-----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, QWQCxFqHmauZMIMRa6vHjQ56DkUlS7SCVXftC/Y7fZph8VIWEuw2bgsKzG32Vd0X YkmHA2bDep0/6yaQwhauyg== 0000950144-98-004750.txt : 19980417 0000950144-98-004750.hdr.sgml : 19980417 ACCESSION NUMBER: 0000950144-98-004750 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980416 SROS: AMEX 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-K405 SEC ACT: SEC FILE NUMBER: 001-09330 FILM NUMBER: 98595315 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-K405 1 INTELLIGENT SYSTEMS CORPORATION 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 (I.R.S. Employer Identification No.) incorporation or organization) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] As of March 20, 1998, 5,104,467 shares of Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates of the registrant was $15,111,949 (computed using the closing price of the Common Stock on March 20, 1998 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 June 12, 1998 are incorporated by reference in Part III hereof. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................................................3 2. Properties...............................................................................8 3. Legal proceedings........................................................................8 4. Submission of matters to a vote of security holders......................................8 PART II 5. Market for the registrant's common equity and related stockholder matters................8 6. Selected financial data..................................................................9 7. Management's discussion and analysis of financial condition and results of operations....9 8. Financial statements and supplementary data.............................................12 9. Changes in and disagreements with accountants on accounting and financial disclosure....12 PART III 10. Directors and executive officers of the registrant......................................12 11. Executive compensation..................................................................12 12. Security ownership of certain beneficial owners and management..........................12 13. Certain relationships and related transactions..........................................13 PART IV 14. Exhibits, financial statement schedules and reports on Form 8-K.........................13 Signatures........................................................................................15
3 PART I ITEM 1. BUSINESS GENERAL Intelligent Systems Corporation, a Georgia corporation (the "Company" or "Intelligent Systems"), has operated either in corporate or partnership form since 1973 and its securities have been publicly traded since 1981. The Company operated as a master limited partnership from 1986 to 1991, when it was merged into the present corporation (the "Merger"). The Company's executive offices are located at 4355 Shackleford Road, Norcross, Georgia 30093. The Company's telephone number is (770) 381-2900. The Company's operations are involved in two industry segments (which are defined by the product or service provided rather than the market served): technology related products and services, and health care services. The Company's principal majority-owned and controlled operating subsidiaries in the technology sector include InterQuad Services (training/education for software products), ChemFree Corporation (bio-remediating parts washers for automotive and industrial applications), Intelligent Enclosures (mini-environment systems for ultraclean manufacturing) and HumanSoft LLC (health and human services software for public health agencies). In the health care services segment, the Company's operations involve the PsyCare America subsidiary (psychiatric treatment programs for the Christian community). The Company's operating subsidiaries are relatively small in size and subject to greater fluctuation in revenue and profitability than larger, more established businesses would be. The Company's main focus is to create and manage growing companies through flexible partnership arrangements. The Company actively explores opportunities, principally in the technology area, to develop partnerships with promising domestic companies or to start new businesses. Depending upon the needs of the partner company, the Company may be the sole, majority or minority owner of the business and will undertake a variety of roles which often include day-to-day management of operations, board of director participation, financing, market planning, strategic contract negotiations, personnel and administrative functions, etc. Partner companies in which the Company owns less than a majority interest or in which the Company is not considered the controlling shareholder are not consolidated in the Company's results of operations, rather they are accounted for by the equity method. However, the Company may be actively engaged in managing strategic and operational issues with these companies and devotes significant resources to the development of the business. In some instances, the Company may acquire a majority ownership at some future point or the business may become a stand-alone public company or be sold to another entity. A more detailed description of some of the Company's affiliated partner companies is provided on page 7 of this report. The Company operates the Shared Resource Technology Center, a small business incubator, at its corporate facility. The Center permits the Company to reduce its overhead expense by subleasing excess capacity to small businesses that benefit from flexible, shared resources. At the same time, the Company has day-to-day contact with emerging companies that may become partnership companies, either as majority-owned subsidiaries or minority-owned affiliates. For instance, ChemFree Corporation was started as an incubator company. The Company expects to continue its regular practice of discussing with interested parties possible sales, acquisitions or business combinations involving its operations or related businesses. However, these discussions may not result in any completed transactions. For ease of comprehension, the business discussion which follows contains information on products, markets, competitors, research and development and manufacturing for various of the Company's operating subsidiaries, organized by industry sector and by company. For further information concerning the Company's domestic and foreign operations, see Notes 13 and 14 in the accompanying Notes to the Consolidated Financial Statements. INTELLIGENT SYSTEMS CORPORATION -3- 4 INDUSTRY SEGMENT: TECHNOLOGY RELATED PRODUCTS AND SERVICES HUMANSOFT LLC - HumanSoft LLC (formerly named Public Health Software Systems) specializes in the design, manufacture and sale of a comprehensive array of software programs which permit public health agencies to capture, analyze and manage client information. Within the past 12 months, the Company acquired two former competitors, QS, Inc. and JK, Inc., to position itself as a leading provider of information systems software and services for health and human services organization nationwide. The operations of all companies are consolidated under the HumanSoft umbrella. HumanSoft products include modules such as maternal and child health, cancer screening, HIV testing, scheduling, etc. The acquisition of JK, Inc. in January 1998 expands the HumanSoft offering to include vital records information systems and health statistics coding and data collection. The products run on multiple platforms including DOS, Windows, UNIX, AS/400 and others. Typically, HumanSoft provides some customization and training services as well as ongoing technical support and, in some cases, data collection and coding. HumanSoft customers are local, state and federal public health agencies nationwide as well as other government agencies, hospitals and clinics. Installations range from single-site clinics to city-wide and state-wide systems employing networks of computers. The customer base covers more than 40 states. HumanSoft sells primarily in response to competitive bids solicited by city, county and state agencies. The process can take several months and awards are made on the basis of a number of factors including software features, pricing, and financial strength. Marketing activities include trade shows and industry conferences. HumanSoft competes against a number of other software companies, some of which are larger and which may have access to greater resources than does HumanSoft. However, HumanSoft believes it is competitive based on product features, ease of use and extensive industry experience and contacts in the public health market. The company continues to add new functionality to its ACCLAIM product and to develop new versions of its vital records software. CHEMFREE CORPORATION - ChemFree Corporation (ChemFree) designs, manufactures and markets the SmartWashertm parts washer which uses an advanced bio-remediation system to clean automotive and machine parts without using hazardous, solvent-based chemicals. The SmartWasher consists of a molded plastic tub and sink with faucet and brush, recirculating pump, heater, electronic control panel, filter, microorganisms and an aqueous based degreasing solution. 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 after the parts washer sale. ChemFree's markets include the automotive, transportation, industrial and military markets. In the automotive aftermarket sector, customers include companies with fleets of vehicles to maintain; automobile manufacturers such as Chrysler, GM and BMW with extensive service networks; and individual and chains of auto repair shops and auto parts suppliers. Numerous public transport systems use the SmartWasher in maintenance facilities. The industrial market includes customers with machinery that requires routine maintenance, such as in the textile industry. Military applications include vehicle service depots in all branches of the military. ChemFree entered international markets in 1997 in England and Korea. ChemFree's sales activities include both company representatives who sell direct to high volume customers and several distribution channels: automotive aftermarket distributors (e.g. NAPA), environment/pollution control equipment distributors, automobile manufacturers dealer equipment and service organizations (e.g. GM, Chrysler and BMW) and industrial product distributors. International markets are served by distributors serving specific countries. The Company also sells in competitive bid situations, such as military procurements, and under a GSA schedule to government agencies. Marketing activities include trade show participation, public and press relations, advertisements in trade publications, and evaluation programs. ChemFree competes with larger, established companies using solvent-based systems which require special handling and hauling of regulated material, other small companies using non-hazardous systems, and with hazardous waste hauling firms. Although smaller than the established solvent-based firms, ChemFree believes it is competitive based on product features, positive environmental impact, improved health and safety features, elimination of regulatory compliance, and price. Research and development at ChemFree is directed toward product extensions, enhancements of the base unit, fluid and filter and adaptations for specialized applications. ChemFree subcontracts the manufacturing of major sub-assemblies built to its specifications to various vendors and performs final assembly and testing at its own facility. There are multiple sources available for subassemblies. INTELLIGENT SYSTEMS CORPORATION -4- 5 INTERQUAD SERVICES - InterQuad Services, with two locations in the London, England area, provides technical training and skills development programs for popular microcomputer software and network products. Some of the most popular offerings are courses for networking products from Novell Inc. and Microsoft Corporation. InterQuad also provides some consulting services related to information systems for business. Current and prospective technical users of personal computers in the UK comprise the market for education/training activities conducted by InterQuad Services. Typically, customers choose training programs based on the software and network products that they have installed or plan to install at their company premises. InterQuad Services uses extensive advertising, telemarketing and direct mail to stimulate demand for its products and services. InterQuad Services competes with a number of similar-sized training/education companies. It competes on the basis of quality of training staff, comprehensive and up-to-date course offerings, price and accessibility of training facilities. With relatively high fixed costs for training staff and facilities, profitability depends upon the right mix of customers and courses to optimize the infrastructure. INTELLIGENT ENCLOSURES - Intelligent Enclosures (iE) is a small subsidiary which designs, manufactures and markets mini-environments which provide critical cleanliness, temperature and humidity control in ultra-clean manufacturing applications such as semiconductor fabrication. Typically, iE's systems surround robotics tools, providing environmental control at the process tool while maintaining operator and maintenance access. The primary market for iE's mini-environment systems is semiconductor manufacturers. iE has systems installed at sites such as Motorola, Intel, AT&T, Siemens, IBM and Kodak. Mini-environments are typically used inside traditional clean-rooms and are installed either in new manufacturing facilities or to retrofit existing ones. Mini-environments are typically sold through robotics tool manufacturers, systems integrators or architectural and engineering firms that incorporate the iE enclosure as part of a complete manufacturing equipment/process offering. The sales cycle is usually long and delivery dates may be re-scheduled due to changes in other vendors' timetables. Typically, iE systems involve considerable customization and are delivered within two to four months of order placement. iE competes against traditional clean-room companies and other enclosure manufacturers that provide a variety of custom and standard products. Certain of its competitors are larger and more established and may have access to greater resources than does the company. iE competes based on technical expertise in air-handling, proprietary product design and superior product features. Materials are available from a number of sources and iE is not dependent on any single vendor. GENERAL - Service for the Company's products varies by product line and is available in the markets served by the Company either directly by Company personnel or through its distributors and dealers. The Company provides warranties of varying length for its products and services and, in some cases, sells annual technical support programs. The Company's subsidiaries in the technology segment sell to many customers in numerous markets and would not experience a material adverse effect if the business of a single customer is lost. Intelligent Systems regularly reviews potential hardware and software companies and products for possible acquisition and/or license. Management expects to continue this practice. INDUSTRY SEGMENT: HEALTH CARE SERVICES PsyCare is an established provider of specialty treatment programs for individuals with psychiatric and psychological disorders, including depression and substance abuse. The programs are conducted under PsyCare's Rapha trademark and are directed toward individuals who prefer a treatment approach that integrates the patient's physical and psychological needs with their Christian beliefs. PsyCare provides a continuum of care, including in-patient hospital programs, partial day programs and intensive group out-patient programs. PsyCare presently has 14 program sites, including both adult and adolescent in multiple states. Hospitals in mid to large size metropolitan areas contract with PsyCare to conduct a Rapha treatment program in their hospital. PsyCare provides medical and program directors as well as therapists and maintains control over all aspects of the treatment, while the hospital provides the physical facility, administrative services, billing and nursing staff. INTELLIGENT SYSTEMS CORPORATION -5- 6 The market for PsyCare's treatment programs includes adults and adolescents suffering from illnesses such as depression, addiction and behavioral disorders. The program's integrated approach appeals particularly to individuals affiliated with churches and other organizations with a Christian basis. Hospitals that contract with PsyCare to offer the Rapha program do so because it addresses a segment of the population not typically being served by the hospital. In the health care services business, the number of patients tends to decline during the summer months and prior to holidays. In addition, there are a number of fundamental changes taking place in the industry. In the past few years, the average length of stay for in-hospital treatment has declined by almost 65 percent. At the same time, managed care payors are exerting pressure to lower reimbursement rates paid to treatment providers. Furthermore, managed care is also placing increased emphasis on drug-based treatment programs, with little or no hospital stay, rather than behavioral modification programs such as those offered by PsyCare. With the focus of many hospitals on expense reduction, PsyCare is continually challenged to maintain its margins. The impact of these trends means that PsyCare must treat many more patients for shorter periods of stay while keeping strict control over expenses. Although the company opened programs at new hospitals in 1997, the total number of inpatient programs declined in 1997 compared to 1996 because of intense pressure by service providers to restrict hospital stay for mental health treatment, which makes the Rapha programs less attractive to hospitals. Given these trends, PsyCare has been reducing overhead and costs and exploring alternatives such as expanding outpatient programs. However, at this point it is uncertain whether this strategy will provide a sustainable, profitable business model. In 1996, approximately 37 percent of Company consolidated revenue was derived from programs associated with one chain of psychiatric hospitals. This percentage declined to 13.5 percent in 1997 as the number of programs at the hospital chain decreased. Working in local communities and with national associations, PsyCare has developed an extensive network of Christian churches and organizations by helping pastors meet the needs of their church members through educational, outreach and counseling programs. This network will often suggest the Rapha Treatment program when it has church members in need of professional help since members feel comfortable that the care is likely to be consistent with their beliefs. PsyCare also reaches its market through radio broadcast, special events, conventions, print media, and word-of-mouth referrals from satisfied patients. PsyCare's competitors include individual and group practices, private hospital-affiliated treatment programs, and other independent treatment programs with a religious component. With the advent of managed care and the restrictions on in-hospital treatment, PsyCare also competes with outpatient programs and drug-based therapies. PsyCare believes it is one of the top Christian programs in the country but fundamental changes in the industry brought about by managed care are affecting the success of PsyCare and other similar programs. Unlike many of its competitors, PsyCare does not own hospitals or clinics but rather contracts with other facilities to provide the Rapha program in their hospital. This strategy reduces PsyCare's fixed costs but makes it somewhat dependent upon decisions made by the hospital over which PsyCare has little control. For instance, a change in a hospital's management or priorities may result in cancellation of a contract and require PsyCare to relocate to another hospital. Among PsyCare's strengths is the strong programmatic basis for its treatment that ensures that treatment received in each location is of consistent content and quality and not dependent on the characteristics of a particular therapist. Another key factor is PsyCare's strong network of Christian organizations that support the program's focus. PATENTS, TRADEMARKS AND TRADE SECRETS The Company has several patents (both issued and pending) covering certain aspects of its products and processes. It may be possible for competitors to duplicate certain aspects of the Company's products and processes even though the Company regards such aspects as proprietary. The Company has registered with the US Patent and Trademark Office and various foreign jurisdictions numerous trademarks and service marks for its products. The Company believes that an active trademark and copyright protection program is important in developing and maintaining brand recognition and protecting its intellectual property. The Company markets its products under trademarks and service marks such as Rapha, iEAir, ACCLAIM, SmartWasher, OzzyJuice and others. PERSONNEL As of February 28, 1998, the Company had 249 full-time equivalent employees. The Company's employees are not represented by a labor union and the Company has not had any work stoppages or strikes. The Company believes that its employee relations are good. INTELLIGENT SYSTEMS CORPORATION -6- 7 AFFILIATED PARTNER COMPANIES From time to time, Intelligent Systems evaluates products or companies that it believes are involved in promising technologies or markets with good growth potential. From time to time, it has acquired or invested in such products, product rights or companies and expects to continue to do so as a regular part of its strategy. The Company holds investment positions in various growth stage companies, most of which are in technology-related fields and privately held. Some examples of the Company's involvement are as follows: - - A significant equity position in PaySys International, Inc. (PaySys), a leading software company involved in payment processing software systems. Although the Company owns 58 percent of the currently issued and outstanding shares of PaySys common stock, it does not consolidate the results of operations of PaySys because the Company's majority ownership is temporary. PaySys filed a registration statement on Form S-1 in the fall of 1997 related to an initial public offering of its common stock but the registration is not yet effective. If the registration becomes effective or PaySys sells equity in a private sale, the Company's ownership would likely decrease to below 50 percent. - - A 34 percent equity position in Visibility, Inc., a privately held software company involved in engineer-to-order software for large customers selling and managing complex products. - - A 3.4 percent equity position in IQ Software Corporation (IQ), a software company in which the Company has been involved since 1987, which completed its initial public offering in 1992. - - A 23.5 percent equity position in Paragon Interface, a privately held company involved in data mapping and translation software targeted initially for the insurance industry. - - A 35 percent equity position in Risk Laboratories, a privately held software company involved in risk management software for corporate risk departments. ITEM 2. PROPERTIES At December 31, 1997, to house its manufacturing, sales, service and administration operations, the Company had leases covering approximately 147,525 square feet in two facilities in Atlanta, GA; 6,101 square feet in Greenville, SC; 7,000 square feet in Denver, CO; and 14,506 square feet in the London, England area. The Company believes that its leased facilities are adequate for its existing and foreseeable business operations. A portion of the headquarters facility is subleased to businesses in the small business incubator. ITEM 3. LEGAL PROCEEDINGS The Company is a party to a small number of legal matters arising in the ordinary course of its business. It is management's opinion that none of these matters will have a material adverse impact on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted by the Company to a vote of its shareholders during the fiscal quarter ended December 31, 1997. INTELLIGENT SYSTEMS CORPORATION -7- 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's 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 the Company's Common Stock as reported by AMEX.
