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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, 1997
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
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 20, 1998, 5,104,467 shares of Common Stock were outstanding. The
aggregate market value of the Common Stock held by non-affiliates of the
registrant was $15,111,949 (computed using the closing price of the Common Stock
on March 20, 1998 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 12, 1998 are
incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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PART I
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..........................12
13. Certain relationships and related transactions..........................................13
PART IV
14. Exhibits, financial statement schedules and reports on Form 8-K.........................13
Signatures........................................................................................15
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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.
The Company's 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 and controlled operating subsidiaries in the
technology sector include InterQuad Services (training/education for software
products), ChemFree Corporation (bio-remediating parts washers for automotive
and industrial applications), Intelligent Enclosures (mini-environment systems
for ultraclean manufacturing) and HumanSoft LLC (health and human services
software for public health agencies). In the health care services segment, the
Company's operations 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,
principally in the technology area, to develop partnerships with promising
domestic 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 or in which the Company is not considered the controlling shareholder
are not consolidated in the Company's results of operations, rather they are
accounted for by the equity method. However, the Company may be 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 Company operates 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 emerging companies that 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 Notes 13 and 14 in the accompanying Notes
to the Consolidated Financial Statements.
INTELLIGENT SYSTEMS CORPORATION
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INDUSTRY SEGMENT: TECHNOLOGY RELATED PRODUCTS AND SERVICES
HUMANSOFT LLC - HumanSoft LLC (formerly named Public Health Software Systems)
specializes in the design, manufacture and sale of a comprehensive array of
software programs which permit public health agencies to capture, analyze and
manage client information. Within the past 12 months, the Company acquired two
former competitors, QS, Inc. and JK, Inc., to position itself as a leading
provider of information systems software and services for health and human
services organization nationwide. The operations of all companies are
consolidated under the HumanSoft umbrella. HumanSoft products include modules
such as maternal and child health, cancer screening, HIV testing, scheduling,
etc. The acquisition of JK, Inc. in January 1998 expands the HumanSoft offering
to include vital records information systems and health statistics coding and
data collection. The products run on multiple platforms including DOS, Windows,
UNIX, AS/400 and others. Typically, HumanSoft provides some customization and
training services as well as ongoing technical support and, in some cases, data
collection and coding.
HumanSoft customers are local, state and federal public health agencies
nationwide as well as other government agencies, hospitals and clinics.
Installations range from single-site clinics to city-wide and state-wide systems
employing networks of computers. The customer base covers more than 40 states.
HumanSoft 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,
and financial strength. Marketing activities include trade shows and industry
conferences.
HumanSoft competes against a number of other software companies, some of which
are larger and which may have access to greater resources than does HumanSoft.
However, HumanSoft believes it is competitive based on product features, ease of
use and extensive industry experience and contacts in the public health market.
The company continues to add new functionality to its ACCLAIM product and to
develop new versions of its vital records software.
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. 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 replacement fluid and filters to its customers
after the parts washer sale.
ChemFree's markets include the automotive, transportation, industrial and
military markets. 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 and auto parts suppliers. Numerous public transport systems
use the SmartWasher in maintenance facilities. The industrial market includes
customers with machinery that requires routine maintenance, such as in the
textile industry. Military applications include vehicle service depots in all
branches of the military. ChemFree entered international markets in 1997 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.
International markets are served by distributors serving specific countries. The
Company also sells in competitive bid situations, such as military procurements,
and under a GSA schedule to government agencies. Marketing activities include
trade show participation, 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 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.
INTELLIGENT SYSTEMS CORPORATION
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INTERQUAD SERVICES - InterQuad Services, with two 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 networking products from Novell Inc. 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 its 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.
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. iE 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 either 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 the company. 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.
INDUSTRY SEGMENT: HEALTH CARE SERVICES
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 prefer a treatment approach that
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. PsyCare
presently has 14 program sites, including both adult and adolescent in multiple
states.
Hospitals in mid to large size metropolitan areas contract with PsyCare to
conduct a Rapha treatment program in 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.
INTELLIGENT SYSTEMS CORPORATION
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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 that
contract with PsyCare to offer the Rapha program do so because it addresses a
segment of the population not typically being served by the hospital.
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. Furthermore, managed care is
also placing increased emphasis on drug-based treatment programs, with little or
no hospital stay, rather than behavioral modification programs such as those
offered by PsyCare. 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 many more patients for shorter periods of
stay while keeping strict control over expenses. Although the company opened
programs at new hospitals in 1997, the total number of inpatient programs
declined in 1997 compared to 1996 because of intense pressure by service
providers to restrict hospital stay for mental health treatment, which makes the
Rapha programs less attractive to hospitals. Given these trends, PsyCare has
been reducing overhead and costs and exploring alternatives such as expanding
outpatient programs. However, at this point it is uncertain whether this
strategy will provide a sustainable, profitable business model. In 1996,
approximately 37 percent of Company consolidated revenue was derived from
programs associated with one chain of psychiatric hospitals. This percentage
declined to 13.5 percent in 1997 as the number of programs at the hospital chain
decreased.
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. PsyCare also reaches its market through radio broadcast, special
events, conventions, print media, and word-of-mouth referrals from satisfied
patients.
PsyCare's competitors include individual and group practices, private
hospital-affiliated treatment programs, and other independent treatment programs
with a religious component. With the advent of managed care and the restrictions
on in-hospital treatment, PsyCare also competes with outpatient programs and
drug-based therapies. PsyCare believes it is one of the top Christian programs
in the country but fundamental changes in the industry brought about by managed
care are affecting the success of PsyCare and other similar programs. Unlike
many of its competitors, PsyCare does not own hospitals or clinics but rather
contracts with other facilities to provide the Rapha program in their hospital.
This strategy reduces PsyCare's fixed costs but makes it somewhat dependent upon
decisions made by the hospital over which PsyCare has little control. For
instance, a change in a hospital's management or priorities may result in
cancellation of a contract and require PsyCare to relocate to another hospital.
Among PsyCare's strengths is the strong programmatic basis for its treatment
that 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 that
support the program's focus.
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,
iEAir, ACCLAIM, SmartWasher, OzzyJuice and others.
PERSONNEL
As of February 28, 1998, the Company had 249 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.
INTELLIGENT SYSTEMS CORPORATION
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AFFILIATED PARTNER COMPANIES
From time to time, Intelligent Systems evaluates products or companies that it
believes are involved in promising technologies or 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 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. Although the Company owns 58 percent of the currently issued
and outstanding shares of PaySys common stock, it does not consolidate
the results of operations of PaySys because the Company's majority
ownership is temporary. PaySys filed a registration statement on Form
S-1 in the fall of 1997 related to an initial public offering of its
common stock but the registration is not yet effective. If the
registration becomes effective or PaySys sells equity in a private
sale, the Company's ownership would likely decrease to below 50
percent.
- - A 34 percent equity position in Visibility, Inc., a privately held
software company involved in engineer-to-order software for large
customers selling and managing complex products.
- - 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.
- - A 23.5 percent equity position in Paragon Interface, a privately held
company involved in data mapping and translation software targeted
initially for the insurance industry.
- - A 35 percent equity position in Risk Laboratories, a privately held
software company involved in risk management software for corporate
risk departments.
ITEM 2. PROPERTIES
At December 31, 1997, to house its manufacturing, sales, service and
administration operations, the Company had leases covering approximately 147,525
square feet in two facilities in Atlanta, GA; 6,101 square feet in Greenville,
SC; 7,000 square feet in Denver, CO; and 14,506 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, 1997.
INTELLIGENT SYSTEMS CORPORATION
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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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YEAR ENDED DECEMBER 31, 1997 1996
HIGH LOW HIGH LOW
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1ST QUARTER 4 3 2 11/16 1 7/8
2ND QUARTER 6 1/2 2 7/8 3 1/16 1 3/4
3RD QUARTER 6 1/4 4 1/2 2 15/16 2
4TH QUARTER 7 15/16 4 3 1/4 2 1/2
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The Company's Common Stock was held by approximately 750 shareholders of record
as of February 27, 1998. No cash dividends were declared or paid by the Company
in the two year period ended December 31, 1997. The Company does not intend to
pay dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The income statement and balance sheet data for 1994 and 1993 reflect the
reclassification of the Company's European Distribution Business as a
discontinued operation in June 1994.
(in thousands except share amounts)
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TWELVE MONTHS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
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Net Sales $ 21,160 $ 23,678 $ 28,240 $ 21,364 $ 12,598
Net Income (Loss):
Continuing Operations (7,176)(a) 4,239(b) 147(c) (6,226)(d) 2,945 (e)
Discontinued Operations -- -- -- (1,505) (3,369)
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Net Income (Loss) (7,176) 4,239 147 (7,731) (424)
Net Income (Loss) Per Share:
Continuing Operations (1.41) 0.80 0.03 (1.05) 0.45
Discontinued Operations -- -- -- (0.25) (0.52)
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Net Income (Loss) Per Share (1.41) 0.80 0.03 (1.30) (0.07)
Total Assets 19,091 24,927 23,330 22,755 26,866
Working Capital (1,068) 8,554 4,092 6,089 15,342
Long-term Debt 1,000 -- 50 -- --
Stockholders' Equity 11,396 21,630 18,725 19,192 24,112
Shares Outstanding at Year End 5,104,467 5,126,767 5,312,867 5,575,767 6,413,368
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a. Includes $953,000 charge for purchased in-process R&D, $2.6 million
gain on sales of investments, $3.0 million write-off of note receivable
and $2.3 million loss in equity of investments.
b. Includes net gains of $6.9 million on investments and non-recurring
charges of $1.25 million.
c. Includes $818,000 gain on investment and $1.3 million gain on sale of
ISJ.
d. 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.
e. Includes gain of $4.1 million on settlement of lawsuit.
INTELLIGENT SYSTEMS CORPORATION
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Effective July 1, 1997, the Company acquired QS, Inc. ("QS") and has included
the results of QS in the consolidated operating results since that date. In
December 1995, the Company sold its Intelligent Systems Japan ("ISJ") subsidiary
and in September 1996 sold the assets of a small health care 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 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 (software training programs),
ChemFree Corporation (bio-remediating parts washers), Intelligent Enclosures
(mini-environment systems for ultraclean manufacturing) and HumanSoft LLC, which
includes QS operations (health and human services software for public health
agencies). The operating subsidiary in the health care segment is PsyCare
America (specialty psychiatric treatment programs).
SALES - Net sales in 1997 were $21,160,000 compared to $23,678,000 in 1996.
Although each of the technology sector companies experienced revenue increases
ranging from 11 percent to almost 100 percent, the 11 percent decline overall is
attributed to a decrease of more than 45 percent in revenue derived from the
PsyCare operations. PsyCare had fewer inpatient programs in 1997 than in 1996
and the contract reimbursement rates were lower in 1997 than in 1996. In the
technology sector, the companies sold a greater volume of products and services
in 1997 than in 1996. The Company also benefited from the acquisition of QS part
way through 1997.
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 disposition of
certain businesses during 1996 and 1995. 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 HumanSoft based on a greater volume
of services and products sold, offset in part 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 service revenue reflects a fourth quarter reduction in the number of
inpatient programs.
Health care services represent 29 percent, 55 percent and 50 percent of revenue
in 1997, 1996 and 1995, respectively. The sharp decline in the contribution of
the health care services is due to fewer inpatient programs at the PsyCare
subsidiary as well as the sale in September 1996 of another health care
subsidiary. Revenue derived from international sales was 33 percent in 1997,
compared to 25 percent in 1996 and 32 percent in 1995. The increase in 1997 was
due to higher sales volume at the InterQuad subsidiary, the first international
sales of ChemFree products in the UK and Korea and the decrease in PsyCare's
revenues, which are all domestic. The year-to-year decline in 1996 is due to the
sale of ISJ in 1995.
COST OF SALES - Cost of sales in 1997 was 62 percent of revenue compared to 54
percent of revenue in 1996. Cost of sales differs for each of the Company's
subsidiaries, ranging in 1997 from 50 to 70 percent of revenue. The overall
increase in cost of sales as a percentage of revenue relates primarily to higher
cost of services at the InterQuad subsidiary due to increased use of higher paid
consultants to conduct training classes for part of the year as a result of a
shortage of qualified employees. In addition, PsyCare experienced lower average
rates on contract reimbursement for inpatient programs.
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 service 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.
OPERATING EXPENSES - In 1997, marketing and general and administrative expenses
declined by approximately 17 percent and 4 percent, respectively, compared to
1996 on an 11 percent decline in revenue. PsyCare reduced its marketing expenses
significantly in line with lower revenue levels, while increases at certain
technology subsidiaries were tied to generating and supporting higher sales
volumes. General and administrative expenses declined in absolute values
year-to-year but increased
INTELLIGENT SYSTEMS CORPORATION
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slightly as a percentage of revenue in 1997 compared to 1996. The acquisition of
QS increased overhead expenses in the second half of the year. Research and
development expense in 1997 was $1.5 million in 1997 compared to $286,000 in
1996. The difference is due principally to a non-recurring charge of $953,000
booked in the third quarter of 1997 related to the allocation of a portion of
the QS purchase price to in-process research and development. The remaining
increase is due to more spending on new product development at the HumanSoft
operation.
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.
INTEREST INCOME - Net interest income in 1997 was $350,000, 30 percent lower
than in 1996. The decrease relates to higher interest expense in 1997 as well as
a reduction in interest bearing notes receivable. 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.
INVESTMENT INCOME - In 1997, the Company recorded a net loss of $2,585,000 on
investments compared to investment income of $5,844,000 in 1996. In 1997, the
principal components of this category include a gain of $1.9 million on the sale
of PaySys stock (see Note 3), a gain of $469,000 on the sale of an investment in
Astra Communications, a gain of $217,000 on the sale of OrCAD stock (see Note
3), a $3.0 million write-off of a note receivable from DayStar Digital, Inc.
(see Note 5) and $2.3 million in net losses in the equity of investments
accounted for by the equity method. 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). 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 DayStar. 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 equity in the losses of PaySys.
OTHER INCOME - Other income/expense in 1997 and 1996 consists mainly of several
miscellaneous, non-recurring sources of income and expense. In 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 related
income was recorded in later years.
TAXES - Taxes payable in 1997 relate to the operations of QS. 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.
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
5,104,467, 5,126,767 and 5,312,867 shares outstanding at December 31, 1997, 1996
and 1995, 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 pro forma 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
INTELLIGENT SYSTEMS CORPORATION
-10-
<PAGE> 11
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.
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share", which changes the method of computing earnings per share. The new
standard requires presentation of "basic earnings per share" and "diluted
earnings per share", as defined. Basic and diluted earnings per share amounts
pursuant to SFAS No. 128 do not differ from reported earnings per share amounts
under existing accounting rules.
In October 1997, the AICPA issued Statement of Position 97-2, "Software Revenue
Recognition". SOP 97-2 clarifies and changes some software recognition practices
and supersedes the existing guidance of SOP 91-1. SOP 97-2 must be adopted
effective January 1, 1998. The Company's management does not believe adopting
SOP 97-2 will have a material impact on the Company's financial position or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, the principal sources of liquidity were $2.0 million from the sale of
PaySys shares (see Note 3), $1.7 million from the sale of investments in OrCAD
and Astra Communications, advances totaling approximately $700,000 under bank
lines of credit, advances under short-term notes totaling $778,000, the maturity
of certificates of deposit totaling $1.1 million and approximately $1.0 million
generated from operations. The principal uses of funds were $870,000 to fund the
acquisition of QS, Inc. (see Note 2), $4.6 million to acquire a 34 percent
equity position in Visibility, Inc. (a privately held software company), $1.7
million to increase the Company's long-term investments in several small,
privately-held technology companies, $1.2 million in net advances under loans to
companies in which the Company holds long-term investments and $1.2 million to
acquire property and equipment mainly related to new facilities at the InterQuad
subsidiary. Notes payable and long-term debt at December 31, 1997 are comprised
of $700,000 in bank debt, $1.5 million in notes payable to the sellers of QS,
and $778,000 in notes related to two acquisitions of long-term investments.
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
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 October 1997, PaySys filed a registration statement on Form S-1 with respect
to a proposed initial public offering of its common stock, in which the Company
had anticipated selling some of its PaySys stock to provide additional
liquidity. As of the date hereof, the registration has not become effective.
Although the Company believes that PaySys will be successful in raising capital
in 1998 either through a public offering or private sale, there can be no
assurance as to the timing or amount of capital raised or to what extent the
Company would participate in the sale of PaySys stock. Consequently, subsequent
to the year-end, the Company arranged for an additional bank loan of up to
$1,000,000 secured by the Company's holdings in PaySys common stock which the
Company believes will be adequate to fund its operations and commitments in the
foreseeable future. The Company will not make new investments while the bank
loan is outstanding without the bank's permission. The Company believes it could
enter into a private sale of some portion of its PaySys holdings, at a
significant gain, if it desired to do so prior to an effective public offering
of PaySys common stock.
The Company believes it has adequate access to capital through bank borrowings
or sale of assets 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 significant
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.
INTELLIGENT SYSTEMS CORPORATION
-11-
<PAGE> 12
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, 1997 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 1 - The
Election of Directors - Nominees" and "Proposal 1 - The Election of Directors -
Executive Officers" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held on June 12, 1998. Such information is incorporated
herein by reference. Information regarding compliance by directors and executive
officers of the Company and owners of more than 10 percent 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 1 - 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 1 - The Election of Directors - Executive
Compensation - Board Compensation Committee Report on Executive Compensation"
and "Performance Graph," which specifically are not so incorporated by
reference.
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.
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, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
INTELLIGENT SYSTEMS CORPORATION
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<PAGE> 13
Consolidated Statements of Cash Flow for the years ended December 31,
1997, 1996 and 1995 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.
Consolidated Balance Sheets of PaySys at December 31, 1997 and 1996
Consolidated Statements of Operations of PaySys for the three years
ended December 31, 1997
Consolidated Statements of Changes in Stockholders' Equity of PaySys
for the three years ended December 31, 1997
Consolidated Statements of Cash Flows of PaySys for the three years
ended December 31, 1997
Notes to Consolidated Financial Statements of PaySys
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.
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
Francis Crowder, Sr., Marion S. Crowder, Kevin W. Davidson and Charles
S. Verdin III dated July 1, 1997.
2.4 Stock Purchase Agreement between Intelligent Systems Corporation and
Oak Investment Partners V, L.P. and Oak V Affiliate Fund, L.P. dated
March 31, 1997.
3(i) Articles of Amendment of Articles of Incorporation dated November 25,
1997. (Incorporated by reference to Exhibit 3.1 to the Registrant's
Report on Form 8-K dated November 25, 1996.)
3(ii) Bylaws of the Registrant dated March 11, 1997. (Incorporated by
reference to Exhibit 3(ii) of the Registrant's Form 10-K for the year
ended December 31, 1996.)
4.1 See Exhibits 3(i) and 3(ii) for instruments defining rights of holders
of Common Stock and Preferred Stock of Registrant.
4.2 Rights Agreement dated as of November 25, 1997 between the Registrant
and American Stock Transfer & Trust Company as Rights Agent.
(Incorporated by reference to Exhibit 4.1 of the Registrant's Report on
Form 8-K dated November 25, 1997.)
4.3 Form of Rights Certificate. (Incorporated by reference to Exhibit 4.2
of the Registrant's Report on Form 8-K dated November 25, 1997.)
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.)
INTELLIGENT SYSTEMS CORPORATION
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<PAGE> 14
10.2 Second Amendment to Lease Agreement dated June 19, 1997 between a
subsidiary of the Registrant and A.R. Weeks.
10.3 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.)
10.4 Management Compensation Plans and Arrangements:
(a) Intelligent Systems Corporation 1991 Stock Incentive Plan, amended
June 6, 1997.
(b) Intelligent Systems Corporation Change in Control Plan for
Officers.
(c) Intelligent Systems Corporation Outside Director's Retirement Plan.
Item 10.6 (a) is incorporated by reference to Exhibit 4.1 of the
Registrant's Form S-8 dated July 25, 1997.
Items 10.6 (b) and (c) are incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-K for the year ended December 31, 1993.
10.5 Form of Promissory Note of Registrant in favor of sellers of QS, Inc.
dated as of July 1, 1997.
10.6 Loan Agreement dated February 17, 1998 between Registrant and
NationsBank, N.A.
10.7 Pledge Agreement dated February 17, 1998 between Registrant and
NationsBank, N.A.
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.
27 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K.
The Registrant filed a report on Form 8-K dated November 25, 1997.
(c) SEE ITEM 14(a)(3) ABOVE.
(d) SEE ITEM 14(a)(2) ABOVE.
INTELLIGENT SYSTEMS CORPORATION
-14-
<PAGE> 15
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
Dated: April 15, 1998
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>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ J. LELAND STRANGE Chairman of the Board, President, April 15, 1998
- ------------------------------ Chief Executive Officer and Director
J. Leland Strange (Principal Executive Officer)
/s/ HENRY H. BIRDSONG Chief Financial Officer April 15, 1998
- ------------------------------ (Principal Accounting and Financial Officer)
Henry H. Birdsong
/s/ DONALD A. MCMAHON Director April 15, 1998
- ------------------------------
Donald A. McMahon
/s/ JAMES V. NAPIER Director April 15, 1998
- ------------------------------
James V. Napier
/s/ JOHN B. PEATMAN Director April 15, 1998
- ------------------------------
John B. Peatman
/s/ PARKER H. PETIT Director April 15, 1998
- ------------------------------
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, 1997 and 1996...............................................F-3
Consolidated Statements of Operations -
Years Ended December 31, 1997, 1996 and 1995........................................................F-4
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1997, 1996 and 1995........................................................F-5
Consolidated Statements of Cash Flow -
Years Ended December 31, 1997, 1996 and 1995........................................................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
Consolidated Balance Sheets of PaySys at December 31, 1997 and 1996.................................S-4
Consolidated Statements of Operations of PaySys for the three years ended December 31, 1997.........S-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit) of PaySys
for the three years ended December 31, 1997......................................................S-6
Consolidated Statements of Cash Flow of PaySys for the three years ended December 31, 1997..........S-7
Notes to Consolidated Financial Statements of PaySys................................................S-8
</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, 1997 and 1996, 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, 1997. 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 majority-owned
subsidiary, which statements reflect total assets and total revenues of 18.9
percent and 31.2 percent, respectively, in 1997 and of 9.4 percent and 25.1
percent, respectively, in 1996 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 0 percent of
total assets in 1997 and 6.9 percent of total assets in 1996, and the equity in
its 1997 net loss and its 1996 net income represents, respectively, 40 percent
of consolidated net loss for 1997 and 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 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 II 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, 1998
INTELLIGENT SYSTEMS CORPORATION
F-2
<PAGE> 18
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------------------------
Current assets:
Cash $ 43 $ 2,434
Certificate of deposit -- 1,056
Accounts receivable, net 3,855 3,764
Notes and interest receivable 330 3,212
Inventories 611 648
Other current assets 788 737
- -----------------------------------------------------------------------------------------------------------
Total current assets 5,627 11,851
- -----------------------------------------------------------------------------------------------------------
Long-term investments 9,512 8,967
Long-term notes receivable 133 1,414
Property and equipment, at cost less accumulated depreciation and amortization 2,848 2,126
Excess of cost over underlying net assets of businesses acquired,
net of accumulated amortization 971 569
- -----------------------------------------------------------------------------------------------------------
Total assets $ 19,091 $ 24,927
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term borrowings $ 1,979 $ --
Accounts payable 1,285 984
Accrued expenses and other current liabilities 3,431 2,313
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 6,695 3,297
- -----------------------------------------------------------------------------------------------------------
Long-term debt 1,000 --
- -----------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 authorized, 5,104,467 and
5,126,767 outstanding at December 31, 1997 and 1996, respectively 51 51
Paid-in capital 24,046 24,139
Foreign currency translation adjustment (193) (196)
Unrealized gain in available-for-sale securities 836 3,804
Accumulated deficit (13,344) (6,168)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,396 21,630
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 19,091 $ 24,927
===========================================================================================================
</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, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 21,160 $ 23,678 $ 28,240
Expenses:
Cost of sales 13,031 12,838 14,579
Marketing 3,860 4,624 4,280
General & administrative 7,638 7,983 10,846
Research & development 1,485 286 995
- --------------------------------------------------------------------------------------------------------------------
Loss from operations (4,854) (2,053) (2,460)
- --------------------------------------------------------------------------------------------------------------------
Other income:
Interest income, net 350 501 428
Investment income (loss), net (2,585) 5,844 1,896
Other income (loss), net (61) (38) 399
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax provision and minority interest (7,150) 4,254 263
- --------------------------------------------------------------------------------------------------------------------
Income tax provision 16 3 102
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest (7,166) 4,251 161
- --------------------------------------------------------------------------------------------------------------------
Minority interest 10 12 14
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (7,176) $ 4,239 $ 147
====================================================================================================================
Basic and diluted net income (loss) per share $ (1.41) $ 0.80 $ 0.03
====================================================================================================================
Weighted average shares outstanding 5,087,456 5,278,269 5,371,401
====================================================================================================================
</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 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK, NUMBER OF SHARES, beginning of year 5,126,767 5,312,867 5,575,767
Exercise of options during year 25,000 50,000 --
Purchase and retirement of stock (47,300) (236,100) (262,900)
- ---------------------------------------------------------------------------------------------------------------
End of year 5,104,467 5,126,767 5,312,867
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCK, AMOUNT, beginning of year $ 51 $ 53 $ 56
Purchase and retirement of stock -- (2) (3)
- ---------------------------------------------------------------------------------------------------------------
End of year 51 51 53
- ---------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL, beginning of year 24,139 24,756 25,263
Proceeds from options exercised 67 -- --
Purchase and retirement of stock (160) (617) (507)
- ---------------------------------------------------------------------------------------------------------------
End of year 24,046 24,139 24,756
- ---------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT, beginning of year (196) (153) (141)
Foreign currency translation adjustment during year 3 (43) (12)
- ---------------------------------------------------------------------------------------------------------------
End of year (193) (196) (153)
- ---------------------------------------------------------------------------------------------------------------
UNREALIZED GAIN IN AVAILABLE-FOR-SALE SECURITIES 836 3,804 4,476
- ---------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT, beginning of year (6,168) (10,407) (10,554)
Net income (loss) (7,176) 4,239 147
- ---------------------------------------------------------------------------------------------------------------
End of year (13,344) (6,168) (10,407)
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 11,396 $ 21,630 $ 18,725
===============================================================================================================
</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): 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net income (loss) $(7,176) $ 4,239 $ 147
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 2,193 985 1,451
Loss (gain) from sale or write-down of assets, net 330 (5,804) (2,545)
Equity in net loss (gain) of affiliates 2,262 (40) 203
Changes in operating assets and liabilities:
Accounts receivable 453 195 (1,210)
Inventories 37 (203) (180)
Other current assets (36) (202) 66
Accounts payable 301 (520) 665
Accrued expenses and other current liabilities 2,668 885 316
- --------------------------------------------------------------------------------------------------------------
Cash provided by (used for) continuing operations 1,032 (465) (1,087)
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of investments 3,667 8,267 939
Decrease in net assets/liabilities of
discontinued operations 100 -- 939
Acquisition of company, net of cash acquired (870) -- (8)
Increase in ownership of subsidiaries (50) (136) --
Decrease in minority interests -- -- (136)
Dispositions of short-term investments -- -- 1,328
Acquisitions of long-term investments (6,329) (1,025) (796)
Advances under notes receivable, net (1,223) (115) (1,644)
Maturity (purchases) of certificates of deposit 1,056 (1,056) --
Purchases of property and equipment, net (1,162) (1,406) (752)
- --------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities (4,811) 4,529 (130)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under short-term
borrowing arrangements 1,478 (1,488) 1,249
Purchase and retirement of stock (160) (619) (509)
Exercise of stock options 67 -- --
Foreign currency translation adjustment 3 (43) 27
- --------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities 1,388 (2,150) 767
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (2,391) 1,914 (450)
Cash at beginning of year 2,434 520 970
- --------------------------------------------------------------------------------------------------------------
Cash at end of year $ 43 $ 2,434 $ 520
==============================================================================================================
</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.
