-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NIoYBQF1xhgoj8ygMIOdK/0EZpdQG0nDXqLNvgmO7xbLLazimC7fBjRG/X581EU8 FtG+HsLmRQ73JGvBG6dDJw== 0000950144-04-003222.txt : 20040330 0000950144-04-003222.hdr.sgml : 20040330 20040330113105 ACCESSION NUMBER: 0000950144-04-003222 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELLIGENT SYSTEMS CORP CENTRAL INDEX KEY: 0000320340 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 581964787 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09330 FILM NUMBER: 04698794 BUSINESS ADDRESS: STREET 1: 4355 SHACKLEFORD RD CITY: NORCROSS STATE: GA ZIP: 30093 BUSINESS PHONE: 4043812900 MAIL ADDRESS: STREET 1: 4355 SHACKLEFORD ROAD CITY: NORCROSS STATE: GA ZIP: 30093 10-K 1 g88120e10vk.htm INTELLIGENT SYSTEMS CORPORATION INTELLIGENT SYSTEMS CORPORATION
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

     
(Mark One)
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________ to ____________

Commission file number 1-9330

INTELLIGENT SYSTEMS CORPORATION

(Exact name of Registrant as specified in its charter)
     
Georgia   58-1964787
 
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
4355 Shackleford Road, Norcross, Georgia   30093
 
(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
  		 
 
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 o

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes o No x

As of March 12, 2004, 4,478,971 shares of Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 30, 2003 was $4,484,511 (computed using the closing price of the Common Stock on June 30, 2003 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 27, 2004, are incorporated by reference in Part III hereof.

 

TABLE OF CONTENTS

                 
            PAGE
               
  1.   Business     3  
 
   2.   Properties     8  
 
   3.   Legal proceedings     8  
 
   4.   Submission of matters to a vote of security holders     8  
               
 
   5.   Market for the registrant's common equity and related stockholder matters     9  
 
   6.   Selected financial data     9  
 
   7.   Management's discussion and analysis of financial condition and results of operations     10  
 
   7A.   Quantitative and qualitative disclosures about market risk     18  
 
   8.   Financial statements and supplementary data     18  
 
   9.   Changes in and disagreements with accountants on accounting and financial disclosure     18  
 
   9A.   Controls and procedures     18  
               
 
   10.   Directors and executive officers of the registrant     18  
 
   11.   Executive compensation     19  
 
   12.   Security ownership of certain beneficial owners and management and related stockholder matters     19  
 
   13.   Certain relationships and related transactions     19  
 
   14.   Principal accountant fees and services     19  
               
 
   15.   Exhibits, financial statement schedules and reports on Form 8-K     19  
            21  
 EX-10.2 2003 STOCK INCENTIVE PLAN
 EX-10.3 LOAN AGREEMENT
 EX-10.4 SECURITY AGREEMENT
 EX-10.5 FORM OF SECURITY AGREEMENT
 EX-10.6 NEGATIVE PLEDGE AGREEMENT
 EX-10.7 COMMERCIAL PROMISSORY NOTE
 EX-10.8 FORM OF GUARANTEE
 EX-21.1 LIST OF SUBSIDIARIES OF REGISTRANT
 EX-23.1 CONSENT OF BDO SEIDMAN, LLP
 EX-31.1 SECTION 302 CERTIFICATION OF CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO/CFO

 

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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 words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, “likely” 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. A number of the factors that we believe could impact our future operations are discussed in Management’s Discussion and Analysis in section Item 7. of this Form 10-K. ISC undertakes no obligation to update or revise its 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 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. Our executive offices are located at 4355 Shackleford Road, Norcross, Georgia 30093 and our telephone number is (770) 381-2900. Our Internet address is www.intelsys.com. We publish our SEC-filed reports on our website as soon as reasonably practicable after we file them with or furnish them to the SEC, and shareholders may access and download these reports free of charge.

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 early stage companies in the technology industry have long been components of our overall strategy. From time to time, we may sell one of our companies or we may increase our investment in a less-than-wholly owned company. As a result, our ownership position in a given company may change from time to time, our results of operations vary considerably from quarter-to-quarter and year-to-year and our past performance is not necessarily indicative of future results.

Our strategy has been 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, an incubator program. Depending upon the needs of each 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 roles, and similar functions. Our subsidiary and affiliate companies are in the information technology industry (principally software for business applications) although one of our subsidiary companies is in the industrial products industry. Presently, our focus is on managing our subsidiary companies and current minority investments and we do not anticipate significant new investments or acquisitions in the foreseeable future.

Financial Reporting

We consolidate the results of operations of companies in which we own a majority interest or over which we exert control. We generally account for investments by the equity method for minority owned companies (i) in which we own 20 to 50 percent and over which we do not exert control or (ii) entities that are organized as partnerships or limited liability companies. In general, under the equity method, we report our pro rata share of the income or loss generated by each of these businesses as equity income/losses of affiliates on a quarterly basis. These equity losses and income decrease or increase, respectively, the cost basis of our investment. Privately owned corporations 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 their businesses.

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Industry Segment Overview

Our consolidated companies operate in two industry segments: Information Technology Products and Services and Industrial Products. The Information Technology segment includes our VISaer, Inc., QS Technologies, Inc. and CoreCard Software, Inc. subsidiaries and the Industrial Products segment includes ChemFree Corporation. As of December 31, 2003, we own 100 percent of the ChemFree and QS Technologies subsidiaries, 65 percent of VISaer and 87 percent of CoreCard Software.

Operations in the Information Technology segment are involved in the design, development and marketing of application software products that are used by business customers and government agencies to manage aspects of their operations. Our software products are typically sold in competitive bids with relatively long sales and implementation cycles. We receive software license fees that vary depending upon the number of licensed users and the number of software modules licensed with total contract revenue typically ranging from $100,000 to over $1 million. We also derive service revenue from implementation, customization, training and support services.

The Industrial Products segment includes the design, assembly and sale of equipment and associated supplies that are used by commercial, industrial, military and government agencies to maintain and service machinery or vehicles used in their operations. Our assembled products are shipped to resellers or direct to customer sites and do not require set-up or on-site support from us. Unit pricing varies by model but typical end-user prices are less than $2,000 per unit. Customers purchase replacement supplies from us after the sale. In some cases, we provide equipment to multi-site corporate users under leases which typically have averaged 3 to 4 years.

Our individual operations in both segments are relatively small in size and are subject to greater fluctuation in revenue and profitability than larger, more established businesses. Sales of ChemFree products have represented between 47 and 50 percent of consolidated revenue in each of the last three years. QS Technologies and VISaer have made up the balance of consolidated revenue, with each contributing approximately one half of the remaining consolidated revenue. In 2003, QS Technologies revenue exceeded VISaer’s whereas in the prior two years, VISaer’s revenue was slightly greater than was QS Technologies. CoreCard began to generate revenue in 2003 and contributed an immaterial amount to consolidated revenues in 2003, although their contribution is expected to increase in 2004. The business in our segments is not seasonal on a consolidated basis although there is generally some slowdown in ChemFree’s European business in late summer. The business discussion which follows contains information on products, markets, competitors, research and development and manufacturing for our operating subsidiaries, organized by industry segment and by company. For further detailed financial information concerning our segments, see Note 16 in the accompanying Notes to Consolidated Financial Statements. For further information about trends and risks likely to impact our business, please refer to Management’s Discussion and Analysis in Item 7. of this Form 10-K.

Industry Segment: Information Technology Products and Services

VISaer, Inc. - VISaer develops, sells and supports software for the world-wide aircraft maintenance and engineering industry. VISaer offers a fully integrated, real time software solution that helps aviation customers efficiently and cost-effectively manage the technical, commercial and operational aspects of their maintenance, repair and overhaul (“MRO”) operations while also meeting regulatory requirements, such as those of the Federal Aviation Administration. Headquartered in Wilmington, Massachusetts, VISaer also has operations in England to support product development and sales activities in Europe. VISaer is the successor company of Visibility, Inc., a software company whose operations were sold in July 2000 to allow VISaer to concentrate on the MRO software market. VISaer’s product offering includes the following major components: technical records planning and management, MRO operations, materials management, production scheduling, commercial operations and financial management. VISaer announced the first release of Version 3.1, a fully Web-native version of its complete MRO solution, in late 2002 and the first installation of this release was accomplished in 2003. VISaer has signed contracts to purchase software licenses for its Version 3 software with four customers and has $1.4 million in short-term deferred revenue and $5.1 million in long-term deferred revenue at December 31, 2003 that will be recognized when various releases of the Version 3 software are delivered to customers in 2004 and thereafter. In addition, VISaer has a sales and marketing program that has identified additional prospects for MRO license sales, professional services and maintenance contracts. However, due to resource constraints, in 2004 VISaer expects to focus on completing and delivering its Version 3 software to establish strong reference accounts and generate cash flow and revenue before allocating significant resources to new sales and marketing programs.

During 2002 and much of 2003, the general slow-down in the economy, the terrorist attacks of September 11, 2001, hostilities involving Iraq and the outbreak of Sudden Acute Respiratory Syndrome had a significant negative impact on the commercial aviation market, initially in the domestic market and then in international markets. Some airlines delayed or canceled planned information technology projects and others experienced a decline in financial strength during the industry downturn. In recent months, there appears to be momentum building, especially in international markets, to move forward on delayed proposals to purchase MRO software which we believe will provide an

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opportunity to build a pipeline of additional business. Regulatory requirements dictate that airlines manage their MRO processes carefully and there is increased pressure to improve and automate MRO record-keeping. VISaer’s software products provide a comprehensive, cost-effective way to do so. We believe significant sales opportunities exist in the Asian Pacific, Latin American and Chinese markets, MRO service outsourcing companies, low-cost airlines, defense related aviation, and small to mid-size domestic regional airlines.

VISaer markets and sells its software in both domestic and international markets. International customers have represented a majority of VISaer sales of products and services in each of the last two years and are expected to do so in 2004 as well. The markets for VISaer products include both airline-owned maintenance and engineering shops as well as third party MRO organizations. Most of VISaer’s sales are direct to the customer with VISaer providing a turnkey solution that covers project management, software, system implementation, training, consulting and support. Prior to 2003, as VISaer was building its internal capacity, VISaer sold its products through certain re-sellers on a non-exclusive basis in certain markets. In most cases, sales are made in response to competitive bids and requests for proposals and have sales cycles of six to eighteen months with implementation periods of an additional six to eighteen months. VISaer provides full suite implementation services and post-sales support and maintenance activities under annual contracts, as well as customization and professional services on an as needed basis. VISaer has a number of competitors, some of whom offer MRO software as part of an Enterprise Resource Planning package and who have significantly more financial resources, larger customer bases and greater market coverage than VISaer. Other competitors are small players focused on MRO solutions with resources similar to VISaer. VISaer competes on the basis that its software provides extensive product functionality using Web-native technology; provides low cost-of-ownership; includes integrated modules offering a complete software and service solution; and runs on industry standard technology platforms. VISaer believes that its new Version 3 Web-native software is a strong competitive offering.

QS Technologies, Inc. - QS Technologies operates from its Greenville, South Carolina location, providing health and human services software, maintenance and support services to its installed customer base as well as to 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. 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. QS Technologies competes on the basis of product functionality and value, reputation for customer service, and knowledge of market requirements acquired through more than twenty years in the market. Sales are typically made in response to competitive bids and may take six to twelve months before contracts are awarded. Demand for products and the timing of contract awards is impacted by general economic conditions as well as customer-specific factors such as state and local budgets and program priorities, over which QS Technologies has little control. Typically, QS Technologies provides its customers with post-sales service and support under annual contracts that often renew for multiple years after the initial software license fee is earned. QS Technologies has expanded its product line to include vital records software and web-based capabilities. In 2003, QS Technologies benefited from expanded sales and marketing activities in 2002 and an industry-wide increase in the number of new projects contracted for after several years of slowdown due to state and local budget constraints. Consequently, QS Technologies had a record year for revenue from new license sales and from annual maintenance contracts due to an expanded installed customer base. Based on our current outlook and the generally months-long process between submission of a proposal, contract award and delivery of the software, it is unlikely that QS Technologies will experience the same level of new license revenue in 2004 as it did in 2003, although the level of service revenue should continue to provide a significant recurring contribution because new and existing customers typically sign annual maintenance and support contracts.

CoreCard Software, Inc. - CoreCard Software was spun off from our former affiliate company, PaySys International, in April 2001. CoreCard designs, develops and markets software to accounts receivable businesses, banks, credit unions and retailers to manage their credit card, merchant and loan accounts. After more than seven years of extensive product development activity (including prior to the spin-off), in 2003 CoreCard completed the first major installation of its CoreISSUE™ and CoreCOLLECT™ application modules, based on its proprietary CoreENGINE™ architecture, at a major catalog retailer customer and will recognize revenue related to this contract in early 2004. CoreCard products allow financial institutions and commercial customers to optimize their account management systems, improve customer retention, lower operating costs and create greater market differentiation. CoreCard’s feature-rich, browser-based financial software allows customers to automate, streamline and optimize business processes associated with the set-up, administration and management of credit card, merchant and loan accounts, to process transactions and to generate reports and statements for these accounts. Because CoreCard’s products are designed to run on PC-based servers, rather than mini or mainframe computers, customers benefit from a lower overall cost-of-ownership, faster implementations and increased flexibility to respond to market conditions. CoreCard’s product functionality includes embedded multilingual, multi-currency support, web-based interface, real-time processing, complex rules-based authorizations, unlimited account hierarchies, and flexible, customer-defined pricing and payment terms.

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CoreCard’s initial target markets include accounts receivable businesses, small and mid-size banks, and retail and private-label issuers, in the United States and in certain emerging international markets, most likely focusing on the Pacific Rim. CoreCard competes with third-party card processors, larger and more established software suppliers, and a number of software solution providers that offer more limited functional modules. CoreCard has relatively limited sales and marketing experience compared to many of its competitors and it is unclear whether potential customers will choose to outsource their account transaction processing rather than acquire software to manage their transactions in-house, which could impact negatively the total addressable market for CoreCard, if such a trend gains momentum. Moreover, it is uncertain whether potential customers will be reluctant to acquire software from a relatively small emerging company with limited customer installations and choose instead a lower risk strategy of acquiring older technology from more established companies. Certain of CoreCard’s competitors have significantly more financial, marketing and development resources than does CoreCard and have large, established customer bases often tied to long-term contracts. CoreCard believes it can compete successfully in selected markets based on providing customers with a next-generation technology platform, lower overall cost-of-ownership, faster implementation cycles, greater system flexibility and more customer-driven marketing options. Like most emerging software companies, CoreCard’s challenge is to establish a growing base of referenceable, satisfied customers and to overcome customer reluctance to implement a business-critical system based on a new software product with limited installations. CoreCard has certain non-compete restrictions related to the spin-off from PaySys International, which limit for varying time periods through 2006 the customers and markets that CoreCard can solicit and serve. However, CoreCard believes that the available worldwide market is substantial, even with these time-limited restrictions.

CoreCard licenses its software products for either a one-time license fee or a per transaction fee, depending on specific customer requirements and preferences. It provides maintenance and support services under annual contracts, as well as professional services on an as needed basis for customization, implementation and training activities. Generally, CoreCard expects to sell its products directly to its initial customers in the domestic U.S. and is developing relationships with a small number of resellers and third parties in international markets to identify, sell and support targeted opportunities. CoreCard completed its initial software modules, CoreISSUE™, CoreFRAUD™ and CoreCOLLECTIONS™ in 2003 and expects to complete CoreACQUIRE™ in 2004 as customer demand and CoreCard resources allow.

Industrial Products Segment

ChemFree Corporation - Our only subsidiary in the Industrial Products segment is ChemFree Corporation, one of our early incubator companies. ChemFree designs, manufactures and markets a line of parts washers under the SmartWasher® trademark. SmartWashers® use an advanced bio-remediation system that cleans automotive and machine parts without using hazardous, solvent-based chemicals. Typically, the SmartWasher® system consists of a molded plastic tub and sink, recirculating pump, heater, control panel, filter with microorganisms, and water-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 and governmental agencies with fleets of vehicles to maintain, individual and chain automobile service centers and auto parts suppliers, such as NAPA. The industrial market includes customers with machinery that requires routine maintenance, such as power plants and tool and equipment rental companies. Military applications include vehicle, aircraft and weapons maintenance 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 under a General Services Administration schedule to government agencies. Because ChemFree sells in part through large national distributors such as NAPA and Barnes Group in the United States and exclusive distributors in certain international markets, its results could be impacted negatively if one or more of such distributors stops carrying ChemFree products. One of ChemFree’s domestic distributors, NAPA, represented 13 percent and 14 percent of our consolidated revenue in 2003 and 2002, respectively and 28 percent of our Industrial Products Segment revenue in both 2003 and 2002. Part of ChemFree’s revenue is derived from multi- year lease contracts under which ChemFree provides SmartWashers® and supplies to nationwide chains of auto repair shops, such as Firestone and Pep Boys.

ChemFree competes with larger, established companies that offer 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, desirable health and safety features, elimination of regulatory compliance, and price. ChemFree believes that new regulations from governmental agencies such as the Environmental Protection Agency that prohibit or restrict the use of solvent-based products, with which ChemFree’s products compete, will expand overall market demand significantly if such regulations are enforced effectively by state, local and federal governments.

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Customer and warranty service, typically covering a one-year period, is provided either by ChemFree personnel or through its distributors and dealers. ChemFree subcontracts the manufacturing of major sub-assemblies built to its specifications to various manufacturers and performs final assembly and testing at its own facility. While there are multiple sources available for subassemblies, ChemFree frequently contracts with a single source for certain components in order to benefit from lower prices and consistent quality.

Incubator Program

For more than ten years, we have operated the Intelligent Systems Incubator at our corporate facility in a suburb of Atlanta, Georgia. In exchange for a monthly facility fee, incubator companies have access to resources such as office space, conference facilities, telecommunication and network infrastructure, business advice and planning, a network of professional services, and, in some cases, financial capital from Intelligent Systems. Depending upon the experience and needs of the founding entrepreneur, incubator companies will choose to use some or all of the available resources. Income from incubator companies reduces our total facility and personnel costs.

Because we have a large facility, we have been able to offer the benefits of the incubator program to companies in which we have no ownership interest. 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.

Minority-Owned Partner Companies

Part of our business strategy has been to seek to own a minority interest in companies that we believe are involved in promising technologies or markets with good growth potential. From time to time, we have acquired an investment in such companies and expect to continue to do so as a regular part of our strategy. Typically, 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 17 percent interest in Horizon Software International, Inc., a leading provider of software and systems to manage the food service operations of primary and secondary education, college, medical and military facilities.

•   A 25 percent interest in NKD Enterprises, LLC (dba CoreXpand), a software services company with an e-commerce application for promotional and incentive product distributors and corporate customers. CoreXpand is part of our incubator program.

•   A 22 percent interest in Cirronet, Inc., a privately held and former Intelligent Systems incubator company involved in wireless telecommunications products for industrial, medical and commercial markets as well as residential and small business wireless Internet markets.

Research and Development

We spent $8.3 million, $9.8 million and $3.4 million in the years ended December 31, 2003, 2002 and 2001, respectively, on company sponsored research and development. In 2003, the Information Technology segment spent $1.5 million less on software development than in 2002 when R&D spending had increased by $6.4 million compared to 2001. In 2002, the significant increase in spending was due to an intensive effort related to development of the VISaer Version 3.0 product line and the initial software offering by CoreCard. In 2003, we spent less at both VISaer and CoreCard than in 2002 because fewer personnel and third party resources were required than in the initial product development phases. In both 2003 and 2002, of the consolidated research and development expense, approximately 50 percent relates to VISaer product development and 33 percent relates to CoreCard with the balance spent mainly for development projects at QS Technologies and, to a small extent, at ChemFree. We estimate that total R&D expenses in 2004 will be lower than in 2003 mainly due to a reduced number of U.S. based personnel at CoreCard compared to 2003 coupled with a greater use of lower cost off-shore personnel for testing and certain development tasks; reduced need for third party developers than were required during the early product development stages; at VISaer, increased use of customer’s personnel for certain testing activities which contribute to lower overall costs; and the ongoing benefit of a reduction in personnel in the third quarter of 2003 and reassignment of some software developers to customer support and professional services activities.

VISaer released its first Version 3 software in 2003 and expects to complete additional version releases and modules at various times in 2004. In 2004, CoreCard Software plans to continue to complete additional software modules, principally CoreACQUIRE™, and to develop further enhancements to its initial suite of products.

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Patents, Trademarks and Trade Secrets

Our ChemFree subsidiary has 11 U.S. patents issued and 15 patents in foreign jurisdictions issued and pending covering various aspects of the design and construction of the SmartWasher® system and the process of bioremediation used in the SmartWasher® system. ChemFree considers these patents an important component of their overall business strategy. (See Item 3 below). CoreCard has filed several patent applications covering aspects of its core software engine. 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 U.S. Patent and Trademark Office and various foreign jurisdictions numerous trademarks and service marks for our products. We believe that an active trade secret, trade name, trademark, and copyright protection program is important in developing and maintaining brand recognition and protecting our subsidiaries’ intellectual property. Our companies presently market their products under trademarks and service marks such as SmartWasher®, OzzyJuice™, VISaer™, CoreENGINE™, CoreISSUE™, CoreCOLLECT™ and others.

Personnel

As of February 28, 2004, we had 168 full-time equivalent employees in our company as well as 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.

Financial Information About Geographic Areas

Refer to Note 14 to the Consolidated Financial Statements for financial information in response to this item. We do not believe there are any specific risks attendant to our foreign operations that are significantly different than the general business risks discussed elsewhere in this annual report.

ITEM 2. PROPERTIES

At February 28, 2004, we have leases covering approximately 137,500 square feet in Norcross, GA, 6,100 square feet in Greenville, SC, and 21,400 square feet in Wilmington, MA, to house our product development, manufacturing, sales, service and administration operations, as well as small sales and/or development offices in England, Ireland, and Romania. A portion of the Norcross corporate facility is subleased to businesses in our technology business incubator. Our current lease on the Norcross facility expires May 31, 2004 and we are presently evaluating options to move or stay in the same facility, which in either case is likely to result in a substantial increase in facility lease costs because our expiring lease was at below current market rates. We anticipate successfully negotiating a lease to stay in the current facility but, if not, we expect that adequate facilities will be available at prevailing market rates.

ITEM 3. LEGAL PROCEEDINGS

In 1999, a former consultant of the ChemFree subsidiary brought suit against ChemFree and other third parties in an action styled James C. McClure vs. Zymo International, Inc., G. Robert Whiteman and ChemFree Corporation et al. challenging the ownership of certain of ChemFree’s patents. ChemFree and other parties to the suit deny the allegations and are vigorously defending the suit, which is pending in the Superior Court of Gwinnett County, Georgia. ChemFree has filed a counter suit in the United States District Court for the Northern District of Georgia in an action styled ChemFree Corporation vs. James C. McClure. The case in Federal Court was scheduled to go to trial early in 2004 but was postponed due to changes in the court’s calendar and no new date has been set. The case in the Superior Court of Gwinnett County is on hold pending resolution of the Federal case. While we believe ChemFree has sufficient evidence to prevail in both cases, there can be no assurance that the cases will be resolved in ChemFree’s favor. At this time it is unclear what, if any, impact a finding in either case which is adverse to ChemFree would have on its business or financial condition. In addition, from time to time we are or may become a party to a 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, 2003.

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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.

                                 
    2003   2002
Year Ended December 31,   High
   Low
   High
   Low
1st Quarter
   $ 1.70     $ 1.25     $ 3.28     $ 2.95  
2nd Quarter
     2.04       1.40       3.25       2.85  
3rd Quarter
     2.20       1.59       3.00       1.60  
4th Quarter
     2.01       1.55       1.92       1.45  

We had 385 shareholders of record as of February 28, 2004. 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. The company has in the past paid cash dividends from time to time on an irregular basis but has not in the past paid regular dividends and does not expect to pay any dividends in the foreseeable future. Under our revolving line of credit facility, we are precluded from paying dividends without obtaining consent from the bank. See Note 6 to the Consolidated Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA

Twelve Months Ended December 31,

                                         
(in thousands except share and per share amounts)
   2003
   2002
   2001
   2000
   1999
Net Sales
   $ 13,334     $ 10,741     $ 8,718     $ 7,027     $ 8,479  
Net Income (Loss)
     (4,798 )a     (12,257 )b     9,113 c     8,215 d     249 e
Net Income (Loss) Per Share (Basic)
     (1.07 )     (2.73 )     1.78       1.47       0.05  
Net Income (Loss) Per Share (Diluted)
     (1.07 )     (2.73 )     1.77       1.46       0.05  
Total Assets
     13,742       17,860       26,089       18,057       13,658  
Working Capital
     (1,898 )     1,490       10,206       3,294       (48 )
Long-term Debt
     —       —       —       —       363  
Stockholders’ Equity
     1,070       5,894       17,858       14,674       10,209  
Cash Dividends Paid Per Common Share
     —       —       —       0.52       —  
Shares Outstanding at Year End
     4,478,971       4,491,779       4,495,530       5,623,784       5,114,467  
Basic Weighted Average Shares Outstanding
     4,483,458       4,495,058       5,108,413       5,606,715       5,106,134  
Diluted Weighted Average Shares Outstanding
     4,483,458       4,495,058       5,145,691       5,632,484       5,336,776  

a.   Includes net investment gains of $3.0 million, $184,000 in net income in equity of affiliates and $328,000 other income.
 
b.   Includes net investment losses of $934,000, $235,000 in net losses in equity of affiliates and $900,000 other income.
 
c.   Includes investment gains of $19.9 million, $2.2 million in net losses in equity of affiliates and charges totaling $6.4 million related to the write-off of in-process R&D in connection with the acquisition of VISaer and subsequent goodwill impairment charge.
 
d.   Includes investment gains of $9.7 million and $771,000 in net losses in equity of affiliates.
 
e.   Includes investment gains of $2.2 million and $948,000 in net losses in equity of affiliates.

Please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements for a discussion of material acquisitions or dispositions that may affect the comparability of this financial information.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. We consider certain accounting policies related to revenue recognition, valuation of acquired intangibles and impairment of long-lived assets, and valuation of investments to be critical policies due to the estimation processes involved in each. For a detailed description on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements beginning on page F-8.

Revenue Recognition – Product revenue consists of fees from software licenses and sales or leases of industrial products. Service revenue consists of fees for implementation, consulting, training, reimbursable expenses, maintenance and support for software products.

We recognize revenue for industrial products when products are shipped, at which time title transfers to the customer. There are no remaining future obligations and delivery occurs upon shipment. We provide for estimated sales returns allowances and rebates in the period in which the sales are recorded. As an alternative to selling the product, on occasion we may lease our equipment. For leased equipment, we recognize revenue monthly at the contracted monthly rate during the term of the lease.

We recognize software fees in accordance with Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition”, as amended by SOP No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions”. Under SOP 97-2, we recognize software license 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 or determinable; and (4) collectibility is probable. Additionally, license fee revenue is not recognized until there are no material uncertainties regarding customer acceptance, cancellation provisions, if any, have expired and there are no significant vendor obligations remaining. SOP No. 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 No. 97-2 other than the requirement for vendor-specific objective evidence of the fair value of each delivered element of the arrangement are satisfied. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the license fee is recognized as revenue. For those contracts that contain significant production, modification and/or customization, software license fees are recognized utilizing Accounting Research Bulletin (“ARB”) No. 45, “Long-term Construction Type Contracts”, using the relevant guidance in SOP No. 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts”.

For percentage of completion contracts, we measure the progress toward completion and recognize the software license fees based upon input measures (i.e. in the same proportion that the amount of labor hours incurred to date bears to the total estimated labor hours required for the contract). If reliable estimates cannot be determined, we follow the completed contract method. Under the completed contract method, all revenue is deferred until the customer has accepted the software and any refund rights have expired.

A number of internal and external factors could affect our estimates related to software contracts, including labor rates, utilization of resources, changes in specifications or testing requirements, and unforeseen technical problems. If we do not accurately estimate the resources required or the scope of work to be performed, or we do not manage the contract properly, in future periods we may need to restate revenues, to defer revenue longer than originally anticipated or to incur additional cost which would impact our margins and reported results.

Valuation of Investments - We hold minority interests in non-publicly traded companies whose values are difficult to determine and are based on management’s estimate of realizability of the carrying value of the investment. Future adverse changes in market conditions, poor operating results, lack of progress of the underlying investee company or its inability to raise capital to support the business plan could result in investment losses or an inability to recover the current carrying value of the investment. Many of the companies in which we hold non-control, minority positions are backed by venture capital, and the value of our investment may be impacted by the amount, terms and valuation of the investee’s financial transactions with third party venture funds or the terms of the sale of the investee company to a third party. Our policy with respect to minority interests is to record an impairment charge when we believe an investment has experienced a decline in value that is other than temporary. For instance, this could occur if the investee company is sold for less than our pro rata carrying value or if a new round of funding is at a lower valuation than our investment was made or if the financing terms for the new

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investors (such as preferences on liquidation) otherwise reduce the estimated value of our investment. We do not write-up the carrying value of our investments based on favorable changes or financial transactions. At least quarterly, we review our investments to determine any impairment in their carrying value and we write-down any impaired asset at quarter-end to our best estimate of its current realizable value. Such charges could have a material adverse impact on our financial condition or results of operations and are generally not predictable or quantifiable in advance. For instance, in Note 3 to the Consolidated Financial Statements, we discuss aggregate charges totaling $1.2 million which we recorded in 2003 to reflect a reduction in the carrying value of our investments in RF Solutions, Silverpop and MediZeus. Charges were recorded in the first, second and fourth quarters of 2003, respectively, based on the timing of the events giving rise to management’s change in estimated valuation.

Valuation of Intangibles - From time to time in the past, we have acquired companies and we may do so in the future. Occasionally, as in the case with our VISaer and CoreCard Software subsidiaries (as described in detail in Note 2 to the Consolidated Financial Statements), we may increase our ownership or control of an entity from a minority to a majority position, which generally is treated as an acquisition for accounting purposes. Purchase accounting for an acquisition requires use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets and liabilities purchased. Our business acquisitions may result in the allocation of a portion of the purchase price to goodwill and other intangible assets. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect the amount of future period amortization expenses and possible impairment expense that we will incur. Typically, we use the services of a third party appraiser to provide a valuation of material intangible assets. However, often the acquired company is a small entity with limited operating history on which to base future projections and thus valuing the assets requires the use of estimates which are very subjective. Furthermore, the period over which we amortize certain intangibles may change based on future conditions and consequently we may need to adjust the intangible value and/or amortization period, which could require us to increase the amount of amortization expense we record each period or to take a non-cash charge to reduce the value of the intangible. On at least an annual basis, generally with the assistance of a third party appraiser, we review the values assigned to long-lived assets using an estimate of the undiscounted cash flows of the entity over the remaining life of the asset. Any resulting impairment could require a write-down that would have a material adverse impact on our financial condition or results of operations. We did not acquire any companies in 2003 and no write-downs with respect to goodwill or other intangibles occurred in 2003 or 2002. By comparison, in 2001, we recorded charges totaling $6.4 million related to the carrying value of VISaer intangibles at the time of its acquisition and subsequent to the September 11, 2001 terrorist attacks.

Overview

Our consolidated subsidiaries operate in two industry segments: Information Technology Products and Services and Industrial Products. Included in the Information Technology sector are QS Technologies, Inc. (software for public health and human services), VISaer, Inc. (software for maintenance, repair and overhaul operations in the commercial aviation industry) and CoreCard Software, Inc. (software for managing credit and debit cards). The Industrial Products segment includes ChemFree Corporation (bio-remediating parts washers).

We derive our product revenue from sales of software licenses in our Information Technology sector and sales and leases of equipment and supplies in our Industrial Products sector. Our service revenue consists of fees for implementation, consulting, training, maintenance and support for software products in our Information Technology sector. Our consolidated revenue is the aggregate of the revenue generated at our four subsidiary companies. Our revenue fluctuates from period to period and our results are not necessarily indicative of the results to be expected in future periods. Period-to-period comparisons may not be meaningful and it is difficult to predict the level of consolidated revenue on a quarterly or annual basis for a number of reasons, including the following:

•   A change in revenue level at one of our subsidiaries may impact consolidated revenue or be offset by an opposing change at another subsidiary.

•   Economic and marketplace trends may impact our subsidiaries differently or not at all and two of our software subsidiaries have very limited experience in their marketplaces which makes it difficult to identify and evaluate trends that may impact their business.

•   Two of our software subsidiaries, CoreCard Software and VISaer, have been involved in major new product development initiatives for the past three years and have limited experience delivering and installing their new products at customer sites, making it difficult to predict with certainty when they will recognize revenue on individual software contracts.

•   Our subsidiaries are relatively small in revenue size and, in the Information Technology sector, license revenue at a subsidiary in a given period may consist of a relatively small number of contracts. Consequently, even small delays in a subsidiary’s delivery under a software contract (which may be out of their control) could have a significant and unpredictable impact on consolidated revenue that we can recognize in a given quarterly or annual period.

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•   Acquisitions may affect our revenue and expense levels. For instance, in 2002, we acquired a controlling interest in CoreCard Software and in mid 2001, we acquired a controlling interest in VISaer. Consequently, we consolidated the results of operations of those companies from the dates of acquisition but not for prior periods.

