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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 MARCH 31, 2002
Commission file number 1-9330
INTELLIGENT SYSTEMS CORPORATION
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(Exact name of Registrant as specified in its charter)
GEORGIA 58-1964787
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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 March 31, 2002, 4,495,530 shares of Common Stock were
outstanding.
THIS FORM 10-Q INCLUDES UN-REVIEWED FINANCIAL STATEMENTS IN LIEU OF REVIEWED
FINANCIAL STATEMENTS BECAUSE THE REGISTRANT ELECTED NOT TO HAVE ARTHUR ANDERSEN
LLP CONDUCT A REVIEW OF THE FINANCIAL STATEMENTS. REFER TO ITEM 1 AND NOTE 1 IN
THIS FORM 10-Q.
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ITEM 1. FINANCIAL STATEMENTS
REFER TO NOTE 1 ON PAGE 5 REGARDING THE FACT THAT THE FINANCIAL
STATEMENTS PRESENTED HAVE NOT BEEN REVIEWED BY AN INDEPENDENT AUDITOR.
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
MARCH 31, DECEMBER 31,
2002 2001
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ASSETS
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Current assets:
Cash $ 10,172 $ 12,026
Accounts receivable, net 1,909 2,297
Notes and interest receivable 1,467 424
Inventories 513 547
Other current assets 286 353
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Total current assets 14,347 15,647
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Long-term investments 6,021 7,476
Property and equipment, at cost less accumulated depreciation 1,098 664
Intangibles, net 3,261 2,271
Other assets, net 21 31
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Total assets $ 24,748 $ 26,089
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Notes payable $ 1,415 $ --
Accounts payable 1,186 1,013
Deferred revenue 1,292 1,536
Deferred gain 489 1,328
Accrued expenses and other current liabilities 1,645 1,564
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Total current liabilities 6,027 5,441
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Deferred revenue, net of current portion 3,182 2,596
Other long-term liabilities 68 80
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Total long term liabilities 3,250 2,676
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Redeemable preferred stock of subsidiary 171 114
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 4,495,530
issued and outstanding at March 31, 2002 and December 31, 2001 45 45
Paid-in capital 18,438 18,438
Accumulated other comprehensive loss (792) (355)
Accumulated deficit (2,391) (270)
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Total stockholders' equity 15,300 17,858
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Total liabilities and stockholders' equity $ 24,748 $ 26,089
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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 MARCH 31, 2002 2001
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Revenue
Products $ 1,352 $ 1,262
Services 816 432
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Total revenue 2,168 1,694
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Cost of sales
Products 649 614
Services 527 71
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Total cost of sales 1,176 685
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Gross profit 992 1,009
Expenses
Marketing 587 325
General & administrative 1,236 664
Research & development 2,786 254
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Loss from operations (3,617) (234)
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Other income, net
Interest income (expense), net 24 437
Investment income, net 797 845
Equity losses of affiliate companies (66) (306)
Other income, net 751 7
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Income (loss) before income tax provision and minority interest (2,111) 749
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Income tax provision 11 --
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Net income (loss) $ (2,122) $ 749
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Basic net income (loss) per share $ (0.47) $ 0.13
Diluted net income (loss) per share $ (0.47) $ 0.13
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Basic weighted average shares outstanding 4,495,530 5,623,784
Diluted weighted average shares outstanding 4,495,530 5,627,450
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The accompanying notes are an integral part of these statements.
Page 3
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited, in thousands)
THREE MONTHS ENDED MARCH 31,
CASH PROVIDED BY (USED FOR): 2002 2001
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OPERATIONS:
Net income (loss) $ (2,122) $ 749
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities, net of effects of acquisitions and
dispositions:
Depreciation and amortization 220 53
Investment income, net (1,047) (845)
Equity loss of affiliate companies 66 306
Changes in operating assets and liabilities, net of
effects of acquisition
Accounts receivable 388 (38)
Inventories 34 (100)
Other current assets 177 95
Accounts payable 172 (12)
Accrued expenses and other current liabilities (304) (108)
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Cash provided by (used for) continuing operations (2,416) 100
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INVESTING ACTIVITIES:
Proceeds from sales of investments 1,666 904
Acquisition of company, net of cash acquired 39 --
Acquisitions of long-term investments -- (725)
Repayments under notes and interest receivable 14 12
Advances under notes and interest receivable (1,057) (689)
Purchases of property and equipment, net (105) (24)
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Cash provided by (used for) investing activities 557 (522)
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FINANCING ACTIVITIES:
Borrowings under short-term borrowing arrangements -- 210
Foreign currency translation adjustment 5 --
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Cash provided by financing activities 5 210
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Net decrease in cash (1,854) (212)
Cash at beginning of period 12,026 594
Cash at end of period $ 10,172 $ 382
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The accompanying notes are an integral part of these consolidated statements.
