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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
Commission file number 1-9330
INTELLIGENT SYSTEMS CORPORATION
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(Exact name of Registrant as specified in its charter)
GEORGIA 58-1964787
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(State or other jurisdiction (I.R.S. Employer 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of March 15, 2001, 5,623,784 shares of Common Stock were outstanding. The
aggregate market value of the Common Stock held by non-affiliates of the
registrant was $14,263,000 (computed using the closing price of the Common Stock
on March 15, 2001 as reported by the American Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 17, 2001, are
incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business........................................................................................3
2. Properties......................................................................................7
3. Legal proceedings...............................................................................7
4. Submission of matters to a vote of security holders.............................................7
PART II
5. Market for the registrant's common equity and related stockholder matters.......................7
6. Selected financial data.........................................................................8
7. Management's discussion and analysis of financial condition and results of operations...........8
7A. Quantitative and qualitative disclosures about market risk.....................................11
8. Financial statements and supplementary data....................................................11
9. Changes in and disagreements with accountants on accounting and financial disclosure...........11
PART III
10. Directors and executive officers of the registrant.............................................11
11. Executive compensation.........................................................................12
12. Security ownership of certain beneficial owners and management.................................12
13. Certain relationships and related transactions.................................................12
PART IV
14. Exhibits, financial statement schedules and reports on Form 8-K................................12
Signatures ...............................................................................................15
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PART I
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-K may contain
forward-looking statements relating to Intelligent Systems Corporation
(ISC). 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.
ITEM 1. BUSINESS
OVERVIEW
Intelligent Systems Corporation, a Georgia corporation, has operated either in
corporate or partnership form since 1973 and its securities have been publicly
traded since 1981. In this report, sometimes we use the terms "company", "we",
"ours" and similar words to refer to Intelligent Systems Corporation. We
operated as a master limited partnership from 1986 to 1991, when we merged into
the present corporation. Our executive offices are located at 4355 Shackleford
Road, Norcross, Georgia 30093 and our telephone number is (770) 381-2900.
Since the early 1980's, we have conducted our operations principally through
majority owned subsidiaries or minority owned affiliates to which we devote
extensive management resources. Frequent acquisitions of or investment in
promising early stage companies in the technology and healthcare industries have
long been components of our overall strategy. Since most of our companies are
early or growth stage businesses, from time to time they may require funding, in
excess of what we can provide, from third parties or the public markets to
support their business plan. They may seek to be acquired or to merge with
another company in response to various market conditions or if circumstances
indicate that operating as a stand-alone company is not in the their best
interest. As a result, our ownership position frequently changes from time to
time. Moreover, in the past several years, we have sold or discontinued several
subsidiaries - InterQuad Services, Intelligent Enclosures, PsyCare America and
HumanSoft - generally in response to what we believe to be unfavorable industry
trends or prospects as stand-alone companies. We anticipate that generally lower
valuations for early stage companies and our increased liquidity (based on a
pending transaction discussed in Note 19 to the Consolidated Financial
Statements) will allow us to return to our historical practice by increasing the
number of companies we control and day-to-day management of their operations.
Our main focus is to help entrepreneurs build valuable companies by providing
operational and strategic management, practical business advice, early stage
equity capital, a network of business contacts and, in some cases, a proven
incubator program. Depending upon the needs of the partner company, we will
undertake a variety of roles which often include day-to-day management of
operations, board of director participation, financing, market planning,
strategic contract negotiations, personnel and administrative functions, etc.
Most of our partner companies are involved in the information technology
industry (business to business, e-commerce, software) although we are involved
in other promising industries as well (biotechnology, wireless, etc.).
INTELLIGENT SYSTEMS CORPORATION
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FINANCIAL REPORTING.
We consolidate the results of operations of our partner companies in which we
own a majority interest. We account for investments in affiliate companies in
which we own 20 to 50 percent by the equity method. In general, under the equity
method, we include our pro rata share of the income or loss generated by each of
these businesses as investment income (loss) on a quarterly basis. These equity
losses and income decrease or increase, respectively, our cost basis of the
investment. However, if there is no commitment for ISC to provide additional
funding to the company, to the extent losses exceed our cost, we do not record a
value below zero. Because of this equity method accounting treatment, some of
our affiliate companies, such as PaySys International, are recorded at zero on
our balance sheet but, we believe their estimated market value is substantially
higher. Privately owned partner companies in which we own less than 20 percent
of the equity are carried at the lower of cost or market. We do not mark up the
value of privately-owned businesses even when they raise money at higher
valuations. We are often actively engaged in managing strategic and operational
issues with our non-consolidated companies and devote significant resources to
the development of the business.
CONSOLIDATED COMPANIES
During 2000, our consolidated companies included ChemFree Corporation, QS
Technologies and PsyCare America. They operate in two industry segments:
technology related products and services, and health care services. Effective
November 2000, we sold the principal operating assets of PsyCare in response to
continuing unfavorable market conditions in the managed health care environment.
Therefore, we will operate only in the technology industry in 2001. Our
companies are relatively small in size and are subject to greater fluctuation in
revenue and profitability than larger, more established businesses. For ease of
comprehension, the business discussion which follows contains information on
products, markets, competitors, research and development and manufacturing for
our operating subsidiaries, organized by industry sector and by company. For
further information concerning our historical domestic and foreign operations,
see Notes 14 and 16 in the accompanying Notes to the Consolidated Financial
Statements.
INDUSTRY SEGMENT: TECHNOLOGY RELATED PRODUCTS AND SERVICES
CHEMFREE CORPORATION - ChemFree Corporation (ChemFree), an incubator company
since its inception, designs, manufactures and markets a line of parts washers
under the SmartWasher(TM) trademark. SmartWashers use an advanced
bio-remediation system to clean automotive and machine parts without using
hazardous, solvent-based chemicals. SmartWashers consist of a molded plastic tub
and sink, recirculating pump, heater, control panel, filter with microorganisms,
and aqueous based degreasing solutions. Unlike traditional solvent based
systems, there are no regulated, hazardous products used or produced in the
process and the SmartWasher system is completely self-cleaning. ChemFree sells
replacement fluid and filters to its customers on a regular basis after the
initial parts washer sale.
ChemFree's markets include the automotive, transportation, industrial and
military markets. The automotive market includes companies with fleets of
vehicles to maintain; automobile manufacturers with extensive service networks
such as Chrysler, GM and BMW; and individual and chains of auto repair shops and
auto parts suppliers. The industrial market includes customers with machinery
that requires routine maintenance, such as in the textile industry. Military
applications include vehicle service depots in all branches of the military.
ChemFree sells its products directly to high volume customers as well as through
several distribution channels, including international distributors in Europe
and the Pacific Rim. ChemFree also sells in competitive bid situations and under
a GSA schedule to government agencies. The ChemFree business is not seasonal and
would not be impacted significantly by the loss of one customer.
ChemFree competes with larger, established companies using solvent-based
systems, other small companies using non-hazardous systems, and hazardous waste
hauling firms. Although smaller than the established solvent-based firms,
ChemFree believes it is competitive based on product features, positive
environmental impact, improved health and safety features, elimination of
regulatory compliance, and price.
Warranty service, typically covering a one-year period, is provided by ChemFree
personnel or through its distributors and dealers. ChemFree subcontracts the
manufacturing of major sub-assemblies built to its specifications to various
vendors and performs final assembly and testing at its own facility. There are
multiple sources available for subassemblies.
INTELLIGENT SYSTEMS CORPORATION
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QS TECHNOLOGIES - QS Technologies operates from its Greenville, South Carolina
location, providing public health management software products, maintenance and
support services to its installed customer base as well as new customers. QS
Technologies' products allow public health agencies to capture, analyze and
manage client information such as immunization, maternal health, and birth and
death records. The market includes local, state and federal public health
agencies nationwide as well as other government agencies, hospitals and clinics.
The market is fragmented and limited in size. QS Technologies competes against a
number of other software companies, many of which are small vendors like itself
and some of which are larger with access to greater resources. Typically, QS
Technologies provides its customers with service and support under annual
contracts. Sales are typically made in response to competitive bids and may take
six to twelve months to complete. QS Technologies is engaged in new product
development (including a web-based initiative) and sales activities to expand
its customer base and generate future revenue.
INDUSTRY SEGMENT: HEALTH CARE SERVICES
Until it ceased operations in November 2000, PsyCare provided specialty
treatment programs for individuals with psychiatric and psychological disorders,
including depression and substance abuse. The programs were conducted under
PsyCare's Rapha(R) trademark and directed toward individuals who prefer a
treatment approach that integrates their physical and psychological needs with
their Christian beliefs. The market for PsyCare's treatment programs included
adults and adolescents suffering from illnesses such as depression, addiction
and behavioral disorders.
Traditionally, PsyCare's programs have been in-patient hospital programs
although some individual and group counseling services were marketed and
conducted via the Internet and telephone. Historically hospitals in mid to large
size metropolitan areas contracted with PsyCare to conduct a Rapha treatment
program in the hospital. In 1999, PsyCare implemented a licensing program which
allowed hospitals to license the Rapha program for a monthly fee and implement
the program using the hospital's existing medical and therapy staff.
The number of hospital-based programs declined in the past three years for a
number of reasons. The average length of stay for in-hospital treatment declined
dramatically and managed care payors reimbursed treatment providers and
hospitals at much lower rates. Furthermore, managed care placed increased
emphasis on drug-based treatment programs, with little or no hospital stay.
Given these trends, PsyCare reduced overhead costs and explored alternative
business models. Although it was successful in maintaining profitability in 1999
and 1998, the market outlook did not improve in 2000 and in November 2000 we
determined that the best alternative to avoid losses in the future was to sell
the operating assets and close the operations.
INCUBATOR PROGRAM
For more than ten years, we have operated the Intelligent Systems Incubator at
our corporate facility in the suburbs of Atlanta, Georgia. We believe our
incubator program is one of the longest running and largest self-funded
incubator programs in the United States. Our incubator companies, in exchange
for a monthly facility fee, have access to resources such as office space,
conference facilities, telecommunication and network infrastructure, education
programs, business advice and planning, a network of professional services, and
financial capital. Depending upon the experience and needs of the founding
entrepreneur, incubator companies will choose to use some or all of the
available resources. The incubator staff takes care of time-consuming
infrastructure issues so the entrepreneur can focus on driving business
development. The Intelligent Systems Incubator provides us with the opportunity
for day-to-day involvement with emerging companies that may become partnership
companies, either as majority-owned subsidiaries or minority-owned affiliates.
Income from incubator companies also reduces our total facility and personnel
costs. In 1999, ChemFree Corporation, an incubator company and majority owned
company, was named Incubator Company of the Year (Manufacturing category) by the
National Business Incubation Association.
We are equity partners in some but not all of the companies in our incubator
program. Because we have a large incubator facility, we can offer the benefits
of the incubator program to non-affiliate companies. Conversely, many of our
subsidiary and minority owned partner companies are not physically located in
our incubator. In attracting companies to our incubator program, we compete with
other sources of business assistance, facilities and financial capital that may
be available to the entrepreneur. These sources include other incubator programs
as well as angel and venture capital investors, corporate partner relationships
and merger/sale opportunities.
INTELLIGENT SYSTEMS CORPORATION
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AFFILIATED PARTNER COMPANIES
An important part of our business is to seek out and form relationships with
companies that we believe are involved in promising technologies or markets with
good growth potential. From time to time, we have acquired or invested in such
companies and expect to continue to do so as a regular part of our strategy.
When we become involved, most of these companies are privately held, early stage
companies in technology-related fields. We are often actively involved in
helping the companies develop and implement their business plans. Some examples
of our involvement are as follows:
- A significant equity position in PaySys International, Inc. (PaySys), a
leading software company involved in providing software systems for
processing credit transactions. At December 31, 2000, we owned a 33
percent common stock interest in PaySys (which is approximately 27.8
percent on a fully diluted basis). Revenue at PaySys was $40.5 million
in 2000. PaySys spent significant amounts on new product development
during recent years to increase its technological leadership. In recent
years, our ownership in PaySys declined as PaySys raised capital from
Oak Partners, GE Capital and Advent, all large venture capital firms,
to support significant new product development programs. Our investment
in PaySys is recorded at zero on our balance sheet as a result of the
equity method of accounting. Refer to Note 19 to the Consolidated
Financial Statements for details relating to the pending sale of
PaySys.
- A 40 percent equity position in VISaer, Inc., a privately held company
(formerly Visibility, Inc.) that was historically involved in
engineer-to-order software. The downturn in the ERP industry in 1999
had a negative impact on sales growth and profitability. Consequently
in 2000, VISaer sold off its historical business line to concentrate on
a new software product line addressing the global aircraft maintenance,
repair and overhaul market. We expect to continue to actively support
VISaer in 2001. Refer to Note 4 to the Consolidated Financial
Statements.
- An 18 percent interest in Cirronet Inc. (formerly Digital Wireless
Corporation), a privately held and former incubator company involved in
wireless telecommunications products for industrial and commercial
markets as well as residential and small business wireless Internet
markets. Refer to Note 4 to the Consolidated Financial Statements.
- A minority equity position in Novient, a privately held company
involved in web-based resource and revenue management solutions for the
professional services market. Novient's growth as a leader in its
industry has been supported by recent funding from venture capital
firms including Hummer Winblad, Mellon Ventures and Noro-Moseley.
- A minority ownership in Atherogenics, a pharmaceutical company involved
in novel drugs which address inflammatory diseases such as
cardiovascular disease and asthma. Atherogenics completed its initial
public offering in August 2000. We were part of the original investor
group of Georgia-based institutions supporting the company's efforts to
commercialize technology developed at Emory University.
- The largest non-founder shareholder in Medizeus, a start-up company
that provides artificial intelligence and reporting tools for
radiologists focused initially on the mammography market. Medizeus'
technology was originally developed by its founders based on their
research at Georgia Tech.
- In March 2000, we sold most of our ownership position in Risk
Laboratories, a software company involved in risk management software,
resulting in a gain of $8.6 million on the transaction. We retained a
seven percent equity position in the former affiliate company after the
sale.
- A minority position in RF Solutions, Inc., a start-up company that is
developing proprietary radio frequency integrated chips used in
broadband wireless products. The development stage company is building
on the founding team's world-renowned research at Georgia Tech to
develop commercial products.
- An interest in CoreXpand, an early-stage software company with an
e-commerce application for promotional and incentive product
distributors. CoreXpand is part of the Intelligent Systems Incubator
program.
INTELLIGENT SYSTEMS CORPORATION
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PATENTS, TRADEMARKS AND TRADE SECRETS
The ChemFree subsidiary has several patents (both issued and pending) covering
certain aspects of its products and processes. It may be possible for
competitors to duplicate certain aspects of these products and processes even
though we regard such aspects as proprietary. We have registered with the US
Patent and Trademark Office and various foreign jurisdictions numerous
trademarks and service marks for our products. We believe that an active
trademark and copyright protection program is important in developing and
maintaining brand recognition and protecting its intellectual property. Our
companies presently market their products under trademarks and service marks
such as SmartWasher, OzzyJuice and others.
PERSONNEL
As of February 28, 2001, we had 51 full-time equivalent employees in our
majority-owned companies. Our employees are not represented by a labor union, we
have not had any work stoppages or strikes and we believe our employee relations
are good.
ITEM 2. PROPERTIES
At February 28, 2001, we have leases covering approximately 137,500 square feet
in Atlanta, GA and 6,100 square feet in Greenville, SC to house our
manufacturing, sales, service and administration operations. We believe our
leased facilities are adequate for our existing and foreseeable business
operations. A portion of the Atlanta corporate facility is subleased to
businesses in our technology business incubator.
ITEM 3. LEGAL PROCEEDINGS
In 1999, a former consultant of the ChemFree subsidiary brought a suit against
ChemFree and other third parties challenging the ownership of certain of
ChemFree's patents. ChemFree and other parties to the suit strongly deny the
allegations, have filed a counterclaim and are vigorously defending the suit,
which is pending in the Superior Court of Gwinnett County, Georgia. In addition,
we are party to a small number of other legal matters arising in the ordinary
course of business. It is management's opinion that none of these other matters
will have a material adverse impact on our consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our shareholders during the fiscal
quarter ended December 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is listed and traded on The American Stock Exchange ("AMEX")
under the symbol "INS". The following table sets forth, for the periods
indicated, the range of high and low sales prices for our common stock as
reported by AMEX.
YEAR ENDED DECEMBER 31, 2000 1999
HIGH LOW HIGH LOW
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1ST QUARTER 14 1/2 3 5/8 2 5/8 1 9/16
2ND QUARTER 10 1/4 3 1/2 3 5/8 2
3RD QUARTER 6 1/4 3 3/4 3 5/8 2 3/8
4TH QUARTER 6 2 7/8 4 1/4 2 1/16
We had 422 shareholders of record as of February 28, 2001. This number does not
include beneficial owners of our common stock whose shares are held in the names
of various dealers, clearing agencies, banks, brokers and other fiduciaries. We
paid a special cash dividend of $0.52 per common share on April 20, 2000. The
company may pay cash dividends from time to time on an irregular basis but has
not in the past paid regular dividends and does not expect to do so in the
future.
INTELLIGENT SYSTEMS CORPORATION
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ITEM 6. SELECTED FINANCIAL DATA
(in thousands except share amounts)
TWELVE MONTHS ENDED DECEMBER 31, 2000 1999 1998 1997 1996
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Net Sales $ 7,027 $ 8,479 $ 18,253 $ 21,160 $ 23,678
Net Income (Loss) 8,215(a) 249(b) (1,548)(c) (7,176)(d) 4,239(e)
Net Income (Loss) Per Share (Basic) 1.47 0.05 (.30) (1.41) 0.80
Total Assets 18,057 13,658 17,099 19,091 24,927
Working Capital 3,294 (48) (1,827) (1,068) 8,554
Long-term Debt -- 363 900 1,000 --
Stockholders' Equity 14,674 10,209 9,641 11,396 21,630
Cash Dividends Paid Per Common Share $ 0.52 -- -- -- --
Shares Outstanding at Year End 5,623,784 5,114,467 5,104,467 5,104,467 5,126,767
a. Includes investment gains of $9.6 million and $771,000 in net losses in
equity of affiliates.
b. Includes investment gains of $2.2 million and $948,000 in net losses in
equity of affiliates.
c. Includes $944,000 charge for purchased in-process R&D, $955,000 charge
to discontinue product lines, $5.2 million gain on investments and
$593,000 income in equity of investments.
d. Includes $953,000 charge for purchased in-process R&D, $2.6 million
gain on investments, $3.0 million write-off of note receivable and $2.3
million loss in equity of investments.
e. Includes net gains of $6.9 million on investments and non-recurring
charges of $1.25 million.
Please refer to Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations for a discussion of material acquisitions
or dispositions that may affect the comparability of this financial information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Form 10-K 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
SUMMARY OF RESULTS - Our consolidated subsidiaries during 2000 are ChemFree
Corporation (bio-remediating parts washers), QS Technologies (health and human
services software) and PsyCare America (specialty psychiatric treatment
programs). The net loss from operations in 2000 was $177,000 greater than the
operating loss in 1999, mainly due to losses incurred at the PsyCare America
subsidiary prior to closing its operations in the fourth quarter of 2000. Net
profit in 2000 was $8,215,000 compared to $249,000 in 1999 mainly reflecting a
gain of $8,622,000 from the first quarter 2000 sale of most of our ownership of
Risk Laboratories. The net loss from operations in 1999 was significantly lower
than in 1998 principally
INTELLIGENT SYSTEMS CORPORATION
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because we sold or discontinued the HumanSoft and InterQuad businesses, which
had sustained large losses in 1998. Operating losses in 1999 are principally
corporate overhead and expenses related to the technology incubator program.
In the past several years, a significant portion of our income has been derived
from sales of holdings in affiliate and other minority-owned companies. We also
recognize on a quarterly basis our pro rata share of the income or losses of
affiliate companies accounted for by the equity method. The timing and amount of
gain or loss recognized as a result of a sale or the amount of equity in the
income or losses of affiliates generally are not under our control and are not
necessarily indicative of future results.
SALES - Net sales in 2000 were $7,027,000, a decline of 17 percent compared to
1999. The majority of the decline is due to lower revenue at the PsyCare
operation, reflecting fewer hospital-based treatment programs and the sale of
PsyCare operating assets in November 2000. In addition, year-to-year revenue is
down because the InterQuad operation had contributed revenue in 1999 but not in
2000 because the subsidiary was sold in 1999. QS Technologies revenue was
essentially flat year-to-year while ChemFree's sales in both domestic and
international markets grew slightly in 2000 compared to the prior year. Going
forward, we will no longer recognize revenue from the PsyCare subsidiary because
we sold its principal operating assets in November 2000 due to continuing
unfavorable market conditions.
Net sales in 1999 were $8,479,000, a decline of 54 percent compared to 1998.
Almost 80 percent of the decrease is related to the sale of the InterQuad
Services business in early 1999 and the discontinuation of certain HumanSoft
operations. The QS Technologies subsidiary of HumanSoft continues to generate
license and maintenance revenue from software products and services. ChemFree
experienced an increase in revenue while PsyCare's revenue declined as the firm
closed certain hospital programs and moved to a licensing arrangement with more
of its programs. Under the licensing arrangement, although revenue declined,
expenses associated with the programs also declined proportionately.
Health care services revenues represent 13 percent, 21 percent and 23 percent of
total revenues for 2000, 1999, and 1998, respectively. The decline in the
contribution of the health care services sector is due to fewer inpatient
programs, lower reimbursement rates, a shift to licensing arrangements instead
of fixed fee contracts and, finally, the sale of the PsyCare operating assets in
November 2000. Revenue derived from international sales was 11 percent in 2000
compared to 16 percent in 1999 and 39 percent in 1998. The decrease in 2000 and
1999 is a direct result of the sale of the InterQuad Services group, the revenue
of which was all international.
COST OF SALES - In 2000, cost of sales was 42 percent of revenue compared to 47
percent of revenue in 1999. Each of the subsidiaries lowered their cost of sales
as a percent of revenue in the current period, with the largest increase at the
QS Technologies subsidiary principally due to lower personnel costs. ChemFree's
cost of sales, as a percent of revenue was slightly lower year-to-year due to
reduced material costs.
In 1999, cost of sales was 47 percent of revenue compared to 68 percent in 1998.
The change is due to the fact that both InterQuad Services and the discontinued
HumanSoft operations had much higher cost of sales in 1998 than do the
continuing operations in 1999. Cost of sales as a percent of revenue for the
continuing operations was not significantly different in 1999 compared to 1998.
OPERATING EXPENSES - In 2000, marketing expenses were down eight percent
compared to the prior year, mainly because the prior year amounts included
marketing expenses at InterQuad services for the first part of the year.
ChemFree increased marketing expenses during 2000 to generate and support higher
revenue levels. We anticipate that marketing expenses at both ChemFree and QS
Technologies will increase moderately next year to generate new and repeat
customer sales. General and administrative expenses were lower by almost
$300,000 in 2000 compared to 1999 but represent a higher percent of annual
revenue. PsyCare reduced G&A expenses in 2000 through payroll and facility
expense reductions. ChemFree's legal expenses were higher in 2000 than in 1999
for legal expenses related to protecting intellectual property assets. Corporate
expenses were higher in 2000 compared to 1999 due to $175,000 in bonuses related
to the successful sale of Risk Laboratories as well as non-recurring
expenditures to revise the company's website and other corporate communications
activities. Research and development expenses at both ChemFree and QS
Technologies increased in 2000 as compared to 1999 to support development of new
and enhanced product offerings at the respective subsidiaries and we anticipate
continuing these efforts in the future at similar levels.
INTELLIGENT SYSTEMS CORPORATION
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In 1999, marketing expenses declined in both absolute terms and as a percentage
of revenue compared to 1998. Much of the year-to-year change is attributed to
the sale of the InterQuad Services group in early 1999 and the discontinuation
of HumanSoft operations in 1998. In addition, PsyCare decreased its marketing
expenses in line with lower revenue from hospital based programs. General and
administrative expenses were $3,469,000 compared to $7,346,000 in 1998. Almost
70 percent of the year-to-year change is due to the sale of InterQuad Services
and the downsizing of the HumanSoft operation. Included in the 1999 results are
non-recurring administrative and legal expenses totaling $156,000 related to the
HumanSoft bankruptcy case. In addition, in 1999 PsyCare reduced its facility and
personnel expenses and ISC's corporate expenses were lower as well, mainly due
to lower personnel expenses. Research and development expense declined in 1999
compared to 1998 principally because of the downsizing of the HumanSoft
operation.
INTEREST INCOME - In 2000, we generated net interest income of $434,000 compared
to net interest expense of $88,000 and $290,000 in 1999 and 1998, respectively.
In 2000, we earned interest on substantially higher levels of cash during the
first half of the year and also earned interest on a higher level of notes
receivable at higher rates of interest in 2000, as compared to 1999. In 1999,
interest expense associated with InterQuad Services was lower than in 1998 and
the domestic operations paid less interest on notes payable to third parties
because there was a lower level of debt in 1999 as compared to 1998.
INVESTMENT INCOME AND EQUITY EARNINGS (LOSSES) OF AFFILIATES - In 2000,
investment income related to affiliated companies was the major source of
company profits. For 2000, we recorded a gain of $8.6 million on the sale of our
ownership in Risk Laboratories as well as investment gains totaling $1.0 million
related to sales of shares of common stock of Primus and SI. Offset against
these gains were $771,000 in net losses in equity of affiliates accounted for by
the equity method, principally related to VISaer, Inc. (formerly Visibility,
Inc.). Refer to Note 3 for details on the sale transactions mentioned in this
section.
In 1999, we recorded net investment income of $1.2 million compared to net
investment income of $5.8 million in 1998 and a net investment loss of $2.6
million in 1997. The main components of investment income in 1999 include gains
totaling $1.2 million on the sale of certain equity holdings in three private
software companies, a gain of $995,000 on the sale of our holdings in
MediaMetrix stock and $948,000 in net losses in the equity of affiliates
accounted for by the equity method. Refer to Note 3 for details on the sale
transactions mentioned in this section.
The main components of 1998 investment income include a gain of $1.0 million on
the sale of IQ Software common stock, a gain of $2.5 million on the sale of
PaySys stock, a gain of $457,000 on the sale of Paragon Interface stock, a gain
of $1.2 million on the sale of the IE business, and $593,000 in net gains in the
equity of affiliates accounted for by the equity method. Refer to Note 3 for
details on the sale transactions mentioned in this section.
OTHER INCOME - Other income/expense in each of the last three years consists
mainly of various minor, non-recurring sources of income and expense. However,
in 1999, this category includes a net non-recurring charge of $141,500 related
to final settlement of the amounts owed to creditors in the HumanSoft bankruptcy
case.
TAXES - We incurred income tax expense totaling $203,000 in 2000 relating to
operating income at the QS Technologies subsidiary and a small amount of
investment income related to the Risk Laboratories sale that could not be
sheltered by tax loss carryforwards. We had no income tax expense in 1999
because investment gains were offset by capital loss carryforwards. We
recognized a tax benefit in 1998 due to a net operating loss carryback at the
JK, Inc. subsidiary.
COMMON SHARES - In 2000, executive officers exercised options to acquire a total
of 701,972 shares of common stock and turned in to the company a total of
101,769 shares of common stock in partial payment of the exercise price. The
company also repurchased and retired 24,900 shares during 2000 pursuant to an
ongoing stock repurchase plan announced in August 2000. As a result, 5,623,784
shares were outstanding at December 31, 2000 and weighted average basic shares
outstanding in 2000 increased to 5,606,715 compared to 5,106,134 in 1999. In
1999, the exercise of a stock option to acquire 10,000 shares increased the
number of shares outstanding at December 31, 1999 to 5,114,467.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2000, our principal sources of cash were $8.7
million, net of sales expenses, from the sale of our equity interest in Risk
Laboratories, $296,000 from the sale of 9,515 shares of S1 Corporation and $1.3
million from the sale of 66,431 shares of Primus stock. We also borrowed $1.5
million on our bank line of credit to fund a short-term loan to PaySys. During
2000, our principal uses of cash were $3.0 million to pay a $0.52 per share cash
dividend to shareholders
INTELLIGENT SYSTEMS CORPORATION
- 10 -
11
in April 2000; a total of $3.6 million for new and follow-on investments in
early stage technology partner companies; a total of $3.8 million net, in loans
to investee companies; and $112,000 to repurchase 24,900 shares of our common
stock.
