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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED JUNE 30, 2000
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
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 30, 2000, 5,582,698 shares of Common Stock were outstanding.
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ITEM 1. FINANCIAL STATEMENTS
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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ASSETS (Unaudited) (Audited)
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<S> <C> <C>
Current assets:
Cash $ 4,336 $ 737
Accounts receivable, net 1,868 1,464
Notes and interest receivable 313 254
Inventories 486 325
Other current assets 420 263
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Total current assets 7,423 3,043
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Long-term investments 12,318 8,576
Long-term notes receivable 41 53
Property and equipment, at cost less accumulated depreciation and amortization 612 686
Other assets -- 1,300
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Total assets $ 20,394 $ 13,658
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Short-term borrowings $ 1,100 $ 1,000
Accounts payable 523 444
Accrued expenses and other current liabilities 1,601 1,647
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Total current liabilities 3,224 3,091
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Long-term debt 163 363
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Minority interest -- (5)
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 authorized, 5,582,698 and 5,104,467
outstanding at June 30, 2000 and December 31, 1999, respectively 56 51
Paid-in capital 24,134 24,069
Unrealized gain in available-for-sale securities 2,163 731
Accumulated deficit (9,346) (14,642)
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Total stockholders' equity 17,007 10,209
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Total liabilities and stockholders' equity $ 20,394 $ 13,658
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</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales $ 1,988 $ 2,090 $ 3,995 $ 4,773
Expenses:
Cost of sales 822 1,082 1,663 2,468
Marketing 211 250 431 626
General & administrative 703 898 1,750 1,928
Research & development 202 182 410 357
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Income (loss) from operations 50 (322) (259) (606)
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Other income (expense):
Interest income (expense), net 54 (30) 86 (68)
Investment income (expense) (284) (545) 8,369 872
Other, net 50 2 61 3
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Income (loss) before minority interest (130) (895) 8,257 201
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Minority interest 2 3 5 5
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Net income (loss) $ (132) $ (898) $ 8,252 $ 196
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Basic net income (loss) per share based upon basic
weighted average shares $ (0.02) $ (0.18) $ 1.47 $ 0.04
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Diluted net income (loss) per share based upon diluted
weighted average shares $ (0.02) $ (0.18) $ 1.47 $ 0.04
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Basic weighted average shares outstanding 5,590,613 5,104,467 5,622,218 5,104,467
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Diluted weighted average shares outstanding 5,590,613 5,104,467 5,613,346 5,305,752
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</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
CASH PROVIDED BY (USED FOR): 2000 1999
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<S> <C> <C>
OPERATIONS:
Net income (loss) $ 8,252 $ 196
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 8 163
Gain from sale of assets (8,849) (1,175)
Equity in net loss of affiliates 479 303
Changes in operating assets and liabilities:
Accounts receivable (405) 124
Inventories (161) 105
Other current assets (156) 244
Accounts payable 79 (359)
Accrued expenses and other current liabilities 49 403
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Cash provided by (used for) continuing operations (704) 4
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INVESTING ACTIVITIES:
Proceeds from sale of investments 8,937 1,320
Acquisitions of long-term investments (1,953) (163)
Increase in minority interest 5 5
Repayments of notes receivable, net 233 8
Dispositions (purchases) of property and equipment, net 66 106
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Cash provided by investing activities 7,288 1,276
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FINANCING ACTIVITIES:
Net repayments under short-term borrowing arrangements (100) (360)
Payment of dividend to stockholders (2,956) --
Purchase and retirement of stock related to options 71 --
Foreign currency translation adjustment -- 94
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Cash used for financing activities (2,985) (266)
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Net increase in cash 3,599 1,014
Cash at beginning of period 737 461
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Cash at end of period $ 4,336 $ 1,475
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</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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INTELLIGENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Throughout this report, the terms "we", "us", "ours", "ISC" and
"company" refer to Intelligent Systems Corporation, including its
subsidiaries.
2. The unaudited consolidated financial statements presented in this Form
10-Q have been prepared in accordance with accounting principles
generally accepted in the United States applicable to interim financial
statements. Accordingly, they do not include all of the information and
notes required for complete financial statements. In the opinion of ISC
management, these consolidated financial statements contain all
adjustments (which comprise only normal and recurring accruals)
necessary to present fairly the financial position as of June 30, 2000
and 1999. The interim results for the six months ended June 30, 2000
are not necessarily indicative of the results to be expected for the
full year. These statements should be read in conjunction with our
combined financial statements for the fiscal year ended December 31,
1999, as filed in our annual report on Form 10-K.