Page 4
INTELLIGENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements Not Reviewed - The financial statements have not
been reviewed by the company's independent auditor because the company
elected not to have Arthur Andersen LLP conduct a review of the
financial statements. The financial statements will be reviewed in the
second quarter of 2002 by the new independent auditor that will be
selected in June 2002. No auditor has opined that the unaudited and
unreviewed statements present fairly, in all material respects, the
financial position, the results of operations or cash flows of the
company for the periods reported in accordance with generally accepted
accounting principles.
2. Throughout this report, the terms "we", "us", "ours", "ISC" and
"company" refer to Intelligent Systems Corporation, including its
subsidiaries.
3. 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
March 31, 2002 and 2001. The interim results for the three months
ended March 31, 2002 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 and notes thereto
for the fiscal year ended December 31, 2001, as filed in our annual
report on Form 10-K.
4. 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 March 31,
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2002 2001
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Net income (loss) $(2,122) $ 749
Other comprehensive income (loss):
Foreign currency translation adjustment 5 --
Unrealized gain (loss) (439) 420
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Comprehensive income (loss) $(2,556) $1,169
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5. Acquisition of Controlling Interest in Delos Payment Systems, Inc.
("Delos") - In 2001, we loaned $1.5 million to Delos Payment Systems,
Inc. ("Delos"), an affiliate company accounted for under the equity
method. We acquired our 27 percent interest in Delos as a result of
the spin-off of Delos to the shareholders of PaySys prior to its sale
in April 2001. The carrying value of the loan on our balance sheet at
December 31, 2001 was $80,000 due to recording our pro rata share of
Delos losses during 2001 under equity accounting. As a result of the
loan default in January 2002, we acquired control of the Delos board
of directors and began to consolidate the Delos operations in 2002. We
are providing additional borrowings of $1.5 million to Delos under the
loan. The loan eliminates in consolidation. As a result of
consolidating Delos, we recorded intangible assets upon consolidation
in the first quarter of 2002 in accordance with SFAS 141. Of the
intangibles acquired, $642,000 was allocated to our pro rate share of
acquired software which will be amortized over a five-year period and
$289,000 was recorded as goodwill.
Page 5
6. Sale of Interest in Risk Laboratories, LLC ("Risk") - On March 14,
2002, we sold our remaining interest in Risk, a former affiliate
company, to American Home Assurance Company ("AHAC") for a total of
$474,000 cash. We recorded a gain of $474,000 based on a cost basis of
$0, which is included in investment income in the accompanying
statement of operations for the three months ended March 31, 2002.
7. Sale of Interest in Atherogenics, Inc. ("Atherogenics") - During the
quarter ended March 31, 2002, we sold on various dates and at various
prices averaging $6.69 per share, 178,350 shares of common stock of
Atherogenics [NASDAQ: AGIX], a company in which we were an early
investor. We received a total of $1.2 million cash and recorded a gain
of $573,000 on the sale transactions, which is included in investment
income in the accompanying statement of operations for the three
months ended March 31, 2002.
8. New Accounting Pronouncements - In August 2001, FASB issued SFAS No.
144 "Accounting for the Impairment of Long-Lived Assets". SFAS No. 144
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement is effective for
financial statements issued for fiscal years beginning after December
15, 2001 and interim periods within those years. The adoption of SFAS
No. 144 did not have a significant impact on our financial statements.
