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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, 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 (I.R.S. Employer
of 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
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 February 29, 2000, 5,684,467 shares of Common Stock were outstanding. The
aggregate market value of the Common Stock held by non-affiliates of the
registrant was $40,486,044 (computed using the closing price of the Common Stock
on February 29, 2000 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 9, 2000, 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...................................................................................................7
3. Legal proceedings............................................................................................7
4. Submission of matters to a vote of security holders..........................................................7
PART II
5. Market for the registrant's common equity and related stockholder matters....................................7
6. Selected financial data......................................................................................8
7. Management's discussion and analysis of financial condition and results of operations........................8
7A. Quantitative and qualitative disclosures about market risk..................................................11
8. Financial statements and supplementary data.................................................................11
9. Changes in and disagreements with accountants on accounting and financial disclosure........................11
PART III
10. Directors and executive officers of the registrant..........................................................11
11. Executive compensation......................................................................................12
12. Security ownership of certain beneficial owners and management..............................................12
13. Certain relationships and related transactions..............................................................12
PART IV
14. Exhibits, financial statement schedules and reports on Form 8-K.............................................12
Signatures ............................................................................................................15
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PART I
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-K may contain
forward-looking statements relating to Intelligent Systems Corporation
(ISC). Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ
materially from those contemplated by such forward-looking statements.
Among the important factors that could cause actual results to differ
materially from those indicated by such forward-looking statements are
delays in product development, undetected software errors, competitive
pressures, technical difficulties, market acceptance, availability of
technical personnel, changes in customer requirements, changes in
financial markets, performance of affiliate companies, and general
economic conditions. ISC undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes in future operating
results.
ITEM 1. BUSINESS
OVERVIEW. Intelligent Systems Corporation, a Georgia corporation, has operated
either in corporate or partnership form since 1973 and its securities have been
publicly traded since 1981. In this report, sometimes we use the terms
"company", "we", "ours" and similar words to refer to Intelligent Systems
Corporation. We operated as a master limited partnership from 1986 to 1991, when
we merged into the present corporation. Our executive offices are located at
4355 Shackleford Road, Norcross, Georgia 30093 and our telephone number is (770)
381-2900. Our website address is www.intelsys.com.
Our main focus is to help entrepreneurs build valuable companies by forming
flexible partnership arrangements with early stage domestic companies. We bring
value to these companies by providing practical business advice, a proven
incubator program, early stage equity capital and a network of business and
financial contacts. Depending upon the needs of the partner company, we may be
either the 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. Most of our partner
companies are involved in the information technology industry (Internet,
Business to Business, e-commerce, software) although we are involved in other
promising opportunities as well (biotechnology, health care services etc.).
For almost ten years, we have operated the Intelligent Systems Incubator at our
corporate facility in the suburbs of Atlanta, Georgia. We believe our incubator
program is one of the longest running and largest privately funded incubator
programs in the United States. Our incubator companies have access to resources
such as office space, conference facilities, telecommunication and network
infrastructure, education programs, business advice and planning, a network of
professional services, and financial capital. Depending upon the experience and
needs of the founding entrepreneur, incubator companies will choose to use some
or all of the available resources. The incubator staff takes care of
time-consuming infrastructure issues so the entrepreneur can focus on driving
business development. The Intelligent Systems Incubator provides us with the
opportunity for day-to-day contact with emerging companies that may become
partnership companies, either as majority-owned subsidiaries or minority-owned
affiliates. Additionally, the incubator increases the number of business and
investment opportunities with which we are presented. Recently, we launched an
Internet incubator program at our facility to support our plan to become more
active in companies tied to internet-related applications, tools or services. In
1999, ChemFree Corporation, an incubator company in which we have a significant
investment, was named Incubator Company of the Year (Manufacturing category) by
the National Business Incubation Association.
We have made equity investments in some but not all of the companies in our
incubator program. Because we have a large incubator facility, we can offer the
benefits of the incubator program to companies that may not be appropriate
investment opportunities for us at a given time. Conversely, we are partners
with a number of companies that are not physically located in our incubator.
Although most of our investments involve companies located in Georgia, we
believe it is too limiting to consider only opportunities in companies that are
close enough geographically to locate in our incubator facility. In acquiring
companies for our incubator program or for investment, we compete with other
sources of business assistance,
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facilities and financial capital that may be available to the entrepreneur.
These sources include other incubator programs as well as angel and venture
capital investors.
FINANCIAL REPORTING. We consolidate the results of operations of our partner
companies in which we own a majority interest. We account for investments in
which we own 20 to 50 percent by the equity method. In general, under the equity
method, we include our pro rata share of the income or loss generated by each of
these businesses as investment income (loss) on a quarterly basis. These equity
losses and income decrease or increase, respectively, our cost basis of the
investment. However, if there is no commitment for ISC to provide additional
funding to the company, to the extent losses exceed our cost, we do not record a
value below zero. Because of this equity method accounting treatment, some of
our investments such as PaySys and Risk Laboratories are shown as zero on our
balance sheet but, we believe their estimated market value is substantially
higher. Privately owned partner companies in which we own less than 20 percent
of the equity are carried at the lower of cost or market. We do not mark up the
value of privately-owned businesses even when they raise money at higher
valuations. We are often actively engaged in managing strategic and operational
issues with our non-consolidated companies and devote significant resources to
the development of the business. From time to time, we may increase or decrease
our ownership in the company, the business may become a stand-alone public
company or it may be sold to another entity.
Beginning on page 5 of this report in the section titled "Affiliated Partner
Companies", we discuss some of our minority-owned partner companies.
CONSOLIDATED COMPANIES - Our consolidated companies, which currently include
ChemFree Corporation, QS Technologies and PsyCare America, operate in two
industry segments: technology related products and services, and health care
services. These companies are relatively small in size and subject to greater
fluctuation in revenue and profitability than larger, more established
businesses. For ease of comprehension, the business discussion which follows
contains information on products, markets, competitors, research and development
and manufacturing for our current operating subsidiaries, organized by industry
sector and by company. For further information concerning our historical
domestic and foreign operations, see Notes 14 and 16 in the accompanying Notes
to the Consolidated Financial Statements.
INDUSTRY SEGMENT: TECHNOLOGY RELATED PRODUCTS AND SERVICES
CHEMFREE CORPORATION - ChemFree Corporation (ChemFree), an incubator company
since its inception, designs, manufactures and markets a line of parts washers
under the SmartWasher(TM) trademark. SmartWashers use an advanced
bio-remediation system to clean automotive and machine parts without using
hazardous, solvent-based chemicals. SmartWashers consist of a molded plastic tub
and sink, recirculating pump, heater, control panel, filter with microorganisms,
and aqueous based degreasing solutions. 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 on a regular basis after the
parts washer sale.
ChemFree's markets include the automotive, transportation, industrial and
military markets. The automotive market includes companies with fleets of
vehicles to maintain; automobile manufacturers with extensive service networks
such as Chrysler, GM and BMW; and individual and chains of auto repair shops and
auto parts suppliers. 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 sells its products direct to high volume customers as well as through
several distribution channels, including international distributors in Europe
and the Pacific Rim. ChemFree also sells in competitive bid situations and under
a GSA schedule to government agencies. The ChemFree business is not seasonal and
would not be impacted significantly by the loss of one customer.
ChemFree competes with larger, established companies using solvent-based
systems, other small companies using non-hazardous systems, and 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.
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Warranty service, typically covering a one-year period, is provided by ChemFree
personnel or through its distributors and dealers. 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.
QS TECHNOLOGIES - QS Technologies operates from its Greenville, South Carolina
location, providing public health management software products, maintenance and
support services to its installed customer base as well as new customers. QS
Technologies products allow public health agencies to capture, analyze and
manage client information such as immunization and maternal health records. The
market includes local, state and federal public health agencies nationwide as
well as other government agencies, hospitals and clinics. The market is
fragmented and limited in size. QS Technologies competes against a number of
other software companies, many of which are small vendors like itself and some
of which are larger with access to greater resources. Typically, QS Technologies
provides its customers with service and support under annual contracts. Sales
are typically made in response to competitive bids and may take six to twelve
months to complete. QS Technologies is engaged in new product development
(including a web-based initiative) and sales activities to expand its customer
base and generate future revenue.
INDUSTRY SEGMENT: HEALTH CARE SERVICES
PsyCare provides specialty treatment programs for individuals with psychiatric
and psychological disorders, including depression and substance abuse. The
programs are conducted under PsyCare's Rapha(R) trademark and are directed
toward individuals who prefer a treatment approach that integrates their
physical and psychological needs with their Christian beliefs. The market for
PsyCare's treatment programs includes adults and adolescents suffering from
illnesses such as depression, addiction and behavioral disorders.
Traditionally, PsyCare's programs have been in-patient hospital programs
although PsyCare is introducing individual and group counseling services that
are marketed and conducted via the Internet and telephone. Historically
hospitals in mid to large size metropolitan areas contract with PsyCare to
conduct a Rapha treatment program in the 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. In 1999, PsyCare implemented
a licensing program which allows hospitals to license the Rapha program for a
monthly fee and implement the program using the hospital's existing medical and
therapy staff.
The number of hospital-based programs has declined in the past three years for a
number of reasons. The average length of stay for in-hospital treatment has
declined dramatically and managed care payors are reimbursing treatment
providers and hospitals at much lower rates. Furthermore, managed care is also
placing increased emphasis on drug-based treatment programs, with little or no
hospital stay. Given these trends, PsyCare has reduced overhead costs and
explored alternative business models, including licensing and telephone and
online counseling services. Although it was successful in maintaining
profitability in 1999 and 1998, it is too early to determine if the new
strategies will be effective long-term.
PsyCare's competitors include individual and group practices, private
hospital-affiliated treatment programs, other independent treatment programs
with a religious component, outpatient programs and drug-based therapies. Among
PsyCare's strengths are the consistent content and quality of its programs and
the strong network of Christian organizations that support the program's focus.
AFFILIATED PARTNER COMPANIES
An important part of our business is to seek out and form relationships with
companies that we believe are involved in promising technologies or markets with
good growth potential. From time to time, we have acquired or invested in such
companies and expect to continue to do so as a regular part of our strategy.
When we become involved, most of these companies are privately held, early stage
companies in technology-related fields. We are often the first investor in these
companies and are actively involved in helping the companies develop their
business strategy and plans. Some examples of our recent involvement are as
follows:
- - A significant equity position in PaySys International, Inc. (PaySys), a
leading software company involved in providing software systems for
processing credit transactions. We own a 37 percent common stock
interest in PaySys (which is
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approximately 29.6 percent on a fully diluted basis). Revenue at PaySys
grew to $50 million in 1999. PaySys spent significant amounts on new
product development during recent years to increase its technological
leadership. During the past three years, PaySys raised equity capital
from Oak Partners, GE Capital and Advent, all large venture capital
firms, at valuations higher than our original investment basis. Our
investment in PaySys is recorded at zero on our balance sheet as a
result of the equity method of accounting. Refer to Note 4 to the
Consolidated Financial Statements.
- - A 33 percent equity position in Visibility, Inc., a privately held
company involved in engineer-to-order software for large customers
selling and managing complex products. Other investors include Oak
Partners and Grubb & Williams. The downturn in the ERP industry in 1999
had a negative impact on Visibility's sales growth and profitability
although the company believes it prospects are improving. In addition,
a new product line should allow Visibility to address a sizable new
market. Refer to Note 4 to the Consolidated Financial Statements.
- - An approximately 29 percent equity position in Risk Laboratories, a
privately held company involved in risk management software for
corporate risk departments. Our investment in Risk is recorded at zero
on our balance sheet due to early stage losses that we recorded under
the equity method of accounting. Subsequent to year-end 1999, we sold
part of our interest in a private transaction for $8.8 million cash and
still retain an ownership position of approximately 7% of Risk
Laboratories.
- - A 21 percent interest in Digital Wireless Corporation, a privately held
incubator company involved in wireless telecommunications products for
industrial and commercial markets. Refer to Note 4 to the Consolidated
Financial Statements.
- - A minority equity position in 2order.com, an e-business involved in
sales configuration software. In early 2000, 2order.com was acquired by
publicly traded Primus Knowledge Systems and we acquired 66,431 shares
of Primus stock for our holdings in 2order.com. We expect to recognize
a significant gain when we sell our Primus shares, following a lock-up
period.
- - A minority equity position in Novient, a privately held company
involved in web-based resource and revenue management solutions for the
professional services market. Novient raised two rounds of financing in
the past two years from venture capital firms including Hummer Winblad,
Mellon Ventures and Noro-Moseley, at valuations significantly higher
than our original investment.
- - Our early investment in MediaMetrix, a leader in providing
statistically valid tools and methodology to measure Internet use and
user demographics, was converted into a gain of $995,000 in late 1999
when we sold our shares following the initial public offering of
MediaMetrix.
- - An early stage investment in VerticalOne, an emerging company focused
on providing a personal portal to the Internet, was converted into a
10,000 share interest in publicly traded SI Corporation when
VerticalOne was acquired by SI Corporation in November 1999, less than
a year after the initial financing.
- - A minority ownership in Atherogenics, a development stage company
involved in novel pharmaceuticals and diagnostic markers which address
cardiovascular disease and intervention. Atherogenics has raised
subsequent rounds from large venture capital firms and recently filed a
registration statement for its initial public offering.
- - A minority ownership in Medizeus, a start-up Internet company that
provides web-based diagnostic and reporting tools for radiologists,
medical image archival services and a women's health website, all of
which are focused initially on the mammography market.
- - A minority ownership in ThinkWorks, an early stage company that
provides web-based recruitment automation and employee records
management automation tools via an application service provider model.
A complete list of our partner companies is found on our company website at
www.intelsys.com which is updated regularly to reflect frequent changes,
additions and progress in our affiliate partner companies.
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PATENTS, TRADEMARKS AND TRADE SECRETS
The ChemFree subsidiary 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 these products and processes even
though we regard such aspects as proprietary. We have registered with the US
Patent and Trademark Office and various foreign jurisdictions numerous
trademarks and service marks for our products. We believe that an active
trademark and copyright protection program is important in developing and
maintaining brand recognition and protecting its intellectual property. Our
companies presently market their products under trademarks and service marks
such as Rapha, SmartWasher, OzzyJuice and others.
PERSONNEL
As of February 29, 2000, we had 64 full-time equivalent employees. Our employees
are not represented by a labor union, we have not had any work stoppages or
strikes and we believe our employee relations are good.
ITEM 2. PROPERTIES
At February 29, 2000, we have leases covering approximately 144,000 square feet
in two facilities in Atlanta, GA and 6,100 square feet in Greenville, SC to
house our manufacturing, sales, service and administration operations. We
believe our leased facilities are adequate for our existing and foreseeable
business operations. A portion of the Atlanta corporate facility is subleased to
businesses in the company's technology business incubator.
ITEM 3. LEGAL PROCEEDINGS
In 1999, a former consultant of the ChemFree subsidiary brought a suit against
ChemFree and other third parties challenging the ownership of certain of
ChemFree's patents. ChemFree and other parties to the suit strongly deny the
allegations, have filed a counterclaim and are vigorously defending the suit,
which is pending in the Superior Court of Gwinnett County, Georgia. Refer to
Note 10 to the Consolidated Financial Statements for further detail. In
addition, we are party to a small number of other legal matters arising in the
ordinary course of business. It is management's opinion that none of these other
matters will have a material adverse impact on our consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our shareholders during the fiscal
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our 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 our common stock as
reported by AMEX.
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YEAR ENDED DECEMBER 31, 1999 1998
HIGH LOW HIGH LOW
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1ST QUARTER 2 5/8 1 9/16 5 1/8 3 3/8
2ND QUARTER 3 5/8 2 4 5/8 2 7/8
3RD QUARTER 3 5/8 2 3/8 3 3/4 2 3/16
4TH QUARTER 4 1/4 2 1/16 3 1 3/8
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We had 461 shareholders of record as of February 29, 2000. We did not declare or
pay any cash dividends in the two-year period ended December 31, 1999. The
company has not paid dividends in the past but may pay cash dividends from time
to time on an irregular basis. On March 27, 2000 the company declared a special
cash dividend of $0.52 per share payable to shareholders of record on April 7,
2000.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands except share amounts)
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TWELVE MONTHS ENDED DECEMBER 31, 1999 1998 1997 1996 1995
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Net Sales $ 8,479 $ 18,253 $ 21,160 $ 23,678 $ 28,240
Net Income (Loss) 249 (a) (1,548)(b) (7,176)(c) 4,239(d) 147(e)
Net Income (Loss) Per Share 0.05 (.30) (1.41) 0.80 0.03
Total Assets 13,658 17,099 19,091 24,927 23,330
Working Capital (48) (1,827) (1,068) 8,554 4,092
Long-term Debt 363 900 1,000 -- 50
Stockholders' Equity 10,209 9,641 11,396 21,630 18,725
Shares Outstanding at Year End 5,114,467 5,104,467 5,104,467 5,126,767 5,312,867
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a. Includes investment gains of $2.2 million and $948,000 in net losses in
equity of investments.
b. Includes $944,000 charge for purchased in-process R&D, $955,000 charge
to discontinue product lines, $5.2 million gain on investments and
$593,000 income in equity of investments.
c. Includes $953,000 charge for purchased in-process R&D, $2.6 million
gain on investments, $3.0 million write-off of note receivable and $2.3
million loss in equity of investments.
d. Includes net gains of $6.9 million on investments and non-recurring
charges of $1.25 million.
e. Includes $818,000 gain on investment and $1.3 million gain on sale of
ISJ.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion relative to markets for our products and trends in
revenue, gross margins and anticipated expense levels, as well as other
statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," and "intend" and other similar expressions
constitute forward-looking statements. These forward-looking statements
are subject to business and economic risks and uncertainties, and our
actual results of operations may differ materially from those contained
in the forward-looking statements.
In August 1998, our HumanSoft subsidiary discontinued certain product lines
and, in November 1998, filed a petition for relief under Chapter 11 of the
federal bankruptcy code. Although HumanSoft emerged from Chapter 11 in November
1999, since the original 1998 filing date, only the QS Technologies subsidiary
of HumanSoft has continued to develop and sell software products and services to
the public health market. Also, effective February 1, 1999, we sold our
InterQuad Services company and thus do not consolidate the results of
InterQuad's operations since the sale date. Much of the variance in operating
results between 1999 and 1998 can be attributed to these two transactions.
RESULTS OF OPERATIONS
SUMMARY OF OPERATING RESULTS - Our ongoing consolidated subsidiaries are
ChemFree Corporation (bio-remediating parts washers), QS Technologies (health
and human services software) and PsyCare America (specialty psychiatric
treatment programs). The net loss from operations in 1999 was significantly
lower than in 1998 principally because we sold or discontinued the HumanSoft and
InterQuad businesses, which had sustained large losses in 1998, and because our
remaining
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consolidated companies are operating at break even or generating slight profits.
Operating losses in 1999 are principally corporate overhead and expenses related
to the technology incubator program.
SALES - Net sales in 1999 were $8,479,000, a decline of 54 percent compared to
1998. Almost 80 percent of the decrease is related to the sale of the InterQuad
Services business in early 1999 and the discontinuation of certain HumanSoft
operations. The QS Technologies subsidiary of HumanSoft continues to generate
license and maintenance revenue from software products and services. ChemFree
experienced an increase in revenue while PsyCare's revenue declined as the firm
closed certain hospital programs and moved to a licensing arrangement with more
of its programs. Under the licensing arrangement, although revenue billed
declines, expenses associated with the programs also decline.
Net sales in 1998 were $18,253,000, a decline of 14 percent compared to 1997.
The decrease is related to the sale of the Intelligent Enclosures business in
early 1998 and the continued decline in revenue derived from the PsyCare
operations, offset in part by an increased volume of products and services at
ChemFree and InterQuad. In the last quarter of 1998, HumanSoft's contribution to
our revenue was substantially lower than in prior periods as a result of
discontinuing two product lines and the Chapter 11 bankruptcy filing.
Health care services revenues represent 21 percent, 23 percent and 29 percent of
the total revenues for 1999, 1998 and 1997, respectively. The decline in the
contribution of the health care services is due to fewer inpatient programs,
lower reimbursement rates and a shift to licensing arrangements at the PsyCare
subsidiary. Revenue derived from international sales was 16 percent in 1999
compared to 39 percent in 1998 and 33 percent in 1997. The decrease in 1999
compared to prior years is a direct result of the sale of the InterQuad Services
group, the revenue of which was all international.
COST OF SALES - In 1999, cost of sales was 47 percent of revenue compared to 68
percent in 1998. The change is due to the fact that both InterQuad Services and
the discontinued HumanSoft operations had much higher cost of sales than do the
continuing operations. Cost of sales for the continuing operations was not
significantly different in 1999 compared to 1998.
Cost of sales in 1998 was 68 percent of revenue compared to 62 percent in 1997.
Although ChemFree, InterQuad and PsyCare reduced their respective cost of sales
as a percentage of revenue in 1998 as compared to 1997, HumanSoft's cost of
sales increased dramatically. For much of 1998, HumanSoft's expenses increased
significantly for technical personnel to develop, install and support software
for which the company was unable to record sufficient new revenue.
OPERATING EXPENSES - In 1999, marketing expenses declined in both absolute terms
and as a percentage of revenue compared to 1998. Again, much of the year-to-year
change is attributed to the sale of the InterQuad Services group and the
discontinuation of HumanSoft operations. In addition, PsyCare decreased its
marketing expenses in line with lower revenue from hospital based programs
although it is likely to increase marketing expenditures slightly in the future
as it introduces new services. General and administrative expenses were
$3,469,000 compared to $7,346,000 in 1998. Almost 70 percent of the year-to-year
change is due to the sale of InterQuad Services and the downsizing of the
HumanSoft operation. Included in the 1999 results are non-recurring
administrative and legal expenses totaling $156,000 related to the HumanSoft
bankruptcy case. In addition, in 1999 PsyCare reduced its facility and personnel
expenses and ISC's corporate expenses were lower as well, mainly due to lower
personnel expenses. Research and development expense declined in 1999 compared
to 1998 principally because of the downsizing of the HumanSoft operation. The QS
Technologies and ChemFree subsidiaries continue to invest in new product
development efforts.
In 1998, marketing expenses declined in absolute terms but increased as a
percentage of revenue compared to 1997. This change represents the net effect of
increased expenditures in the technology sector to support more customers and
higher revenue levels offset by a decline in marketing spending at PsyCare due
to a decline in in-patient hospital programs. Furthermore, in contrast to the
prior period, in 1998 we include the operating expenses related to two acquired
companies, JK and QS, for the full year. General and administrative expenses
were $7.3 million in 1998 compared to $7.6 million in the prior year. PsyCare
reduced expenses significantly through lower staffing levels and expense
control, as did our corporate group. At the same time, however, general and
administrative expenses at HumanSoft increased significantly. The increase
includes a third-quarter charge of $955,000 to discontinue two product lines, a
$191,000 restructuring charge in the first quarter following the JK acquisition,
and increased amortization expense related to the acquisitions. The $955,000
charge includes a goodwill write-off of $558,000. Research and development
expense for 1998 includes a one-time expense of $944,000 to allocate a portion
of the JK purchase price to in-process research and development as well as
increased new
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product development spending in the first 8 months of this year. By comparison,
in 1997, R&D expense includes a one-time charge of $953,000 to allocate a
portion of the QS purchase price to in-process research and development.
INTEREST INCOME - In 1999, we had net interest expense of $88,000 compared to
net interest expense of $289,000 in 1998 and net interest income of $350,000 in
1997. In 1999, interest expense associated with InterQuad Services was lower
than in 1998 and the domestic operations paid less interest on notes payable to
third parties because there was a lower level of debt in 1999 as compared to
1998. In 1998, we had interest expense on notes payable principally to the
sellers of QS and JK as well as interest on a higher level of bank debt in 1998
than in 1997. We also earned less interest on interest-bearing notes receivable
because some of the notes were repaid early in 1998.
INVESTMENT INCOME - In 1999, we recorded net investment income of $1.2 million
compared to net investment income of $5.8 million in 1998 and a net investment
loss of $2.6 million in 1997. The main components of investment income in 1999
include gains totaling $1.2 million on the sale of certain equity holdings in
three private software companies, a gain of $995,000 on the sale of our holdings
in MediaMetrix stock and $948,000 in net losses in the equity of affiliates
accounted for by the equity method. Refer to Note 3 for details on the sale
transactions mentioned in this section.
The main components of 1998 investment income include a gain of $1.0 million on
the sale of IQ Software common stock, a gain of $2.5 million on the sale of
PaySys stock, a gain of $457,000 on the sale of Paragon Interface stock, a gain
of $1.2 million on the sale of the IE business, and $593,000 in net gains in the
equity of affiliates accounted for by the equity method. Refer to Note 3 for
details on the sale transactions mentioned in this section.
In 1997, we recorded a net loss of $2.6 million on investments. 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. and $2.3
million in net losses in the equity of affiliates accounted for by the equity
method.
OTHER INCOME - Other income/expense in each of the last three years consists
mainly of various minor, non-recurring sources of income and expense. However,
in 1999, this category includes a net non-recurring charge of $141,500 related
to final settlement of the amounts owed to creditors in the HumanSoft bankruptcy
case.
TAXES - We had no income tax expense in 1999 because investment gains were
offset by capital loss carryforwards. We recognized a tax benefit in 1998 due to
a net operating loss carryback at the JK, Inc. subsidiary. Taxes payable in 1997
relate to the operations of the QS, Inc. subsidiary acquired in 1997.
COMMON SHARES - In 1999, the exercise of a stock option to acquire 10,000 shares
increased the number of shares outstanding at year-end to 5,114,467.
YEAR 2000 READINESS - In preparation for 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 reviewed our internal
computer-based systems, inquired of our key vendors and suppliers as to their
Year 2000 readiness and upgraded all non-compliant internal systems. Our QS
Technologies subsidiary licenses software to its customers and either migrated
its customers to software versions that we believe are Year 2000 compliant or
had previously informed customers that certain older software versions would no
longer be supported. Our cost to address internal compliance updates was well
under the anticipated level of $100,000. To date, we have not experienced any
impact on our operations or financial position as a result of the Year 2000
issue nor are we aware of any problems that might arise. However, we have
investments in a number of companies over which we do not exercise control. To
the extent that any company in which we have a significant investment
experiences a material negative impact on its business, the long-term value of
our investment could be reduced.
LIQUIDITY AND CAPITAL RESOURCES
With respect to continuing operations, in 1999 we derived $902,000 cash from the
sale of our remaining holdings in Information Advantage (formerly IQ Software),
$416,000 cash from sales of part of our holdings in two privately held software
companies and $1.1 million cash from the sale of our holdings in MediaMetrix,
Inc. During the year, we drew down a total of $1.25 million under a bank line of
credit which was paid down subsequently to $100,000 at year-end 1999.
INTELLIGENT SYSTEMS CORPORATION
-10-
<PAGE> 11
We used approximately $1.1 million cash in 1999 to pay down short-term notes
payable to third parties (not including banks), $845,000, net, for investments
in new businesses or follow-on funding for prior investments, and $310,000 for
payments for legal expenses and creditor settlements under the confirmed Plan of
Reorganization of HumanSoft. Significant changes year-to-year in accounts
receivable, property plant and equipment, notes payable, accounts payable, and
other current assets and liabilities are due principally to the sale of
InterQuad Services in February 1999 and the de-consolidation of assets and
liabilities of the former subsidiary.
