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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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.)
incorporation or organization)
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [x]
As of March 19, 1997, 5,092,567 shares of Common Stock were outstanding. The
aggregate market value of the Common Stock held by non-affiliates of the
registrant was $12,699,000 (computed using the closing price of the Common
Stock on March 19, 1997 as reported by the American Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on June 6, 1997 are
incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Business.................................................................................3
2. Properties...............................................................................8
3. Legal proceedings........................................................................8
4. Submission of matters to a vote of security holders......................................8
PART II
5. Market for the registrant's common equity and related stockholder matters................8
6. Selected financial data..................................................................9
7. Management's discussion and analysis of financial condition and results of operations....9
8. Financial statements and supplementary data.............................................12
9. Changes in and disagreements with accountants on accounting and financial disclosure....12
PART III
10. Directors and executive officers of the registrant......................................12
11. Executive compensation..................................................................12
12. Security ownership of certain beneficial owners and management..........................13
13. Certain relationships and related transactions..........................................13
PART IV
14. Exhibits, financial statement schedules and reports on Form 8-K.........................13
Signatures...........................................................................................16
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PART I
ITEM 1. BUSINESS
GENERAL
Intelligent Systems Corporation, a Georgia corporation (the "Company" or
"Intelligent Systems"), has operated either in corporate or partnership form
since 1973 and its securities have been publicly traded since 1981. The Company
operated as a master limited partnership from 1986 to 1991, when it was merged
into the present corporation (the "Merger"). The Company's executive offices
are located at 4355 Shackleford Road, Norcross, Georgia 30093. The Company's
telephone number is (770) 381-2900.
Effective June 1994, the Company adopted a plan to discontinue its European
operations which were involved in the distribution of third party microcomputer
software and hardware products. Pursuant to this plan, the Company sold its
French operation in August 1994 and sold its distribution businesses in Germany
and the United Kingdom as of December 31, 1996. The Company continues to
operate InterQuad Services, a computer education business in the UK. A more
detailed description of this plan is contained in Note 4 to the Consolidated
Financial Statements for the year ended December 31, 1996.
The Company's continuing operations are involved in two industry segments
(which are defined by the product or service provided rather than the market
served): technology related products and services, and health care services.
The Company's principal majority-owned operating subsidiaries in the technology
sector include InterQuad Services (training/education for microcomputer
products), ChemFree Corporation (bio-remediating parts washers for automotive
and industrial applications), Intelligent Enclosures (mini-environment systems
for ultraclean manufacturing) and Public Health Software Systems (patient
information management software for public health agencies). The principal
operations in the health care services segment involve the PsyCare America
subsidiary (psychiatric treatment programs for the Christian community). The
Company's operating subsidiaries are relatively small in size and subject to
greater fluctuation in revenue and profitability than larger, more established
businesses would be.
The Company's main focus is to create and manage growing companies through
flexible partnership arrangements. The Company actively explores opportunities
both in the health care services and technology area to develop stronger
domestic partnerships with promising companies or to start new businesses.
Depending upon the needs of the partner company, the Company may be the sole,
majority or minority owner of the business and will undertake a variety of
roles which often include day-to-day management of operations, board of
director participation, financing, market planning, strategic contract
negotiations, personnel and administrative functions, etc. Partner companies in
which the Company owns less than a majority interest are not consolidated in
the Company's results of operations. However, the Company is often actively
engaged in managing strategic and operational issues with these companies and
devotes significant resources to the development of the business. In some
instances, the Company may acquire a majority ownership at some future point or
the business may become a stand-alone public company or be sold to another
entity. A more detailed description of some of the Company's affiliated partner
companies is provided on page 7 of this report.
The history of some of the Company's consolidated partner companies exemplifies
this strategy. In 1990, the Company became a minority owner of PsyCare L.P., a
firm which provides comprehensive psychiatric treatment programs for adults and
adolescents under contracts with various hospitals throughout the southeastern
United States. In April 1993, the Company acquired a majority interest in
PsyCare L.P. In 1994, the Company acquired the operations of PsyCare U.S.A.,
the parent company from which Intelligent Systems had originally acquired
PsyCare L.P., thereby expanding the number of programs and geographic coverage
of the Company's PsyCare operations. The PsyCare companies have now combined
operations as PsyCare America. In 1994 the Company acquired a majority
ownership in Public Health Software Systems and increased its ownership in
1995. In 1993, the Company founded ChemFree Corporation to develop and market
an environmentally-friendly parts washer for use in automotive and industrial
applications.
For the past several years, the Company has operated the Shared Resource
Technology Center, a small business incubator, at its corporate facility. The
Center permits the Company to reduce its overhead expense by subleasing excess
capacity to small businesses that benefit from flexible, shared resources. At
the same time, the Company has day-to-day contact with
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emerging companies which may become partnership companies, either as
majority-owned subsidiaries or minority-owned affiliates. For instance,
ChemFree Corporation was started as an incubator company.
The Company expects to continue its regular practice of discussing with
interested parties possible sales, acquisitions or business combinations
involving its operations or related businesses. However, these discussions may
not result in any completed transactions.
For ease of comprehension, the business discussion which follows contains
information on products, markets, competitors, research and development and
manufacturing for various of the Company's operating subsidiaries, organized by
industry sector and by company. For further information concerning the
Company's domestic and foreign operations, see Note 13 and 14 in the
accompanying Notes to the Consolidated Financial Statements.
INDUSTRY SEGMENT: TECHNOLOGY RELATED PRODUCTS AND SERVICES
INTERQUAD SERVICES - InterQuad Services, with 3 locations in the London,
England area, provides technical training and skills development programs for
popular microcomputer software and network products. Some of the most popular
offerings are courses for industry-standard products from Novell Inc., IBM
Corporation and Microsoft Corporation. InterQuad also provides some consulting
services related to information systems for business.
Current and prospective technical users of personal computers in the UK
comprise the market for education/training activities conducted by InterQuad
Services. Typically, customers choose training programs based on the software
and network products that they have installed or plan to install at their
company premises. InterQuad Services uses extensive advertising, telemarketing
and direct mail to stimulate demand for their products and services.
InterQuad Services competes with a number of similar-sized training/education
companies. It competes on the basis of quality of training staff,
comprehensive and up-to-date course offerings, price and accessibility of
training facilities. With relatively high fixed costs for training staff and
facilities, profitability depends upon the right mix of customers and courses
to optimize the infrastructure.
CHEMFREE CORPORATION - ChemFree Corporation (ChemFree) designs, manufactures
and markets the SmartWashertm parts washer which uses an advanced
bio-remediation system to clean automotive and machine parts without using
hazardous, solvent-based chemicals. The SmartWasher consists of a molded
plastic tub and sink with faucet and brush, recirculating pump, heater,
electronic control panel, filter, microorganisms and an aqueous based
degreasing solution. Operating as a closed-loop system, microorganisms
embedded in the filter are activated upon contact with the heated degreasing
solution and break down oil and grease into non-toxic matter. Unlike
traditional solvent based systems, there are no regulated, hazardous products
used or produced in the process and the SmartWasher system is completely
self-cleaning. ChemFree sells to its customers replacement fluid and filters
after the parts washer sale.
ChemFree's markets include the automotive, industrial and military markets. In
In the automotive aftermarket sector, customers include companies with fleets of
vehicles to maintain; automobile manufacturers such as Chrysler, GM and BMW with
extensive service networks; and individual and chains of auto repair shops. The
industrial market includes customers with machinery which requires routine
maintenance, such as in the textile industry. Military applications include
service depots for all military branches. ChemFree entered international markets
in late 1996, first in England and Korea.
ChemFree's sales activities include both company representatives who sell
direct to high volume customers and several distribution channels: automotive
aftermarket distributors (e.g. NAPA), environment/pollution control equipment
distributors, automobile manufacturers dealer equipment and service
organizations (e.g. GM, Chrysler and BMW) and industrial product distributors.
The Company also sells in competitive bid situations, such as military
procurements. Marketing activities include extensive trade show participation
(local, regional and national), public and press relations, advertisements in
trade publications, and evaluation programs.
ChemFree competes with larger, established companies using solvent-based
systems which require special handling and hauling of regulated material, other
small companies using non-hazardous systems, and with hazardous waste hauling
firms. Although smaller than the established solvent-based firms, ChemFree
believes it is competitive based on product
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features, positive environmental impact, improved health and safety features,
elimination of regulatory compliance, and price.
Research and development at ChemFree is directed toward product extensions,
enhancements of the base unit, fluid and filter and adaptations for specialized
applications. ChemFree subcontracts the manufacturing of major sub-assemblies
built to its specifications to various vendors and performs final assembly and
testing at its own facility. There are multiple sources available for
subassemblies.
PUBLIC HEALTH SOFTWARE SYSTEMS - Public Health Software Systems (PHSS), a small
majority owned firm, designs, manufactures and sells client/server-based
software programs which permit public health agencies to capture, analyze and
manage client information. PHSS products include modules such as maternal and
child health, cancer screening, HIV testing, scheduling, etc. The products run
on a host of platforms including DOS, Windows, UNIX, AS/400 and others.
Typically, PHSS provides some customization and training services as well as
ongoing technical support.
PHSS customers are public health agencies nation-wide, from single-site clinics
to city-wide and state-wide systems employing networks of computers.
Representative installations include the State of Texas, the city of Wichita,
Kansas and the State of North Carolina. PHSS sells primarily in response to
competitive bids solicited by city, county and state agencies. The process can
take several months and awards are made on the basis of a number of factors
including software features, pricing, financial strength, etc.
PHSS, although small, is a leader in an emerging market niche. It competes
against a number of other software companies, some of which are larger and
which may have access to greater resources than does PHSS. However, PHSS
believes it is competitive based on product features, ease of use, extensive
experience in the public health market and technical support. Research and
development is focused on adding new modules and product extensions to its
ACCLAIM product.
INTELLIGENT ENCLOSURES - Intelligent Enclosures (iE) is a small subsidiary
which designs, manufactures and markets mini-environments which provide
critical cleanliness, temperature and humidity control in ultra-clean
manufacturing applications such as semiconductor fabrication. Typically, iE's
systems surround robotics tools, providing environmental control at the process
tool while maintaining operator and maintenance access.
The primary market for iE's mini-environment systems is semiconductor
manufacturers. The Company has systems installed at sites such as Motorola,
Intel, AT&T, Siemens, IBM and Kodak. Mini-environments are typically used
inside traditional clean-rooms and are installed in new manufacturing
facilities or to retrofit existing ones.
Mini-environments are typically sold through robotics tool manufacturers,
systems integrators or architectural and engineering firms that incorporate the
iE enclosure as part of a complete manufacturing equipment/process offering.
The sales cycle is usually long and delivery dates may be re-scheduled due to
changes in other vendors' timetables. Typically, iE systems involve
considerable customization and are delivered within two to four months of order
placement.
iE competes against traditional clean-room companies and other enclosure
manufacturers that provide a variety of custom and standard products. Certain
of its competitors are larger and more established and may have access to
greater resources than does iE. iE competes based on technical expertise in
air-handling, proprietary product design and superior product features.
Materials are available from a number of sources and iE is not dependent on any
single vendor.
GENERAL - Service for the Company's products varies by product line and is
available in the markets served by the Company either directly by Company
personnel or through its distributors and dealers. The Company provides
warranties of varying length for its products and services and in some cases
sells annual technical support programs. The Company's subsidiaries in the
technology segment sell to many customers in numerous markets and would not
experience a material adverse effect if the business of a single customer is
lost.
Intelligent Systems regularly reviews potential hardware and software companies
and products for possible acquisition and/or license. Management expects to
continue this practice.
INTELLIGENT SYSTEMS CORPORATION
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INDUSTRY SEGMENT: HEALTH CARE SERVICES
SERVICES PROVIDED
PsyCare is an established provider of specialty treatment programs for
individuals with psychiatric and psychological disorders, including depression
and substance abuse. The programs are conducted under PsyCare's Rapha
trademark and are directed toward individuals who will benefit from a treatment
approach which integrates the patient's physical and psychological needs with
their Christian beliefs. PsyCare provides a continuum of care, including
in-patient hospital programs, partial day programs and intensive group
out-patient programs. The company presently has 15 program sites, both adult
and adolescent in multiple states. The Company intends to grow its revenue
base by adding new in-patient sites in more states as well as more outpatient
programs and resource materials. Hospitals in mid to large size metropolitan
areas contract with PsyCare to conduct a Rapha treatment program in a separate
section of their hospital. PsyCare provides medical and program directors as
well as therapists and maintains control over all aspects of the treatment,
while the hospital provides the physical facility, administrative services,
billing and nursing staff.
MARKETS
The market for PsyCare's treatment programs includes adults and adolescents
suffering from illnesses such as depression, addiction and behavioral
disorders. The program's integrated approach appeals particularly to
individuals affiliated with churches and other organizations with a Christian
basis. Hospitals are interested in offering the Rapha program because it
addresses a segment of the population not typically being served by the
hospital and fits in with the trend by hospitals toward targeted marketing and
specialty programs.
MARKETING
Working in local communities and with national associations, PsyCare has
developed an extensive network of Christian churches and organizations by
helping pastors meet the needs of their church members through educational,
outreach and counseling programs. This network will often suggest the Rapha
Treatment program when it has church members in need of professional help since
members feel comfortable that the care is likely to be consistent with their
beliefs. A program called RaphaCare provides member churches and their
parishioners with special rates and services, much like a preferred provider
network. Introduced in the southeast in 1995, RaphaCare has been very
successful and the Company is expanding to other markets. PsyCare also reaches
its market through radio broadcast, special events, conventions, print media,
and word-of-mouth referrals from satisfied patients.
COMPETITION
PsyCare's competitors include individual and group practices, private
hospital-affiliated treatment programs, and other independent treatment
programs with a religious component. The Company believes it is one of the top
Christian programs in the country. Unlike many of its competitors, PsyCare
does not own hospitals or clinics but rather contracts with other facilities to
provide its programs in separate sections of the hospital. This variable cost
structure, as well as a history of successful treatment methodology, allows
PsyCare to be a stable participant in a changing industry. Among PsyCare's
strengths is the strong programmatic basis for its treatment which ensures that
treatment received in each location is of consistent content and quality and
not dependent on the characteristics of a particular therapist. Another key
factor is PsyCare's strong network of Christian organizations which support the
program's focus.
TRENDS
In the health care services business, the number of patients tends to decline
during the summer months and prior to holidays. In addition, there are a
number of fundamental changes taking place in the industry. In the past few
years, the average length of stay for in-hospital treatment has declined by
almost 65 percent. At the same time, managed care payors are exerting pressure
to lower reimbursement rates paid to treatment providers. With the focus of
many hospitals on expense reduction, PsyCare is continually challenged to
maintain its margins. The impact of these trends means that PsyCare must treat
more patients just to maintain the same year-to-year revenues while keeping
strict control over expenses. Because PsyCare does not have fixed facility
costs, has strong local support for its programs and has introduced innovative
new programs such as its extensive out-patient programs, it believes it is
successfully adapting to these changes. In the fourth
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quarter of 1996, a national hospital chain canceled certain Rapha contracts
because of a change in the chain's focus and priorities. The company plans to
relocate these programs to other hospitals although it anticipates a decline in
revenue and profit contribution during the transition stage. In 1996,
approximately 37 percent of Company consolidated revenue was derived from
programs located at the chain's psychiatric hospitals. This number is expected
to decline in 1997 as the Company expands into other hospitals. In 1997, it
intends to open programs at new hospitals, expand into more states and add new
programs to address other mental health needs in the Christian community.