9. Industry Segments - Our consolidated subsidiaries are involved in two
industry segments: information technology products and services, and
industrial products. Operations in information technology products and
services include development and sales of software licenses and
related professional services and software maintenance contracts.
Operations in the industrial product segment include the manufacture
and sale of bio-remediating parts washers by our ChemFree subsidiary.
Total revenue by industry segment includes sales to unaffiliated
customers. Sales between our industry segments are not material.
Operating profit (loss) is total revenue less operating expenses. None
of the corporate overhead expense is allocated to the individual
industry segments. Identifiable assets by industry segment are those
assets that are used in our subsidiaries in each industry segment.
Corporate assets are principally cash, notes receivable and
investments. The table following contains segment information for the
quarters ended March 31, 2002 and 2001.
Quarter ended March 31,
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(in thousands) 2002 2001
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Information Technology
Revenue $ 1,024 $ 445
Operating Income (loss) (3,241) 49
Industrial Products
Revenue 1,144 1,249
Operating Income (loss) (19) 127
Consolidated Segments
Revenue $ 2,168 $ 1,694
Operating Income (loss) (3,260) 176
Page 6
A reconciliation of consolidated segment data above to consolidated income
(loss) and assets follows:
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Quarter ended March 31
(in thousands) 2002 2001
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Consolidated segments operating income (loss) $(3,260) $ 176
Corporate expenses (357) (410)
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Consolidated operating loss (3,617) (234)
Interest income 24 437
Investment income 797 845
Equity of affiliates (66) (306)
Other income 751 7
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Income (loss) before taxes (2,111) 749
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Income tax provision 11 --
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Net income (loss) $(2,122) $ 749
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March 31, December 31,
2002 2001
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Identifiable Assets
Information Technology $ 5,406 $ 4,792
Industrial Products 1,614 1,730
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Consolidated segments identifiable assets 7,020 6,522
Corporate 17,728 19,567
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Consolidated assets $24,748 $26,089
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
In addition to historical information, this Form 10-Q may contain
forward-looking statements relating to Intelligent Systems Corporation
(ISC). All statements, trend analysis and other information contained in
the following discussion relative to markets for our products and trends
in revenue, gross margins and anticipated expense levels, as well as
other statements including works such as "anticipate", "believe",
"plan", "estimate", "expect", and "intend", and other similar
expressions constitute forward-looking statements. Prospective investors
are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those contemplated by
such forward-looking statements. Among the important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements are delays in product development, undetected
software errors, competitive pressures, technical difficulties, market
acceptance, availability of technical personnel, changes in customer
requirements, changes in financial markets, performance and financial
condition of affiliate companies, and general economic conditions. ISC
undertakes no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events
or changes in future operating results.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes to the consolidated financial statements
presented in this Form 10-Q.
Overview - Our consolidated subsidiaries during 2002 operate in two industry
segments: Information Technology and Industrial Products. Included in the
Information Technology sector are QS Technologies, Inc. (software for health and
human services), VISaer, Inc. (software for maintenance, repair and overhaul
operations in the aerospace industry) and Delos Payment Systems, Inc. (a
development stage company developing software for the credit card processing
market). The Industrial Products segment includes ChemFree Corporation
(bio-remediating parts washers).
Page 7
Revenue in the first quarter of 2002 was $2,168,000, an increase of 28 percent
compared to the same period in 2001. Our net loss from operations in the first
quarter of 2002 was $3,617,000 compared to a net loss of $234,000 in the first
quarter of 2001. In the current quarter, we recognized a total of $1,506,000 in
other income that offset in part the loss from operations, resulting in a
consolidated net loss for the quarter of $2,122,000 compared to net income of
$749,000 in the first quarter of 2001.
The results of the first quarter of 2002 are not directly comparable to those of
last year because we consolidate the results of operations of two companies,
VISaer and Delos Payment Systems, in 2002 that were not consolidated in the
first quarter of 2001. An explanation of the transactions by which we acquired a
controlling interest in each of these companies is explained in more detail in
Notes 2 and 20 of our consolidated financial statements for the fiscal year
ended December 31, 2001 as filed in our annual report on Form 10-K for 2001.