In 1998, we derived most of our cash from the sale of common stock of IQ
Software (now Information Advantage) for $1.2 million, the sale of our interest
in Paragon Software and payment of a Paragon note for a total of $989,000, the
sale of shares of common stock of PaySys for $2.5 million, advances of $750,000
under a bank loan at the InterQuad subsidiary, and a net cash return of $589,000
on another minority investment. Details on these sales are found in Note 3. We
used approximately $5.3 million cash in 1998 to fund operating losses at certain
subsidiaries (the majority of which relates to the HumanSoft operation),
$200,000 for the initial payment related to the acquisition of JK, $700,000 to
repay a domestic bank line, and $500,000 for a principal payment on a note
related to the acquisition of QS. Accounts receivable are lower at December 31,
1998 than at December 31, 1997 mainly because of improved collection activity,
lower revenue levels at the PsyCare subsidiary and reserves taken at the
HumanSoft subsidiary related to the decision to discontinue certain product
lines.
We believe we have adequate funding for anticipated cash needs for the
foreseeable future. Subsequent to year end, on March 21, 2000, we sold the
majority of our holdings in Risk Laboratories for $8.8 million in cash. In
addition, we have the right to require the purchaser to acquire our remaining 7%
interest in Risk Laboratories from us at various time periods in the next two
years for approximately $2.4 million cash. Refer to Note 19 for further details.
Furthermore, as a result of the acquisitions by public companies of two of our
investments, 2order.com and VerticalOne, we now hold common stock of the two
public companies. These holdings represent additional sources of liquidity
either through borrowings secured by a pledge of the stock or by selling the
stock in the public market, subject to certain short-term holding period
restrictions. As explained in Note 1 to the Consolidated Financial Statements, 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. Conversely, developments at one or more of these companies which result
in a liquidity event, such as an initial public offering or acquisition, could
impact our financial condition in a positive manner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report. See
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No independent public accountant of the company has resigned, indicated any
intent to resign or been dismissed as the independent public accountant of the
company during the two years ended December 31, 1999 or at any time afterward.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Please refer to the subsection entitled "Proposal 1 - The Election of Directors
- - Nominees" and "Proposal 1 - The Election of Directors - Executive Officers" in
our Proxy Statement for the Annual Meeting of Shareholders to be held on June 9,
2000 for information about those individuals nominated as directors and about
the executive officers of the company. This information is incorporated into
this Item 10 by reference. Information regarding compliance by directors and
executive officers of the company and owners of more than 10 percent of our
common stock with the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, is contained under the caption "Section 16(a)
Beneficial
INTELLIGENT SYSTEMS CORPORATION
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<PAGE> 12
Ownership Reporting Compliance" in the Proxy Statement mentioned above. This
information is incorporated into this Item 10 by reference.
ITEM 11. EXECUTIVE COMPENSATION
Please refer to the subsection entitled "Proposal 1 - The Election of Directors
- - Executive Compensation" in the Proxy Statement referred to in Item 10 for
information about management compensation. This information is incorporated into
this Item 11 by reference, except that we specifically do not incorporate into
this Item 11 the information in the subsections entitled "Proposal 1 - The
Election of Directors - Executive Compensation - Board Compensation Committee
Report on Executive Compensation" and "Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Please refer to the subsection entitled "Voting - Principal Shareholders,
Directors and Certain Executive Officers" in the Proxy Statement referred to in
Item 10 for information about the ownership of our $0.01 par value common stock
by certain persons. This information is incorporated into this Item 12 by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1999, J. William Goodhew, Vice President of the company, invested $100,000 in
Risk Laboratories, LLC, a business in which Intelligent Systems Corporation
owned an equity interest. The terms of the transaction were negotiated between
Mr. Goodhew and Risk Laboratories at arm's length on terms similar to those
offered to other third parties. On March 21, 2000, as part of the transaction in
which the company sold the majority of its interest in Risk Laboratories (see
Note 19), Mr. Goodhew sold part of his interest for the same valuation as other
shareholders.
On January 5, 2000, three officers of the company exercised stock options and
issued to the company promissory notes in payment of the exercise price. J.
Leland Strange, President and Chief Executive Officer, exercised options to
acquire 230,000 shares of common stock and issued the company a promissory note
for $380,000 representing the total exercise price of the options. Bonnie L.
Herron, Vice President and Chief Financial Officer, and Francis A. Marks, Vice
President, each exercised options to acquire 170,000 shares of common stock and
each issued the company a promissory note for $258,750 representing the total
exercise price of their respective options. Each of the notes is secured by a
pledge of the common stock acquired upon exercise of the option, has a term of
one year and bears interest at the rate of seven percent (7%) per annum.
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 reports 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, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 Consolidated Statements of
Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flow for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
INTELLIGENT SYSTEMS CORPORATION
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<PAGE> 13
2. Financial Statement Schedules
We are including the financial statement schedules listed below in this
report. We omitted all other schedules required by certain applicable accounting
regulations of the Securities and Exchange Commission because the omitted
schedules are not required under the related instructions or do not apply or
because we have included the information required in the consolidated financial
statements or notes thereto. See the Index to Financial Statements and
Supplemental Schedules on page F-1 hereof.
Schedule II - Valuation and Qualifying Accounts and Reserves
Report of Independent Auditors for PaySys International, Inc.
Consolidated Balance Sheets of PaySys at December 31, 1999 and 1998
Consolidated Statements of Operations of PaySys for the three years
ended December 31, 1999
Consolidated Statements of Changes in Stockholders' Equity of
PaySys for the three years ended December 31, 1999
Consolidated Statements of Cash Flow of PaySys for the three years ended
December 31, 1999
Notes to Consolidated Financial Statements of PaySys
Report of Independent Public Accountants for Visibility, Inc.
Consolidated Balance Sheets of Visibility at December 31, 1999 and 1998
Consolidated Statements of Operations of Visibility for the three years
ended December 31, 1999
Consolidated Statements of Changes in Stockholders' Equity of
Visibility for the three years ended December 31, 1999
Consolidated Statements of Cash Flow of Visibility for the three
years ended December 31, 1999
Notes to Consolidated Financial Statements of Visibility
Report of Independent Public Accountants for Digital Wireless Corporation
Balance Sheet of Digital Wireless Corporation at December 31, 1999
Statement of Operations of Digital Wireless Corporation for the year ended
December 31, 1999
Statement of Changes in Stockholders' Equity of Digital Wireless
Corporation for the year ended December 31, 1999
Statement of Cash Flow of Digital Wireless Corporation for the year ended
December 31, 1999
Notes to Financial Statements of Digital Wireless Corporation
3. Exhibits
We are filing the following exhibits with this report or incorporating
them by reference to earlier filings. Shareholders may request a copy of any
exhibit by contacting 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.
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, 1997.)
3(ii) Bylaws of the Registrant dated June 6, 1997. (Incorporated by reference
to Exhibit 3(ii) of the Registrant's Form 10-K/A for the year ended
December 31, 1997.)
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. (Incorporated by reference
to Exhibit 10.2 of the Registrant's Form 10-K for the year ended
December 31, 1997.)
10.3 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 10.3 (a) is incorporated by reference to Exhibit 4.1 of the
Registrant's Form S-8 dated July 25, 1997.
Items 10.3 (b) and (c) are incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-K for the year ended December 31, 1993.
10.4 Revolving Loan Agreement dated July 2, 1999 between Registrant and
Fidelity National Bank.
10.5 Stock Pledge Agreement dated July 2, 1999 between Registrant and
Fidelity National Bank.
10.6 Second Modification to Loan Documents dated March 7, 2000 between
Registrant and Fidelity National Bank.
10.7 Commercial Promissory Note dated July 2, 1999 in favor of Fidelity
National Bank.
10.8 Second Amendment to Commercial Promissory Note dated March 7, 2000 in
favor of Fidelity National Bank.
10.9 Conditional Guaranty of Payment dated November 29, 1999 by the
Registrant in favor of certain creditors of HumanSoft LLC, related to
the confirmation of the Amended and Restated Plan of Reorganization of
HumanSoft LLC, a wholly owned subsidiary of the Registrant.
21.0 List of subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst and Young LLP.
23.7 Financial Data Schedule (for SEC only).
(B) REPORTS ON FORM 8-K.
We did not file any reports on Form 8-K during the quarter ended December 31,
1999.
(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
Date: March 29, 2000 By: /s/ J. Leland Strange
----------------------------------
J. Leland Strange
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ J. Leland Strange Chairman of the Board, President, March 29, 2000
- ----------------------- Chief Executive Officer and Director
J. Leland Strange (Principal Executive Officer)
/s/ Bonnie L. Herron Chief Financial Officer March 29, 2000
- ----------------------- (Principal Accounting and Financial Officer)
Bonnie L. Herron
/s/ Donald A. McMahon Director March 29, 2000
- -----------------------
Donald A. McMahon
/s/ James V. Napier Director March 29, 2000
- -----------------------
James V. Napier
/s/ John B. Peatman Director March 29, 2000
- -----------------------
John B. Peatman
/s/ Parker H. Petit Director March 29, 2000
- -----------------------
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, 1999 and 1998.................................................................F-3
Consolidated Statements of Operations -
Years Ended December 31, 1999, 1998 and 1997......................................................................F-4
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1999, 1998 and 1997......................................................................F-5
Consolidated Statements of Cash Flow -
Years Ended December 31, 1999, 1998 and 1997......................................................................F-6
Notes to Consolidated Financial Statements...............................................................................F-7
FINANCIAL STATEMENT SCHEDULES:
The following supplemental schedules of the Registrant and its subsidiaries are
submitted herewith in response to Item 14(a)(2):
Schedule II - Valuation and Qualifying Accounts and Reserves.............................................................S-1
Report of Independent Auditors for PaySys International, Inc.............................................................S-2
Consolidated Balance Sheets of PaySys at December 31, 1999 and 1998...............................................S-3
Consolidated Statements of Operations of PaySys for the three years ended December 31, 1999.......................S-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) of PaySys
for the three years ended December 31, 1999....................................................................S-5
Consolidated Statements of Cash Flow of PaySys for the three years ended December 31, 1999........................S-6
Notes to Consolidated Financial Statements of PaySys..............................................................S-7
Report of Independent Public Accountants for Visibility, Inc............................................................S-31
Consolidated Balance Sheets of Visibility at December 31, 1999 and 1998..........................................S-32
Consolidated Statements of Operations of Visibility for the three years ended December 31, 1999..................S-33
Consolidated Statements of Changes in Shareholders' Equity of Visibility
for the three years ended December 31, 1999...................................................................S-34
Consolidated Statements of Cash Flow of Visibility for the three years ended December 31, 1999...................S-35
Notes to Consolidated Financial Statements of Visibility.........................................................S-36
Report of Independent Public Accountants for Digital Wireless Corporation...............................................S-49
Balance Sheet of Digital Wireless Corporation at December 31, 1999...............................................S-50
Statement of Operations of Digital Wireless Corporation for the year ended December 31, 1999.....................S-52
Statement of Changes in Shareholders' Equity of Digital Wireless Corporation
for the year ended December 31, 1999..........................................................................S-53
Statement of Cash Flow of Digital Wireless Corporation for the year ended December 31, 1999......................S-54
Notes to Financial Statements of Digital Wireless Corporation....................................................S-55
</TABLE>
*These documents are available upon request to Bonnie Herron and payment of $.50
per page for copying charges.
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, 1999 and 1998, 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, 1999. 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, which statements reflect
0 percent of total assets and 7 percent of total revenues in 1999 and 19.5
percent of total assets and 37.1 percent of total revenues in 1998. 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 1999 and 1998, and the equity in its 1999 and 1998
net loss represents 0 percent of consolidated net income for 1999 and 0 percent
of consolidated net loss for 1998. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
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
March 23, 2000
INTELLIGENT SYSTEMS CORPORATION
F-2
<PAGE> 18
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 737 $ 461
Accounts receivable, net 1,464 2,165
Notes and interest receivable 254 189
Inventories 325 741
Other current assets 263 990
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 3,043 4,546
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term investments 8,576 8,593
Long-term notes receivable 53 75
Property and equipment, at cost less accumulated depreciation and amortization 686 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 $ 13,658 $ 17,099
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term borrowings $ 1,000 $ 2,078
Accounts payable 444 1,727
Accrued expenses and other current liabilities 1,647 2,568
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,091 6,373
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 363 900
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest (5) 185
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 authorized, 5,114,467 and
5,104,467 outstanding at December 31, 1999 and 1998, respectively 51 51
Paid-in capital 24,069 24,046
Foreign currency translation adjustment -- (197)
Unrealized gain in available-for-sale securities 731 633
Accumulated deficit (14,642) (14,892)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,209 9,641
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 13,658 $ 17,099
===================================================================================================================================
</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, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 8,479 $ 18,253 $ 21,160
Expenses:
Cost of sales 3,983 12,495 13,031
Marketing 1,021 3,561 3,860
General & administrative 3,469 7,346 7,638
Research & development 805 1,892 1,485
- --------------------------------------------------------------------------------------------------------------------------
Loss from operations (799) (7,041) (4,854)
- --------------------------------------------------------------------------------------------------------------------------
Other income:
Interest income (expense), net (88) (290) 350
Investment income (loss), net 1,222 5,776 (2,585)
Other loss, net (76) (135) (61)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax provision (benefit)
and minority interest 259 (1,690) (7,150)
- --------------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) -- (152) 16
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest 259 (1,538) (7,166)
- --------------------------------------------------------------------------------------------------------------------------
Minority interest 10 10 10
==========================================================================================================================
Net income (loss) $ 249 $ (1,548) $ (7,176)
Basic net income (loss) per share $ 0.05 $ (0.30) $ (1.41)
Diluted net income (loss) per share $ 0.05 $ (0.30) $ (1.41)
Basic weighted average shares outstanding 5,106,134 5,104,467 5,087,456
- --------------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 5,336,776 5,104,467 5,087,456
- --------------------------------------------------------------------------------------------------------------------------
</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 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK, NUMBER OF SHARES, beginning of year 5,104,467 5,104,467 5,126,767
Exercise of options during year 10,000 -- 25,000
Purchase and retirement of stock -- -- (47,300)
- ---------------------------------------------------------------------------------------------------------------------------------
End of year 5,114,467 5,104,467 5,104,467
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, AMOUNT, beginning of year $ 51 $ 51 $ 51
Purchase and retirement of stock -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
End of year 51 51 51
- ---------------------------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL, beginning of year 24,046 24,046 24,139
Proceeds from options exercised 23 -- 67
Purchase and retirement of stock -- -- (160)
- ---------------------------------------------------------------------------------------------------------------------------------
End of year 24,069 24,046 24,046
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT, beginning of year (197) (193) (196)
Foreign currency translation adjustment during year 197 (4) 3
- ---------------------------------------------------------------------------------------------------------------------------------
End of year -- (197) (193)
- ---------------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAIN IN AVAILABLE-FOR-SALE SECURITIES 731 633 836
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT, beginning of year (14,892) (13,344) (6,168)
Net income (loss) 249 (1,548) (7,176)
- ---------------------------------------------------------------------------------------------------------------------------------
End of year (14,642) (14,892) (13,344)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 10,209 $ 9,641 $ 11,396
=================================================================================================================================
COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 249 $ (1,548) $ (7,176)
Other comprehensive income (loss):
Foreign currency translation adjustments -- (4) 3
Unrealized gain 731 633 836
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 980 $ (919) $ (6,337)
=================================================================================================================================
</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): 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net income (loss) $ 249 $(1,548) $(7,176)
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 347 1,509 2,193
Loss (gain) from sale or write-down of assets, net (2,170) (5,184) 330
Equity in net loss (income) of affiliates 948 (592) 2,262
Changes in operating assets and liabilities:
Accounts receivable 19 2,013 453
Inventories 279 (130) 37
Other current assets 290 (200) (36)
Accounts payable (459) 353 301
Accrued expenses and other current liabilities 315 (1,507) 2,668
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) continuing operations (182) (5,286) 1,032
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of investments 2,365 5,451 3,667
Decrease in net assets/liabilities of
discontinued operations -- -- 100
Acquisition of company, net of cash acquired -- 83 (870)
Increase in ownership of subsidiaries -- -- (50)
Increase (decrease) in minority interests (190) 10 --
Acquisitions of long-term investments (788) (306) (6,329)
Repayments (advances) under notes receivable, net (57) 232 (1,223)
Maturity (purchases) of certificates of deposit -- -- 1,056
Dispositions (purchases) of property and equipment, net (13) 838 (1,162)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities 1,317 6,308 (4,811)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under short-term
borrowing arrangements (975) (600) 1,478
Purchase and retirement of stock -- -- (160)
Exercise of stock options 23 -- 67
Foreign currency translation adjustment 93 (4) 3
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (859) (604) 1,388
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 276 418 (2,391)
Cash at beginning of year 461 43 2,434
- ---------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 737 $ 461 $ 43
=================================================================================================================================
</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 was
formed in November 1991 to acquire through merger the business, net assets and
operations of Intelligent Systems Master, L.P. In this document, terms such as
the company, we and us refer to Intelligent Systems Corporation.
Nature of Operations - Our business is to create, manage and invest in
businesses which we believe have promising growth potential. Consolidated
companies (in which we have 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 16). Our affiliate
companies (in which we have a minority ownership or non-controlling interest)
are mainly involved in the technology industry.
Use of Estimates - In preparing the financial statements in conformity with
generally accepted accounting principles, management makes 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. These estimates and assumptions also affect amounts of revenues and
expenses during the reporting period. Actual results could differ from these
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 accounts and transactions
between our subsidiaries.
Investments - For entities in which we have 20 to 50 percent ownership
interest, we account for these investments by the equity method. We account for
investments of less than 20 percent in non-marketable equity securities at the
lower of cost or market. When calculating gain or loss on the sale of an
investment, we use the average cost basis of the securities. 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). At December 31, 1999, the aggregate fair
market value of our available-for-sale securities, which consist of 10,000
shares of common stock of S1 Corporation (which shares were acquired as a
result of the merger of one of our minority owned businesses) totaled $781,000.
At December 31, 1998, the aggregate fair value of our available-for-sale
securities, which consisted primarily of 95,449 shares of common stock of
Information Advantage, Inc. (successor by merger to IQ Software Corporation
(IQ)) totaled $725,000. These amounts include unrealized holding gains of
$731,000 and $633,000 as of December 31, 1999 and 1998, respectively. These
amounts are reflected as a separate component of stockholders' equity.
We classify short-term investments as trading securities under SFAS No. 115.
The impact on the December 31, 1999 and 1998 financial statements of applying
SFAS No. 115 to the trading securities was immaterial. Our investment in
Visibility represents approximately $4.2 million of our long-term investments
at December 31, 1999 (see Note 4). If the financial condition of Visibility
deteriorates, it could have an adverse effect on our financial condition.
Translation of Foreign Currencies - We consider that local currencies are the
functional currencies for foreign operations. We translate assets and
liabilities to U.S. dollars at year-end exchange rates. We translate income and
expense items at average rates of exchange prevailing during the year.
Translation adjustments are accumulated as a separate component of
stockholders' equity. Earnings include gains and losses that result from
foreign currency transactions.
Inventories - We state the value of inventories at the lower of 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, we depreciate these assets 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 $1,024,000 and $2,241,000 at
December 31, 1999 and 1998, respectively.
INTELLIGENT SYSTEMS CORPORATION
F-7
<PAGE> 23
Intangibles - Intangibles are carried at cost net of related amortization. When
we acquire a business, we generally amortize the excess of the cost of the
acquisition over underlying net assets of the business acquired over three to
five year periods using the straight-line method. Accumulated amortization of
intangibles totaled $179,000 and $2.7 million at December 31, 1999 and 1998,
respectively. Our policy is to write off the asset and accumulated amortization
for fully amortized intangibles. Periodically we review the values assigned to
intangible assets to determine whether they have been permanently impaired. To
measure whether goodwill is recoverable, we use an estimate of the undiscounted
cash flows of the applicable entity over the remaining life of the goodwill. In
1998, we wrote off $558,000 of goodwill associated with discontinuing certain
product lines of the HumanSoft subsidiary (see Note 18). This write-off is
reflected in general and administrative expense in the accompanying statements
of operations. In 1999, 1998 and 1997, we recorded intangible amortization
expense of approximately $14,987, $957,000 and $604,000, respectively. In 1998,
we expensed $944,000 of purchased research and development related to the
acquisition of JK, Inc. (see Note 2). In 1997, we expensed $953,000 of
purchased research and development related to the acquisition of QS, Inc. (see
Note 2). These expenses are included in research and development expense on the
accompanying statements of operations.
Accrued Expenses and Other Current Liabilities - Accrued expenses and other
liabilities at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- ---------------------------------------------------------
<S> <C> <C>
Accrued wages and payroll taxes $ 277 $454
Deferred revenue 709 782
Other accrued expenses 660 1,329
- ---------------------------------------------------------
</TABLE>
Warranty Costs - We accrue the estimated costs associated with product
warranties as an expense in the period the related sales are recognized.
Revenue Recognition -Sales of software licenses, technology-related products
and services and health care services make up our revenue. We recognize 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 97-2, "Software Revenue Recognition".
Generally, we recognize software license revenue upon delivery of the software
and related documentation when there are no significant remaining obligations.
We accrue the costs of insignificant remaining obligations at the time that we
recognize software license revenue. Service fees received from the sale of
software maintenance and support contracts provide customers access to
technical support and minor upgrades to licensed revenues. These fees are
recognized as services are provided over the life of such contracts. We provide
for estimated sales returns in the period in which the sales are recorded.
Financial Instruments - The carrying value of cash, accounts receivable,
accounts payable and other financial instruments included in the accompanying
balance sheets approximates their fair value principally due to the short-term
maturity of these instruments.
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.
NOTE 2
ACQUISITIONS
QS, Inc. - Effective July 1, 1997, we 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. We 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. We 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, we have consolidated the results of operations of
QS.
JK, Inc. - Effective January 1, 1998, our HumanSoft LLC subsidiary acquired all
of the common stock of JK, Inc. (JK), a company that provides software and
services to the public health market, in exchange for 1,523 units of limited
liability interest in HumanSoft. Immediately afterward, Intelligent Systems
acquired 878 of the newly issued HumanSoft units from the sellers of JK for
$200,000 cash and a promissory note of $600,000. The note was due in three
equal annual installments beginning January 1, 1999 and bears interest of 8.5
INTELLIGENT SYSTEMS CORPORATION
F-8
<PAGE> 24
percent per annum payable annually. The acquisition was accounted for as a
purchase. We expensed $944,000 of purchased research and development projects
that had not reached technological feasibility and that did not have an
alternative future use. We have consolidated the results of operations of JK
since the acquisition. The company ceased operations in September 1998.
Intelligent Systems made a claim against the sellers of JK for breach of
certain representations and warranties in the acquisition agreements and
asserted its right to offset amounts owed to the sellers under the notes. The
sellers indicated they disagree with our claim. Neither party has taken any
further action in this matter.
NOTE 3
SALES OF ASSETS
Intelligent Enclosures Corporation - Effective April 1, 1998, we sold
substantially all the assets and the business operations of our Intelligent
Enclosures (IE) subsidiary to Daw Technologies, Inc. in exchange for common
stock of Daw. The number of shares of common stock of Daw that we will receive
for the assets will be determined at a second closing two years from the date
of the sale (or earlier based on certain events). The sales price was fixed at
$1.3 million; therefore, the trading price of Daw shares at the second closing
will determine the number of Daw shares we will receive.
InterQuad Services - Effective February 1, 1999, we sold our ownership in the
InterQuad Services subsidiary. 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.
IQ Software Corporation - In 1998, we recorded a gain of $1.0 million and cash
proceeds of $1.2 million on the sale of 114,000 shares of common stock of IQ.
In January 1999, we sold our remaining 95,449 shares of common stock of
Information Advantage (formerly IQ Software). We recorded a gain on the sale of
$814,000 and netted cash proceeds of $902,000.
MediaMetrix, Inc. - As a result of a merger between Relevant Knowledge (a
company in which we were a minority investor) and MediaMetrix in 1998, we
acquired 24,501 shares of MediaMetrix stock. We sold the shares in the public
market on November 6, 1999 after the one year holding period, realizing a gain
of $995,000 on the sale and cash of $1,045,000.
Novient, Inc. - In the first quarter of 1999, we sold 66,500 shares of
preferred stock of Novient, Inc., in a private transaction, recognizing a gain
of $233,000 and netting $286,000 in cash. At December 31, 1999, we retain
227,250 shares of preferred stock in the private company.
OrCAD, Inc. - We sold our remaining 104,484 shares of common stock of OrCAD
(acquired in the sale of our Japanese affiliate in 1995) in the second quarter
of 1997, recognizing a gain of $217,000 on the sale.
Paragon Interface, Inc. - Effective April 17, 1998, we sold our minority
interest in Paragon Interface, Inc. for $839,000 cash. At the closing, Paragon
also repaid a loan of $150,000 from us. We recorded a gain of $457,000 on the
sale. In the second quarter of 1999, we recorded additional gain of $130,000
upon the expiration of certain contingencies.
PaySys International, Inc. - On March 31, 1997, we sold 252,685 shares
(adjusted for a stock split) of common stock of PaySys International, Inc. in a
private transaction. We received $2.0 million in cash for the stock and
recorded a gain of $1.9 million on the sale. In a second private transaction on
July 1, 1998, we sold 437,063 shares of common stock of PaySys. The transaction
netted $2.5 million in cash and resulted in a gain of $2.5 million on the sale.
At December 31, 1998, we still own 3,606,382 shares of common stock of PaySys.
NOTE 4
INVESTMENTS IN AFFILIATES
PaySys International, Inc. - At December 31, 1999, we owned a 37 percent
interest (approximately 29.6% on a diluted basis) in PaySys International,
Inc., a software company accounted for using the equity method of accounting.
Our pro rata share of PaySys losses was $7.9 million in 1997. However, in
accordance with the equity method of accounting, we only recorded $3.0 million,
reducing our investment of $3.0 million to zero
INTELLIGENT SYSTEMS CORPORATION
F-9
<PAGE> 25
on the balance sheet at December 31, 1998 and 1999. During 1998 and 1999, we
did not record any additional losses or income related to PaySys. We have no
obligation or intent to provide additional funding to PaySys. No dividends were
received from the affiliate during 1999 and 1998.
The following table contains the summarized financial information of PaySys.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 18,929 $ 14,852 $ 10,658
Current liabilities 18,947 18,957 20,981
Noncurrent assets 4,960 3,005 3,604
Noncurrent liabilities 16,370 8,653 5,204
Net sales $ 50,068 $ 45,905 $ 32,787
Operating income (loss) 902 (3,814) (15,063)
Net income (loss) (1,706) (5,163)(1) (15,815)(2)
- ---------------------------------------------------------------------
</TABLE>
(1) Includes non-recurring charges totaling $4.3 million.
(2) Includes non-recurring charges totaling $5.8 million.
Visibility, Inc. - At December 31, 1998, we owned a 33 percent interest in
Visibility, Inc., a software company. The investment is classified as an
affiliate and accounted for using the equity method of accounting. Our pro rata
share of Visibility income (loss) was $(1,418,000), $195,000 and $797,000 in
1999, 1998 and 1997, respectively. No dividends were received from the
affiliate in 1998 or 1997.
The following table contains the summarized financial information of
Visibility.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 9,177 $10,236 $ 6,755
Current liabilities 16,862 14,402 11,894
Noncurrent assets 1,108 1,337 1,452
Noncurrent liabilities 1,972 2,029 1,855
Net sales $24,210 $30,193 $21,850
Operating income (loss) (3,636) 1,040 (2,892)
Net income (loss) (4,225) 679 (3,360)
- --------------------------------------------------------------
</TABLE>
Digital Wireless Corporation - At December 31, 1999, we owned a 21 percent
interest in Digital Wireless Corporation, a private company involved in
wireless telecommunication products for industrial and commercial markets. Our
pro rata share of Digital's income in 1999 was $184,000. No dividends were
received from the affiliate in 1999.