PATENTS, TRADEMARKS AND TRADE SECRETS
The Company has several patents (both issued and pending) covering certain
aspects of its products and processes. It may be possible for competitors to
duplicate certain aspects of the Company's products and processes even though
the Company regards such aspects as proprietary. The Company has registered
with the US Patent and Trademark Office and various foreign jurisdictions
numerous trademarks and service marks for its products. The Company believes
that an active trademark and copyright protection program is important in
developing and maintaining brand recognition and protecting its intellectual
property. The Company markets its products under trademarks and service marks
such as Rapha Treatment Centers, iEAir, ACCLAIM, SmartWasher, OzzyJuice and
others.
PERSONNEL
As of February 28, 1997, the Company had 219 full-time equivalent employees.
The Company's employees are not represented by a labor union and the Company
has not had any work stoppages or strikes. The Company believes that its
employee relations are good.
AFFILIATED PARTNER COMPANIES
From time to time, Intelligent Systems evaluates products or companies which it
believes are involved in promising technologies or in non-technology niche
markets with good growth potential. From time to time, it has acquired or
invested in such products, product rights or companies and expects to continue
to do so as a regular part of its strategy. The Company holds minority
investment positions in various growth stage companies, most of which are in
technology-related fields and privately held. Some examples of the Company's
involvement are as follows:
- A significant equity position in PaySys International,
Inc. (PaySys), a leading software company involved in
payment processing software systems. The Company is involved
with PaySys in areas such as new product planning, research
and development, marketing and customer relations. The
Company's management holds officer and director positions
with PaySys.
- A 3.4 percent equity position in IQ Software
Corporation (IQ), a software company in which the Company
has been involved since 1987, which completed its initial
public offering in 1992. The Company is represented on the
board of IQ.
- A minority equity position in Paragon Interface, a
privately held company involved in data mapping and
translation software targeted initially for the insurance
industry.
- A minority equity position in and secured loan to
DayStar Digital, Inc. (DayStar), a manufacturer of
accelerator cards and Macintosh O/S compatible computers for
the high-end pre-press and publishing market. The Company
is represented on the board of directors of DayStar.
- A minor equity position in OrCAD, Inc., acquired on
the exchange of stock in the Company's ISJ subsidiary in
December 1995. OrCAD completed its initial public offering
in March 1996.
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ITEM 2. PROPERTIES
At December 31, 1996, to house its manufacturing, sales, service and
administration operations, the Company had leases covering approximately
150,187 square feet in three facilities in Atlanta, Georgia and 14,300 square
feet in the London, England area. The Company believes that its leased
facilities are adequate for its existing and foreseeable business operations.
A portion of the headquarters facility is subleased to businesses in the small
business incubator.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a small number of legal matters arising in the
ordinary course of its business. It is management's opinion that none of these
matters will have a material adverse impact on the Company's consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to a vote of its shareholders during the
fiscal quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed and traded on the American Stock Exchange
("AMEX") under the symbol "INS". The following table sets forth, for the
periods indicated, the range of high and low sales prices for the Company's
Common Stock as reported by AMEX.
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<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995
HIGH LOW HIGH LOW
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1ST QUARTER 2 11/16 1 7/8 2 1/4 1 3/8
2ND QUARTER 3 1/16 1 3/4 1 15/16 1 1/2
3RD QUARTER 2 15/16 2 2 7/16 1 3/4
4TH QUARTER 3 1/4 2 1/2 2 3/4 1 15/16
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The Company's Common Stock was held by approximately 807 shareholders of record
as of March 19, 1997. No cash dividends were declared or paid by the Company in
the two year period ended December 31, 1996. The Company does not intend to pay
dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The income statement and balance sheet data reflect the reclassification of the
Company's European Distribution Business as a discontinued operation. Refer to
Note 4 to the Consolidated Financial Statements.
(in thousands except share amounts)
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<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
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Net Sales $ 23,678 $ 28,240 $ 21,364 $ 12,598 $ 5,650
Net Income (Loss):
Continuing Operations 4,239a. 147b. (6,226)c. 2,945d. (1,114)e.
Discontinued Operations -- -- (1,505) (3,369) (2,601)
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Net Income (Loss) 4,239 147 (7,731) (424) (3,715)
Net Income (Loss) Per Share:
Continuing Operations 0.80 0.03 (1.05) 0.45 (0.17)
Discontinued Operations -- -- (0.25) (0.52) (0.39)
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Net Income (Loss) Per Share 0.80 0.03 (1.30) (0.07) (0.56)
Total Assets 24,927 23,330 22,755 26,866 29,381
Working Capital 8,554 4,092 6,089 15,342 10,824
Long-term Debt -- 50 -- -- --
Stockholders' Equity 21,630 18,725 19,192 24,112 24,836
Shares Outstanding at Year End 5,126,767 5,312,867 5,575,767 6,413,368 6,642,168
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a. Includes net gains of $6.9 million on investments and non-recurring
charges of $1.25 million.
b. Includes $818,000 gain on investment and $1.3 million gain on sale
of ISJ.
c. Includes $2.2 million write-off of intangibles, $.6 million expense
allocated to purchase price of 1994 acquisitions and $1.5 million
gain on sale of Peachtree Software note.
d. Includes gain of $4.1 million on settlement of lawsuit.
e. Includes gain of $1.7 million on partial sale of investment.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Year-to-year comparisons of financial results described herein reflect results
of continuing operations only. The results of the Company's European
distribution business (the "Distribution Business"), which was discontinued in
mid-1994, are recorded as a separate line item in the accompanying income
statements. In December 1995, the Company sold its Intelligent Systems Japan
("ISJ") subsidiary and in September 1996 sold the assets of a small healthcare
subsidiary. Results of operations of these businesses are not included in the
consolidated results of operations after the respective sale dates. A
significant amount of the variance in operating results between 1995 and 1996
can be attributed to the sale of ISJ in 1995.
RESULTS OF OPERATIONS
Net sales from continuing operations are derived from two major areas:
technology-related products and services and health care services. Principal
operating subsidiaries in the technology segment include InterQuad Services
(microcomputer education programs), ChemFree Corporation (bio-remediating parts
washers), Intelligent Enclosures (mini-environment systems for ultraclean
manufacturing) and Public Health Software Systems (patient information
management software for public health agencies). The operating subsidiary in
the health care segment is PsyCare America (specialty psychiatric treatment
programs).
SALES - Net sales in 1996 were $23,678,000 compared to $28,240,000 in 1995.
The 16 percent decline year-to-year is principally related to the fact that the
businesses which were sold in 1995 and 1996 did not contribute to revenues
after their respective sale dates. Revenue from the ongoing companies was
essentially flat year-to-year with a net increase in revenue from the
technology companies and a slight decline in PsyCare revenue. Revenue
increases in the technology sector were led by InterQuad and Public Health
Software Systems based on a greater volume of services and products sold,
offset in part
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by a decline in revenue at the ChemFree subsidiary due in large part to stock
balancing and a product upgrade program which offset current revenue. The
slight decline year-to-year in health care services revenue reflects a fourth
quarter reduction in the number of inpatient programs. A national hospital
chain in which PsyCare houses a number of its programs terminated certain
contracts as a result of their internal restructuring and change in priorities.
Consequently, PsyCare expects to open additional programs in other hospitals
by mid-1997 although there may be a decline in revenue and profit contribution
during this transition stage.
Net sales in 1995 increased 32 percent compared to 1994. In the health care
services sector, revenue grew in 1995 because PsyCare expanded the number of
programs offered and increased its customer base. Revenue in 1995 includes
revenue of PsyCare U.S.A. for 12 months as compared with seven months in 1994.
In the technology sector, revenue increased year-to-year due to higher sales
volume at ISJ and InterQuad Services as well as from the initial shipments of
ChemFree products.
Health care services represent 55 percent, 50 percent and 53 percent of revenue
in 1996, 1995 and 1994, respectively. Revenue derived from international sales
was 25 percent in 1996, compared to 32 percent of revenue in both 1995 and
1994. The decline in 1996 is due to the sale of ISJ in 1995.
COST OF SALES - Cost of sales in 1996 was 54 percent of revenue compared to 52
percent in 1995. The change is principally related to the fact that ISJ's cost
for software products was significantly lower than the cost for products and
services provided by the remaining subsidiaries, thus contributing to a lower
overall cost of sales in 1995. After eliminating the effect of ISJ, for the
remaining operations, there was a decline in cost of sales as a percent of
revenue in the health care services segment due to operating efficiencies and
lower personnel costs and a slight increase in cost of sales for the technology
companies reflecting price pressure due to competition.
Cost of sales in 1995 was slightly higher than in 1994. The increase is
principally related to the increased cost (personnel and equipment) of
providing computer education and training services at the Company's InterQuad
subsidiary and higher costs for initial ChemFree products.
OPERATING EXPENSES - Expenses for marketing, general and administrative and
research and development activities were lower by $3,228,000 in 1996 than in
1995. These expenses declined by 20 percent year-to-year on a 16 percent
decline in revenue. After eliminating the expense and revenue of ISJ, expenses
at the comparable remaining subsidiaries represented 55 percent of revenue in
1996, a significant improvement compared to 70 percent of revenue in 1995. The
improvement in the expense to revenue ratio results from improved operating
efficiency at the PsyCare operation through consolidation of functions and
programs, as well as controlling expenses while growing revenues at the other
subsidiaries, except for ChemFree. At ChemFree, expenses increased to provide
the infrastructure to support the existing installed base of products, to
expand the marketing and sales efforts to develop new channels of distribution
and target markets, and to add new product enhancements. In 1996, PsyCare
incurred a non-recurring expense of $250,000 in the second quarter to buy out a
long-term contract and amend a license agreement with a founder and former
employee of PsyCare.
Expenses in all categories were lower in 1995 than in 1994, both in absolute
terms and as a percentage of revenue. Most of the margin improvement came as a
result of the Company's efforts to reduce operating expenses at existing and
newly acquired subsidiaries and the growth in sales volume. Marketing expense
was 20 percent less in 1995 than in 1994 due to expense reduction at
essentially all subsidiaries, improved productivity and a change in
classification of certain marketing expenses to general and administrative at
ISJ. General and administrative expense declined by 7 percent in 1995 as
compared to 1994. The favorable comparison is due in part to expense controls
in 1995 but also to the fact that 1994 expenses contain $2.2 million of
non-recurring expenses. Non-recurring expenses in 1995 include a $367,000
write-off of goodwill in the fourth quarter at a small subsidiary.
INTEREST INCOME - Net interest income in 1996 increased by $73,000 over 1995
due in part to lower interest expense in 1996 because the Company repaid its
outstanding bank debt in 1996. Net interest income declined slightly in 1995
compared to 1994 because increased borrowings under a line of credit offset in
part interest earned from other sources.
INVESTMENT INCOME - In 1996, the Company recorded gains of $6.6 million on
aggregate sales of 315,000 shares of common stock of IQ Software Corporation
(IQ) from time to time during the year. The Company also recorded a gain, net
of taxes, of $337,000 on the sale of 104,484 shares of OrCAD, Inc. common stock
in OrCAD's initial public offering (see Note 3).
INTELLIGENT SYSTEMS CORPORATION
- 10 -
<PAGE> 11
As of December 31, 1996, the Company retains 157,801 shares of IQ common stock,
of which 154,914 shares are pledged as collateral pursuant to a pledge
agreement (Note 6), and 104,484 shares of OrCAD common stock. In the fourth
quarter of 1996, the Company recorded a charge of $1.0 million to reduce the
carrying value of its minority equity investment in a privately-held business.
In 1995, the Company recorded a gain of $818,000 on the sale of a portion of
its holdings in IQ and a gain of $1.3 million on the exchange of the Company's
equity interest in ISJ for OrCAD, Inc. common stock. In addition, in 1995 the
Company recorded a loss of $203,000 related to its pro rata share of the
results of PaySys International, Inc., a firm in which the Company holds a
significant minority position. In 1994, the Company recorded a gain on the
sale of the Company's notes receivable from Peachtree Software, offset in part
by a reserve to reduce the carrying value of one of the Company's investments.
OTHER INCOME - In 1994 and 1995, the Company recognized income from marketing
and consulting agreements related to the sale of a subsidiary in 1991. The
agreements terminated in 1995 and thus no income was recorded in 1996.
TAXES - The Company used net loss carryforwards to offset taxable income in
1996. Income taxes in 1995 are related to the income of ISJ prior to its sale
in December 1995 as well as a partial reversal of a tax refund at a subsidiary
upon completion of final tax returns for a prior period. Most of the gain
which the Company realized on the sale of its note receivable from Peachtree
Software in 1994 was offset by tax loss carryforwards. The small tax provision
in 1994 reflects the unsheltered portion of the gain and estimated taxes of
ISJ.
LOSS FROM CONTINUING OPERATIONS - In 1996, the loss from operations of
$2,053,000 (including a non-recurring expense of $250,000) was offset by
significant capital gains recognized on the sale of a portion of the Company's
holdings in IQ and OrCAD, as explained above. In 1995, the loss from
operations of $2.5 million (including $367,000 in non-recurring charges) was
offset by non-operating income of $2.7 million. Of the $6.2 million loss from
continuing operations in 1994, approximately $3.7 million is related to
non-recurring expenses recorded in 1994 offset in part by $2.0 million in
non-recurring income.
DISCONTINUED OPERATIONS - As more fully described in Note 4 to the Consolidated
Financial Statements, the Company discontinued its Distribution Business
effective June 30, 1994. In conjunction with this action, the Company recorded
a provision for disposition of the business of $1.4 million, net of applicable
taxes of $0, to accrue for net losses estimated to be incurred during the
phase-out period and to adjust the carrying amount of the net assets held for
sale to net realizable value. Effective December 31, 1996, the Company sold
the remaining discontinued operations for the amounts estimated.
COMMON SHARES - The Company has repurchased its common shares in each of the
last three years under a stock repurchase program. The repurchases resulted in
5,126,767, 5,312,867 and 5,575,767 shares outstanding at December 31, 1996,
1995 and 1994, respectively.
ACCOUNTING CHANGES - In October 1995, the Financial Accounting Standards Board
issued Statement No. 123, "Accounting for Stock-Based Compensation". The
Statement requires companies to estimate the value of all stock-based
compensation using a recognized pricing model. Companies have the option of
recognizing this value as an expense or disclosing its proforma effects on net
income. The Company adopted the disclosure requirements of this statement and
has chosen to continue to apply the accounting provision of Accounting
Principle Board Opinion No. 25. As a result, the adoption of this new standard
did not have an effect on the Company's financial position or results of
operations.
Effective January 1996, the Company adopted Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used, as well
as for long-lived assets and certain identifiable intangibles to be disposed
of. The adoption of this standard did not have a material effect on the
Company's financial position.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the principal sources of liquidity were $7,193,000 from the proceeds
of various sales of IQ stock, $1,069,000 from the proceeds of the sale of OrCAD
common stock and repayment of a note receivable of $400,000. The principal
uses of funds were to increase the Company's long-term investments as a
minority investor in several promising, privately-held companies, to repay
$1,488,000 of bank debt, to repurchase 236,100 shares of the Company's common
stock during the
INTELLIGENT SYSTEMS CORPORATION
- 11 -
<PAGE> 12
year for $619,000, to purchase approximately $1.4 million in fixed assets
(mainly computers and related equipment), to purchase certificates of deposit
totaling $1,056,000, and to fund working capital requirements of domestic
operations.