YEAR ENDED DECEMBER 31, 1997 1996 HIGH LOW HIGH LOW - ----------------------------------------------------------------------------------- 1ST QUARTER 4 3 2 11/16 1 7/8 2ND QUARTER 6 1/2 2 7/8 3 1/16 1 3/4 3RD QUARTER 6 1/4 4 1/2 2 15/16 2 4TH QUARTER 7 15/16 4 3 1/4 2 1/2
The Company's Common Stock was held by approximately 750 shareholders of record as of February 27, 1998. No cash dividends were declared or paid by the Company in the two year period ended December 31, 1997. The Company does not intend to pay dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The income statement and balance sheet data for 1994 and 1993 reflect the reclassification of the Company's European Distribution Business as a discontinued operation in June 1994. (in thousands except share amounts)
TWELVE MONTHS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Net Sales $ 21,160 $ 23,678 $ 28,240 $ 21,364 $ 12,598 Net Income (Loss): Continuing Operations (7,176)(a) 4,239(b) 147(c) (6,226)(d) 2,945 (e) Discontinued Operations -- -- -- (1,505) (3,369) ----------- ----------- ----------- ----------- ----------- Net Income (Loss) (7,176) 4,239 147 (7,731) (424) Net Income (Loss) Per Share: Continuing Operations (1.41) 0.80 0.03 (1.05) 0.45 Discontinued Operations -- -- -- (0.25) (0.52) ----------- ----------- ----------- ----------- ----------- Net Income (Loss) Per Share (1.41) 0.80 0.03 (1.30) (0.07) Total Assets 19,091 24,927 23,330 22,755 26,866 Working Capital (1,068) 8,554 4,092 6,089 15,342 Long-term Debt 1,000 -- 50 -- -- Stockholders' Equity 11,396 21,630 18,725 19,192 24,112 Shares Outstanding at Year End 5,104,467 5,126,767 5,312,867 5,575,767 6,413,368
a. Includes $953,000 charge for purchased in-process R&D, $2.6 million gain on sales of investments, $3.0 million write-off of note receivable and $2.3 million loss in equity of investments. b. Includes net gains of $6.9 million on investments and non-recurring charges of $1.25 million. c. Includes $818,000 gain on investment and $1.3 million gain on sale of ISJ. d. Includes $2.2 million write-off of intangibles, $.6 million expense allocated to purchase price of 1994 acquisitions and $1.5 million gain on sale of Peachtree Software note. e. Includes gain of $4.1 million on settlement of lawsuit. INTELLIGENT SYSTEMS CORPORATION -8- 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Effective July 1, 1997, the Company acquired QS, Inc. ("QS") and has included the results of QS in the consolidated operating results since that date. In December 1995, the Company sold its Intelligent Systems Japan ("ISJ") subsidiary and in September 1996 sold the assets of a small health care subsidiary. Results of operations of these businesses are not included in the consolidated results of operations after the respective sale dates. A significant amount of the variance in operating results between 1995 and 1996 can be attributed to the sale of ISJ in 1995. RESULTS OF OPERATIONS Net sales are derived from two major areas: technology-related products and services and health care services. Principal operating subsidiaries in the technology segment include InterQuad Services (software training programs), ChemFree Corporation (bio-remediating parts washers), Intelligent Enclosures (mini-environment systems for ultraclean manufacturing) and HumanSoft LLC, which includes QS operations (health and human services software for public health agencies). The operating subsidiary in the health care segment is PsyCare America (specialty psychiatric treatment programs). SALES - Net sales in 1997 were $21,160,000 compared to $23,678,000 in 1996. Although each of the technology sector companies experienced revenue increases ranging from 11 percent to almost 100 percent, the 11 percent decline overall is attributed to a decrease of more than 45 percent in revenue derived from the PsyCare operations. PsyCare had fewer inpatient programs in 1997 than in 1996 and the contract reimbursement rates were lower in 1997 than in 1996. In the technology sector, the companies sold a greater volume of products and services in 1997 than in 1996. The Company also benefited from the acquisition of QS part way through 1997. Net sales in 1996 were $23,678,000 compared to $28,240,000 in 1995. The 16 percent decline year-to-year is principally related to the disposition of certain businesses during 1996 and 1995. Revenue from the ongoing companies was essentially flat year-to-year with a net increase in revenue from the technology companies and a slight decline in PsyCare revenue. Revenue increases in the technology sector were led by InterQuad and HumanSoft based on a greater volume of services and products sold, offset in part by a decline in revenue at the ChemFree subsidiary due in large part to stock balancing and a product upgrade program which offset current revenue. The slight decline year-to-year in health care service revenue reflects a fourth quarter reduction in the number of inpatient programs. Health care services represent 29 percent, 55 percent and 50 percent of revenue in 1997, 1996 and 1995, respectively. The sharp decline in the contribution of the health care services is due to fewer inpatient programs at the PsyCare subsidiary as well as the sale in September 1996 of another health care subsidiary. Revenue derived from international sales was 33 percent in 1997, compared to 25 percent in 1996 and 32 percent in 1995. The increase in 1997 was due to higher sales volume at the InterQuad subsidiary, the first international sales of ChemFree products in the UK and Korea and the decrease in PsyCare's revenues, which are all domestic. The year-to-year decline in 1996 is due to the sale of ISJ in 1995. COST OF SALES - Cost of sales in 1997 was 62 percent of revenue compared to 54 percent of revenue in 1996. Cost of sales differs for each of the Company's subsidiaries, ranging in 1997 from 50 to 70 percent of revenue. The overall increase in cost of sales as a percentage of revenue relates primarily to higher cost of services at the InterQuad subsidiary due to increased use of higher paid consultants to conduct training classes for part of the year as a result of a shortage of qualified employees. In addition, PsyCare experienced lower average rates on contract reimbursement for inpatient programs. Cost of sales in 1996 was 54 percent of revenue compared to 52 percent in 1995. The change is principally related to the fact that ISJ's cost for software products was significantly lower than the cost for products and services provided by the remaining subsidiaries, thus contributing to a lower overall cost of sales in 1995. After eliminating the effect of ISJ, for the remaining operations, there was a decline in cost of sales as a percent of revenue in the health care service segment due to operating efficiencies and lower personnel costs and a slight increase in cost of sales for the technology companies reflecting price pressure due to competition. OPERATING EXPENSES - In 1997, marketing and general and administrative expenses declined by approximately 17 percent and 4 percent, respectively, compared to 1996 on an 11 percent decline in revenue. PsyCare reduced its marketing expenses significantly in line with lower revenue levels, while increases at certain technology subsidiaries were tied to generating and supporting higher sales volumes. General and administrative expenses declined in absolute values year-to-year but increased INTELLIGENT SYSTEMS CORPORATION -9- 10 slightly as a percentage of revenue in 1997 compared to 1996. The acquisition of QS increased overhead expenses in the second half of the year. Research and development expense in 1997 was $1.5 million in 1997 compared to $286,000 in 1996. The difference is due principally to a non-recurring charge of $953,000 booked in the third quarter of 1997 related to the allocation of a portion of the QS purchase price to in-process research and development. The remaining increase is due to more spending on new product development at the HumanSoft operation. Expenses for marketing, general and administrative and research and development activities were lower by $3,228,000 in 1996 than in 1995. These expenses declined by 20 percent year-to-year on a 16 percent decline in revenue. After eliminating the expense and revenue of ISJ, expenses at the comparable remaining subsidiaries represented 55 percent of revenue in 1996, a significant improvement compared to 70 percent of revenue in 1995. The improvement in the expense to revenue ratio results from improved operating efficiency at the PsyCare operation through consolidation of functions and programs, as well as controlling expenses while growing revenues at the other subsidiaries, except for ChemFree. At ChemFree, expenses increased to provide the infrastructure to support the existing installed base of products, to expand the marketing and sales efforts to develop new channels of distribution and target markets, and to add new product enhancements. In 1996, PsyCare incurred a non-recurring expense of $250,000 in the second quarter to buy out a long-term contract and amend a license agreement. INTEREST INCOME - Net interest income in 1997 was $350,000, 30 percent lower than in 1996. The decrease relates to higher interest expense in 1997 as well as a reduction in interest bearing notes receivable. Net interest income in 1996 increased by $73,000 over 1995 due in part to lower interest expense in 1996 because the Company repaid its outstanding bank debt in 1996. INVESTMENT INCOME - In 1997, the Company recorded a net loss of $2,585,000 on investments compared to investment income of $5,844,000 in 1996. In 1997, the principal components of this category include a gain of $1.9 million on the sale of PaySys stock (see Note 3), a gain of $469,000 on the sale of an investment in Astra Communications, a gain of $217,000 on the sale of OrCAD stock (see Note 3), a $3.0 million write-off of a note receivable from DayStar Digital, Inc. (see Note 5) and $2.3 million in net losses in the equity of investments accounted for by the equity method. In 1996, the Company recorded gains of $6.6 million on aggregate sales of 315,000 shares of common stock of IQ Software Corporation (IQ) from time to time during the year. The Company also recorded a gain, net of taxes, of $337,000 on the sale of 104,484 shares of OrCAD, Inc. common stock in OrCAD's initial public offering (see Note 3). In the fourth quarter of 1996, the Company recorded a charge of $1.0 million to reduce the carrying value of its minority equity investment in DayStar. In 1995, the Company recorded a gain of $818,000 on the sale of a portion of its holdings in IQ and a gain of $1.3 million on the exchange of the Company's equity interest in ISJ for OrCAD, Inc. common stock. In addition, in 1995 the Company recorded a loss of $203,000 related to its equity in the losses of PaySys. OTHER INCOME - Other income/expense in 1997 and 1996 consists mainly of several miscellaneous, non-recurring sources of income and expense. In 1995, the Company recognized income from marketing and consulting agreements related to the sale of a subsidiary in 1991. The agreements terminated in 1995 and thus no related income was recorded in later years. TAXES - Taxes payable in 1997 relate to the operations of QS. The Company used net loss carryforwards to offset taxable income in 1996. Income taxes in 1995 are related to the income of ISJ prior to its sale in December 1995 as well as a partial reversal of a tax refund at a subsidiary upon completion of final tax returns for a prior period. COMMON SHARES - The Company has repurchased its common shares in each of the last three years under a stock repurchase program. The repurchases resulted in 5,104,467, 5,126,767 and 5,312,867 shares outstanding at December 31, 1997, 1996 and 1995, respectively. ACCOUNTING CHANGES - In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation". The Statement requires companies to estimate the value of all stock-based compensation using a recognized pricing model. Companies have the option of recognizing this value as an expense or disclosing its pro forma effects on net income. The Company adopted the disclosure requirements of this statement and has chosen to continue to apply the accounting provision of Accounting Principle Board Opinion No. 25. As a result, the adoption of this new standard did not have an effect on the Company's financial position or results of operations. Effective January 1996, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which established accounting standards for INTELLIGENT SYSTEMS CORPORATION -10- 11 the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, as well as for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of this standard did not have a material effect on the Company's financial position. Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share", which changes the method of computing earnings per share. The new standard requires presentation of "basic earnings per share" and "diluted earnings per share", as defined. Basic and diluted earnings per share amounts pursuant to SFAS No. 128 do not differ from reported earnings per share amounts under existing accounting rules. In October 1997, the AICPA issued Statement of Position 97-2, "Software Revenue Recognition". SOP 97-2 clarifies and changes some software recognition practices and supersedes the existing guidance of SOP 91-1. SOP 97-2 must be adopted effective January 1, 1998. The Company's management does not believe adopting SOP 97-2 will have a material impact on the Company's financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES In 1997, the principal sources of liquidity were $2.0 million from the sale of PaySys shares (see Note 3), $1.7 million from the sale of investments in OrCAD and Astra Communications, advances totaling approximately $700,000 under bank lines of credit, advances under short-term notes totaling $778,000, the maturity of certificates of deposit totaling $1.1 million and approximately $1.0 million generated from operations. The principal uses of funds were $870,000 to fund the acquisition of QS, Inc. (see Note 2), $4.6 million to acquire a 34 percent equity position in Visibility, Inc. (a privately held software company), $1.7 million to increase the Company's long-term investments in several small, privately-held technology companies, $1.2 million in net advances under loans to companies in which the Company holds long-term investments and $1.2 million to acquire property and equipment mainly related to new facilities at the InterQuad subsidiary. Notes payable and long-term debt at December 31, 1997 are comprised of $700,000 in bank debt, $1.5 million in notes payable to the sellers of QS, and $778,000 in notes related to two acquisitions of long-term investments. In 1996, the principal sources of liquidity were $7,193,000 from the proceeds of various sales of IQ stock, $1,069,000 from the proceeds of the sale of OrCAD common stock and repayment of a note receivable of $400,000. The principal uses of funds were to increase the Company's long-term investments as a minority investor in several promising, privately-held companies, to repay $1,488,000 of bank debt, to repurchase 236,100 shares of the Company's common stock during the year for $619,000, to purchase approximately $1.4 million in fixed assets (mainly computers and related equipment), to purchase certificates of deposit totaling $1,056,000, and to fund working capital requirements of domestic operations. In October 1997, PaySys filed a registration statement on Form S-1 with respect to a proposed initial public offering of its common stock, in which the Company had anticipated selling some of its PaySys stock to provide additional liquidity. As of the date hereof, the registration has not become effective. Although the Company believes that PaySys will be successful in raising capital in 1998 either through a public offering or private sale, there can be no assurance as to the timing or amount of capital raised or to what extent the Company would participate in the sale of PaySys stock. Consequently, subsequent to the year-end, the Company arranged for an additional bank loan of up to $1,000,000 secured by the Company's holdings in PaySys common stock which the Company believes will be adequate to fund its operations and commitments in the foreseeable future. The Company will not make new investments while the bank loan is outstanding without the bank's permission. The Company believes it could enter into a private sale of some portion of its PaySys holdings, at a significant gain, if it desired to do so prior to an effective public offering of PaySys common stock. The Company believes it has adequate access to capital through bank borrowings or sale of assets to support current operations and plans. As explained in Note 1 to the Consolidated Financial Statements, a substantial deterioration in the financial condition of any of the companies in which the Company has significant long-term investments could have an adverse effect on the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this report. See page F-1. INTELLIGENT SYSTEMS CORPORATION -11- 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No independent public accountant of the Company has resigned, indicated any intent to resign or been dismissed as the independent public accountant of the Company during the two years ended December 31, 1997 or subsequent thereto. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to management's nominees for directors and to the executive officers of the Company is set forth under the captions "Proposal 1 - The Election of Directors - Nominees" and "Proposal 1 - The Election of Directors - Executive Officers" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on June 12, 1998. Such information is incorporated herein by reference. Information regarding compliance by directors and executive officers of the Company and owners of more than 10 percent of the Company's Common Stock with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the above referenced Proxy Statement. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to management compensation is set forth under the captions "Proposal 1 - The Election of Directors - Executive Compensation" in the Company's Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference, except for the information set forth in the subsections entitled "Proposal 1 - The Election of Directors - Executive Compensation - Board Compensation Committee Report on Executive Compensation" and "Performance Graph," which specifically are not so incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding ownership of the Company's $0.01 par value Common Stock by certain persons is set forth under the caption "Voting - Principal Shareholders, Directors and Certain Executive Officers" in the Company's Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT. 1. Financial Statements The following consolidated financial statements and related report of independent public accountants are included in this report and are incorporated by reference in Part II, Item 8 hereof. See the Index to Financial Statements and Supplemental Schedules on page F-1 hereof. Report of Independent Public Accountants Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 INTELLIGENT SYSTEMS CORPORATION -12- 13 Consolidated Statements of Cash Flow for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following financial statement schedules are included in this report. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions or are inapplicable or because the information required is included in the consolidated financial statements or notes thereto. See the Index to Financial Statements and Supplemental Schedule on page F-1 hereof. Schedule II - Valuation and Qualifying Accounts and Reserves Report of Independent Auditors for InterQuad Services Limited Report of Independent Auditors for PaySys International, Inc. Consolidated Balance Sheets of PaySys at December 31, 1997 and 1996 Consolidated Statements of Operations of PaySys for the three years ended December 31, 1997 Consolidated Statements of Changes in Stockholders' Equity of PaySys for the three years ended December 31, 1997 Consolidated Statements of Cash Flows of PaySys for the three years ended December 31, 1997 Notes to Consolidated Financial Statements of PaySys 3. Exhibits The following exhibits are filed with or incorporated by reference in this report. The Company will furnish any exhibit upon request to 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. 2.1 Stock Exchange Agreement between OrCAD, Inc., Intelligent Systems Corporation, Stuart A. Harrington, Michel A. Burton, and various ISJ minority shareholders dated December 2, 1995. (Incorporated by reference to Exhibit 2.1 to the Registrant's Form 10-K for the year ended December 31, 1995.) 2.2 Piggyback Registration Rights Agreement regarding stock of OrCAD, Inc. dated December 1, 1995. (Incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-K for the year ended December 31, 1995.) 2.3 Stock Purchase Agreement between Intelligent Systems Corporation and Francis Crowder, Sr., Marion S. Crowder, Kevin W. Davidson and Charles S. Verdin III dated July 1, 1997. 2.4 Stock Purchase Agreement between Intelligent Systems Corporation and Oak Investment Partners V, L.P. and Oak V Affiliate Fund, L.P. dated March 31, 1997. 3(i) Articles of Amendment of Articles of Incorporation dated November 25, 1997. (Incorporated by reference to Exhibit 3.1 to the Registrant's Report on Form 8-K dated November 25, 1996.) 3(ii) Bylaws of the Registrant dated March 11, 1997. (Incorporated by reference to Exhibit 3(ii) of the Registrant's Form 10-K for the year ended December 31, 1996.) 4.1 See Exhibits 3(i) and 3(ii) for instruments defining rights of holders of Common Stock and Preferred Stock of Registrant. 4.2 Rights Agreement dated as of November 25, 1997 between the Registrant and American Stock Transfer & Trust Company as Rights Agent. (Incorporated by reference to Exhibit 4.1 of the Registrant's Report on Form 8-K dated November 25, 1997.) 4.3 Form of Rights Certificate. (Incorporated by reference to Exhibit 4.2 of the Registrant's Report on Form 8-K dated November 25, 1997.) 10.1 Lease Agreement dated March 11, 1985, between a subsidiary of the Registrant and A.R. Weeks. (Incorporated by reference to Exhibit 10.1 to Intelligent Systems Corporation Annual Report on Form 10-K for the fiscal year ended March 31, 1986.) INTELLIGENT SYSTEMS CORPORATION -13- 14 10.2 Second Amendment to Lease Agreement dated June 19, 1997 between a subsidiary of the Registrant and A.R. Weeks. 10.3 Promissory Note of Registrant in favor of NationsBank dated September 29, 1995 and related Security Agreement. (Incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 1995.) 10.4 Management Compensation Plans and Arrangements: (a) Intelligent Systems Corporation 1991 Stock Incentive Plan, amended June 6, 1997. (b) Intelligent Systems Corporation Change in Control Plan for Officers. (c) Intelligent Systems Corporation Outside Director's Retirement Plan. Item 10.6 (a) is incorporated by reference to Exhibit 4.1 of the Registrant's Form S-8 dated July 25, 1997. Items 10.6 (b) and (c) are incorporated by reference to Exhibit 10.4 to Registrant's Form 10-K for the year ended December 31, 1993. 10.5 Form of Promissory Note of Registrant in favor of sellers of QS, Inc. dated as of July 1, 1997. 10.6 Loan Agreement dated February 17, 1998 between Registrant and NationsBank, N.A. 10.7 Pledge Agreement dated February 17, 1998 between Registrant and NationsBank, N.A. 21.0 List of subsidiaries of Registrant. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Morley and Scott. 23.3 Consent of Ernst and Young LLP. 27 Financial Data Schedule (for SEC use only) (b) REPORTS ON FORM 8-K. The Registrant filed a report on Form 8-K dated November 25, 1997. (c) SEE ITEM 14(a)(3) ABOVE. (d) SEE ITEM 14(a)(2) ABOVE. INTELLIGENT SYSTEMS CORPORATION -14- 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. INTELLIGENT SYSTEMS CORPORATION Registrant By: /s/ J. LELAND STRANGE ---------------------------------------- J. Leland Strange Chairman of the Board, President and Chief Executive Officer Dated: April 15, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE /s/ J. LELAND STRANGE Chairman of the Board, President, April 15, 1998 - ------------------------------ Chief Executive Officer and Director J. Leland Strange (Principal Executive Officer) /s/ HENRY H. BIRDSONG Chief Financial Officer April 15, 1998 - ------------------------------ (Principal Accounting and Financial Officer) Henry H. Birdsong /s/ DONALD A. MCMAHON Director April 15, 1998 - ------------------------------ Donald A. McMahon /s/ JAMES V. NAPIER Director April 15, 1998 - ------------------------------ James V. Napier /s/ JOHN B. PEATMAN Director April 15, 1998 - ------------------------------ John B. Peatman /s/ PARKER H. PETIT Director April 15, 1998 - ------------------------------ Parker H. Petit
INTELLIGENT SYSTEMS CORPORATION -15- 16 INTELLIGENT SYSTEMS CORPORATION INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES The following consolidated financial statements and schedules of the Registrant and its subsidiaries are submitted herewith in response to Item 8: FINANCIAL STATEMENTS: Report of Independent Public Accountants...............................................................F-2 Consolidated Balance Sheets - December 31, 1997 and 1996...............................................F-3 Consolidated Statements of Operations - Years Ended December 31, 1997, 1996 and 1995........................................................F-4 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995........................................................F-5 Consolidated Statements of Cash Flow - Years Ended December 31, 1997, 1996 and 1995........................................................F-6 Notes to Consolidated Financial Statements.............................................................F-7
