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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, 2000
Commission file number 1-9330
INTELLIGENT SYSTEMS CORPORATION
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(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-1964787
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
4355 SHACKLEFORD ROAD, NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (770) 381-2900
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
As of September 30, 2000, 5,577,698 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,
2000 1999
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ASSETS (Unaudited) (Audited)
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<S> <C> <C>
Current assets:
Cash $ 1,482 $ 737
Accounts receivable, net 1,242 1,464
Notes and interest receivable 2,613 254
Inventories 591 325
Other current assets 368 263
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Total current assets 6,296 3,043
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Long-term investments 11,828 8,576
Long-term notes receivable 35 53
Property and equipment, at cost less accumulated depreciation and amortization 594 686
Other assets -- 1,300
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Total assets $18,753 $ 13,658
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Short-term borrowings $ 600 $ 1,000
Accounts payable 414 444
Accrued expenses and other current liabilities 1,534 1,647
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Total current liabilities 2,548 3,091
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Long-term debt 163 363
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Minority interest 2 (5)
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 authorized, 5,557,698 and 5,104,467
outstanding at September 30, 2000 and December 31, 1999, respectively 56 51
Paid-in capital 24,109 24,069
Unrealized gain in available-for-sale securities 1,076 731
Accumulated deficit (9,201) (14,642)
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Total stockholders' equity 16,040 10,209
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Total liabilities and stockholders' equity $18,753 $ 13,658
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</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share amounts)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales $1,630 $1,816 $5,624 $6,589
Expenses:
Cost of sales 638 714 2,300 3,182
Marketing 253 172 684 798
General & administrative 756 754 2,506 2,682
Research & development 258 234 668 591
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Loss from operations (275) (58) (534) (664)
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Other income (expense):
Interest income (expense), net 55 (3) 141 (71)
Investment income (expense) 579 (815) 8,948 57
Other, net 2 5 63 8
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Income (loss) before taxes 361 (871) 8,618 (670)
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Current tax provision 213 -- 213 --
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Income (loss) before minority interest 148 (871) 8,405 (670)
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Minority interest 3 2 8 7
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Net income (loss) $ 145 $ (873) $8,397 $ (677)
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Basic net income (loss) per share based upon basic
weighted average shares $ 0.03 $(0.17) $ 1.50 $(0.13)
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Diluted net income (loss) per share based upon
diluted weighted average shares $ 0.03 $(0.17) $ 1.49 $(0.13)
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Basic weighted average shares outstanding 5,582,259 5,104,467 5,608,898 5,104,467
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Diluted weighted average shares outstanding 5,608,529 5,104,467 5,618,895 5,305,752
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</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited, in thousands)
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
CASH PROVIDED BY (USED FOR): 2000 1999
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<S> <C> <C>
OPERATIONS:
Net income (loss) $8,397 $ (677)
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 80 164
Gain from sale of assets (9,675) (1,175)
Equity in net loss of affiliates 726 859
Changes in operating assets and liabilities:
Accounts receivable 259 (51)
Inventories (266) 157
Other current assets (105) 539
Accounts payable (32) (365)
Accrued expenses and other current liabilities (10) 418
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Cash used for continuing operations (626) (131)
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INVESTING ACTIVITIES:
Proceeds from sale of investments 10,150 1,320
Purchase of investment securities -- (510)
Acquisitions of long-term investments (3,154) (418)
Increase in minority interest 7 7
Advances under notes receivable, net (2,135) (88)
Dispositions of property and equipment, net 13 135
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Cash provided by investing activities 4,881 446
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FINANCING ACTIVITIES:
Net repayments under short-term borrowing arrangements (600) (63)
Payment of dividend to stockholders (2,956) --
Purchase and retirement of stock 46 --
Foreign currency translation adjustment -- 94
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Cash provided by (used for) financing activities (3,510) 31
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Net increase in cash 745 346
Cash at beginning of period 737 461
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Cash at end of period $1,482 $ 807
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</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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INTELLIGENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 accounting principles
generally accepted in the United States applicable to interim financial
statements. Accordingly, they do not include all of the information and
notes required 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,
2000 and 1999. The interim results for the nine months ended September
30, 2000 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, 1999, as filed in our annual report on Form 10-K.