In 1995, the principal sources of liquidity were a cash payment of $962,000
representing payment in full of a promissory note related to the sale of the
Company's French subsidiary, proceeds of $1.3 million from the sale of
short-term investments, advances under the Company's line of credit and
proceeds of $939,000 from the sale of a portion of the Company's holdings in IQ
common stock. The principal uses of funds were to make loans to and acquire
additional equity in firms in which the Company is a minority owner, to
repurchase 262,900 shares of the Company's common stock, and to provide working
capital for several domestic subsidiaries.
The Company believes it has adequate working capital to support current
operations and plans. As explained in Note 1 to the Consolidated Financial
Statements, a substantial deterioration in the financial condition of any of
the companies in which the Company has long-term investments could have an
adverse effect on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report.
See page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No independent public accountant of the Company has resigned, indicated any
intent to resign or been dismissed as the independent public accountant of the
Company during the two years ended December 31, 1996 or subsequent thereto.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to management's nominees for directors and to the
executive officers of the Company is set forth under the captions "Proposal 2 -
The Election of Directors - Nominees" and "Proposal 2 - The Election of
Directors - Executive Officers" in the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held on June 6, 1997. Such information is
incorporated herein by reference. Information regarding compliance by directors
and executive officers of the Company and owners of more than 10% of the
Company's Common Stock with the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, is set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the above
referenced Proxy Statement. Such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to management compensation is set forth under the captions
"Proposal 2 - The Election of Directors - Executive Compensation" in the
Company's Proxy Statement referred to in Item 10 above. Such information is
incorporated herein by reference, except for the information set forth in the
subsections entitled "Proposal 2 - The Election of Directors - Executive
Compensation - Board Compensation Committee Report on Executive Compensation"
and "Performance Graph," which specifically are not so incorporated by
reference.
INTELLIGENT SYSTEMS CORPORATION
- 12 -
<PAGE> 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of the Company's $0.01 par value Common Stock
by certain persons is set forth under the caption "Voting - Principal
Shareholders, Directors and Certain Executive Officers" in the Company's Proxy
Statement referred to in Item 10 above. Such information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 2, 1996, J. Leland Strange, president and a director of the
Company, exercised 50,000 stock options. Mr. Strange turned in 14,894 shares
to the Company at $2.9375 per share in payment of the exercise price and sold
the remaining 35,106 shares to the Company at $2.75 per share, in a transaction
which had prior approval of the board of directors. The proceeds to Mr.
Strange on the sale of the shares was $96,542.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
1. Financial Statements
The following consolidated financial statements and related report of
independent public accountants are included in this report and are incorporated
by reference in Part II, Item 8 hereof. See the Index to Financial Statements
and Supplemental Schedules on page F-1 hereof.
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flow for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are included in this report.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
such schedules are not required under the related instructions or are
inapplicable or because the information required is included in the
consolidated financial statements or notes thereto. See the Index to Financial
Statements and Supplemental Schedule on page F-1 hereof.
Schedule II - Valuation and Qualifying Accounts and Reserves
Report of Independent Auditors for InterQuad Services Limited
Report of Independent Auditors for PaySys International, Inc.
3. Exhibits
The following exhibits are filed with or incorporated by reference in this
report. The Company will furnish any exhibit upon request to Bonnie L. Herron,
Secretary, Intelligent Systems Corporation, 4355 Shackleford Road, Norcross,
Georgia 30093; telephone (770) 381-2900. There is a charge of $.50 per page to
cover expenses of copying and mailing.
INTELLIGENT SYSTEMS CORPORATION
- 13 -
<PAGE> 14
2.1 Stock Exchange Agreement between OrCAD, Inc., Intelligent Systems
Corporation, Stuart A. Harrington, Michel A. Burton, and various ISJ
minority shareholders dated December 2, 1995. (Incorporated by reference
to Exhibit 2.1 to the Registrant's Form 10-K for the year ended December
31, 1995.)
2.2 Piggyback Registration Rights Agreement regarding stock of OrCAD, Inc.
dated December 1, 1995. (Incorporated by reference to Exhibit 2.2 to the
Registrant's Form 10-K for the year ended December 31, 1995.)
2.3 Stock Purchase Agreement between Intelligent Systems Corporation and
PsyCare U.S.A., LLC dated September 1, 1995. (Incorporated by reference to
Exhibit 2.16 to the Registrant's Form 10-K for the year ended December 31,
1995.)
2.4 Subscription, Assignment and Assumption agreement by and among PsyCare
L.P., PsyCare U.S.A., LLC and PsyCare America LLC dated January 1, 1996.
(Incorporated by reference to Exhibit 2.17 to the Registrant's Form 10-K
for the year ended December 31, 1995.)
3(i) Amended and Restated Articles of Incorporation of the Registrant dated
November 14, 1991. (Incorporated by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991.)
3(ii)Bylaws of the Registrant dated March 11, 1997.
4.1 See Exhibits 3(i) and 3(ii) for instruments defining rights of holders of
Common Stock and Special Stock of Registrant.
10.1 Lease Agreement dated March 11, 1985, between a subsidiary of the
Registrant and A.R. Weeks. (Incorporated by reference to Exhibit 10.1 to
Intelligent Systems Corporation Annual Report on Form 10-K for the fiscal
year ended March 31, 1986.)
10.2 Amendment to Lease Agreement dated November 30, 1990 between a subsidiary
of the Registrant and A.R. Weeks. (Incorporated by reference to Exhibit
10.2 to Intelligent Systems Master, L.P. Annual Report on Form 10-K for
the year ended December 31, 1990.)
10.3 Pledge Agreement between Intelligent Systems Corporation and IQ Software
Corporation dated April 18, 1995. (Incorporated by reference to Exhibit
10.3 to the Registrant's Form 10-K for the year ended December 31, 1995.)
10.4 Unconditional Guarantee of Intelligent Systems Corporation in favor of IQ
Software Corporation dated April 18, 1995. (Incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-K for the year ended December 31,
1995.)
10.5 Promissory Note of Registrant in favor of NationsBank dated September 29,
1995 and related Security Agreement. (Incorporated by reference to Exhibit
10.5 to the Registrant's Form 10-K for the year ended December 31, 1995.)
10.6 Management Compensation Plans and Arrangements:
(a) Intelligent Systems Corporation 1991 Stock Incentive Plan.
(b) Intelligent Systems Corporation Change in Control Plan for Officers.
(c) Intelligent Systems Corporation Outside Director's Retirement Plan.
(All of the above are incorporated by reference to Exhibit 10.4 to
Intelligent Systems Corporation Annual Report on Form 10-K for the year
ended December 31, 1993.)
21.0 List of subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Morley and Scott.
23.3 Consent of Ernst and Young LLP.
INTELLIGENT SYSTEMS CORPORATION
- 14 -
<PAGE> 15
27 Financial Data Schedule (for SEC use only)
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Registrant during the last quarter
covered by this report, October 1, 1996 to December 31, 1996.
(C) SEE ITEM 14(A)(3) ABOVE.
(D) SEE ITEM 14(A)(2) ABOVE.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTELLIGENT SYSTEMS CORPORATION
Registrant
By: /s/ J. LELAND STRANGE
---------------------------------
J. Leland Strange
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
SIGNATURE CAPACITY DATE
/s/ J. LELAND STRANGE Chairman of the Board, President, March 28, 1997
- --------------------- Chief Executive Officer and Director
J. Leland Strange (Principal Executive Officer)
/s/ HENRY H. BIRDSONG Chief Financial Officer March 28, 1997
- --------------------- (Principal Accounting and Financial Officer)
Henry H. Birdsong
/s/ DONALD A. MCMAHON Director March 28, 1997
- ---------------------
Donald A. McMahon
/s/ JAMES V. NAPIER Director March 28, 1997
- -------------------
James V. Napier
/s/ JOHN B. PEATMAN Director March 28, 1997
- -------------------
John B. Peatman
/s/ PARKER H. PETIT Director March 28, 1997
- --------------------
Parker H. Petit
</TABLE>
INTELLIGENT SYSTEMS CORPORATION
- 15 -
<PAGE> 16
INTELLIGENT SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
The following consolidated financial statements and schedules of the
Registrant and its subsidiaries are submitted herewith in response to
Item 8:
FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Report of Independent Public Accountants......................F-2
Consolidated Balance Sheets - December 31, 1996 and 1995......F-3
Consolidated Statements of Operations -
Years Ended December 31, 1996, 1995 and 1994.................F-4
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1996, 1995 and 1994.................F-5
Consolidated Statements of Cash Flow -
Years Ended December 31, 1996, 1995 and 1994.................F-6
Notes to Consolidated Financial Statements....................F-7
</TABLE>
FINANCIAL STATEMENT SCHEDULES:
The following supplemental schedules of the Registrant and its
subsidiaries are submitted herewith in response to Item 14(a)(2):
<TABLE>
<S> <C>
Schedule II - Valuation and Qualifying Accounts and Reserves...S-1
Report of Independent Auditors for InterQuad Services Limited..S-2
Report of Independent Auditors for PaySys International, Inc...S-3
</TABLE>
INTELLIGENT SYSTEMS CORPORATION
F-1
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF INTELLIGENT SYSTEMS CORPORATION:
We have audited the accompanying consolidated balance sheets of
Intelligent Systems Corporation (a Georgia corporation) and its subsidiary
companies and operating partnerships as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements and the
schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the
financial statements of InterQuad Services Limited, a wholly-owned
subsidiary, which statements reflect total assets and total revenues of
9.4 percent and 16.1 percent, respectively, in 1996 and 8.5 percent and
16.8 percent, respectively, in 1995 of the consolidated totals. We did not
audit the financial statements of PaySys International, Inc., an
investment which is reflected in the accompanying financial statements
using the equity method of accounting. The investment in PaySys
International, Inc. represents 6.9 percent of total assets in 1996 and the
equity in its net income represents 1.1 percent of consolidated net income
for 1996. The statements of InterQuad Services Limited and PaySys
International, Inc. were audited by other auditors whose reports have been
furnished to us and our opinion, insofar as it relates to the amounts
included for InterQuad Services Limited and PaySys International, Inc., is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Intelligent Systems Corporation and
its subsidiary companies and operating partnerships as of December 31,
1996 and 1995, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule in Item
14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 27, 1997
INTELLIGENT SYSTEMS CORPORATION
F-2
<PAGE> 18
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 2,434 $ 520
Certificate of deposit 1,056 --
Accounts receivable, net 3,764 3,964
Notes and interest receivable 3,212 3,127
Inventories 648 502
Other current assets 737 534
- ------------------------------------------------------------------------------------------------------
Total current assets 11,851 8,647
- ------------------------------------------------------------------------------------------------------
Long-term investments 8,967 10,922
Long-term notes receivable 1,414 1,356
Property and equipment, at cost less accumulated depreciation and amortization 2,126 1,619
Excess of cost over underlying net assets of businesses acquired,
net of accumulated amortization 569 786
- ------------------------------------------------------------------------------------------------------
Total assets $24,927 $ 23,330
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term borrowings $ -- $ 1,488
Accounts payable 984 1,632
Accrued expenses and other current liabilities 2,313 1,435
- ------------------------------------------------------------------------------------------------------
Total current liabilities 3,297 4,555
- ------------------------------------------------------------------------------------------------------
Long-term debt -- 50
- ------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 authorized, 5,126,767 and
5,312,867 outstanding at December 31, 1996 and 1995, respectively 51 53
Paid-in capital 24,139 24,756
Foreign currency translation adjustment (196) (153)
Unrealized gain in available-for-sale securities 3,804 4,476
Accumulated deficit (6,168) (10,407)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 21,630 18,725
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $24,927 $ 23,330
======================================================================================================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
INTELLIGENT SYSTEMS CORPORATION
F-3
<PAGE> 19
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 23,678 $ 28,240 $ 21,364
Expenses:
Cost of sales 12,838 14,579 10,897
Marketing 4,624 4,280 5,391
General & administrative 7,983 10,846 11,751
Research & development 286 995 1,639
- -------------------------------------------------------------------------------------------------
Loss from operations (2,053) (2,460) (8,314)
- -------------------------------------------------------------------------------------------------
Other income:
Interest income, net 501 428 463
Investment income 5,844 1,896 1,091
Other income (loss), net (38) 399 633
- -------------------------------------------------------------------------------------------------
Income (loss) before income tax provision and minority interest 4,254 263 (6,127)
- -------------------------------------------------------------------------------------------------
Income tax provision 3 102 78
- -------------------------------------------------------------------------------------------------
Income (loss) before minority interest 4,251 161 (6,205)
- -------------------------------------------------------------------------------------------------
Minority interest 12 14 21
- -------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations 4,239 147 (6,226)
- -------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations -- -- (133)
Estimated loss on disposal of discontinued operations -- -- (1,372)
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 4,239 $ 147 $ (7,731)
=================================================================================================
Net income (loss) per share based upon weighted
average shares outstanding:
Continuing operations $ 0.80 $ 0.03 $ (1.05)
Discontinued operations -- -- (0.25)
- -------------------------------------------------------------------------------------------------
Net income (loss) per share $ 0.80 $ 0.03 $ (1.30)
=================================================================================================
Weighted average shares outstanding 5,278,269 5,371,401 5,947,515
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
INTELLIGENT SYSTEMS CORPORATION
F-4
<PAGE> 20
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
STOCKHOLDERS' EQUITY 1996 1995 1994
- -------------------------------------------------------------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK, NUMBER OF SHARES, beginning of year 5,312,867 5,575,767 6,413,368
Exercise of options during year 50,000 -- --
Purchase and retirement of stock (236,100) (262,900) (837,601)
- --------------------------------------------------------------------------------------
End of year 5,126,767 5,312,867 5,575,767
- --------------------------------------------------------------------------------------
COMMON STOCK, AMOUNT, beginning of year $ 53 $ 56 $ 67
Purchase and retirement of stock (2) (3) (11)
- --------------------------------------------------------------------------------------
End of year 51 53 56
- --------------------------------------------------------------------------------------
PAID-IN CAPITAL, beginning of year 24,756 25,263 27,035
Purchase and retirement of stock (617) (507) (1,772)
- --------------------------------------------------------------------------------------
End of year 24,139 24,756 25,263
- --------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT, beginning
of year (153) (141) (167)
Foreign currency translation adjustment during year (43) (12) 26
- --------------------------------------------------------------------------------------
End of year (196) (153) (141)
- --------------------------------------------------------------------------------------
UNREALIZED GAIN IN AVAILABLE-FOR-SALE SECURITIES 3,804 4,476 4,568
- --------------------------------------------------------------------------------------
ACCUMULATED DEFICIT, beginning of year (10,407) (10,554) (2,823)
Net income (loss) 4,239 147 (7,731)
- --------------------------------------------------------------------------------------
End of year (6,168) (10,407) (10,554)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 21,630 $ 18,725 $ 19,192
======================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
INTELLIGENT SYSTEMS CORPORATION
F-5
<PAGE> 21
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
CASH PROVIDED BY (USED FOR): 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net income (loss) $ 4,239 $ 147 $(7,731)
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 985 1,451 3,853
Gain from sale of assets (5,804) (2,545) (1,457)
Equity in net loss (gain) of affiliates (40) 203 --
Loss from discontinued operations -- -- 1,505
Changes in operating assets and liabilities:
Accounts receivable 195 (1,210) 1,010
Inventories (203) (180) 15
Other current assets (202) 66 84
Accounts payable (520) 665 (415)
Accrued expenses and other current liabilities 885 316 (232)
- -----------------------------------------------------------------------------------------------
Cash used for continuing operations (465) (1,087) (3,368)
===============================================================================================
INVESTING ACTIVITIES:
Proceeds from sale of investment 8,267 939 --
Decrease in net assets/liabilities of
discontinued operations -- 939 3,635
Acquisitions of companies, net of cash acquired -- (8) (2,288)
Increase in ownership of subsidiaries (136) -- --
Increase (decrease) in minority interests -- (136) 15
Dispositions (acquisitions) of short-term
investments -- 1,328 (1,328)
Acquisitions of long-term investments (1,025) (796) (2,003)
Repayments of (advances under) notes receivable, net (115) (1,644) 7,249
Purchases of certificates of deposit (1,056) -- --
Purchases of property and equipment, net (1,406) (752) (697)
- -----------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities 4,529 (130) 4,583
===============================================================================================
FINANCING ACTIVITIES:
Net borrowings (repayments) under short-term
borrowing arrangements (1,488) 1,249 222
Purchase and retirement of stock (619) (509) (1,783)
Foreign currency translation adjustment (43) 27 26
- -----------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (2,150) 767 (1,535)
===============================================================================================
Net increase (decrease) in cash 1,914 (450) (320)
Cash at beginning of year 520 970 1,290
- -----------------------------------------------------------------------------------------------
Cash at end of year $ 2,434 $ 520 $970
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
INTELLIGENT SYSTEMS CORPORATION
F-6
<PAGE> 22
================================================================================
NOTE 1
================================================================================
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization - Intelligent Systems Corporation, a Georgia corporation (the
"Corporation" or the "Company"), was formed in November 1991 to acquire through
merger the business, net assets and operations of Intelligent Systems Master,
L.P. (the "Partnership").