Frequently we recognize consolidated operating losses on a quarterly and annual basis and are likely to do so in the future from time to time. Our operating expenses consist of the aggregate of our four subsidiaries’ expenses and the corporate office expenses. Our ChemFree and QS Technologies subsidiaries usually generate an operating profit on an annual basis but our early stage subsidiaries, VISaer and CoreCard, presently do not, mainly due to significant research and development expense that is invested to complete their new product offerings and the deferral of revenue recognition until such products are delivered to customers in future periods. Depending upon the size and number of software licenses recognized in a particular period and the level of expenses incurred to support development and sales activities, our subsidiaries may report operating profits on an irregular basis as they build their customer base. A significant portion of our subsidiaries’ expense is related to personnel which is relatively fixed in the short-term and we continually evaluate and strive to balance our financial resources with the resources required to complete products under development and support our subsidiaries’ customers. For these and other reasons, our operating profits or losses may vary from quarter to quarter and at the present time are generally not predictable with any degree of certainty.

We also frequently generate income or losses from non-operating sources and we may do so from time to time in the future. Occasionally we derive income from sales of holdings in affiliate and other minority-owned companies or we record a charge if we believe the value of a non-consolidated company is impaired. 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, either on a quarterly or annual basis.

In recent years, most of our cash has been generated on an irregular basis from sales of our investments in early stage technology companies. We have used a significant amount of the cash received from these sales to support the operations of our CoreCard Software and VISaer subsidiaries. We do not expect and cannot support the same level of cash investment in the future in these two entities and presently believe that customer payments on existing and pending software contracts will be sufficient to fund VISaer’s operations and a growing portion of CoreCard’s expenses. If the business or cash flow of either subsidiary does not develop as anticipated, we would need to scale back or restructure their operations.

Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this annual report.

2003 Compared to 2002

Revenue - Total revenue for the year ended December 31, 2003 was $13.3 million, an increase of 24 percent ($2.6 million) compared to the same period in 2002. Revenue from product sales increased 34 percent year-to-year from $6.3 million to $8.5 million whereas revenue from services billed by the Information Technology segment increased 10 percent year-to-year from $4.4 million to $4.9 million. The increase in product revenue is due to several factors: software license fees generated by our Information Technologies segment subsidiary, QS Technologies, accounted for 57 percent of the total year-to-year increase and the Industrial Products segment accounted for the remaining 43 percent of the year-to-year increase due to increased revenue from ChemFree products in both domestic and international markets.

In 2003, QS Technologies benefited from pent-up demand for its products by local and state governments after several years of reduced spending by such entities on software products. Almost 80 percent of QS Technologies product revenue was generated in the fourth quarter of 2003 upon delivery of its most recent product release to new customers. Based on the current pipeline and foreseeable demand, we may not achieve the same level of new license revenue in 2004 because we expect that state and local government budget constraints may reduce overall spending, including for software products.

Our Industrial Products segment achieved a 37 percent increase in international sales and a 14.5 percent increase in domestic sales in 2003 compared to 2002. The year-to-year increase was due to approximately 15 percent higher unit shipments of SmartWasher® parts washers and fluid, a 14 percent increase in revenue from units leased to customers under multi-site corporate lease contracts, and an increase of approximately four percent in the average selling price of parts washers and fluid due to price increases on certain products.

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Some of the factors contributing to the year-to-year increase include expanded geographic coverage by domestic distributors, more installations at new and existing multi-site corporate facilities and a larger installed base of customers who purchase replenishment supplies of fluids and filters. We expect demand for ChemFree products to continue to grow, although it is unlikely we would sustain the same level of high growth in the international markets in 2004 as in 2003.

Our CoreCard Software subsidiary began generating limited revenue in 2003 while license revenue booked by our VISaer subsidiary was approximately 27 percent lower than in 2002, mainly due to deferring revenue on new licenses sold until delivery of the final Web-based version of their licensed software in 2004. At December 31, 2003, we have recorded $2.6 million of unearned short-term deferred revenue and $5.1 million of long-term deferred revenue, of which 79 percent of the total is related to VISaer license fees and 15 percent of the total is related to annual maintenance, support and lease contracts at three subsidiaries which will be recognized ratably over twelve months in 2004.

With respect to our revenue from services, the increase from year-to-year from $4.4 million to $4.9 million reflects mainly a 20 percent or $252,000 increase in maintenance and support revenue generated by our QS Technologies subsidiary due to a larger installed base of customers paying annual maintenance fees as well as approximately $165,000 more revenue from training and other services provided (excluding billable travel) due to the record number of new customer licenses sold during 2003. The level of service revenue generated by our VISaer subsidiary was relatively constant year-to-year.

Cost of Sales - Cost of product sales in 2003 was 39 percent of product revenue, or $3.3 million compared to 48 percent of product revenue, or $3.0 million in 2002. The difference between years is due to the significantly greater contribution of license revenue generated in 2003 by the QS Technologies subsidiary which has a lower cost of sales than do our Industrial Products, which experienced a relatively consistent cost as a percentage of revenue in both 2003 and 2002 (52 percent and 55 percent in 2003 and 2002, respectively).

Cost of service sales in 2003 represented 69 percent of service revenue or $3.4 million compared to 64 percent of service revenue, or $2.9 million in 2002. The increase is due to higher personnel costs. QS Technologies allocated more resources to customer support functions in 2003 than in 2002 to support a high volume of new customers in 2003 and VISaer utilized more expensive third party contractors for certain specialized development services in the first half of 2003 and utilized more of its personnel in the customer support and professional services departments in 2003 as compared to 2002.

Operating Expenses - Consolidated operating expenses were 13 percent lower in 2003 than in 2002, decreasing from $17.3 million to $15.0 million. Both general and administrative and research and development expenses declined 15 percent in 2003 compared to 2002 while marketing expenses were five percent lower than the prior year. General and administrative expenses decreased from $4.6 million in 2002 to $3.9 million in 2003 mainly due to lower administrative and management personnel costs at CoreCard than had been incurred in early 2002 prior to the consolidation of CoreCard operations, saving approximately $667,000 in 2003. Other factors contributing to the reduced expenses in 2003 were lower personnel costs at VISaer offset in part by an increase of $147,000 in legal fees at ChemFree and higher personnel costs at QS Technologies. Research and development expense declined by 15 percent in 2003 compared to 2002 from $9.8 million to $8.3 million principally due to a net reduction in the number of personnel employed in our domestic Information Technologies subsidiaries and a reduction in contract programming expense that had been incurred by VISaer in 2002 related to the initial conversion and development of its Web-based software product.

Interest Income - We recognized net interest income of $2,000 in 2003 compared to $129,000 in 2002. In 2002, we earned interest on a higher level of notes receivable balances because we had a $1.5 million note receivable outstanding for five months in 2002 and a $3.0 million note receivable outstanding for four months in 2002. Both notes were repaid or converted to equity in 2002.

Investment Income - We earned net investment income of $3.0 million in 2003 compared to a net investment loss of $934,000 in 2002. In 2003, net investment income includes a gain of $4.5 million related to the PaySys escrow settlement (refer to Note 3 for details), offset in part by charges of $600,000, $76,000 and $501,000 to reduce the carrying value of our investments in RF Solutions Inc, Silverpop, Inc. and MediZeus, Inc., respectively. In addition, we recorded charges of $92,000 and $131,000 against the carrying values of notes receivable of RF Solutions, Inc. and Medizeus, Inc., respectively. By comparison, in 2002, we recorded investment gains of $1.1 million on the sale of our holdings in Atherogenics stock and $474,000 on the sale of our remaining interest in Risk Laboratories. Offset against these gains were charges totaling $1.1 million to reduce the carrying value of our investments in NuTec Sciences, Inc., Lumenor, Inc., and Novient, Inc., three privately-held software companies, and a charge of $1.3 million to recognize the accumulated loss on our holdings in publicly traded Daw Technologies, Inc. and Ixalt, Inc. Refer to Note 3 for more details regarding these transactions. The timing and amounts of asset sales or writedowns, if any, vary on an annual and quarterly basis and are generally not predictable by us in advance.

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Equity Earnings (Losses) of Affiliate Companies - On a quarterly basis, we recognize our pro rata share of the earnings or losses of affiliate companies that we record on the equity method. The amount recorded is not generally predictable or indicative of future results because it is the aggregate earnings (losses) of a number of relatively small companies operating in various industries and thus aggregate earnings (losses) are subject to considerable fluctuation from quarter-to-quarter. In 2003, we recorded $184,000 in equity earnings of five affiliate companies (including Horizon Software International, CoreXpand, Riverside Software, MediZeus, and Cirronet, for those periods in which we accounted for each by the equity method) compared to equity losses in 2002 of $235,000 in three affiliate companies (CoreXpand, MediZeus and Horizon Software for those periods in which we accounted for each by the equity method).

Other Income, Net - We recognized $328,000 in other income in 2003 compared to other income of $900,000 in 2002. In 2003, the amount includes $137,000 in recognition of deferred gain related to a VISaer product line sale in a prior period, $124,000 in foreign currency exchange gains, and other miscellaneous income. By comparison, in 2002 other income consists mainly of $813,000 of deferred gain related to the VISaer product line sale and other miscellaneous income.

Income Taxes - In 2003, we recorded an income tax credit of $40,000 representing the net of a $104,000 refund of alternative minimum taxes paid by the VISaer subsidiary in a prior year and income tax of $64,000 related to our QS Technologies’ state tax liability. We did not accrue for any other income tax liability in 2003 and we believe that the deferred tax assets should be fully reserved given their character and our recent losses. By comparison, in 2002, we recorded an income tax benefit of $343,000 reflective of a refund of alternate minimum taxes paid in 2001.

2002 Compared to 2001

Revenue - Total revenue for the year ended December 31, 2002 was $10.7 million versus $8.7 million in the same period in 2001, an increase of 23 percent. Revenue from product sales increased 18 percent year-to-year whereas revenue from services billed by the Information Technology segment increased 29 percent year-to-year. The increase in product revenue is mainly due to a greater number of units sold by the ChemFree subsidiary due to an increase in domestic demand for its products. The increase in service revenue year-to-year reflects mainly the fact that we included the results of VISaer for the full 12 months in 2002 but only for six months in 2001. Approximately two-thirds of our service revenue in 2002 was generated by VISaer for professional services with the balance coming mainly from software maintenance contracts at the QS Technologies subsidiary. At December 31, 2002, long-term deferred revenue was $4.8 million, related to VISaer’s software license contract with a major U.S. air freight company, which it expects to realize beginning in 2004.

Cost of Sales - In 2002, total cost of sales was 55 percent of revenue compared to 47 percent of revenue in 2001. Cost of product sales as a percentage of product revenue was 48 percent in 2002 compared to 49 percent in 2001, reflecting mainly a reduction in the unit cost of producing ChemFree products because fixed production overhead was spread across a higher volume of goods produced. Cost of service sales almost doubled in 2002 as compared to 2001 and represented 64 percent of services revenue in 2002 as compared to 42 percent in 2001. Approximately $1.0 million of the year-to-year increase in costs of service sales is attributed to including VISaer costs for the full 12 months in 2002 as compared to only six months in 2001. Typically, costs associated with VISaer service revenue involve higher labor costs than do costs associated with QS Technologies services.

Operating Expenses - In 2002, marketing expenses increased by $870,000 (42 percent) compared to 2001. Of the increase, approximately $330,000 is due to the inclusion of VISaer expenses for 12 months in 2002, $283,000 is due to increased expenditures at the ChemFree subsidiary to support a direct sales initiative in selected markets, and the balance of $257,000 reflects mainly the inclusion of CoreCard expenses in 2002. General and administrative expenses were 53 percent lower in 2002 than in 2001, mainly reflecting the fact that 2001 expenses included non-cash charges totaling $6.0 million related to the write-down of goodwill associated with the VISaer acquisition in 2001. This decrease was offset by an increase of approximately $950,000 year-to-year mainly because we included the expenses of VISaer for the full 12 months in 2002 as compared to only six months in 2001. An increase in legal expenses in 2002 at ChemFree of approximately $140,000 related to intellectual property protection was offset by a reduction in G&A personnel expenses at the QS Technologies subsidiary. Research and development expense increased by $6.4 million (191 percent) in 2002 as compared to 2001. Approximately one-half of the increase is attributable to each of VISaer and CoreCard due to the inclusion for the full year of their respective expenses to support significant new product development initiatives.

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Interest Income - In 2002, we earned $129,000 in interest income compared to $1.0 million in 2001. The reduced interest income is because we earned significant interest on a high-interest loan to PaySys in 2001 before PaySys was sold and the loan repaid. In 2002, we also had lower average cash balances and notes receivable balances than in 2001 and we earned interest at a lower rate than in 2001.

Investment Income/Loss - In 2002, we had a net investment loss of $934,000 compared to net investment income of $19.9 million in 2001, of which $17.8 million was derived from the sale of our PaySys affiliate in 2001. In 2002, we recorded investment gains of $1.1 million on the sale of our holdings in Atherogenics stock and $474,000 on the sale of our remaining interest in Risk Laboratories. Offset against these gains were charges totaling $1.1 million to reduce the carrying value of our investments in NuTec Sciences, Lumenor, and Novient, three privately-held software companies, and a charge of $1.3 million to recognize the accumulated loss on our holdings in publicly traded Daw Technologies, Inc. and Ixalt, Inc. Refer to Note 3 for more details regarding these write-downs. The timing and amounts of asset sales or write-downs, if any, vary on an annual and quarterly basis and are generally not predictable by us in advance.

Equity Losses of Affiliates - On a quarterly basis, we recognize our pro rata share of the earnings or losses of affiliate companies that we record on the equity method. In some cases, these companies are early stage companies that incur losses during their development and early revenue period. In 2002, we recorded equity losses of $235,000 related to four affiliate companies compared to equity losses in 2001 of $2.2 million related to seven affiliate companies. The main difference between years is that we consolidated VISaer and CoreCard for the full year in 2002 but in 2001, we consolidated VISaer only for the last half of the year and we accounted for CoreCard under the equity method for the entire year.

Other Income - In 2002, other income consists mainly of $813,000 of deferred gain related to a VISaer product line sale in July 2000, compared to the recognition of $961,000 of deferred gain related to the product line sale in 2001. Refer to Note 7 for detail on the deferred gain.

Income Taxes - In 2002, we recorded an income tax benefit of $343,000 reflective of a refund of alternate minimum taxes paid in 2001. In 2001, we incurred a net income tax expense of $173,000, representing a tax liability of $343,000 for alternative minimum tax on the PaySys transaction and a tax benefit of $211,000 recorded at the VISaer subsidiary. The difference between our effective and statutory income tax rate is caused by our valuation allowance on our deferred tax assets.

Liquidity and Capital Resources

Our cash balance at December 31, 2003 was $1.1 million, which is $1.5 million lower than at the prior year-end. During the year ended December 31, 2003, our principal source of cash was $4.6 million from settlement of the PaySys escrow account as described in more detail in Note 3 to the Consolidated Financial Statements. During the year, our principal use of cash was $5.5 million for operations, which was $3.6 million less than in 2002. We used approximately $328,000 cash, net of repayments and distributions, related to new and follow-on investments or loans to investee companies in 2003 but plan to concentrate our activities and resources in 2004 on our existing companies.

In recent years, most of our cash has been generated on an irregular basis from sales of our investments in non-consolidated technology companies and we have used a significant amount of the cash received from these sales to support the operations of our CoreCard Software and VISaer subsidiaries. In 2003, we used $6.7 million to support these two subsidiaries which was $286,000 less than we used in 2002. We do not expect and cannot support the same level of cash investment in the future in these two subsidiaries. Based on recent trends and current projections, we presently believe that scheduled customer payments on existing and pending software contracts will be sufficient to fund substantially all of VISaer’s operations and a growing portion of CoreCard’s expenses in 2004. If the business or cash flow of either subsidiary does not develop as anticipated either due to delays in customer payments, software development or new contract acquisitions, we would need to scale back or restructure the respective operations to a level that could be supported by their internal cash flow with minimal cash, if any, provided by us, or to seek alternative sources of funding for the subsidiaries. Most of our consolidated expenses are related to personnel, none of whom are represented by a union or have employment contracts. Thus, while there are no current plans to do so, any action to reduce negative cash flow from operations would generally entail a reduction in numbers of employees and the payment of accrued and severance compensation which could increase cash requirements in a given quarter but reduce cash needs in future quarters. Our established operating companies, QS Technologies and ChemFree, generated sufficient cash in 2003 to offset a majority of the corporate office expenses and are expected to do so again in 2004. There are no restrictions on the transfer of cash balances between the parent and subsidiary companies.

Accounts receivable at December 31, 2003 were $1.5 million, 49 percent lower than at December 31, 2002, when they were $3.0 million. At December 31, 2002, our receivables were higher than normal for several reasons. First, at December 31, 2002, $816,000 of the

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accounts receivable was related to billings to two VISaer customers upon the achievement of contract milestones and such amounts were collected in early 2003. At year-end December 2003, there were no such scheduled milestone billings included. Second, $150,000 of the year-to-year difference in accounts receivable is attributable to timing differences on billings of annual maintenance contracts for two VISaer customers. Third, in the Industrial Products segment, increased emphasis on collections and stricter credit policies resulted in reduced collection cycles and improved cash flow in 2003 by approximately $360,000. In the aggregate, current and non-current deferred revenue increased by $1.0 million in 2003 compared to 2002, representing cash payments in 2003 by customers for software licenses and annual software maintenance contracts by our Information Technology subsidiaries as well as leased Industrial Products equipment for which the related revenue will be recognized in future periods. In 2003, we used approximately $95,000 cash to increase inventory levels of ChemFree products to support a growing volume of sales and leases of equipment to domestic and international customers. Accounts payables declined by $369,000 at December 31, 2003 compared to December 31, 2002 for several reasons. Of the decline, $83,000 is related to a planned reduction in the use of third-party software contractors in 2003 and the balance is mostly related to improved cash collections in the Industrial Products segment which allowed payment of payables generally within current terms.

We have several potential near-term sources of cash to support negative cash flow from consolidated operations, including periodic draws against our bank line of credit, sale(s) of investments or other assets or third party strategic investment in a subsidiary. The amount and timing of sales of investments or assets cannot be predicted with reasonable certainty at this time and presently we do not have any firm pending transactions. Our budgeted cash requirements for 2004 are substantially lower than for 2003 based on new and pending software license and professional services contracts at our Information Technology subsidiaries, recently negotiated periodic payments by two key customers at VISaer, and lower product development costs at VISaer and CoreCard. We expect to use our bank line of credit as needed in 2004 to accommodate short-term timing differences in consolidated cash flows. We presently project that we will have sufficient accounts receivable and inventory balances throughout the year to provide the required borrowing base for such draws under our bank line of credit; however, if we fail to do so, we could experience a short-term cash shortfall unless the bank provided an exception. Furthermore, if the bank elects not to renew our line of credit at the end of the current term (September 1, 2004), we may not be able to find a replacement line of credit on acceptable terms, if at all. Certain VISaer customer contracts tie cash payments to delivery dates of various software deliverables and in other cases, customers have agreed on periodic payments at scheduled time periods to enable the company to dedicate resources to complete contract deliverables. VISaer is working closely with key customers to meet its project milestones but delays could cause customers to postpone payments and increase VISaer’s need for cash during 2004. Also our ability to recognize deferred revenue reflected on the balance sheet will depend on VISaer delivering and the customer accepting the final software deliverables in 2004 and thereafter. Presently, we do not believe there is a material risk to successfully performing under these contracts but if customer payments are delayed for any reason or we do not control costs or we encounter unforeseen technical problems, then VISaer could experience a cash shortfall to fund its operations and would need to scale back its operations or seek new financing, which could affect its performance under the contracts, at least in the short term. In addition, unanticipated delays in contract awards and implementations at CoreCard would have a negative impact on results of operations and increase our cash requirements.

Beyond 2004, we expect that liquidity will continue to improve and consolidated operations will generate sufficient cash to fund their requirements with use of our credit facility to accommodate short-term needs. Other long-term sources of liquidity include potential sales of investments or other assets although the timing and amount of any such transactions are uncertain and, to the extent they involve non-consolidated companies, generally not within our control.

We do not currently have any off balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, liquidity or results of operations.

Long-Term Contractual Obligations

Our only material long-term contractual obligations consist of operating leases as indicated below:

                                         
    Payment Due By Period
Contractual Obligations           Less than   1-3   3-5   More than
(in thousands)
   Total
   1 year
   years
   years
   5 years
Operating Lease Obligations
   $ 404     $ 345     $ 59       —       —  
     
     
     
     
     
 
Total
   $ 404     $ 345     $ 59       —       —  
     
     
     
     
     
 

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Factors That May Affect Future Operations

Future operations in both the Information Technology and Industrial Products segments are subject to risks and uncertainties that may negatively impact our future results of operations or projected cash requirements. It is difficult to predict future quarterly and annual results with any certainty mainly because several of our subsidiaries are early stage companies with limited revenue and experience in their respective markets, all are relatively small in size and, particularly in the Information Technology sector, revenue tends to be associated with fewer and larger sales than in the Industrial Products segment. Thus any trend or delay that affects even one of our subsidiaries could have a negative impact on the company’s consolidated results of operations or cash requirements on a quarterly or annual basis. In addition, the carrying value of our investments is impacted by a number of factors which are generally beyond our control since we are typically a non-control shareholder in a private company with limited liquidity. Among the numerous factors that may affect our consolidated results of operations or financial condition are the following:

•   Delays in software development projects which could cause our customers to delay implementations, delay payments or cancel contracts, which would increase our costs and reduce our revenue.

•   Undetected software errors which may delay product releases, increase our costs, result in non-acceptance of our software by customers or delay revenue recognition.

•   Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product offerings) which may cause prospective customers to choose an alternative product solution, resulting in lower revenue and profits (or increased losses).

•   The inability of our CoreCard or VISaer subsidiaries to establish a base of referenceable customers for their new product offerings, resulting in lower revenue and profits (or increased losses), increased cash needs and possibly leading to restructuring or cutting back of the subsidiary’s operations.

•   Failure of our products’ specifications and features to achieve market acceptance.

•   Delays in anticipated customer payments for any reason which would increase our cash requirements and possibly our losses.

•   Declines in performance, financial condition or valuation of minority-owned companies which could cause us to write-down the carrying value of our investment or postpone an anticipated liquidity event, which could negatively impact our earnings and cash.

•   A reversal of the improving trend in the commercial aviation industry worldwide which could impact VISaer’s short-term customer purchases, thus increasing its losses and need for cash.

•   The relatively limited sales and marketing experience of our VISaer and CoreCard subsidiaries in their respective markets could cause them to misinterpret or fail to interpret or adjust to a trend in the market or to underestimate the sales cycle time frame.

•   In the Industrial Products market, failure by ChemFree to achieve anticipated growth in the European market or in the domestic national accounts and non-automotive markets for their products could cause lower than anticipated sales and profits.

•   An insufficient number of potential CoreCard customers decide to purchase and run an in-house software system and instead choose to outsource their account transaction processing which could result in lower revenue, increased costs and greater cash requirements.

•   Budget reductions by state and local governments for information technology products that delay award of contracts or implementations for our QS Technologies subsidiary.

•   An insufficient level of qualifying accounts receivable and inventories to support a borrowing base sufficient to meet our anticipated borrowing requirements under our bank line of credit.

•   The recurrence of some incidence such as the SARS epidemic in 2003 that has a negative impact on the aviation industry, resulting in delays in contract awards and customer implementations similar to the unforeseen negative impact on cash and profits experienced by VISaer during the SARS epidemic.

•   Other general economic and political conditions, particularly those which may cause international business and domestic government customers to delay or cancel software purchase decisions.

We have certain lease commitments, legal matters and contingent liabilities described in detail in Note 9 to the Consolidated Financial Statements. We are not aware presently of any facts or circumstances related to these that are likely to have a material negative impact on our results of operations or financial condition.

Recent Accounting Pronouncements

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities”. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created on or prior to January 31, 2003, the provisions of FIN No. 46 must be applied for the first

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interim or annual period beginning after December 15, 2003. We have identified no variable interest entities and do not expect FIN No. 46 to have an effect on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity by issuers. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. On November 7, 2003, the FASB deferred the classification and measurement provisions of SFAS No. 150 as they apply to certain mandatory redeemable non-controlling interests. This deferral is expected to remain in effect while these provisions are further evaluated by the FASB. The adoption of this statement did not have a significant impact on our financial position, results of operations or cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not have any material market risk because we have no long-term borrowings or sales transactions involving financial instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted as a separate section of this report. See the Consolidated Financial Statements and Note 17 to the Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On May 10, 2002, we dismissed Arthur Andersen LLP as our independent public accountants. No report of Arthur Andersen LLP on the financial statements for either of the two past years contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. There were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its report during the company’s two most recent fiscal years or any subsequent interim period preceding the dismissal of Arthur Andersen LLP. Effective July 3, 2002, our Board of Directors, upon the recommendation of the Audit Committee, appointed BDO Seidman, LLP as our new independent accountants.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the company carried out an evaluation, under the supervision and with the participation of the company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and the procedures are effective. There were no significant changes in the company’s internal controls over financial reporting or in other factors identified in connection with this evaluation that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Please refer to the subsection entitled “Proposal 1 - The Election of One Director - Nominee” and “Proposal 1 - The Election of One Director - Executive Officers” in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 27, 2004 for information about the individual nominated as director 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

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under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in this Proxy Statement. This information is incorporated into this Item 10 by reference.

ITEM 11. EXECUTIVE COMPENSATION

Please refer to the subsection entitled “Proposal 1 - The Election of One Director - 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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Please refer to the subsections entitled “Voting - Principal Shareholders, Directors and Certain Executive Officers” and “Voting - Securities Authorized for Issuance Under Equity Compensation Plan” 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 and securities authorized for issuance under our equity compensation plans. This information is incorporated into this Item 12 by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

J. Leland Strange, a director, and President and Chief Executive Officer of the company, participated as a common shareholder in the pro rata distribution of the escrow fund related to the sale in April 2001 of PaySys International, Inc. as described more fully in Note 3 to the Consolidated Financial Statements. Mr. Strange, who had owned his shares in PaySys since 1983 prior to the company’s investment in PaySys in 1994, received $149,106 in the aggregate in two payments in March and June 2003, which represented his pro rata share of the escrow funds released.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Please refer to the subsections entitled “Audit Committee Report” and “Independent Public Accountants” in the Proxy Statement referred to in Item 10 for information about the fees paid to and services performed by our independent accountants. This information is incorporated into this Item 14 by reference.

PART IV

ITEM 15. 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 Certified Public Accountants
 
    Report of Previous Independent Public Accountants
 
    Consolidated Balance Sheets at December 31, 2003 and 2002
 
    Consolidated Statements of Operations for the three years ended December 31, 2003
 
    Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the three years ended December 31, 2003
 
    Consolidated Statements of Cash Flow for the three years ended December 31, 2003
 
    Notes to Consolidated Financial Statements

          2. Financial Statement Schedule

          We are including the financial statement schedule 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

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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

          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)   Amended and Restated Articles of Incorporation of the Registrant dated November 14, 1991, as amended November 25, 1997. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991 and 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   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 and filed on December 16, 1997.)
 
4.2   Form of Rights Certificate. (Incorporated by reference to Exhibit 4.2 of the Registrant’s Report on Form 8-K dated November 25, 1997 and filed on December 16, 1997.)
 
10.1   Lease Agreement dated November 26, 2002, between the Registrant and Duke Realty Limited Partnership (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-K for the year ended December 31, 2002).
 
10.2   Management Compensation Plans and Arrangements:

(a)   Intelligent Systems Corporation 2003 Stock Incentive Plan
 
(b)   Intelligent Systems Corporation 1991 Stock Incentive Plan, amended June 6, 1997
 
(c)   Intelligent Systems Corporation Change in Control Plan for Officers
 
(d)   Intelligent Systems Corporation Outside Director’s Retirement Plan
 
(e)   Non-Employee Directors Stock Option Plan
 
    Exhibit 10.2(a) is filed herewith.
 
    Exhibit 10.2 (b) is incorporated by reference to Exhibit 4.1 of the Registrant’s Form S-8 dated July 25, 1997.
 
    Exhibits 10.2 (c) and (d) are incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-K for the year ended December 31, 1993.
 
    Exhibit 10.2 (e) is incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-K for the year ended December 31, 2000.

10.3   Loan Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated October 1, 2003.
 
10.4   Security Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated as of October 1, 2003.
 
10.5   Form of Security Agreement by and among majority owned subsidiary companies of Intelligent Systems Corporation and Fidelity Bank as of October 1, 2003.
 
10.6   Negative Pledge Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated October 1, 2003.
 
10.7   Commercial Promissory Note and Rider thereto of Intelligent Systems Corporation in favor of Fidelity Bank dated October 1, 2003.
 
10.8   Form of Guarantee of majority owned subsidiaries of Intelligent Systems Corporation in favor of Fidelity Bank dated October 1, 2003.

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21.1   List of subsidiaries of Registrant.
 
23.1   Consent of BDO Seidman, LLP.
 
31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

We filed a report on Form 8-K on November 7, 2003 disclosing that we issued a press release on November 7, 2003 announcing our financial results for the quarter ended September 30, 2003.

(c) See Item 15(a)(3) above.

(d) See Item 15(a)(2) above.

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, 2004  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
J. Leland Strange
  Chairman of the Board, President,
Chief Executive Officer and Director
(Principal Executive Officer) 		  March 30, 2004
 
        
/s/ Bonnie L. Herron
Bonnie L. Herron
  Chief Financial Officer
(Principal Accounting and Financial Officer) 		  March 30, 2004
 
        
/s/ James V. Napier
James V. Napier
  Director   March 30, 2004
 
        
/s/ John B. Peatman
John B. Peatman
  Director   March 30, 2004
 
        
/s/ Parker H. Petit
Parker H. Petit
  Director   March 30, 2004

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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 Certified Public Accountants
     F-2  
Report of Previous Independent Public Accountants
     F-3  
Consolidated Balance Sheets - December 31, 2003 and 2002
     F-4  
Consolidated Statements of Operations -
        
Three Years Ended December 31, 2003
     F-5  
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive (Loss) Income -
        
Three Years Ended December 31, 2003
     F-6  
Consolidated Statements of Cash Flow -
        
Three Years Ended December 31, 2003
     F-7  
Notes to Consolidated Financial Statements
     F-8  
Financial Statement Schedule:
        
 
The following supplemental schedule of the Registrant and its subsidiaries is submitted herewith in response to Item 15(a)(2):
        
 
Schedule II - - Valuation and Qualifying Accounts and Reserves
     S-1  

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Intelligent Systems Corporation:

We have audited the accompanying consolidated balance sheets of Intelligent Systems Corporation and subsidiaries (the “Company”) as of December 31, 2003 and 2002 and the related consolidated statements of operations, shareholders equity and comprehensive (loss) income and cash flows for the two years then ended. We have also audited the financial statement schedule for the years ended December 31, 2003 and 2002 listed in the accompanying index. These financial statements and schedule 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. The Company’s consolidated financial statements and financial statement schedule as of December 31, 2001, and for the one year period ended December 31, 2001, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and schedule in their report dated March 1, 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule 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 financial position of Intelligent Systems Corporation and subsidiaries as of December 31, 2003 and 2002 and the results of their operations and their cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the 2003 and 2002 schedule presents fairly, in all material respects, the information set forth therein.

/s/ BDO Seidman, LLP

Atlanta, Georgia
March 4, 2004

INTELLIGENT SYSTEMS CORPORATION

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THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR ANDERSEN LLP AND IT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR ANDERSEN LLP HAS NOT CONSENTED TO ITS INCORPORATION BY REFERENCE INTO INTELLIGENT SYSTEMS CORPORATION’S PREVIOUSLY FILED REGISTRATION STATEMENTS FILE NOS: 33-99432, 333-32157 AND 333-58134. THEREFORE, AN INVESTOR’S ABILITY TO RECOVER ANY POTENTIAL DAMAGE MAY BE LIMITED.

REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS

TO INTELLIGENT SYSTEMS CORPORATION:

We have audited the accompanying consolidated balance sheets of Intelligent Systems Corporation (a Georgia corporation) and its subsidiaries as of December 31, 2001 and 2000, 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, 2001. 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. The summarized financial data for PaySys International, Inc. contained in Note 4 are based on the financial statements of PaySys International, Inc., which were audited by other auditors. Their report has been furnished to us and our opinion, insofar as it relates to the data in Note 4, is based solely on the report of the other auditors. 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 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 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 audits 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 subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 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, is fairly stated in all material respects in relation to 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 1, 2002

INTELLIGENT SYSTEMS CORPORATION

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Intelligent Systems Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

                 
As of December 31,
   2003
   2002
ASSETS
                
Current assets:
                
Cash
   $ 1,133     $ 2,644  
Accounts receivable, net
     1,543       3,025  
Notes and interest receivable
     142       205  
Inventories
     766       671  
Other current assets
     614       213  
 
    
 		      
 		  
Total current assets
     4,198       6,758  
 
    
 		      
 		  
Long-term investments
     6,275       7,145  
Property and equipment, at cost less accumulated depreciation
     746       761  
Goodwill, net
     2,039       2,380  
Other intangibles, net
     476       788  
Other assets, net
     8       28  
 
    
 		      
 		  
Total assets
   $ 13,742     $ 17,860  
 
    
 		      
 		  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Short-term borrowings
   $ 250     $ —  
Accounts payable
     932       1,301  
Deferred revenue
     2,586       1,784  
Deferred gain
     291       428  
Accrued expenses and other current liabilities
     2,037       1,755  
 
    
 		      
 		  
Total current liabilities
     6,096       5,268  
 
    
 		      
 		  
Deferred revenue, net of current portion
     5,060       4,813  
Other long-term liabilities
     —       27  
 
    
 		      
 		  
Total long term liabilities
     5,060       4,840  
 
    
 		      
 		  
Commitments and contingencies (note 9)
                
Minority interest
     1,516       1,516  
Redeemable preferred stock of subsidiary
     —       342  
 
    
 		      
 		  
Stockholders’ equity:
                
Common stock, $0.01 par value, 20,000,000 shares authorized, 4,478,971 and 4,491,779 issued and outstanding at December 31, 2003 and 2002, respectively
     45       45  
Paid-in capital
     18,410       18,432  
Accumulated other comprehensive loss
     (60 )     (56 )
Accumulated deficit
     (17,325 )     (12,527 )
 
    
 		      
 		  
Total stockholders’ equity
     1,070       5,894  
 
    
 		      
 		  
Total liabilities and stockholders’ equity
   $ 13,742     $ 17,860  
 
    
 		      
 		  

The accompanying notes are an integral part of these consolidated financial statements.