FINANCIAL STATEMENT SCHEDULES: The following supplemental schedules of the Registrant and its subsidiaries are submitted herewith in response to Item 14(a)(2): Schedule II - Valuation and Qualifying Accounts and Reserves...........................................S-1 Report of Independent Auditors for InterQuad Services Limited..........................................S-2 Report of Independent Auditors for PaySys International, Inc...........................................S-3 Consolidated Balance Sheets of PaySys at December 31, 1997 and 1996.................................S-4 Consolidated Statements of Operations of PaySys for the three years ended December 31, 1997.........S-5 Consolidated Statements of Changes in Shareholders' Equity (Deficit) of PaySys for the three years ended December 31, 1997......................................................S-6 Consolidated Statements of Cash Flow of PaySys for the three years ended December 31, 1997..........S-7 Notes to Consolidated Financial Statements of PaySys................................................S-8
INTELLIGENT SYSTEMS CORPORATION F-1 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS OF INTELLIGENT SYSTEMS CORPORATION: We have audited the accompanying consolidated balance sheets of Intelligent Systems Corporation (a Georgia corporation) and its subsidiary companies and operating partnerships as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of InterQuad Services Limited, a majority-owned subsidiary, which statements reflect total assets and total revenues of 18.9 percent and 31.2 percent, respectively, in 1997 and of 9.4 percent and 25.1 percent, respectively, in 1996 of the consolidated totals. We did not audit the financial statements of PaySys International, Inc., an investment which is reflected in the accompanying financial statements using the equity method of accounting. The investment in PaySys International, Inc. represents 0 percent of total assets in 1997 and 6.9 percent of total assets in 1996, and the equity in its 1997 net loss and its 1996 net income represents, respectively, 40 percent of consolidated net loss for 1997 and 1.1 percent of consolidated net income for 1996. The statements of InterQuad Services Limited and PaySys International, Inc. were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for InterQuad Services Limited and PaySys International, Inc., is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Intelligent Systems Corporation and its subsidiary companies and operating partnerships as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule II in Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia February 27, 1998 INTELLIGENT SYSTEMS CORPORATION F-2 18 INTELLIGENT SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
AS OF DECEMBER 31, 1997 1996 - ----------------------------------------------------------------------------------------------------------- ASSETS - ----------------------------------------------------------------------------------------------------------- Current assets: Cash $ 43 $ 2,434 Certificate of deposit -- 1,056 Accounts receivable, net 3,855 3,764 Notes and interest receivable 330 3,212 Inventories 611 648 Other current assets 788 737 - ----------------------------------------------------------------------------------------------------------- Total current assets 5,627 11,851 - ----------------------------------------------------------------------------------------------------------- Long-term investments 9,512 8,967 Long-term notes receivable 133 1,414 Property and equipment, at cost less accumulated depreciation and amortization 2,848 2,126 Excess of cost over underlying net assets of businesses acquired, net of accumulated amortization 971 569 - ----------------------------------------------------------------------------------------------------------- Total assets $ 19,091 $ 24,927 =========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------- Current liabilities: Short-term borrowings $ 1,979 $ -- Accounts payable 1,285 984 Accrued expenses and other current liabilities 3,431 2,313 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 6,695 3,297 - ----------------------------------------------------------------------------------------------------------- Long-term debt 1,000 -- - ----------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, $.01 par value, 20,000,000 authorized, 5,104,467 and 5,126,767 outstanding at December 31, 1997 and 1996, respectively 51 51 Paid-in capital 24,046 24,139 Foreign currency translation adjustment (193) (196) Unrealized gain in available-for-sale securities 836 3,804 Accumulated deficit (13,344) (6,168) - ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 11,396 21,630 - ----------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 19,091 $ 24,927 ===========================================================================================================
The accompanying notes are an integral part of these balance sheets. INTELLIGENT SYSTEMS CORPORATION F-3 19 INTELLIGENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except share amounts)
YEAR ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Net sales $ 21,160 $ 23,678 $ 28,240 Expenses: Cost of sales 13,031 12,838 14,579 Marketing 3,860 4,624 4,280 General & administrative 7,638 7,983 10,846 Research & development 1,485 286 995 - -------------------------------------------------------------------------------------------------------------------- Loss from operations (4,854) (2,053) (2,460) - -------------------------------------------------------------------------------------------------------------------- Other income: Interest income, net 350 501 428 Investment income (loss), net (2,585) 5,844 1,896 Other income (loss), net (61) (38) 399 - -------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax provision and minority interest (7,150) 4,254 263 - -------------------------------------------------------------------------------------------------------------------- Income tax provision 16 3 102 - -------------------------------------------------------------------------------------------------------------------- Income (loss) before minority interest (7,166) 4,251 161 - -------------------------------------------------------------------------------------------------------------------- Minority interest 10 12 14 - -------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (7,176) $ 4,239 $ 147 ==================================================================================================================== Basic and diluted net income (loss) per share $ (1.41) $ 0.80 $ 0.03 ==================================================================================================================== Weighted average shares outstanding 5,087,456 5,278,269 5,371,401 ====================================================================================================================
The accompanying notes are an integral part of these statements. INTELLIGENT SYSTEMS CORPORATION F-4 20 INTELLIGENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands except share amounts)
YEAR ENDED DECEMBER 31, STOCKHOLDERS' EQUITY 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- COMMON STOCK, NUMBER OF SHARES, beginning of year 5,126,767 5,312,867 5,575,767 Exercise of options during year 25,000 50,000 -- Purchase and retirement of stock (47,300) (236,100) (262,900) - --------------------------------------------------------------------------------------------------------------- End of year 5,104,467 5,126,767 5,312,867 - --------------------------------------------------------------------------------------------------------------- COMMON STOCK, AMOUNT, beginning of year $ 51 $ 53 $ 56 Purchase and retirement of stock -- (2) (3) - --------------------------------------------------------------------------------------------------------------- End of year 51 51 53 - --------------------------------------------------------------------------------------------------------------- PAID-IN CAPITAL, beginning of year 24,139 24,756 25,263 Proceeds from options exercised 67 -- -- Purchase and retirement of stock (160) (617) (507) - --------------------------------------------------------------------------------------------------------------- End of year 24,046 24,139 24,756 - --------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION ADJUSTMENT, beginning of year (196) (153) (141) Foreign currency translation adjustment during year 3 (43) (12) - --------------------------------------------------------------------------------------------------------------- End of year (193) (196) (153) - --------------------------------------------------------------------------------------------------------------- UNREALIZED GAIN IN AVAILABLE-FOR-SALE SECURITIES 836 3,804 4,476 - --------------------------------------------------------------------------------------------------------------- ACCUMULATED DEFICIT, beginning of year (6,168) (10,407) (10,554) Net income (loss) (7,176) 4,239 147 - --------------------------------------------------------------------------------------------------------------- End of year (13,344) (6,168) (10,407) - --------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 11,396 $ 21,630 $ 18,725 ===============================================================================================================
The accompanying notes are an integral part of these statements. INTELLIGENT SYSTEMS CORPORATION F-5 21 INTELLIGENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)
YEAR ENDED DECEMBER 31, CASH PROVIDED BY (USED FOR): 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- OPERATIONS: Net income (loss) $(7,176) $ 4,239 $ 147 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities, net of effects of acquisitions and dispositions: Depreciation and amortization 2,193 985 1,451 Loss (gain) from sale or write-down of assets, net 330 (5,804) (2,545) Equity in net loss (gain) of affiliates 2,262 (40) 203 Changes in operating assets and liabilities: Accounts receivable 453 195 (1,210) Inventories 37 (203) (180) Other current assets (36) (202) 66 Accounts payable 301 (520) 665 Accrued expenses and other current liabilities 2,668 885 316 - -------------------------------------------------------------------------------------------------------------- Cash provided by (used for) continuing operations 1,032 (465) (1,087) - -------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from sale of investments 3,667 8,267 939 Decrease in net assets/liabilities of discontinued operations 100 -- 939 Acquisition of company, net of cash acquired (870) -- (8) Increase in ownership of subsidiaries (50) (136) -- Decrease in minority interests -- -- (136) Dispositions of short-term investments -- -- 1,328 Acquisitions of long-term investments (6,329) (1,025) (796) Advances under notes receivable, net (1,223) (115) (1,644) Maturity (purchases) of certificates of deposit 1,056 (1,056) -- Purchases of property and equipment, net (1,162) (1,406) (752) - -------------------------------------------------------------------------------------------------------------- Cash provided by (used for) investing activities (4,811) 4,529 (130) - -------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net borrowings (repayments) under short-term borrowing arrangements 1,478 (1,488) 1,249 Purchase and retirement of stock (160) (619) (509) Exercise of stock options 67 -- -- Foreign currency translation adjustment 3 (43) 27 - -------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities 1,388 (2,150) 767 - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (2,391) 1,914 (450) Cash at beginning of year 2,434 520 970 - -------------------------------------------------------------------------------------------------------------- Cash at end of year $ 43 $ 2,434 $ 520 ==============================================================================================================
The accompanying notes are an integral part of these statements. INTELLIGENT SYSTEMS CORPORATION F-6 22 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - Intelligent Systems Corporation, a Georgia corporation (the "Corporation" or the "Company"), was formed in November 1991 to acquire through merger the business, net assets and operations of Intelligent Systems Master, L.P. Nature of Operations - The Company is involved in creating and managing businesses through flexible partnership arrangements. Consolidated partnership companies (in which the Company has the majority ownership and control) are principally engaged in two industries: technology related products and services and health care services (as defined more specifically in Note 14). The Company's affiliate partnership companies (in which the Company has a minority ownership or non-controlling stake) are mainly involved in the technology industry. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 intercompany accounts and transactions. Investments - Investments in entities in which the Company has a 20 to 50 percent ownership interest or where majority ownership is temporary are accounted for by the equity method. Investments of less than 20 percent in non-marketable equity securities are accounted for at the lower of cost or market. Marketable securities are accounted for in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The aggregate fair value of the Company's available-for-sale securities, which consist primarily of 157,801 shares of IQ Software Corporation (IQ) common stock as of December 31, 1997 and 1996 and 104,484 shares of common stock of OrCAD, Inc. (OrCAD) as of December 31, 1996, totaled $1,288,000 and $4,818,000, at December 31, 1997 and 1996, respectively. Such amounts include unrealized holding gains of $836,000 and $3,804,000, as of December 31, 1997 and 1996, respectively, which are reflected as a separate component of stockholders' equity. In 1997, the Company recorded a gain of $217,000 and cash proceeds of $948,000 from the sale of 104,484 shares of common stock of OrCAD as well as a gain of $1,865,000 and cash proceeds of $2.0 million on the sale of 50,537 shares of common stock of PaySys International, Inc. (Note 3). In 1996, the Company recorded gains of $6,628,000 and cash proceeds of $7,193,000 on sales of 315,000 shares of IQ common stock as well as a gain of $337,000 and cash proceeds of $1,069,000 on the sale of 104,484 shares of common stock of OrCAD. The gains on the transactions are calculated based on the average cost basis of the securities. The Company's short-term investments are classified as trading securities under SFAS No. 115. The impact on the December 31, 1997 and 1996 financial statements of applying SFAS No. 115 to the trading securities was immaterial. Approximately $6.6 million of the Company's long-term investments at December 31, 1997 are concentrated in IQ and Visibility, Inc. (see Note 4). A deterioration in the financial condition of either of these companies could have an adverse effect on the Company's financial condition. Translation of Foreign Currencies - The Company considers that local currencies are the functional currencies for foreign operations. Assets and liabilities are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of stockholders' equity. Gains and losses which result from foreign currency transactions are included in earnings. Inventories - Inventories are stated at the lower of average cost or market. Cost includes labor, materials and production overhead. Market is defined as net realizable value. Property and Equipment - Property and equipment are carried at cost. For financial reporting purposes, depreciation is provided using the 150 percent declining balance method over the estimated lives of the assets, as follows:
CLASSIFICATION USEFUL LIFE IN YEARS - -------------------------------------------------------------- Operating equipment 5 Furniture & fixtures 7 Leasehold improvements 1-7 - --------------------------------------------------------------
Accumulated depreciation and amortization was $4,386,000 and $3,162,000 at December 31, 1997 and 1996, respectively. Intangibles - Intangibles are carried at cost net of related amortization. The excess of costs over underlying net assets of businesses acquired is generally amortized over periods of three to five years using the straight-line method. Accumulated amortization of intangibles totaled $1.8 million and $1.2 million at December 31, 1997 and 1996, respectively. The Company follows a policy of writing off the asset and accumulated amortization for fully amortized intangibles. The Company periodically reviews the values INTELLIGENT SYSTEMS CORPORATION F-7 23 assigned to intangible assets to determine whether they have been permanently impaired. Relative to goodwill, the Company uses an estimate of the undiscounted cash flows of the applicable entity over the remaining life of the goodwill in measuring whether the goodwill is recoverable. Based on this analysis, the Company wrote off $367,000 of goodwill related to Carisys, Inc. in 1995. This write-off is reflected in general and administrative expense in the accompanying statements of operations. In 1997, 1996 and 1995, the Company recorded intangible amortization expense of approximately $604,000, $332,000 and $773,000, respectively. In 1997, the Company expensed $953,000 of purchased research and development related to the acquisition of QS, Inc. as more fully discussed in Note 2. This expense is included in research and development expense on the accompanying statements of operations. The Company conforms to the requirements of SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", which requires capitalization of costs incurred in developing new software once technological feasibility, as defined, has been reached. Costs of maintaining existing software and research and development are expensed as incurred. The Company did not capitalize any software development costs during the years ended December 31, 1997, 1996 and 1995. Accrued Expenses and Other Current Liabilities - Accrued expenses and other liabilities at December 31, 1997 and 1996 consist of the following:
(in thousands) 1997 1996 - --------------------------------------------------------------- Accrued wages and payroll taxes $ 574 $392 Deferred revenue 1,748 421 Other accrued expenses 721 -- - ---------------------------------------------------------------
Warranty Costs - Estimated costs associated with product warranties are accrued as an expense in the period the related sales are recognized. Revenue Recognition - Revenue is derived from sales of software licenses, technology-related products and services and health care services. The Company recognizes revenue when products are shipped or, in the case of service providers, when the services are rendered. Revenue recognition practices for software are in accordance with Statement of Position 91-1, "Software Revenue Recognition". The Company generally recognizes software license revenue upon delivery of the software and related documentation when there are no significant remaining obligations. The Company accrues the costs of insignificant obligations remaining when software license revenue is recognized. Service fees received from the sale of software maintenance and support contracts provide customers access to technical support and minor upgrades to licensed revenues and are recognized as services are provided over the life of such contracts. The Company provides for estimated sales returns in the period in which the sales are recorded. Cost of Sales - Cost of sales includes direct material, direct labor and production overhead for product companies and direct cost of services rendered for service companies. Accounting Changes - Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share", which changes the method of computing earnings per share. The new standard requires presentation of "basic earnings per share" and "diluted earnings per share", as defined. Basic and diluted earnings per share amounts pursuant to SFAS No. 128 do not differ from reported earnings per share amounts under existing accounting rules. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation". The Statement requires companies to estimate the value of all stock-based compensation using a recognized pricing model. Companies have the option of recognizing this value as an expense or disclosing its pro forma effects on net income. The Company has adopted the disclosure requirements of this statement and has chosen to continue to apply the accounting provision of Accounting Principle Board Opinion No. 25. As a result, the adoption of this new standard did not have an effect on the Company's financial position or results of operations. See Note 11. Effective January 1996, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, as well as for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of this standard did not have a material effect on the Company's financial position. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income". The Statement requires companies to report comprehensive income and its components in its financial statements. Comprehensive income is the total of net income and all other nonowner changes in equity in a period. The Company will adopt the disclosure requirements of this statement in March 1998. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Statement requires a management approach to be used when reporting business segments. Reportable segments are based on products and services, geography, legal structure or management structure. The Company will adopt the disclosure requirements of this statement in March 1998. INTELLIGENT SYSTEMS CORPORATION F-8 24 In October 1997, the AICPA issued Statement of Position 97-2, "Software Revenue Recognition". SOP 97-2 clarifies and changes some software recognition practices and supersedes the existing guidance of SOP 91-1. SOP 97-2 must be adopted effective January 1, 1998. The Company's management does not believe adopting SOP 97-2 will have a material impact on the Company's financial position or results of operations. NOTE 2 ACQUISITIONS Carisys, Inc. - Effective February 8, 1995, the Company acquired a controlling interest in Carisys, a start-up engaged in the manufacture and sale of carrier tape products. The Company had previously held a minority ownership position in Carisys. The Company paid $100,000 in cash for its equity interest and exercised an existing warrant for no additional consideration. The acquisition was accounted for as a purchase. Since the date of acquisition, the Company has consolidated the results of operations of Carisys without recording a minority interest, since there are no other contributing investors. The Company wrote off $367,000 of goodwill related to Carisys in the fourth quarter of 1995 and the business wound down its operations in early 1996 due to unexpected losses and market changes. QS, Inc. - Effective July 1, 1997, the Company acquired all of the outstanding common stock of QS, Inc. (QS), a company engaged in providing software products and services to the public health market. The Company paid $2.0 million in cash and issued a promissory note for $1.5 million due in three equal annual installments beginning July 1, 1998 and bearing interest at 8.5 percent per annum, payable quarterly. The promissory note is guaranteed by an executive officer of the Company. The acquisition was accounted for as a purchase. The Company expensed $953,000 of purchased research and development projects that had not reached technological feasibility and that did not have an alternative future use. Since the acquisition date, the Company has consolidated the results of operations of QS. NOTE 3 SALE OF ASSETS PaySys International, Inc. - On March 31, 1997, the Company sold 50,537 (252,685 post-split) shares of common stock of PaySys International, Inc. ("PaySys") in a private transaction. The Company received $2.0 million in cash for the stock and recorded a gain of $1,864,000 on the sale. The Company retains 4,135,330 post-split shares of common stock of PaySys as of December 31, 1997. Intelligent Systems Japan, K. K. - Effective December 2, 1995, the Company sold all its ownership interest in Intelligent Systems Japan (ISJ), a subsidiary company, to OrCAD, Inc. The Company exchanged its interest in ISJ for 208,968 shares of common stock of OrCAD. The Company recorded a gain of $1.3 million in the quarter ended December 31, 1995 on the exchange transaction. On March 1, 1996, OrCAD completed its initial public offering. The Company sold one-half of its OrCAD stock (104,484 shares) in the initial public offering and recognized a gain, net of tax, of $337,000 in the first quarter of 1996. The Company sold its remaining 104,484 shares of common stock of OrCAD in the second quarter of 1997, recognizing a gain of $217,000 on the sale. NOTE 4 INVESTMENTS IN AFFILIATES At December 31, 1997, the Company owned a 58 percent interest in PaySys. Since it is the majority owner only temporarily, the Company is not considered the controlling shareholder in 1997 and therefore, the investment is classified as an affiliate and accounted for by the equity method of accounting. The Company's pro rata share of PaySys losses was $7.9 million in 1997. However, in accordance with the equity method of accounting, the Company only recorded $3.0 million, reducing the Company's investment of $3.0 million to zero. The Company has no obligation or intent to provide additional funding to PaySys. No dividends were received from the affiliate during 1997 and 1996. The table below contains the summarized financial information of PaySys.
YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------- Current assets $ 12,884 $ 11,700 $ -- Current liabilities 23,207 14,271 -- Noncurrent assets 3,604 4,494 -- Noncurrent liabilities 4,897 1,761 -- Net sales $ 32,787 $ 26,924 $ 21,728 Operating income (loss) (15,063) 592 222 Net income (loss) (15,815)(1) 139 (472)(2) - ----------------------------------------------------------------------------
1. Includes non-recurring charges totaling $5.8 million. 2. Includes non-recurring charge of $1.2 million. At December 31, 1997, the Company owned a 33.7 percent interest in Visibility, Inc., a software company. The investment is classified as an affiliate and accounted for using the equity method of accounting. No dividends were received from the affiliate in 1997. INTELLIGENT SYSTEMS CORPORATION F-9 25 The table below contains the summarized financial information of Visibility.