Nature of Operations - The Company is involved in creating and managing
businesses through flexible partnership arrangements. Consolidated partnership
companies (in which the Company is the majority owner) are principally engaged
in two industries: technology related products and services and health care
services (as defined more specifically in Note 14.) The Company's affiliate
partnership companies (in which the Company has a minority ownership stake) are
mainly involved in the technology industry.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Consolidation - The financial statements include the accounts of Intelligent
Systems Corporation and all its majority owned U.S. and non-U.S. subsidiary
companies and operating partnerships after elimination of all material
intercompany accounts and transactions.
Investments - Investments in entities in which Intelligent Systems has a 20 to
50 percent ownership interest are accounted for by the equity method.
Investments of less than 20 percent in non-marketable equity securities are
accounted for at the lower of cost or market. Marketable securities are
accounted for in accordance with Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). In 1994 the Company adopted SFAS No. 115. The initial
adoption of SFAS No. 115 required the recording of an unrealized gain in
available-for-sale securities of $2,947,000 as a separate component of
stockholders' equity. The adoption of SFAS No. 115 had no impact on retained
earnings. The aggregate fair value of the Company's available-for-sale
securities, which consist of 157,801 and 472,801 shares of IQ Software
Corporation (IQ) common stock as of December 31, 1996 and 1995, respectively,
and 104,484 shares of common stock of OrCAD, Inc. (OrCAD) as of December 31,
1996, totaled $4,818,000 and $5,323,000, respectively, which include unrealized
holding gains of $3,804,000 and $4,476,000, respectively, which are reflected
as a separate component of stockholders' equity. Through February 21, 1997,
the market value of these securities decreased by $2.2 million from December
31, 1996. The Company does not believe that this decrease represents a
permanent impairment of value. The Company recorded gains of $6,628,000 and
$818,000 on sales of 315,000 and 67,362 shares of IQ common stock in 1996 and
1995, respectively. Cash proceeds in 1996 from the sale of 315,000 shares of
IQ stock and 104,484 shares of OrCAD stock were $7,193,000 and $1,069,000,
respectively. The gains on the transactions are calculated based on the
average cost basis of the securities. The Company's short-term investments are
classified as trading securities under SFAS No. 115. The impact on the
December 31, 1995 and 1994 financial statements of applying SFAS No. 115 to the
trading securities was immaterial. Approximately $6.5 million of the Company's
long-term investments are concentrated in IQ, OrCAD (Note 3), DayStar Digital,
Inc. and PaySys International, Inc. (Note 5). A deterioration in the financial
condition of any of these companies could have an adverse effect on the
Company's financial condition.
Translation of foreign currencies - The Company considers that local currencies
are the functional currencies for foreign operations. Assets and liabilities
are translated to U.S. dollars at year-end exchange rates. Income and expense
items are translated at average rates of exchange prevailing during the year.
Translation adjustments are accumulated as a separate component of
stockholders' equity. Gains and losses which result from foreign currency
transactions are included in earnings.
Inventories - Inventories are stated at the lower of average cost or market.
Cost includes labor, materials and production overhead. Market is defined as
net realizable value.
Property and equipment - Property and equipment are carried at cost. For
financial reporting purposes, depreciation is provided using the 150 percent
declining balance method over the estimated lives of the assets, as follows:
<TABLE>
<CAPTION>
CLASSIFICATION USEFUL LIFE IN YEARS
- --------------------------------------------
<S> <C>
Operating equipment 5
Furniture & fixtures 7
Leasehold improvements 4-11
- --------------------------------------------
</TABLE>
Accumulated depreciation and amortization was $3,162,000 and $2,668,000 at
December 31, 1996 and 1995, respectively.
Intangibles - Intangibles are carried at cost net of related amortization. The
excess of costs over underlying net assets of businesses acquired is generally
amortized over periods of
INTELLIGENT SYSTEMS CORPORATION
F-7
<PAGE> 23
three to five years using the straight-line method. Accumulated amortization
of intangibles totaled $1.2 million and $1.3 million at December 31, 1996 and
December 31, 1995, respectively. The Company follows a policy of writing off
the asset and accumulated amortization for fully amortized intangibles. The
Company periodically reviews the values assigned to intangible assets to
determine whether they have been permanently impaired. Relative to goodwill,
the Company uses an estimate of the undiscounted cash flows of the applicable
entity over the remaining life of the goodwill in measuring whether the
goodwill is recoverable. Based on this analysis, the Company wrote off $367,000
of goodwill related to Carisys, Inc. in 1995. During 1994 the Company wrote off
$1,591,000 of goodwill relating to Intelligent Enclosures. During 1994, the
Company also wrote off $610,000 of intangible assets relating to certain
contracts and licenses acquired during 1993 and 1994 which were subsequently
terminated. These write-offs are reflected in general and administrative
expense in the accompanying statements of operations. During 1994, the Company
also expensed $580,000 related to the allocation of purchase price of the 1994
acquisitions. In 1996, 1995 and 1994, the Company recorded intangible
amortization expense of approximately $332,000, $773,000 and $2.8 million,
respectively.
Accrued expenses and other current liabilities - Accrued expenses and other
liabilities at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------
<S> <C> <C>
Accrued wages and payroll taxes $ 392 $ 323
Deferred revenue 421 477
Duty reserve -- 130
</TABLE>
Warranty costs - Estimated costs associated with product warranties are accrued
as an expense in the period the related sales are recognized.
Revenue recognition - Sales are recorded when products are shipped and all
significant obligations are complete, or in the case of service providers, when
the services are rendered. The Company provides for estimated sales returns in
the period in which the sales are recorded.
Cost of sales - Cost of sales includes direct material, direct labor and
production overhead for product companies and direct cost of services rendered
for service companies.
Accounting Changes - In October 1995, the Financial Accounting Standards Board
issued Statement No. 123, "Accounting for Stock-Based Compensation". The
Statement requires companies to estimate the value of all stock-based
compensation using a recognized pricing model. Companies have the option of
recognizing this value as an expense or disclosing its pro forma effects on net
income. The Company has adopted the disclosure requirements of this statement
and has chosen to continue to apply the accounting provision of Account
Principle Board Opinion No. 25. As a result, the adoption of this new standard
did not have an effect on the Company's financial position or results of
operations. See Note 12.
Effective January 1996, the Company adopted Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used, as well
as for long-lived assets and certain identifiable intangibles to be disposed
of. The adoption of this standard did not have a material effect on the
Company's financial position.
Restated Amounts - Certain prior year amounts have been restated for current
year presentation.
================================================================================
NOTE 2
================================================================================
ACQUISITIONS
Carisys, Inc. - Effective February 8, 1995, the Company acquired a controlling
interest in Carisys, a start-up engaged in the manufacture and sale of carrier
tape products. The Company had previously held a minority ownership position
in Carisys. The Company paid $100,000 in cash for its equity interest and
exercised an existing warrant for no additional consideration. The acquisition
was accounted for as a purchase. Since the date of acquisition, the Company has
consolidated the results of operations of Carisys without recording a minority
interest, since there are no other contributing investors. The Company wrote
off $367,000 of goodwill related to Carisys in the fourth quarter of 1995 and
the business wound down its operations in early 1996 due to unexpected losses
and market changes.
PsyCare U.S.A., LLC - Effective June 1, 1994, the Company acquired a 70 percent
interest in PsyCare U.S.A., LLC, a company formed for the purpose of
simultaneously acquiring the assets and operations of U.S.A. Rapha, Inc.
PsyCare U.S.A. is a provider of mental health care and substance abuse
treatment programs to certain niche markets throughout the United States. The
Company paid $600,000 in cash for the equity interest and agreed to provide a
line of credit to PsyCare U.S.A. In 1995,the Company converted a portion of
the line of credit into additional equity, thereby increasing its ownership
percentage of PsyCare U.S.A. In 1996, the Company made an additional
investment of $136,000 and became the sole owner. Since June 1, 1994, the
Company has consolidated 100 percent of PsyCare U.S.A.'s operations, without
recording a minority interest, since there are no other contributing investors.
In 1996, the Company merged the operations of PsyCare U.S.A. and
INTELLIGENT SYSTEMS CORPORATION
F-8
<PAGE> 24
PsyCare L.P., a majority owned company, into a newly formed company, PsyCare
America, LLC, of which the Company effectively owns a 76 percent equity
interest.
================================================================================
NOTE 3
================================================================================
SALE OF ASSETS
Intelligent Systems Japan, K. K. - Effective December 2, 1995, the Company sold
all its ownership interest in Intelligent Systems Japan (ISJ), a subsidiary
company, to OrCAD, Inc. Since 1990, ISJ had been the exclusive distributor in
Japan of OrCAD software products. The Company exchanged its interest in ISJ for
208,968 shares of common stock of OrCAD, which is carried on the Company's
balance sheet as a long-term investment. The Company recorded a gain of $1.3
million in the quarter ended December 31, 1995 on the exchange transaction. On
March 1, 1996, OrCAD completed its initial public offering. The Company sold
one-half of its OrCAD stock (104,484 shares) in the initial public offering and
recognized a gain, net of tax, of $337,000 in the first fiscal quarter of 1996.
================================================================================
NOTE 4
================================================================================
DISCONTINUED OPERATIONS
Effective June 1994, the Company adopted a plan to discontinue the operations
of its European subsidiaries which are involved in distribution of computer
hardware and software products (the "Distribution Business"). As part of its
plan to discontinue the Distribution Business in France, Germany and the United
Kingdom, the Company sold its French operation in August 1994 for $2.8 million
in cash and a promissory note of $962,000. Effective December 31, 1996, the
Company sold its discontinued operations in Germany and the U.K. to a privately
held foreign corporation for $100,000 cash. The results of operations of the
Distribution Business and its net assets and liabilities, previously included
in the Company's consolidated results, have been reported separately as
discontinued operations in the consolidated financial statements. In
conjunction with the discontinuation, the Company recorded a provision for
disposition of the Distribution Business of $1,372,000, which included
estimated operating losses during the phase-out period and reserves to adjust
the carrying amount of the net assets held for sale to net realizable value,
net of applicable taxes of $0. No gain or loss was recognized upon the sale of
the discontinued operations. Revenue for the Distribution Business for the
years ended December 31, 1996, 1995 and 1994 was $14.3 million, $14.7 million
and $15.9 million, respectively. The results of operations of the Distribution
Business during the years ended December 31, 1996, 1995 and 1994 were $141,000,
$(300,000) and $(501,000), respectively.
================================================================================
NOTE 5
================================================================================
INVESTMENTS IN AFFILIATES
At December 31, 1996, the Company owned a 37 percent ownership interest in
PaySys International, Inc. (PaySys). Because the ownership interest is 50
percent or less, the investment is classified as an affiliate and accounted for
using the equity method of accounting. No dividends were received from the
affiliate during 1996 and 1995. Retained earnings in 1996 and 1995 included
undistributed earnings of PaySys, net of taxes, of $47,000 and $(203,000),
respectively.
The table below contains the summarized financial information of PaySys.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------
(in thousands) 1996 1995
- -----------------------------------------
<S> <C> <C>
Current assets $11,868 $ 7,364
Current liabilities 14,271 8,914
Noncurrent assets 4,494 4,143
Noncurrent liabilities 1,929 2,581
Net sales $26,926 $21,728
Operating income (loss) 358 (142)
Net income (loss) 139(1) (472)(2)
</TABLE>
1. includes final installment payment of $1.8 million royalty expense.
2. includes non-recurring charge of $1.2 million to write off capitalized
software.
================================================================================
NOTE 6
================================================================================
ACCOUNTS AND
NOTES RECEIVABLE AND
OTHER COMMITMENTS
At December 31, 1996 and 1995, the Company's allowance for doubtful accounts
and sales returns amounted to $372,000 and $318,000, respectively.
Provisions for doubtful accounts and sales returns were $312,000, $446,000 and
$298,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company holds minority ownership positions in DayStar Digital, Inc.
(Macintosh compatible accelerator cards and media publishing workstations) and
Digital Wireless, Inc. (wireless communication products). As part
INTELLIGENT SYSTEMS CORPORATION
F-9
<PAGE> 25
of these transactions, the Company entered into secured loan agreements with
terms of two to three years and interest rates ranging from 2 to 5 percent over
prime. The Company provided advances under these commitments (which amount to
approximately $2.9 million and $4.0 million at December 31, 1996 and 1995,
respectively, and which are included in notes receivable in the accompanying
balance sheet) and does not expect additional funding during the terms of the
agreements. At December 31, 1996, the Company owns less than twenty percent of
the equity in DayStar Digital and Digital Wireless and accounts for these
investments at cost.
The Company's long-term notes receivable totaling $1,414,000 are due in 1988.
In April 1995, the Company entered into a Pledge Agreement with IQ Software
Corporation (IQ) pursuant to which the Company pledged 240,163 shares of IQ
stock held by the Company as collateral for a loan of $1.8 million from IQ to
DayStar Digital Inc. At the time of the transaction, DayStar used the proceeds
from the loan to repay a portion of its debt to the Company. In 1996, IQ
released 85,259 shares of stock held as collateral which were then sold by the
Company in several market transactions. Upon the sale of the stock, the
Company secured certificates of deposit totaling $1.1 million as replacement
collateral. IQ retains 154,904 shares as additional collateral.
================================================================================
NOTE 7
================================================================================
BORROWINGS
Terms and borrowings under the Company's credit facilities are summarized
below:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------
<S> <C> <C>
Maximum outstanding (month-end) $1,476 $1,619
Outstanding at year end -- $1,488
Average interest rate at year end N/A 9%
Average borrowings during the year $ 604 $ 976
Average interest rate 10.0% 9.5%
- ---------------------------------------------------
</TABLE>
Interest paid on debt during 1996, 1995 and 1994 amounted to $61,000, $93,000
and $2,000, respectively.