The following table contains the summarized financial information of Digital
Wireless.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------
(in thousands) 1999
- ----------------------------------
<S> <C>
Current assets $2,785
Current liabilities 439
Noncurrent assets 115
Noncurrent liabilities 103
Net sales $4,471
Operating income 1,006
Net income 794
------
</TABLE>
NOTE 5
LONG-TERM INVESTMENTS
Investments in Alliance Technology Ventures (a private technology venture fund)
and Atherogenics, Inc. (a biotechnology firm) represent 8% each of the
company's long-term investments at December 31, 1999 and 4% and 8%,
respectively, of long-term investments at December 31, 1998.
NOTE 6
ACCOUNTS AND NOTES RECEIVABLE AND OTHER COMMITMENTS
At December 31, 1999 and 1998, our allowance for doubtful accounts and sales
returns amounted to $58,000 and $1,188,000, respectively.
Provisions for doubtful accounts and sales returns were $24,000, $240,000 and
$46,000 for the years ended December 31, 1999, 1998 and 1997, respectively. As
of December 31, 1999, we hold a minority ownership position in Risk
Laboratories, LLC (risk management software). We own approximately 29 percent
of Risk Laboratories and account for this investment by the equity method. We
have also made loans to Risk Laboratories with original terms expiring in 1999
and bearing interest at various rates over prime. These loans amounted to
$148,000 and $133,000 at December 31, 1999 and 1998, respectively. Our pro rata
INTELLIGENT SYSTEMS CORPORATION
F-10
<PAGE> 26
share of Risk Laboratories losses was $106,000 in 1998. However, in accordance
with the equity method of accounting, we only recorded $80,000, reducing our
investment of $200,000 to zero on the balance sheet at December 31, 1998.
During 1999, we did not record any additional losses or income related to Risk
Laboratories. Refer to Note 19 for an explanation of the sale of our interest
in Risk Laboratories on March 21, 2000.
At December 31, 1999, one UK-based customer of our ChemFree subsidiary
represented 25 percent of consolidated accounts receivable as a result of a
high volume of shipments to the customer in the last 45 days of the year.
Balances were paid within terms subsequent to the year-end.
NOTE 7
BORROWINGS
Terms and borrowings under our credit facilities are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Maximum outstanding (month-end) $1,250 $2,477
Outstanding at year end $ 100 $ 750
Average interest rate at year end 8.5% 8.5%
Average borrowings during the year $ 387 $1,127
Average interest rate 8.5% 10.4%
- -----------------------------------------------------------
</TABLE>
Interest paid on debt during 1999, 1998 and 1997 amounted to $33,000, $118,000
and $103,000, respectively.
NOTE 8
LONG-TERM DEBT
Our long-term debt consists of the promissory notes payable to the sellers of
JK, as more fully described in Note 2, and the long-term portion of the
creditor payments related to the HumanSoft reorganization. Maturities of
long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------
(in thousands)
- ---------------------------------------------------------
<S> <C>
2001 $363
- ---------------------------------------------------------
Total long-term debt payments $363
=========================================================
</TABLE>
NOTE 9
INCOME TAXES
The income tax provision (benefit) related to operations consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------
(in thousands) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Current:
Domestic $ -- $(152) $ 16
- ---------------------------------------------------------
$ -- $(152) $ 16
=========================================================
</TABLE>
We do not show a reconciliation between our effective tax rate and the U.S.
statutory rate since only state income taxes are provided.
At December 31, 1999, our domestic subsidiaries had net operating loss
carryforwards totaling $24.0 million. The net operating loss carryforwards, if
unused as offsets to future taxable income, will expire beginning in 2006 and
continuing through 2019. We may not be able to use these carryforwards because,
in some cases, they are limited to taxable income of a particular subsidiary or
may be subject to annual limitation under the Internal Revenue Code if there is
a greater than 50 percent change in ownership as defined under Section 382.
We account for income taxes using Statement of Financial Accounting Standard
109, "Accounting for Income Taxes". We have a deferred tax benefit of
approximately $11.0 million at December 31, 1999 and $10.0 million at December
31, 1998. Since our ability to realize the deferred tax asset is uncertain, the
amount is offset in both 1999 and 1998 by a valuation allowance of an equal
amount. The deferred tax benefit at December 31, 1999 and 1998 relates
primarily to net operating loss carryforwards.
Income taxes paid (or refunds received) during 1999, 1998 and 1997 amounted to
$0, $(152,000), and $16,000, respectively.
NOTE 10
COMMITMENTS AND CONTINGENCIES
Leases - We have noncancellable operating leases expiring at various dates
through 2002. Future minimum lease payments are as follows:
INTELLIGENT SYSTEMS CORPORATION
F-11
<PAGE> 27
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------
(in thousands)
- --------------------------------------------------------
<S> <C> <C>
2000 $ 989
2001 923
2002 764
Thereafter --
- --------------------------------------------------------
Total minimum lease payments $2,676
========================================================
</TABLE>
Rental expense for leased facilities and equipment related to operations
amounted to $995,000, $1.2 million and $1.2 million, for the years ended
December 31, 1999, 1998 and 1997, respectively.
Guaranty Of HumanSoft Obligations - In connection with the confirmation on
November 18, 1999 of the Plan of Reorganization of HumanSoft LLC, a wholly
owned subsidiary of the company, we guaranteed the future payments to certain
creditors of HumanSoft. The total amount of future payments is $327,000, due in
two equal payments on the first and second anniversary of the confirmation.
Legal Matters - In 1999, a suit was brought against our ChemFree subsidiary and
two other parties by a former paid consultant of ChemFree. The suit challenges
the ownership of various intellectual property assets of ChemFree. ChemFree and
the other parties to the litigation strongly deny the allegations, have filed
cross claims against another entity and intend to vigorously defend the suit.
The case is pending in the Superior Court of Gwinnett County, Georgia. While
the company believes ChemFree has sufficient evidence to refute the claims
made, there can be no assurance that the case will be resolved in favor of
ChemFree.
In addition, we are party to a small number of legal matters arising in the
ordinary course of business. It is management's opinion that none of these
matters will have a material adverse impact on our consolidated financial
position or results of operations.
NOTE 11
POST-RETIREMENT BENEFITS
Effective January 1, 1992, we adopted the Outside Directors' Retirement Plan
which provides that each nonemployee director, upon resignation from the Board
after reaching the age of 65, will 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. We have accrued $80,000 to date for
anticipated future payments under the plan.
NOTE 12
STOCKHOLDERS' EQUITY
We have 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, we 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. We
repurchased and retired 47,300 shares of common stock in the year ended
December 31, 1997 but made no repurchases during 1998 and 1999.
NOTE 13
STOCK OPTION PLAN
We instituted the 1991 Incentive Stock Plan (the "Plan") in December 1991 and
amended it 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, 1999, 655,000 options are fully vested
and exercisable at a weighted average price per share of $1.75. All options
expire ten years from their respective dates of grant. At December 31, 1999,
the weighted average remaining contractual life of the outstanding options is
4.73 years. 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, 1999 were
as follows:
INTELLIGENT SYSTEMS CORPORATION
F-12
<PAGE> 28
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at Jan. 1 665,000 665,000 690,000
Options granted -- -- --
Options exercised 10,000 -- 25,000
Options canceled -- -- --
Options outstanding
at Dec. 31 655,000 665,000 665,000
Options available for
grant at Dec. 31 185,000 185,000 185,000
Option price ranges per share:
Granted -- -- --
Exercised $2.25 -- $2.25-2.94
Canceled -- -- --
Weighted average
option price per
share:
Granted -- --
Exercised $2.25 -- $2.67
Canceled -- --
Outstanding at
Dec. 31 $1.75 $1.75 $1.75
- ---------------------------------------------------------------------------------
</TABLE>
We account 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 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 years
- - expected dividend yield rate of 0 percent
- - 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, 1998 or 1999. The
fair value of the grants would be amortized over the vesting period for the
options. Accordingly, our pro forma net income (loss) and net income (loss) per
common share assuming compensation cost as determined under SFAS No. 123 would
have been the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(in thousands except 1999 1998 1997
per share data)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 249 $ (1,548) $ (7,176)
Net income (loss)
per common share
basic $ 0.05 $ (0.30) $ (1.53)
- --------------------------------------------------------------------------------
Net income (loss)
per common share
diluted $ 0.05 $ (0.30) $ (1.53)
- --------------------------------------------------------------------------------
</TABLE>
NOTE 14
FOREIGN SALES AND OPERATIONS
Aggregate export and foreign sales were $1.3 million, $7.0 million and $7.0
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Export and foreign sales were made principally in the United Kingdom and the
Pacific Rim. Sales in these geographic areas are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------
(in thousands) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
United Kingdom $1,317 $7,011 $6,813
Pacific Rim 22 49 210
- ----------------------------------------------------------
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, income (loss) before
provision for income taxes derived from foreign subsidiaries approximated
$(109,000), $(1,092,000) and $(930,000), respectively.
As of December 31, 1999 and 1998, foreign subsidiaries had assets of $0 and $3.3
million, respectively, and total liabilities of $0 and $3.4 million,
respectively.
As a result of the sale of our InterQuad subsidiary in early 1999, we have no
foreign subsidiaries and therefore no currency exchange restrictions that would
affect our financial position or results of operations.
Refer to Note 1 for a discussion regarding how we account for translation of
non-US currency amounts.
INTELLIGENT SYSTEMS CORPORATION
F-13
<PAGE> 29
NOTE 15
EARNINGS PER SHARE
For the year ended December 31, 1999, our diluted weighted average shares
outstanding include the assumed conversion of stock options resulting in an
increase of 222,000 shares outstanding.
For the years ended December 31, 1998 and 1997, basic and diluted weighted
average shares outstanding are the same because all of our common stock
equivalents (stock options) are non-dilutive since we reported a loss for each
period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------
(in thousands) 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 249 $(1,548) $(7,176)
Basic earnings (loss) per
share $ 0.05 $ (0.30) $ (1.41)
Basic weighted average
shares 5,106 5,104 5,087
Diluted earnings (loss)
per share $ 0.05 $ (0.30) $ (1.41)
Diluted weighted
average shares 5,337 5,104 5,087
</TABLE>
NOTE 16
INDUSTRY SEGMENTS
Our consolidated subsidiaries are 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. We
derived 2.4 percent, 10.6 percent and 13.5 percent of our consolidated revenue
in 1999, 1998 and 1997, respectively, from a national chain of hospitals in
which our PsyCare subsidiary conducts some of its treatment programs. Operations
in technology related products include development and sales of software
products and services and manufacture and sale of bio-remediating parts washers.
Total revenue by industry includes sales to unaffiliated customers. Sales
between the two industry segments are not material. Operating profit (loss) 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 our operations in each
industry. Corporate assets are principally cash, marketable securities, notes
receivable and investments.
The table following contains segment information for the years ended December
31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
- -----------------------------------------------------------
Health
(in thousands) Tech. Care Consol.
- -----------------------------------------------------------
<S> <C> <C> <C>
Net sales $6,693 $1,786 $ 8,479
R&D 805 -- 805
Depreciation 215 76 291
Operating income (loss) 35 65 100
General corp. expenses 899
- -----------------------------------------------------------
Consolidated operating
loss (799)
Interest expense (88)
Investment income 1,222
Other loss, net (76)
- -----------------------------------------------------------
Income from continuing
operations before
income tax provision
and minority interest 259
Income tax provision --
- -----------------------------------------------------------
Income before minority
interest 259
Minority interest 10
- -----------------------------------------------------------
Net income from
continuing operations $ 249
===========================================================
Capital expenditures $ 188 $ 7 $ 195
===========================================================
Identifiable assets $3,288 $ 497 $ 3,785
Corporate assets 9,873
- -----------------------------------------------------------
Total assets at year end $ 13,658
===========================================================
</TABLE>
INTELLIGENT SYSTEMS CORPORATION
F-14
<PAGE> 30
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
- -----------------------------------------------------------
Health
(in thousands) Tech. Care Consol.
- -----------------------------------------------------------
<S> <C> <C> <C>
Net sales $14,124 $ 4,129 $18,253
R&D 1,892 -- 1,892
Depreciation 814 97 911
Operating income (loss) (5,848) 77 (5,771)
General corp. expenses 1,270
- -----------------------------------------------------------
Consolidated operating
loss (7,041)
Interest expense (290)
Investment income 5,776
Other loss, net (135)
- -----------------------------------------------------------
Loss from continuing
operations before
income tax provision
and minority interest (1,690)
Income tax benefit 152
- -----------------------------------------------------------
Loss before minority
interest (1,538)
Minority interest 10
- -----------------------------------------------------------
Net loss from
continuing operations $(1,548)
===========================================================
Capital expenditures $ 896 $ 9 $ 905
===========================================================
Identifiable assets $ 6,954 $ 960 $ 7,914
Corporate assets 9,185
- -----------------------------------------------------------
Total assets at year end $17,099
===========================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------
Health
(in thousands) Tech. Care Consol.
- ----------------------------------------------------------
<S> <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>
NOTE 17
QUARTERLY FINANCIAL DATA (unaudited)
The table below contains a summary of selected quarterly data for the years
ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
FOR QUARTERS ENDED
(in thousands except MARCH JUNE SEPT. DEC.
per share data) 31 30 30 31
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net sales $ 2,683 $ 2,090 $ 1,816 $ 1,890
Operating loss (284) (322) (58) (135)
Net income (loss) 1,094 (a) (898)(b) (872)(C) 926 (d)
Basic income (loss) per
share 0.21 (0.18) (0.17) 0.18
Diluted income (loss)
per share 0.21 (0.18) (0.17) 0.17
1998
Net sales $ 4,804 $ 5,322 $ 4,409 $ 3,718
Operating loss (3,389) (813) (2,093) (746)
Net income (loss) (2,608)(e) 690 (f) 282 (g) 88 (h)
Basic income (loss)
per share (0.51) 0.14 0.06 0.02
Diluted income (0.51) 0.13 0.05 0.02
(loss) per share
</TABLE>
a. Includes gain of $1.0 million on investments and $370,000 income in
equity of affiliates.
b. Includes gain of $128,000 on investments and $674,000 loss in equity of
affiliates.
c. Includes $556,000 loss in equity of affiliates.
d. Includes gain of $995,000 on investment and $89,000 loss in equity of
affiliates.
e. Includes charge of $944,000 for in-process R&D, $191,000 charge for
restructuring and gain of $947,000 on investment.
f. Includes gains of $1.7 million on investments.
g. Includes charge of $955,000 to discontinue product lines and gain of
$2.5 million on investment.
h. Includes $829,000 income in equity of affiliates.
NOTE 18
HUMANSOFT SUBSIDIARY REORGANIZATION UNDER CHAPTER 11
On November 17, 1998, our HumanSoft subsidiary filed a petition for relief under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Northern District of Georgia in response to an involuntary filing under
Chapter 7 by three creditors. In the quarter ended September 30, 1998, we
recorded a write-off related to the discontinued product lines. On November 18,
1999, the court confirmed the HumanSoft Plan of
INTELLIGENT SYSTEMS CORPORATION
F-15
<PAGE> 31
Reorganization. The plan provides for payment of a fixed percent of the allowed
claims for certain trade creditors and customers of HumanSoft as well as payment
of the administrative expenses. The first payments were made immediately
following the confirmation, with two additional payments of $163,000 each due to
certain creditors on the first and second anniversary of the confirmation.
Intelligent Systems has guaranteed the future payments. The final plan expanded
the creditor class to include certain customer claims, which caused the final
settlement amount to exceed the original amount reserved for the bankruptcy.
Accordingly, in the fourth quarter of 1999, we recorded additional reserves
totaling $141,000 to reflect the provisions of the confirmed plan of
reorganization.
NOTE 19
SUBSEQUENT EVENTS (unaudited)
Acquisition of 2order.com - On January 21, 2000, 2order.com, a company in which
we hold a minority equity position, was acquired by Primus Knowledge Solutions,
Inc., a publicly traded company. We received 66,431 shares of Primus common
stock in exchange for our interest in 2order.com. The shares must be held for a
short period of time.
Sale of interest in Risk Laboratories - On March 21, 2000, we sold part of our
interest in Risk Laboratories in a private transaction. We sold 2,310,000 shares
for $8.8 million in cash and can require the purchaser to acquire our remaining
623,515 shares (7% of Risk Laboratories) at approximately the same price per
share within two years from the original transaction date. At the closing of the
transaction, Risk also repaid a note in the amount of $43,000.
INTELLIGENT SYSTEMS CORPORATION
F-16
<PAGE> 32
SCHEDULE II
INTELLIGENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(a.) RECLASSIFICATION(c.) END OF PERIOD
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS b.
Year Ended December 31, 1997 371,705 46,963 211,760 -- 206,908
Year Ended December 31, 1998 206,908 239,734 126,537 867,463 1,187,568
Year Ended December 31, 1999 1,187,568 23,375 1,156,523 3,238 57,658
</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.
c. Reclassification of unearned revenue to Allowance for Doubtful
Accounts.
<PAGE> 33
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, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1999. These 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 1997
(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 and Young LLP
February 18, 2000
Atlanta, Georgia
<PAGE> 34
PaySys International, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------------------------
(In thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,974 $ 1,846
Accounts receivable, less allowance for bad debts of $2,266 and
$1,078 at December 31, 1999 and 1998, respectively 9,450 8,338
Unbilled receivables 4,837 4,382
Prepaid expenses and other current assets 668 286
---------------------------
Total current assets 18,929 14,852
Furniture and equipment, net 2,936 2,511
Computer software costs, net of accumulated amortization
of $1,204 and $770 at December 31, 1999 and 1998, respectively
1,685 301
Deposits and other assets 339 193
---------------------------
$ 23,889 $ 17,857
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,821 $ 1,734
Accrued employee compensation 2,415 2,000
Deferred revenues 10,728 9,586
Current portion of long-term debt and capital lease obligations 733 3,629
Accrued royalties -- 926
Other current liabilities 3,250 1,082
---------------------------
Total current liabilities 18,947 18,957
Other liabilities 226 --
Long-term debt and capital lease obligations, less current portion 12,378 7,679
Deferred rent expense 183 520
---------------------------
31,734 27,156
Redeemable stock purchase warrants 3,583 454
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 10,000,000 shares authorized; 2,779,689
shares issued and outstanding; liquidation
preference of $15,900 at December 31, 1999 and 1998 28 28
Common stock, $.01 par value; 30,000,000 shares authorized;
6,976,644 and 5,797,534 shares issued and outstanding at
December 31, 1999 and 1998, respectively 70 58
Additional paid-in capital 16,282 12,782
Notes receivable - officers (3,423) --
Deferred stock compensation (3) (41)
Accumulated deficit (24,123) (22,417)
Cumulative translation adjustments (259) (163)
---------------------------
(11,428) (9,753)
---------------------------
$ 23,889 $ 17,857
===========================
</TABLE>
See accompanying notes.
2
<PAGE> 35
PaySys International, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Revenues:
License fees $ 19,789 $ 18,385 $ 13,088
Services 30,279 27,520 19,699
----------------------------------------------
Total revenues 50,068 45,905 32,787
Cost of revenues:
License fees 998 1,934 4,223
Services 21,552 20,608 15,683
----------------------------------------------
Total cost of revenues 22,550 22,542 19,906
Gross margin 27,518 23,363 12,881
Operating expenses:
Sales and marketing 7,691 6,240 4,865
Research and development 12,424 11,804 10,641
General and administrative 6,501 4,793 6,900
Royalty termination settlement -- 4,340 --
Non-cash compensation -- -- 3,722
Write-off of capitalized software -- -- 949
Cost of abandoned stock offering -- -- 867
----------------------------------------------
Total operating expenses 26,616 27,177 27,944
Income (loss) from operations 902 (3,814) (15,063)
Interest income (expense):
Interest income 217 118 95
Interest expense (2,555) (1,279) (442)
----------------------------------------------
(2,338) (1,161) (347)
----------------------------------------------
Income (loss) before income taxes (1,436) (4,975) (15,410)
Income tax expense 270 188 405
----------------------------------------------
Net income (loss) $ (1,706) $ (5,163) $(15,815)
==============================================
</TABLE>
See accompanying notes.
3
<PAGE> 36
PaySys International, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
----------------------------------------------------------------------------------------------
NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
----------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 6,826,520 $ 68 159,050 $ (491)
Comprehensive loss:
Net loss -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- --
Comprehensive loss
Noncash compensation from stock --
purchase warrants and stock
options -- -- -- -- -- --
Exercise of stock purchase --
warrants and stock options -- 464,355 5 -- --
Retirement of treasury stock -- -- (159,050) (2) (159,050) 491
-----------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 7,131,825 71 -- --
Comprehensive loss:
Net loss -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- --
adjustment
Comprehensive loss
Noncash compensation from stock --
purchase warrants and stock -- -- -- -- -- --
options
Exercise of stock options -- -- 8,335 -- -- --
Issuance of preferred stock and
repurchase and retirement of
common stock 2,779,689 28 (1,342,626) (13) -- --
-----------------------------------------------------------------------------------------------
Balance at December 31, 1998 2,779,689 28 5,797,534 58 -- --
Comprehensive loss:
Net loss -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- --
adjustment
Comprehensive loss
Noncash compensation from stock
purchase warrants and stock
options -- -- -- -- -- --
Exercise of stock options -- -- 75,000 1 -- --
Issuance of common stock for
notes receivable from officers -- -- 1,104,110 11 -- --
-----------------------------------------------------------------------------------------------
Balance at December 31, 1999 2,779,689 $ 28 6,976,644 $ 70 -- $ --
===============================================================================================
<CAPTION>
ADDITIONAL NOTES DEFERRED CUMULATIVE
PAID-IN RECEIVABLE STOCK ACCUMULATED TRANSLATION
CAPITAL OFFICERS COMPENSATION DEFICIT ADJUSTMENTS TOTAL
----------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 2,079 $ -- $ -- $ (1,439) $ (55) $ 162
Comprehensive loss:
Net loss -- -- -- (15,815) -- (15,815)
Foreign currency translation
adjustment -- -- -- -- (16) (16)
Comprehensive loss (15,831)
Noncash compensation from stock
purchase warrants and stock
options 3,793 -- (67) -- -- 3,726
Exercise of stock purchase
warrants and stock options 15 -- -- -- -- 20
Retirement of treasury stock (489) -- -- -- -- --
-----------------------------------------------------------------------------------------------
Balance at December 31, 1997 5,398 -- (67) (17,254) (71) (11,923)
Comprehensive loss:
Net loss -- -- -- (5,163) -- (5,163)
Foreign currency translation
adjustment -- -- -- -- (92) (92)
--------
(5,255)
Comprehensive loss
Noncash compensation from stock
purchase warrants and stock
options -- 26 -- -- 26
Exercise of stock options 26 -- -- -- -- 26
Issuance of preferred stock and
repurchase and retirement of 7,358 -- -- -- -- 7,373
common stock -----------------------------------------------------------------------------------------------
Balance at December 31, 1998 12,782 -- (41) (22,417) (163) (9,753)
Comprehensive loss:
Net loss -- -- -- (1,706) -- (1,706)
Foreign currency translation
adjustment -- -- -- -- (96) (96)
--------
(1,802)
Comprehensive loss
Noncash compensation from stock
purchase warrants and stock -- -- 38 -- -- 38
options
Exercise of stock options 88 -- -- -- -- 89
Issuance of common stock for
notes receivable from officers 3,412 (3,423) -- -- -- --
-----------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 16,282 $(3,423) $ (3) $ 24,123) $ (259) $(11,428)
===============================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 37
PaySys International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,706) $ (5,163) $(15,815)
Add (deduct) adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 1,294 1,480 1,052
Amortization of computer software costs 434 391 2,257
Amortization of discounts on debt 353 118 15
Provision for doubtful accounts 1,915 1,940 288
Accrued rent expense (337) (308) (294)
Deferred income taxes -- -- 277
Noncash compensation 38 26 3,726
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables (3,482) (5,361) (2,254)
Deposits and other assets (528) (48) (138)
Accounts payable 87 (1,321) 1,195
Accrued employee compensation 415 (483) 1,164
Deferred revenues 1,142 199 2,830
Other liabilities 1,468 (3,639) 4,163
---------------------------------------
Net cash provided by (used in) operating activities 1,093 (12,169) (1,534)
INVESTING ACTIVITIES
Purchases of furniture and equipment (1,721) (1,224) (2,112)
Purchased computer software rights (1,818) -- --
Computer software development -- -- (216)
---------------------------------------
Net cash used in investing activities (3,539) (1,224) (2,328)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock -- 7,373 --
Exercise of options and warrants 89 172 20
Proceeds from borrowings 15,016 9,735 4,491
Principal payments on long-term debt, capital lease
obligations (10,435) (3,023) (1,596)
---------------------------------------
Net cash provided by financing activities 4,670 14,257 2,915
---------------------------------------
Effect of foreign currency translation on cash and cash
equivalents (96) (92) (16)
---------------------------------------
Increase (decrease) in cash and cash equivalents 2,128 772 (963)
Cash and cash equivalents at beginning of period 1,846 1,074 2,037
---------------------------------------
Cash and cash equivalents at end of period $ 3,974 $ 1,846 $ 1,074
=======================================
</TABLE>
See accompanying notes.
5
<PAGE> 38
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
PaySys International, Inc. (the Company) is a global provider of credit card
transaction processing software to banks, retailers and third party processors.
PaySys' flagship software product, Vision PLUS (R), is a customizable software
system consisting of a range of integrated application modules for processing
both bank and retail credit card transactions. Additionally, the Company has
developed a new transaction payment software engine that is an
internet-enabled, diversified billing and customer management system that
serves business-to-business e-commerce. This new engine will enable commercial
users to integrate a highly flexible payment system into their e-commerce
systems.
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
6
<PAGE> 39
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
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.
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
the fees are fixed and determinable and collectibility is assessed as probable;
professional services revenue as the services are performed; and post-contract
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 $240,000,
$240,000 and $680,000 during the years ended 1999, 1998 and 1997, respectively.
During 1999 and 1998, no individual customer exceeded 10% of revenues. During
1997, one customer accounted for 19% of revenues.
7
<PAGE> 40
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the 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.
INTERNAL USE SOFTWARE
Under the provisions of SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", the Company capitalizes costs incurred
in developing or obtaining internal use software. No software has been
developed internally for internal use. At December 31, 1999 unamortized
software costs from purchased software totaled $774,000, net of accumulated
amortization of $65,000 which is included in furniture and equipment (see Note
2).
SOFTWARE COMPUTER 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 achieved. Costs of maintaining existing software and research
and development costs are otherwise expensed as incurred. No software
development costs were capitalized in 1999 or 1998. The Company capitalized
software development costs of $210,000 during 1997. The Company records
amortization of capitalized software development costs using the greater of the
straight-line method (currently three years) or the estimated economic life
8
<PAGE> 41
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE COMPUTER COSTS (CONTINUED)
of the product. Amortization of software development costs totaled $252,000,
$357,000 and $2,257,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The higher amortization of capitalized software costs for 1997 is
due to the write-off of $949,000 of capitalized software costs for projects
deemed to have no net realizable value.
SFAS No. 86 also allows for the capitalization of purchased software. In 1999,
the Company entered into an agreement to terminate a previously existing
royalty agreement. The original agreement provided for royalty payments based
on the sale of a particular component of the Company's product. The termination
agreement assigns all rights to that component to the Company. The net amount
of the agreement, $1,818,000, is included in software development costs and is
being amortized over five years, the estimated economic life of the product.
Amortization costs totaled $182,000 for the year ended December 31, 1999 and
are included in Cost of License Fees.
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.
STOCK-BASED COMPENSATION
As permitted by 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. The Company accounts for stock
option grants in accordance with APB 25 and has elected the pro forma
disclosure alternative of the effect of SFAS No. 123.
9
<PAGE> 42
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ABANDONED STOCK OFFERING
In December 1997, the Company abandoned a planned public offering of its common
stock. Costs associated with the abandoned offering were expensed during 1997.