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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)

                         
Year Ended December 31,
   2003
   2002
   2001
Revenue
                        
Products
   $ 8,466     $ 6,296     $ 5,321  
Services
     4,868       4,445       3,397  
 
    
 		      
 		      
 		  
Total revenue
     13,334       10,741       8,718  
 
    
 		      
 		      
 		  
Cost of sales
                        
Products
     3,324       3,019       2,633  
Services
     3,380       2,862       1,439  
 
    
 		      
 		      
 		  
Total cost of sales
     6,704       5,881       4,072  
 
    
 		      
 		      
 		  
Expenses
                        
Marketing
     2,811       2,960       2,090  
General & administrative
     3,895       4,562       9,605  
Research & development
     8,316       9,798       3,371  
 
    
 		      
 		      
 		  
Loss from operations
     (8,392 )     (12,460 )     (10,420 )
 
    
 		      
 		      
 		  
Other income
                        
Interest income, net
     2       129       1,017  
Investment income (expense)
     3,040       (934 )     19,902  
Equity in income (losses) of affiliate companies
     184       (235 )     (2,173 )
Other income, net
     328       900       960  
 
    
 		      
 		      
 		  
Income (loss) before income tax provision (benefit)
     (4,838 )     (12,600 )     9,286  
 
    
 		      
 		      
 		  
Income tax provision (benefit)
     (40 )     (343 )     173  
 
    
 		      
 		      
 		  
Net income (loss)
   $ (4,798 )   $ (12,257 )   $ 9,113  
 
    
 		      
 		      
 		  
Basic net income (loss) per share
   $ (1.07 )   $ (2.73 )   $ 1.78  
Diluted net income (loss) per share
   $ (1.07 )   $ (2.73 )   $ 1.77  
 
    
 		      
 		      
 		  
Basic weighted average shares outstanding
     4,483,458       4,495,058       5,108,413  
Diluted weighted average shares outstanding
     4,483,458       4,495,058       5,145,691  
 
    
 		      
 		      
 		  

The accompanying notes are an integral part of these consolidated financial statements.

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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share amounts)

                         
    Year Ended December 31,
    2003
   2002
   2001
STOCKHOLDERS’ EQUITY
                        
Common stock, number of shares, beginning of year
     4,491,779       4,495,530       5,623,784  
Exercise of options during year
     —       —       3,334  
Purchase and retirement of stock
     (12,808 )     (3,751 )     (1,131,588 )
 
    
 		      
 		      
 		  
End of year
     4,478,971       4,491,779       4,495,530  
 
    
 		      
 		      
 		  
Common stock, amount, beginning of year
   $ 45     $ 45     $ 56  
Purchase and retirement of stock
     —       —       (11 )
 
    
 		      
 		      
 		  
End of year
     45       45       45  
 
    
 		      
 		      
 		  
Paid-in capital, beginning of year
     18,432       18,438       24,216  
Proceeds from options exercised
     —       —       14  
Purchase and retirement of stock
     (22 )     (6 )     (5,792 )
 
    
 		      
 		      
 		  
End of year
     18,410       18,432       18,438  
 
    
 		      
 		      
 		  
Accumulated other comprehensive income (loss), beginning of year
     (56 )     (355 )     (215 )
Foreign currency translation adjustment during year
     (68 )     4       4  
Net unrealized gain (loss) on marketable securities
     64       295       (144 )
 
    
 		      
 		      
 		  
End of year
     (60 )     (56 )     (355 )
 
    
 		      
 		      
 		  
Accumulated deficit, beginning of year
     (12,527 )     (270 )     (9,383 )
Net income (loss)
     (4,798 )     (12,257 )     9,113  
 
    
 		      
 		      
 		  
End of year
     (17,325 )     (12,527 )     (270 )
 
    
 		      
 		      
 		  
Total stockholders’ equity
   $ 1,070     $ 5,894     $ 17,858  
 
    
 		      
 		      
 		  
COMPREHENSIVE INCOME (LOSS)
                        
Net income (loss)
   $ (4,798 )   $ (12,257 )   $ 9,113  
Other comprehensive income:
                        
Foreign currency translation adjustments
     (68 )     4       4  
Net unrealized gain (loss) on marketable securities
     64       295       (144 )
 
    
 		      
 		      
 		  
Comprehensive income (loss)
   $ (4,802 )   $ (11,958 )   $ 8,973  
 
    
 		      
 		      
 		  

The accompanying notes are an integral part of these consolidated financial statements.

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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)

                         
    Year Ended December 31,
    2003
   2002
   2001
OPERATIONS:
                        
Net income (loss)
   $ (4,798 )   $ (12,257 )   $ 9,113  
Adjustments to reconcile net income (loss) to net cash used for operating activities, net of effects of acquisitions and dispositions:
                        
Depreciation and amortization
     759       1,031       6,595  
Deferred gain recognized
     (137 )     (813 )     (961 )
Investment (income) loss, net
     (3,033 )     934       (19,902 )
Equity in (income) loss of affiliate companies
     (184 )     235       2,173  
Changes in operating assets and liabilities, net of effects of acquisition
                        
Accounts receivable
     1,482       (728 )     (33 )
Inventories
     (95 )     (124 )     (72 )
Other current assets
     (381 )     (24 )     126  
Accounts payable
     (369 )     287       (166 )
Accrued expenses and other current liabilities
     1,308       2,378       1,110  
 
    
 		      
 		      
 		  
Cash used for operating activities
     (5,448 )     (9,081 )     (2,017 )
 
    
 		      
 		      
 		  
INVESTING ACTIVITIES:
                        
Proceeds from sales of investments
     4,540       2,659       20,540  
Acquisition of company, net of cash acquired
     —       39       81  
Acquisitions of long-term investments
     (160 )     (2,880 )     (2,806 )
Repayments under notes receivable
     116       4,902       5,105  
Advances under notes receivable
     (284 )     (4,684 )     (2,087 )
Purchases of property and equipment, net
     (434 )     (335 )     (95 )
 
    
 		      
 		      
 		  
Cash provided by (used for) investing activities
     3,778       (299 )     20,738  
 
    
 		      
 		      
 		  
FINANCING ACTIVITIES:
                        
Borrowings under short-term borrowing arrangements
     250       —       889  
Repayments under short-term borrowings arrangements
     —       —       (2,393 )
Purchase and retirement of stock
     (22 )     (6 )     (5,803 )
Exercise of stock options
     —       —       14  
 
    
 		      
 		      
 		  
Cash used for financing activities
     228       (6 )     (7,293 )
 
    
 		      
 		      
 		  
Effects of exchange rate changes on cash
     (69 )     4       4  
 
    
 		      
 		      
 		  
Net increase (decrease) in cash
     (1,511 )     (9,382 )     11,432  
Cash at beginning of year
     2,644       12,026       594  
Cash at end of year
   $ 1,133     $ 2,644     $ 12,026  
 
    
 		      
 		      
 		  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                        
Cash paid during the year for interest
   $ —     $ —     $ 52  
Cash paid (received) during the year for income taxes
     (40 )     (362 )     577  
 
    
 		      
 		      
 		  

The accompanying notes are an integral part of these consolidated financial statements.

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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, us, and ISC refer to Intelligent Systems Corporation.

Nature of Operations - We create, operate and invest in businesses, principally in the information technology sector. Consolidated companies (in which we have majority ownership and control) are engaged in two industries: Information Technology products and services and Industrial Products. Operations in Information Technology products and services, which consist of our VISaer, QS Technologies and CoreCard Software subsidiaries, include development and sales of software licenses and related professional services and software maintenance contracts. Operations in the Industrial Product segment include the manufacture and sale of bio-remediating parts washer systems by our ChemFree subsidiary. Our operations are explained in further detail in Note 16. Our affiliate companies (in which we have a minority ownership) are mainly involved in the information 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. Some areas where we use estimates and make assumptions are to determine our allowance for doubtful accounts, valuation allowances on our investments, depreciation and amortization expense, and accrued expenses. 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.

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 period-end exchange rates. We translate income and expense items at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of stockholders’ equity. Gains and losses that result from foreign currency transactions are recorded in the consolidated statement of operations.

Cash - We consider all highly liquid instruments with maturities of less than 90 days to be cash.

Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable are customer obligations due under normal trade terms. We sell our products to distributors and end users involved in a variety of industries including automotive, aircraft operators and maintenance providers, and government entities. We perform continuing credit evaluations of our customers’ financial condition and we generally do not require collateral.

Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectable. We include any accounts receivable balances that are determined to be uncollectable, along with a general reserve, in our overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts as of December 31, 2003 is adequate. However, actual write-offs might exceed the recorded allowance.

Inventories - We state the value of inventories at the lower of cost or market determined on a first-in first-out basis. 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, 2003 and 2002 is as follows:

                 
(in thousands)
   2003
   2002
Operating equipment
   $ 3,041     $ 2,616  
Furniture and fixtures
     217       216  
Leasehold improvements
     456       448  

For financial reporting purposes, we use a combination of the straight-line method and the 150 percent declining balance method over the estimated lives of the assets, as follows:

     
Classification
   Useful life in years
Operating equipment
   3 – 5
Furniture & fixtures
   5 – 7
Leasehold improvements
   1 – 3

Accumulated depreciation was $3.0 million and $2.5 million at December 31, 2003 and 2002, respectively. Depreciation expense was $467,000, $721,000 and $307,000 in 2003, 2002 and 2001, respectively. These expenses are included in general and administrative expenses, except with respect to our Industrial Products Segment, where the depreciation expense

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relates primarily to products leased to customers and is included in cost of sales.

Leased Equipment - In the Industrial Products segment, certain equipment is leased to customers. The cost, carrying value and accumulated depreciation associated with the leased equipment at December 31, 2003 and 2002 is as follows:

                 
(in thousands)
   2003
   2002
Cost of equipment
   $ 820     $ 657  
Carrying value of equipment
     283       176  
Accumulated depreciation
     537       481  

The minimum future lease revenue under non-cancelable contracts through October 2004 is $833,000 at December 31, 2003. There is no contingent rental income under the leases. These assets are included in Property and Equipment at December 31, 2003 and 2002.

Investments - We account for investments by the equity method for (i) entities in which we have a 20 to 50 percent ownership interest and over which we do not exert control or (ii) entities that are organized as partnerships or limited liability companies. We account for investments in corporations of less than 20 percent in non-marketable equity securities of corporations 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 (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. At December 31, 2003 and 2002, the aggregate fair market value of our available-for-sale securities consisted of equity securities totaling $0 and $36,000, respectively. These amounts include net unrealized holding losses of $0 and $64,000 as of December 31, 2003 and 2002, respectively. These amounts are reflected as a separate component of stockholders’ equity.

Other Intangibles and Goodwill - Other intangibles are carried at cost net of related amortization. Effective July 1, 2001, we account for acquisitions in accordance with SFAS No. 141, “Accounting for Business Combinations” and SFAS No. 142, “Accounting for Intangible Assets”. In accordance with SFAS No. 142, we periodically, but at least annually, assess goodwill for indicators of impairment. Our annual assessment date has been at the end of the third quarter. When circumstances indicate that an intangible other than goodwill may be impaired, we utilize the guidance provided by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. For the years ended December 31, 2003 and 2002, no impairment was identified.

Prior to the adoption of SFAS No. 142, we periodically assessed the impairment of enterprise level intangibles pursuant to the provisions of APB No. 17, “Intangible Assets” and SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”. At September 30, 2001, we determined the long-lived assets associated with our VISaer subsidiary were impaired under SFAS No. 121 (see Note 2). Accordingly, we expensed $6.0 million related to goodwill in general and administrative expense which is reflected in the statements of operations for the year ended December 30, 2001. Also in the year ended December 31, 2001, we expensed $425,000 of purchased research and development related to the acquisition of VISaer (see Note 2).

The carrying value of intangibles at December 31, 2003 is $2.5 million, of which $2.0 million represents goodwill. The carrying value of intangibles at December 31, 2002 was $3.2 million, of which $2.4 million represented goodwill. Intangibles other than goodwill primarily relate to acquired software. Goodwill declined in 2003 as compared to December 31, 2002 due to a permanent waiver of redemption rights by the holders of preferred stock of our VISaer subsidiary that was effective March 28, 2003. We reclassed $342,000 accrued in prior periods related to the redemption provision shown as “redeemable preferred stock of subsidiary” at December 31, 2002 against goodwill.

In fiscal years 2003, 2002 and 2001, we recorded amortization expense related to intangible assets of approximately $312,000, $310,000 and $92,000, respectively. Accumulated amortization of intangibles totaled $715,000 and $403,000 at December 31, 2003 and 2002, respectively. We had no goodwill amortization expense in periods presented herein. Annual amortization expense for the following five years is expected to be approximately $220,000, $129,000, $128,000, $0 and $0 for the years ending December 31, 2004 through 2008, respectively.

Accrued Expenses and Other Current Liabilities - Accrued expenses and other liabilities at December 31, 2003 and 2002 consist of the following:

                 
(in thousands)
   2003
   2002
Income taxes payable
   $ —     $ 7  
Accrued payroll
     1,361       869  
Other accrued expenses
     676       879  

Deferred Revenue — Current deferred revenue consists of advance payments by software customers for annual maintenance and support services as well as advance payments from VISaer customers for software licenses expected to be delivered in 2004. Deferred revenue, net of current portion, consists of advance payments from one VISaer customer and is being accounted for on a completed-contract basis. As of December 31, 2003, we had an outstanding balance of deferred long-term revenue of $5.1 million. We do not anticipate any loss under this contract.

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Fair Value of Financial Instruments - The carrying value of cash, accounts receivable, accounts payable and certain other financial instruments (such as notes receivable and certain investments) included in the accompanying consolidated balance sheets approximates their fair value principally due to the short-term maturity of these instruments.

Financial instruments that potentially subject us to concentrations of market/credit risk consist principally of cash and cash equivalents and trade accounts receivable. We invest cash in high credit-quality financial institutions. A concentration of credit risk may exist with respect to trade receivables, as a substantial portion of our customers are affiliated in the following industries (by subsidiary):

     
ChemFree:
  Distributors in the automotive parts industry
QS Technologies:
  State and local governments
VISaer:
  Aviation

We perform ongoing credit evaluations of customers worldwide and generally do not require collateral from our customers. Management reviews our accounts receivable on a regular basis to determine if any such amounts may be potentially uncollectible. We include any balances that are determined to be uncollectible, along with a general reserve, in our overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on management’s best estimate, we believe our allowance for doubtful accounts is adequate. Historically, we have not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

Revenue Recognition - Product revenue consists of fees from software licenses and sales or leases of industrial products. Service revenue consists of fees for implementation, consulting, training, reimbursable expenses, maintenance and support for software products.

We recognize revenue for industrial products when products are shipped, at which time title transfers to the customer. There are no remaining future obligations and delivery occurs upon shipment. We provide for estimated sales returns allowances and rebates in the period in which the sales are recorded. As an alternative to selling the product, on occasion we may lease our equipment. For leased equipment, we recognize revenue monthly at the contracted monthly rate during the term of the lease.

We recognize software fees in accordance with Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition”, as amended by SOP No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions”. Under SOP 97-2, we recognize software license 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 or determinable; and (4) collectibility is probable. Additionally, license fee revenue is not recognized until there are no material uncertainties regarding customer acceptance, cancellation provisions, if any, have expired and there are no significant vendor obligations remaining. SOP No. 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 No. 97-2 other than the requirement for vendor-specific objective evidence of the fair value of each delivered element of the arrangement are satisfied. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the license fee is recognized as revenue. For those contracts that contain significant production, modification and/or customization, software license fees are recognized utilizing Accounting Research Bulletin (“ARB”) No. 45, “Long-term Construction Type Contracts”, using the relevant guidance in SOP No. 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts”.

For percentage of completion contracts, we measure the progress toward completion and recognize the software license fees based upon input measures (i.e. in the same proportion that the amount of labor hours incurred to date bears to the total estimated labor hours required for the contract). If reliable estimates cannot be determined, we follow the completed contract method. Under the completed contract method, all revenue is deferred until the customer has accepted the software and any refund rights have expired.

Service revenue related to implementation, consulting, training and other professional services is recognized when the services are performed. Service revenue related to software maintenance and support contracts is recognized on a straight-line basis over the life of the contract (typically one year). Substantially all of our software customers purchase software maintenance and support contracts and renew such contracts annually.

Reimbursable Expenses - Prior to January 1, 2002, we recorded reimbursement by our customers for out-of-pocket expenses as a decrease to cost of services. Our results of operations for the year ended December 31, 2002 have been reclassified in accordance with the Emerging Issues Task Force (“EITF”) release 01-14, “Income Statement Characterization of Reimbursement Received for Out of Pocket Expenses Incurred”. The effect of this reclassification was to increase both services revenues and cost of services by $75,000 for the year ended

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December 31, 2002. The effects of the aforementioned adjustment was immaterial for the year ended December 31, 2001.

Cost of Sales - Cost of sales for product revenue includes direct material, direct labor, production overhead and third party license fees. Cost of sales for service revenue includes direct cost of services rendered, including reimbursed expenses.

Software Development Expense - We have evaluated the establishment of technological feasibility of our products in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”. We sell products in markets that are subject to rapid technological change, new product development and changing customer needs; accordingly, we have concluded that technological feasibility has generally not been established until the development stage of the product is nearly complete. We define technological feasibility as the completion of a working model. The time period during which cost could be capitalized, from the point of reaching technological feasibility until the time of general product release, is very short and, consequently, the amounts that could be capitalized are not material to our financial position or results of operations. Therefore, we have charged all such costs to research and development in the period incurred.

In circumstances in which we acquire software, the annual amortization is the greater of (1) the ratio of current revenues to the expected revenues from the related product sales or (2) the straight-line method over the remaining useful life of the product. See Note 2 for situations in which we acquired software.

In accordance with SOP No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, we have expensed all cost incurred in the preliminary project stage for software developed for internal use. We capitalize all direct costs of materials and services consumed in developing or obtaining internal use software. All costs incurred for upgrades, maintenance and enhancements that do not result in additional functionality are expensed. During the three years ended December 31, 2003, we did not capitalize any internal use software costs.

Warranty Costs - We accrue the estimated costs associated with product warranties as an expense in the period the related sales are recognized. The warranty accrual is included in accrued expenses and other current liabilities at December 31, 2003 and 2002.

Stock Based Compensation - At December 31, 2003 we had three stock-based compensation plans which are more fully described in Note 13. We account for the plans under the intrinsic value recognition and measurement principles of Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. The intrinsic value recognition is measured by the difference between the exercise price and the market value of the underlying securities. Based on the additional disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment to SFAS No. 123”, the following table illustrates the effect of net income and earnings (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation”.

                         
Year ended December 31,
(in thousands except per share data)
   2003
   2002
   2001
Net income (loss), reported
   $ (4,798 )   $ (12,257 )   $ 9,113  
Add: stock-based employee compensation included in reported net income (loss), net of related tax effect
     —       —       —  
Deduct: stock-based compensation expense determined under fair value based method for all awards, net of related tax effect
     (48 )     (14 )     (27 )
 
    
 		      
 		      
 		  
Proforma net income (loss)
   $ (4,846 )   $ (12,271 )   $ 9,086  
 
    
 		      
 		      
 		  
Proforma net income (loss) per common share basic
   $ (1.08 )   $ (2.73 )   $ 1.78  
 
    
 		      
 		      
 		  
Proforma net income (loss) per common share diluted
   $ (1.08 )   $ (2.73 )   $ 1.77  
 
    
 		      
 		      
 		  

The fair value of each option granted in each of the last three years has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

                         
Year ended December 31,
   2003
   2002
   2001
Risk free rate
     4 %     4 %     4 %
Expected life of option in years
     6.7     7.3     7.9
Expected dividend yield rate
     0 %     0 %     0 %
Expected volatility
     49 %     47 %     51 %

Under these assumptions, the weighted average fair value of options granted in 2003, 2002 and 2001 was $0.83, $1.72 and $1.71 per share, respectively. The fair value of the grants would be amortized over the vesting period for the options.

Income Taxes — In accordance with SFAS No. 109, “Accounting for Income Taxes”, we utilize the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are established to recognize the future tax consequences

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attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax bases.

Comprehensive Loss - Comprehensive loss represents net loss plus the results of certain stockholders’ equity changes not reflected in the consolidated statements of operations. These items are accumulated over time as accumulated other comprehensive loss on the consolidated balance sheet and are primarily the result of cumulative translation adjustments at December 31, 2003 and unrealized losses on marketable securities at December 31, 2002.

Reclassifications — It is our policy to reclassify prior year amounts to conform with current year financial statements presentation when necessary.

New Accounting Pronouncements — In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities”. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created on or prior to January 31, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after December 15, 2003. We believe that the adoption of this standard will have no material impact on our financial position and results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity by issuers. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. On November 7, 2003, the FASB deferred the classification and measurement provisions of SFAS No. 150 as they apply to certain mandatory redeemable non-controlling interests. This deferral is expected to remain in effect while these provisions are further evaluated by the FASB. The adoption of this statement did not have a significant impact on our financial position, results of operations or cash flows.

NOTE 2

ACQUISITIONS

CoreCard Software, Inc. - We acquired 360,639 shares of common stock of CoreCard, representing a 30.7% interest in CoreCard Software, Inc. (formerly Delos Payment Systems, Inc.) (“CoreCard”) as a result of the spin-off of CoreCard to the shareholders of PaySys prior to its sale in April 2001. CoreCard develops software to handle account management and processing of card systems (such as credit and debit cards) for financial and commercial institutions. In 2001, we loaned $1.5 million to CoreCard. As a result of a default on the loan during 2002, we acquired the right to and elected a majority of the CoreCard board of directors and obtained the right to and converted our loans into what resulted in a controlling interest. Therefore, we began to consolidate the CoreCard operations during 2002.

We recorded intangible assets upon consolidation in the first quarter of 2002 in accordance with SFAS No. 141. Of the intangibles acquired, $642,000 was allocated to our pro rata share of CoreCard’s acquired software which is being amortized at a rate of $128,400 annually over a five-year period, and $287,000 was recorded as goodwill. Of the goodwill amount, none is deductible for tax purposes.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the CoreCard acquisition.

At January 1, 2002

         
(in thousands)        
       
Current assets
   $ 138  
Property, plant, and equipment
     472  
Intangible assets
     642  
Goodwill
     287  
 
    
 		  
Total assets acquired
     1,539  
 
Current liabilities
     124  
Long-term debt
     1,415  
 
    
 		  
Total liabilities assumed
   $ 1,539  
 
    
 		  

During 2002, we converted $3.2 million of principal and interest outstanding under the loans to CoreCard into 3,734 shares of Series B Convertible Preferred Stock of CoreCard, at the same

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time as two other minority investors converted their loans to Series B Preferred Stock of CoreCard. As a result, our ownership interest increased to 65% of the outstanding shares of CoreCard on an as-if converted basis. We provided additional funds in the amount of $2.6 million to CoreCard under a secured loan to fund working capital in the second half of 2002. The loan is eliminated in consolidation. Effective January 2003, we converted $2.5 million of CoreCard’s indebtedness to us into 10,137 additional shares of Series B Convertible Preferred Stock, increasing our ownership to 87% of the outstanding shares of CoreCard.

VISaer, Inc. - As of June 30, 2001, we owned 40% of VISaer, Inc. (“VISaer”) and accounted for our investment under the equity method of accounting. At that date, we had a carrying value for VISaer of $2.9 million in long-term investments and $1.7 million in principal and interest outstanding under affiliate notes receivable from VISaer. VISaer, a software company that designs and sells software that automates the maintenance, repair and overhaul (“MRO”) operations of airlines, is the successor company of Visibility, Inc., an enterprise resource planning (“ERP”) company whose operations were spun off in June 2000. Effective July 1, 2001, in an unplanned restructuring transaction involving all preferred shareholders of VISaer, we converted $956,000 of our VISaer note receivable into a new series of preferred stock of VISaer. In addition, VISaer repaid the balance of $725,000 owed to us shortly after the restructuring was completed.

The debt to equity conversion in July 2001 resulted in our taking control of VISaer. Our ownership of VISaer increased from 40% to 65%, and we accounted for the transaction as a “step” acquisition. For financial reporting periods after July 1, 2001, we account for VISaer under the consolidation method. The accounting treatment for the “step” acquisition and related purchase accounting of VISaer had the result of immediately creating $8.8 million in intangible assets for financial reporting purposes. In accordance with SFAS No. 141, based on third party valuations, we identified and valued the following intangible assets: existing software technology ($2.0 million), in-process research and development ($1.7 million) and a favorable lease contract ($200,000). At the time of the acquisition we recorded 25% of such amounts to reflect the amount associated with our acquisition of an additional 25% “step” of VISaer. The recorded amount for existing software technology ($500,000) is being amortized over its estimated useful life of three years and the recorded amount for the favorable lease contract ($50,000) is being amortized over the remaining term of the lease (through July 2004). We immediately expensed $425,000 (representing 4.8% of the $8.8 million of total intangibles) related to purchased research and development projects that had not reached technological feasibility and that did not have an alternative future use. This amount is included in research and development expense in the accompanying financial statements for the year ended December 31, 2001. The remaining excess intangible value in the amount of $7.8 million was booked as goodwill at July 1, 2001.

Post-acquisition Write-down of Goodwill - At September 30, 2001, as a result of the terrorist attacks on September 11, 2001 which directly impacted the aerospace industry into which VISaer sells its software products, we evaluated the extent to which the VISaer reporting unit might be impaired. An analysis by a third party based on an undiscounted cash flow model determined that under SFAS No. 121, the long-lived assets associated with VISaer were impaired. Based upon this appraisal, we assessed the total fair value of VISaer at September 30, 2001 to be $3.7 million. Based on our 65% ownership, the value of our ownership was $2.4 million. We expensed $6.0 million related to goodwill. The non-cash charge is included in general and administrative expense in the consolidated financial statements for the year ended December 31, 2001. We loaned additional funds to VISaer for working capital needs in the amounts of $4.4 million and $3.8 million during 2002 and 2003, respectively. These loans eliminate in consolidation.

NOTE 3

SALES AND WRITE-DOWNS OF ASSETS

Atherogenics, Inc. - At various times in 2002, we sold all of our interest in Atherogenics, Inc. [NASDAQ:AGIX], a company in which we were a seed-stage investor. The average price per share for the 306,859 shares sold in 2002 was $7.22. We received a total of $2.1 million cash from the sales and recorded a gain of $1.1 million in the year ended December 31, 2002.

Daw Technologies, Inc. - In the second quarter of 2002, we wrote off $1.2 million related to our holdings in Daw Technologies, Inc. (“Daw”). We had acquired the Daw common stock in a prior sale of a subsidiary to Daw and had accumulated $1.2 million of unrealized loss as of June 30, 2002 as a result of a decline in the market price of Daw stock. We determined that the value of our Daw stock was permanently impaired due to Daw’s delisting from NASDAQ and poor financial condition. Consequently we took a charge of $1.2 million to write off the unrealized loss and to reserve against the remaining carrying value of the investment. We sold our interest in the fourth quarter of 2002 for a minimal amount.

HeadHunter.net - In the third quarter ended September 30, 2001, we sold 90,228 shares of common stock (representing all of our interest) of HeadHunter.net. We originally acquired the shares in exchange for our holdings in privately held MiracleWorker.com in August 2000. We received $821,000 cash and recognized a gain of $471,000 on an original cost basis of $350,000.

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Lumenor, Inc. - In 2002, we took a write-down of $500,000 against the original $500,000 cost of our minority investment in Lumenor, Inc. based on the failure of the business to raise new financing.

MediZeus, Inc. - In the fourth quarter of 2003, we took a write-down of $501,000 against the carrying cost of $501,000 and our original investment cost of $843,000 in MediZeus, Inc. based on a decision by the board of directors and investors of the early stage, artificial intelligence software company to wind down operations. At the same time, we wrote off $131,000 relating to a note receivable from MediZeus.

Novient, Inc. - In 2002, we sold our remaining interest in Novient, Inc., a privately held software company, for $10,000 cash in a merger transaction between Novient and a foreign corporation, recognizing a loss of $187,000 on the sale. Previously, in 1999, we had sold part of our holdings in Novient in a private transaction, recognizing a gain of $233,000 and netting $286,000 in cash.

NuTec Sciences, Inc. - In 2002, we recorded an investment loss of $444,000 on the sale of our minority interest in NuTec Sciences, Inc., in a transaction in which we received cash of $56,000 on an original cost basis of $500,000.

PaySys International, Inc. - On April 27, 2001, we sold our 32% ownership interest in PaySys, an affiliate company, to First Data Corporation (“FDC”). In exchange for the sale of all of our shares of PaySys common stock, we received cash proceeds of $17.8 million and recorded a pretax gain of $17.8 million. In addition, PaySys repaid $4.3 million in principal and interest related to short-term bridge loans. Furthermore, an escrow fund totaling $20.0 million was set aside for potential liabilities that may arise after the closing of the sale. On March 21, 2003, a settlement was reached with FDC related to the escrow fund. We received $4,464,000 cash in the first half of 2003, which represented our pro rata share of the amount released from the escrow fund, after payment of legal and administrative expenses related to the escrow. Since these escrow funds were contingent and not considered in the previously reported gain on the sale of PaySys in April 2001, these escrow payments are recorded as investment income in the year ended December 31, 2003.

Immediately prior to the sale to FDC in April 2001, PaySys spun off two subsidiaries to its shareholders. Accordingly, at that time we owned approximately 31 percent of Delos Payment Systems, Inc. (now CoreCard Software) and 31 percent of dbbAPPS, Inc. We did not record a gain on the distribution to us of an interest in these two companies. Rather, due to uncertainty regarding the two early stage companies, we booked a valuation reserve equal to the net asset value and goodwill associated with our pro rata share of the value of our interest in CoreCard and dbbAPPS. In the fourth quarter of 2001, in accordance with Accounting Principles Board (“APB”) No. 18, “The Equity Method of Accounting for Investments in Common Stock”, we classified a secured loan in the amount of $1.5 million to CoreCard as additional investment. At the same time, we recaptured $1.42 million in losses related to our pro rata share of cumulative unrecorded losses. This loss is recorded in equity loss in affiliates in the consolidated statements of operations for the year ended December 31, 2001. As explained in Note 2, we acquired a controlling interest in CoreCard effective January 2002 and consolidate its results of operations since that date. The carrying value of dbbAPPS at December 31, 2003 and 2002 is zero.

RF Solutions, Inc. - In the first quarter of 2003, we reserved $600,000 against the $600,000 carrying value of our minority investment in RF Solutions, Inc., an early stage company that sold its principal assets to a publicly traded company effective early in April 2003. We received $106,000 cash in partial repayment of our note in 2003. We took a net reserve of $92,000 against the $198,000 carrying value of a note receivable from RF Solutions. Under the terms of the RF Solutions sale, the note holders and preferred shareholders of RF Solutions, including other minority investors like ISC, received a cash payment to repay part of the principal and interest outstanding on the notes and may receive an additional payment on the note balance and preferred stock investment, payable in common stock of Anadigics, Inc., the acquiror company [NASDAQ: ANAD], based on achievement of certain performance targets in the twelve month period following the acquisition. Since the amount of any future payment, if any, was not determinable, in 2003, we fully reserved our remaining note balance and investment in RF Solutions.

Risk Laboratories, LLC - On March 21, 2000, we sold part of our interest in Risk Laboratories, LLC in a private transaction. We sold 2,310,000 units for $8.8 million in cash and a gain of $8.6 million. On January 18, 2001, we sold 214,273 units of Risk to the same buyer for a total of $900,000 cash and 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 for a total acquisition price of $450,000. Concurrent with the purchase of these units, we recaptured $450,000 in losses related to our pro rata share of cumulative unrecorded losses. This loss is recorded in equity loss in affiliates in the accompanying consolidated statement of operations for 2001. On May 3, 2001, we sold an additional 257,127 common units of Risk to the same buyer. We received $1.0 million cash and recorded a second quarter gain of $1.0 million on a cost basis of zero. On March 14, 2002, we sold our remaining interest in Risk for a total of $474,000 cash, recording a gain of $474,000 on a cost basis of zero.

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Silverpop, Inc. - During the quarter ended June 30, 2003, we reserved $76,000 against our original investment of $100,000 in Silverpop, Inc., an early stage technology company, to reflect the valuation at which Silverpop raised additional capital, which we believe indicates a non-temporary impairment of our original carrying value.

NOTE 4

INVESTMENTS

The following summarizes our ownership interest in certain non-significant companies included in our long-term investments.

At December 31, 2003, our ownership interest in each of the named companies was as follows: NKD Enterprises, LLC (25%), Horizon Software, LLC (17%) and Cirronet, Inc. (22%). We account for each of the named companies by the equity method of accounting in 2003.

