SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 28, 2002
icad, inc.
(Exact name of registrant as specified in its charter)
Delaware 0-9341 02-0377419
--------------- ----------- -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
6405 Congress Avenue, Boca Raton, Florida 33487
--------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (561) 994-0881
Howtek, Inc., 21 Park Avenue, Hudson, New Hampshire 03051
--------------------------------------------------------------------------------
(Former name or former address, if changed since the last report)
Item 2 Acquisition or Disposition of Assets
On June 28, 2002 (the "Effective Time"), the Registrant completed the
acquisition of Intelligent Systems Software, Inc. ("ISSI") pursuant to the
provisions of the previously reported Plan and Agreement of Merger dated as of
February 15, 2002 (the "Merger Agreement") between the Registrant, ISSI and ISSI
Acquisition Corp., a wholly-owned subsidiary of the Registrant ("Merger Sub").
In accordance with the terms of the merger (the "Merger"), pursuant to which
ISSI merged with and into Merger Sub, the holders of the common stock, $.01 par
value (the "ISSI Common Stock"), of ISSI received, for each share of ISSI Common
Stock held immediately prior to the Merger, 1.25 shares of the common stock,
$.01 par value of the Registrant. The holders of options to purchase shares of
ISSI Common Stock and the holders of promissory notes convertible into shares of
ISSI Common Stock became eligible to receive, upon exercise of an option or
conversion of a note for each one share of ISSI Common Stock immediately prior
to the Merger, 1.25 shares of the Registrant's common stock with the exercise
price or conversion rate, as the case may be, proportionately adjusted.
In the Merger, the Registrant issued an aggregate of 10.4 million
shares of its common stock to the ISSI stockholders, including 2.0 million
shares of the Registrant's common stock which were issued to a corporation owned
by the Chairman of the Registrant in exchange for shares of ISSI Common Stock
purchased by the corporation immediately prior to the Merger in accordance with
the provisions of the Merger Agreement.
The description of the Merger Agreement is qualified in its entirety by
reference to the copy of the Merger Agreement which is incorporated as an
exhibit to this Current Report on Form 8-K and which is incorporated herein by
reference.
Item 5. Other Event
On June 28, 2002, Registrant amended its certificate of incorporation
to, among other things: (i) increase its authorized common stock to 50,000,000
shares; (ii) change its name from "Howtek, Inc." to "icad, inc."; and
(iii) classify its Board of Directors into three classes.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial statements of business acquired.
The following financial statements of ISSI are filed as part of this
Current Report on Form 8-K:
Page
----
Report of Independent Certified Public Accountants F-1
Balance Sheets as of December 31, 2001 and 2000 and as of
March 31, 2002 (unaudited) F-2
-2-
Statements of Operations for (i) the years ended
December 31, 2001 and 2000, (ii) the cumulative period
from March 27, 1996 (date of inception) through
December 31, 2001, and (iii) the three months ended
March 31, 2002 and 2001 (unaudited) F-3
Statement of Changes in Stockholders' Equity (Deficit) for
(i) the period from March 26, 1996 through December 31,
1996, (ii) the years ended December 31, 2001, 2000,
1999, 1998 and 1997, and (iii) the three months ended
March 31, 2002 (unaudited) F-4
Statements of Cash Flows for (i) the years ended
December 31, 2001 and 2000, (ii) the cumulative period
from March 27, 1996 through December 31, 2001, and
(iii) the three months ended March 31, 2002 and 2001
(unaudited) F-5 - F-6
Notes to Financial Statements for the years ended
December 31, 2001 and 2000 F-7 - F-14
(b) Pro forma financial information.
The following pro forma financial information is filed as part of this
Current Report on Form 8-K:
Page
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Introductory paragraph briefly describing the Merger,
the parties to the Merger and the periods for which the
pro forma information is presented PF-1
Unaudited Pro Forma Combined Condensed Balance Sheet as
of March 31, 2002 PF-2
Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 2001 and for
the three months ended March 31, 2002 PF-3 - PF-4
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements PF-5
(c) Exhibits.
The exhibits filed as part of this Current Report on Form 8-K are
listed in the attached Index to Exhibits.
-3-
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.
icad, inc.
By: /s/ W. Scott Parr
--------------------------------
W. Scott Parr, President
Dated: July 15, 2002
-4-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Intelligent Systems Software, Inc.
We have audited the accompanying balance sheets of Intelligent Systems
Software, Inc. (a Development Stage Company) (the "Company") for the years ended
December 31, 2001 and 2000, and the related statements of operations,
stockholders' deficit and cash flows for the years then ended and for the period
from March 27, 1996 (date of inception) through December 31, 2001. 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 of America. 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 statements 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 Intelligent Systems
Software, Inc. (a Development Stage Company) as of December 31, 2001 and 2000,
and the results of its operations and its cash flows for the years then ended
and for the period from March 27, 1996 (date of inception) through December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Grant Thornton LLP
Fort Lauderdale, Florida
February 4, 2002, except for the third paragraph of Note J as to which the date
is June 3, 2002
F-1
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
BALANCE SHEETS
March 31, December 31, December 31,
2002 2001 2000
----------- ------------ ------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents........................................................... $ 265,316 $ 84,585 $ 11,493
Government grant receivable......................................................... -- -- 28,625
Accounts receivable................................................................. 409,627 -- --
Inventory........................................................................... 111,904 100,709 --
Prepaid expenses.................................................................... -- 3,553 961
Other assets........................................................................ 57,673 -- 6,443
----------- ----------- ----------
Total current assets.............................................................. 844,520 188,847 47,522
Property and equipment, net.......................................................... 246,488 265,448 132,278
----------- ----------- ----------
Total assets...................................................................... $ 1,091,008 $ 454,295 $ 179,800
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.................................................................... $ 114,042 $ 82,187 $ 43,704
Accrued expenses.................................................................... 426,846 421,221 160,110
----------- ----------- ----------
Total current liabilities......................................................... 540,888 503,408 203,814
----------- ----------- ----------
Convertible promissory notes payable................................................. 56,155 56,155 --
----------- ----------- ----------
Stockholders' equity (deficit)
Common stock, $0.01 par value; 100,000,000 shares
authorized; 6,720,000, 6,159,100 and 4,889,900 shares
issued and outstanding in 2002,
2001 and 2000, respectively....................................................... 67,200 61,591 48,899
Additional paid-in capital.......................................................... 2,196,579 1,505,563 269,663
Note receivable for common stock issued............................................. -- -- (10,000)
Deficit accumulated during the development stage.................................... (1,769,814) (1,672,422) (332,576)
----------- ----------- ----------
Total stockholders' equity (deficit).............................................. 493,965 (105,268) (24,014)
----------- ----------- ----------
Total liabilities and stockholders' equity (deficit).............................. $ 1,091,008 $ 454,295 $ 179,800
=========== =========== ==========
The accompanying notes are an integral part of these statements.