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------ (in thousands) 1997 1996 1995 - ------------------------------------------------------------ Current assets $ 6,832 $ 4,804 Current liabilities 7,235 8,955 Noncurrent assets 1,453 1,763 Noncurrent liabilities 6,490 5,040 Net sales $21,850 $19,982 $19,963 Operating loss (2,791) (5,759) (2,531) Net loss (3,260) (6,048) (3,028) - ------------------------------------------------------------
NOTE 5 ACCOUNTS AND NOTES RECEIVABLE AND OTHER COMMITMENTS At December 31, 1997 and 1996, the Company's allowance for doubtful accounts and sales returns amounted to $207,000 and $372,000, respectively. Provisions for doubtful accounts and sales returns were $46,000, $312,000 and $446,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company holds minority ownership positions in Paragon Interface, Inc. (data mapping software) and Risk Laboratories, Inc. (risk management software). As part of these transactions, the Company entered into loan agreements with terms of two to three years and interest rates ranging from 2 to 5 percent over prime. The Company provided advances under these commitments (which amount to approximately $368,000 and $150,000 at December 31, 1997 and 1996, respectively) and has no commitment for additional funding under the terms of the agreements. At December 31, 1997, the Company owns 23.5 percent and 35 percent of the equity in Paragon and Risk, respectively, and accounts for these investments by the equity method. In April 1995, the Company entered into a Pledge Agreement with IQ Software Corporation (IQ) pursuant to which the Company pledged 240,163 shares of IQ stock held by the Company as collateral for a loan of $1.8 million from IQ to DayStar Digital Inc. In 1996, IQ released 85,259 shares of stock held as collateral that was then sold by the Company. In 1997, the Company repaid the $1.8 million debt of DayStar to IQ and IQ released the balance of 154,904 shares to the Company. The Company subsequently wrote off $3.0 million related to uncollectability of the note from DayStar when DayStar ceased operations in October 1997. NOTE 6 BORROWINGS Terms and borrowings under the Company's credit facilities are summarized below:
(in thousands) 1997 1996 - ------------------------------------------------------------------------------- Maximum outstanding (month-end) $1,172 $1,476 Outstanding at year end $ 700 -- Average interest rate at year end 8.5% N/A Average borrowings during the year $1,040 $ 604 Average interest rate 8.7% 10.0% - -------------------------------------------------------------------------------
Interest paid on debt during 1997, 1996 and 1995 amounted to $103,000, $61,000 and $93,000, respectively. NOTE 7 LONG-TERM DEBT The Company's long-term debt consists of the promissory notes payable to the sellers of QS, as more fully described in Note 2. Maturities of long-term debt are as follows:
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------- (in thousands) - -------------------------------------------------------------- 1999 $ 500 2000 500 - -------------------------------------------------------------- Total long-term debt payments $1,000 ==============================================================
NOTE 8 INCOME TAXES The income tax provision related to operations consists of the following:
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Current: Foreign $ -- $ -- $ 46 Domestic 16 3 56 - -------------------------------------------------------------------------------- $ 16 $ 3 $102 ================================================================================
A reconciliation between the Company's effective tax rate and the U.S. statutory rate is not provided since only state income and foreign taxes are provided. At December 31, 1997, the Company's domestic subsidiaries had net operating loss carryforwards totaling $19.0 million. The net operating loss carryforwards, if unused as offsets to future taxable income, will expire beginning in 2005 and INTELLIGENT SYSTEMS CORPORATION F-10 26 continuing through 2012. The utilization of these carry-forwards may be limited in some cases to taxable income of the particular subsidiary and also may be subject to annual limitation under the Internal Revenue Code in connection with a greater than 50 percent change in ownership as defined under Section 382. The Company accounts for income taxes using Statement of Financial Accounting Standard 109, "Accounting for Income Taxes". The Company has a deferred tax benefit of approximately $10.0 million and $8.6 million at December 31, 1997 and 1996, respectively. As the Company's ability to realize the deferred tax asset is uncertain, the amount is offset in both 1997 and 1996 by a valuation allowance of an equal amount. The deferred tax benefit at December 31, 1997 and 1996 relates primarily to net operating loss carryforwards. Income taxes paid during 1997, 1996 and 1995 amounted to $16,000, $3,000 and $0, respectively. NOTE 9 COMMITMENTS AND CONTINGENCIES The Company has noncancellable operating leases expiring at various dates through 2004. Future minimum lease payments are as follows:
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------- (in thousands) - -------------------------------------------------------------- 1998 $1,311 1999 1,234 2000 1,190 2001 950 2002 885 Thereafter 223 - -------------------------------------------------------------- Total minimum lease payments $5,793 ==============================================================
Rental expense for leased facilities and equipment related to operations amounted to $1.2 million, $1.0 million and $1.4 million, for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 10 POST-RETIREMENT BENEFITS Effective January 1, 1992, the Company adopted the Outside Directors' Retirement Plan which provides for each nonemployee director, upon resignation from the Board after reaching the age of 65, to 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. The Company has accrued $80,000 to date related to anticipated payments under the plan. NOTE 11 STOCK OPTION PLAN The Company instituted the 1991 Incentive Stock Plan (the "Plan") in December 1991, which was amended in 1997 to increase the number of shares authorized under the Plan to 925,000. The Plan provides shares of common stock that may be sold to officers and key employees. Stock options are granted at fair market value on the date of grant. As of December 31, 1997, 655,000 options are fully vested and exercisable at a weighted average price per share of $1.75. Of the unvested options, 5,000 vest in 1998 and 5,000 vest in 1999. All options expire ten years from their respective dates of grant. At December 31, 1997, the weighted average remaining contractual life of the outstanding options is 6.8 years and there are 655,000 options exercisable with option prices ranging from $0.875 to $2.94 and with a weighted average price per share of $1.75. Stock option transactions during the three years ended December 31, 1997 were as follows:
(in thousands) 1997 1996 1995 - ------------------------------------------------------------ Options outstanding at January 1 690,000 640,000 330,000 Options granted -- 410,000 310,000 Options exercised 25,000 50,000 -- Options canceled -- 310,000 -- Options outstanding at December 31 665,000 690,000 640,000 Options available for grant at December 31 185,000 -- 10,000 Option price ranges per share: Granted -- $2.25-2.94 $ 2.07 Exercised $2.25-2.94 0.875 -- Canceled -- 2.07 -- Weighted average option price per share: Granted -- $ 2.42 $ 2.07 Exercised $ 2.67 0.875 -- Canceled -- 2.07 -- Outstanding at December 31 1.75 1.79 1.45 - ------------------------------------------------------------
The Company accounts for the Plan under the provisions of APB No. 25. The following pro forma information is based on estimating the fair value of grants under the Plan based upon the provisions of SFAS No. 123. The fair value of each option granted in 1995 and 1996 has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 6.3 percent, expected life of the option of 6 INTELLIGENT SYSTEMS CORPORATION F-11 27 years, expected dividend yield rate of 0 percent, and expected volatility of 63 percent. Under these assumptions, the weighted average fair value of options granted in 1996 was $1.54. There were no awards under the Plan in 1997. The fair value of the grants would be amortized over the vesting period for the options. Accordingly, the Company's pro forma net income (loss) and net income (loss) per common share assuming compensation cost was determined under SFAS No. 123 would have been the following:
YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------- Net income (loss) $ (7,760) $ 4,205 $ 147 Net income (loss) per common share basic and diluted $ (1.53) $ .80 $ .03 - ----------------------------------------------------------------------------------
Because SFAS No. 123 method of accounting has not been applied to grants and awards prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that expected in future years. NOTE 12 STOCKHOLDERS' EQUITY The Corporation has authorized 20,000,000 shares of Common Stock, $.01 par value per share, and 2,000,000 shares of Series A Preferred Stock, $.10 par value per share. No shares of Preferred Stock have been issued; however, the Company adopted a Rights Agreement on November 25, 1997, which provides that, under certain circumstances, shareholders may redeem the Rights to purchase shares of Preferred Stock. The Rights have certain anti-takeover effects. The Board of Directors has authorized stock repurchases at various times in the past. The Company repurchased and retired 47,300 and 236,100 shares of common stock in the years ended December 31, 1997 and 1996, respectively. NOTE 13 FOREIGN SALES AND OPERATIONS Aggregate export and foreign sales from continuing operations were approximately $7.0 million, $5.9 million and $9.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Export and foreign sales were made principally in the United Kingdom and the Far East. Sales in these geographic areas are as follows:
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------- United Kingdom $6,813 $5,934 $4,734 Far East 210 -- 4,312 - --------------------------------------------------------------
For the years ended December 31, 1997, 1996 and 1995, income (loss) before provision for income taxes derived from foreign subsidiaries approximated $(930,000), $43,000 and $130,000, respectively. As of December 31, 1997 and 1996, foreign subsidiaries had assets of $3.6 million and $2.3 million, respectively, and total liabilities of $4.0 million and $2.3 million, respectively. Foreign subsidiaries are located in England and there are no currency exchange restrictions that would affect the Company's financial position or results of operations. The accounting for translation of non-US currency amounts is discussed in Note 1. NOTE 14 INDUSTRY SEGMENTS The Company's operating divisions are principally involved in two industry segments: health care services and technology related products and services. Operations in health care services involve mental health and substance abuse treatment programs and, through August 1996, locum tenens service (placement of physicians in temporary positions). The Company derived 13.5 percent, 37 percent and 27 percent of its consolidated revenue in 1997, 1996 and 1995, respectively, from a national chain of hospitals in which the Company conducts some of its treatment programs. In the fourth quarter of 1996 and during 1997, several programs located in the chain's hospitals were closed. The Company has in the past and is likely in the future to contract with other hospitals or chains to conduct its programs. Operations in technology related products and services include design, development and marketing of microcomputer software; educational training programs for PC users; design, manufacture and sales of mini-environments for semiconductor manufacturing; and manufacture and sales of bio-remediating parts washers. Total revenue by industry includes sales to unaffiliated customers. Intersegment sales are not material. Operating profit is total revenue less operating expenses. None of the general corporate overhead expense has been allocated to the individual industry segments. Identifiable assets by industry are those assets that are used in the Company's operations in each industry. Corporate assets are principally cash, marketable securities, notes receivable and investments. INTELLIGENT SYSTEMS CORPORATION F-12 28 The table below contains segment information for the years ended December 31, 1997, 1996 and 1995.
YEAR ENDED DECEMBER 31, 1997 - ------------------------------------------------------------------------------ Adjust. Health and (in thousands) Tech. Care Elimin. Consol. - ------------------------------------------------------------------------------ Net sales $14,957 $ 6,203 $ 21,160 R&D 1,485 -- 1,485 Depreciation 964 147 1,111 Operating loss (2,290) (912) (3,202) General corp. expenses 1,652 - ------------------------------------------------------------------------------ Consolidated operating loss (4,854) Interest income 350 Investment loss (2,585) Other loss, net (61) - ------------------------------------------------------------------------------ Loss from continuing operations before income tax provision and minority interest (7,150) Income tax provision 16 - ------------------------------------------------------------------------------ Loss before minority Interest (7,166) Minority interest 10 - ------------------------------------------------------------------------------ Net loss from continuing operations $ (7,176) ============================================================================== Capital expenditures $ 1,973 $ 7 $ 1,980 ============================================================================== Identifiable assets $ 7,762 $ 1,059 $ 8,821 Corporate assets 10,270 - ------------------------------------------------------------------------------ Total assets at year end $ 19,091 ==============================================================================
YEAR ENDED DECEMBER 31, 1996 - --------------------------------------------------------------------------- Adjust. Health and (in thousands) Tech. Care Elimin. Consol. - --------------------------------------------------------------------------- Net sales $10,698 $12,980 $ 23,678 R&D 286 -- 286 Depreciation 550 140 690 Operating profit (loss) (1,135) 433 (702) General corp. expenses 1,351 - --------------------------------------------------------------------------- Consolidated operating loss (2,053) Interest income 501 Investment income 5,844 Other loss, net (38) - --------------------------------------------------------------------------- Income from continuing operations before income tax provision and minority interest 4,254 Income tax provision 3 - --------------------------------------------------------------------------- Income before minority interest 4,251 Minority interest 12 - --------------------------------------------------------------------------- Net income from continuing operations $ 4,239 =========================================================================== Capital expenditures $ 1,275 $ 262 $ 1,537 =========================================================================== Identifiable assets $ 4,859 $ 2,671 $ 7,536 Corporate assets 17,391 - --------------------------------------------------------------------------- Total assets at year end $ 24,927 ===========================================================================
YEAR ENDED DECEMBER 31, 1995 - ------------------------------------------------------------------------------- Adjust. Health and (in thousands) Tech. Care Elimin. Consol. - ------------------------------------------------------------------------------- Net sales $14,226 $14,050 $ (36) $ 28,240 R&D 1,554 -- 1,554 Depreciation 440 131 571 Operating loss (1,527) (71) (1,598) General corp. expenses 862 - ------------------------------------------------------------------------------- Consolidated operating loss (2,460) Interest income 428 Investment income 1,896 Other income, net 399 - ------------------------------------------------------------------------------- Income from continuing operations before income tax provision and minority interest 263 Income tax provision 102 - ------------------------------------------------------------------------------- Income before minority interest 161 Minority interest 14 - ------------------------------------------------------------------------------- Net income from continuing operations $ 147 =============================================================================== Capital expenditures $ 733 $ 110 $ 843 =============================================================================== Identifiable assets $ 4,029 $ 3,388 $ 7,417 Corporate assets 15,913 - ------------------------------------------------------------------------------- Total assets at year end $ 23,330 ===============================================================================
NOTE 15 QUARTERLY FINANCIAL DATA (UNAUDITED) The table below contains a summary of selected quarterly data for the years ended December 31, 1997 and 1996.
FOR QUARTERS ENDED (in thousands except MARCH JUNE SEPT. DEC. per share data) 31 30 30 31 - --------------------------------------------------------------------------------------------- 1997 Net sales $ 5,108 $ 5,320 $ 5,248 $ 5,484 Operating loss (684) (531) (2,605) (1,034) Net income (loss) 584 (a) (869)(b) (6,984)(c) 92 (d) Basic and diluted income (loss) per share 0.11 (0.17) (1.37) 0.02 1996 Net sales $ 6,085 $ 6,451 $ 6,067 $ 5,075 Operating loss (335) (510) (370) (838) Net income (loss) (532)(e) 3,511 (f) 59 1,201 (g) Basic and diluted income (loss) per share (0.10) 0.66 0.01 0.23
a. Includes gain of $1.9 million on investment. b. Includes gain of $217,000 on investment and $721,000 loss in equity of affiliate. c. Includes charge of $.9 million for purchased R&D, write-off of $3.0 million note and $1.25 million loss in equity of affiliate. d. Includes gain of $469,000 on investment and $707,000 income in equity of affiliate. e. Includes gain of $337,000 on investment. f. Includes gain of $3.3 million on investment and $250,000 non-recurring charge. g. Includes gain of $3.0 million on investment and $1.0 million reduction in carrying value of investment. INTELLIGENT SYSTEMS CORPORATION F-13 29 NOTE 16 SUBSEQUENT EVENTS Effective January 1, 1998, the Company acquired all the common stock of JK, Inc. (JK), a company that provides software and services to the public health market. The purchase price included $200,000 cash, a promissory note of $600,000 and 645 units of limited liability interest (approximately 14 percent) of the Company's HumanSoft LLC subsidiary. The note is due in three equal annual installments beginning January 1, 1999 and bears interest of 8.5 percent per annum payable quarterly. The sellers may exchange a portion of the note for additional equity of HumanSoft prior to January 1, 1999. Additional contingent payments of up to $500,000 may be due the sellers based on attainment of performance criteria in 1998. The acquisition was accounted for as a purchase. On February 17, 1998, the Company entered into a loan agreement with a commercial bank providing for borrowings up to $1.0 million. The loan is secured by 4,014,872 shares of PaySys common stock held by the Company and bears interest at prime plus 3.5 percent per annum. INTELLIGENT SYSTEMS CORPORATION F-14 30 SCHEDULE II INTELLIGENT SYSTEMS CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT DESCRIPTION PERIOD EXPENSES DEDUCTIONS(a) END OF PERIOD - ---------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS(b) Year Ended December 31, 1995 325,305 446,337 453,541 318,101 Year Ended December 31, 1996 318,101 311,887 258,283 371,705 Year Ended December 31, 1997 371,705 46,963 211,760 206,908
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 31 InterQuad Services Limited Auditors' Report to the Stockholders and directors of InterQuad Services Limited We have audited the balance sheet at 31 December 1997 and the profit and loss account for the year then ended of InterQuad Services Limited which have been prepared under the historical cost convention and the company's accounting policies. Respective responsibilities of directors and auditors This company's directors are responsible for the preparation of financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. Basis of opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. The results of our audit would not have been materially different had the audit been conducted in accordance with U.S. generally accepted auditing standards. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InterQuad Services Limited as at 31 December 1997 and the results of its operations for the year then ended. The financial statements conform with UK generally accepted accounting principles. In our opinion, the financial statements would not be materially different if prepared under U.S. generally accepted accounting principles. /s/ Morley & Scott Morley & Scott Chartered Accountants Registered Auditor London March 12, 1998 S-2 32 Report of Independent Auditors Board of Directors PaySys International, Inc. We have audited the accompanying consolidated balance sheets of PaySys International, Inc. and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PaySys International, Inc. and subsidiaries at December 31, 1996 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective October 1, 1997 the Company adopted Statement of Position 97-2, "Software Revenue Recognition", changing its method of recognizing revenue on software transactions. ERNST & YOUNG LLP February 19, 1998 Atlanta, Georgia S-3 33 PaySys International, Inc. and Subsidiaries Consolidated Balance Sheets
DECEMBER 31 1996 1997 --------------------------------- ASSETS (In thousands, except share data) Current assets: Cash and cash equivalents $ 2,037 $ 1,074 Accounts receivable, less allowance for bad debts of $143 and $431 at December 31, 1996 and 1997, respectively 4,055 6,288 Unbilled receivables 5,094 5,238 Prepaid expenses and other current assets 237 284 Deferred income taxes 277 -- --------------------------------- Total current assets 11,700 12,884 Furniture and equipment, net 1,705 2,765 Computer software costs, net of accumulated amortization of $2,914 and $2,419 at December 31, 1996 and December 31, 1997, respectively 2,733 692 Deposits and other assets 56 147 --------------------------------- $ 16,194 $ 16,488 ================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,859 $ 3,055 Accrued employee compensation 1,319 2,483 Deferred revenues 8,374 11,614 Current portion of long-term debt and capital lease obligations 1,393 408 Accrued royalties 1,039 3,398 Other current liabilities 287 2,249 --------------------------------- Total current liabilities 14,271 23,207 Long-term debt and capital lease obligations, less current portion 482 4,069 Deferred rent expense 1,122 828 Other noncurrent liabilities 157 -- --------------------------------- 16,032 28,104 Shareholders' equity (deficit): Preferred stock, no par value; 2,000,000 shares authorized; no shares issued or outstanding -- -- Common stock, $.01 par value; 20,000,000 shares authorized; 6,826,520 and 7,131,825 shares issued and outstanding at December 31, 1996 and December 31, 1997, respectively 68 71 Additional paid-in capital 2,079 5,705 Deferred stock compensation -- (67) Accumulated deficit (1,439) (17,254) Cumulative translation adjustments (55) (71) --------------------------------- 653 (11,616) Less 159,050 shares held in treasury at December 31, 1996, at cost (491) -- --------------------------------- 162 (11,616) --------------------------------- $ 16,194 $ 16,488 =================================
See accompanying notes. S-4 34 PaySys International, Inc. and Subsidiaries Consolidated Statements of Operations