Nature of Operations - The Company is involved in creating and managing
businesses through flexible partnership arrangements. Consolidated partnership
companies (in which the Company has the majority ownership and control) 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 or non-controlling 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 its majority owned and controlled U.S. and non-U.S.
subsidiary companies after elimination of material intercompany accounts and
transactions.
Investments - Investments in entities in which the Company has a 20 to 50
percent ownership interest or where majority ownership is temporary 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). The aggregate fair value of the
Company's available-for-sale securities, which consist primarily of 157,801
shares of IQ Software Corporation (IQ) common stock as of December 31, 1997 and
1996 and 104,484 shares of common stock of OrCAD, Inc. (OrCAD) as of December
31, 1996, totaled $1,288,000 and $4,818,000, at December 31, 1997 and 1996,
respectively. Such amounts include unrealized holding gains of $836,000 and
$3,804,000, as of December 31, 1997 and 1996, respectively, which are reflected
as a separate component of stockholders' equity. In 1997, the Company recorded a
gain of $217,000 and cash proceeds of $948,000 from the sale of 104,484 shares
of common stock of OrCAD as well as a gain of $1,865,000 and cash proceeds of
$2.0 million on the sale of 50,537 shares of common stock of PaySys
International, Inc. (Note 3). In 1996, the Company recorded gains of $6,628,000
and cash proceeds of $7,193,000 on sales of 315,000 shares of IQ common stock as
well as a gain of $337,000 and cash proceeds of $1,069,000 on the sale of
104,484 shares of common stock of OrCAD. 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, 1997 and 1996 financial statements of applying
SFAS No. 115 to the trading securities was immaterial. Approximately $6.6
million of the Company's long-term investments at December 31, 1997 are
concentrated in IQ and Visibility, Inc. (see Note 4). A deterioration in the
financial condition of either 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 1-7
- --------------------------------------------------------------
</TABLE>
Accumulated depreciation and amortization was $4,386,000 and $3,162,000 at
December 31, 1997 and 1996, 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 three to five years using the straight-line method.
Accumulated amortization of intangibles totaled $1.8 million and $1.2 million at
December 31, 1997 and 1996, respectively. The Company follows a policy of
writing off the asset and accumulated amortization for fully amortized
intangibles. The Company periodically reviews the values
INTELLIGENT SYSTEMS CORPORATION
F-7
<PAGE> 23
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. This
write-off is reflected in general and administrative expense in the accompanying
statements of operations. In 1997, 1996 and 1995, the Company recorded
intangible amortization expense of approximately $604,000, $332,000 and
$773,000, respectively. In 1997, the Company expensed $953,000 of purchased
research and development related to the acquisition of QS, Inc. as more fully
discussed in Note 2. This expense is included in research and development
expense on the accompanying statements of operations.
The Company conforms to the requirements of SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed", which
requires capitalization of costs incurred in developing new software once
technological feasibility, as defined, has been reached. Costs of maintaining
existing software and research and development are expensed as incurred. The
Company did not capitalize any software development costs during the years ended
December 31, 1997, 1996 and 1995.
Accrued Expenses and Other Current Liabilities - Accrued expenses and other
liabilities at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Accrued wages and payroll taxes $ 574 $392
Deferred revenue 1,748 421
Other accrued expenses 721 --
- ---------------------------------------------------------------
</TABLE>
Warranty Costs - Estimated costs associated with product warranties are accrued
as an expense in the period the related sales are recognized.
Revenue Recognition - Revenue is derived from sales of software licenses,
technology-related products and services and health care services. The Company
recognizes revenue when products are shipped or, in the case of service
providers, when the services are rendered. Revenue recognition practices for
software are in accordance with Statement of Position 91-1, "Software Revenue
Recognition". The Company generally recognizes software license revenue upon
delivery of the software and related documentation when there are no significant
remaining obligations. The Company accrues the costs of insignificant
obligations remaining when software license revenue is recognized. Service fees
received from the sale of software maintenance and support contracts provide
customers access to technical support and minor upgrades to licensed revenues
and are recognized as services are provided over the life of such contracts. 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 - Effective December 31, 1997, the Company adopted SFAS No.
128, "Earnings Per Share", which changes the method of computing earnings per
share. The new standard requires presentation of "basic earnings per share" and
"diluted earnings per share", as defined. Basic and diluted earnings per share
amounts pursuant to SFAS No. 128 do not differ from reported earnings per share
amounts under existing accounting rules.
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 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. See Note 11.
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.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income". The Statement requires companies to report
comprehensive income and its components in its financial statements.
Comprehensive income is the total of net income and all other nonowner changes
in equity in a period. The Company will adopt the disclosure requirements of
this statement in March 1998.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement requires a management approach to be used when reporting business
segments. Reportable segments are based on products and services, geography,
legal structure or management structure. The Company will adopt the disclosure
requirements of this statement in March 1998.
INTELLIGENT SYSTEMS CORPORATION
F-8
<PAGE> 24
In October 1997, the AICPA issued Statement of Position 97-2, "Software Revenue
Recognition". SOP 97-2 clarifies and changes some software recognition practices
and supersedes the existing guidance of SOP 91-1. SOP 97-2 must be adopted
effective January 1, 1998. The Company's management does not believe adopting
SOP 97-2 will have a material impact on the Company's financial position or
results of operations.
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.
QS, Inc. - Effective July 1, 1997, the Company acquired all of the outstanding
common stock of QS, Inc. (QS), a company engaged in providing software products
and services to the public health market. The Company paid $2.0 million in cash
and issued a promissory note for $1.5 million due in three equal annual
installments beginning July 1, 1998 and bearing interest at 8.5 percent per
annum, payable quarterly. The promissory note is guaranteed by an executive
officer of the Company. The acquisition was accounted for as a purchase. The
Company expensed $953,000 of purchased research and development projects that
had not reached technological feasibility and that did not have an alternative
future use. Since the acquisition date, the Company has consolidated the results
of operations of QS.
NOTE 3
SALE OF ASSETS
PaySys International, Inc. - On March 31, 1997, the Company sold 50,537 (252,685
post-split) shares of common stock of PaySys International, Inc. ("PaySys") in a
private transaction. The Company received $2.0 million in cash for the stock and
recorded a gain of $1,864,000 on the sale. The Company retains 4,135,330
post-split shares of common stock of PaySys as of December 31, 1997.
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. The Company exchanged its interest in ISJ for 208,968
shares of common stock of OrCAD. 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 quarter of 1996. The Company sold its
remaining 104,484 shares of common stock of OrCAD in the second quarter of 1997,
recognizing a gain of $217,000 on the sale.
NOTE 4
INVESTMENTS IN AFFILIATES
At December 31, 1997, the Company owned a 58 percent interest in PaySys. Since
it is the majority owner only temporarily, the Company is not considered the
controlling shareholder in 1997 and therefore, the investment is classified as
an affiliate and accounted for by the equity method of accounting. The Company's
pro rata share of PaySys losses was $7.9 million in 1997. However, in accordance
with the equity method of accounting, the Company only recorded $3.0 million,
reducing the Company's investment of $3.0 million to zero. The Company has no
obligation or intent to provide additional funding to PaySys. No dividends were
received from the affiliate during 1997 and 1996.
The table below contains the summarized financial information of PaySys.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 12,884 $ 11,700 $ --
Current liabilities 23,207 14,271 --
Noncurrent assets 3,604 4,494 --
Noncurrent liabilities 4,897 1,761 --
Net sales $ 32,787 $ 26,924 $ 21,728
Operating income (loss) (15,063) 592 222
Net income (loss) (15,815)(1) 139 (472)(2)
- ----------------------------------------------------------------------------
</TABLE>
1. Includes non-recurring charges totaling $5.8 million.
2. Includes non-recurring charge of $1.2 million.
At December 31, 1997, the Company owned a 33.7 percent interest in Visibility,
Inc., a software company. The investment is classified as an affiliate and
accounted for using the equity method of accounting. No dividends were received
from the affiliate in 1997.
INTELLIGENT SYSTEMS CORPORATION
F-9
<PAGE> 25
The table below contains the summarized financial information of Visibility.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 6,832 $ 4,804
Current liabilities 7,235 8,955
Noncurrent assets 1,453 1,763
Noncurrent liabilities 6,490 5,040
Net sales $21,850 $19,982 $19,963
Operating loss (2,791) (5,759) (2,531)
Net loss (3,260) (6,048) (3,028)
- ------------------------------------------------------------
</TABLE>
NOTE 5
ACCOUNTS AND NOTES RECEIVABLE AND OTHER COMMITMENTS
At December 31, 1997 and 1996, the Company's allowance for doubtful accounts and
sales returns amounted to $207,000 and $372,000, respectively.
Provisions for doubtful accounts and sales returns were $46,000, $312,000 and
$446,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company holds minority ownership positions in Paragon Interface, Inc. (data
mapping software) and Risk Laboratories, Inc. (risk management software). As
part of these transactions, the Company entered into 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 $368,000 and $150,000 at December 31, 1997 and 1996, respectively)
and has no commitment for additional funding under the terms of the agreements.
At December 31, 1997, the Company owns 23.5 percent and 35 percent of the equity
in Paragon and Risk, respectively, and accounts for these investments by the
equity method.
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. In 1996, IQ released 85,259 shares of stock held as
collateral that was then sold by the Company. In 1997, the Company repaid the
$1.8 million debt of DayStar to IQ and IQ released the balance of 154,904 shares
to the Company. The Company subsequently wrote off $3.0 million related to
uncollectability of the note from DayStar when DayStar ceased operations in
October 1997.
NOTE 6
BORROWINGS
Terms and borrowings under the Company's credit facilities are summarized below:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding (month-end) $1,172 $1,476
Outstanding at year end $ 700 --
Average interest rate at year end 8.5% N/A
Average borrowings during the year $1,040 $ 604
Average interest rate 8.7% 10.0%
- -------------------------------------------------------------------------------
</TABLE>
Interest paid on debt during 1997, 1996 and 1995 amounted to $103,000, $61,000
and $93,000, respectively.
NOTE 7
LONG-TERM DEBT
The Company's long-term debt consists of the promissory notes payable to the
sellers of QS, as more fully described in Note 2. Maturities of long-term debt
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------
<S> <C>
1999 $ 500
2000 500
- --------------------------------------------------------------
Total long-term debt payments $1,000
==============================================================
</TABLE>
NOTE 8
INCOME TAXES
The income tax provision related to operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Foreign $ -- $ -- $ 46
Domestic 16 3 56
- --------------------------------------------------------------------------------
$ 16 $ 3 $102
================================================================================
</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, 1997, the Company's domestic subsidiaries had net operating loss
carryforwards totaling $19.0 million. The net operating loss carryforwards, if
unused as offsets to future taxable income, will expire beginning in 2005 and
INTELLIGENT SYSTEMS CORPORATION
F-10
<PAGE> 26
continuing through 2012. 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 percent 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 $10.0 million and $8.6 million at December 31, 1997 and
1996, respectively. As the Company's ability to realize the deferred tax asset
is uncertain, the amount is offset in both 1997 and 1996 by a valuation
allowance of an equal amount. The deferred tax benefit at December 31, 1997 and
1996 relates primarily to net operating loss carryforwards.
Income taxes paid during 1997, 1996 and 1995 amounted to $16,000, $3,000 and $0,
respectively.
NOTE 9
COMMITMENTS AND
CONTINGENCIES
The Company has noncancellable operating leases expiring at various dates
through 2004. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------
<S> <C>
1998 $1,311
1999 1,234
2000 1,190
2001 950
2002 885
Thereafter 223
- --------------------------------------------------------------
Total minimum lease payments $5,793
==============================================================
</TABLE>
Rental expense for leased facilities and equipment related to operations
amounted to $1.2 million, $1.0 million and $1.4 million, for the years ended
December 31, 1997, 1996 and 1995, 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
STOCK OPTION PLAN
The Company instituted the 1991 Incentive Stock Plan (the "Plan") in December
1991, which was amended in 1997 to increase the number of shares authorized
under the Plan to 925,000. The Plan provides shares of common stock that may be
sold to officers and key employees. Stock options are granted at fair market
value on the date of grant. As of December 31, 1997, 655,000 options are fully
vested and exercisable at a weighted average price per share of $1.75. Of the
unvested options, 5,000 vest in 1998 and 5,000 vest in 1999. All options expire
ten years from their respective dates of grant. At December 31, 1997, the
weighted average remaining contractual life of the outstanding options is 6.8
years and there are 655,000 options exercisable with option prices ranging from
$0.875 to $2.94 and with a weighted average price per share of $1.75. Stock
option transactions during the three years ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at January 1 690,000 640,000 330,000
Options granted -- 410,000 310,000
Options exercised 25,000 50,000 --
Options canceled -- 310,000 --
Options outstanding
at December 31 665,000 690,000 640,000
Options available for
grant at December 31 185,000 -- 10,000
Option price ranges
per share:
Granted -- $2.25-2.94 $ 2.07
Exercised $2.25-2.94 0.875 --
Canceled -- 2.07 --
Weighted average
option price per share:
Granted -- $ 2.42 $ 2.07
Exercised $ 2.67 0.875 --
Canceled -- 2.07 --
Outstanding at
December 31 1.75 1.79 1.45
- ------------------------------------------------------------
</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 model with the following weighted average
assumptions: risk free interest rate of 6.3 percent, expected life of the option
of 6
INTELLIGENT SYSTEMS CORPORATION
F-11
<PAGE> 27
years, expected dividend yield rate of 0 percent, and expected volatility of 63
percent. Under these assumptions, the weighted average fair value of options
granted in 1996 was $1.54. There were no awards under the Plan in 1997. The fair
value of the grants would be amortized over the vesting period for the options.
Accordingly, the Company's pro forma net income (loss) and net income (loss) 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) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (7,760) $ 4,205 $ 147
Net income (loss)
per common share
basic and diluted $ (1.53) $ .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 12
STOCKHOLDERS' EQUITY
The Corporation has authorized 20,000,000 shares of Common Stock, $.01 par value
per share, and 2,000,000 shares of Series A Preferred Stock, $.10 par value per
share. No shares of Preferred Stock have been issued; however, the Company
adopted a Rights Agreement on November 25, 1997, which provides that, under
certain circumstances, shareholders may redeem the Rights to purchase shares of
Preferred Stock. The Rights have certain anti-takeover effects. The Board of
Directors has authorized stock repurchases at various times in the past. The
Company repurchased and retired 47,300 and 236,100 shares of common stock in the
years ended December 31, 1997 and 1996, respectively.
NOTE 13
FOREIGN SALES
AND OPERATIONS
Aggregate export and foreign sales from continuing operations were approximately
$7.0 million, $5.9 million and $9.0 million for the years ended December 31,
1997, 1996 and 1995, 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) 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
United Kingdom $6,813 $5,934 $4,734
Far East 210 -- 4,312
- --------------------------------------------------------------
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, income (loss) before
provision for income taxes derived from foreign subsidiaries approximated
$(930,000), $43,000 and $130,000, respectively.
As of December 31, 1997 and 1996, foreign subsidiaries had assets of $3.6
million and $2.3 million, respectively, and total liabilities of $4.0 million
and $2.3 million, respectively.
Foreign subsidiaries are located in England and there are no currency exchange
restrictions that 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
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 and, through August 1996, locum tenens service (placement of
physicians in temporary positions). The Company derived 13.5 percent, 37 percent
and 27 percent of its consolidated revenue in 1997, 1996 and 1995, respectively,
from a national chain of hospitals in which the Company conducts some of its
treatment programs. In the fourth quarter of 1996 and during 1997, several
programs located in the chain's hospitals were closed. 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; educational
training 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,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------
Adjust.
Health and
(in thousands) Tech. Care Elimin. Consol.
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $14,957 $ 6,203 $ 21,160
R&D 1,485 -- 1,485
Depreciation 964 147 1,111
Operating loss (2,290) (912) (3,202)
General corp. expenses 1,652
- ------------------------------------------------------------------------------
Consolidated operating
loss (4,854)
Interest income 350
Investment loss (2,585)
Other loss, net (61)
- ------------------------------------------------------------------------------
Loss from continuing
operations before
income tax provision
and minority interest (7,150)
Income tax provision 16
- ------------------------------------------------------------------------------
Loss before minority
Interest (7,166)
Minority interest 10
- ------------------------------------------------------------------------------
Net loss from continuing
operations $ (7,176)
==============================================================================
Capital expenditures $ 1,973 $ 7 $ 1,980
==============================================================================
Identifiable assets $ 7,762 $ 1,059 $ 8,821
Corporate assets 10,270
- ------------------------------------------------------------------------------
Total assets at year end $ 19,091
==============================================================================
</TABLE>
<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 loss, 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
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 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
Corporate assets 15,913
- -------------------------------------------------------------------------------
Total assets at year end $ 23,330
===============================================================================
</TABLE>
NOTE 15
QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below contains a summary of selected quarterly data for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
FOR QUARTERS ENDED
(in thousands except MARCH JUNE SEPT. DEC.
per share data) 31 30 30 31
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net sales $ 5,108 $ 5,320 $ 5,248 $ 5,484
Operating loss (684) (531) (2,605) (1,034)
Net income (loss) 584 (a) (869)(b) (6,984)(c) 92 (d)
Basic and diluted
income (loss) per share 0.11 (0.17) (1.37) 0.02
1996
Net sales $ 6,085 $ 6,451 $ 6,067 $ 5,075
Operating loss (335) (510) (370) (838)
Net income (loss) (532)(e) 3,511 (f) 59 1,201 (g)
Basic and diluted
income (loss) per share (0.10) 0.66 0.01 0.23
</TABLE>
a. Includes gain of $1.9 million on investment.
b. Includes gain of $217,000 on investment and $721,000 loss in equity of
affiliate.
c. Includes charge of $.9 million for purchased R&D, write-off of $3.0 million
note and $1.25 million loss in equity of affiliate. d. Includes gain of
$469,000 on investment and $707,000 income in equity of affiliate.
e. Includes gain of $337,000 on investment.
f. Includes gain of $3.3 million on investment and $250,000 non-recurring
charge.
g. Includes gain of $3.0 million on investment and $1.0 million reduction in
carrying value of investment.
INTELLIGENT SYSTEMS CORPORATION
F-13
<PAGE> 29
NOTE 16
SUBSEQUENT EVENTS
Effective January 1, 1998, the Company acquired all the common stock of JK, Inc.
(JK), a company that provides software and services to the public health market.
The purchase price included $200,000 cash, a promissory note of $600,000 and 645
units of limited liability interest (approximately 14 percent) of the Company's
HumanSoft LLC subsidiary. The note is due in three equal annual installments
beginning January 1, 1999 and bears interest of 8.5 percent per annum payable
quarterly. The sellers may exchange a portion of the note for additional equity
of HumanSoft prior to January 1, 1999. Additional contingent payments of up to
$500,000 may be due the sellers based on attainment of performance criteria in
1998. The acquisition was accounted for as a purchase.
On February 17, 1998, the Company entered into a loan agreement with a
commercial bank providing for borrowings up to $1.0 million. The loan is secured
by 4,014,872 shares of PaySys common stock held by the Company and bears
interest at prime plus 3.5 percent per annum.
INTELLIGENT SYSTEMS CORPORATION
F-14
<PAGE> 30
SCHEDULE II
INTELLIGENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(a) END OF PERIOD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS(b)
Year Ended December 31, 1995 325,305 446,337 453,541 318,101
Year Ended December 31, 1996 318,101 311,887 258,283 371,705
Year Ended December 31, 1997 371,705 46,963 211,760 206,908
</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> 31
InterQuad Services Limited
Auditors' Report
to the Stockholders and directors of InterQuad Services Limited
We have audited the balance sheet at 31 December 1997 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 includes an assessment of the significant estimates and
judgements 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 1997 and the results of its operations for the year then ended.
The financial statements 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.
/s/ Morley & Scott
Morley & Scott
Chartered Accountants
Registered Auditor
London
March 12, 1998
S-2
<PAGE> 32
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 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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 the 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 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
October 1, 1997 the Company adopted Statement of Position 97-2, "Software
Revenue Recognition", changing its method of recognizing revenue on software
transactions.
ERNST & YOUNG LLP
February 19, 1998
Atlanta, Georgia
S-3
<PAGE> 33
PaySys International, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
---------------------------------
ASSETS (In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,037 $ 1,074
Accounts receivable, less allowance for bad debts of $143 and
$431 at December 31, 1996 and 1997, respectively 4,055 6,288
Unbilled receivables 5,094 5,238
Prepaid expenses and other current assets 237 284
Deferred income taxes 277 --
---------------------------------
Total current assets 11,700 12,884
Furniture and equipment, net 1,705 2,765
Computer software costs, net of accumulated amortization of
$2,914 and $2,419 at December 31, 1996 and
December 31, 1997, respectively 2,733 692
Deposits and other assets 56 147
---------------------------------
$ 16,194 $ 16,488
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,859 $ 3,055
Accrued employee compensation 1,319 2,483
Deferred revenues 8,374 11,614
Current portion of long-term debt and capital lease obligations 1,393 408
Accrued royalties 1,039 3,398
Other current liabilities 287 2,249
---------------------------------
Total current liabilities 14,271 23,207
Long-term debt and capital lease obligations, less current portion 482 4,069
Deferred rent expense 1,122 828
Other noncurrent liabilities 157 --
---------------------------------
16,032 28,104
Shareholders' equity (deficit):
Preferred stock, no par value; 2,000,000 shares authorized; no
shares issued or outstanding -- --
Common stock, $.01 par value; 20,000,000 shares authorized;
6,826,520 and 7,131,825 shares issued and outstanding at
December 31, 1996 and December 31, 1997, respectively 68 71
Additional paid-in capital 2,079 5,705
Deferred stock compensation -- (67)
Accumulated deficit (1,439) (17,254)
Cumulative translation adjustments (55) (71)
---------------------------------
653 (11,616)
Less 159,050 shares held in treasury at December 31, 1996, at
cost (491) --
---------------------------------
162 (11,616)
---------------------------------
$ 16,194 $ 16,488
=================================
</TABLE>
See accompanying notes.
S-4
<PAGE> 34
PaySys International, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1996 1997
--------------------------------------
(In thousands)
<S> <C> <C> <C>
Revenues:
License $ 8,668 $ 13,366 $ 13,088
Services 13,060 13,558 19,699
--------------------------------------
Total revenues 21,728 26,924 32,787
Cost of revenues:
License 1,324 2,935 4,223
Services 9,503 8,956 15,683
--------------------------------------
Total cost of revenues 10,827 11,891 19,906
Gross margin 10,901 15,033 12,881
Operating expenses:
Sales and marketing 2,298 3,270 4,865
Research and development 2,133 6,944 10,641
General and administrative 4,105 4,227 6,900
Non-cash compensation -- -- 3,722
Write off of capitalized software 2,143 -- 949
Cost of postponed stock offering -- -- 867
--------------------------------------
Total operating expenses 10,679 14,441 27,944
Income (loss) from operations 222 592 (15,063)
Interest income (expense):
Interest income 27 83 95
Interest expense (365) (233) (442)
--------------------------------------
(338) (150) (347)
--------------------------------------
Income (loss) before income taxes (116) 442 (15,410)
Income tax expense 356 303 405
--------------------------------------
Net income (loss) $ (472) $ 139 $(15,815)
======================================
</TABLE>
See accompanying notes.
