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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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
incorporation or organization) Identification No.)
4355 SHACKLEFORD ROAD, NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 381-2900
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
As of September 30, 1999, 5,104,467 shares of Common Stock were
outstanding.
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ITEM 1. FINANCIAL STATEMENTS
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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ASSETS (Unaudited) (Audited)
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<S> <C> <C>
Current assets:
Cash $ 807 $ 461
Accounts receivable, net 1,534 2,165
Notes and interest receivable 276 189
Inventories 447 741
Other current assets 524 990
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Total current assets 3,588 4,546
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Long-term investments 9,259 8,593
Long-term notes receivable 59 75
Property and equipment, at cost less accumulated depreciation and amortization 722 2,570
Excess of cost over underlying net assets of businesses acquired,
net of accumulated amortization -- 15
Other assets 1,300 1,300
============= ============
Total assets $ 14,928 $ 17,099
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 2,076 $ 2,078
Accounts payable 539 1,727
Accrued expenses and other current liabilities 1,729 2,568
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Total current liabilities 4,344 6,373
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Long-term debt 200 900
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Minority interest 193 185
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 authorized, 5,104,467
outstanding at September 30, 1999 and December 31, 1998 51 51
Paid-in capital 24,046 24,046
Foreign currency translation adjustment -- (197)
Unrealized gain in available-for-sale securities 1,662 633
Accumulated deficit (15,568) (14,892)
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Total stockholders' equity 10,191 9,641
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Total liabilities and stockholders' equity $ 14,928 $ 17,099
============= ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,816 $ 4,409 $ 6,589 $ 14,535
Expenses:
Cost of sales 714 3,253 3,182 10,187
Marketing 172 867 798 2,731
General & administrative 754 2,300 2,682 6,159
Research & development 234 82 591 1,753
----------- ----------- ----------- -----------
Loss from operations (58) (2,093) (664) (6,295)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (3) (49) (71) (198)
Investment income (expense), net (815) 2,604 57 4,872
Other income (expense), net 5 (330) 8 (160)
----------- ----------- ----------- -----------
Income (loss) before income tax benefit and
minority interest (871) 132 (670) (1,781)
----------- ----------- ----------- -----------
Income tax benefit -- (152) -- (152)
----------- ----------- ----------- -----------
Income (loss) before minority interest (871) 284 (670) (1,629)
----------- ----------- ----------- -----------
Minority interest 2 2 7 7
------------ ----------- ----------- -----------
Net income (loss) $ (873) $ 282 $ (677) $ (1,636)
=========== =========== =========== ===========
Basic net income (loss) per share based upon basic
weighted average shares $ (0.17) $ 0.06 $ (0.13) $ (0.32)
----------- ----------- ----------- -----------
Diluted net income (loss) per share based upon diluted
weighted average shares $ (0.17) $ 0.05 $ (0.13) $ (0.32)
=========== =========== =========== ===========
Basic weighted average shares outstanding 5,104,467 5,104,467 5,104,467 5,104,467
----------- ----------- ----------- -----------
Diluted weighted average shares outstanding 5,104,467 5,397,461 5,104,467 5,104,467
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited, in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
CASH PROVIDED BY (USED FOR): 1999 1998
------------ ------------
<S> <C> <C>
OPERATIONS:
Net loss $ (677) $ (1,635)
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 164 1,941
Gain from sale of assets (1,175) (5,109)
Equity in net loss of affiliates 859 236
Changes in operating assets and liabilities:
Accounts receivable (51) 1,499
Inventories 157 (73)
Other current assets 539 (368)
Accounts payable (365) 399
Accrued expenses and other current liabilities 418 (1,284)
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Cash provided by (used for) continuing operations (131) (4,394)
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INVESTING ACTIVITIES:
Proceeds from sales of investments 1,320 5,367
Purchase of investment securities (510) --
Acquisitions of companies, net of cash acquired -- 83
Acquisitions of long-term investments (418) (300)
Increase in minority interest 7 7
Repayments of (advances under) notes receivable, net (88) 262
Dispositions of property and equipment 135 355
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Cash provided by (used for) investing activities 446 5,774
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FINANCING ACTIVITIES:
Net repayments under short-term
borrowing arrangements (63) (679)
Foreign currency translation adjustment 94 (20)
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Cash provided by (used for) financing activities 31 (699)
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Net increase in cash 346 681
Cash at beginning of period 461 43
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Cash at end of period $ 807 $ 724
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</TABLE>
The accompanying notes are an integral part of these statements.
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INTELLIGENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Throughout this report, the terms "we", "us", "ours", "ISC" and
"company" refer to Intelligent Systems Corporation, including its
subsidiaries.
2. The unaudited consolidated financial statements presented in this Form
10-Q have been prepared in accordance with generally accepted
accounting principles applicable to interim financial statements.
Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of ISC management, these
consolidated financial statements contain all adjustments (which
comprise only normal and recurring accruals) necessary to present
fairly the financial position as of September 30, 1999 and 1998. The
interim results for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
These statements should be read in conjunction with our combined
financial statements for the fiscal year ended December 31, 1998, as
filed in our annual report on Form 10-K.