RECLASSIFICATION
Certain amounts reported in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 financial statement presentation.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------------------
(In thousands)
<S> <C> <C>
Furniture and equipment:
Office furniture and equipment $ 1,313 $ 1,011
Computer equipment and software 4,808 2,551
Computer equipment under capital lease 1,565 1,960
-----------------------------------
7,686 5,522
Less allowances for depreciation and amortization
(4,750) (3,011)
-----------------------------------
$ 2,936 $ 2,511
===================================
</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 approximate 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,
10
<PAGE> 43
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
degree of risk and remaining maturities. The remaining financial instruments
approximate fair value based on their short-term nature.
11
<PAGE> 44
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
1999 1998
--------------------------------
(In thousands)
<S> <C> <C>
12.5% Note payable due May 15, 2006 (1) $ 15,000 $ --
Less discount 2,785 --
--------------------------------
12,215 --
13.5% Note payable due March 31, 2001 (2) -- 4,000
Less discount -- 314
--------------------------------
-- 3,686
12% Note payable due in quarterly installments through April
30, 2001 (3) -- 4,444
Unsecured note payable due in quarterly installments through
April 30, 2001, interest at 8% -- 535
Unsecured obligation due in monthly installments through
December 15, 1999, interest at 8.5% -- 1,374
Loan from product development joint venture due August 31,
2002, no interest (4) 550 536
Other debt 52 52
Capital lease obligations, various imputed interest rates and
monthly payments 294 681
--------------------------------
13,111 11,308
Less current portion (733) (3,629)
--------------------------------
$ 12,378 $ 7,679
================================
</TABLE>
12
<PAGE> 45
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND LEASES (CONTINUED)
(1) This note, which is junior to a line of credit facility (see Note 5), is
secured by a lien, on equipment, accounts receivable and software and
related material. The lender has been granted warrants to purchase 999,563
shares of the Company's common stock, exercisable at $.01 per share (see
Note 7). The stated interest rate combined with the amortization of
discount allocated to the fair value of the warrants results in a 15.5%
effective interest rate. Beginning in June 2003 and continuing each
quarter through March 2006, the Company must redeem $1,250,000 in
aggregate principal plus accrued and unpaid interest. Redemption of the
outstanding principal amount of the note, including accrued and unpaid
interest, is required upon the closing of an initial public offering
resulting in at least $25 million in proceeds, a change in control or a
qualified disposition, as defined by the note.
(2) In 1998, this note was secured by a first lien on equipment, accounts
receivable and software and related material. In addition, this note
required periodic issuance of warrants to purchase shares of the Company's
common stock (see Note 7). The note was retired in 1999.
(3) In 1998, this note which was junior to the $4,000,000 13.5% note payable
due March 31, 2001, was secured by a lien on equipment, accounts
receivable and software and related material. The lender had also been
granted a contingent warrant to purchase 962,055 shares of the Company's
common stock, exercisable at $.01 per share only upon an event of default
as defined in the loan agreement. The note and warrant were retired in
1999.
(4) The Company entered into a software development joint venture agreement
for a specific project, whereby the Company could borrow fifty percent of
the associated development cost, up to $600,000, from the co-developer.
The loan is non-interest bearing and repayment is due by the earlier of
August 31, 2002 or as future revenue is recognized from the sales of the
jointly developed product. The Company expects to repay this loan in 2000
and accordingly the balance is included in the current portion of long
term debt.
13
<PAGE> 46
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND LEASES (CONTINUED)
The Company's notes payable and long-term debt agreements contain covenants
restricting additional borrowings, the incurrence of liens on assets, the
acquisition and disposition of assets, capital expenditures, distributions to
shareholders and certain financial restrictions.
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
$342,000, $310,000 and $145,000 for 1999, 1998 and 1997, respectively.
Total rental expense was $2,861,000, $2,784,000 and $2,209,000 for 1999, 1998,
and 1997, respectively.
Required payments by year for long-term debt, capital leases and non-cancelable
operating leases with initial or remaining terms in excess of one year at
December 31, 1999, were as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL OPERATING
YEAR ENDING DECEMBER 31, DEBT LEASES LEASES
- ------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
2000 $ 602 $158 $2,120
2001 -- 112 1,903
2002 -- 62 1,846
2003 3,750 -- 1,771
2004 and beyond 11,250 -- 1,442
-----------------------------------------------------
15,602 332 9,082
Less amounts representing interest and discounts
(2,785) (38) --
-----------------------------------------------------
$12,817 $294 $9,082
=====================================================
</TABLE>
14
<PAGE> 47
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
COMMITMENTS AND CONTINGENCIES
LINE OF CREDIT
On October 19, 1999, the Company entered into a $5 million revolving line of
credit facility with a financial institution. The line of credit matures 18
months from the effective date, subject to automatic annual renewals, and is
secured by a first lien on equipment, accounts receivable and software and
related material. Availability under the facility is based on a formula of
eligible accounts receivable and a collection multiple, based on such eligible
accounts receivable as defined. The line of credit contains covenants
restricting additional borrowings, the incurrence of liens on assets, the
acquisition and disposition of assets, capital expenditures, and distributions
to shareholders and certain financial restrictions. Interest at Prime plus
1.75% is payable monthly on the daily average outstanding balance, based on a
minimum of 20% of the maximum availability for the first six months and 50% of
the maximum availability thereafter. Borrowings under the facility at December
31, 1999 were $1,067,000 and are included in other current liabilities due to
the revolving nature of repayment.
Under the provisions of this line of credit facility as discussed above, the
Company is required to maintain a minimum level of net tangible worth. Net
tangible worth as defined by the agreement at December 31, 1999, was
$4,954,000. The Company's lender agreed to reduce the net tangible worth
requirement at December 31, 1999 to $4,950,000 from $5,000,000. The Company
expects to incur operating losses in 2000. As a result, the Company does not
anticipate satisfying the net tangible worth requirement for all of 2000. The
Company plans to work towards another amendment of the requirement to a level
acceptable to both the Company and lender and to a level that the Company
believes it will obtain.
ROYALTY AGREEMENT
In 1998, the Company executed an agreement to terminate a royalty agreement
that had previously been in place as a result of a software development
agreement entered into by the Company and a customer. The Company had been
required in the initial period of the original agreement to pay 10% of any
sale, license or other grant of right to use the product which totaled less
than $1,000,000 and 15% of any sale, license or other grant of
15
<PAGE> 48
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED
ROYALTY AGREEMENT (CONTINUED)
right to use the product which totaled more than $1,000,000. The fees were to
increase incrementally each year until paid in full. The entire amount that
would have been owed was capped at $6,027,000. In settlement, the Company
issued a note payable of $4,694,000 and incurred a one-time expense in 1998 of
$4.3 million. The outstanding balance at December 31, 1998 of $4,444,000 was
repaid in 1999.
SOFTWARE LICENSE AGREEMENT
In 1999 the Company entered into a software license agreement whereby the
Company purchased approximately $675,000 of software for internal use. The
terms of the agreement require the Company to pay for the license in equal
monthly installments
through August 31, 2001. As of December 31, 1999 the remaining balance of
$564,000 is included in the balance sheet as $338,000 other current liabilities
and $226,000 other long term liabilities.
LEGAL MATTERS
In August 1997, the Company settled a copyright infringement lawsuit for
$550,000. The Company paid $200,000 and $350,000 during the years ended
December 31, 1999 and 1998, respectively. 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.
The Company is a party to various legal proceedings that have arisen in the
normal course of its business. In the opinion of management, these actions will
not have a material adverse effect on the Company's consolidated financial
statements.
16
<PAGE> 49
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The provisions for income taxes for 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ -- $ -- $ --
Foreign 270 188 128
State -- -- --
-----------------------------------------------------
Total current 270 188 128
Deferred tax expense (benefit):
Federal -- -- 248
Foreign -- -- --
State -- -- 29
-----------------------------------------------------
Total deferred -- -- 277
=====================================================
$270 $188 $405
=====================================================
</TABLE>
Income tax expense for the year ended December 31, 1999 relates to current
foreign withholding taxes. No additional income tax expense has been recorded
for the year ended December 31, 1999 due to the Company's loss for the period
and the related net operating loss carryforward position.
17
<PAGE> 50
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
1999 1998 1997
--------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax (benefit) at statutory federal rate $(488) $(1,692) $(5,239)
State taxes, net of federal benefit (38) (131) (406)
Foreign tax credits (270) (274) --
Foreign withholding taxes 190 188 128
Foreign operations not subject to U.S. tax 80 50 349
Meals and entertainment 40 74 34
Increase in other tax credits (423) -- --
Other-net (144) (189) 101
Change in valuation allowance 1,323 2,162 5,438
--------------------------------------------------
Total income tax expense $270 $188 $405
==================================================
</TABLE>
18
<PAGE> 51
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
1999 1998 1997
---------------------------------------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,217 $ 5,591 $ 4,126
Accruals not deductible for tax purposes 2,532 2,629 2,424
General business credit carryforwards 2,070 1,567 1,280
Foreign tax credit carryforwards 506 316 407
Minimum tax credit carryforwards 213 213 185
Property and equipment, principally due to
depreciation 15 9 --
---------------------------------------
Total gross deferred tax assets 11,553 10,325 8,422
Deferred tax liability:
Property and equipment, principally due to
depreciation -- -- (109)
Amortization of intangibles (18) (113) (263)
---------------------------------------
Total gross deferred tax liabilities (18) (113) (372)
Less valuation allowance (11,535) (10,212) (8,050)
---------------------------------------
Net deferred tax asset $ -- $ -- $ --
=======================================
</TABLE>
At December 31, 1999, the Company had general business and foreign tax
carryforwards which expire in 2000 through 2014 and AMT credit carryforwards
available to offset future federal income tax liabilities totaling
approximately $2,800,000. The Company has net federal loss carryforwards of
$12,000,000 generated through December 31, 1999 federal income tax purposes
which expire at various dates between 2012 through 2019.
19
<PAGE> 52
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
In addition, the Company's foreign subsidiaries had cumulative losses of
$4,500,000 at December 31, 1999. The tax benefits of these credit carryforwards
and net operating loss 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 and net operating loss 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.
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.
WARRANTS
In connection with a financing agreement entered into with Capital Resource
Partners IV, L.P. and CRP Investment Partners IV, L.L.C. on April 15, 1999, the
Company issued warrants to purchase an aggregate of 999,563 shares of the
Company's common stock at an exercise price of $.01 per share. In the event of
a change in control or an event of default, as defined, or within one year of
the redemption of all outstanding shares of Series A-1 Preferred Stock, the
holder or holders of the warrants have the right to put the warrants to the
Company at the then current fair market value of the shares underlying the
warrants. The warrants were valued at approximately $3.1 million and are fully
exercisable and outstanding at December 31, 1999. The value allocated to the
warrants has been recorded as a discount to the related debt and redeemable
stock purchase warrants. The discount is amortized to interest over eighty-four
months, term of the debt. The related interest expense in 1999 was $300,000.
Warrants issued under the agreement expire on the earlier of (a) a qualified
IPO or (b) the later of April 15, 2006 or such time as all principal and
interest on the notes is paid in full. The warrants may either be exercised in
full, partially, or through a
20
<PAGE> 53
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
net issue election, as defined. Warrantholders have certain rights to purchase
future subordinated debt issued by the Company, according to their pro-rata
holdings of warrants and warrant shares to total stock outstanding.
Pursuant to a 1992 loan agreement between the Company and Sirrom Capital, L.P.
(Sirrom), Sirrom obtained a warrant to purchase 150,000 shares of the Company's
common stock at an exercise price of $.002 per share. The warrant was exercised
in August 1997.
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 warrants to purchase 37,660 shares of the
Company's common stock at an exercise price of $.002 per share which were fully
exercisable and outstanding at December 31, 1997. The warrant was valued at
approximately $307,000. If the debt remained outstanding for certain periods
during the term of the financing arrangement the Company was required to issue
warrants to purchase additional shares. During 1999 and 1998, the Company
issued warrants to purchase 9,560 and 47,500, respectively, additional shares
exercisable at $.002 per share and valued these additional warrants at
approximately $30,000 and $147,000, respectively. Of the additional warrants,
57,060 and 47,500 were fully exercisable and outstanding, at December 31, 1999
and 1998, respectively. Warrants issued under this financing agreement provide
the holder of the warrant the right and option to sell to the Company the
warrants for a period of thirty days immediately prior to the expiration of the
warrant, at a purchase price equal to the fair market value of the shares of
common stock that would be issued upon exercise of the warrant. Warrants issued
under this agreement expire March 31, 2001.
21
<PAGE> 54
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
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.
Pro forma 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 1999,
1998 and 1997: risk-free interest rate of 6% for 1997, 5.5% for 1998 and 6% for
1999; no dividend yield; and a weighted-average expected life of the awards of
7 years, 7 years and 8 years, respectively. The weighted average fair value of
awards during 1999, 1998 and 1997 was $1.10, $.93 and $.66 per share,
respectively.
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.
22
<PAGE> 55
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
For purposes of pro forma 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
1999 1998 1997
------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net income (loss) $(1,824) $(5,255) $(17,032)
</TABLE>
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
1999, the 1995 Plan was amended to increase the number of options by 932,835,
or a total of 2,021,585.
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.
23
<PAGE> 56
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 1999, 1998 and 1997 under the
Company's stock option plans.
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE PRICE AVERAGE
SHARES RANGE EXERCISE PRICE
-------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 916,500 $ 0-$3.10 $1.02
Granted 297,075 3.10 3.10
Exercised (1,750) 0 0
Expired (153,740) 3.10 3.10
-------------------------------------------------
Outstanding at December 31, 1997 1,058,085 0.80- 3.10 1.30
Granted 339,000 3.10 3.10
Exercised (8,335) 3.10 3.10
Expired (81,250) 3.10 3.10
-------------------------------------------------
Outstanding at December 31, 1998 1,307,500 0.80- 3.10 1.64
GRANTED 193,500 3.10 3.10
EXERCISED (75,000) 0.80- 3.10 1.11
EXPIRED (153,938) 3.10 3.10
=================================================
OUTSTANDING AT DECEMBER 31, 1999 1,272,062 $0.80- 3.10 $1.72
=================================================
Exercisable at December 31, 1997 583,845 $0.80-$3.10 $1.04
Exercisable at December 31, 1998 796,581 $0.80-$3.10 $1.24
EXERCISABLE AT DECEMBER 31, 1999 844,859 $0.80-$3.10 $1.47
</TABLE>
Options outstanding at $.80 per share totaled 762,250 of which 600,310 were
exercisable at December 31, 1999. The weighted average remaining contractual
life of options exercisable at $.80 per share was six years at December 31,
1999. Options outstanding at $3.10 per share totaled 509,812 of which 244,549
were exercisable at December 31, 1999. The weighted average remaining
contractual life of options exercisable at $3.10 per share was eight years at
December 31, 1999
24
<PAGE> 57
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
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.
In 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. 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. In 1999, these warrants were canceled in
exchange for full recourse notes receivable, totaling $3,423,000, and the
issuance of 1,104,110 shares of common stock. The notes bear interest at 5% per
annum payable on April 30, 2001 and annually thereafter. The notes are due on
the earlier of (a) September 30, 2004 or (b) one year after the date of an
initial public offering or any other sale or transfer of securities of the
Company, as defined in the agreement. The December 31, 1999 notes receivable
balance is included in shareholders' equity.
At December 31, 1999, a total of 6,281,897 shares of the Company's common stock
were reserved for the exercise of outstanding stock warrants and options and
conversion of convertible preferred stock.
In 1998 the Company amended and restated its Articles of Incorporation to
authorize 10,000,000 shares of preferred stock and designate 2,779,689 shares as
Series A-1 Convertible Participating Preferred Stock. Each share of Series A-1
Preferred Stock is convertible at any time after the date of issuance into a
number of shares of common stock,
25
<PAGE> 58
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK (CONTINUED)
determined by dividing the Series A-1 original cost by the Series A-1 conversion
price that is currently in effect. Upon issuance, the conversion price is deemed
to be the original price. Each share of Series A-1 Preferred Stock entitles it's
holder to voting rights equivalent to those that would exist if the holder were
to convert to common stock and to receive $5.72 per share plus accrued dividends
in the event of involuntary or voluntary liquidation, adjusted for any
combinations, consolidations, stock splits, or stock distributions or dividends.
The collective Series A-1 Preferred Stock shareholders have the right to appoint
and remove, at their discretion, one member of the Company's Board of Directors.
In 1998 the Company issued 2,779,689 shares of Series A-1 Preferred Stock in
exchange for $7.5 million in cash (less issuance costs) and 1,342,626 shares of
previously outstanding shares of common stock that were retired.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan (the "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. Effective July 1, 1998 the Company amended the plan to provide for an
employer matching contribution equal to 20% of up to 6% of eligible compensation
deferred by the employee. Prior to this amendment, employer contributions were
discretionary. Contribution expense related to the Plan during 1999, 1998, and
1997 was $219,000, $194,000 and $200,000, respectively.
9. SEGMENTS AND GEOGRAPHICAL INFORMATION
The Company is organized around two geographic areas; the United States and
foreign operations. Foreign operations primarily consist of Australia, Ireland,
Singapore, and South Africa. The foreign locations principally function as
service providers for the products developed by the Company in the United
States. The accounting policies as described in the summary of significant
accounting policies are applied consistently across the two segments. Foreign
revenues are based on intercompany transfer prices to provide a reasonable
margin upon distribution.
26
<PAGE> 59
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SEGMENTS AND GEOGRAPHICAL INFORMATION (CONTINUED)
Information about the Company's operations by geographic area is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------
(In thousands)
<S> <C> <C> <C>
UNITED STATES
Revenues:
License fees $ 19,789 $ 18,385 $ 13,088
Service 25,144 23,443 19,455
----------------------------------------------
Total Revenues $ 44,933 $ 41,828 $ 32,543
Interest income $ 211 $ 108 $ 95
Interest expense $ (2,554) $ (1,279) $ (442)
Depreciation and amortization $ (1,577) $ (1,783) $ (1,020)
Income tax expense $ -- $ -- $ (405)
Income (loss) before income taxes $ (1,150) $ (4,826) $(14,662)
Long-lived assets $ 4,593 $ 2,571 $ 3,425
Total segment assets $ 22,702 $ 17,148 $ 14,332
Expenditures for long-lived assets $ 3,371 $ 757 $ 1,956
FOREIGN OPERATIONS
Revenues:
License fees $ -- $ -- $ --
Service 5,135 4,077 244
----------------------------------------------
Total Revenues $ 5,135 $ 4,077 $ 244
Interest income $ 8 $ 10 $ --
Interest expense $ (1) $ -- $ --
Depreciation and amortization $ (151) $ (88) $ (32)
Income tax expense $ (270) $ (188) $ --
Income (loss) before income taxes $ (286) $ (149) $ (1,153)
Long-lived assets $ 367 $ 434 $ 179
Total segment assets $ 1,187 $ 709 $ 340
Expenditures for long-lived assets $ 168 $ 467 $ 156
</TABLE>
27
<PAGE> 60
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SEGMENTS AND GEOGRAPHICAL INFORMATION (CONTINUED)
Export sales were $30.6 million, $27.6 million and $20.7 million in 1999, 1998,
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 $8.1
million and $8.6 million as of December 31, 1999 and 1998, respectively.
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
1999 1998 1997
---------------------------------
(In thousands)
<S> <C> <C> <C>
Furniture and equipment acquired under
capital lease obligations $ 46 $ 382 $358
=================================
Cash paid for interest $ 2,010 $ 1,303 $277
=================================
Cash paid for income taxes $ 247 $ 188 $128
=================================
</TABLE>
11. YEAR 2000 DATE CONVERSION (UNAUDITED)
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning an implementation efforts, the
Company experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the year 2000 date change. The Company is not aware of
any material problems resulting from Year 2000, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
28
<PAGE> 61
PaySys International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. SUBSEQUENT EVENTS
On January 19, 2000, Capital Resource Partners IV, L.P. and CRP Investment
Partners IV, L.L.C. exercised the common stock warrants (Note 7) issued pursuant
to the financing agreement (Note 4). The warrants were exercised in their
entirety, resulting in the issuance of 996,338 shares of common stock at a value
of approximately $3,100,000.
29
<PAGE> 62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Visibility Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Visibility Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' deficit and cash flows for each of the three
years in the period ended December 31, 1999. These 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Visibility Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
Boston, Massachusetts
March 15, 2000
1
<PAGE> 63
VISIBILITY INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 738,071 $ 1,162,605
Accounts receivable, net of allowance for doubtful accounts of $373,861 and
$423,627 in 1999 and 1998, respectively 7,977,903 8,563,901
Prepaid expenses and other current assets 461,377 509,604
------------ ------------
Total current assets 9,177,351 10,236,110
Property and Equipment, net 1,063,573 1,112,122
Other Assets 44,734 225,348
------------ ------------
Total assets $ 10,285,658 $ 11,573,580
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Short-term debt $ 2,923,370 $ 1,500,000
Current portion of capital lease obligations 135,368 188,068
Accounts payable 3,374,419 3,220,513
Accrued expenses 2,647,204 3,294,076
Deferred revenue 7,801,751 5,986,378
------------ ------------
Total current liabilities 16,882,112 14,189,035
Notes Payable to Shareholders 1,299,373 1,602,378
Capital Lease Obligations 221,444 192,706
Deferred Rent 124,085 118,811
Deferred Income Taxes 328,046 328,046
------------ ------------
Total liabilities 18,855,060 16,430,976
------------ ------------
Commitments and Contingencies (Note 10)
Redeemable Convertible Preferred Stock
Series A redeemable convertible preferred stock, $0.001 par value-
Authorized, issued and outstanding--1,881,721 shares, at redemption value
(liquidation preference of $5,250,000) 5,250,000 5,250,000
Series B redeemable convertible preferred stock, $0.001 par value-
Authorized, issued and outstanding--1,628,700 shares, at redemption value
(liquidation preference of $879,500) 879,500 879,500
Series C redeemable convertible preferred stock, $0.001 par value-
Authorized, issued and outstanding--337,331 shares, at redemption value
(liquidation preference of $2,250,000) 2,250,000 2,250,000
Series D redeemable convertible preferred stock, $0.001 par value-
Authorized, issued and outstanding--369,125 shares (redemption value and
liquidation preference of $1,988,916) 790,768 --
------------ ------------
Total redeemable convertible preferred stock 9,170,268 8,379,500
Stockholders' Deficit
Common stock, $0.001 par value-
Authorized--15,000,000 shares
Issued and outstanding--958,147 shares 958 1,190
Additional paid-in capital 318,677 452,397
Accumulated deficit (18,064,654) (13,692,297)
Accumulated other comprehensive income 5,349 1,814
------------ ------------
Total stockholders' deficit (17,739,670) (13,236,896)
------------ ------------
Total liabilities, redeemable convertible preferred stock and
stockholders' deficit $ 10,285,658 $ 11,573,580
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
2
<PAGE> 64
VISIBILITY INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Software licenses $ 7,088,950 $ 10,580,620 $ 7,468,984
Maintenance and support services 14,504,997 15,648,548 11,866,985
Hardware equipment sales 2,616,061 3,963,723 2,513,204
------------ ------------ ------------
24,210,008 30,192,891 21,849,173
------------ ------------ ------------
Cost of Revenues:
Software licenses 942,403 2,140,600 1,382,908
Maintenance and support services 9,050,259 8,874,150 7,825,208
Hardware equipment sales 2,129,342 3,208,613 1,997,848
------------ ------------ ------------
12,122,004 14,223,363 11,205,964
------------ ------------ ------------
Gross profit 12,088,004 15,969,528 10,643,209
Operating Expenses:
Selling and marketing 7,757,451 5,928,999 5,231,012
Research and development 5,511,591 6,628,824 5,370,082
General and administrative 2,455,290 2,372,088 2,934,459
------------ ------------ ------------
15,724,332 14,929,911 13,535,553
------------ ------------ ------------
(Loss) income from operations (3,636,328) 1,039,617 (2,892,344)
Interest Expense, net (includes amortization of debt discount of (553,384)
$126,171 in 1999 (Note 7)) (315,392) (448,801)
Other (Expense) Income, net (35,435) 19,751 (19,169)
------------ ------------ ------------
(Loss) income before provision for income taxes (4,225,147) 743,976 (3,360,314)
Provision for Income Taxes -- 65,000 --
------------ ------------ ------------
Net (loss) income $ (4,225,147) $ 678,976 $ (3,360,314)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE> 65
VISIBILITY INC. AND SUBSIDIARIES
Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Deficit
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
SERIES A SERIES B SERIES C
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,1996 -- $ -- -- $ -- -- $ --
Issuance of Series A convertible
preferred stock 1,881,721 5,250,000 -- -- -- --
Conversion of common stock to
convertible preferred stock -- -- 1,628,700 879,500 337,331 2,250,000
Comprehensive loss -- -- -- -- -- --
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
--------- ---------- --------- -------- ------- ----------
Balance, December 31, 1997 1,881,721 5,250,000 1,628,700 879,500 337,331 2,250,000
Comprehensive loss -- -- -- -- -- --
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
--------- ---------- --------- -------- ------- ----------
Balance, December 31, 1998 1,881,721 5,250,000 1,628,700 879,500 337,331 2,250,000
Exercise of stock options -- -- -- -- -- --
Conversion of common stock to Series D
convertible preferred stock -- -- -- -- -- --
Accretion of Series D convertible
preferred stock -- -- -- -- -- --
Issuance of common stock warrants -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
--------- ---------- --------- -------- ------- ----------
Balance, December 31, 1999 1,881,721 $5,250,000 1,628,700 $879,500 337,331 $2,250,000
========= ========== ========= ======== ======= ==========
<CAPTION>
CONVERTIBLE PREFERRED STOCK ADDITIONAL
SERIES D COMMON SHARES PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS)
------- -------- ---------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,1996 -- -- 3,155,700 $ 3,156 $ 3,579,931
Issuance of Series A convertible
preferred stock -- -- -- -- --
Conversion of common stock to
convertible preferred stock -- -- (1,966,031) (1,966) (3,127,534)
Comprehensive loss -- -- -- -- --
Net loss -- -- -- -- -- $ (3,360,314)
Foreign currency translation adjustment -- -- -- -- -- (4,240)
------------
Comprehensive loss -- -- -- -- -- $ (3,364,554)
------- -------- ---------- ------- ----------- ============
Balance, December 31, 1997 -- -- 1,189,669 1,190 452,397
Comprehensive loss -- -- -- -- --
Net loss -- -- -- -- -- $ 678,976
Foreign currency translation adjustment -- -- -- -- -- 6,054
------------
Comprehensive loss -- -- -- -- -- $ 685,030
------- -------- ---------- ------- ----------- ============
Balance, December 31, 1998 -- -- 1,189,669 1,190 452,397
Exercise of stock options -- -- 137,603 137 30,562
Conversion of common stock to Series D
convertible preferred stock 369,125 643,558 (369,125) (369) (221,106)
Accretion of Series D convertible
preferred stock -- 147,210 -- -- --
Issuance of common stock warrants -- -- -- -- 56,824
Comprehensive loss -- -- -- -- --
Net loss -- -- -- -- -- $ (4,225,147)
Foreign currency translation adjustment -- -- -- -- -- 3,535
------------
Comprehensive loss -- -- -- -- -- $ (4,221,612)
------- -------- ---------- ------- ----------- ============
Balance, December 31, 1999 369,125 $790,768 958,147 $ 958 $ 318,677
======= ======== ========== ======= ===========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
INCOME (LOSS) DEFICIT DEFICIT
------------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31,1996 $ -- $(11,010,959) $ (7,427,872)
Issuance of Series A convertible
preferred stock -- -- --
Conversion of common stock to
convertible preferred stock -- -- (3,129,500)
Comprehensive loss -- -- --
Net loss -- (3,360,314) (3,360,314)
Foreign currency translation adjustment (4,240) -- (4,240)
Comprehensive loss -- -- --
------------ ------------ ------------
Balance, December 31, 1997 (4,240) (14,371,273) (13,921,926)
Comprehensive loss -- -- --
Net loss -- 678,976 678,976
Foreign currency translation adjustment 6,054 -- 6,054
Comprehensive loss -- -- --
------------ ------------ ------------
Balance, December 31, 1998 1,814 (13,692,297) (13,236,896)
Exercise of stock options -- -- 30,699
Conversion of common stock to Series D
convertible preferred stock -- -- (221,475)
Accretion of Series D convertible
preferred stock -- (147,210) (147,210)
Issuance of common stock warrants -- -- 56,824
Comprehensive loss -- -- --
Net loss -- (4,225,147) (4,225,147)
Foreign currency translation adjustment 3,535 -- 3,535
Comprehensive loss -- -- --
------------ ------------ ------------
Balance, December 31, 1999 $ 5,349 $(18,064,654) $(17,739,670)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 66
VISIBILITY INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $(4,225,147) $ 678,976 $(3,360,314)
Adjustments to reconcile net income (loss) to net cash used in
operating activities-
Depreciation and amortization 781,716 734,440 911,003
Interest expense capitalized to debt 162,459 76,925 57,016
Noncash amortization of debt discount 126,171 -- --
Changes in assets and liabilities, net of assets acquired-
Accounts receivable, net 585,998 (4,743,798) (377,113)
Prepaid expenses and other current assets 48,227 (204,607) (128,544)
Accounts payable 153,906 1,063,590 (167,529)
Accrued expenses (859,601) 272,695 201,367
Deferred revenue 1,815,373 1,269,554 557,387
Deferred rent 5,274 26,402 26,402
----------- ----------- -----------
Net cash used in operating activities (1,405,624) (825,823) (2,280,324)
----------- ----------- -----------
Cash Flows from Investing Activities:
Acquisition, net of cash acquired -- (126,000) (23,346)
Purchases of fixed assets (588,162) (206,878) (372,292)
Other assets 35,609 (3,078) 15,626
----------- ----------- -----------
Net cash used in investing activities (552,553) (335,956) (380,012)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 30,700 -- --
Proceeds from issuance of Series A preferred stock -- -- 3,500,000
Proceeds from issuance of notes payable and Series D preferred
stock 1,100,000 -- 2,200,000
Proceeds from short-term bank loans, net 423,370 -- --
Repayment of notes payable -- -- (250,000)
Payment of capital lease obligation (23,962) (311,395) (358,092)
Payments of short-term bank loans, net -- -- (600,000)
----------- ----------- -----------
Net cash provided by (used in) by financing activities 1,530,108 (311,395) 4,491,908
----------- ----------- -----------
Foreign Exchange Impact on Cash 3,535 6,054 (4,240)
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (424,534) (1,467,120) 1,827,332
Cash and Cash Equivalents, beginning of year 1,162,605 2,629,725 802,393
----------- ----------- -----------
Cash and Cash Equivalents, end of year $ 738,071 $ 1,162,605 $ 2,629,725
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 433,334 $ 242,771 $ 236,980
=========== =========== ===========
Supplemental Disclosure of Noncash Financing and Investing
Activities:
Acquisition of equipment under capital lease $ 197,352 $ 283,731 $ --
=========== =========== ===========
Conversion of 369,125 shares of common stock into 369,125
shares of Series D redeemable convertible preferred stock,
net of discount (Note 12) $ 643,558 $ -- $ --
=========== =========== ===========
Conversion of notes payable into 627,240 shares of Series A
redeemable convertible preferred stock $ -- $ -- $ 1,750,000
=========== =========== ===========
Discount on issuance of note payable to shareholders $ 478,907 $ -- $
=========== =========== ===========
Acquisition of certain assets of the former European
distributor-
Fair value of assets acquired-
Equipment $ -- $ -- $ 109,135
Goodwill and other intangible assets -- 126,000 140,865
----------- ----------- -----------
-- 126,000 250,000
Forgiveness of Visibility debt, net -- -- (226,654)
----------- ----------- -----------
Cash payment for acquisition $ -- $ 126,000 $ 23,346
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE> 67
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(1) NATURE OF THE BUSINESS
Visibility Inc., a Delaware corporation, and subsidiaries (the Company),
develops, markets, sells and supports an integrated line of business
application software for manufacturers and aviation maintenance, repair
and overhaul companies. The Company is subject to a number of risks
similar to those of other companies in a similar stage of development.