                 
            Cost Basis
    Carrying   Before
(in thousands)
   Value
   Distributions
NKD Enterprises
   $ 828     $ 1,286  
Horizon Software
     2,850       2,500  
Cirronet
     803       525  

At December 31, 2002, our ownership interest in each of the named companies was as follows: NKD Enterprises (25%), MediZeus (27%), Horizon Software (17%), Cirronet (18%) and RF Solutions (3%). The material ownership interests are classified below according to applicable accounting methods at December 31, 2002.

                 
            Cost Basis
    Carrying   Before
(in thousands)
   Value
   Distributions
Equity Method
                
NKD Enterprises
   $ 862     $ 1,286  
Horizon Software
     2,613       2,500  
MediZeus
     615       843  
 
    
 		      
 		  
Cost Method
                
Cirronet
   $ 740     $ 525  
RF Solutions
     600       600  

The following table presents summarized combined financial information for our 50% or less owned investments named above for the respective time periods:

As of and for the year ended December 31,

                 
(in thousands)
   2003
   2002
Revenues
   $ 25,377     $ 23,446  
Operating Income
     1,814       (6,619 )
Net Income
     1,539       (7,227 )
Current Assets
     8,174       8,166  
Non-current Assets
     5,595       7,410  
Current Liabilities
     4,863       6,813  
Non-current Liabilities
     445       1,405  
Stockholders Equity
     8,460       7,358  

Marketable Securities - The carrying and estimated fair values of available-for-sale securities at December 31, 2003 and 2002 are summarized as follows:

                 
(in thousands)
   2003
   2002
Cost
     —     $ 100  
Gross unrealized losses
     —       (64 )
 
    
 		      
 		  
Estimated fair values
     —     $ 36  
 
    
 		      
 		  

Matria Healthcare [NASDAQ:MATR] represents $36,000 at December 31, 2002. We had no available-for-sale securities at December 31, 2003.

NOTE 5

ACCOUNTS AND NOTES RECEIVABLE

At December 31, 2003 and 2002, our allowance for doubtful accounts and sales returns amounted to $124,000 and $63,000, respectively. Provisions for doubtful accounts and sales returns were $63,000, $49,000 and $8,500 for the years ended December 31, 2003, 2002 and 2001, respectively.

At December 31, 2002, notes receivable included $163,000 from RF Solutions, Inc., an early stage company in which we own a minority interest accounted for on the cost basis. The convertible bridge loan bore interest at the rate of 8% per annum and principal and accrued interest were due on March 1, 2003. In 2003, RF Solutions sold its principal assets to a third party. As a result, we received $106,000 in partial payment of our note receivable, which was $198,000 at the time, and wrote off $92,000 in 2003 to reduce the balance of the note to zero. Refer to Note 3 for additional details.

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The following table indicates the percentage of consolidated revenue and year-end accounts receivable represented by each customer for any period in which such customer represented more than 10% of consolidated revenue or year-end accounts receivable.

                                         
            Revenue           A/R 
    2003
   2002
   2001
   2003
   2002
VISaer-Customer A
     11 %     12 %     —       —       15 %
VISaer-Customer B
     —       —       —       —       21 %
VISaer-Customer C
     —       —       23 %     —       —  
ChemFree-Customer D
     13 %     14 %     —       11 %     —  
ChemFree-Customer E
     —       —       —       16 %     —  
ChemFree-Customer F
     —       —       10 %     —       —  

NOTE 6

BORROWINGS AND LONG-TERM DEBT

Terms and borrowings under our credit facility are summarized as follows:

                 
Year ended December 31,
(in thousands)
   2003
   2002
Maximum outstanding (month-end)
   $ 250       —  
Outstanding at year end
     250       —  
Average interest rate at year end
     5.5 %     —  
Average interest rate
     5.5 %     N/A  

We established a new working capital credit facility with a bank in October 2003. The $1.5 million revolving line of credit bears interest at the prime rate (4% at December 31, 2003) plus one and one half percent, is secured by all assets of the company and our principal subsidiaries, is guaranteed by our subsidiaries, and expires September 1, 2004. We may borrow an aggregate of 70-80% of qualified accounts receivable of our consolidated subsidiaries (depending upon the type of account) plus 50% of inventory, up to a maximum of $1.5 million. At December 31, 2003, our borrowing base calculation resulted in availability of $1.1 million of which we drew down $250,000 at year end. The terms of the loan contain typical covenants not to sell or transfer material assets, to create liens against assets, to merge with another entity, to change corporate structure or the nature of our business, to declare or pay dividends, or to redeem shares of common stock as well as covenants not to change the chief executive and chief financial officers of the company or to make loans to or invest in new minority-owned companies, without first obtaining the consent of the financial institution in each case.

NOTE 7

DEFERRED GAIN

In connection with the sale of one of our VISaer subsidiary’s product lines in July 2000, the buyer assumed the liabilities of the purchased line of business. VISaer did not obtain releases from creditors for a portion of these liabilities and contracts and, accordingly, remains contingently liable for these obligations. VISaer recorded these liabilities as deferred gain. As of December 31, 2003, the balance of $291,000 in deferred gain consisted of accounts payable and accrued expenses. In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, a replacement of FASB Statement 125”, VISaer recognizes the deferred gain when the liability is paid and the company is relieved of its obligation. We recognized $137,000, $813,000 and $961,000 of the deferred gain in the years ended December 31, 2003, 2002 and 2001, respectively, which is recorded in the component of other income/expense in the consolidated statements of operations.

NOTE 8

INCOME TAXES

The income tax provision (benefit) consists of the following:

                         
Year ended December 31,
(in thousands)
   2003
   2002
   2001
Current
   $ (40 )   $ (343 )   $ 173  

Following is a reconciliation of estimated income taxes at the blended statutory rate to estimated tax expense as reported:

                         
Year ended December 31,
   2003
   2002
   2001
Statutory rate, blended
     34 %     34 %     34 %
Change in valuation allowance
     (34 %)     (34 %)     (32 %)
Other
     (1 %)     (3 %)     —  
 
    
 		      
 		      
 		  
Effective rate
     (1 %)     (3 %)     2 %
 
    
 		      
 		      
 		  

At December 31, 2003, our subsidiaries had net operating loss carryforwards totaling $8,653,000. The net operating loss carryforwards, if unused as offsets to future taxable income, will expire by 2023. Approximately $1.1 million of the net operating loss carryforward is subject to limitation by the Federal Income Tax code section 382.

We account for income taxes using SFAS No. 109, “Accounting for Income Taxes”. We have a deferred tax asset of approximately $15.6 million and $13.6 million at December 31, 2003 and 2002, respectively. Since our ability to realize the deferred tax asset is uncertain, the amount is offset in both 2003

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and 2002 by a valuation allowance of an equal amount. The deferred tax asset at December 31, 2003 and 2002 relates primarily to net operating loss and tax credit carryforwards and loss limitations on investments. No deferred taxes have been provided on temporary differences related to investments in foreign subsidiaries because these investments are considered to be permanent. We do not believe it is practicable to determine the amount of these unrecognized deferred taxes at this time.

NOTE 9

COMMITMENTS AND CONTINGENCIES

Leases - We have noncancellable operating leases expiring at various dates through July 2005. Future minimum lease payments are as follows:

         
Year ended December 31,
(in thousands)		        
2004
   $ 345  
2005
     59  
 
    
 		  
Total minimum lease payments
   $ 404  
 
    
 		  

Rental expense for leased facilities and equipment related to operations amounted to $759,000, $1.2 million and $1.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. Companies in Intelligent Systems Incubator sublease space from the company. For the years ended December 31, 2003, 2002 and 2001, the company received $255,000, $444,000 and $484,000, respectively, in sublease rental income which reduced the company’s rental expense during these years.

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 and intend to vigorously defend the suit. The case is pending in the Superior Court of Gwinnett County, Georgia. ChemFree has filed suit in Federal Court seeking a judgment against the consultant. The case was scheduled to go to trial early in 2004 but was postponed due to a change in the Court’s calendar. A new trial date has not been set. 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, from time to time 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.

ISC Guarantee — In conjunction with a Software License Agreement entered into on June 12, 2003 between our majority owned subsidiary, CoreCard Software, Inc. and a CoreCard customer, ISC entered into a letter of guarantee with the CoreCard customer. Under the guarantee, in the event that the Software License is terminated for certain reasons, ISC has guaranteed that CoreCard will make available at its expense up to four employees to provide technical assistance to the customer during a transition period of up to one year. The guarantee is limited to the amount paid by the customer to CoreCard under the Software License Agreement at the time of termination. The guarantee phases out upon the achievement of certain milestones or after five years, whichever occurs sooner. As of December 31, 2003, it does not appear probable that the guarantee will be paid; thus no amounts have been accrued with respect to this guarantee. No revenue in respect of this license agreement has been recognized in 2003.

Investment Company Act - The Investment Company Act of 1940 broadly defines an investment company generally as any issuer that is primarily engaged in, or proposes to engage in, the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the issuer’s total assets. We do not intend to be and do not consider that we are an investment company and have relied on Rule 3a-1 of the 1940 Act which provides that a company is not deemed to be an investment company if not more than 45 percent of the value of its assets and no more that 45 percent of its net income in the last four quarters is derived from securities of companies it does not control. In the quarter ended March 31, 2001, we may technically have triggered the definition related to net income because of gains generated from the sale of non-control securities in the past four quarters. However, at that time and to the extent necessary to do so, we elected to rely on safe harbor from the definition of an investment company for transient investment companies contained in Rule 3a-2 under the Investment Company Act. Rule 3a-2 provides a conditional one year exclusion from the investment company definition for an issuer that, among other things, has a bona fide intent not to be an investment company as soon as reasonably practicable. No issuer may rely on Rule 3a-2 more frequently than once in any three-year period. We were in compliance with the requirements of Rule 3a-1 of the 1940 Act within the one-year exemption period and have been in compliance since that time.

NOTE 10

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. At December 31, 2003 and 2002, we have accrued $150,000 for future payments under the plan. In January 2004, we made a lump sum

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payment of $50,000 to a director upon his retirement from the board.

NOTE 11

REDEEMABLE PREFERRED STOCK OF SUBSIDIARY

At December 31, 2002, this amount related to our VISaer subsidiary’s obligation to a minority shareholder of VISaer pursuant to the redemption provision of the preferred stock of VISaer. On March 28, 2003, the holders of preferred stock of VISaer consented to a permanent waiver of their redemption rights. Accordingly, in 2003 we reclassed $342,000 accrued in prior periods against goodwill. There was no income statement impact of this non-cash transaction.

NOTE 12

STOCKHOLDERS’ EQUITY

We have authorized 20,000,000 shares of Common Stock, $0.01 par value per share, and 2,000,000 shares of Series A Preferred Stock, $0.10 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 from time to time. At various times during the years ended December 31, 2003 and 2002, we repurchased and retired 12,808 and 3,751 shares, respectively, of our common stock at prevailing market prices. On July 17, 2001, we repurchased and retired one million shares of our common stock at $5.25 per share pursuant to a self-tender offer. We repurchased and retired an additional 132,000 shares at fair market value during the year ended December 31, 2001.

NOTE 13

STOCK OPTION PLAN

We instituted the 2003 Incentive Stock Plan (the “2003 Plan”) in March 2003. The 2003 Plan authorizes the issuance of up to 450,000 options to purchase shares of common stock to officers and key employees. During 2003, 100,000 options were granted to officers. We instituted the 1991 Incentive Stock Plan (the “1991 Plan”) in December 1991 and amended it in 1997 to increase the number of shares authorized under the Plan to 925,000. The Plan expired in December 2001, with 148,000 shares ungranted. 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, each director receives a grant of 4,000 shares. Stock options under all three plans are granted at fair market value on the date of grant. As of December 31, 2003, a total of 945,000 options under all three Plans have been granted, 724,320 have been exercised and 96,680 options are fully vested and exercisable at a weighted average price per share of $3.86. All options expire ten years from their respective dates of grant. At December 31, 2003, the weighted average remaining contractual life of the outstanding options is 6.7 years. Stock option transactions during the three years ended December 31, 2003 were as follows:

                         
    2003
   2002
   2001
Options outstanding at Jan. 1
     104,680       88,680       76,014  
Options granted
     116,000       16,000       16,000  
Options exercised
     —       —       3,334  
Options canceled
     —       —       —  
 
    
 		      
 		      
 		  
Options outstanding at Dec. 31
     220,680       104,680       88,680  
 
    
 		      
 		      
 		  
Options available for grant at Dec. 31
     482,000       148,000       164,000  
 
    
 		      
 		      
 		  
Options exercisable at Dec. 31
     96,680       68,349       38,014  
 
    
 		      
 		      
 		  
Option price ranges per share:
                        
Granted
   $ 1.51-1.75     $ 3.15     $ 4.26  
Exercised
     —       —     $ 4.25  
Canceled
     —       —       —  
Weighted average option price per share:
                        
Granted
   $ 1.54     $ 3.15     $ 4.26  
Exercised
     —       —     $ 4.25  
Canceled
     —       —       —  
Outstanding at Dec. 31
   $ 2.49     $ 3.80     $ 3.91  
Exercisable at Dec. 31
   $ 3.86     $ 4.59     $ 3.53  
 
    
 		      
 		      
 		  

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NOTE 14

FOREIGN REVENUES AND OPERATIONS

Foreign revenues are based on the location of the customer. Revenues from customers by geographic areas for three years ended December 31, 2003 are as follows:

                         
Year ended December 31,
(in thousands)
   2003
   2002
   2001
Foreign Countries:
                        
United Kingdom
   $ 2,727     $ 2,846     $  2,429  
Australia
     374       55       —  
Chile
     362       214       —  
China
     110       294       244  
Other
     217       165       253  
 
    
 		      
 		      
 		  
Subtotal
     3,790       3,574       2,926  
United States
     9,544       7,167       5,792  
 
    
 		      
 		      
 		  
Total
   $ 13,334     $ 10,741     $ 8,718  
 
    
 		      
 		      
 		  

With the acquisition of VISaer on July 1, 2001, we acquired foreign subsidiaries in the United Kingdom and Ireland. In 2003, we established a subsidiary of CoreCard Software in Romania for certain software development and testing activities. For the years ended December 31, 2003, 2002 and 2001, income before provision for income taxes derived from foreign subsidiaries approximated $0, $20,000 and $63,000, respectively. Substantially all long-lived assets are in the United States.

At December 31, 2003 and 2002, foreign subsidiaries had assets of $443,000 and $356,000, respectively, and total liabilities of $698,000 and $464,000, respectively.

There are no currency exchange restrictions related to our foreign subsidiaries 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-U.S. currency amounts.

NOTE 15

EARNINGS (LOSS) PER SHARE

Basic and diluted earnings (loss) per share are computed in accordance with SFAS No. 128 “Earnings per Share”. Basic net earnings (loss) per share are computed by dividing net earnings (loss) (numerator) by the weighted average number of common shares outstanding (denominator) during the period and exclude the dilutive effect of stock options. Diluted net earnings per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted net earnings per share, the average stock price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method for the hypothetical exercise of stock options.

The following tables represent required disclosure of the reconciliation of the earnings (loss) and the shares used in the basic and diluted net earnings (loss) per share computation:

                         
Year ended December 31,
(in thousands except per share data)
   2003
   2002
   2001
Basic
                        
Net earnings (loss)
   $ (4,798 )   $ (12,257 )   $ 9,113  
Weighted average shares outstanding
     4,483       4,495       5,108  
 
    
 		      
 		      
 		  
Net earnings (loss) per share
   $ (1.07 )   $ (2.73 )   $ 1.78  
 
    
 		      
 		      
 		  
Diluted
                        
Net earnings (loss)
   $ (4,798 )   $ (12,257 )   $ 9,113  
Weighted average shares outstanding
     4,483       4,495       5,108  
Effect of dilutive potential common shares:
                        
Stock options
     —       —       38  
 
    
 		      
 		      
 		  
Total
     4,483       4,495       5,146  
Net earnings (loss) per share
   $ (1.07 )   $ (2.73 )   $ 1.77  
 
    
 		      
 		      
 		  

At December 31, 2003 and 2002, there were no potentially dilutive stock options excluded from diluted weighted average shares outstanding.

NOTE 16

INDUSTRY SEGMENTS

Our consolidated subsidiaries are involved in two industry segments: Information Technology products and services and Industrial Products. Operations in Information Technology products and services, which include our VISaer, QS Technologies and CoreCard Software subsidiaries, involve development and sales of software licenses and related professional services and software maintenance contracts. Operations in the Industrial Product segment include the manufacture and sale of bio-remediating parts washers by our ChemFree subsidiary. Total revenue by industry segment includes sales to unaffiliated customers. Sales between our industry segments are not material. Operating profit (loss) is total revenue less operating expenses. None of the corporate overhead expense is allocated to the individual industry segments. Identifiable assets by industry segment are those assets that are used in our subsidiaries in each industry segment. Corporate assets are principally cash, notes receivable and investments. The table following contains segment information for the three years ended December 31, 2003.

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Year ended December 31,
(in thousands)
   2003
   2002
   2001
Information Technology
                        
Revenue
   $ 7,118     $ 5,456     $ 4,353  
Operating income (loss)
     (7,928 )     (11,096 )     (4,754 )
Depreciation and amortization
     591       858       2,527  
Capital expenditures
     150       116       189  
Identifiable assets
     4,740       6,334       4,792  
Goodwill
     2,039       2,380       1,813  
Industrial Products
                        
Revenue
     6,216       5,285       4,365  
Operating income (loss)
     276       (340 )     (227 )
Depreciation and amortization
     130       136       157  
Capital expenditures
     272       219       83  
Identifiable assets
     2,024       1,944       1,730  
Goodwill
     —       —       —  
Consolidated Segments
                        
Revenue
   $ 13,334     $ 10,741     $ 8,718  
Operating income (loss)
     (7,652 )     (11,436 )     (4,981 )
Depreciation and amortization
     721       994       2,684  
Capital expenditures
     422       335       272  
Identifiable assets
     6,764       8,278       6,522  
Goodwill
     2,039       2,380       1,813  

A reconciliation of consolidated segment data above to consolidated income (loss), depreciation and amortization, capital expenditures and assets follows:

 

                         
Year ended December 31,
(in thousands)
   2003
   2002
   2001
Consolidated segments operating loss
   $ (7,652 )   $ (11,436 )   $ (4,981 )
Corporate expenses
     (740 )     (1,024 )     (5,439 )
 
    
 		      
 		      
 		  
Consolidated operating loss
     (8,392 )     (12,460 )     (10,420 )
Interest income
     2       129       1,017  
Investment income (loss)
     3,040       (934 )     19,902  
Equity of affiliates
     184       (235 )     (2,173 )
Other income
     328       900       960  
 
    
 		      
 		      
 		  
Income (loss) before taxes
     (4,838 )     (12,600 )     9,286  
Income taxes
     (40 )     (343 )     173  
 
    
 		      
 		      
 		  
Net income (loss)
   $ (4,798 )   $ (12,257 )   $ 9,113  
 
    
 		      
 		      
 		  
Depreciation and amortization
                        
Consolidated segments
   $ 721     $ 994     $ 2,684  
Corporate
     38       37       3,911  
 
    
 		      
 		      
 		  
Consolidated
   $ 759     $ 1,031     $ 6,595  
 
    
 		      
 		      
 		  
Capital Expenditures
                        
Consolidated segments
   $ 422     $ 335     $ 272  
Corporate
     12       12       25  
 
    
 		      
 		      
 		  
Consolidated
   $ 434     $ 347     $ 297  
 
    
 		      
 		      
 		  
Assets
                        
Consolidated segments identifiable assets
   $ 6,764     $ 8,278     $ 6,522  
Corporate
     6,978       9,582       19,567  
 
    
 		      
 		      
 		  
Consolidated
   $ 13,742     $ 17,860     $ 26,089  
 
    
 		      
 		      
 		  

NOTE 17

QUARTERLY FINANCIAL DATA (unaudited)

The table following contains a summary of selected quarterly data for the years ended December 31, 2003 and 2002.

                                 
    For Quarters Ended
(in thousands except per share data)
   Mar. 31
   June 30
   Sept. 30
   Dec. 31
2003
                                
Net sales
   $ 3,170     $ 2,821     $ 2,748     $ 4,595  
Operating loss
     (2,574 )     (2,609 )     (2,535 )     (675 )
Net (income) loss
     949 a     (2,183 )     (2,396 )     (1,168 )b
Basic (income) loss per share
     0.21       (0.49 )     (0.53 )     (0.26 )
Diluted (income) loss per share
     0.21       (0.49 )     (0.53 )     (0.26 )
2002
                                
Net sales
   $ 2,168     $ 2,213     $ 2,973     $ 3,387  
Operating loss
     (3,617 )     (3,512 )     (2,885 )     (2,446 )
Net loss
     (2,122 )c     (4,708 )d     (2,697 )e     (2,730 )
Basic loss per share
     (0.47 )     (1.05 )     (0.60 )     (0.61 )
Diluted loss per share
     (0.47 )     (1.05 )     (0.60 )     (0.61 )

a.   Includes net investment gain of $3.5 million.
 
b.   Includes net investment losses of $604,000.
 
c.   Includes investment gains of $797,000 and $751,000 deferred gain.
 
d.   Includes $1.3 million write-down of investment.
 
e.   Includes net investment losses of $360,000.

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Schedule II

INTELLIGENT SYSTEMS CORPORATION
Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 2001, 2002 and 2003

                                 
    Balance at Beginning   Charged to Costs           Balance at
Description
   of Period
   and Expenses
   Deductionsa
   End of Period
Allowance for Doubtful Accountsb
                                
Year Ended December 31, 2001
   $ 45,904     $ 8,591     $ (9,511 )   $ 44,984  
Year Ended December 31, 2002
     44,984       48,717       (31,195 )     62,506  
Year Ended December 31, 2003
     62,506       62,779       (1,192 )     124,093  

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.