YEAR ENDED DECEMBER 31 1995 1996 1997 -------------------------------------- (In thousands) Revenues: License $ 8,668 $ 13,366 $ 13,088 Services 13,060 13,558 19,699 -------------------------------------- Total revenues 21,728 26,924 32,787 Cost of revenues: License 1,324 2,935 4,223 Services 9,503 8,956 15,683 -------------------------------------- Total cost of revenues 10,827 11,891 19,906 Gross margin 10,901 15,033 12,881 Operating expenses: Sales and marketing 2,298 3,270 4,865 Research and development 2,133 6,944 10,641 General and administrative 4,105 4,227 6,900 Non-cash compensation -- -- 3,722 Write off of capitalized software 2,143 -- 949 Cost of postponed stock offering -- -- 867 -------------------------------------- Total operating expenses 10,679 14,441 27,944 Income (loss) from operations 222 592 (15,063) Interest income (expense): Interest income 27 83 95 Interest expense (365) (233) (442) -------------------------------------- (338) (150) (347) -------------------------------------- Income (loss) before income taxes (116) 442 (15,410) Income tax expense 356 303 405 -------------------------------------- Net income (loss) $ (472) $ 139 $(15,815) ======================================
See accompanying notes. S-5 35 PaySys International, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (Deficit)
COMMON STOCK TREASURY STOCK ----------------- ---------------- ADDITIONAL DEFERRED CUMULATIVE NUMBER NUMBER PAID-IN STOCK ACCUMULATED TRANSLATION OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENTS TOTAL ----------------------------------------------------------------------------------------------- (In thousands, except share data) Balance at December 31, 1994 5,269,010 $ 53 172,800 $(533) $ 871 $ -- $ (1,106) $(45) $ (760) Net loss -- -- -- -- -- -- (472) -- (472) Foreign currency translation adjustments -- -- -- -- -- -- -- (16) (16) Issuance of stock purchase warrants -- -- -- -- 9 -- -- -- 9 Issuance of employee stock options 1,500 -- -- -- 9 -- -- -- 9 Treasury shares issued pursuant to exercise of employee stock options -- -- (13,750) 42 (42) -- -- -- -- Conversion of debt to equity 1,552,010 15 -- -- 1,227 -- -- -- 1,242 ---------------------------------------------------------------------------------------------- Balance at December 31, 1995 6,822,520 68 159,050 (491) 2,074 -- (1,578) (61) 12 Net income -- -- -- -- -- -- 139 -- 139 Foreign currency translation adjustments -- -- -- -- -- -- -- 6 6 Exercise of employee stock options 4,000 -- -- -- -- -- -- -- -- Issuance of stock purchase warrants -- -- -- -- 5 -- -- -- 5 ---------------------------------------------------------------------------------------------- Balance at December 31, 1996 6,826,520 68 159,050 (491) 2,079 -- (1,439) (55) 162 Net loss -- -- -- -- -- -- (15,815) -- (15,815) Foreign currency translation adjustment -- -- -- -- -- -- -- (16) (16) Noncash compensation from stock purchase warrants and stock options -- -- -- -- 3,793 (67) -- -- 3,726 Issuance of warrants -- -- -- -- 307 -- -- -- 307 Exercise of stock purchase warrants and stock options 464,355 5 -- -- 15 -- -- -- 20 Retirement of treasury stock (159,050) (2) (159,050) 491 (489) -- -- -- -- ---------------------------------------------------------------------------------------------- Balance at December 31, 1997 7,131,825 $ 71 -- $ -- $ 5,705 $(67) $(17,254) $(71) $(11,616) ==============================================================================================
See accompanying notes. S-6 36 PaySys International, Inc. and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1995 1996 1997 -------------------------------------- (In thousands) OPERATING ACTIVITIES Net income (loss) $ (472) $ 139 $(15,815) Add (deduct) adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 580 624 1,052 Amortization of computer software 3,437 1,383 2,257 Amortization of discounts on debt 90 45 15 Provision for doubtful accounts 121 24 288 Accrued rent expense (135) (233) (294) Deferred income taxes 37 228 277 Noncash compensation -- 5 3,726 Changes in operating assets and liabilities: Accounts receivable and unbilled receivables (1,881) (3,289) (2,664) Other assets 19 (113) (138) Accounts payable 1,113 (75) 1,195 Income taxes payable 6 (6) -- Deferred revenues 823 3,541 3,240 Accrued employee compensation (37) 96 1,164 Other liabilities (293) 1,098 4,163 -------------------------------------- Net cash provided by (used in) operating activities 3,408 3,467 (1,534) INVESTING ACTIVITIES Purchases of furniture and equipment (215) (665) (2,112) Computer software development (2,343) (1,132) (216) -------------------------------------- Net cash used in investing activities (2,558) (1,797) (2,328) FINANCING ACTIVITIES Exercise of options and warrants 18 -- 20 Proceeds from borrowings 300 23 4,491 Principal payments on long-term debt, capital lease obligations, and line of credit (362) (884) (1,596) -------------------------------------- Net cash provided by (used in) financing activities (44) (861) 2,915 -------------------------------------- Effect of foreign currency translation on cash and cash equivalents (16) 6 (16) -------------------------------------- Increase (decrease) in cash and cash equivalents 790 815 (963) Cash and cash equivalents at beginning of period 432 1,222 2,037 -------------------------------------- Cash and cash equivalents at end of period $ 1,222 $ 2,037 $ 1,074 ======================================
See accompanying notes. S-7 37 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS PaySys International, Inc. (the Company) was incorporated on January 27, 1981. The Company develops, licenses and supports computer software for use by financial institutions, retailers and third party processors to process credit card transactions. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances, transactions, and profits and losses have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Revenues are derived from sales of software licenses and related services. Through September 30, 1997, the Company's revenue recognition policies were in accordance with Statement of Position (SOP) 91-1, "Software Revenue Recognition". Under the provisions of SOP 91-1, the Company generally recognized software license revenue upon delivery of the software and related documentation when there were no significant remaining obligations and collectibility was assessed as probable. Service fees received from the sales of software maintenance and support contracts and sales of other professional services were recognized over the period the services were provided or as the services were performed. Adoption of the new revenue recognition policies of SOP 97-2, "Software Revenue Recognition", is required for all transactions beginning January 1, 1998, but earlier adoption is encouraged for periods not previously reported. Prior periods reported under SOP 91-1 may not be restated. S-8 38 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION (CONTINUED) The Company elected to adopt the provisions of SOP 97-2 effective October 1, 1997. The most significant impact of adopting SOP 97-2 on the Company's revenue recognition policies is later recognition of revenue on certain contracts than under past practices. Under SOP 97-2, license and professional service fee revenues from contracts which require significant production or modification are recognized under contract accounting on a percentage of completion basis as services are performed. For contracts which do not require significant production or modification, fees are allocated to the various contract elements based on the fair value of each element and are recognized as follows: software license revenue upon delivery of the software and related documentation when collectibility is assessed as probable; professional services revenue as the services are performed; and postcontract customer support over the term of the arrangement. Revenue related to research and development agreements is recognized as services are performed over the related funding period for each contract. Such revenue is included in license revenue. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company's revenues consist primarily of license and service revenues from large companies in the United States, Canada, South America, Australia, New Zealand, and South Africa. The Company does not obtain collateral against its outstanding receivables. The Company maintains reserves for potential credit losses for both billed and unbilled receivables. Bad debt expense was $121,000, $133,000 and $680,000 during the years ended 1995, 1996 and 1997, respectively. During 1997, one customer accounted for 19% of revenues; during 1996, one customer accounted for 11% of revenues; during 1995, two customers accounted for 15% and 13% of revenues. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company maintains deposits with a bank and invests its excess cash in overnight funds which bear minimal risk. S-9 39 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FURNITURE AND EQUIPMENT Furniture and equipment are carried at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives (generally 3 to 5 years). Amortization of computer equipment under capital lease is recorded over the term of the lease and is included in depreciation expense. Expenditures for repairs and maintenance are charged to operations as incurred. COMPUTER SOFTWARE COSTS The Company conforms with the requirements of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed", which requires capitalization of costs incurred in developing new software products once technological feasibility, as defined, has been reached. Costs of maintaining existing software and research and development are expensed as incurred. The Company capitalized software development costs of $2,343,000, $1,132,000, and $210,000 during the years ended 1995, 1996, and 1997, respectively. The Company records amortization of software development costs capitalized in an amount equal to the greater of the amount computed using i) the ratio that current gross revenues for a product bear to the total of current and anticipated revenues for that product or ii) the straight-line method over the estimated useful life of the released product (currently three years). Amortization of internally-developed software costs totaled $3,247,000, $1,168,000 and $2,257,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The higher amortization of capitalized software costs for 1995 and 1997 is due to the write-off of $2.1 million and $949,000, respectively, of capitalized software costs for projects deemed to have no net realizable value. INCOME TAXES The Company follows the liability method of accounting for income taxes. Deferred income taxes relate to the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. S-10 40 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", which provides an alternative to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in accounting for stock-based compensation issued to employees. As permitted by SFAS No. 123, the Company continues to account for stock option grants in accordance with APB 25 and has elected the pro forma disclosure alternative of the effect of SFAS No. 123. Accordingly, adoption of the standard in 1996 did not affect the Companies' results of operations. POSTPONED STOCK OFFERING In December 1997, the Company postponed for more than ninety days a planned public offering of its common stock. Costs associated with the postponed offering were expensed during 1997. RECLASSIFICATION Certain amounts reported in the 1995 and 1996 financial statements have been reclassified to conform to the 1997 financial statement presentation. S-11 41 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. FURNITURE AND EQUIPMENT Furniture and equipment consists of the following:
DECEMBER 31 1996 1997 ------------------------- (In thousands) Furniture and equipment: Office furniture and equipment $ 1,158 $ 937 Computer equipment 2,629 2,461 Computer equipment under capital lease 2,569 1,389 ------------------------- 6,356 4,787 Less allowances for depreciation and amortization (4,651) (2,022) ------------------------- $ 1,705 $ 2,765 =========================
3. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company considers its cash and cash equivalents, accounts receivable, line of credit and long-term debt and capital lease obligations to be its only significant financial instruments and believes that the carrying amounts of these instruments approximates their fair value. The carrying amount of long-term debt approximates fair value based on current interest rates available to the Company for debt instruments with similar terms, degree of risk and remaining maturities. The remaining financial instruments approximate fair value based on the short-term nature of these instruments. S-12 42 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT AND LEASES Long-term debt and capital lease obligations consist of the following:
DECEMBER 31 1996 1997 --------------------- (In thousands) Note payable due September 1, 1997, interest at 13%, secured by equipment, accounts receivable, software and related materials $ 1,000 $ -- Less discount (4) -- --------------------- 996 -- Note payable due September 26, 2002, interest at 13.5%, secured by equipment, accounts receivable, software and related materials -- 4,000 Less discount -- 292 --------------------- -- 3,708 Other note payable 21 11 Capital lease obligations, various imputed interest rates and monthly payments 858 758 --------------------- 1,875 4,477 Less current portion (1,393) (408) --------------------- $ 482 $ 4,069 =====================
S-13 43 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT AND LEASES (CONTINUED) Under a sublease agreement, the Company leases office space from Quadram Corporation ("Quadram"), a wholly-owned subsidiary of Intelligent Systems Corporation (ISC). ISC and the chairman of ISC are shareholders' of the Company. The lease began in 1996 and ends November 2002 (subject to earlier termination if Quadram's lease is terminated). Rental expense under this agreement was $86,000 and $145,000 for 1996 and 1997, respectively. Total rental expense was $1,171,000, $1,108,000 and $1,644,000 and for 1995, 1996, and 1997, respectively. Required payments by year for long-term debt, capital leases and noncancelable operating leases with initial or remaining terms in excess of one year at December 31, 1997, were as follows:
LONG-TERM CAPITAL OPERATING YEAR ENDING DECEMBER 31, DEBT LEASES LEASES - ----------------------------------------------------------------------------- (In thousands) 1998 11 437 1,842 1999 -- 304 1,866 2000 -- 70 1,700 2001 -- -- 1,549 2002 4,000 -- 906 ---------------------------------- 4,011 811 7,863 Less amount representing interest -- (53) -- ---------------------------------- $4,011 758 7,863 ==================================
S-14 44 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. COMMITMENTS AND CONTINGENCIES ROYALTY AGREEMENT In connection with a software development agreement entered into by the Company and a customer, the Company is required to pay royalties to the customer for sales of the product developed under the agreement. The Company is required to pay 10% of any sale, license or other grant of right to use the product which total less than $1,000,000 and 15% of any sale, license or other grant of right to use product which total more than $1,000,000. Further the Company is required to pay the following incremental royalty fees on the sale, license, or other grant of right to use the product: 1996 2.5% 1997 5.0% 1998 7.5% 1999 and beyond 10.0%
Total amounts to be paid under this agreement are capped at $6,027,000. As of December 31, 1996 and 1997, amounts accrued under this agreement are approximately $0.7 million and $2.8 million, respectively. LEGAL MATTERS In August 1997, the Company settled a copyright infringement lawsuit for $550,000. The Company has paid $150,000 as of December 31, 1997 and is paying the remaining $400,000 in equal quarterly installments of $50,000 beginning in November 1997. The company accrued an estimated reserve of $325,000 for this lawsuit at December 31, 1996 and accrued an additional $225,000 in 1997 when additional information regarding the total settlement of $550,000 became available. S-15 45 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. INCOME TAXES The provisions for income taxes for 1995, 1996 and 1997 are as follows:
YEAR ENDED DECEMBER 31 1995 1996 1997 -------------------------------- (In thousands) Current tax expense: Federal $ 6 $ 21 $ -- Foreign 313 54 128 State -- -- -- -------------------------------- Total current 319 75 128 Deferred tax expense (benefit): Federal 48 181 248 Foreign -- -- -- State (11) 47 29 -------------------------------- Total deferred 37 228 277 -------------------------------- $ 356 $ 303 $ 405 ================================
Income tax expense for the year ended December 31, 1997 relates to an increase in the valuation allowance to reduce the net deferred tax asset balance to zero and current foreign withholding taxes payable. No additional income tax expense has been recorded for the year ended December 31, 1997 due to the Company's loss for the period and the federal tax credit carryforward position from prior periods. S-16 46 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. INCOME TAXES (CONTINUED) A reconciliation of the statutory U.S. income tax rate to the effective income tax rate is as follows:
YEAR ENDED DECEMBER 31, 1995 1996 1997 ---------------------------------- (In thousands) Tax (benefit) at statutory federal rate $ (39) $ 150 $(5,239) State taxes net of federal benefit (7) 31 -- Research and development credit (51) (490) -- Foreign tax credits -- (205) -- Foreign withholding taxes 210 1 128 Foreign operations not subject to U.S. tax 43 58 349 Expiring foreign tax credits 161 -- -- Meals and entertainment 29 34 34 Other-net 10 (16) (290) Change in valuation allowance -- 740 5,423 ---------------------------------- Total income tax expense $ 356 $ 303 $ 405 ==================================
S-17 47 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. INCOME TAXES (CONTINUED) Components of U.S. deferred tax assets (liabilities) are as follows:
DECEMBER 31 1995 1996 1997 ----------------------------------- (In thousands) Deferred tax assets: Federal and state net operating losses $ 248 $ 86 $ 2,848 Accruals not deductible for tax purposes 135 445 2,424 General business credit carryforwards 1,280 1,771 1,280 Foreign tax credit carryforwards 271 69 407 Minimum tax credit carryforwards 163 207 185 Other 1 -- -- ----------------------------------- Total gross deferred tax assets 2,098 2,578 7,144 Deferred tax liability: Property and equipment, principally due to depreciation (65) (40) (109) Amortization of intangibles (918) (912) (263) ----------------------------------- Total gross deferred tax liabilities (983) (952) (372) Less valuation allowance (609) (1,349) (6,772) ----------------------------------- Net deferred tax asset $ 506 $ 277 $ -- ===================================
At December 31, 1997, the Company had general business, foreign tax and AMT credit carryforwards which expire in 1998 through 2012 available to offset future federal income tax liabilities totalling approximately $1,900,000. In addition, the Company has approximately $7,300,000 of net operating losses for federal income tax purposes at S-18 48 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. INCOME TAXES (CONTINUED) December 31, 1997, which may be carried forward through 2012. The tax benefits of these credit carryforwards can be realized only through their application to taxable income arising from future successful operations of the Company. These credit and net operating loss carryforwards may be subject to certain limitations under Section 382 in the event of an ownership change. Due to the uncertainty of the Company's ability to fully realize the benefits of the credit carryforwards, a valuation allowance has been recorded against net deferred tax assets. When recognized, the tax benefit of those items will be applied to reduce future income tax amounts. The Company's foreign subsidiaries had cumulative losses of $4,477,000 at December 31, 1997 which have been fully reserved by a valuation allowance. 7. SHAREHOLDERS' EQUITY COMMON STOCK In October 1997 the Company's Board of Directors approved a five-for-one stock split effected as a stock dividend. Accordingly, all the share data has been retroactively adjusted to reflect these changes. Effective August 1, 1995, the Company issued 1,552,010 shares of common stock to ISC for the cancellation of $900,000 in line of credit borrowings, $83,000 in accrued interest and $259,000 in accounts payable to a subsidiary of ISC. WARRANTS Pursuant to a 1992 loan agreement between the Company and Sirrom Capital, L.P. (Sirrom), Sirrom obtained warrants to purchase 150,000 shares of the Company's common stock at an exercise price of $.002 per share. The warrants were exercised in August of 1997. S-19 49 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. SHAREHOLDERS' EQUITY (CONTINUED) WARRANTS (CONTINUED) Pursuant to a loan agreement dated January 24, 1994 between the Company and ISC, ISC received a warrant to purchase 277,605 shares of the Company's common stock at $.002 per share in consideration for making the loan. The warrant was exercised in August 1997. In connection with a financing agreement entered into with Sirrom on September 26, 1997, the Company issued a warrant to purchase 37,660 shares of the Company's common stock at an exercise price of $.002 per share which is fully exercisable and outstanding at December 31, 1997. The warrants were valued at approximately $300,000. If the debt remains outstanding for certain periods during the term of the financing arrangement the Company will be required to grant additional shares under the warrant. STOCK-BASED AWARDS TO EMPLOYEES The Company has elected to follow APB 25 and related interpretations in accounting for its stock-based awards to employees because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing stock-based awards to employees. Under APB 25, no compensation expense is recognized for stock-based awards with an exercise price equal to the fair value of the underlying stock on the date of grant. Proforma information regarding net income (loss) is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its stock-based awards to employees granted subsequent to December 31, 1994 under the fair value method prescribed by that statement. The fair value for these awards were estimated at the date of grant using the minimum value method with the following weighted-average assumptions for 1996 and 1997: risk-free interest rate of 6%; dividend yields of 0%; and a weighted-average expected life of the awards of 8 years, 8 years and 4 years, respectively. The weighted average fair value of awards during 1995, 1996 and 1997 was $.26, $.26 and $.66 per share, respectively. S-20 50 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. SHAREHOLDERS' EQUITY (CONTINUED) STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED) The option valuation models require the input of highly subjective assumptions. Because the Company's stock-based awards to employees have characteristics different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee awards. For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
DECEMBER 31 1995 1996 1997 -------------------------------------- (In thousands) Net income (loss) $ (474) $ 89 $(17,032)
Because SFAS No. 123 is applicable only to awards subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999. The 1995 Stock Incentive Plan (the "1995 Plan") allows for the granting of options for up to 1,088,750 shares of common stock to employees and directors. Stock options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options may be granted with exercise prices of no less than the fair market value. The options expire 10 years from the date of grant. Options may be granted with different vesting terms but generally provide for vesting equally over a four year period. In October 1997, the Company adopted the 1997 Stock Incentive Plan (the "1997 Plan"). The 1997 Plan allows for the granting of options for up to 411,250 shares of common stock to employees, non-employee directors, consultants and other vendors. S-21 51 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. SHAREHOLDERS' EQUITY (CONTINUED) STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED) The following table summarizes option activity for 1995, 1996 and 1997.
