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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Commission file number 1-9330
INTELLIGENT SYSTEMS CORPORATION
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(Exact name of Registrant as specified in its charter)
GEORGIA 58-1964787
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4355 SHACKLEFORD ROAD, NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 381-2900
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
As of September 30, 2001, 4,495,530 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)
SEPTEMBER 30, DECEMBER 31,
2001 2000
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ASSETS (Unaudited) (Audited)
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Current assets:
Cash $ 14,012 $ 594
Accounts receivable, net 2,158 1,253
Affiliate notes and interest receivable 1,500 4,088
Other notes and interest receivable 352 --
Inventories 695 475
Other current assets 481 268
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Total current assets 19,198 6,678
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Long-term investments 7,340 10,504
Long-term notes receivable 7 378
Property and equipment, at cost less accumulated depreciation 680 482
Goodwill 2,359 --
Other assets, net 52 15
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Total assets $ 29,636 $ 18,057
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Short-term borrowings $ -- $ 1,504
Accounts payable 1,036 357
Accrued payroll 925 241
Accrued expenses and other current liabilities 1,827 1,281
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Total current liabilities 3,788 3,383
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Deferred gain 2,105 --
Deferred revenue 562 --
Billings in excess of cost 3,368 --
Other long-term liabilities 333 --
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Total long-term liabilities 6,368 --
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Redeemable preferred stock of VISaer 57 --
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 4,495,530 and
5,623,874 outstanding at September 30, 2001 and December 31, 2000, respectively 44 56
Paid-in capital 18,438 24,216
Accumulated other comprehensive loss (684) (215)
Accumulated earnings (deficit) 1,625 (9,383)
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Total stockholders' equity 19,423 14,674
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Total liabilities and stockholders' equity $ 29,636 $ 18,057
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The accompanying notes are an integral part of these consolidated balance
sheets.
Page 2
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
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Net sales $ 2,257 $ 1,630 $ 5,469 $ 5,624
Expenses:
Cost of sales 1,218 638 2,492 2,300
Marketing 621 253 1,301 684
General & administrative 7,220 756 8,805 2,506
Research & development 1,548 258 2,043 668
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Loss from operations (8,350) (275) (9,172) (534)
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Other income:
Interest income, net 167 55 891 141
Investment income, net 305 826 19,948 9,675
Equity losses in affiliated companies (69) (247) (558) (727)
Other income, net 278 2 286 63
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Income (loss) before tax provision and minority interest (7,669) 361 11,395 8,618
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Income tax provision 3 213 387 213
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Income (loss) before minority interest (7,672) 148 11,008 8,405
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Minority interest -- 3 -- 8
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Net income (loss) $ (7,672) $ 145 $ 11,008 $ 8,397
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Basic net income (loss) per share ($ 1.63) $ 0.03 $ 2.07 $ 1.50
Diluted net income (loss) per share ($ 1.63) $ 0.03 $ 2.07 $ 1.49
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Basic weighted average shares outstanding 4,693,491 5,582,259 5,312,707 5,608,898
Diluted weighted average shares outstanding 4,693,491 5,608,529 5,315,934 5,618,895
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The accompanying notes are an integral part of these consolidated statements.