In 1999 we derived $902,000 cash from the sale of our remaining holdings in
Information Advantage (formerly IQ Software), $416,000 cash from sales of part
of our holdings in two privately held software companies and $1.1 million cash
from the sale of our holdings in MediaMetrix, Inc. During the year, we drew down
a total of $1.25 million under a bank line of credit which was paid down
subsequently to $100,000 at year-end 1999. We used approximately $1.1 million
cash in 1999 to pay down short-term notes payable to third parties (not
including banks), $845,000, net, for investments in new businesses or follow-on
funding for prior investments, and $310,000 for payments for legal expenses and
creditor settlements under the confirmed Plan of Reorganization of HumanSoft.
Notes and interest receivable increased at December 31, 2000 compared to the
prior year end primarily due to loans to affiliate companies. The balances at
December 31, 2000 include $3.5 million related to short-term bridge loans to
PaySys and $285,000 and $300,000 related to short-term and long-term loans,
respectively, to VISaer, Inc. Long-term investments increased year-to-year as a
result of new investments in early stage technology companies totaling $1.9
million, offset by sales of some investments made in earlier periods, as
described more fully in Note 3 to the Consolidated Financial Statements.
We believe we have adequate funding for anticipated cash needs for the
foreseeable future. At December 31, 2000, we have approximately $500,000
available under a bank line of credit. In January 2001, we completed a
transaction that netted $450,000 cash from the sale of part of our holdings in
Risk Laboratories. We also have the right to require the purchaser to acquire
approximately one half of our remaining ownership in Risk Laboratories for $1.0
million with 30 days notice. Other sources of near-term liquidity include our
holdings in "available-for-sale" securities, which have a market value at
December 31, 2000 of $2.3 million. Subsequent to year-end 2000, we entered into
an agreement to sell our common stock interest in PaySys to First Data
Corporation. At the close of the transaction, we expect to receive $17.0 to
$19.0 million cash in consideration of the sale of our shares and $3.5 million
cash, plus interest, representing payment of the outstanding principal due us on
the $3.5 million bridge loans. Refer to Note 19 for details regarding the PaySys
and Risk sale transactions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report. See
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No independent public accountant of the company has resigned, indicated any
intent to resign or been dismissed as the independent public accountant of the
company during the two years ended December 31, 2000 or at any time afterward.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Please refer to the subsection entitled "Proposal 1 - The Election of Directors
- Nominees" and "Proposal 1 - The Election of Directors - Executive Officers" in
our Proxy Statement for the Annual Meeting of Shareholders to be held on May 17,
2001 for information about those individuals nominated as directors and about
the executive officers of the company. This information is incorporated into
this Item 10 by reference. Information regarding compliance by directors and
executive officers of the company and owners of more than 10 percent of our
common stock with the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, is contained under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement mentioned
above. This information is incorporated into this Item 10 by reference.
INTELLIGENT SYSTEMS CORPORATION
- 11 -
12
ITEM 11. EXECUTIVE COMPENSATION
Please refer to the subsection entitled "Proposal 1 - The Election of Directors
- Executive Compensation" in the Proxy Statement referred to in Item 10 for
information about management compensation. This information is incorporated into
this Item 11 by reference, except that we specifically do not incorporate into
this Item 11 the information in the subsections entitled "Proposal 1 - The
Election of Directors - Executive Compensation - Board Compensation Committee
Report on Executive Compensation" and "Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Please refer to the subsection entitled "Voting - Principal Shareholders,
Directors and Certain Executive Officers" in the Proxy Statement referred to in
Item 10 for information about the ownership of our $0.01 par value common stock
by certain persons. This information is incorporated into this Item 12 by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please refer to the subsection entitled "Certain Transactions" in the Proxy
Statement referred to in Item 10 for information about certain related party
transactions. This information is incorporated into this Item 13 by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
1. Financial Statements
The following consolidated financial statements and related reports of
independent public accountants are included in this report and are incorporated
by reference in Part II, Item 8 hereof. See the Index to Financial Statements
and Supplemental Schedules on page F-1 hereof.
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the three years ended
December 31, 2000
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the three years ended December 31, 2000
Consolidated Statements of Cash Flow for the three years ended December
31, 2000 Notes to Consolidated Financial Statements
2. Financial Statement Schedules
We are including the financial statement schedules listed below in this
report. We omitted all other schedules required by certain applicable accounting
regulations of the Securities and Exchange Commission because the omitted
schedules are not required under the related instructions or do not apply or
because we have included the information required in the consolidated financial
statements or notes thereto. See the Index to Financial Statements and
Supplemental Schedules on page F-1 hereof.
Schedule II - Valuation and Qualifying Accounts and Reserves
Report of Independent Auditors for PaySys International, Inc.
Consolidated Balance Sheets of PaySys at December 31, 2000 and 1999
Consolidated Statements of Operations of PaySys for the three years
ended December 31, 2000
Consolidated Statements of Changes in Stockholders' Equity of PaySys for
the three years ended December 31, 2000
Consolidated Statements of Cash Flow of PaySys for the three years ended
December 31, 2000 Notes to
Consolidated Financial Statements of PaySys
INTELLIGENT SYSTEMS CORPORATION
- 12 -
13
Report of Independent Public Accountants for VISaer, Inc.
(for 2000 statements)
Consolidated Balance Sheet of VISaer, Inc. at December 31, 2000
Consolidated Statement of Operations of VISaer, Inc. for the year ended
December 31, 2000
Consolidated Statement of Comprehensive Loss of VISaer, Inc. for the
year ended December 31, 2000
Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Deficit of VISaer, Inc. for the year ended
December 31, 2000
Consolidated Statement of Cash Flow of VISaer, Inc. for the year ended
December 31, 2000
Notes to Consolidated Financial Statements of VISaer, Inc.
Report of Independent Public Accountants for Visibility, Inc. (for two
years ended December 31, 1999)
Consolidated Balance Sheets of Visibility at December 31, 1999
Consolidated Statements of Operations of Visibility for the two years
ended December 31, 1999
Consolidated Statements of Changes in Stockholders' Equity of Visibility
for the two years ended December 31, 1999
Consolidated Statements of Cash Flow of Visibility for the two years
ended December 31, 1999
Notes to Consolidated Financial Statements of Visibility
Report of Independent Public Accountants for Cirronet, Inc.
Balance Sheet of Cirronet, Inc. at December 31, 2000 (unaudited) and
December 31, 1999 (audited)
Statement of Operations of Cirronet, Inc. for the year ended December
31, 2000 (unaudited) and the year ended December 31, 1999 (audited)
Statement of Changes in Stockholders' Equity of Cirronet, Inc. for the
year ended December 31, 2000 (unaudited) and the year ended December
31, 1999 (audited)
Statement of Cash Flow of Cirronet, Inc. for the year ended December
31, 2000 (unaudited) and the year ended December 31, 1999 (audited)
Notes to Financial Statements of Cirronet, Inc.
3. Exhibits
We are filing the following exhibits with this report or incorporating
them by reference to earlier filings. Shareholders may request a copy of any
exhibit by contacting Bonnie L. Herron, Secretary, Intelligent Systems
Corporation, 4355 Shackleford Road, Norcross, Georgia 30093; telephone (770)
381-2900. There is a charge of $.50 per page to cover expenses of copying and
mailing.
3(i) Articles of Amendment of Articles of Incorporation dated November 25,
1997. (Incorporated by reference to Exhibit 3.1 to the Registrant's
Report on Form 8-K dated November 25, 1997.)
3(ii) Bylaws of the Registrant dated June 6, 1997. (Incorporated by reference
to Exhibit 3(ii) of the Registrant's Form 10-K/A for the year ended
December 31, 1997.)
4.1 See Exhibits 3(i) and 3(ii) for instruments defining rights of holders
of Common Stock and Preferred Stock of Registrant.
4.2 Rights Agreement dated as of November 25, 1997 between the Registrant
and American Stock Transfer & Trust Company as Rights Agent.
(Incorporated by reference to Exhibit 4.1 of the Registrant's Report on
Form 8-K dated November 25, 1997.)
4.3 Form of Rights Certificate. (Incorporated by reference to Exhibit 4.2
of the Registrant's Report on Form 8-K dated November 25, 1997.)
10.1 Lease Agreement dated March 11, 1985, between a subsidiary of the
Registrant and A.R. Weeks. (Incorporated by reference to Exhibit 10.1
to Intelligent Systems Corporation Annual Report on Form 10-K for the
fiscal year ended March 31, 1986.)
10.2 Second Amendment to Lease Agreement dated June 19, 1997 between a
subsidiary of the Registrant and A.R. Weeks. (Incorporated by reference
to Exhibit 10.2 of the Registrant's Form 10-K for the year ended
December 31, 1997.)
INTELLIGENT SYSTEMS CORPORATION
- 13 -
14
10.3 Management Compensation Plans and Arrangements:
(a) Intelligent Systems Corporation 1991 Stock Incentive Plan,
amended June 6, 1997.
(b) Intelligent Systems Corporation Change in Control Plan for
Officers.
(c) Intelligent Systems Corporation Outside Director's Retirement
Plan.
(d) Non-Employee Directors Stock Option Plan.
Item 10.3 (a) is incorporated by reference to Exhibit 4.1 of the
Registrant's Form S-8 dated July 25, 1997.
Items 10.3 (b) and (c) are incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-K for the year ended December 31, 1993.
Item 10.3 (d) is filed herewith.
10.4 Revolving Loan Agreement dated July 2, 1999 between Registrant and
Fidelity National Bank. (Incorporated by reference to Exhibit 10.4 of
the Registrant's Form 10-K for the year ended December 31, 1999.)
10.5 Stock Pledge Agreement dated July 2, 1999 between Registrant and
Fidelity National Bank. (Incorporated by reference to Exhibit 10.5 of
the Registrant's Form 10-K for the year ended December 31, 1999.)
10.6 Second Modification to Loan Documents dated March 7, 2000 between
Registrant and Fidelity National Bank. (Incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K for the year ended December
31, 1999.)
10.7 Third Modification to Loan Documents dated October 9, 2000 between
Registrant and Fidelity National Bank.
10.8 Commercial Promissory Note dated July 2, 1999 in favor of Fidelity
National Bank. (Incorporated by reference to Exhibit 10.7 of the
Registrant's Form 10-K for the year ended December 31, 1999.)
10.9 Second Amendment to Commercial Promissory Note dated March 7, 2000 in
favor of Fidelity National Bank. (Incorporated by reference to Exhibit
10.8 of the Registrant's Form 10-K for the year ended December 31,
1999.)
10.10 Third Amendment to Commercial Promissory Note dated October 9, 2000 in
favor of Fidelity National Bank.
10.11 Conditional Guaranty of Payment dated November 29, 1999 by the
Registrant in favor of certain creditors of HumanSoft LLC, related to
the confirmation of the Amended and Restated Plan of Reorganization of
HumanSoft LLC, a wholly owned subsidiary of the Registrant.
(Incorporated by reference to Exhibit 10.9 of the Registrant's Form
10-K for the year ended December 31, 1999.)
21.1 List of subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst and Young LLP.
23.3 Consent of Moody, Famiglietti and Andronico LLP.
(B) REPORTS ON FORM 8-K.
We did not file any reports on Form 8-K during the quarter ended December 31,
2000.
(C) SEE ITEM 14(A)(3) ABOVE.
(D) SEE ITEM 14(A)(2) ABOVE.
INTELLIGENT SYSTEMS CORPORATION
- 14 -
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTELLIGENT SYSTEMS CORPORATION
Registrant
Date: March 30, 2001 By: /s/ J. Leland Strange
------------------------------------
J. Leland Strange
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
/s/ J. Leland Strange Chairman of the Board, President, March 30, 2001
--------------------------------------- Chief Executive Officer and Director
J. Leland Strange (Principal Executive Officer)
/s/ Bonnie L. Herron Chief Financial Officer March 30, 2001
--------------------------------------- (Principal Accounting and Financial Officer)
Bonnie L. Herron
/s/ Donald A. McMahon Director March 30, 2001
---------------------------------------
Donald A. McMahon
/s/ James V. Napier Director March 30, 2001
---------------------------------------
James V. Napier
/s/ John B. Peatman Director March 30, 2001
---------------------------------------
John B. Peatman
/s/ Parker H. Petit Director March 30, 2001
---------------------------------------
Parker H. Petit
INTELLIGENT SYSTEMS CORPORATION
- 15 -
16
INTELLIGENT SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
The following consolidated financial statements and schedules of the Registrant
and its subsidiaries are submitted herewith in response to Item 8:
FINANCIAL STATEMENTS:
Report of Independent Public Accountants......................................................................F-2
Consolidated Balance Sheets - December 31, 2000 and 1999......................................................F-3
Consolidated Statements of Operations -
Three Years Ended December 31, 2000........................................................................F-4
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income -
Three Years Ended December 31, 2000........................................................................F-5
Consolidated Statements of Cash Flow -
Three Years Ended December 31, 2000........................................................................F-6
Notes to Consolidated Financial Statements....................................................................F-7
FINANCIAL STATEMENT SCHEDULES:
The following supplemental schedules of the Registrant and its subsidiaries are
submitted herewith in response to Item 14(a)(2):
Schedule II - Valuation and Qualifying Accounts and Reserves..................................................S-1
Report of Independent Auditors for PaySys International, Inc..................................................S-2
Consolidated Balance Sheets of PaySys at December 31, 2000 and 1999........................................S-3
Consolidated Statements of Operations of PaySys for the three years ended December 31, 2000................S-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) of PaySys
for the three years ended December 31, 2000.............................................................S-5
Consolidated Statements of Cash Flow of PaySys for the three years ended December 31, 2000.................S-6
Notes to Consolidated Financial Statements of PaySys.......................................................S-7
Report of Independent Public Accountants for VISaer, Inc. (for 2000).........................................S-32
Consolidated Balance Sheet of VISaer, Inc. at December 31, 2000...........................................S-33
Consolidated Statement of Operations of VISaer, Inc. for the year ended December 31, 2000.................S-34
Consolidated Statement of Comprehensive Loss of VISaer, Inc. for the year ended December 31, 2000.........S-35
Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders' Deficit of
VISaer, Inc. for the year ended December 31, 2000.......................................................S-36
Consolidated Statement of Cash Flow of VISaer, Inc. for the year ended December 31, 2000..................S-37
Notes to Consolidated Financial Statements of VISaer, Inc. for 2000.......................................S-38
Report of Independent Public Accountants for Visibility, Inc. (for two years ended December 31, 1999)........S-48
Consolidated Balance Sheets of Visibility at December 31, 1999............................................S-49
Consolidated Statements of Operations of Visibility for the two years ended December 31, 1999.............S-50
Consolidated Statements of Changes in Stockholders' Equity of Visibility for the two years ended
December 31, 1999......................................................................................S-51
Consolidated Statements of Cash Flow of Visibility for the two years ended December 31, 1999..............S-52
Notes to Consolidated Financial Statements of Visibility..................................................S-53
Report of Independent Public Accountants for Cirronet, Inc...................................................S-66
Balance Sheet of Cirronet, Inc. at December 31, 2000 (unaudited) and December 31, 1999 (audited)..........S-67
Statement of Operations of Cirronet, Inc. for the year ended December 31, 2000 (unaudited) and the
year ended December 31, 1999 (audited).................................................................S-68
Statement of Changes in Shareholders' Equity of Cirronet, Inc. for the year ended December 31, 2000
(unaudited) and the year ended December 31, 1999 (audited).............................................S-69
Statement of Cash Flow of Cirronet, Inc. for the year ended December 31, 2000 (unaudited)
and the year ended December 31, 1999 (audited).........................................................S-70
Notes to Financial Statements of Cirronet, Inc............................................................S-71
INTELLIGENT SYSTEMS CORPORATION
F-1
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO INTELLIGENT SYSTEMS CORPORATION:
We have audited the accompanying consolidated balance sheets of Intelligent
Systems Corporation (a Georgia corporation) and its subsidiary companies
and operating partnerships as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders'
equity and comprehensive income, and cash flows for each of the three years
in the period ended December 31, 2000. These financial statements and the
schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of InterQuad Services Limited, which statements reflect 0
percent of both total assets and total revenues in 2000 and 0 percent of
total assets and 7 percent of total revenues in 1999. We did not audit the
financial statements of PaySys International, Inc., an investment which is
reflected in the accompanying financial statements using the equity method
of accounting. The investment in PaySys International, Inc. represents 0
percent of total assets in 2000 and 1999, and the equity in its 2000 and
1999 net loss represents 0 percent of consolidated net income for 2000 and
1999. We did not audit the December 31, 2000 financial statements of
VISaer, Inc., an investment which is reflected in the accompanying
financial statements using the equity method of accounting. The investment
in VISaer, Inc. represents 16 percent of total assets in 2000, and the
equity in 2000 net loss represents 9 percent of consolidated net income for
2000. The statements of InterQuad Services Limited, PaySys International,
Inc., and VISaer, Inc. were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to
the amounts included for InterQuad Services Limited, PaySys International,
Inc., and VISaer, Inc. is based solely on the reports of the
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Intelligent Systems Corporation and its
subsidiary companies and operating partnerships as of December 31, 2000 and
1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule II in Item
14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 23, 2001
INTELLIGENT SYSTEMS CORPORATION
F-2
18
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
AS OF DECEMBER 31, 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash $ 594 $ 737
Accounts receivable, net 1,253 1,464
Affiliate notes and interest receivable (note 7 and 19) 4,088 254
Inventories 475 325
Other current assets 268 263
--------------------------------------------------------------------------------------------------------------------------------
Total current assets 6,678 3,043
--------------------------------------------------------------------------------------------------------------------------------
Long-term investments 10,504 8,576
Long-term notes receivable 378 53
Property and equipment, at cost less accumulated depreciation 482 686
Other assets, net 15 1,300
--------------------------------------------------------------------------------------------------------------------------------
Total assets $ 18,057 $ 13,658
================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term borrowings $ 1,504 $ 1,000
Accounts payable 357 444
Accrued expenses and other current liabilities 1,522 1,647
--------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,383 3,091
--------------------------------------------------------------------------------------------------------------------------------
Long-term debt -- 363
--------------------------------------------------------------------------------------------------------------------------------
Minority interest -- (5)
--------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 10)
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 5,623,784 and
5,114,467 shares outstanding at December 31, 2000 and 1999, respectively 56 51
Paid-in capital 24,216 24,069
Accumulated other comprehensive income (loss) (215) 731
Accumulated deficit (9,383) (14,642)
--------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,674 10,209
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 18,057 $ 13,658
================================================================================================================================
The accompanying notes are an integral part of these consolidated balance
sheets.
INTELLIGENT SYSTEMS CORPORATION
F-3
19
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share amounts)
YEAR ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
Net sales $ 7,027 $ 8,479 $ 18,253
Expenses:
Cost of sales 2,974 3,983 12,495
Marketing 942 1,021 3,561
General & administrative 3,172 3,469 7,346
Research & development 915 805 1,892
-------------------------------------------------------------------------------------------------------------------------------
Loss from operations (976) (799) (7,041)
-------------------------------------------------------------------------------------------------------------------------------
Other income:
Interest income (expense), net 434 (88) (290)
Investment income, net 9,665 2,170 5,184
Equity earnings (losses) of affiliated companies (771) (948) 592
Other income (loss), net 66 (76) (135)
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax provision (benefit) and minority interest 8,418 259 (1,690)
-------------------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) 203 -- (152)
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest 8,215 259 (1,538)
-------------------------------------------------------------------------------------------------------------------------------
Minority interest -- 10 10
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,215 $ 249 $ (1,548)
===============================================================================================================================
Basic net income (loss) per share $ 1.47 $ 0.05 $ (0.30)
Diluted net income (loss) per share $ 1.46 $ 0.05 $ (0.30)
===============================================================================================================================
Basic weighted average shares outstanding 5,606,715 5,106,134 5,104,467
Diluted weighted average shares outstanding 5,632,484 5,336,776 5,104,467
===============================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
INTELLIGENT SYSTEMS CORPORATION
F-4
20
INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in thousands except share amounts)
YEAR ENDED DECEMBER 31,
STOCKHOLDERS' EQUITY 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, NUMBER OF SHARES, beginning of year 5,114,467 5,104,467 5,104,467
Exercise of options during year 635,986 10,000 --
Purchase and retirement of stock (126,669) -- --
-----------------------------------------------------------------------------------------------------------------------------
End of year 5,623,784 5,114,467 5,104,467
-----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, AMOUNT, beginning of year $ 51 $ 51 $ 51
Exercise of options during year 6 -- --
Purchase and retirement of stock (1) -- --
-----------------------------------------------------------------------------------------------------------------------------
End of year 56 51 51
-----------------------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL, beginning of year 24,069 24,046 24,046
Proceeds from options exercised 1,085 23 --
Purchase and retirement of stock (938) -- --
-----------------------------------------------------------------------------------------------------------------------------
End of year 24,216 24,069 24,046
-----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of year 731 436 643
Foreign currency translation adjustment during year -- 197 (4)
Change in accumulated other comprehensive income (loss) during year (946) 98 (203)
-----------------------------------------------------------------------------------------------------------------------------
End of year (215) 731 436
-----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT, beginning of year (14,642) (14,892) (13,344)
Dividends paid (2,956) -- --
Net income (loss) 8,215 249 (1,548)
-----------------------------------------------------------------------------------------------------------------------------
End of year (9,383) (14,642) (14,892)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 14,674 $ 10,209 $ 9,641
=============================================================================================================================
COMPREHENSIVE INCOME
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,215 $ 249 $ (1,548)
Other comprehensive income (loss):
Foreign currency translation adjustments -- -- (4)
Unrealized gain (loss) (946) 731 633
-----------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 7,269 $ 980 $ (919)
=============================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
INTELLIGENT SYSTEMS CORPORATION
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INTELLIGENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
YEAR ENDED DECEMBER 31,
CASH PROVIDED BY (USED FOR): 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net income (loss) $ 8,215 $ 249 $ (1,548)
Adjustments to reconcile net income (loss) to net cash
used for operating activities, net of
effects of acquisitions and dispositions:
Depreciation and amortization 314 347 1,509
Gain from sale or write-down of assets, net (9,665) (2,170) (5,184)
Equity loss (earnings) of affiliate companies 771 948 (592)
Changes in operating assets and liabilities:
Accounts receivable 249 19 2,013
Inventories (149) 279 (130)
Other current assets 66 290 (200)
Accounts payable (87) (459) 353
Accrued expenses and other current liabilities (124) 315 (1,507)
----------------------------------------------------------------------------------------------------------------
Cash used for continuing operations (410) (182) (5,286)
----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of investments 10,291 2,365 5,451
Acquisition of company, net of cash acquired -- -- 83
Increase (decrease) in minority interests 5 (190) 10
Acquisitions of long-term investments (3,628) (788) (306)
Repayments (advances) under notes receivable, net (4,156) (57) 232
Dispositions (purchases) of property and equipment, net (111) (13) 838
----------------------------------------------------------------------------------------------------------------
Cash provided by investing activities 2,401 1,317 6,308
----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Borrowings under short-term borrowing arrangements 1,503 262 750
Repayments under short-term borrowings arrangements (763) (1,237) (1,350)
Payment of dividends to stockholders (2,956) -- --
Purchase and retirement of stock (112) -- --
Exercise of stock options 194 23 --
----------------------------------------------------------------------------------------------------------------
Cash used for financing activities (2,134) (859) (604)
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (143) 276 418
Cash at beginning of year 737 461 43
----------------------------------------------------------------------------------------------------------------
Cash at end of year $ 594 $ 737 $ 461
================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
INTELLIGENT SYSTEMS CORPORATION
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NOTE 1
ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Organization - Intelligent Systems Corporation, a Georgia corporation, was
formed in November 1991 to acquire through merger the business, net assets and
operations of Intelligent Systems Master, L.P. In this document, terms such as
the company, we and us refer to Intelligent Systems Corporation.
Nature of Operations - Our business is to create, operate and invest in
businesses which we believe have promising growth potential. Consolidated
companies (in which we have majority ownership and control) are principally
engaged in two industries: technology related products and services and,
through November 2000, health care services (as defined more specifically in
Note 16). Our affiliate companies (in which we have a minority ownership) are
mainly involved in the technology industry.
Use of Estimates - In preparing the financial statements in conformity with
accounting principles generally accepted in the United States, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions also affect amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
Consolidation - The financial statements include the accounts of Intelligent
Systems Corporation and its majority owned and controlled U.S. and non-U.S.
subsidiary companies after elimination of material accounts and transactions
between our subsidiaries.
Investments - For entities in which we have 20 to 50 percent ownership interest,
we account for these investments by the equity method. We account for
investments of less than 20 percent in non-marketable equity securities at the
lower of cost or market. When calculating gain or loss on the sale of an
investment, we use the average cost basis of the securities. Marketable
securities are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115). At December 31, 2000, the aggregate fair
market value of our available-for-sale securities consisted of equity securities
and totaled $2.3 million. At December 31, 1999, the aggregate fair market value
of our available-for-sale securities consisted of equity securities and totaled
$781,000. These amounts include unrealized holding gains (losses) of ($215,000)
and $731,000 as of December 31, 2000 and 1999, respectively. These amounts are
reflected as a separate component of stockholders' equity.
Translation of Foreign Currencies - We consider that local currencies are the
functional currencies for foreign operations. We translate assets and
liabilities to U.S. dollars at year-end exchange rates. We translate income and
expense items at average rates of exchange prevailing during the year.
Translation adjustments are accumulated as a separate component of
stockholders' equity. Earnings include gains and losses that result from
foreign currency transactions.
We consider all highly liquid instruments with maturities of less than 90 days
to be cash.
Inventories - We state the value of inventories at the lower of cost or market
determined on a first-in first-out basis. Cost includes labor, materials and
production overhead. Market is defined as net realizable value.
Property and Equipment - Property and equipment are carried at cost less
accumulated depreciation. The cost of each major class of property and
equipment at December 31, 2000 and 1999 is as follows:
INTELLIGENT SYSTEMS CORPORATION
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(in thousands) 2000 1999
-----------------------------------------------------------
Operating equipment $974 $1,453
Furniture and fixtures 117 140
Leasehold improvements 33 117
-----------------------------------------------------------
For financial reporting purposes, we depreciate these assets using the 150
percent declining balance method over the estimated lives of the assets, as
follows:
CLASSIFICATION USEFUL LIFE IN YEARS
--------------------------------------------------------
Operating equipment 5
Furniture & fixtures 7
Leasehold improvements 1-7
--------------------------------------------------------
Accumulated depreciation and amortization was $642,000 and $1,024,000 at
December 31, 2000 and 1999, respectively. Depreciation expense was $316,000,
$332,000, and $911,000 in 2000, 1999 and 1998, respectively. These expenses are
included in general and administrative expenses.
Other Assets - Other assets are carried at cost net of related amortization.
When we acquire a business, we generally amortize the excess of the cost of the
acquisition over underlying net assets of the business acquired over three to
five year periods using the straight-line method. Accumulated amortization of
intangibles totaled $0 and $179,000 at December 31, 2000 and 1999, respectively.
Our policy is to write off the asset and accumulated amortization for fully
amortized intangibles. Periodically we review the values assigned to long-lived
assets to determine whether they have been permanently impaired. To measure
whether long-lived assets are recoverable, we use an estimate of the
undiscounted cash flows of the applicable entity over the remaining life of the
asset. In 1998, we wrote off $558,000 of goodwill associated with discontinuing
certain product lines of the HumanSoft subsidiary (see Note 18). This write-off
is reflected in general and administrative expense in the accompanying
consolidated statements of operations. In 2000, 1999 and 1998, we recorded
intangible amortization expense of approximately $29,000, $15,000 and $957,000,
respectively. In 1998, we expensed $944,000 of purchased research and
development related to the acquisition of JK, Inc. (see Note 2). These expenses
are included in research and development expense on the accompanying statements
of operations.