S-5
<PAGE> 35
PaySys International, Inc.
and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
----------------- ---------------- ADDITIONAL DEFERRED CUMULATIVE
NUMBER NUMBER PAID-IN STOCK ACCUMULATED TRANSLATION
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 5,269,010 $ 53 172,800 $(533) $ 871 $ -- $ (1,106) $(45) $ (760)
Net loss -- -- -- -- -- -- (472) -- (472)
Foreign currency translation
adjustments -- -- -- -- -- -- -- (16) (16)
Issuance of stock purchase
warrants -- -- -- -- 9 -- -- -- 9
Issuance of employee stock options 1,500 -- -- -- 9 -- -- -- 9
Treasury shares issued pursuant
to exercise of employee stock
options -- -- (13,750) 42 (42) -- -- -- --
Conversion of debt to equity 1,552,010 15 -- -- 1,227 -- -- -- 1,242
----------------------------------------------------------------------------------------------
Balance at December 31, 1995 6,822,520 68 159,050 (491) 2,074 -- (1,578) (61) 12
Net income -- -- -- -- -- -- 139 -- 139
Foreign currency translation
adjustments -- -- -- -- -- -- -- 6 6
Exercise of employee stock options 4,000 -- -- -- -- -- -- -- --
Issuance of stock purchase
warrants -- -- -- -- 5 -- -- -- 5
----------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,826,520 68 159,050 (491) 2,079 -- (1,439) (55) 162
Net loss -- -- -- -- -- -- (15,815) -- (15,815)
Foreign currency translation
adjustment -- -- -- -- -- -- -- (16) (16)
Noncash compensation from stock
purchase warrants and stock
options -- -- -- -- 3,793 (67) -- -- 3,726
Issuance of warrants -- -- -- -- 307 -- -- -- 307
Exercise of stock purchase
warrants and stock options 464,355 5 -- -- 15 -- -- -- 20
Retirement of treasury stock (159,050) (2) (159,050) 491 (489) -- -- -- --
----------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,131,825 $ 71 -- $ -- $ 5,705 $(67) $(17,254) $(71) $(11,616)
==============================================================================================
</TABLE>
See accompanying notes.
S-6
<PAGE> 36
PaySys International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1996 1997
--------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (472) $ 139 $(15,815)
Add (deduct) adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 580 624 1,052
Amortization of computer software 3,437 1,383 2,257
Amortization of discounts on debt 90 45 15
Provision for doubtful accounts 121 24 288
Accrued rent expense (135) (233) (294)
Deferred income taxes 37 228 277
Noncash compensation -- 5 3,726
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables (1,881) (3,289) (2,664)
Other assets 19 (113) (138)
Accounts payable 1,113 (75) 1,195
Income taxes payable 6 (6) --
Deferred revenues 823 3,541 3,240
Accrued employee compensation (37) 96 1,164
Other liabilities (293) 1,098 4,163
--------------------------------------
Net cash provided by (used in) operating activities 3,408 3,467 (1,534)
INVESTING ACTIVITIES
Purchases of furniture and equipment (215) (665) (2,112)
Computer software development (2,343) (1,132) (216)
--------------------------------------
Net cash used in investing activities (2,558) (1,797) (2,328)
FINANCING ACTIVITIES
Exercise of options and warrants 18 -- 20
Proceeds from borrowings 300 23 4,491
Principal payments on long-term debt, capital lease
obligations, and line of credit (362) (884) (1,596)
--------------------------------------
Net cash provided by (used in) financing activities (44) (861) 2,915
--------------------------------------
Effect of foreign currency translation on cash and cash
equivalents (16) 6 (16)
--------------------------------------
Increase (decrease) in cash and cash equivalents 790 815 (963)
Cash and cash equivalents at beginning of period 432 1,222 2,037
--------------------------------------
Cash and cash equivalents at end of period $ 1,222 $ 2,037 $ 1,074
======================================
</TABLE>
See accompanying notes.
S-7
<PAGE> 37
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
PaySys International, Inc. (the Company) was incorporated on January 27, 1981.
The Company develops, licenses and supports computer software for use by
financial institutions, retailers and third party processors to process credit
card transactions. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances, transactions, and profits and losses have been eliminated.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are derived from sales of software licenses and related services.
Through September 30, 1997, the Company's revenue recognition policies were in
accordance with Statement of Position (SOP) 91-1, "Software Revenue
Recognition". Under the provisions of SOP 91-1, the Company generally recognized
software license revenue upon delivery of the software and related documentation
when there were no significant remaining obligations and collectibility was
assessed as probable. Service fees received from the sales of software
maintenance and support contracts and sales of other professional services were
recognized over the period the services were provided or as the services were
performed.
Adoption of the new revenue recognition policies of SOP 97-2, "Software Revenue
Recognition", is required for all transactions beginning January 1, 1998, but
earlier adoption is encouraged for periods not previously reported. Prior
periods reported under SOP 91-1 may not be restated.
S-8
<PAGE> 38
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
The Company elected to adopt the provisions of SOP 97-2 effective October 1,
1997. The most significant impact of adopting SOP 97-2 on the Company's revenue
recognition policies is later recognition of revenue on certain contracts than
under past practices. Under SOP 97-2, license and professional service fee
revenues from contracts which require significant production or modification are
recognized under contract accounting on a percentage of completion basis as
services are performed. For contracts which do not require significant
production or modification, fees are allocated to the various contract elements
based on the fair value of each element and are recognized as follows: software
license revenue upon delivery of the software and related documentation when
collectibility is assessed as probable; professional services revenue as the
services are performed; and postcontract customer support over the term of the
arrangement. Revenue related to research and development agreements is
recognized as services are performed over the related funding period for each
contract. Such revenue is included in license revenue.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's revenues consist primarily of license and service revenues from
large companies in the United States, Canada, South America, Australia, New
Zealand, and South Africa. The Company does not obtain collateral against its
outstanding receivables. The Company maintains reserves for potential credit
losses for both billed and unbilled receivables. Bad debt expense was $121,000,
$133,000 and $680,000 during the years ended 1995, 1996 and 1997, respectively.
During 1997, one customer accounted for 19% of revenues; during 1996, one
customer accounted for 11% of revenues; during 1995, two customers accounted for
15% and 13% of revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The Company maintains
deposits with a bank and invests its excess cash in overnight funds which bear
minimal risk.
S-9
<PAGE> 39
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using straight-line method over the estimated useful
lives (generally 3 to 5 years). Amortization of computer equipment under capital
lease is recorded over the term of the lease and is included in depreciation
expense. Expenditures for repairs and maintenance are charged to operations as
incurred.
COMPUTER SOFTWARE COSTS
The Company conforms with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed", which requires capitalization of costs
incurred in developing new software products once technological feasibility, as
defined, has been reached. Costs of maintaining existing software and research
and development are expensed as incurred. The Company capitalized software
development costs of $2,343,000, $1,132,000, and $210,000 during the years ended
1995, 1996, and 1997, respectively. The Company records amortization of software
development costs capitalized in an amount equal to the greater of the amount
computed using i) the ratio that current gross revenues for a product bear to
the total of current and anticipated revenues for that product or ii) the
straight-line method over the estimated useful life of the released product
(currently three years). Amortization of internally-developed software costs
totaled $3,247,000, $1,168,000 and $2,257,000 for the years ended December 31,
1995, 1996 and 1997, respectively. The higher amortization of capitalized
software costs for 1995 and 1997 is due to the write-off of $2.1 million and
$949,000, respectively, of capitalized software costs for projects deemed to
have no net realizable value.
INCOME TAXES
The Company follows the liability method of accounting for income taxes.
Deferred income taxes relate to the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
S-10
<PAGE> 40
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which provides an alternative to Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in
accounting for stock-based compensation issued to employees. As permitted by
SFAS No. 123, the Company continues to account for stock option grants in
accordance with APB 25 and has elected the pro forma disclosure alternative of
the effect of SFAS No. 123. Accordingly, adoption of the standard in 1996 did
not affect the Companies' results of operations.
POSTPONED STOCK OFFERING
In December 1997, the Company postponed for more than ninety days a planned
public offering of its common stock. Costs associated with the postponed
offering were expensed during 1997.
RECLASSIFICATION
Certain amounts reported in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 financial statement presentation.
S-11
<PAGE> 41
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
-------------------------
(In thousands)
<S> <C> <C>
Furniture and equipment:
Office furniture and equipment $ 1,158 $ 937
Computer equipment 2,629 2,461
Computer equipment under capital lease 2,569 1,389
-------------------------
6,356 4,787
Less allowances for depreciation and
amortization (4,651) (2,022)
-------------------------
$ 1,705 $ 2,765
=========================
</TABLE>
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers its cash and cash equivalents, accounts receivable, line
of credit and long-term debt and capital lease obligations to be its only
significant financial instruments and believes that the carrying amounts of
these instruments approximates their fair value. The carrying amount of
long-term debt approximates fair value based on current interest rates available
to the Company for debt instruments with similar terms, degree of risk and
remaining maturities. The remaining financial instruments approximate fair value
based on the short-term nature of these instruments.
S-12
<PAGE> 42
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND LEASES
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
---------------------
(In thousands)
<S> <C> <C>
Note payable due September 1, 1997, interest at
13%, secured by equipment, accounts receivable,
software and related materials $ 1,000 $ --
Less discount (4) --
---------------------
996 --
Note payable due September 26, 2002, interest at
13.5%, secured by equipment, accounts receivable,
software and related materials -- 4,000
Less discount -- 292
---------------------
-- 3,708
Other note payable 21 11
Capital lease obligations, various imputed interest rates
and monthly payments 858 758
---------------------
1,875 4,477
Less current portion (1,393) (408)
---------------------
$ 482 $ 4,069
=====================
</TABLE>
S-13
<PAGE> 43
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND LEASES (CONTINUED)
Under a sublease agreement, the Company leases office space from Quadram
Corporation ("Quadram"), a wholly-owned subsidiary of Intelligent Systems
Corporation (ISC). ISC and the chairman of ISC are shareholders' of the Company.
The lease began in 1996 and ends November 2002 (subject to earlier termination
if Quadram's lease is terminated). Rental expense under this agreement was
$86,000 and $145,000 for 1996 and 1997, respectively.
Total rental expense was $1,171,000, $1,108,000 and $1,644,000 and for 1995,
1996, and 1997, respectively.
Required payments by year for long-term debt, capital leases and noncancelable
operating leases with initial or remaining terms in excess of one year at
December 31, 1997, were as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL OPERATING
YEAR ENDING DECEMBER 31, DEBT LEASES LEASES
- -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
1998 11 437 1,842
1999 -- 304 1,866
2000 -- 70 1,700
2001 -- -- 1,549
2002 4,000 -- 906
----------------------------------
4,011 811 7,863
Less amount representing interest -- (53) --
----------------------------------
$4,011 758 7,863
==================================
</TABLE>
S-14
<PAGE> 44
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT
In connection with a software development agreement entered into by the Company
and a customer, the Company is required to pay royalties to the customer for
sales of the product developed under the agreement. The Company is required to
pay 10% of any sale, license or other grant of right to use the product which
total less than $1,000,000 and 15% of any sale, license or other grant of right
to use product which total more than $1,000,000. Further the Company is required
to pay the following incremental royalty fees on the sale, license, or other
grant of right to use the product:
<TABLE>
<S> <C>
1996 2.5%
1997 5.0%
1998 7.5%
1999 and beyond 10.0%
</TABLE>
Total amounts to be paid under this agreement are capped at $6,027,000. As of
December 31, 1996 and 1997, amounts accrued under this agreement are
approximately $0.7 million and $2.8 million, respectively.
LEGAL MATTERS
In August 1997, the Company settled a copyright infringement lawsuit for
$550,000. The Company has paid $150,000 as of December 31, 1997 and is paying
the remaining $400,000 in equal quarterly installments of $50,000 beginning in
November 1997. The company accrued an estimated reserve of $325,000 for this
lawsuit at December 31, 1996 and accrued an additional $225,000 in 1997 when
additional information regarding the total settlement of $550,000 became
available.
S-15
<PAGE> 45
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The provisions for income taxes for 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1996 1997
--------------------------------
(In thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ 6 $ 21 $ --
Foreign 313 54 128
State -- -- --
--------------------------------
Total current 319 75 128
Deferred tax expense (benefit):
Federal 48 181 248
Foreign -- -- --
State (11) 47 29
--------------------------------
Total deferred 37 228 277
--------------------------------
$ 356 $ 303 $ 405
================================
</TABLE>
Income tax expense for the year ended December 31, 1997 relates to an increase
in the valuation allowance to reduce the net deferred tax asset balance to zero
and current foreign withholding taxes payable. No additional income tax expense
has been recorded for the year ended December 31, 1997 due to the Company's loss
for the period and the federal tax credit carryforward position from prior
periods.
S-16
<PAGE> 46
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
A reconciliation of the statutory U.S. income tax rate to the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
----------------------------------
(In thousands)
<S> <C> <C> <C>
Tax (benefit) at statutory federal rate $ (39) $ 150 $(5,239)
State taxes net of federal benefit (7) 31 --
Research and development credit (51) (490) --
Foreign tax credits -- (205) --
Foreign withholding taxes 210 1 128
Foreign operations not subject to U.S. tax 43 58 349
Expiring foreign tax credits 161 -- --
Meals and entertainment 29 34 34
Other-net 10 (16) (290)
Change in valuation allowance -- 740 5,423
----------------------------------
Total income tax expense $ 356 $ 303 $ 405
==================================
</TABLE>
S-17
<PAGE> 47
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Components of U.S. deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1996 1997
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Federal and state net operating losses $ 248 $ 86 $ 2,848
Accruals not deductible for tax purposes 135 445 2,424
General business credit carryforwards 1,280 1,771 1,280
Foreign tax credit carryforwards 271 69 407
Minimum tax credit carryforwards 163 207 185
Other 1 -- --
-----------------------------------
Total gross deferred tax assets 2,098 2,578 7,144
Deferred tax liability:
Property and equipment, principally due to
depreciation (65) (40) (109)
Amortization of intangibles (918) (912) (263)
-----------------------------------
Total gross deferred tax liabilities (983) (952) (372)
Less valuation allowance (609) (1,349) (6,772)
-----------------------------------
Net deferred tax asset $ 506 $ 277 $ --
===================================
</TABLE>
At December 31, 1997, the Company had general business, foreign tax and AMT
credit carryforwards which expire in 1998 through 2012 available to offset
future federal income tax liabilities totalling approximately $1,900,000. In
addition, the Company has approximately $7,300,000 of net operating losses for
federal income tax purposes at
S-18
<PAGE> 48
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
December 31, 1997, which may be carried forward through 2012. The tax benefits
of these credit carryforwards can be realized only through their application to
taxable income arising from future successful operations of the Company. These
credit and net operating loss carryforwards may be subject to certain
limitations under Section 382 in the event of an ownership change. Due to the
uncertainty of the Company's ability to fully realize the benefits of the credit
carryforwards, a valuation allowance has been recorded against net deferred tax
assets. When recognized, the tax benefit of those items will be applied to
reduce future income tax amounts.
The Company's foreign subsidiaries had cumulative losses of $4,477,000 at
December 31, 1997 which have been fully reserved by a valuation allowance.
7. SHAREHOLDERS' EQUITY
COMMON STOCK
In October 1997 the Company's Board of Directors approved a five-for-one stock
split effected as a stock dividend. Accordingly, all the share data has been
retroactively adjusted to reflect these changes.
Effective August 1, 1995, the Company issued 1,552,010 shares of common stock to
ISC for the cancellation of $900,000 in line of credit borrowings, $83,000 in
accrued interest and $259,000 in accounts payable to a subsidiary of ISC.
WARRANTS
Pursuant to a 1992 loan agreement between the Company and Sirrom Capital, L.P.
(Sirrom), Sirrom obtained warrants to purchase 150,000 shares of the Company's
common stock at an exercise price of $.002 per share. The warrants were
exercised in August of 1997.
S-19
<PAGE> 49
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
Pursuant to a loan agreement dated January 24, 1994 between the Company and ISC,
ISC received a warrant to purchase 277,605 shares of the Company's common stock
at $.002 per share in consideration for making the loan. The warrant was
exercised in August 1997.
In connection with a financing agreement entered into with Sirrom on September
26, 1997, the Company issued a warrant to purchase 37,660 shares of the
Company's common stock at an exercise price of $.002 per share which is fully
exercisable and outstanding at December 31, 1997. The warrants were valued at
approximately $300,000. If the debt remains outstanding for certain periods
during the term of the financing arrangement the Company will be required to
grant additional shares under the warrant.
STOCK-BASED AWARDS TO EMPLOYEES
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock-based awards to employees because, as discussed below,
the alternative fair value accounting provided for under SFAS No. 123 requires
use of option valuation models that were not developed for use in valuing
stock-based awards to employees. Under APB 25, no compensation expense is
recognized for stock-based awards with an exercise price equal to the fair value
of the underlying stock on the date of grant.
Proforma information regarding net income (loss) is required by SFAS No. 123,
which also requires that the information be determined as if the Company has
accounted for its stock-based awards to employees granted subsequent to December
31, 1994 under the fair value method prescribed by that statement. The fair
value for these awards were estimated at the date of grant using the minimum
value method with the following weighted-average assumptions for 1996 and 1997:
risk-free interest rate of 6%; dividend yields of 0%; and a weighted-average
expected life of the awards of 8 years, 8 years and 4 years, respectively. The
weighted average fair value of awards during 1995, 1996 and 1997 was $.26, $.26
and $.66 per share, respectively.
S-20
<PAGE> 50
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
The option valuation models require the input of highly subjective assumptions.
Because the Company's stock-based awards to employees have characteristics
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee awards.
For purposes of proforma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1996 1997
--------------------------------------
(In thousands)
<S> <C> <C> <C>
Net income (loss) $ (474) $ 89 $(17,032)
</TABLE>
Because SFAS No. 123 is applicable only to awards subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1999.
The 1995 Stock Incentive Plan (the "1995 Plan") allows for the granting of
options for up to 1,088,750 shares of common stock to employees and directors.
Stock options granted under the Plan may be either incentive stock options or
nonqualified stock options. Incentive stock options may be granted with exercise
prices of no less than the fair market value. The options expire 10 years from
the date of grant. Options may be granted with different vesting terms but
generally provide for vesting equally over a four year period.
In October 1997, the Company adopted the 1997 Stock Incentive Plan (the "1997
Plan"). The 1997 Plan allows for the granting of options for up to 411,250
shares of common stock to employees, non-employee directors, consultants and
other vendors.
S-21
<PAGE> 51
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
The following table summarizes option activity for 1995, 1996 and 1997.
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE PRICE AVERAGE
SHARES RANGE EXERCISE PRICE
---------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1995 32,750 $ 0 $ 0
Granted 410,080 .80 .80
Exercised (15,250) 0 0
Expired (11,750) 0 0
------------------------------------------------
Outstanding at December 31, 1995 415,830 0 - .80 .79
Granted 504,670 0.80 - 3.10 1.20
Exercised (4,000) 0 0
------------------------------------------------
Outstanding at December 31, 1996 916,500 0 - 3.10 1.02
Granted 297,075 3.10 3.10
Expired (153,740) 3.10 3.10
Exercised (1,750) 0 0
------------------------------------------------
Outstanding at December 31, 1997 1,058,085 $0.80 - $3.10 $1.30
================================================
Exercisable at December 31, 1996 315,160 $ 0 - $3.10 $0.80
Exercisable at December 31, 1997 583,845 $0.80 - $3.10 $1.04
</TABLE>
S-22
<PAGE> 52
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
Options outstanding at $.80 per share totaled 827,250 of which 523,490 were
exercisable at December 31, 1997. The weighted average remaining contractual
life of options exercisable at $.80 per share was 8.0 years at September 30,
1997. Options exercisable at $3.10 per share totaled 230,835 of which 60,355
were exercisable at December 31, 1997. The weighted average remaining
contractual life of options exercisable at $3.10 per share was 9.0 years at
December 31, 1997.
In addition to the stock option plans described above, the Company has issued
warrants to purchase common stock to employees. During 1995, the Company issued
to each of two individuals warrants to purchase 52,675 shares of common stock at
an exercise price of $.60 per share. These warrants, which expire in December
2005, become exercisable equally over a two year and three year vesting period.
In April and June 1997, 35,000 shares of common stock were issued pursuant to
the partial exercise of one of these warrants and the remainder of the warrant
to purchase 17,675 shares of common stock was canceled in September, 1997.
Additionally, during 1996 the Company issued warrants to two employees to
purchase 1,104,110 shares of common stock exercisable at a price per share based
on $50,000,000 divided by the number of shares outstanding at the exercise date.
These warrants were exercisable upon achievement of certain milestones and
expire in February 2003. Effective August 5, 1997, the Company amended these
warrants. The amendment fixed the exercise price of the warrants at $4.80 per
share, and the warrants became fully exercisable as of the amendment date. In
addition, the amendment added provisions (i) restricting transfer of any shares
obtained from exercise of the warrants until the earlier of achievement of
certain milestones or February 2003 and (ii) withholding certain registration
rights until achievement of the milestones. As a result of amending the
warrants, the Company recorded compensation expense of $3,708,000 in 1997 for
the difference between the exercise price and estimated fair value per share at
the amendment date.
At December 31, 1997, a total of 3,105,695 shares of the Company's common stock
were reserved for the exercise of outstanding stock warrants and options.
S-23
<PAGE> 53
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan for the benefit of eligible
employees and their beneficiaries. All employees who have completed three months
of service are eligible to participate in the Plan and are fully vested. The
Company's contributions to the Plan are discretionary. Contribution expense
related to the Plan during 1995, 1996, and 1997 were $-0-, $100,000 and
$200,000, respectively.
9. FOREIGN OPERATIONS
Export sales were $8,411,000, $8,803,000, and $20,681,682 in 1995, 1996, and
1997, respectively. Such revenues were derived principally from Australia, New
Zealand, Canada, West Indies, South Africa and South America. Accounts
receivable (billed and unbilled) arising from foreign revenues total $3,691,000,
and $8,066,000 as of December 31, 1996 and 1997, respectively.
Information about the Company's operations by geographic area is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------------------
(In thousands)
<S> <C> <C> <C>
UNITED STATES
Revenues $ 21,106 $ 26,445 $ 32,543
Income (loss) from continuing
operations (344) 301 (14,662)
Identifiable Assets 11,265 16,086 16,148
EUROPE/FAR EAST
Revenues $ 622 $ 479 $ 244
Loss from continuing operations (128) (162) (1,153)
Identifiable Assets 242 108 340
</TABLE>
S-24
<PAGE> 54
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. SUPPLEMENTAL CASH FLOW INFORMATION
The following is a summary of non cash transactions and additional cash flow
information:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
1995 1996 1997
------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Stock issued for the cancellation of accounts
payable, line of credit borrowings and related
accrued interest
$1,242 $ -- $ --
==============================
Furniture and equipment acquired under capital
lease obligations $ 6 $ 933 $ 358
==============================
Cash paid for interest $ 278 $ 204 $ 277
==============================
Cash paid for income taxes $ -- $ 65 $ 128
==============================
</TABLE>
11. YEAR 2000 DATE CONVERSION (UNAUDITED)
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. The Company intends to take the actions
necessary to ensure that its systems and applications will appropriately
recognize and process transactions in the year 2000 and beyond. The Company does
not expect the cost of year 2000 compliance to be material to its financial
statements.
S-25
<PAGE> 1
EXHIBIT 2.3
STOCK PURCHASE AGREEMENT
between
INTELLIGENT SYSTEMS CORPORATION
and
FRANCIS M. CROWDER, SR.
MARIAN S. CROWDER,
KEVIN W. DAVIDSON, AND
CHARLES S. VERDIN, III
July 1, 1997
<PAGE> 2
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "AGREEMENT"), dated as of July 1,
1997 is by and among FRANCIS M. CROWDER, SR., MARIAN S. CROWDER, KEVIN W.
DAVIDSON, and CHARLES S. VERDIN, III (individually, each a "SHAREHOLDER" and
collectively, the "SHAREHOLDERS"), all shareholders of QS, Inc., a South
Carolina corporation ("QS") on the one hand, and INTELLIGENT SYSTEMS
CORPORATION, a Georgia corporation ("ISC") on the other hand. Shareholders
desire to sell the Shares (as herein defined) to ISC, and ISC desires to buy the
Shares from Shareholders, on all the terms and subject to the conditions
contained herein. Therefore, in consideration of the mutual representations,
warranties, covenants and agreements, and upon and subject to the terms and the
conditions hereinafter set forth in this Agreement, the parties do hereby agree
as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
"Accounting Standards" means the accounting practices of QS as
specified in the Disclosure Memorandum.
<PAGE> 3
"Affiliates" of a particular Person means other Persons controlled by,
controlling, or under common control with, such Person.
"Charter Documents" means the articles of incorporation of QS.
"Closing" means the consummation of the purchase and sale of the Shares
under the terms of this Agreement.
"Disclosure Memorandum" means the memorandum signed and delivered by
the Shareholders contemporaneously with the execution and delivery of this
Agreement, containing information required to be disclosed under this Agreement.
"Documentation" means all user's manuals or descriptive materials
(other than inventory) related to the Intellectual Property or Software
Programs.
"Employee Benefit" refers to employment-related obligations of QS
(other than salary, wages and bonuses), including all actual or contingent
liabilities relating to unemployment coverage, health, injury, death and
retirement.
"Employees" means the employees of QS.
"Encumbrance" means any mortgage, charge (whether fixed or floating),
security interest, pledge, claim, right of first refusal, lien (including,
without limitation any unpaid vendor's lien), option, hypothecation, title
retention or conditional sale agreement, lease, option, restriction as to
transfer, use or possession, easement, subordination to any right of any other
person, and any other encumbrance on the absolute and unfettered use and
ownership of any asset or property.
"Escrow Agreement" means the agreement between ISC, the Shareholders
and the Escrow Agent named therein pursuant to which the most current software
version on the Closing Date will be held in escrow as long as any principal
remains unpaid under the Note.
"Financial Statements" means the balance sheets of QS as of December
31, 1996, 1995 and 1994, and the related unaudited income statements for the
three years ended December 31, 1996, 1995 and 1994, together with all footnotes,
annexes and schedules thereto, together with the Interim Financial Statements,
and all notes
2
<PAGE> 4
thereto, all of which balance sheets and notes have been attached to and
incorporated into the Disclosure Memorandum.