Page 3
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited, in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
CASH PROVIDED BY (USED FOR): 2001 2000
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OPERATIONS:
Net income $ 11,008 $ 8,397
Adjustments to reconcile net income to net cash used for operating
activities, net of effects of acquisitions and dispositions:
Depreciation and amortization 249 80
Write-down of goodwill 6,003 --
In-process research & development charge 425 --
Gain from sale of assets (19,929) (9,675)
Equity in net loss of affiliates 558 726
Changes in operating assets and liabilities:
Accounts receivable 107 259
Inventories (221) (266)
Other current assets (61) (105)
Accounts payable (142) (32)
Accrued expenses and other current liabilities 2,018 (10)
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Cash provided by (used for) continuing operations 15 (626)
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INVESTING ACTIVITIES:
Proceeds from sale of investments 20,525 10,150
Acquisition of company, net of cash acquired 81 --
Acquisitions of long-term investments (1,306) (3,154)
Increase in minority interest -- 7
Repayments of notes and interest receivable 5,044 379
Advances under notes and interest receivable (3,466) (2,514)
Dispositions (purchases) of property and equipment, net (172) 13
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Cash provided by investing activities 20,706 4,881
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FINANCING ACTIVITIES:
Repayments under short-term borrowing arrangements (1,504) (600)
Payment of dividend to stockholders -- (2,956)
Purchase and retirement of stock (5,789) 46
Foreign currency translation adjustment (10) --
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Cash used for financing activities (7,303) (3,510)
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Net increase in cash 13,418 745
Cash at beginning of period 594 737
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Cash at end of period $ 14,012 $ 1,482
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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 September 30,
2001 and 2000. The interim results for the nine months ended September
30, 2001 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, 2000, 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)
Three Months Ended Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
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Net income (loss) $(7,672) $145 $11,008 $8,397
Other comprehensive income (loss):
Foreign currency translation adjustment (10) -- -- --
Unrealized gain (loss) (763) 1,006 (459) (898)
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Comprehensive income (loss) $(8,445) $1,151 $10,549 $7,499
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4. Sale of Interest in Risk Laboratories, LLC ("Risk") - On January 18,
2001, we sold 214,273 common units of Risk, a former affiliate company,
to American Home Assurance Company ("AHAC") for a total of $900,000
cash. We recorded a gain of $893,000 based on a cost basis of $7,000,
which is included in investment income in the accompanying statement of
operations for the nine months ended September 30, 2001. At the same
time, we acquired 107,137 common units from Risk for a total
acquisition price of $450,000. Concurrent with the purchase of these
units, we recaptured $450,000 in losses related to our pro rata share
of cumulative unrecorded losses. This loss is recorded in equity loss
in affiliates in the accompanying consolidated statement of operations
for the nine months ended September 30, 2001. On May 3, 2001, we sold
an additional 257,127 common units of Risk to AHAC pursuant to a "put"
option we held. AHAC paid us $1,029,000 in cash for the units, on which
we recorded a second quarter gain of $1,029,000 on a cost basis of
zero. At September 30, 2001, we retain 259,253 common units,
representing approximately 2.7% of Risk.
5. Sale of Interest in PaySys International, Inc. ("PaySys") - On April
27, 2001, we sold our ownership interest in PaySys, an affiliate
company, to First Data Corporation. In exchange for the sale of our
3,606,382 shares of PaySys common stock, we received cash proceeds of
$17,770,000
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and recorded a pretax gain of $17,770,000 in the second quarter of
2001. In addition, PaySys repaid $4,329,000 in principal and interest
related to short-term bridge loans. Immediately prior to the sale to
First Data Corporation, PaySys spun off two subsidiaries to its
shareholders. Accordingly, we own approximately 31 percent of each of
Delos Payment Systems, Inc. and dbbAPPS, Inc., both development stage
companies that will continue to develop and market a proprietary
software operating platform and application software that has been
under development by PaySys. We did not record a gain on the
distribution to us of an interest in these two companies. Rather, due
to uncertainty regarding the two early stage companies, we booked a
valuation reserve equal to the net asset value and goodwill associated
with our pro rata share of the value of our interest in Delos Payment
Systems and dbbAPPS and therefore these assets are carried at zero on
our balance sheet. In addition, an escrow fund totaling $20 million was
set aside for potential liabilities that may arise after the closing of
the sale. The balance of the fund, after payment of any and all claims,
will be distributed pro rata to PaySys shareholders, including us, as
additional sale proceeds at various time periods over the next four
years.
6. Self-Tender Offer and Share Repurchases - On June 1, 2001, we initiated
a self-tender offer to acquire one million shares of our outstanding
common stock at a cash price of $5.25 per share. The offer expired on
July 12, 2001, with 3,904,086 shares tendered. On July 17, 2001, we
paid $5,250,000 to acquire one million shares (7,034 odd lot shares and
25.48076% of the remaining shares tendered). We also repurchased an
additional 125,688 shares at an average price of $4.20 per share during
the third quarter. All shares acquired were retired.
7. Acquisition of VISaer, Inc. - As of June 30, 2001, we owned 40% of
VISaer, Inc. ("VISaer") and accounted for our investment under the
equity method of accounting. At June 30, 2001, we had a carrying value
of $2,860,000 in long-term investments and $1,681,000 in principal and
interest outstanding under affiliate notes receivable from VISaer.