Both of the new subsidiaries are generating operating losses related to
significant research and development expense to complete new software products.
In the case of VISaer, the company is deriving software license fees and support
revenue for its current software products but revenue from the new web-native
product is being deferred until the software is delivered in 2003. In the case
of Delos, the company expects to complete the first marketable version of its
software in the third quarter of 2002 but does not expect to generate revenue
until late 2002 or early 2003. As a result, operating losses are expected to
continue through 2002.
Sales - Total revenue in the first quarter of 2002 was $2,168,000, an increase
of 28 percent compared to revenue of $1,694,000 in the same period last year.
Revenue from products, which includes sales of equipment in our Industrial
Products segment as well as software license fees related to the Information
Technology segment, increased 7 percent period-to-period whereas revenue from
services billed by the Information Technology segment increased 89 percent
period-to-period. The growth in both product and service revenue reflects the
benefit of the 2001 acquisition of VISaer and its contribution to the revenue
generated by our Information Technology segment. The Industrial Product segment
revenue was down 8 percent compared to the first quarter last year, mainly
reflecting lower volume of product sales to customers in Europe. At the end of
March 2002, VISaer has accrued $3,182,000 in deferred revenue related to a
contract with United Parcel Services (UPS) to license its new software product.
UPS has advanced $3,500,000 cash to offset some of the development expenses but
all revenue related to this contract is being deferred under the completed
contracts accounting rules until the software is complete in 2003.
Cost of Sales - In the three months ended March 31, 2002, gross profit was 45.8
percent of revenue, compared to 59 percent in the same period last year. Cost of
service sales (all of which relates to the Information Technology segment)
increased in the first quarter of 2002 compared to last year mainly due to the
inclusion of VISaer costs in 2002 but not in 2001. VISaer professional services
have a higher labor component and cost than do services provided by QS
Technologies and, in the first quarter of 2002, VISaer had some underutilization
of professional service employees due to delays in planned contract
implementations. Cost of product sales was unchanged at approximately 48 percent
of revenue in the first quarters of both 2002 and 2001.
Operating Expenses - In the first quarter of 2002, operating expenses were
higher than in the comparable period last year in large part due to the
inclusion of expenses of the VISaer and Delos Payment Systems subsidiaries this
year. Overall, expenses related to QS Technologies, ChemFree and corporate
activities were essentially the same in the first period of 2002 and 2001.
Marketing expenses were up 80 percent period-to-period, reflecting mainly higher
expenses in the Information Technology segment due to the inclusion of VISaer
expenses in 2002 as well as some minor increase at the QS Technologies
subsidiary. Consolidated general and administrative expenses increased 87
percent in the first period of 2002 compared to the first period last year. This
increase reflects the inclusion of expenses related to VISaer and Delos Payment
Systems in 2002 but not in 2001. In addition, we had higher depreciation and
amortization expense in 2002, reflecting amortization of intangible assets
acquired in the VISaer and Delos transactions. Research and development expense
in the first period of 2002 was $2,531,000 higher than for the first period last
year. The significant increase is related to major new product development
initiatives in the Information Technology segment. VISaer and Delos had combined
R&D expenses of approximately $2.5 million in the first quarter of 2002 and we
expect this level of expense to continue for most of 2002.
Interest Income - In the first quarter this year, we recorded $24,000 in
interest income compared to interest income of $437,000 in the first quarter of
2001. The change compared to 2001 is mainly
Page 8
because we earned significant interest in the first quarter of last year on a
short-term, high-interest $3.5 million note receivable of our PaySys affiliate,
prior to the sale of PaySys in April 2001. In 2002, we are earning much lower
interest income on our cash balances due to lower bank interest rates, we have
a lower level and interest rate for notes receivable and Delos is accruing
interest expense on a loan from a minority shareholder.
Investment Income - In the first quarter of 2002, we earned $797,000 net
investment income compared to net investment income of $845,000 in the
comparable period last year. This year, we recognized gains of $573,000 on the
sale of 178,350 publicly traded shares of Atherogenics stock; $474,000 on the
private sale of our remaining interest in a former affiliate company, Risk Labs;
and a reserve of $250,000 to write down the carrying value of our minority
interest in a privately held early stage software company. By comparison, in the
first quarter of 2001, we recognized a gain of $893,000 on the private sale of
part of our interest in Risk Labs, offset by a loss of $50,000 loss on a
minority interest in a privately held start-up technology company.