INTELLIGENT SYSTEMS CORPORATION

S-1

EX-10.2 3 g88120exv10w2.txt EX-10.2 2003 STOCK INCENTIVE PLAN EXHIBIT 10.2 (a) INTELLIGENT SYSTEMS CORPORATION 2003 STOCK INCENTIVE PLAN EFFECTIVE AS OF MARCH 4, 2003 ARTICLE I PURPOSE; DEFINITIONS The purpose of the Plan is to support the Company's ongoing efforts to develop and retain leaders of exceptional talent and to provide the Company with the ability to provide incentives more directly linked to the profitability of the Company's businesses and to increases in shareholder value. For purposes of the Plan, the following terms are defined as set forth below: (a) "Awards" mean grants under this Plan of Stock Options, Stock Appreciation Rights, Restricted Stock or Other Stock-Based Awards. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (d) "Commission" means the Securities and Exchange Commission or any successor agency. (e) "Committee" means a committee of at least two directors of the Company appointed from time to time by the Board, having the duties and authority set forth herein in addition to any other authority granted by the Board; provided, however, that with respect to any Awards granted to an individual who is also a Section 16 Insider, the Committee shall consist of either the entire Board or a committee of at least two directors who are Non-Employee Directors, and all authority and discretion shall be exercised by such Non-Employee Directors, and references herein to the "Committee" means such Non-Employee Directors insofar as any actions or determinations of the Committee shall relate to or affect Awards made to or held by any Section 16 Insider. In selecting the Committee, the Board shall also consider the benefits under Section 162(m) of the Code of having a Committee composed of "outside directors" (as that term is defined in the Code) for certain grants of Awards to highly-compensated executives. At any time that the Board shall not have appointed a committee that meets the above requirements, any reference herein to the Committee shall refer to the Board. (f) "Common Stock" or "Stock" means the Common Stock of the Company. (g) "Company" means Intelligent Systems Corporation, a corporation organized under the laws of the State of Georgia, or any successor thereto. (h) "Exercise Period" means the 60-day period from and after a Change in Control. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. (j) "Fair Market Value" means, as of any given date, the mean between the highest and lowest reported sales prices of the Common Stock on the American Stock Exchange--Composite Transactions or, if no such sale of Common Stock is reported on such date, the fair market value of the Stock as determined by the Committee in good faith. (k) "Incentive Stock Option" means any Stock Option that complies with Section 422 of the Code. (l) "Nonqualified Stock Option" means any Stock Option that is not an Incentive Stock Option. A-1 (m) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3 under the Exchange Act, as the same may be in effect from time to time, or in any successor rule thereto, and shall be determined for all purposes under the Plan according to interpretative or "no-action" positions with respect thereto issued by the Commission. (n) "Other Stock-Based Award" means an Award made pursuant to paragraph (a)(iv) of Article V. (o) "Plan" means this 2003 Intelligent Systems Corporation 2003 Stock Incentive Plan, as amended from time to time. (p) "Restricted Period" means the period during which an Award may not be sold, assigned, transferred, pledged or otherwise encumbered. (q) "Restricted Stock" means an Award of shares of Common Stock pursuant to paragraph (a)(iii) of Article V. (r) "Section 16 Insider" means any person who is subject to the provisions of Section 16 of the Exchange Act, as provided in Rule 16a-2 promulgated pursuant to the Exchange Act. (s) "Spread Value" means, with respect to a share of Common Stock subject to an Award, an amount equal to the excess of the Fair Market Value, on the date such value is determined, over the Award's exercise or grant price, if any. (t) "Stock Appreciation Right" or "SAR" means a right granted pursuant to paragraph (a)(ii) of Article V. (u) "Stock Option" means an option granted pursuant to paragraph (a)(i) of Article V. In addition, the terms "Business Combination," "Change in Control," "Change in Control Price," "Incumbent Board," "Outstanding Company Common Stock," "Outstanding Company Voting Securities" and "Person" have the meanings set forth in Article VI. ARTICLE II ADMINISTRATION The Plan shall be administered by the Committee, which shall have the power to interpret the Plan and to adopt such rules and guidelines for carrying out the Plan as it may deem appropriate. The Committee shall have the authority to adopt such modifications to the Plan, procedures and subplans as may be necessary or desirable to comply with the laws, regulations, compensation practices and tax and accounting principles of the countries in which the Company, a subsidiary or an affiliate may operate to assure the viability of the benefits of Awards made to individuals employed in such countries and to meet the objectives of the Plan. The Committee shall also have the authority to determine the details and provisions of each Award agreement, and to make all other determinations necessary or advisable for the administration of the Plan. Subject to the terms of the Plan, the Committee shall have the authority to determine those individuals eligible to receive Awards and the amount, type and terms of each Award, but, at the discretion of the Committee or the Board, such determinations may be made subject to ratification by the Board. Any determination made by the Committee with respect to any Award shall be made in the sole discretion of the Committee, and all decisions made by the Committee shall be final and binding on all persons, including the Company and Plan participants, but subject to ratification by the Board if the Committee or the Board so provides. A-2 ARTICLE III ELIGIBILITY All employees of the Company, its parents, subsidiaries and affiliates, as well as non-employee officers and non-employee members of the Board of Directors and key consultants and advisors of the Company or its parents, subsidiaries or affiliates, are eligible to be granted Awards under the Plan. However, only persons who are employees of the Company or its parents or subsidiaries may be eligible to receive an Incentive Stock Option. ARTICLE IV COMMON STOCK SUBJECT TO PLAN (a) SHARES RESERVED. The total number of shares of Common Stock reserved and available for distribution pursuant to the Plan shall be 450,000 shares, all of which may be issued pursuant to the exercise of Stock Options awarded under the Plan. If any Award is exercised, cashed out or terminates or expires without a payment being made to the participant in the form of Common Stock, the shares subject to such Award, if any, shall again be available for distribution in connection with Awards under the Plan. Any shares of Common Stock that are issued or issuable under the Plan and used by a participant as full or partial payment of withholding or other taxes or as payment for the exercise or conversion price of an Award shall be available for distribution in connection with Awards under the Plan. (b) ANTIDILUTION ADJUSTMENTS. In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend, stock split, or similar corporate change involving the Common Stock, the aggregate number and kind of shares subject to Awards outstanding or to be granted under the Plan shall be appropriately adjusted or modified, and the terms of any outstanding Award shall be adjusted or modified accordingly. (c) LIQUIDATION OR DISSOLUTION. If the Company is to be liquidated or dissolved in connection with a transaction described in Article VI, the provisions of such Article shall apply. In all other instances, the adoption of a plan of dissolution or liquidation of the Company shall, except as may be provided by the Committee, cause all then-remaining restrictions pertaining to Awards under the Plan to lapse, and shall cause every Stock Option outstanding under the Plan to terminate to the extent not exercised prior to the adoption of the plan of dissolution or liquidation by the shareholders, provided that, notwithstanding other provisions hereof, the Committee may declare all Stock Options granted under the Plan to be exercisable at such time or times as the Committee may determine, notwithstanding the provisions of the respective Stock Option agreements regarding exercisability. (d) APPLICATION OF ADJUSTMENTS. The adjustments described in paragraphs (b) through (d) of this Article IV, and the manner of their application, shall be determined solely by the Committee, and any such adjustment may provide for the elimination of fractional share interests; provided, however, that any adjustment made by the Committee shall be made, to the greatest extent possible, in a manner that will not cause an Incentive Stock Option to be other than an Incentive Stock Option under applicable statutory and regulatory provisions. The adjustments required under this Article IV shall apply to any successors of the Company and shall be made regardless of the number or type of successive events requiring such adjustments. ARTICLE V AWARDS (a) GENERAL. The types of Awards that may be granted under the Plan are set forth below. Awards may be granted singly, in combination or in tandem with other Awards. (i) Stock Options. A Stock Option represents the right to purchase a share of Stock at a predetermined exercise price. Stock Options granted under this Plan may be in the form of Incentive Stock Options or Nonqualified Stock Options, as specified in the Award agreement. The term of each Stock Option shall be set forth in the Award agreement, but no Incentive Stock Option shall be exercisable more than ten years after the grant date. The exercise price per share of Common Stock purchasable under an Incentive Stock Option shall not be less than 100% of the Fair Market Value on the date of grant. Subject to the A-3 applicable Award agreement, Stock Options may be exercised, in whole or in part, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the exercise price by certified or bank check or, if permitted by applicable law, such other instrument as the Company may accept (including a copy of instructions to a broker or bank acceptable to the Company requesting that such broker deliver promptly to the Company an amount of sale or loan proceeds sufficient to pay the aggregate exercise price). As determined by the Committee, payment in full or in part may also be made in the form of Common Stock already owned by the optionee valued at the Fair Market Value on the date the Stock Option is exercised; provided, however, with respect to a Section 16 Insider, that such Common Stock shall not have been acquired within the preceding six months upon the exercise by such Section 16 Insider of a Stock Option or Award granted under the Plan, or a similar award granted under any other plan maintained at any time by the Company or any parent or subsidiary. Notwithstanding any provision of the Plan or any Award agreement to the contrary, in no event shall the Company be permitted to arrange for or extend credit to (as such terms are defined in Section 13(k) of the Exchange Act) any director or officer of the Company in connection with the exercise of any Award if such arrangement or extension of credit would violate applicable law. (ii) Stock Appreciation Rights. An SAR represents the right to receive a payment, in cash, shares of Common Stock or both (as determined by the Committee), equal to the Spread Value on the date the SAR is exercised. The grant price of an SAR shall be set forth in the applicable Award agreement. Subject to the terms of the applicable Award agreement, an SAR shall be exercisable, in whole or in part, by giving written notice of exercise to the Company. (iii) Restricted Stock. Shares of Restricted Stock are shares of Common Stock that are awarded to a participant and that during the Restricted Period may be forfeitable to the Company upon such conditions as may be set forth in the applicable Award agreement. Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered during the Restricted Period. Except as provided in this subsection (iii) and in the applicable Award agreement, a participant shall have all the rights of a holder of Common Stock, including the rights to receive dividends and to vote during the Restricted Period. Dividends with respect to Restricted Stock that are payable in Common Stock shall be paid in the form of Restricted Stock and shall be subject to all of the terms and conditions of the Restricted Stock agreement pursuant to which the underlying shares of Restricted Stock were issued. (iv) Other Stock-Based Awards. Other Stock-Based Awards are Awards, other than Stock Options, SARs or Restricted Stock, that are denominated in, valued in whole or in part by reference to, or otherwise based on or related to, Common Stock. The purchase, exercise, exchange or conversion of Other Stock-Based Awards granted under this subsection (iv) shall be on such terms and conditions and by such methods as shall be specified by the Committee. (b) MAXIMUM AWARDS. The total number of shares of Restricted Stock and other shares of Common Stock subject to or underlying Stock Options, SARs and Other Stock-Based Awards awarded to any participant during the term of this Plan shall not exceed 15 % of the shares of Common Stock originally reserved for distribution pursuant to the Plan. An amount not in excess of 25 % of the shares of Common Stock originally reserved for distribution pursuant to the Plan may be issued pursuant to Restricted Stock Awards and Other Stock-Based Awards, except that Other Stock-Based Awards with values based on Spread Values shall not be included in this limitation. ARTICLE VI CHANGE IN CONTROL PROVISIONS (a) Impact of Change in Control. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control: (i) Stock Options and Stock Appreciation Rights. All Stock Options and Stock Appreciation Rights outstanding as of the date such Change in Control occurs shall become immediately fully vested and exercisable. A-4 (ii) Restricted Stock and Other Stock-Based Awards. The restrictions and other conditions applicable to any Restricted Stock or Other Stock-Based Awards, including vesting requirements, shall lapse, and such Awards shall become immediately free of all restrictions and fully vested. (iii) Cash-Out of Stock-Based Awards. Unless otherwise determined by the Committee at or after grant, the value of all outstanding Stock Options, Stock Appreciation Rights, Restricted Stock and Other Stock-Based Awards shall be cashed out on the basis of the "Change in Control Price," as defined in paragraph (c) of this Article VI, as of the date such Change in Control occurs or such other date as the Committee may determine. (b) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" means the happening of any of the following: (i) The acquisition, other than in a transaction approved by the Incumbent Board, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of Common Stock (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any corporation pursuant to a transaction satisfying all of the requirements of clauses (A), (B) and (C) of subparagraph (b) (iii) of this Article VI; or (ii) Individuals who, as of the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to such effective date whose election, or nomination for election by the shareholders of the Company, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger, share exchange or consolidation (a "Business Combination"), unless, in each case following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such Person owned 25% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which, following such sale or other disposition, (1) more A-5 than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) less than 25% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of the Company or such corporation), except to the extent that such Person owned 25% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such sale or other disposition of assets of the Company or were elected, appointed or nominated by the Board. (c) CHANGE IN CONTROL PRICE. "Change in Control Price" means the maximum price paid for any shares of Stock acquired as part of the Change in Control except that, in the case of Incentive Stock Options, unless the Committee otherwise provides, such price shall be based only on transactions reported for the date on which such Incentive Stock Options are cashed out. (d) SURRENDER ELECTION. Notwithstanding any other provision of this Plan, upon a Change in Control, unless the Committee shall determine otherwise at grant, or after grant but before the Change in Control occurs, an Award recipient shall have the right, by giving notice to the Company within the Exercise Period, to elect to surrender all or part of the Stock Option, SAR or Other Stock-Based Award to the Company and to receive in cash, within 30 days of such notice, an amount equal to the amount by which the Change in Control Price on the date of such notice shall exceed the exercise or grant price under such Award, multiplied by the number of shares of Stock as to which the right granted under this Article VI shall have been exercised. (e) ACCOUNTING TREATMENT. Notwithstanding the foregoing, if any right granted pursuant to this Article VI would make a Change in Control transaction ineligible for pooling of interests accounting under generally accepted accounting principles that but for this Article VI would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute the cash payable pursuant to this Article VI with Common Stock with a Fair Market Value equal to the cash that would otherwise be payable hereunder. ARTICLE VII PLAN AMENDMENT AND TERMINATION The Board or the Committee may amend the Plan at any time, and the Board may terminate the Plan at any time, provided that no such amendment or termination shall be made without shareholder approval if such approval (a) would be required under applicable law or the applicable rules of any stock exchange, market or inter-dealer quotation system, or if (b) such amendment would (1) increase the total number of shares of Common Stock issuable pursuant to Incentive Stock Options granted under the Plan or (2) change the class of employees eligible to receive Incentive Stock Options under the Plan. Except as set forth in any Award agreement, no amendment or termination of the Plan may materially and adversely affect any outstanding Award under the Plan without the Award recipient's consent. ARTICLE VIII PAYMENTS AND PAYMENT DEFERRALS Payment of Awards may be in the form of cash, Stock, other Awards or combinations thereof as the Committee shall determine, and with such restrictions as it may impose. Subject to the limitations set forth in paragraph (a) of Article V and except as prohibited by applicable law, the Committee, either at the time of grant or by subsequent amendment, may require or permit deferral of the payment of Awards under such rules and A-6 procedures as it may establish. It also may provide that deferred settlements include the payment or crediting of interest or other earnings on the deferred amounts, or the payment or crediting of dividend equivalents where the deferred amounts are denominated in Common Stock equivalents. ARTICLE IX DIVIDENDS AND DIVIDEND EQUIVALENTS The Committee may provide that any Awards under the Plan earn dividends or dividend equivalents. Such dividends or dividend equivalents may be paid currently or may be credited to a participant's Plan account. Any crediting of dividends or dividend equivalents may be subject to such restrictions and conditions as the Committee may establish, including reinvestment in additional shares of Common Stock or Common Stock equivalents. ARTICLE X TRANSFERABILITY Except to the extent permitted by the Award agreement, either initially or by subsequent amendment, Awards shall not be transferable or assignable other than by will or the laws of descent and distribution, and shall be exercisable during the lifetime of the recipient only by him. ARTICLE XI AWARD AGREEMENTS Each Award under the Plan shall be evidenced by a written agreement (which need not be signed by the recipient unless otherwise specified by the Committee) that sets forth the terms, conditions and limitations for each Award. Such terms may include, but are not limited to, the term of the Award, vesting and forfeiture provisions, and the provisions applicable in the event the recipient's employment terminates. Such agreement shall contain such additional terms and conditions not inconsistent with the Plan as the Committee may, in its discretion, prescribe. The Committee may amend an Award agreement, provided that no such amendment may materially and adversely affect an Award without the Award recipient's consent. ARTICLE XII UNFUNDED STATUS OF PLAN It is presently intended that the Plan constitute an "unfunded" plan for incentive compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that, unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. ARTICLE XIII GENERAL PROVISIONS (a) Notwithstanding any other provision of the Plan, the Company shall not be obligated to issue any Award or shares of Common Stock under the Plan unless such issuance is in compliance with all applicable laws and any applicable requirements of any securities exchange or market on which the Common Stock is traded. Prior to the issuance of any Award or shares of Common Stock under the Plan, the Company may require a written statement from the recipient as evidence of such compliance, including, in some cases, an acknowledgment by the recipient that the recipient is acquiring the securities for investment and not for the purpose or with the intent of engaging in any distribution thereof. All certificates for shares of Common Stock or other securities delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Commission, any stock exchange or market upon which the Common Stock is then listed or traded and any applicable Federal, state or foreign securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. A-7 (b) Nothing contained in this Plan shall prevent the Company, a parent, a subsidiary or an affiliate from adopting other or additional compensation arrangements for its employees, officers or directors. (c) The adoption of the Plan shall not confer upon any employee any right to continued employment nor shall it interfere in any way with the right of the Company, a subsidiary or an affiliate to terminate the employment of any employee at any time. The grant of an Award under the Plan shall not confer upon the holder thereof any right as a shareholder of the Company. In the case of shares of Common Stock that may be issuable upon the exercise of an Award granted under the Plan, no person entitled to exercise such Award shall have any of the rights or privileges of a shareholder of record with respect to any such shares of Common Stock until such Award is exercised and certificates representing such shares have been issued and delivered to such person. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for Federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the immediate payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. If permitted by the Award agreement, withholding obligations arising from an Award may be settled with Common Stock, including Common Stock that is part of, or is received upon exercise or conversion of, the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company, its subsidiaries and its affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. The Committee may establish such procedures as it deems appropriate, including the making of irrevocable elections, for the settling of withholding obligations with Common Stock. (e) On receipt of written notice of exercise, the Committee may elect to cash out all or a portion of the shares of Common Stock for which a Stock Option is being exercised by paying the optionee an amount, in cash or Common Stock, equal to the Spread Value of such shares on the date such notice of exercise is received. (f) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Georgia. (g) If any provision of the Plan is held invalid or unenforceable, the invalidity or unenforceability shall not affect the remaining parts of the Plan, and the Plan shall be enforced and construed as if such provision had not been included. (h) The Plan shall be effective on March 4, 2003. Except as otherwise provided by the Board, no Incentive Stock Option shall be granted after February 28, 2013, but any Awards granted theretofore may extend beyond that date. A-8 EX-10.3 4 g88120exv10w3.txt EX-10.3 LOAN AGREEMENT EXHIBIT 10.3 LOAN AGREEMENT BY AND AMONG INTELLIGENT SYSTEMS CORPORATION AND FIDELITY BANK OCTOBER 1 , 2003 EXHIBITS EXHIBIT A BORROWING BASE CERTIFICATE EXHIBIT B EXISTING UCC FILINGS 1 LOAN AGREEMENT THIS AGREEMENT is made and entered into effective the 1st day of October, 2003, by and among Intelligent Systems Corporation, a Georgia corporation, with its chief executive offices located at 4355 Shackleford Road, Norcross, Georgia 30093 ("DEBTOR"); and FIDELITY BANK, chartered under the laws of the State of Georgia, having a mailing address of 3490 Piedmont Road, Suite 1450, Atlanta, Georgia 30305 (hereafter referred to as "SECURED PARTY"). SECTION 1. DEFINITIONS 1.1. In addition to the terms hereinafter defined, the following terms shall have the meanings set forth in this Section: (a) Accounts. All of Debtor's or Guarantors' (as the case may be) present or future accounts, accounts receivable, other receivables, contract rights, issues, profits, rents, chattel paper, instruments and documents, together with all of the proceeds, cash or non-cash, thereof, however acquired, or now or hereafter existing. (b) Account Obligor. Any Person who is or may become obligated under or on account of an Account. (c) Borrowing Base. An amount equal to the sum of: (i) 80% of the total face value of the Eligible Accounts of ChemFree; (ii) 80% of the total face value of VISaer's Eligible Accounts; (iii) 80% of the total face value of the Eligible Accounts of Corecard; (iv) 70% of the total face value of QS Tech's Eligible Accounts; and (v) 50% of the Eligible Inventory of ChemFree. (d) Borrowing Base Certificate. As defined in Section 3 hereof. (e) Closing Date. The date of execution and delivery of this Agreement. (f) Collateral. The Collateral as defined in the Security Agreement. (g) Credit Line. The revolving line of credit described in Section 2 hereof. (h) Eligible Account. An Account arising in the ordinary course of Debtor's or Guarantors' (as the case may be) business from the sale of goods or rendition of services which Secured Party, in its sole credit judgment, deems to be an Eligible Account. Secured Party may, in its sole discretion, determine that an Account is not an Eligible Account if: (i) it arises out of a sale made by Debtor or Guarantor to a Subsidiary or an Affiliate of Debtor or Guarantor or to a Person controlled by a Subsidiary or an Affiliate of Debtor or Guarantor; or (ii) it is unpaid for more than ninety (90) days after the original invoice date therefor; or (iii) any covenant, representation or warranty contained in this Agreement or the applicable Security Agreement with respect to such Account has been breached in any material respect and such breach is continuing; or (iv) the Account Obligor is also Debtor's creditor or supplier or the Account Obligor has disputed liability with respect to such Account, or has made any claim with respect to any other Account due from such Account Obligor to Debtor, or the Account otherwise is or may become subject to any right of set-off by the Account Obligor, in each of the foregoing cases to the extent of any offset, dispute or claim; or (v) the Account Obligor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or 1 order for relief has been entered by a court having jurisdiction in the premises in respect of the Account Obligor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Obligor, or if the Account Obligor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; or (vi) it arises from a sale to an Account Obligor who is located outside the United States, unless the sale is on letter of credit, guaranty or acceptance terms, in each case acceptable to Secured Party in its sole discretion; or (vii) it arises from a sale to the Account Obligor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or (viii) Secured Party believes, in its sole judgment, that collection of such Account is insecure or that payment thereof is doubtful or will be delayed by reason of the Account Obligor's financial condition; or (ix) the Account Obligor is the United States of America or any department, agency or instrumentality thereof, unless Debtor assigns its right to payment of such Account to Secured Party, in form and substance satisfactory to Secured Party, so as to comply with the Assignment of Claims Act of 1940, as amended (as codified at 31 U.S.C. Section 3727); or (x) the Account is subject to a Lien; or (xi) the goods giving rise to such Account have not been delivered to and accepted by the Account Obligor or the services giving rise to such Account have not been performed by Debtor and accepted by the Account Obligor or the Account otherwise does not represent a final sale; or (xii) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; or (xiii) Debtor has made any agreement with the Account Obligor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (xiv) Debtor has made an agreement with the Account Obligor to extend the time of payment thereof. (i) Eligible Inventory. Any and all of the assets which from time to time are in the possession of and form a part of the Inventory of Debtor or any Guarantor (as the case may be) and which Secured Party, in its sole credit judgment, deems to be Eligible Inventory. The value of Eligible Inventory shall be determined by the actual purchase price thereof as determined by the acquisition contract. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory if it arises out of a sale made by Debtor to a subsidiary or an affiliate of Debtor or to a person controlled by an affiliate of Debtor. (j) Event of Default. As defined in Section 14 hereof. (k) Guarantors. CHEMFREE CORPORATION ("ChemFree"), QS TECHNOLOGIES, INC. ("QS Tech"), VISAER, INC. ("VISaer") and CORECARD SOFTWARE, INC. ("Corecard") (individually and/or collectively referred to herein as the "Guarantors." (l) Guarantor Security Agreement. The Security Agreements executed of even date herewith between Guarantors and Secured Party. (m) Guaranty. The guaranties executed by Guarantors in favor of Secured Party of even date herewith. (n) Indebtedness. All items which, in accordance with generally accepted accounting principles, would be included on the liability side of a balance sheet of Debtor or Guarantor as of the date Indebtedness is to be determined and, in any event, shall include any liability, whether or not such liability shall have been assumed, guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations in respect of the obligations of others. (o) Interest Period. The period from the 1st day of the month through the 30th day of the 2 same month based upon a 360 day year. (p) Inventory. The Inventory as defined in the Security Agreement or the Guarantor Security Agreements, as the case may be. (q) Line of Credit Note. The commercial promissory note of Debtor issued pursuant to Section 2 hereof to evidence the Credit Line. (r) Loan Documents. In addition to this Agreement, the Note, the Guaranty and the Security Agreement, the Guarantor Security Agreements, all financing statements, pledges, title certificates, documents of title, documents, instruments, assignments, leases, guarantees or contracts (including any amendments thereto) now or at any time or times hereafter executed and delivered by Debtor, Guarantors or any affiliate of Debtor or Guarantor to Secured Party and relating to the Obligations. (s) Loan. The Credit Line as evidenced by the Commercial Promissory Note. (t) Note. The Commercial Promissory Note. (u) Obligations. All indebtedness, obligations and liabilities of any and every kind and nature now and hereafter owing to Secured Party by the Debtor, however evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed, joint or several or otherwise, and whether arising out of this Agreement, the Note, the Loan Documents or under any contracts, guarantees or agreements heretofore, now or hereafter executed and delivered by the Debtor and Guarantors (as the case may be) to the Secured Party, including without limitation, the Note. (v) Security Agreement. The Security Agreement of even date herewith between Debtor and Secured Party. (w) Settlement Date. The 1st day of each month during the term of this Agreement or the last business day immediately preceding such date, if such date falls on a Saturday, Sunday or legal holiday. SECTION 2. AGREEMENT TO LEND. 2.1. Subject to all the terms and conditions hereinafter contained, Secured Party grants to Debtor a revolving line of credit in the maximum principal amount of $1,500,000 or so much thereof as may be advanced or re-advanced from time to time, which aggregate indebtedness is evidenced by the Line of Credit Note. 2.2. Secured Party's obligation to make the initial advance under the Loan, and Secured Party's performance of its other obligations hereunder, are subject to the fulfillment of the following conditions precedent: (a) All of the Debtor's or Guarantors' (as the case may be) representations and warranties in this Agreement and the Loan Documents shall be true and correct on and as of the date of each advance, with the same effect as if made on and as of such date; (b) At the time of each advance hereunder, the Debtor or the Guarantor (as the case may be) shall have observed and performed all of the terms, conditions and agreements set forth herein or in the other Loan Documents on their respective parts to be observed and performed, and neither any Event of Default, as defined herein, nor any event which, with notice or lapse of time or both, would constitute an 3 Event of Default, shall have occurred and be continuing either at the time of such advance or after giving effect thereto; (c) The financing statements required by the Security Agreement shall have been filed for record with the appropriate governmental authorities; (d) Debtor shall have performed all obligations and taken all actions to be performed or taken by it hereunder on or prior to the Closing Date; (e) On the Closing Date, Debtor shall deliver to Secured Party certificates, dated as of the Closing Date and signed by its Vice President or Chief Executive Officer, certifying compliance with the conditions of clauses (a),(b) and (d) above; (f) Debtor shall have furnished to Secured Party a certificate (or other evidence satisfactory to Secured Party) that the insurance required herein is in full force and effect and that Secured Party is loss payee under each such insurance policy, as specified herein; (g) On the Closing Date, Debtor shall deliver to Secured Party the following: (i) Certificate of Good Standing for Debtor from the Secretary of State of Georgia and from the Secretary of State of each additional state where Debtor is qualified to do business, such certified articles and good standing certificates to be dated as of a date as near to the Closing Date as practicable; (ii) A Certificate from Debtor's Secretary dated as of the Closing Date, certifying that attached thereto is a true and complete copy of Debtor's Articles of Incorporation and By-laws; (iii) A Certificate from Debtor's Secretary dated as of the Closing Date, certifying that attached thereto is a complete copy of resolutions adopted by Debtor's Board of Directors authorizing the execution, delivery and performance of the Loan Documents to which it is a party; (iv) A Certificate from Debtor's Secretary dated as of the Closing Date, which shall certify the names of Debtor's officers authorized to sign the Loan Documents to be executed by Debtor together with the true signatures of such officers. Secured Party may rely conclusively on such certificate until Secured Party shall receive a further certificate of Debtor's Secretary, canceling or amending any prior certificate and submitting the signatures of the officers named in the future certificate; (v) Such other documents as Secured Party may reasonably request in connection with the corporate proceedings taken by Debtor authorizing this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby. (h) Debtor shall have delivered to Secured Party a fully-executed original of each Loan Document; and (i) Secured Party shall have received such other certificates, opinions, agreements and documents, in form and substance satisfactory to it, as Secured Party may reasonably request. 2.3. Secured Party's obligation to make advances under the Credit Line after the Closing Date shall be subject to the fulfillment of the following conditions precedent: 4 (a) All of Debtor's representations and warranties in this Agreement and the other Loan Documents shall be true on and as of the date of such subsequent advance, with the same effect as if made on and as of such date; (b) No Event of Default, nor any event or condition which, upon notice or lapse of time, or both, would constitute an Event of Default, shall have occurred and be continuing or would occur upon the making of such advance; (c) Debtor shall have performed all obligations and taken all actions to be performed or taken by it hereunder on or prior to the date of such subsequent advance; and (d) Secured Party shall have received such other certificates, opinions, agreements and documents, in form and substance satisfactory to it, as Secured Party may reasonably request. SECTION 3. ADVANCES. 3.1. Provided that all of the conditions precedent set forth in Section 2 hereof have been satisfied, Secured Party will make advances to Debtor under the Credit Line upon Debtor's request, the outstanding balance of which in the aggregate at any one time, shall not exceed the lesser of: (i) $1,500,000 or (ii) the Borrowing Base as shown on the Borrowing Base Certificate (which shall be in the form attached hereto as EXHIBIT "A" and incorporated herein by reference). Debtor may request advances in amounts of $10,000 or more each time and such advances shall be made by transfer to Debtors' account held with Secured Party; it is also contemplated that advances and repayments may be made in accordance with operation of Secured Party's cash management system. 3.2. Debtor shall deliver to Secured Party monthly, on or before the twentieth (20th) day of each month for the preceding calendar month, a Borrowing Base Certificate and an aging of Accounts as of the prior month end. Debtor may request advances on the basis of a given Borrowing Base Certificate until the next month or the delivery of a new Borrowing Base Certificate, whichever is earlier. If upon delivery of a new Borrowing Base Certificate, the aggregate principal amount of all advances under the Credit Line then outstanding exceed the Borrowing Base as shown on the new Borrowing Base Certificate, then Debtor shall immediately pay to Secured Party, in addition to any interest, the difference between the outstanding principal balance of all advances and the current Borrowing Base as shown on the new Borrowing Base Certificate. Debtor shall not request, and Secured Party shall be under no obligation to make, any advances under the Credit Line which would cause the aggregate principal amount outstanding of all advances under the Credit Line to exceed the Borrowing Base. 3.3. Notwithstanding the foregoing, Debtor agrees that the obligation to repay each advance under the Note and this Agreement and to repay the Obligations, together with interest thereon, shall not be limited to any specific fund, but shall be a direct and general liability of Debtor. Debtor waives the right to direct the application of any payment at any time received by Secured Party on account of the Obligations; and Debtor agrees that Secured Party shall have the continuing exclusive right to apply and reapply such payments in any way that Secured Party deems advisable, notwithstanding any entry by Secured Party upon its books. Until checks and other instruments delivered to Secured Party in payment or on account of Debtor's Obligations are actually collected and credited to Secured Party's account, Debtor agrees that such items shall not constitute payment. SECTION 4. INTEREST RATE AND PAYMENTS. 5 4.1. Interest shall be due monthly on the outstanding and unpaid balance of the sums advanced or re-advanced to Debtor pursuant to the Loan in accordance with this Agreement and the Note. Overdue principal (and interest to the extent permitted by law) shall bear interest on demand at the default rate stated in the Note. Interest shall be the product obtained when multiplying the rate of interest by the average daily principal balance outstanding, dividing by 360 and then multiplying by the actual number of days interest has accrued. 4.2. (a) Debtor hereby agrees that it shall immediately pay to Secured Party, with respect to the Credit Line: (i) upon either oral or written demand, the amount necessary to reduce the balance of the Credit Line to the Borrowing Base; (ii) On each Settlement Date, interest on the average daily balance of the Credit Line for the preceding Interest Period. (b) Upon the effective termination of this Agreement as set forth herein, Debtor shall pay the total amount of the Obligations, including all accrued and unpaid interest, principal and other charges and any and all costs of collection, including reasonable attorneys' fees. 4.3. Payments under the Note also may be made through any blocked account or collateral account in accordance with the Security Agreement delivered herewith. Until checks and other instruments delivered to Secured Party in payment or on account of the Obligations are actually paid to Secured Party, Debtor agrees that such items constitute conditional payment only. 4.4. Secured Party will account to Debtor monthly with a statement of the total outstanding balance of the Note and all interest and charges due and payable. Each such statement shall be deemed final, binding and conclusive unless Secured Party is notified by Debtor in writing to the contrary. Any such notice shall only be deemed an objection to those items specifically objected to therein. SECTION 5. RIGHT OF SECURED PARTY TO AUDIT DEBTOR. 5.1. Debtor hereby authorizes all duly constituted federal, state and municipal authorities to furnish to Secured Party copies of all tax returns of Debtor and all reports of examinations or other information of Debtor which have been made by them. 5.2 In an Event of Default, Secured Party shall have the right, in its sole and absolute discretion, to cause an independent audit to be performed on all books and records of Debtor and Guarantors, and Debtor shall be responsible for payment of all costs and expenses in connection with any such audit; provided however, the cost of such audit shall not exceed Five Thousand Dollars ($5,000). SECTION 6. WARRANTIES. Debtor warrants, represents and covenants that, at the execution hereof and at all times when any portion of the Obligations are or shall be outstanding: 6.1. Debtor is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia and is duly qualified and licensed to do business and is in good standing in any other state where the conduct of its business or ownership of its properties requires such qualification. 6 6.2. Debtor is and shall remain duly authorized to execute, deliver and perform all of its respective duties and obligations under the Loan Documents. The execution, delivery and performance of this Agreement and the Loan Documents by the Debtor do not and will not: (a) constitute a breach of or default under any provision contained in the Debtor's organizational documents or contained in any agreement in which Debtor is or may be a party or by which Debtor's properties are or may be bound or affected; (b) require any consent, approval, license or authorization of, or declaration to be filed with any, court or governmental authority or regulatory body, domestic or foreign, except as has been obtained or filed; (c) contravene any judgment, decree or order, or any material law, rule or regulation, presently in effect and having an applicability to Debtor; or (d) result in or require the creation or imposition of any deed to secure debt, mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature upon or with respect to any properties now owned or hereafter acquired by Debtor. There is no provision in Debtor's Articles of Incorporation or By-Laws or in the laws of the state of Debtor's incorporation requiring any consent of shareholders to authorize the mortgage or pledge of or the creation of a security interest in any of the Debtor's assets, such power being vested exclusively in the Debtor's boards of directors. 6.3. This Agreement is, and the Loan Documents when duly executed and delivered will be, legal, valid and binding obligations of Debtor enforceable in accordance with their respective terms, except as such enforcement may be limited by Bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether considered in a proceeding in equity or in law). 6.4. Debtor is and shall be lawfully possessed and the sole owners of the Collateral, free of any pledge, lien or encumbrance of any kind or character, legal or equitable, except for the security interest created by this Agreement. Debtor has authority to encumber the Collateral in the manner and form herein provided. There are no restrictions on the Collateral or any contracts or agreements regarding the Collateral which would prevent or restrict the Debtor from freely assigning the Collateral to Secured Party as security for the Loan, and the Collateral is freely assignable and Debtor has the exclusive right and authority to assign the Collateral to Secured Party as set forth herein. 