Accrued Expenses and Other Current Liabilities - Accrued expenses and other
liabilities at December 31, 2000 and 1999 consist of the following:
(in thousands) 2000 1999
---------------------------------------------------------
Accrued wages and payroll taxes $242 $277
Deferred revenue 661 709
Income taxes payable 203 --
Other accrued expenses 253 660
---------------------------------------------------------
Warranty Costs - We accrue the estimated costs associated with product
warranties as an expense in the period the related sales are recognized.
Revenue Recognition - Sales of software licenses, technology-related products
and services and health care services make up our revenue. We recognize revenue
when products are shipped or, in the case of service providers, when the
services are rendered. We recognize software fees in accordance with Statement
of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended
by Statement of Position No. 98-9, "Software Revenue Recognition, With Respect
to Certain Transactions" ("SOP 98-9"). Under SOP 97-2, We recognize software
fees when the following criteria are met: (1) a signed contract is obtained;
(2) delivery of the product has occurred; (3) the license fee is fixed and
determinable; (4) collectibility is probable; and (5) remaining obligations
under the license agreement are insignificant. SOP 98-9 requires recognition of
revenue using the "residual method" when (1) there is vendor-specific objective
evidence of the fair values of all undelivered elements in a multiple-element
arrangement that is not accounted for using long-term contract accounting; (2)
vendor-specific objective evidence of fair value does not exist for one or more
of the delivered elements in the arrangement; and (3) all revenue-recognition
criteria in SOP 97-2 other than the requirement for vendor-specific objective
evidence of the fair value of each delivered element of the arrangement are
satisfied. SOP 98-9 was effective for transactions entered into after March 15,
1999, and we adopted the residual method for such arrangements at that time.
For those contracts that contain significant future obligations, software fees
are recognized under the percentage of completion method. Service fees received
from the sale of software maintenance and support contracts provide customers
access to technical support and minor upgrades to licensed revenues. These fees
are recognized as services are provided over the life of such contracts. We
provide for estimated sales returns in the period in which the sales are
recorded.
Fair Value of Financial Instruments - The carrying value of cash, accounts
receivable, accounts payable and other financial instruments included in the
accompanying consolidated balance sheets approximates their fair value
INTELLIGENT SYSTEMS CORPORATION
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principally due to the short-term maturity of these instruments.
Cost of Sales - Cost of sales includes direct material, direct labor and
production overhead for product companies and direct cost of services rendered
for service companies.
New Accounting Pronouncements - In June of 1998, the Financial Accounting
Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivatives instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. We adopted the new statement on January 1,
2001. The Statement did not have a significant impact on our financial
statements.
NOTE 2
ACQUISITIONS
JK, Inc. - Effective January 1, 1998, our former HumanSoft LLC subsidiary
acquired all of the common stock of JK, Inc. (JK), a company that provides
software and services to the public health market, in exchange for 1,523 units
of limited liability interest in HumanSoft. Immediately afterward, Intelligent
Systems acquired 878 of the newly issued HumanSoft units from the sellers of JK
for $200,000 cash and a promissory note of $600,000. The note was due in three
equal annual installments beginning January 1, 1999 and bears interest of 8.5
percent per annum payable annually. The acquisition was accounted for as a
purchase. We expensed $944,000 of purchased research and development projects
that had not reached technological feasibility and that did not have an
alternative future use. We consolidated the results of operations of JK since
the acquisition until the company ceased operations in September 1998.
In 1999, Intelligent Systems made a claim against the sellers of JK for breach
of certain representations and warranties in the acquisition agreements and
asserted its right to offset amounts owed to the sellers under the notes. The
note payable in the amount of $600,000 was determined by management not to be
due the sellers as a result of the claims asserted. Accordingly, in the fourth
quarter of 2000, we reversed the note payable of $600,000 against the allowance
for the same amount.
NOTE 3
SALES OF ASSETS
Intelligent Enclosures Corporation - Effective April 1, 1998, we sold
substantially all the assets and the business operations of our Intelligent
Enclosures (IE) subsidiary to Daw Technologies, Inc. in exchange for common
stock of Daw. The number of shares of common stock of Daw that we received for
the assets was determined at a second closing two years from the date of the
sale. The sales price was fixed at $1.3 million; therefore, in April 2000, Daw
issued to us a total of 645,462 shares of Daw common stock which number was
determined by a formula related to the trading price of the shares at that
time.
InterQuad Services - Effective February 1, 1999, we sold our ownership in the
InterQuad Services subsidiary. We sold our interest in return for a 19 percent
interest in a privately held U.K. company whose principal asset is a 49 percent
ownership in InterQuad Group. InterQuad Group is a privately held U.K. based
company that provides computer hardware, software, training and consulting
services to businesses.
IQ Software Corporation - In 1998, we recorded a gain of $1.0 million and cash
proceeds of $1.2 million on the sale of 114,000 shares of common stock of IQ.
In January 1999, we sold our remaining 95,449 shares of common stock of
Information Advantage (formerly IQ Software). We recorded a gain on the sale of
$814,000 and netted cash proceeds of $902,000.
MediaMetrix, Inc. - As a result of a merger between Relevant Knowledge (a
company in which we were a minority investor) and MediaMetrix in 1998, we
acquired 24,501 shares of MediaMetrix stock. We sold the shares in the public
market on November 6, 1999, realizing a gain of $995,000 on the sale and cash
of $1,045,000.
Novient, Inc. - In the first quarter of 1999, we sold 66,500 shares of
preferred stock of Novient, Inc., in a private transaction, recognizing a gain
of $233,000 and netting $286,000 in cash. At December 31, 2000 we hold 227,250
shares of preferred stock (equal to 681,750 common shares) in the private
company.
INTELLIGENT SYSTEMS CORPORATION
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Paragon Interface, Inc. - Effective April 17, 1998, we sold our minority
interest in Paragon Interface, Inc. for $839,000 cash. At the closing, Paragon
also repaid a loan of $150,000 due us. We recorded a gain of $457,000 on the
sale. In the second quarter of 1999, we recorded additional gain of $130,000
upon the expiration of certain contingencies.
PaySys International, Inc. - In a private transaction on July 1, 1998, we sold
437,063 shares of common stock of PaySys. The transaction netted $2.5 million
in cash and resulted in a gain of $2.5 million on the sale. At December 31,
2000, we still own 3,606,382 shares of common stock of PaySys. Refer to Note 19
where we discuss the pending sale of PaySys.
Risk Laboratories, LLC - On March 21, 2000, we sold part of our interest in
Risk Laboratories in a private transaction. We sold 2,310,000 shares for $8.8
million in cash and a gain of $8.6 million. We retained 623,515 shares (7% of
Risk Laboratories). At the closing of the transaction, Risk also repaid a note
in the amount of $43,000. Refer to Note 19 for a Subsequent Event.
Primus Knowledge System, Inc. - On January 21, 2000, a company in which we held
a minority equity position was acquired by Primus Knowledge Solutions, Inc., a
publicly traded company. We received 66,431 shares of Primus common stock in
exchange for our interest in the acquired company. The shares were sold at
various times during 2000, resulting in a net gain of $775,000 and cash of $1.3
million.
SI Corporation - At various times during 2000, we sold a total of 9,515 shares
of SI Corporation common stock, which had been received as consideration for
our shares of stock in VerticalOne Corporation upon the merger of the two
companies in 1999. We realized net gains of $249,000 and cash of $296,000 on
the sales of SI stock.
PsyCare America, LLC - On November 1, 2000, we sold certain operating assets of
PsyCare America, LLC, consisting mainly of contracts and intellectual property,
and closed the remaining operations. We sold the assets to iExalt, Inc. in
exchange for 200,000 shares of common stock of iExalt, a publicly traded
company, and may receive additional shares based on the trading price of the
iExalt stock on the second anniversary of the transaction.
NOTE 4
INVESTMENTS IN AFFILIATES
PaySys International, Inc. - At December 31, 2000, we owned a 32.6 percent
interest (approximately 27.8 percent on a diluted basis) in PaySys
International, Inc., a software company accounted for using the equity method
of accounting. In 1997, in accordance with the equity method of accounting, we
recorded $3.0 million representing our pro rata share of PaySys losses, thus
reducing our investment of $3.0 million to zero on the balance sheet at
December 31, 2000 and 1999. During 1999 and 2000, we did not record any
additional losses or income related to PaySys. We have no obligation to provide
additional funding to PaySys. No dividends were received from the affiliate
during 2000 and 1999. Refer to Note 19 where we discuss the pending sale of
PaySys.
The following table contains the summarized financial information of PaySys.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
(in thousands) 2000 1999 1998
------------------------------------------------------------
Current assets $ 8,747 $18,929 $14,852
Current liabilities 31,992 18,947 18,957
Noncurrent assets 4,978 4,960 3,005
Noncurrent liabilities 12,730 16,370 8,653
Net sales $40,477 $50,068 $45,905
Operating income (loss) (20,653) 902 (3,814)
Net loss (24,257) (1,706) (5,163)
------------------------------------------------------------
VISaer, Inc. - At December 31, 2000, we owned a 40.2 percent interest in VISaer,
Inc., a software company formerly named Visibility, Inc. The investment is
classified as an affiliate and accounted for using the equity method of
accounting because we do not exert control over the company. Our pro rata share
of VISaer income (loss) was $(78,000), $(1,418,000) and $195,000 in 2000, 1999
and 1998, respectively. No dividends were received from the affiliate in 2000 or
1999. Along with another party, we intend to fund or arrange funding to support
VISaer's cash requirements in 2001.
INTELLIGENT SYSTEMS CORPORATION
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The following table contains the summarized financial information of VISaer.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
(in thousands) 2000 1999 1998
--------------------------------------------------------------
Current assets $1,036 $ 9,177 $10,236
Current liabilities 7,794 16,862 14,402
Noncurrent assets 257 1,108 1,337
Noncurrent liabilities 2,632 1,972 2,029
Net sales $11,752 $24,210 $30,193
Operating income (loss) (2,757) (3,636) 1,040
Net income (loss) (583) (4,225) 679
---------------------------- ----------- ---------- ----------
Cirronet, Inc. - At December 31, 2000, we owned an 18.3 percent interest in
Cirronet, Inc. (formerly Digital Wireless Corporation), a private company
involved in wireless telecommunication products for industrial and commercial
markets that is accounted for using the cost method of accounting. During 2000,
we lost the ability to exert significant influence and therefore converted from
the equity to the cost method of accounting. Our pro rata share of Cirronet's
income (loss) in 2000 and 1999 was ($28,000) and $184,000, respectively. No
dividends were received from the affiliate in 2000 or 1999.
The following table contains the summarized financial information of Cirronet.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999
(in thousands) (unaudited) (audited)
------------------------------------------------------
Current assets $3,279 $2,785
Current liabilities 911 439
Noncurrent assets 364 115
Noncurrent liabilities 84 103
Net sales $6,241 $4,471
Operating income (loss) (117) 1,006
Net income (loss) (38) 794
---------------------------- ------------- -----------
Our aggregate share of the undistributed earnings (losses) of 50 percent or
less owned companies accounted for by the equity method was $(22,879,000) at
December 31, 2000, the majority of which is related to PaySys.
NOTE 5
INVESTMENTS
Investments of $1.2 million and $788,000, respectively, in Atherogenics, Inc.
(a biotechnology firm) and Alliance Technology Ventures (a private technology
venture fund) represent 12 percent and 7.5 percent, respectively, of the
company's long-term investments at December 31, 2000. Investments in Alliance
Technology Ventures and Atherogenics, Inc. each represent 8 percent of the
company's long-term investments at December 31, 1999. We account for
Atherogenics in accordance with SFAS No. 115 because it is a marketable
security. We account for Alliance Technology Ventures under the equity method
of accounting.
The carrying and estimated fair values of available-for-sale securities at
December 31, 2000 and 1999 are summarized as follows:
(in thousands) 2000 1999
--------------------------------------------------------
Amortized cost $ 2,469 $ 50
Gross unrealized gains 795 731
Gross unrealized losses (1,010) --
--------------------------------------------------------
Estimated fair values $2,254 $781
========================================================
NOTE 6
COST BASIS OF INVESTMENTS
The following summarizes our ownership interest in associated companies. The
ownership interests are classified according to applicable accounting methods
at December 31, 2000.
(in thousands) CARRYING COST
VALUE BASIS
---------------------------------------------------------
EQUITY METHOD
---------------------------------------------------------
Alliance Technology Ventures $ 788 $1,000
PaySys -- 3,197
VISaer 2,806 4,269
COST METHOD
---------------------------------------------------------
Cirronet 909 525
---------------------------------------------------------
INTELLIGENT SYSTEMS CORPORATION
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NOTE 7
ACCOUNTS, AFFILIATE
NOTES RECEIVABLE AND
INTEREST RECEIVABLE
At December 31, 2000 and 1999, our allowance for doubtful accounts and sales
returns amounted to $46,000 and $58,000, respectively.
Provisions for doubtful accounts and sales returns were $12,000, $24,000 and
$240,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, one customer of our ChemFree subsidiary represented 20
percent of consolidated accounts receivable as a result of a high volume of
shipments to the customer in the last 45 days of the year. Balances were paid
within terms subsequent to the year-end.
At December 31, 2000, notes receivable include $3.5 million in principal amount
of short-term bridge loans to PaySys International, Inc. Such notes bear
interest at the rate of fifty percent per annum and are due on demand after
February 28, 2001. Refer to Note 19 related to the pending sale of PaySys and
repayment of the loans.
NOTE 8
BORROWINGS AND LONG-TERM DEBT
Terms and borrowings under our credit facility are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
(in thousands) 2000 1999
-----------------------------------------------------------
Maximum outstanding (month-end) $1,504 $1,250
Outstanding at year end $1,504 $ 100
Average interest rate at year end 9.5% 8.5%
Average borrowings during the year $197 $ 387
Average interest rate 9.2% 8.5%
--------------------------------------- --------- ---------
The maximum available under our credit facility is $2 million.
Long-term debt at December 31, 1999 consists of a note payable of $600,000
bearing interest of 8.5% per annum due in three annual installments through
January 2001; a note payable of $500,000 bearing interest of 8.5% per annum due
July 1, 2000; and $163,000 payable in November 2001 bearing interest of 8% per
annum related to settlement of the HumanSoft bankruptcy.
Interest paid on debt during 2000, 1999 and 1998 amounted to $10,000, $33,000
and $118,000, respectively.
NOTE 9
INCOME TAXES
The income tax provision (benefit) related to operations consists of the
following:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
(in thousands) 2000 1999 1998
---------------------------------------------------------
Current $203 $ -- $(152)
=========================================================
Following is a reconciliation of estimated income taxes at the Federal
statutory rate to estimated tax expense (benefit) as reported:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998
---------------------------------------------------------
Federal statutory rate 34% 34% 34%
Change in valuation
allowance (32%) (34%) (61%)
---------------------------------------------------------
Effective rate 2% 0% (27%)
=========================================================
At December 31, 2000, our domestic subsidiaries had net operating loss
carryforwards totaling $18.0 million. The net operating loss carryforwards, if
unused as offsets to future taxable income, will expire beginning in 2007 and
continuing through 2019. We may not be able to use these carryforwards because,
in some cases, they are limited to taxable income of a particular subsidiary or
may be subject to annual limitation under the Internal Revenue Code if there is
a greater than 50 percent change in ownership as defined under Section 382.
We account for income taxes using SFAS 109, "Accounting for Income Taxes". We
have a deferred tax benefit of approximately $8.0 million at December 31, 2000
and $11.0 million at December 31, 1999. Since our ability to realize the
deferred tax asset is uncertain, the amount is offset in both 2000 and 1999 by
a valuation allowance of an equal amount. The deferred tax benefit at December
31, 2000 and 1999 relates primarily to net operating loss carryforwards.
INTELLIGENT SYSTEMS CORPORATION
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Income taxes paid (or refunds received) during 2000, 1999 and 1998 amounted to
$0, $0 and $(152,000), respectively.
NOTE 10
COMMITMENTS AND
CONTINGENCIES
Leases - We have noncancellable operating leases expiring at various dates
through 2002. Future minimum lease payments are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
(in thousands)
--------------------------------------------------------
2001 $917
2002 764
Thereafter --
--------------------------------------------------------
Total minimum lease payments $1,681
========================================================
Rental expense for leased facilities and equipment related to operations
amounted to $948,000, $995,000 and $1.2 million, for the years ended December
31, 2000, 1999 and 1998, respectively.
Guaranty Of HumanSoft Obligations - In connection with the confirmation on
November 18, 1999 of the Plan of Reorganization of HumanSoft LLC, a wholly
owned subsidiary of the company, we guaranteed the future payments to certain
creditors of HumanSoft. The total balance of future payments is $163,500, plus
interest, due on November 18, 2001.
Legal Matters - In 1999, a suit was brought against our ChemFree subsidiary and
two other parties by a former consultant of ChemFree. The suit challenges the
ownership of various intellectual property assets of ChemFree. ChemFree and the
other parties to the litigation strongly deny the allegations, have filed cross
claims against another entity and intend to vigorously defend the suit. The
case is pending in the Superior Court of Gwinnett County, Georgia. While the
company believes ChemFree has sufficient evidence to refute the claims made,
there can be no assurance that the case will be resolved in favor of ChemFree.
In addition, we are party to a small number of legal matters arising in the
ordinary course of business. It is management's opinion that none of these
matters will have a material adverse impact on our consolidated financial
position or results of operations.
NOTE 11
POST-RETIREMENT BENEFITS
Effective January 1, 1992, we adopted the Outside Directors' Retirement Plan
which provides that each nonemployee director, upon resignation from the Board
after reaching the age of 65, will receive a lump sum cash payment equal to
$5,000 for each full year of service as a director of the company (and its
predecessors and successors) up to $50,000. We have accrued $80,000 to date for
anticipated future payments under the plan.
NOTE 12
STOCKHOLDERS' EQUITY
We have authorized 20,000,000 shares of Common Stock, $.01 par value per share,
and 2,000,000 shares of Series A Preferred Stock, $.10 par value per share. No
shares of Preferred Stock have been issued; however, we adopted a Rights
Agreement on November 25, 1997, which provides that, under certain
circumstances, shareholders may redeem the Rights to purchase shares of
Preferred Stock. The Rights have certain anti-takeover effects. The Board of
Directors has authorized stock repurchases at various times in the past. We
repurchased, at fair market value, and retired 24,900 shares of common stock in
the year ended December 31, 2000 but made no repurchases during 1999 and 1998.
NOTE 13
STOCK OPTION PLAN
We instituted the 1991 Incentive Stock Plan (the "Plan") in December 1991 and
amended it in 1997 to increase the number of shares authorized under the Plan
to 925,000. The Plan provides shares of common stock that may be sold to
officers and key employees. In August 2000, we instituted a Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") that authorizes the
issuance of up to 200,000 shares of common stock to non-employee directors.
Upon adoption of the Directors' Plan, each non-employee director was granted an
option to acquire 5,000 shares. At each annual meeting in the future, each
director will receive an option grant of 4,000 shares. Stock options under both
plans are granted at fair market value on the date of grant. As of December 31,
2000, a total of 790,000 options under both plans have been granted, 720,986
have been exercised and 19,014 options are fully vested and exercisable at a
weighted average price per share of
INTELLIGENT SYSTEMS CORPORATION
F-13
29
$2.9375. All options expire ten years from their respective dates of grant. At
December 31, 2000, the weighted average remaining contractual life of the
outstanding options is 8.6 years. Stock option transactions during the three
years ended December 31, 2000 were as follows:
2000 1999 1998
---------------------------------------------------------------------------
Options outstanding
at Jan. 1 655,000 665,000 665,000
Options granted 57,000 -- --
Options exercised 635,986 10,000 --
Options canceled -- -- --
Options outstanding
at Dec. 31 76,014 655,000 665,000
Options available for
grant at Dec. 31 328,000 185,000 185,000
Option price ranges
per share:
Granted $ 4.00 -- --
4.25
Exercised $ .875 $ 2.25 --
2.9375
Canceled -- -- --
Weighted average option
price per share:
Granted $ 4.16 -- --
Exercised $ 1.72 $ 2.25 --
Canceled -- -- --
Outstanding at
Dec. 31 $ 3.86 $ 1.75 $ 1.75
---------------------------------------------------------------------------
We account for the Plan under the provisions of Accounting Principles Board
Opinion No. 25. The following pro forma information is based on estimating the
fair value of grants under the Plan based upon the provisions of SFAS No. 123,
"Accounting for Stock Based Compensation". The fair value of each option
granted in 2000 has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
- risk free interest rate of 6.3 percent
- expected life of the option of 9 years
- expected dividend yield rate of 0 percent
- expected volatility of 114 percent
Under these assumptions, the weighted average fair value of options granted in
2000 was $3.15. There were no awards under the Plan in 1998 or 1999. The fair
value of the grants would be amortized over the vesting period for the options.
Accordingly, our pro forma net income (loss) and net income (loss) per common
share assuming compensation cost as determined under SFAS No. 123 would have
been the following:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
(in thousands except 2000 1999 1998
per share data)
--------------------------------------------------------
Net income (loss) $8,215 $249 $(1,548)
Net income (loss)
per common share
basic $1.47 $0.05 $(0.30)
--------------------------------------------------------
Net income (loss)
per common share
diluted $1.46 $0.05 $(0.30)
--------------------------------------------------------
At December 31, 2000, we hold notes from management totaling $90,000 related to
the exercise of options.
NOTE 14
FOREIGN SALES
AND OPERATIONS
Aggregate export and foreign sales were $805,000, $1.3 million and $7.0 million
for the years ended December 31, 2000, 1999 and 1998, respectively. Export and
foreign sales were made principally in the United Kingdom and the Pacific Rim.
Sales in these geographic areas are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
(in thousands) 2000 1999 1998
-----------------------------------------------------------
United Kingdom $733 $1,317 $7,011
Pacific Rim 72 22 49
-----------------------------------------------------------
We sold our only foreign subsidiary, InterQuad, in February 1999. For the years
ended December 31, 2000, 1999 and 1998, income (loss) before provision for
income taxes derived from foreign subsidiaries approximated $0, $(109,000) and
$(1,092,000), respectively.
At December 31, 2000 and 1999, there are no assets or liabilities related to
foreign subsidiaries.
As a result of the sale of our InterQuad subsidiary, we have no foreign
subsidiaries and therefore no currency exchange restrictions that would affect
our financial position or results of operations.
Refer to Note 1 for a discussion regarding how we account for translation of
non-US currency amounts.
INTELLIGENT SYSTEMS CORPORATION
F-14
30
NOTE 15
EARNINGS PER SHARE
For the years ended December 31, 2000 and 1999, our diluted weighted average
shares outstanding include the assumed conversion of stock options.
For the year ended December 31, 1998, basic and diluted weighted average shares
outstanding are the same because all of our common stock equivalents (stock
options) are non-dilutive since we reported a loss for the period.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
(in thousands except per 2000 1999 1998
share data)
-------------------------------------------------------------
Net income (loss) $8,215 $ 249 $(1,548)
Basic earnings (loss) per
share $1.47 $ 0.05 $ (0.30)
Basic weighted average
shares 5,607 5,106 5,104
Diluted earnings (loss)
per share $1.46 $ 0.05 $ (0.30)
Diluted weighted
average shares 5,632 5,337 5,104
NOTE 16
INDUSTRY SEGMENTS
Our consolidated subsidiaries have historically been involved in two industry
segments: health care services and technology related products and services.
Operations in health care services involve mental health and substance abuse
treatment programs. We derived 10.6 percent of our consolidated revenue in 1998
from a national chain of hospitals in which our PsyCare subsidiary conducted
some of its treatment programs. Operations in technology related products
include development and sales of software products and services and manufacture
and sale of bio-remediating parts washers. In 2000, we derived 10.4 percent of
our consolidated revenue from a company that distributes our ChemFree
subsidiary's products.
Total revenue by industry includes sales to unaffiliated customers. Sales
between the two industry segments are not material. Operating profit (loss) is
total revenue less operating expenses. None of the general corporate overhead
expense has been allocated to the individual industry segments. Identifiable
assets by industry are those assets that are used in our operations in each
industry. Corporate assets are principally cash, notes receivable and
investments.
The table following contains segment information for the years ended December
31, 2000, 1999 and 1998.
YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------
Health
(in thousands) Tech. Care Consol.
----------------------------------------------------------
Net sales (external) $6,097 $930 $ 7,027
R&D 915 -- 915
Depreciation 227 42 269
Operating income (loss) 284 (17) 267
General corp. expenses 1,243
----------------------------------------------------------
Consolidated operating
loss (976)
Interest income -- -- 434
Investment income 8,894
Other income, net 66
----------------------------------------------------------
Income before income
tax provision and
minority interest 8,418
Income tax provision 203 -- 203
----------------------------------------------------------
Income before minority
interest 8,215
Minority interest --
----------------------------------------------------------
Net income $ 8,215
==========================================================
Capital expenditures $ 177 $ -- $ 203
==========================================================
Identifiable assets $2,319 $ 62 $ 2,381
Corporate assets 15,676
----------------------------------------------------------
Total assets at year end $18,057
==========================================================
INTELLIGENT SYSTEMS CORPORATION
F-15
31
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------
Health
(in thousands) Tech. Care Consol.
-----------------------------------------------------------
Net sales (external) $6,693 $1,786 $8,479
R&D 805 -- 805
Depreciation 215 76 291
Operating income (loss) 35 65 100
General corp. expenses 899
-----------------------------------------------------------
Consolidated operating
loss (799)
Interest expense -- -- (88)
Investment income 1,222
Other loss, net (76)
-----------------------------------------------------------
Income before income tax
provision and minority
interest 259
Income tax provision -- -- --
-----------------------------------------------------------
Income before minority
interest 259
Minority interest 10
-----------------------------------------------------------
Net income $ 249
===========================================================
Capital expenditures $ 188 $ 7 $ 195
===========================================================
Identifiable assets $3,288 $ 497 $ 3,785
Corporate assets 9,873
-----------------------------------------------------------
Total assets at year end $13,658
===========================================================
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------
Health
(in thousands) Tech. Care Consol.
-------------------------------------------------------------
Net sales (external) $14,124 $4,129 $18,253
R&D 1,892 -- 1,892
Depreciation 814 97 911
Operating income (loss) (5,848) 77 (5,771)
General corp. expenses 1,270
-------------------------------------------------------------
Consolidated operating
loss (7,041)
Interest expense -- -- (290)
Investment income 5,776
Other loss, net (135)
-------------------------------------------------------------
Loss before income tax
benefit and minority
interest (1,690)
Income tax benefit (152) -- (152)
-------------------------------------------------------------
Loss before minority
interest (1,538)
Minority interest 10
-------------------------------------------------------------
Net loss $(1,548)
=============================================================
Capital expenditures $ 896 $ 9 $ 905
=============================================================
Identifiable assets $6,954 $ 960 $ 7,914
Corporate assets 9,185
-------------------------------------------------------------
Total assets at year end $17,099
=============================================================
NOTE 17
QUARTERLY FINANCIAL DATA (unaudited)
The table below contains a summary of selected quarterly data for the years
ended December 31, 2000 and 1999.