"GAAP" means generally accepted accounting principles, consistently
applied.
"Guaranty" means the guaranty of payment of the Notes by J. Leland
Strange in the form of Exhibit A attached hereto.
"Intellectual Property" means all patents, trademarks service marks,
trade names, and copyrights (including registrations, licenses, and applications
pertaining thereto), and all other intellectual property rights, trade secrets,
and other proprietary information, processes and formulae used in QS Business or
otherwise necessary to conduct QS Business other than rapid development tools,
data based managers, API, and interface engines and other similar tools.
"Interim Financial Statements" means the unaudited balance sheet of QS
as of June 30, 1997, and the related unaudited statements of profit for the
six-month period then ended, prepared by management of QS.
"Knowledge of Shareholders" (or words of similar import) refers to all
those things known by any Shareholder.
"Notes" means the promissory notes of ISC in favor of the Shareholders
in an aggregate amount of One Million Five Hundred Thousand Dollars ($1,500,000)
bearing interest at 8.5% with principal due in three equal installments on July
1, 1998, 1999, and 2000 and with interest payable quarterly on January 1, April
1, July 1 and October 1 beginning on October 1, 1997 for each quarter during
which any principal remains unpaid, in the form of Exhibit B hereto.
"Permitted Encumbrance" means an Encumbrance identified as a "Permitted
Encumbrance" in the Disclosure Memorandum.
"Per Share Price" is defined in Section 2.2.
"Person" means a corporation, partnership, trust, limited liability
company, other business entity or an individual.
"Purchase Price" is defined in Section 2.2.
3
<PAGE> 5
"QS Business" means the business, conducted by QS, of developing,
marketing, selling, installing and servicing software that manages public health
and/or accounting information and the supplies, equipment, products and services
related to the above.
"QS Contracts" means all contracts, leases, agreements, indentures,
licenses, mortgages, commitments or binding arrangements or relationships
pursuant to which QS is either a party or a third party beneficiary.
"QS Premises" means the real estate (including fixtures, buildings and
other improvements thereon) leased or used by QS at the addresses listed in the
Disclosure Memorandum.
"Rule" means any law, statute, rule, regulation, order, court decision,
judgment or decree of any federal, state, territorial, provincial or municipal
authority or body.
"Shares" means all the issued and outstanding capital stock of QS owned
by the Shareholders, as set forth in the Disclosure Memorandum.
"Software Programs" means all software developed, manufactured and
licensed as part of the QS Business.
"Tax" or "Taxes" means all forms of levies, taxes, customs and other
duties normally deemed to be of a fiscal or customs nature, including but not
limited to (a) all taxes levied, imposed or assessed under the Internal Revenue
Code or any other statute, rule, ordinance or law, in the United States or
elsewhere; (b) taxes in the nature of sales tax, consumption tax, value added
tax, payroll tax, group tax, undistributed profits tax, fringe benefits tax,
recoupment tax, withholding tax, land tax, water rates, municipal rates, stamp
duties, gift duties or other state, territorial, provincial or municipal charges
or impositions levied, imposed or collected by any governmental body; and (c)
any additional tax, interest, penalty, charge, fee or other amount of any kind
assessed, charged or imposed in relation to the non-, late, short or incorrect
payment of the same or the failure to file any return.
"Warranty" means any representation and warranty of any Shareholder in
this Agreement and in each certificate or other document delivered by him or her
or on his or her behalf in connection with this Agreement.
4
<PAGE> 6
"1996 Balance Sheet" means the balance sheet of QS as of December 31,
1996 and all notes thereto.
ARTICLE II
TERMS OF TRANSACTION
II.1 Purchase and Sale of Shares of QS. Upon the terms and subject to
the conditions of this Agreement, at the Closing, ISC shall purchase from
Shareholders, and Shareholders shall sell and transfer to ISC, all of the
Shares.
II.2 Purchase Price. The price per Share (the "Per Share Price") shall
be $39.111826 so that the aggregate price of the Shares (the "Purchase Price")
shall be Three Million Five Hundred Thousand Dollars ($3,500,000).
II.3 Payment. In consideration of the sale and transfer to ISC of the
Shares:
(a) at the Closing, ISC shall make a cash payment to or on behalf
of the Shareholders in the aggregate amount of Two Million Dollars ($2,000,000)
by wire transfer of immediately available funds to the accounts indicated for
each shareholder in the Disclosure Memorandum (the "Cash Payment") allocated as
follows:
Francis Crowder - $1,213,047
Marian Crowder - $74,290
Kevin Davidson - $402,293
Charles Verdin - $310,370;
and
(b) ISC shall execute the Notes and deliver them to the
Shareholders (the "Debt Payment") with the $1,500,000 aggregate principal amount
to be allocated as follows:
Francis Crowder - $909,786
Marian Crowder - $55,717
Kevin Davidson - $301,720
Charles Verdin - $232,777.
5
<PAGE> 7
II.4 The Closing.
(a) The Closing shall take place at 10:00 a.m., July 30, 1997 (the
"Closing Date") (and shall be effective as of July 1, 1997), in the offices of
Nelson Mullins Riley & Scarborough, L.L.P., 301 N. Main Street, 24th Floor, BB&T
Building, Greenville, South Carolina 29601 or on such other date and at such
other time and place as the parties shall agree in writing.
(b) At the Closing, ISC shall deliver to the Shareholders the
following (all documents to be duly executed by ISC or J. Leland Strange, as the
case may be):
(i) the Cash Payment;
(ii) the Notes;
(iii) the Guaranty;
(iv) the Escrow Agreement; and
(v) legal opinions of ISC's counsel concerning the due
authorization, execution and delivery of this Agreement, the Notes and
the Escrow Agreement and the enforceability of this Agreement, the
Notes, the Guaranty and the Escrow Agreement against ISC, all in a form
reasonably acceptable to the Shareholders.
(c) At the Closing, the Shareholders shall deliver to ISC the
following (all documents to be duly executed by the applicable Shareholders):
(i) the Disclosure Memorandum;
(ii) the certificates representing all of the Shares,
endorsed in blank for transfer to ISC, or accompanied by stock transfer
powers;
(iii) the resignations of all of the directors and officers
of QS effective as of the Closing Date;
(iv) QS's original corporate minute book and seal;
(v) the Escrow Agreement;
6
<PAGE> 8
(vi) the Acknowledgement of Rights in Work Products in the
form of Exhibit C hereto, to be executed by each Shareholder; and
(vii) legal opinions of the Shareholder's counsel
concerning, among other things, QS's authorized and outstanding capital
stock, the due authorization, execution and delivery of this Agreement
by the Shareholders, the enforceability of this Agreement against the
Shareholders, the transfer of the Shares and other reasonable and
customary matters, all in a form reasonably acceptable to ISC.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
SHAREHOLDERS REGARDING THE SHARES
In order to meet the requirements of ISC to execute, deliver and
perform this Agreement, and in acknowledgement of ISC's reliance on the
following Warranties, Shareholders hereby jointly and severally represent and
warrant to ISC as of the date hereof and as of the Closing Date as follows:
III.1 Power and Authority of Shareholders. Shareholders have the right,
power and capacity to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, have been duly and validly authorized by all necessary
action on the part of Shareholders. Shareholders have obtained all necessary
consents, approvals, authorizations or estoppels of any other Person or
governmental or regulatory authority required to be obtained to authorize and
permit Shareholders to transfer, or cause to be transferred, to ISC all of the
Shares. This Agreement has been duly and validly executed and delivered by
Shareholders and constitutes each Shareholder's legal, valid and binding
obligation, enforceable in accordance with its terms. The execution and delivery
of this Agreement by Shareholders, the consummation of the transactions
contemplated herein by Shareholders, and the performance of the covenants and
agreements of Shareholders, will not, with or without the giving of notice or
the lapse of time, or both, (i) violate, conflict with or result in a breach or
default under or cause termination of any term or condition of any mortgage,
indenture, contract, license, permit,
7
<PAGE> 9
instrument, trust document, or other agreement, document or instrument to which
any Shareholder is a party or by which any Shareholder or any Shareholder's
properties may be bound; (ii) violate any Rule; or (iii) result in the creation
or imposition of any Encumbrance upon any asset of QS.
III.2 Ownership of the Shares. Shareholders own, of record and
beneficially, good, valid and marketable title to the Shares, and such Shares
are validly issued and are free and clear of any Encumbrances, with no defects
of title whatsoever. At the Closing, ISC shall obtain good, valid and marketable
title to the Shares, free and clear of all Encumbrances, with no defects of
title whatsoever. Shareholders have full and exclusive power, right and
authority to vote the Shares. No Shareholder is a party to or bound by any
agreement affecting or relating to his or her right or obligation to transfer or
vote the Shares.
III.3 Issued Shares. All issuances, transfers, or purchases of the
Shares have been in compliance with all applicable agreements and all applicable
Rules, and all Taxes thereon have been paid. There are no QS treasury shares.
III.4 Absence of Other Claims. Except as set forth in the Disclosure
Memorandum, there is not outstanding, nor is QS bound by, any subscriptions,
options, preemptive rights, warrants, agreements or rights of any character
requiring QS to issue or transfer any of its Shares or the voting rights
thereto, including any right of conversion or exchange under any outstanding
security or other instrument. There are no outstanding obligations of QS to
repurchase, redeem or otherwise acquire any of its outstanding Shares.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE SHAREHOLDERS REGARDING QS
In order to meet the requirements of ISC to execute, deliver and
perform this Agreement, and in acknowledgement of ISC's reliance on the
following Warranties, Shareholders hereby jointly and severally represent and
warrant to ISC, as of the date hereof and as of the Closing Date, as follows:
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IV.1 Organization and Authority.
(a) QS is a corporation duly incorporated and validly existing
under the laws of the State of South Carolina and has all requisite power and
authority, corporate or otherwise, to carry on and conduct its business as it is
now being conducted and to own or lease its properties and assets. All documents
required to be filed with the South Carolina Secretary of State with respect to
QS have been properly and timely filed. The Shares are all of the issued and
outstanding stock of QS and the number of issued Shares and the record holder of
such issued Shares are set forth in the Disclosure Memorandum.
(b) Except as disclosed in the Disclosure Memorandum, QS has not
proposed a compromise or arrangement to its creditors; had any petition for
bankruptcy filed against it; taken any proceeding with respect to a compromise,
arrangement or winding up, or otherwise taken advantage of any insolvency or
bankruptcy legislation; had a receiver appointed to any part of its property; or
had any execution or distress or seizure levied upon any of its property.
(c) The Disclosure Memorandum sets forth the name, address and
jurisdiction of organization of QS and all jurisdictions in which QS is
qualified to do business. The Disclosure Memorandum is complete, true, valid and
correct.
(d) The copies of the Charter Documents that are attached to the
Disclosure Memorandum are the complete, true, valid and correct Charter
Documents of QS in effect as of the date hereof. The minutes of directors' and
shareholders' meetings of QS that have previously been delivered to ISC are the
complete, true, valid and correct records of directors' and shareholders'
meetings through and including the date hereof and, reflect all transactions and
other matters required to be reflected in such records.
(e) The current officers and directors of QS are listed in the
Disclosure Memorandum.
(f) The execution, delivery and performance of this Agreement by
the Shareholders, the consummation of the transactions contemplated herein by
the Shareholders, and the performance of the covenants and agreements of the
Shareholders, will not, with or without the giving of notice or the lapse of
time, or both, (i) violate or conflict with any of the provisions
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of any Charter Document of QS; (ii) violate, conflict with or result in a breach
or default under or cause termination of any term or condition of any mortgage,
indenture, contract, license, permit, instrument, trust document, or other
agreement, document or instrument to which QS is a party or by which QS or any
of its properties may be bound; (iii) violate any Rule; or (iv) result in the
creation or imposition of any Encumbrance upon any asset of QS.
IV.2 Compliance With Law. QS has not violated any order of any court,
governmental authority, arbitration board or tribunal to which it is or was
subject, nor is QS in violation of any Rule the violation of which would have a
material adverse effect on QS, the transactions contemplated by this Agreement,
or QS Business.
IV.3 Financial Matters.
(a) The Financial Statements, including the footnotes thereto, are
true, complete and correct, have been prepared in accordance with the Accounting
Standards, consistently applied, and fairly present the financial position of QS
as of the dates thereof and the results of its operations for the respective
periods thereof. The Financial Statements contain all disclosures required under
the Accounting Standards as of the dates of, and for the periods covered by, the
Financial Statements.
(b) The net book value (shareholders' equity) of QS, as determined
under the Accounting Standards, is more than $1,250,000. QS does not accrue
annual vacation time on its Financial Statements; provided, however, accrued
vacation listed in the Disclosure Memorandum will be calculated in determining
the net book value (shareholders' equity) of QS.
IV.4 Indebtedness. The Disclosure Memorandum sets forth a complete and
accurate list and description of all instruments or other documents relating to
any direct or indirect indebtedness for borrowed money of QS, as well as
indebtedness by way of lease-purchase arrangements, guarantees, undertakings on
which others rely in extending credit, and all conditional sales contracts,
pledges and other security arrangements with respect to personal property used
or owned by QS. QS is not in default with respect to any indebtedness.
IV.5 No Undisclosed Liabilities. Except as and to the extent reflected
and adequately reserved against in the 1996
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Balance Sheet, or as shown in the Disclosure Memorandum, QS had no material
liabilities or obligations whatsoever, whether accrued, absolute, contingent or
otherwise. Since June 30, 1997 and the date of this Agreement, QS has not
incurred any liability or obligation whatsoever, except for liabilities and
obligations incurred by QS in the ordinary course of its business consistent
with reasonable past practice or as specifically stated in the Disclosure
Memorandum.
IV.6 Tax Matters.
(a) Tax Returns. All Tax returns required by any governmental
authority to be filed by QS in connection with the properties, business, income,
expenses, net worth and corporate status of QS have been timely filed, and such
returns are accurate and complete in all respects. Except as set forth in the
Disclosure Memorandum, all Taxes due pursuant to the Tax returns or otherwise
due in connection with the properties, business, income, expenses, net worth and
corporate status of QS have been paid, other than Taxes which are not yet due or
which, if due, are not delinquent, are being disputed in good faith, or have not
been finally determined, and adequate and complete reserves for all such Taxes
have been established on the Financial Statements. QS has withheld and paid all
Taxes required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, Shareholder, or other
third party.
(b) Tax and Employee Benefit Returns. Except as set forth in the
Disclosure Memorandum, QS has correctly and timely (i) filed all Tax and
Employee Benefit returns required to be filed in the manner required by Tax and
Employee Benefit authorities, (ii) responded to information requested by said
authorities and (iii) made all Tax and Employee Benefit payments at due dates.
(c) Other Matters. Except as set forth in the Disclosure
Memorandum: (i) QS is not subject to income tax in countries other than the
United States; (ii) expenses already incurred or which QS is required to incur
in the ordinary course of its business are deductible from its ordinary income;
(iii) QS has not entered into any transaction which could be disregarded or
recharacterized for Tax or Employee Benefit purposes on the grounds that it
aimed at the avoidance of Tax or Employee Benefit obligations; and (iv) QS is
not the subject matter of any inquiry,
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investigation or audit relating to Tax or Employee Benefit matters and has not
been informed of any proposed audit.
(d) Tax and Employee Benefit Audits. The Disclosure Memorandum
sets forth the conclusions of any Tax or Employee Benefit audit or reassessment
made during the period not yet completely time barred by applicable statutes of
limitation.
(e) Returns Furnished. QS has furnished ISC with true and complete
copies of (i) income tax audit reports, statements of deficiencies, closing or
other agreements received by or on behalf of QS relating to Taxes, and (ii) all
tax returns for QS for all periods since January 1, 1995.
(f) Tax Basis and Tax Attributes. The Disclosure Memorandum
contains an accurate and complete description of QS's tax basis in its assets.
IV.7 Product Returns. To the Shareholder's knowledge, no customer has a
present intent to return products sold. The Disclosure Memorandum lists all
customers that have taken possession of products but retain the right to return
products under the contract prior to final acceptance. While QS does not
anticipate that other products will be returned, this will depend in large part
on the continued service of such products after Closing. Shareholders shall not
be responsible for product returns after Closing where the anticipated return
was not known to Shareholders as of the date hereof.
IV.8 Litigation. Except as set forth in the Disclosure Memorandum,
there is no action, suit, investigation or proceeding pending or, to the
knowledge of Shareholders, threatened against or affecting QS, QS Business or
the assets of QS before any court or by or before any governmental body or
arbitration board or tribunal, nor to the knowledge of any Shareholder is there
a basis for any such action, suit, investigation or proceeding.
IV.9 Assets. Except as set forth on the Disclosure Memorandum,
(a) Description. The Disclosure Memorandum sets forth a general
description and the location of all personal property and leasehold improvements
included in the assets of QS.
(b) Title. QS has good, valid and marketable title to
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all of its assets, free and clear of any and all Encumbrances other than the
Permitted Encumbrances. After the Closing, no Permitted Encumbrance or other
Encumbrance will materially interfere with the conduct of QS Business as
presently conducted by QS. QS owns all the real and personal property reflected
in the 1996 Balance Sheet except as set forth in the Disclosure Memorandum.
(c) Possession. All tangible assets of QS are on QS Premises, in
QS's possession and control except as set forth in the Disclosure Memorandum. No
one else has any right, title or interest in any property or asset now used or
proposed to be used by QS in QS Business.
(d) All Necessary Assets. On the Closing Date, QS will have in its
possession such assets as are necessary for the conduct of the QS Business after
the Closing in the same manner as it has been conducted since January 1, 1997.
Other than changes in the ordinary course of business occurring since January 1,
1997, or as set forth in the Disclosure Memorandum, QS has not disposed of any
assets held as of that date.
(e) Condition. The assets of QS that constitute tangible personal
property that are necessary to conduct the QS Business in the manner that it has
been previously conducted (collectively, the "QS Properties") are in good
condition and repair, ordinary wear and tear excepted, in satisfactory working
order, and are suitable for their respective intended uses. The plants and
structures owned, leased or used by QS are structurally sound with no known
material defects.
(f) Compliance. To the knowledge of Shareholders, the QS
Properties and the existing and prior uses thereof are in compliance in all
material respects with all applicable Rules. QS has delivered to ISC all reports
and documents generated by QS or any third party about the condition of QS
Properties or about such compliance.
(g) Accounts Receivable. Except as set forth in the Disclosure
Memorandum, all accounts receivable of QS: (i) are valid, existing and fully
collectible; (ii) represent monies due for license fees, maintenance and support
revenues, goods sold or services rendered in the ordinary course of business;
and (iii) are not subject to any defenses, rights of set-off, assignment or
other Encumbrances. To the knowledge of each Shareholder there is
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no dispute regarding the collectability of any such accounts receivable. QS has
provided ISC with a current, complete and accurate aging report of such accounts
receivable. Except as set forth in the Disclosure Memorandum, there are no
accounts receivable included in the assets of QS that are owed to QS by any
director, officer, shareholder or employee of QS or any relative of any such
person.
(h) Real Property. QS owns no real property.
(i) Interests in Other Persons. QS does not own, either legally or
beneficially, directly or indirectly (i) any shares (or other securities
convertible into shares) of any other company or (ii) any participating interest
in any partnership, limited liability company, trust, joint venture, association
or other non-corporate business enterprise.
IV.10 Bank Accounts. The Disclosure Memorandum contains a list of all
the checking, depository or other bank accounts and any safe deposit boxes of or
relating to the assets, operations or business of QS, together with the
authorized signers.
IV.11 Suppliers and Customers.
(a) Except as set forth in the Disclosure Memorandum, there are no
disputes between QS (or any of QS's employees or representatives) and any of
QS's significant suppliers or others having business with QS. To the knowledge
of Shareholders the consummation of the transactions contemplated hereunder will
not have any adverse effect on the business relationship of QS with any such
supplier.
(b) Except as set forth in the Disclosure Memorandum, there are no
disputes between QS (or any of QS's employees or representatives) and any of
QS's significant customers or others having business with QS, nor are
Shareholders aware of any present intent by any customer of QS to cancel its
existing contractual arrangements; provided, however, that ISC acknowledges that
some of QS's contracts may be canceled in accordance with their terms. To the
knowledge of Shareholders, the consummation of the transactions contemplated
hereunder will not have any adverse effect on the business relationship of QS
with any such customer.
IV.12 Trade Secret and Employment Claims. To the knowledge of
Shareholders, no third party has claimed that QS, any
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Shareholder, or any director, officer, manager, employee or agent of QS, in
respect of activities on behalf of QS or in respect of the operations of QS
Business to date, has (i) violated any of the terms or conditions of any
employment contract with a third party, (ii) infringed any patent, trademark or
copyright of a third party, (iii) disclosed or used any trade secrets or
proprietary information or documentation of such third party, or (iv) interfered
in the employment relationship between a third party and any of his or its
employees; nor, to the knowledge of Shareholders, has any such violation,
disclosure, use or interference occurred.
IV.13 Intellectual Property.
(a) The Disclosure Memorandum (i) lists and describes all
patents, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations and applications, and all patent, trademark and
service mark licenses; (ii) describes all copyrights, computer software, data
bases and all other intellectual property, that are owned by or registered in
the name of QS or to which QS has any rights as licensee or otherwise, which
list specifies which items are owned and to which items QS has rights as a
licensee or otherwise; and (iii) lists and describes all contracts, agreements
or understandings pursuant to which QS has authorized any person to use, or
which any person otherwise has the right to use, in any business or commercial
activity, any of the items listed in clause (i) or (ii) above.
(b) The items listed or described in the Disclosure Memorandum
pursuant to the preceding subsection (a) constitute or represent all of the
intellectual property necessary to the conduct of QS Business, and QS's
ownership and use rights with respect thereto are free and clear of
Encumbrances.
(c) QS has no federal trademark or service mark registrations.
(d) To the knowledge of Shareholders, QS has not infringed upon
any patent, service mark, trade name, trademark, copyright, trade secret, or
other intellectual property belonging to any other Person; and QS has not agreed
to indemnify any Person for or against any infringement of or by the
Intellectual Property set forth in the Disclosure Memorandum. To the knowledge
of Shareholders, no person is infringing upon any of QS's patents, patent
applications, trade names, trademarks, service marks,
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trademark and service mark registrations, licenses, copyrights, computer
software or other intellectual property.
(e) Except for licenses intentionally granted by QS or pursuant
to which QS is a licensee, QS owns the Software Programs, the Intellectual
Property and the Documentation. Except as described in the Disclosure
Memorandum, QS has obtained copyright protection for all of the Intellectual
Property and Documentation. Except as set forth in the Disclosure Memorandum, QS
and the Shareholders have used their best efforts to protect the trade secrets
and other confidential information contained in the Intellectual Property and
have used best efforts to ensure that QS does not lose any protection for the
Intellectual Property and Documentation under applicable copyright law. To the
knowledge of Shareholders and except as described in the Disclosure Memorandum,
there has been no material disclosure of such trade secrets and confidential
information. The source code relating to the Software Programs (i) has at all
times been maintained in confidence; (ii) has been disclosed only to QS
employees and consultants having a "need to know" the contents thereof in
connection with the performance of their duties to QS; and (iii) has been
disclosed to certain customers who have agreed to keep such information
confidential. The Documentation relating to the Software Programs (i) has at all
times been maintained in confidence except as may have been disclosed to
potential customers and (ii) has been disclosed only to QS employees,
consultants, ISC and its employees, customers and potential customers having a
"need to know" the contents thereof in connection with the performance of their
duties to QS or in connection with the purchase of QS products or services.
(f) All Software Programs and Documentation were developed for
the benefit of, and to be owned by, QS. Each of the Shareholders has signed
acknowledgments of QS's rights in work products in substantially the form
contained in Exhibit C hereto.
(g) Except as disclosed in the Disclosure Memorandum, no claims
have been asserted by any person or entity to use the Intellectual Property, and
Shareholders do not know of any valid basis for any such claim. The use of the
Intellectual Property by QS does not infringe on the rights of any Person.
(h) Except as disclosed in the Disclosure Memorandum, the
Software Programs licensed by QS perform in accordance with the documentation
related thereto and are free of material defects
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in programming and operation when used in accordance with the documentation.
(i) QS owns or has a license to use all computer software and
databases that are necessary for the conduct of the QS Business as presently
conducted by QS and all documentation relating to all such computer software and
databases. The Disclosure Memorandum lists material defects in such computer
software and databases which are known to Shareholders as of the Closing Date.
IV.14 Contracts. The Disclosure Memorandum sets forth a list of all
current QS Contracts relating to QS Business that involve payment to or by QS of
more than $10,000 or that are otherwise material to QS Business or the prospects
of the QS Business. Except as set forth in the Disclosure Memorandum:
(a) to the knowledge of Shareholders, each of such QS Contracts
is in full force and effect and constitutes a binding obligation of all parties
thereto, enforceable in accordance with its terms. To the knowledge of the
Shareholders and except as set forth in the Disclosure Memorandum, there is no
threat to cancel or otherwise terminate the QS Contracts.
(b) to the knowledge of Shareholders, there are no existing
defaults or events of default, real or claimed, or events which with notice or
lapse of time or both would constitute defaults under any QS Contract.
(c) there are no QS Contracts relating to QS Business or the
assets of QS with any director, officer or shareholder of QS, or with any person
related to any such person or with any company or other organization in which
any director, officer, or shareholder of QS or anyone related to any such
person, has a direct or indirect financial interest.
(d) neither QS nor any Shareholder is subject to any contract or
agreement:
(1) that contains covenants limiting the freedom of QS to
compete in any line of business in the United States or Canada;
(2) that requires QS to share any profits, or requiring any
payments or other distributions based on profits,
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revenues or cash flows; or
(3) that, to the knowledge of Shareholders, has had or may in
the future have a material adverse effect upon the business, earnings or
financial condition of QS.
IV.15 Leases. The Disclosure Memorandum contains a complete and
accurate list of all leases (including any capital leases) and lease-purchase
arrangements pursuant to which QS leases real or personal property from others.