6.5. There are no proceedings pending or, to the knowledge of the officers of Debtor, threatened or before any court or administrative agency which may materially and adversely affect the Debtor's financial conditions or operations, or which seek to question or set aside any of the transactions herein contemplated. 6.6. Debtor has and will continue to duly file all federal, state, and other governmental tax returns which it is required by law to file; all taxes and other sums which may be due by Debtor to the United States or any state or other governmental authority have been fully paid; Debtor will maintain reserves adequate in amount to fully pay all such tax liabilities as they accrue, or have accrued such tax liabilities in accordance with generally accepted accounting principles; and Debtor has paid and will continue to pay its withholding and social security taxes relating to its employees. 6.7. All financial data and other information furnished by Debtor or Guarantors to Secured Party, including but not limited to, schedules of Eligible Inventory, Eligible Accounts, Collateral and accounts payable were and will be taken from the books and records of Debtor and Guarantors which are kept in accordance with generally accepted accounting principles consistently applied, and as of the date thereof shall be true, accurate and correct in all respects. Any balance sheet so furnished will accurately reflect the financial condition of Debtor and Guarantors as of the date thereof. 7 6.8. Debtor is not a party to any contract or agreement or subject to any charge, corporate restriction, judgment, decree or order that, individually or collectively, materially adversely affects or may materially adversely affect its businesses, properties, assets, operations or condition, financial or otherwise, and Debtor is not a party to any labor dispute; there are no strikes or walkouts relating to any labor contracts of Debtor; and no such contract is scheduled to expire during the Term. 6.9. Debtor is not in violation of any applicable statute, regulation, or ordinance of any governmental entity, or of any agency thereof, in any respect that, individually or collectively, materially and adversely affects, or may materially and adversely affect, the Collateral or any of the Debtor's businesses, property, assets, operations, or condition, financial or otherwise, including without limitation the Fair Labor Standards Act. 6.10. The offices or locations where Debtor or Guarantors (as the case may be) keep the Collateral and books and records, including without limitation, computer programs, printouts and other computer materials and records concerning the Collateral, are as set forth on Schedule B hereto. Such addresses includes and designates Debtor's chief executive offices, principal places of business, and other offices and places of business and are Debtor's sole offices and places of business. Debtor shall not establish any other such office or location without Secured Party's prior written consent, which consent shall not be unreasonably withheld; provided, however, that in no event shall any such office or location be outside the United States of America or any jurisdiction within the United States of America which has not adopted Article 9 of the Uniform Commercial Code. 6.11. Debtor has not, during the preceding five years, been known as or used (directly or through any predecessor or affiliate) any other corporate or fictitious name. 6.12. Debtor has, and is currently in good standing with respect to, all governmental approvals, permits, certificates, inspections, patents, copyrights, trademarks, trade names, consents, and franchises necessary to continue to conduct business as heretofore conducted by it and to own or lease and operate the properties now owned or leased by it. 6.13. Any guarantee, security, property or right received by Debtor in connection with the Collateral shall be received by Debtor as agent of, and on behalf of, Secured Party, will be kept separate from other property of Debtors capable of identification, and will be delivered and paid immediately by Debtor to Secured Party as additional security. 6.14. Debtor's execution and delivery of this Agreement and the Loan Documents does not directly or indirectly violate or result in a violation of Regulations G or X of the Board of Governors of the Federal Reserve System and Debtor owns no, or do not intend to purchase or carry any, "margin security," as defined in those Regulations. 6.15. The current fiscal year end for Debtor is December 31 and Debtor will not change its fiscal year ends without providing written notice to Secured Party. 6.16. Each request for an advance made by Debtor pursuant to this Agreement shall constitute: (a) a warranty and representation by Debtor to Secured Party that there does not then exist an Event of Default or any event or condition which, with notice, lapse of time or the making of such advance, would constitute an Event of Default, and (b) a reaffirmation as of the date of such request of all the representations and warranties of Debtor in this Agreement. All representations and warranties of Debtor contained in this Agreement and any other Loan Document shall survive the execution, delivery 8 and acceptance thereof by the parties thereto. SECTION 7. AFFIRMATIVE COVENANTS. As long as any of the Obligations remain unpaid or this Agreement is in effect, Debtor shall: 7.1. Keep books of account and prepare financial statements and cause to be furnished to Secured Party the following (prepared in accordance with generally accepted accounting principles applied on a basis consistent with the financial statements heretofore delivered to Secured Party), except to the extent that Debtor's certified public accountants concur in any changes therein and such changes are disclosed to Secured Party and are consistent with then generally accepted accounting principles: (a) As soon as available, but not later than ninety (90) days after the close of each fiscal year of Debtor, audited consolidated financial statements of Debtor (which includes the financial information with respect to all Guarantors), consisting of a balance sheet, income and expense statements and statements of cash flow as at the end of such fiscal year and related statements of income, paid in surplus and retained earnings for such year, audited by a Certified Public Accountant and satisfactory to Secured Party, and prepared in accordance with generally accepted accounting principles and fairly presenting the financial position and results of operations of Debtors for such fiscal year, and including a copy of Debtor's internal "Consolidating Statement" prepared from such financial statements; (b) As soon as available, but not later than forty-five (45) days after the end of each calendar quarter, a balance sheet, income and expense statement and statement of cash flow as of the last day of the previous month and related statements of paid in surplus and retained earnings for that calendar quarter, certified by an executive officer of Debtor or Guarantor (as the case may be) and satisfactory to Secured Party, and prepared in accordance with generally accepted accounting principles and fairly presenting the financial position and results of operations of Debtor and Guarantors for such calendar quarter, together with statements regarding any significant change within the business operation of Debtor and Guarantors; (c) As soon as available, but not later than twenty (20) days after the end of each calendar month, a written report setting forth the Accounts of Debtor and Guarantors which have been aged according to their due date as of the last day of said month, certified by an executive officer satisfactory to Secured Party; (d) Monthly, on or before the twentieth (20th) day of each month, a Borrowing Base Certificate as required by Section 3 hereof; and (e) Prior to the commencement of Debtor's and Guarantors' fiscal year, Debtor and Guarantors shall submit to Secured Party an annual financial budget indicating a statement of budgeted income and expenses for the upcoming fiscal year of Debtor and Guarantors which parallels the income and expense statements required to be delivered by Debtor and Guarantors to Secured Party under the terms of this Section 7.1; (f) With reasonable promptness, such other data and information (financial and otherwise) as Secured Party from time to time, may reasonably request, bearing upon or related to the Collateral or Debtor's or Guarantors (as the case may be) financial condition or results of operations. 7.2. Concurrently with the delivery of any annual financial statements described in paragraph 7.1(a) above, if Debtor otherwise secure(s) the following although not required to by the terms 9 hereof, a certificate of Debtor's certified public accountants certifying to Secured Party that, based upon their examination of the affairs of Debtor and Guarantors performed in connection with preparation of such financial statements, they are not aware of the existence of any condition or event which constitutes or would, upon notice or lapse of time or both, constitute an Event of Default or, if they are aware of such condition or event, the nature thereof; 7.3. Permit Secured Party from time to time during business hours, to examine, inspect, audit and make extracts from their books and records, including the corporate records, and Debtor and Guarantors hereby authorizes all duly constituted federal, state and municipal authorities to furnish to Secured Party copies of reports of examination of them which have been made by such authorities; 7.4. On request of Secured Party, execute and deliver to Secured Party any and all additional documents which Secured Party may from time to time determine necessary or convenient to evidence the advances made hereunder or to evidence and continue the security interest created hereby; 7.5. Comply with all applicable statutes and governmental regulations and pay or otherwise have discharged, before any penalty attaches thereto for nonpayment thereof, all taxes, assessments, fees and charges of any kind levied upon or assessed against it, the Collateral or any income therefrom; provided, however, that Debtor or Guarantors (as the case may be) shall not be required to pay any such taxes, assessments, fees or charges so long as they shall in good faith contest the validity thereof and shall further provide for the payment of such items in a manner reasonably satisfactory to Secured Party; 7.6. Promptly upon, but in no event later than seven (7) business days after Debtor's or any Guarantor's learning thereof, inform Secured Party, in writing, of: (i) any facts relating to the Collateral which would render untrue any representation or warranty made herein; and (ii) any litigation affecting Debtor or Guarantors whether or not the claim is considered to be covered by insurance, and the institution of any suit or administrative proceeding which may materially and adversely affect its operations, financial condition or business or Secured Party's security interest in the Collateral; 7.7. Perform in a timely manner the covenants, obligations and agreements under each lease or agreement to which Debtor is a party and relating to any of its assets; 7.8. Notify Secured Party immediately of any information which Debtor or Guarantor (as the case may be) has or may have received with regard to the Collateral which might in any way materially and adversely affect the value of same or the rights or remedies of Secured Party in respect thereof; 7.9. Pay to Secured Party all reasonable attorneys' fees and all proper expenses which may be expended or incurred by Secured Party in perfecting, enforcing or attempting to enforce any of its rights under any Loan Document, or with respect to any matter growing out of the Loan Documents; 7.10. Preserve and maintain its corporate existence in good standing, and preserve and maintain all rights, franchises and privileges in the jurisdictions of their incorporation which is material to the conduct of their operations or financial condition, and qualify and remain qualified as a foreign corporation in good standing in each jurisdiction in which the failure to qualify or remain qualified would have a material adverse effect upon the results of operation or financial condition. SECTION 8. NEGATIVE COVENANTS As long as any portion of the Obligations remain unpaid or this Agreement is in effect, Debtor shall not, without obtaining Secured Party's prior written consent (which Secured Party may or may not give in 10 its sole discretion): 8.1. Make any material change in its Chief Executive Officer and/or its Chief Financial Officer; 8.2. Create, incur, assume or suffer to exist any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance (including the lien of an attachment, judgment or execution), securing a charge or obligation, on or of any of its property, real or personal, tangible or intangible, whether now owned or hereafter acquired, except for: (a) liens in favor of Secured Party; (b) liens set forth on Schedule I hereto; and (c) purchase money liens for equipment purchases. 8.3. Notwithstanding anything herein to the contrary, sell, lease or have removed from Debtor's premises any Collateral or other material assets, except in the ordinary course of business; 8.4. Make any material change in its capital structure or in the type of business now conducted; 8.5. Except for loans or contributions to Guarantors or to companies in which Debtor currently owns a minority equity interest, provided however, such funding shall be subordinate to the rights of Secured Party under this Loan Agreement, extend credit to or make any advance, loan, contribution or payment of money or goods (other than normal compensation for personal services and travel expenses in the ordinary course of business) to, any individual, partnership, corporation, joint venture, association or organization, or become liable, directly or indirectly, as a surety, guarantor, accommodation endorser or otherwise for the payment or performance of any obligation of any corporation, individual, partnership, joint venture, association or organization; provided, however, that this Section shall not be deemed to prohibit: (a) the endorsement of negotiable instruments received in the ordinary course of its business; or (b) the guarantee of obligations in favor of Secured Party. 8.6. Merge or consolidate with any other corporation, including the merger of a parent and subsidiary corporation, or purchase or sell any stock or assets of or from any other person, association, partnership or corporation, other than purchasing or selling assets in the ordinary course of business; 8.7. Declare or pay any dividend upon any class of stock, make any distribution in respect thereto, or purchase, redeem or otherwise acquire any of its shares of stock (except distributions for subchapter S tax liability of the Debtor's shareholders which relate to the income of Debtor); or 8.8. Enter into, or be a party to, any transaction with any affiliates or stockholders, except in the ordinary course of and pursuant to the reasonable requirements of its business and upon fair and reasonable terms which are fully disclosed to Secured Party and are no less favorable than would be obtained in a comparable arm's-length transaction with a person not an affiliate or stockholder; or 8.9. Sell, transfer, lease or otherwise dispose of all or any substantial part of its assets or the Collateral without the prior written consent of Secured Party. 11 8.10 Debtor or Guarantor(s) (as the case may be) shall not change its state of incorporation. SECTION 9. COLLECTION RIGHTS. 9.1. Upon an Event of Default, Secured Party may at any time notify the account debtor on any Account of its security interest therein, and may demand that monies due or to become due be paid directly to Secured Party. Debtor hereby irrevocably appoints Secured Party, or any person designated by Secured Party, its true and lawful attorney-in-fact, to endorse for Debtor and in its name any check, draft or other order for payment of money payable to Debtor in payment of any account owing to Debtor assigned pursuant to this Agreement, and to collect all Accounts. 9.2. Upon an Event of Default, Secured Party's costs of collection and enforcement, including attorneys' fees as set forth herein and out-of-pocket expenses, shall be borne solely by Debtor. Secured Party shall not be liable for any negligent act or omission on the part of Secured Party, or its officers, agents or employees. 9.3. After exercising its rights under this Section, Secured Party may, without notice to Debtor, renew, modify or extend any Account, grant waivers or indulgences with respect thereto, accept partial payments thereon, surrender or release any debtors or other party liable thereon in such manner as Secured Party may, in its sole discretion, deem advisable, without affecting or diminishing Debtor's continuing obligations upon such Accounts. SECTION 10. PAYMENTS BY SECURED PARTY. 10.1. If Debtor fails to pay when due any insurance premium, tax or other obligation required to be paid under this Agreement or the Security Agreement, which relates to the preservation of the Collateral, Secured Party in its sole discretion may (without waiving or releasing any obligation or liability of Debtor hereunder or any event of Default), but shall not be obligated to, make such payment or any part thereof on behalf of Debtor and add any and all amounts so paid to the principal indebtedness under the Loan. SECTION 11. EXTENSION; TERMINATION; LINE OF CREDIT CHARGE; ASSUMPTION 11.1. The agreement of Secured Party to make advances to Debtors under the Credit Line and of Debtor to borrow money from Secured Party under the Credit Line shall continue from the date hereof until September 1, 2004, unless earlier terminated as provided in this Agreement. The Credit Line or any part thereof may be extended thereafter, upon the agreement of Debtor, at Secured Party's sole discretion for any term selected by Secured Party. If either Secured Party or Debtor does not extend the Credit Line or any part thereof (Debtor to so notify Secured Party in accordance with Section 13 hereof within five business days after being advised of renewal by Secured Party), then Debtor shall, on or before the expiration date of the term, pay to Secured Party in full the outstanding principal balance under the Credit Line, together with all accrued but unpaid interest thereon and other charges. 11.2. Debtor may terminate the Credit Line at any time during the term of the Credit Line in accordance with Section 12 hereof and upon payment in full of the outstanding principal balance, accrued interest and other charges due under the Line of Credit Note. Termination of the Credit Line shall void Secured Party's commitment for future advances hereunder. 11.3. Except as otherwise expressly provided for in this Agreement and in the other Loan Documents, no termination by Debtor or Secured Party of the Credit Line or failure by Secured Party to 12 renew the Credit Line, shall in any way affect the continuing obligations of Debtor under the remaining Note, or affect or impair the powers, obligations, duties and rights of Debtor or Secured Party relating to: (i) any transaction or event occurring prior to such termination; (ii) the Collateral; or (iii) so long as any of the Obligations are outstanding, any of the undertakings, agreements, covenants, warranties and representations of Debtor and Guarantor contained in this Agreement or any other Loan Document. All such undertakings, agreements, covenants, warranties and representations shall survive such termination until fully performed or remedied. SECTION 12. NOTICE. 12.1. All notices to be given hereunder shall be in writing and shall be effective three business days after being mailed by certified mail, return receipt requested, to the following addresses or such other addresses as the parties may from time to time designate in writing (and if not so mailed, shall be effective upon receipt at such address): If to the Debtor: Intelligent Systems Corporation Attention: Chief Financial Officer 4355 Shackleford Road Norcross, Georgia 30093 If to Secured Party: Fidelity Bank 3490 Piedmont Road Suite 1450 Atlanta, Georgia 30348 Attn: Vice President, Commercial Lending SECTION 13. EVENTS OF DEFAULT; ACCELERATION. 13.1. The occurrence of any one or more of the following conditions or events shall constitute an "Event of Default": (a) Debtor fails to pay any principal, interest, or premium on either of the Note or any other obligation to Secured Party under this Agreement or any Loan Document when due and payable or declared due and payable; (b) Debtor or Guarantor fails to perform, keep, or observe any term, provision, condition, or covenant contained in this Agreement or any Loan Document which is required to be performed, kept, or observed by them, and such default shall not be cured within thirty (30) days of written notice from Secured Party to Debtor; (c) There is an event of default pursuant to either of the Note, the Guaranty, any Security Agreement, Guarantor Security Agreements, or any other Loan Document, after the applicable grace period, if any; 13 (d) Any representation or warranty of Debtor in this Agreement or in any other Loan Document proves to have been untrue or misleading in any material respect when made; (e) A default shall occur under any agreement, guarantee, document or instrument, other than the Loan Documents, to which Debtor or Guarantor is a party or by which the Debtor is bound creating or relating to any indebtedness of Debtor, the consequences of which could have a materially adverse effect on Debtor's business or financial condition, the Collateral or Secured Party's interest therein; (f) Any statement, report, financial statement or certification made or delivered by Debtor or any officer, director, shareholder, employee, or agent of Debtor to Secured Party is not true and correct in any material respect; (g) There shall occur any material uninsured damage to or loss, theft, or destruction of, any of the Collateral; (h) The Collateral or any other of Debtor's assets are attached, seized, levied upon, or subjected to a writ or distress warrant, or come within the possession of any receiver, trustee, custodian, or assignee for the benefit of creditors; and the same is not cured within thirty (30) days thereafter; or an application is made by any person other than Debtor for the appointment of a receiver, trustee, or custodian for any of their respective assets and the same is not dismissed within sixty (60) days after the application therefor; (i) Debtor or Guarantor applies for the appointment of a receiver, trustee, or custodian for any of their respective assets; Debtor or Guarantor file a petition under any section or chapter of the Bankruptcy Code or any similar law or regulation; Debtor or Guarantor make an assignment for the benefit of their creditors; or Debtor file any case or proceeding for its dissolution, liquidation or termination; (j) Debtor ceases to conduct its business as now conducted, or is enjoined, restrained, or in any way prevented by court order from conducting all or any material part of its business affairs, or a petition under any section or chapter of the Bankruptcy Code, or under any similar law or regulation, is filed against Debtor or any case or proceeding is filed against Debtor for its dissolution or liquidation and such injunction, restraint, or petition is not dismissed within sixty (60) days after the entry or filing thereof; (k) A notice of lien, levy, or assessment is filed of record with respect to all or any of Debtor's assets by the United States, or any department, agency, or instrumentality thereof, including without limitation, the Pension Benefit Guaranty Corporation (in the case of Debtor), or any taxes or debts owing at the time or times hereafter to any one of the foregoing becomes a lien or encumbrance upon the assets of Debtor and the same is not released within sixty (60) days after the same becomes a lien or encumbrance; (l) Guarantor files a petition under any section or chapter of the Bankruptcy Code or under any similar law or regulation, or the same is filed against Guarantor and is not dismissed within sixty (60) days after the filing thereof; (m) There is an event of default under the terms of any other loan from Secured Party to Debtor, or an event of default or other breach under the terms of any other agreement, other than a Loan Document, between Secured Party and Debtor; or (n) Debtor or the Guarantor shall have filed against it a lawsuit, proceeding, or administrative action which Secured Party deems, in its sole discretion, to materially and adversely affect 14 the condition, financial or otherwise, of Debtors or the Guarantor. 13.2. Upon the occurrence of an Event of Default, at Secured Party's option, the Credit Line shall be terminated and all Debtor's Obligations to Secured Party may, without demand, notice, or legal process of any kind, be declared, and immediately shall become, due and payable, and Secured Party shall be entitled to exercise all of its remedies contained in the Note, the Security Agreement or any of the Loan Documents. 13.3 Upon the occurrence of an Event of Default, Secured Party will provide ten (10) days written notice to any Guarantor of said Event of Default before Secured Party shall pursue collection against the Guarantor(s) (or any of them) or under the Guarantor Security Agreement(s) for payment of any of the Indebtedness, whether or not the Secured Party shall have pursued collection against any property securing any of the Indebtedness or any obligation, or shall have proceeded against any other of the Guarantor(s) or any other party primarily or secondarily liable on any of the Indebtedness. SECTION 14. WAIVER OF BREACH. 14.1. No delay or failure on the part of Secured Party to exercise any right or remedy accruing to Secured Party hereunder or under any Loan Document, upon any default or breach by Debtor, of any covenant, condition or provision hereof, shall be held to be a waiver thereof. No delay on the part of Secured Party in exercising any of its rights or remedies shall preclude Secured Party from the exercise thereof at any time during the continuance of any default or breach. No waiver of a single default or breach shall be deemed a waiver of any subsequent default or breach. All waivers under this Agreement must be in writing. Secured Party may enforce any one or more remedies hereunder successively or concurrently, at its option. SECTION 15. APPLICABLE LAW; JURISDICTION. 15.1. This Agreement has been delivered at and shall be deemed to have been made at Atlanta, Georgia, and shall be interpreted, and the rights and liabilities of the parties hereto determined, in accordance with the laws of Georgia, applicable to agreements executed, delivered, and performed entirely within Georgia. As part of the consideration for new value received, and regardless of any present or future domicile of Debtor or Secured Party, Debtor hereby consents to the jurisdiction of the state courts of Georgia, and waive personal service of any and all process upon debtor and consents that all such service of process be made by registered mail directed to Debtor at the address described in Section 13 and service so made shall be deemed to be completed upon actual receipt thereof. Debtor waives trial by jury and waives any objection to venue of any action instituted hereunder and consents to the granting of such legal or equitable relief as is deemed appropriate by the appropriate court. 15.2. Nothing contained herein shall prevent Secured Party from bringing any action or exercising any rights against any security and against Debtors and against any property of Debtor within any other state. Initiating such proceeding or taking such action in any other state shall in no event constitute a waiver of the agreement contained herein that the laws of the State of Georgia shall govern the rights and obligations of Debtor and Secured Party hereunder or of the submission herein made by Debtor to personal jurisdiction within the State of Georgia. SECTION 16. EXPENSES. 16.1. Debtor shall reimburse Secured Party on demand for all its expenses (including, but not limited to, reasonable attorneys' fees), of or incidental to: 15 (a) The structuring and preparation of this Agreement and the transactions it contemplates, all other Loan Documents and the transactions contemplated thereby, or any amendment to or modification of this Agreement or any other Loan Documents or any sale or attempted sale of any interest herein to a participant, including any taxes on any of the foregoing; (b) Any litigation, contest, dispute, suit, proceeding or action (whether instituted by Secured Party, Debtor or any other person) in any way relating to the Collateral, this Agreement, any other Loan Document, or Debtor's affairs; (c) Any attempt to enforce any right of Secured Party or any participant against Debtor or any other person which may be obligated to Secured Party by virtue of this Agreement or the other Loan Documents; (d) All costs or expenses required to be paid by Debtor under this Agreement which are paid or advanced by Secured Party; (e) Taxes and insurance premiums of every nature and kind of Debtor paid by Secured Party; (f) Filing, recording, publication and search fees paid or incurred by Secured Party in connection with Secured Party's transactions with Debtor; (g) Upon an Event of Default hereunder, costs and expenses incurred by Secured Party in collecting the Accounts and any other Collateral (with or without suit), in correcting any default or enforcing any provision of this Agreement, or in gaining possession of, maintaining, handling, preserving, storing, shipping, appraising, selling, preparing for sale and advertising to sell the Collateral, whether or not a sale is consummated; (h) Any other attempt to inspect, verify, protect, collect, sell, liquidate or otherwise dispose of the Collateral; (i) The deposit, collection or processing of any check or other item of payment received by or for Secured Party on account of the Obligations. 16.2. Such expenses shall be additional Obligations hereunder secured by the Collateral. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include those of an outside liquidator, paralegals, accountants, duplicating, court reporters, long distance telephone, air express, telegrams, secretarial over-time, and travel, lodging and food paid or incurred in connection with the performance of legal services or with the administration or enforcement of this Agreement or any other Loan Document. SECTION 17. SEVERABILITY. 17.1. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If, however, any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such Agreement, unless the ineffectiveness of such provision materially adversely alters the benefits accruing to either party hereunder in which case Secured Party may, at its option and sole discretion, treat such severance as though it were a stated Event of Default under Section 13 and proceed in accordance with the 16 rights and remedies set forth herein upon and after an Event of Default. SECTION 18. GENERAL. 18.1. This Agreement, the Note, the Security Agreement and the Loan Documents comprise the entire agreement relating to this financing and supersede any and all prior written or oral agreements relating thereto between Secured Party and the parties hereto. No amendment hereto shall be valid unless contained in a writing duly executed by Secured Party, Debtor and any subsequent assignee hereof. This Agreement shall benefit and bind the successors and assigns of the parties, but Debtor may not assign or otherwise transfer this Agreement. Secured Party may freely sell, assign, or participate out this Agreement, the Note, and all other instruments and documents executed and delivered to Secured Party pursuant to this Agreement in whole or in part at any time. The section titles herein are for convenience only and do not define, limit or construe the contents of such sections. The pronouns used herein shall include, when appropriate, either gender or neuter and both singular and plural. If this Agreement is signed by more than one Debtor, this Agreement is the joint and several obligation of each Debtor. IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first above written. DEBTOR: Intelligent Systems Corporation, a Georgia corporation Attest:________________________ By:__________________________________________ Its:__________________________________ [CORPORATE SEAL] SECURED PARTY: FIDELITY BANK By:__________________________________________ Its:__________________________________ (BANK SEAL) 17 EX-10.4 5 g88120exv10w4.txt EX-10.4 SECURITY AGREEMENT EXHIBIT 10.4 SECURITY AGREEMENT (Borrower) THIS SECURITY AGREEMENT (this "AGREEMENT" or "SECURITY AGREEMENT") is made effective the 1st day of October, 2003, by INTELLIGENT SYSTEMS CORPORATION, a Georgia corporation, (the "PLEDGOR"), in favor of FIDELITY BANK, chartered under the laws of the state of Georgia (the "LENDER"). WITNESSETH: WHEREAS, the Lender has agreed to make a line of credit loan of up to $1,500,000 (herein "LOAN") to the Pledgor pursuant to the terms and conditions of a Loan Agreement of even date herewith (the "LOAN AGREEMENT") between the Lender and the Pledgor; and WHEREAS, the Loan is evidenced by that certain Commercial Promissory Note of even date herewith from the Pledgor and payable to the order of the Lender in the face amount of $1,500,000 (the "NOTE"); and WHEREAS, the proceeds of the Loan are to be used by the Pledgor for business purposes; WHEREAS, the Lender has required, as a condition to extending such financial accommodations, the execution and delivery of this Agreement by the Pledgor; NOW, THEREFORE, in order to secure the prompt payment of all past, present, and future indebtedness, liabilities, and obligations of the Pledgor to the Lender of any nature whatsoever in connection with the Loan, together with all obligations of the Pledgor to the Lender hereunder and under any note, any loan agreement, all contracts of suretyship, guaranty, or accommodation, and all other obligations of the Pledgor to the Lender, however and wherever created, arising, or evidenced, whether direct or indirect, absolute, contingent, or otherwise, now or hereafter existing or due or to become due (collectively, the "PLEDGOR'S LIABILITIES"), and the performance by the Pledgor of all the terms, conditions, and provisions of this Agreement, the Loan Agreement and of any other loan document previously, simultaneously, or hereafter executed and delivered by the Pledgor and/or any other person, singly or jointly with another person or persons, evidencing, securing, guarantying, or in connection with any of the Pledgor's Liabilities (the "LOAN DOCUMENTS"), the Pledgor agrees with the Lender as follows: 1. Collateral. To secure the payment and performance of the Pledgor's Liabilities and the Pledgor's performance of its obligations under the Loan Documents, the Pledgor hereby grants to the Lender a security interest in, and security title to, the following property of the Pledgor: A. Inventory. All of the Pledgor's inventory of every description which is held by the Pledgor for sale of lease or is furnished by the Pledgor under any contract of service or is held by the Pledgor as raw materials, work in process, or materials used or consumed in a business, whether now owned or hereafter acquired, wherever located, and a the same may now and hereafter from time to time be constituted, together with all cash and non-cash proceeds and products thereof (the "INVENTORY"). B. Accounts. All of the Pledgor's accounts (including, without limitation, all notes, notes receivable, drafts, acceptances, and similar instruments and documents) whether now owned or hereafter acquired, together with: (i) all cash and non-cash proceeds thereof, and (ii) all returned, rejected, or repossessed goods, the sale or lease of which shall have given or shall give rise to an account, and all cash and non-cash proceeds and products of all such goods (the "ACCOUNTS"). C. General Intangibles. All of the Pledgor's general intangibles (including, without limitation, any proceeds from insurance policies after payment of prior interests), patents, unpatented inventions, trade secrets, copyrights, contract rights, goodwill, literary rights, rights to performance, rights under licenses, choices-in-action, claims, information contained in computer media (such as data bases, source and object codes, and information therein) things in action, trademarks and trademarks applied for (together with the goodwill associated therewith) and derivatives thereof, trade names, including the right to make, use, and vend goods utilizing any of the foregoing, and permits, licenses, certifications, authorizations and approvals, and the rights of the Debtor thereunder, issued by any governmental, regulatory, or private authority, agency, or entity whether now owned or hereafter acquired, together with all cash and non-cash products thereof. D. Chattel Paper. All of the Pledgor's chattel paper, whether now owned or hereafter existing, acquired, or created, together with: (i) all moneys due and to become due thereafter, (ii) all cash and non-cash proceeds thereof, and (iii) all returned, rejected, or repossessed goods, the sale or lease of which shall have given or shall give rise to chattel paper, and all cash and non-cash proceeds and products of all such goods. Additionally, the Pledgor assigns and grants to the Lender a security interest in all property and goods both now owned and hereafter acquired by the Pledgor which are sold, leased, secured, are the subject of, or otherwise covered by, the Pledgor's chattel paper, together with all rights incident to such property and goods and all cash and non-cash proceeds thereof (the "CHATTEL PAPER"). E. All Equipment and Fixtures. All of the Pledgor's equipment, furniture and fixtures, whether now owned or hereafter acquired, together with: (i) all additions, parts, fittings, accessories, special tools, attachments, and accessions now and hereafter affixed thereto and/or used in connection therewith, (ii) all replacements thereof and substitutions therefor, and (iii) all cash and non-cash proceeds and products thereof (the "EQUIPMENT"). F. Leasehold Improvements. All present and future improvements made by Pledgor to any real estate leased or owned by Pledgor. 2 The term "Collateral" as used herein means each and all of the items of Collateral described above, and the term "proceeds" as used herein includes, without limitation, the proceeds of all insurance policies covering all or any part of such items of Collateral. 2. Title to Collateral. The Pledgor warrants and represents that (i) it is the lawful owner of the Collateral, and has the full right, power, and authority to convey, transfer, and grant the security title and security interest in the Collateral granted herein to the Lender; (ii) all licenses relating to the Collateral are fully paid, and, upon the occurrence of an Event of Default and foreclosure by the Lender, the Lender shall have all rights of the Pledgor to any Collateral licensed to the Pledgor or licensed by the Pledgor; (iii) the Collateral is not, and so long as this Agreement is in effect will not be, subject to any liens, claims, security interests, encumbrances, taxes, or assessments, however described or denominated; (iv) no financing statement, mortgage, notice of lien, deed of trust, deed to secure debt, security agreement, or any other agreement or instrument creating an encumbrance, lien, charge against any of the Collateral is in existence or on file in any public office, other than financing statements (or other appropriate security documentation) filed on behalf of the Lender; and (v) all information with respect to the Collateral and the Pledgor's Liabilities, of any of them, set forth in any written schedule, certificate, or other document at any time heretofore or hereafter furnished by the Pledgor to the Lender, and all other written information heretofore or hereafter furnished by the Pledgor to the Lender, is and will be true and correct in all material respects as of the date furnished. 3. Further Assurances. The Pledgor will defend its title to the Collateral against all persons and will, upon request of the Lender: (i) furnish such further assurances of title as may be required by the Lender; (ii) deliver and execute or cause to be delivered and executed, in form and content satisfactory to the Lender, any financing statements, notices, certificates of title, and other documents and pay the cost of filing or recording the same in all public offices deemed necessary by the Lender, as well as any recordation, documentary, or transfer tax required by law to be paid in connection with such filing or recording; and (iii) do such other acts as the Lender may request in order to perfect, preserve, maintain, or continue the perfection of the Lender's security interest in the Collateral and/or its priority. 4. Accounts, etc. Until such time as the Lender shall notify the Pledgor in writing of the revocation of such power and authority, the Pledgor, as agent for the Lender, will, at its own expense, diligently collect, as and when due, all amounts owing under the Accounts, including the taking of such action with respect to such collection as the Lender may requests from time to time, and to hold in trust and segregate for the Lender all funds received from the Accounts; provided, however, that until an Event of Default shall occur or would occur but for the passage of time, or giving of notice, or both, the Pledgor may use or consume in the ordinary course of its business any such collections on the Accounts in any lawful manner not inconsistent with this Agreement and the other Loan Documents. Upon an Event of Default hereunder which has not been cured within any applicable cure period and during the continuance of such uncured default, the Lender, however, may revoke such power and authority and notify any parties obligated on any of the Accounts to make payment to the Lender of any amounts due or to become due thereunder, and enforce collection of performance under any of the Accounts by suit or otherwise, and surrender, release, or exchange all or any part thereof, or compromise or extend or renew for any period 3 (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. After an Event of Default or upon request of the Lender, the Pledgor will, at its own expense, notify any parties obligated on any of the Accounts to make payments to the Lender and will hold in trust and immediately forward to the Lender all payments received by the Pledgor in the form received, with all necessary endorsements thereon for collection by the Lender. 5. Transfer and Other Liens. The Pledgor will not sell, lease, transfer, exchange, or otherwise dispose of the Collateral, or any part hereof, without the prior written consent of the Lender and will not permit any lien, security interest, or other encumbrance to attach to the Collateral, or any part thereof, other than those in favor of the Lender or those permitted by the Lender in writing, except that the Pledgor may, in the ordinary course of its business and in the absence of an Event of Default hereunder or notice by the Lender to the Pledgor under Section 6 hereof, collect its Accounts and Chattel Paper and sell its Inventory. 6. Financial Statements, Books, and Records. The Pledgor will: (i) at all times maintain, in accordance with generally accepted accounting principles consistently applied, accurate and complete books and records pertaining to the operation, business affairs, and financial condition of the Pledgor and pertaining to the Collateral and any contracts and collections relating to the Collateral; (ii) furnish to the Lender promptly upon request, certified by an officer of the Pledgor and in the form and content and at the intervals specified by the Lender, such financial statements, reports, schedules, and other information with respect to the operation, business affairs, and financial condition of the Pledgor as required pursuant to the Loan Agreement; (iii) at all reasonable times, and without hindrance or delay, permit the Lender or any person designated by the Lender to enter any place of business of the Pledgor or any other premises where any books, records, and other data concerning the Pledgor and/or the Collateral may be kept and to examine, audit, inspect, and make extracts from and photocopies of any such books, records, and other data; (iv) furnish to the Lender promptly upon request, certified by an officer of the Pledgor and in the form and content specified by the Lender, lists of purchasers of inventory, aging of accounts, aggregate cost or wholesale market value of inventory, schedules of equipment, and other data concerning the Collateral as the Lender may from time to time specify; and (v) mark its books and records in a manner satisfactory to the Lender so that the Lender's rights in and to the Collateral will be shown. 