3. Comprehensive Income - In accordance with Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive
Income", comprehensive income is the total of net income and all other
non-owner changes in equity in a period. A summary follows:
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net income (loss) $ (132) $ (898) $ 8,252 $ 196
Other comprehensive income (loss):
Foreign currency translation adjustments -- -- -- 197
Unrealized gain (loss) in available-for-sale securities (3,223) 1,258 1,904 622
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Comprehensive income (loss) $ (3,355) $ 360 $ 10,156 $ 1,015
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</TABLE>
4. Sale of Interest in Risk Laboratories, LLC ("Risk") - In the quarter
ended March 31, 2000, we sold 2,310,000 equity units in Risk for
$8,801,000 in cash to American Home Assurance Company, recognizing a
gain of $8,622,000 on the transaction. We retain ownership of 623,515
equity units representing approximately 7 percent of the equity of
Risk, after a capital infusion of $5,000,000 in Risk by American Home
Assurance Company.
5. Sale of Partial Holdings in S1 Corporation - In the quarter ended March
31, 2000, we sold 2,000 shares of common stock of S1 Corporation
[NASDAQ: SONE] for $217,000 cash, recognizing a gain of $207,000. We
retain ownership of 8,000 shares of S1 Corporation stock. The stock in
S1 Corporation was received as consideration for our shares of stock in
VerticalOne Corporation upon the merger of VerticalOne and SI
Corporation in the fourth quarter of 1999.
6. Daw Technologies, Inc. Common Stock - During the quarter ended June 30,
2000, the Company received a total of 645,462 shares of common stock of
Daw Technologies, Inc., [NASDAQ: DAWK], a company that had acquired the
assets of our Intelligent Enclosures operation in April 1998. Under the
terms of the acquisition agreement, the purchase price was to be paid
in common stock of Daw based on a formula related to the trading price
of Daw common stock in April 2000. Consequently,
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the $1.3 million guaranteed purchase price which had been carried in
prior periods on our balance sheet as an "other asset" is treated as a
marketable security at June 30, 2000 in accordance with Statement of
Financial Accounting Standards No. 115 as explained in Note 1 to the
consolidated financial statements for the fiscal year ended December
31, 1999, as filed in our annual report on Form 10-K.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Summary - Our consolidated operating subsidiaries in 2000 are ChemFree, QS
Technologies and PsyCare America. In the first quarter of 1999, we also
consolidated the results of our InterQuad subsidiary prior to its sale in
February 1999. Part of the difference in consolidated operating results between
the first half of last year and this year is a result of not including the
InterQuad operation and its financial losses in the results for the first half
of 2000.
Overall, results for ongoing consolidated companies improved year-to-year, with
each subsidiary operating profitably for the first six months of 2000. During
the same period, we recognized a significant return on the sale of part of our
investment in Risk Laboratories in March 2000, which contributed significantly
to net income for the first half of 2000 of $8.3 million compared to $196,000
for the first half of 1999.
Sales - We generate revenue from operations of our consolidated subsidiaries in
two industry segments: technology-related products and services, and health care
services. For the three month period ended June 30, 2000, net sales were
$1,988,000, a decline of five percent compared to the second quarter in 1999.
Revenue declined in the second quarter this year compared to last year at the
PsyCare subsidiary due to a reduction in the number of programs operated and
revenue per program. The decline in revenue at the PsyCare operations was offset
in part by revenue increases at the ChemFree and QS Technologies subsidiaries.
For the six months ended June 30, 2000, revenue was $4.0 million, a decline of
16 percent compared to the same period last year. The major factors contributing
to lower revenue for the six month period are the sale of the InterQuad
subsidiary, which had contributed revenue of $581,000 in the same period in
1999, and the lower revenue levels at the PsyCare subsidiary.
Cost of sales - Cost of sales as a percentage of revenue decreased significantly
in both the three and six month periods this year compared to the same periods
last year. The improvement reflects mainly the following:
- improved cost control at the PsyCare subsidiary
- higher margin contracts at the QS Technologies subsidiary
- reduction in the cost of sales for fluid products sold by ChemFree and
a change in product mix at ChemFree favoring higher margin fluid sales
- sale of the InterQuad subsidiary which had a relatively high cost of
sales compared to the ongoing subsidiaries.
Operating Expenses - Marketing expenses declined in absolute dollars and as a
percentage of revenue in the three and six month periods of 2000 compared to the
same periods last year. During the three month period, the difference is
attributable to lower expenditures at the ChemFree operations on higher revenue
levels whereas for the six month period, most of the period-to-period change is
due to the sale of InterQuad and the elimination of its related expenses in the
2000 financials. General and administrative expenses were down in the second
quarter and six month periods for 2000 compared to the same periods
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last year. Included in the six month expenses for 2000 is a non-recurring bonus
expense of $150,000 recorded in the first quarter this year related to the
successful completion of the Risk transaction that was offset by the elimination
of general and administrative expenses associated with the InterQuad operation
last year. Research and development expense increased in the three and six month
periods of 2000 compared to the same periods in 1999 at both the QS Technologies
and ChemFree subsidiaries to support more new product development.