WEIGHTED EXERCISE PRICE AVERAGE SHARES RANGE EXERCISE PRICE --------------------------------------------------- Outstanding at January 1, 1995 32,750 $ 0 $ 0 Granted 410,080 .80 .80 Exercised (15,250) 0 0 Expired (11,750) 0 0 ------------------------------------------------ Outstanding at December 31, 1995 415,830 0 - .80 .79 Granted 504,670 0.80 - 3.10 1.20 Exercised (4,000) 0 0 ------------------------------------------------ Outstanding at December 31, 1996 916,500 0 - 3.10 1.02 Granted 297,075 3.10 3.10 Expired (153,740) 3.10 3.10 Exercised (1,750) 0 0 ------------------------------------------------ Outstanding at December 31, 1997 1,058,085 $0.80 - $3.10 $1.30 ================================================ Exercisable at December 31, 1996 315,160 $ 0 - $3.10 $0.80 Exercisable at December 31, 1997 583,845 $0.80 - $3.10 $1.04
S-22 52 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. SHAREHOLDERS' EQUITY (CONTINUED) STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED) Options outstanding at $.80 per share totaled 827,250 of which 523,490 were exercisable at December 31, 1997. The weighted average remaining contractual life of options exercisable at $.80 per share was 8.0 years at September 30, 1997. Options exercisable at $3.10 per share totaled 230,835 of which 60,355 were exercisable at December 31, 1997. The weighted average remaining contractual life of options exercisable at $3.10 per share was 9.0 years at December 31, 1997. In addition to the stock option plans described above, the Company has issued warrants to purchase common stock to employees. During 1995, the Company issued to each of two individuals warrants to purchase 52,675 shares of common stock at an exercise price of $.60 per share. These warrants, which expire in December 2005, become exercisable equally over a two year and three year vesting period. In April and June 1997, 35,000 shares of common stock were issued pursuant to the partial exercise of one of these warrants and the remainder of the warrant to purchase 17,675 shares of common stock was canceled in September, 1997. Additionally, during 1996 the Company issued warrants to two employees to purchase 1,104,110 shares of common stock exercisable at a price per share based on $50,000,000 divided by the number of shares outstanding at the exercise date. These warrants were exercisable upon achievement of certain milestones and expire in February 2003. Effective August 5, 1997, the Company amended these warrants. The amendment fixed the exercise price of the warrants at $4.80 per share, and the warrants became fully exercisable as of the amendment date. In addition, the amendment added provisions (i) restricting transfer of any shares obtained from exercise of the warrants until the earlier of achievement of certain milestones or February 2003 and (ii) withholding certain registration rights until achievement of the milestones. As a result of amending the warrants, the Company recorded compensation expense of $3,708,000 in 1997 for the difference between the exercise price and estimated fair value per share at the amendment date. At December 31, 1997, a total of 3,105,695 shares of the Company's common stock were reserved for the exercise of outstanding stock warrants and options. S-23 53 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. EMPLOYEE BENEFIT PLAN The Company has a 401(k) Profit Sharing Plan for the benefit of eligible employees and their beneficiaries. All employees who have completed three months of service are eligible to participate in the Plan and are fully vested. The Company's contributions to the Plan are discretionary. Contribution expense related to the Plan during 1995, 1996, and 1997 were $-0-, $100,000 and $200,000, respectively. 9. FOREIGN OPERATIONS Export sales were $8,411,000, $8,803,000, and $20,681,682 in 1995, 1996, and 1997, respectively. Such revenues were derived principally from Australia, New Zealand, Canada, West Indies, South Africa and South America. Accounts receivable (billed and unbilled) arising from foreign revenues total $3,691,000, and $8,066,000 as of December 31, 1996 and 1997, respectively. Information about the Company's operations by geographic area is as follows:
1995 1996 1997 ---------------------------------------- (In thousands) UNITED STATES Revenues $ 21,106 $ 26,445 $ 32,543 Income (loss) from continuing operations (344) 301 (14,662) Identifiable Assets 11,265 16,086 16,148 EUROPE/FAR EAST Revenues $ 622 $ 479 $ 244 Loss from continuing operations (128) (162) (1,153) Identifiable Assets 242 108 340
S-24 54 PaySys International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. SUPPLEMENTAL CASH FLOW INFORMATION The following is a summary of non cash transactions and additional cash flow information:
FOR THE YEAR ENDED DECEMBER 31 1995 1996 1997 ------------------------------ SUPPLEMENTAL CASH FLOW INFORMATION Stock issued for the cancellation of accounts payable, line of credit borrowings and related accrued interest $1,242 $ -- $ -- ============================== Furniture and equipment acquired under capital lease obligations $ 6 $ 933 $ 358 ============================== Cash paid for interest $ 278 $ 204 $ 277 ============================== Cash paid for income taxes $ -- $ 65 $ 128 ==============================
11. YEAR 2000 DATE CONVERSION (UNAUDITED) The Company recognizes the need to ensure its operations will not be adversely impacted by year 2000 software failures. The Company intends to take the actions necessary to ensure that its systems and applications will appropriately recognize and process transactions in the year 2000 and beyond. The Company does not expect the cost of year 2000 compliance to be material to its financial statements. S-25 EX-2.3 2 STOCK PURCHASE AGREEMENT 1 EXHIBIT 2.3 STOCK PURCHASE AGREEMENT between INTELLIGENT SYSTEMS CORPORATION and FRANCIS M. CROWDER, SR. MARIAN S. CROWDER, KEVIN W. DAVIDSON, AND CHARLES S. VERDIN, III July 1, 1997 2 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "AGREEMENT"), dated as of July 1, 1997 is by and among FRANCIS M. CROWDER, SR., MARIAN S. CROWDER, KEVIN W. DAVIDSON, and CHARLES S. VERDIN, III (individually, each a "SHAREHOLDER" and collectively, the "SHAREHOLDERS"), all shareholders of QS, Inc., a South Carolina corporation ("QS") on the one hand, and INTELLIGENT SYSTEMS CORPORATION, a Georgia corporation ("ISC") on the other hand. Shareholders desire to sell the Shares (as herein defined) to ISC, and ISC desires to buy the Shares from Shareholders, on all the terms and subject to the conditions contained herein. Therefore, in consideration of the mutual representations, warranties, covenants and agreements, and upon and subject to the terms and the conditions hereinafter set forth in this Agreement, the parties do hereby agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, the following terms shall have the following meanings: "Accounting Standards" means the accounting practices of QS as specified in the Disclosure Memorandum. 3 "Affiliates" of a particular Person means other Persons controlled by, controlling, or under common control with, such Person. "Charter Documents" means the articles of incorporation of QS. "Closing" means the consummation of the purchase and sale of the Shares under the terms of this Agreement. "Disclosure Memorandum" means the memorandum signed and delivered by the Shareholders contemporaneously with the execution and delivery of this Agreement, containing information required to be disclosed under this Agreement. "Documentation" means all user's manuals or descriptive materials (other than inventory) related to the Intellectual Property or Software Programs. "Employee Benefit" refers to employment-related obligations of QS (other than salary, wages and bonuses), including all actual or contingent liabilities relating to unemployment coverage, health, injury, death and retirement. "Employees" means the employees of QS. "Encumbrance" means any mortgage, charge (whether fixed or floating), security interest, pledge, claim, right of first refusal, lien (including, without limitation any unpaid vendor's lien), option, hypothecation, title retention or conditional sale agreement, lease, option, restriction as to transfer, use or possession, easement, subordination to any right of any other person, and any other encumbrance on the absolute and unfettered use and ownership of any asset or property. "Escrow Agreement" means the agreement between ISC, the Shareholders and the Escrow Agent named therein pursuant to which the most current software version on the Closing Date will be held in escrow as long as any principal remains unpaid under the Note. "Financial Statements" means the balance sheets of QS as of December 31, 1996, 1995 and 1994, and the related unaudited income statements for the three years ended December 31, 1996, 1995 and 1994, together with all footnotes, annexes and schedules thereto, together with the Interim Financial Statements, and all notes 2 4 thereto, all of which balance sheets and notes have been attached to and incorporated into the Disclosure Memorandum. "GAAP" means generally accepted accounting principles, consistently applied. "Guaranty" means the guaranty of payment of the Notes by J. Leland Strange in the form of Exhibit A attached hereto. "Intellectual Property" means all patents, trademarks service marks, trade names, and copyrights (including registrations, licenses, and applications pertaining thereto), and all other intellectual property rights, trade secrets, and other proprietary information, processes and formulae used in QS Business or otherwise necessary to conduct QS Business other than rapid development tools, data based managers, API, and interface engines and other similar tools. "Interim Financial Statements" means the unaudited balance sheet of QS as of June 30, 1997, and the related unaudited statements of profit for the six-month period then ended, prepared by management of QS. "Knowledge of Shareholders" (or words of similar import) refers to all those things known by any Shareholder. "Notes" means the promissory notes of ISC in favor of the Shareholders in an aggregate amount of One Million Five Hundred Thousand Dollars ($1,500,000) bearing interest at 8.5% with principal due in three equal installments on July 1, 1998, 1999, and 2000 and with interest payable quarterly on January 1, April 1, July 1 and October 1 beginning on October 1, 1997 for each quarter during which any principal remains unpaid, in the form of Exhibit B hereto. "Permitted Encumbrance" means an Encumbrance identified as a "Permitted Encumbrance" in the Disclosure Memorandum. "Per Share Price" is defined in Section 2.2. "Person" means a corporation, partnership, trust, limited liability company, other business entity or an individual. "Purchase Price" is defined in Section 2.2. 3 5 "QS Business" means the business, conducted by QS, of developing, marketing, selling, installing and servicing software that manages public health and/or accounting information and the supplies, equipment, products and services related to the above. "QS Contracts" means all contracts, leases, agreements, indentures, licenses, mortgages, commitments or binding arrangements or relationships pursuant to which QS is either a party or a third party beneficiary. "QS Premises" means the real estate (including fixtures, buildings and other improvements thereon) leased or used by QS at the addresses listed in the Disclosure Memorandum. "Rule" means any law, statute, rule, regulation, order, court decision, judgment or decree of any federal, state, territorial, provincial or municipal authority or body. "Shares" means all the issued and outstanding capital stock of QS owned by the Shareholders, as set forth in the Disclosure Memorandum. "Software Programs" means all software developed, manufactured and licensed as part of the QS Business. "Tax" or "Taxes" means all forms of levies, taxes, customs and other duties normally deemed to be of a fiscal or customs nature, including but not limited to (a) all taxes levied, imposed or assessed under the Internal Revenue Code or any other statute, rule, ordinance or law, in the United States or elsewhere; (b) taxes in the nature of sales tax, consumption tax, value added tax, payroll tax, group tax, undistributed profits tax, fringe benefits tax, recoupment tax, withholding tax, land tax, water rates, municipal rates, stamp duties, gift duties or other state, territorial, provincial or municipal charges or impositions levied, imposed or collected by any governmental body; and (c) any additional tax, interest, penalty, charge, fee or other amount of any kind assessed, charged or imposed in relation to the non-, late, short or incorrect payment of the same or the failure to file any return. "Warranty" means any representation and warranty of any Shareholder in this Agreement and in each certificate or other document delivered by him or her or on his or her behalf in connection with this Agreement. 4 6 "1996 Balance Sheet" means the balance sheet of QS as of December 31, 1996 and all notes thereto. ARTICLE II TERMS OF TRANSACTION II.1 Purchase and Sale of Shares of QS. Upon the terms and subject to the conditions of this Agreement, at the Closing, ISC shall purchase from Shareholders, and Shareholders shall sell and transfer to ISC, all of the Shares. II.2 Purchase Price. The price per Share (the "Per Share Price") shall be $39.111826 so that the aggregate price of the Shares (the "Purchase Price") shall be Three Million Five Hundred Thousand Dollars ($3,500,000). II.3 Payment. In consideration of the sale and transfer to ISC of the Shares: (a) at the Closing, ISC shall make a cash payment to or on behalf of the Shareholders in the aggregate amount of Two Million Dollars ($2,000,000) by wire transfer of immediately available funds to the accounts indicated for each shareholder in the Disclosure Memorandum (the "Cash Payment") allocated as follows: Francis Crowder - $1,213,047 Marian Crowder - $74,290 Kevin Davidson - $402,293 Charles Verdin - $310,370; and (b) ISC shall execute the Notes and deliver them to the Shareholders (the "Debt Payment") with the $1,500,000 aggregate principal amount to be allocated as follows: Francis Crowder - $909,786 Marian Crowder - $55,717 Kevin Davidson - $301,720 Charles Verdin - $232,777. 5 7 II.4 The Closing. (a) The Closing shall take place at 10:00 a.m., July 30, 1997 (the "Closing Date") (and shall be effective as of July 1, 1997), in the offices of Nelson Mullins Riley & Scarborough, L.L.P., 301 N. Main Street, 24th Floor, BB&T Building, Greenville, South Carolina 29601 or on such other date and at such other time and place as the parties shall agree in writing. (b) At the Closing, ISC shall deliver to the Shareholders the following (all documents to be duly executed by ISC or J. Leland Strange, as the case may be): (i) the Cash Payment; (ii) the Notes; (iii) the Guaranty; (iv) the Escrow Agreement; and (v) legal opinions of ISC's counsel concerning the due authorization, execution and delivery of this Agreement, the Notes and the Escrow Agreement and the enforceability of this Agreement, the Notes, the Guaranty and the Escrow Agreement against ISC, all in a form reasonably acceptable to the Shareholders. (c) At the Closing, the Shareholders shall deliver to ISC the following (all documents to be duly executed by the applicable Shareholders): (i) the Disclosure Memorandum; (ii) the certificates representing all of the Shares, endorsed in blank for transfer to ISC, or accompanied by stock transfer powers; (iii) the resignations of all of the directors and officers of QS effective as of the Closing Date; (iv) QS's original corporate minute book and seal; (v) the Escrow Agreement; 6 8 (vi) the Acknowledgement of Rights in Work Products in the form of Exhibit C hereto, to be executed by each Shareholder; and (vii) legal opinions of the Shareholder's counsel concerning, among other things, QS's authorized and outstanding capital stock, the due authorization, execution and delivery of this Agreement by the Shareholders, the enforceability of this Agreement against the Shareholders, the transfer of the Shares and other reasonable and customary matters, all in a form reasonably acceptable to ISC. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS REGARDING THE SHARES In order to meet the requirements of ISC to execute, deliver and perform this Agreement, and in acknowledgement of ISC's reliance on the following Warranties, Shareholders hereby jointly and severally represent and warrant to ISC as of the date hereof and as of the Closing Date as follows: III.1 Power and Authority of Shareholders. Shareholders have the right, power and capacity to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary action on the part of Shareholders. Shareholders have obtained all necessary consents, approvals, authorizations or estoppels of any other Person or governmental or regulatory authority required to be obtained to authorize and permit Shareholders to transfer, or cause to be transferred, to ISC all of the Shares. This Agreement has been duly and validly executed and delivered by Shareholders and constitutes each Shareholder's legal, valid and binding obligation, enforceable in accordance with its terms. The execution and delivery of this Agreement by Shareholders, the consummation of the transactions contemplated herein by Shareholders, and the performance of the covenants and agreements of Shareholders, will not, with or without the giving of notice or the lapse of time, or both, (i) violate, conflict with or result in a breach or default under or cause termination of any term or condition of any mortgage, indenture, contract, license, permit, 7 9 instrument, trust document, or other agreement, document or instrument to which any Shareholder is a party or by which any Shareholder or any Shareholder's properties may be bound; (ii) violate any Rule; or (iii) result in the creation or imposition of any Encumbrance upon any asset of QS. III.2 Ownership of the Shares. Shareholders own, of record and beneficially, good, valid and marketable title to the Shares, and such Shares are validly issued and are free and clear of any Encumbrances, with no defects of title whatsoever. At the Closing, ISC shall obtain good, valid and marketable title to the Shares, free and clear of all Encumbrances, with no defects of title whatsoever. Shareholders have full and exclusive power, right and authority to vote the Shares. No Shareholder is a party to or bound by any agreement affecting or relating to his or her right or obligation to transfer or vote the Shares. III.3 Issued Shares. All issuances, transfers, or purchases of the Shares have been in compliance with all applicable agreements and all applicable Rules, and all Taxes thereon have been paid. There are no QS treasury shares. III.4 Absence of Other Claims. Except as set forth in the Disclosure Memorandum, there is not outstanding, nor is QS bound by, any subscriptions, options, preemptive rights, warrants, agreements or rights of any character requiring QS to issue or transfer any of its Shares or the voting rights thereto, including any right of conversion or exchange under any outstanding security or other instrument. There are no outstanding obligations of QS to repurchase, redeem or otherwise acquire any of its outstanding Shares. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS REGARDING QS In order to meet the requirements of ISC to execute, deliver and perform this Agreement, and in acknowledgement of ISC's reliance on the following Warranties, Shareholders hereby jointly and severally represent and warrant to ISC, as of the date hereof and as of the Closing Date, as follows: 8 10 IV.1 Organization and Authority. (a) QS is a corporation duly incorporated and validly existing under the laws of the State of South Carolina and has all requisite power and authority, corporate or otherwise, to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets. All documents required to be filed with the South Carolina Secretary of State with respect to QS have been properly and timely filed. The Shares are all of the issued and outstanding stock of QS and the number of issued Shares and the record holder of such issued Shares are set forth in the Disclosure Memorandum. (b) Except as disclosed in the Disclosure Memorandum, QS has not proposed a compromise or arrangement to its creditors; had any petition for bankruptcy filed against it; taken any proceeding with respect to a compromise, arrangement or winding up, or otherwise taken advantage of any insolvency or bankruptcy legislation; had a receiver appointed to any part of its property; or had any execution or distress or seizure levied upon any of its property. (c) The Disclosure Memorandum sets forth the name, address and jurisdiction of organization of QS and all jurisdictions in which QS is qualified to do business. The Disclosure Memorandum is complete, true, valid and correct. (d) The copies of the Charter Documents that are attached to the Disclosure Memorandum are the complete, true, valid and correct Charter Documents of QS in effect as of the date hereof. The minutes of directors' and shareholders' meetings of QS that have previously been delivered to ISC are the complete, true, valid and correct records of directors' and shareholders' meetings through and including the date hereof and, reflect all transactions and other matters required to be reflected in such records. (e) The current officers and directors of QS are listed in the Disclosure Memorandum. (f) The execution, delivery and performance of this Agreement by the Shareholders, the consummation of the transactions contemplated herein by the Shareholders, and the performance of the covenants and agreements of the Shareholders, will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions 9 11 of any Charter Document of QS; (ii) violate, conflict with or result in a breach or default under or cause termination of any term or condition of any mortgage, indenture, contract, license, permit, instrument, trust document, or other agreement, document or instrument to which QS is a party or by which QS or any of its properties may be bound; (iii) violate any Rule; or (iv) result in the creation or imposition of any Encumbrance upon any asset of QS. IV.2 Compliance With Law. QS has not violated any order of any court, governmental authority, arbitration board or tribunal to which it is or was subject, nor is QS in violation of any Rule the violation of which would have a material adverse effect on QS, the transactions contemplated by this Agreement, or QS Business. IV.3 Financial Matters. (a) The Financial Statements, including the footnotes thereto, are true, complete and correct, have been prepared in accordance with the Accounting Standards, consistently applied, and fairly present the financial position of QS as of the dates thereof and the results of its operations for the respective periods thereof. The Financial Statements contain all disclosures required under the Accounting Standards as of the dates of, and for the periods covered by, the Financial Statements. (b) The net book value (shareholders' equity) of QS, as determined under the Accounting Standards, is more than $1,250,000. QS does not accrue annual vacation time on its Financial Statements; provided, however, accrued vacation listed in the Disclosure Memorandum will be calculated in determining the net book value (shareholders' equity) of QS. IV.4 Indebtedness. The Disclosure Memorandum sets forth a complete and accurate list and description of all instruments or other documents relating to any direct or indirect indebtedness for borrowed money of QS, as well as indebtedness by way of lease-purchase arrangements, guarantees, undertakings on which others rely in extending credit, and all conditional sales contracts, pledges and other security arrangements with respect to personal property used or owned by QS. QS is not in default with respect to any indebtedness. IV.5 No Undisclosed Liabilities. Except as and to the extent reflected and adequately reserved against in the 1996 10 12 Balance Sheet, or as shown in the Disclosure Memorandum, QS had no material liabilities or obligations whatsoever, whether accrued, absolute, contingent or otherwise. Since June 30, 1997 and the date of this Agreement, QS has not incurred any liability or obligation whatsoever, except for liabilities and obligations incurred by QS in the ordinary course of its business consistent with reasonable past practice or as specifically stated in the Disclosure Memorandum. IV.6 Tax Matters. (a) Tax Returns. All Tax returns required by any governmental authority to be filed by QS in connection with the properties, business, income, expenses, net worth and corporate status of QS have been timely filed, and such returns are accurate and complete in all respects. Except as set forth in the Disclosure Memorandum, all Taxes due pursuant to the Tax returns or otherwise due in connection with the properties, business, income, expenses, net worth and corporate status of QS have been paid, other than Taxes which are not yet due or which, if due, are not delinquent, are being disputed in good faith, or have not been finally determined, and adequate