7. Name of Pledgors, Places of Business, and Location of Collateral. The Pledgor represents and warrants that its correct legal name is as specified on the signature lines of this Agreement, and each legal or trade name of the Pledgor for the previous five (5) years (if different from the Pledgor's current legal name) is as specified below the signature lines of this Agreement. Without the prior written consent of the Lender, the Pledgor will not change its name, dissolve, merge, or consolidate with any other person. The Pledgor warrants that the address of the Pledgor's chief executive office and the address of each other place of business of the Pledgor are as specified below the signature lines of this Agreement. Except for mobile equipment and motor vehicles, the Collateral and all books and records pertaining to the Collateral have been, are, and will be located at the Pledgor's chief executive office specified below or at any other place of business which may be specified below. The Pledgor will immediately advise the Lender in writing of the opening of 4 any new place of business and of any change in the location of the places where the Collateral or any part thereof, or the books and records concerning the Collateral or any part thereof, are kept. 8. Care of Collateral. The Pledgor will maintain the Collateral in first-class condition excepting any loss, damage, or destruction which is fully covered by proceeds of insurance and will not do or permit anything to be done to the collateral that may impair its value or that may violate the terms of any insurance covering the Collateral or any part thereof, normal wear and tear excepted. The Lender shall have no duty to, and the Pledgor hereby releases the Lender from all claims for loss or damage caused by the failure to, collect or enforce any Account of Chattel Paper or to preserve rights against prior parties to the Collateral. The Pledgor will use the Collateral for lawful purposes only, with all reasonable care and caution and in conformity with all applicable laws, ordinances, and regulations. 9. Insurance. The Pledgor will insure such of the Collateral as specified by the Lender against such casualties and risks in such form and amount and with such companies as may from time to time be required by the Lender. All insurance proceeds shall be payable to the Lender, and such policies or certificates thereon or duplicates thereof shall immediately be deposited with the Lender. The Pledgor will pay all premiums due or to become due for such insurance and hereby assigns to the Lender any returned or unearned premiums which may be due upon cancellation of insurance coverage. The Lender is hereby irrevocably: (i) appointed the Pledgor's attorney-in-fact (which appointment is coupled with an interest and is irrevocable) to endorse any draft or check which may be payable to the Pledgor in order to collect such returned or unearned premiums or the proceeds of insurance and (ii) authorized to apply such insurance premiums for payment of the Pledgor's Liabilities, when due, in such order of application as the Lender may determine. 10. Taxes. The Pledgor will pay as and when due and payable all taxes, levies, license fees, assessments, and other impositions levied on the Collateral or any part thereof or for its use and operation. 11. Equipment Not Fixtures. The Pledgor warrants that all Equipment which constitutes a part of the Collateral is personalty and is not and will not be affixed to real estate in such manner as to become a fixture or part of such real estate, except with respect to such items of Equipment which may become fixtures in the normal course of Pledgor's business in constructing leasehold improvements. The Pledgor will use its best efforts to furnish to the Lender a written waiver by the record owner of such real estate of all interest in such equipment and a written subordination to the Lender's security interest and lien by any person who has a lien on or security interest in such real estate which is or may be superior to the Lender's security interest hereunder. 12. Specific Assignments. Promptly upon request by the Lender, the Pledgors will execute and deliver to the Lender written assignments, endorsements, and/or schedules, in form and content satisfactory to the Lender, of specific Chattel Paper and Accounts or groups of Accounts or Chattel Paper, but the security interest of the Lender hereunder shall not be limited in any way by such assignments. 5 13. Delivery of Chattel Paper. The Pledgors will promptly upon request by the Lender deliver, assign, and endorse to the Lender all Chattel Paper and all other documents held by the Pledgors in connection herewith. 14. Government Contracts. If any Account or Chattel Paper arises out of a contract or contracts with the United States of America or any department, agency, or instrumentality thereof, the Pledgor shall immediately notify the Lender thereof in writing and execute any instruments or take any steps required by the Lender in order that all moneys due or to become due under such contract or contracts shall be assigned to the Lender and notice thereof given under the Federal Assignment of Claims Act or other applicable law. 15. Collateral Account. If all or any part of the collateral at any time consists of Inventory, Accounts, or Chattel Paper, the Pledgor will, upon the request of the Lender at any time after the occurrence of an Event of Default hereunder, deposit or cause to be deposited to a bank account designated by the Lender and from which the Lender alone has power of access and withdrawal (the "COLLATERAL ACCOUNt") all checks, drafts, cash, and other remittances in payment or on account of payment of such Inventory, Accounts, or Chattel Paper and the cash proceeds of any returned goods, the sale or lease of which gave rise to an Account or Chattel Paper (all of the foregoing herein collectively referred to as "ITEMS OF PAYMENT"). The Pledgor shall deposit the Items of Payment for credit to the Collateral Account within two (2) business days of the receipt thereof, and in precisely the form received, except for the endorsement of the Pledgor where necessary to permit the collection of the Items of Payment, which endorsement the Pledgor hereby agrees to make. Pending such deposit, the Pledgor will not commingle any of the Items of Payment with any of its other funds or property but will hold them separate and apart. The Lender may at any from time to time apply the whole or any part of the collected funds credited to the Collateral Account against the Pledgor's Liabilities or credit such collected funds to a banking account of the Pledgor with the Lender, the order and method of such application to be in the discretion of the Lender. 16. Rights of Lender and Duties of Pledgors. If all or any part of the Collateral at any time consists of Inventory, Accounts, or Chattel Paper, the Lender may at any time and from time to time after the occurrence of an Event of Default hereunder (a) notify the account debtors obligated on any of the Collateral to make payments thereon directly to the Lender, and to take control of the cash and non-cash proceeds of any such Collateral; (b) charge to any banking account of the Pledgors with the Lender any Item of Payment credited to the Collateral Account which is dishonored by the drawee or maker thereof; (c) compromise, extend, or renew any of the Collateral or deal with the same as it may deem advisable; (d) release, make exchanges or substitutions for, or surrender all or any part of the Collateral; (e) remove from the Pledgors' places of business all books, records, ledger sheets, correspondence, invoices, and documents relating to or evidencing any of the Collateral or, without cost or expense to the Lender, make such use of the Pledgor's place(s) of business as may be reasonably necessary to administer, control, and collect the Collateral; (f) repair, alter, or supply goods, if any, necessary to fulfill in whole or in part the purchase order of any account debtor; (g) demand, collect, receipt for, and give renewals, extensions, discharges, and releases of any of the Collateral; (h) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (i) settle, 6 renew, extend, compromise, compound, exchange, or adjust claims with respect to any of the Collateral or any legal proceedings brought with respect thereto; (j) endorse the name of the Pledgor upon any Items of Payment relating to the collateral or upon any proof of claim in bankruptcy against an account debtor; and (k) receive and open all mail addressed to the Pledgor and, if an Event of Default exists hereunder, notify postal authorities to change the address for the delivery of mail to the Pledgor to such address as the Lender may designate; and for purposes of taking the actions described in Subsections (a) through (k) the Pledgor hereby irrevocably appoints the Lender as its attorney-in-fact (which appointment being coupled with an interest is irrevocable while any of Pledgor's Liabilities remain unpaid), with power of substitution, in the name of the Lender or in the name of the Pledgor or otherwise, for the use and benefit of the Lender, but at the cost and expense of the Pledgor and without notice to the Pledgor. The Pledgor will: (i) make no material change to the terms of any sale or lease of Inventory or of any Account or Chattel Paper without the prior written permission of the Lender; (ii) on demand, make available in form acceptable to the Lender shipping documents and delivery receipts evidencing the shipment of goods which gave rise to the sale or lease of Inventory or of an Account of Chattel Paper, completion certificate, or other proof of the satisfactory performance of services which gave rise to the sale or lease of Inventory or of an Account or Chattel Paper, copies of the invoices arising out of the sale or lease of Inventory or for an Account, and the Pledgor's copy of any written contract or order from which the sale or lease of Inventory, an Account, or Chattel Paper arose; and (iii) when requested, advise the Lender whenever an account debtor returns or refuses to retain any goods, the sale or lease of which gave rise to an Account or Chattel Paper, and will comply with any instructions which the Lender may give regarding the sale or other disposition of such returns. 17. Performance by Lender. After an Event of Default hereunder which has not been cured within any applicable cure period and during the continuance of such uncured default, if the Pledgor fails to perform, observe, or comply with any of the conditions, terms, or covenants contained in this Agreement, the Lender, without notice to or demand upon the Pledgor and without waiving or releasing any of the Pledgor's Liabilities or any Event of Default, may (but shall be under no obligation to) at any time thereafter perform such conditions, terms, or covenants for the account and at the expense of the Pledgor, and may enter upon any place of business or other premises of the Pledgor for that purpose and take all such action thereon as the Lender may consider necessary or appropriate for such purpose. All sums paid or advanced by the Lender in connection with the foregoing and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection therewith (collectively, the "EXPENSE PAYMENTS") together with interest thereon at a simple per annum rate of interest which is equal to the then highest rate of interest charged on the principal of any of the Pledgor's Liabilities, plus one percent (1%) per annum (but in no event higher than the maximum interest rate permitted by applicable law), from the date of payment until repaid in full, shall be paid by the Pledgor to the Lender on demand and shall constitute and become a part of the Pledgor's Liabilities secured hereby. 18. Default. The occurrence of any one or more of the following events shall constitute an event of default (an "EVENT OF DEFAULT") under this Agreement: (i) failure of the Pledgor to pay any of the Pledgor's Liabilities as and when due and payable; (ii) failure of the Pledgor to perform, observe, or comply with any of the provisions of this Agreement or of any of the other Loan 7 Documents; (iii) the occurrence of an Event of Default (as defined therein) under any of the other Loan Documents; (iv) any information contained in any financial statement, application, schedule, report, or any other document given by the Pledgor or by any other person in connection with the Pledgor's Liabilities, with the Collateral, or with any of the Loan Documents is not in all material respects true and accurate or the Pledgor or such other person omitted to state any material fact or any fact necessary to make such information not misleading; (v) the Pledgor is generally not paying debts as such debts become due; (vi) the filing of any petition for relief under any provision of the Federal Bankruptcy Code or any similar state law is brought by or against the Pledgor; (vii) an application for the appointment of a receiver for, the making of a general assignment for the benefit of creditors by or the insolvency of, the Pledgor and not dismissed within forty-five (45) days; (viii) the dissolution, merger, consolidation, or reorganization of the Pledgor; (i) suspension of the operation of the Pledgor's present business; (j) transfer of a substantial part (determined by market value) of the Pledgor's property; (k) sale, transfer, or exchange, either directly or indirectly, of a controlling stock interest of the Pledgor; (l) termination or withdrawal of any guaranty for the Pledgor's Liabilities; (m) the Pension Benefit Guaranty Corporation commences proceedings under Section 4042 of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, to terminate any employee pension benefit plan of the Pledgor; (n) the determination in good faith by the Lender in its reasonable judgement that a material adverse change has occurred in the financial condition of the Pledgor from the condition set forth in the most recent financial statement of the Pledgor heretofore furnished to the Lender, or from the financial condition of the Pledgor as heretofore most recently disclosed to the Lender in any other manner; or (o) a default occurs or in the event a default exists under any document or instrument executed by any Guarantor of the Pledgor's Liabilities, including, without limitation, any Guaranty Agreement, any Security Agreement or any other similar document or instrument. 19. Rights and Remedies upon Default. Upon the occurrence of an Event of Default hereunder (and in addition to all of its other rights, powers, and remedies under this Agreement), the Lender may, at its option, and upon written notice to the Pledgor, declare the unpaid balance of the Pledgor's Liabilities to be immediately due and payable. The occurrence or non-occurrence of an Event of Default shall in no manner impair the ability of the Lender to demand payment of any portion of the Pledgor's Liabilities which are payable on demand. The Lender shall have all the rights and remedies of a secured party under the Uniform Commercial Code and other applicable law in the State of Georgia. Upon the occurrence of an Event of Default hereunder, the Pledgor, upon demand by the Lender, shall assemble the Collateral and make it available to the Lender at a place designated by the Lender which is mutually convenient to both parties. Upon the occurrence of an Event of Default hereunder, the Lender or its agents may enter upon the Pledgor's premises to take possession of the Collateral, to remove it, to render it unusable, or to sell of otherwise dispose of it, all without judicial process or proceedings. Any written notice of the sale, disposition, or other intended action by the Lender with respect to the Collateral which is required by applicable laws and is sent by certified mail, postage prepaid, to the Pledgor at the address of the Pledgor's chief executive office specified below, or such other address of the Pledgor which may from time to time be shown on the Lender's records, at least five (5) days prior to such sale, disposition, or other action, shall constitute reasonable notice to the Pledgor. The Pledgor shall pay on demand all costs and expenses, including, without 8 limitation, reasonable attorneys' fees and expenses, incurred by or on behalf of the Lender: (i) in enforcing the Pledgor's Liabilities; and (ii) in connection with the taking, holding, preparing for sale or other disposition, selling, managing, collecting, or otherwise disposing of the Collateral. All of such costs and expenses (collectively, the "LIQUIDATION COSTS") together with interest thereon at a simple per annum rate of interest which is equal to the then highest rate of interest charged on the principal of any of the Pledgor's Liabilities, plus one percent (1%) per annum (but in no event higher than the maximum interest rate permitted by law), from the date of payment until repaid in full, shall be paid by the Pledgor to the Lender on demand and shall constitute and become a part of the Pledgor's Liabilities secured hereby. Any proceeds of sale or other disposition of the Collateral will be applied by the Lender to the payment of Liquidation Costs and Expense Payments, and any balance of such proceeds will be applied by the Lender to the payment of the remaining Pledgor's Liabilities in such order and manner of application as the Lender may from time to time in its sole discretion determine. 20. Remedies Cumulative. Each right, power, and remedy of the Lender as provided for in this Agreement or in the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Agreement or in the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Lender or any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by the Lender of any or all such other rights, powers, or remedies. 21. Waiver. No failure or delay by the Lender to insist upon the strict performance of any term, condition, covenant, or agreement or of the other Loan Documents, or to exercise any right, power, or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant, or agreement or of any such breach, or such term, condition, covenant, or agreement or of any such breach, or preclude the Lender from exercising any such right, power, or remedy at any later time or times. By accepting payment which does not fully repay any indebtedness then due and payable with respect to any of the Pledgor's Liabilities, the Lender shall not be deemed to have waived the right either to require payment when due of all other Pledgor's Liabilities or to declare an Event of Default for failure to effect such payment of any such other Pledgor's Liabilities. The Pledgor waives presentment, notice of dishonor, and notice of non-payment with respect to Accounts and Chattel Paper. THE PLEDGORS HEREBY ACKNOWLEDGE THAT THE LIABILITIES AROSE OUT OF A "COMMERCIAL TRANSACTION" AS THIS TERM IS DEFINED IN O.C.G.A. SECTION 44-14-260(1) CONCERNING FORECLOSURE OF MORTGAGES ON PERSONALTY, AND AGREES THAT IN THE EVENT OF ANY DEFAULT, THE LENDER SHALL HAVE THE RIGHT TO AN IMMEDIATE WRIT OF POSSESSION WITHOUT NOTICE OF HEARING AND KNOWINGLY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO ANY NOTICE AND POSTING OF A BOND BY THE LENDER PRIOR TO SEIZURE BY THE LENDER, ITS TRANSFEREES, ASSIGNS, OR SUCCESSORS IN INTEREST, OF THE COLLATERAL OR ANY PORTION THEREOF. THIS IS INTENDED BY THE PLEDGOR AS A "WAIVER" AS THIS TERM IS DEFINED IN O.C.G.A. SECTION 44-14-260(3) RELATING TO FORECLOSURE OF MORTGAGES ON PERSONALTY. 9 22. Miscellaneous. Time is of the essence of this Agreement. The section headings of this Agreement are for convenience only and shall not limit or otherwise affect any of the terms hereof. Neither this Agreement nor any term, condition, covenant, or agreement hereof may be changed, waived, discharged, or terminated orally but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge, or termination is sought. This Agreement shall be governed by the laws of the State of Georgia and shall be binding upon the Pledgor and its heirs, executors, administrators, legal representatives, successors, and assigns, and shall inure to the benefit of the Lender and its successors and assigns. As used herein, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine, or neuter gender shall include all genders, as the context may require, and the term "person" shall include an individual, a corporation, an association, a partnership, a trust, and an organization. Invalidation of any one or more of the provisions of their Agreement shall in no way affect any of the other provisions hereof, which shall remain in full force and effect. All references herein to any document, instrument, or agreement shall be deemed to refer to such document, instrument, or agreement as the same may be amended, modified, restated, supplemented, or replaced from time to time. Unless varied by this Agreement, all terms used herein which are defined by the Georgia Uniform Commercial Code shall have the same meanings hereunder as assigned to them by the Georgia Uniform Commercial Code. IN WITNESS WHEREOF, the Pledgor has caused its duly authorized officers to execute this Agreement and to affix its corporate seal hereto, as of the day and year first written above. PLEDGOR: Intelligent Systems Corporation, a Georgia corporation By:__________________________________________ Bonnie L. Herron, Chief Financial Officer Attested:____________________________________ Its Secretary [CORPORATE SEAL] 10 LENDER: FIDELITY BANK By:__________________________________________ Its:__________________________________ (BANK SEAL) Address(es) where Collateral is is to be located: 4355 Shackleford Road Norcross, Georgia 30093 Previous legal and/or trade name(s) of the Pledgor: None. 11 EX-10.5 6 g88120exv10w5.txt EX-10.5 FORM OF SECURITY AGREEMENT EXHIBIT 10.5 FORM OF SECURITY AGREEMENT (Guarantor) THIS SECURITY AGREEMENT (this "AGREEMENT" or "GUARANTOR SECURITY AGREEMENT") is made effective the 1st day of October, 2003, by and between CHEMFREE CORPORATION, a Georgia corporation (the "PLEDGOR"), in favor of FIDELITY BANK, chartered under the laws of the state of Georgia (the "LENDER"): WITNESSETH: WHEREAS, Pledgor is justly indebted to Lender pursuant to that certain Guaranty (with Security Agreement) (herein the "GUARANTY") guaranteeing a loan evidenced by a Commercial Promissory Note of even date herewith in the principal amount of $1,500,000 (herein the "NOTE") executed by Intelligent Systems Corporation in favor of Lender; and WHEREAS, the Lender has required, as a condition to extending such financial accommodations, the execution and delivery of this Agreement by the Pledgor. NOW, THEREFORE, in order to secure the prompt payment of all past, present, and future indebtedness, liabilities, and obligations of the Pledgor to the Lender of any nature whatsoever in connection with the Guaranty and all other obligations of Pledgor to the Lender, however and wherever created, arising, or evidenced, whether direct or indirect, absolute, contingent, or otherwise, now or hereafter existing, due or to become due (collectively, the "PLEDGOR'S LIABILITIES"), and the performance by the Pledgor of all the terms, conditions, and provisions of this Agreement, the Guaranty and of any other loan document previously, simultaneously, or hereafter executed and delivered by the Pledgor and/or any other person, singly or jointly with another person or persons, evidencing, securing, guarantying, or in connection with any of the Pledgor's Liabilities (the "LOAN DOCUMENTS"), the Pledgor agrees with the Lender as follows: 1. Collateral. To secure the payment and performance of the Pledgor's Liabilities and the Pledgor's performance of its obligations under the Loan Documents, the Pledgor hereby grants to the Lender a security interest in, and security title to, the following property of the Pledgor: A. Inventory. All of the Pledgor's inventory of every description which is held by the Pledgor for sale of lease or is furnished by the Pledgor under any contract of service or is held by the Pledgor as raw materials, work in process, or materials used or consumed in a business, whether now owned or hereafter acquired, wherever located, and a the same may now and hereafter from time to time be constituted, together with all cash and non-cash proceeds and products thereof (the "INVENTORY"). B. Accounts. All of the Pledgor's accounts (including, without limitation, all notes, notes receivable, drafts, acceptances, and similar instruments and documents) whether now owned or hereafter acquired, together with (i) all cash and non-cash proceeds thereof and (ii) all returned, rejected, or repossessed goods, the sale or lease of which shall have given or shall give rise to an account, and all cash and non-cash proceeds and products of all such goods (the "ACCOUNTS"). C. General Intangibles. All of the Pledgor's general intangibles (including, without limitation, any proceeds from insurance policies after payment of prior interests), patents, unpatented inventions, trade secrets, copyrights, contract rights, goodwill, literary rights, rights to performance, rights under licenses, choices-in-action, claims, information contained in computer media (such as data bases, source and object codes, and information therein) things in action, trademarks and trademarks applied for (together with the goodwill associated therewith) and derivatives thereof, trade names, including the right to make, use, and vend goods utilizing any of the foregoing, and permits, licenses, certifications, authorizations and approvals, and the rights of the Debtor thereunder, issued by any governmental, regulatory, or private authority, agency, or entity whether now owned or hereafter acquired, together with all cash and non-cash products thereof. D. Chattel Paper. All of the Pledgor's chattel paper, whether now owned or hereafter existing, acquired, or created, together with (i) all moneys due and to become due thereafter, (ii) all cash and non-cash proceeds thereof, and (iii) all returned, rejected, or repossessed goods, the sale or lease of which shall have given or shall give rise to chattel paper, and all cash and non-cash proceeds and products of all such goods. Additionally, the Pledgor assigns and grants to the Lender a security interest in all property and goods both now owned and hereafter acquired by the Pledgor which are sold, leased, secured, are the subject of, or otherwise covered by, the Pledgor's chattel paper, together with all rights incident to such property and goods and all cash and non-cash proceeds thereof (the "CHATTEL PAPER"). E. All Equipment and Fixtures. All of the Pledgor's equipment and fixtures, whether now owned or hereafter acquired, together with (i) all additions, parts, fittings, accessories, special tools, attachments, and accessions now and hereafter affixed thereto and/or used in connection therewith; (ii) all replacements thereof and substitutions therefore; and (iii) all cash and non-cash proceeds and products thereof (the "EQUIPMENT"). F. Leasehold Improvements. All present and future improvements made by Pledgor to any real estate leased or owned by Pledgor. The term "Collateral" as used herein means each and all of the items of Collateral described above, and the term "proceeds" as used herein includes, without limitation, the proceeds of all insurance policies covering all or any part of such items of Collateral. 2. Title to Collateral. The Pledgor warrants and represents that: (i) it is the lawful owner of the Collateral, and has the full right, power, and authority to convey, transfer, and grant the security title and security interest in the Collateral granted herein to the Lender; (ii) all licenses relating to the Collateral are fully paid, and, upon the occurrence of an Event of Default and 2 foreclosure by the Lender, the Lender shall have all rights of the Pledgor to any Collateral licensed to the Pledgor or licensed by the Pledgor; (iii) the Collateral is not, and so long as this Agreement is in effect will not be, subject to any liens, claims, security interests, encumbrances, taxes, or assessments, however described or denominated; (iv) no financing statement, mortgage, notice of lien, deed of trust, deed to secure debt, security agreement, or any other agreement or instrument creating an encumbrance, lien, charge against any of the Collateral is in existence or on file in any public office, other than financing statements (or other appropriate security documentation) filed on behalf of the Lender; and (v) all information with respect to the Collateral and the Pledgor's Liabilities, of any of them, set forth in any written schedule, certificate, or other document at any time heretofore or hereafter furnished by the Pledgor to the Lender, and all other written information heretofore or hereafter furnished by the Pledgor to the Lender, is and will be true and correct in all material respects as of the date furnished. 3. Further Assurances. The Pledgor will defend its title to the Collateral against all persons and will, upon request of the Lender: (i) furnish such further assurances of title as may be required by the Lender; (ii) deliver and execute or cause to be delivered and executed, in form and content satisfactory to the Lender, any financing statements, notices, certificates of title, and other documents and pay the cost of filing or recording the same in all public offices deemed necessary by the Lender, as well as any recordation, documentary, or transfer tax required by law to be paid in connection with such filing or recording; and (iii) do such other acts as the Lender may request in order to perfect, preserve, maintain, or continue the perfection of the Lender's security interest in the Collateral and/or its priority. 4. Accounts, etc. Until such time as the Lender shall notify the Pledgor in writing of the revocation of such power and authority, the Pledgor, as agent for the Lender, will, at its own expense, diligently collect, as and when due, all amounts owing under the Accounts, including the taking of such action with respect to such collection as the Lender may requests from time to time, and to hold in trust and segregate for the Lender all funds received from the Accounts; provided, however, that until an Event of Default shall occur or would occur but for the passage of time, or giving of notice, or both, the Pledgor may use or consume in the ordinary course of its business any such collections on the Accounts in any lawful manner not inconsistent with this Agreement and the other Loan Documents. Upon an Event of Default hereunder which has not been cured within any applicable cure period and during the continuance of such uncured default, the Lender, however, may revoke such power and authority and notify any parties obligated on any of the Accounts to make payment to the Lender of any amounts due or to become due thereunder, and enforce collection of performance under any of the Accounts by suit or otherwise, and surrender, release, or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. After an Event of Default or upon request of the Lender, the Pledgor will, at its own expense, notify any parties obligated on any of the Accounts to make payments to the Lender and will hold in trust and immediately forward to the Lender all payments received by the Pledgor in the form received, with all necessary endorsements thereon for collection by the Lender. 5. Transfer and Other Liens. The Pledgor will not sell, lease, transfer, exchange, or otherwise dispose of the Collateral, or any part hereof, without the prior written consent of the 3 Lender and will not permit any lien, security interest, or other encumbrance to attach to the Collateral, or any part thereof, other than those in favor of the Lender or those permitted by the Lender in writing, except that the Pledgor may, in the ordinary course of its business and in the absence of an Event of Default hereunder or notice by the Lender to the Pledgor under Section 6 hereof, collect its Accounts and Chattel Paper and sell its Inventory. 6. Financial Statements, Books, and Records. The Pledgor will: (i) at all times maintain, in accordance with generally accepted accounting principles consistently applied, accurate and complete books and records pertaining to the operation, business affairs, and financial condition of the Pledgor and pertaining to the Collateral and any contracts and collections relating to the Collateral; (ii) furnish to the Lender promptly upon request, certified by an officer of the Pledgor and in the form and content and at the intervals specified by the Lender, such financial statements, reports, schedules, and other information with respect to the operation, business affairs, and financial condition of the Pledgor as required pursuant to the Loan Agreement; (iii) at all reasonable times, and without hindrance or delay, permit the Lender or any person designated by the Lender to enter any place of business of the Pledgor or any other premises where any books, records, and other data concerning the Pledgor and/or the Collateral may be kept and to examine, audit, inspect, and make extracts from and photocopies of any such books, records, and other data; (iv) furnish to the Lender promptly upon request, certified by an officer of the Pledgor and in the form and content specified by the Lender, lists of purchasers of inventory, aging of accounts, aggregate cost or wholesale market value of inventory, schedules of equipment, and other data concerning the Collateral as the Lender may from time to time specify; and (v) mark its books and records in a manner satisfactory to the Lender so that the Lender's rights in and to the Collateral will be shown. 7. Name of Pledgor, Places of Business, and Location of Collateral. The Pledgor represents and warrants that its correct legal name is as specified on the signature lines of this Agreement, and each legal or trade name of the Pledgor for the previous five (5) years (if different from the Pledgor's current legal name) is as specified below the signature lines of this Agreement. Without the prior written consent of the Lender, the Pledgor will not change its name, dissolve, merge, or consolidate with any other person. The Pledgor warrants that the address of the Pledgor's chief executive office and the address of each other place of business of the Pledgor are as specified below the signature lines of this Agreement. Except for mobile equipment and motor vehicles, the Collateral and all books and records pertaining to the Collateral have been, are, and will be located at the Pledgor's chief executive office specified below or at any other place of business which may be specified below. The Pledgor will immediately advise the Lender in writing of the opening of any new place of business and of any change in the location of the places where the Collateral or any part thereof, or the books and records concerning the Collateral or any part thereof, are kept. 8. Care of Collateral. The Pledgor will maintain the Collateral in first-class condition excepting any loss, damage, or destruction which is fully covered by proceeds of insurance and will not do or permit anything to be done to the collateral that may impair its value or that may violate the terms of any insurance covering the Collateral or any part thereof, normal wear and tear excepted. The Lender shall have no duty to, and the Pledgor hereby releases the Lender from all claims for loss or damage caused by the failure to, collect or enforce any Account of Chattel Paper or to preserve rights against prior parties to the Collateral. The Pledgor will use the Collateral for 4 lawful purposes only, with all reasonable care and caution and in conformity with all applicable laws, ordinances, and regulations. 9. Insurance. The Pledgor will insure such of the Collateral as specified by the Lender against such casualties and risks in such form and amount and with such companies as may from time to time be required by the Lender. All insurance proceeds shall be payable to the Lender, and such policies or certificates thereon or duplicates thereof shall immediately be deposited with the Lender. The Pledgor will pay all premiums due or to become due for such insurance and hereby assigns to the Lender any returned or unearned premiums which may be due upon cancellation of insurance coverage. The Lender is hereby irrevocably: (i) appointed the Pledgor's attorney-in-fact (which appointment is coupled with an interest and is irrevocable) to endorse any draft or check which may be payable to the Pledgor in order to collect such returned or unearned premiums or the proceeds of insurance; and (ii) authorized to apply such insurance premiums for payment of the Pledgor's Liabilities, when due, in such order of application as the Lender may determine. 10. Taxes. The Pledgor will pay as and when due and payable all taxes, levies, license fees, assessments, and other impositions levied on the Collateral or any part thereof or for its use and operation. 11. Equipment Not Fixtures. The Pledgor warrants that all Equipment which constitutes a part of the Collateral is personalty and is not and will not be affixed to real estate in such manner as to become a fixture or part of such real estate, except with respect to such items of Equipment which may become fixtures in the normal course of Pledgor's business in constructing leasehold improvements. The Pledgor will use its best efforts to furnish to the Lender a written waiver by the record owner of such real estate of all interest in such equipment and a written subordination to the Lender's security interest and lien by any person who has a lien on or security interest in such real estate which is or may be superior to the Lender's security interest hereunder. 12. Specific Assignments. Promptly upon request by the Lender, the Pledgor will execute and deliver to the Lender written assignments, endorsements, and/or schedules, in form and content satisfactory to the Lender, of specific Chattel Paper and Accounts or groups of Accounts or Chattel Paper, but the security interest of the Lender hereunder shall not be limited in any way by such assignments. 13. Delivery of Chattel Paper. The Pledgor will promptly upon request by the Lender deliver, assign, and endorse to the Lender all Chattel Paper and all other documents held by the Pledgor in connection herewith. 14. Government Contracts. If any Account or Chattel Paper arises out of a contract or contracts with the United States of America or any department, agency, or instrumentality thereof, the Pledgor shall immediately notify the Lender thereof in writing and execute any instruments or take any steps required by the Lender in order that all moneys due or to become due under such contract or contracts shall be assigned to the Lender and notice thereof given under the Federal Assignment of Claims Act or other applicable law. 5 15. Collateral Account. If all or any part of the collateral at any time consists of Inventory, Accounts, or Chattel Paper, the Pledgor will, upon the request of the Lender at any time after the occurrence of an Event of Default hereunder, deposit or cause to be deposited to a bank account designated by the Lender and from which the Lender alone has power of access and withdrawal (the "COLLATERAL ACCOUNt") all checks, drafts, cash, and other remittances in payment or on account of payment of such Inventory, Accounts, or Chattel Paper and the cash proceeds of any returned goods, the sale or lease of which gave rise to an Account or Chattel Paper (all of the foregoing herein collectively referred to as "ITEMS OF PAYMENT"). The Pledgor shall deposit the Items of Payment for credit to the Collateral Account within two (2) business days of the receipt thereof, and in precisely the form received, except for the endorsement of the Pledgor where necessary to permit the collection of the Items of Payment, which endorsement the Pledgor hereby agrees to make. Pending such deposit, the Pledgor will not commingle any of the Items of Payment with any of its other funds or property but will hold them separate and apart. The Lender may at any from time to time apply the whole or any part of the collected funds credited to the Collateral Account against the Pledgor's Liabilities or credit such collected funds to a banking account of the Pledgor with the Lender, the order and method of such application to be in the discretion of the Lender. 16. Rights of Lender and Duties of Pledgor. If all or any part of the Collateral at any time consists of Inventory, Accounts, or Chattel Paper, the Lender may at any time and from time to time after the occurrence of an Event of Default hereunder: (i) notify the account debtors obligated on any of the Collateral to make payments thereon directly to the Lender, and to take control of the cash and non-cash proceeds of any such Collateral; (ii) charge to any banking account of the Pledgor with the Lender any Item of Payment credited to the Collateral Account which is dishonored by the drawee or maker thereof; (iii) compromise, extend, or renew any of the Collateral or deal with the same as it may deem advisable; (iv) release, make exchanges or substitutions for, or surrender all or any part of the Collateral; (v) remove from the Pledgor's place of business all books, records, ledger sheets, correspondence, invoices, and documents relating to or evidencing any of the Collateral or, without cost or expense to the Lender, make such use of the Pledgor's place(s) of business as may be reasonably necessary to administer, control, and collect the Collateral; (vi) repair, alter, or supply goods, if any, necessary to fulfill in whole or in part the purchase order of any account debtor; (vii) demand, collect, receipt for, and give renewals, extensions, discharges, and releases of any of the Collateral; (viii) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (ix) settle, renew, extend, compromise, compound, exchange, or adjust claims with respect to any of the Collateral or any legal proceedings brought with respect thereto; (x) endorse the name of the Pledgor upon any Items of Payment relating to the collateral or upon any proof of claim in bankruptcy against an account debtor; and (xi) receive and open all mail addressed to the Pledgor and, if an Event of Default exists hereunder, notify postal authorities to change the address for the delivery of mail to the Pledgor to such address as the Lender may designate; and for purposes of taking the actions described in Subsections (i) through (xi) the Pledgor hereby irrevocably appoints the Lender as its attorney-in-fact (which appointment being coupled with an interest is irrevocable while any of Pledgor's Liabilities remain unpaid), with power of substitution, in the name of the Lender or in the name of the Pledgor or otherwise, for the use and benefit of the Lender, but at the cost and expense of the Pledgor and without notice to the Pledgor. The Pledgor will (a) make no material change to the terms of any 6 sale or lease of Inventory or of any Account or Chattel Paper without the prior written permission of the Lender; (b) on demand, make available in form acceptable to the Lender shipping documents and delivery receipts evidencing the shipment of goods which gave rise to the sale or lease of Inventory or of an Account of Chattel Paper, completion certificate, or other proof of the satisfactory performance of services which gave rise to the sale or lease of Inventory or of an Account or Chattel Paper, copies of the invoices arising out of the sale or lease of Inventory or for an Account, and the Pledgor's copy of any written contract or order from which the sale or lease of Inventory, an Account, or Chattel Paper arose; and (c) when requested, advise the Lender whenever an account debtor returns or refuses to retain any goods, the sale or lease of which gave rise to an Account or Chattel Paper, and will comply with any instructions which the Lender may give regarding the sale or other disposition of such returns. 17. Performance by Lender. After an Event of Default hereunder which has not been cured within any applicable cure period and during the continuance of such uncured default, if the Pledgor fails to perform, observe, or comply with any of the conditions, terms, or covenants contained in this Agreement, the Lender, without notice to or demand upon the Pledgor and without waiving or releasing any of the Pledgor's Liabilities or any Event of Default, may (but shall be under no obligation to) at any time thereafter perform such conditions, terms, or covenants for the account and at the expense of the Pledgor, and may enter upon any place of business or other premises of the Pledgor for that purpose and take all such action thereon as the Lender may consider necessary or appropriate for such purpose. All sums paid or advanced by the Lender in connection with the foregoing and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection therewith (collectively, the "EXPENSE PAYMENTS") together with interest thereon at a simple per annum rate of interest which is equal to the then highest rate of interest charged on the principal of any of the Pledgor's Liabilities, plus one percent (1%) per annum (but in no event higher than the maximum interest rate permitted by applicable law), from the date of payment until repaid in full, shall be paid by the Pledgor to the Lender on demand and shall constitute and become a part of the Pledgor's Liabilities secured hereby. 18. Default. The occurrence of any one or more of the following events shall constitute an event of default (an "EVENT OF DEFAULT") under this Agreement: (a) failure of the Pledgor to pay any of the Pledgor's Liabilities as and when due and payable; (b) failure of the Pledgor to perform, observe, or comply with any of the provisions of this Agreement or of any of the other Loan Documents; (c) the occurrence of an Event of Default (as defined therein) under any of the other Loan Documents; (d) any information contained in any financial statement, application, schedule, report, or any other document given by the Pledgor or by any other person in connection with the Pledgor's Liabilities, with the Collateral, or with any of the Loan Documents is not in all material respects true and accurate or the Pledgor or such other person omitted to state any material fact or any fact necessary to make such information not misleading; (e) the Pledgor is generally not paying debts as such debts become due; (f) the filing of any petition for relief under any provision of the Federal Bankruptcy Code or any similar state law is brought by or against the Pledgor; (g) an application for the appointment of a receiver for, the making of a general assignment for the benefit of creditors by or the insolvency of, the Pledgor and not dismissed within forty-five (45) days; (h) the dissolution, merger, consolidation, or reorganization of the Pledgor; (i) suspension of the operation of the Pledgor's present business; (j) transfer of a substantial part (determined by market 7 value) of the Pledgor's property; (k) sale, transfer, or exchange, either directly or indirectly, of a controlling stock interest of the Pledgor; (l) termination or withdrawal of any guaranty for the Pledgor's Liabilities; (m) the Pension Benefit Guaranty Corporation commences proceedings under Section 4042 of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, to terminate any employee pension benefit plan of the Pledgor; (n) the determination in good faith by the Lender in its reasonable judgement that a material adverse change has occurred in the financial condition of the Pledgor from the condition set forth in the most recent financial statement of the Pledgor heretofore furnished to the Lender, or from the financial condition of the Pledgor as heretofore most recently disclosed to the Lender in any other manner; or (o) a default occurs or in the event a default exists under any document or instrument executed by any Guarantor of the Pledgor's Liabilities, including, without limitation, any Guaranty Agreement, any Security Agreement or any other similar document or instrument. 