================================================================================
NOTE 8
================================================================================
INCOME TAXES
Tax returns for the Company are subject to examination by federal and state
taxing authorities for the years ended December 31, 1996, 1995, 1994 and 1993.
The income tax provision related to operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(in thousands) 1996 1995 1994
- -----------------------------------------
<S> <C> <C> <C>
Current:
Foreign -- $ 46 $ 13
Domestic 3 56 65
- -----------------------------------------
$ 3 $ 102 $ 78
=========================================
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is not provided since only state income and foreign taxes are
provided.
At December 31, 1996, the Company's domestic subsidiaries had net operating
loss carryforwards totaling $18.0 million. The net operating loss
carryforwards, if unused as offsets to future taxable income, will expire
beginning in 2005 and continuing through 2011. The utilization of these
carry-forwards may be limited in some cases to taxable income of the particular
subsidiary and also may be subject to annual limitation under the Internal
Revenue Code in connection with a greater than 50% change in ownership as
defined under Section 382.
The Company accounts for income taxes using Statement of Financial Accounting
Standard 109 "Accounting for Income Taxes". The Company has a deferred tax
benefit of approximately $8.6 million and $6.0 million at December 31, 1996 and
1995, respectively. As the Company's ability to realize the deferred tax asset
is uncertain, the amount is offset in both 1996 and 1995 by a valuation
allowance of an equal amount. The deferred tax benefit at December 31, 1996 and
1995 relates primarily to net operating loss carryforwards.
Income taxes paid during 1996, 1995 and 1994 amounted to $3,000, $0 and
$65,000, respectively.
INTELLIGENT SYSTEMS CORPORATION
F-10
<PAGE> 26
================================================================================
NOTE 9
================================================================================
COMMITMENTS AND
CONTINGENCIES
The Company has noncancellable operating leases expiring at various dates
through 2006. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------
(in thousands)
- ------------------------------------
<S> <C>
1997 $1,082
1998 392
1999 375
2000 376
2001 103
Thereafter 799
- ------------------------------------
Total minimum lease payments $3,127
</TABLE>
Rental expense for leased facilities and equipment related to operations
amounted to $1.0 million, $1.4 million and $1.2 million, for the years ended
December 31, 1996, 1995 and 1994, respectively.
================================================================================
NOTE 10
================================================================================
POST-RETIREMENT BENEFITS
Effective January 1, 1992, the Company adopted the Outside Directors'
Retirement Plan which provides for each nonemployee director, upon resignation
from the Board after reaching the age of 65, to receive a lump sum cash payment
equal to $5,000 for each full year of service as a director of the Company (and
its predecessors and successors) up to $50,000. The Company has accrued
$80,000 to date related to anticipated payments under the plan.
================================================================================
NOTE 11
================================================================================
STOCKHOLDERS' EQUITY
The Corporation has authorized 20,000,000 shares of Common Stock, $.01 par
value per share, and 2,000,000 shares of Special Stock, $.10 par value per
share. No shares of Special Stock have been issued and the Company does not
presently contemplate the issuance of such shares. The Board of Directors has
authorized stock repurchases at current trading prices at various times in the
past six years. In 1996, the Board authorized repurchases of up to 500,000
shares of the Company's common stock. The Company repurchased and retired
236,100, 262,900 and 837,601 shares of common stock in the years ended December
31, 1996, 1995 and 1994, respectively.
================================================================================
NOTE 12
================================================================================
STOCK OPTION PLAN
The Company instituted the 1991 Incentive Stock Plan (the "Plan") in December
1991. The Plan provides up to 650,000 shares of common stock that may be sold
to officers and key employees. The Company intends to seek shareholder
approval at the Company's 1997 Annual Meeting to amend the Plan to increase the
number of shares authorized under the Plan to 925,000. Stock options are
granted at fair market value on the date of grant. As of December 31, 1996,
285,000 options are fully vested and exercisable at a weighted average price
per share of $0.899. Of the unvested options, 115,000 vest ratably over four
years from the grant date and 290,000 stock options become exercisable in 2003.
Under certain circumstances, the vesting dates for these options may
accelerate. All options expire ten years from their respective dates of grant.
At December 31, 1996, the weighted average remaining contractual life of the
outstanding options is 7.8 years and there are 285,000 options exercisable with
option prices ranging from $0.875 to $2.25 and with a weighted average price
per share of $0.90. Stock option transactions during the three years ended
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at January 1 640,000 330,000 330,000
Options granted 410,000 310,000 --
Options exercised 50,000 -- --
Options canceled 310,000 -- --
Options outstanding
at December 31 690,000 640,000 330,000
Options available for grant
at December 31 -- 10,000 320,000
Option price ranges
per share:
Granted $2.25-2.94 $ 2.07 --
Exercised 0.875 -- --
Canceled 2.07 -- --
Weighted average option
price per share:
Granted $ 2.42 $ 2.07 --
Exercised 0.875 -- --
Canceled 2.07 -- --
Outstanding at
December 31 1.79 1.45 0.875
</TABLE>
The Company accounts for the Plan under the provisions of APB No. 25. The
following pro forma information is based on estimating the fair value of grants
under the Plan based upon the provisions of SFAS No. 123. The fair value of
each option granted in 1995 and 1996 has been estimated as of the date of grant
using the Black-Scholes option pricing
INTELLIGENT SYSTEMS CORPORATION
F-11
<PAGE> 27
model with the following weighted average assumptions: risk free interest rate
of 6.3%, expected life of the option of 6 years, expected dividend yield rate
of 0%, and expected volatility of 63%. Under these assumptions, the weighted
average fair value of options granted in 1996 was $1.54. There were no awards
under the Plan in 1994. The fair value of the grants would be amortized over
the vesting period for the options. Accordingly, the Company's pro forma net
income and net income per common share assuming compensation cost was
determined under SFAS No. 123 would have been the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------
(in thousands) 1996 1995
- -----------------------------------------------------
<S> <C> <C>
Net income $4,205 $ 147
Net income per common share
fully diluted $ .80 $ .03
</TABLE>
Because SFAS No. 123 method of accounting has not been applied to grants and
awards prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that expected in future years.
================================================================================
NOTE 13
================================================================================
FOREIGN SALES
AND OPERATIONS
Aggregate export and foreign sales from continuing operations were
approximately $5.9 million, $9.0 million and $6.8 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Export and foreign sales were
made principally in the United Kingdom and the Far East. Sales in these
geographic areas are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------
<S> <C> <C> <C>
United Kingdom $5,934 $4,734 $3,894
Far East -- 4,312 2,935
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, income (loss) before
provision for income taxes derived from foreign subsidiaries approximated
$43,000, $130,000 and $(778,000), respectively.
As of December 31, 1996 and 1995, foreign subsidiaries had assets of $2.3
million and $2.0 million, respectively, and total liabilities of $2.3 million
and $2.0 million, respectively. Foreign subsidiaries are located in England
and Japan (through December 2, 1995) and there are no currency exchange
restrictions which would affect the Company's financial position or results of
operations.
The accounting for translation of non-US currency amounts is discussed
in Note 1.
================================================================================
NOTE 14
================================================================================
INDUSTRY SEGMENTS
Prior to 1994, the Company had operated in only one industry segment. However,
as a result of the acquisitions of the PsyCare operations and the
discontinuation of the European Distribution Business in 1994, the Company's
operating divisions are principally involved in two industry segments: health
care services and technology related products and services. Operations in
health care services involve mental health and substance abuse treatment
programs as well as locum tenens service (placement of physicians in temporary
positions) through August 1996. The Company derived 37%, 27% and 10% of its
revenue in 1996, 1995 and 1994, respectively, from a national chain of
hospitals in which the Company conducts some of its treatment programs. In the
fourth quarter of 1996, several of the smaller programs located in the chain's
hospitals were closed because of a change in the priorities of the hospital
chain. The Company expects to relocate these programs to other facilities
although there may be a short-term decline in revenue and profit contribution.
The Company has in the past and is likely in the future to contract with other
hospitals or chains to conduct its programs. Operations in technology related
products and services include design, development and marketing of
microcomputer software; education programs for PC users; design, manufacture
and sales of mini-environments for semiconductor manufacturing; and manufacture
and sales of bio-remediating parts washers.
Total revenue by industry includes sales to unaffiliated customers.
Intersegment sales are not material. Operating profit is total revenue less
operating expenses. None of the general corporate overhead expense has been
allocated to the individual industry segments. Identifiable assets by industry
are those assets that are used in the Company's operations in each industry.
Corporate assets are principally cash, marketable securities, notes receivable
and investments.
INTELLIGENT SYSTEMS CORPORATION
F-12
<PAGE> 28
The table below contains segment information for the years ended December 31,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------------
Adjust.
Health and
(in thousands) Tech. Care Elimin. Consol.
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $10,698 $12,980 $23,678
R&D 286 -- 286
Depreciation 550 140 690
Operating profit (loss) (1,135) 433 (702)
General corp. expenses 1,351
- -----------------------------------------------------------------------------------
Consolidated operating
loss (2,053)
Interest income 501
Investment income 5,844
Other income, net (38)
- -----------------------------------------------------------------------------------
Income from continuing
operations before
income tax provision
and minority interest 4,254
Income tax provision 3
- -----------------------------------------------------------------------------------
Income before minority
interest 4,251
Minority interest 12
- -----------------------------------------------------------------------------------
Net income from
continuing operations $ 4,239
===================================================================================
Capital expenditures $ 1,275 $ 262 $ 1,537
===================================================================================
Identifiable assets $ 4,859 $ 2,671 $ 7,536
Assets of discontinued
business --
Corporate assets 17,391
- -----------------------------------------------------------------------------------
Total assets at year end $24,927
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------------
Adjust.
Health and
(in thousands) Tech. Care Elimin. Consol.
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $14,226 $14,050 $(36) $28,240
R&D 1,554 -- 1,554
Depreciation 440 131 571
Operating profit (loss) (1,527) (71) (1,598)
General corp. expenses 862
- -----------------------------------------------------------------------------------
Consolidated operating
loss (2,460)
Interest income 428
Investment income 1,896
Other income, net 399
- -----------------------------------------------------------------------------------
Income from continuing
operations before
income tax provision
and minority interest 263
Income tax provision 102
- -----------------------------------------------------------------------------------
Income before minority
interest 161
Minority interest 14
- -----------------------------------------------------------------------------------
Net income from
continuing operations $ 147
===================================================================================
Capital expenditures $ 733 $ 110 $ 843
===================================================================================
Identifiable assets $ 4,029 $ 3,388 $ 7,417
Assets of discontinued
business --
Corporate assets 15,913
- -----------------------------------------------------------------------------------
Total assets at year end $23,330
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
- -----------------------------------------------------------------------------------
Adjust.
Health and
(in thousands) Tech. Care Elimin. Consol.
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 9,966 $11,432 $(34) $21,364
R&D 2,390 -- 2,390
Depreciation 413 62 475
Operating profit (loss) (5,081) (2,166) (7,247)
General corp. expenses 1,067
- -----------------------------------------------------------------------------------
Consolidated operating
loss (8,314)
Interest income 463
Investment income 1,091
Other income, net 633
- -----------------------------------------------------------------------------------
Income from continuing
operations before
income tax provision
and minority interest (6,127)
Income tax provision 78
- -----------------------------------------------------------------------------------
Income before minority
interest (6,205)
Minority interest 21
- -----------------------------------------------------------------------------------
Net income from
continuing operations $(6,226)
===================================================================================
Capital expenditures $ 983 $ 389 $ 1,372
===================================================================================
Identifiable assets $ 4,344 $ 3,794 $ 8,138
Assets of discontinued
business 939
Corporate assets 13,678
- -----------------------------------------------------------------------------------
Total assets at year end $22,755
===================================================================================
</TABLE>
================================================================================
NOTE 15
================================================================================
QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below contains a summary of selected quarterly data for the years
ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
FOR QUARTERS ENDED
(in thousands except
per share data) MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net sales $ 6,085 $ 6451 $6,067 $ 5,075
Operating loss (335) (510) (370) (838)
Net income (loss) (532)(a) 3,511(b) 59 1,201(c)
Income (loss) per share (0.10) 0.66 0.01 0.23
1995
Net sales $ 5,933 $7,360 $7,087 $ 7,860
Operating loss (1,102) (57) (176) (1,125)
Net income (loss) (917) (19) 867(d) 216(e)
Income (loss) per share (0.17) 0.00 0.16 0.04
</TABLE>
a. Includes gain of $337,000 on sale of OrCAD stock.
b. Includes gain of $3.3 million on sale of IQ Software stock and
$250,000 non-recurring charge.
c. Includes gain of $3.0 million on sale of IQ Software stock and $1.0
million reduction in carrying value of another investment.
d. Includes gain of $818,000 on sale of IQ Software stock.
e. Includes gain of $1.3 million on ISJ/OrCAD exchange.
INTELLIGENT SYSTEMS CORPORATION
F-13
<PAGE> 29
SCHEDULE II
INTELLIGENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
DESCRIPTION BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS(a) END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 1994 (b) $ 90,163 $297,498 $ 62,356 325,305
Year Ended December 31, 1995 (b) 325,305 446,337 453,541 318,101
Year Ended December 31, 1996 (b) 318,101 311,887 258,283 371,705
</TABLE>
a. Write-offs of accounts receivable against allowance accounts.
b. This includes the combination of the Allowance for Sales Returns with the
Allowance for Doubtful Accounts.
INTELLIGENT SYSTEMS CORPORATION
S-1
<PAGE> 30
InterQuad Services Limited
Auditors' Report
to the Stockholders and director of InterQuad Services Limited
We have audited the balance sheet at 31 December 1996 and the profit and loss
account for the year then ended of InterQuad Services Limited which have been
prepared under the historical cost convention and the company's accounting
policies.
Respective responsibilities of directors and auditors
This company's directors are responsible for the preparation of financial
statements. It is our responsibility to form an independent opinion, based on
our audit, on those statements and to report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. The results of our audit would not have been
materially different had the audit been conducted in accordance with U.S.
generally accepted auditing standards. An audit includes examination, on a
test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also included an assessment of the significant
estimates and judgments made by the directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InterQuad Services Limited as
at 31 December 1996 and the results of its operations for the year then ended.
The financial statement conform with UK generally accepted accounting
principles.
In our opinion, the financial statements would not be materially different if
prepared under U.S. generally accepted accounting principles.
Morley & Scott
Chartered Accountants
Registered Auditor
London
10 March 1997
INTELLIGENT SYSTEMS CORPORATION
S-2
<PAGE> 31
Report of Independent Auditors
Board of Directors
PaySys International, Inc.