Principal among these risks are the need to obtain adequate financing,
dependence on key individuals, the need for successful development and
marketing of services and products, and competition from other companies.
Management believes that its current cash and available borrowings under
the Company's current and future bank lines of credit (see Note 6) will
provide sufficient capital to finance the Company through December 31,
2000. The Company may attempt to raise additional capital during 2000 in
order to fund operations, product marketing and development, and working
capital requirements. There can be no assurance that additional financing
will be available or on terms favorable to the Company. The Company's
largest investors have stated that they continue to support the Company
and that they have the positive ability, intent and commitment to fund or
arrange funding of any cash requirements that Visibility may have,
resulting from operating losses or other uses of cash required in the
ordinary course of business, through at least December 31, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
RECLASSIFICATIONS
Certain prior-year balances have been reclassified in order to conform
with the current year's presentation.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany
accounts and transactions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying
amounts of cash and cash equivalents approximate their fair value due to
the short-term maturities of these investments.
6
<PAGE> 68
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's United Kingdom subsidiary is
the British pound sterling. Gains (losses) from foreign currency
translations of the United Kingdom subsidiary are credited or charged to
accumulated other comprehensive income (loss), which is included as a
component of stockholders' equity in the accompanying consolidated
balance sheets. The functional currency of the Company's other foreign
operations is the U.S. dollar. Gains and losses for these subsidiaries
resulting from the remeasurement of foreign currencies into U.S. dollars
are included in the results of operations and the amounts are
insignificant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to their
short-term nature. See Note 6 for fair value information pertaining to
the Company's long-term debt.
REVENUE RECOGNITION
In accordance with the provisions of Statement of Position (SOP) No.
97-2, Software Revenue Recognition, the Company recognizes revenue from
noncancelable software licenses upon product shipment, provided
collection is probable and no significant vendor and postcontract
customer obligations remain at the time of shipment. Sales of the
Company's products do not require significant production, modification or
customization of software. Installation of the software is routine,
requires insignificant effort and is not essential to the functionality
of the system or software. The Company accounts for insignificant vendor
obligations by deferring a portion of the revenue and recognizing it when
the related services are performed. Postcontract support (maintenance)
service fees are typically billed separately and are recognized on a
straight-line basis over the life of the applicable agreement. The
Company recognizes service revenues from consulting and implementation
services, including training, provided by both its own personnel and by
third parties, upon performance of the services. Long-term service and
development contracts are recognized using the percentage-of-completion
method. Revenue from equipment sales is recognized upon shipment of the
equipment.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software development costs after
technological feasibility of the product has been established. Costs
incurred prior to the establishment of technological feasibility are
charged to research and development expense. The Company capitalized no
software development costs during 1999, 1998 and 1997, as the costs
incurred after technological feasibility was established were deemed to
be immaterial. Capitalized software costs are amortized ratably over the
useful life of the product, generally two years, and are charged to cost
of revenues. There was no amortization expense for the years ended
December 31, 1999 and 1998 relating to capitalized software.
7
<PAGE> 69
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences,
utilizing current tax rates, of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Financial
Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133. Consequently, SFAS No. 133 will be effective for
the Company's year ending December 31, 2001. Management believes that
this statement will not have a significant impact on the Company.
(3) ACQUISITION
On May 15, 1997, the Company established a wholly owned UK subsidiary,
Visibility Europe Ltd. (the Subsidiary), which acquired certain equipment
and intangible assets of the Company's then European distributor, whose
parent company was formerly also a minority stockholder of the Company,
for $250,000. The purchase price was allocated $109,135 to equipment and
$140,865 to goodwill and other intangibles, which are being amortized on
a straight-line basis over three years. This acquisition was accounted
for as a purchase. Additional purchase price was contingent on the
Subsidiary achieving certain profitability levels for 1997 and 1998,
which the Company did not achieve in 1997. The Company achieved the 1998
targeted profitability, resulting in an additional $117,000 of contingent
consideration. This payment has been accounted for as an addition to
goodwill. $87,677 of goodwill amortization was recorded as an expense in
1999. Pro forma information for this acquisition has not been presented,
as the impact was not material.
(4) ACCOUNTS RECEIVABLE; ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT PROVISION NET DEDUCTIONS
BEGINNING OF CHARGED TO FROM BALANCE AT END
PERIOD OPERATIONS ALLOWANCE (1) OF PERIOD
<S> <C> <C> <C> <C>
Year Ended December 31, 1999 $ 424 $ 55 $(105) $ 374
Year Ended December 31, 1998 484 40 (100) 424
Year Ended December 31, 1997 518 99 (133) 484
</TABLE>
(1) Accounts deemed uncollectable, net of recoveries.
8
<PAGE> 70
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated using
the straight-line method over the estimated useful lives of the assets.
Maintenance and repair costs are charged to expense as incurred.
Fixed assets consist of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1999 1998
<S> <C> <C> <C>
Furniture and fixtures 5 years $ 708,980 $ 528,255
Equipment 1-3 years 3,503,784 3,192,787
Computer software 3 years 636,493 541,847
Leasehold improvements 2-10 years 352,207 350,411
----------- -----------
5,201,464 4,613,300
Less--Accumulated depreciation and
amortization 4,137,891 3,501,178
----------- -----------
$ 1,063,573 $ 1,112,122
=========== ===========
</TABLE>
Included above is equipment held under capital leases with a cost of
$477,494 and $943,950 and accumulated amortization of $149,319 and
$531,633 at December 31, 1999 and 1998, respectively.
(6) SHORT-TERM DEBT
LINE OF CREDIT
The Company has two line of credit facilities with a bank which allow the
Company to borrow up to $3,125,000 as of December 31, 1999. Borrowings
are secured by substantially all of the Company's assets under these two
facilities. Aggregate borrowings under these facilities at December 31,
1999 totaled $1,923,370. The facilities expire on March 31, 2000.
The first facility allows the Company to borrow against 80% of factored
U.S. accounts receivable up to a maximum of $2,125,000. Interest accrues
at the bank's prime rate (8.5% at December 31, 1999) plus 1.5% points. In
addition, a 0.5% administrative fee is due on the value of each factored
account receivable when it is collected. The facility has certain
covenants that pertain to the Company's profitability, as defined, which
the Company was in compliance with at December 31, 1999. $1,673,370 was
outstanding under this facility at December 31, 1999.
The second facility was entered into on October 1, 1999 and established a
line of credit in the maximum principal amount of $1,000,000 guaranteed
by the U.S. Export-Import Bank (EXIM). This facility allowed the Company
to borrow the lesser of a borrowing base calculation based on certain
percentages of accounts receivable originating outside the U.S.,
primarily from the U.K., as defined, or $1,000,000. As of December 31,
1999, the Company had borrowed $250,000 under this facility. During 1999,
the interest rate under this facility was the bank's prime rate (8.5% at
December 31, 1999) plus 2% points. The facility has certain covenants
that include the
9
<PAGE> 71
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Company's profitability and quick ratios, as defined. At December 31,
1999, the Company was not in compliance with these covenants. During
2000, the Company is obligated to pay down the borrowings in $125,000
installments on the 15th and last day of each month, beginning in
February. The bank applied the February payments to the $250,000 EXIM
loan that has settled this facility.
In connection with the November 1997 amendment of the credit line
agreement with the bank, the Company issued the bank a warrant to
purchase 71,685 shares of common stock at an exercise price of $2.79 per
share. The fair value of this warrant was immaterial. In connection with
the April 1998 amendment of the agreement with the bank, the bank will be
issued a warrant to purchase 10,526 shares of common stock at an exercise
price of $4.75 per share in the event that the Company defaults on its
payment obligations to the bank and it is not cured within two business
days. To date, warrants have not been issued since the Company has not
defaulted on its payments to the bank.
The Company has executed a Commitment Letter offered by a commercial
credit corporation that offers a $4 million credit line effective March
31, 2000. Borrowings under the credit line would be advanced against a
borrowing base calculation and would allow the lesser of 85% of worldwide
accounts receivable or $4 million. To secure the loans, the lender would
be granted a first priority security interest in all the assets of the
Company. Interest would accrue at the commercial credit corporation's
prime lending rate plus 2% points and a 1% commitment fee has been paid
subsequent to year-end. Minimum monthly interest charges would be $4,150.
The Company would grant to the lender warrants to purchase 55,363 shares
of the Company's common stock at an exercise price of $5.78 per share
which would be exercisable for seven years from the date of issuance. The
credit line period is one year and is automatically renewable. There are
no profitability or financial ratio covenants associated with the credit
line. The Company expects that this credit line would be sufficient to
provide for its working capital needs through December 31, 2000.
NOTE PAYABLE TO OTHERS
The Company has $1,000,000 of borrowings under a senior subordinated note
agreement due to a former shareholder, the parent company of its former
European distributor. The note plus accrued interest is reflected as
short-term debt in the accompanying 1999 balance sheet and is due on May
15, 2000. The note is subject to acceleration provisions upon the closing
of an initial public offering, sale or other disposition, as defined. The
note accrues interest at 8% per annum, payable upon maturity, and is
unsecured. As part of the financing, the Company also issued a warrant
for the purchase of up to 50,000 shares of common stock at $6.67 per
share. The fair value of the warrant was not material. The warrant
expires upon repayment of the senior subordinated note.
Interest expense on this note for 1999 and 1998 was $80,000 for each
year.
(7) LONG-TERM DEBT
The Company has $402,555 of notes outstanding to a stockholder as of
December 31, 1999 and December 31, 1998. The notes accrue interest at 10%
per annum. During 1999, the maturity date was extended to January 1,
2000. Subsequent
10
<PAGE> 72
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
to year-end, the maturity date was further extended to January 31, 2001
and, accordingly, the outstanding borrowings and accrued interest of
$509,904 and $473,004 at December 31, 1999 and 1998, respectively, are
reflected as noncurrent in the accompanying balance sheet. The borrowings
are secured by the Company's accounts receivable.
On September 17, 1999, the Company entered into several stockholder note
agreements totaling $1,100,000. These notes accrue interest at a rate of
10% per annum and are unsecured. The original maturity date was March 31,
2000 but subsequent to year-end this was extended to January 31, 2001.
Accordingly, the outstanding borrowings and accrued interest are
reflected as noncurrent in the accompanying balance sheet. The debt is
carried in the financial statements net of unamortized discount, based on
the relative fair values of securities issued in connection with the
notes (see Note 12 (a)). The original debt discount of $478,907 is being
amortized over the term of the debt as additional noncash interest
expense. This noncash interest expense amounted to $126,171 in 1999.
Interest expense, including amortized debt discount, for 1999 and 1998 on
these notes payable to stockholders totaled $208,631 and $40,255,
respectively.
The fair value of the Company's debt approximates its carrying value
based on the current rate offered to the Company for obligations of the
same remaining maturities.
(8) BENEFIT PLAN
The Company has a defined contribution plan, which is qualified under
Section 401(k) of the Internal Revenue Code. The plan covers
substantially all employees who meet minimum age and service requirements
and allows participants to defer a portion of their salary. After one
year of employment, the Company contributes 25% of the employee's
contribution, up to a maximum of 6% of the employee's salary. Employer
contributions may be suspended at the option of the Board of Directors.
The Company's contributions to the plan for the years ended December 31,
1999, 1998 and 1997 were approximately $100,000, $100,000 and $86,000,
respectively.
(9) INCOME TAXES
(Loss) income before income taxes for domestic and foreign operations is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Domestic $(2,932,507) $ 1,649,938 $(2,235,762)
Foreign (1,292,640) (905,962) (1,124,552)
----------- ----------- -----------
$(4,225,147) $ 743,976 $(3,360,314)
=========== =========== ===========
</TABLE>
11
<PAGE> 73
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The provision for income taxes consists of the following for 1999, 1998
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current tax expense-
Federal $ -- $ 38,000 $ --
State -- 27,000 --
Foreign -- -- --
-------- -------- --------
$ -- $ 65,000 $ --
======== ======== ========
</TABLE>
The 1998 federal tax expense represents alternative minimum taxes payable
and the 1998 state provision represents minimum and other
non-income-measured taxes. The Company utilized $1,655,000 of federal
and state net operating loss carryforwards in 1998 and reduced the
valuation allowance accordingly.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income tax provision (benefit) at
statutory rate (34)% 34% (34)%
State tax provision (benefit) (5) 10 (4)
Impact of foreign tax rates (benefit) 2 9 3
(Decrease) increase in valuation
allowance 45 (59) 29
Other (8) 15 6
--- --- ---
--% 9% --%
=== === ===
</TABLE>
The Company has approximately $9,000,000 of U.S. federal net operating
loss carryforwards available to reduce future taxable income, if any.
These net operating loss carryforwards expire in varying amounts through
2019 and are subject to the review and possible adjustment by the
Internal Revenue Service. The Company has $4,915,000 of foreign net
operating loss carryforwards available to reduce future taxable income in
the foreign jurisdictions, if any.
Section 382 of the Internal Revenue Code and the tax laws of certain
foreign jurisdictions also contain provisions that could place annual
limitations on the utilization of these net operating loss carryforwards
in the event of a change in ownership, as defined.
12
<PAGE> 74
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Significant components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax liabilities $ 328,046 $ 328,046
----------- -----------
Deferred tax assets-
Net operating loss carryforwards $ 4,652,900 $ 2,822,000
Allowance for doubtful accounts 117,035 153,275
Deferred rent 50,875 48,713
Accrued benefits 112,503 188,430
Tax credits 617,934 402,023
Other 44,038 59,054
----------- -----------
5,595,285 3,673,495
Valuation allowance (5,595,285) (3,673,495)
----------- -----------
Total deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The valuation allowance at December 31, 1999 and 1998 relates to the
uncertainty of realizing the tax benefits of the deferred tax assets.
Nonetheless, some, if not all, of these deferred tax assets may be
available to offset any deferred income tax liabilities as they become
otherwise payable.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases facilities under various operating leases. The Company
also leases certain equipment under noncancelable capital and operating
leases. Future minimum lease commitments under all noncancelable
operating and capital leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
<S> <C> <C>
2000 $ 534,380 $ 187,290
2001 514,943 198,744
2002 445,416 52,404
2003 425,699 --
2004 282,422
Thereafter 1,292,400 --
---------- ----------
Total minimum lease payments $3,495,260 438,438
==========
Less--Amount representing interest 81,626
----------
Present value of minimum lease payments
(including current portion of $135,368) $ 356,812
==========
</TABLE>
Total rent expense under noncancelable operating leases was approximately
$493,000, $464,000 and $491,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
13
<PAGE> 75
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(11) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to
concentrations of credit risk include trade accounts receivable. To
minimize this risk, ongoing credit evaluations of customers' financial
condition are performed, although collateral is not required. The Company
maintains reserves for potential credit losses.
No one customer accounted for 10% or more of gross accounts receivable at
December 31, 1999 or December 31, 1998. One customer accounted for 13% of
total revenues in 1999. No customer accounted for 10% or more of total
revenues in 1998 or 1997.
(12) STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
On October 6, 1997, the Company amended and restated its
Certification of Incorporation, whereby the Company's authorized
shares of $0.001 par value common stock was increased to
15,000,000. The Company also authorized the issuance of 3,847,752
shares of $0.001 par value preferred stock, of which 1,881,721
shares are designated as Series A Preferred Stock, 1,628,700
shares are designated as Series B Preferred Stock and 337,331
shares are designated as Series C Preferred Stock.
The Company issued 1,881,721 shares of Series A Redeemable
Convertible Preferred Stock in exchange for $3,500,000 of cash
plus the conversion of the $1,750,000 notes payable issued in 1997
and 1996. In 1997, the Company also allowed common stockholders to
convert 1,966,031 shares of common stock into 1,628,700 shares of
Series B Redeemable Convertible Preferred Stock and 337,331 shares
of Series C Redeemable Convertible Preferred Stock.
On September 10, 1999, the Company further amended and restated
the Amended and Restated Certification of Incorporation to provide
for the authorization and issuance of 369,125 additional shares of
$0.001 par value preferred stock, 335,569 shares to be designated
as Series D-1 Preferred Stock, 16,778 shares to be designated as
Series D-2 Preferred Stock, 16,778 shares to be designated as
Series D-3 Preferred Stock (collectively, the Series D Preferred
Stock).
In connection with the September 17, 1999 stockholder debt
financing discussed in Note 7, the Company allowed certain common
stockholders who participated in the debt financing to convert
369,125 shares of common stock into 335,569 shares of Series D-1
Redeemable Convertible Preferred Stock, 16,778 shares of Series
D-2 Redeemable Convertible Preferred Stock and 16,778 shares of
Series D-3 Redeemable Convertible Preferred Stock. Warrants to
purchase 415,847 shares of common stock were also issued to the
investors who participated in the debt financing. The warrants
expire on September 17, 2002, have an exercise price of $0.60, and
were valued using the Black-Sholes option pricing model. The value
of the consideration received has been allocated to the debt and
equity instruments based on their relative fair values. The
resulting discount is being accreted over the term of the
securities.
14
<PAGE> 76
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The Series A, Series B Series C and Series D redeemable
convertible preferred stock have the following rights and
preferences:
VOTING
Preferred stockholders are entitled to vote on an as-converted
basis together with common stockholders as one class.
DIVIDENDS
The preferred stockholders are entitled to receive dividends
or other distributions equal to the dividend or distribution
that would be received had the preferred stockholders
converted their shares into common stock.
LIQUIDATION
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of
Series A, B and C redeemable convertible preferred stock are
entitled to receive a $2.79, $.54 and $6.67 per share
liquidation preference, respectively, plus accrued or unpaid
dividends. The holders of Series D-1, D-2 and D-3 redeemable
convertible preferred stock are entitled to receive a $5.78,
$0.54 and $2.40 per share liquidation preference,
respectively, plus accrued or unpaid dividends. If the assets
available for distribution are insufficient to permit payment
of the liquidation preference amount, then the holders of the
preferred stock shall share ratably in any distribution, as
defined. After distribution to the preferred stockholders of
the full liquidation preference amount, any remaining assets
available for distribution are distributed both to holders of
common stock and preferred stock on a pro rata basis, with the
exception of holders of Series D redeemable convertible
preferred stock, assuming the preferred stock is converted
into common stock. Any dissolution or liquidation resulting
from an event of sale, as defined, with proceeds of greater
than or equal to $15.00 per share on an as-converted basis,
will not result in distributions in accordance with the
foregoing; rather, all preferred stock will be converted into
common and share in the proceeds on a pro rata basis.
CONVERSION
Each share of preferred stock is convertible, at the option of
the holder, into one share of common stock, adjusted for
certain dilutive events, as defined. In the event of an
initial public offering with a per share price of less than
$15.00, each holder of the preferred stock will receive a cash
payment equal to the liquidation preference (the IPO
Preference Amount) and all shares shall convert automatically
into common stock. The shares automatically convert upon the
occurrence of a qualified offering with a per share price
greater than or equal to $15.00 without any IPO Preference
Amount.
15
<PAGE> 77
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
REDEMPTION
As of March 31, 2003, the holders of the preferred stock may
require the Company, with 30 days' written notice, to redeem
outstanding preferred stock. The redemption price equals the
liquidation preference plus all accrued but unpaid dividends.
OTHER RESTRICTIONS
The Corporation is restricted, without the approval of 51% of
the holders of preferred stock, from issuing additional shares
of preferred stock, common stock or convertible debt, altering
the terms of outstanding preferred stock, amending its
articles of incorporation, selling or otherwise disposing of
all or substantially all of its assets, or voluntary
dissolving or otherwise liquidating the Company.
(B) STOCK OPTION PLANS
In 1994, the Company adopted the Visibility Inc. and Subsidiaries
Stock Option Plan (the 1994 Plan), which is administered by the
Board of Directors. The 1994 Plan provides for the issuance to key
employees and directors of the Company options to purchase shares
of common stock. The maximum number of shares of common stock that
may be issued under the 1994 Plan is 202,500 shares. Options are
granted under the 1994 Plan at exercise prices not less than the
fair value of the stock on the date of grant. The options are
exercisable over periods determined by the Board of Directors and
expire after 10 years from the date of grant.
On February 2, 1996, the Company adopted the Visibility Inc. and
Subsidiaries 1996 Stock Plan (the Plan), which is administered by
the Board of Directors. The Plan provides for the issuance of
incentive and nonqualified options to purchase shares of common
stock to key employees and directors of the Company. The maximum
number of shares of common stock that may be issued under the Plan
is 1,050,000 shares. Incentive stock options may be granted under
the Plan at exercise prices not less than the fair value of the
stock on the date of grant. The options are exercisable over
periods determined by the Board of Directors and expire 10 years
from the date of grant.
16
<PAGE> 78
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The following summarizes the stock option activity under the
Company's stock option plans:
<TABLE>
<CAPTION>
WEIGHTED
OUTSTANDING AVERAGE
OPTIONS EXERCISE PRICE
<S> <C> <C>
Balance, December 31, 1996 728,400 $ 1.11
Granted 1,098,850 0.20
Exercised -- --
Canceled (674,700) 0.63
----------
Balance, December 31, 1997 1,152,550 0.40
Granted 196,300 0.40
Exercised -- --
Canceled (162,499) 0.25
----------
Balance, December 31, 1998 1,186,351 0.42
Granted 344,000 0.58
Exercised (137,603) 0.22
Canceled (495,797) 0.52
----------
Balance, December 31, 1999 896,951 $ 0.46
========== ==========
</TABLE>
At December 31, 1999, 1998 and 1997, options to purchase 457,122, 549,162
and 364,600 shares were exercisable, respectively. The options
exercisable at December 31, 1999, 1998 and 1997 had a weighted average
exercise price of $0.46, $0.49 and $0. 55, respectively. Options
generally vest over three to four years. At December 31, 1999, 127,946
shares were available for future option grants.
During 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which defines a fair
value-based method of accounting for employee stock options or similar
equity instruments and encourages all entities to adopt that method of
accounting for all their employee stock compensation plans. However, it
also allows an entity to continue to measure compensation costs for those
plans using the intrinsic method of accounting prescribed by APB Opinion
25. Entities electing to remain with the accounting in APB Opinion 25
must make pro forma disclosures of net income as if the fair-value-based
method of accounting defined in SFAS No. 123 has been applied. The
Company has elected to account for its stock-based compensation plans
under APB Opinion 25.
Had compensation costs for the stock option plan been determined using
the fair value-based method as prescribed by SFAS No. 123, the Company's
1999 and 1997 net losses and 1998 net income would have been increased
and decreased, respectively, to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net (loss) income-
As reported $ (4,225,147) $ 678,976 $ (3,360,314)
Pro forma (4,228,464) 665,174 (3,373,765)
</TABLE>
Consistent with SFAS No. 123, pro forma compensation cost has not been
calculated for options granted prior to January 1, 1995. Pro forma
compensation cost may not be representative of that to be expected in
future years.
17
<PAGE> 79
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The weighted average per share fair values of options granted during
1999, 1998 and 1997 were $0.10, $0.09 and $0.05, respectively. The values
were estimated on the date of grant using the following weighted average
assumptions for grants in 1999, 1998 and 1997: risk-free interest rate of
5.50 %, 5.17% and 6.15%, respectively; expected life of five years;
expected dividend yield of 0% and volatility factor of 0%.
The weighted average remaining contractual life of outstanding options
was 7.67 years and the range of exercise prices was $0.20 to $1.67 at
December 31, 1999.