F-2
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Cumulative
Period from
March 27,
Three Three 1996
Months Months (Date of
Ended Ended For the Year Ended Inception)
March 31, March 31, -------------------------- Through
2002 2001 December 31, December 31, December 31,
(unaudited) (unaudited) 2001 2000 2001
--------- ---------- ------------ ---------- ------------
Revenue
Sales................................................. $ 600,094 $ -- $ -- $ -- $ --
Services.............................................. -- -- -- -- 45,056
Government grant
revenue............................................. -- 211,484 486,330 475,192 1,063,847
--------- ---------- ------------ ---------- ------------
600,094 211,484 486,330 475,192 1,108,903
--------- ---------- ------------ ---------- ------------
Costs and expenses
Cost of sales......................................... 228,794 -- -- -- --
Cost of services...................................... -- -- -- -- 22,500
Noncash stock
compensation........................................ 49,000 -- 276,060 45,000 321,060
Research and
development......................................... 166,185 189,683 852,407 411,170 1,645,312
General and
administrative...................................... 255,042 115,485 706,068 112,982 861,465
--------- ---------- ------------ ---------- ------------
699,021 305,168 1,834,535 569,152 2,850,337
--------- ---------- ------------ ---------- ------------
Loss from operations................................... (98,927) (93,684) (1,348,205) (93,960) (1,741,434)
--------- ---------- ------------ ---------- ------------
Other income........................................... 1,535 32 8,359 60,217 69,012
--------- ---------- ------------ ---------- ------------
Net loss............................................... $ (97,392) $ (93,652) $ (1,339,846) $ (33,743) $ (1,672,422)
========= ========== ============ ========== ============
The accompanying notes are an integral part of these statements.
F-3
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit)
For the Period March 26, 1996 (Date of Inception) Through December 31, 1996
and For the Years Ended December 31, 1997, 1998, 1999, 2000 and 2001 and Three
Months Ended March 31, 2002 (Unaudited)
Deficit
Note Accumulated
Common Stock Additional Receivable During the
-------------------------- Paid-In for Common Development
Shares Par Value Capital Stock Issued Stage Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 26, 1996 (inception) .... -- $ -- $ 172 $ -- $ -- $ 172
Net loss ................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 ............. -- -- 172 -- -- 172
Net loss ................................. -- -- -- -- (24,509) (24,509)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 ............. -- -- 172 -- (24,509) (24,337)
Issuance of common stock to founders ..... 3,238,900 32,389 (32,065) -- -- 324
Net loss ................................. -- -- -- -- (107,544) (107,544)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 ............. 3,238,900 32,389 (31,893) -- (132,053) (131,557)
Conversion of debt and accounts
payable to common stock ............... 652,200 6,522 252,285 -- -- 258,807
Net loss ................................. -- -- -- -- (166,780) (166,780)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 ............. 3,891,100 38,911 220,392 -- (298,833) (39,530)
Issuance of common stock ................. 1,248,400 12,484 27,275 (10,000) -- 29,759
Cancellation of common stock ............. (249,600) (2,496) -- -- -- (2,496)
Noncash compensation expense of
shareholder ........................... -- -- 15,000 -- -- 15,000
Cancellation of loans payable from
shareholders' ......................... -- -- 6,996 -- -- 6,996
Net loss ................................. -- -- -- -- (33,743) (33,743)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 ............. 4,889,900 48,899 269,663 (10,000) (332,576) (24,014)
Issuance of common stock, net of
offering costs ........................ 1,005,000 $ 10,050 $ 962,482 $ -- $ -- $ 972,532
Proceeds from payment of note
receivable............................. -- -- -- 10,000 -- 10,000
Issuance of common stock and stock
options for software development
services .............................. 264,200 2,642 273,418 -- -- 276,060
Net loss ................................. -- -- -- -- (1,339,846) (1,339,846)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 ............. 6,159,100 $ 61,591 $ 1,505,563 $ -- $(1,672,422) $ (105,268)
Issuance of common stock, net of
offering costs (unaudited) ............ 560,900 $ 5,609 $ 642,016 $ -- $ -- $ 647,625
Issuance of stock options for
software development services
(unaudited) ........................... -- -- 49,000 -- -- 49,000
Net loss (unaudited) ..................... -- -- -- -- (97,392) (97,392)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2002 (unaudited) .... 6,720,000 $ 67,200 $ 2,196,579 $ -- $(1,769,814) $ 493,965
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Statements of Cash Flows
Cumulative
Period from
March 27,
1996
Three Months Three Months (Date of
Ended Ended For the Year Ended Inception)
March 31, March 31, --------------------------- Through
2002 2001 December 31, December 31, December 31,
(unaudited) (unaudited) 2001 2000 2001
----------- ----------- ----------- ----------- -----------
Cash flows from operating activities
Net loss .............................................. $ (97,392) $ (93,652) $(1,339,846) $ (33,743) $(1,672,422)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ....................... 18,960 13,250 56,412 21,770 99,256
Issuance of stock options for services .............. 49,000 -- 11,860 -- 11,860
Issuance of common stock for services ............... -- -- 264,200 29,759 293,959
Issuance of common stock for