3. Comprehensive Income - In accordance with Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive
Income", comprehensive income is the total of net income and all other
non-owner changes in equity in a period. A summary follows:
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
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<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net income (loss) $ 145 $(873) $8,397 $ (677)
Other comprehensive income (loss):
Foreign currency translation adjustments -- -- -- 197
Unrealized gain (loss) in available-for-sale securities 1,006 407 (898) 1,029
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Comprehensive income (loss) $1,151 $(466) $7,499 $ 549
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4. Sale of Interest in Risk Laboratories, LLC ("Risk") - In the quarter ended
March 31, 2000, we sold 2,310,000 equity units in Risk for $8,801,000 in
cash to American Home Assurance Company, recognizing a gain of $8,622,000
on the transaction. We retain ownership of 623,515 equity units
representing approximately 7 percent of the equity of Risk, after a capital
infusion of $5,000,000 in Risk by American Home Assurance Company.
5. Sale of Partial Holdings in S1 Corporation - In the first and third
quarters of 2000, we sold a total of 4,000 shares of common stock of S1
Corporation [NASDAQ: SONE] for a total of $252,000 cash, recognizing a gain
of $233,000. We retain ownership of 6,000 shares of SONE stock. The SONE
stock was received as consideration for our shares of stock in VerticalOne
Corporation upon the merger of VerticalOne and SONE in the fourth quarter
of 1999.
6. Daw Technologies, Inc. Common Stock - During the quarter ended June 30,
2000, the Company received a total of 645,462 shares of common stock of Daw
Technologies, Inc., [NASDAQ: DAWK],
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a company that had acquired the assets of our Intelligent Enclosures
operation in April 1998. Under the terms of the acquisition agreement, the
purchase price was to be paid in common stock of Daw based on a formula
related to the trading price of DAWK common stock in April 2000.
Consequently, the $1.3 million guaranteed purchase price which had been
carried in prior periods on our balance sheet as an "other asset" is
treated as a marketable security at September 30, 2000 in accordance with
Statement of Financial Accounting Standards No. 115 as explained in Note 1
to the consolidated financial statements for the fiscal year ended December
31, 1999, as filed in our annual report on Form 10-K.
7. Sale of Partial Holdings in Primus Knowledge Solutions, Inc. - In the three
months ended September 30, 2000, we sold 50,000 shares of common stock of
Primus Knowledge Solutions [NASDAQ: PKSI] for a total of $1,177,000 cash,
recognizing a gain of $800,000. At September 30, 2000 we retain ownership
of 16,431 shares of PKSI stock. The stock in PKSI was received as
consideration for our shares of stock in 2Order.com upon the merger of
2Order.com and PKSI in the first quarter of 2000.
8. Acquisition of MiracleWorker.com - During the third quarter ended September
30, 2000, MiracleWorkers.com, an early stage company in which we hold a
minority position, was acquired by HeadHunter.NET [NASDAQ:HHNT]. We
received 90,228 shares of HeadHunter.NET common stock in exchange for our
interest in MiracleWorkers.com. The shares are restricted for one year.
9. Initial Public Offering of Atherogenics, Inc. - In August 2000,
Atherogenics, Inc., a company in which we own 246,500 shares of common
stock, completed its initial public offering [NASDAQ: AGIX]. Accordingly,
on the balance sheet at September 30, 2000, we account for this asset as a
marketable security in accordance with Statement of Financial Accounting
Standards No. 115.