We have audited the accompanying consolidated balance sheets of PaySys
International, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PaySys
International, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
Ernst & Young LLP
February 7, 1997
INTELLIGENT SYSTEMS CORPORATION
S-3
<PAGE> 1
EXHIBIT 3(II)
BYLAWS
OF
INTELLIGENT SYSTEMS CORPORATION
As of March 11, 1997
(unless otherwise noted)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE ONE OFFICE.......................................................... 1
1.1 Registered Office and Agent....................... 1
1.2 Principal Office.................................. 1
1.3 Other Offices..................................... 1
ARTICLE TWO SHAREHOLDERS' MEETINGS.......................................... 1
2.1 Place of Meetings................................. 1
2.2 Annual Meetings................................... 2
2.3 Special Meetings.................................. 2
2.4 Notice of Meetings................................ 2
2.5 Waiver of Notice.................................. 2
2.6 Voting Group; Quorum; Vote Required to Act........ 3
2.7 Voting of Shares.................................. 3
2.8 Proxies........................................... 3
2.9 Presiding Officer................................. 4
2.10 Adjournments...................................... 4
2.11 Conduct of the Meeting............................ 4
2.12 Action of Shareholders Without a Meeting.......... 5
2.13 Matters Considered at Annual Meetings............. 5
ARTICLE THREE BOARD OF DIRECTORS............................................ 5
3.1 General Powers.................................... 5
3.2 Number, Election and Term of Office............... 6
3.3 Removal of Directors.............................. 6
3.4 Vacancies......................................... 6
3.5 Compensation...................................... 6
3.6 Committees of the Board of Directors.............. 7
3.7 Qualification of Directors........................ 7
3.8 Certain Nomination Requirements................... 7
ARTICLE FOUR MEETINGS OF THE BOARD OF DIRECTORS............................. 8
4.1 Regular Meetings.................................. 8
4.2 Special Meetings.................................. 8
4.3 Place of Meetings................................. 8
4.4 Notice of Meetings................................ 8
4.5 Quorum............................................ 8
4.6 Vote Required for Action.......................... 8
4.7 Participation by Conference Telephone............. 9
4.8 Action by Directors Without a Meeting............. 9
4.9 Adjournments...................................... 9
4.10 Waiver of Notice.................................. 9
ARTICLE FIVE OFFICERS....................................................... 9
5.1 Offices........................................... 9
5.2 Term.............................................. 10
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
5.3 Compensation..................................... 10
5.4 Removal.......................................... 10
5.5 Chairman of the Board............................ 10
5.6 Chief Executive Officer.......................... 10
5.7 President........................................ 11
5.8 Vice Presidents.................................. 11
5.9 Secretary........................................ 11
5.10 Treasurer........................................ 11
ARTICLE SIX DISTRIBUTIONS AND DIVIDENDS.................................... 12
ARTICLE SEVEN SHARES....................................................... 12
7.1 Share Certificates............................... 12
7.2 Rights of Corporation with Respect
to Registered Owners............................. 12
7.3 Transfers of Shares.............................. 13
7.4 Duty of Corporation to Register Transfer......... 13
7.5 Lost, Stolen, or Destroyed Certificates.......... 13
7.6 Fixing of Record Date............................ 13
7.7 Record Date if None Fixed........................ 14
ARTICLE EIGHT INDEMNIFICATION.............................................. 14
8.1 Indemnification of Directors..................... 14
8.2 Indemnification of Others........................ 14
8.3 Other Organizations.............................. 14
8.4 Advances ........................................ 15
8.5 Non-Exclusivity.................................. 15
8.6 Insurance........................................ 15
8.7 Notice........................................... 16
8.8 Security......................................... 16
8.9 Amendment........................................ 16
8.10 Agreements....................................... 16
8.11 Continuing Benefits.............................. 17
8.12 Successors....................................... 17
8.13 Severability..................................... 17
8.14 Additional Indemnification....................... 17
ARTICLE NINE MISCELLANEOUS................................................. 17
9.1 Inspection of Books and Records.................. 17
9.2 Fiscal Year...................................... 18
9.3 Corporate Seal................................... 18
9.4 Annual Statements................................ 18
9.5 Notice........................................... 8
ARTICLE TEN AMENDMENTS..................................................... 19
</TABLE>
<PAGE> 4
BYLAWS
OF
INTELLIGENT SYSTEMS CORPORATION
References in these Bylaws to "Articles of Incorporation" are to the Articles
of Incorporation of Intelligent Systems Corporation, a Georgia corporation (the
"Corporation"), as amended and restated from time to time.
All of these Bylaws are subject to contrary provisions, if any, of the Articles
of Incorporation (including provisions designating the preferences,
limitations, and relative rights of any class or series of shares), the Georgia
Business Corporation Code (the "Code"), and other applicable law, as in effect
on and after the effective date of these Bylaws. References in these Bylaws to
"Sections" shall refer to sections of the Bylaws, unless otherwise indicated.
ARTICLE ONE
OFFICE
1.1 REGISTERED OFFICE AND AGENT. The Corporation shall maintain a registered
office and shall have a registered agent whose business office is the same as
the registered office.
1.2 PRINCIPAL OFFICE. The principal office of the Corporation shall be at the
place designated in the Corporation's annual registration with the Georgia
Secretary of State.
1.3 OTHER OFFICES. In addition to its registered office and principal office,
the Corporation may have offices at other locations either in or outside the
State of Georgia.
ARTICLE TWO
SHAREHOLDERS' MEETINGS
2.1 PLACE OF MEETINGS. Meetings of the Corporation's shareholders may be held
at any location inside or outside the State of Georgia designated by the Board
of Directors or any other person or persons who properly call the meeting, or
if the Board of Directors or such other person or persons do not specify a
location, at the Corporation's principal office.
<PAGE> 5
2.2 ANNUAL MEETINGS. The Corporation shall hold an annual meeting of
shareholders, at a time determined by the Board of Directors, to elect
directors and to transact any business that properly may come before the
meeting. The annual meeting may be combined with any other meeting of
shareholders, whether annual or special.
2.3 SPECIAL MEETINGS. Special meetings of the shareholders of one or more
classes of the series of the Corporation's shares may be called at any time by
the Board of Directors, the Chairman of the Board, the President, or the Chief
Executive Officer, and shall be called by the Corporation upon the written
request (in compliance with applicable requirements of the Code) of the holders
of shares representing fifty percent (50%) or more of the votes entitled to be
cast on each issue proposed to be considered at the special meeting. The
business that may be transacted at any special meeting of the shareholders
shall be limited to that proposed in the notice of the special meeting given in
accordance with Section 2.4 (including related or incidental matters that may
be necessary or appropriate to effectuate the proposed business). Special
meetings of shareholders that are called by the shareholders in accordance with
the above requirements will be held at least fifty (50) days after receipt by
the Corporation's Secretary of the notice meeting such requirements.
2.4 NOTICE OF MEETINGS. In accordance with Section 9.5 and subject to waiver by
a shareholder pursuant to Section 2.5, the Corporation shall give written
notice of the date, time, and place of each annual and special shareholders'
meeting no fewer than SO days nor more than 60 days before the meeting date to
each shareholder of record entitled to vote at the meeting. The notice of an
annual meeting need not state the purpose of the meeting unless these Bylaws
require otherwise. The notice of a special meeting shall state the purpose for
which the meeting is called. If an annual or special shareholders' meeting is
adjourned to a different date, time, or location, the Corporation shall give
shareholders notice of the new date, time, or location of the adjourned
meeting, unless a quorum of shareholders was present at the meeting and
information regarding the adjournment was announced before the meeting was
adjourned; provided, however, that if a new record date is or must be fixed in
accordance with Section 7.6, the Corporation must give notice of the adjourned
meeting to all shareholders of record as of the new record date who are
entitled to vote at the adjourned meeting.
<PAGE> 6
2.5 WAIVER OF NOTICE. A shareholder may waive any notice required by the Code,
the Articles of Incorporation, or these Bylaws, before or after the date and
time of the matter to which the notice relates, by delivering to the
Corporation a written waiver of notice signed by the shareholder entitled to
the notice. In addition, a shareholder's attendance at a meeting shall be (a) a
waiver of objection to lack of notice or defective notice of the meeting unless
the shareholder at the beginning of the meeting objects to holding the meeting
or transacting business at the meeting, and (b) a waiver of objection to
consideration of a particular matter at the meeting that is not within the
purpose stated in the meeting notice, unless the shareholder objects to
considering the matter when it is presented. Except as otherwise required by
the Code, neither the purpose of nor the business transacted at the meeting
need be specified in any waiver.
2.6 VOTING GROUP: QUORUM: VOTE REQUIRED TO ACT. (a) Unless otherwise required
by the Code or the Articles of Incorporation, all classes or series of the
Corporation's shares entitled to vote generally on a matter shall for that
purpose be considered a single voting group (a "Voting Group"). If either the
Articles of Incorporation or the Code requires separate voting by two or more
Voting Groups on a matter, action on that matter is taken only when voted upon
by each such Voting Group separately. At all meetings of shareholders, any
Voting Group entitled to vote on a matter may take action on the matter only if
a quorum of that Voting Group exists at the meeting, and if a quorum exists,
the Voting Group may take action on the matter notwithstanding the absence of a
quorum of any other Voting Group that may be entitled to vote separately on the
matter. Unless the Articles of Incorporation, these Bylaws, or the Code
provides otherwise, the presence (in person or by proxy) of shares representing
a majority of votes entitled to be cast on a matter by a Voting Group shall
constitute a quorum of that Voting Group with regard to that matter. Once a
share is present at any meeting other than solely to object to holding the
meeting or transacting business at the meeting, the share shall be deemed
present for quorum purposes for the remainder of the meeting and for any
adjournments of that meeting, unless a new record date for the adjourned
meeting is or must be set pursuant to Section 7.6 of these Bylaws.
(b) Except as provided in Section 3.4, if a quorum exists, action on a matter
by a Voting Group is approved by that Voting Group if the votes cast within the
Voting Group favoring the action exceed the votes cast opposing the action,
unless the Articles of Incorporation, a provision of these Bylaws that has been
adopted pursuant to Section 14-2-1021 of the Code (or any successor provision),
or the Code requires a greater number of affirmative votes.
2.7 VOTING OF SHARES. Unless otherwise required by the Code or the Articles of
Incorporation, each outstanding share of any class or series having voting
rights shall be entitled to one vote on each matter that is submitted to a vote
of shareholders.
2.8 PROXIES. A shareholder entitled to vote on a matter may vote in person or
by proxy pursuant to an appointment executed in writing by the shareholder or
by his or her attorney-in-fact. An appointment of a proxy shall be valid for 11
months from the date of its execution, unless a longer or shorter period is
expressly stated in the proxy.
2.9 PRESIDING OFFICER. Except as otherwise provided in this Section 2.9, the
Chairman of the Board, and in his or her absence or disability the President,
and in his or her absence or
<PAGE> 7
disability the Chief Executive Officer, shall preside at every shareholders'
meeting (and any adjournment thereof) as its chairman, if either of them is
present and willing to serve. If neither the Chairman of the Board nor the
President nor the Chief Executive Officer is present and willing to serve as
chairman of the meeting, and if the Chairman of the Board has not designated
another person who is present and willing to serve, then a majority of the
Corporation's directors present at the meeting shall be entitled to designate a
person to serve as chairman. If no director of the Corporation is present at the
meeting or if a majority of the directors who are present cannot be established,
then a chairman of the meeting shall be selected by a majority vote of (a) the
shares present at the meeting that would be entitled to vote in an election of
directors, or (b) if no such shares are present at the meeting, then the shares
present at the meeting comprising the Voting Group with the largest number of
shares present at the meeting and entitled to vote on a matter properly proposed
to be considered at the meeting. The chairman of the meeting may designate other
persons to assist with the meeting.
2.10 ADJOURNMENTS. At any meeting of shareholders (including an adjourned
meeting), a majority of shares of any Voting Group present and entitled to vote
at the meeting (whether or not those shares constitute a quorum) may adjourn
the meeting, but only with respect to that Voting Group, to reconvene at a
specific time and place. If more than one Voting Group is present and entitled
to vote on a matter at the meeting, then the meeting may be continued with
respect to any such Voting Group that does not vote to adjourn as provided
above, and such Voting Group may proceed to vote on any matter to which it is
otherwise entitled to do so; provided, however, that if (a) more than one
Voting Group is required to take action on a matter at the meeting and (b) any
one of those Voting Groups votes to adjourn the meeting (in accordance with the
preceding sentence), then the action shall not be deemed to have been taken
until the requisite vote of any adjourned Voting Group is obtained at its
reconvened meeting. The only business that may be transacted at any reconvened
meeting is business that could have been transacted at the meeting that was
adjourned, unless further notice of the adjourned meeting has been given in
compliance with the requirements for a special meeting that specifies the
additional purpose or purposes for which the meeting is called. Nothing
contained in this Section 2.10 shall be deemed or otherwise construed to limit
any lawful authority of the chairman of a meeting to adjourn the meeting.
2.11 CONDUCT OF THE MEETING. At any meeting of shareholders, the chairman of
the meeting shall be entitled to establish the rules of order governing the
conduct of business at the meeting.
2.12 ACTION OF SHAREHOLDERS WITHOUT A MEETING. Action required or permitted to
be taken at a meeting of shareholders may be taken without a meeting if the
action is taken by all shareholders entitled to vote on the action. The action
must be evidenced by one or more written consents describing the action taken,
signed by all the shareholders entitled to take action without a meeting, and
delivered to the Corporation for inclusion in the minutes or filing with the
corporate records.
2.13 MATTERS CONSIDERED AT ANNUAL MEETINGS. Notwithstanding anything to the
contrary in these Bylaws, the only business that may be conducted at an annual
meeting of shareholders shall be business brought before the meeting (a) by or
at the direction of the Board of Directors prior to the meeting, (b) by or at
the direction of the Chairman of the Board, the President, or the Chief
Executive Officer or by a shareholder of the Corporation who is entitled to
vote with respect to the business and who complies with the notice procedures
set forth in this Section 2.13. For business to be brought properly before an
annual meeting by a shareholder, the shareholder must have given timely notice
of the business in writing to the Secretary of the Corporation. To be timely a
shareholder's notice must be delivered or mailed to and received at the
principal offices of the Corporation at least 120 days before the anniversary
of the date of the proxy statement for the immediately preceding annual meeting
of the Corporation. A shareholder's notice to the Secretary shall set forth a
brief description of each matter of business the shareholder proposes to bring
before the meeting and the reasons for conducting that business at the meeting;
the name, as it appears on the Corporation's books and address of the
shareholder proposing the business; the series or class and number of shares of
the Corporation's stock that are beneficially owned by the shareholder; and any
material interest of the shareholder in the proposed business. The Chairman of
the meeting shall have the discretion to declare to the meeting that any
business proposed by a shareholder to be considered at the meeting is out of
order and that such business shall not be transacted at the meeting if (i) the
Chairman concludes that the matter has been proposed in a manner inconsistent
with this Section 2.13 or (ii) the Chairman concludes that the subject matter
of the proposed business is inappropriate for consideration by the shareholders
at the meeting.
<PAGE> 8
ARTICLE THREE
BOARD OF DIRECTORS
3.1 GENERAL POWERS. All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the Corporation shall be managed
by, the Board of Directors, subject to any limitation set forth in the Articles
of Incorporation, in bylaws approved by the shareholders, or in agreements
among all the shareholders that are otherwise lawful.
3.2 NUMBER. ELECTION AND TERM OF OFFICE. The number of directors of the
Corporation shall be fixed by resolution of the Board of Directors or of the
shareholders from time to time; provided, however, that no decrease in the
number of directors shall have the effect of shortening the term of an
incumbent director. Except as provided elsewhere in this Section 3.2 and in
Section 3.4, the directors shall be elected at each annual meeting of
shareholders, or at a special meeting of shareholders called for purposes that
include the election of directors, by a plurality of the votes cast by the
shares entitled to vote and present at the meeting. Except in case of death,
resignation, disqualification, or removal, the term of each director shall
expire at the next succeeding annual meeting of shareholders. Despite the
expiration of a director's term, he or she shall continue to serve until his or
her successor, if there is to be any, has been elected and has qualified.
3.3 REMOVAL OF DIRECTORS. The entire Board of Directors or any individual
director may be removed only for cause by the shareholders, provided that
directors elected by a particular Voting Group may be removed only by the
shareholders in that Voting Group. Removal action may be taken only at a
shareholders' meeting for which notice of the removal action has been given. A
removed director's successor, if any, may be elected at the same meeting to
serve the unexpired term.