and complete reserves for all such Taxes have been established on the Financial Statements. QS has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, Shareholder, or other third party. (b) Tax and Employee Benefit Returns. Except as set forth in the Disclosure Memorandum, QS has correctly and timely (i) filed all Tax and Employee Benefit returns required to be filed in the manner required by Tax and Employee Benefit authorities, (ii) responded to information requested by said authorities and (iii) made all Tax and Employee Benefit payments at due dates. (c) Other Matters. Except as set forth in the Disclosure Memorandum: (i) QS is not subject to income tax in countries other than the United States; (ii) expenses already incurred or which QS is required to incur in the ordinary course of its business are deductible from its ordinary income; (iii) QS has not entered into any transaction which could be disregarded or recharacterized for Tax or Employee Benefit purposes on the grounds that it aimed at the avoidance of Tax or Employee Benefit obligations; and (iv) QS is not the subject matter of any inquiry, 11 13 investigation or audit relating to Tax or Employee Benefit matters and has not been informed of any proposed audit. (d) Tax and Employee Benefit Audits. The Disclosure Memorandum sets forth the conclusions of any Tax or Employee Benefit audit or reassessment made during the period not yet completely time barred by applicable statutes of limitation. (e) Returns Furnished. QS has furnished ISC with true and complete copies of (i) income tax audit reports, statements of deficiencies, closing or other agreements received by or on behalf of QS relating to Taxes, and (ii) all tax returns for QS for all periods since January 1, 1995. (f) Tax Basis and Tax Attributes. The Disclosure Memorandum contains an accurate and complete description of QS's tax basis in its assets. IV.7 Product Returns. To the Shareholder's knowledge, no customer has a present intent to return products sold. The Disclosure Memorandum lists all customers that have taken possession of products but retain the right to return products under the contract prior to final acceptance. While QS does not anticipate that other products will be returned, this will depend in large part on the continued service of such products after Closing. Shareholders shall not be responsible for product returns after Closing where the anticipated return was not known to Shareholders as of the date hereof. IV.8 Litigation. Except as set forth in the Disclosure Memorandum, there is no action, suit, investigation or proceeding pending or, to the knowledge of Shareholders, threatened against or affecting QS, QS Business or the assets of QS before any court or by or before any governmental body or arbitration board or tribunal, nor to the knowledge of any Shareholder is there a basis for any such action, suit, investigation or proceeding. IV.9 Assets. Except as set forth on the Disclosure Memorandum, (a) Description. The Disclosure Memorandum sets forth a general description and the location of all personal property and leasehold improvements included in the assets of QS. (b) Title. QS has good, valid and marketable title to 12 14 all of its assets, free and clear of any and all Encumbrances other than the Permitted Encumbrances. After the Closing, no Permitted Encumbrance or other Encumbrance will materially interfere with the conduct of QS Business as presently conducted by QS. QS owns all the real and personal property reflected in the 1996 Balance Sheet except as set forth in the Disclosure Memorandum. (c) Possession. All tangible assets of QS are on QS Premises, in QS's possession and control except as set forth in the Disclosure Memorandum. No one else has any right, title or interest in any property or asset now used or proposed to be used by QS in QS Business. (d) All Necessary Assets. On the Closing Date, QS will have in its possession such assets as are necessary for the conduct of the QS Business after the Closing in the same manner as it has been conducted since January 1, 1997. Other than changes in the ordinary course of business occurring since January 1, 1997, or as set forth in the Disclosure Memorandum, QS has not disposed of any assets held as of that date. (e) Condition. The assets of QS that constitute tangible personal property that are necessary to conduct the QS Business in the manner that it has been previously conducted (collectively, the "QS Properties") are in good condition and repair, ordinary wear and tear excepted, in satisfactory working order, and are suitable for their respective intended uses. The plants and structures owned, leased or used by QS are structurally sound with no known material defects. (f) Compliance. To the knowledge of Shareholders, the QS Properties and the existing and prior uses thereof are in compliance in all material respects with all applicable Rules. QS has delivered to ISC all reports and documents generated by QS or any third party about the condition of QS Properties or about such compliance. (g) Accounts Receivable. Except as set forth in the Disclosure Memorandum, all accounts receivable of QS: (i) are valid, existing and fully collectible; (ii) represent monies due for license fees, maintenance and support revenues, goods sold or services rendered in the ordinary course of business; and (iii) are not subject to any defenses, rights of set-off, assignment or other Encumbrances. To the knowledge of each Shareholder there is 13 15 no dispute regarding the collectability of any such accounts receivable. QS has provided ISC with a current, complete and accurate aging report of such accounts receivable. Except as set forth in the Disclosure Memorandum, there are no accounts receivable included in the assets of QS that are owed to QS by any director, officer, shareholder or employee of QS or any relative of any such person. (h) Real Property. QS owns no real property. (i) Interests in Other Persons. QS does not own, either legally or beneficially, directly or indirectly (i) any shares (or other securities convertible into shares) of any other company or (ii) any participating interest in any partnership, limited liability company, trust, joint venture, association or other non-corporate business enterprise. IV.10 Bank Accounts. The Disclosure Memorandum contains a list of all the checking, depository or other bank accounts and any safe deposit boxes of or relating to the assets, operations or business of QS, together with the authorized signers. IV.11 Suppliers and Customers. (a) Except as set forth in the Disclosure Memorandum, there are no disputes between QS (or any of QS's employees or representatives) and any of QS's significant suppliers or others having business with QS. To the knowledge of Shareholders the consummation of the transactions contemplated hereunder will not have any adverse effect on the business relationship of QS with any such supplier. (b) Except as set forth in the Disclosure Memorandum, there are no disputes between QS (or any of QS's employees or representatives) and any of QS's significant customers or others having business with QS, nor are Shareholders aware of any present intent by any customer of QS to cancel its existing contractual arrangements; provided, however, that ISC acknowledges that some of QS's contracts may be canceled in accordance with their terms. To the knowledge of Shareholders, the consummation of the transactions contemplated hereunder will not have any adverse effect on the business relationship of QS with any such customer. IV.12 Trade Secret and Employment Claims. To the knowledge of Shareholders, no third party has claimed that QS, any 14 16 Shareholder, or any director, officer, manager, employee or agent of QS, in respect of activities on behalf of QS or in respect of the operations of QS Business to date, has (i) violated any of the terms or conditions of any employment contract with a third party, (ii) infringed any patent, trademark or copyright of a third party, (iii) disclosed or used any trade secrets or proprietary information or documentation of such third party, or (iv) interfered in the employment relationship between a third party and any of his or its employees; nor, to the knowledge of Shareholders, has any such violation, disclosure, use or interference occurred. IV.13 Intellectual Property. (a) The Disclosure Memorandum (i) lists and describes all patents, patent applications, trade names, trademarks, service marks, trademark and service mark registrations and applications, and all patent, trademark and service mark licenses; (ii) describes all copyrights, computer software, data bases and all other intellectual property, that are owned by or registered in the name of QS or to which QS has any rights as licensee or otherwise, which list specifies which items are owned and to which items QS has rights as a licensee or otherwise; and (iii) lists and describes all contracts, agreements or understandings pursuant to which QS has authorized any person to use, or which any person otherwise has the right to use, in any business or commercial activity, any of the items listed in clause (i) or (ii) above. (b) The items listed or described in the Disclosure Memorandum pursuant to the preceding subsection (a) constitute or represent all of the intellectual property necessary to the conduct of QS Business, and QS's ownership and use rights with respect thereto are free and clear of Encumbrances. (c) QS has no federal trademark or service mark registrations. (d) To the knowledge of Shareholders, QS has not infringed upon any patent, service mark, trade name, trademark, copyright, trade secret, or other intellectual property belonging to any other Person; and QS has not agreed to indemnify any Person for or against any infringement of or by the Intellectual Property set forth in the Disclosure Memorandum. To the knowledge of Shareholders, no person is infringing upon any of QS's patents, patent applications, trade names, trademarks, service marks, 15 17 trademark and service mark registrations, licenses, copyrights, computer software or other intellectual property. (e) Except for licenses intentionally granted by QS or pursuant to which QS is a licensee, QS owns the Software Programs, the Intellectual Property and the Documentation. Except as described in the Disclosure Memorandum, QS has obtained copyright protection for all of the Intellectual Property and Documentation. Except as set forth in the Disclosure Memorandum, QS and the Shareholders have used their best efforts to protect the trade secrets and other confidential information contained in the Intellectual Property and have used best efforts to ensure that QS does not lose any protection for the Intellectual Property and Documentation under applicable copyright law. To the knowledge of Shareholders and except as described in the Disclosure Memorandum, there has been no material disclosure of such trade secrets and confidential information. The source code relating to the Software Programs (i) has at all times been maintained in confidence; (ii) has been disclosed only to QS employees and consultants having a "need to know" the contents thereof in connection with the performance of their duties to QS; and (iii) has been disclosed to certain customers who have agreed to keep such information confidential. The Documentation relating to the Software Programs (i) has at all times been maintained in confidence except as may have been disclosed to potential customers and (ii) has been disclosed only to QS employees, consultants, ISC and its employees, customers and potential customers having a "need to know" the contents thereof in connection with the performance of their duties to QS or in connection with the purchase of QS products or services. (f) All Software Programs and Documentation were developed for the benefit of, and to be owned by, QS. Each of the Shareholders has signed acknowledgments of QS's rights in work products in substantially the form contained in Exhibit C hereto. (g) Except as disclosed in the Disclosure Memorandum, no claims have been asserted by any person or entity to use the Intellectual Property, and Shareholders do not know of any valid basis for any such claim. The use of the Intellectual Property by QS does not infringe on the rights of any Person. (h) Except as disclosed in the Disclosure Memorandum, the Software Programs licensed by QS perform in accordance with the documentation related thereto and are free of material defects 16 18 in programming and operation when used in accordance with the documentation. (i) QS owns or has a license to use all computer software and databases that are necessary for the conduct of the QS Business as presently conducted by QS and all documentation relating to all such computer software and databases. The Disclosure Memorandum lists material defects in such computer software and databases which are known to Shareholders as of the Closing Date. IV.14 Contracts. The Disclosure Memorandum sets forth a list of all current QS Contracts relating to QS Business that involve payment to or by QS of more than $10,000 or that are otherwise material to QS Business or the prospects of the QS Business. Except as set forth in the Disclosure Memorandum: (a) to the knowledge of Shareholders, each of such QS Contracts is in full force and effect and constitutes a binding obligation of all parties thereto, enforceable in accordance with its terms. To the knowledge of the Shareholders and except as set forth in the Disclosure Memorandum, there is no threat to cancel or otherwise terminate the QS Contracts. (b) to the knowledge of Shareholders, there are no existing defaults or events of default, real or claimed, or events which with notice or lapse of time or both would constitute defaults under any QS Contract. (c) there are no QS Contracts relating to QS Business or the assets of QS with any director, officer or shareholder of QS, or with any person related to any such person or with any company or other organization in which any director, officer, or shareholder of QS or anyone related to any such person, has a direct or indirect financial interest. (d) neither QS nor any Shareholder is subject to any contract or agreement: (1) that contains covenants limiting the freedom of QS to compete in any line of business in the United States or Canada; (2) that requires QS to share any profits, or requiring any payments or other distributions based on profits, 17 19 revenues or cash flows; or (3) that, to the knowledge of Shareholders, has had or may in the future have a material adverse effect upon the business, earnings or financial condition of QS. IV.15 Leases. The Disclosure Memorandum contains a complete and accurate list of all leases (including any capital leases) and lease-purchase arrangements pursuant to which QS leases real or personal property from others. QS's possession of such property has not been disturbed, nor has any claim been asserted against QS adverse to its rights in such leasehold interests. All leases that are required to be capitalized by the Accounting Standards have been so accounted for in the Financial Statements, and such leases are identified as capital leases in the Disclosure Memorandum. IV.16 Permits. QS holds free and clear all permits, licenses, franchises and authorizations from governmental and regulatory authorities as are necessary to conduct QS Business (the "QS Permits"), all of which QS Permits are listed in the Disclosure Memorandum. To the knowledge of each Shareholder no event has occurred that allows (nor after notice or lapse of time or both would allow) revocation or termination of any QS Permit or would result in any other material impairment of the rights of the holder of any QS Permit. IV.17 Labor Matters. (a) QS is in compliance with all Rules respecting employment and employment practices, terms and conditions of employment, wages and hours. (b) QS is not and has not been engaged in any unfair labor practice, and no unfair labor practice complaints against QS are pending before the National Labor Relations Board or similar authority. To the knowledge of Shareholders: there are no labor strike or other labor trouble actually pending, being threatened against, or affecting QS; relations between management and labor are amicable; and there have not been, nor are there presently, any attempts or plans to organize QS's employees. (c) There is no agreement, arrangement or understanding between QS and any trade union, any representative of any trade union or any bargaining unit in respect of any of the 18 20 Employees. IV.18 Employees. (a) The Disclosure Memorandum sets forth as to each Employee, his or her name, the location of employment, the date on which he or she was hired, the annual salary or hourly rate of pay for the Employees (separately listing any bonus), each Employee's raises and bonuses since January 1, 1997, a true and correct estimate of each of the Employee's accrued sick leave entitlement up to the Closing Date, a true and correct estimate of each of the Employee's accrued vacation up to the Closing Date, and a true and correct description of all other benefits actually or contingently accruing to any Employee as of the Closing Date. (b) The Disclosure Memorandum sets forth as to each officer or other manager of QS, the information described in subsection (a) above, as well as the current compensation rate (salary, bonus, commission or other) for each such person other than Francis Crowder and Marian Crowder. (c) Except as set forth in the Disclosure Memorandum, QS has not entered into any agreement with any Employee, for a fixed term or otherwise. (d) Except as set forth in the Disclosure Memorandum, since October 1996, all Employees who have received raises have received normal raises which in no instance exceeded ten percent (10%) and all remuneration for shift, weekend and/or casual work has been negotiated and agreed upon with the applicable employees on a case-by-case basis. (e) During the last five years no major accident has occurred at QS Premises. (f) To the knowledge of each Shareholder, no key Employee of QS (other than Francis and Marian Crowder) will voluntarily leave QS in connection with the transfer of the Shares to ISC hereunder. (g) QS has made available to ISC all employment records for each Employee upon the request of ISC, except for those of Francis Crowder and Marian Crowder. Francis Crowder and Marian Crowder agree to provide QS and ISC with any requested employment records in the event such records are necessary to 19 21 satisfy QS's obligations as an employer pursuant to federal or state Rules, to cooperate with QS and ISC if necessary to meet QS's obligations as an employer, and jointly and severally agree to indemnify and hold harmless QS and ISC from and against any liability or penalty caused by Francis Crowder's or Marian Crowder's failure to provide QS or ISC with any employment records required hereunder. IV.19 Employee Benefit Plans and Arrangements. (a) List of Plans and Obligations. The Disclosure Memorandum sets forth a complete and accurate list and description of all plans, arrangements, agreements, commitments, promises and other obligations of QS, including but not limited to pension, retirement, profit-sharing, deferred compensation, stock option, employee stock ownership, severance pay, vacation, sick leave without compensation, bonus and other incentive plans, every medical, vision, dental and other health plan, every life insurance plan and every other written or unwritten employee program, arrangement, agreement or understanding, commitment or method of contribution or compensation, whether formal or informal, whether funded or unfunded and other obligations under which QS has been, is or will be obligated to provide benefits to any current or former Employee, retiree, director, independent contractor, shareholder, officer, consultant or other beneficiary, or dependent, spouse or other family member or beneficiary of such Employee, retiree, director, independent contractor, shareholder, officer, consultant or other beneficiary, of QS whether during their employment with QS or after the termination of such employment (the "Plans" and the "Beneficiaries", respectively). (b) Compliance. All of the Plans have been maintained, funded and administered in compliance, in all material respects, with all Rules, including but not limited to the Employee Retirement Income Security Act of 1974, as amended ("ERISA")and the Internal Revenue Code of 1986, as amended and all regulations and rulings related thereto. There are no penalties, interest or Taxes related to the Plans due to any federal or state authority. (c) No Liabilities or Obligations. Except as reflected on the 1996 Balance Sheet, QS has no liabilities or obligations to any Beneficiaries, governmental authorities or any other parties arising out of or relating to the Plans. 20 22 (d) No Payments. The consummation of the transactions contemplated by this Agreement will not (i) entitle any Beneficiary to any severance pay, unemployment compensation or any other payment contingent upon a change in control or ownership of QS or its assets or (ii) accelerate the time of payment or vesting or increase the amount of any compensation or benefit due to any Beneficiary. (e) No Multi-Employer Plans. None of the Plans is a multi-employer plan, as defined in Section 3(37) of ERISA. IV.20 Insurance Policies. The Disclosure Memorandum sets forth a complete and accurate list and description of all insurance policies in force naming QS, or any employees thereof in the capacity as such, as an insured or beneficiary or as a loss payable payee, or for which QS has paid or are obligated to pay all or part of the premiums. Except as set forth in the Disclosure Memorandum, QS has not received notice of any pending or threatened termination or premium increase (retroactive or otherwise) with respect thereto, and QS are in compliance with all conditions contained therein. There have been no lapses (whether cured or not) in the coverage provided under the insurance policies, referenced herein and as set forth in the Disclosure Memorandum. IV.21 Events After December 31, 1996. Except as set forth in the Disclosure Memorandum, since December 31, 1996, QS has conducted its business only in the ordinary course, consistent with reasonable past practices, and has not: (a) suffered any material property or casualty loss, or waived any material right; (b) entered into any insurance, pension or other employee benefit plan, payment or arrangement, or entered into or amended any employment, consulting, severance or similar agreement; (c) made any changes in employee compensation, or paid any other bonus, except in the ordinary course of business and consistent with QS past practice; (d) lost a major customer or vendor, suffered a material deterioration in any of its other significant 21 23 relationships, or experienced any other material adverse change in any aspect of QS Business or in its prospects; (e) made any change in any method, practice or principle of financial or tax accounting; (f) made any sales on terms (including but not limited to discounts, extended payment terms and other incentives) materially inconsistent with QS prior practices; (g) entered into any material commitment or transaction affecting QS Business other than in the ordinary course of business; (h) realized an asset or reduced a liability related to a transaction with a customer or supplier, that was not authorized by the customer or supplier; (i) failed to maintain the Financial Statements and its books of account in accordance with the Accounting Standards; (j) sold, assigned, transferred or encumbered any of its assets or affected the carrying value of any its liabilities, including without limitation any commercial agreements, or entered into any arrangement to purchase assets and/or assume liabilities (except in each case as required in the ordinary course of business); (k) paid, discharged, satisfied or renewed any claim, liability or obligation other than payment in the ordinary course of business and consistent with QS past practice; (l) made any distribution or declared or paid any dividends to any shareholders, received any capital contribution, or redeemed, purchased or otherwise acquired any shares; (m) made any payment of cash or any transfer of other assets, to any shareholder or affiliate thereof, or paid, loaned, advanced, sold, transferred or leased any asset to any employee, except for normal compensation involving salary and benefits; (n) failed to maintain its assets and continue with all contractual obligations in accordance with their respective terms; 22 24 (o) failed to use commercially reasonable efforts to preserve its business, keep available the services of its present employees, and preserve the goodwill of its customers, suppliers and others having business relations with it; or (p) agreed to take any action described in this Section 4.21. IV.22 Copies Provided to ISC. QS has given or made available to ISC, true, correct and complete copies of each of the contracts, agreements, instruments and other documents listed in the Disclosure Memorandum. IV.23 Brokers. No broker or finder has acted on behalf of QS or Shareholders in connection with this Agreement and the transactions contemplated hereby, and neither QS nor any Shareholder has made any other agreement to pay any agent, finder, broker or any other representative any fee or commission in the nature of a finder's or originator's fee arising out of or in connection with the subject matter of this Agreement. IV.24 Adverse Information. Neither QS nor any Shareholder has knowingly withheld information about any conditions, facts or circumstances that have had or reasonably could be expected to have a material adverse effect on the value of the assets of QS or QS Business to ISC. ARTICLE V REPRESENTATIONS AND WARRANTIES OF ISC In order to meet the requirements of the Shareholders, ISC hereby represents and warrants, as of the date hereof and as of the Closing Date as follows: V.1 Organization, Power and Authority of ISC. (a) ISC is a company duly incorporated and validly existing under the laws of the State of Georgia and has all requisite power and authority, corporate or otherwise, to carry on and conduct its business and to own or lease its properties and assets. 