10. Subsequent Event: Sale of Certain Assets of PsyCare America LLC - Effective
November 1, 2000, our PsyCare America subsidiary sold certain assets,
including intellectual property and program contracts and licenses, to
iExalt, Inc. [OTC:IXLT]. The purchase price for the assets was paid in
common stock of IXLT, with the initial payment being 200,000 shares subject
to adjustment on November 1, 2002. On that date, IXLT shall issue to
PsyCare additional shares of stock, if necessary, so that the market value
of the shares paid for the assets shall be $1 million on that date. PsyCare
retained other assets such as cash and accounts receivable. PsyCare ceased
its ongoing operations as of November 1, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Summary - Our consolidated operating subsidiaries in 2000 are ChemFree, QS
Technologies and PsyCare America. In the first quarter of 1999, we also
consolidated the results of our InterQuad subsidiary prior to its sale in
February 1999. Part of the difference in consolidated operating results between
the first nine months of last year and this year is a result of not including
the InterQuad operation and its financial losses in the results for 2000.
During the nine month period ended September 30, 2000, our losses from
operations reflect principally the corporate overhead expenses. We recognized a
significant return on the sale of part of our investment in Risk Laboratories in
March 2000, which contributed significantly to net income of $8.4 million for
the nine months of 2000 compared to a loss of $677,000 for the same period in
1999.
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As a result of the transaction explained in note 10 to these financial
statements, results of operations for future periods will not include revenue
and expenses related to the PsyCare operation after November 1, 2000.
Sales - We generate revenue from operations of our consolidated subsidiaries in
two industry segments: technology-related products and services, and health care
services. For the three month period ended September 30, 2000, net sales were
$1,630,000, a decline of ten percent compared to the third quarter in 1999.
Revenue declined in the third quarter this year compared to last year at the
PsyCare subsidiary due to a reduction in the number of programs operated and
revenue per program. The decline in revenue at the PsyCare operations was offset
in part by revenue increases at the ChemFree subsidiary. For the nine months
ended September 30, 2000, revenue was $5.6 million, a decline of 15 percent
compared to the same period last year. The major factors contributing to lower
revenue for the nine month period are the sale of the InterQuad subsidiary,
which had contributed revenue of $581,000 in the same period in 1999, and the
lower revenue levels at the PsyCare subsidiary.
Cost of sales - Cost of sales as a percentage of revenue was 39 percent in the
three month periods ended September 30, 1999 and 2000. For the year to date
period, cost of sales was 41 percent in 2000 compared to 48 percent in the same
period last year. The improvement reflects mainly the sale of the InterQuad
subsidiary which had a relatively high cost of sales compared to the ongoing
operating subsidiaries as well as improved margins at the ChemFree and QS
Technologies subsidiaries.
Operating Expenses - Marketing expenses increased in absolute dollars in the
three month period ended September 30, 2000 as compared to the same period last
year but declined in absolute dollars for the year-to-date period this year as
compared to the same period last year. During the three month period, the
increase is attributable to higher expenditures at the ChemFree operations to
support higher revenue levels whereas for the nine month period, most of the
period-to-period decline is due to the sale of InterQuad and the elimination of
its related expenses in the 2000 financials. General and administrative expenses
were approximately the same in the third quarter and nine month periods for 2000
as compared to the respective periods last year. Included in the nine month
expenses for 2000 is a non-recurring bonus expense of $150,000 recorded in the
first quarter this year related to the successful completion of the Risk
transaction that was offset by the elimination of general and administrative
expenses associated with the InterQuad operation last year. Research and
development expense increased in the three and nine month periods of 2000
compared to the same periods in 1999 at both the QS Technologies and ChemFree
subsidiaries to support more new product development.
Interest Income - We had net interest income of $55,000 and $141,000 in the
third quarter and year-to-date periods, respectively, in 2000. This compares
with net interest expense of $3,000 and $71,000, respectively, for the same
periods in 1999. During the three and nine month periods this year, we had a
lower level of notes payable outstanding and we earned interest on higher cash
levels and notes receivable, compared to the same periods in 1999.