Effective July 1, 2001, in an unplanned restructuring transaction
involving all preferred shareholders of VISaer, we converted $956,000
of our VISaer note receivable into a new series of preferred stock of
VISaer. In addition, VISaer repaid the balance of $725,000 owed to us
shortly after the restructuring was completed. Following the
transaction, we own approximately 65% of the equity of VISaer. VISaer,
a software company that designs and sells software that automates the
maintenance, repair and overhaul (MRO) operations of airlines, is the
successor company of Visibility, Inc., an enterprise resource planning
(ERP) company whose operations were spun off a year ago in July 2000 in
order to allow VISaer to concentrate on the higher growth aerospace MRO
market.
The debt to equity conversion in July resulted in ISC taking control of
VISaer. Our ownership of VISaer increased from 40% to 65%, and we
account for the transaction as a "step" acquisition. For financial
reporting periods after July 1, 2001, we account for VISaer under the
consolidation method, compared to the equity method of accounting used
to account for VISaer prior to July 1, 2001. The required accounting
treatment for the "step" acquisition and related purchase accounting of
VISaer had the result of immediately creating $8,806,000 in intangible
assets for financial reporting purposes. In accordance with Statement
of Financial Accounting Standards No. 141, "Accounting for Business
Combinations" (SFAS 141) and Statement of Financial Accounting
Standards No. 142, "Accounting for Intangible Assets", based on third
party valuations, we identified and valued the following intangible
assets: existing software technology ($2,000,000), in-process research
and development ($1,700,000) and a favorable lease contract ($200,000).
At the time of the acquisition we recorded 25% of such amounts to
reflect the amount associated with our acquisition of an additional 25%
"step" of VISaer. The recorded amount for existing software technology
($500,000) is being amortized over its estimated useful life of three
years and the recorded amount for the favorable lease contract
($50,000) is being amortized over the remaining term of the lease
(through July 2004). We immediately expensed $425,000 (representing
4.8% of the $8,806,000 of total intangibles) related to purchased
research and
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development projects that had not reached technological feasibility and
that did not have an alternative future use. This amount is included in
research and development expense for the third quarter. The remaining
excess intangible value in the amount of $7,831,000 was booked as
goodwill at July 1, 2001.
8. Write-down of Goodwill - At September 30, 2001, as a result of the
terrorist attacks on September 11, 2001 which have directly impacted
the aerospace industry into which VISaer sells its software products,
we evaluated the extent to which the reporting unit of VISaer might be
impaired. Among the factors considered were deferrals and reduced value
of anticipated contracts, reduced spending and financial resources of
the airline industry, increased working capital requirements to get to
breakeven, general economic conditions, reduced spending on IT
products, and a significant increase in the general uncertainty
regarding the airline industry. An analysis by a third party based on
an undiscounted cash flow model determined that under SFAS 121, the
long lived assets associated with VISaer were impaired. Based upon a
fair value appraisal by a third party valuation firm, we assessed the
total value of VISaer at September 30, 2001 to be $3.7 million. Based
on our 65% ownership, the value of our ownership was $2.4 million. We
expensed $6,003,000 related to the goodwill, reducing the carrying
value of the residual goodwill to $1,855,000 at September 30, 2001
(exclusive of the $550,000 of identifiable intangible explained in Note
7). The one-time charge is included in general and administrative
expense for the third quarter.
9. Sale of HeadHunter.com Common Stock - In the third quarter ended
September 30, 2001, we sold 90,228 shares of common stock (representing
all of our interest) of HeadHunter.com [NASDAQ:HHNT]. We originally
acquired the shares in exchange for our holdings in privately held
MiracleWorker.com in August 2000. We received $821,000 cash and
recognized a gain of $471,000 on an original cost basis of $350,000.
10. New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement established accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Company adopted the new statement on January 1, 2001. The
adoption of this Statement did not have a significant impact on the
Company's financial statements.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement No. 125." This Statement
revises the standards for accounting for securitizations and other
transfers of financial assets and collateral. This statement is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The
adoption of this Statement did not have a significant impact on the
Company's financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 141, "Business Combinations." This
Statement requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 and eliminates
the pooling-of-interests method. See Note 7 for the impact related to
the acquisition of VISaer, Inc. Also in July 2001, the Financial
Accounting Standards Board issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This Statement requires that goodwill and certain
intangible assets, including those recorded in past business
combinations, no longer be amortized to earnings, but
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instead be tested for impairment at least annually. SFAS No. 142 will
become effective for fiscal years beginning after December 15, 2001.