QS's possession of such property has not been disturbed, nor has any claim been
asserted against QS adverse to its rights in such leasehold interests. All
leases that are required to be capitalized by the Accounting Standards have been
so accounted for in the Financial Statements, and such leases are identified as
capital leases in the Disclosure Memorandum.
IV.16 Permits. QS holds free and clear all permits, licenses,
franchises and authorizations from governmental and regulatory authorities as
are necessary to conduct QS Business (the "QS Permits"), all of which QS Permits
are listed in the Disclosure Memorandum. To the knowledge of each Shareholder no
event has occurred that allows (nor after notice or lapse of time or both would
allow) revocation or termination of any QS Permit or would result in any other
material impairment of the rights of the holder of any QS Permit.
IV.17 Labor Matters.
(a) QS is in compliance with all Rules respecting employment and
employment practices, terms and conditions of employment, wages and hours.
(b) QS is not and has not been engaged in any unfair labor
practice, and no unfair labor practice complaints against QS are pending before
the National Labor Relations Board or similar authority. To the knowledge of
Shareholders: there are no labor strike or other labor trouble actually pending,
being threatened against, or affecting QS; relations between management and
labor are amicable; and there have not been, nor are there presently, any
attempts or plans to organize QS's employees.
(c) There is no agreement, arrangement or understanding between
QS and any trade union, any representative of any trade union or any bargaining
unit in respect of any of the
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Employees.
IV.18 Employees.
(a) The Disclosure Memorandum sets forth as to each Employee, his
or her name, the location of employment, the date on which he or she was hired,
the annual salary or hourly rate of pay for the Employees (separately listing
any bonus), each Employee's raises and bonuses since January 1, 1997, a true and
correct estimate of each of the Employee's accrued sick leave entitlement up to
the Closing Date, a true and correct estimate of each of the Employee's accrued
vacation up to the Closing Date, and a true and correct description of all other
benefits actually or contingently accruing to any Employee as of the Closing
Date.
(b) The Disclosure Memorandum sets forth as to each officer or
other manager of QS, the information described in subsection (a) above, as well
as the current compensation rate (salary, bonus, commission or other) for each
such person other than Francis Crowder and Marian Crowder.
(c) Except as set forth in the Disclosure Memorandum, QS has not
entered into any agreement with any Employee, for a fixed term or otherwise.
(d) Except as set forth in the Disclosure Memorandum, since
October 1996, all Employees who have received raises have received normal raises
which in no instance exceeded ten percent (10%) and all remuneration for shift,
weekend and/or casual work has been negotiated and agreed upon with the
applicable employees on a case-by-case basis.
(e) During the last five years no major accident has occurred at
QS Premises.
(f) To the knowledge of each Shareholder, no key Employee of QS
(other than Francis and Marian Crowder) will voluntarily leave QS in connection
with the transfer of the Shares to ISC hereunder.
(g) QS has made available to ISC all employment records for each
Employee upon the request of ISC, except for those of Francis Crowder and Marian
Crowder. Francis Crowder and Marian Crowder agree to provide QS and ISC with any
requested employment records in the event such records are necessary to
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satisfy QS's obligations as an employer pursuant to federal or state Rules, to
cooperate with QS and ISC if necessary to meet QS's obligations as an employer,
and jointly and severally agree to indemnify and hold harmless QS and ISC from
and against any liability or penalty caused by Francis Crowder's or Marian
Crowder's failure to provide QS or ISC with any employment records required
hereunder.
IV.19 Employee Benefit Plans and Arrangements.
(a) List of Plans and Obligations. The Disclosure Memorandum sets
forth a complete and accurate list and description of all plans, arrangements,
agreements, commitments, promises and other obligations of QS, including but not
limited to pension, retirement, profit-sharing, deferred compensation, stock
option, employee stock ownership, severance pay, vacation, sick leave without
compensation, bonus and other incentive plans, every medical, vision, dental and
other health plan, every life insurance plan and every other written or
unwritten employee program, arrangement, agreement or understanding, commitment
or method of contribution or compensation, whether formal or informal, whether
funded or unfunded and other obligations under which QS has been, is or will be
obligated to provide benefits to any current or former Employee, retiree,
director, independent contractor, shareholder, officer, consultant or other
beneficiary, or dependent, spouse or other family member or beneficiary of such
Employee, retiree, director, independent contractor, shareholder, officer,
consultant or other beneficiary, of QS whether during their employment with QS
or after the termination of such employment (the "Plans" and the
"Beneficiaries", respectively).
(b) Compliance. All of the Plans have been maintained, funded and
administered in compliance, in all material respects, with all Rules, including
but not limited to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")and the Internal Revenue Code of 1986, as amended and all
regulations and rulings related thereto. There are no penalties, interest or
Taxes related to the Plans due to any federal or state authority.
(c) No Liabilities or Obligations. Except as reflected on the
1996 Balance Sheet, QS has no liabilities or obligations to any Beneficiaries,
governmental authorities or any other parties arising out of or relating to the
Plans.
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(d) No Payments. The consummation of the transactions
contemplated by this Agreement will not (i) entitle any Beneficiary to any
severance pay, unemployment compensation or any other payment contingent upon a
change in control or ownership of QS or its assets or (ii) accelerate the time
of payment or vesting or increase the amount of any compensation or benefit due
to any Beneficiary.
(e) No Multi-Employer Plans. None of the Plans is a
multi-employer plan, as defined in Section 3(37) of ERISA.
IV.20 Insurance Policies. The Disclosure Memorandum sets forth a
complete and accurate list and description of all insurance policies in force
naming QS, or any employees thereof in the capacity as such, as an insured or
beneficiary or as a loss payable payee, or for which QS has paid or are
obligated to pay all or part of the premiums. Except as set forth in the
Disclosure Memorandum, QS has not received notice of any pending or threatened
termination or premium increase (retroactive or otherwise) with respect thereto,
and QS are in compliance with all conditions contained therein. There have been
no lapses (whether cured or not) in the coverage provided under the insurance
policies, referenced herein and as set forth in the Disclosure Memorandum.
IV.21 Events After December 31, 1996. Except as set forth in the
Disclosure Memorandum, since December 31, 1996, QS has conducted its business
only in the ordinary course, consistent with reasonable past practices, and has
not:
(a) suffered any material property or casualty loss, or waived
any material right;
(b) entered into any insurance, pension or other employee benefit
plan, payment or arrangement, or entered into or amended any employment,
consulting, severance or similar agreement;
(c) made any changes in employee compensation, or paid any other
bonus, except in the ordinary course of business and consistent with QS past
practice;
(d) lost a major customer or vendor, suffered a material
deterioration in any of its other significant
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relationships, or experienced any other material adverse change in any aspect of
QS Business or in its prospects;
(e) made any change in any method, practice or principle of
financial or tax accounting;
(f) made any sales on terms (including but not limited to
discounts, extended payment terms and other incentives) materially inconsistent
with QS prior practices;
(g) entered into any material commitment or transaction affecting
QS Business other than in the ordinary course of business;
(h) realized an asset or reduced a liability related to a
transaction with a customer or supplier, that was not authorized by the customer
or supplier;
(i) failed to maintain the Financial Statements and its books of
account in accordance with the Accounting Standards;
(j) sold, assigned, transferred or encumbered any of its assets
or affected the carrying value of any its liabilities, including without
limitation any commercial agreements, or entered into any arrangement to
purchase assets and/or assume liabilities (except in each case as required in
the ordinary course of business);
(k) paid, discharged, satisfied or renewed any claim, liability
or obligation other than payment in the ordinary course of business and
consistent with QS past practice;
(l) made any distribution or declared or paid any dividends to
any shareholders, received any capital contribution, or redeemed, purchased or
otherwise acquired any shares;
(m) made any payment of cash or any transfer of other assets, to
any shareholder or affiliate thereof, or paid, loaned, advanced, sold,
transferred or leased any asset to any employee, except for normal compensation
involving salary and benefits;
(n) failed to maintain its assets and continue with all
contractual obligations in accordance with their respective terms;
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(o) failed to use commercially reasonable efforts to preserve its
business, keep available the services of its present employees, and preserve the
goodwill of its customers, suppliers and others having business relations with
it; or
(p) agreed to take any action described in this Section 4.21.
IV.22 Copies Provided to ISC. QS has given or made available to ISC,
true, correct and complete copies of each of the contracts, agreements,
instruments and other documents listed in the Disclosure Memorandum.
IV.23 Brokers. No broker or finder has acted on behalf of QS or
Shareholders in connection with this Agreement and the transactions contemplated
hereby, and neither QS nor any Shareholder has made any other agreement to pay
any agent, finder, broker or any other representative any fee or commission in
the nature of a finder's or originator's fee arising out of or in connection
with the subject matter of this Agreement.
IV.24 Adverse Information. Neither QS nor any Shareholder has knowingly
withheld information about any conditions, facts or circumstances that have had
or reasonably could be expected to have a material adverse effect on the value
of the assets of QS or QS Business to ISC.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ISC
In order to meet the requirements of the Shareholders, ISC hereby
represents and warrants, as of the date hereof and as of the Closing Date as
follows:
V.1 Organization, Power and Authority of ISC.
(a) ISC is a company duly incorporated and validly existing under
the laws of the State of Georgia and has all requisite power and authority,
corporate or otherwise, to carry on and conduct its business and to own or lease
its properties and assets.
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(b) The execution, delivery and performance of this Agreement,
the Notes and the Escrow Agreement and the consummation of the transactions
contemplated hereby, have been duly and validly authorized by all necessary
action, corporate or otherwise, on the part of ISC. This Agreement, the Notes
and the Escrow Agreement constitute ISC's legal, valid, and binding obligations,
enforceable in accordance with their terms.
(c) ISC has obtained all necessary consents, approvals,
authorizations or estoppels of any other Person or governmental or regulatory
authority required to be obtained to authorize and permit ISC to purchase all of
the Shares. The execution and delivery of this Agreement, the Notes and the
Escrow Agreement, and the consummation of the transactions contemplated herein
by ISC, and the performance of the covenants and agreements will not, with or
without the giving of notice or the lapse of time, or both, (i) violate or
conflict with any of the provisions of any Articles of Incorporation or Bylaws
of ISC; (ii) violate, conflict with or result in a material breach or default
under or cause termination of any material term or condition of any material
mortgage, indenture, contract, license, permit, instrument, trust document, or
other agreement, document or instrument to which ISC is a party or by which ISC
or any of its properties may be bound; or (iii) violate any Rule. ISC has the
right, power and capacity to execute, deliver and perform this Agreement, the
Notes and the Escrow Agreement and to consummate the transactions contemplated
hereby.
5.2 Financial Statements. The financial statements contained in ISC's
Form 10-K for the period ending December 31, 1996, and its Form 10-Q for the
period ending March 31, 1997, (both of which are attached hereto) fairly present
the financial position of ISC as of the dates thereof and the results of its
operations for the respective periods thereof. Since March 31, 1997, there has
been no material adverse change in the financial condition of ISC or its
business, operations or assets.
ARTICLE VI
COVENANTS OF THE PARTIES
VI.1 Cooperation. Shareholders and ISC shall cooperate fully with each
other and their respective employees, legal counsel, accountants and other
representatives and advisers in
24
<PAGE> 26
connection with the steps required to be taken as part of their respective
obligations under this Agreement; and shall, at any time and from time to time
after the Closing, upon the reasonable request of the other, do, execute,
acknowledge and deliver, or will cause to be done, executed, acknowledged and
delivered, all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney, receipts, acknowledgments, acceptances and assurances as may
be reasonably required to satisfy and perform the obligations of such party
hereunder, and to allow ISC to operate QS Business after the Closing in the
manner in which it was operated before the Closing.
VI.2 Records. Except as provided in the Employment Letter between
Francis Crowder and ISC dated April 14, 1997, Shareholders shall provide to QS,
as soon as is reasonably practicable after QS's request, copies of any and all
files, records or other data in any Shareholder's possession in respect of QS or
QS Business.
VI.3 Use of QS Name. The Shareholders shall cease to use the name "QS"
(or any variation thereof) for any business purpose, except as employees or
agents of QS or ISC, and for the benefit of QS, ISC or their Affiliates.
VI.4 Expenses. Whether or not the expenses are incurred before or
after the Closing, each of the expenses incurred by ISC, QS and Shareholders in
connection with the authorization, preparation, execution and performance of
this Agreement, including without limitation all fees, commissions, and expenses
of agents, representatives, counsel, accountants, brokers and finders, shall be
paid by the party that incurred such expenses. Without limiting the generality
of the foregoing, Shareholders shall be responsible for the payment of: any
fees, commissions or expenses of any broker or finder engaged by QS or
Shareholders and any expenses of QS.
VI.5 Tax Matters.
(a) Shareholders shall pay all Taxes arising from or relating to
the sale of the Shares to ISC.
(b) ISC and QS shall file and control any returns required to be
filed by QS after the Closing Date.
(c) Shareholders, on the one hand, and ISC, on the other hand,
agree to give prompt notice to each other of any
25
<PAGE> 27
proposed adjustment to Taxes for periods ending on or prior to the Closing Date.
Shareholders and ISC shall cooperate with each other in the conduct of any Tax
audit or other proceedings involving QS for such periods. In connection with any
such audit or other proceeding ISC, upon the Shareholders' request, shall
provide the Shareholders copies of all notices, correspondence, demands,
assessments and other documents generated in connection with such audit or other
proceeding, all of which information shall remain subject to Section 7.13
(Confidentiality) below. The Shareholders shall also have the right to discuss
the status of such audit or other proceeding with the ISC's representatives and,
with the prior written consent of ISC (not to be unreasonably withheld), with
the applicable taxing authorities involved. All of such activities by the
Shareholders shall be conducted in a manner so as not to adversely impact the
best interests of QS.
(d) Shareholders on the one hand, and ISC, on the other hand,
agree to furnish or cause to be furnished to each other, upon request, as
promptly as practicable, such information and assistance (including access to
books and records) relating to QS as is reasonably necessary for the preparation
of any return, claim for refund or audit, and the prosecution or defense of any
claim, suit or proceeding relating to any proposed adjustment.
VI.6 Survival of Warranties. The Warranties will not merge, but will
survive the Closing as follows:
(a) the Warranties contained in Sections 3.2, 3.4, 4.6 and 4.13
hereof will survive the Closing indefinitely; and
(b) all Warranties not identified in Section 6.6(a) above shall
survive the Closing for a period of three (3) years after the Closing Date.
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<PAGE> 28
VI.7 Indemnification.
(a) By the Shareholders. Shareholders jointly (except as provided
in subsection 6.7(b)(5) hereof) and severally shall indemnify, reimburse and
hold harmless ISC, its Affiliates and any successor or assigns (the "Indemnified
Persons") for any and all direct or indirect claims, losses, liabilities,
damages (including special and consequential damages), costs (including court
costs) and expenses (including all attorneys' and accountants' fees and
expenses) (hereinafter "a Loss" or "Losses"), as a result of or in connection
with (i) any breach, inaccuracy or untruth of any Warranty; or (ii) any breach
of or noncompliance by any Shareholder with any covenant or agreement of
Shareholder contained in this Agreement or in any other agreement or instrument
delivered in connection with this Agreement ; or (iii) any litigation, mediation
or arbitration involving QS, any Shareholder, or QS Business arising from
actions taken or facts existing before the Closing or arising out of or related
to the transactions contemplated by this Agreement; or (iv) any act or omission
of QS or any Shareholder constituting or causing non-compliance on or after the
date hereof with any requirement of applicable Rules, if such act or omission
occurred or arose prior to the Closing; or (v) any fees, commissions or expenses
of any broker or finder engaged by QS or Shareholders; or (vi) any Taxes for
which there was an insufficient accrual shown on the Financial Statements or
Interim Financial Statements.
(b) Limitations.
(1) Shareholders shall not be required to indemnify an
Indemnified Person with respect to any Loss unless the Loss, when aggregated
with all other Losses of all Indemnified Persons, exceeds $25,000 (the "Minimum
Aggregate Liability Amount"), at which time Losses may be asserted for any
amounts in excess of the Minimum Aggregate Liability Amount up to the Maximum
Liability Amount (defined below).
(2) The maximum aggregate liability of the Shareholders for any
Loss shall be limited as follows (the "Maximum Liability Amount"):
A. The Maximum Liability Amount for any Loss arising out of or
resulting from a breach, inaccuracy or untruth of a Warranty contained in
Article III or Sections 4.1 and 4.13 shall be $1,500,000; and
27
<PAGE> 29
B. The Maximum Liability Amount for any other Loss shall be
limited to $500,000.
(3) Notwithstanding subsections 6.7(b)(1) and 6.7(b)(2) above,
the Minimum Aggregate Liability Amount and the Maximum Liability Amount shall
not apply to any Loss (A) which results from or arises out of fraud or
intentional misrepresentation or an intentional breach of Warranty on the part
of any Shareholder, (B) claimed with respect to Section 4.6, (C) which results
from or arises out of a breach of Section 6.8 or 6.9, or (D) described in
Section 6.7(a)(vi). For any Loss or Losses not subject to the Minimum Aggregate
Liability Amount or the Maximum Liability Amount, the Indemnified Persons shall
be entitled to indemnification regardless of the amount of the Loss.
(4) Kevin Davidson shall be responsible for the first $250,000 of
any Loss arising out of Sections 4.13(h) or 4.13(i) hereof. Thereafter, the
Shareholders shall be jointly and severally liable under Section 6.7(a).
(5) Each Shareholder severally, not jointly, shall indemnify,
reimburse and hold harmless the Indemnified Persons for any Loss as a result of,
or in connection with, any breach of, or noncompliance by, that Shareholder of
the agreements contained in Sections 6.8 or 6.9 hereof.
(c) Notice of Claim. To seek indemnification hereunder, an
Indemnified Person shall notify each Shareholder of any claim for
indemnification, specifying in reasonable detail the nature of the Loss and the
amount or an estimate of the amount thereof.
(d) No Prejudice. Nothing herein shall prevent an Indemnified
Person from making a claim for a Loss hereunder notwithstanding its knowledge of
the Loss or possibility of the Loss on or prior to the Closing Date.
(e) Other Rights. The indemnities granted hereunder are in
addition to and not in substitution for any other right or remedy an Indemnified
Person may now have or may subsequently take or hold, and may be enforced
without first recourse to such other right or remedy and without taking any
steps or proceedings in connection therewith, and notwithstanding any rule of
law or equity or statutory provision to the contrary.
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<PAGE> 30
(f) Duty to Mitigate. The Indemnified Persons shall have the duty
to mitigate, to the extent reasonably practicable, any damages for which they
seek indemnification hereunder.
(g) Setoff. ISC shall satisfy any indemnity right it may have
under Section 6.7(a) first by setoff against any amount payable by ISC to any
Shareholder under the Notes; provided, however, ISC shall have the right to seek
indemnification directly from the Shareholders if the Notes are insufficient to
satisfy ISC's indemnity right because ISC pays the Notes in full before May 30,
2000 or because ISC seeks indemnification for a Loss of the type described in
subsections 6.7(b)(3)(A)-(D) hereof.
VI.8 Confidentiality.
(a) Except as provided in the Employment Letter between Francis
Crowder and ISC dated April 14, 1997, QS and Shareholders shall hold in trust
and confidence all Confidential Information (as defined below) for a period of
three (3) years from the date hereof, and shall hold in trust and confidence all
Trade Secrets (as defined below) for as long as such information remains a trade
secret under applicable law, and shall not make any copies of, distribute or use
any Confidential Information or Trade Secrets except as necessary to prepare for
the completion of the transactions contemplated under this Agreement. Upon the
first request in writing from ISC, Shareholders shall return to ISC all
Confidential Information and Trade Secrets in their possession, without
retaining any copies thereof.
(b) As used in this Section 6.8 and only in this Section 6.8:
(1) "Confidential Information" means all information relating
to QS Business, ISC, any ISC Affiliate, or any person or entity with which it
deals, which information is reasonably regarded as confidential, being
information not in the public domain (including, without limitation: all
Inventions; technical data; research and development information; business
records, information and notes; products; "know-how"; Trade Secrets; engineering
or other data; designs, specifications, processes and formulae; manufacturing or
planning procedures, techniques or information; marketing plans, strategies and
forecasts; business and product development plans, strategies and forecasts;
financial statements, budgets, prices, costs and
29
<PAGE> 31
financial projections; accounting procedures or financial information; names and
details of consumers, customers, suppliers and agents; employee details; and
secret information); together with the possible or likely function, purpose or
application of that information whether in the current activities of QS, ISC or
any Affiliate or fields to which the activities of QS, ISC or any Affiliate may
reasonably extend from time to time, any part of or improvements to that
information, and any recommendation, test or report of QS, ISC or any Affiliate
or any consultant or agent in connection with that information; and whether such
information is oral, written, recorded or stored by electronic, magnetic,
electromagnetic or other form or process or otherwise in a machine readable
form, translated from the original form, recompiled, made into a compilation,
wholly or partially copied, modified, updated or otherwise altered, or
originated or obtained by, or coming into the possession, custody, control or
knowledge of QS, ISC or an Affiliate either alone or jointly.
(2) "Invention" means any invention, drawing, design, model,
contrivance, structure, specification, improvement, discovery, creation, idea,
concept, formula, process and other work or contribution however developed,
created, made discovered or conceived, and whether or not patented or patentable
(whether by renewal or otherwise), protected by copyright, or otherwise
protected or capable of protection by law anywhere.
(3) "Trade Secrets" means any information of QS, ISC or an
Affiliate (including but not limited to technical or non-technical data, a
formula, a pattern, a compilation, a program, a device, a method, a technique, a
drawing, a process, financial data, financial plans, product plans, or a list of
actual or potential customers or suppliers) which (i) derives economic value,
actual or potential, from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can obtain economic value
from its disclosure or use, and (ii) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy.
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<PAGE> 32
VI.9 Noncompetition.
(a) Each Shareholder acknowledges and recognizes the highly
competitive nature of QS Business and accordingly agree that, to induce ISC to
consummate the transaction contemplated by this Agreement, each Shareholder
shall not, from the Closing Date and for a period of three (3) years after the
later of the Closing Date or the termination of such Shareholder's employment
with QS:
(1) Engage directly or indirectly in any Competitive Business
(as defined below) anywhere in the Restricted Territory (as defined below),
whether such engagement be as an employer, officer, director, owner, investor,
employee, partner, consultant or other participant in any Competitive Business;
(2) Solicit or accept business from anyone who is or becomes
an active or prospective customer of QS, ISC or their Affiliates or who was an
active or prospective customer of QS on or prior to the Closing Date;
(3) Solicit for employment or hire any employee of ISC or its
Affiliates; or
(4) Attempt to do any of the things (or directly or
indirectly assist anyone else in doing or attempting to do any of the things)
specified in subsections (1), (2) or (3) above.
(b) As used in this Section 6.9:
(1) "Competitive Business" means and includes any business
individual, corporation or other entity which is engaged wholly or partly in any
business similar to QS Business; and
(2) "Restricted Territory" means the entire United States and
anywhere that QS Business is being or will be conducted.
(c) The provisions of this Section 6.9 shall not apply to:
(1) The activities of any Shareholder performed in the course
of his or her employment with and authorized by QS.
(2) Consulting or strategic planning services
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<PAGE> 33
performed by Francis Crowder for health-related information systems if and to
the extent ISC gives its express prior written consent to such services on a
case-by-case basis.
(3) Francis Crowder writing books, articles or papers for
public distribution dealing with the use of health-related information by
governmental bodies, provided that such writing does not conflict with the QS
Business.
VI.10 Funds Received After Closing. Any and all funds received by any
Shareholder (or anyone other than QS or ISC) after Closing in respect of QS
Business shall be remitted to QS or ISC immediately upon receipt.
VI.11 Employment, General. For a period of 90 days after the Closing
Date, QS shall provide at least 90 days notice to an Employee prior to
terminating such Employee (other than Francis Crowder and Marian Crowder).
VI.12 Announcements. Except as required by law or contract obligating
the announcing party, Shareholders shall not make any announcement of the
transactions contemplated hereby without the prior agreement of ISC, and ISC
shall not make any announcement of the transactions contemplated hereby without
the prior agreement of the parties. The parties agree to cooperate in developing
such announcements.
ARTICLE VII
MISCELLANEOUS
VII.1 Notices. All notices, requests, demands, consents and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered by overnight courier, express mail
service, by postage pre-paid certified or registered mail, return receipt
requested (the return receipt constituting prima facie evidence of the giving of
such notice, request, demand or other communication) by personal delivery, or by
fax with confirmation of receipt to the following address or such other address
of which a party subsequently may give notice to all the other parties:
32
<PAGE> 34
To the Shareholders: Francis M. Crowder, Sr.
1107 Thornehill Drive
Anderson, South Carolina 29621
Marian S. Crowder
1107 Thornehill Drive
Anderson, South Carolina 29621
Kevin W. Davidson
26 Merry Oak Trail
Piedmont, South Carolina 29673
Charles S. Verdin, III
319 Bethel Road
Simpsonville, South Carolina 29681
with a copy to: Joseph J. Blake, Jr.
Haynsworth, Marion, McKay & Guerard, L.L.P.
P.O. Box 2048
75 Beattle Place
Greenville, SC 29602
Fax: (864) 240-3300
To ISC: Intelligent Systems Corporation
4355 Shackleford Road
Norcross, Georgia 30093
Fax: 770/381-2808
Attention: President
with a copy to: Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Suite 1400
Atlanta, Georgia 30309
Fax: 404/817-6050
Attention: Philip H. Moise
VII.2 Parties Bound by Agreement; Successors and Assigns. The terms,
conditions and obligations of this Agreement shall inure to the benefit of and
be binding upon the parties hereto and the respective successors and assigns
thereof. Without the prior written consent of ISC, neither Shareholders nor QS
may assign their rights, duties or obligations hereunder or any part thereof to
any other Person. ISC may assign its rights and duties
33
<PAGE> 35
hereunder in whole or in part to one or more Affiliates.