19. Rights and Remedies upon Default. Upon the occurrence of an Event of Default hereunder (and in addition to all of its other rights, powers, and remedies under this Agreement), the Lender may, at its option, and upon written notice to the Pledgor, declare the unpaid balance of the Pledgor's Liabilities to be immediately due and payable. The occurrence or non-occurrence of an Event of Default shall in no manner impair the ability of the Lender to demand payment of any portion of the Pledgor's Liabilities which are payable on demand. The Lender shall have all the rights and remedies of a secured party under the Uniform Commercial Code and other applicable law in the State of Georgia. Upon the occurrence of an Event of Default hereunder, the Pledgor, upon demand by the Lender, shall assemble the Collateral and make it available to the Lender at a place designated by the Lender which is mutually convenient to both parties. Upon the occurrence of an Event of Default hereunder, the Lender or its agents may enter upon the Pledgor's premises to take possession of the Collateral, to remove it, to render it unusable, or to sell of otherwise dispose of it, all without judicial process or proceedings. Any written notice of the sale, disposition, or other intended action by the Lender with respect to the Collateral which is required by applicable laws and is sent by certified mail, postage prepaid, to the Pledgor at the address of the Pledgor's chief executive office specified below, or such other address of the Pledgor which may from time to time be shown on the Lender's records, at least five (5) days prior to such sale, disposition, or other action, shall constitute reasonable notice to the Pledgor. The Pledgor shall pay on demand all costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, incurred by or on behalf of the Lender: (i) in enforcing the Pledgor's Liabilities; and (ii) in connection with the taking, holding, preparing for sale or other disposition, selling, managing, collecting, or otherwise disposing of the Collateral. All of such costs and expenses (collectively, the "LIQUIDATION COSTS") together with interest thereon at a simple per annum rate of interest which is equal to the then highest rate of interest charged on the principal of any of the Pledgor's Liabilities, plus one percent (1%) per annum (but in no event higher than the maximum interest rate permitted by law), from the date of payment until repaid in full, shall be paid by the Pledgor to the Lender on demand and shall constitute and become a part of the Pledgor's Liabilities secured hereby. Any proceeds of sale or other disposition of the Collateral will be applied by the Lender to the payment of Liquidation Costs and Expense Payments, and any balance of such proceeds will be applied by the Lender to the payment of the remaining Pledgor's Liabilities 8 in such order and manner of application as the Lender may from time to time in its sole discretion determine. 20. Remedies Cumulative. Each right, power, and remedy of the Lender as provided for in this Agreement or in the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Agreement or in the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Lender or any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by the Lender of any or all such other rights, powers, or remedies. 21. Waiver. No failure or delay by the Lender to insist upon the strict performance of any term, condition, covenant, or agreement or of the other Loan Documents, or to exercise any right, power, or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant, or agreement or of any such breach, or such term, condition, covenant, or agreement or of any such breach, or preclude the Lender from exercising any such right, power, or remedy at any later time or times. By accepting payment which does not fully repay any indebtedness then due and payable with respect to any of the Pledgor's Liabilities, the Lender shall not be deemed to have waived the right either to require payment when due of all other Pledgor's Liabilities or to declare an Event of Default for failure to effect such payment of any such other Pledgor's Liabilities. The Pledgor waives presentment, notice of dishonor, and notice of non-payment with respect to Accounts and Chattel Paper. THE PLEDGOR HEREBY ACKNOWLEDGES THAT THE LIABILITIES AROSE OUT OF A "COMMERCIAL TRANSACTION" AS THIS TERM IS DEFINED IN O.C.G.A. SECTION 44-14-260(1) CONCERNING FORECLOSURE OF MORTGAGES ON PERSONALTY, AND AGREES THAT IN THE EVENT OF ANY DEFAULT, THE LENDER SHALL HAVE THE RIGHT TO AN IMMEDIATE WRIT OF POSSESSION WITHOUT NOTICE OF HEARING AND KNOWINGLY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO ANY NOTICE AND POSTING OF A BOND BY THE LENDER PRIOR TO SEIZURE BY THE LENDER, ITS TRANSFEREES, ASSIGNS, OR SUCCESSORS IN INTEREST, OF THE COLLATERAL OR ANY PORTION THEREOF. THIS IS INTENDED BY THE PLEDGOR AS A "WAIVER" AS THIS TERM IS DEFINED IN O.C.G.A. SECTION 44-14-260(3) RELATING TO FORECLOSURE OF MORTGAGES ON PERSONALTY. 22. Miscellaneous. Time is of the essence of this Agreement. The section headings of this Agreement are for convenience only and shall not limit or otherwise affect any of the terms hereof. Neither this Agreement nor any term, condition, covenant, or agreement hereof may be changed, waived, discharged, or terminated orally but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge, or termination is sought. This Agreement shall be governed by the laws of the State of Georgia and shall be binding upon the Pledgor and its heirs, executors, administrators, legal representatives, successors, and assigns, and shall inure to the benefit of the Lender and its successors and assigns. As used herein, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine, or neuter gender shall include all genders, as the context may require, and the term "person" shall 9 include an individual, a corporation, an association, a partnership, a trust, and an organization. Invalidation of any one or more of the provisions of their Agreement shall in no way affect any of the other provisions hereof, which shall remain in full force and effect. All references herein to any document, instrument, or agreement shall be deemed to refer to such document, instrument, or agreement as the same may be amended, modified, restated, supplemented, or replaced from time to time. Unless varied by this Agreement, all terms used herein which are defined by the Georgia Uniform Commercial Code shall have the same meanings hereunder as assigned to them by the Georgia Uniform Commercial Code. IN WITNESS WHEREOF, the Pledgor has caused its duly authorized officers to execute this Agreement and to affix its corporate seal hereto, as of the day and year first written above. PLEDGOR: CHEMFREE CORPORATION, a Georgia corporation By:__________________________________________ Francis A. Marks, President Attest:______________________________________ Its Secretary [CORPORATE SEAL] LENDER: FIDELITY BANK By:__________________________________________ Its:__________________________________ (BANK SEAL) Address(es) where Collateral is Address(es) of other place(s) of is to be located: business of the Pledgor: ___________________________________ ______________________________________ ___________________________________ ______________________________________ 10 Previous legal and/or trade name(s) of the Pledgor: ___________________________________ 11 EX-10.6 7 g88120exv10w6.txt EX-10.6 NEGATIVE PLEDGE AGREEMENT EXHIBIT 10.6 NEGATIVE PLEDGE AGREEMENT THIS NEGATIVE PLEDGE AGREEMENT ("AGREEMENT") is made effective the 1st day of October, 2003 by Intelligent Systems, Corporation, a Georgia corporation (hereinafter referred to as "PLEDGOR") in favor of Fidelity Bank, chartered under the laws of the state of Georgia (hereinafter referred to as "LENDER" or "BANK"). BACKGROUND STATEMENT WHEREAS, Pledgor is justly indebted to Lender pursuant to that certain Commercial Promissory Note and Loan Agreement of even date herewith evidencing a loan ("LOAN") in the principal amount of $1,500,000.00 (herein the "NOTE") executed by Pledgor in favor of Lender; and WHEREAS, the Lender has required, as a condition to extending such financial accommodations, the execution and delivery of this Agreement by the Pledgor. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals, the agreement of Lender to extend the Loan, Ten Dollars ($10.00) in hand paid and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees as follows: 1. The following terms shall have the following meanings: "DEBT" or "DEBT INSTRUMENT" shall mean (a) indebtedness or liability for borrowed money; (b) obligations evidenced by bonds, debentures, notes or other similar instruments; (c) obligations for the deferred purchase price of property or services (including trade obligations); (d) obligations as lessee under capital leases; (e) current liabilities in respect of unfunded vested benefits under plans covered by ERISA; (f) all guaranties, endorsements (other than for collection or deposit in the ordinary course of business), and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person or entity, or otherwise to assure a creditor against loss; (g) obligations secured by any Liens whether or not the obligations have been assumed; and (h) any further negative pledge, encumbrance or like or similar agreement pursuant to which Pledgor agrees to the matters or restrictions described in Section 2 hereof (other than in favor of Lender). "LIEN" shall mean any mortgage, deed to secure debt, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority, or other security agreement or preferential arrangement, charge, or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction to evidence any of the foregoing). "PROPERTY" shall mean all of Pledgor's right, title and interest whether fee or leasehold, in and to the property described on EXHIBIT "A" attached hereto and by reference incorporated herein. 2. Without the prior written consent of Lender, which consent may be withheld in Lender's sole discretion for any reason, Pledgor shall not: (A) LIENS. Create, assume, or allow to exist any Lien upon the Property, except: (i) Liens in favor of the Lender given to secure any Debt, whether now owing or hereafter coming into existence, owed from the Pledgor to the Bank; (ii) Liens for taxes or assessments or other governmental charges or levies not yet due or which are being actively contested in good faith by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Pledgor or any subsidiary in accordance with generally accepted accounting principles; (iii) Statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves are being maintained; (iv) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workmen's compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (other than obligation for the payment of borrowed money); (B) DEBT. Create, incur, assume, or suffer to exist any Debt or enter into any Debt Instrument of any description whatsoever secured by the Property not existing AND disclosed to Lender in writing as of the date of this Agreement, except (i) Debt incurred under the Note; and (ii) Debt Instruments executed in favor of Lender. (C) MERGER, ETC. Wind up, liquidate or dissolve itself, reorganize, merge or consolidate with or into, or convey, sell, assign, transfer, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any person or entity, or acquire all or substantially all of the assets of the business of any person or entity. 2 (D) SALES. No sale, gift, transfer, assignment or conveyance of any property or interests as set forth on Exhibit A hereto without the written consent of Lender, which shall not be unreasonably withheld, and provided that Lender received the gross proceeds of any such sale, less any normal and customary closing costs. 3. Any attempted sale, transfer, gift, pledge, assignment, encumbrance, mortgage, hypothecation, lien or security interest in or to, or other disposition of, or any interest or right in or to, or option to purchase the Property, not in accordance with the terms and conditions of this Agreement shall be NULL AND VOID and the same shall constitute an Event of Default under the Note. 4. In the event that any of the covenants, agreements, terms or provisions contained herein shall be invalid, illegal or unenforceable, in any respect, the validity of the remaining provisions contained herein shall be in no way affected, prejudiced or disturbed thereby. 5. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing, signed by both parties hereto. 6. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the parties hereto. 7. This Agreement may be executed in two or more original counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. This Agreement shall be governed by the laws of the State of Georgia. IN WITNESS WHEREOF, the parties have executed this Negative Pledge Agreement under seal the date and year set forth above. Signed, sealed and delivered PLEDGOR: in the presence of: Intelligent Systems Corporation, a Georgia corporation ___________________________________ Witness By:___________________________________ ___________________________________ Its:_______________________________ Notary Public Attest:_______________________________ My commission expires:_____________ Name:__________________________ Title:_________________________ (NOTARIAL SEAL) 3 Signed, sealed and delivered LENDER: in the presence of: Fidelity Bank ___________________________________ Witness By:___________________________________ Name:______________________________ ___________________________________ Title:_____________________________ Notary Public My commission expires:_____________ (NOTARIAL SEAL) 4 EX-10.7 8 g88120exv10w7.txt EX-10.7 COMMERCIAL PROMISSORY NOTE EXHIBIT 10.7 COMMERCIAL PROMISSORY NOTE [FIDELITY BANK LOGO] Loan No.______________ Borrower(s):__________ Location:_____________ Officer:______________ U.S. $1,500,000.00 OCTOBER 1, 2003 FOR VALUE RECEIVED, the undersigned INTELLIGENT SYSTEMS CORPORATION, A GEORGIA CORPORATION (hereinafter, whether one or more, referred to as "Maker") promises to pay to the order of Fidelity Bank, chartered under the laws of the state of Georgia (hereinafter, together with any subsequent holder hereof, referred to as "Holder"), at its office at 3 Corporate Square, Atlanta, Georgia 30329 or at such other place as Holder hereof may from time to time designate in writing, in lawful money of the United States of America, the principal sum of ONE MILLION FIVE HUNDRED DOLLARS ($ 1,500,000.00 ) or so much as may be disbursed hereunder, together with simple interest (computed on the basis of actual days elapsed in a 360-day year) on the principal balance from time to time outstanding prior to default hereunder at the rate of PRIME PLUS 1.5% PER ANNUM percent per annum. The initial interest rate on this loan is 5.50 %. (If the interest rate is stated in terms of, or with reference to, "Prime", "Prime Rate", or "P" (the "Prime Rate"), then (i) such terms shall mean the rate established by Holder from time to time as being its "Prime Rate" for the purpose of a reference from which it sets rates for specific loans, which reference rate is not necessarily the rate actually provided to the most creditworthy, or any other class of, borrowers, and (ii) the interest rate charged hereunder will change as of the opening business on each day the Prime Rate changes.) Installments of principal and interest shall be due under this Note as follows: SEE RIDER ATTACHED HERETO AND INCORPORATED HEREIN BY THIS REFERENCE. This Note shall mature and the principal balance hereof, together with all unpaid interest and other charges, costs and expenses provided for hereunder or under any other document or instrument evidencing or securing the indebtedness of this Note shall be due and payable on SEPTEMBER 1, 2004 . If (i) any payment of principal or interest on this Note is not received by Holder as and when same is due or (ii) a default occurs n the performance of any other covenant or agreement of Maker in this Note or by Maker (or by any guarantor, endorser, accommodation party or any other party liable for payment of this Note or providing security for payment of the same, collectively with Maker, an "Obligor") under any other Loan Document or (iii) any Obligor shall cease to exist or become insolvent or (iv) debtor reorganization, relief or liquidation proceedings shall be initiated by or against any Obligor, or (v) Holder shall otherwise deem itself insecure, then all obligations of Maker to Holder, including this Note, although otherwise unmatured or contingent, shall, at the option of Holder, forthwith mature, and the entire principal balance and all accrued interest and other charges due Holder shall become immediately due and payable without any notice or demand whatsoever. If the principal balance of this Note is accelerated, or any installment due hereunder is not paid as and when the same is due, or if the principal balance of this Note is not paid at maturity, then Holder shall have the option to increase the rate of interest to a default rate equal to two percentage points (2%) per annum plus the rate specified above, but in no event to exceed the maximum rate permitted by applicable law. If any monthly installment is not received within ten (10) days after its due date, Maker shall, at Holder's option, pay a late charge equal to five percent (5%) of the past due installment, such payment to be due with the succeeding monthly installment. Payment of any late charge or default interest does not entitle Maker to extension of any due date. To secure this indebtedness, along with any extensions or renewals thereof, in whole or in part, as well as all other indebtedness of Maker to Holder, now existing or hereafter incurred or arising however incurred (hereinafter sometimes referred to collectively as the "Liabilities"), Maker does hereby grant to Holder a security interest in and security title to the following: SEE RIDER ATTACHED HERETO AND INCORPORATED HEREIN BY THIS REFERENCE. together with any and all additions and accessions thereto or replacements thereof, returned or unearned premiums from any insurance on any of the same against fire, theft, collision or other catastrophe and any products and/or proceeds of any of the foregoing (al referred to herein as the "Collateral"). Holder shall have the right to accelerate the maturity of the Liabilities in the event that the Collateral or any portion thereof is transferred, assigned, or sold, or any security interest granted therein without the prio r written consent of Holder. If at any time Holder deem itself insecure, Maker will immediately furnish such further Collateral to be held by Holder, or make such payment on account, as will be satisfactory to holder. In addition to and independent of the rights and remedies of Holder as a secured party under the Uniform Commercial Code of Georgia, Holder shall, as security for the Liabilities, have the right to take possession of the Collateral, or the proceeds thereof and to sell or otherwise dispose thereof, and for this purpose, to sign in the name of Maker any transfer, conveyance or instrument necessary therefor, and Holder may enter upon the premises on which the Collateral or any part thereof may be situated and remove the same therefrom, without being liable in any way to Maker on account of entering any premises. Holder may require Maker to assemble the Collateral and make the same reasonably convenient to both parties. The right is expressly granted to Holder to transfer at any time to itself or its nominee any Collateral held hereunder and to receive the income therefrom and hold the same as security herefor, or to apply it to any of the Liabilities. If any notification of intended disposition of any of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed at least five days before such disposition. Whenever Holder in good faith reasonably believes that the prospect of payment of this Note is impaired, Holder, without notice or demand of any kind, may if the Maker is in bankruptcy place an administrative freeze upon, and if the Maker is not in bankruptcy, hold and set off against any or all outstanding principal or interest as Holder may elect, any balance or amount to the credit of Maker in any deposit, agency, reserve, holdback or other account of any nature whatsoever maintained by or on behalf of Maker with Holder at any of its offices, regardless of whether such accounts are general or special and regardless of whether such accounts are individual or joint, excepting only accounts which are actually known to Holder to be trust accounts. Time is of the essence with respect to all of Maker's obligations and agreements under this Note and the Loan Documents. In the event that Holder institutes legal proceedings to enforce this Note or refers the same to an attorney-at-law for enforcement or collection, Maker agrees to pay to Holder, in addition to an y indebtedness due and unpaid, all costs and expenses of such proceedings, including attorney's fees in the amount of fifteen percent (15%) of the outstanding principal and interest. Holder shall not by any act of omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein; a waiver on one occasion shall not be construed as continuing or as a bar to or waiver of such right or remedy on any other occasion. All remedies conferred upon Holder by this Note or any other instrument or agreement connected herewith or related hereto shall be cumulative and none is exclusive, and such remedies may be exercised concurrently or consecutively at Holder's option. This Note is hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity of the debt evidenced hereby or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance or retention of the money advanced or to be advanced hereunder exceed the highest lawful rate permissible under applicable laws. If, from any circumstances whatsoever, fulfillment of any provision hereof or of any other agreement evidencing or securing the debt, at the time performance of such provisions shall be due, shall involve the payment of interest in excess of that authorized by law, the obligation to be fulfilled shall be reduced to the limit so authorized by law, and if from any circumstances, Holder shall ever receive as interest an amount which would exceed the highest lawful rate applicable to Maker, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the debt evidenced hereby and not to the payment of interest, regardless of any books or records of Holder which may indicate the contrary. As used herein, the terms "Maker" and "Holder" shall be deemed to include their respective heirs, successors, legal representatives and assigns, whether by voluntary action of the parties or by operation of law; provided, nothing herein shall be deemed consent by Holder to any assignment or conveyance which is restricted or prohibited by the terms of any Loan Document. In the event that more than one person, firm or entity is a Maker hereunder, then all references to "Maker" shall be deemed to refer equally to each of said persons, firms, or entities, all of whom shall be jointly and severally liable for all of the obligations of Maker hereunder. Each Obligor hereby waives presentment for payment, demand, notice of non-payment of this Note, protest and notice of protest, and consents that Holder may extend the time of payment of any part or the whole of the debt at any time at the request of any other person or entity liable. Each Obligor hereby waives and renounces for itself, its heirs, successors and assigns, all rights to the benefits of any appraisement, exemption or homestead now provided, or which may hereafter be provided by the Constitution and laws of the United States of America and of any state thereof in and to all of its property, real and personal, against the enforcement and collection of the Liabilities. Each Obligor hereby transfers, conveys and assigns to Holder a sufficient amount of such homestead or exemption as may be set apart in bankruptcy, to pay this Note in full, with all costs of collection, and does hereby direct any trustee in bankruptcy having possession of such homestead or exemption to deliver to Holder a sufficient amount of property or money set apart as exempt to pay the indebtedness evidenced hereby, or any renewal thereof, and does hereby appoint Holder the attorney-in-fact for such Obligor to claim any and all homestead exemptions allowed by law. In the event any suit or legal action is commenced by Holder, Maker hereby expressly agrees, consents and submits to the personal jurisdiction of any state or federal court sitting in DeKalb or Fulton County, Georgia with respect to such suit or legal action, and the Maker also expressly consents and submits to and agrees that venue in any such suit or legal action is proper in said courts and county and Maker hereby expressly waives any and all personal rights under applicable law or in equity to object to the jurisdiction and venue in said courts and county. The jurisdiction and venue of the courts consented and submitted to and agreed upon in this paragraph are not exclusive but are cumulative and in addition to the jurisdiction and venue of any court under any applicable laws or in equity. This Note shall be governed and construed under the laws of the State of Georgia except to the extent applicable Georgia law is preempted by the laws of the United States of America. Maker warrants that the proceeds of the loan evidenced hereby shall be used solely for business or commercial purposes. IN WITNESS WHEREOF, Maker has signed, sealed and delivered this Note as of the date first hereinbove written and acknowledges receipt of a complete copy hereof. MAKER: MAKER: INTELLIGENT SYSTEMS CORPORATION, A GEORGIA CORPORATION By:_______________________________________ By:________________________________ Title: [CORPORATE SEAL] __________________________________________ ___________________________________ Address 4355 Shackleford Road Address Norcross, Georgia 30093 Social Security No.:_______________ Phone No.:_________________________ Social Security No.:______________________ Phone No.:____________ RIDER TO COMMERCIAL PROMISSORY NOTE FROM INTELLIGENT SYSTEMS CORPORATION, A GEORGIA CORPORATION ("MAKER") IN FAVOR OF FIDELITY BANK ("HOLDER") IN THE FACE PRINCIPAL AMOUNT OF $1,500,000.00 DATED OCTOBER 1, 2003 This Rider to the above referenced Promissory Note (the "NOTE") is hereby made a part of the Note and incorporated therein by this reference. 1. From and after the date hereof, interest shall accrue at the "prime rate" of Holder (as defined on the face of the Note) plus one and one-half percent (1 1/2 %) per annum, and shall be adjusted daily with changes in the prime rate during the term of the Note. The Note is calculated on a 360 day basis. 2. Commencing on November 1, 2003 and continuing on the same day of each month thereafter through and including August 1, 2004, payments of interest only, in arrears, shall be due and payable. 3. On September 1, 2004, the entire outstanding principal balance of the indebtedness hereby evidenced, together with all accrued and unpaid interest thereon, and all sums due to Holder hereunder shall be due and payable in full. 4. The Liabilities (as defined in the Note) are secured by certain assets of Maker as more particularly described in the following documents dated of even date herewith: a. Security Agreement from Maker, as pledgor, to Holder, as lender; b. Loan Agreement by and between Maker and Holder; and c. Those certain Georgia form UCC-1 financing statements executed by Maker, as debtor to Holder, as secured party. d. Guaranties from VISaer, Inc., Corecard Software, Inc., ChemFree Corporation, and QS Technologies, Inc., all secured by Security Agreements executed by each Guarantor in favor of the Secured Party as evidenced by certain form UCC-1 financing statements executed by Guarantor, as guarantor to Holder, as secured party. e. Assignment of Life Insurance Policy in the amount of no less than $1,000,000.00 on the life of J. Leland Strange. 5. Disbursements under the loan evidenced by this Note (the "LOAN") shall be made in accordance with the terms of that certain Loan Agreement of even date herewith by and between Maker, as debtor, and Holder, as secured party (the "LOAN AGREEMENT"). The undersigned Maker has executed this Rider under seal on this ______ day of October, 2003. MAKER: INTELLIGENT SYSTEMS CORPORATION., a Georgia corporation Attest:__________________________ By: __________________________________ Its:__________________________________ [CORPORATE SEAL] EX-10.8 9 g88120exv10w8.txt EX-10.8 FORM OF GUARANTEE EXHIBIT 10.8 OCTOBER 1, 2003 FORM OF GUARANTY (WITH SECURITY AGREEMENT) FIDELITY BANK, ATLANTA, GEORGIA FOR VALUE RECEIVED, the sufficiency of which is hereby acknowledged, and in consideration of any loan or other financial accommodation heretofore or hereafter at any time made or granted to Intelligent Systems Corporation. (hereinafter called the "Debtor") by FIDELITY BANK, chartered under the laws of the state of Georgia (hereinafter together with its successors and assigns, called the "Bank"), the undersigned Guarantor(s) do hereby unconditionally guaranty the full and prompt payment when due, whether by declaration or otherwise, and at all times hereafter, of all obligations of the Debtor to the Bank, however and whenever incurred or evidenced, whether direct or indirect, absolute or contingent, or due or to become due (collectively called "Liabilities"), and the undersigned Guarantor(s) further agree(s) to pay the following (herein called "Expenses"): (a) all expenses paid or incurred by the Bank in endeavoring to collect the Liabilities or any part thereof from the Debtor, including attorney's fees of 15% of the total amount sought to be collected if the Bank endeavors to collect from the Debtor by law or through an attorney at law; and (b) all expenses paid or incurred by the Bank in collecting this Guaranty, including attorney's fees of 15% of the total amount sought to be collected if this Guaranty is collected by law or through an attorney at law. Undersigned Guarantor(s) hereby warrants that loans or other financial accommodations by the Bank to the Debtor will be to the direct interest and advantage of the undersigned Guarantor(s). This Guaranty is a guaranty of payment and not merely a guaranty of collection. This Guaranty shall be continuing, absolute and unconditional and shall remain in full force and effect as to the undersigned Guarantor(s), even though from time to time the Liabilities of the Debtor may from time to time be completely paid, subject to discontinuance of this Guaranty as to any of the undersigned Guarantor(s) (including, without limitation, any undersigned Guarantor(s) who shall become deceased, incompetent or dissolved) only as follows: Any of the undersigned Guarantor(s), and an person duly authorized and acting on behalf of any of the undersigned Guarantor(s), may give written notice to the Bank of the discontinuance of this Guaranty as to the undersigned Guarantor(s) by whom or on whose behalf such notice is given, but no such notice shall be effective in any respect until it is actually received by the Bank and no such notice shall affect or impair the obligations hereunder of the undersigned Guarantor(s) by whom or on whose behalf such notice is given with respect to the Liabilities existing at the date of receipt of such notice by the Bank, any interest thereon or any expenses paid or incurred by the Bank in endeavoring to collect such Liabilities, or any part thereof, and in enforcing this Guaranty against such undersigned Guarantor(s). Any such notice of discontinuance by or on behalf of any of the undersigned Guarantor(s) shall not affect or impair the obligations hereunder of any other of the undersigned Guarantor(s). To secure the obligations herein, along with any extensions or renewals thereof, in whole or in part, as well as all other indebtedness of undersigned Guarantor(s) to Bank, now existing or hereafter incurred or arising however incurred, undersigned Guarantor(s) does hereby grant to Bank a security interest in and security title to the following: all assets of the Guarantor, including all Inventory, Accounts, General Intangibles, Chattel Paper, Equipment and Fixtures, and Leasehold Improvements owned by the Guarantor now or in the future together with any and all additions and accessions thereto or replacements thereof, returned or unearned premiums from any insurance on any of the same against fire, theft, collision or other catastrophe and any products and/or proceeds of any of the foregoing (all referred to herein as the "Collateral"). Neither the Collateral nor any portion thereof may be transferred, assigned, or sold, or any security interest granted therein without prior written consent of Bank. If at any time Bank shall deem itself insecure, undersigned Guarantor(s) will immediately furnish such further Collateral to be held by Bank or make such payment on account, as will be satisfactory to Bank. In addition to and independent of the rights and remedies of Bank as a secured party under the Uniform Commercial Code of Georgia, Bank shall, as security for the obligations of the undersigned herein, have the right to take possession of the Collateral, or the proceeds thereof and to sell or otherwise dispose thereof, and for this purpose, to sign in the name of undersigned Guarantor(s) any transfer, conveyance or instrument necessary therefor, and Bank may enter upon the premises on which the Collateral or any part thereof may be situated and remove the same therefrom without being liable in any way to undersigned Guarantor(s) to assemble the Collateral and make the same reasonably convenient to both parties. The right is expressly granted to Bank to transfer at any time to itself or its nominee any Collateral held hereunder and to receive the income therefrom and hold the same as security herefor, or to apply it to any of the obligations of the undersigned herein. If any notification of intended disposition of any of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed at least five days before such disposition. Whenever Bank in good faith reasonably believes that the prospect of payment of the obligations of the undersigned Guarantor(s) herein is impaired, Bank, without notice or demand of any kind, may if the undersigned Guarantor(s) is in bankruptcy place an administrative freeze upon, and if the undersigned Guarantor(s) is not in bankruptcy, hold and set off against any or all outstanding principal or interest as reserve, a holdback or other account of any nature whatsoever maintained by or on behalf of undersigned and regardless of whether such accounts are individual or joint, excepting only accounts which are actually known to Bank to be trust accounts. Bank may, without demand or notice of any kind, at any time when any amount shall be due and payable hereunder by any of the undersigned guarantor(s), appropriate and apply toward the payment of such amount, and in such order of application as the Bank may from time to time elect, any property, balances, credits, deposits, accounts, items or monies of such undersigned Guarantor(s) in the possession or control of the Bank for any purpose. The Bank may, from time to time, without notice to the undersigned Guarantor(s) (or any of them) (a) retain or obtain a security interest in any property to secure any of the Liabilities or any obligation hereunder, (b) retain or obtain the primary or secondary liability of any party or parties, in addition to the undersigned Guarantor(s), with respect to any of the Liabilities, (c) extend or renew for any period (whether or not longer than the original period), alter or exchange any of the Liabilities, (d) release or compromise any liability of any of the undersigned Guarantor(s) hereunder or any liability of any other party or parties primarily or secondarily liable on any of the Liabilities, (e) release its security interest, if any, in all or any property securing any of the Liabilities or any obligation hereunder and permit any substitution or exchange for any such property, and (f) resort to the undersigned Guarantor(s) (or any of them) for payment of any of the Liabilities, whether or not the Bank shall have resorted to any property securing any of the Liabilities or any obligation hereunder or shall have proceeded against any other of the undersigned Guarantor(s) or any other party primarily or secondarily liable on any of the Liabilities. In the event of death, incompetency, dissolution or insolvency of the Debtor, or if a petition in bankruptcy be filed by or against the Debtor, or if a receiver be appointed for any part of the property or assets of the Debtor, or if any judgment be entered against the Debtor, or if the Bank shall deem itself insecure with respect to Liabilities, and if any such event should occur at a time when any of the Liabilities may not then be due and payable, the undersigned Guarantor(s) agrees to pay to the Bank upon demand the full amount which would be payable hereunder by the undersigned Guarantor(s) if all Liabilities were then due and payable. Any amount received by the Bank from whatever source and applied by it toward the payment of the Liabilities shall be applied in such order of application as the Bank may from time to time elect. The undersigned Guarantor(s) hereby expressly waive(s): (a) notice of the acceptance of this Guaranty, (b) notice of the existence or creation of all or any of the Liabilities, (c)presentment, demand, notice of dishonor, protest, and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon the Liabilities or any thereof, any obligation hereunder, or any security for any of the foregoing. The creation or existence from time to time of Liabilities in excess of the amount to which the right of recovery under this Guaranty is limited is hereby authorized, without notice to the undersigned Guarantor(s) (or any of them), and shall in no way affect or impair this Guaranty. The Bank may, without notice of any kind, sell, assign or transfer all or any of the Liabilities, and in such event each and every immediate and successive assignee, transferee, or holder of all or any of the liabilities, shall have the right to enforce this Guaranty, by suit or otherwise, for the benefit of such assignee, transferee or holder, as fully as if such assignee, transferee or holder of all or any of the Liabilities, shall have the right to enforce this Guaranty, by suit or otherwise, for the benefit of such assignee, transferee or holder, as fully as if such assignee, transferee or holder were herein by name specifically given such rights, powers and benefits, but the Bank shall have an unimpaired right, prior and superior to that of any such assignee, transferee or holder, to enforce this Guaranty for the benefit of the Bank as to so much of the Liabilities as it has not sold, assigned or transferred. No delay or failure on the part of the Bank in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Bank of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. No action of the Bank permitted hereunder shall in any way impair or affect this Guaranty. For the purpose of this Guaranty, the Liabilities shall include all obligations of the Debtor to the Bank, notwithstanding any right or power of the Debtor or anyone else to assert any claim or defense, as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall impair or affect the obligations of the undersigned Guarantor(s) hereunder. In the event any payment of Debtor to Bank is held to constitute a preference under the bankruptcy laws, or if for any other reason, Bank is required to refund such payment or pay the amount thereof to any other party, such payment by Debtor to Bank shall not constitute a release of the undersigned Guarantor(s) from any liability hereunder, but the undersigned Guarantor(s) agree to pay such amount to Bank upon demand and this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments. Undersigned Guarantor(s) shall have no right of subrogation to Bank against Debtor, and undersigned Guarantor(s) hereby waives any rights to enforce any remedy which Bank may have against Debtor, claims which the undersigned Guarantor(s) may have against Debtor with respect to sums due hereunder, and any rights to participate in any security for the Liabilities. The undersigned hereby expressly waive(s) the right to require Bank to take action against the Debtor as provided for in O.C.G.A. Section 10-7-24 or any successor statute. This Guaranty has been made and delivered in the State of Georgia and shall be governed by the laws of the State. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provision of this Guaranty. In the event any suit or legal action is commenced by Bank, the undersigned Guarantor(s) do hereby expressly agree, consent and submit to the personal jurisdiction of any state or federal court sitting in Dekalb or Fulton County, Georgia with respect to such suit or legal action, and the undersigned Guarantor(s) do also expressly consent and submit to and agree that venue in any such suit or legal action is proper in said courts and county and the undersigned Guarantor(s) do hereby expressly waive any and all personal rights under applicable law or in equity to object to the jurisdiction and venue in said courts and county. The jurisdiction and venue of the courts consented and submitted to and agreed upon in this paragraph are not exclusive but are cumulative and in addition to the jurisdiction and venue of any other court under any applicable laws or in equity. NOTICE TO GUARANTOR: You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility. You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount. The bank can collect this debt from you without first trying to collect from the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record. This notice is not the contract that makes you liable for the debt. IN WITNESS WHEREOF the undersigned have hereunto set their hands and affixed their seals the day and year above written. GUARANTORS: CHEMFREE CORPORATION, A GEORGIA CORPORATION __________________________________________ ___________________________________ __________________________________________ ___________________________________ Address: Address: Tax Identification No.:___________________ Tax Identification No.:____________ Telephone No._____________________________ Telephone No.:_____________________ __________________________________________ ___________________________________ Address: Address: Tax Identification No.:___________________ Tax Identification No.:____________ Telephone No._____________________________ Telephone No.:_____________________ EX-21.1 10 g88120exv21w1.txt EX-21.1 LIST OF SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 INTELLIGENT SYSTEMS CORPORATION LIST OF PRINCIPAL SUBSIDIARY COMPANIES AS OF MARCH 1, 2004 SUBSIDIARY NAME STATE OF ORGANIZATION ChemFree Corporation Georgia CoreCard Software, Inc. Delaware QS Technologies, Inc. Georgia VISaer, Inc. Delaware EX-23.1 11 g88120exv23w1.txt EX-23.1 CONSENT OF BDO SEIDMAN, LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Intelligent Systems Corporation Norcross, GA We hereby consent to the incorporation by reference in the registration statements (Form S-8 No. 333-58134, No. 333-32157 and No. 33-99432) of our report dated March 4, 2004, relating to the consolidated financial statements and schedule of Intelligent Systems Corporation and Subsidiaries appearing in the company's annual report on Form 10-K for the year ended December 31, 2003. /s/ BDO Seidman, LLP BDO Seidman, LLP Atlanta, Georgia March 26, 2004 EX-31.1 12 g88120exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, J. Leland Strange, the Chief Executive Officer of Intelligent Systems Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Intelligent Systems Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; and b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 30, 2004 /s/ J. Leland Strange ----------------------------------------- J. Leland Strange Chief Executive Officer and President INTELLIGENT SYSTEMS CORPORATION EX-31.2 13 g88120exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Bonnie L. Herron, the Chief Financial Officer of Intelligent Systems Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Intelligent Systems Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; and b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 30, 2004 /s/ Bonnie L. Herron -------------------------------- Bonnie L. Herron Chief Financial Officer INTELLIGENT SYSTEMS CORPORATION EX-32.1 14 g88120exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE CEO/CFO EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned officers of Intelligent Systems Corporation (the "Company") hereby certifies to his or her knowledge that the Company's annual report on Form 10-K for the period ended December 31, 2003 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 30, 2004 /s/ J. Leland Strange ----------------------------------- J. Leland Strange Chief Executive Officer /s/ Bonnie L. Herron ----------------------------------- Bonnie L. Herron Chief Financial Officer INTELLIGENT SYSTEMS CORPORATION -----END PRIVACY-ENHANCED MESSAGE-----