FOR QUARTERS ENDED
(in thousands except MARCH JUNE SEPT. DEC.
per share data) 31 30 30 31
-----------------------------------------------------------------------------------------------
2000
Net sales $ 2,007 $ 1,988 $ 1,630 $ 1,402
Operating income (loss) (309) 50 (275) (442)
Net income (loss) 8,384a (132)b 145c (182)d
Basic income (loss) per
share 1.48 (0.02) 0.03 (0.03)
Diluted income (loss)
per share 1.46 (0.02) 0.03 (0.03)
1999
Net sales $ 2,683 $ 2,090 $ 1,816 $ 1,890
Operating loss (284) (322) (58) (135)
Net income (loss) 1,094e (898)f (872)g 926h
Basic income (loss) per
share 0.21 (0.18) (0.17) 0.18
Diluted income (loss) 0.21 (0.18) (0.17) 0.17
per share
a. Includes gains of $8.8 million on investments and $195,000 loss in
equity of affiliates.
b. Includes $284,000 loss in equity of affiliates.
c. Includes gains of $826,000 on investments and $247,000 loss in equity
of affiliates.
d. Includes $44,000 loss in equity of affiliates.
e. Includes gain of $1.0 million on investments and $370,000 income in
equity of affiliates.
f. Includes gain of $128,000 on investments and $674,000 loss in equity
of affiliates.
g. Includes $556,000 loss in equity of affiliates.
h. Includes gain of $995,000 on investment and $89,000 loss in equity of
affiliates.
NOTE 18
HUMANSOFT SUBSIDIARY Reorganization Under CHAPTER 11
On November 17, 1998, our HumanSoft subsidiary filed a petition for relief
under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy
Court for the Northern District of Georgia in response to an involuntary filing
under Chapter 7 by three creditors. In the quarter ended September 30, 1998, we
recorded a write-off of $955,000 related to the discontinued product lines.
This expense is included in general and administrative expenses. On November
18, 1999, the court confirmed the HumanSoft Plan of
INTELLIGENT SYSTEMS CORPORATION
F-16
32
Reorganization. The plan provides for payment of a fixed percent of the allowed
claims for certain trade creditors and customers of HumanSoft as well as
payment of the administrative expenses. The first payments were made
immediately following the confirmation, a second payment to certain creditors
was made in November 2000 and the final payment of $163,500, plus interest, is
due November 2001. Intelligent Systems has guaranteed the future payment. The
final plan expanded the creditor class to include certain customer claims,
which caused the final settlement amount to exceed the original amount reserved
for the bankruptcy. Accordingly, in the fourth quarter of 1999, we recorded
additional reserves totaling $141,000 to reflect the provisions of the
confirmed plan of reorganization. In 1999, we also incurred $156,000 in legal
and administrative costs, related to the bankruptcy. These costs are included
in general administrative expenses.
NOTE 19
SUBSEQUENT EVENTS
Risk Laboratories, LLC - On January 18, 2001 we sold 214,273 common units of
Risk Laboratories, LLC to American Home Assurance Company ("AHAC") for a total
of $900,000 cash. We recorded a gain of $893,000 based on a cost basis of
$7,000. At the same time, we acquired 107,137 common units from Risk
Laboratories, LLC for a total acquisition price of $450,000. After the
transactions, we own a total of 516,380 units (5.5%) of Risk, and have the
right to require AHAC to purchase from us up to 471,399 shares at the same per
share price at various times prior to March 20, 2003.
PaySys International, Inc. - On March 17, 2001, we signed a definitive
agreement to sell our interest in PaySys in a transaction in which First Data
Corp. will acquire all of the outstanding shares of PaySys from its
shareholders. We expect to receive between $17.0 million and $19.0 million in
cash at the closing for our 3,606,382 common shares as well as $3.5 million in
repayment of principal, plus interest, on bridge loans advanced to PaySys in
the third and fourth quarters of 2000. Prior to the stock sale, PaySys will
spin off certain assets and liabilities into two new subsidiaries, Delos
Payment Systems, Inc. and dbbAPPS, Inc. We will retain approximately 32% of the
ownership of each of the two subsidiaries which are development stage companies
involved in the design and development of the dbb operating platform and
software applications. The cash proceeds we expect to receive at closing are
after the sellers set aside an escrow account for payment of any claims by
First Data Corporation with respect to representation and warranties contained
in the transaction documents. The escrow amount, after payment of any allowed
claims, will be released and distributed pro-rata to the sellers at various
times over the next four years. The transaction is expected to close as soon as
possible but no later than April 30, 2001, subject to regulatory approval,
PaySys shareholder approval, resolution of certain obligations of PaySys and
other closing conditions.
Lawsuit - On January 26, 2001, Intelligent Systems was named as co-defendant in
a lawsuit filed in the Circuit Court of the Ninth Judicial Circuit in Orange
County, Florida by four former employees of PaySys International, Inc. The suit
alleges that the former employees hold warrants to purchase up to 142,500
shares of common stock of PaySys owned by us. The plaintiffs allege the
warrants were issued to them by a former officer of PaySys, from whom we
acquired shares in 1994. We filed an initial response to the suit, deny that
any valid warrants exist and intend to vigorously defend the suit. While we
believe there are sufficient evidence and legal grounds to refute the claims
made, the ultimate outcome of this claim cannot be determined currently.
INTELLIGENT SYSTEMS CORPORATION
F-17
33
SCHEDULE II
INTELLIGENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS a. RECLASSIFICATION c. END OF PERIOD
-------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS b.
Year Ended December 31, 1998 206,908 239,734 126,537 867,463 1,187,568
Year Ended December 31, 1999 1,187,568 23,375 1,156,523 3,238 57,658
Year Ended December 31, 2000 57,658 11,594 23,348 -- 45,904
a. Write-offs of accounts receivable against allowance accounts.
b. This includes the combination of the Allowance for Sales Returns with
the Allowance for Doubtful Accounts.
c. Reclassification of unearned revenue to Allowance for Doubtful
Accounts.
34
Report of Independent Auditors
Board of Directors
PaySys International, Inc.
We have audited the accompanying consolidated balance sheets of PaySys
International, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PaySys
International, Inc. and subsidiaries at December 31, 2000 and 1999 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses and has a working capital
deficiency. In addition, the Company has $8,000,000 of Short Term Notes Payable
that become due on demand on or after February 28, 2001 that have not been
renegotiated. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst and Young LLP
February 16, 2001
except for the third paragraph of Note 11,
which is dated March 17, 2001
Atlanta, Georgia
S-2
35
PaySys International, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
2000 1999
--------------------------------------------
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 881 $ 3,974
Accounts receivable, less allowance for bad debts of $1,000 and 4,824
$2,266 at December 31, 2000 and 1999, respectively 9,450
Unbilled receivables 2,439 4,837
Prepaid expenses and other current assets 603 668
--------------------------------------------
Total current assets 8,747 18,929
Furniture and equipment, net 3,304 2,936
Computer software costs, net of accumulated amortization of $1,616 1,273
and $1,204 at December 31, 2000 and 1999, respectively
1,685
Deposits and other assets 401 339
--------------------------------------------
$ 13,725 $ 23,889
============================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 2,746 $ 1,821
Accrued employee compensation 1,943 2,415
Deferred revenues 17,102 10,728
Current portion of long-term debt and capital lease obligations 100 733
Short Term Notes Payable 8,000 --
Accrued interest 923 --
Other current liabilities 1,178 3,250
--------------------------------------------
Total current liabilities 31,992 18,947
Other liabilities -- 226
Long-term debt and capital lease obligations, less current portion 12,719 12,378
Deferred rent expense 11 183
--------------------------------------------
44,722 31,734
Redeemable stock purchase warrants -- 3,583
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 10,000,000 shares authorized; 28
2,779,689 shares issued and outstanding; liquidation preference
of $15,900 at December 31, 2000 and 1999 28
Common stock, $.01 par value; 30,000,000 shares authorized; 84
8,371,254 and 6,976,644 shares issued and outstanding at
December 31, 2000 and 1999, respectively 70
Additional paid-in capital 21,112 16,282
Notes receivable - officers (3,423) (3,423)
Deferred stock compensation -- (3)
Accumulated deficit (48,380) (24,123)
Cumulative translation adjustments (418) (259)
--------------------------------------------
(30,997) (11,428)
--------------------------------------------
$ 13,725 $ 23,889
============================================
See accompanying notes.
S-3
36
PaySys International, Inc. and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
2000 1999 1998
----------------------------------------------------------
(In thousands)
Revenues:
License fees $ 12,215 $19,789 $18,385
Services 28,262 30,279 27,520
----------------------------------------------------------
Total revenues 40,477 50,068 45,905
Cost of revenues:
License fees 649 998 1,934
Services 22,391 21,552 20,608
----------------------------------------------------------
Total cost of revenues 23,040 22,550 22,542
Gross margin 17,437 27,518 23,363
Operating expenses:
Sales and marketing 11,239 7,691 6,240
Research and development 17,994 12,424 11,804
General and administrative 8,857 6,501 4,793
Royalty termination settlement -- -- 4,340
----------------------------------------------------------
Total operating expenses 38,090 26,616 27,177
(Loss) income from operations (20,653) 902 (3,814)
Interest income (expense):
Interest income 369 217 118
Interest expense (3,978) (2,555) (1,279)
----------------------------------------------------------
(3,609) (2,338) (1,161)
----------------------------------------------------------
Loss before income taxes (24,262) (1,436) (4,975)
Income tax (benefit) expense (5) 270 188
----------------------------------------------------------
Net loss $(24,257) $(1,706) $ (5,163)
==========================================================
See accompanying notes.
S-4
37
PaySys International, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
PREFERRED STOCK COMMON STOCK
------------------------------------------------------------- ADDITIONAL
NUMBER NUMBER PAID-IN
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL
-------------------------------------------------------------------------------
Balance at December 31, 1997 -- $-- 7,131,825 $ 71 $ 5,398
Comprehensive loss:
Net loss -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive loss
Noncash compensation from stock purchase
warrants and stock options -- -- -- -- --
Exercise of stock options -- -- 8,335 -- 26
Issuance of preferred stock and
repurchase and retirement of
common stock 2,779,689 28 (1,342,626) (13) 7,358
-------------------------------------------------------------------------------
Balance at December 31, 1998 2,779,689 28 5,797,534 58 12,782
Comprehensive loss:
Net loss -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive loss
Noncash compensation from stock
purchase warrants and stock options -- -- -- -- --
Exercise of stock options -- -- 75,000 1 88
Issuance of common stock for notes
receivable from officers 2,779,689 28 1,104,110 11 3,412
-------------------------------------------------------------------------------
Balance at December 31, 1999 2,779,689 28 6,976,644 70 16,282
Comprehensive loss:
Net loss -- -- -- -- --
Foreign currency translation -- -- -- -- --
adjustment
Comprehensive loss (24,416)
Exercise of stock purchase warrants -- -- 1,091,058 11 3,572
Exercise of stock purchase warrants --
officers -- -- 52,675 -- 31
Beneficial conversion feature of
convertible Short Term Notes Payable -- -- -- -- 890
Noncash compensation from stock
purchase warrants and stock options -- -- -- -- --
Exercise of stock options -- -- 250,877 3 337
Balance at December 31, 2000 2,779,689 $28 8,371,254 $ 84 $21,112
===============================================================================
NOTES DEFERRED CUMULATIVE
RECEIVABLE - STOCK ACCUMULATED TRANSLATION
OFFICERS COMPENSATION DEFICIT ADJUSTMENTS TOTAL
-------------------------------------------------------------------------------
Balance at December 31, 1997 $ -- $(67) $ (17,254) $ (71) $ (11,923)
Comprehensive loss:
Net loss -- -- (5,163) -- (5,163)
Foreign currency translation adjustment -- -- -- (92) (92)
---------
Comprehensive loss (5,255)
Noncash compensation from stock
purchase warrants and stock options -- 26 -- -- 26
Exercise of stock options -- -- -- -- 26
Issuance of preferred stock and
repurchase and retirement of
common stock -- -- -- -- 7,373
-------------------------------------------------------------------------------
Balance at December 31, 1998 -- (41) (22,417) (163) (9,753)
Comprehensive loss:
Net loss -- -- (1,706) -- (1,706)
Foreign currency translation adjustment -- -- -- (96) (96)
---------
Comprehensive loss (1,802)
Noncash compensation from stock
purchase warrants and stock options -- 38 -- -- 38
Exercise of stock options -- -- -- -- 89
Issuance of common stock for notes
receivable from officers (3,423) -- -- -- --
-------------------------------------------------------------------------------
Balance at December 31, 1999 (3,423) (3) (24,123) (259) (11,428)
Comprehensive loss:
Net loss -- -- (24,257) -- (24,257)
Foreign currency translation adjustment -- -- (159) (159)
---------
Comprehensive loss (24,416)
Exercise of stock purchase warrants -- -- -- -- 3,583
Exercise of stock purchase warrants
- officers -- -- -- -- 31
Beneficial conversion feature of
convertible Short Term Notes -- -- -- -- 890
Payable
Noncash compensation from stock
purchase warrants and stock options -- 3 -- -- 3
Exercise of stock options -- -- -- -- 340
Balance at December 31, 2000 $ (3,423) $ -- $ (48,380) $(418) $ (30,997)
===============================================================================
See accompanying notes.
S-5
38
PaySys International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
2000 1999 1998
-------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net loss $ (24,257) $ (1,706) $ (5,163)
Add (deduct) adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Revised joint venture agreement (550) -- --
Depreciation 1,525 1,294 1,480
Amortization of computer software costs 412 434 391
Amortization of discounts on debt 443 353 118
Interest expense associated with beneficial conversion
feature of convertible Short Term Notes Payable 890 -- --
Provision for doubtful accounts and concession (1,266) 1,915 1,940
Accrued rent expense (172) (337) (308)
Noncash compensation 3 38 26
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables 8,290 (3,482) (5,361)
Deposits and other assets 3 (528) (48)
Accounts payable 925 87 (1,321)
Accrued employee compensation (472) 415 (483)
Deferred revenues 6,374 1,142 199
Other liabilities (1,375) 1,468 (3,639)
-------------------------------------------------
Net cash (used in) provided by operating activities (9,227) 1,093 (12,169)
INVESTING ACTIVITIES
Purchases of furniture and equipment (1,893) (1,721) (1,224)
Purchased computer software rights -- (1,818) --
-------------------------------------------------
Net cash used in investing activities (1,893) (3,539) (1,224)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock -- -- 7,373
Exercise of options and warrants 371 89 172
Proceeds from short-term notes payable 8,000 15,016 9,735
Principal payments on long-term debt, capital lease
obligations (185) (10,435) (3,023)
-------------------------------------------------
Net cash provided by financing activities 8,186 4,670 14,257
-------------------------------------------------
Effect of foreign currency translation on cash and cash
equivalents (159) (96) (92)
-------------------------------------------------
(Decrease) increase in cash and cash equivalents (3,093) 2,128 772
Cash and cash equivalents at beginning of period 3,974 1,846 1,074
-------------------------------------------------
Cash and cash equivalents at end of period $ 881 $ 3,974 $ 1,846
=================================================
See accompanying notes.
S-6
39
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
PaySys International, Inc. (the Company) is a global provider of credit card
transaction processing software to banks, retailers and third party processors.
PaySys' flagship software product, VisionPLUS(R), is a customizable software
system consisting of a range of integrated application modules for processing
both bank and retail credit card transactions. Additionally, the Company has
developed a new transaction payment software engine that is an internet-enabled,
diversified billing and customer management system that serves
business-to-business e-commerce. This new engine will enable commercial users to
integrate a highly flexible payment system into their e-commerce systems.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances,
transactions, and profits and losses have been eliminated.
BASIS OF PRESENTATION
The Company's financial statements are prepared and presented on a basis
assuming it will continue as a going concern. At December 31, 2000, the Company
had an accumulated deficit of $48,380,000 and negative working capital of
$24,245,000 and incurred a net loss of $24,257,000 for the year ended December
31, 2000. The Company has total cash and cash equivalents of $881,000 at
December 31, 2000, which are not sufficient for the Company to fund operations
through December 31, 2001. Management believes that sufficient funds will be
available from either the sale of the Company's operations or obtaining
additional financing to support planned operations through December 31, 2001.
The Company intends to raise additional funds through the sale of a portion of
the operations to outside investors (see Note 11). There can be no assurance
that the Company will be able to raise additional funds on terms favorable to
the Company, or at all. These conditions raise substantial doubt about the
Company's ability to continue as a going concern through at least December 31,
2001. These financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
S-7
40
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are derived from sales of software licenses and related services.
The Company recognizes revenue in accordance with Statement of Position (SOP)
97-2, "Software Revenue Recognition". Under SOP 97-2, license and professional
service fee revenues from contracts that require significant production or
modification are recognized under contract accounting on a percentage of
completion basis as services are performed. For contracts which do not require
significant production or modification, fees are allocated to the various
contract elements based on the fair value of each element and are recognized as
follows; software license revenue upon delivery of the software and related
documentation when the fees are fixed and determinable and collectibility is
assessed as probable; professional services revenue as the services are
performed; and post-contract customer support over the term of the arrangement.
Revenue related to research and development agreements is recognized as services
are performed over the related funding period for each contract. Such revenue is
included in license revenue. Service fees received from the sales of software
maintenance and support contracts and sales of other professional services were
recognized over the period the services were provided or as the services were
performed.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provided guidance on revenue recognition matters. The Company
adopted the provisions of SAB 101 effective January 1, 2000. The adoption of SAB
101 did not have a material impact on the Company's revenue recognition
policies, financial condition or results of operations.
S-8
41
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's revenues consist primarily of license and service revenues from
large companies in the United States, Canada, South America, Europe, Australia,
China and South Africa. The Company does not obtain collateral against its
outstanding receivables. The Company maintains reserves for potential credit
losses for both billed and unbilled receivables. Bad debt expense was $363,000,
$240,000, and $240,000 during the years ended 2000, 1999 and 1998, respectively.
During 2000, revenues from one customer accounted for 11% of the Company's
revenue. During 1999 and 1998, no individual customer exceeded 10% of revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The Company maintains
deposits with a bank and invests its excess cash in overnight funds.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives (generally 3 to 5 years). Amortization of computer equipment under
capital lease is recorded over the term of the lease and is included in
depreciation expense. Expenditures for repairs and maintenance are charged to
operations as incurred.
INTERNAL USE SOFTWARE
Under the provisions of SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", the Company capitalizes costs incurred
in developing or obtaining internal use software. No software has been developed
internally for internal use. At December 31, 2000 unamortized software costs
from purchased software totaled $600,000, net of accumulated amortization of
$253,000, which is included in furniture and equipment (see Note 2).
S-9
42
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE COMPUTER COSTS
The Company conforms with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed", which requires capitalization of costs
incurred in developing new software products once technological feasibility, as
defined, has been achieved. Costs of maintaining existing software and research
and development costs are otherwise expensed as incurred. No software
development costs were capitalized in 2000, 1999 or 1998. The Company records
amortization of capitalized software development costs using the greater of 1)
the ratio of current sales to total expected sales for a product or 2) the
straight-line method over the estimated economic life of the related product
(currently three years). Amortization of software development costs totaled
$48,000, $252,000, and $357,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
SFAS No. 86 also allows for the capitalization of purchased software. In 1999,
the Company entered into an agreement to terminate a previously existing royalty
agreement. The original agreement provided for royalty payments based on the
sale of a particular component of the Company's product. The termination
agreement assigns all rights to that component to the Company. The net amount of
the agreement, $1,818,000, is included in computer software costs and is being
amortized over five years, the estimated economic life of the product.
Amortization of such costs totaled $364,000 and $182,000 for the years ended
December 31, 2000 and 1999, respectively, and is included in Cost of License
Fees.
INCOME TAXES
The Company follows the liability method of accounting for income taxes.
Deferred income taxes relate to the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
S-10
43
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation", provides an alternative
to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), in accounting for stock-based compensation issued to
employees. The Company accounts for stock option grants in accordance with APB
25 and has elected the pro forma disclosure alternative of the effect of SFAS
No. 123.
ADVERTISING COSTS
During 2000, 1999, 1998 the Company expensed advertising costs of $359,000,
$143,000, and $143,000, respectively. Advertising costs are expensed as
incurred.
RECLASSIFICATION
Certain amounts reported in the 1998 and 1999 financial statements have been
reclassified to conform to the 2000 financial statement presentation.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
DECEMBER 31
2000 1999
------------------------------------------
(In thousands)
Furniture and equipment:
Office furniture and equipment $ 1,974 $ 1,313
Computer equipment and software 5,983 4,808
Computer equipment under capital lease 1,560 1,565
------------------------------------------
9,517 7,686
Less allowances for depreciation and
amortization (6,213) (4,750)
------------------------------------------
$ 3,304 $ 2,936
==========================================
S-11
44
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers its cash and cash equivalents, accounts receivable,
short-term and long-term debt and capital lease obligations to be its only
significant financial instruments and believes that the carrying amounts of
these instruments approximate their fair value. The carrying amount of long-term
debt approximates fair value based on current interest rates available to the
Company for debt instruments with similar terms, degree of risk and remaining
maturities. The remaining financial instruments approximate fair value based on
their short-term nature.
4. LONG-TERM DEBT AND LEASES
Long-term debt and capital lease obligations consist of the following:
DECEMBER 31
2000 1999
-----------------------------------
(In thousands)
12.5% Note payable due May 15, 2006 (1) $15,000 $15,000
Less discount (2,342) (2,785)
-----------------------------------
12,658 12,215
Loan from product development joint venture due
August 31, 2002, no interest (2) -- 550
Other debt -- 52
Capital lease obligations, various imputed interest rates and
monthly payments 161 294
-----------------------------------
12,819 13,111
Less current portion (100) (733)
-----------------------------------
$12,719 $12,378
===================================
S-12
45
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND LEASES (CONTINUED)
(1) This note is secured by a lien on equipment, accounts receivable and
software and related material. The lender was granted warrants to purchase
999,563 shares of the Company's common stock, exercisable at $.01 per share
(see Note 7). The stated interest rate combined with the amortization of
discount allocated to the fair value of the warrants results in a 15.5%
effective interest rate. Beginning in June 2003 and continuing each quarter
through March 2006, the Company must redeem $1,250,000 in aggregate
principal plus accrued and unpaid interest. Redemption of the outstanding
principal amount of the note, including accrued and unpaid interest, is
required upon the closing of an initial public offering resulting in at
least $25 million in proceeds, a change in control or a qualified
disposition, as defined by the note. In January of 2000 the lender
exercised the referenced warrants and received 996,338 shares of the
Company's common stock (net of exercise costs settled in shares).
(2) In 1999, the Company entered into a software development joint venture
agreement for a specific project, whereby the Company could borrow fifty
percent of the associated development cost, up to $600,000, from the
co-developer. The loan was non-interest bearing and repayment was due by
the earlier of August 31, 2002 or as future revenue was recognized from the
sales of the jointly developed product. In December 2000, this agreement
was modified whereby the third party provided for 100% funding for all
development costs up to $1,200,000, thus relieving this loan obligation.
The modification requires the Company to be responsible for all additional
development costs. In addition, revised revenue sharing methodology was
established concurrently. As of December 31, 2000, approximately $3,400,000
has been incurred on this project. The $600,000 and $600,000 received from
the third-party in the years ended 2000 and 1999, respectively, is
reflected in the statement of operations as license revenue.
S-13
46
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND LEASES (CONTINUED)
The Company's notes payable and long-term debt agreements contain covenants
restricting additional borrowings, the incurrence of liens on assets, the
acquisition and disposition of assets, capital expenditures, distributions to
shareholders and certain financial restrictions.
Under a sublease agreement, the Company leases office space from Quadram
Corporation ("Quadram"), a wholly owned subsidiary of Intelligent Systems
Corporation (ISC). ISC and the chairman of ISC are shareholders of the Company.
The lease began in 1996 and ends November 2002 (subject to earlier termination
if Quadram's lease is terminated). Rental expense under this agreement was
$460,000, $342,000, and $310,000 for 2000, 1999, and 1998, respectively.
Total rental expense was $3,214,000, $2,861,000, and $2,784,000 for 2000, 1999,
and 1998, respectively.
Required payments by year for long-term debt, capital leases and non-cancelable
operating leases with initial or remaining terms in excess of one year at
December 31, 2000, were as follows:
LONG-TERM CAPITAL OPERATING
YEAR ENDING DECEMBER 31, DEBT LEASES LEASES
------------------------------------------------------------------------------------------------------
(In thousands)
2001 $ -- $112 $2,429
2002 -- 62 1,502
2003 3,750 -- 133
2004 5,000 -- 112
2005 and beyond 6,250 -- 159
-----------------------------------------------------
15,000 174 4,335
Less amounts representing interest and discounts
(2,342) (13) --
-----------------------------------------------------
$12,658 $161 $4,335
=====================================================
S-14
47
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES
LINE OF CREDIT
On October 19, 1999, the Company entered into a $5 million revolving line of
credit facility with a financial institution. Borrowings under the facility at
December 31, 1999 were $1,067,000 and are included in other current liabilities
due to the revolving nature of repayment. In December 2000, the revolving line
of credit facility was cancelled and the outstanding amount on the line of
credit was repaid in full through proceeds from the $1,500,000 promissory note
from existing investors as described under Short Term Notes Payable.
SHORT TERM NOTES PAYABLE
In July 2000, the Company issued convertible subordinated notes ("Notes") to a
group of existing investors for a total of $4,500,000 in cash. The Notes bear
interest at 8% per annum. Interest and principal were due on the earlier of
December 31, 2000, the closing date of Maker's first Triggering Financing (as
defined in the Notes), or the occurrence of an Event of Default (as defined in
the Notes). The Notes were convertible into the Company's Series A-2 preferred
stock upon a Triggering Event (as defined in the Note Purchase Agreement) on or
before December 31, 2000 in an amount equal to the Conversion Amount divided by
the Alternative Per Share Price (as defined in the Note Purchase Agreement), or
if A-2 preferred shares are not available or designated at the conversion date,
the Notes may be converted into notes bearing interest of 12% beginning
January 1, 2001. The stated interest rate combined with the amortization of
discount allocated to fair value of the beneficial conversion feature (see
Note 7) results in a 50% effective interest rate.
In January 2001, the Company cancelled the Note Purchase Agreement and the Notes
and issued revised notes and a revised Note Purchase Agreement effective July
2000 ("New Notes"), whereby the interest rate was retroactively increased to 50%
per annum from the effective date of the original convertible subordinate notes
and the conversion feature of the Notes was cancelled (see Note 11). Principal
and interest on the New Notes are due on demand on or after February 28, 2001,
subject to the terms in the amended Note Purchase Agreement.
S-15
48
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SHORT TERM NOTES PAYABLE (CONTINUED)
In September 2000, the Company issued a promissory note to an existing investor
("the Investor") in exchange for $2,000,000 in cash. Interest is accrued at 12%
per annum and accrued interest and principal are due on demand on or after
October 31, 2000. In December 2000, the Company issued an additional promissory
note to the Investor in exchange for $1,500,000 in cash. Interest is accrued at
50% per annum and accrued interest and principal are due on demand on or after
January 12, 2001. In January 2001, the Company cancelled the two promissory
notes and reissued revised promissory notes effective on the original promissory
notes respective issuance dates, whereby interest is accrued at 50% and
principal and accrued interest are due on demand on or after February 28, 2001
(see Note 11).
ROYALTY AGREEMENT
In 1998, the Company executed an agreement to terminate a royalty agreement that
had previously been in place as a result of a software development agreement
entered into by the Company and a customer.
The Company had been required in the initial period of the original agreement to
pay 10% of any sale, license or other grant of right to use the product that
totaled less than $1,000,000 and 15% of any sale, license or other grant of
right to use the product that totaled more than $1,000,000. The fees were to
increase incrementally each year until paid in full. The entire amount that
would have been owed was capped at $6,027,000. In settlement, the Company issued
a note payable of $4,694,000 and incurred a one-time expense in 1998 of $4.3
million. The outstanding balance at December 31, 1998 of $4,444,000 was repaid
in 1999.
S-16
49
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SOFTWARE LICENSE AGREEMENT
In 1999, the Company entered into a software license agreement whereby the
Company purchased approximately $675,000 of software for internal use. The terms
of the agreement require the Company to pay for the license in equal monthly
installments through August 31, 2001. As of December 31, 2000 the remaining
balance of $196,000 is included in the balance sheet in other current
liabilities.