compensation expense .............................. -- -- -- 15,000 15,000
Changes in assets and liabilities
Decrease (increase) in government grant
receivable ........................................ (409,627) 28,625 28,625 (28,625) --
Increase in inventories ............................. (11,195) -- (100,709) -- (100,709)
(Increase) decrease in prepaid expenses ............. 3,553 868 (2,592) 39 (3,553)
Decrease in other assets ............................ (57,673) 6,443 -- 322 --
Increase in accounts payable ........................ 31,854 (21,806) 38,483 39,545 82,187
Increase in accrued expenses ........................ 5,625 75,243 261,111 52,813 421,221
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities ...................................... (466,895) 8,971 (782,456) 96,880 (853,201)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment ................... -- (70,304) (189,582) (108,460) (358,539)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities ............ -- (70,304) (189,582) (108,460) (358,539)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from issuance of convertible debt ............ -- -- 56,155 -- 56,155
Proceeds from issuance of common stock, net ........... 647,626 420,000 978,975 -- 979,299
Proceeds from shareholder loans ....................... -- -- -- 257,314
Payment of note receivable for common
stock issuance ..................................... -- -- 10,000 -- 10,000
Payments for private placement issuance costs ......... -- -- -- (6,443) (6,443)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities ..................................... 647,626 420,000 1,045,130 (6,443) 1,296,325
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents ........................................... 180,731 358,667 73,092 (18,023) 84,585
Cash and cash equivalents, beginning of period .......... 84,585 11,493 11,493 29,516 --
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period ................ $ 265,316 $ 370,160 $ 84,585 $ 11,493 $ 84,585
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-5
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Statements of Cash Flows -- Continued
Cumulative
Period from
March 27,
1996
Three Months Three Months (Date of
Ended Ended For the Year Ended Inception)
March 31, March 31, --------------------------- Through
2001 2002 December 31, December 31, December 31,
(unaudited) (unaudited) 2001 2000 2001
----------- ----------- ------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest ................................... $ -- $ -- $ -- $ 439 $ 1,582
===== ==== ======== ======== ========
Cash paid for taxes ...................................... $ -- $ -- $ -- $ -- $ --
===== ==== ======== ======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Conversion of debt and payables to
common stock ............................................. $ -- $ -- $ -- $ -- $258,807
===== ==== ======== ======== ========
Shareholder loan exchanged for donated
equipment ........................................... $ -- $ -- $ -- $ -- $ 6,100
===== ==== ======== ======== ========
Amortization of private placement
issuance costs to additional paid-in
capital ............................................. $ -- $ -- $ 6,443 $ -- $ --
===== ==== ======== ======== ========
Cancellation of loans payable from
shareholders' ....................................... $ -- $ -- $ -- $ 4,500 $ --
===== ==== ======== ======== ========
Issuance of common stock for note
receivable .......................................... $ -- $ -- $ -- $ 10,000 $ --
===== ==== ======== ======== ========
The accompanying notes are an integral part of these statements.
F-6
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001 and 2000
Note A -- Nature of the Business
Intelligent Systems Software, Inc. (the "Company" or "ISSI"), formerly
known as Intelligent Systems, M.D., Inc. through November 3, 2000, was
organized under the laws of the State of Florida on March 27, 1996. The
Company was formed to design, develop, manufacture and market medical
image analysis products. The Company's first product,
"MammoReader(TM)", utilizes image analysis software that is designed as
a second-reader of mammograms to assist radiologists in detecting
breast cancer.
The Company has generated revenues under government research grants
during the early years of its existence while it was developing
commercial applications of the "MammoReader(TM)". The final grant under
which the Company is conducting such research was completed during the
fiscal year 2001. All subsequent research and clinical development
efforts have been devoted towards commercial applications for the
"MammoReader(TM)" and developing the computer aided detection
technology to assist in the detection of other forms of cancer.
Note B -- Summary of Significant Accounting Policies
Development Stage Company
Since inception, the Company has devoted substantially all of its
efforts to business planning, research and development, recruiting
management and technical staff, acquiring operating assets and raising
capital. Accordingly, the Company is considered to be in the
development stage and the Company's financial statements are presented
in accordance with Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises". The
Company completed U.S. Food and Drug Administration ("FDA") clinical
trials in April 2001. In January 2002, the Company received Pre-Market
Approval ("PMA") from the FDA allowing it to commence U.S. sales and
marketing activities of its "MammoReader(TM)". Upon FDA approval, the
Company immediately began sale of its "MammoReader(TM)" product through
its exclusive distributor in the U.S.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of
three months or less at time of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is
principally being determined by the first-in, first-out method.
