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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 MARCH 31, 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 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
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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As of March 31, 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>
MARCH 31, DECEMBER 31,
1999 1998
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ASSETS (Unaudited) (Audited)
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<S> <C> <C>
Current assets:
Cash $ 943 $ 461
Accounts receivable, net 1,525 2,165
Notes and interest receivable 209 189
Inventories 612 741
Other current assets 411 990
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Total current assets 3,700 4,546
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Long-term investments 8,622 8,593
Long-term notes receivable 70 75
Property and equipment, at cost less accumulated depreciation and amortization 818 2,570
Excess of cost over underlying net assets of businesses acquired,
net of accumulated amortization 6 15
Other assets 1,300 1,300
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Total assets $14,516 $17,099
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Short-term borrowings $ 1,429 $ 2,078
Accounts payable 526 1,727
Accrued expenses and other current liabilities 1,377 2,568
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Total current liabilities 3,332 6,373
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Long-term debt 700 900
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Minority interest 188 185
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 authorized,
5,104,467 outstanding at December 31, 1998 and March 31, 1999 51 51
Paid-in capital 24,046 24,046
Foreign currency translation adjustment -- (197)
Unrealized gain in available-for-sale securities (3) 633
Accumulated deficit (13,798) (14,892)
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Total stockholders' equity 10,296 9,641
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Total liabilities and stockholders' equity $14,516 $17,099
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</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 MARCH 31, 1999 1998
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<S> <C> <C>
Net sales $2,683 $4,804
Expenses:
Cost of sales 1,386 3,725
Marketing 376 1,025
General & administrative 1,030 2,151
Research & development 175 1,292
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Loss from operations (284) (3,389)
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Other income (expense):
Interest expense (38) (43)
Investment income, net 1,417 722
Other income (expense), net 1 104
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Income (loss) before income tax provision and minority interest 1,096 (2,606)
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Income tax provision -- --
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Income (loss) before minority interest 1,096 (2,606)
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Minority interest 2 2
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Net income (loss) $1,094 $(2,608)
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Basic and diluted net income (loss) per share based upon weighted
average shares outstanding $0.21 $(0.51)
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Basic weighted average shares outstanding 5,104,467 5,104,467
Diluted weighted average shares outstanding 5,271,041 5,104,467
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</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>
THREE MONTHS ENDED MARCH 31,
CASH PROVIDED BY (USED FOR): 1999 1998
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<S> <C> <C>
OPERATIONS:
Net income (loss) $1,094 $(2,608)
Adjustments to reconcile net income (loss) to net cash used for
operating activities, net of effects of acquisitions and dispositions:
Depreciation and amortization 78 1,282
Gain from sale of assets (1,047) (932)
Equity in net loss (income) of affiliates (371) 209
Changes in operating assets and liabilities:
Accounts receivable (42) 576
Inventories (7) 22
Other current assets 142 (1,408)
Accounts payable (378) 411
Accrued expenses and other current liabilities 38 (431)
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Cash used for continuing operations (493) (2,879)
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INVESTING ACTIVITIES:
Proceeds from sales of investments 1,187 1,497
Acquisition of company, net of cash acquired -- 83
Acquisitions of long-term investments (200) (50)
Increase (decrease) in minority interest 2 (22)
Advances under notes receivable, net (15) (39)
Dispositions (purchases) of property and equipment, net 117 (120)
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Cash provided by investing activities 1,091 1,349
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FINANCING ACTIVITIES:
Net borrowings (repayments) under short-term
borrowing arrangements (210) 1,777
Foreign currency translation adjustment 94 (22)
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Cash provided by (used for) financing activities (116) 1,755
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Net increase in cash 482 225
Cash at beginning of period 461 43
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Cash at end of period $ 943 $ 268
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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 March 31, 1999 and 1998. The
interim results for the three months ended March 31, 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 the 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 March 31,
1999 1998
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<S> <C> <C>
Net income (loss) $1,094 $(2,608)
Other comprehensive income (loss):
Foreign currency translation adjustments 197 (22)
Unrealized loss in available-for-sale securities (636) (348)
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Comprehensive income (loss) $ 655 $(2,978)
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</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
In 1999, our principal operating subsidiaries in the technology sector are
ChemFree and the QS Technologies subsidiary of HumanSoft (and InterQuad for the
first month of the quarter). Our only health care subsidiary is PsyCare. For the
same period last year, we also include the results of InterQuad for the entire
quarter as well as the results of HumanSoft and its JK subsidiary, both of which
are inactive presently as a result of HumanSoft's reorganization under Chapter
11. For more details on the HumanSoft reorganization, refer to Note 17 to our
Consolidated Financial Statements in our Form 10-K for 1998. Much of the
variance between the first quarter last year and this year is due to these
changes in consolidated subsidiaries.
Although our consolidated companies are fewer this year compared to last year,
our results improved. Both HumanSoft and InterQuad had generated sizable losses
last year which are reduced this year. Results at our remaining subsidiaries
also improved year-to-year. We also recognized approximately $1.0 million in
gain in the first quarter of 1999 related to sales of investments in two
software companies. The combination of these factors yielded a significant
period-to-period improvement in our overall results.