3.4 VACANCIES. A vacancy occurring in the Board of Directors may be filled for
the unexpired term, unless the shareholders have elected a successor, by the
affirmative vote of a majority of the remaining directors, whether or not the
remaining directors constitute a quorum; provided, however, that if the vacant
office was held by a director elected by a particular Voting Group, only the
holders of shares of that Voting Group or the remaining directors elected by
that Voting Group shall be entitled to fill the vacancy; provided further,
however, that if the vacant office was held by a director elected by a
particular Voting Group and there is no remaining director elected by that
Voting Group, the other remaining directors or director (elected by another
Voting Group or Groups) may fill the vacancy during an interim period before
the shareholders of the vacated director's Voting Group act to fill the
vacancy. A vacancy or vacancies in the Board of Directors may result from the
death, resignation, disqualification, or removal of any director, or from an
increase in the number of directors.
3.5 COMPENSATION. Directors may receive such compensation for their services as
directors as may be fixed by the Board of Directors from time to time. A
director may also serve the Corporation in one or more capacities other than
that of director and receive compensation for services rendered in those other
capacities.
3.6 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors may designate
from among its members an executive committee or one or more other standing or
ad hoc
<PAGE> 9
committees, each consisting of one or more directors, who serve at the pleasure
of the Board of Directors. Subject to the limitations imposed by the Code, each
committee shall have the authority set forth in the resolution establishing the
committee or in any other resolution of the Board of Directors specifying,
enlarging, or limiting the authority of the committee.
3.7 QUALIFICATION OF DIRECTORS. No person elected to serve as a director of the
Corporation shall assume office and begin serving unless and until duly
qualified to serve, as determined by reference to the Code, the Articles of
Incorporation, and any further eligibility requirements established in these
Bylaws.
3.8 CERTAIN NOMINATION REQUIREMENTS. No person may be nominated for election as
a director at any annual or special meeting of shareholders unless (a) the
nomination has been or is being made pursuant to a recommendation or approval
of the Board of Directors of the Corporation or a properly constituted
committee of the Board of Directors previously delegated authority to recommend
or approve nominees for director; (b) the person is nominated by a shareholder
of the Corporation who is entitled to vote for the election of the nominee at
the subject meeting, and the nominating shareholder has furnished written
notice to the Secretary of the Corporation, at the Corporation's principal
office, not later than 14 days before the date of the meeting or 5 days after
notice is given pursuant to Section 2.4, whichever is later, and the notice (i)
sets forth with respect to the person to be nominated his or her name, age,
business and residence addresses, principal business or occupation during the
past five years, any affiliation with or material interest in the Corporation
or any transaction involving the Corporation, and any affiliation with or
material interest in any person or entity having an interest materially adverse
to the Corporation, and (ii) is accompanied by the sworn or certified statement
of the shareholder that the nominee has consented to being nominated and that
the shareholder believes the nominee will stand for election and will serve if
elected; or (c) (i) the person is nominated to replace a person previously
identified as a proposed nominee (in accordance with the provisions of subpart
(b) of this Section 3.8) who has since become unable or unwilling to be
nominated or to serve if elected, (ii) the shareholder who furnished such
previous identification makes the replacement nomination and delivers to the
Secretary of the Corporation (at the time of or prior to making the replacement
nomination) an affidavit or other sworn statement affirming that the
shareholder had no reason to believe the original nominee would be so unable or
unwilling, and (iii) such shareholder also furnishes in writing to the
Secretary of the Corporation (at the time of or prior to making the replacement
nomination) the same type of information about the replacement nominee as
required by subpart (b) of this Section 3.8 to have been furnished about the
original nominee. The chairman of any meeting of shareholders at which one or
more directors are to be elected, for good cause shown and with proper regard
for the orderly conduct of business at the meeting, may waive in whole or in
part the operation of this Section 3.8.
<PAGE> 10
ARTICLE FOUR
MEETINGS OF THE BOARD OF DIRECTORS
4.1 REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held
in conjunction with each annual meeting of shareholders. In addition, the Board
of Directors may, by prior resolution, hold regular meetings at other times.
4.2 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called
by or at the request of the Chairman of the Board, the President, the Chief
Executive Officer, or any two directors in office at that time.
4.3 PLACE OF MEETINGS. Directors may hold their meetings at any place in or
outside the State of Georgia that the Board of Directors may establish from
time to time.
4.4 NOTICE OF MEETINGS. Directors need not be provided with notice of any
regular meeting of the Board of Directors. Unless waived in accordance with
Section 4.10, the Corporation shall give at least two days' notice to each
director of the date, time, and place of each special meeting. Notice of a
meeting shall be deemed to have been given to any director in attendance at any
prior meeting at which the date, time, and place of the subsequent meeting was
announced.
4.5 QUORUM. At meetings of the Board of Directors, the majority of the
directors then in office shall constitute a quorum for the transaction of
business.
4.6 VOTE REQUIRED FOR ACTION. If a quorum is present when a vote is taken, the
vote of a majority of the directors present at the time of the vote will be the
act of the Board of Directors, unless the vote of a greater number is required
by the Code, the Articles of Incorporation, or these Bylaws. A director who is
present at a meeting of the Board of Directors when corporate action is taken
is deemed to have assented to the action taken unless (a) he or she objects at
the beginning of the meeting (or promptly upon his or her arrival) to holding
the meeting or transacting business at it; (b) his or her dissent or abstention
from the action taken is entered in the minutes of the meeting; or (c) he or
she delivers written notice of dissent or abstention to the presiding officer
of the meeting before its adjournment or to the Corporation immediately after
adjournment of the meeting. The right of dissent or abstention is not available
to a director who votes in favor of the action taken.
4.7 PARTICIPATION BY CONFERENCE TELEPHONE. Members of the Board of Directors
may participate in a meeting of the Board by means of conference telephone or
similar communications equipment through which all persons participating may
hear and speak to each other. Participation in a meeting pursuant to this
Section 4.7 shall constitute presence in person at the meeting.
4.8 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a
meeting if a written consent, describing the action taken, is signed by each
director and delivered to the Corporation for inclusion in the minutes or
filing with the corporate records. The consent
<PAGE> 11
may be executed in counterpart, and shall have the same force and effect as a
unanimous vote of the Board of Directors at a duly convened meeting.
4.9 ADJOURNMENTS. A meeting of the Board of Directors, whether or not a quorum
is present, may be adjourned by a majority of the directors present to
reconvene at a specific time and place. It shall not be necessary to give
notice to the directors of the reconvened meeting or of the business to be
transacted, other than by announcement at the meeting that was adjourned,
unless a quorum was not present at the meeting that was adjourned, in which
case notice shall be given to directors in the same manner as for a special
meeting. At any such reconvened meeting at which a quorum is present, any
business may be transacted that could have been transacted at the meeting that
was adjourned.
4.10 WAIVER OF NOTICE. A director may waive any notice required by the Code,
the Articles of Incorporation, or these Bylaws before or after the date and
time of the matter to which the notice relates, by a written waiver signed by
the director and delivered to the Corporation for inclusion in the minutes or
filing with the corporate records. Attendance by a director at a meeting shall
constitute waiver of notice of the meeting, except where a director at the
beginning of the meeting (or promptly upon his or her arrival) objects to
holding the meeting or to transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
ARTICLE FIVE
OFFICERS
5.1 OFFICES. The officers of the Corporation shall consist of a President, a
Secretary, and a Treasurer, and may include a Chief Executive Officer separate
from the President, each of whom shall be elected or appointed by the Board of
Directors. The Board of Directors may also elect a Chairman of the Board from
among its members. The Board of Directors from time to time may, or may
authorize the Chief Executive Officer to, create and establish the duties of
other offices and may, or may authorize the Chief Executive Officer to, elect
or appoint, or authorize specific senior officers to appoint, the persons who
shall hold such other offices, including one or more Vice Presidents (including
Executive Vice Presidents, Senior Vice Presidents, Assistant Vice Presidents,
and the like), one or more Assistant Secretaries, and one or more Assistant
Treasurers. Whether or not so provided by the Board of Directors, the Chairman
of the Board or the Chief Executive Officer may appoint one or more Assistant
Secretaries, and one or more Assistant Treasurers. Any two or more offices may
be held by the same person.
5.2 TERM. Each officer shall serve at the pleasure of the Board of Directors
(or, if appointed by the Chief Executive Officer or a senior officer pursuant
to this Article Five, at the pleasure of the Board of Directors, the Chief
Executive Officer, or the senior officer authorized to have appointed the
officer) until his or her death, resignation, or removal, or until his or her
replacement is elected or appointed in accordance with this Article Five.
5.3 COMPENSATION. The compensation of all officers of the Corporation shall be
fixed by the Board of Directors or by a committee or officer appointed by the
Board of Directors. Officers may serve without compensation.
<PAGE> 12
5.4 REMOVAL. All officers (regardless of how elected or appointed) may be
removed, with or without cause, by the Board of Directors, and any officer
appointed by the Chief Executive Officer or another senior officer may also be
removed, with or without cause, by the Chief Executive Officer or by any senior
officer authorized to have appointed the officer to be removed. Removal will be
without prejudice to the contract rights, if any, of the person removed, but
shall be effective notwithstanding any damage claim that may result from
infringement of such contract rights.
5.5 CHAIRMAN OF THE BOARD. The Chairman of the Board (if there be one) shall
preside at and serve as chairman of meetings of the shareholders and of the
Board of Directors (unless another person is selected under Section 2.9 to act
as chairman). The Chairman of the Board shall perform other duties and have
other authority as may from time to time be delegated by the Board of
Directors.
5.6 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be charged with
the general and active management of the Corporation, shall see that all orders
and resolutions of the Board of Directors are carried into effect, shall have
the authority to select and appoint employees and agents of the Corporation,
and shall, in the absence or disability of the Chairman of the Board, perform
the duties and exercise the powers of the Chairman of the Board. The Chief
Executive Officer shall perform any other duties and have any other authority
as may be delegated from time to time by the Board of Directors, and shall be
subject to the limitations fixed from time to time by the Board of Directors.
5.7 PRESIDENT. If there shall be no separate Chief Executive Officer of the
Corporation, then the President shall be the chief executive officer of the
Corporation and shall have all the duties and authority given under these
Bylaws to the Chief Executive Officer. The President shall otherwise be the
chief operating officer of the Corporation and shall, subject to the authority
of the Chief Executive Officer, have responsibility for the conduct and general
supervision of the business operations of the Corporation. The President shall
perform such other duties and have such other authority as may from time to
time be delegated by the Board of Directors or the Chief Executive Officer. In
the absence or disability of the Chief Executive Officer, the President shall
perform the duties and exercise the powers of the Chief Executive Officer.
5.8 VICE PRESIDENTS. The Vice President (if there be one) shall, in the absence
or disability of the President, perform the duties and exercise the powers of
the President, whether the duties and powers are specified in these Bylaws or
otherwise. If the Corporation has more than one Vice President, the one
designated by the Board of Directors or the Chief Executive Officer (in that
order of precedence) shall act in the event of the absence or disability of the
President. Vice Presidents shall perform any other duties and have any other
authority as from time to time may be delegated by the Board of Directors, the
Chief Executive Officer, or the President.
5.9 SECRETARY. The Secretary shall be responsible for preparing minutes of the
meetings of shareholders, directors, and committees of directors and for
authenticating records of the Corporation. The Secretary or any Assistant
Secretary shall have authority to give all notices required by law or these
Bylaws. The Secretary shall be responsible for the custody
<PAGE> 13
of the corporate books, records, contracts, and other documents. The Secretary
or any Assistant Secretary may affix the corporate seal to any lawfully executed
documents requiring it, may attest to the signature of any officer of the
Corporation, and shall sign any instrument that requires the Secretary's
signature. The Secretary or any Assistant Secretary shall perform any other
duties and have any other authority as from time to time may be delegated by the
Board of Directors, the Chief Executive Officer, or the President.
5.10 TREASURER. Unless otherwise provided by the Board of Directors, the
Treasurer shall be responsible for the custody of all funds and securities
belonging to the Corporation and for the receipt, deposit, or disbursement of
these funds and securities under the direction of the Board of Directors. The
Treasurer shall cause full and true accounts of all receipts and disbursements
to be maintained and shall make reports of these receipts and disbursements to
the Board of Directors, the Chief Executive Officer and President upon request.
The Treasurer or Assistant Treasurer shall perform any other duties and have
any other authority as from time to time may be delegated by the Board of
Directors, the Chief Executive Officer, or the President.
ARTICLE SIX
DISTRIBUTIONS AND DIVIDENDS
Unless the Articles of Incorporation provide otherwise, the Board of Directors,
from time to time in its discretion, may authorize or declare distributions or
share dividends in accordance with the Code.
ARTICLE SEVEN
SHARES
7.1 SHARE CERTIFICATES. The interest of each shareholder in the Corporation
shall be evidenced by a certificate or certificates representing shares of the
Corporation, which shall be in such form as the Board of Directors from time to
time may adopt in accordance with the Code. Share certificates shall be in
registered form and shall indicate the date of issue, the name of the
Corporation, that the Corporation is organized under the laws of the State of
Georgia, the name of the shareholder, and the number and class of shares and
designation of the series, if any, represented by the certificate. Each
certificate shall be signed by the President or a Vice President (or in lieu
thereof, by the Chairman of the Board or Chief Executive Officer, if there be
one) and may be signed by the Secretary or an Assistant Secretary; provided,
however, that where the certificate is signed (either manually or by facsimile)
by a transfer agent, or registered by a registrar, the signatures of those
officers may be facsimiles.
7.2 RIGHTS OF CORPORATION WITH RESPECT TO REGISTERED OWNERS. Prior to due
presentation for transfer of registration of its shares, the Corporation may
treat the registered owner of the shares (or the beneficial owner of the shares
to the extent of any rights granted by a nominee certificate on file with the
Corporation pursuant to any procedure that may be established by the
Corporation in accordance with the Code) as the person exclusively entitled to
vote the shares, to receive any dividend or other distribution with respect to
the
<PAGE> 14
shares, and for all other purposes; and the Corporation shall not be bound to
recognize any equitable or other claim to or interest in the shares on the part
of any other person, whether or not it has express or other notice of such a
claim or interest, except as otherwise provided by law.
7.3 TRANSFERS OF SHARES. Transfers of shares shall be made upon the books of
the Corporation kept by the Corporation or by the transfer agent designated to
transfer the shares, only upon direction of the person named in the certificate
or by an attorney lawfully constituted in writing. Before a new certificate is
issued, the old certificate shall be surrendered for cancellation or, in the
case of a certificate alleged to have been lost, stolen, or destroyed, the
provisions of Section 7.5 of these Bylaws shall have been complied with.
7.4 DUTY OF CORPORATION TO REGISTER TRANSFER. Notwithstanding any of the
provisions of Section 7.3 of these Bylaws, the Corporation is under a duty to
register the transfer of its shares only if: (a) the share certificate is
endorsed by the appropriate person or persons; (b) reasonable assurance is
given that each required endorsement is genuine and effective; (c) the
Corporation has no duty to inquire into adverse claims or has discharged any
such duty; (d) any applicable law relating to the collection of taxes has been
complied with; (e) the transfer is in fact rightful or is to a bona fide
purchaser; and (f) the transfer is in compliance with applicable provisions of
any transfer restrictions of which the Corporation shall have notice.