Equity Losses of Affiliates - On a quarterly basis, we recognize our pro rata
share of the earnings or losses of affiliate companies that we record on the
equity method. These companies are typically early stage companies that incur
losses during their development and early revenue stages. We recorded $66,000 of
net equity losses in the first quarter of 2001, compared to $306,000 in net
equity losses in the same period last year. The difference between periods is
mainly the result of fewer companies accounted for on the equity method this
year compared to last year, mainly due to the change from equity method to
consolidation accounting for VISaer this year.
Other Income - Other income/expense in the quarter ended March 31, 2002 includes
$751,000 of deferred gain related to a VISaer product line sale in July 2000.
Taxes - In the first quarter of 2002, we recorded income tax expense of $11,000
representing a subsidiary's state tax liability. We had no income tax expense in
the first quarter of 2001 because investment gains were offset by capital loss
carryforwards.
Common Shares - The average number of basic shares outstanding in the first
quarter of 2002 is 20 percent lower than in the first quarter of 2001 because we
repurchased 1,132,000 shares of our common stock in the second half of 2001,
including one million shares repurchased in the company's self-tender offer
completed July 12, 2001.
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter ended March 31, 2001, our principal sources of cash were
$1.2 million from the sale of 178,350 shares of Atherogenics stock and $474,000
from the sale of our remaining Risk Labs interest. During the three month
period, our principal uses of cash were a $1,500,000 secured loan to Delos to
fund operating losses, loan advances of $850,000 to VISaer to fund operating
losses and a $1,000,000 secured loan to a private software company in which we
may acquire an equity interest in the future. The increase in notes receivable
at March 31, 2002 compared to December 31, 2001 is related to this $1 million
loan.
Notes payable increased to $1,415,000 at March 31, 2002 compared to zero at
year-end December 31, 2001 as a result of consolidating Delos as of January
2002. The note reflects a loan to Delos from a minority shareholder of Delos and
Intelligent Systems does not have any corporate liability for the Delos
obligation. Long-term investments decreased $1,455,000 at March 31, 2002
compared to the prior year-end. Of the decrease, $1.1 million reflects the sale
of Atherogenics stock and $250,000 reflects a reduction in the carrying value of
our minority interest in a private software company. During the period,
property, plant and equipment increased by $434,000 mainly due to consolidating
Delos this quarter. Intangibles increased by $990,000 in the first quarter of
2002, principally as a result of intangible assets recorded in the consolidation
accounting for Delos. Of the intangibles acquired, $642,000 was allocated to our
pro rata share of acquired software which will be amortized over a five-year
period and $289,000 was recorded as goodwill.
Subsequent to the period end, we entered into a secured, $3.0 million bridge
loan with a private company which will be repaid in August 2002 and also
increased the amount of our $1.0 million loan made in the first quarter to a
private software company by $500,000. Since the terrorist attacks of
Page 9
September 11, 2001, our Information Technology segment, in particular VISaer,
has experienced delays in contract awards and implementations which, if they
continue, may have a negative impact on results of operations and increase the
segment's cash requirements, which we intend to fund or arrange funding for.
However, we believe we have adequate cash reserves to meet any such needs. We
do not have off-balance sheet arrangements, relationships, transactions or
guarantees with third parties or related parties that would affect our
liquidity or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets, liabilities, revenues and
expenses. We consider certain accounting policies related to revenue
recognition, valuation of acquired intangibles and impairment of long-lived
assets, and valuation of investments to be critical policies due to the
estimation processes involved in each. For a detailed description on the
application of these and other accounting policies, see Note 1 to the
Consolidated Financial Statements contained in our annual report on Form 10-K
for 2001.