Inventories include finished goods, materials, and labor.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for
in amounts sufficient to relate the costs of depreciable assets to
operations over their estimated service lives on a straight-line
method. Repairs and maintenance costs are expensed as incurred. The
estimated lives used in determining depreciation are:
Computer equipment 5 years
Computer software 3 years
Furniture and fixtures 7 years
Leasehold Improvements 3 years
Molds and tooling 7 years
F-7
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Notes to Financial Statements -- (Continued)
December 31, 2001 and 2000
Note B -- Summary of Significant Accounting Policies -- (Continued)
Product Development
Costs incurred in the research and development of the Company's
products are expensed as incurred, except for certain software
development costs. Costs associated with the development of computer
software are expensed prior to establishment of technological
feasibility and capitalized thereafter until the product is available
for general release to customers. To date, no software development
costs have been capitalized.
Revenue Recognition
The Company was awarded Small Business Innovation Research ("SBIR")
grants from the National Cancer Institute in the amount of
approximately $1,064,000. The purpose of the grants were to fund
feasibility studies and clinical testing of the Company's mammogram
analysis system. Reimbursement for the grant revenue is not contingent
on any specified results of the studies. The Company recognizes the
grant revenue over the duration of the study to which the grant relates
as the reimbursable costs are incurred and collection is reasonably
assured. The Company retains all proprietary rights to any product(s)
developed using grant revenues. The grant expired on December 31, 2001.
Advertising
Costs for advertising are expensed as incurred. Advertising expense for
the year ended December 31, 2001 and 2000 was $59,197 and $-0-,
respectively.
Income Taxes
Prior to February 27, 2001, the Company had elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code. Under
these provisions, the Company did not pay federal corporate income
taxes on its taxable income, as the shareholders were liable for the
taxes on their respective shares of Company earnings. On February 27,
2001, the Company's S Corporation status was technically terminated due
to an investment in the Company by a foreign person (i.e., ineligible
shareholder). From February 28, 2001 through December 31, 2001, the
Company will be taxed as a C Corporation, and will provide for income
taxes under the provisions of SFAS No. 109 "Accounting for Income
Taxes". SFAS No. 109 requires an asset and liability based approach in
accounting for income taxes.
The Company did not provide an income tax provision (benefit) for the
ten months ended December 31, 2001 due to operating losses. The Company
has approximately $1,300,000 in net operating loss carryforwards
available for offset against future taxable income. The deferred tax
asset at December 31, 2001 was $490,000. Due to the uncertainty of the
realization of the net operating loss carryforwards, the Company has
established a full valuation allowance against the deferred tax asset
in the amount of $490,000.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
F-8
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Notes to Financial Statements -- (Continued)
December 31, 2001 and 2000
Note B -- Summary of Significant Accounting Policies -- (Continued)
Stock Split
During October 2000, the Board of Directors approved that the Company's
issued and outstanding common stock be split on a 100 to 1 basis. All
share amounts have been retroactively adjusted in the accompanying
financial statements to reflect this stock split.
Other Income
During 2000, other income primarily represents $60,000 for the
extinguishment of a liability based on an agreement dated October 2000
with a consulting company. The majority of this liability was accrued
prior to fiscal year 2000. The consulting company is controlled by two
of the shareholders of the Company.
Stock Options
Statement of Financial Accounting Standards No. 123 establishes
accounting and reporting standards for stock-based compensation plans.
SFAS No. 123 encourages entities to use a "fair value based method" in
accounting for employee stock-based compensation plans but allows the
"intrinsic value based method" prescribed by APB Opinion No. 25. SFAS
No. 123 amends Opinion No. 25 to require pro forma disclosures of net
income and earnings per share as if the "fair value based method" was
used. The Company's issuance of employee stock options is accounted for
using the intrinsic value method under APB 25. The Company provides
disclosure of certain pro forma information as if the fair value-based
method had been applied in measuring compensation expense.
Prior Year Data
Certain prior year data has been reclassified to conform to the 2001
presentation.
Quarterly Data
In the opinion of Intelligent Systems, the accompanying unaudited
financial statements reflect all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position
as of March 31, 2002 and the results of operations and cash flows for
the three months ended March 31, 2002 and 2001.
Note C -- Property and Equipment
Property and equipment at December 31, 2001 and 2000 consists of the
following:
2001 2000
-------- --------
Computers and office equipment........................ $189,572 $131,395
Computer software..................................... 7,866 7,866
Furniture and fixtures................................ 106,579 35,861
Leasehold improvements................................ 30,659 --
Molds and tooling..................................... 30,028 --
-------- --------
364,704 175,122
Less accumulated depreciation and amortization........ (99,256) (42,844)
-------- --------
$265,448 $132,278
======== ========
F-9
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Notes to Financial Statements -- (Continued)
December 31, 2001 and 2000
Note D -- Accrued Expenses
Accrued expenses at December 31, 2001 and 2000 consists of the
following:
2001 2000
-------- --------
Accrued payroll and benefits.......................... $306,995 $119,570
Accrued professional fees............................. 100,370 --
Accrued rent.......................................... -- 37,089
Other................................................. 13,856 3,451
-------- --------
$421,221 $160,110
======== ========
Accrued expenses include unpaid rent for office space totaling $37,089
at December 31, 2000. This amount consists of rent due for the months
of September 1998 through December 1999. The Company's landlord agreed
to defer collection of the unpaid rent until January 2001, provided
that current rent is paid when due, beginning January 2000. The
landlord is an entity that was partly owned by one of the Company's
director-shareholders at the time the lease was executed. The Company
agreed to repayment terms beginning January 2001. During 2001, the
Company paid all outstanding balances on the accrued rent.
In the interest of cash conservation, the Company's executive vice
president and principal shareholder made the decision to defer
collection of her salary during the period July 1, 1999 through January
31, 2000. As of February 1, 2000, she began to collect eighty percent
of her salary, which is the portion being funded by the federal grant.