7.5 LOST, STOLEN, OR DESTROYED CERTIFICATES. Any person claiming a share
certificate to be lost, stolen, or destroyed shall make an affidavit or
affirmation of this claim in such a manner as the Corporation may require and
shall, if the Corporation requires, give the Corporation a bond of indemnity in
form and amount, and with one or more sureties satisfactory to the Corporation,
as the Corporation may require, whereupon an appropriate new certificate may be
issued in lieu of the one alleged to have been lost, stolen or destroyed.
7.6 FIXING OF RECORD DATE. For the purpose of determining shareholders (a)
entitled to notice of or to vote at any meeting of shareholders or, if
necessary, any adjournment thereof, (b) entitled to receive payment of any
distribution or dividend, or (c) for any other proper purpose, the Board of
Directors may fix in advance a date as the record date. The record date may not
be more than 70 days (and, in the case of a notice to shareholders of a
shareholders' meeting, not less than 10 days) prior to the date on which the
particular action, requiring the determination of shareholders, is to be taken.
A separate record date may be established for each Voting Group entitled to
vote separately on a matter at a meeting. A determination of shareholders of
record entitled to notice of or to vote at a meeting of shareholders shall
apply to any adjournment of the meeting, unless the Board of Directors shall
fix a new record date for the reconvened meeting, which it must do if the
meeting is adjourned to a date more than 120 days after the date fixed for the
original meeting.
7.7 RECORD DATE IF NONE FIXED. If no record date is fixed as provided in
Section 7.6, then the record date for any determination of shareholders that
may be proper or required by law shall be, as appropriate, the date on which
notice of a shareholders' meeting is mailed, the date on which the Board of
Directors adopts a resolution declaring a dividend or
<PAGE> 15
authorizing a distribution, or the date on which any other action is taken that
requires a determination of shareholders.
ARTICLE EIGHT
INDEMNIFICATION
8.1 INDEMNIFICATION OF DIRECTORS. The Corporation shall indemnify and hold
harmless any director of the Corporation (an "Indemnified Person") who was or
is a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative, whether formal or informal, including any action or suit by
or in the right of the Corporation (for purposes of this Article Eight,
collectively, a Proceeding") because he or she is or was a director, officer,
employee, or agent of the Corporation, against any judgment, settlement,
penalty, fine, or reasonable expenses (including, but not limited to,
attorneys' fees and disbursements, court costs, and expert witness fees)
incurred with respect to the Proceeding (for purposes of this Article Eight, a
"Liability/'), provided, however, that no indemnification shall be made for:
(a) any appropriation by a director, in violation of the director's duties, of
any business opportunity of the corporation; (b) any acts or omissions of a
director that involve intentional misconduct or a knowing violation of law; (c)
the types of liability set forth in Code Section 14-2-832; or (d) any
transaction from which the director received an improper personal benefit.
8.2 INDEMNIFICATION OF OTHERS. The Board of Directors shall have the power to
cause the Corporation to provide to officers, employees, and agents of the
Corporation all or any part of the right to indemnification permitted for such
persons by appropriate provisions of the Code. Persons to be indemnified may be
identified by position or name, and the right of indemnification may be
different for each of the persons identified. Each officer, employee, or agent
of the Corporation so identified shall be an "Indemnified Person" for purposes
of the provisions of this Article Eight.
8.3 OTHER ORGANIZATIONS. The Corporation shall provide to each director, and
the Board of Directors shall have the power to cause the Corporation to provide
to any officer, employee, or agent, of the Corporation who is or was serving as
a director, officer, partner, trustee, employee, or agent of
(a) Intelligent Systems Master, L.P., INTS Management Company or any of their
current or former affiliates, or
(b) another corporation, partnership, joint venture, trust, employee benefit
plan, or other enterprise at the Corporation's request
all or any part of the right to indemnification and other rights of the type
provided under Sections 8.1, 8.2, &.4, and 8.10 of this Article Eight (subject
to the conditions, limitations, and obligations specified in those Sections)
permitted for such persons by appropriate provisions of the Code. Persons to be
indemnified may be identified by position or name, and the right of
indemnification may be different for each of the persons identified. Each
<PAGE> 16
person so identified shall be an "Indemnified Person" for purposes of the
provisions of this Article Eight.
8.4 ADVANCES. Expenses (including, but not limited to, attorneys' fees and
disbursements, court costs, and expert witness fees) incurred by an Indemnified
Person in defending any Proceeding of the kind described in Sections 8.1 or
8.3, as to an Indemnified Person who is a director of the Corporation, or in
Sections 8.' or 8.3 as to other Indemnified Persons, if the Board of Directors
has specified that advancement of expenses be made available to any such
Indemnified Person, shall be paid by the Corporation in advance of the final
disposition of such Proceeding as set forth herein. The Corporation shall
promptly pay the amount of such expenses to the Indemnified Person, but in no
event later than 10 days following the Indemnified Person's delivery to the
Corporation of a written request for an advance pursuant to this Section 8.4,
together with a reasonable accounting of such expenses; provided, however, that
the Indemnified Person shall furnish the C Corporation a written affirmation of
his or her good faith belief that he or she has met the applicable standard of
conduct and a written undertaking and agreement to repay to the Corporation any
advances made pursuant to this Section 8.4 if it shall be determined that the
Indemnified Person is not entitled(l to be indemnified by the Corporation for
such amounts. The Corporation may make the advances contemplated by this
Section 8.4 regardless of the Indemnified Person's financial ability to make
repayment. Any advances and undertakings to repay pursuant to this Section 8.4
may be unsecured and interest-free.
8.5 NON-EXCLUSIVITY. Subject to any applicable limitation imposed by the
Code or the Articles of Incorporation, the indemnification and advancement of
expenses provided by or granted pursuant to this Article Eight shall not be
exclusive of any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under any provision of the Articles of
Incorporation, or any Bylaw, resolution, or agreement specifically or in
general terms approved or ratified by the affirmative vote of holders of a
majority of the shares entitled to be voted thereon.
8.6 INSURANCE. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the Corporation, or who, while serving in such a capacity, is also
or was also serving at the request of the Corporation as a director, officer,
trustee, partner, employee, or agent of any corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise, against any
Liability that may be asserted against or incurred by him or her in any such
capacity, or arising out of his or her status as such, whether or not the
Corporation would have the power to indemnify him or her against such liability
under the provisions of this Article Eight.
8.7 NOTICE. If the Corporation indemnifies or advances expenses to a director
under any of Sections 142-851 through 14-2-854 of the Code in connection with a
Proceeding by or in the right of the Corporation, the Corporation shall, to the
extent required by Section 14-2-1621 or any other applicable provision of the
Code, report the indemnification or advance in writing to the shareholders with
or before the notice of the next shareholders' meeting.
<PAGE> 17
8.8 SECURITY. The Corporation may designate certain of its assets as
collateral, provide self-insurance, establish one or more indemnification
trusts, or otherwise secure or facilitate its ability to meet its obligations
under this Article Eight, or under any indemnification agreement or plan of
indemnification adopted and entered into in accordance with the provisions of
this Article Eight, as the Board of Directors deems appropriate.
8.9 AMENDMENT. Any amendment to this Article Eight that limits or otherwise
adversely affects the right of indemnification, advancement of expenses, or
other rights of any Indemnified Person hereunder shall, as to such Indemnified
Person, apply only to Proceedings based on actions, events, or omissions
(collectively, "Post Amendment Events") occurring after such amendment and
after delivery of notice of such amendment to the Indemnified Person so
affected. Any Indemnified Person shall. as to any Proceeding based on actions,
events, or omissions occurring prior to the date of receipt of such notice, be
entitled to the right of indemnification, advancement of expenses, and other
rights under this Article Eight to the same extent as if such provisions had
continued as part of the Bylaws of the Corporation without such amendment. This
Section 8.9 cannot be altered, amended, or repealed in a manner effective as to
any Indemnified Person (except as to Post Amendment Events) without the prior
written consent of such Indemnified Person.
8.10 AGREEMENTS. The provisions of this Article Eight shall be deemed to
constitute an agreement between the Corporation and each Indemnified Person
hereunder. In addition to the rights provided in this Article Eight, the
Corporation shall have the power, upon authorization by the Board of Directors,
to enter into an agreement or agreements providing to any Indemnified Person
indemnification rights substantially similar to those provided in this Article
Eight.
8.11 CONTINUING BENEFITS. The rights of indemnification and advancement of
expenses permitted or authorized by this Article Eight shall, unless otherwise
provided when such rights are granted or conferred, continue as to a person who
has ceased to be a director, officer, employee. or agent and shall inure to the
benefit of the heirs, executors, and administrators of such person.
8.12 SUCCESSORS. For purposes of this Article Eight, the term "Corporation"
shall include any corporation. joint venture, trust, partnership, or
unincorporated business association that is the successor to all or
substantially all of the business or assets of this Corporation, as a result of
merger, consolidation, sale, liquidation. or otherwise, and any such successor
shall be liable to the persons indemnified under this Article Eight on the same
terms and conditions and to the same extent as this Corporation.
8.13 SEVERABILITY. Each of the Sections of this Article Eight, and each of the
clauses set forth herein, shall be deemed separate and independent, and should
any part of any such Section or clause be declared invalid or unenforceable by
any court of competent jurisdiction, such invalidity or unenforceability shall
in no way render invalid or unenforceable any other part thereof or any
separate Section or clause of this Article Eight that is not declared invalid
or unenforceable.
8.14 ADDITIONAL INDEMNIFICATION. In addition to the specific indemnification
rights set forth herein, the Corporation shall indemnify each of its directors
and such of its officers as
<PAGE> 18
have been designated by the Board of Directors to the full extent permitted by
action of the Board of Directors without shareholder approval under the Code or
other laws of the State of Georgia as in effect from time to time.
ARTICLE NINE
MISCELLANEOUS
9.1 INSPECTION OF BOOKS AND RECORDS. The Board of Directors shall have the
power to determine which accounts, books, and records of the Corporation shall
be available for shareholders to inspect or copy, except for those books and
records required by the Code to be made available upon compliance by a
shareholder with applicable requirements, and shall have the power to fix
reasonable rules and regulations (including confidentiality restrictions and
procedures) not in conflict with applicable law for the inspection and copying
of accounts, books, and records that by law or by determination of the Board of
Directors are made available. Unless required by the Code or otherwise provided
by the Board of Directors, a shareholder of the Corporation holding less than
two percent of the total shares of the Corporation then outstanding shall have
no right to inspect the books and records of the Corporation.
9.2 FISCAL YEAR. The Board of Directors is authorized to fix the fiscal year of
the Corporation and to change the fiscal year from time to time as it deems
appropriate.
9.3 CORPORATE SEAL. The corporate seal will be in such form as the Board of
Directors may from time to time determine. The Board of Directors may authorize
the use of one or more facsimile forms of the corporate seal. The corporate
seal need not be used unless its use is required by law, by these Bylaws, or by
the Articles of Incorporation.
9.4 ANNUAL STATEMENTS. Not later than four months after the close of each
fiscal year, and in any case prior to the next annual meeting of shareholders,
the Corporation shall prepare (a) a balance sheet showing in reasonable detail
the financial condition of the Corporation as of the close of its fiscal year,
and (b) a profit and loss statement showing the results of its operations
during its fiscal year. Upon receipt of written request, the Corporation
promptly shall mail to any shareholder of record a copy of the most recent such
balance sheet and profit and loss statement, in such form and with such
information as the Code may require.
9.5 NOTICE. (a) Whenever these Bylaws require notice to be given to any
shareholder or to any director, the notice may be given by mail, in person, by
courier delivery, by telephone, or by telecopier, telegraph, or similar
electronic means. Whenever notice is given to a shareholder or director by
mail, the notice shall be sent by depositing the notice in a post office or
letter box in a postage-prepaid, sealed envelope addressed to the shareholder
or director at his or her address as it appears on the books of the
Corporation. Any such written notice given by mail shall be effective: (i) if
given to shareholders, at the time the same is deposited in the United States
mail, and (ii) in all other cases, at the earliest of (x) when received or when
delivered, properly addressed, to the addressee's last known principal place of
business or residence, (y) five days after its deposit in the mail, as
evidenced by the postmark, if mailed with first-class postage prepaid and
correctly addressed, or (z) on the date shown on the return receipt, if sent by
registered or certified
<PAGE> 19
mail, return receipt requested, and the receipt is signed by or on behalf of the
addressee. Whenever notice is given to a shareholder or director by any means
other than mail, the notice shall be deemed given when received.
(b) In calculating time periods for notice, when a period of time measured in
days, weeks, months, years, or other measurement of time is prescribed for the
exercise of any privilege or the discharge of any duty, the first day shall not
be counted but the last day shall be counted.
ARTICLE TEN
AMENDMENTS
Except as otherwise provided under the Code, the Board of Directors shall have
the power to alter, amend, or repeal these Bylaws or adopt new Bylaws. Any
Bylaws adopted by the Board of Directors may be altered, amended, or repealed,
and new Bylaws adopted, by the shareholders. The shareholders may prescribe in
adopting any Bylaw or Bylaws that the Bylaw or Bylaws so adopted shall not be
altered, amended, or repealed by the Board of Directors.
<PAGE> 1
EXHIBIT 21.0
INTELLIGENT SYSTEMS CORPORATION
LIST OF PRINCIPAL SUBSIDIARY COMPANIES AND OPERATING PARTNERSHIPS
AS OF MARCH 18, 1997
<TABLE>
<CAPTION>
SUBSIDIARY NAME STATE OF ORGANIZATION
- --------------------------------------------------------- ---------------------
<S> <C>
ChemFree Corporation Georgia
Intelligent Enclosures Corporation Georgia
INP L.P. Delaware
InterQuad Services Limited United Kingdom
INTS Holdings, Inc. Delaware
Public Health Software Systems, LLC Georgia
PsyCare America, LLC dba Rapha or Rapha Treatment Centers Georgia
PsyCare L.P. Delaware
PsyCare U.S.A., LLC Georgia
Quadram Corporation Georgia
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K for the fiscal year ended December 31,
1996 into Intelligent Systems Corporation's previously filed Registration
Statement on Form S-8 (File No. 33-99432).
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 24, 1997
<PAGE> 1
EXHIBIT 23.2
10 March 1997
The Directors
Intelligent Systems Corporation
4355 Shackleford Road
Norcross
GA 30093
USA
Dear Sirs
INTERQUAD SERVICES LIMITED
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K for the fiscal year ended December 31,
1996 into Intelligent Systems Corporation's previously filed Registration
Statement on Form S-8 (File No. 33-99432).
Yours faithfully
Morley & Scott
<PAGE> 1
EXHIBIT 23.3
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-99432) of Intelligent Systems Corporation of our report dated
February 7, 1997, with respect to the consolidated financial statements of
PaySys International, Inc. and Subsidiaries for the year ended December 31,
1996 and 1995 included in this Form 10-K for the year ended December 31, 1996.
Ernst & Young LLP
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,490
<SECURITIES> 0
<RECEIVABLES> 3,764
<ALLOWANCES> 0
<INVENTORY> 648
<CURRENT-ASSETS> 11,851
<PP&E> 2,126
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,927
<CURRENT-LIABILITIES> 3,297
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 21,579
<TOTAL-LIABILITY-AND-EQUITY> 24,927
<SALES> 23,678
<TOTAL-REVENUES> 0
<CGS> 12,838
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,254
<INCOME-TAX> 3
<INCOME-CONTINUING> 4,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,239
<EPS-PRIMARY> .80
<EPS-DILUTED> 0
</TABLE>