3. Sale of InterQuad Services - Effective February 1, 1999, we sold our
ownership in the InterQuad Services (Services) subsidiary. Services
provides technical and software training in England. We sold our
interest in return for a 19 percent interest in a privately held U.K.
company whose principal asset is a 49 percent ownership in InterQuad
Group. InterQuad Group is a privately held U.K. based company that
provides computer hardware, software, training and consulting services
to businesses. Effective as of the date of the sale, we no longer
consolidate the results of Services and record our minority investment
in accordance with the accounting policies outlined in Note 1 to the
Consolidated Financial Statements in our Report on Form 10-K. Our cost
basis is zero.
4. Sale of Information Advantage Stock - In January 1999, we sold our
remaining 95,449 shares of common stock of Information Advantage
(formerly IQ Software). In the first quarter, our results include a
gain of $814,000 on the sale. Cash proceeds of the sale were $902,000.
5. Accounting Changes - 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 their financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity in a
period. We adopted the disclosure requirements of this statement in
March 1998.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ (873) $ 282 $ (677) $(1,636)
Other Comprehensive Income (Loss):
Foreign currency translation adjustments -- (8) 197 (21)
Unrealized gain (loss) in available-for-sale securities 407 (117) 1,029 (445)
------- ------- ------- -------
Comprehensive income (loss) $ 466 $ 157 $ 549 $(2,102)
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</TABLE>
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1. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Direct comparisons between periods are impacted by several transactions. The
1998 results include the results of InterQuad Services, a company that we sold
in February 1999. Since the sale date, we no longer consolidate the results of
operations or balance sheet of InterQuad Services. In the third quarter last
year, our HumanSoft subsidiary discontinued two product lines and recorded
one-time charges to wind down certain activities. The QS subsidiary of HumanSoft
continues to operate and we consolidate its results of operations of QS
Technologies in our financial statements.
Sales - The company generates revenue from consolidated operations in two
industry segments: technology-related products and health care services. For the
three-month period ended September 30, 1999, net sales were $1,816,000, a
decline of 59 percent compared to the third quarter last year. For the nine
month period ended September 30, 1999, revenue was $6,589,000, down by 54
percent compared to last year. The revenue decline in the third quarter and
year-to-date periods is due to the sale of InterQuad Services in early 1999, the
discontinuation of HumanSoft operations and a decline in the health care sector.
Our health care subsidiary, PsyCare America, had fewer hospital-based programs
in operation in the first nine months of this year as compared to last year.
Price pressure and expense reductions in the managed care environment reduced
further the revenue contribution from each program.
Cost of sales - Cost of sales as a percentage of revenue was significantly lower
in the third quarter and nine-month periods this year compared to the same
periods last year. Most of the change is related to the InterQuad and HumanSoft
transactions described earlier. Last year, HumanSoft recorded significant
employee related costs in the first nine months of the year prior to the
decision to curtail most of its operations. These costs are not repeated in this
year's results. Cost of sales for the remaining consolidated operations
(ChemFree, PsyCare and QS Technologies) were relatively stable as a percent of
revenue in the quarter and year to date periods this year compared to the same
periods last year.
Operating Expenses - Overall, marketing expenses declined in absolute dollars
and as a percent of revenue in both the three and nine month periods this year
compared to the same periods last year. Most of the change is attributable to
the HumanSoft and InterQuad transactions described above. In addition, PsyCare
reduced marketing expenses as the number of programs and reimbursement rates
declined. General and administrative expenses declined in absolute dollars and
as percent of revenue in the three and nine months ended September 30, 1999
compared to the same periods last year. Again, most of the period-to-period
reductions result from the sale of InterQuad and the downsizing of HumanSoft
operations. Last year, our general and administrative expenses include a
one-time charge of $955,000 in the third quarter related to the HumanSoft
downsizing and an acquisition related restructuring charge of $191,000 in the
first quarter, both of which further accentuate the year-to-year change in
expense levels. In continuing operations this year, PsyCare reduced corporate
personnel expenses as the number of programs declined. Research and development
expense at the QS Technologies operation increased in the quarter and year to
date periods this year compared to last year to support new initiatives in
product development. Last year, year-to-date research and development expense
includes a first quarter non-recurring charge of $944,000 for in-process
research and development.
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Interest Income (Expense) - We had net interest expense of $3,000 and $71,000,
respectively, for the three and nine month periods in 1999 compared to net
interest expense of $49,000 and $198,000, respectively, in the same periods last
year. During the three month period ended September 30, 1999, we incurred
approximately $35,000 of interest expense payable to third parties, which was
offset by a one-time accounting reconciliation of $38,000 related to
intercompany interest. Interest expense to third parties was lower this year
than last year because the principal amounts outstanding on certain notes
payable to third parties was lower this year than last year.