VII.3 Entire Agreement. This Agreement, the Disclosure Memorandum, the
Notes, the Escrow Agreement, the Employment Letter between ISC and Francis
Crowder dated April 14, 1997 and all other certificates, schedules and other
documents delivered pursuant thereto constitute the entire agreement between the
parties with respect to the transactions contemplated hereby, and supersede and
are in full substitution of any and all prior agreements and understandings
written or oral between the parties relating to such transactions.
VII.4 Descriptive Headings. The descriptive headings of the Sections of
this Agreement are inserted for convenience only and shall not control or affect
the meaning or construction of any of the provisions hereof.
VII.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
VII.6 Amendments and Waivers. No modification, termination, extension,
renewal or waiver of any provision of this Agreement shall be binding upon a
party unless made in writing and signed by such party. A waiver on one occasion
shall not be construed as a waiver of any right on any future occasion. No delay
or omission by a party in exercising any of its rights hereunder shall operate
as a waiver of such rights.
VII.7 Governing Law Jurisdiction and Venue. This Agreement shall be
construed in accordance with and governed by the laws of the State of South
Carolina, and jurisdiction and venue for any matter submitted to a court
hereunder or in connection with the transactions described herein shall lie in
any court of competent jurisdiction in Anderson County and Greenville County,
South Carolina.
VII.8 No Third-Party Beneficiaries. With the exception of the parties
to this Agreement and the Indemnified Parties, there shall exist no right of any
person to claim a beneficial interest in this Agreement or any rights accruing
by virtue of this Agreement.
VII.9 Gender and Number. Where the context requires, the use of a
pronoun of one gender or the neuter is to be deemed to
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<PAGE> 36
include a pronoun of the appropriate gender, singular words are to be deemed to
include the plural, and vice versa.
VII.10 Cooperation in Transition. Each Shareholder agrees to cooperate
in the transition of ownership of QS from the Shareholders to ISC. In connection
therewith, Shareholders will, among other things, use their best efforts to help
QS maintain good relationships with customers, suppliers, Employees and others
doing business with QS and will use their best efforts to ensure that such
customers, suppliers, Employees and other continue to do business with QS in a
manner that is consistent with QS's business relationships prior to the date
hereof.
Each of the parties hereto has caused this Agreement to be duly
executed on its behalf as of the date indicated on the first page hereof.
SHAREHOLDERS:
- -------------
FRANCIS CROWDER
- ------------------------------
MARIAN CROWDER
- ------------------------------
KEVIN DAVIDSON
- ------------------------------
CHARLES VERDIN
- ------------------------------
ISC:
- ----
INTELLIGENT SYSTEMS CORPORATION
By:
---------------------------
J. Leland Strange
President
35
<PAGE> 1
EXHIBIT 2.4
STOCK PURCHASE AGREEMENT
BETWEEN
OAK INVESTMENT PARTNERS
AND
INTELLIGENT SYSTEMS CORPORATION
DATED 3/31/97
<PAGE> 2
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made March 31, 1997,
by and among Intelligent Systems Corporation, a Georgia corporation ("Seller"),
on the one hand, and Oak Investment Partners V, Limited Partnership and Oak V
Affiliates Fund, Limited Partnership, both Delaware limited partnerships
("Buyers"), on the other hand. Seller owns shares of common stock, $.01 par
value ("Common Stock"), of PaySys International, Inc., a Florida corporation
("PaySys"). Seller desires to sell a portion of the Common Stock to Buyers, and
Buyers desire to purchase such portion of the Common Stock. Therefore, in
consideration of the mutual covenants and conditions contained herein, the
parties do hereby agree as follows.
1. Purchase and Sale of Common Stock.
(a) Sale and Purchase of Common Stock. Subject to the terms and
conditions set forth in this Agreement, Seller hereby sells to Buyers, and
Buyers hereby purchase from Seller, an aggregate of 50,537 shares of the Common
Stock (the "Shares").
(b) Purchase Price. Simultaneously with the execution and delivery
of this Agreement, Buyers shall pay Seller an aggregate of Two Million Dollars
($2,000,000), the purchase price of the Shares (approximately $39.575 per
Share).
(c) Delivery of Shares. Simultaneously with the execution and
delivery of this Agreement, Seller shall deliver to Buyers certificates
representing all of the Shares, in such separate denominations as Buyers shall
determine, endorsed in blank for transfer to Buyers or accompanied by a stock
transfer power executed in blank.
2. Obligation to Transfer Additional Shares.
(a) If PaySys is a Public Company in One Year. If by the first
anniversary of this Agreement (the "First Anniversary") the Company has sold
shares of the Common Stock to the public pursuant to a registration statement
effective under the Securities Act of 1933 in a firm commitment underwritten
public offering, and if the Average Fair Market Value per Share on the First
Anniversary (as defined below) is less than $51.45 per Share (the "Target Market
Price"), then within 15 days after the First Anniversary Seller shall transfer
to Buyer" for no further consideration a number of shares of Common Stock (the
"Additional Public Shares") determined by dividing $2,600,000 by the Average
Fair Market Value per Share on the First Anniversary, subtracting 50,537 (the
number of Shares) from that number, and rounding up to the nearest whole number
of shares.
For purpose of this subsection 2(a), "Average Fair Market Value per
Share on the First Anniversary" shall mean the average for the last 20 trading
days before the First Anniversary (or if such public sale was closed during such
20 trading-day-period, the average for the number of trading days immediately
following such public sale and
<PAGE> 3
before the First Anniversary) of either (i) or (ii) below, whichever is
applicable:
(i) if the Common Stock is traded on a national securities
exchange, the closing sales price of a share of Common Stock,
regular way, on such exchange on each such trading day; or
(ii) if the Common Stock is not traded on any national securities
exchange, the average of the closing high bid and low-asked
prices of the Common Stock on the over-the-counter market on
each such trading day, or in the absence of closing bids on a
particular trading day, the closing bids on the next preceding
trading day on which there were bids.
Such transfer shall be accomplished by Seller delivering to Buyers certificates
representing the Additional Public Shares in such separate denominations as
Buyers shall determine, endorsed in blank for transfer to Buyers or accompanied
by stock transfer powers executed in blank.
(b) If PaySys is a Private Company in One Year. If by the First
Anniversary the Company has not sold shares of the Common Stock to the public
pursuant to a registration statement effective under the Securities Act of 1933
in a firm commitment underwritten public offering, then within 15 days after
the First Anniversary Seller shall transfer to Buyers for no further
consideration an aggregate of 18,377 shares of Common Stock (the "Additional
Private Shares"). Such transfer shall be accomplished by Seller delivering to
Buyers certificates representing the Additional Private Shares in such separate
denominations as Buyers shall determine, endorsed in blank for transfer to
Buyers or accompanied by stock transfer powers executed in blank.
(c) Adjustments Under Subsections (a) and (b).
(i) If before the First Anniversary the outstanding
shares of Common Stock are changed into or exchanged for a different number or
kind of shares or other securities of PaySys by reason of a stock split, reverse
stock split, combination, stock dividend, recapitalization or reclassification,
the Target Market Price and the aggregate number and kind of Additional Public
Shares or Additional Private Shares shall be appropriately adjusted.
(ii) For purposes of determining the number of Additional
Private Shares, if before the First Anniversary PaySys shall issue any options
or warrants exercisable for Common Stock or for any securities convertible into
Common Stock (other than any options or warrants already identified on Exhibit A
hereto), or shall issue any securities convertible into Common Stock, and the
aggregate price per share of Common Stock to be paid upon the exercise of such
options or warrants, or upon the conversion of such convertible securities (when
added to the price, if any, paid for such convertible securities and allocable
to the shares of Common Stock issuable upon conversion), is less than
2
<PAGE> 4
$39.575 per share (adjusted if appropriate in any of the events identified in
subsection (c)(i) above), the number of Additional Private Shares shall be
appropriately adjusted to account for the proportionate potential dilution to
the value of the Shares caused by the issuance of such options, warrants or
convertible securities.
(d) Restrictions on Transfer. In connection with the contingent
obligation of Seller to transfer either the Additional Public Shares or the
Additional Private Shares to Buyer, Seller agrees that it shall not sell,
transfer, pledge or otherwise encumber 25,000 shares of Common Stock (the
"Restricted Shares") for 13 months after the date hereof, and that a legend will
be affixed to the certificate(s) representing the Restricted Shares referencing
the restrictions contained in this subsection (d).
(e) Registration Rights; Further Assurances. Seller shall use its
best efforts to cause PaySys to grant registration rights to Buyers on the same
terms and conditions as any such rights heretofore or hereafter granted by
PaySys to Seller, and shall use its best efforts to provide that the Shares, any
Additional Public Shares and any Additional Private Shares be freely
transferable by Buyers promptly after the consummation of an initial public
offering by PaySys; provided, however, Seller shall not be required to do
anything under this subsection (e) that would, or reasonably could be expected
to, adversely impact PaySys' ability to raise additional funding in a public
offering or otherwise, or SelIer's ability to participate as a selling
shareholder in any such transaction, or otherwise adversely impact the existing
PaySys shareholders.
3. Representations and Warranties of Seller. Seller hereby represents and
warrants to Buyers as follows:
(a) Organization of PaySys. PaySys is a corporation duly
incorporated and validly existing under the laws of Florida and has all
requisite power and authority, corporate or otherwise, to carry on and conduct
its business as it is now being conducted and to own or lease its properties and
assets.
(b) Capitalization of PaySys. The authorized capital stock of
PaySys consists of 30,000,000 shares of Common Stock and 10,000,000 shares of
$.01 par value preferred stock. At the date hereof, 1,333,494 shares of Common
Stock are issued and outstanding, all of which are validly issued, fully paid
and nonassessable, and no shares of preferred stock are issued and outstanding.
Except as disclosed on Exhibit A hereto, as of the date hereof there are no
options, warrants, convertible securities or other rights or agreements under
which PaySys may be required to issue additional shares of Common Stock.
(c) Organization of Seller. Seller is a corporation duly
incorporated and validly existing under the laws of Georgia and has all
requisite power and authority, corporate or otherwise, to carry on and conduct
its business as it is now being conducted and to own or lease its properties and
assets.
3
<PAGE> 5
(d) Authority. Seller has full power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance by Seller of this Agreement and all
transactions contemplated hereby have been duly and validly authorized by all
necessary action on the part of Seller, and this Agreement constitutes the
legal, valid and binding obligation of Seller, enforceable in accordance with
its terms, except as the same may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the rights and remedies of
creditors generally and general equitable principles (whether applied in law or
equity) and (ii) judicial discretion in the enforcement of legal or equitable
remedies.
(e) No Conflict. The execution and delivery of this Agreement by
Seller and the consummation of the transactions contemplated herein will not,
with or without the giving of notice or the lapse of time, or both, (i) violate
or conflict with any of the provisions of any articles of incorporation or
bylaws of Seller, or (ii) conflict with, violate, or constitute a default under,
any mortgage, agreement, lease, license, permit or other instrument to which
Seller is a party or by which any of its assets or properties is bound or
affected, or (iii) result in the creation of any lien or encumbrance on any of
the Shares.
(f) Title to Shares. Seller is the record and beneficial owner of
the Shares, and holds good and marketable title to the Shares free and clear of
all transfer restrictions, security interests, liens, encumbrances, claims and
options; and immediately after Seller's sale of the Shares to Buyers hereunder,
Buyers will hold good and marketable title to the Shares free and clear of all
transfer restrictions, security interests, liens, encumbrances, claims and
options, other than those created or suffered to exist by Buyers or either of
them.
(g) Financial Statements. Attached hereto as Schedule 3(g) are the
audited balance sheet of PaySys as of December 31, 1996 and the related audited
statements of operations, cash flows and stockholders' equity for the year ended
December 31, 1996, in each case certified by Ernst and Young LLP. All such
financial statements (i) are true, correct, and complete; (ii) are in accordance
with the books and records of PaySys; (iii) present fairly the financial
position and results of operations of PaySys as of the dates and periods
indicated; and (iv) have been prepared in accordance with generally accepted
accounting principles.
(h) Use of Proceeds. Seller will use the proceeds of the sale of
the Shares to make an investment in Visibility Inc., a Georgia corporation,
pursuant to the terms of a Convertible Note Purchase Agreement dated March 31,
1997 by and among Visibility Date Inc., Seller, Buyers, Grubb & Williams, Ltd.,
GW Investments, Ltd. and Mentec Limited.
4. Representations and Warranties of Buyer. Each Buyer hereby represents
and warrants to Seller as follows:
4
<PAGE> 6
(a) Organization. Buyer is a limited partnership duly organized
and validly existing under the laws of Delaware and has all requisite power and
authority to carry on and conduct its business as it is now being conducted and
to own or lease its properties and assets.
(b) Authority. Buyer hen full power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance by Buyer of this Agreement and all
transactions contemplated hereby have been duly and validly authorized by all
necessary action on the part of Buyer and its partners, and this Agreement
constitutes the legal, valid and binding obligation of Buyer, enforceable in
accordance with its terms, except as the same may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting the rights and
remedies of creditors generally and general equitable principles (whether
applied in law or equity) and (ii) judicial discretion in the enforcement of
legal or equitable remedies.
(c) No Conflict. The execution and delivery of this Agreement by
Buyer and the consummation of the transactions contemplated herein will not,
with or without the giving of notice or the lapse of time, or both, (i) violate
or conflict with any of the provisions of Buyer's Agreement of Limited
Partnership or other governing documents, or (ii) conflict with, violate, or
constitute a default under, any mortgage, agreement, lease, license, permit or
other instrument to which Buyer is a party or by which any of its assets or
properties is bound or affected.
(d) Investment Representations.
(i) Buyer is acquiring the Shares for investment for its
own account and not with a view to, or for, resale, transfer or distribution,
and that Buyer has no intention of participating, directly or indirectly, in a
distribution of the Shares or any portion thereof.
(ii) Buyer understands and acknowledges that the transfer
of the Shares has not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), or under the Georgia Securities Act of 1973 (the
"Georgia Act") or the securities or Blue Sky laws of any other jurisdiction, and
that the Shares will be transferred in reliance upon exemptions contained in the
such Acts and such laws. Further, Buyer understands that PaySys is under no
obligation to register the transfer of the Shares under the 1933 Act, the
Georgia Act or any such other laws, or to take any other action necessary in
order to comply with an available exemption.
(iii) Buyer understands and acknowledges that a legend will
be placed on the certificates evidencing the Shares, or any substitutions there
fore, substantially to the effect of subsection (d)(ii) above.
5
<PAGE> 7
5. Miscellaneous.
(a) Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing; shall be
delivered by U.S. mail (certified, return receipt requested), hand delivery,
overnight courier (such as FedEx), or fax; shall be deemed to have been given at
the earlier of the time it is actually received or, if sent by U.S. mail
(certified, return receipt requested), five days after the day when deposited in
the U.S. mail (the return receipt constituting prima facie evidence of the
giving of such notice, request, demand or other communication) delivered or
addressed to the address below or to such other address of which a party
subsequently may give notice to the other party.
To Buyers: Oak Investment Partners V, Limited Partnership
Oak V Affiliates Fund, Limited Partnership
One Gorham Island
Westport, Connecticut 06880
Attention: Edward F. Glassmeyer
FAX: (203) 227-0372
with a copy to:
Julie M. Allen, Esq.
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, NY 10112
FAX: (212) 408-2420
To Seller:
Intelligent Systems Corporation
4355 Shackleford Road
Norcross, GA 30093
Attention: President
FAX: (770) 381-2808
with a copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attention: Philip H. Moise, Esq.
FAX: (404) 817-6050
(b) Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto, their respective
successors, successors-in-title, legal representatives, heirs, executors and
lawful assigns.
(c) Entire Agreement. The Agreement constitutes the entire
agreement between the parties with respect to the Shares, and supersedes and is
in full substitution for any and all prior
6
<PAGE> 8
agreements and understandings, written or oral between the parties relating to
the Shares.
(d) Descriptive Headings. The descriptive headings of the sections
of this Agreement are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.
(e) Counterparts. This Agreement may be executed in more than one
counterpart, each of which shall be an original, but all of which together shall
constitute one instrument.
(f) Amendments and Waivers. No modification, termination,
extension renewal or waiver or any provision of this Agreement shall be binding
upon a party unless made in writing and signed by such party. A waiver on one
occasion shall not be construed as a waiver of any right on any future occasion.
No delay or omission by a party in exercising any of its rights hereunder shall
operate as a waiver of such rights.
(g) Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Georgia.
(h) Survival. The representations and warranties of Seller in
Section 3 hereof and the representations and warranties of Buyers contained in
Section 4 hereof shall survive the execution and delivery of this Agreement and
the transfer of the Shares. '
(i) Fees. Seller and Buyers shall each pay one-half of the legal
fees incurred by Seller and Buyers related to the preparation and review of this
Agreement and the consummation of the transactions contemplated herein. '
The parties each have executed this Agreement as of the date stated on
the first page.
SELLER:
Intelligent Systems Corporation
By: /s/ J. Leland Strange
---------------------------
J. Leland Strange
President
[Signatures continue on next page]
7
<PAGE> 9
[STOCK PURCHASE AGREEMENT - continuation of signatures]
BUYERS:
Oak Investment Partners V,
Limited Partnership
By: Oak Associates V, L.L.C., as
General Partner
By: /s/
---------------------------
A Managing Member
Oak V Affiliates Fund, Limited
Partnership
By: Oak V Affiliates, as General
Partner
By: /s/
---------------------------
A General Partner
8
<PAGE> 10
Exhibit A to Stock Purchase Agreement
Options, Warrants, Convertible Securities
or Other Rights or Agreements
<TABLE>
<CAPTION>
Number of Common
Shares Subject to
Holder of Right Form of Right Right
- --------------- ------------- -----------------
<S> <C> <C>
Intelligent Systems Corp. Warrant 55,521
Sirrom Warrant 30,000
Employee TIP Option 350
David Black Warrant 10,535
Option 38,046
Option 16,194
Warrant 110,411
Jerry Vaughn Warrant 10,535
Dan Cone Option 13,000
Harry Hall Option 10,000
Mike Casey Option 10,000
Henry Stewart Option 5,000
Steve Grubb Option 82,016
Option 16,194
Warrant 110,411
Employee options issued
2/4/97 Options 43,415
TOTAL 561,628
</TABLE>
9
<PAGE> 1
EXHIBIT 10.2
SECOND AMENDMENT TO LEASE AGREEMENT
THIS SECOND AMENDMENT TO LEASE AGREEMENT (hereinafter referred to as
the "Second Amendment") is made as of the 19 day of June 1997, by and between
WEEKS REALTY, L.P. (hereinafter referred to as "Landlord") and QUADRAM
CORPORATION (hereinafter referred to as "Tenant").
WITNESSETH:
WHEREAS, A.R. Weeks & Associates, Inc. and Tenant entered into that
certain Lease Agreement dated March 11, 1985, as amended by that certain First
Amendment to Lease Agreement dated November 16, 1990, (hereinafter collectively
referred to as the "Agreement") for the lease of 137,100 square feet of
office/warehouse space at 4355 Shackleford Road, Norcross, Georgia, Building 2
in Gwinnett Park which is more particularly described in Exhibit "A" to the
Agreement and certain easements, rights and privileges appurtenant thereto
(hereinafter referred to as the "Leased Premises"); and
WHEREAS, Weeks Realty, L.P. succeeded to the interest of the landlord
under the Agreement and is the Landlord with respect to the Leased Premises; and
WHEREAS, the Agreement will expire by its terms on November 30, 1997
and Tenant desires to enter into this Second Amendment in order to extend the
term of the Agreement;
NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) paid
by Landlord and Tenant to one another, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
Landlord and Tenant, Landlord and Tenant amend the Agreement as follows:
1. The Agreement is hereby extended for an additional five (5) year
term effective December 1, 1997 and continuing until midnight on November 30,
2002 on all of the same terms, covenants and conditions as the original
Agreement with the same base year except that the base rental for the new term
shall be as set forth below:
<TABLE>
<S> <C> <C>
December 1, 1997 - November 30, 2000 $59,981.25/month $719,775.00/year
December 1, 2000 - November 30, 2002 $62,837.50/month $754,050.00/year
</TABLE>
The base rental shall be due on or before the first day of each
calendar month during the term together with any other additional rent as set
forth in the Agreement. The landscaping service fee shall continue at its
current rate.
2. As consideration for Tenant's performance of all obligations to be
performed by Tenant under this Lease, Landlord shall contribute the sum of One
Hundred Twelve Thousand One Hundred and 00/100 Dollars ($112,100.00) (the
"Allowance") towards the cost of tenant improvements to the Leased Premises. The
Allowance shall be used for alterations, improvements, fixtures and equipment
which become part of or are attached or affixed to the Leased Premises,
including walls, wall coverings and floor coverings, but excluding trade
fixtures, furniture and furnishings or other personal property. In the event the
cost of tenant improvements exceeds the cost of tenant improvement Allowance the
excess shall be paid by Tenant within thirty (30) days of Tenant's receipt of
Landlord's notice.
<PAGE> 2
3. Tenant shall have the option to renew the Agreement for one (1) five
(5) year term provided that Tenant gives written notice to Landlord of its
intention to renew at least one hundred eighty (180) days prior to the end of
the then current term of the Lease. The Extended Term shall be on the same terms
and conditions as the initial term of the Agreement, except as expressly
provided herein to the contrary with respect to Base Rent and except for such as
are, by their terms, inapplicable to an Extended Term.
The Base Rental for the Extended Term shall increase at a rate of seven
percent (7%) above the ending rate for the preceding term, payable in monthly
installments on or before the first day of each calendar month in the Extended
Term.
It is expressly understood that Tenant shall have no option to extend
the term of the Agreement for the Extended Term if at the time of such attempted
exercise of the Extended Term the Agreement is not then in full force and effect
and if Tenant is then in default of any terms and conditions of the Agreement
beyond any applicable notice and cure period provided for herein.
4. Landlord and Tenant hereby agree to cooperate with each other in the
construction of 10 to 12 parking spaces ("Additional Parking") to be added to
the existing parking area per the attached plan marked Exhibit "A". The cost of
constructing the Additional Parking shall be paid by Landlord.
5. Landlord has agreed to renovate the landscaping and sprinkler
system, at Landlord's sole cost and expense per the attached plan marked Exhibit
"B" and to construct a new storefront entrance to the Premises on the Meca Way
side of the Building, per the attached plan marked Exhibit "C".
6. Landlord agrees to provide preventive maintenance on the HVAC system
for the Leased Premises, at its sole cost, provided that Landlord shall not have
any obligation to make any corrections, repairs or replacements to the systems.
7. Except as expressly modified by this Second Amendment, all
provisions, terms and conditions of the Agreement shall remain in full force and
effect.
8. In the event a provision of this Second Amendment conflicts with a
provision of the Agreement, the Second Amendment shall supersede and control.
9. All terms and phrases used herein shall have the same meaning as
assigned to them in the Agreement.
10. This Second Amendment shall not be of any legal effect or
consequence unless signed by Landlord and Tenant, and once signed by Landlord
and Tenant it shall be binding upon and inure to the benefit of Landlord,
Tenant, and their respective legal representatives, successors and assigns.
11. This Second Amendment has been executed and shall be construed
under the laws of the State of Georgia.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have caused this Second Amendment
to be executed under seal and delivered as of the day and year first above
written.
LANDLORD:
Signed, sealed and delivered
in the presence of: WEEKS REALTY, L.P.,
a Georgia limited partnership
/s/ Kelly A. Kinnery
- ----------------------------------
Witness By: Weeks GP Holdings, Inc.,
a Georgia corporation,
/s/ Stephanie Pongetti its sole general partner
- ----------------------------------
Notary Public
By: /s/ Forrest Robinson
-------------------------------
Name: Forrest Robinson
-----------------------------
Its: President/C.O.O.
------------------------------
[SEAL]
TENANT:
Signed, sealed and delivered QUADRAM CORPORATION
in the presence of:
/s/ Sonja Lee By: /s/ J. L. Strange
- ---------------------------------- -------------------------------
Witness Name: J. L. Strange
-----------------------------
Its: President
/s/ Sherry L. Wilhelm ------------------------------
- ----------------------------------
Notary Public
ATTEST:
By: /s/ Bonnie Herron
-------------------------------
Name: Bonnie Herron
-----------------------------
Its: Secretary
------------------------------
[Corporate Seal]
<PAGE> 1
EXHIBIT 10.5
Form of Promissory Note
PROMISSORY NOTE
Principal Amount: $__________ Atlanta, Georgia
July 1, 1997
FOR VALUE RECEIVED, Intelligent Systems Corporation, a Georgia
corporation (hereinafter called "Maker") promises to pay to ____________________
(hereinafter called "Holder"), at _____________________________________________,
or at such other place as Holder may request, the principal sum of
___________________ Dollars ($_________), plus simple interest accruing from the
date hereof on the unpaid principal balance at eight and one/half percent (8.5%)
per annum. The principal shall be payable in three equal installments on July 1,
1998, July 1, 1999 and July 1, 2000. Interest on the outstanding principal shall
be payable quarterly on January 1, April 1, July 1 and October 1 of each year
beginning October 1, 1997 as long as any principal shall remain outstanding.
Principal and all interest shall be paid in lawful money of the United States of
America. If the due date for any payment of principal or interest falls on a
weekend or federal holiday, such payment shall be due the next business day.
Maker may, at its discretion, prepay this Note, in whole or in part,
without penalty or premium, from time to time. Any payment under this Note shall
be applied first to the discharge of any interest accrued and unpaid at the
time, and the balance, if any, shall be applied to installments of principal in
the order designated by Maker at the time of prepayment.
This Note is subject to the terms and conditions of that certain Stock
Purchase Agreement dated as of July 1, 1997, between Maker, the "Shareholders"
identified therein including Holder, and Q.S., Inc. (the "Purchase Agreement").
