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SECURITIES AND EXCHANGE COMMISSION
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, 1997
Commission file number 1-9330
INTELLIGENT SYSTEMS CORPORATION
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(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
GEORGIA 58-1964787
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4355 SHACKLEFORD ROAD, NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
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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 No
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As of September 30, 1997, 5,084,467 shares of Common Stock were
outstanding.
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ITEM 1. FINANCIAL STATEMENTS
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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ASSETS (Unaudited) (Audited)
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<S> <C> <C>
Current assets:
Cash $ 481 $ 2,434
Certificate of deposit -- 1,056
Accounts receivable, net 4,386 3,764
Notes and interest receivable 992 3,212
Inventories 660 648
Other current assets 666 737
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Total current assets 7,185 11,851
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Long-term investments 6,952 8,967
Long-term notes receivable 133 1,414
Property and equipment, at cost less accumulated depreciation and amortization 2,757 2,126
Excess of cost over underlying net assets of businesses acquired,
net of accumulated amortization 1,131 569
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Total assets $ 18,158 $ 24,927
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Short-term borrowings $ 799 $ --
Accounts payable 1,626 984
Accrued expenses and other current liabilities 2,976 2,313
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Total current liabilities 5,401 3,297
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Long-term debt 1,000 --
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 authorized, 5,084,467 outstanding
at September 30, 1997 and 5,126,767 outstanding at December 31, 1996 51 51
Paid-in capital 23,990 24,139
Foreign currency translation adjustment (180) (196)
Unrealized gain in available-for-sale securities 1,332 3,804
Accumulated deficit (13,436) (6,168)
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Total stockholders' equity 11,757 21,630
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Total liabilities and stockholders' equity $ 18,158 $ 24,927
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The accompanying notes are an integral part of these balance sheets
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share amounts)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales $ 5,248 $ 6,067 $ 15,676 $ 18,603
Expenses:
Cost of sales 3,210 3,363 9,542 10,086
Marketing 1,043 1,084 2,841 3,548
General & administrative 2,418 1,941 5,832 6,013
Research & development 1,182 49 1,281 171
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Loss from operations (2,605) (370) (3,820) (1,215)
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Other income (expense):
Interest income, net 53 143 396 329
Investment income (expense) (4,292) 263 (3,763) 3,921
Other, net (137) 29 (69) 16
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Income (loss) before income tax provision and
minority interest (6,981) 65 (7,256) 3,051
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Income tax provision -- 3 4 3
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Income (loss) before minority interest (6,981) 62 (7,260) 3,048
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Minority interest 3 3 8 10
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Net income (loss) $ (6,984) $ 59 $ (7,268) $ 3,038
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Net income (loss) per share based upon
weighted average shares $ (1.37) $ 0.01 $ (1.43) $ 0.57
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Weighted average shares outstanding 5,081,078 5,288,959 5,087,252 5,304,898
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The accompanying notes are an integral part of these statements
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited, in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
CASH PROVIDED BY (USED FOR): 1997 1996
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OPERATIONS:
Net income (loss) $ (7,268) $ 3,038
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities, net of
effects of acquisitions and dispositions:
Depreciation and amortization 1,895 694
Loss (gain) from sale of assets 919 (3,877)
Equity in net loss (income) of affiliates 2,968 (44)
Changes in operating assets and liabilities:
Accounts receivable (79) (70)
Inventories (12) (29)
Other current assets 86 88
Accounts payable 641 (277)
Accrued expenses and other current liabilities 1,031 466
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Cash provided by (used for) continuing operations 181 (11)
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INVESTING ACTIVITIES:
Proceeds from sales of investments 3,278 5,063
Proceeds from sale of discontinued operations 100 --
Acquisitions of companies, net of cash acquired (870) (30)
Maturity of certificate of deposit 1,056 --
Acquisitions of long-term investments (3,451) (825)
Advances under notes receivable, net (1,431) (41)
Purchases of property and equipment, net (982) (1,064)
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Cash provided by (used for) investing activities (2,300) 3,103
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FINANCING ACTIVITIES:
Net borrowings (repayments) under short-term
borrowing arrangements 299 (1,488)
Purchase and retirement of stock (160) (133)
Exercise of stock options 11 --
Foreign currency translation adjustment 16 (1)
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Cash provided by (used for) financing activities 166 (1,622)
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Net increase (decrease) in cash (1,953) 1,470
Cash at beginning of period 2,434 520
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Cash at end of period $ 481 $ 1,990
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The accompanying notes are an integral part of these statements
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INTELLIGENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The financial statements furnished herein reflect all adjustments,
consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair statement of the results for the
periods for which they are presented. Such results, however, are not
necessarily indicative of the results to be expected for the full year. The
accounting policies followed by Intelligent Systems (the "Company" or
"ISC") are set forth in Note 1 to the Consolidated Financial Statements in
the Company's Report on Form 10-K for the year ended December 31, 1996,
previously filed with the Commission.