Investment Income - For the three month period ended September 30, 1999,
investment expense was $814,000, which consists of $556,000 equity in losses of
affiliates and a $259,000 non-cash loss on an investment. By comparison, in the
third quarter of 1998, we realized a gain of $2.5 million on the sale of shares
of common stock of PaySys and recognized $105,000 equity in income, of
affiliates accounted for by the equity method. For the nine month period this
year, we recorded net investment income of $57,000, which consists of a gain of
$814,000 on the sale of our remaining interest in Information Advantage
(formerly IQ Software), a gain of $362,000 on the sale of part of our interests
in two private software companies, the $259,000 non-cash investment loss in the
third quarter, and $859,000 equity in losses of affiliates. By comparison,
investment income year-to-date in 1998 includes the $2.5 million gain described
above, a gain of $1.2 million on the sale of our IE business, a gain of $457,000
on the sale of our interest in a private software company, a gain of $947,000 on
the sale of shares of common stock of IQ Software, Inc., and approximately
$236,000 equity in losses of affiliates accounted for by the equity method.
Other Expense - Other expense is composed of a number of relatively small items
of income and expense at various subsidiaries. The major reason for the
period-to-period declines in 1999 compared to 1998 is an expense of
approximately $330,000 recorded in the third quarter of 1998 to write off
certain fixed assets of discontinued HumanSoft operations.
Minority Interest - This amount represents the pro rata ownership share of
minority shareholders in certain non-wholly-owned subsidiaries of the company.
Year 2000 Readiness - In our Annual Report on Form 10-K for the year ended
December 31, 1998, we provided an overview of our status and plans related to
potential problems arising from the inability of certain computer programs to
correctly interpret dates designated as "00" as the year 2000 rather than the
year 1900. We have substantially completed updating any non-compliant internal
computer systems. Presently, we do not anticipate a material impact on our
operations or financial position as a result of Year 2000 issues. However, as
outlined in our Form 10-K, we have investments in a number of companies over
which we do not exercise control. To the extent that any of these companies in
which we have a significant investment experiences a material negative impact on
their business, the value of our investment could be reduced. Furthermore,
although our QS Technologies subsidiary gave customers early notification that
older, non-compliant software would not be supported and offered to upgrade
customers to Y2K compliant software versions, there can be no assurance that the
company will not be exposed to potential claims. We have not identified any
business functions that are materially at risk of Year 2000 related disruption
but are prepared to develop contingency plans when and if we identify them as
being at risk.
FINANCIAL CONDITION
In the first nine months of 1999, we derived $902,000 cash from selling our
remaining shares of common stock of Information Advantage and $416,000 cash from
sales of part of our holdings in two privately held software companies. We
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used approximately $131,000 to fund corporate overhead expenses, $1,010,000 to
pay down short-term notes payable to third parties, $533,000 for new
investments and/or follow-on funding for prior investments, and $510,000 for a
non-hedge contract on marketable securities which was closed out in early
October 1999.
Changes in the balance sheet since December 31, 1998 in receivables, inventory,
fixed assets, accounts payable and other current liabilities are principally the
result of selling the InterQuad subsidiary and deconsolidating its assets and
liabilities.
At September 30, 1999, we owned 24,501 shares of Media Metrix [NASDAQ: MMXI], an
internet company in which we were an early investor. After the quarter end, we
sold our shares in MMXI in early November 1999, generating approximately $1.1
million cash, which will be used in part to pay down our bank line. The gain on
the MMXI transaction will be recorded in the fourth quarter. While our cash
position will limit significant new investments in the near future, we believe
we have adequate funds for the foreseeable future. However, as explained in Note
1 to the Consolidated Financial Statements in our Report on Form 10K for the
year ended December 31, 1998, a substantial deterioration in the financial
condition of companies in which we have significant long-term investments could
have an adverse effect on the company.
PART II. OTHER INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest excess funds in derivative financial instruments or other
market risk sensitive instruments for the purpose of managing foreign currency
exchange rate risk or for any other purposes. Further, our business activities
do not involve foreign currency transactions.
ITEM 6. EXHIBITS, REPORTS ON FORM 8-K
A. The following exhibit is filed with this report: Exhibit 27 Financial Data
Schedule (for SEC use only).
B. The Company has not filed any Reports on Form 8-K during the period covered
by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
INTELLIGENT SYSTEMS CORPORATION
Registrant
Date: November 15, 1999 By: /s/ J. LELAND STRANGE
-----------------------------------------
J. Leland Strange
Chairman of the Board, President
Date: November 15, 1999 By: /s/ BONNIE L. HERRON
-----------------------------------------
Bonnie L. Herron
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 807
<SECURITIES> 0
<RECEIVABLES> 1,534
<ALLOWANCES> 0
<INVENTORY> 447
<CURRENT-ASSETS> 3,588
<PP&E> 722
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,928
<CURRENT-LIABILITIES> 4,344
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 10,140
<TOTAL-LIABILITY-AND-EQUITY> 14,928
<SALES> 6,589
<TOTAL-REVENUES> 0
<CGS> 3,182
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (71)
<INCOME-PRETAX> (670)
<INCOME-TAX> 0
<INCOME-CONTINUING> (677)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (677)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