Capitalized terms used herein and not herein defined shall have the meanings set
forth in the Purchase Agreement. In the event of any conflict between the terms
of this Note and the Purchase Agreement, the Purchase Agreement shall control.
Amounts payable under this Note are subject to certain setoff rights under the
Purchase Agreement. If QS consummates an SEC-registered public offering of its
common stock or of the common stock of a successor to the QS Business that
engages in the same business as QS, all principal and interest outstanding under
this Note shall be due and payable by Maker thirty (30) days thereafter.
This Note shall be governed by the laws of Georgia, USA. This Note
shall not be transferred or assigned by Holder without Maker's express prior
written consent.
If all or any portion of the indebtedness evidenced hereby shall be
collected by or through a legal representative or agent, Holder shall be
entitled to collect from Maker all costs of collection, including reasonable
legal fees, actually and reasonably incurred by Holder.
PRESENTMENT, DEMAND FOR PAYMENT, PROTEST, NOTICE OF PROTEST OR
DISHONOR, AND ALL OTHER NOTICES ARE HEREBY WAIVED BY MAKER.
1
<PAGE> 2
IN WITNESS WHEREOF, the undersigned has executed this Note, as Maker on
the day and year first written above.
MAKER:
INTELLIGENT SYSTEMS CORPORATION
By:
---------------------------
Its:
--------------------------
2
<PAGE> 1
EXHIBIT 10.6
NATIONSBANK, N.A.
LOAN AGREEMENT
This Loan Agreement (the "Agreement") dated as of February 17, 1998, by
and between NationsBank, N.A., a national banking association ("Bank") and the
Borrower described below.
In consideration of the Loan or Loans described below and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, Bank and Borrower agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any other
terms defined herein, the following terms shall have the meaning set forth with
respect thereto:
A. BORROWER: Intelligent Systems Corporation, a Georgia
corporation
B. BORROWER'S ADDRESS:
4355 Shackleford Road
Norcross, Georgia 30093
C. CURRENT ASSETS. Current Assets means the aggregate
amount of all of Borrower's assets which would, in accordance with GAAP,
properly be defined as current assets.
D. HAZARDOUS MATERIALS. Hazardous Materials include all
materials defined as hazardous materials or substances under any local, state or
federal environmental laws, rules or regulations, and petroleum, petroleum
products, oil and asbestos.
E. LOAN. Any loan described in Section 2 hereof and any
subsequent loan which states that it is subject to this Loan Agreement.
F. LOAN DOCUMENTS. Loan Documents means this Loan
Agreement and any and all promissory notes executed by Borrower in favor of Bank
that certain Negative Pledge Agreement from Borrower in favor of Lender dated as
of February 17, 1998, and all other documents, instruments, guarantees,
certificates and agreements executed and/or delivered by Borrower, any guarantor
or third party in connection with any Loan.
G. ACCOUNTING TERMS. All accounting terms not
specifically defined or specified herein shall have the meanings generally
attributed to such terms under generally accepted accounting principles
("GAAP"), as in effect from time to time, consistently applied, with respect to
the financial statements referenced in Section 3.H. hereof.
2. LOANS.
A. LOAN. Bank hereby agrees to make (or has made) one or
more loans to Borrower in the aggregate principal face amount of S1,000,000.00.
The obligation to repay the loans is evidenced by a promissory note or notes
dated February 17, 1998, (the promissory note together with any and all
renewals, extensions or rearrangements thereof being hereafter collectively
referred to as the "Note") having a maturity date, repayment terms and interest
rate as set forth in the Note.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Bank as follows:
A. GOOD STANDING. Borrower is a corporation, duly
organized, validly existing and in good standing under the laws of Georgia and
has the power and authority to own its property and to carry on its business in
each jurisdiction in which Borrower does business.
<PAGE> 2
B. AUTHORITY AND COMPLIANCE. Borrower has full power and
authority to execute and deliver the Loan Documents and to incur and perform the
obligations provided for therein, all of which have been duly authorized by all
proper and necessary action of the appropriate governing body of Borrower. No
consent or approval of any public authority or other third party is required as
a condition to the validity of any Loan Document, and Borrower is in compliance
with all laws and regulatory requirements to which it is subject.
C. BINDING AGREEMENT. This Agreement and the other Loan
Documents executed by Borrower constitute valid and legally binding obligations
of Borrower, enforceable in accordance with their terms.
D. LITIGATION. There is no proceeding involving Borrower
pending or, to the knowledge of Borrower, threatened before any court or
governmental authority, agency or arbitration authority, except as disclosed to
Bank in writing and acknowledged by Bank prior to the date of this Agreement.
E. NO CONFLICTING AGREEMENTS. There is no charter,
bylaw, stock provision, partnership agreement or other document pertaining to
the organization, power or authority of Borrower and no provision of any
existing agreement, mortgage, indenture or contract binding on Borrower or
affecting its property, which would conflict with or in any way prevent the
execution, delivery or carrying out of the terms of this Agreement and the other
Loan Documents.
F. OWNERSHIP OF ASSETS. Borrower has good title to its
assets, and its assets are free and clear of liens, except those granted to Bank
and as disclosed to Bank in writing prior to the date of this Agreement.
G. TAXES. All taxes and assessments due and payable by
Borrower have been paid or are being contested in good faith by appropriate
proceedings and the Borrower has filed all tax returns which it is required to
file.
H. FINANCIAL STATEMENTS. The financial statements of
Borrower heretofore delivered to Bank have been prepared in accordance with GAAP
applied on a consistent basis throughout the period involved and fairly present
Borrower's financial condition as of the date or dates thereof, and there has
been no material adverse change in Borrower's financial condition or operations
since February 17, 1998. All factual information furnished by Borrower to Bank
in connection with this Agreement and the other Loan Documents is and will be
accurate and complete on the date as of which such information is delivered to
Bank and is not and will not be incomplete by the omission of any material fact
necessary to make such information not misleading.
I. PLACE OF BUSINESS. Borrower's chief executive office
is located at 4355 Shackleford Road, Norcross, Georgia 30093
J. ENVIRONMENTAL The conduct of Borrower's business
operations and the condition of Borrower's property does not and will not
violate any federal laws, rules or ordinances for environmental protection,
regulations of the Environmental Protection Agency, any applicable local or
state law, rule, regulation or rule of common law or any judicial interpretation
thereof relating primarily to the environment or Hazardous Materials.
K. CONTINUATION OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made under this Agreement shall be deemed to be
made at and as of the date hereof and at and as of the date of any advance under
any Loan.
<PAGE> 3
4. AFFIRMATIVE COVENANTS. Until full payment and performance of
all obligations of Borrower under the Loan Documents, Borrower will, unless Bank
consents otherwise in writing (and without limiting any requirement of any other
Loan Document):
A. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows, determined in accordance with GAAP applied on a consistent
basis throughout the period involved
B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain
a system of accounting satisfactory to Bank and in accordance with GAAP applied
on a consistent basis throughout the period involved, permit Bank's officers or
authorized representatives to visit and inspect Borrower's books of account and
other records at such reasonable times and as often as Bank may desire, and pay
the reasonable fees and disbursements of any accountants or other agents of Bank
selected by Bank for the foregoing purposes. Unless written notice of another
location is given to Bank, Borrower's books and records will be located at
Borrower's chief executive office set forth above. All financial statements
called for below shall be prepared in form and content acceptable to Bank and by
independent certified public accountants acceptable to Bank.
In addition, Borrower will furnish to Bank audited financial statements of
Borrower for each fiscal year of Borrower, within 120 days after the close of
each such fiscal year.
C. INSURANCE. Maintain insurance with responsible
insurance companies on such of its properties, in such amounts and against such
risks as is customarily maintained by similar businesses operating in the same
vicinity, specifically to include fire and extended coverage insurance covering
all assets, business interruption insurance, workers compensation insurance and
liability insurance, all to be with such companies and in such amounts as are
satisfactory to Bank and providing for at least 30 days prior notice to Bank of
any cancellation thereof. Satisfactory evidence of such insurance will be
supplied to Bank prior to funding under the Loan(s) and 30 days prior to each
policy renewal.
D. EXISTENCE AND COMPLIANCE. Maintain its existence,
good standing and qualification to do business, where required and comply with
all laws, regulations and governmental requirements including, without
limitation, environmental laws applicable to it or to any of its properly,
business operations and transactions.
E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in
writing of (i) any condition, event or act which comes to its attention that
would or might materially adversely affect Borrower's financial condition or
operations or Bank's rights under the Loan Documents, (ii) any litigation filed
by or against Borrower, (iii) any event that has occurred that would constitute
an event of default under any Loan Documents and (iv) any uninsured or partially
uninsured loss through fire, theft, liability or property damage in excess of an
aggregate of $100,000.
F. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes,
assessments and other obligations, including, but not limited to taxes, costs or
other expenses arising out of this transaction, as the same become due and
payable, except to the extent the same are being contested in good faith by
appropriate proceedings in a diligent manner.
G. MAINTENANCE. Maintain all of its tangible property in
good condition and repair and make all necessary replacements thereof, and
preserve and maintain all licenses, trademarks, privileges, permits, franchises,
certificates and the like necessary for the operation of its business.
H. ENVIRONMENTAL. Immediately advise Bank in writing of
(i) any and all enforcement, cleanup, remedial, removal, or other governmental
or regulatory actions instituted, completed or threatened pursuant to any
applicable federal, state, or local laws, ordinances or regulations relating to
any Hazardous Materials affecting Borrower's business operations; and (ii) all
claims made or threatened by any third party against Borrower relating to
damages, contribution, cost recovery, compensation, loss or
<PAGE> 4
injury resulting from any Hazardous Materials. Borrower shall immediately notify
Bank of any remedial action taken by Borrower with respect to Borrower's
business operations. Borrower will not use or permit any other party to use any
Hazardous Materials at any of Borrower's places of business or at any other
property owned by Borrower except such materials as are incidental to Borrower's
normal course of business, maintenance and repairs and which are handled in
compliance with all applicable environmental laws. Borrower agrees to permit
Bank, its agents, contractors and employees to enter and inspect any of
Borrower's places of business or any other property of Borrower at any
reasonable times upon three (3) days prior notice for the purposes of conducting
an environmental investigation and audit (including taking physical samples) to
insure that Borrower is complying with this covenant and Borrower shall
reimburse Bank on demand for the costs of any such environmental investigation
and audit. Borrower shall provide Bank, its agents, contractors, employees and
representatives with access to and copies of any and all data and documents
relating to or dealing with any Hazardous Materials used, generated,
manufactured, stored or disposed of by Borrower's business operations within
five (5) days of the request therefore.
5. NEGATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will not, without the
prior written consent of Bank (and without limiting any requirement of any other
Loan Documents):
A. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or
otherwise dispose of or transfer any assets, except in the normal course of its
business, or enter into any merger or consolidation, or transfer control or
ownership of the Borrower or form or acquire any subsidiary.
B. LIENS. Grant, suffer or permit any contractual or
noncontractual lien on or security interest in its assets. except in favor of
Bank, or fail to promptly pay when due all lawful claims, whether for labor,
materials or otherwise.
C. EXTENSIONS OF CREDIT. Make or permit any subsidiary
to make, any loan or advance to any person or entity, or purchase or otherwise
acquire, or permit any subsidiary to purchase or other wise acquire, any capital
stock, assets, obligations, or other securities of, make any capital
contribution to, or otherwise. except in the ordinary course of business, invest
in or acquire any interest in any entity, or participate as a partner or joint
venturer with any person or entity, except for the purchase of direct
obligations of the United States or any agency thereof with maturities of less
than one year.
D. BORROWINGS. Create, incur, assume or become liable in
any manner for any indebtedness (for borrowed money, deferred payment for the
purchase of assets, lease payments, as surety or guarantor for the debt for
another, or otherwise) other than to Bank, except for normal trade debts
incurred in the ordinary course of Borrower's business, and except for existing
indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the
date of this Agreement.
E. CHARACTER OF BUSINESS. Change the general character
of business as conducted at the date hereof, or engage in any type of business
not reasonably related to its business as presently conducted.
F. MANAGEMENT CHANGE. Make any substantial change in its
present executive or management personnel.
6. DEFAULT. Borrower shall be in default under this Agreement and
under each of the other Loan Documents if it shall default in the payment of any
amounts due and owing under the Loan or should it fail to timely and properly
observe, keep or perform any term, covenant, agreement or condition in any Loan
Document or in any other loan agreement, promissory note, security agreement,
deed of trust, deed to secure debt, mortgage, assignment or other contract
securing or evidencing payment of any indebtedness of Borrower to Bank or any
affiliate or subsidiary of NationsBank Corporation.
<PAGE> 5
7. REMEDIES UPON DEFAULT. If an event of default shall occur,
Bank shall have all rights, powers and remedies available under each of the Loan
Documents as well as all rights and remedies available at law or equity.
8. NOTICES. All notices, requests or demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to the other party at the following
address:
Borrower:
Intelligent Systems Corporation
4355 Shackleford Road
Norcross, Georgia 30093
Fax No.: 770-381-2808
Bank:
NationsBank, N.A. - Technologies Group
600 Peachtree Street, 19th Floor
Atlanta, Georgia 30308
Fax No.: (404) 607-6338
or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or made
as follows:
A. If sent by mail, upon the earlier of the date of
receipt or five (5) days after deposit in the U.S. Mail, first class postage
prepaid;
B. If sent by any other means, upon delivery.
9. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all costs and expenses,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of Bank's in-house counsel if permitted by applicable law),
incurred by Bank in connection with (a) negotiation and preparation of this
Agreement and each of the Loan Documents, and (b) all other costs and attorneys'
fees incurred by Bank for which Borrower is obligated to reimburse Bank in
accordance with the terms of the Loan Documents.
10. MISCELLANEOUS. Borrower and Bank further covenant and agree as
follows, without limiting any requirement of any other Loan Document:
A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right
granted to Bank under any Loan Document, or allowed it by law or equity shall be
cumulative of each other and may be exercised in addition to any and all other
rights of Bank, and no delay in exercising any right shall operate as a waiver
thereof, nor shall any single or partial exercise by Bank of any right preclude
any other or future exercise thereof or the exercise of any other right.
Borrower expressly waives any presentment, demand, protest or other notice of
any kind, including but not limited to notice of intent to accelerate and notice
of acceleration. No notice to or demand on Borrower in any case shall, of
itself, entitle Borrower to any other or future notice or demand in similar or
other circumstances.
B. APPLICABLE LAW. This Loan Agreement and the rights
and obligations of the parties hereunder shall be governed by and interpreted in
accordance with the laws of Georgia and applicable United States federal law.
C. AMENDMENT. No modification, consent, amendment or
waiver of any provision of this Loan Agreement, nor consent to any departure by
Borrower therefrom, shall be effective unless the same shall be in writing and
signed by an officer of Bank, and then shall be effective only in the specified
<PAGE> 6
instance and for the purpose for which given. This Loan Agreement is binding
upon Borrower, its successors and assigns, and inures to the benefit of Bank,
its successors and assigns; however, no assignment or other transfer of
Borrower's rights or obligations hereunder shall be made or be effective without
Bank's prior written consent, nor shall it relieve Borrower of any obligations
hereunder. There is no third party beneficiary of this Loan Agreement.
D. DOCUMENTS. All documents, certificates and other
items required under this Loan Agreement to be executed and/or delivered to Bank
shall be in form and content satisfactory to Bank and its counsel.
E. PARTIAL INVALIDITY. The unenforceability or
invalidity of any provision of this Loan Agreement shall not affect the
enforceability or validity of any other provision herein and the invalidity or
unenforceability of any provision of any Loan Document to any person or
circumstance shall not affect the enforceability or validity of such provision
as it may apply to other persons or circumstances.
F. INDEMNIFICATION. Notwithstanding anything to the
contrary contained in Section 10(G), Borrower shall indemnify, defend and hold
Bank and its successors and assigns harmless from and against any and all
claims, demands, suits, losses, damages, assessments, fines, penalties, costs or
other expenses (including reasonable attorneys' fees and court costs) arising
from or in any way related to any of the transactions contemplated hereby,
including but not limited to actual or threatened damage to the environment,
agency costs of investigation, personal injury or death, or property damage, due
to a release or alleged release of Hazardous Materials, arising from Borrower's
business operations, any other property owned by Borrower or in the surface or
ground water arising from Borrower's business operations, or gaseous emissions
arising from Borrower's business operations or any other condition existing or
arising from Borrower's business operations resulting from the use or existence
of Hazardous Materials, whether such claim proves to be true or false. Borrower
further agrees that its indemnity obligations shall include, but are not limited
to, liability for damages resulting from the personal injury or death of an
employee of the Borrower, regardless of whether the Borrower has paid the
employee under the workmen' s compensation laws of any state or other similar
federal or state legislation for the protection of employees. The term "property
damage" as used in this paragraph includes, but is not limited to, damage to any
real or personal property of the Borrower, the Bank, and of any third parties.
The Borrower's obligations under this paragraph shall survive the repayment of
the Loan and any deed in lieu of foreclosure or foreclosure of any Deed to
Secure Debt, Deed of Trust, Security Agreement or Mortgage securing the Loan.
G. SURVIVABILITY. All covenants, agreements,
representations and warranties made herein or in the other Loan Documents shall
survive the making of the Loan and shall continue in full force and effect so
long as the Loan is outstanding or the obligation of the Bank to make any
advances under the Line shall not have expired.
11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE
PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO
THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S/ENDISPUTE OR ANY
SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE
EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO
THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY
OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM
<PAGE> 7
TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN
THE COUNTY OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS
INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT
AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION
PROVISION SHALL BE DEEMED TO (1) LIMIT THE APPLICABILITY OF ANY OTHERWISE
APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS
INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION
AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW;
OR (111) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH
AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL
PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY
REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR
THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES
BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT
PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF
SELF HELP; REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR
FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF
THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE
THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
12. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed under seal by their duly authorized representatives as of the date
first above written.
BORROWER: BANK: NationsBank, N.A.
By: /s/ Henry H. Birdsong (Seal) By: /s/ Deborah W. Levin
----------------------------- -----------------------------
(Seal)
Name: Henry H. Birdsong Name: Deborah W. Levin
Title: Chief Financial Officer Title: Vice President
[Corporate Seal]
Attest: /s/ Bonnie L. Herron (Seal)
-------------------------
Name: Bonnie Herron
---------------------------
Title: VP/Sec
--------------------------
<PAGE> 1
EXHIBIT 10.7
Customer #3620179
Date: FEBRUARY 17, 1998
PLEDGE AGREEMENT
BANK/SECURED PARTY:
NationsBank, N.A.
Banking Center: High Tech/Healthcare
600 Peachtree Street, N.E.
Atlanta, Georgia 30308
County: Fulton
(Name and street address including county)
PLEDGOR(S)/DEBTOR(S):
Intelligent Systems Corporation
4355 Shackleford Road
Norcross, Georgia 30093
County: Gwinnett
(Name and street address including county)
Pledgor/Debtor is: CORPORATION
Address is Pledgor's/Debtor's: 4355 SHACKLEFORD ROAD NORCROSS, GEORGIA 30093
1. SECURITY INTEREST. For good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Pledgor/Debtor (hereinafter referred
to as "Pledgor") pledges, assigns and grants to Bank a security interest and
lien in the Collateral (hereinafter defined) to secure the payment and the
performance of the Obligation (hereinafter defined).
2. COLLATERAL. The security interest is granted in the following collateral (the
"Collateral"):
A. DESCRIPTION OF COLLATERAL.
SPECIFIC INVESTMENT PROPERTY/SECURITIES: The following investment property
and/or securities, together with all investment property and/or securities
hereafter delivered to Bank in substitution therefor or in addition thereto: SEE
"EXHIBIT A" ATTACHED HERETO MADE A PART HEREOF BY REFERENCE.
It is contemplated by the parties that Pledgor may provide additional collateral
from time to time hereunder as additional security for the Obligation, and may
from time to time with the prior written consent of Bank sell or otherwise
dispose of any Collateral provided that Pledgor provides Bank with substitute
collateral. At the time of each addition or substitution of Collateral, the
securities added or substituted shall be identified on a Pledge Certificate,
substantially in the form of Schedule II attached hereto (the "Pledge
Certificate"), and delivered to Bank. Bank has no obligation to make any
advances requested in connection therewith unless (i) such additional and/or
substituted Collateral is satisfactory to Bank and (ii) the perfected security
interest granted to Bank therein is completed to the satisfaction of Bank. All
such additional and/or substituted Collateral shall be Collateral for purposes
of this Agreement, and shall secure the Obligation in the same manner as the
Collateral for which it is added to and/or,
B. PROCEEDS. All additions, substitutes and replacements for and proceeds of
the above Collateral (including all income and benefits resulting from any of
the above, such as dividends payable or distributable in cash, property or
stock, interest, premium and principal payments; redemption proceeds and
subscription rights; and shares or other proceeds of conversions or splits of
any securities in the Collateral). Any investment property and/or securities
received by Pledgor, which shall comprise such additions, substitutes and
replacements for, or proceeds of, the Collateral, shall be held in trust for
Bank and shall be delivered immediately to Bank. Any cash proceeds shall be held
in trust for Bank and upon request shall be delivered immediately to Bank.
C. DEPOSIT ACCOUNTS. The balance of every deposit account of Pledgor
maintained with Bank and any other claim of Pledgor against Bank, now or
hereafter existing, liquidated or unliquidated, and all money, instruments,
investment property, securities, documents, chattel paper, credits, claims,
demands, income, and any other property, rights and Interests of Pledgor which
at any time shall come into the possession or custody or under the control of
Bank or any of its agents or affiliates, for any purpose, and the proceeds of
any thereof. Bank shall be deemed to have possession of any of the Collateral in
transit to or set apart for it or any of its agents or affiliates.
3. OBLIGATION.
A. DESCRIPTION OF OBLIGATION. The following obligations ("Obligation") are
secured by this Agreement:
i. ALL DEBT: All debts, obligations, liabilities and agreements of Pledgor
and/or N/A to Bank, now or hereafter existing, arising directly or indirectly
between Pledgor and Bank whether absolute or contingent, joint or several,
secured or unsecured, due or not due, liquidated or unliquidated, arising by
operation of law or otherwise, and all renewals, extensions and rearrangements
of any of the above;
ii. All costs and expenses incurred by Bank, including attorney's fees, to
obtain, preserve, perfect, enforce and defend this Agreement and maintain,
preserve, collect and realize upon the Collateral, together with interest
thereon at the highest rate allowed by law, or if none, 25% per annum;
iii. All amounts which may be owed to Bank pursuant to all other loan
documents executed in connection with the indebtedness described in subpart i.
above.
In the event any amount paid to Bank on any Obligation is subsequently recovered
from Bank in or as a result of any bankruptcy, insolvency or fraudulent
conveyance proceeding involving an obliger of the Obligation other than Pledgor,
Pledgor shall be liable to Bank for the amounts so recovered up to the fair
market value of the Collateral whether or not the Collateral has been released
or the security interest terminated. In the event the Collateral has been
released or the security interest terminated, the fair market value of the
Collateral shall be determined, at Bank's option, as of the date the Collateral
was released, the security interest terminated, or said amounts were recovered.
B. Use of Proceeds. The proceeds of any indebtedness or obligation secured by
the Collateral "WILL NOT BE" used directly or indirectly to purchase or carry
any "margin stock" as that term is defined in Regulation U of the Board of
1-
<PAGE> 2
Governors of the Federal Reserve System, or extend credit to or invest in other
parties for the purpose of purchasing or carrying any such "margin stock, or to
reduce or retire any indebtedness incurred for such purpose or otherwise in a
manner which would violate Regulations G, T or U.
4. PLEDGOR'S WARRANTIES. Pledgor hereby represents and warrants to Bank as
follows:
A. FINANCING STATEMENTS. Except as may be noted by schedule attached hereto
and incorporated herein by reference, no financing statement covering the
Collateral is or will be on file in any public office, except the financial
statements relating to this security interest, and no security interest, other
than the one herein created, has attach or been perfected in the Collateral or
any part thereof.
B. OWNERSHIP. Pledgor owns, or will use the proceeds of any loans by Bank to
become the owner of, the Collateral free from any set off, claim, restriction,
lien, security interest or encumbrance except liens for taxes not yet due and
payable and the security interest hereunder.
C. POWER AND AUTHORITY. Pledgor has full power and authority to make this
Agreement, and all necessary consents and approvals of any persons, entities,
governmental or regulatory authorities and securities exchanges have been
obtained to effectuate the validity of this Agreement.
5. PLEDGOR'S COVENANTS. Until full payment and performance of all of the
Obligation and termination or expiration of any obligation or commitment of Bank
to make advances or loans to Pledgor, unless Bank otherwise consents in writing:
A. OBLIGATION AND THIS AGREEMENT. Pledgor shall perform all of its agreements
herein and in any other agreements between it and Bank.
B. OWNERSHIP OF COLLATERAL. Pledgor shall defend the Collateral against all
claims and demands of all person at any time claiming any interest therein
adverse to Bank. Pledgor shall keep the Collateral free from all liens and
security interests except those for taxes not yet due and payable and the
security interest hereby created.
C. BANK'S COSTS. Pledgor shall pay all costs necessary to obtain, preserve,
perfect, defend and enforce the security interest created by this Agreement,
collect the Obligation, and preserve, defend, enforce and collect the
Collateral, including but not limited to taxes, assessments, reasonable
attorney's fees, legal expenses and expenses of sales. Whether the Collateral is
or is not in Bank's possession, and without any obligation to do so and without
waiving Pledgor's default for failure to make any such payment, Bank at its
option may pay any such costs and expenses and discharge encumbrances on the
Collateral, and such payments shall be a part of the Obligation and bear
interest at the rate set out in the Obligation. Pledgor agrees to reimburse Bank
on demand for any costs so incurred.