The Company is required to adopt SFAS No. 142 on January 1, 2002 and is
currently evaluating the overall impact of SFAS No. 142 on its
financial statements. For acquisitions completed after June 30, 2001,
the Statement requires that goodwill not be amortized to earnings
beginning immediately. Related to the acquisition of VISaer, Inc. (Note
8) the Company generated $1,855,000 of goodwill, after related charges,
of which no amortization expense is reflected in the statement of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Summary - Our consolidated operating subsidiaries in 2001 are ChemFree
Corporation (bio-remediating parts washers and fluids), QS Technologies, Inc.
(public health software) and, since July 1, 2001, VISaer, Inc. (software for the
aerospace maintenance, repair and overhaul industry). In the same periods last
year, we also consolidated the results of our PsyCare subsidiary (health care
services) prior to the sale of its operations in November 2000.
In the third quarter this year, we recorded significant losses, in large part
due to the acquisition of VISaer as detailed in Notes 7 and 8 above which
resulted in non-recurring, no-cash charges totaling $6,428,000. VISaer, as an
early stage company, also incurs operating losses due to significant new
software product development activities and delayed recognition of revenue under
applicable accounting standards. In addition, both ChemFree and VISaer have seen
some negative impact related to the terrorist attacks of September 11th, with
lower revenue levels in September than anticipated and some delay or deferral of
anticipated contracts. The impact on VISaer (which sells its software products
and services to airlines) is likely to be of longer duration than for ChemFree.
Year-to-date net income for 2001 includes a gain of $17,770,000 on the sale of
our interest in affiliate company, PaySys International, Inc. as described in
Note 5 above, which was offset in part by the third quarter, non-recurring
charges related to the VISaer acquisition. In the year-to-date period last year,
we recognized a gain of $8,622,000 on the sale of part of our interest in
affiliate company, Risk Laboratories, in March 2000, which contributed to net
income of $8,396,000 million for the first nine months of 2000.
Sales - In 2001, we generate revenue from domestic and international sales of
parts washers and related chemicals at the ChemFree subsidiary, from domestic
sales of software licenses and maintenance agreements at the QS Technologies
subsidiary and, since July 1, 2001, from domestic and international sales of
software licenses, maintenance agreements and professional services at the
VISaer subsidiary. For the three month period ended September 30, 2001, net
sales were $2,257,000, an increase of 38 percent compared to the third quarter
in 2000. For the nine months ended September 30, 2001, revenue was $5,469,000, a
decline of three percent compared to the same period last year. The major factor
contributing to increased revenue for the three month period this year is the
inclusion of revenue of the VISaer subsidiary since July 1, 2001. In addition to
the revenue recognized by VISaer during the quarter, the company also has $3.9
million in deferred revenue and billings in excess of cost which will be
recognized in future periods on either a percentage of completion or completed
contracts basis. Revenue related to ChemFree's operations was down slightly in
the third quarter (attributable to a slowdown after the terrorist attacks in
September) and up approximately 4 percent for the year-to-date periods in 2001
compared to the same periods in 2000. Sales of new software licenses at QS
Technologies declined in both the three and nine month periods this year
compared to last year although maintenance revenue was relatively consistent
year-to-year. Another factor impacting the period-to-period comparisons is the
fact that last year's results include revenue of
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$211,000 and $891,000 for the three and nine months, respectively, related to
our PsyCare operations prior to its sale last year.
Cost of sales - Cost of sales as a percentage of revenue was 54% and 46% in the
three and nine month periods this year compared to 39% and 41% in the comparable
periods last year. The acquisition of VISaer this year and the sale of PsyCare
last year make direct comparisons of the consolidated cost of sales misleading.
ChemFree's cost of sales consistently represented approximately 55 percent of
revenue for the year-to-date period this year and both quarter and year-to-date
periods last year. However, it was higher in the third quarter this year due to
higher transportation costs and a reconciliation of demonstration inventory.
VISaer's cost of sales in the third quarter was higher as a percentage of
revenue than its historical levels because the revenue mix was skewed toward
services rather than new license fees. Cost of sales in 2000 includes costs of
delivering the health care services associated with the PsyCare subsidiary prior
to its sale in November 2000.