(13) FOREIGN OPERATIONS
The following table summarizes the Company's operations by geographic
area:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues-
North America $ 19,664,679 $ 24,022,301 $ 19,592,990
Europe 4,545,329 6,170,590 2,256,183
------------ ------------ ------------
Consolidated total $ 24,210,008 $ 30,192,891 $ 21,849,173
============ ============ ============
(Loss) income from operations-
North America $ (2,932,507) $ 1,964,561 $ (1,767,792)
Europe (1,292,640) (924,944) (1,124,552)
------------ ------------ ------------
Consolidated total $ (4,225,147) $ 1,039,617 $ (2,892,344)
============ ============ ============
Identifiable assets-
North America $ 8,061,279 $ 7,872,620 $ 6,204,875
Europe 2,224,379 3,700,960 2,002,173
------------ ------------ ------------
Consolidated total $ 10,285,658 $ 11,573,580 $ 8,207,048
============ ============ ============
</TABLE>
Export sales were not material in 1999, 1998 or 1997.
18
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Digital Wireless Corporation:
We have audited the accompanying balance sheet of Digital Wireless Corporation
as of December 31, 1999, and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Wireless Corporation
as of December 31, 1999, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States.
Atlanta, Georgia ARTHUR ANDERSEN LLP
February 18, 2000
<PAGE> 81
DIGITAL WIRELESS CORPORATION
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 917,129
Accounts receivable, less allowance of $20,109 618,053
Inventories 1,250,012
------------
Total current assets 2,785,194
------------
Property and equipment, at cost:
Research and development equipment 235,814
Production equipment 27,083
Office equipment 21,428
Furniture and fixtures 6,843
Computers and software 64,568
------------
355,736
Less accumulated depreciation 259,552
------------
Net property and equipment 96,184
------------
Other assets:
Patents, net of accumulated amortization of $12,234 11,724
Deposits 6,656
------------
Total other assets 18,380
------------
Total assets $ 2,899,758
============
</TABLE>
-2-
<PAGE> 82
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Accounts payable $ 158,165
Accrued expenses 86,231
Income taxes payable 153,292
Current maturities of notes payable 41,016
------------
Total current liabilities 438,704
------------
Notes payable, less current maturities 82,033
Deferred income taxes 21,460
------------
Total long term liabilities 103,493
------------
Total liabilities 542,197
------------
Stockholders' equity:
Common stock, $.01 par value; 5,000,000 shares
authorized, 633,888 shares issued and outstanding 6,339
Additional paid in capital 1,432,482
Retained earnings 918,740
------------
Total stockholders' equity 2,357,561
------------
Total liabilities and stockholders' equity $ 2,899,758
============
</TABLE>
The accompanying notes are an integral part of this statement.
-3-
<PAGE> 83
DIGITAL WIRELESS CORPORATION
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
Revenues:
Product sales and service revenues $ 4,118,153
Development contracts 352,700
------------
Total revenues 4,470,853
Costs of revenues 1,912,709
------------
Gross profit 2,558,144
------------
Operating expenses:
Research and development costs 520,720
Marketing and sales costs 656,285
General and administrative expenses 375,447
------------
Total operating expenses 1,552,452
------------
Income from operations 1,005,692
Other income (expense):
Interest income 23,921
Interest expense (9,387)
Other income (expense) 13,487
------------
Total other income (expense) 28,021
------------
Income before provision for income taxes
and cumulative effect of accounting change 1,033,713
Provision for income taxes:
Federal income taxes 240,706
State income taxes 33,502
------------
Total provision for income taxes 274,208
------------
Net income before cumulative effect of
accounting change 759,505
Cumulative effect of accounting change (less
applicable income taxes of $22,980) 34,469
------------
Net income $ 793,974
============
</TABLE>
The accompanying notes are an integral part of this statement.
-4-
<PAGE> 84
DIGITAL WIRELESS CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------------------- paid-in Retained stockholders'
Shares Amount capital earnings equity
------------ ------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 625,888 $ 6,259 $ 1,392,562 $ 124,766 $ 1,523,587
Conversion of subordinated debentures
into common stock 8,000 80 39,920 -- 40,000
Net income -- -- -- 793,974 793,974
-------- ------- ----------- --------- -----------
Balance, December 31, 1999 633,888 $ 6,339 $ 1,432,482 $ 918,740 $ 2,357,561
======== ======= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
-5-
<PAGE> 85
DIGITAL WIRELESS CORPORATION
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 793,974
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change (57,449)
Depreciation and amortization 29,508
Net changes in assets and liabilities:
Accounts receivable (118,738)
Inventory (307,098)
Accounts payable 62,432
Accrued expenses (24,054)
Advance billings (102,060)
Income taxes payable 58,289
------------
Net cash provided by operating activities 334,804
------------
Cash flows from investing activities:
Acquisition of property and equipment (28,085)
------------
Net cash used in investing activities (28,085)
------------
Cash flows from financing activities:
Net proceeds on notes payable and line-of-credit 123,049
Payments on convertible subordinated debentures (143,557)
Payments on notes payable (17,742)
Payments on obligations under capital leases (34,916)
------------
Net cash used in financing activities (73,166)
------------
Net increase in cash and cash equivalents 233,553
Cash and cash equivalents at beginning of year 683,576
------------
Cash and cash equivalents at end of year $ 917,129
============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 19,757
============
Income taxes $ 239,899
============
</TABLE>
The accompanying notes are an integral part of this statement.
-6-
<PAGE> 86
DIGITAL WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Digital Wireless Corporation (the "Company") designs, manufactures and
markets wireless telecommunications products for industries that provide
a wireless pathway for data information. The Company has expertise in a
wide range of wireless technologies including wireless system
architecture, application-specific integrated circuit design, data
communications software, protocols and hardware. The Company focuses
exclusively on products for the industrial and commercial market.
Additionally, the Company holds a patent on a wireless system called
Recombinant Spread Spectrum (RSS) that minimizes dropout or data transfer
errors in wireless data transmission.
The Company's customers are spread across the United States and Europe.
However, the Company derives a substantial portion of its revenue from
one product. Typical product lives for wireless telecommunication
products are 3-5 years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. REVENUE RECOGNITION
The Company recognizes revenue from product sales at shipment.
Revenue from development contracts is recognized as earned based on
the agreements.
B. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
C. BAD DEBTS
The Company uses the reserve method of accounting for bad debts.
Accounts are written off against the reserve at the time at which
they are determined to be uncollectible.
-7-
<PAGE> 87
DIGITAL WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INVENTORIES
Inventories are stated at cost or market, whichever is lower. Cost
is determined using the first-in, first-out ("FIFO") method of
valuation. At December 31, 1999, the major components of
inventories were as follows:
<TABLE>
<S> <C>
Raw materials and purchased parts $ 688,863
Work-in-process 338,240
Finished goods 222,909
----------
Total inventories $1,250,012
</TABLE>
E. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets. Depreciation is computed on
the straight-line method for financial reporting purposes and on
the declining balance method for federal income tax purposes.
Maintenance and repairs that do not improve or extend the lives of
the respective assets are expensed. Depreciation expense for the
year ended December 31, 1999 was $28,099 (Note 10).
F. PATENTS
Patents are being amortized on a straight-line basis over the
expected useful life of the asset, which is estimated at 17 years.
Amortization expense for the year ended December 31, 1999 was
$1,409.
-8-
<PAGE> 88
DIGITAL WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. INCOME TAXES
Income taxes are computed under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of
taxes currently due plus deferred taxes. Deferred taxes are
recognized for differences between the basis of assets and
liabilities for financial statement and income tax purposes. The
differences relate primarily to depreciation methods and research
and experimentation credits. The Company uses the flow-through
method in accounting for research and experimentation credits. The
credits reduce income tax expense in the years they are used. The
deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
H. STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its employee stock
options. Under APB Opinion No. 25, because the exercise price of
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recorded.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" (Note 7).
I. USE OF ESTIMATES
The use of estimates is necessary in the preparation of financial
statements in accordance with generally accepted accounting
principles. Management believes that the estimates used in
preparation of the Company's financial statements are reasonable.
Actual results may differ from the estimates.
-9-
<PAGE> 89
DIGITAL WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. NOTES PAYABLE AND LINE OF CREDIT
The Company had available a $300,000 revolving line of credit and a
$200,000 equipment line of credit with a bank during the year.
Outstanding borrowings under the lines accrued interest at the prime
rate plus .75% and 1.25%, respectively. At December 31, 1999, the lines
had expired.
Borrowings under the revolving line of credit were limited to 80% of
eligible accounts receivable, as defined. The equipment line of credit
was used to finance equipment and other fixed asset purchases between
May 1, 1998 and June 1, 1999. Interest accrued from the date of each
advance at the appropriate rate and was payable monthly until June 1,
1999. On June 1, 1999, the equipment line of credit was converted to a
term note, payable in 42 equal monthly installments of principal and
accrued interest of $3,418.
The note bears interest at a variable rate of prime plus 1.25% (9.75% at
December 31, 1999) and is secured by substantially all assets of the
Company. Future minimum principal payments are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
2000 $ 41,017
2001 41,016
2002 41,016
---------
$ 123,049
=========
</TABLE>
The Company used the equipment line of credit to retire any
non-converted subordinated debentures (Note 4).
4. CONVERTIBLE SUBORDINATED DEBENTURES
At December 31, 1998 the Company had outstanding convertible
subordinated debentures amounting to $183,557. These debentures bore
interest at varying rates from 8% to 10% and were convertible into
common stock at a conversion rate of $5 per share. The debentures
matured on May 31, 1999. Interest accrued and was payable annually on
May 31. The debentures were redeemable at face value beginning June 1,
1997. They were convertible any time until maturity, at the option of
the holder. The debentures were subordinated to current and future
obligations due to financial institutions and/or certain other
traditional lending institutions. During 1999, $40,000 of debentures
were converted into 8,000 shares of common stock of the Company. The
Company used the equipment line of credit to retire the remaining
debentures during 1999 (Note 3).
-10-
<PAGE> 90
DIGITAL WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. INCOME TAXES
The components of the provision for income taxes for the year ended
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Current:
Federal $222,465
State 30,283
Deferred:
Federal $ 18,241
State 3,219
--------
Total:
Federal $240,706
State 33,502
========
</TABLE>
Deferred income taxes at December 31, 1999 were $21,460 and are the
result of temporary differences due to depreciation methods. The net
change in the deferred tax valuation allowance during 1999 was a
decrease of $63,906.
The Company utilized $90,630 of available research and experimentation
credits during 1999. At December 31, 1999, the Company has no research
and experimentation credit carryforwards.
The following is a summary of the items which resulted in recorded
income taxes to differ from taxes computed using the statutory federal
income tax rate for the year ended December 31, 1999:
<TABLE>
<S> <C>
Statutory federal income tax rate 34%
Effect of:
State income tax, net of federal benefit 4%
Research and development credits (8)%
Valuation allowance (5)%
Other 2%
----
Effective income tax rate 27%
====
</TABLE>
6. STOCK WARRANTS
At December 31, 1999, the Company had outstanding to an officer and
employees, stock warrants to purchase 62,000 shares of common stock at
$0.02 per share. The warrants expire on January 1, 2006.
-11-
<PAGE> 91
DIGITAL WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. STOCK OPTIONS
The Company has an incentive stock option plan and outstanding
non-qualified stock options for the benefit of directors, shareholders,
officers, and employees. Options are granted at fair value at the time of
grant as determined by the Company's board of directors.
A summary of the status of the Company's stock option plans as of
December 31, 1999 and changes during the year is presented below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
-------- ----------------
<S> <C> <C>
Outstanding at beginning of year 272,326 $ 4.20
Granted 14,550 4.79
Exercised -- --
Forfeited (2,600) $ 3.08
--------- ------
Outstanding at end of year 284,276 $ 4.24
========= ======
Options exercisable at end of year 170,976 $ 4.22
========= ======
Weighted-average fair value of options granted during the year $ 4.79
======
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Exercise Outstanding Remaining Average Outstanding Average
Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$7.00 22,450 3.98 $7.00 22,450 $7.00
$5.00 25,100 9.29 $5.00 19,700 $5.00
$4.37 58,250 6.94 $4.37 40,250 $4.37
$4.35 4,983 6.81 $4.35 2,883 $4.35
$4.30 10,200 9.08 $4.30 3,400 $4.30
$4.00 127,500 7.63 $4.00 46,500 $4.00
$3.08 25,050 2.40 $3.08 25,050 $3.08
$2.00 2,000 4.36 $2.00 2,000 $2.00
$1.08 2,876 1.86 $1.08 2,876 $1.08
$1.00 5,867 2.94 $1.00 5,867 $1.00
------- -------
284,276 170,976
======= =======
</TABLE>
-12-
<PAGE> 92
DIGITAL WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options; accordingly, no compensation cost has been
recognized. Had compensation cost been determined based upon the fair
value of the stock options at grant date consistent with the method of
SFAS No. 123, it would not have had a material effect on either the
Company's net income or the financial statements as a whole.
8. COMMITMENTS
The Company has a compensation agreement with an officer/employee of the
Company. Under the agreement, during 2000, the employee is entitled to a
base salary and bonuses based on increases in revenues and operating
profit. The employee was granted stock options to purchase 36,000 shares
of the Company's common stock at $4.37 a share during 1998. Vesting
occurs over a two year period. This agreement is revised annually by the
Company's Board of Directors.
9. RELATED PARTY TRANSACTIONS
The Company leases space under an operating lease and purchases certain
services from a company controlled by the same parties as one of its
stockholders. During 1999, the Company paid approximately $95,000 for
rent and other services to this related company. The lease expires in
September, 2000. At December 31, 1999, future minimum rental payments due
under the lease are approximately $54,000. In management's opinion the
amounts paid were reasonable and equivalent to what it would have paid an
unrelated party for the same facility rental and services. At December
31, 1999, no amounts were owed to the related company.
Also outstanding are 61,926 non-qualified stock options to directors at
prices ranging from $1.00 to $7.00, expiring at varying dates through
October, 2009.
-13-
<PAGE> 93
DIGITAL WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
10. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During 1999, the Company changed its method of depreciating property and
equipment from the declining-balance method to the straight-line method.
The Company believes that using the straight line method is a more
accurate and conservative approach to depreciating the assets. The
effect of this change was to increase income before provision for income
taxes and cumulative effect of accounting change and net income for 1999
by $57,449 and $34,469, respectively.
11. NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year, a subordinated debenture holder converted a note for
$40,000 into 8,000 shares of common stock of the Company.
12. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash and
cash equivalents and accounts receivable.
The Company maintains cash balances at two financial institutions, which
at times may exceed federally insured limits. The Company maintains its
cash and cash equivalents with high credit, quality financial
institutions. The Company believes no significant concentration of
credit risk exists with respect to these cash investments. At December
31, 1999, the Company's cash and cash equivalents exceeded federally
insured limits by $717,004.
13. DEFINED CONTRIBUTION PLAN
The Company has a contributory, defined contribution 401(k) plan (the
"Plan") covering all employees. Employees are eligible to participate in
the Plan on the first day of the month following the date of their
employment.
Under the Plan there are two types of contributions which can be made
during the Plan period. The contributions are:
1. Salary reduction contributions: The amount by which the
participants have elected to reduce their compensation for
the plan year.
2. Employer discretionary matching contributions: The employer,
in its sole discretion, may make discretionary matching
contributions within certain limits provided by law.
The Company made a $40,000 contribution to the Plan for the year ended
1999. Such amount is included in accrued expenses in the accompanying
balance sheet.
-14-
<PAGE> 1
EXHIBIT 10.4
REVOLVING LOAN AGREEMENT
This Agreement dated July 2, 1999, made by and between INTELLIGENT
SYSTEMS CORPORATION, a Georgia corporation, ("Borrower") and FIDELITY NATIONAL
BANK, a national bank, ("BANK").
WITNESSETH:
That for valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, and in consideration of the mutual promises herein made,
Bank and Borrower, intending to be legally bound, agree as follows:
ARTICLE I -THE REVOLVING LOAN
SECTION 1.1. Bank hereby agrees to lend to Borrower, and Borrower
hereby agrees to borrow from Bank, upon the terms and conditions, set forth in
this Agreement, the principal sum of up to ONE MILLION AND NO/100 DOLLARS
($1,000,000.00) (the "Revolving Loan"). Borrower's obligation to repay the
Revolving Loan and the interest thereon shall be evidenced by a commercial
promissory note (the "Note") in form and substance satisfactory to Bank. Until
the earlier of June 30, 2000, or the occurrence of any Event of Default (as
defined under Article VI of this Agreement), or written notice to Borrower of
Bank's election to terminate the availability of new advances under this
Agreement (which notice Bank may give at its discretion, in the event an Event
of Default has occurred or is threatened), Borrower may borrow hereunder in
minimum advances of $5,000.00, prepay the principal sum of advances in whole or
in part without penalty, and reborrow hereunder, so long as the aggregate unpaid
principal balance of such advances does not exceed the maximum principal amount
set forth in the preceding sentence of this Section 1.1. Bank may require at
any time that advances be made upon at least one banking day's notice to Bank.
Bank may also require at any time that advances be requested in writing on
Bank's advance request form. Bank may disburse each loan by credit to Borrower's
transaction account with Bank, by check, or in such other manner as Borrower and
Bank may agree.
SECTION 1.2. Borrower agrees to pay interest on the Revolving Loan at
the rate(s), on the date(s), and calculated by the method, set forth in the
Note.
SECTION 1.3. Unless payment is required to be made earlier under the
terms of the Note or pursuant to Section 6.2 of this Agreement following an
Event of Default, Borrower shall pay the unpaid principal balance of the
Revolving Loan in full on the maturity date of the Note.
SECTION 1.4. For the privilege of having the Revolving Loan available,
until the earlier of the termination of this Agreement or the effective date of
Bank's election to terminate the availability of new loans, Borrower agrees to
pay to Bank a loan fee of $5,000.00 to be paid on the date hereof.
ARTICLE 11 - COLLATERAL
SECTION 2.1. The repayment by Borrower of its indebtedness under the
Revolving Loan and the Note, and the performance by Borrower of all obligations
under this Agreement, shall be secured by every security agreement (every
"Security Agreement") which secures obligations so defined as to include the
Revolving Loan or the Note, and by certain stock interests of Borrower as more
particularly described in the Note (herein the "Collateral").
SECTION 2.2. Borrower shall execute and deliver, or shall cause to be
executed and delivered, such documents relating to the Collateral as Bank may
from time to time request.
ARTICLE III - REPRESENTATIONS AND WARRANTIES; CONDITIONS PRECEDENT
SECTION 3.1. Borrower is a Georgia corporation duly organized and
existing under the laws of the State of Georgia, and is qualified to do business
in all jurisdictions in which it conducts its business.
SECTION 3.2. The execution and delivery by Borrower of, and the
performance by Borrower of its obligations under, this Agreement, the Note and
the Security Agreements have been duly authorized by all requisite action on the
part of Borrower and do not and will not (i) violate any provision of Borrower's
articles of incorporation by-laws, or other organizational documents, any law or
any judgment, order or ruling of any court or governmental agency, or (ii) be in
conflict with, result in a breach of, or constitute, following notice or lapse
of time or both, a default under any indenture, agreement or other instrument to
which Borrower is a party or by which Borrower or any of its property is bound.
SECTION 3.3. Each of this Agreement and the Note is the legal, valid
and binding agreement of Borrower enforceable against Borrower in accordance
with its terms.
SECTION 3.4. There are no pending or threatened actions or proceedings
before any court or administrative or governmental agency that may, individually
or collectively, adversely affect the financial condition or business operations
of Borrower.
SECTION 3.5. The financial statements previously delivered by Borrower
to Bank, fairly and accurately presents the financial condition of Borrower as
of such date and has been prepared in accordance with generally accepted
accounting principles consistently applied. Since the date of that financial
statement, there has been no material adverse change in the financial condition
of Borrower, and, after due inquiry, there exists no material contingent
liability or obligation assertable against Borrower.
SECTION 3.6. All federal, state and other tax returns of Borrower
required by law to be filed have been completed in full and have been duly
filed, and all taxes, assessments and withholdings shown on such returns or
billed to Borrower have been paid, and Borrower maintains adequate reserves and
accruals in respect of all such federal, state and other taxes, assessments and
withholdings. There are no unpaid assessments pending against Borrower for any
taxes or withholdings, and Borrower knows of no basis therefor.
SECTION 3.7. The obligations of Borrower under this Agreement and the
Note are not subordinated in right of payment to any other obligation of
Borrower.
SECTION 3.8. Borrower possesses all permits, memberships, franchises,
contracts, licenses, trademark rights, trade names, patents, and other
authorizations necessary to enable it to conduct its business operations as now
conducted, and no filing with, and no consent, permission, authorization, order
or license of, any individual, entity, or governmental authority is necessary in
connection with the execution delivery, performance or enforcement of this
Agreement or the Note.
SECTION 3.9. No event has occurred and is continuing which is, or which
with the giving of notice or lapse of time or both would be, an Event of Default
(as defined in Article VI) of this Agreement.
SECTION 3.10. Borrower has good and marketable title to all of its
properties and assets including, without limitation, the Collateral and the
properties and assets reflected in the above-described financial statement.
SECTION 3.11. The minimum funding standards of Section 302 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") have been
met at all times with respect to all "plans" of Borrower to which such standards
apply; Borrower has not made a "partial withdrawal" or a "complete withdrawal"
from any "multiemployer plan"; and no "reportable event" or "prohibited
transaction" has occurred with respect to any such "plan" (as all of the quoted
terms are defined in ERISA).
SECTION 3.12. Except as otherwise expressly disclosed by Borrower to
Bank in writing on the date of this Agreement: No "hazardous substance" (as that
term is defined in Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ["CERCLA"]) has been
released, discharged, disposed of, or stored on any of Borrower's owned or
leased real or personal property by Borrower, by any third party, or by any
predecessor in interest of title to Borrower; Borrower and all of Borrower's
properties are in compliance with all applicable local, state and federal
environmental laws and regulations; no notice has been served on Bark by any
governmental authority or any individual or entity claiming violation of any
environmental protection law or regulation, or demanding compliance with any
environmental protection law or regulation, or demanding payment, indemnity, or
contribution for any environmental damage or injury to natural resources; no
<PAGE> 2
"hazardous substance" (as defined in CERCLA) is produced or used in Borrower's
business; and no improvement of any real property owned or leased by Borrower
contains any asbestos, including, without limitation, asbestos, insulation on
ceilings, piping or structural members or supports.
SECTION 3.13. Bank shall not be obligated to make any loan under the
Revolving Loan until Borrower shall have furnished Bank, at Borrower's expense,
such evidence as Bank shall require regarding the truth or continued truth of
the foregoing representations and warranties, including, without limitation,
opinions of Borrower's outside legal counsel, opinions and certificates of
Borrower's independent certified public accountants, surveys, appraisals,
environmental audits by qualified environmental engineers selected by Bank,
reports of other independent consultants selected by Bank, and certificates of
Borrower's officers. All such evidence must be in form and content satisfactory
to Bank.
SECTION 3.14. As of the date of this Agreement, the stock interest held
by Borrower in Paysys International, Inc., a Florida corporation, and pledged as
part of the Collateral, represents 30% of the outstanding shares of said
corporation.
SECTION 3.13. Borrower hereby represents and warrants to Bank that it
is currently "Millennium Compliant" (as defined in Section 4.14 hereinbelow.
ARTICLE IV - AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as it may borrow under this
Agreement or so long as any indebtedness remains outstanding under the Revolving
Loan or under the Note, Borrower shall:
SECTION 4.1 Deliver to Bank (i) unaudited income and expense
statements, copies of Borrower's filings with the Securities and Exchange
Commission and such additional analytical information as previously provided to
Bank immediately following the dates of Borrower's filings with the Securities
and Exchange Commission, (ii) within 120 days after the end of each fiscal year
of Borrower's statements of income and retained earnings of Borrower for the
just-ended fiscal year, and a balance sheet of Borrower as of the end of such
year, audited by the present independent certified public accountants of
Borrower or by such other firm of independent public accountants as may be
designated by Borrower and be satisfactory to Bank, and (iii) with reasonable
promptness, such other information as Bank may reasonably request.
SECTION 4.2. Maintain its books, accounts and records in accordance
with generally accepted accounting principles and shall permit any person or
entity designated in writing by Bank to visit and inspect any of its properties,
books and financial records, and to make copies thereof and take extracts
therefrom, and to discuss Borrower's financial affairs with Borrower's financial
officers and accountants.
SECTION 4.3. Pay and discharge all taxes, assessments, fees,
withholdings and other governmental charges or levies imposed upon it, or upon
its income and profits, or upon any property belonging to it, prior to the date
on which penalties attach thereto, unless the legality thereof shall be promptly
and actively contested in good faith by appropriate proceedings, and unless
adequate reserves for such liability are maintained by Borrower pending
determination of such contest.
SECTION 4.4. Maintain its existence in good standing in the state of
its organization or incorporation and its qualification and good standing in all
jurisdictions where such qualification is required under applicable law, and
conduct its business in the manner in which it is now conducted subject only to
changes made in the ordinary course of business.
SECTION 4.5. Promptly notify Bank in writing of the occurrence of any
Event of Default or of any pending or threatened litigation claiming damages in
excess of $25,000 or seeking relief that, if granted, would adversely affect the
financial condition or business operations of Borrower.
SECTION 4.6. Maintain and keep in force insurance of the types and in
the amounts customarily carried in lines of business similar to Borrower's and
such other insurance as Bank may require, including, without limitation, fire,
public liability, casualty, property damage, flood damage, and worker's
compensation insurance. Borrower shall deliver to Bank from time to time at
Bank's request copies of all such insurance policies and certificates of
insurance and schedules setting forth all insurance then in effect.
SECTION 4.7. Keep all of its properties in good repair and condition,
and from time to time make necessary repairs, renewals and replacements thereto
so that Borrower's properly shall be fully and efficiently preserved and
maintained.
SECTION 4.8. Perform or take, on request of Bank, such action as may be
necessary or advisable to perfect any lien or security interest in the
Collateral or otherwise to carry out the intent of this Agreement.
SECTION 4.9. Pay or reimburse Bank for any out-of-pocket expenses,
including attorneys' fees, incurred by Bank in preparing or enforcing this
Agreement, the Note, and the Security Agreements, or in collecting the Revolving
Loan and any other sums due under the Note or this Agreement after default by
Borrower in the payment thereof.
SECTION 4.10. Fund all of its "plans" to which the minimum funding
standard, of Section 301 of ERISA apply in accordance with such standards;
furnish Bank, promptly upon Bank's request, copies of all reports or other
statements filed with, or received from, the United States Department of Labor,
the Internal Revenue Service, or the Pension Benefit Guaranty Corporation with
respect to all of Borrower's "plans"; and promptly advise Bank of the occurrence
of any "reportable event" or "prohibited transaction" with respect to any such
"plan" (as all of the quoted terms are defined in ERISA).
SECTION 4.11. Maintain its principal transaction and depository
accounts with Bank.
SECTION 4.12. Use the proceeds of the Revolving Loan only for working
capital and general corporate purposes.
SECTION 4.13. In the event the price of the common stock of Media
Metrix, Inc., a Delaware corporation, held by Borrower and pledged as part of
the Collateral to Bank, falls below eighteen dollars ($18.00) per share,
Borrower agrees that it shall supply to Bank additional collateral sufficient to
fully collateralize the Loan, which additional collateral shall be sufficient to
Bank in its sole and absolute discretion. The failure of Borrower to supply such
sufficient additional collateral to Bank hereunder shall be deemed an event of
default under the Note and this Agreement.
SECTION 4.14. Borrower shall be "Millennium Compliant." As set forth
herein, Millennium Compliant means that software, hardware, embedded microchips
and other processing capabilities utilized by, and material to, the business
operations ("Systems") of Borrower functions accurately and consistently accept
date input, provide date output and perform calculations on dates before, during
and after January 1, 2000 without interruption and without any change in
operations associated with the advent of the year 2000. Upon request by the
Bank, Borrower shall provide to the Bank its plan to become Millennium Compliant
and status reports on the implementation of the same, or such other information
which is sufficient to demonstrate that Borrower will be Millennium Compliant.