DEVELOPMENT AND DISTRIBUTION AGREEMENT
In 2000, the Company entered into a development and distribution agreement
whereby the Company purchased approximately $93,000 of software for internal
use. The terms of the agreement require the Company to pay an annual
distribution fee of $30,000 annually for four year effective March 31, 2001.
LEGAL MATTERS
The Company is a party to various legal proceedings and is involved in various
unasserted claims and assessments that have arisen in the normal course of its
business. In the opinion of management, these actions will not have a material
adverse effect on the Company's consolidated financial statements.
S-17
50
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The provisions for income taxes for 2000, 1999 and 1998 are as follows:
YEAR ENDED DECEMBER 31
2000 1999 1998
-------------------------------
(In thousands)
Current tax expense:
Federal $ -- $ -- $ --
Foreign (5) 270 188
State -- -- --
-------------------------------
Total current (5) 270 188
Deferred tax expense (benefit):
Federal -- -- --
Foreign -- -- --
State -- -- --
-------------------------------
Total deferred -- -- --
-------------------------------
$ (5) $270 $188
===============================
Income tax expense for the year ended December 31, 2000 relates to a foreign tax
credit. No additional income tax expense has been recorded for the year ended
December 31, 2000 due to the Company's loss for the period and the related net
operating loss carryforward position.
S-18
51
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
A reconciliation of the statutory U.S. income tax rate to the effective income
tax rate is as follows:
YEAR ENDED DECEMBER 31
2000 1999 1998
---------------------------------
(In thousands)
Tax (benefit) at statutory federal rate $(8,234) $ (488) $(1,692)
State taxes, net of federal benefit (264) (38) (131)
Foreign tax credits (23) (270) (274)
Foreign withholding taxes 17 190 188
Foreign operations not subject to U.S. tax 69 80 50
Meals and entertainment 112 40 74
Increase in other tax credits (530) (423) --
Other-net 63 (144) (189)
Change in valuation allowance 8,785 1,323 2,162
---------------------------------
Total income tax (benefit) expense $ (5) $ 270 $188
=================================
S-19
52
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Components of U.S. deferred tax assets (liabilities) are as follows:
DECEMBER 31
2000 1999 1998
-----------------------------------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards $ 14,859 $ 6,217 $ 5,591
Accruals not deductible for tax purposes 2,254 2,532 2,629
General business credit carryforwards 2,578 2,070 1,567
Foreign tax credit carryforwards 491 506 316
Minimum tax credit carryforwards 213 213 213
Property and equipment, principally due to
depreciation -- 15 9
---------------------------------
Total gross deferred tax assets 20,395 11,553 10,325
Deferred tax liability:
Property and equipment, principally due to
depreciation (75) -- --
Amortization of intangibles -- (18) (113)
---------------------------------
Total gross deferred tax liabilities (75) (18) (113)
Less valuation allowance (20,320) (11,535) (10,212)
---------------------------------
Net deferred tax asset $ -- $ -- $ --
=================================
At December 31, 2000, the Company had general business and foreign tax
carryforwards which expire in 2001 through 2015 and AMT credit carryforwards
available to offset future federal income tax liabilities totaling approximately
$213,000. The Company has net federal loss carryforwards of $37,477,000
generated through December 31, 2000 for federal income tax purposes that expire
at various dates between 2012 through 2020.
S-20
53
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
In addition, the Company's foreign subsidiaries had cumulative losses of
$3,350,000 at December 31, 2000. The tax benefits of these credit carryforwards
and net operating loss carryforwards can be realized only through their
application to taxable income arising from future successful operations of the
Company. These credit and net operating loss carryforwards may be subject to
certain limitations under Section 382 in the event of an ownership change. Due
to the uncertainty of the Company's ability to fully realize the benefits of the
credit and net operating loss carryforwards, a valuation allowance has been
recorded against net deferred tax assets. When recognized, the tax benefit of
those items will be applied to reduce future income tax amounts.
7. SHAREHOLDERS' EQUITY
WARRANTS
In connection with a financing agreement entered into with Capital Resource
Partners IV, L.P. and CRP Investment Partners IV, L.L.C. on April 15, 1999, the
Company issued warrants to purchase an aggregate of 999,563 shares of the
Company's common stock at an exercise price of $.01 per share. In the event of a
change in control or an event of default, as defined, or within one year of the
redemption of all outstanding shares of Series A-1 Preferred Stock, the holder
or holders of the warrants have the right to put the warrants to the Company at
the then current fair market value of the shares underlying the warrants. The
warrants were valued at approximately $3.1 million, which has been recorded as a
discount to the related debt and redeemable stock purchase warrants. The
discount is amortized to interest expense over eighty-four months, the term of
the debt. The related interest expense in 2000 and 1999 was approximately
$445,000 and $300,000, respectively. Warrants issued under the agreement expire
on the earlier of (a) a qualified IPO or (b) the later of April 15, 2006 or such
time as all principal and interest on the notes is paid in full. The warrants
may either be exercised in full, partially, or through a net issue election, as
defined. Warrant holders have certain rights to purchase future subordinated
debt issued by the Company, according to their pro-rata holdings of warrants and
warrant shares to total stock outstanding. In January 2000, these warrants were
exercised and 994,346 shares of common stock were issued (net of exercise price
settled in shares).
S-21
54
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
In connection with a financing agreement entered into with Sirrom Capital, L.P.
(Sirrom) on September 26, 1997, the Company issued warrants to purchase 37,660
shares of the Company's common stock at an exercise price of $.002 per share
which were fully exercisable and outstanding at December 31, 1997. The warrant
was valued at approximately $307,000. If the debt remained outstanding for
certain periods during the term of the financing arrangement the Company was
required to issue warrants to purchase additional shares of common stock. During
1999 and 1998, the Company issued warrants to purchase 9,560 and 47,500,
respectively additional shares at $0.002 per share and valued these additional
warrants at approximately $30,000 and $147,000, respectively. Of the additional
warrants 57,060 were fully exercisable and outstanding during 2000 and 1999,
respectively. Warrants issued under this financing agreement provide the holder
of the warrant the right and option to sell to the Company the warrants for a
period of thirty days immediately prior to the expiration of the warrant, at a
purchase price equal to the fair market value of the shares of common stock that
would be issued upon exercise of the warrant. In December 2000, 94,720 warrants
were exercised by Sirrom in exchange for an equal amount of shares of the
Company's common stock.
BENEFICIAL CONVERSION FEATURE OF SHORT TERM NOTES PAYABLE
The Notes described in Note 4 included a beneficial conversion feature for
conversion into capital stock. The $890,000 value of the beneficial conversion
feature has been recorded as a discount on the Notes and was amortized to
interest expense over the terms of the notes payable.
STOCK-BASED AWARDS TO EMPLOYEES
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock-based awards to employees because, as discussed below,
the alternative fair value accounting provided for under SFAS No. 123 requires
use of option valuation models that were not developed for use in valuing
stock-based awards to employees. Under APB 25, no compensation expense is
recognized for stock-based awards with an exercise price equal to the fair value
of the underlying stock on the date of grant.
S-22
55
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED) (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
Pro forma information regarding net income (loss) is required by SFAS No. 123,
which also requires that the information be determined as if the Company has
accounted for its stock-based awards to employees granted subsequent to December
31, 1994 under the fair value method prescribed by that statement. The fair
value for these awards were estimated at the date of grant using the minimum
value method with the following weighted-average assumptions for 2000, 1999 and
1998: risk-free interest rate of 5.5% for 1998, 6.0% for 1999; and 6.4% for
2000, no dividend yield; and a weighted-average expected life of the awards of 7
years. The weighted average fair value of awards granted during 2000, 1999 and
1998 was $.67, $1.10, and $.93 per share, respectively.
The option valuation models require the input of highly subjective assumptions.
Because the Company's stock-based awards to employees have characteristics
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee awards.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
DECEMBER 31
2000 1999 1998
--------------------------------------------
(In thousands)
Net loss $24,387 $(1,824) $(5,255)
S-23
56
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED) (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
The 1995 Stock Incentive Plan (the "1995 Plan") allows for the granting of
options for up to 1,088,750 shares of common stock to employees and directors.
Stock options granted under the Plan may be either incentive stock options or
nonqualified stock options. Incentive stock options may be granted with exercise
prices of no less than the fair market value. The options expire 10 years from
the date of grant. Options may be granted with different vesting terms but
generally provide for vesting equally over a four-year period.
In October 1997, the Company adopted the 1997 Stock Incentive Plan (the "1997
Plan"). The 1997 Plan allowed for the granting of options for up to 411,250
shares of common stock to employees, non-employee directors, consultants and
other vendors. In 1999, the 1997 Plan was amended to increase the number of
options by 932,835, or a total of 1,344,085. Stock options granted under the
Plan may be either incentive stock options or nonqualified stock options.
Incentive stock options may be granted with exercise prices of no less than the
fair market value. The options expire 10 years from the date of grant. Options
may be granted with different vesting terms but generally provide for vesting
equally over a four-year period.
S-24
57
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
The following table summarizes option activity for 2000, 1999 and 1998 under the
Company's stock option plans.
WEIGHTED
EXERCISE PRICE AVERAGE
SHARES RANGE EXERCISE PRICE
---------------------------------------------
Outstanding at December 31, 1997 1,058,085 $0.80-3.10 $1.30
Granted 339,000 3.10 3.10
Exercised (8,335) 3.10 3.10
Expired (81,250) 3.10 3.10
---------------------------------------------
Outstanding at December 31, 1998 1,307,500 $0.80-3.10 $1.64
Granted 193,500 3.10 3.10
Exercised (75,000) 0.80-3.10 1.11
Expired (153,938) 3.10 3.10
---------------------------------------------
Outstanding at December 31, 1999 1,272,062 $0.80-3.10 $1.72
Granted 889,000 3.10 3.10
Exercised (250,877) 3.10 3.10
Expired (233,727) 3.10 3.10
---------------------------------------------
Outstanding at December 31, 2000 1,676,458 $0.80-3.10 $2.48
=============================================
Exercisable at December 31, 1998 796,581 $0.80-$3.10 $1.24
Exercisable at December 31, 1999 844,859 $0.80-$3.10 $1.47
Exercisable at December 31, 2000 775,185 $0.80-$3.10 $1.88
Options outstanding at $.80 per share totaled 572,020 of which 410,080 were
exercisable at December 31, 2000. The weighted average remaining contractual
life of options exercisable at $.80 per share was five years at December 31,
2000. Options outstanding at $3.10 per share totaled 1,104,438 of which 365,105
were exercisable at December 31, 2000. The weighted average remaining
contractual life of options exercisable at $3.10 per share was nine years at
December 31, 2000.
S-25
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PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)
In addition to the stock option plans described above, the Company has issued
warrants to purchase common stock to employees. During 1995, the Company issued
to each of two individuals warrants to purchase 52,675 shares of common stock at
an exercise price of $.60 per share. These warrants, which expire in December
2005, become exercisable equally over a two-year and three-year vesting period.
In April and June 1997, 35,000 shares of common stock were issued pursuant to
the partial exercise of one of these warrants and the remainder of the warrant
to purchase 17,675 shares of common stock was canceled in September 1997. In
March 2000, the remaining warrants were exercised and 52,675 shares of common
stock were issued.
In 1996, the Company issued warrants to two employees to purchase 1,104,110
shares of common stock exercisable at a price per share based on $50,000,000
divided by the number of shares outstanding at the exercise date. These warrants
were exercisable upon achievement of certain milestones and expire in February
2003. Effective August 5, 1997, the Company amended these warrants. The
amendment fixed the exercise price of the warrants at $4.80 per share, and the
warrants became fully exercisable as of the amendment date. As a result of
amending the warrants, the Company recorded compensation expense of $3,708,000
in 1997 for the difference between the exercise price and estimated fair value
per share at the amendment date. In 1999, these warrants were canceled in
exchange for full recourse notes receivable, totaling $3,423,000, and the
issuance of 1,104,110 shares of common stock. The notes bear interest at 5% per
annum payable on April 30, 2001 and annually thereafter. The notes are due on
the earlier of (a) September 30, 2004 or (b) one year after the date of an
initial public offering or any other sale or transfer of securities of the
Company, as defined in the agreement. The December 31, 2000 notes receivable
balance is included in shareholders' equity.
At December 31, 2000, a total of 4,878,311 shares of the Company's common stock
were reserved for the exercise of outstanding stock options and conversion of
convertible preferred stock.
S-26
59
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK
In 1998 the Company amended and restated its Articles of Incorporation to
authorize 10,000,000 shares of preferred stock and designate 2,779,689 shares as
Series A-1 Convertible Participating Preferred Stock. Each share of Series A-1
Preferred Stock is convertible at any time after the date of issuance into a
number of shares of common stock, determined by dividing the Series A-1 original
cost by the Series A-1 conversion price that is currently in effect. Upon
issuance, the conversion price is deemed to be the original price. Each share of
Series A-1 Preferred Stock entitles it's holder to voting rights equivalent to
those that would exist if the holder were to convert to common stock and to
receive $5.72 per share plus accrued dividends in the event of involuntary or
voluntary liquidation, adjusted for any combinations, consolidations, stock
splits, or stock distributions or dividends. The collective Series A-1 Preferred
Stock shareholders have the right to appoint and remove, at their discretion,
one member of the Company's Board of Directors. In 1998 the Company issued
2,779,689 shares of Series A-1 Preferred Stock in exchange for $7.5 million in
cash (less issuance costs) and 1,342,626 shares of previously outstanding shares
of common stock that were retired.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan (the "Plan") for the benefit of
eligible employees and their beneficiaries. All employees are eligible to
participate in the Plan on the first day of the month following hire. Effective
July 1, 1998 the Company amended the plan to provide for an employer matching
contribution equal to 20% of up to 6% of eligible compensation deferred by the
employee. Prior to this amendment, employer contributions were discretionary.
Effective January 1, 2000 the Company amended the plan to provide for an
employer matching contribution equal to 100% of up to 3% of the eligible
compensation deferred by the employee. The Company's contribution vests in even
increments over a five-year period. Contribution expense related to the Plan
during 2000, 1999 and 1998 was $480,000, $219,000 and $194,000 respectively.
S-27
60
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SEGMENTS AND GEOGRAPHICAL INFORMATION
The Company is organized around two geographic areas; the United States and
foreign operations. Foreign operations primarily consist of Australia, Ireland,
Singapore, and South Africa.
The foreign locations principally function as service providers for the products
developed by the Company in the United States. The accounting policies as
described in the summary of significant accounting policies are applied
consistently across the two segments. Foreign revenues are based on intercompany
transfer prices to provide a reasonable margin upon distribution.
S-28
61
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SEGMENTS AND GEOGRAPHICAL INFORMATION (CONTINUED)
Information about the Company's operations by geographic area is as follows:
2000 1999 1998
----------------------------------------
(In thousands)
UNITED STATES
Revenues:
License fees $ 12,215 $ 19,789 $ 18,385
Service 21,542 25,144 23,443
----------------------------------------
Total revenues 33,757 44,933 41,828
Interest income 361 211 108
Interest expense (3,978) (2,554) (1,279)
Depreciation and amortization (1,870) (1,577) (1,783)
Income tax expense (17) -- $ --
Income (loss) before income taxes (24,441) (1,150) $ (4,826)
Long-lived assets 4,423 4,593 $ 2,571
Total segment assets 12,637 22,702 $ 17,148
Expenditures for long-lived assets 1,536 3,371 $ 757
FOREIGN OPERATIONS
Revenues:
License fees -- -- $ --
Service 6,720 5,135 4,077
----------------------------------------
Total revenues 6,720 5,135 $ 4,077
Interest income 8 8 $ 10
Interest expense -- (1) $ --
Depreciation and amortization (67) (151) $ (88)
Income tax benefit (expense) 22 (270) $ (188)
Income (loss) before income taxes 179 (286) $ (149)
Long-lived assets 555 367 $ 434
Total segment assets 1,088 1,187 $ 709
Expenditures for long-lived assets 357 168 $ 467
S-29
62
PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SEGMENTS AND GEOGRAPHICAL INFORMATION (CONTINUED)
Export sales were $28.3 million, $30.6 million, and $27.6 million in 2000, 1999,
and 1998, respectively. Such revenues were derived principally from Australia,
New Zealand, Canada, Europe, West Indies, South Africa and South America.
Accounts receivable (billed and unbilled) arising from foreign revenues total
$7.2 million and $8.1 million as of December 31, 2000 and 1999, respectively.
10. SUPPLEMENTAL CASH FLOW INFORMATION
The following is a summary of non-cash transactions and additional cash flow
information:
FOR THE YEAR ENDED DECEMBER 31
2000 1999 1998
----------------------------------
(In thousands)
Furniture and equipment acquired under
capital lease obligations $ -- $ 46 $ 382
==================================
Relief of loan from negotiated cost-sharing
agreement
$ 550 $ -- $ --
==================================
Cash paid for interest $1,723 $2,010 $1,303
==================================
Cash paid for income taxes $ 17 $ 247 $ 188
==================================
11. SUBSEQUENT EVENTS
On January 11, 2001 the existing $4,500,000 of convertible notes and Note
Purchase Agreement and $3,500,000 of demand notes described in Note 5 under the
subheading Short Term Financing were cancelled and exchanged for unsubordinated,
non-convertible demand notes with an interest rate of 50%. The notes described
above have the same principal amount and issuance date of the originally issued
notes. Principal and accrued interest are due on demand on or after February 28,
2001.
As part of the revised Note Purchase Agreement dated January 11, 2001, an
additional $4,000,000 of notes were issued on January 11, 2001. Interest accrues
at 50%. Principal and accrued interest are due on demand on or after February
28, 2001.
S-30
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PaySys International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENTS (CONTINUED)
On March 17, 2001 the Company signed a definitive agreement to be acquired in a
cash transaction for $135 million including payment of debt. Certain proprietary
technology will be spun out to shareholders immediately prior to the
acquisition. Several contractual modifications, assignments, and dispute
resolutions need to be completed as conditions to closing. In addition, certain
governmental approvals, corporate governance transactions, personnel and
shareholder-related actions are required.
S-31
64
To the Board of Directors
VISaer, Inc. and Subsidiaries
100 Fordham Road
Wilmington, Massachusetts 01887
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of VISaer, Inc. and
Subsidiaries (the Company) as of December 31, 2000 and the related consolidated
statements of operations, comprehensive loss, redeemable convertible preferred
stock and stockholders' deficiency, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We did not audit the financial
statements of VISaer (UK) Ltd. and VISaer (IRL) Ltd., wholly owned subsidiaries,
which statements reflect total assets of $817,198 and $6,198 as of December 31,
2000, respectively, and total revenues of $488,841 and $249,360, for the five
months and year then ended, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and in our opinion, insofar as
it relates to the amounts included for VISaer (UK) Ltd. and VISaer (IRL) Ltd.,
are based solely on the reports of the other auditors.
We conducted our audit 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of VISaer, Inc. and Subsidiaries as of
December 31, 2000, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
Moody, Famiglietti & Andronico, LLP
February 27, 2001
S-32
65
CONSOLIDATED BALANCE SHEET VISAER, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
DECEMBER 31 2000
----------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 168,926
Accounts Receivable, Net of Allowance for Doubtful Accounts of $15,000 837,927
Prepaid Expenses and Other Current Assets 29,314
----------------------------------------------------------------------------------------------------------
Total Current Assets 1,036,167
Property and Equipment, Net of Accumulated Depreciation (Note 2) 206,647
Other Assets 50,577
----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,293,391
============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Notes Payable - Stockholders (Note 12) $ 263,750
Accounts Payable 824,189
Accrued Expenses 1,067,183
Deferred Revenues 1,017,601
Deferred Gain (Note 7) 4,564,325
Current Maturities of Capital Lease Obligations (Note 3) 57,137
----------------------------------------------------------------------------------------------------------
Total Current Liabilities 7,794,185
Notes Payable - Stockholders (Note 12) 2,267,856
Capital Lease Obligations, Net of Current Maturities (Note 3) 44,606
Deferred Rent 108,231
Deferred Income Taxes (Note 4) 211,525
----------------------------------------------------------------------------------------------------------
Total Liabilities 10,426,403
----------------------------------------------------------------------------------------------------------
Redeemable Convertible Preferred Stock:
Series A Redeemable Convertible Preferred Stock: $0.001 Par Value;
1,881,721 Shares Authorized; 1,523,298 Shares Issued and Outstanding
at Redemption Value; Liquidation Preference of $4,250,000 (Note 10) 4,250,000
Series B Redeemable Convertible Preferred Stock: $0.001 Par Value;
1,628,700 Shares Authorized, Issued and Outstanding at Redemption
Value; Liquidation Preference of $879,500 (Note 10) 879,500
Series C Redeemable Convertible Preferred Stock: $0.001 Par Value;
337,331 Shares Authorized, No Shares Issued and Outstanding (Note 10) --
Series D Redeemable Convertible Preferred Stock: $0.001 Par Value;
369,125 Shares Authorized; 33,556 Shares Issued and Outstanding at Redemption
Value, Net of Unaccreted Discount of $20,294; Liquidation Preference
of $49,327 (Note 10) 29,033
----------------------------------------------------------------------------------------------------------
Total Redeemable Convertible Preferred Stock 5,158,533
----------------------------------------------------------------------------------------------------------
Stockholders' Deficiency:
Common Stock: $0.001 Par Value; 15,000,000 Shares Authorized;
965,189 Shares Issued and Outstanding 965
Additional Paid-in Capital 4,689,522
Accumulated Deficit (18,934,603)
Accumulated Other Comprehensive Deficit (47,429)
----------------------------------------------------------------------------------------------------------
Total Stockholders' Deficiency (14,291,545)
----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIENCY $ 1,293,391
============
The accompanying notes are an integral part of these consolidated financial
statements.
S-33
66
CONSOLIDATED STATEMENT OF OPERATIONS VISAER, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
For the Year Ended December 31 2000
--------------------------------------------------------------
Revenues:
Software Licenses $ 3,113,159
Maintenance and Support Services 8,094,870
Hardware Equipment Sales 544,118
--------------------------------------------------------------
Total Revenues 11,752,147
--------------------------------------------------------------
Cost of Revenues:
Software Licenses 680,477
Maintenance and Support Services 4,619,525
Hardware Equipment Sales 445,975
--------------------------------------------------------------
Total Cost of Revenues 5,745,977
--------------------------------------------------------------
Gross Profit 6,006,170
--------------------------------------------------------------
Operating Expenses:
Research and Development 3,415,907
Selling and Marketing 3,206,936
General and Administrative 2,140,493
--------------------------------------------------------------
Total Operating Expenses 8,763,336
--------------------------------------------------------------
Loss from Operations (2,757,166)
--------------------------------------------------------------
Other Income (Expense):
Gain on Sale of Product Line (Note 7) 2,926,114
Interest Expense (708,504)
Other Expense (69,297)
Other Income 26,154
--------------------------------------------------------------
Total Other Income 2,174,467
--------------------------------------------------------------
Net Loss $ (582,699)
============
The accompanying notes are an integral part of these consolidated financial
statements.
S-34
67
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS VISAER, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31 2000
-------------------------------------------------------------
Net Loss $(582,699)
Other Comprehensive Loss:
Foreign Currency Translation Adjustment (52,778)
-------------------------------------------------------------
Total Comprehensive Loss $(635,477)
=========
The accompanying notes are an integral part of these consolidated financial
statements.
S-35
68
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE
PREFERRED AND STOCKHOLDERS' DEFICIENCY VISAER, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
SERIES A SERIES B SERIES C SERIES D
---------------------- ---------------------- --------------------------------------------
NUMBER $.001 PAR NUMBER $.001 PAR NUMBER $.001 PAR NUMBER $.001 PAR
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
---------------------- ---------------------- --------------------------------------------
Balance as of December 31, 1999 1,881,721 $ 5,250,000 1,628,700 $ 879,500 337,331 $2,250,000 369,125 $ 790,768
Exercise of Stock Options - - - - - - - -
Accretion of Series D
Convertible Preferred Stock - - - - - - - 287,250
Repurchase of Convertible
Preferred Stock (358,423) (1,000,000) - - (337,331) (2,250,000) (335,569) (1,048,985)
Issuance of Common Stock
Warrants - - - - - - - -
Net Loss - - - - - - - -
Foreign Currency Translation
Adjustment - - - - - - - -
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Balance as of December 31, 2000 1,523,298 $ 4,250,000 1,628,700 $ 879,500 - $ - 33,556 $ 29,033
====================== ====================== ============================================
STOCKHOLDERS' DEFICIENCY
---------------------------------------------------------------------------
COMMON STOCK FOREIGN
---------------------- ADDITIONAL CURRENCY TOTAL
NUMBER $.001 PAR PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
OF SHARES VALUE CAPITAL ADJUSTMENT DEFICIT DEFICIENCY
---------------------- -------------------------------------- -------------
Balance as of December 31, 1999 958,146 $ 958 $ 318,677 $ 5,349 $(18,064,654) $(17,739,670)
Exercise of Stock Options 7,043 7 2,218 - - 2,225
Accretion of Series D
Convertible Preferred Stock - - - - (287,250) (287,250)
Repurchase of Convertible
Preferred Stock - - 4,298,984 - - 4,298,984
Issuance of Common Stock
Warrants - - 69,643 - - 69,643
Net Loss - - - - (582,699) (582,699)
Foreign Currency Translation
Adjustment - - - (52,778) - (52,778)
---------------------------------------------------------------------------
Balance as of December 31, 2000 965,189 $ 965 $4,689,522 $ (47,429) $(18,934,603) $(14,291,545)
====================== ====================================== ============
The accompanying notes are an integral part of these consolidated financial
statements.
S-36
69
CONSOLIDATED STATEMENT OF CASH FLOWS VISAER, INC. AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31 2000
-------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Loss $ (582,699)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities:
Depreciation and Amortization 399,319
Gain of Sale of Product Line (2,926,114)
Deferred Income Taxes (106,000)
Interest Expense Capitalized to Debt 205,070
Non-Cash Amortization of Debt Discount 191,803
Decrease in Accounts Receivable 4,342,214
Increase in Prepaid Expenses and Other Current Assets (226,323)
Increase in Other Assets (50,577)
Increase in Accounts Payable 1,145,298
Decrease in Accrued Expenses (539,585)
Decrease in Deferred Revenues (2,854,414)
Decrease in Deferred Rent (15,854)
-------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (1,017,862)
-------------------------------------------------------------------------------------------
Cash Flows Used in Investing Activities:
Acquisition of Property and Equipment (76,978)
-------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Payable - Stockholders 905,000
Repayments Under Line of Credit (356,831)
Principal Repayments of Capital Lease Obligations (49,356)
Proceeds from Issuance of Common Stock 2,225
-------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 501,038
-------------------------------------------------------------------------------------------
Effect of Foreign Currency Exchange Rate Changes on Cash 24,657
-------------------------------------------------------------------------------------------
Net Decrease in Cash (569,145)
------------
Cash, Beginning 738,071
------------
Cash, Ending $ 168,926
============
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest $ 289,251
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the year ended December 31, 2000, the Company financed the
acquisition of certain property and equipment with capital lease obligations in
the amount of $48,735.
See Notes 7 and 12 for additional disclosure of non-cash investing and financing
activities.
The accompanying notes are an integral part of these consolidated financial
statements.
S-37
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VISAER INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements include the
accounts of VISaer, Inc. (the Parent) and its wholly owned subsidiaries, VISaer
(UK) Ltd., VISaer (IRL) Ltd., Visibility, Ltd. and Visibility Europe Ltd. (the
Subsidiaries). On July 28, 2000, under the terms of a share purchase agreement
(the Share Purchase Agreement) with a third party, the Parent effectively sold
its net assets, operations and contracts relating to its Engineer-to-Order (ETO)
product line of business, which included the sale of Visibility Europe, Ltd.
(Note 7). Accordingly, the consolidated financial statements include the
activity of Visibility Europe Ltd. and the Parents' ETO product line of business
operations only through July 28, 2000. Under the terms of the Share Purchase
Agreement, the Parent also sold its rights to the "Visibility" name and, as
such, the Parent's name was changed from Visibility, Inc. to VISaer, Inc.,
effective on August 1, 2000. All significant inter-company balances and
transactions of the Parent and Subsidiaries (the Company) have been eliminated
in consolidation.