Revenue Recognition. Our product revenue consists of fees from software licenses
and sales of equipment and supplies. Our service revenue consists of fees for
implementation, consulting, training, maintenance and support for software
products. A portion of our revenue is derived from software contracts that
contain significant production, modification and/or customization requirements
and license fees for such contracts are recognized using contract accounting. We
recognize revenue on a percentage of completion basis that involves estimating
our progress on the contract based on input measures. We recognize revenue and
the related costs in the same proportion that the amount of labor hours incurred
to date bears to the total estimated hours required for contract completion. If
reliable estimates cannot be determined or if there is an acceptance clause in
the contract, all revenue is deferred until the customer has accepted the
software and any refund rights have expired. If we do not accurately estimate
the resources required or the scope of work to be performed, or we do not manage
the contract properly, in future periods we may need to restate revenues or to
incur additional cost which would impact our margins and reported results.
Valuation of Intangibles. Purchase accounting for an acquisition requires use of
accounting estimates and judgments to allocate the purchase price to the fair
market value of the assets and liabilities purchased. Our business acquisitions
typically result in goodwill and other intangible assets. The determination of
the value of such intangible assets requires management to make estimates and
assumptions that affect the amount of future period amortization expenses and
possible impairment expense that we will incur. Periodically we review the
values assigned to long-lived assets using an estimate of the undiscounted cash
flows of the entity over the remaining life of the asset. Any resulting
impairment could require a write-down that would have a material adverse impact
on our financial condition or results of operations.
Valuation of Investments. We hold minority interests in non-publicly traded
companies whose values are difficult to determine and are based on management's
estimate of realizability of the carrying value of the investment. Future
adverse changes in market conditions, poor operating results or lack of progress
of the underlying investment could result in losses or an inability to recover
the current carrying value of the investment. Our policy is to record an
impairment charge when we believe an investment has experienced a decline in
value that is other than temporary. In the March 31, 2002 quarter, we recorded
an impairment charge of $250,000 related to one investment. Other such charges
could have a material adverse impact on our financial condition or results of
operations. We also hold minority interests in several publicly-traded companies
whose shares experience price volatility and are thinly traded. The carrying
value of these investments reflects the market value of the shares at the
balance sheet date. Future values could increase or decrease and we may not be
able to realize the current carrying value due to changes in the market price of
the stock or limited liquidity of the stock.
Page 10
FACTORS THAT MAY AFFECT FUTURE OPERATIONS
Future operations in both the Information Technology and Industrial Products
segments are subject to risks and uncertainties that may negatively impact our
results or projected cash requirements. In addition, the value of our
investments are impacted by a number of factors beyond our control. Among the
factors that may affect our consolidated results of operations are delays in
product development, undetected software errors, competitive pressures,
technical difficulties, market acceptance of our products, availability of
technical personnel, changes in customer requirements, delays in customer
payments, changes in financial markets, performance and financial condition of
affiliate or investee companies, and general economic conditions.
In early January 2002, we acquired control of the Delos Payment Systems board of
directors as result of a default under a secured loan and, consequently, we are
consolidating the Delos operations and our 27 percent ownership of common stock
of Delos in 2002. We provided additional borrowings of $1.5 million to Delos
under the loan and are considering investing funds to increase our ownership to
a significant majority position. It will incur operating losses that we are
consolidating and it will require cash to operate in 2002. While we have no
contractual requirement to provide additional funding, we are likely to use part
of our available cash balances to support the Delos operations in the near-term.
If Delos is unsuccessful or if we decide to suspend funding, we may not recover
all of these funds.
Furthermore, Delos is subject to a number of risks that may impact negatively
its future performance, including significant non-competition restrictions
entered into at the time of the sale of PaySys in April 2001 that limit who
Delos can sell its products to for varying time periods through 2006, risks
associated with completing and testing the initial software application, lack of
a proven business model and customers, a limited operating history, and unproven
market acceptance of the Delos software features and architecture.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS, REPORTS ON FORM 8-K
A. There are no exhibits filed with this report.
B. The Company filed a Report on Form 8-K dated May 10, 2002.
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: May 15, 2002 By: /s/ J. LELAND STRANGE
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J. Leland Strange
Chief Executive Officer, President
Date: May 15, 2002 By: /s/ BONNIE L. HERRON
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Bonnie L. Herron
Chief Financial Officer