2. Accounting Changes - In March 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share". The statement
requires the replacement of primary earnings per share with basic earnings
per share for financial statements for periods ending after December 15,
1997. For financial statements issued prior to December 15, 1997, footnote
disclosure of pro forma earnings per share is required. For the three and
nine month periods ending September 30, 1997, the adoption of this standard
did not have a material effect on the Company's earnings per share
calculation.
3. Acquisition of Q.S., Inc. - Effective July 1, 1997, the Company acquired
all of the outstanding equity of Q.S., Inc. ("QS"), a company which
provides public health management software and related services to public
health agencies in the U. S. The acquisition was accounted for as a
purchase and, accordingly, the Company has consolidated the results of
operation of QS from the date of acquisition. The purchase price was $3.5
million with $2.0 million paid in cash at closing and the balance due in
three equal annual installments beginning July 1, 1998.
4. Note Receivable - On July 31, 1997, IQ Software Corporation ("IQ") assigned
to the Company a $1.8 million note of DayStar Digital, Inc., the payment of
which was guaranteed by the Company and secured by a pledge to IQ of shares
of common stock of IQ owned by the Company. In consideration of the
assignment, the Company paid $1.8 million to IQ and the shares of stock
were released to the Company. Subsequently, at the end of the third
quarter, the Company wrote off $3.0 million of DayStar debt, which amount
includes the $1.8 million described above.
5. PaySys International, Inc. - During the quarter ended September 30, 1997,
the Company exercised certain options to acquire common stock of PaySys
International, Inc. ("PaySys"), thereby increasing its direct ownership of
PaySys common stock from 37 percent to 58 percent. On October 8, 1997,
PaySys filed a registration statement on Form S-1 with the Securities and
Exchange Commission covering a proposed initial public offering of
3,333,333 shares of PaySys common stock. ISC intends to offer for sale
712,500 shares in the initial offering and an additional 250,000 shares to
cover over-allotments. If the initial public offering proceeds as planned,
ISC's ownership in PaySys would decline to approximately 37 percent after
the offering (or 34 percent after the over-allotment). ISC accounts for the
investment in PaySys by the equity method. A number of factors including
the state of the securities market in general and PaySys operating
performance could cause a delay, postponement or change in the terms of the
proposed offering.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Sales - Revenue from operations is derived from technology-related products and
services as well as health care services. For the three and nine month periods
ended September 30, 1997, net sales were $5,248,000 and $15,676,000,
respectively, a decline of 13.5 percent and 15.7 percent, respectively, compared
to the corresponding periods last year. Although the Company's subsidiaries in
the technology sector experienced increases in revenue year-to-year, revenue
derived from health care services declined. In the quarter ended September 30,
1997, revenue from the health care sector represented 26 percent of total
revenue compared to 53 percent of total revenue for the same period last year.
Part of the decline is because the Company sold a small health care subsidiary
in September 1996. In addition, the Company's health care services subsidiary,
PsyCare America, had fewer hospital based programs in operation in the three and
nine month periods in 1997 as compared to last year and on-going price pressure
in the managed care environment further reduced the revenue contribution from
each program. There continues to be good demand for the Company's Christian
based counseling and treatment services but the traditional method of delivering
these services through hospital-based programs is being impacted by the managed
care structure. PsyCare is negotiating to open programs in additional hospitals
and is reviewing alternative programs and services to deal with the changing
health care environment.
Cost of sales - Cost of sales as a percentage of revenue was higher in the three
and nine month periods in 1997 compared to the same periods last year. The
change reflects higher personnel costs in 1997 at two of the Company's
technology subsidiaries. The Company added more technical personnel to support
increased sales of products and services. In addition, industry-wide demand for
technical trainers and programmers led to increased compensation rates for
personnel and the use of higher paid independent contractors and consultants.
Marketing Expenses - Total marketing expenses in the three and nine months ended
September 30, 1997 were lower by four percent and 20 percent, respectively, than
the amounts spent in the comparable periods in 1996. The decline is related to
lower levels of spending in the health care services sector, reflecting fewer
program locations, a reduction in facility and personnel costs, and more
efficient operations. On the other hand, marketing expenses increased slightly
year-to-year at several technology subsidiaries to support higher revenue levels
and increased sales and marketing activities.
General and Administrative Expenses - General and administrative expenses were
almost twenty-five percent higher in the three month period ended September 30,
1997 than in the comparable period last year, although year-to-date G&A declined
by three percent compared to the nine month period in 1996. Part of the
quarterly increase is due to the acquisition of QS in July 1997 which increased
expenses at the same time that the Company deferred sales revenue in order to
consolidate product lines. G&A expenses also increased at the InterQuad
operations due to expansion of classroom facilities to support projected sales.