Investment Income - For the third quarter of 2000, we recorded investment income
of $579,000 compared to an investment loss of $815,000 in the same period last
year. For the current quarter, investment income includes gains totaling
$826,000 related to the sale of shares of Primus and SI stock (refer to Notes 5
and 7) as well as $247,000 representing our pro rata share of net losses of our
affiliate companies that are recorded under the equity method. Last year,
$556,000 of the investment loss was related to our pro rata shares of net losses
of affiliates accounted for by the equity method. For the year to date periods
in 2000, we recorded investment income of $8,948,000 compared to income of
$57,000 for the nine months ended September 30, 1999. Included in the nine month
figures for 2000 is a gain of $8,622,000 on the partial sale of our ownership
interest in Risk Laboratories LLC (refer to Note 4). In addition, we realized
gains totaling $1,033,000 related to the sales of shares of Primus and SI stock
as
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well as some other immaterial miscellaneous income. Offset against these
gains were $692,000 in net losses in equity of affiliate companies accounted for
by the equity method. By comparison, in the first nine months of 1999, we
realized net gains totaling $916,000 on sales of investments in three software
companies and $859,000 in net losses in equity of investments accounted for by
the equity method.
Taxes - In the third quarter and year-to-date periods of 2000, we provide for a
total of $213,000 in income taxes payable that relate to gains on the Risk
transaction (most of the gains were offset by tax loss carryforwards) and income
from operations at the QS Technologies subsidiary.
Minority Interest - This amount represents the pro rata ownership share of
minority shareholders in certain non-wholly-owned subsidiaries of the company.
Common Shares - In the first nine months of 2000, three officers of the company
exercised options to acquire a total of 570,000 shares of common stock and
turned in to the company a total of 101,769 shares of common stock in partial
payment of the exercise price. The company also initiated a stock repurchase
program in September 2000. Thus the average number of diluted shares outstanding
during the three and nine month periods ended September 30, 2000 were 5,608,529
and 5,618,895, respectively, representing a ten percent increase over the
comparable periods in 1999.
FINANCIAL CONDITION
In the first nine months of 2000, our principal sources of cash were $8,701,000,
net of sales expenses, from the sale of 2,310,000 equity units of Risk
Laboratories, $252,000 from the sale of 4,000 shares of S1 Corporation, and
$1,177,000 from the sale of 50,000 shares of PKSI stock. Our main uses of cash
were $2,956,000 to pay a $0.52 per share dividend to shareholders in April 2000;
a total of $3,154,000, net, for new and follow-on investments in early stage
technology companies, including MiracleWorker.com, ThinkWorks, RF Solutions,
Medizeus, Screen4me, UtilConnect, Ardext Technologies, Nutec Sciences and NKD
Enterprises; $2,135,000, net, in loans to investee companies, the largest of
which is a short term demand note of $2.0 million to PaySys International, Inc.;
and $46,000 for the repurchase of our common stock.
Inventory increased by $265,000 at the ChemFree subsidiary to support higher
sales levels of both domestic and international shipments. Other current assets
increased at September 30, 2000 compared to December 31, 1999, in part due to
$71,000 in notes from officers of the company that were issued in partial
payment of the exercise price of stock options exercised by the officers in
January 2000. Long-term investments increased at September 30, 2000 compared to
December 31, 1999 mainly as a result of net new investments totaling $3,154,000
in early stage technology companies. At September 30, 2000, unrealized gains
totaling $1,076,000 in the shares of SONE, PKSI, DAWK, HHNT and AGIX are
reflected as a separate category of shareholders' equity on the balance sheet.
The value of these holdings at September 30, 2000 is lower than the value at
June 30, 2000 due to the partial sale of our holdings in PKSI during the quarter
and a general decline in the trading prices of the securities.
In September 2000, we negotiated an increase in our bank line of credit to $2.0
million. We have no borrowings under the line as of September 30, 2000. We
believe we have adequate cash and access to capital to support our operations
and plans for the foreseeable future.
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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: November 14, 2000 By: /s/ J. LELAND STRANGE
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J. Leland Strange
Chief Executive Officer, President
Date: November 14, 2000 By: /s/ BONNIE L. HERRON
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Bonnie L. Herron
Chief Financial Officer, Vice President
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