Reporting Entity: VISaer Inc. was originally incorporated in 1979 as a
Massachusetts corporation and, effective October 25, 1996, became incorporated
as a Delaware corporation. VISaer (UK), Ltd. was incorporated on June 27, 2000,
as an English corporation. VISaer (IRL) Ltd. was incorporated on August 16,
1994, as an Irish corporation. Visibility, Ltd. was incorporated on May 15,
1985, as a Canadian corporation. Visibility Europe Ltd. was incorporated on
September 18, 1996, as an English corporation. Through July 28, 2000, the
principal business activities of the Company included the development,
marketing, sale and support of an integrated line of business application
software for manufacturers and aviation maintenance, repair and overhaul
companies. Subsequent to the Parent's sale of its ETO product line of business
on July 28, 2000 (Note 7), the Company's business activities are focused
primarily toward the development, marketing, sale and support of the "VISaer",
an integrated, enterprise resource planning (ERP) system suited to the specific
"Service-to-Order" needs of aerospace maintenance, repair and overhaul (MRO)
companies, as well as various technical records management and other consulting
services. The Company's customers are located worldwide.
The Company is subject to a number of risks similar to those of other companies
in a similar stage of development, such as the need to obtain adequate
financing, dependence on key individuals, the need for products, and competition
from other companies.
The Company has experienced losses from operations, reduction in liquidity and
is in an accumulated deficit and negative working capital position. The Company
also remains primary obligor as of December 31, 2000 on certain liabilities in
the amount of approximately $4,500,000 assumed by a third party (the Buyer)
under the Share Purchase Agreement, including certain liabilities in litigation
as of December 31, 2000 (Note 7). Included in the liabilities assumed by the
Buyer was the Parent's line of credit arrangement with a financial institution
with a balance outstanding as of December 31, 2000 in the amount of
approximately $1,600,000. This line of credit is currently in default and has
been terminated by the financial institution effective March 30, 2001, at which
time all outstanding obligations under the line of credit are to become due and
payable (Note 8).
In regard to these conditions, the Buyer and the Company are working toward
arranging a renegotiated payment plan with the financial institution for the
Buyer to repay the balance outstanding under the line of credit. Also, the
Company may attempt to seek a new relationship with a bank to provide the
Company with additional working capital. However, there can be no assurance that
the Company and the Buyer will be successful in renegotiating the terms of the
line of credit, or that additional bank financing will be available or on terms
favorable to the Company. Management estimates the Company's backlog as of
February 27, 2001, to be approximately $2,000,000 (unaudited), which represents
contracts for full systems implementations, including licensed software,
services and software maintenance. The Company has developed an operating plan
designed to control operating costs, increase revenues, sustain gross margins
and provide for additional procedures to monitor and manage the payment of
liabilities assumed by the Buyer. Through December 31, 2000, the Company's
largest investors have provided funding to the Company under various equity and
debt financings and have stated that they have the positive ability, intent and
commitment to continue to fund or arrange sufficient funding for cash
requirements that the Company may have through at least December 31, 2001.
Property and Equipment: Property and equipment are recorded at cost.
Depreciation is calculated using straight-line and accelerated methods for both
financial and income tax reporting purposes over the estimated useful and
statutory lives of the related assets, respectively.
S-38
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
Software Development Costs: The Company capitalizes software development costs
after technological feasibility of the product has been established. Costs
incurred prior to the establishment of technological feasibility are charged to
research and development expense. The Company did not capitalize software
development costs during the year ended December 31, 2000, as the costs incurred
after reaching technological feasibility was established were immaterial.
Deferred Rent: The Company records rent expense related to non-cancelable lease
agreements based on a constant periodic rent over the term of the lease. The
excess of the cumulative rent expense incurred over the cumulative amounts due
under the lease agreement is deferred and recognized over the term of the
non-cancelable lease.
Revenue Recognition: The Company reports under the provisions of Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition". In accordance with SOP
No. 97-2, the Company recognizes revenue from non-cancelable software licenses
upon delivery, provided evidence of an arrangement exists, the fee is fixed and
determinable, collection is probable and no further significant obligations
remain at the time of delivery. Post contract maintenance and support service
fees are typically billed separately and are recognized on a straight-line basis
over the life of the applicable agreement. Revenues from consulting services are
recognized upon performance of the services. Revenues from equipment sales are
recognized when the products are shipped. Revenues from long-term service and
development contracts are recognized on the percentage of completion method.
Income Taxes: The Company reports under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
require an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Research and Development: The Company expenses all research and development
expenses as incurred.
Foreign Currency Translation: The financial statements of VISaer, (UK) Ltd. and
Visibility Europe, Ltd. are translated into United States dollars in accordance
with SFAS No. 52, "Foreign Currency Translation." Assets and liabilities are
translated at the current exchange rates in effect as of the balance sheet date.
Common stock and additional paid-in capital are translated at historical
exchange rates. Income statement accounts are translated at the average exchange
rates for the related periods. Translation adjustments arising from differences
in exchange rates are recorded as a separate component of stockholders'
deficiency. Transaction gains and losses are recorded in the consolidated
statement of operations. The functional currency of the Parent's other foreign
subsidiaries, VISaer (IRL) Ltd. and Visibility, Ltd., is the U.S. dollar. Gains
and losses for these subsidiaries resulting from the remeasurement of foreign
currencies into U.S. dollars are recorded in the consolidated statement of
operations and such amounts are immaterial.
Advertising Costs: The Company expenses advertising costs as incurred.
Advertising expense incurred by the Company during the year ended December 31,
2000, amounted to $99,798.
Comprehensive Loss: Comprehensive loss consists of changes in stockholders'
deficiency not related to transactions with stockholders. They include net loss
and certain other comprehensive loss items that are not presented in the
consolidated statement of operations, but which are recorded as a separate
component of stockholders' deficiency, net of the related tax effect. As of
December 31, 2000, these items of other comprehensive loss include foreign
currency translation adjustments.
Use of Estimates: Management has used estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities in its preparation of the consolidated financial statements in
accordance with generally accepted accounting principles. Actual results
experienced by the Company may differ from those estimates.
S-39
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
2. PROPERTY AND EQUIPMENT:
As of December 31, 2000, property and equipment consists of the following:
Computer Equipment $ 248,620
Leasehold Improvements 176,104
Telephone System 159,021
Purchased Software 100,293
Furniture and Fixtures 29,281
---------
713,319
Less: Accumulated Depreciation 506,672
---------
$ 206,647
=========
3. CAPITAL LEASE OBLIGATIONS:
The Parent is a party to various non-cancelable capital lease agreements, which
expire at various dates through October, 2003. As of December 31, 2000, the
total future minimum and present value lease payments due under these agreements
are as follows:
YEAR ENDED
DECEMBER 31,
2001 $ 67,008
2002 35,061
2003 13,616
---------
115,685
Less: Amount Representing Interest 13,942
---------
Present Value of Net Minimum Lease
Payments 101,743
Current Maturities of Capital Lease
Obligations 57,137
---------
Capital Lease Obligations, Net of
Current Maturities $ 44,606
=========
4. INCOME TAXES:
The provision for income taxes during the year ended December 31, 2000, consists
of the following:
Current $ 106,000
Deferred (106,000)
----------
$ --
==========
As discussed in Note 1, the Company reports under the provisions of SFAS 109.
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The temporary differences, which give rise to a
significant portion of the Company's deferred income taxes as of December 31,
2000, are as follows:
Deferred Tax Liabilities $ 211,525
============
Deferred Gain $ 1,845,000
Net Operating Loss Carryforwards 2,331,000
Tax Credits 1,494,000
Deferred Rent 44,000
Other Deferred Tax Assets 34,000
------------
5,748,000
Less: Valuation Allowance (5,748,000)
------------
Total Deferred Tax Assets $ --
============
The valuation allowance as of December 31, 2000, relates to the uncertainty of
realizing the tax benefits of the deferred tax assets. Nonetheless, some, if not
all, of these deferred tax assets may be available to offset any deferred tax
liabilities as they become otherwise payable.
As of December 31, 2000, the Company has federal and foreign net operating loss
carryforwards of approximately $4,300,000 and $2,700,000, respectively. The
Parent also has federal and state tax credit carryforwards of approximately
$949,000 and $825,000, respectively. Section 382 of the Internal Revenue Code
and the tax laws of certain foreign jurisdictions contain provisions that could
place limitations on the utilization of these net operating loss carryforwards
and tax credits in the event of a change in ownership, as defined.
S-40
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
5. RETIREMENT PLAN:
The Parent maintains a 401(k) retirement plan covering substantially all of its
employees. The plan allows each employee participant an election to defer a
percentage of their compensation up to the maximum allowed for federal income
tax purposes. The Parent contributes 25% of the employee's contribution, up to a
maximum of 6% of each participant's salary. Contributions may be suspended at
the option of the Parent's Board of Directors. During the year ended December
31, 2000, the Parent contributed approximately $64,000 into the plan.
6. OPERATING LEASE COMMITMENTS:
The Company leases certain facilities, vehicles and equipment under
non-cancelable lease agreements expiring through July 2004, as well as certain
facilities under tenant-at-will agreements. The Parent subleases certain space
in its Wilmington, Massachusetts facility under a tenant-at-will agreement.
During the year ended December 31, 2000, lease expense incurred by the Company
under these lease agreements, net of sublease rental income, amounted to
$391,638.
Future minimum lease payments due under these non-cancelable lease agreements as
of December 31, 2000, are as follows:
YEAR ENDED
DECEMBER 31,
------------
2001 $ 332,953
2002 320,569
2003 313,465
2004 153,182
-----------
$ 1,120,169
===========
7. SALE OF PRODUCT LINE:
On July 27, 2000, the Parent formed a new wholly owned subsidiary, ETO, Inc. and
on June 27, 2000, it's former wholly owned subsidiary, Visibility Europe, Ltd.
also formed a new subsidiary, Tribonium, Inc. In connection with the formation
of ETO, Inc., the Parent contributed, at book value, all of its operational
assets and liabilities relating to its ETO product line of business into ETO,
Inc. In connection with the formation by Visibility Europe, Ltd. of Tribonium,
Inc., Visibility Europe, Ltd. contributed, at book value, all of its non-ETO
product line of business operational assets and liabilities into Tribonium, Inc.
Subsequent to such transfer of assets and liabilities, 100% of the stock of
Tribonium, Inc. was spun off from Visibility Europe, Ltd. to the Parent. On July
27, 2000, the name of Tribonium, Inc. was changed to VISaer (UK) Ltd.
On July 28, 2000, under the Share Purchase Agreement, the Parent sold 100% of
its shares in ETO, Inc. and Visibility Europe, Ltd. (the Sold Subsidiaries),
containing all of its net assets, operations and contracts relating to its ETO
product line of business, to the Buyer. The consideration received by the Parent
under this sale transaction consisted solely of the assumption by the buyer of
all of the liabilities contained in the Sold Subsidiaries.
The book value of net assets included in the Sold Subsidiaries on July 28, 2000
consisted of the following:
Accounts Receivable $ 2,642,518
Other Current Assets 637,247
Property and Equipment, Net 621,703
Accounts Payable and Accrued Expenses (4,706,874)
Line of Credit, Plus Accrued Interest (1,580,239)
Note Payable, Plus Accrued Interest (1,270,628)
Deferred Revenues (3,953,247)
Capital Lease Obligations (254,448)
------------
Excess of Liabilities over Book Value of
Net Assets Included in Sold Subsidiaries $ (7,863,968)
============
The Parent did not obtain releases from creditors for a substantial portion of
the liabilities and contracts assumed by the Buyer and, consequently, remains
the primary obligor for any such obligations outstanding as of December 31,
2000. Accordingly, the Parent has not derecognized liabilities assumed by the
Buyer for which the Parent continues to be the primary obligor as of December
31, 2000 and has classified them on the accompanying consolidated balance sheet
as "deferred gain." As of December 31, 2000, the balance of deferred gain
consisted of the following liabilities:
Accounts Payable and Accrued
Expenses $2,020,966
Line of Credit, Plus Accrued
Interest (Note 8) 1,618,505
Note Payable, Plus Accrued
Interest 595,626
Deferred Revenues 124,976
Capital Lease Obligations 204,252
----------
Total Deferred Gain as of
December 31, 2000 $4,564,325
==========
S-41
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
7. SALE OF PRODUCT LINE (CONTINUED):
During the year ended December 31, 2000, the gain recognized by the Parent on
the sale of the ETO product line of business consisted of the following:
Excess of Liabilities over Book Value of
Net Assets Included in Sold Subsidiaries $ 7,863,968
Less: Deferred Gain as of
December 31, 2000 (4,564,325)
Transaction Costs (373,529)
------------
Gain on Sale of Product Line $ 2,926,114
============
In connection with the Share Purchase Agreement, the Buyer assumed a
subordinated, unsecured note payable agreement between the Parent and Mentec
Limited (Mentec), at which time the outstanding balance, plus accrued interest,
amounted to 1,270,628. The note bears interest at 8% per annum. In connection
with the issuance of this note, the Parent issued 50,000 common stock warrants
at an exercise price of $6.67 per share. The fair value of the warrants was
immaterial. The warrants expire upon the repayment of the note. As of December
31, 2000, the remaining balance outstanding under the note, including accrued
interest and certain expenses, amounted to $595,626. This balance has been
included as deferred gain in the accompanying consolidated balance sheet. During
January 2001, the Parent and the Buyer entered into a settlement agreement with
Mentec, such that the outstanding balance due as of December 31, 2000 would be
repaid by the Buyer in two $200,000 installments on January 25, 2001 and
February 22, 2001, with a third and final installment due on March 22, 2001, for
the remaining balance due. During January and February 2001, the Buyer made
payments in accordance with the terms of the January, 2001 settlement agreement.
During July 2000, a vendor of the Parent filed a lawsuit in the U.S. District
Court, District of Massachusetts for a claim in the amount of $291,567, plus
certain damages and expenses. The lawsuit claims that payment had not been made
for certain invoices provided to the Parent for services performed by the vendor
during 1999. This liability was assumed by the Buyer under the Share Purchase
Agreement and remains outstanding as of December 31, 2000. The outstanding
balance of this liability as of December 31, 2000 in the amount of $291,567 has
been included in the deferred gain - accounts payable in the accompanying
consolidated balance sheet.
8. DEFERRED GAIN - LINE OF CREDIT:
During March 2000, the Parent entered into a line of credit agreement with a
financial institution, the initial proceeds from which were used to repay and
terminate the Parent's then existing line of credit agreement. The Parent
continues to have 71,685 common stock warrants outstanding with the financial
institution that provided the previous line of credit, which warrants have an
exercise price of $2.79 per share and expire during June 2004. Under the terms
of the new line of credit agreement, borrowings were limited to the lesser of
85% of worldwide eligible accounts receivable or $4,000,000. The line of credit
is collateralized by a first security interest in substantially all assets of
the Parent. Interest on the outstanding balance was calculated at the prime rate
in effect during the borrowing term plus 2%, with a minimum monthly interest
charge of $4,150.
In connection with this line of credit agreement, the Parent issued to the
financial institution 55,363 common stock warrants with an exercise price of
$5.78 per share and an expiration date of March 30, 2007. The fair value of
these warrants was not material.
In connection with the Parent's sale of its ETO product line operations during
July 2000 (Note 7), the Buyer assumed the line of credit, at which time the
outstanding balance, plus accrued interest, amounted to $1,580,239. The Parent
did not obtain a release from the financial institution for the assumption of
this obligation by the Buyer and, accordingly, it remains the primary obligor
under the original agreement. As of December 31, 2000, the outstanding balance
under the line of credit, plus accrued interest, amounted to $1,618,505, and has
been included as deferred gain in the accompanying consolidated balance sheet
(Note 7). As of December 31, 2000, the Parent, as primary obligor, was in
default of its obligations to the financial institution for, among other things,
changes in the nature of its business and the sale of assets under the Share
Purchase Agreement. The default interest rate under the line of credit is prime
plus 4%. Based on the defaults under the line of credit agreement, during
January 2001, the financial institution terminated the line of credit agreement
effective on its maturity date of March 30, 2001, at which time all outstanding
obligations under the line of credit are to become due and payable. The Buyer
and the Company are working toward arranging a renegotiated payment plan for the
Buyer to repay the balance outstanding under the line of credit. However, there
can be no assurance that the Company and the Buyer will be successful in
renegotiating the terms of the line of credit.
S-42
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
9. CROSS LICENSE, NON-COMPETITION AND NON-DISCLOSURE AGREEMENT:
In connection with the closing of the Share Purchase Agreement (Note 7), the
Parent entered into a cross license, non-competition and non-disclosure
agreement with the Buyer. Both, the software products under the ETO line of
business sold under the Share Purchase Agreement and the software products under
the MRO line of business retained by the Parent, generally share much of the
same source code contained in the ETO software products. Accordingly, the Buyer
granted the Parent an exclusive, royalty-free, worldwide, perpetual right to
license the ETO software for use solely in connection with the MRO line of
business, which provides that the Buyer and the Parent do not license products
to distributors that are in direct competition with each other. The Parent
retained exclusive ownership and all rights to the MRO software products. This
agreement also provides for, among other things, the licensing of certain
additional products and potential royalties thereon based on which parties are
involved in the future development of such products, as defined. In addition,
this agreement provides that, among other matters, the Buyer and the Parent will
generally not compete within each other's lines of businesses for a period of
five years.
10. PREFERRED STOCK:
SERIES A, B, C AND D REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series D: Series D preferred stock consists of 335,569, 16,778 and 16,778
authorized shares of Series D-1, D-2 and D-3 redeemable convertible preferred
stock, respectively. As of December 31, 2000, 16,778 shares of each of Series
D-2 and D-3 redeemable convertible preferred stock are outstanding.
Dividends: All classes of preferred stockholders are entitled to receive
dividends or other distributions equal to the dividend or distributions that
would be received had the preferred stockholders converted their shares into
common stock.
Voting: All classes of preferred stockholders are entitled to vote on an
as-converted basis together with common stockholders as one class.
Conversion: All classes of preferred stockholders are entitled to convert, at
the option of the holder, each share of preferred stock into one share of common
stock, adjusted for certain dilutive events, as defined. In the event of an
initial public offering with a per share price of less than $15.00, each holder
of the preferred stock will receive a cash payment equal to the liquidation
preference (the IPO Preference Amount) and all shares will then convert
automatically into common stock. In the event of a qualified offering with a per
share price greater than or equal to $15.00, the preferred shares automatically
convert into common stock without any IPO Preference Amount.
Liquidation: In the event of a voluntary or involuntary liquidation, dissolution
or winding up of the Parent, the holders of Series A, B and C redeemable
convertible preferred stock are entitled to receive a $2.79, $.54 and $6.67 per
share liquidation preference, respectively, plus accrued and unpaid dividends.
The holders of Series D-1, D-2 and D-3 redeemable convertible preferred stock
are entitled to receive a $5.78, $.54 and $2.40 per share liquidation
preference, respectively, plus accrued and unpaid dividends. If the assets
available for distribution are insufficient to permit payment of the liquidation
preference amount, then the holders of the preferred stock shall share ratably
in any distributions, as defined. After distribution to the preferred
stockholders of the full liquidation preference amount, any remaining assets
available for distribution are distributed both to holders of common stock and
preferred stock on a pro rata basis, with the exception of holders of Series D
redeemable convertible preferred stock, assuming the preferred stock is
converted into common stock. Any dissolution or liquidation resulting from an
event of sale, as defined, with proceeds of greater than or equal to $15.00 per
share on an as-converted basis, will not result in distributions in accordance
with the foregoing; rather, all preferred stock will be converted into common
stock and shareholders will participate in the proceeds on a pro rata basis.
Redemption: As of March 31, 2003, the preferred stockholders may require the
Parent, with written notice of at least 30 days, to redeem the outstanding
preferred stock. The redemption price equals the liquidation preference of the
series held, plus all accrued but unpaid dividends.
S-43
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
10. PREFERRED STOCK (CONTINUED):
Other Restrictions: The Parent is restricted, without the approval of 51% of the
holders of preferred stock, from issuing additional shares of preferred stock,
common stock or convertible debt, altering the terms of outstanding preferred
stock, amending its articles of incorporation, selling or otherwise disposing of
all or substantially all of its assets, or voluntarily dissolving or otherwise
liquidating the Company.
Accretion: In connection with the issuance of notes payable to certain
stockholders of the Parent in the aggregate amount of $1,100,000 (Note 12), the
Parent allowed such stockholders to convert 369,125 shares of common stock held
by them into 335,569, 16,778 and 16,778 shares of Series D-1, D-2 and D-3
redeemable convertible preferred stock, respectively, and issued 415,847 common
stock warrants to those stockholders. The warrants expire during September 2002,
have an exercise price of $.60 and were valued using the Black-Scholes option
pricing model. The value of the consideration was allocated to the debt and
equity securities based on their relative fair values. The discount on preferred
stock is being accreted over the term of the securities. The unaccreted discount
on Series D-2 and D-3 redeemable convertible preferred stock outstanding as of
December 31, 2000, amounted to $20,294.
Repurchase of Preferred Stock: During September 2000, the Parent repurchased
358,423, 337,331 and 335,569 shares of its Series A, C and D-1 redeemable
convertible preferred stock, respectively, and 654,952 of its common stock
warrants, all of which had an exercise price of $.60, for aggregate
consideration in the amount of $1. In connection with this transaction, the
Parent reduced the balance of its redeemable convertible preferred stock, net of
unaccreted discount, with a corresponding increase to additional paid-in capital
in the aggregate amount of $4,298,984.
11. CONTINGENCIES:
During January 2001, a vendor filed a lawsuit against the Parent and the Buyer
for a claim in the amount of $137,397, plus certain damages and expenses.
Obligations under the Parent's contract with this vendor were assumed by the
Buyer under the Share Purchase Agreement. The lawsuit claims that the Parent
breached its contract with the vendor for failing to make license fee payments
due under the terms of the Parent's contract with the vendor in the amount of
$137,397 and that the Parent wrongfully transferred its rights and obligations
under that contract to the Buyer under the Share Purchase Agreement. The Parent
and the Buyer are defending this lawsuit and the management of the Parent is of
the opinion that the outcome of this litigation will not have a material adverse
effect on the accompanying consolidated balance sheet.
S-44
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
12. NOTES PAYABLE - STOCKHOLDERS:
As of December 31, 2000, notes payable - stockholders consists of the following:
Seven, prime plus 2% unsecured notes payable to certain stockholders in the
amount of $1,100,000, plus aggregate accrued interest in the amount of $152,206.
During May 2000, maturities were extended from January 2001 to May 2003. In
connection with the issuance of these notes and the conversion of 369,125 shares
of common stock held by such stockholders into 335,569, 16,778 and 16,778 shares
of Series D-1, D-2 and D-3 redeemable convertible preferred stock, respectively,
during 1999, the Parent issued 415,847 common stock warrants to such
stockholders. The warrants, which expire during September 2002, have an exercise
price of $.60, and were valued using the Black-Scholes option pricing model. The
value of the consideration received was allocated to the debt and equity
instruments based on their relative fair values. The original debt discount on
these notes in the amount of $478,907 is being amortized over the extended term
of the notes to interest expense. Amortization of the debt discount on these
notes during the year ended December 31, 2000 amounted to $177,875. The
aggregate balance outstanding under these notes as of December 31, 2000, is net
of unamortized debt discount of $174,861. During September 2000, the Parent
repurchased 277,231 of the common stock warrants originally issued with these
notes (Note 10). $ 1,077,345
Nine, prime plus 2% unsecured notes payable to certain stockholders in the
amount of $650,000, plus aggregate accrued interest in the amount of $42,712,
mature in May 2003. In connection with the issuance of these notes, the Parent
issued 818,396 common stock warrants. The warrants, which expire during May
2003, have an exercise price of $.60, and were valued using the Black-Scholes
option pricing model. The value of the consideration received was allocated to
the debt and equity instruments based on their relative fair values. The
original debt discount on these notes in the amount of $69,643 is being
amortized over the term of the notes to interest expense. Amortization of the
debt discount on these notes during the year ended December 31, 2000 amounted to
$13,928. The aggregate balance outstanding under these notes as of December 31,
2000, is net of unamortized debt discount in the amount of $55,715. During
September 2000, the Parent repurchased 377,721 of the common stock warrants
originally issued with these notes (Note 10). 636,997
Two, 10% notes payable to certain stockholders, in the amount of $402,555, plus
aggregate accrued interest in the amount of $150,959. During May 2000,
maturities were extended from January 2001 to May 2003. The notes are
collateralized by the Parent's accounts receivable. 553,514
S-45
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
12. NOTES PAYABLE - STOCKHOLDERS (CONTINUED):
Five, 12% unsecured notes payable to certain stockholders in the amount of
$255,000, plus aggregate accrued interest in the amount of $8,750, due upon
demand. 263,750
-----------
Total Notes Payable - Stockholders 2,531,606
Less: Current Portion 263,750
-----------
Long-Term Portion of Notes Payable - Stockholders $ 2,267,856
===========
Maturities of notes payable - stockholders as of December 31, 2000, consist of
the following:
YEAR ENDED
DECEMBER 31,
------------
2001 $ 263,750
2002 --
2003 2,498,432
----------
$2,762,182
==========
13. FOREIGN OPERATIONS:
Condensed audited information of the Parent's European Subsidiaries as of and
for the year ended December 31, 2000, is summarized as follows:
Revenues $ 2,981,758
Net Loss $(1,390,119)
Total Assets $ 823,396
Stockholders' Deficiency $(2,883,649)
Activity in the Canadian subsidiary, Visibility, Ltd., was not material during
the year ended December 31, 2000.
S-46
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VISAER INC. AND SUBSIDIARIES
14. STOCK OPTION PLANS:
As of December 31, 2000, 1,252,500 shares of the Parent's common stock are
reserved for issuance or grant under the Parent's 1996 and 1994 stock option
plans. The options may be granted to certain employees and directors of the
Parent and Subsidiaries at exercise prices not less than the fair market value
of the stock on the date of grant. The fair market value, rate of exercisability
and expiration dates of the options granted are determined by the Board of
Directors at the time of the grant. Options generally vest over a period
determined by the Board of Directors and expire ten years from the date of
grant.
Stock option activity during the year ended December 31, 2000, is as follows:
Weighted
Exercise Average
Number of Price Range Exercise Price Expiration
Shares Per Share Per Share Dates
---------- -------------- -------------- ----------
Outstanding as of December 31, 1999 895,001 $0.20 - $1.67 $ 0.46 2004-2009
Stock Options Granted 55,800 $0.60 $ 0.60 2010
Stock Options Exercised (7,043) $0.20 - $0.60 $ 0.48 2007-2008
---------- -------------- ------ ----------
Outstanding as of December 31, 2000 943,758 $0.20 - $1.67 $ 0.47 2002-2010
========== ============== ====== ==========
Exercisable as of December 31, 2000 463,529 $0.20 - $1.67 $ 0.47 2002-2010
========== ============== ====== ==========
During the year ended December 31, 2000, the employment of certain employees of
the Parent was terminated as a result of the transaction under the Share
Purchase Agreement discussed in Note 7. The expiration dates of 66,509 vested
options held by such terminated employees were extended by the Board of
Directors from three months to eighteen months after the termination of
employment. The weighted average exercise price of these extended options was
$.89 per share.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, the
Company has elected to continue following the guidance of Accounting Principles
Board (APB) No. 25 for measurement and recognition of stock-based transactions
with employees and to adopt the disclosure only provisions of SFAS No. 123. If
the Company had elected to recognize compensation costs for stock-based
compensation plans with employees based on the fair market value at the grant
dates for awards under those plans consistent with the method prescribed under
SFAS No. 123, such compensation expense would not have been material to the
consolidated statement of operations during the year ended December 31, 2000.