Her unpaid wages and related taxes are included in accrued expenses in
the amount of $ 61,809 at December 31, 2001 and 2000.
Note E -- Common Stock
The Company has authorized 100,000,000 shares of $.01 par value common
stock. Each share of common stock is entitled to one vote. The holders
of common stock are also entitled to receive dividends whenever funds
are legally available and when declared by the Board of Directors,
subject to the prior rights of holders of all classes of stock
outstanding.
Stock Issued to Key Executives
In connection with employment of the Company's Chief Executive Officer
in October 2000, the Company agreed to sell 1,000,000 shares of common
stock at $.01 per share. As of December 31, 2000, the Company has a
receivable of $10,000 for the sale of stock. The receivable was paid to
the Company during the first quarter of fiscal 2001. Based on the fair
value of the Company's common stock at the date of issuance of $.04 per
shares as determined by an independent appraisal, the Company recorded
$30,000 of compensation for the year ended December 31, 2000.
Private Placement Offering
Pursuant to a private placement offering, dated January 10, 2001 of up
to 4,000,000 shares at the offering price of $1 per share of common
stock, the Company has received proceeds, net of offering costs, of
approximately $973,000.
Note F -- Long-term Debt
In November 2001, the Company issued two convertible promissory notes
payable with an original principal amount of $56,155. The Company is
required to make quarterly interest payments on the outstanding
principal balance at a rate of 7% per annum. The convertible promissory
notes payable mature in November 2004 at which time any outstanding
principal balance is due. The convertible promissory notes payable give
the holder the right at any time to convert the then outstanding
principal
F-10
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Notes to Financial Statements -- (Continued)
December 31, 2001 and 2000
Note F -- Long-term Debt -- (Continued)
and any accrued interest balances into shares of common stock based on
a conversion rate of $1.11 per share of common stock.
Note G -- Commitments and Contingencies
Operating Leases
On June 15, 2001, the Company leased office and warehouse space for
administrative and production related purposes in Boca Raton, Florida.
The lease payments are $33,150 annually through May 31, 2004 with an
increase between three and seven percent annually, depending on certain
cost of living adjustments.
The Company leases its offices and certain computer equipment under
non-cancelable operating leases that expire at various dates through
December 31, 2001. Total rent expense of $60,998 and $29,419 were
incurred in connection with the office lease for the year ended
December 31, 2001 and 2000. Total lease expense of $5,059 and $5,653
were incurred in connection with the computer lease for the year ended
December 31, 2001 and 2000.
Employment Agreements
The Company entered into employment agreements with several of its
executives that expire between September 2003 and June 2004. These
agreements contain provisions for minimum base salaries and an annual
bonus. At the Executive's option during the first 12 months of the
agreement, the base salary may be paid in part, in shares of common
stock of the Company in lieu of cash. For this purpose, the shares
shall be valued at $1.00 per share. During 2001 and 2000, all base
salary was paid in cash.
Software Development
The Company entered into a software development agreement with one of
its vendors for the development of software that is capable of
digitizing, displaying, and tracking mammogram cases in use with the
Company's mammogram analysis technology. The agreement binds the vendor
and its employees with a "Confidentiality and Non-Disclosure
Agreement", and grants the Company the proprietary rights with respect
to the developmental software. In accordance with this agreement, the
Company issued 264,200 shares of common stock in full consideration of
all services rendered. Based on the fair value of the Company's common
stock at the date of the issuance, the Company recorded $264,200 as
compensation for services rendered.
F-11
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Notes to Financial Statements -- (Continued)
December 31, 2001 and 2000
Note G -- Commitments and Contingencies -- (Continued)
Purchase Commitments
The Company is committed to a one-year purchase agreement. Under this
commitment, the Company agrees to purchase all of its medical digitizer
needs, subject to the quality standards prescribed in the agreement and
provides incentive volume discounts if the Company purchases a minimum
number of digitizers during the terms of the agreement. The purchase
agreement expires in November 2002. Subsequently this vendor and the
Company entered into a merger agreement (see Note J).
Exclusive Distributorship Agreement
In August 2001, the Company entered into an agreement with a third
party ("Distributor") for the exclusive distribution of the Company's
"MammoReader(TM)" product. The agreement requires the Distributor to
purchase a certain number of "MammoReader(TM)" over a term of three
years in order to be able to retain exclusivity of distribution. The
agreement begins upon FDA approval of the "MammoReader(TM)".
Note H -- Related Party Transactions
The Company leases office space from one of the Company's director-
shareholders (see Note D). Total rent expense paid to the director-
shareholders for the year ended December 31, 2001 and 2000 was $29,580
and $29,419, respectively. The Company did not pay any rent expense
from September 1998 through December 1999. The landlord agreed to defer
the collection of the unpaid rent until January 2001, provided that the
current rent is paid when due. The Company has agreed to pay $3,091 per
month from January 2001 through November 2001 for back rent. The
Company has accrued $37,089 for back rent which has been included in
the accrued liabilities at December 31, 2000. The lease expired on
November 30, 2001 and all accrued rent was repaid during 2001.
Note I -- Stock Options
In 2001, the Board of Directors adopted the Company's 2001 Stock Option
Plan (the "Plan"). Under the Plan, the Company had reserved an
aggregate of 400,000 shares of Common Stock for issuance pursuant to
options granted under the Plan ("Plan Options"), with a maximum of
100,000 aggregate number of shares granted to any individual during any
calendar year subject to certain adjustments as dictated by the Plan. A
Committee of the Board of Directors (the "Committee") of the Company
administers the Plan including, without limitation, the selection of
the persons who will be granted Plan Options under the Plan, the time
or times at which options shall be granted, the number of shares
subject to each option, the manner in which the options may be
exercised and the option price.