ARTICLE V - NEGATIVE COVENANTS
Borrower covenants and agrees that, without the prior written consent
of Bank, so long as it may borrow under this Agreement or so long as any
indebtedness remains outstanding under the Revolving Loan or under the Note,
Borrower shall not:
SECTION 5.1. Use any proceeds of the Revolving Loan except for the
purposes stated in Section 4.13.
SECTION 5.2. Create, incur, assume, or suffer to exist any indebtedness
of any description whatsoever not existing as of the date of this Agreement,
except (i) indebtedness incurred under this Agreement, and (ii) any trade
indebtedness incurred in the ordinary course of business payable within 60 days
of its incurrence
SECTION 5.3. Without the prior written consent of Bank, merge,
consolidate or sell, lease, transfer or otherwise dispose all or any substantial
portion of its assets, except sales of stock interests owned by Borrower in the
ordinary course of business; or change its name; or change its location of its
chief executive office.
SECTION 5.4. Without the prior written consent of Bank, grant any lien
on or security interest in, or otherwise encumber, any of its receivables,
inventory or the Collateral, and, except for liens for taxes not yet due and
payable or which are being actively contested in good faith by appropriate
proceedings and for which adequate reserves are being maintained by Borrower and
those liens disclosed to Bank by Borrower in writing prior to the execution of
this Agreement, Borrower shall not permit to exist any lien, security interest
or other encumbrance on any of its receivables or inventory.
SECTION 5.5. Take, or fail to take, any act if such act or failure to
act results in the imposition of withdrawal liability under Title IV of ERISA.
2
<PAGE> 3
ARTICLE VI - EVENTS OF DEFAULT AND REMEDIES
SECTION 6.1. Anyone or more of the following shall constitute an Event
of Default hereunder by Borrower:
(a) Failure to pay when due any payment of principal or interest
due on the Note or any other sum due hereunder within five (5)
days of the due date of such payment; or
(b) Failure to pay when due any payment of principal or interest
due on any other obligation for money borrowed or the deferred
purchase price of goods or services; or
(c) Default under any Security Agreement or any other document,
note, agreement, mortgage, security agreement, instrument, or
understanding with, held by, or executed in favor of Bank,
which default remains uncured ten (10) days after written
notice of such default from Bank to Borrower; or
(d) Should any representation or warranty contained herein or made
by or furnished on behalf of Borrower in connection herewith
be false or misleading in any material respect as of the date
made; or
(e) Failure to perform or observe any covenant or agreement
contained in Articles IV or V of this Agreement, which default
remains uncured ten (10) days after written notice of such
default from Bank to Borrower; or
(f) Failure to pay its debts generally as they become due; or
(g) Borrower's making or taking any action to make an assignment
for the benefit of creditors, or petitioning or taking any
action to petition any tribunal for the appointment of a
custodian, receiver or any trustee for it or a substantial
part of its assets, or commencing or taking any action to
commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or
debtor relief law or statute of any jurisdiction, whether now
hereafter in effect, including, without limitation, any
chapter of the federal Bankruptcy Code, or, if there shall
have been filed or commenced against Borrower any such
petition, application or proceeding which is not dismissed
within 30 days or in which all order for relief is entered; or
should Borrower by any act or omission indicate its approval
of or acquiescence in any such petition, application or
proceeding or order for relief or the appointment of a
Custodian, receiver or any trustee for it or any substantial
part of any of its properties; or should Borrower suffer to
exist any such custodianship, receivership or trusteeship, or
(h) Borrower's concealing, removing, or permitting to be concealed
or removed, any part of its property, with intent to hinder,
delay or defraud its creditors or any of them, or making or
suffering a transfer of any of its property which may be
fraudulent under any bankruptcy, fraudulent conveyance or
similar law; or making any transfer of its property to or for
the benefit, of a creditor at a time when other creditors
similarly situated have not been paid, or suffering
permitting, while insolvent, any creditor to obtain a lien
upon any of its property through legal proceedings or
distraint which is not vacated within 30 days after the date
thereof, or
(i) Occurrence of any of the following with respect to Borrower:
dissolution or cessation of business or insolvency.
SECTION 6.2. Upon the occurrence and continuation of an Event of
Default, Bank may (i) terminate all obligations of Bank to Borrower, including,
without limitation, all obligations to lend money under this Agreement, (ii)
declare immediately due and payable, without presentment, demand, protest or any
other notice of any kind, all of which are expressly waived, the Note and any
other note of Borrower held by Bank, including, without limitation, principal,
accrued interest and costs of collection (including, without limitation,
principal, accrued interest and costs of collection (including, without
limitation, a reasonable attorney's fee if collected by or through an attorney
who is not a salaried employee of Bank, in bankruptcy or in other judicial
proceedings) and (iii) pursue any remedy available to it under this Agreement,
under the Note, under any other note of Borrower held by Bank, under any
Security Agreement or available at law or in equity.
ARTICLE VII - DEFINITIONS
SECTION 7.1.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) Accounting terms used in this Agreement such as "net income",
"working capital", "current assets", "current liabilities",
"tangible net worth", and "total liabilities" shall have the
meanings normally given them by, and shall be calculated, both
as to amounts and classification of items, in accordance with,
generally accepted accounting principles.
(b) "Agreement" means this Revolving Loan Agreement, as amended or
supplemented in writing from time to time.
(c) "Bank" means the banking corporation or association named in
the first sentence of this Agreement and which executes this
Agreement.
(d) "Borrower". For purposes of Section 3.11, 4.10, and 5.9, such
term also includes any member of a "controlled group" (as
defined in ERISA) of which the named Borrower is a member.
(c) "CERCLA" is defined in Section 3.12.
(f) "Collateral" is defined in Section 2, 1.
(g) "ERISA" is defined in Section 3.11.
(h) "Event of Default" is defined in Section 6.1.
(i) "Note" is defined in Section 1.1 and includes any promissory
note or notes given in extension or renewal of, or in
substitution for, the original Note.
(j) "Revolving Loan" is defined in Section 1.1.
(k) "Security Agreement" is defined in Section 2.1.
ARTICLE VIII - MISCELLANEOUS
SECTION 8.1. No delay or failure on the part of Bank in the exercise of
any right, power or privilege granted under this Agreement or the Note, or
available at law or in equity, shall impair any such right, power or privilege
or be construed as a waiver of any Event of Default or any acquiescence therein.
No single or partial exercise of any such right, power or privilege shall
preclude the further exercise of such right, power or privilege. No waiver shall
be valid against bank unless made in writing and signed by Bank, and then only
to the extent expressly specified therein.
SECTION 8.2. All notices and communications provided for hereunder
shall be in writing, delivered by hand or sent by first-class or certified mail,
postage prepaid to the following addresses:
(a) If to Bank, Fidelity National Bank
3490 Piedmont Road
Suite 1450
Atlanta, Georgia 30305
(b) If to Borrower, Intelligent Systems Corporation
4355 Shackleford Road
Norcross, Georgia 30093
Attn: Bonnie Herron
Either Borrower or Bank, or both, may change its addresses for notice
purposes by notice to the other party in the matter provided herein.
SECTION 8.3. This Agreement and the Note shall be governed by and
construed and enforced in accordance with the substantive laws of the United
States and the state in which the principal; office of Bank is located without
regard to that state's rules governing conflicts of law.
SECTION 8.4. All representations and warranties contained in this
Agreement or made or furnished on behalf of Borrower in connection herewith
shall survive the execution and delivery of this Agreement and the Note, shall
be deemed to be made anew each time Borrower requests a loan under this
Agreement, and shall survive until the Revolving Loan and all interest thereon
are paid in full.
3
<PAGE> 4
SECTION 8.5. This Agreement shall bind and inure to the benefit of
Borrower and Bank, and their respective successors and assigns: provided,
however, Borrower shall have no right to assign its rights or obligations
hereunder to any person or entity.
SECTION 8.6. Time is of the essence in the payment and performance of
every term and covenant of this Agreement and the Note.
SECTION 8.7. This Agreement may be amended or modified, and Borrower
may take any action herein prohibited, or omit to perform any action required to
be performed by it, only if Borrower shall obtain the prior written consent of
Bank to such amendment, modification, action or omission to act, and no course
of dealing between Borrower and Bank shall operate as a waiver of any right,
power or privilege granted under this Agreement, under the Note or the Security
Agreements, or available at law or in equity. This Agreement, the Note and the
Security Agreements contain the entire agreement between Borrower and Bank
regarding the Revolving Loan and the Collateral. No oral representations or
statements shall be binding on Bank, and no agent of Bank has the authority to
vary the terms of this Agreement except in writing on the face hereof or on a
Security page attached hereto.
SECTION 8.8. All rights, powers and privileges granted hereunder shall
be cumulative, and shall not be exclusive of any other rights, powers and
privileges granted by the Note or any other document or agreement, or available
at law or in equity.
SECTION 8.9. Upon the occurrence and during the continuation of an
Event of Default, Borrower recognizes Bank's right, without notice or demand, to
apply any indebtedness due or to become due to Borrower from Bank in
satisfaction of any of the indebtedness, liabilities or obligations of Borrower
under the Agreement, under the Note, or under any other note, instrument,
agreement, document or writing of Borrower held by or executed in favor of Bank,
including, without imitation, the right to set off against any deposits or cash
collateral of Borrower held by Bank. In Addition to the right of setoff, as
additional collateral for the Revolving Loan, Borrower hereby grants to Bank a
continuing lien on an security interest in all deposit accounts of Borrower now
or hereafter held by Bank, including all certificates of deposit now or
hereafter issued to Borrower by Bank.
SECTION 8.10. Borrower hereby agrees to indemnify Bank and its
officers, directors, agents and attorneys against, and to hold Bank and all such
other persons harmless from, any claims, demands, liabilities, costs, damages,
and judgments (including, without limitation liability under CERCLA, the Federal
Resource Conservation and Recovery Act, or other environmental law or
regulation, and costs of defense and attorney's fees) resulting from, any
Representation or Warranty made by Borrower or on Borrower's behalf pursuant to
Article III of this Agreement having been false when made, or resulting from
Borrower's breach of any of the covenants set forth in Articles IV or V of this
Agreement. This Agreement of indemnity shall be a continuing agreement and shall
survive payment of the Revolving Loan and the Note and termination of this
Agreement.
WITNESS the hand and seal of the parties hereto on or as of the date
first above written.
BANK: BORROWER:
FIDELITY NATIONAL BANK INTELLIGENT SYSTEMS CORPORATION,
a Georgia corporation
By: /s/ By: /s/
----------------------------- ---------------------------------
Title: Title: Vice Pres.
-------------------------- ------------------------------
Attest: Bonnie L. Herron
-----------------------------
Title: VP/Sec
------------------------------
(BANK SEAL) (CORPORATE SEAL)
4
<PAGE> 1
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (the "Agreement"), entered into as of this
2nd day of July, 1999, by and between INTELLIGENT SYSTEMS CORPORATION, a
Georgia corporation (herein the "Pledgor"), and FIDELITY NATIONAL BANK, a
national bank (herein the "Bank"),
WITNESSETH
WHEREAS, the Bank has extended a credit facility to Pledgor in the
principal amount of $1,000,000.00 (the "Loan"), pursuant to the terms and
conditions of a certain Revolving Loan Agreement dated on even date herewith,
as amended from time to time (the "Loan Agreement"), which Loan is evidenced by
the Pledgor's commercial promissory note in favor of the Bank (the "Note"); and
WHEREAS, to secure the payment and performance of all obligations of
the Pledgor under the Note, the Pledgor wishes to pledge to the Bank all of its
right, title and interest in and to all of the shares of the issued and
outstanding capital stock now owned or hereafter acquired by the Pledgor in
PAYSYS INTERNATIONAL, INC., a Florida corporation, evidenced by the stock
certificates described in Exhibit "A" attached hereto and incorporated herein
by this reference (the "Stock");
NOW, THEREFORE, the parties hereto agree that all capitalized terms
used herein shall have the meanings ascribed to them in the Loan Agreement to
the extent not otherwise defined or limited herein, and further agree as
follows:
1. WARRANTY. Pledgor hereby represents and warrants to the Bank that
except for the security interest created hereby, the Pledgor owns the stock
free and clear of all liens, charges and encumbrances, that the Stock is duly
issued, fully paid and nonassessable, and that Pledgor has the unencumbered
right to pledge its Stock. Bank acknowledges that the Stock is subject to
certain terms and provisions regarding the sale and voting of the Stock
contained in that certain Second Amended and Restated Stockholders Agreement
dated April 15, 1999 for PaySys International, Inc., and Bank agrees to abide
by such terms and provisions regarding the Stock.
2. SECURITY INTEREST. Pledgor hereby unconditionally grants and
assigns to the Bank, its successors and assigns, a continuing security interest
in and security title to the Stock. The Pledgor has delivered to and deposited
with the Bank herewith all of its right, title and interest in and to the
Stock, together with certificates representing the Stock and stock powers
endorsed in blank by Pledgor, as security for (i) all obligations of the
Pledgor to the Bank hereunder; and (ii) payment and performance of all
obligations of Pledgor to the Bank under the Loan Agreement, Note, or any other
Loan Document, or any extension, renewal, amendment or modification of any of
the foregoing, however created, acquired, arising or evidenced, whether direct
or indirect, absolute or contingent, now or hereafter existing, or due or to
become due. Beneficial ownership of the Stock, including, without limitation,
all voting, consensual and dividend rights, shall remain in the Pledgor until
the occurrence of a default under the terms hereof (as defined in Section 4
below) and until the Bank shall notify Pledgor of the Bank's exercise of voting
rights to the Stock pursuant to Section 9
<PAGE> 2
of this Agreement.
3. ADDITIONAL SHARES. In the event that, during the term of this
Agreement:
(a) any stock dividend, stock split, reclassification,
readjustment or other change is declared or made in the capital structure of
PAYSYS INTERNATIONAL, INC., all new, substituted and additional shares, or
other securities, issued by reason of any such change and received by Pledgor
or to which Pledgor shall be entitled shall be immediately delivered to the
Bank, together with stock powers endorsed in blank by Pledgor, and shall
thereupon constitute Stock to be held by the Bank under the terms of this
Agreement; and
(b) subscriptions, warrants or any other rights or options
shall be issued in connection with the Stock, all new stock or other securities
acquired through such subscriptions, warrants, rights or options by Pledgor
shall be immediately delivered to the Bank and shall thereupon constitute Stock
to be held by the Bank under the terms of this Agreement.
4. DEFAULT. In the event of a demand for payment by the Bank under the
terms of the Note, an Event of Default under the terms of the Loan Agreement,
or a Default under the terms of this Agreement (any of such occurrences being
hereinafter referred to as a "Default"), the Bank may sell or otherwise dispose
of the Stock at a public or private sale or make other commercially reasonable
disposition of the Stock or any portion thereof after ten (10) days' notice to
Pledgor and the Bank may purchase the Stock or any portion thereof at any
public sale. The proceeds of the public or private sale or other disposition
shall be applied (i) to the costs incurred in connection with the sale,
expressly including, without limitation, any costs under Section 7(a) hereof;
(ii) to any unpaid interest which may have accrued on any obligations secured
hereby; and (iii) to any unpaid principal; in such order as the Bank may
determine, and any remaining proceeds shall be paid over to the Pledgor or
others as by law provided. In the event the proceeds of the sale or other
disposition of the Stock are insufficient to pay such expenses, interest,
principal, obligations and damages, the Pledgor shall remain liable to the Bank
for any such deficiency.
5. ADDITIONAL RIGHTS OF SECURED PARTIES. In addition to their rights
and privileges under this Agreement, the Bank shall have all the rights, powers
and privileges of secured parties under the Uniform Commercial Code.
6. RETURN OF STOCK TO PLEDGOR. Upon payment in full of all principal
and interest on the Note and full performance by the Pledgor of all covenants,
undertakings and obligations under the Loan Agreement and the other Loan
Documents, the Bank shall return to the Pledgor all of the then remaining Stock
and all rights received by the Bank as agent for the Pledgor as a result of its
possessory interest in the Stock.
7. DISPOSITION OF STOCK BY AGENT. The Stock is not registered under
the various Federal or State Securities Acts and disposition thereof after
default may be restricted to one or more private (instead of public) sales in
view of the lack of such registration. The Pledgor understands that upon such
disposition, the Bank may approach only a restricted number of potential
purchasers and further understands that a sale under such circumstances may
yield a lower price for the Stock than
2
<PAGE> 3
if the Stock were registered pursuant to federal and state securities
legislation and sold on the open market. Pledgor, therefore, agrees that:
(a) if the Bank shall, pursuant to the terms of this
Agreement, sell or cause the Stock or any portion thereof to be sold at a
private sale, the Bank shall have the right to rely upon the advice and opinion
of any national brokerage or investment firm (but shall not be obligated to
seek such advice and the failure to do so shall not be considered in
determining the commercial reasonableness of the Bank's action) as to the best
manner in which to expose the Stock for sale and as to the best price
reasonably obtainable at the private sale thereof, and
(b) that such reliance shall be conclusive evidence that the
Bank has handled such disposition in a commercially reasonable manner.
8. PLEDGOR'S OBLIGATIONS ABSOLUTE. The obligations of the Pledgor
under this Agreement shall be direct and immediate and not conditional or
contingent upon the pursuit of any remedies against any other person, nor
against other security or liens available to the Bank or its successors,
assigns or agents. The Pledgor hereby waives any right to require that an
action be brought against any other person or to require that resort be had to
any security or to any balance of any deposit account or credit on the books of
the Bank in favor of any other Person prior to any exercise of rights or
remedies hereunder, or to require resort to rights or remedies of the Bank in
connection with the Loan.
9. VOTING RIGHTS.
(a) For so long as the Note remains unpaid, after a Default,
(i) the Bank may, upon five (5) days' prior written notice to the Pledgor of
its intention to do so, exercise all voting rights, and all other ownership or
consensual rights of the Stock, but under no circumstances is the Bank
obligated by the terms of this Agreement to exercise such rights, and (ii)
Pledgor hereby appoints the Bank, which appointment shall be effective on the
fifth day following the giving of notice by the Bank as provided in the
foregoing Section 9(a)(i), Pledgor's true and lawful attorney-in-fact and
IRREVOCABLE PROXY to vote the Stock in any manner the Bank deems advisable for
or against all matters submitted or which may be submitted to a vote of
shareholders. The power-of-attorney granted hereby is coupled with an interest
and shall be irrevocable.
(b) For so long as Pledgor shall have the right to vote the
Stock, Pledgor covenants and agrees that it will not, without the prior written
consent of the Bank vote or take any consensual action with respect to the
Stock which would constitute a default under this Agreement.
10. NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and, if mailed by prepaid certified
mail, at any time other than during a general discontinuance of postal service
due to strike, lockout or otherwise, shall be deemed to have been received on
the earlier of the date shown on the receipt or three (3) Business Days after
the postmarked date thereof and, if telexed, shall be followed forthwith by
letter and shall be deemed to have been received on the next Business Day
following dispatch and acknowledgment of receipt by the recipient's telex
machine. In addition, notices hereunder may be delivered by hand in which
3
<PAGE> 4
event such notice shall be deemed effective when delivered. Notice of change of
address for notice shall also be governed by this Section. Notices shall be
addressed as follows:
If to the Pledgor: INTELLIGENT SYSTEMS CORPORATION
4355 Shackleford Road
Norcross, Georgia 30093
Attn: Bonnie Herron
If to the Bank: FIDELITY NATIONAL BANK
3490 Piedmont Road
Suite 1450
Atlanta, Georgia 30305
11. BINDING AGREEMENT. The provisions of this Agreement shall be
construed and interpreted, and all rights and obligations of the parties hereto
determined, in accordance with the laws of the State of Georgia. This
Agreement, together with all documents referred to herein, constitutes the
entire Agreement between the Pledgor and the Bank with respect to the matters
addressed herein and may not be modified except by a writing executed by the
Bank and delivered by the Bank to the Pledgor. This Agreement may be executed
in multiple counterparts, each of which shall be deemed an original but all of
which, taken together, shall constitute one and the same instrument.
12. SEVERABILITY. If any paragraph or part thereof shall for any
reason be held or adjudged to be invalid, illegal or unenforceable by any court
of competent jurisdiction, such paragraph or part thereof so adjudicated
invalid, illegal or unenforceable shall be deemed separate, distinct and
independent, and the remainder of this Agreement shall remain in full force and
effect and shall not be affected by such holding or adjudication.
4
<PAGE> 5
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and
affixed their seals, by and through their duly authorized officers, as of the
day and year first above written.
PLEDGOR:
INTELLIGENT SYSTEMS CORPORATION
By: /s/
---------------------------
Its: Vice President
--------------------------
Attest: Bonnie L. Hernon
-----------------------
Its: VD/Sec
--------------------------
[CORPORATE SEAL]
BANK:
FIDELITY NATIONAL BANK
By: /s/
---------------------------
Its: Sr. Vice Pres.
--------------------------
[BANK SEAL]
5
<PAGE> 6
CERTIFICATES OF COMMON STOCK IN PAYSYS INTERNATIONAL, INC (FORMERLY CCS
TECHNOLOGY GROUP, INC.) HELD BY INTELLIGENT SYSTEMS CORPORATION AND PLEDGED AS
COLLATERAL ON $1M LOAN FROM FIDELITY NATIONAL BANK.
<TABLE>
<CAPTION>
CERTIFICATE # # SHARES STOCK NAME HOLDER
<S> <C> <C> <C>
212 4,658 CCS Technology Group, Inc. Intelligent Systems Corporation
216 600 CCS Technology Group, Inc. Intelligent Systems Corporation
218 2,000 CCS Technology Group, Inc. Intelligent Systems Corporation
222 15,000 CCS Technology Group, Inc. Intelligent Systems Corporation
229 6,000 CCS Technology Group, Inc. Intelligent Systems Corporation
232 100 CCS Technology Group, Inc. Intelligent Systems Corporation
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
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
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
367 215 PaySys International, Inc. Intelligent Systems Corporation
371 12,058 PaySys International, Inc. Intelligent Systems Corporation
---------
3,606,382
</TABLE>
Page 1
<PAGE> 1
SECOND MODIFICATION TO LOAN DOCUMENTS
THIS SECOND MODIFICATION TO LOAN DOCUMENTS (herein the
"Modification") is made and entered into this 7th day of March, 2000, by and
between INTELLIGENT SYSTEMS CORPORATION, a Georgia corporation (herein
"Borrower"), and FIDELITY NATIONAL BANK, a national bank (herein "Lender").
W I T N E S S E T H :
WHEREAS, on July 2, 1999, Lender made a One Million Dollar
($1,000,000.00) Loan to Borrower ("Loan") evidenced by that certain Commercial
Promissory Note dated July 2, 1999 in the face principal amount of
$1,000,000.00 executed by Borrower in favor of Lender (herein the "Original
Note");
WHEREAS, the Loan and the Original Note are secured and evidenced by,
among other instruments:
(a) Revolving Loan Agreement by and between Borrower and Lender dated
July 2, 1999 (herein the "Loan Agreement");
(b) Stock Pledge Agreement dated July 2, 1999 by and between Borrower
and Lender with regard to the certain stock owned by Borrower in Paysys
International, Inc. (herein the "Paysys Pledge Agreement").
The Loan Agreement and Paysys Pledge Agreement are collectively referred to
herein as the "Additional Loan Documents";
WHEREAS, the Loan and the Additional Loan Documents were amended by
that certain First Modification to Loan Documents dated October 13, 1999 by and
between Borrower and Lender, whereby certain terms and provisions of the Loan
were modified at the request of Borrower (all references to the term "Loan" and
any "Additional Loan Documents" shall be as amended by the aforesaid First
Modification to Loan Documents);
WHEREAS, Borrower and Lender entered into that certain First
Modification to Commercial Promissory Note dated October 13, 1999, whereby
Borrower and Lender agreed to modify certain terms and provisions of the
Original Note (all references to the
-1-
<PAGE> 2
term "Original Note" shall be as modified by the aforesaid First Amendment to
Commercial Promissory Note);
WHEREAS, Borrower had requested and Lender has agreed to increase the
line of credit amount available under the terms of the Loan from $600,000 to
$1,000,000.
NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars
($10.00) and other good and valuable consideration, the receipt, adequacy and
sufficiency of which are hereby acknowledged, Lender and Borrower hereby agree
as follows:
1. Recitals. The foregoing recitals are true and correct and are
incorporated herein by this reference.
2. Capitalized Terms. All capitalized terms contained in this
Modification shall have the same meaning afforded to them in the additional
loan documents.
3. Specific Modifications to Documents.
a. The Loan Agreement shall be modified to provide that all
references to the amount "$1,600,000.00" (as originally amended by the
aforesaid First Modification to Loan Documents) contained in the Loan
Agreement shall hereinafter refer to "$1,000,000.00" in order to
evidence the increase of the amount of the Revolving Loan availability
from $600,000.00 (after repayment of the loan from $1,600,000 to
$600,000.00) to $1,000,000.00.
b. Section 1.5 of the Loan Agreement is hereby modified to
provide that the maximum amount which Borrower shall be entitled to
draw upon shall be increased from $600,000 to $1,000,000.
C. The Paysys Pledge Agreement is hereby modified to provide
that all references to the amount "$1,600,000.00" contained therein
shall hereinafter refer to the amount "$1,000,000.00" in order to
reflect the increase in the amount of the Loan from $600,000.00 to
$1,000,000.00.
(d) The maturity date provided for in Section 1. 1 of the
Loan Agreement is hereby extended from June 30, 2000 to May 1, 2001.
4. No Impairment. Borrower agrees that the terms and provisions hereof
shall in no manner impair, limit, restrict or otherwise effect the obligations
of Borrower to
-2-
<PAGE> 3
Lender or the priority of any lien evidenced by the Additional Loan Documents
except as modified hereby.
5. No Defenses. Borrower acknowledges that it has no offsets, claims,
counterclaims or defenses against Lender or under any of its obligations
contained in the Additional Loan Documents and to the extent any such offsets,
claims, counterclaims, or defenses exist, the same are hereby waived by the
Borrower.
6. Ratification. Except as amended hereby, each and every term and
provision of the Additional Loan Documents are hereby ratified and affirmed by
Borrower and shall remain in full force and effect.
7. No Novation. It is the intention of the parties hereto that the
execution and delivery of this Modification shall in no way constitute a
novation or extinguishment of the debt evidenced and secured by the Additional
Loan Documents.
8. Effect of Modification. In signing this Modification, the parties
hereto expressly certify and covenant that they have carefully read all
provisions contained herein, have had an opportunity to consult with legal
counsel of their choosing and to consider the ramifications and terms of this
Modification, and they have voluntarily signed this Modification with the
understanding that it will be final and binding as to their interests and they
have had a sufficient opportunity to review the Modification and consult with
counsel of their choice prior to making such decision to execute this
Modification. The parties hereby represent and warrant that this Modification
is executed without reliance on any statement or representation of the other,
except as expressly set forth in the within and foregoing Modification, and
this Modification constitutes the entire Modification between the parties
hereto and that no promise or inducement or consideration, other than that
expressed in the within and foregoing Modification, has been offered or
accepted and all such prior inducements or considerations are deemed merged
herein.
-3-
<PAGE> 4
IN WITNESS WHEREOF, Borrower and Lender have set their hands and seals
to this Modification as of the day and year first above-written.
BORROWER:
INTELLIGENT SYSTEMS CORPORATION, a
Georgia corporation
By: /s/
-----------------------------------
Title: Pres.
----------------------------
Attest: Bonnie L. Hernon
-------------------------------
Title: VP/CFO
---------------------------
[CORPORATE SEAL]
LENDER:
FIDELITY NATIONAL BANK, a national bank
By: /s/
-----------------------------------
Title: Sr. Vice Pres.