The fair value of the stock options, at the date of grant used to compute such
additional compensation was calculated under the Black-Scholes option pricing
model as described in SFAS No. 123 using the following assumptions: (i)
risk-free interest rate of 5.75% (ii) expected life of five years; (iii) no
dividend yield and (iv) no volatility. The weighted average fair value at the
date of grant for options granted during the year ended December 31, 2000, was
$0.15 per option.
15. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially expose the Company to concentrations of
credit risk include trade accounts receivable. To minimize this risk, ongoing
credit evaluations of customers' financial condition are performed, although
collateral is not required. The Company maintains reserves for potential credit
losses.
As of December 31, 2000, three customers represented approximately 25%, 16% and
13%, respectively, of gross accounts receivable.
S-47
80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Visibility Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Visibility Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1999 and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' deficit and cash flows for each of the two years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Visibility Inc. and
subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United
States.
Boston, Massachusetts
March 15, 2000
S-48
81
VISIBILITY INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999
ASSETS 1999
Current Assets:
Cash and cash equivalents $ 738,071
Accounts receivable, net of allowance for doubtful accounts of $373,861 7,977,903
Prepaid expenses and other current assets 461,377
------------
Total current assets 9,177,351
Property and Equipment, net 1,063,573
Other Assets 44,734
------------
Total assets $ 10,285,658
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Short-term debt $ 2,923,370
Current portion of capital lease obligations 135,368
Accounts payable 3,374,419
Accrued expenses 2,647,204
Deferred revenue 7,801,751
------------
Total current liabilities 16,882,112
Notes Payable to Shareholders 1,299,373
Capital Lease Obligations 221,444
Deferred Rent 124,085
Deferred Income Taxes 328,046
------------
Total liabilities 18,855,060
------------
Commitments and Contingencies (Note 10)
Redeemable Convertible Preferred Stock
Series A redeemable convertible preferred stock, $0.001 par value-
Authorized, issued and outstanding--1,881,721 shares, at redemption value
(liquidation preference of $5,250,000) 5,250,000
Series B redeemable convertible preferred stock, $0.001 par value-
Authorized, issued and outstanding--1,628,700 shares, at redemption value
(liquidation preference of $879,500) 879,500
Series C redeemable convertible preferred stock, $0.001 par value-
Authorized, issued and outstanding--337,331 shares, at redemption value
(liquidation preference of $2,250,000) 2,250,000
Series D redeemable convertible preferred stock, $0.001 par value-
Authorized, issued and outstanding--369,125 shares (redemption value and
liquidation preference of $1,988,916) 790,768
------------
Total redeemable convertible preferred stock 9,170,268
Stockholders' Deficit
Common stock, $0.001 par value-
Authorized--15,000,000 shares
Issued and outstanding--958,147 shares 958
Additional paid-in capital 318,677
Accumulated deficit (18,064,654)
Accumulated other comprehensive income 5,349
------------
Total stockholders' deficit (17,739,670)
------------
Total liabilities, redeemable convertible preferred stock and
stockholders' deficit $ 10,285,658
============
The accompanying notes are an integral part of these consolidated financial
statements.
S-49
82
VISIBILITY INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998
1999 1998
Revenues:
Software licenses $ 7,088,950 $10,580,620
Maintenance and support services 14,504,997 15,648,548
Hardware equipment sales 2,616,061 3,963,723
------------ -----------
24,210,008 30,192,891
------------ -----------
Cost of Revenues:
Software licenses 942,403 2,140,600
Maintenance and support services 9,050,259 8,874,150
Hardware equipment sales 2,129,342 3,208,613
------------ -----------
12,122,004 14,223,363
------------ -----------
Gross profit 12,088,004 15,969,528
Operating Expenses:
Selling and marketing 7,757,451 5,928,999
Research and development 5,511,591 6,628,824
General and administrative 2,455,290 2,372,088
------------ -----------
15,724,332 14,929,911
------------ -----------
(Loss) income from operations (3,636,328) 1,039,617
Interest Expense, net (includes amortization of debt discount of (553,384)
$126,171 in 1999 (Note 7)) (315,392)
Other (Expense) Income, net (35,435) 19,751
------------ -----------
(Loss) income before provision for income taxes (4,225,147) 743,976
Provision for Income Taxes -- 65,000
------------ -----------
Net (loss) income $ (4,225,147) $ 678,976
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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VISIBILITY INC. AND SUBSIDIARIES
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Deficit
For the Years Ended December 31, 1999 and 1998
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
STOCK SERIES A STOCK SERIES B STOCK SERIES C
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
Balance, December 31, 1997 1,881,721 5,250,000 1,628,700 879,500 337,331 2,250,000
Comprehensive loss -- -- -- -- -- --
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
--------- ---------- --------- -------- ------- ----------
Balance, December 31, 1998 1,881,721 5,250,000 1,628,700 879,500 337,331 2,250,000
Exercise of stock options -- -- -- -- -- --
Conversion of common stock to Series D
convertible preferred stock -- -- -- -- -- --
Accretion of Series D convertible
preferred stock -- -- -- -- -- --
Issuance of common stock warrants -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
--------- ---------- --------- -------- ------- ----------
Balance, December 31, 1999 1,881,721 $5,250,000 1,628,700 $879,500 337,331 $2,250,000
========= ========== ========= ======== ======= ==========
CONVERTIBLE PREFERRED ADDITIONAL
STOCK SERIES D COMMON SHARES PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
Balance, December 31, 1997 -- -- 1,189,669 1,190 452,397
Comprehensive loss -- -- -- -- --
Net loss -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive loss -- -- -- -- --
------- -------- ---------- ------- ---------
Balance, December 31, 1998 -- -- 1,189,669 1,190 452,397
Exercise of stock options -- -- 137,603 137 30,562
Conversion of common stock to Series D
convertible preferred stock 369,125 643,558 (369,125) (369) (221,106)
Accretion of Series D convertible
preferred stock -- 147,210 -- -- --
Issuance of common stock warrants -- -- -- -- 56,824
Comprehensive loss -- -- -- -- --
Net loss -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive loss -- -- -- -- --
------- -------- ---------- ------- ---------
Balance, December 31, 1999 369,125 $790,768 958,147 $ 958 $ 318,677
======= ======== ========== ======= =========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
INCOME (LOSS) INCOME (LOSS) DEFICIT DEFICIT
Balance, December 31, 1997 (4,240) (14,371,273) (13,921,926)
Comprehensive loss -- -- --
Net loss $ 678,976 -- 678,976 678,976
Foreign currency translation adjustment 6,054 6,054 -- 6,054
-----------
Comprehensive loss $ 685,030 -- -- --
=========== ------- ------------ ------------
Balance, December 31, 1998 1,814 (13,692,297) (13,236,896)
Exercise of stock options -- -- 30,699
Conversion of common stock to Series D
convertible preferred stock -- -- (221,475)
Accretion of Series D convertible
preferred stock -- (147,210) (147,210)
Issuance of common stock warrants -- -- 56,824
Comprehensive loss -- -- --
Net loss $(4,225,147) -- (4,225,147) (4,225,147)
Foreign currency translation adjustment 3,535 3,535 -- 3,535
-----------
Comprehensive loss $(4,221,612) -- -- --
=========== ------- ------------ ------------
Balance, December 31, 1999 $ 5,349 $(18,064,654) $(17,739,670)
======= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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VISIBILITY INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
1999 1998
Cash Flows from Operating Activities:
Net (loss) income $ (4,225,147) $ 678,976
Adjustments to reconcile net income (loss) to net cash used in
operating activities-
Depreciation and amortization 781,716 734,440
Interest expense capitalized to debt 162,459 76,925
Noncash amortization of debt discount 126,171 --
Changes in assets and liabilities, net of assets acquired-
Accounts receivable, net 585,998 (4,743,798)
Prepaid expenses and other current assets 48,227 (204,607)
Accounts payable 153,906 1,063,590
Accrued expenses (859,601) 272,695
Deferred revenue 1,815,373 1,269,554
Deferred rent 5,274 26,402
------------ -----------
Net cash used in operating activities (1,405,624) (825,823)
------------ -----------
Cash Flows from Investing Activities:
Acquisition, net of cash acquired -- (126,000)
Purchases of fixed assets (588,162) (206,878)
Other assets 35,609 (3,078)
------------ -----------
Net cash used in investing activities (552,553) (335,956)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 30,700 --
Proceeds from issuance of Series A preferred stock -- --
Proceeds from issuance of notes payable and Series D preferred
stock 1,100,000 --
Proceeds from short-term bank loans, net 423,370 --
Repayment of notes payable -- --
Payment of capital lease obligation (23,962) (311,395)
Payments of short-term bank loans, net -- --
------------ -----------
Net cash provided by (used in) by financing activities 1,530,108 (311,395)
------------ -----------
Foreign Exchange Impact on Cash 3,535 6,054
------------ -----------
Net (Decrease) Increase in Cash and Cash Equivalents (424,534) (1,467,120)
Cash and Cash Equivalents, beginning of year 1,162,605 2,629,725
------------ -----------
Cash and Cash Equivalents, end of year $ 738,071 $ 1,162,605
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 433,334 $ 242,771
============ ===========
Supplemental Disclosure of Noncash Financing and Investing
Activities:
Acquisition of equipment under capital lease $ 197,352 $ 283,731
============ ===========
Conversion of 369,125 shares of common stock into 369,125
shares of Series D redeemable convertible preferred stock,
net of discount (Note 12) $ 643,558 $ --
============ ===========
Conversion of notes payable into 627,240 shares of Series A
redeemable convertible preferred stock $ -- $ --
============ ===========
Discount on issuance of note payable to shareholders $ 478,907 $ --
============ ===========
Acquisition of certain assets of the former European
distributor-
Fair value of assets acquired-
Equipment $ -- $ --
Goodwill and other intangible assets -- 126,000
------------ -----------
-- 126,000
Forgiveness of Visibility debt, net -- --
------------ -----------
Cash payment for acquisition $ -- $ 126,000
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
S-52
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VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(1) NATURE OF THE BUSINESS
Visibility Inc., a Delaware corporation, and subsidiaries (the Company),
develops, markets, sells and supports an integrated line of business
application software for manufacturers and aviation maintenance, repair
and overhaul companies. The Company is subject to a number of risks
similar to those of other companies in a similar stage of development.
Principal among these risks are the need to obtain adequate financing,
dependence on key individuals, the need for successful development and
marketing of services and products, and competition from other companies.
Management believes that its current cash and available borrowings under
the Company's current and future bank lines of credit (see Note 6) will
provide sufficient capital to finance the Company through December 31,
2000. The Company may attempt to raise additional capital during 2000 in
order to fund operations, product marketing and development, and working
capital requirements. There can be no assurance that additional financing
will be available or on terms favorable to the Company. The Company's
largest investors have stated that they continue to support the Company
and that they have the positive ability, intent and commitment to fund or
arrange funding of any cash requirements that Visibility may have,
resulting from operating losses or other uses of cash required in the
ordinary course of business, through at least December 31, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain prior-year balances have been reclassified in order to conform
with the current year's presentation.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany
accounts and transactions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying
amounts of cash and cash equivalents approximate their fair value due to
the short-term maturities of these investments.
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VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's United Kingdom subsidiary is
the British pound sterling. Gains (losses) from foreign currency
translations of the United Kingdom subsidiary are credited or charged to
accumulated other comprehensive income (loss), which is included as a
component of stockholders' equity in the accompanying consolidated
balance sheets. The functional currency of the Company's other foreign
operations is the U.S. dollar. Gains and losses for these subsidiaries
resulting from the remeasurement of foreign currencies into U.S. dollars
are included in the results of operations and the amounts are
insignificant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to their
short-term nature. See Note 6 for fair value information pertaining to
the Company's long-term debt.
REVENUE RECOGNITION
In accordance with the provisions of Statement of Position (SOP) No.
97-2, Software Revenue Recognition, the Company recognizes revenue from
noncancelable software licenses upon product shipment, provided
collection is probable and no significant vendor and postcontract
customer obligations remain at the time of shipment. Sales of the
Company's products do not require significant production, modification or
customization of software. Installation of the software is routine,
requires insignificant effort and is not essential to the functionality
of the system or software. The Company accounts for insignificant vendor
obligations by deferring a portion of the revenue and recognizing it when
the related services are performed. Postcontract support (maintenance)
service fees are typically billed separately and are recognized on a
straight-line basis over the life of the applicable agreement. The
Company recognizes service revenues from consulting and implementation
services, including training, provided by both its own personnel and by
third parties, upon performance of the services. Long-term service and
development contracts are recognized using the percentage-of-completion
method. Revenue from equipment sales is recognized upon shipment of the
equipment.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software development costs after
technological feasibility of the product has been established. Costs
incurred prior to the establishment of technological feasibility are
charged to research and development expense. The Company capitalized no
software development costs during 1999 and 1998, as the costs incurred
after technological feasibility was established were deemed to be
immaterial. Capitalized software costs are amortized ratably over the
useful life of the product, generally two years, and are charged to cost
of revenues. There was no amortization expense for the year ended
December 31, 1999 relating to capitalized software.
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VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences,
utilizing current tax rates, of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Financial
Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133. Consequently, SFAS No. 133 will be effective for
the Company's year ending December 31, 2001. Management believes that
this statement will not have a significant impact on the Company.
(3) ACQUISITION
On May 15, 1997, the Company established a wholly owned UK subsidiary,
Visibility Europe Ltd. (the Subsidiary), which acquired certain equipment
and intangible assets of the Company's then European distributor, whose
parent company was formerly also a minority stockholder of the Company,
for $250,000. The purchase price was allocated $109,135 to equipment and
$140,865 to goodwill and other intangibles, which are being amortized on
a straight-line basis over three years. This acquisition was accounted
for as a purchase. Additional purchase price was contingent on the
Subsidiary achieving certain profitability levels for 1997 and 1998,
which the Company did not achieve in 1997. The Company achieved the 1998
targeted profitability, resulting in an additional $117,000 of contingent
consideration. This payment has been accounted for as an addition to
goodwill. $87,677 of goodwill amortization was recorded as an expense in
1999. Pro forma information for this acquisition has not been presented,
as the impact was not material.
(4) ACCOUNTS RECEIVABLE; ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT PROVISION NET DEDUCTIONS
BEGINNING OF CHARGED TO FROM BALANCE AT END
PERIOD OPERATIONS ALLOWANCE (1) OF PERIOD
Year Ended December 31, 1999 $ 424 $ 55 $ (105) $ 374
Year Ended December 31, 1998 484 40 (100) 424
(1) Accounts deemed uncollectable, net of recoveries.
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VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated using
the straight-line method over the estimated useful lives of the assets.
Maintenance and repair costs are charged to expense as incurred.
Fixed assets consist of the following at December 31, 1999:
ESTIMATED
USEFUL LIVES 1999
Furniture and fixtures 5 years $ 708,980
Equipment 1-3 years 3,503,784
Computer software 3 years 636,493
Leasehold improvements 2-10 years 352,207
-----------
5,201,464
Less--Accumulated depreciation and
amortization 4,137,891
-----------
$ 1,063,573
===========
Included above is equipment held under capital leases with a cost of
$477,494 and accumulated amortization of $149,319 at December 31, 1999.
(6) SHORT-TERM DEBT
LINE OF CREDIT
The Company has two line of credit facilities with a bank which allow the
Company to borrow up to $3,125,000 as of December 31, 1999. Borrowings
are secured by substantially all of the Company's assets under these two
facilities. Aggregate borrowings under these facilities at December 31,
1999 totaled $1,923,370. The facilities expire on March 31, 2000.
The first facility allows the Company to borrow against 80% of factored
U.S. accounts receivable up to a maximum of $2,125,000. Interest accrues
at the bank's prime rate (8.5% at December 31, 1999) plus 1.5% points. In
addition, a 0.5% administrative fee is due on the value of each factored
account receivable when it is collected. The facility has certain
covenants that pertain to the Company's profitability, as defined, which
the Company was in compliance with at December 31, 1999. $1,673,370 was
outstanding under this facility at December 31, 1999.
The second facility was entered into on October 1, 1999 and established a
line of credit in the maximum principal amount of $1,000,000 guaranteed
by the U.S. Export-Import Bank (EXIM). This facility allowed the Company
to borrow the lesser of a borrowing base calculation based on certain
percentages of accounts receivable originating outside the U.S.,
primarily from the U.K., as defined, or $1,000,000. As of December 31,
1999, the Company had borrowed $250,000 under this facility. During 1999,
the interest rate under this facility was the bank's prime rate (8.5% at
December 31, 1999) plus 2% points. The facility has certain covenants
that include the Company's profitability and quick ratios, as defined. At
December 31, 1999, the
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VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Company was not in compliance with these covenants. During 2000, the
Company is obligated to pay down the borrowings in $125,000 installments
on the 15th and last day of each month, beginning in February. The bank
applied the February payments to the $250,000 EXIM loan that has settled
this facility.
In connection with the November 1997 amendment of the credit line
agreement with the bank, the Company issued the bank a warrant to
purchase 71,685 shares of common stock at an exercise price of $2.79 per
share. The fair value of this warrant was immaterial. In connection with
the April 1998 amendment of the agreement with the bank, the bank will be
issued a warrant to purchase 10,526 shares of common stock at an exercise
price of $4.75 per share in the event that the Company defaults on its
payment obligations to the bank and it is not cured within two business
days. To date, warrants have not been issued since the Company has not
defaulted on its payments to the bank.
The Company has executed a Commitment Letter offered by a commercial
credit corporation that offers a $4 million credit line effective March
31, 2000. Borrowings under the credit line would be advanced against a
borrowing base calculation and would allow the lesser of 85% of worldwide
accounts receivable or $4 million. To secure the loans, the lender would
be granted a first priority security interest in all the assets of the
Company. Interest would accrue at the commercial credit corporation's
prime lending rate plus 2% points and a 1% commitment fee has been paid
subsequent to year-end. Minimum monthly interest charges would be $4,150.
The Company would grant to the lender warrants to purchase 55,363 shares
of the Company's common stock at an exercise price of $5.78 per share
which would be exercisable for seven years from the date of issuance. The
credit line period is one year and is automatically renewable. There are
no profitability or financial ratio covenants associated with the credit
line. The Company expects that this credit line would be sufficient to
provide for its working capital needs through December 31, 2000.
NOTE PAYABLE TO OTHERS
The Company has $1,000,000 of borrowings under a senior subordinated note
agreement due to a former shareholder, the parent company of its former
European distributor. The note plus accrued interest is reflected as
short-term debt in the accompanying 1999 balance sheet and is due on May
15, 2000. The note is subject to acceleration provisions upon the closing
of an initial public offering, sale or other disposition, as defined. The
note accrues interest at 8% per annum, payable upon maturity, and is
unsecured. As part of the financing, the Company also issued a warrant
for the purchase of up to 50,000 shares of common stock at $6.67 per
share. The fair value of the warrant was not material. The warrant
expires upon repayment of the senior subordinated note.
Interest expense on this note for 1999 and 1998 was $80,000 for each
year.
(7) LONG-TERM DEBT
The Company has $402,555 of notes outstanding to a stockholder as of
December 31, 1999. The notes accrue interest at 10% per annum. During
1999, the maturity date was extended to January 1, 2000. Subsequent to
year-end, the maturity date was further extended to January 31, 2001 and,
accordingly, the outstanding
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VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
borrowings and accrued interest of $509,904 at December 31, 1999 are
reflected as noncurrent in the accompanying balance sheet. The borrowings
are secured by the Company's accounts receivable.
On September 17, 1999, the Company entered into several stockholder note
agreements totaling $1,100,000. These notes accrue interest at a rate of
10% per annum and are unsecured. The original maturity date was March 31,
2000 but subsequent to year-end this was extended to January 31, 2001.
Accordingly, the outstanding borrowings and accrued interest are
reflected as noncurrent in the accompanying balance sheet. The debt is
carried in the financial statements net of unamortized discount, based on
the relative fair values of securities issued in connection with the
notes (see Note 12 (a)). The original debt discount of $478,907 is being
amortized over the term of the debt as additional noncash interest
expense. This noncash interest expense amounted to $126,171 in 1999.
Interest expense, including amortized debt discount, for 1999 and 1998 on
these notes payable to stockholders totaled $208,631 and $40,255,
respectively.
The fair value of the Company's debt approximates its carrying value
based on the current rate offered to the Company for obligations of the
same remaining maturities.
(8) BENEFIT PLAN
The Company has a defined contribution plan, which is qualified under
Section 401(k) of the Internal Revenue Code. The plan covers
substantially all employees who meet minimum age and service requirements
and allows participants to defer a portion of their salary. After one
year of employment, the Company contributes 25% of the employee's
contribution, up to a maximum of 6% of the employee's salary. Employer
contributions may be suspended at the option of the Board of Directors.
The Company's contributions to the plan for the years ended December 31,
1999 and 1998 were approximately $100,000 and $100,000, respectively.
(9) INCOME TAXES
(Loss) income before income taxes for domestic and foreign operations is
as follows:
1999 1998
Domestic $ (2,932,507) $ 1,649,938
Foreign (1,292,640) (905,962)
------------ -----------
$ (4,225,147) $ 743,976
============ ===========
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VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The provision for income taxes consists of the following for 1999 and
1998:
1999 1998
Current tax expense-
Federal $ -- $ 38,000
State -- 27,000
Foreign -- --
------- ---------
$ -- $ 65,000
======= =========
The 1998 federal tax expense represents alternative minimum taxes payable
and the 1998 state provision represents minimum and other
non-income-measured taxes. The Company utilized $1,655,000 of federal and
state net operating loss carryforwards in 1998 and reduced the valuation
allowance accordingly.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
1999 1998
Income tax provision (benefit) at
statutory rate (34)% 34%
State tax provision (benefit) (5) 10
Impact of foreign tax rates (benefit) 2 9
(Decrease) increase in valuation
allowance 45 (59)
Other (8) 15
------ ------
--% 9%
====== ======
The Company has approximately $9,000,000 of U.S. federal net operating
loss carryforwards available to reduce future taxable income, if any.
These net operating loss carryforwards expire in varying amounts through
2019 and are subject to the review and possible adjustment by the
Internal Revenue Service. The Company has $4,915,000 of foreign net
operating loss carryforwards available to reduce future taxable income in
the foreign jurisdictions, if any.
Section 382 of the Internal Revenue Code and the tax laws of certain
foreign jurisdictions also contain provisions that could place annual
limitations on the utilization of these net operating loss carryforwards
in the event of a change in ownership, as defined.
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VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Significant components of deferred income taxes are as follows:
1999
Deferred tax liabilities $ 328,046
-----------
Deferred tax assets-
Net operating loss carryforwards $ 4,652,900
Allowance for doubtful accounts 117,035
Deferred rent 50,875
Accrued benefits 112,503
Tax credits 617,934
Other 44,038
-----------
5,595,285
Valuation allowance (5,595,285)
-----------
Total deferred tax assets $ --
===========
The valuation allowance at December 31, 1999 relates to the uncertainty
of realizing the tax benefits of the deferred tax assets. Nonetheless,
some, if not all, of these deferred tax assets may be available to offset
any deferred income tax liabilities as they become otherwise payable.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases facilities under various operating leases. The Company
also leases certain equipment under noncancelable capital and operating
leases. Future minimum lease commitments under all noncancelable
operating and capital leases at December 31, 1999 are as follows:
OPERATING CAPITAL
LEASES LEASES
2000 $ 534,380 $ 187,290
2001 514,943 198,744
2002 445,416 52,404
2003 425,699 --
2004 282,422
Thereafter 1,292,400 --
------------ ----------
Total minimum lease payments $ 3,495,260 438,438
============
Less--Amount representing interest 81,626
----------
Present value of minimum lease payments
(including current portion of $135,368) $ 356,812
==========
Total rent expense under noncancelable operating leases was approximately
$493,000 and $464,000 for the years ended December 31, 1999 and 1998,
respectively.
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93
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(11) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to
concentrations of credit risk include trade accounts receivable. To
minimize this risk, ongoing credit evaluations of customers' financial
condition are performed, although collateral is not required. The Company
maintains reserves for potential credit losses.
No one customer accounted for 10% or more of gross accounts receivable at
December 31, 1999. One customer accounted for 13% of total revenues in
1999. No customer accounted for 10% or more of total revenues in 1998.
(12) STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
On October 6, 1997, the Company amended and restated its
Certification of Incorporation, whereby the Company's authorized
shares of $0.001 par value common stock was increased to
15,000,000. The Company also authorized the issuance of 3,847,752
shares of $0.001 par value preferred stock, of which 1,881,721
shares are designated as Series A Preferred Stock, 1,628,700
shares are designated as Series B Preferred Stock and 337,331
shares are designated as Series C Preferred Stock.
The Company issued 1,881,721 shares of Series A Redeemable
Convertible Preferred Stock in exchange for $3,500,000 of cash
plus the conversion of the $1,750,000 notes payable issued in 1997
and 1996. In 1997, the Company also allowed common stockholders to
convert 1,966,031 shares of common stock into 1,628,700 shares of
Series B Redeemable Convertible Preferred Stock and 337,331 shares
of Series C Redeemable Convertible Preferred Stock.
On September 10, 1999, the Company further amended and restated
the Amended and Restated Certification of Incorporation to provide
for the authorization and issuance of 369,125 additional shares of
$0.001 par value preferred stock, 335,569 shares to be designated
as Series D-1 Preferred Stock, 16,778 shares to be designated as
Series D-2 Preferred Stock, 16,778 shares to be designated as
Series D-3 Preferred Stock (collectively, the Series D Preferred
Stock).
In connection with the September 17, 1999 stockholder debt
financing discussed in Note 7, the Company allowed certain common
stockholders who participated in the debt financing to convert
369,125 shares of common stock into 335,569 shares of Series D-1
Redeemable Convertible Preferred Stock, 16,778 shares of Series
D-2 Redeemable Convertible Preferred Stock and 16,778 shares of
Series D-3 Redeemable Convertible Preferred Stock. Warrants to
purchase 415,847 shares of common stock were also issued to the
investors who participated in the debt financing. The warrants
expire on September 17, 2002, have an exercise price of $0.60, and
were valued using the Black-Scholes option pricing model. The
value of the consideration received has been allocated to the
debt and equity instruments based on their relative fair values.
The resulting discount is being accreted over the term of the
securities.
S-61
94
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The Series A, Series B Series C and Series D redeemable
convertible preferred stock have the following rights and
preferences:
VOTING
Preferred stockholders are entitled to vote on an
as-converted basis together with common stockholders as one
class.
DIVIDENDS
The preferred stockholders are entitled to receive dividends
or other distributions equal to the dividend or distribution
that would be received had the preferred stockholders
converted their shares into common stock.
LIQUIDATION
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of
Series A, B and C redeemable convertible preferred stock are
entitled to receive a $2.79, $.54 and $6.67 per share
liquidation preference, respectively, plus accrued or unpaid
dividends. The holders of Series D-1, D-2 and D-3 redeemable
convertible preferred stock are entitled to receive a $5.78,
$0.54 and $2.40 per share liquidation preference,
respectively, plus accrued or unpaid dividends. If the assets
available for distribution are insufficient to permit payment
of the liquidation preference amount, then the holders of the
preferred stock shall share ratably in any distribution, as
defined. After distribution to the preferred stockholders of
the full liquidation preference amount, any remaining assets
available for distribution are distributed both to holders of
common stock and preferred stock on a pro rata basis, with the
exception of holders of Series D redeemable convertible
preferred stock, assuming the preferred stock is converted
into common stock. Any dissolution or liquidation resulting
from an event of sale, as defined, with proceeds of greater
than or equal to $15.00 per share on an as-converted basis,
will not result in distributions in accordance with the
foregoing; rather, all preferred stock will be converted into
common and share in the proceeds on a pro rata basis.
CONVERSION
Each share of preferred stock is convertible, at the option of
the holder, into one share of common stock, adjusted for
certain dilutive events, as defined. In the event of an
initial public offering with a per share price of less than
$15.00, each holder of the preferred stock will receive a cash
payment equal to the liquidation preference (the IPO
Preference Amount) and all shares shall convert automatically
into common stock. The shares automatically convert upon the
occurrence of a qualified offering with a per share price
greater than or equal to $15.00 without any IPO Preference
Amount.