Plan Options granted under the Plan are intended to be options
qualifying as incentive stock options ("Incentive Options") under
Section 422 of the Internal Revenue Code of 1986.
Any Incentive Option granted under the Plan must provide for an
exercise price of not less than 100% of the fair market value of the
underlying shares on the date of such grant, but the exercise price of
any Incentive Option granted to an eligible employee owning more than
10% of the Company's Common Stock must be at least 110% of such fair
market value as determined on the date of the grant. The term of each
Plan Option and the manner in which it may be exercised is determined
by the Committee, provided that no Plan Option may be exercisable more
than 10 years after the date of its grant and, in the case of an
Incentive Option granted to an eligible employee owning more than 10%
of the Company's Common Stock, no more than five years after the date
of grant.
F-12
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Notes to Financial Statements -- (Continued)
December 31, 2001 and 2000
Note I -- Stock Options -- (Continued)
The options are exercisable in accordance with the terms and
conditions, consistent with the Plan, as may be determined by the
Committee and specified in the Grant Instrument. The Committee may
accelerate the exercisability of any or all outstanding Options at any
time for any reason.
The exercise price of all options granted by the Company is not less
than the estimated market value at the date of grant. The Company's net
loss would have been changed to the proforma amounts indicated below
had compensation cost for the stock option plan issued to employees
been determined based on the fair value of the options at the grant
status consistent with the method of SFAS 123.
Net loss:
As reported .................................................. $(1,339,846)
Pro forma .................................................... $(1,377,663)
The above proforma disclosure may not be representative of the effects
on reported net loss for future years as options vest over several
years and the Company may continue to grant options to employees.
The fair value of each option is estimated on the date of grant using
the minimum value method with the following assumptions:
No expected dividends
Risk-free interest rate ...................................... 5.54%
Expected life ................................................ 2 - 3 years
Volatility ................................................... 80%
During 2001, the Company issued 372,000 options with a weighted average
exercise price of $1.05. These options expire through 2011 and vest
over three years. The weighted average fair value of options granted
was $.32 per option.
The following information applies to options outstanding at December
31, 2001:
Options Outstanding Options Exercise
----------------------- -----------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Shares Life Price Shares Price
------- ----------- -------- ------ --------
$1.00 - $2.00......................................................... 372,000 $1.38 $1.05 96,000 $1.20
During 2001, the Company issued 53,000 stock options to nonemployees
for medical consulting services. The exercise price of these stock
options range from $1.00 per share to $2.00 per share. As of December
31, 2001, the Company recorded $11,860 as compensation expense relating
to the issuance of these stock options.
In January 2002, the board authorized that the Company would provide
options to purchase a total of 5,000 shares to certain salesmen.
F-13
INTELLIGENT SYSTEMS SOFTWARE, INC.
(A Development Stage Company)
Notes to Financial Statements -- (Continued)
December 31, 2001 and 2000
Note J -- Subsequent Events
Merger Agreement
In February 2002, the Company entered into a merger agreement with
Howtek, Inc. ("Howtek"). Pursuant to the merger agreement, the Company
would receive approximately 8.4 million shares of Howtek common stock
in exchange for all of the issued and outstanding capital stock of
ISSI.
Private Placement Offering
Pursuant to a private placement offering, dated December 15, 2001, the
Company is offering up to 750,000 shares at the offering price of $2
per share of common stock through February 4, 2002. The Company has
received proceeds of approximately $701,125.
Legal Action
On June 3, 2002. ISSI was sued in United States District Court for the
District of Delaware by R2 Technology, Inc. and Shih-Ping Wang. The
lawsuit alleges that ISSI's Mammo Reader device infringes certain
patents owned by R2 Technology, Inc. The complaint requests treble
damages, but does not specify the amount of damages sought. The
complaint also seeks to enjoin ISSI from further infringement. On July
11, 2002, subsequent to the acquisition of ISSI by Howtek, the
plaintiffs amended their complaint to add icad, inc. (formerly, Howtek,
Inc.) and ISSI Acquisition Corp. as additional parties. The Company
believes the lawsuit is without merit and indents to vigorously defend
itself.
F-14
Unaudited Pro Forma Combined Condensed Financial Statements
The following unaudited pro forma combined condensed financial
statements give effect to the merger of Howtek, Inc. ("Howtek") and ISSI using
the purchase method of accounting, as required by Statement of Financial
Accounting Standard No. 141, "Business Combinations." Under this method of
accounting, the Registrant will allocate the purchase price to the fair value of
assets acquired, including identified intangible assets and goodwill. The
purchase price allocation is subject to revision when the Registrant obtains
additional information regarding asset valuation. The unaudited pro forma
combined condensed financial statements are based on the historical financial
statements and the accompanying notes of Howtek and the historical financial
statements and the accompanying notes of ISSI which are included elsewhere in
this filing. The unaudited pro forma combined condensed balance sheet assumes
the merger took place on March 31, 2002. The unaudited pro forma combined
condensed statement of operations assumes that the merger took place as of
January 1, 2001. The unaudited pro forma information is presented for
illustration purposes only in accordance with the assumptions set forth below.
This information is not necessarily indicative of the operating results or of
the financial position that would have occurred if the merger had been
consummated on the dates indicated nor is it necessarily indicative of future
operating results or financial position of the combined enterprise. The
unaudited pro forma combined condensed financial information does not reflect
any adjustments to conform accounting practices or to reflect any cost savings
or other synergies anticipated as a result of the merger or any merger-related
expenses.