----------------------------
[BANK SEAL]
-4-
<PAGE> 1
EXHIBIT 10.7
COMMERCIAL PROMISSORY NOTE
FIDELITY Loan No.
[LOGO] NATIONAL BANK -------------------------
P.O. Box 105075 Borrower(s)
Atlanta, Ga. 30348 -------------------------
-------------------------
Location:
-------------------------
Officer:
-------------------------
(Name/Initial/#)
U.S. $1,000,000.00 July 2, 1999
FOR VALUE RECEIVED, the undersigned INTELLIGENT SYSTEMS CORPORATION, A
GEORGIA CORPORATION, (hereinafter, whether one or more, referred to as
"Maker") promises to pay to the order of Fidelity National Bank, a national
banking association (hereinafter, together with any subsequent holder
hereof, referred to as "Holder"), at its office at 160 Clairmont Avenue,
Decatur, Georgia 30030 or at such other place as Holder hereof may from
time to time designate in writing, in lawful money of the United States of
America, the principal sum of ONE MILLION AND NO/100 - DOLLARS
($1,000,000,000 or so much as may be disbursed hereunder, together with
simple interest (computed on the basis of actual days elapsed in a 360-day
year) on the principal balance from time to time outstanding prior to
default hereunder at the rate of prime plus 0% percent per annum. The
initial interest rate on this loan is 17.75%.
(If the interest rate is stated in terms of, or with reference to,
"Prime", "Prime Rate", or "P" (the "Prime Rate"), then (i) such terms shall
mean the rate established by Holder from time to time as being its "Prime
Rate" for the purpose of a reference from which it sets rates for specific
loans, which reference rate is not necessarily the rate actually provided
to the most creditworthy, or any other class of, borrowers, and (ii) the
interest rate charged hereunder will change as of the opening business on
each day the Prime Rate changes.)
Installments of principal and interest shall be due under this Note as
follows:
SEE RIDER ATTACHED HERETO AND INCORPORATED HEREIN BY THIS REFERENCE.
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This Note shall mature and the principal balance hereof, together with
all unpaid interest and other charges, costs and expenses provided for
hereunder or under any other document or instrument evidencing or securing
the indebtedness of this Note shall be due and payable on June 30, 2000.
If (i) any payment of principal or interest on this Note is not
received by Holder as and when same is due or (ii) a default occurs in the
performance of any other covenant or agreement of Maker in this Note or by
Maker (or by any guarantor, endorser, accommodation party or any other
party liable for payment of this Note or providing security for payment of
the same, collectively with Maker, an "Obligor") under any other Loan
Document or (iii) any Obligor shall cease to exist or become insolvent or
(iv) debtor reorganization, relief or liquidation proceedings shall be
initiated by or against any Obligor, or (v) Holder shall otherwise deem
itself insecure, then all obligations of Maker to Holder, including this
Note, although otherwise unmatured or contingent, shall, at the option of
Holder, forthwith mature, and the entire principal balance and all accrued
interest and other charges due Holder shall become immediately due and
payable without any notice or demand whatsoever.
If the principal balance of this Note is accelerated, or any
installment due hereunder is not paid as and when the same is due, or if
the principal balance of this Note is not paid at maturity, then Holder
shall have the option to increase the rate of interest to a default rate
equal to two percentage points (2%) per annum plus the rate specified
above, but in no event to exceed the maximum rate permitted by applicable
law. If any monthly installment is not received within ten (10) days after
its due date, Maker shall, at Holder's option, pay a late charge equal to
five percent (5%) of the past due installment, such payment to be due with
the succeeding monthly installment. Payment of any late charge or default
interest does not entitle Maker to extension of any due date.
To secure this indebtedness, along with any extensions or renewals
thereof, in whole or in part, as well as all other indebtedness of Maker to
Holder, now existing or hereafter incurred or arising however incurred
(hereinafter sometimes referred to collectively as the "Liabilities").
Maker does hereby grant to Holder a security interest in and security title
to the following:
SEE RIDER ATTACHED HERETO AND INCORPORATED HEREIN BY THIS REFERENCE.
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together with any and all additions and accessions thereto or replacements
thereof, returned or unearned premiums from any insurance on any of the
same against fire, theft, collision or other catastrophe and any products
and/or proceeds of any of the foregoing (all referred to herein as the
"Collateral").
Holder shall have the right to accelerate the maturity of the
Liabilities in the event that the Collateral or any portion thereof is
transferred, assigned, or sold, or any security interest granted therein
without the prior written consent of Holder. If at any time Holder deem
itself insecure, Maker will immediately furnish such further Collateral to
be held by Holder, or make such payment on account, as will be satisfactory
to holder.
In addition to and independent of the rights and remedies of Holder as
a secured party under the Uniform Commercial Code of Georgia, Holder shall,
as security for the Liabilities, have the right to take possession of the
Collateral, or the proceeds thereof and to sell or otherwise dispose
thereof, and for this purpose, to sign in the name of Maker any transfer,
conveyance or instrument necessary therefor, and Holder may enter upon the
premises on which the Collateral or any part thereof may be situated and
remove the same therefrom, without being liable in any way to Maker on
account of entering any premises. Holder may require Maker to assemble the
Collateral and make the same reasonably convenient to both parties. The
right is expressly granted to Holder to transfer at any time to itself or
its nominee any Collateral held hereunder and to receive the income
therefrom and hold the same as security herefor, or to apply it to any of
the Liabilities. If any notification of intended disposition of any of the
Collateral is required by law, such notification shall be deemed reasonable
and properly given if mailed at least five days before such disposition.
Whenever Holder in good faith reasonably believes that the prospect of
payment of this Note is impaired, Holder, without notice or demand of any
kind, may if the Maker is in bankruptcy place an administrative freeze
upon, and if the Maker is not in bankruptcy, hold and set off against any
or all outstanding principal or interest as Holder may elect, any balance
or amount to the credit of Maker in any deposit, agency, reserve, holdback
or other account of any nature whatsoever maintained by or on behalf of
Maker with Holder at any of its offices, regardless of whether such
accounts are general or special and regardless of whether such accounts are
individual or joint, excepting only accounts which are actually known to
Holder to be trust accounts.
Time is of the essence with respect to all of Maker's obligations and
agreements under this Note and the Loan Documents. In the event that Holder
institutes legal proceedings to enforce this Note or refers the same to an
attorney-at-law for enforcement or collection, Maker agrees to pay to
Holder, in addition to any indebtedness due and unpaid, all costs and
expenses of such proceedings, including attorney's fees in the amount of
fifteen percent (15%) of the outstanding principal and interest.
Holder shall not by any act of omission or commission be deemed to
waive any of its rights or remedies hereunder unless such waiver be in
writing and signed by an authorized officer of Holder and then only to the
extent specifically set forth therein; a waiver on one occasion shall not
be construed as continuing of as a bar to or waiver of such right or remedy
on any other occasion. All remedies conferred upon Holder by this Note or
any other instrument or agreement connected herewith or related hereto
shall be cumulative and none is exclusive, and such remedies maybe
exercised concurrently or consecutively at Holder's option.
This Note is hereby expressly limited so that in no contingency or
event whatsoever, whether by acceleration of maturity of the debt evidenced
hereby or otherwise, shall the amount paid or agreed to be paid to Holder
for the use, forbearance or retention of the money advanced or to be
advanced hereunder exceed the highest lawful rate permissible under
applicable laws. If, from any circumstances whatsoever, fulfillment of any
provision hereof or of any other agreement evidencing or securing the debt,
at the time performance of such provisions shall be due, shall involve the
payment of interest in excess of that authorized by law, the obligation to
be fulfilled shall be reduced to the limit so authorized by law, and if
from any circumstances, Holder shall ever receive as interest an amount
which would exceed the highest lawful rate applicable to Maker, such amount
which would be excessive interest shall be applied to the reduction of the
unpaid principal balance of the debt evidenced hereby and not to the
payment of interest, regardless of any books or records of Holder which may
indicate the contrary.
As used herein, the terms "Maker" and "Holder" shall be deemed to
include their respective heirs, successors, legal representatives and
assigns, whether by voluntary action of the parties or by operation of law;
provided, nothing herein shall be deemed consent by Holder to any
assignment or conveyance which is restricted or prohibited by the terms of
any Loan Document. In the event that more than one person, firm or entity
is a Maker hereunder, then all references to "Maker" shall be deemed to
refer equally to each of said persons, firms, or entities, all of whom
shall be jointly and severally liable for all of the obligations of Maker
hereunder.
Each Obligor hereby waives presentment for payment, demand, notice of
non-payment of this Note, protest and notice of protest, and consents that
Holder may extend the time of payment of any part or the whole of the debt
at any time at the request of any other person or entity liable.
Each Obligor hereby waives and renounces for itself, its heirs,
successors and assigns, all rights to the benefits of any appraisement,
exemption or homestead now provided, or which may hereafter be provided by
the Constitution and laws of the United States of America and of any state
thereof in and to all of its property, real and personal, against the
enforcement and collection of the Liabilities. Each Obligor hereby
transfers, conveys and assigns to Holder a sufficient amount of such
homestead or exemption as may be set apart in bankruptcy, to pay this Note
in full, with all costs of collection, and does hereby direct any trustee
in bankruptcy having possession of such homestead exemption to deliver to
Holder a sufficient amount of property or money set apart as exempt to pay
the indebtedness evidenced hereby, or any renewal thereof, and does hereby
appoint Holder the attorney-in-fact for such Obligor to claim any and all
homestead exemptions allowed by law.
In the event any suit or legal action is commenced by Holder, Maker
hereby expressly agrees, consents and submits to the personal jurisdiction
of any state or federal court sitting in DeKalb or Fulton County, Georgia
with respect to such suit or legal action, and the Maker also expressly
consents and submits to and agrees that venue in any such suit or legal
action is proper in said courts and county and Maker hereby expressly
waives any and all personal rights under applicable law or in equity to
object to the jurisdiction and venue in said courts and county. The
jurisdiction and venue of the courts consented and submitted to and agreed
upon in this paragraph are not exclusive but are cumulative and in addition
to the jurisdiction and venue of any other court under any applicable laws
or in equity.
This Note shall be governed and construed under the laws of the State
of Georgia except to the extent applicable Georgia law is preempted by the
laws of the United States of America.
Maker warrants that the proceeds of the loan evidenced hereby shall be
used solely for business or commercial purposes.
IN WITNESS WHEREOF, Maker has signed, sealed and delivered this Note as
of the date first hereinabove written and acknowledges receipt of a
complete copy hereof.
<TABLE>
<S> <C>
MAKER: MAKER: INTELLIGENT SYSTEMS CORPORATION
By: /s/
- ---------------------------------------------------------(Seal) ----------------------------------------------------------(Seal)
ADDRESS: 4355 Shackleford Road, Norcross, GA 30093 Title: Vice President
Tax ID/Soc. Sec. No.: TELEPHONE No.770-381-2900 Address: Attest: /s/
---------------- ------------------------------------------------
Title: Secretary/ Vice President
Tax ID/Soc. Sec. No.: TELEPHONE No.770-381-2900
----------------
(CORPORATE SEAL)
</TABLE>
<PAGE> 2
RIDER TO $1,000,000 LINE OF CREDIT
COMMERCIAL PROMISSORY NOTE FROM
INTELLIGENT SYSTEMS CORPORATION (HEREIN "MAKER")
TO FIDELITY NATIONAL BANK ("HOLDER")
DATED JULY 2, 1999
1. Interest only shall be due under this Note in monthly installments of
accrued interest during the preceding month (and any preceding partial month),
beginning on the 1st day of August, 1999 and continuing on the 1st day of each
month thereafter through and including June 1, 2000. On June 30, 2000, all
outstanding principal, accrued interest and other charges and fees owed under
the Note shall become immediately due and payable. All payments received from
Maker shall first be applied towards outstanding late charges, then towards
outstanding and accrued interest, and then towards outstanding principal.
2. The Liabilities (as defined in this Note) shall be secured by:
a. First-in-priority security interest in 24,501 shares of common
stock of Media Metrix, Inc. owned by Maker and pledged to Holder pursuant to a
Stock Pledge Agreement of even date herewith from Maker to Holder, together
with corresponding stock powers.
b. First-in-priority security interest in 3,606,382 shares of common
stock of PaySys International, Inc. owned by Maker and pledged to Holder
pursuant to a Stock Pledge Agreement of even date herewith from Maker to
Holder, together with corresponding stock powers.
3. This Note evidences a line of credit loan from Maker to Holder and all
disbursements in connection with said loan shall be made in accordance with the
provisions of a Revolving Loan Agreement of even date herewith between Maker
and Holder.
IN WITNESS WHEREOF, Maker has executed this Rider under seal as of the
day and year written on the face of this Note.
MAKER
INTELLIGENT SYSTEMS CORPORATION, a Georgia
corporation
By: /s/
----------------------------------------
Title: Vice President
-------------------------------------
Attest: /s/
------------------------------------
Title: Vice President/Secretary
-------------------------------------
[CORPORATE SEAL]
<PAGE> 1
EXHIBIT 10.8
SECOND AMENDMENT TO COMMERCIAL PROMISSORY NOTE
THIS SECOND AMENDMENT TO RENEWAL COMMERCIAL PROMISSORY NOTE (herein
"Second Amendment") is made and entered into as of this 7th day of March, 2000
by and between INTELLIGENT SYSTEMS CORPORATION, a Georgia corporation (herein
"Borrower"), and FIDELITY NATIONAL BANK, a national bank (herein "Lender").
WITNESSETH:
WHEREAS, on July 2, 1999, Lender extended a $1,000,000.00 line of
credit loan (herein the "Loan") in favor of Borrower as evidenced by that
certain Commercial Promissory Note in the face principal amount of
$1,000,000.00 executed by Borrower in favor of Lender dated July 2, 1999
(herein the "Note");
WHEREAS, Borrower previously requested and Lender agreed to extend an
additional $600,000.00 under the terms of the Loan, and, in evidence thereof,
Borrower and Lender entered into that certain First Amendment to Commercial
Promissory Note dated October 13, 1999, increasing the face amount of the Note
from $1,000,000 to $1,600,000 (all references to the terms "Loan" and "Note"
shall be as amended by the aforesaid First Amendment to Commercial Promissory
Note);
WHEREAS, in accordance with the terms of the Note, Borrower paid to
Lender $1,000,000 in principal in order to reduce the principal balance of the
Loan and the Note from $1,600,000 to $600,000;
WHEREAS, Borrower has requested and Lender has agreed to increase the
amount available under the terms of the Loan and the Note from $600,000 to
$1,000,000, and the parties mutually desire to modify the terms and provisions
of the Note as hereinafter provided.
NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and
other good valuable consideration, the receipt, adequacy, and sufficiency which
are hereby acknowledged, the parties hereby agree as follows:
1. Recitals. The foregoing recitals are true and correct and are
incorporated herein by this reference.
2. Capitalized Terms. All capitalized terms contained in this Second
Amendment shall have the same meaning afforded to them in the Note.
<PAGE> 2
3. Specific Modifications of the Note. The parties hereby agree to
make the following specific modifications to the Note:
a. The face principal amount of the Note is hereby amended to
$1,000,000.00, and all references to the amount "$1,600,000.00" in the
Note shall hereinafter refer to "$1,000,000.00."
b. The maturity date of the Note is hereby extended from June 30, 2000
to May 1, 2001, and all references to the term "June 30, 2000" in the
Note shall hereinafter refer to the date "May 1, 2001".
c. The amount of "$600,000" referred to in paragraph 4 of the Rider to
the Note (as added by the aforesaid First Amendment to Commercial
Promissory Note) shall hereinafter refer to "$1,000,000".
4. No Impairment. Borrower agrees that the terms and provisions hereof
shall in no manner impair, limit, restrict or otherwise effect the obligations
of Borrower to Lender as evidenced by the Note, except as modified hereby.
5. No Defenses. Borrower acknowledges that it has no offsets, claims,
counterclaims or defenses against Lender or under any of their obligations
contained in the Note, and to the extent any such offsets, claims,
counterclaims or defenses exist, the same are hereby waived by Borrower.
6. Ratification. Except as amended hereby, each and every term and
provision of the Note is hereby ratified and affirmed by the Borrower and shall
remain in full force and effect.
7. Effect of Amendment. In signing this Second Amendment, the parties
hereto expressly certify and covenant that they have carefully read all
provisions contained herein, have had an opportunity to consult with legal
counsel of their choosing and to consider the ramifications and terms of this
Second Amendment, and they have voluntarily signed this Second Amendment with
the understanding that it will be final and binding as to their interests and
they have had a sufficient opportunity to review the Second Amendment and
consult with counsel of their choice prior to making such decision to execute
this Second Amendment. The parties hereby represent and warrant that this
Second Amendment is executed without reliance on any statement or
representation of the other, except as expressly set forth in the within and
foregoing Second Amendment, and this Second Amendment constitutes the entire
Second Amendment between the parties hereto and that no promise or inducement
or
2
<PAGE> 3
consideration, other than that expressed in the within and foregoing Second
Amendment, has been offered or accepted and all such prior inducements or
considerations are deemed merged herein.
8. Novation. It is the intention of the parties hereto that the
execution and delivery of this Second Amendment shall in no way constitute a
novation of the debt evidenced by the Note.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment under seal as of the day and year first above written.
BORROWER:
INTELLIGENT SYSTEMS CORPORATION, a
Georgia corporation
By: /s/
------------------------------------
Title: Pres.
----------------------------
Attest: /s/
--------------------------------
Title: VP/CFO
----------------------------
[CORPORATE SEAL]
LENDER:
FIDELITY NATIONAL BANK, a national bank
By: /s/
------------------------------------
Title: Sr. Vice Pres.
----------------------------
[BANK SEAL]
3
<PAGE> 1
EXHIBIT 10.9
CONDITIONAL GUARANTY OF PAYMENT
THIS GUARANTY is made as of the 29th day of November, 1999 by
INTELLIGENT SYSTEMS CORPORATION, INC. ("Guarantor") in favor of each holder of
a Class 7 Allowed Claim whose name is listed in Exhibit 1.03 to that certain
First Amendment to Amended and Restated Plan of Reorganization filed on
November 15, 1999 in the Chapter 11 case of In re Humansoft. L.L.C. which is
pending in the United States Bankruptcy Court for the Northern District of
Georgia, Atlanta Division and is case number 98-77964 ("Class 7 Creditor").
ARTICLE I - BACKGROUND AND AGREEMENT
1.01 Background. Humansoft, L.L.C., debtor in possession, has filed an
Amended Plan of Reorganization (the "Plan") in its Chapter 11 bankruptcy case,
in which it proposes to pay 24% of all Allowed Claims as defined in section
1.03 of the Plan that are classified in Class 7 of the Plan unless the holder
of the such claim is a Non-Certifying Customer, in which event, Humansoft
proposes to pay 12% of the Allowed Claim of such claimant (the "Plan
Indebtedness"); and provided the Plan is confirmed, Guarantor is willing to
execute this Guaranty of Payment in favor of each Class 7 Creditor of
Humansoft's performance of its payment obligations under the Plan to Class 7
Creditors. The Plan Indebtedness to each Class 7 Creditor thus depends on its
status as a Certifying or Non-Certifying Customer as those terms are defined in
the Plan. The Plan Indebtedness Exhibit identifies by name and Allowed Claim
amount each Class 7 Creditor as well as the specific amount of Plan
Indebtedness that will be owed to such Class 7 Creditor if the Plan is
confirmed and if the Class 7 Creditor is a Certifying or a Non-Certifying
Creditor.
1.02 Statement of Agreement. For and in consideration of the sum of
$10.00 and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged by Guarantor, Guarantor does hereby make the following
guarantees to and agreements with each Class 7 Creditor if and only if the Plan
is confirmed. If the Plan is not confirmed, then this Guaranty shall be null
and void and of no force or effect.
ARTICLE II - GUARANTEES
2.01 Guaranty of Payment. Guarantor does hereby conditionally
guarantee to each Class 7 Creditor the full and prompt payment of the Plan
Indebtedness to it (if applicable, either as a Certifying Customer or a
Non-Certifying Customer, but not both) when due, without acceleration, with
such interest as may accrue thereon under the Plan, provided the Plan is
confirmed. In the event that Humansoft fails to make an installment payment by
the date set forth in the Plan, Guarantor, upon demand, will make such payment,
without acceleration.
ARTICLE III - AGREEMENTS AND WARRANTIES
3.01 Consents. Guarantor hereby consents and agrees that a Class 7
Creditor may at any time, and from time to time, without notice to or further
consent from Guarantor, either with or without consideration: extend the time
for payment of the Plan Class 7 indebtedness.
<PAGE> 2
3.02 Waiver of Defenses. Guarantor hereby waives and agrees not to
assert or take advantage of any defense based upon: (a) any incapacity, lack of
authority, death or disability of Guarantor or any other person or entity; (b)
any failure of a Class 7 Creditor to commence an action against Humansoft; (c)
any lack of acceptance or notice of acceptance of this Guaranty by a Class 7
Creditor; and (d) any lack of presentment, demand, protest, or notice of
demand, protest, dishonor or nonpayment with respect to the Class 7 Plan
indebtedness;
3.03 Liability of Guarantor. This is a guaranty of payment and not of
collection. The liability of Guarantor under this Guaranty shall be direct and
immediate and not conditional or contingent upon the pursuit of any remedies
against Humansoft. Guarantor waives any right to require that an action be
brought against Humansoft
3.04 Warranties. Guarantor warrants and represents (a) that the
execution and delivery of this Guaranty do not violate or constitute a breach
of any agreement to which Guarantor is a party or any applicable laws, and (b)
that there is no litigation, claim, action or proceeding, pending or threatened
against Guarantor which would adversely affect the financial condition of
Guarantor or the ability of Guarantor to fulfill all obligations of Guarantor
hereunder.
ARTICLE IV - GENERAL CONDITIONS
4.01 Service of Process. Guarantor hereby (a) submits to personal
jurisdiction in the State of Georgia for the enforcement of this Guaranty, and
(b) waives any and all rights under the law of any state to object to
jurisdiction within the State of Georgia for the purposes of litigation to
enforce this Guaranty. In the event that such litigation is commenced,
Guarantor agrees that service of process may be made and personal jurisdiction
over Guarantor obtained, by the serving of a copy of the summons and complaint
upon Guarantor's appointed agent for service of process in the State of
Georgia, whose name and address is as follows:
BONNIE L. HERRON
4355 SHACKLEFORD ROAD
NORCROSS, GA 30093
with a copy to:
J. Michael Levengood
Long Aldridge & Norman, LLP
Suite 5300, 303 Peachtree Street
Atlanta, GA 30308
4.02 Communications. Unless and except as otherwise specifically
provided herein, any and all notices, elections, approvals, consents, demands,
requests and responses thereto ("Communications") permitted or required to be
given under this Guaranty shall be in writing, signed by or on behalf of the
party giving the same, and shall be deemed to have been properly given and
shall be effective upon the earlier of receipt thereof or deposit thereof in
the United States mail, postage prepaid, certified with return receipt
requested, to the other party at the address of such other party set forth
hereinbelow or at such other address within the continental United States as
such other party may designate by notice specifically designated as a notice of
-2-
<PAGE> 3
change of address and given in accordance herewith; provided, however, that the
time period in which a response to any Communication must be given shall
commence on the date of receipt thereof; and provided further that no notice of
change of address shall be effective with respect to Communications sent prior
to the time of receipt thereof. Receipt of Communications under this Guaranty
shall occur upon actual delivery (whether by mail, telecopy transmission,
messenger, courier service, or otherwise) to any person who is Guarantor or an
officer of Guarantor at any location where such person may be found, or to an
officer, partner, agent or employee of Guarantor, at the address of such party
set forth hereinbelow, subject to change as provided hereinabove. An attempted
delivery in accordance with the foregoing, acceptance of which is refused or
rejected, shall be deemed to be and shall constitute receipt; and an attempted
delivery in accordance with the foregoing by mail, messenger, or courier
service (whichever is chosen by the sender) which is not completed because of
changed address of which no notice was received by the sender in accordance
with this provision prior to the sending of the Communication shall also be
deemed to be and constitute receipt. Any Communication, if given to a Class 7
Creditor, must be addressed as indicated in the Plan Indebtedness Exhibit,
subject to change as provided hereinabove, and, if given to Guarantor, must be
addressed as follows, subject to change as provided hereinabove:
BONNIE L. HERRON
4355 SHACKLEFORD ROAD
NORCROSS, GA 30093
with a copy to:
J. Michael Levengood
Long Aldridge & Norman, LLP
Suite 5300, 303 Peachtree Street
Atlanta, GA 30308
4.03 Irrevocability and Revival. This Guaranty shall be irrevocable by
Guarantor and shall remain in effect until all indebtedness guaranteed hereby
has been completely paid.
4.04 Applicable Law. This Guaranty shall be interpreted, construed and
enforced according to the substantive law of the State of Georgia without
giving effect to its principles of choice of law or conflicts of law.
4.05 Miscellaneous. Time is of the essence with respect to all
obligations of Guarantor hereunder. The provisions of this Guaranty shall be
binding upon Guarantor and the successors and assigns of Guarantor and shall
inure to the benefit of the Class 7 Creditors, and their respective heirs,
executors, legal representatives, successors, successors-in-title and assigns.
This Guaranty is assignable by a Class 7 Creditor as a part of the sale or
assignment of such Class 7 Creditor's Allowed Claim, and any assignment hereof
by such Class 7 Creditor shall operate to vest in the assignee all rights and
powers herein conferred upon and granted to such Class 7 Creditor and so
assigned by it. All personal pronouns used herein, whether used in the
masculine, feminine or neuter gender, shall include all other genders; and the
singular shall include the plural and vice versa. This Guaranty contains the
entire agreement between Guarantor and each Class 7 Creditor relating to the
guarantying of the Plan Indebtedness by
-3-
<PAGE> 4
Guarantor and supersedes entirely any and all prior written or oral agreements
with respect thereto; and Guarantor and each Class 7 Creditor acknowledge that
there are no contemporaneous oral agreements with respect to the subject matter
hereof.
IN WITNESS WHEREOF, Guarantor has executed this Guaranty under seal as
of the date first above written.
Intelligent Systems Corporation
BY: /s/
-------------------------------
-4-
<PAGE> 1
EXHIBIT 21.0
INTELLIGENT SYSTEMS CORPORATION
LIST OF PRINCIPAL SUBSIDIARY COMPANIES AS OF MARCH 1, 2000
SUBSIDIARY NAME STATE OF ORGANIZATION
--------------- ---------------------
ChemFree Corporation Georgia
PsyCare America, LLC dba Rapha or Rapha Treatment Centers Georgia
QS Technologies, Inc. Georgia
Quadram Corporation Georgia
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K for the fiscal year ended December 31,
1999 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
March 29, 2000
<PAGE> 1
EXHIBIT 23.2
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 18, 2000, with respect to the consolidated financial
statements of PaySys International, Inc. and Subsidiaries as of December 31,
1998 and 1999 and for the three years in the period ended December 31, 1999
included in Intelligent Systems Corporation's Form 10-K for the year ended
December 31, 1999.
Ernst & Young LLP
March 29, 2000
Atlanta, Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTELLIGENT SYSTEMS CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 737
<SECURITIES> 0
<RECEIVABLES> 1,521
<ALLOWANCES> (57)
<INVENTORY> 325
<CURRENT-ASSETS> 3,043
<PP&E> 1,710
<DEPRECIATION> (1,024)
<TOTAL-ASSETS> 13,658
<CURRENT-LIABILITIES> 3,091
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 10,157
<TOTAL-LIABILITY-AND-EQUITY> 13,658
<SALES> 8,479
<TOTAL-REVENUES> 8,479
<CGS> (3,983)
<TOTAL-COSTS> (9,277)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (88)
<INCOME-PRETAX> 259
<INCOME-TAX> 0
<INCOME-CONTINUING> 249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 249
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