S-62
95
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
REDEMPTION
As of March 31, 2003, the holders of the preferred stock may
require the Company, with 30 days' written notice, to redeem
outstanding preferred stock. The redemption price equals the
liquidation preference plus all accrued but unpaid dividends.
OTHER RESTRICTIONS
The Corporation is restricted, without the approval of 51% of
the holders of preferred stock, from issuing additional shares
of preferred stock, common stock or convertible debt, altering
the terms of outstanding preferred stock, amending its
articles of incorporation, selling or otherwise disposing of
all or substantially all of its assets, or voluntary
dissolving or otherwise liquidating the Company.
(B) STOCK OPTION PLANS
In 1994, the Company adopted the Visibility Inc. and Subsidiaries
Stock Option Plan (the 1994 Plan), which is administered by the
Board of Directors. The 1994 Plan provides for the issuance to key
employees and directors of the Company options to purchase shares
of common stock. The maximum number of shares of common stock that
may be issued under the 1994 Plan is 202,500 shares. Options are
granted under the 1994 Plan at exercise prices not less than the
fair value of the stock on the date of grant. The options are
exercisable over periods determined by the Board of Directors and
expire after 10 years from the date of grant.
On February 2, 1996, the Company adopted the Visibility Inc. and
Subsidiaries 1996 Stock Plan (the Plan), which is administered by
the Board of Directors. The Plan provides for the issuance of
incentive and nonqualified options to purchase shares of common
stock to key employees and directors of the Company. The maximum
number of shares of common stock that may be issued under the Plan
is 1,050,000 shares. Incentive stock options may be granted under
the Plan at exercise prices not less than the fair value of the
stock on the date of grant. The options are exercisable over
periods determined by the Board of Directors and expire 10 years
from the date of grant.
S-63
96
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The following summarizes the stock option activity under the Company's
stock option plans:
WEIGHTED
OUTSTANDING AVERAGE
OPTIONS EXERCISE PRICE
----------- --------------
Balance, December 31, 1997 1,152,550 0.40
Granted 196,300 0.40
Exercised -- --
Canceled (162,499) 0.25
---------
Balance, December 31, 1998 1,186,351 0.42
Granted 344,000 0.58
Exercised (137,603) 0.22
Canceled (495,797) 0.52
----------
Balance, December 31, 1999 896,951 $0.46
========== =====
At December 31, 1999 and 1998, options to purchase 457,122 and 549,162
shares were exercisable, respectively. The options exercisable at
December 31, 1999 and 1998 had a weighted average exercise price of $0.46
and $0.49, respectively. Options generally vest over three to four years.
At December 31, 1999, 127,946 shares were available for future option
grants.
During 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which defines a fair
value-based method of accounting for employee stock options or similar
equity instruments and encourages all entities to adopt that method of
accounting for all their employee stock compensation plans. However, it
also allows an entity to continue to measure compensation costs for those
plans using the intrinsic method of accounting prescribed by APB Opinion
25. Entities electing to remain with the accounting in APB Opinion 25
must make pro forma disclosures of net income as if the fair-value-based
method of accounting defined in SFAS No. 123 has been applied. The
Company has elected to account for its stock-based compensation plans
under APB Opinion 25.
Had compensation costs for the stock option plan been determined using
the fair value-based method as prescribed by SFAS No. 123, the Company's
1999 net loss and 1998 net income would have been increased and
decreased, respectively, to the following pro forma amounts:
1999 1998
------------ -----------
Net (loss) income-
As reported $ (4,225,147) $ 678,976
Pro forma (4,228,464) 665,174
Consistent with SFAS No. 123, pro forma compensation cost has not been
calculated for options granted prior to January 1, 1995. Pro forma
compensation cost may not be representative of that to be expected in
future years.
The weighted average per share fair values of options granted during 1999
and 1998 were $0.10 and $0.09, respectively. The values were estimated on
the date of grant using the following weighted average assumptions for
grants in 1999 and 1998: risk-
S-64
97
VISIBILITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
free interest rate of 5.50 % and 5.17%; expected life of five years;
expected dividend yield of 0% and volatility factor of 0%.
The weighted average remaining contractual life of outstanding options
was 7.67 years and the range of exercise prices was $0.20 to $1.67 at
December 31, 1999.
(13) FOREIGN OPERATIONS
The following table summarizes the Company's operations by geographic
area:
1999 1998
------------ ------------
Revenues-
North America $ 19,664,679 $ 24,022,301
Europe 4,545,329 6,170,590
------------ ------------
Consolidated total $ 24,210,008 $ 30,192,891
============ ============
(Loss) income from operations-
North America $ (2,932,507) $ 1,964,561
Europe (1,292,640) (924,944)
------------ ------------
Consolidated total $ (4,225,147) $ 1,039,617
============ ============
Identifiable assets-
North America $ 8,061,279 $ 7,872,620
Europe 2,224,379 3,700,960
------------ ------------
Consolidated total $ 10,285,658 $ 11,573,580
============ ============
Export sales were not material in 1999 and 1998.
S-65
98
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Cirronet, Inc.:
We have audited the accompanying balance sheet of Cirronet, Inc. (formerly
Digital Wireless Corporation) as of December 31, 1999, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cirronet, Inc. as of December
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 18, 2000
S-66
99
CIRRONET INC.
Balance Sheets
December 31, 2000 and 1999
2000 1999
------------ ----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 333,274 917,129
Accounts receivable, less allowance for doubtful accounts
of $1,980 and $20,109, respectively 1,315,741 618,053
Inventories 1,425,605 1,250,012
Income tax refund receivable 152,855 --
Other current assets 51,962 --
------------ ----------
Total current assets 3,279,437 2,785,194
Property and equipment, net 315,365 96,184
Other assets 48,728 18,380
------------ ----------
Total assets $ 3,643,530 2,899,758
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 579,135 158,165
Accrued expenses 194,993 86,231
Income taxes payable -- 153,292
Current maturities of obligations under capital leases 81,306 --
Current maturities of long-term debt 55,382 41,016
------------ ----------
Total current liabilities 910,816 438,704
Long-term debt, excluding current maturities 66,156 82,033
Deferred income tax liabilities 18,266 21,460
------------ ----------
Total liabilities 995,238 542,197
------------ ----------
Stockholders' equity:
Common stock, $.001 par value; 40,000,000 shares authorized;
7,335,050 and 6,338,880 shares issued and outstanding
in 2000 and 1999, respectively 7,335 6,339
Additional paid-in capital 1,897,803 1,432,482
Retained earnings 880,419 918,740
Note receivable from employee for stock options (137,265) --
------------ ----------
Total stockholders' equity 2,648,292 2,357,561
Commitments and contingencies (note 10)
------------ ----------
Total liabilities and stockholders' equity $ 3,643,530 2,899,758
============ ==========
See accompanying notes to financial statements.
S-67
100
CIRRONET INC.
Statements of Operations
Years ended December 31, 2000 and 1999
2000 1999
------------ ----------
(unaudited) (audited)
Revenues:
Product sales and service revenues $ 5,975,684 4,118,153
Development contracts 265,067 352,700
------------ ----------
Total revenues 6,240,751 4,470,853
Costs of revenues 3,059,098 1,912,709
------------ ----------
Gross profit 3,181,653 2,558,144
Operating expenses:
Research and development 857,347 520,720
Sales and marketing 1,133,739 656,285
General and administrative 836,806 375,447
Compensation charge for warrant exercise 471,200 --
------------ ----------
Total operating expenses 3,299,092 1,552,452
------------ ----------
Operating (loss) income (117,439) 1,005,692
Other income (expense):
Interest income 33,309 23,921
Interest expense (14,886) (9,387)
Other (expense) income (7,053) 13,487
------------ ----------
------------ ----------
Total other income 11,370 28,021
------------ ----------
(Loss) income before income tax (benefit) expense
and cumulative effect of accounting change (106,069) 1,033,713
Income tax (benefit) expense (67,748) 274,208
------------ ----------
Net (loss) income before cumulative effect of
accounting change (38,321) 759,505
Cumulative effect of accounting change, less applicable
income taxes of $22,980 -- 34,469
------------ ----------
Net (loss) income $ (38,321) 793,974
============ ==========
See accompanying notes to financial statements.
S-68
101
CIRRONET INC.
Statements of Stockholders' Equity
Years ended December 31, 2000 and 1999
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
-------------------- PAID-IN RETAINED FROM EMPLOYEE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS FOR STOCK OPTIONS EQUITY
---------- ------ ---------- -------- ----------------- -------------
Balances at December 31, 1998 (audited) 6,258,880 $6,259 1,392,562 124,766 -- 1,523,587
Conversion of subordinated debentures
into common stock 80,000 80 39,920 -- -- 40,000
Net income -- -- -- 793,974 -- 793,974
---------- ------ ---------- -------- -------- ----------
Balances at December 31, 1999 (audited) 6,338,880 6,339 1,432,482 918,740 -- 2,357,561
Note receivable from employee
for stock options exercise 346,500 346 133,934 -- (134,280) --
Interest on note receivable -- -- 2,985 -- (2,985) --
Exercise of stock warrants 620,000 620 309,380 -- -- 310,000
Exercise of stock options 29,670 30 2,937 -- -- 2,967
Issuance of stock options for
services -- -- 16,085 -- -- 16,085
Net loss -- -- -- (38,321) -- (38,321)
---------- ------ ---------- -------- -------- ----------
Balances at December 31, 2000 (unaudited) 7,335,050 $7,335 1,897,803 880,419 (137,265) 2,648,292
========== ====== ========== ======== ======== ==========
See accompanying notes to financial statements.
S-69
102
CIRRONET INC.
Statements of Cash Flows
Years ended December 31, 2000 and 1999
2000 1999
---------- ----------
(unaudited) (audited)
Cash flows from operating activities:
Net (loss) income $ (38,321) 793,974
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization, including cumulative effect 62,676 (27,941)
Provision for doubtful accounts on accounts receivable 18,129 20,109
Provision for inventory obsolescence 30,000 --
Deferred income tax (benefit) expense (45,503) 21,460
Stock compensation expense 324,845 --
(Increase) decrease in:
Accounts receivable (715,817) (138,847)
Inventories (205,593) (307,098)
Income tax refund receivable (152,855) --
Other current assets (26,158) --
Increase (decrease) in:
Accounts payable 420,970 62,432
Accrued expenses 108,414 (24,054)
Income taxes payable (153,292) 36,829
Advance billings -- (102,060)
---------- ----------
Net cash (used in) provided by operating activities (372,505) 334,804
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (164,054) (28,085)
Increase in intangible assets (15,434) --
---------- ----------
Net cash used in investing activities (179,488) (28,085)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 41,900 123,049
Payments on convertible subordinated debentures -- (143,557)
Payments on long-term debt (43,411) (17,742)
Payments on obligations under capital leases (34,558) (34,916)
Proceeds from exercise of stock options 2,967 --
Proceeds from exercise of stock warrants 1,240 --
---------- ----------
Net cash used in financing activities (31,862) (73,166)
---------- ----------
Net (decrease) increase in cash and cash equivalents (583,855) 233,553
Cash and cash equivalents at beginning of year 917,129 683,576
---------- ----------
Cash and cash equivalents at end of year $ 333,274 917,129
========== ==========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 13,536 19,757
========== ==========
Income taxes $ 137,880 239,899
========== ==========
Supplemental disclosures of noncash operating and investing activities:
Issuance of stock options for services $ 16,085 --
========== ==========
Capital lease obligations incurred for the purchase of
property and equipment $ 115,864 --
========== ==========
Note receivable and interest from employee for stock option exercise $ 137,265 --
========== ==========
See accompanying notes to financial statements.
S-70
103
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 (unaudited) and 1999
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Cirronet Inc., formerly known as Digital Wireless Corporation
(the "Company"), designs, manufactures, and markets wireless
telecommunications products for industries that provide a
wireless pathway for information. The Company has expertise in
a wide range of wireless technologies, including wireless
system architecture, application-specific integrated circuit
design, data communications software, protocols, and hardware.
The Company focuses exclusively on products for the industrial
and commercial markets. Additionally, the Company holds a
patent on a wireless system called Recombinant Spread Spectrum
that minimizes dropout or data transfer errors in wireless
data transmission.
The Company's customers are spread across the United States
and Europe. However, the Company derives a substantial portion
of its revenue from one product. Typical product lives for
wireless telecommunications products are three to five years.
The markets for the Company's telecom products are
characterized by significant risk as a result of rapid changes
in technology, competitors with significant financial
resources, frequent new product and service introductions, and
mergers and acquisition activity in the telecom industry.
Furthermore, the Company's business is also subject to
additional significant risks such as availability of capital,
dependency on major suppliers, protection of intellectual
property rights, dependence on key personnel, and new laws or
regulations affecting the telecom industry. As a result,
negative developments in the Company's markets or in managing
these additional risks could have an adverse effect on the
Company's financial position, results of operations, and
liquidity.
(B) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents.
(C) INVENTORIES
Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation on property and
equipment is provided using the straight-line method over the
estimated useful lives of the assets as follows:
Computer software and equipment 3-5 years
Furniture and fixtures 5-7 years
Vehicles 5 years
Equipment 5-7 years
(Continued)
S-71
104
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
(E) REVENUE RECOGNITION
Revenue from the sale of products is recognized at the time of
shipment. Revenues from services and development contracts are
recognized as services are performed.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in the
statement of operations in the period that includes the
enactment date.
(G) STOCK OPTION PLAN
The Company accounts for its stock option plans in accordance
with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"),
which encourages entities to recognize as compensation expense
over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25 and provide
pro forma disclosures for employee stock-based awards as if
the fair-value based method of SFAS No. 123 had been applied.
As such, compensation expense would be recorded only if the
current market price of the underlying stock as of the date of
grant exceeded the exercise price. The Company has elected to
continue applying the provisions of APB Opinion No. 25 and
include the pro forma disclosures required under SFAS No. 123.
(H) 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 disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(I) COMPREHENSIVE INCOME (LOSS)
No statements of comprehensive income (loss) have been
included in the accompanying financial statements since
comprehensive income (loss) and net income (loss) presented in
the accompanying statements of operations would be the same.
(J) RESEARCH AND DEVELOPMENT
Research and development costs consist principally of
compensation and benefits paid to the Company's employees and
certain allocated indirect costs. All research and development
costs are expensed as incurred.
(Continued)
S-72
105
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents, accounts receivable,
inventories, income tax refund receivable, accounts payable,
accrued expenses, income taxes payable, and obligations under
capital leases approximate fair value because of the short
maturity of these instruments. The Company also believes that
the carrying values of its long-term debt approximates fair
value because of the floating interest rate terms applicable
to the Company's long-term financing arrangements.
(L) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company accounts for long-lived assets in accordance with
the provisions of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("SFAS No. 121").
SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value
less costs to sell.
(M) RECLASSIFICATIONS
Reclassifications were made to certain amounts in the 1999
financial statements to conform with the presentation in the
2000 financial statements.
(2) RELATED PARTY TRANSACTIONS
The Company leased space under an operating lease and purchased certain
services from a company controlled by one of its stockholders. During
2000 and 1999, the Company paid approximately $107,000 and $95,000,
respectively, for rent and other services to this related company. The
lease expired in September 2000. In management's opinion, the amounts
paid were reasonable and equivalent to what it would have paid an
unrelated party for the facility rental and services. At December 31,
2000 and 1999, no amounts were owed to the related company.
(3) INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999:
2000 1999
------------ ----------
(unaudited) (audited)
Raw materials and purchased parts $ 628,962 688,863
Work in process 402,310 338,240
Finished goods 424,333 222,909
------------ ----------
Less valuation allowances (30,000) --
------------ ----------
Total inventories $ 1,425,605 1,250,012
============ ==========
(Continued)
S-73
106
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2000
and 1999:
2000 1999
-------- --------
(unaudited) (audited)
Vehicles $ 25,496 --
Furniture and fixtures 76,101 3,344
Equipment 359,395 267,026
Computer software and equipment 174,662 85,366
-------- --------
635,654
Less accumulated depreciation and amortization 320,289 259,552
-------- --------
$315,365 96,184
======== ========
Depreciation and amortization relating to property and equipment for
the years ended December 31, 2000 and 1999 was $60,737 and $28,009,
respectively.
(5) NOTE PAYABLE TO BANK
The Company maintains a revolving credit facility with a commercial
bank whereby it may borrow the lesser of $300,000 or 80% of eligible
accounts receivable, as defined. The facility is secured by all assets
of the Company and expires on March 31, 2001. Outstanding advances
under the line accrue interest at the prime rate plus .75%. The Company
had no amounts outstanding under the revolving line of credit as of
December 31, 2000 and 1999.
(6) LONG-TERM DEBT
The Company also maintained two equipment lines of credit during the
years ended December 31, 2000 and 1999. Equipment line No. 1 was used
to finance property and equipment purchases up to a maximum of
$200,000. Advances accrue interest at the prime rate plus 1.25%.
Interest accrued from the date of each advance and was payable monthly
until June 1, 1999. On June 1, 1999, the balance outstanding under the
line of $143,557 was converted to a term note, payable in 42 monthly
installments of principal and interest through December 2002. The
outstanding balance of the note accrues interest at the rate of 10.75%
as of December 31, 2000. The note is secured by all the assets of the
Company.
Equipment line No. 2 was used to finance the purchase of property and
equipment up to a maximum of $100,000. Advances accrue interest at the
prime rate plus 1.00%. Interest accrued from the date of each advance
and was payable monthly until October 31, 2000. On October 31, 2000,
the outstanding balance of advances of $41,900 was converted to a term
note, payable in 35 monthly installments of principal and interest
through September 2003. The outstanding balance of the note accrues
interest at the rate of 10.50% as of December 31, 2000. The note is
secured by all the assets of the Company.
(Continued)
S-74
107
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
Future minimum principal payments are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
2001 $ 55,382
2002 55,382
2003 10,774
--------
$121,538
========
(7) CONVERTIBLE SUBORDINATED DEBENTURES
At December 31, 1998, the Company had outstanding convertible
subordinated debentures amounting to $183,557. These debentures
included interest at varying rates from 8% to 10% and were convertible
into common stock at a conversion rate of $0.50 in debentures for one
share of common stock. The debentures matured on May 31, 1999. Interest
accrued and was payable annually on May 31. The debentures were
convertible any time until maturity, at the option of the holder. The
debentures were subordinated to current and future obligations due to
financial institutions and/or certain other traditional lending
institutions. During 1999, $40,000 of debentures were converted into
80,000 shares of common stock of the Company. The Company used existing
financing facilities to retire the remaining debentures during 1999.
(8) INCOME TAXES
The components of the income tax (benefit) expense for the years ended
December 31, 2000 and 1999 are as follows:
2000 1999
-------- --------
(unaudited) (audited)
Current Federal and state income taxes $(22,245) 240,706
Deferred Federal and state income taxes (45,503) 33,502
-------- --------
Total provision for income taxes $(67,748) 274,208
======== ========
The following is a summary of the items that caused recorded income
taxes to differ from income taxes computed using the statutory Federal
income tax rate for the years ended December 31, 2000 and 1999:
2000 1999
---------- ----------
(unaudited) (audited)
Computed "expected" income taxes $ (36,063) 351,462
Increase (decrease) in income taxes resulting from:
State income taxes, net of Federal income taxes (3,889) 41,349
Research and development credits (30,470) (90,630)
Decrease in valuation allowance -- (63,906)
Nondeductible items 2,674 35,933
---------- ----------
$ (67,748) 274,208
========== ==========
(Continued)
S-75
108
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
Deferred income tax assets and liabilities are determined based on the
difference between the financial accounting and tax bases of assets and
liabilities. Significant components of the Company's deferred income
tax assets and liabilities as of December 31, 2000 and 1999 are as
follows:
2000 1999
-------- --------
(unaudited) (audited)
Deferred income tax assets - accrued expenses
and reserve accounts $ 42,309 --
Deferred income tax liabilities - differences in the
book and tax bases of depreciable fixed assets (18,266) (21,460)
-------- --------
Net deferred income tax asset (liability) $ 24,043 (21,460)
======== ========
The net decrease in the valuation allowance for deferred income tax
assets for 1999 was $63,906. In assessing the realizability of deferred
income tax assets, management considers whether it is more likely than
not that some portion or all of the deferred income tax assets will not
be realized. The ultimate realization of deferred income tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
The Company utilized $30,470 and $90,630 of available research and
experimentation credits during the years ended December 31, 2000 and
1999, respectively. At December 31, 2000, the Company has no research
and experimentation credits available for carryforward to future
taxable years.
(9) STOCKHOLDERS' EQUITY
(A) WARRANTS
On December 31, 1995 and January 1, 1996, the Company issued
to various long-term employees stock warrants to purchase a
total of 620,000 shares of the Company's common stock at $.002
per share. The warrants vested over a two-year period and were
fully vested and exercisable as of December 31, 1997 and
January 1, 1998. During the year ended December 31, 2000, the
Company provided the holders with cash bonuses of $162,440
which were equal to their individual income tax liabilities
upon exercise of the warrants. As a result, the Company
recorded a compensation charge of $308,760 which was equal to
the difference between the fair value and the exercise price
upon exercise of the warrants.
(B) STOCK SPLIT
On December 5, 2000, the Company effected a 10-for-1 stock
split which became effective immediately. All common stock and
stockholders' equity amounts in the accompanying financial
statements have been retroactively adjusted to reflect the
stock split.
(C) STOCK OPTIONS
The Company maintains an incentive stock option plan and
outstanding nonqualified stock options for the benefit of
directors, shareholders, officers, and employees. Options are
granted at fair value at the time of grant as determined by
the Company's board of directors.
(Continued)
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109
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
The following summarizes stock option activity for the years ended
December 31, 2000 and 1999:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
Outstanding at December 31, 1998 2,723,260 $ .420
Granted 145,500 .479
Exercised -- --
Canceled or expired (26,000) .308
---------- ------
Outstanding at December 31, 1999 2,842,760 .424
Granted 1,077,500 .500
Exercised (376,170) .365
Canceled or expired (97,000) .331
---------- ------
Outstanding at December 31, 2000 3,447,090 $ .457
========== ======
At December 31, 2000 and 1999, the number of options exercisable was
2,031,420 and 1,709,760, respectively.
The following table summarizes information about stock options
outstanding at December 31, 2000 (unaudited):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- OUTSTANDING WEIGHTED-
RANGE OF AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 2000 LIFE PRICE 2000 PRICE
------------- ------------ ----------- --------- ------------ ----------
$ 0.11 - 0.20 48,760 1.89 0.15 48,760 0.15
0.31 - 0.44 1,870,330 6.50 0.41 1,515,330 0.41
0.50 - 0.70 1,528,000 8.14 0.53 467,330 0.59
------------- ---------- ---- ---- ---------- ----
$ 0.11 - 0.70 3,447,090 7.17 0.46 2,031,420 0.44
============= ========== ==== ==== ========== ====
(Continued)
S-77
110
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
The Company applies APB Opinion No. 25 in accounting for its
stock option plan and, accordingly, no compensation cost has
been recognized for stock options in the financial statements.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No.
123, the Company's net income (loss) would have been adjusted
to the pro forma amounts indicated below.
The per share weighted-average fair value of stock options
granted during 2000 and 1999 was $.15 and $.13, respectively.
The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for 2000 and 1999:
dividend yield of 0%, expected volatility of 0%, risk-free
rate of 6%, and an expected life of five years.
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
-------- -------
(unaudited) (audited)
Net (loss) income As reported $(38,321) 793,974
Pro forma (44,741) 789,474
Pro forma net income (loss) reflects only options granted
during the years ended December 31, 2000 and 1999. Therefore,
the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma
income (loss) amounts presented above because compensation
cost is reflected over the options' vesting periods ranging
from three to four years and compensation cost for options
granted prior to January 1, 1999 is not considered.
(D) NOTE RECEIVABLE FROM EMPLOYEE
Note receivable from employee for stock options resulted from
the exercise of stock options for a full-recourse promissory
note during the year ended December 31, 2000.
(E) STOCK OPTIONS FOR SERVICES
The Company has an arrangement whereby they are compensating a
nonemployee for services provided to the Company. During the
year ended December 31, 2000, the Company issued a stock
option for 20,000 shares under this agreement at an exercise
price of $.50 per share. At the time of issuance, the Company
recorded a compensation charge of $16,085 to reflect the fair
value of the stock option granted using the Black-Scholes
option pricing model. At December 31, 2000, all of these
options remain outstanding.
(10) COMMITMENTS AND CONTINGENCIES
(A) EMPLOYEE COMPENSATION AGREEMENT
The Company has a compensation agreement with an
officer/employee of the Company. Under the agreement, the
employee is entitled to a base salary and bonuses based on
increases in revenues and operating profit and the success of
raising capital during 2001.
(Continued)
S-78
111
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
The employee was granted stock options to purchase 360,000
shares of the Company's common stock at $.44 per share during
1998. Vesting for the 360,000 shares occurred over a two-year
period. During December 2000, the employee was awarded options
for 2000 to purchase 350,000 shares of the Company's common
stock at $.50 per share. Subsequent to year-end, the employee
was awarded options for 2001 and 2002 to purchase 250,000 and
140,000 shares, respectively, of the Company's common stock at
$.50 per share. The options have four-year vesting periods
from the year for which the options related. All of the
options will be fully vested on January 1, 2006.
(B) 401(K) PLAN
The Company maintains a tax-qualified defined contribution
plan under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). Employees are eligible to participate the
first month of the quarter following their date of hire. The
401(k) Plan allows participants to contribute by salary
reduction up to 25% of eligible compensation, subject to
Internal Revenue Service limitations. The 401(k) Plan also
provides for discretionary employer matching contributions.
The Company made $-0- and $40,000 in contributions to the
401(k) Plan for the years ended December 31, 2000 and 1999,
respectively.
(C) LEASES
The Company leases office and warehouse facilities as well as
certain other equipment under noncancelable operating lease
agreements which expire in 2005.
Rental expense under all lease agreements for the years ended
December 31, 2000 and 1999 was approximately $101,000 and
$59,340, respectively.
The Company has also entered into capital lease arrangements
for equipment.
(Continued)
S-79
112
CIRRONET INC.
Notes to Financial Statements
December 31, 2000 and 1999
Future minimum lease payments under non-cancelable operating
leases (with initial or remaining lease terms in excess of one
year) and future minimum lease payments under capital lease
arrangements as of December 31, 2000 are as follows:
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ -------- ---------
2001 $ 86,400 122,000
2002 -- 121,000
2003 -- 121,000
2004 -- 121,000
2005 -- 80,000
-------- --------
Total future minimum lease payments 86,400 $ 565,000
=========
Less amount representing interest (at a rate
of 12.0%) 5,094
--------
Present value of future minimum
capital lease payments 81,306
Less current maturities of obligations
under capital leases 81,306
--------
Obligations under capital leases,
excluding current maturities $ --
========
At December 31, 2000, the gross amount of property and
equipment under capital leases and related accumulated
amortization was $115,864 and $10,270, respectively.
(11) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During 1999, the Company changed its method of depreciating property
and equipment from the declining-balance method to the straight-line
method. The Company believes that using the straight-line method over
the estimated useful lives is a more accurate and conservative approach
to depreciating the assets. The effect of this change was to increase
income before income tax expense and cumulative effect of accounting
change and net income for 1999 by $57,449 and $34,469, respectively.
(12) MAJOR CUSTOMERS, SUPPLIERS, AND INTERNATIONAL REVENUE
Sales derived from major customers (those customers representing more
than 10% of total revenue) as a percentage of total revenue for the
year ended December 31, 2000 were Customer A - 16%, Customer B - 15%,
Customer C - 12%, and Customer D - 11%.
The Company had international revenue that represented approximately
30% of revenue for the year ended December 31, 2000.
The Company had purchases from two suppliers representing 52% and 21%
of purchases for the year ended December 31, 2000.
S-80