecture.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS, REPORTS ON FORM 8-K
A. There are no exhibits filed with this report.
B. The Company has not filed any Reportsa Report on Form 8-K during the period
covered by this report.dated May 10, 2002.
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, hereunto duly authorized.
INTELLIGENT SYSTEMS CORPORATION
Registrant
Date: November 14, 2001May 15, 2002 By: /S//s/ J. LELAND STRANGE
-------------------------------------------------------------------------
J. Leland Strange
Chief Executive Officer, President
Date: November 14, 2001May 15, 2002 By: /S//s/ BONNIE L. HERRON
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Bonnie L. Herron
Chief Financial Officer
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