Operating Expenses - Marketing expenses increased in both absolute dollars and
as a percentage of revenue in the three and nine month periods of 2001 compared
to the same periods last year. The difference is attributable in part to the
inclusion of the marketing expenses of the VISaer subsidiary. In addition, there
were greater expenditures at the ChemFree operation for sales personnel, travel,
and trade show programs that are intended to attract new customers and to
support its established customer base. General and administrative expenses were
higher in the third quarter and nine month period for 2001 compared to the same
periods last year. The difference is largely attributable to a non-recurring
charge in the third quarter of $6,003,000 for impairment of goodwill associated
with VISaer (refer to Note 8). In addition, third quarter expenses were higher
than the comparable period last year due to the inclusion of VISaer operating
expenses this year and increased legal and accounting expenses at the corporate
level. Included in the nine month expenses for 2001 is non-recurring bonus
expense of $187,000 related to the successful completion of the PaySys
transaction. By comparison, in the nine month period ended June 30, 2000, there
is non-recurring bonus expense of $150,000 related to the successful completion
of the sale of the majority of the company's interest in Risk Labs. Research and
development expense increased in the three and nine month periods of 2001
compared to the same periods in 2000. Part of the increase is due to a
non-recurring charge of $425,000 for purchased research and development projects
of VISaer that had not reached technological feasibility and that did not have
an alternative future use (refer to Note 7) and the inclusion of other VISaer
R&D expenses since July 1, 2001 as well. A small part of the increase in the
year-to-date numbers is related to more aggressive new product development
activities at the QS Technologies subsidiary.
Interest Income - We had net interest income of $167,000 and $891,000 in the
third quarter and year-to-date periods, respectively, in 2001. This compares
with net interest income of $55,000 and $141,000, respectively, for the same
periods in 2000. During the three and nine month periods this year, we earned
interest on a higher level of notes receivables (through April 2001) and cash
balances (since April 2001), compared to the same periods in 2000. The interest
earned year-to-date 2001 includes $829,000 related to the short-term bridge loan
to PaySys which was repaid in late April. Since then, most of the interest
earned is related to bank deposits.
Investment Income - In the three and nine month periods ended September 30,
2001, we recorded investment income of $305,000 and $19,948,000, respectively.
The main component of investment income in the third quarter is a gain of
$471,000 related to the sale of HeadHunter stock (refer to Note 9) offset by
reserves totaling $185,000 to write off two small software investments.
Year-to-date investment income also includes a second quarter gain of
$17,770,000 on the PaySys transaction (refer to Note 5), and gains of $893,000
and $1,029,000 in the first and second quarters of 2001, respectively, on sales
related to Risk Labs (refer to Note 4). By comparison, in the nine month period
ended September 30, 2000, we realized investment income of $9,675,000,
consisting mainly of $8,622,000 realized on the sale of equity units in Risk
Labs in a private transaction in March 2000.
Page 9
Equity Losses in Affiliates - On a quarterly basis, we recognize our pro rata
share of the earnings or losses of several affiliate companies that we record on
the equity method. These companies are early stage companies that typically
incur losses during their development and early revenue stages. For the three
and nine month periods ended September 30, 2001, we recorded equity losses
totaling $69,000 and $558,000, respectively. For the comparable periods in 2000,
we recorded equity losses of $247,000 and $727,000, respectively. The equity
losses in prior periods included losses related to VISaer prior to its "step"
acquisition on July 2, 2001.
Other Income - In the third quarter of 2001, other income is mainly related to
VISaer's realization of approximately $271,000 related to deferred gains on the
sale of the Visibility business in July 2000.
Income Taxes - We recorded a year-to-date income tax liability of $387,000
related to the gain on the PaySys transaction. For ordinary income tax purposes,
all of the investment gain was sheltered by net operating loss carryforwards.
However, the investment gain is subject to alternative minimum tax since only
ninety percent of the gain can be sheltered by net operating loss carryforwards.
Last year, the year-to-date figures include income taxes payable on gains on the
Risk transaction in March 2000.
Minority Interest - In 2000, this amount represents the pro rata ownership share
of minority shareholders in our PsyCare subsidiary, before it was sold in
November 2000.
Common Shares - The average number of basic shares outstanding during the three
and nine month periods ended September 30, 2001 was 4,693,491 and 5,312,707,
respectively. The decline in the third quarter average reflects the repurchase
of 1,125,688 shares of common stock during the third quarter, including
1,000,000 in the self tender offer completed July 12, 2001.
FINANCIAL CONDITION
In the first nine months of 2001, our principal sources of cash were $17,770,000
from the sale of our interest in PaySys, $1,928,000 from the sale of Risk units,
$4,329,000 from repayment of principal and interest related to a bridge loan to
PaySys, and $821,000 from the sale of our HeadHunter.com stock. Our main uses of
cash were $5,789,000 to acquire and retire shares of our common stock,
$1,504,000 to repay in full our outstanding bank debt, $1,306,000 for follow-on
investments in technology companies, $1,800,000 for bridge loans (mainly
$1,500,000 to Delos Payment Systems in the third quarter).