Interest Income - We had net interest income of $54,000 and $86,000 in the
second quarter and year-to-date periods, respectively, in 2000. This compares
with net interest expense of $30,000 and $68,000, respectively, for the same
periods in 1999. During the three and six month periods this year, we had a
lower level of notes payable outstanding and we earned interest on higher cash
levels, compared to the same periods in 1999.
Investment Income - For the second quarter of 2000, we recorded an investment
loss of $284,000 compared to an investment loss of $545,000 in the same period
last year. These losses represent our pro rata share of net losses of our
affiliate companies that are recorded under the equity method. For the year to
date periods in 2000, we recorded investment income of $8,369,000 in 2000
compared to income of $872,000 for the six months ended June 30, 1999. Included
in the six month figures for 2000 is a gain of $8,622,000 on the sale of
2,310,000 equity units in Risk Laboratories LLC in a private transaction in
March 2000. In addition, we realized a gain of $207,000 on the sale of twenty
percent of our holdings in S1 Corporation, which was offset in part by $479,000
in net losses in equity of investments accounted for by the equity method. By
comparison, in the first six months of 1999, we realized net gains totaling $1.2
million on sales of investments in three software companies and $303,000 in net
losses in equity of investments accounted for by the equity method.
Minority Interest - This amount represents the pro rata ownership share of
minority shareholders in certain non-wholly-owned subsidiaries of the company.
Common Shares - In the first half of 2000, three officers of the company
exercised options to acquire a total of 570,000 shares of common stock and
turned in to the company a total of 101,769 shares of common stock in partial
payment of the exercise price. Thus the average number of basic shares
outstanding during the three and six month periods ended June 30, 2000 were
5,590,613 and 5,622,218, respectively, compared to 5,104,467 for the three and
six month periods of 1999.
FINANCIAL CONDITION
In the first six months of 2000, our principal sources of cash were $8,701,000,
net of sales expenses, from the sale of 2,310,000 equity units of Risk
Laboratories, $217,000 from the sale of 2000 shares of SI Corporation, and
$233,000, net, related to repayments of notes and interest receivable. Our main
uses of cash were $2,956,000 to pay a $0.52 per share dividend to shareholders
in April 2000 and a total of $1,952,000, net, for new and follow-on investments
in early stage technology companies, including MiracleWorker.com, ThinkWorks, RF
Solutions, Medizeus, Screen4me and UtiliConnect.
Accounts receivable increased by $404,000 at June 30, 2000 compared to December
31, 1999, reflecting the fact that the QS Technologies subsidiary invoices its
annual maintenance contracts with customers in June and then recognizes the
revenue ratably over the following twelve month period. Other current assets
increased at June 30, 2000 compared to December 31, 1999, in part due to $71,000
in notes from officers of the company that were issued in partial payment of the
exercise price of stock options exercised by the officers in January 2000.
Long-term investments increased at June 30, 2000 compared to December 31, 1999
as a result of net new investments totaling $1,952,000 in early stage technology
companies and an increase since December 31, 1999 in the value of our holdings
in S1 Corporation
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[NASDAQ: SONE], Primus Knowledge Systems [NASDAQ: PKSI] and Daw Technologies
[NASDAQ: DAWK]. We acquired 66,431 shares of PKSI stock in exchange for our
ownership interest in 2order.com when 2order.com was acquired by Primus in
January 2000. We acquired 645,462 shares of common stock of Daw in April 2000
related to a prior sale of a subsidiary. Refer to Note 6 to these financial
statements with respect to this transaction. At June 30, 2000, unrealized gains
totaling $2,163,000 in the shares of SONE, PKSI and DAWK are reflected as a
separate category of shareholders' equity on the balance sheet. The value of the
company's holdings in SONE, PKSI and DAWK at June 30, 2000 is lower than their
value at March 31, 2000 due to a decline in the trading prices of the
securities, reflecting general financial market conditions.
We believe we have adequate cash and access to capital to support the company's
operations and plans for the foreseeable future.
PART II. OTHER INFORMATION
ITEM 4. RESULTS OF VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on June 9, 2000, the shareholders
elected J. Leland Strange and James V. Napier as directors of the company to
serve until the 2003 annual meeting. Each of the directors was elected by a vote
of 5,119,125 votes FOR and 30,697 votes WITHHELD.
ITEM 6. EXHIBITS, REPORTS ON FORM 8-K
A The following exhibit is filed with this report: Exhibit 27 Financial
Data Schedule (for SEC use only).
B The Company has not filed any Reports on Form 8-K during the period
covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
INTELLIGENT SYSTEMS CORPORATION
Registrant
Date: August 14, 2000 By: /s/ J. LELAND STRANGE
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J. Leland Strange
Chief Executive Officer, President
Date: August 14, 2000 By: /s/ BONNIE L. HERRON
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Bonnie L. Herron
Chief Financial Officer, Vice President
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