D. INFORMATION AND INSPECTION. Pledgor shall (i) promptly furnish Bank any
information with respect to the Collateral requested by Bank; (ii) allow Bank or
its representatives to inspect and copy, or furnish Bank or its representatives
with copies of, all records relating to the Collateral and the Obligation; and
(iii) promptly furnish Bank or its representatives with any other information
Bank may reasonably request.
E. ADDITIONAL DOCUMENTS. Pledgor shall sign and deliver any papers furnished
by Bank which are necessary or desirable in the judgment of Bank to obtain,
maintain and perfect the security interest hereunder and to enable Bank to
comply with any federal or state law in order to obtain or perfect Bank's
interest in the Collateral or to obtain proceeds of the Collateral.
F. NOTICE OF CHANGES. Pledgor shall notify Bank immediately of (i) any
material change in the Collateral (ii) a change in Pledgor's residence or
location, (iii) a change in any matter warranted or represented by Pledgor in
this Agreement, or in any of the loan documents relating to the Obligation or
furnished to Bank pursuant to this Agreement, and (iv) the occurrence of an
Event of Default as defined herein.
G. POSSESSION OF COLLATERAL. Pledgor shall deliver a copy of this Agreement
(or other notice acceptable to Bank) to any Broker, financial intermediary, or
any other person in possession of any of the Collateral or on whose books the
interest of Pledgor in the Collateral appears, and such delivery shall
constitute notice to such person of Bank's security interest in the Collateral
and shall constitute Pledgor's instruction to such person to note Bank's
security interest on their books and records, or deliver to Bank certificates or
other evidence of the Collateral promptly upon Bank's request. Pledgor shall
deliver all investment securities and other instruments and documents which are
a part of the Collateral and in Pledgor's possession to Bank immediately, or if
hereafter acquired, immediately following acquisition, in a form suitable for
transfer by delivery or accompanied by duly executed instruments of transfer or
assignment in blank with signatures appropriately guaranteed in form and
substance suitable to Bank.
H. CHANGE OF NAME/STATUS. Pledgor shall not change its name, change its
corporate status, use any trade name or engage in any business not reasonably
related to its business as presently conducted.
I. POWER OF ATTORNEY. Pledgor appoints Bank and any officer thereof as
Pledgor's attorney-in-fact with full power in Pledgor's name and on Pledgor's
behalf to do every act which Pledgor is obligated to do or may be required to do
hereunder; however, nothing in this paragraph shall be construed to obligate
Bank to take any action hereunder nor shall Bank be liable to Pledgor for
failure to take any action hereunder. This appointment shall be deemed a power
coupled with an interest and shall not be terminable as long as the Obligation
is outstanding and shall not terminate on the disability or incompetence of
Pledgor. Without limiting the generality of the foregoing, Bank shall have the
right and power to receive, indorse and collect all checks and other orders for
the payment of money made payable to Pledgor representing any dividend, interest
payment or other distribution payable in respect of the Collateral or any part
thereof.
J. OTHER PARTIES AND OTHER COLLATERAL. No renewal or extensions of or any
other indulgence with respect to the Obligation or any part thereof, no
modification of the document(s) evidencing the Obligation, no release of any
security, no release of any person (including any maker, indorser, guarantor or
surety) liable on the Obligation, no delay in enforcement of payment, and no
delay or omission or lack of diligence or care in exercising any right or power
with respect to the Obligation or any security therefor or guaranty thereof or
under this Agreement shall in any manner impair or affect the rights of Bank
under any law, hereunder, or under any other agreement pertaining to the
Collateral Bank need not file suit or assert a claim for personal judgment
against any person for any part of the Obligation or set to realize upon any
other security for the Obligation, before foreclosing or otherwise realizing
upon the Collateral. Pledgor waives any right that can be waived to the benefit
of or to require or control application of any other security or proceeds
thereof, and agrees that Bank shall have no duty or obligation to Pledgor to
apply to the Obligation any such other security or proceeds thereof.
K. WAIVERS BY PLEDGOR. Pledgor waives notice of the creation, advance,
increase, existence, extension or renewal of, and of any indulgence with respect
to, the Obligation; waives presentment, demand, notice of dishonor, and protest;
waives notice of the amount of the Obligation outstanding at any time, notice of
any change in financial condition of any person liable for the Obligation or any
part thereof, notice of any Event of Default, and all other
2-
<PAGE> 3
notices respecting the Obligation; and agrees that maturity of the Obligation
and any part thereof may be accelerated, extended or renewed one or more times
by Bank in its discretion, without notice to Pledgor. Pledgor waives any right
to require that any action be brought against any other person or to require
that resort be had to any other security or to any balance of any deposit
account. Pledgor further waives any right of subrogation or to enforce any right
of action against any other Pledgor until the Obligation is paid in full.
L. WAIVER OF NOTICE FOR IMMEDIATE WRIT OF POSSESSION. Pledgor hereby
acknowledges that the indebtedness arises out of a 'commercial transaction" as
that term is defined in the O.C.G.A. Sec. 44-12-260(1) concerning foreclosure of
mortgages on personally, and agrees that if a default has occurred and is
continuing, Bank shall have the right to an immediate writ of possession without
notice of hearing, and Pledgor hereby knowingly and intelligently waives any and
all rights it may have to any notice and posting of a bond prior to seizure by
Bank, its transferees, assigns or successors in interest of the Collateral or
any portion thereof. The foregoing is intended by Pledgor as a "waiver" as that
term is defined in the O.C.G.A. Sec 44-14-260 (3) relating to foreclosure of
mortgages on personalty.
M. ADDITIONAL PROVISIONS. If one or more Riders to this Agreement are
executed by Pledgor, the covenants and provisions of each such Rider shall be
incorporated by reference into this Agreement.
RULE 144 RIDER: The Collateral is comprised in whole or in part of control
and/or restricted securities, which shall be subject to the additional terms and
provisions described on the Rule 144 Rider attached hereto and made a part
hereof for all purposes.
6. MAINTENANCE OF COLLATERAL.
A. MAINTENANCE OF COLLATERAL. At all times during the term of the Agreement,
Pledgor agrees to maintain as security for the Obligation Collateral of a type
described on Schedule I with an Adjusted Collateral Value (as determined herein)
in excess of the unpaid principal balance of the Obligation. The Adjusted
Collateral Value shall be determined by multiplying the Collateral Value As
defined in subparagraph B below) by the Margin Call Percentage shown on Schedule
I for the type of Collateral securing the Obligation.
No advance requested by Pledgor shall be made to Pledgor if the sum of (i)
the outstanding principal balance of the Obligation plus (ii) the amount of the
advance requested, equals or exceeds the sum of the amounts determined by
multiplying the Collateral Value by the Original Advance Percentage for each
type of Collateral securing the Obligation.
B. VALUE OF COLLATERAL. The "Collateral Value" of Collateral shall be
determined at any given time as follows:
i. If stock, the Collateral Value shall be determined by multiplying (i)
the per share price of such stock at the most recent close of trading on a
trading exchange for such stock, times (ii) the number of shares of such stock
held by Bank as Collateral. In the event that stock held as Collateral is not
traded on an exchange, the Collateral Value of such stock shall be determined by
obtaining the quoted value of such stock from a reputable brokerage firm
selected by Bank. If no such quote is available, the value will be determined by
Bank in its sole discretion.
ii. If a mutual fund, the Collateral Value shall be determined by
multiplying (i) the most recent per share asset value of such mutual fund
obtained from the Wall Street Journal, times (ii) the number of shares of such
mutual fund held by Bank as Collateral. In the event that such net asset value
is not available in the Wall Street Journal, the Collateral Value shall be the
value quoted to Bank by a reputable brokerage firm selected by Bank.
iii. If corporate bonds, the Collateral Value shall be determined from the
most recent closing price for such bonds obtained from the Wall Street Journal.
If such closing price is not available in the Wall Street Journal, the
Collateral Value shall be the value quoted to Bank by a reputable brokerage firm
selected by Bank.
iv. If government or agency obligations or bonds, the Collateral Value
shall be determined from the most recent closing bid price for such bonds
obtained from the Wall Street Journal. If such closing bid price is not
available in the Wall Street Journal, the Collateral Value shall be the value
quoted to Bank by a reputable brokerage firm selected by Bank.
v. If other than stock, mutual funds, corporate bonds, or government or
agency obligations or bonds, the Collateral Value shall be determined by the
Bank in its sole discretion.
C. BREACH OF COLLATERAL MAINTENANCE. Pledgor agrees that the failure to
maintain Collateral with an Adjusted Collateral Value as set forth above shall
constitute an Event of Default under this Agreement. In such event, the Pledgor
shall have two business days from the date Pledgor is notified by Bank (in
writing or orally) of such noncompliance, or such notice is otherwise delivered
to Pledgor, to either pledge additional Collateral satisfactory to Bank, in its
sole discretion, or reduce the unpaid principal balance of the Obligations such
that, in either case, the unpaid principal balance of the Obligation is less
than the sum of the amounts determined by multiplying the Collateral Value by
the Original Advance Percentage shown on Schedule I for each type of Collateral
securing the Obligation. Any reduction in unpaid principal of the Obligation
shall not affect or reduce any future principal payments due except to the
extent such reductions are applied in accordance with the documents evidencing
or securing the Obligation In the event Pledgor fails to comply with the terms
hereof, Bank may, without any further notice of any kind, exercise any of the
following rights and remedies, at Bank's option:
i. The rights and remedies set out in Section 8.B. of this Agreement,
including without limitation the right to accelerate the Obligation and
liquidate the Collateral.
ii. Sell all or any part of the Collateral and apply the proceeds of such
sale to the Obligation to bring the Obligation back into compliance ( that is,
to reduce the unpaid principal of the Obligation such that the unpaid principal
of the Obligation is less than the sum of the amounts determined by multiplying
the Collateral Value by the Original Advance Percentage shown on Schedule I for
each type of Collateral securing the Obligation).
If an Event of Default exists hereunder and the Collateral is declining in value
or threatens to decline speedily in value, Bank shall have no obligation to
notify Pledgor of the failure to maintain Collateral with an Adjusted Collateral
Value as set forth in subparagraph A above or to provide Pledgor with an
opportunity to cure such noncompliance, and in such case Pledgor agrees that
Bank may immediately at Bank's sole option (i) declare amounts due under the
Obligation to be immediately due and payable, and/or (ii) sell all or any part
of the Collateral and apply the proceeds of such Collateral to the Obligation.
D. SALE OR SUBSTITUTION OF COLLATERAL. If no Event of Default has occurred
under this Agreement or would result from such action, Pledgor may (i) sell,
trade, or withdraw any part of the Collateral; or (ii) substitute new Collateral
for existing Collateral, provided that, in either event, the new Collateral
shall be acceptable to Bank in its sole discretion and the unpaid principal
balance of the Obligation shall be less than the sum of the amounts determined
by multiplying the Collateral Value by the Original Advance Percentage for each
type of Collateral securing the Obligation.
3-
<PAGE> 4
7. RIGHTS AND POWERS OF BANK.
A. GENERAL. Bank, before or after default, without liability to Pledgor may:
take control of proceeds, including stock received as dividends or by reason of
stock splits; release the Collateral in its possession to any Pledgor,
temporarily or otherwise; require additional Collateral; reject as
unsatisfactory any property hereafter offered by Pledgor as Collateral; take
control of funds generated by the Collateral, such as cash dividends, interest
and proceeds, and use same to reduce any part of the Obligation and exercise all
other rights which an owner of such Collateral may exercise, except the right to
vote or dispose of the Collateral before an Event of Default; and at any time
transfer any of the Collateral or evidence thereof into its own name or that of
its nominee. Bank shall not be liable for failure to collect any account or
instruments, or for any act or omission on the part of Bank, its officers,
agents or employees, except for its or their own willful misconduct or gross
negligence. The foregoing rights and powers of Bank will be in addition to, and
not a limitation upon, any rights and powers of Bank given by law, elsewhere in
this Agreement, or otherwise.
B. CONVERTIBLE COLLATERAL. Bank may present for conversion any Collateral
which is convertible into any other instrument or investment security or a
combination thereof with cash, but Bank shall not have any duty to present for
conversion any Collateral unless it shall have received from Pledgor detailed
written instructions to that effect at a time reasonably far in advance of the
final conversion date to make such conversion possible.
8. DEFAULT.
A. EVENT OF DEFAULT. An event of default ("Event of Defaults") shall occur
(a) if Pledgor or any other obligor on all or part of the Obligation shall fail
to timely and properly pay or observe, keep or perform any term, covenant,
agreement or condition in this Agreement or in any other agreement between
Pledgor and Bank of between Bank and any other obliger on the Obligation,
including but not limited to any other note or instrument, loan agreement,
security agreement, deed of trust, mortgage, promissory note, assignment or
other agreement or instrument concerning the Obligation; or (b) if Pledgor or
such other obliger shall fail to timely and properly pay or observe, keep or
perform any term, covenant, agreement or condition in any agreement between such
party and any affiliate or subsidiary of NationsBank Corporation.
B. RIGHTS AND REMEDIES. If any Event of Default shall occur, then, in each
and every such case, Bank may without (a) presentment, demand, or protest, (b)
notice of default, dishonor, demand, non-payment, or protest, (c) notice of
intent to accelerate all or any part of the Obligation, (d) notice of
acceleration of all or any part of the Obligation, or (e) notice of any other
kind, all of which Pledgor hereby expressly waives (except for any notice
required under this Agreement, any other loan document or which may not be
waived under applicable law), at any time thereafter exercise and/or enforce any
of the following rights and remedies, at Bank's option:
i. ACCELERATION. The Obligation shall, at Bank's option, become
immediately due and payable, and the obligation, if any, of Bank to permit
further borrowings under the Obligation shall at Bank's option immediately cease
and terminate.
ii. LIQUIDATION OF COLLATERAL. Sell, or instruct any Agent or Broker to
sell, all or any part of the Collateral in a public or private sale, direct any
Agent or Broker to liquidate all or any part of any Account and deliver all
proceeds thereof to Bank, and apply all proceeds to the payment of any or all of
the Obligation in such order and manner as Bank shall, in its discretion,
choose.
iii. UNIFORM COMMERCIAL CODE. All of the rights, powers and remedies of a
secured creditor under the Uniform Commercial Code ("UCC") as adopted in the
jurisdiction to which Bank is subject under this Agreement.
iv. RIGHT OF SET OFF. Without notice or demand to Pledgor, set off and
apply against any and all of the Obligation any and all deposits (general or
special, time or demand, provisional or final) and any other indebtedness at any
time held or owing by Bank or by any of Bank's affiliates or correspondents to
or for the credit of the account of Pledgor or any guarantor or indorser of
Pledgor's Obligation.
Pledgor specifically understands and agrees that any sale by Bank of all or part
of the Collateral pursuant to the terms of this Agreement may be effected by
Bank at times and in manners which could result in the proceeds of such sale as
being significantly and materially less than might have been received if such
sale had occurred at different times or in different manners, and Pledgor hereby
releases Bank and its officers and representatives from and against any and all
obligations and liabilities arising out of or related to the timing or manner of
any such sale.
If, in the opinion of Bank, there is any question that a public sale or
distribution of any Collateral will violate any state or federal securities law,
Bank may offer and sell such Collateral in a transaction exempt from
registration under federal securities law, and any such sale made in good faith
by Bank shall be deemed "commercially reasonable."
9. GENERAL.
A. PARTIES BOUND. Bank's rights hereunder shall inure to the benefit of its
successors and assigns, and in the event of any assignment or transfer of any of
the Obligation or the Collateral, Bank thereafter shall be fully discharged from
any responsibility with respect to the Collateral so assigned or transferred,
but Bank shall retain all rights and powers hereby given with respect to any of
the Obligation or the Collateral not so assigned or transferred. All
representation warranties and agreements of Pledgor if more than one are joint
and several and all shall be binding upon the person representatives, heirs,
successors and assigns of Pledgor.
B. WAIVER. No delay of Bank in exercising any power or right shall operate as
a waiver thereof; nor shall any single or partial exercise of any power or right
preclude other or further exercise thereof or the exercise of any other power or
right. No waiver by Bank of any right hereunder or of any default by Pledgor
shall be binding upon Bank unless in writing, and no failure by Bank to exercise
any power or right hereunder or waiver of any default by Pledgor shall operate
as a waiver of any other or further exercise of such right or power or of any
further default. Each right power and remedy of Bank as provided for herein or
in any of the loan documents related to the Obligation, or which shall now or
hereafter exist at law or in equity or by statute or otherwise, shall be
cumulative and concurrent and shall be in addition to every other such right,
power or remedy. The exercise or beginning of the exercise by Bank of any one or
more of such rights, powers or remedies shall not preclude the simultaneous or
later exercise by Bank of any or all other such rights, powers or remedies.
C. AGREEMENT CONTINUING. This Agreement shall constitute a continuing
agreement. If the Obligation consists of All Debt, this Agreement shall apply to
all future as well as existing transactions, whether or not of the character,
contemplated at the date of this Agreement, and if all transactions between Bank
and Pledgor shall be closed at any time, shall be equally applicable to any new
transactions thereafter. Provisions of this Agreement, unless by their terms
exclusive, shall be in addition to other agreements between the parties. Time is
of the essence of this Agreement.
D. DEFINITIONS. Unless the context indicates otherwise, definitions in the
UCC apply to words and phrases in this Agreement: if UCC definitions conflict,
Article 8 and/or 9 definitions apply.
4-
<PAGE> 5
E. NOTICE. Notice shall be deemed reasonable if mailed postage prepaid at
Cast before the related action (or if the UCC elsewhere specifies a longer
period, such longer period) to the address of Pledgor given above. Each notice,
request and demand shall be deemed given or made, if sent by mail, upon the
earlier of the date of receipt or five (5) days after deposit in the U.S. Mail,
first class postage prepaid, or if sent by any other means, upon delivery.
F. MODIFICATIONS. No provision hereof shall be modified or limited except by
a written agreement expressly referring hereto and to the provisions so modified
or limited and signed by Pledgor and Bank. The provisions of this Agreement
shall not be modified or limited by course of conduct or usage of trade.
G. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of
this Agreement shall not affect the enforceability or validity of any other
provision herein, and the invalidity or unenforceability of any provision of any
loan document related to the Obligation to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to other
persons or circumstances.
H. APPLICABLE LAW AND VENUE. This Agreement has been delivered in the State
of Georgia and shall be construed in accordance with the laws of that State. It
is performable by Pledgor in the county or city of Bank's address set out above
and Pledgor expressly waives any objection as to venue in any such location.
Wherever possible each provision of this Agreement shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provisions or the remaining
provisions of this Agreement.
I. FINANCING STATEMENT. To the extent permitted by applicable law, a carbon,
photographic or other reproduction of this Agreement or any financing statement
covering the Collateral shall be sufficient as a financing statement.
J. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
i. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY
BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT
OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR, IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN
THE AMERICAN ARBITRATION ASSOCIATION WlLL SERVE. ALL ARBITRATION HEARINGS WILL
BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE BE PERMITTED TO EXTEND THE
COMMENCEMENT OF SUCH HEARINGS FOR UP TO AN ADDITIONAL 60 DAYS.
ii. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE
DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR
DOCUMENT, OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12
U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW, OR (III) LIMIT THE
RIGHT OF BANK HERETO IA) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED
TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY
COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH
AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH
PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR
AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES
NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL
OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
K. CONTROLLING DOCUMENT. To the extent that this Agreement conflicts with or
is in any way incompatible with any other loan document concerning the
Obligation, any promissory note shall control over any other document, and if
such promissory note does not address an issue, then each other loan document
shall control to the extent that it deals most specifically with an issue.
L. EXECUTION UNDER SEAL. This Agreement is being executed under seal by
Pledgor(s).
M. NOTICE OF FINAL AGREEMENT. THIS WRITTEN AGREEMENT AND ANY OTHER DOCUMENTS
EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed under seal by their duly authorized representatives as of the date
first above written.
BANK/SECURED PARTY: DEBTOR(S)/PLEDGOR(S):
NATIONSBANK. N.A. CORPORATE OR PARTNERSHIP DEBTOR/PLEDGOR
INTELLIGENT SYSTEMS CORPORATION
By: /s/ Debbie Levin By: /s/ Henry H. Birdsong
------------------------------- -------------------------------
Name: DEBBIE LEVIN Name: HENRY H. BIRDSONG
Title: VICE PRESIDENT Title: C.F.O.
/s/ B. Herron
----------------------------------
Attest (If Applicable)
[Corporate Seal]
5-
<PAGE> 6
SCHEDULE I
TO
PLEDGE AGREEMENT
<TABLE>
<CAPTION>
ORIGINAL ADVANCE MARGIN CALL
COLLATERAL TYPE PERCENTAGE PERCENTAGE
--------------- ---------- ----------
<S> <C> <C>
STOCKS/BONDS
Listed Stocks (NYSE or ASE)(1)
(non-purpose loan) 70% 75%
OTC Margin Stocks
(non-purpose loan) 70% 75%
OTC Non-Margin Stocks(1) 50% 55%
U.S. Government Obligations 90% 95%
U.S. Agency Bonds 80% 80% 85%
State/Municipal Bonds 80% 85%
(A or higher)
Corporate Bonds(2) 80% 85%
(BAA or higher)
Cash Surrender Value of Life Insurance 95% 95%
NationsBank Deposit Account 100% 100%
Other Federally Insured Deposit Accounts 90% 90%
Mutual Fund (quoted daily in WSJ or Barron's)
Money Market 95% 95%
U.S. Government Obligations 90% 95%
Corporate/Municipal Bonds 80% 85%
Equities 70% 75%
</TABLE>
(1) Loans for the purpose of purchasing or carrying margin stocks are limited by
Regulation U to a 50% Original Advance Percentage.
(2) Does not apply to convertible bonds which are convertible into stocks which
are limited to the applicable percentages for the stock to which they may
convert.
6-
<PAGE> 7
SCHEDULE II
PLEDGE CERTIFICATE
Reference is hereby made to that certain Pledge Agreement dated as of
________________________ ("Pledge Agreement"), between _________________________
("Pledgor") and NationsBank, N.A., a national banking association ("Bank"). This
Pledge Certificate is delivered pursuant to Section 2 of the Pledge Agreement.
All capitalized terms used and not otherwise defined herein shall have their
respective meanings as set forth in the Pledge Agreement.
Pledgor hereby certifies that concurrently with the delivery of this
Pledge Certificate,
[ ] Pledgor is delivering to Bank the following items of Collateral as
additional Collateral for the Obligation (collectively, the "Additional
Collateral"):
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
__________________________,
[ ] Pledgor is selling or otherwise disposing of the following items of
Collateral:
_______________________________________________________________________
_______________________________________________________________________
_________________________________________, and Pledgor is delivering to
Bank the following items of Collateral being substituted therefor:
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
(collectively, the "Substituted Collateral").
Pledgor hereby acknowledges that Pledgor has granted to Bank a security
interest in the Additional Collateral and/or Substituted Collateral pursuant to
the Pledge Agreement to secure the Obligation and that the Collateral covered by
the Pledge Agreement includes, without limitation, the Substituted Collateral
and Additional Collateral. Pledgor hereby represents and warrants that all of
the representations and warranties contained in the Pledge Agreement are true
and correct in all material respects, including with respect to the Additional
Collateral and Substituted Collateral, on the date hereof as though made as of
the date hereof.
EXECUTED this ___day of ________, 19___.
____________________________________________
Printed Name
____________________________________________
Printed Name
7-
<PAGE> 8
EXHIBIT A
INTELLIGENT SYSTEMS CORP./PAYSYS INTERNATIONAL INC. STOCK
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CERTIFICATE # # SHARES STOCK NAME HOLDER OF STOCK
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
233 310,402 CCS Technology Group, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
237 290 CCS Technology Group, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
243 10,995 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
257 55,521 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
258 143,600 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
259 185,800 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
265 712,500 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
270 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
271 345,764 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
272 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
273 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
274 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
275 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
276 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
277 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
278 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
279 250,000 PaySys International, Inc. Intelligent Systems Corporation
- ----------------------------------------------------------------------------------------------
4,014,872
- ----------------------------------------------------------------------------------------------
</TABLE>
CUSTOMER INITIAL: BLH
<PAGE> 1
EXHIBIT 21.0
INTELLIGENT SYSTEMS CORPORATION
LIST OF PRINCIPAL SUBSIDIARY COMPANIES
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
SUBSIDIARY NAME STATE OF ORGANIZATION
--------------- ---------------------
<S> <C>
ChemFree Corporation Georgia
HumanSoft LLC Georgia
Intelligent Enclosures Corporation Georgia
InterQuad Services Limited United Kingdom
INTS Holdings, Inc. Delaware
JK, Inc. Wyoming
PsyCare America, LLC dba Rapha or Rapha Treatment Centers 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, 1997
into Intelligent Systems Corporation's previously filed Registration Statements
on Form S-8 (File No. 33-99432 and No. 333-32157).
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 15, 1998
<PAGE> 1
EXHIBIT 23.2
April 16, 1998
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, 1997
into Intelligent Systems Corporation's previously filed Registration Statements
on Form S-8 (File No. 33-99432 and No. 333-32157).
Yours faithfully
MORLEY & SCOTT
<PAGE> 1
EXHIBIT 23.3
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-99432 and No. 333-32157) of Intelligent Systems Corporation of
our report dated February 19, 1998, with respect to the consolidated financial
statements of PaySys International, Inc. and Subsidiaries as of December 31,
1996 and 1997 and for the three years in the period ended December 31, 1997
included in this Form 10-K for the year ended December 31, 1997.
/s/ Ernst & Young LLP
April 15, 1998
Atlanta, Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 3,855
<ALLOWANCES> 0
<INVENTORY> 611
<CURRENT-ASSETS> 5,627
<PP&E> 2,848
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,091
<CURRENT-LIABILITIES> 6,695
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 24,046
<TOTAL-LIABILITY-AND-EQUITY> 19,091
<SALES> 21,160
<TOTAL-REVENUES> 0
<CGS> 13,031
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,150)
<INCOME-TAX> 16
<INCOME-CONTINUING> (7,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,176)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> 0
</TABLE>