Long-term investments decreased at September 30, 2001 compared to December 31,
2000 by $3,164,000. The main components of this amount include reclassification
of $2,860,000 of the carrying value of VISaer, $1,306,000 in follow-on
investments in early stage technology companies, equity losses of $559,000 in
affiliate companies, $643,000 due to the sale of our holdings in HeadHunter.com
and a decline of $174,000 in the market value of our holdings in Daw
Technologies, Inc. [NASDAQ: DAWK] due to lower trading price of the stock at the
period end.
As a result of the step acquisition of VISaer, we now consolidate the assets and
liabilities of VISaer. Much of the increase since December 31, 2000 in accounts
receivables, property and equipment, accounts payable, accrued payroll and
accrued other liabilities are directly related to consolidating the VISaer
accounts since July 1, 2001. In addition, the following liability accounts have
not been part of our financial statements for prior periods but are relevant to
the VISaer operations. A brief explanation of each is outlined below:
- Deferred Gain - When VISaer spun off the Visibility ERP software
product line in July 2000, the buyer assumed certain liabilities and
contracts related to the acquired operations. VISaer did not obtain
releases from creditors for a portion of these liabilities and
contracts and, accordingly,
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remains contingently liable for these obligations and therefore has
classified them as "deferred gain". As the obligations are paid by the
buyer, VISaer recognizes additional income on the sale of the product
line. ISC is not a guarantor or contingently liable for the VISaer
subsidiary obligations.
- Deferred Revenue - These amounts relate to revenue from annual software
maintenance and support contracts for which VISaer customers have paid
the annual fee. Such amounts are recognized ratably over the term of
the contract.
- Billings in Excess of Costs - These amounts relate to VISaer billings
that are not yet recognizable in accordance with auditing standards
generally accepted in the United States. Revenue is recognized in
accordance with Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition", either on the percentage of completion method or
completed contracts method, depending upon the specific terms of the
software license sold.
- Redeemable Preferred Stock of VISaer - This amount relates to VISaer's
obligation to the minority shareholder of VISaer pursuant to the
redemption provision of the preferred stock of VISaer. The amount
related to the VISaer obligation to Intelligent Systems pursuant to the
redemption provision is eliminated in consolidation. The redemption
liability is an obligation of VISaer, not of the parent company
Intelligent Systems.
We believe we have adequate cash and access to capital to support the company's
operations and plans for the foreseeable future.
INVESTMENT COMPANY ACT
The Investment Company Act of 1940 broadly defines an investment company
generally as any issuer that is primarily engaged in, or proposes to engage in,
the business of investing, reinvesting, owning, holding or trading in securities
and owns or proposes to acquire investment securities having a value exceeding
40% of the issuer's total assets. We do not intend to be and do not consider
Intelligent Systems to be an investment company and have relied on Rule 3a-1 of
the 1940 Act which provides that a company is not deemed to be an investment
company if no more than 45 percent of the value of its assets and no more than
45 percent of its net income in the last four quarters is derived from
securities of companies it does not control. In the quarter ended March 31,
2001, we may technically have triggered the definition related to net income
because of gains generated from the sale of non-control securities in the past
four quarters. However, at that time and to the extent necessary to do so, we
elected to rely on the safe harbor from the definition of an investment company
for transient investment companies contained in Rule 3a-2 under the Investment
Company Act. Rule 3a-2 provides a conditional one year exclusion from the
investment company definition for an issuer that, among other things, has a bona
fide intent not to be an investment company as soon as is reasonably practical.
We believe we will be back in compliance with the requirements of Rule 3a-1 of
the 1940 Act within the one-year exemption period.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS, REPORTS ON FORM 8-K
A. There are no exhibits filed with this report.
B. The Company has not filed any Reports on Form 8-K during the period
covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
INTELLIGENT SYSTEMS CORPORATION
Registrant
Date: November 14, 2001 By: /S/ J. LELAND STRANGE
------------------------------------
J. Leland Strange
Chief Executive Officer, President
Date: November 14, 2001 By: /S/ BONNIE L. HERRON
------------------------------------
Bonnie L. Herron
Chief Financial Officer
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