PF-1
Unaudited Pro Forma Combined Condensed Balance Sheet
As of March 31, 2002
(Unaudited)
Intelligent Proforma
Howtek Systems Adjustments Total
------------ ----------- ----------- ------------
Current assets:
Cash and equivalents ............................................. $ 436,849 $ 265,316 $2,000,000(f) $ 2,702,165
Trade accounts receivable, net of
allowance for doubtful accounts.................................. 311,193 409,627 (56,866)(c) 663,954
Inventory ......................................................... 2,489,579 111,904 (1,300,000)(d) 1,301,483
Prepaid and other ................................................ 55,641 57,673 113,314
------------ ----------- ----------- ------------
Total current assets .............................................. 3,293,262 844,520 643,134 4,780,916
------------ ----------- ----------- ------------
Property and equipment:
Equipment ......................................................... 1,446,167 334,045 1,780,212
Leasehold improvements ............................................ 41,721 30,659 72,380
------------ ----------- ----------- ------------
1,487,888 364,704 1,852,592
Less accumulated
Depreciation and amortization...................................... 1,159,204 118,216 1,277,420
------------ ----------- ----------- ------------
Net property and equipment ........................................ 328,684 246,488 575,172
------------ ----------- ----------- ------------
Other assets
Deferred merger costs ............................................ 95,466 -- (95,466)(a) --
Identifiable intangible assets ................................... -- -- 5,437,000 (b) 5,437,000
Goodwill .......................................................... -- -- 22,818,535 (a) 22,818,535
Software development costs, net ................................... 230,264 -- 230,264
Patents, net ..................................................... 11,490 -- 11,490
------------ ----------- ----------- ------------
Total other assets............................................... 337,220 28,160,069 28,497,289
------------ ----------- ----------- ------------
Total assets ...................................................... $ 3,959,166 $ 1,091,008 $28,803,203 $ 33,853,377
============ =========== =========== ============
Current liabilities:
Accounts payable ................................................. $ 1,215,247 $ 114,042 $ (56,866)(c) $ 1,272,423
Accrued interest .................................................. 218,299 -- 218,299
Accrued expenses .................................................. 322,687 426,846 404,534 (a) 1,154,067
Convertible subordinated
debentures ...................................................... 10,000 -- 10,000
Current maturities of note payable ............................... 62,184 -- 62,184
------------ ----------- ----------- ------------
Total current liabilities ......................................... 1,828,417 540,888 347,668 2,716,973
------------ ----------- ----------- ------------
Convertible promissory notes payable .............................. -- 56,155 56,155
Note payable, less current maturities .............................. 101,806 -- 101,806
------------ ----------- ----------- ------------
Total liabilities ................................................. 1,930,223 597,043 347,668 2,874,934
------------ ----------- ----------- ------------
Stockholders' equity:
Convertible preferred stock ....................................... 86 86
Common stock ...................................................... 155,977 67,200 (67,200)(e) 259,977
84,000 (a)
20,000 (f)
Additional paid-in-capital ........................................ 57,614,186 2,196,579 (2,196,579)(e) 91,759,686
28,165,500 (a)
5,980,000 (f)
Accumulated deficit ............................................... (54,791,042) (1,769,814) 1,769,814 (e) (60,091,042)
(1,300,000)(d)
(4,000,000)(i)
Treasury stock, at cost .......................................... (950,264) (950,264)
------------ ----------- ----------- ------------
Stockholders' equity............................................. 2,028,943 493,965 28,455,535 30,978,443
------------ ----------- ----------- ------------
Total liabilities and stockholders'
equity ......................................................... $ 3,959,166 $ 1,091,008 $28,803,203 $ 33,853,377
============ =========== =========== ============
PF-2
Unaudited Pro Forma Combined Condensed Statement of Operations
For the year ended December 31, 2001
(Unaudited)
Intelligent Proforma
Howtek Systems Adjustments Total
----------- ----------- ----------- -----------
Sales ...................................................... $ 4,835,297 $ -- $ (34,140)(g)$ 4,801,157
Government grant revenue ................................... -- 486,330 -- 486,330
----------- ----------- ----------- ------------
Total revenues ......................................... 4,835,297 486,330 (34,140) 5,287,487
Cost of sales .............................................. 3,936,406 -- 1,300,000 (d) 5,219,996
(16,410)(g)
----------- ----------- ----------- ------------
Gross margin ............................................... 898,891 486,330 (1,317,730) 67,491
----------- ----------- ----------- ------------
Operating expenses:
Engineering and product
development.............................................. 751,467 852,407 1,603,874
General and administrative ................................ 1,124,710 982,128 1,087,400 (h) 7,194,238
4,000,000 (i)
Marketing and sales ....................................... 1,563,380 -- 1,563,380
----------- ----------- ----------- ------------
Total operating expenses ................................... 3,439,557 1,834,535 5,087,400 10,361,492
----------- ----------- ----------- ------------
Loss from operations ....................................... (2,540,666) (1,348,205) (6,405,130) (10,294,001)
Interest and other income (expense),
net...................................................... (80,105) 8,359 (71,746)
----------- ----------- ----------- ------------
Net loss ................................................... (2,620,771) (1,339,846) (6,405,130) (10,365,747)
Preferred dividends ........................................ (155,050) (155,050)
----------- ----------- ----------- ------------
Net loss available to common shareholders .................. $(2,775,821) $(1,339,846) $(6,405,130) $(10,520,797)
=========== =========== =========== ============
Net loss per share basic and diluted ....................... $ (0.20) $ (0.24) $ $ (0.43)
=========== =========== =========== ============
Weighted average number of shares
used in computing earnings per
share .................................................... 13,950,119 5,654,398 10,400,000 (j) 24,350,119
=========== =========== =========== ============
PF-3