Research and Development - In the three and nine month figures for 1997, the
significant increase in R&D expense versus the comparable periods in 1996 was
due to a non-recurring charge of $952,000 related to the allocation of a portion
of the QS purchase price to in-process research and development.
Interest Income - Net interest income declined 63 percent in the three months
ended September 30, 1997 compared to the same period last year. The interest
earned on notes receivables in 1997 was lower because certain notes were paid
off and the Company wrote off a portion of the DayStar notes.
Investment Income - In the third quarter ended September 30, 1997, the Company
wrote-off $3.0 million to reduce the note receivable from DayStar Digital to net
realizable value and recorded losses of $1.3
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million representing the Company's pro rata share of the losses of several
private businesses in which the Company's investment is accounted for by the
equity method. Of this loss, $1.25 million was related to non-cash compensation
expense incurred by PaySys International, Inc., related to issuance of options
to buy PaySys stock. In addition to the $3.0 million write-off of the DayStar
note, the nine month figures for 1997 include a first quarter gain of $1,865,000
on the private sale of 50,537 shares of common stock of PaySys, a second quarter
gain of $217,000 on the sale of common stock of OrCAD, Inc., a former subsidiary
of the Company, and $2,969,000 in losses representing the Company's pro rata
share of the losses of several private businesses accounted for by the equity
method. By comparison, in the nine month period for 1996, investment income
includes a gain of $3,675,000 on the sale of a portion of the Company's holdings
in IQ Software Corporation and $337,000 on the sale of OrCAD common stock in
OrCAD's IPO.
Minority Interest - This amount represents the pro rata ownership share of
minority shareholders in certain non wholly-owned subsidiaries of the Company.
Common Shares - There was a decline of 4 percent in the weighted average number
of shares outstanding in the three and nine months periods ended September 30,
1997 compared to the prior year due to the Company's share repurchase program.
FINANCIAL CONDITION
In the first nine months of 1997, the principal sources of cash were $2,000,000
from the sale of 50,537 shares of common stock of PaySys, $948,000 from the sale
of 104,484 shares of OrCAD common stock and $611,000 from repayments of notes
receivable. The Company used $4,084,000 to fund investments (both debt and
equity) in five software companies, $1,800,000 in connection with the assignment
of the DayStar note (as described in Note 4), $870,000, net cash, to acquire QS,
and additional funds to repurchase shares of the Company's common stock and to
purchase equipment to expand training classroom facilities at the InterQuad
Services subsidiary in the United Kingdom.
Since December 31, 1996, the Company's unrealized gain in available-for-sale
securities has declined by approximately $2.5 million as a result of the
Company's sale of its OrCAD stock in June 1997 as well as a decline in the
trading price of IQ Software common stock, of which the Company continues to own
157,801 shares.
Subsequent to September 30, 1997, the Company incurred $1,000,000 in bank
borrowings, secured by the Company's holdings in IQ Software stock, to acquire
additional equity in Visibility, Inc., a software company.
The Company believes it has adequate working capital and access to additional
cash through sales of securities to support its operations and other activities.
If and when the PaySys initial public offering (as described in Note 5) proceeds
as planned, the Company's cash will increase substantially. Conversely, a delay,
postponement or change in the offering terms could require the Company to seek
alternative sources of cash for additional investments, including potential
private sales of PaySys stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest excess funds in derivative financial instruments or
other market risk sensitive instruments for the purposes of managing foreign
currency exchange rate risk or for any other purposes. Further, the Company's
business activities do not involve foreign currency transactions.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS, REPORTS ON FORM 8-K
A. Exhibit 27 Financial Data Schedule (for SEC use only).
B. The Company has not filed any Reports on Form 8-K during the period covered
by this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
INTELLIGENT SYSTEMS CORPORATION
Registrant
Date: November 13, 1997 By: /s/ J. LELAND STRANGE
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J. Leland Strange
Chairman of the Board, President
Date: November 13, 1997 By: /s/ HENRY H. BIRDSONG
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Henry H. Birdsong
Chief Financial Officer
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 481
<SECURITIES> 0
<RECEIVABLES> 4,386
<ALLOWANCES> 0
<INVENTORY> 660
<CURRENT-ASSETS> 7,185
<PP&E> 2,757
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,158
<CURRENT-LIABILITIES> 5,401
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 11,706
<TOTAL-LIABILITY-AND-EQUITY> 18,158
<SALES> 15,676
<TOTAL-REVENUES> 15,676
<CGS> 9,542
<TOTAL-COSTS> 19,496
<OTHER-EXPENSES> (3,436)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,256)
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<INCOME-CONTINUING> (7,268)
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<NET-INCOME> (7,268)
<EPS-PRIMARY> (1.43)
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