Sales - We generate revenue from operations in two industry segments:
technology-related products and services, and health care services. For the
three month period ended March 31, 1999, net sales were $2,683,000, a decline of
44 percent compared to the first quarter in 1998. The major factor contributing
to lower revenue is the sale of the InterQuad subsidiary. In addition, revenue
declined due to the downsizing (and subsequent Chapter 11 reorganization) at
HumanSoft and a reduction in the number of programs offered by the PsyCare
subsidiary brought about by changes related to the managed health care
environment. These declines were offset to some degree by increased revenue at
the ChemFree subsidiary in both domestic and international markets.
Cost of sales - Cost of sales as a percentage of revenue decreased significantly
in the first quarter this year compared to the same period last year. The
improvement reflects mainly the following:
- - reduction of the costs associated with the HumanSoft and InterQuad
subsidiaries, both of which had higher overall cost of sales than the
remaining subsidiaries
- - improved cost control at the PsyCare subsidiary
- - increased revenue from leased products which carry higher margins at
the ChemFree subsidiary
Operating Expenses - In the health care services sector, marketing and general
and administrative expenses declined in both absolute dollars and as a
percentage of revenue in the first quarter of 1999 compared to the first quarter
last year. PsyCare reduced expenses and increased its efficiency as the number
of program locations declined. In the technology sector, marketing and general
and administrative expenses decreased both absolutely and as a percent of
revenue. Most of the decline is related to the reduction in expenses associated
with the HumanSoft and InterQuad subsidiaries. In addition, the ongoing
operating companies successfully reduced the ratio of expenses to sales compared
to the year-ago period. Research and development expense is lower in the first
quarter of 1999 compared to last year due to the reduction in size at HumanSoft.
In addition, the 1998 figures include a one-time charge of $944,000 for
in-process research and development projects related to the acquisition of the
JK subsidiary of HumanSoft in January 1998.
Interest Income - We had net interest expense of $38,000 in the first quarter of
1999, slightly lower than the first quarter of 1998 because interest related to
InterQuad's bank borrowings was eliminated after we sold the company.
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Investment Income - In the first quarter this year, we realized a gain of
$814,000 on the sale of our remaining 95,449 shares of Information Advantage
common stock, a gain of $233,000 on the sale of approximately 30 percent
(155,500 shares) of our investment in a privately held software company, and
$370,000 income in the equity of affiliates accounted for by the equity method.
At the end of the quarter, we retain 456,750 shares and a warrant to purchase
225,000 additional shares in the private software company. By comparison, in the
first quarter of 1998, we realized a gain of $947,000 on the sale of 104,000
shares of common stock of IQ Software (now Information Advantage), offset in
part by $209,000 equity in losses of affiliate companies accounted for by the
equity method.
Minority Interest - This amount represents the pro rata ownership share of
minority shareholders in certain non-wholly-owned subsidiaries of the company,
principally the minority owners in our HumanSoft subsidiary.
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 are on schedule to update any non-compliant internal computer
systems by September 1999. 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 has taken steps to give customers early
notification that older, non-compliant software would not be supported and 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 is 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 three months of 1999, we derived $902,000 in cash from selling
95,449 shares of common stock of Information Advantage. In addition, we sold
part of our investment in another privately held software company, generating
$286,000 cash. We used approximately $200,000 cash during the first quarter of
1999 for new and follow-on investments and approximately $500,000 cash for
operating expenses, a large part of which is related to corporate and HumanSoft
expenses.
Changes in the balance sheet since December 31, 1998 related to decreases in
receivables, inventory, fixed assets, notes payable, accounts payable and other
current liabilities are principally the result of selling the Services
subsidiary and de-consolidating its assets and liabilities.
While our cash position will limit new investments in the near future, we
believe we have adequate access to capital through bank borrowings or sales of
assets to support current operations and plans. Subsequent to March 31, 1999,
Media Metrix, an internet company in which we own approximately 25,000 shares,
completed its initial public offering of common stock (NASDAQ: MMXI). As a
result, these shares represent an additional potential source of liquidity,
although there may be some holding period before they will be freely
transferable and the value will vary depending upon the trading price of the
stock.
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PART II. OTHER INFORMATION
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: May 14, 1999 By: /s/ J. LELAND STRANGE
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J. Leland Strange
Chairman of the Board, President
Date: May 14, 1999 By: /s/ HENRY H. BIRDSONG
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Henry H. Birdsong
Chief Financial Officer
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 943
<SECURITIES> 0
<RECEIVABLES> 1,525
<ALLOWANCES> 0
<INVENTORY> 612
<CURRENT-ASSETS> 3,700
<PP&E> 818
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,516
<CURRENT-LIABILITIES> 3,332
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 10,245
<TOTAL-LIABILITY-AND-EQUITY> 14,516
<SALES> 2,683
<TOTAL-REVENUES> 0
<CGS> 1,386
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (38)
<INCOME-PRETAX> 1,096
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,094
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
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