For the three months ended March 31, 2002
(Unaudited)
Intelligent Proforma
Howtek Systems Adjustments Total
----------- ----------- ----------- -----------
Sales .............................................................. $ 775,633 $ 600,094 $ (100,334)(g) $ 1,275,393
Government grant revenue ........................................... -- --
----------- ---------- ---------- -----------
Total revenues ................................................. 775,633 600,094 (100,334) 1,275,393
Cost of sales ...................................................... 595,412 228,794 (55,701)(g) 768,505
----------- ---------- ---------- -----------
Gross margin ................................................... 180,221 371,300 (44,633) 506,888
----------- ---------- ---------- -----------
Operating expenses:
Engineering and product development ............................... 189,756 215,185 404,941
General and administrative ........................................ 225,355 255,042 271,850 (h) 752,247
Marketing and sales ............................................... 267,080 -- 267,080
----------- ---------- ---------- -----------
Total operating expenses ....................................... 682,191 470,227 271,850 1,424,268
----------- ---------- ---------- -----------
Loss from operations ............................................... (501,970) (98,927) (316,483) (917,380)
Interest and other income (expense), net ........................... (19,152) 1,535 (17,617)
----------- ---------- ---------- -----------
Net loss ........................................................... (521,122) (97,392) (316,483) (934,997)
Preferred dividends ................................................ (36,505) -- (36,505)
----------- ---------- ---------- -----------
Net loss available to common
shareholders ...................................................... $ (557,627) $ (97,392) $ (316,483) $ (971,502)
=========== ========== ========== ===========
Net loss per share basic and diluted ............................... $ (0.04) $ (0.02) $ -- $ (0.04)
=========== ========== ========== ===========
Weighted average number of shares used
in computing earnings per share ................................... 15,251,426 6,346,067 10,400,000 (j) 25,651,426
=========== ========== ========== ===========
PF-4
Notes to Unaudited Pro Forma Combined Condensed Financial Statements
1. Basis of Pro Forma Presentation
The unaudited pro forma combined condensed financial statements of
Howtek have been prepared on the basis of assumptions relating to the allocation
of consideration paid to the acquired assets and liabilities of Intelligent
Systems based on management's best preliminary estimates. The actual allocation
of the amount of the consideration may differ from that reflected in these
unaudited pro forma combined condensed financial statements after a third party
valuation and other procedures have been completed. Below are tables of the
estimated acquisition costs and estimated purchase price allocation for
Intelligent Systems:
Fair value of Howtek common stock issued and common stock options
issued ........................................................ $28,249,500
Direct acquisition costs ......................................... 500,000
-----------
Total purchase price ............................................. $28,749,500
===========
Estimated fair value of identifiable intangible assets ........... $ 5,437,000
Net tangible assets............................................... 493,965
Goodwill ......................................................... 22,818,535
-----------
Total Acquisition Cost ........................................... $28,749,500
===========
2. Pro Forma Adjustments
(a) Reflects the components of the purchase consideration and related
transaction costs which consist of Howtek common stock with a market
value of $26,880,000 and direct acquisition costs of $500,000,
replacement stock options issued by Howtek to certain Intelligent
Systems common stock option holders with an estimated fair value of
$1,369,500. The value of Howtek common stock was based upon a per
share value of $3.20, equal to the closing price on February 19, 2002,
the day the acquisition was announced. The value of Howtek's common
stock options is based on the estimated fair value of these options,
as of the date the transaction was announced, using the Black-Scholes
valuation model.
(b) Represents adjustments to increase the carrying values of tangible
assets acquired and to record the carrying values of identifiable
intangible assets and goodwill acquired.
(c) Reflects the elimination of amounts owed between Howtek and
Intelligent Systems.
(d) Represents increase of reserve for inventory related items associated
with graphic arts product line, which is to be discontinued upon the
consummation of the merger.
(e) Reflects the elimination of existing stockholders' equity of
Intelligent Systems.
(f) Represents cash received related to the issuance of 1,600,000
Intelligent Systems Investment Shares at $1.25 per share and fair
value of Howtek common shares issued in exchange for the Intelligent
Systems Investment shares. Upon the completion of the merger,
2,000,000 shares of Howtek common stock were exchanged for 1,600,000
Intelligent Systems Investment Shares. The 2,000,000 shares of
Howtek common stock had a fair market value of $6,000,000 at the
time the merger was completed.
(g) Reflects the elimination of sales between Howtek and Intelligent
Systems.
(h) Represents amortization of acquired identifiable intangible assets of
Intelligent Systems based upon average estimated useful lives of five
years.
(i) Reflects the adjustment to record compensation expense equal to the
amount that the fair market value of Howtek common stock shares
exchanged for Intelligent Systems Investment Shares exceeded the
consideration paid for the Intelligent Systems Investment Shares.
(j) Reflects the increase in weighted average basic and diluted shares
outstanding for the common stock issued in connection with the merger.
Pro forma basic and diluted loss per share was calculated assuming
that the 10,400,000 shares of Howtek common stock issued in connection
with the merger were issued at the beginning of the period presented.
This total includes the issuance of 2,000,000 shares of Howtek common
stock in exchange for 1,600,000 Intelligent Systems Investment Shares.
PF-5
INDEX TO EXHIBITS
Exhibit Description
2(a) Plan and Agreement of Merger dated as of February 15, 2002
between the Registrant, Intelligent Systems Software Inc.
and ISSI Acquisition Corp. (Incorporated by referenced to
Annex A to the Registrant's Proxy Statement/Prospectus dated
May 24, 2002, constituting a part of Registrant's
Registration Statement on Form S-4 No. 333-86454,
as amended)
23 Consent of Grant Thornton LLP