23 25 (b) The execution, delivery and performance of this Agreement, the Notes and the Escrow Agreement and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary action, corporate or otherwise, on the part of ISC. This Agreement, the Notes and the Escrow Agreement constitute ISC's legal, valid, and binding obligations, enforceable in accordance with their terms. (c) ISC has obtained all necessary consents, approvals, authorizations or estoppels of any other Person or governmental or regulatory authority required to be obtained to authorize and permit ISC to purchase all of the Shares. The execution and delivery of this Agreement, the Notes and the Escrow Agreement, and the consummation of the transactions contemplated herein by ISC, and the performance of the covenants and agreements will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions of any Articles of Incorporation or Bylaws of ISC; (ii) violate, conflict with or result in a material breach or default under or cause termination of any material term or condition of any material mortgage, indenture, contract, license, permit, instrument, trust document, or other agreement, document or instrument to which ISC is a party or by which ISC or any of its properties may be bound; or (iii) violate any Rule. ISC has the right, power and capacity to execute, deliver and perform this Agreement, the Notes and the Escrow Agreement and to consummate the transactions contemplated hereby. 5.2 Financial Statements. The financial statements contained in ISC's Form 10-K for the period ending December 31, 1996, and its Form 10-Q for the period ending March 31, 1997, (both of which are attached hereto) fairly present the financial position of ISC as of the dates thereof and the results of its operations for the respective periods thereof. Since March 31, 1997, there has been no material adverse change in the financial condition of ISC or its business, operations or assets. ARTICLE VI COVENANTS OF THE PARTIES VI.1 Cooperation. Shareholders and ISC shall cooperate fully with each other and their respective employees, legal counsel, accountants and other representatives and advisers in 24 26 connection with the steps required to be taken as part of their respective obligations under this Agreement; and shall, at any time and from time to time after the Closing, upon the reasonable request of the other, do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney, receipts, acknowledgments, acceptances and assurances as may be reasonably required to satisfy and perform the obligations of such party hereunder, and to allow ISC to operate QS Business after the Closing in the manner in which it was operated before the Closing. VI.2 Records. Except as provided in the Employment Letter between Francis Crowder and ISC dated April 14, 1997, Shareholders shall provide to QS, as soon as is reasonably practicable after QS's request, copies of any and all files, records or other data in any Shareholder's possession in respect of QS or QS Business. VI.3 Use of QS Name. The Shareholders shall cease to use the name "QS" (or any variation thereof) for any business purpose, except as employees or agents of QS or ISC, and for the benefit of QS, ISC or their Affiliates. VI.4 Expenses. Whether or not the expenses are incurred before or after the Closing, each of the expenses incurred by ISC, QS and Shareholders in connection with the authorization, preparation, execution and performance of this Agreement, including without limitation all fees, commissions, and expenses of agents, representatives, counsel, accountants, brokers and finders, shall be paid by the party that incurred such expenses. Without limiting the generality of the foregoing, Shareholders shall be responsible for the payment of: any fees, commissions or expenses of any broker or finder engaged by QS or Shareholders and any expenses of QS. VI.5 Tax Matters. (a) Shareholders shall pay all Taxes arising from or relating to the sale of the Shares to ISC. (b) ISC and QS shall file and control any returns required to be filed by QS after the Closing Date. (c) Shareholders, on the one hand, and ISC, on the other hand, agree to give prompt notice to each other of any 25 27 proposed adjustment to Taxes for periods ending on or prior to the Closing Date. Shareholders and ISC shall cooperate with each other in the conduct of any Tax audit or other proceedings involving QS for such periods. In connection with any such audit or other proceeding ISC, upon the Shareholders' request, shall provide the Shareholders copies of all notices, correspondence, demands, assessments and other documents generated in connection with such audit or other proceeding, all of which information shall remain subject to Section 7.13 (Confidentiality) below. The Shareholders shall also have the right to discuss the status of such audit or other proceeding with the ISC's representatives and, with the prior written consent of ISC (not to be unreasonably withheld), with the applicable taxing authorities involved. All of such activities by the Shareholders shall be conducted in a manner so as not to adversely impact the best interests of QS. (d) Shareholders on the one hand, and ISC, on the other hand, agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information and assistance (including access to books and records) relating to QS as is reasonably necessary for the preparation of any return, claim for refund or audit, and the prosecution or defense of any claim, suit or proceeding relating to any proposed adjustment. VI.6 Survival of Warranties. The Warranties will not merge, but will survive the Closing as follows: (a) the Warranties contained in Sections 3.2, 3.4, 4.6 and 4.13 hereof will survive the Closing indefinitely; and (b) all Warranties not identified in Section 6.6(a) above shall survive the Closing for a period of three (3) years after the Closing Date. 26 28 VI.7 Indemnification. (a) By the Shareholders. Shareholders jointly (except as provided in subsection 6.7(b)(5) hereof) and severally shall indemnify, reimburse and hold harmless ISC, its Affiliates and any successor or assigns (the "Indemnified Persons") for any and all direct or indirect claims, losses, liabilities, damages (including special and consequential damages), costs (including court costs) and expenses (including all attorneys' and accountants' fees and expenses) (hereinafter "a Loss" or "Losses"), as a result of or in connection with (i) any breach, inaccuracy or untruth of any Warranty; or (ii) any breach of or noncompliance by any Shareholder with any covenant or agreement of Shareholder contained in this Agreement or in any other agreement or instrument delivered in connection with this Agreement ; or (iii) any litigation, mediation or arbitration involving QS, any Shareholder, or QS Business arising from actions taken or facts existing before the Closing or arising out of or related to the transactions contemplated by this Agreement; or (iv) any act or omission of QS or any Shareholder constituting or causing non-compliance on or after the date hereof with any requirement of applicable Rules, if such act or omission occurred or arose prior to the Closing; or (v) any fees, commissions or expenses of any broker or finder engaged by QS or Shareholders; or (vi) any Taxes for which there was an insufficient accrual shown on the Financial Statements or Interim Financial Statements. (b) Limitations. (1) Shareholders shall not be required to indemnify an Indemnified Person with respect to any Loss unless the Loss, when aggregated with all other Losses of all Indemnified Persons, exceeds $25,000 (the "Minimum Aggregate Liability Amount"), at which time Losses may be asserted for any amounts in excess of the Minimum Aggregate Liability Amount up to the Maximum Liability Amount (defined below). (2) The maximum aggregate liability of the Shareholders for any Loss shall be limited as follows (the "Maximum Liability Amount"): A. The Maximum Liability Amount for any Loss arising out of or resulting from a breach, inaccuracy or untruth of a Warranty contained in Article III or Sections 4.1 and 4.13 shall be $1,500,000; and 27 29 B. The Maximum Liability Amount for any other Loss shall be limited to $500,000. (3) Notwithstanding subsections 6.7(b)(1) and 6.7(b)(2) above, the Minimum Aggregate Liability Amount and the Maximum Liability Amount shall not apply to any Loss (A) which results from or arises out of fraud or intentional misrepresentation or an intentional breach of Warranty on the part of any Shareholder, (B) claimed with respect to Section 4.6, (C) which results from or arises out of a breach of Section 6.8 or 6.9, or (D) described in Section 6.7(a)(vi). For any Loss or Losses not subject to the Minimum Aggregate Liability Amount or the Maximum Liability Amount, the Indemnified Persons shall be entitled to indemnification regardless of the amount of the Loss. (4) Kevin Davidson shall be responsible for the first $250,000 of any Loss arising out of Sections 4.13(h) or 4.13(i) hereof. Thereafter, the Shareholders shall be jointly and severally liable under Section 6.7(a). (5) Each Shareholder severally, not jointly, shall indemnify, reimburse and hold harmless the Indemnified Persons for any Loss as a result of, or in connection with, any breach of, or noncompliance by, that Shareholder of the agreements contained in Sections 6.8 or 6.9 hereof. (c) Notice of Claim. To seek indemnification hereunder, an Indemnified Person shall notify each Shareholder of any claim for indemnification, specifying in reasonable detail the nature of the Loss and the amount or an estimate of the amount thereof. (d) No Prejudice. Nothing herein shall prevent an Indemnified Person from making a claim for a Loss hereunder notwithstanding its knowledge of the Loss or possibility of the Loss on or prior to the Closing Date. (e) Other Rights. The indemnities granted hereunder are in addition to and not in substitution for any other right or remedy an Indemnified Person may now have or may subsequently take or hold, and may be enforced without first recourse to such other right or remedy and without taking any steps or proceedings in connection therewith, and notwithstanding any rule of law or equity or statutory provision to the contrary. 28 30 (f) Duty to Mitigate. The Indemnified Persons shall have the duty to mitigate, to the extent reasonably practicable, any damages for which they seek indemnification hereunder. (g) Setoff. ISC shall satisfy any indemnity right it may have under Section 6.7(a) first by setoff against any amount payable by ISC to any Shareholder under the Notes; provided, however, ISC shall have the right to seek indemnification directly from the Shareholders if the Notes are insufficient to satisfy ISC's indemnity right because ISC pays the Notes in full before May 30, 2000 or because ISC seeks indemnification for a Loss of the type described in subsections 6.7(b)(3)(A)-(D) hereof. VI.8 Confidentiality. (a) Except as provided in the Employment Letter between Francis Crowder and ISC dated April 14, 1997, QS and Shareholders shall hold in trust and confidence all Confidential Information (as defined below) for a period of three (3) years from the date hereof, and shall hold in trust and confidence all Trade Secrets (as defined below) for as long as such information remains a trade secret under applicable law, and shall not make any copies of, distribute or use any Confidential Information or Trade Secrets except as necessary to prepare for the completion of the transactions contemplated under this Agreement. Upon the first request in writing from ISC, Shareholders shall return to ISC all Confidential Information and Trade Secrets in their possession, without retaining any copies thereof. (b) As used in this Section 6.8 and only in this Section 6.8: (1) "Confidential Information" means all information relating to QS Business, ISC, any ISC Affiliate, or any person or entity with which it deals, which information is reasonably regarded as confidential, being information not in the public domain (including, without limitation: all Inventions; technical data; research and development information; business records, information and notes; products; "know-how"; Trade Secrets; engineering or other data; designs, specifications, processes and formulae; manufacturing or planning procedures, techniques or information; marketing plans, strategies and forecasts; business and product development plans, strategies and forecasts; financial statements, budgets, prices, costs and 29 31 financial projections; accounting procedures or financial information; names and details of consumers, customers, suppliers and agents; employee details; and secret information); together with the possible or likely function, purpose or application of that information whether in the current activities of QS, ISC or any Affiliate or fields to which the activities of QS, ISC or any Affiliate may reasonably extend from time to time, any part of or improvements to that information, and any recommendation, test or report of QS, ISC or any Affiliate or any consultant or agent in connection with that information; and whether such information is oral, written, recorded or stored by electronic, magnetic, electromagnetic or other form or process or otherwise in a machine readable form, translated from the original form, recompiled, made into a compilation, wholly or partially copied, modified, updated or otherwise altered, or originated or obtained by, or coming into the possession, custody, control or knowledge of QS, ISC or an Affiliate either alone or jointly. (2) "Invention" means any invention, drawing, design, model, contrivance, structure, specification, improvement, discovery, creation, idea, concept, formula, process and other work or contribution however developed, created, made discovered or conceived, and whether or not patented or patentable (whether by renewal or otherwise), protected by copyright, or otherwise protected or capable of protection by law anywhere. (3) "Trade Secrets" means any information of QS, ISC or an Affiliate (including but not limited to technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers) which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 30 32 VI.9 Noncompetition. (a) Each Shareholder acknowledges and recognizes the highly competitive nature of QS Business and accordingly agree that, to induce ISC to consummate the transaction contemplated by this Agreement, each Shareholder shall not, from the Closing Date and for a period of three (3) years after the later of the Closing Date or the termination of such Shareholder's employment with QS: (1) Engage directly or indirectly in any Competitive Business (as defined below) anywhere in the Restricted Territory (as defined below), whether such engagement be as an employer, officer, director, owner, investor, employee, partner, consultant or other participant in any Competitive Business; (2) Solicit or accept business from anyone who is or becomes an active or prospective customer of QS, ISC or their Affiliates or who was an active or prospective customer of QS on or prior to the Closing Date; (3) Solicit for employment or hire any employee of ISC or its Affiliates; or (4) Attempt to do any of the things (or directly or indirectly assist anyone else in doing or attempting to do any of the things) specified in subsections (1), (2) or (3) above. (b) As used in this Section 6.9: (1) "Competitive Business" means and includes any business individual, corporation or other entity which is engaged wholly or partly in any business similar to QS Business; and (2) "Restricted Territory" means the entire United States and anywhere that QS Business is being or will be conducted. (c) The provisions of this Section 6.9 shall not apply to: (1) The activities of any Shareholder performed in the course of his or her employment with and authorized by QS. (2) Consulting or strategic planning services 31 33 performed by Francis Crowder for health-related information systems if and to the extent ISC gives its express prior written consent to such services on a case-by-case basis. (3) Francis Crowder writing books, articles or papers for public distribution dealing with the use of health-related information by governmental bodies, provided that such writing does not conflict with the QS Business. VI.10 Funds Received After Closing. Any and all funds received by any Shareholder (or anyone other than QS or ISC) after Closing in respect of QS Business shall be remitted to QS or ISC immediately upon receipt. VI.11 Employment, General. For a period of 90 days after the Closing Date, QS shall provide at least 90 days notice to an Employee prior to terminating such Employee (other than Francis Crowder and Marian Crowder). VI.12 Announcements. Except as required by law or contract obligating the announcing party, Shareholders shall not make any announcement of the transactions contemplated hereby without the prior agreement of ISC, and ISC shall not make any announcement of the transactions contemplated hereby without the prior agreement of the parties. The parties agree to cooperate in developing such announcements. ARTICLE VII MISCELLANEOUS VII.1 Notices. All notices, requests, demands, consents and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered by overnight courier, express mail service, by postage pre-paid certified or registered mail, return receipt requested (the return receipt constituting prima facie evidence of the giving of such notice, request, demand or other communication) by personal delivery, or by fax with confirmation of receipt to the following address or such other address of which a party subsequently may give notice to all the other parties: 32 34 To the Shareholders: Francis M. Crowder, Sr. 1107 Thornehill Drive Anderson, South Carolina 29621 Marian S. Crowder 1107 Thornehill Drive Anderson, South Carolina 29621 Kevin W. Davidson 26 Merry Oak Trail Piedmont, South Carolina 29673 Charles S. Verdin, III 319 Bethel Road Simpsonville, South Carolina 29681 with a copy to: Joseph J. Blake, Jr. Haynsworth, Marion, McKay & Guerard, L.L.P. P.O. Box 2048 75 Beattle Place Greenville, SC 29602 Fax: (864) 240-3300 To ISC: Intelligent Systems Corporation 4355 Shackleford Road Norcross, Georgia 30093 Fax: 770/381-2808 Attention: President with a copy to: Nelson Mullins Riley & Scarborough, L.L.P. 999 Peachtree Street, N.E. Suite 1400 Atlanta, Georgia 30309 Fax: 404/817-6050 Attention: Philip H. Moise VII.2 Parties Bound by Agreement; Successors and Assigns. The terms, conditions and obligations of this Agreement shall inure to the benefit of and be binding upon the parties hereto and the respective successors and assigns thereof. Without the prior written consent of ISC, neither Shareholders nor QS may assign their rights, duties or obligations hereunder or any part thereof to any other Person. ISC may assign its rights and duties 33 35 hereunder in whole or in part to one or more Affiliates. VII.3 Entire Agreement. This Agreement, the Disclosure Memorandum, the Notes, the Escrow Agreement, the Employment Letter between ISC and Francis Crowder dated April 14, 1997 and all other certificates, schedules and other documents delivered pursuant thereto constitute the entire agreement between the parties with respect to the transactions contemplated hereby, and supersede and are in full substitution of any and all prior agreements and understandings written or oral between the parties relating to such transactions. VII.4 Descriptive Headings. The descriptive headings of the Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. VII.5 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. VII.6 Amendments and Waivers. No modification, termination, extension, renewal or waiver of any provision of this Agreement shall be binding upon a party unless made in writing and signed by such party. A waiver on one occasion shall not be construed as a waiver of any right on any future occasion. No delay or omission by a party in exercising any of its rights hereunder shall operate as a waiver of such rights. VII.7 Governing Law Jurisdiction and Venue. This Agreement shall be construed in accordance with and governed by the laws of the State of South Carolina, and jurisdiction and venue for any matter submitted to a court hereunder or in connection with the transactions described herein shall lie in any court of competent jurisdiction in Anderson County and Greenville County, South Carolina. VII.8 No Third-Party Beneficiaries. With the exception of the parties to this Agreement and the Indemnified Parties, there shall exist no right of any person to claim a beneficial interest in this Agreement or any rights accruing by virtue of this Agreement. VII.9 Gender and Number. Where the context requires, the use of a pronoun of one gender or the neuter is to be deemed to 34 36 include a pronoun of the appropriate gender, singular words are to be deemed to include the plural, and vice versa. VII.10 Cooperation in Transition. Each Shareholder agrees to cooperate in the transition of ownership of QS from the Shareholders to ISC. In connection therewith, Shareholders will, among other things, use their best efforts to help QS maintain good relationships with customers, suppliers, Employees and others doing business with QS and will use their best efforts to ensure that such customers, suppliers, Employees and other continue to do business with QS in a manner that is consistent with QS's business relationships prior to the date hereof. Each of the parties hereto has caused this Agreement to be duly executed on its behalf as of the date indicated on the first page hereof. SHAREHOLDERS: - ------------- FRANCIS CROWDER - ------------------------------ MARIAN CROWDER - ------------------------------ KEVIN DAVIDSON - ------------------------------ CHARLES VERDIN - ------------------------------ ISC: - ---- INTELLIGENT SYSTEMS CORPORATION By: --------------------------- J. Leland Strange President 35 EX-2.4 3 STOCK PURCHASE AGREEMENT 1 EXHIBIT 2.4 STOCK PURCHASE AGREEMENT BETWEEN OAK INVESTMENT PARTNERS AND INTELLIGENT SYSTEMS CORPORATION DATED 3/31/97 2 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement") is made March 31, 1997, by and among Intelligent Systems Corporation, a Georgia corporation ("Seller"), on the one hand, and Oak Investment Partners V, Limited Partnership and Oak V Affiliates Fund, Limited Partnership, both Delaware limited partnerships ("Buyers"), on the other hand. Seller owns shares of common stock, $.01 par value ("Common Stock"), of PaySys International, Inc., a Florida corporation ("PaySys"). Seller desires to sell a portion of the Common Stock to Buyers, and Buyers desire to purchase such portion of the Common Stock. Therefore, in consideration of the mutual covenants and conditions contained herein, the parties do hereby agree as follows. 1. Purchase and Sale of Common Stock. (a) Sale and Purchase of Common Stock. Subject to the terms and conditions set forth in this Agreement, Seller hereby sells to Buyers, and Buyers hereby purchase from Seller, an aggregate of 50,537 shares of the Common Stock (the "Shares"). (b) Purchase Price. Simultaneously with the execution and delivery of this Agreement, Buyers shall pay Seller an aggregate of Two Million Dollars ($2,000,000), the purchase price of the Shares (approximately $39.575 per Share). (c) Delivery of Shares. Simultaneously with the execution and delivery of this Agreement, Seller shall deliver to Buyers certificates representing all of the Shares, in such separate denominations as Buyers shall determine, endorsed in blank for transfer to Buyers or accompanied by a stock transfer power executed in blank. 2. Obligation to Transfer Additional Shares. (a) If PaySys is a Public Company in One Year. If by the first anniversary of this Agreement (the "First Anniversary") the Company has sold shares of the Common Stock to the public pursuant to a registration statement effective under the Securities Act of 1933 in a firm commitment underwritten public offering, and if the Average Fair Market Value per Share on the First Anniversary (as defined below) is less than $51.45 per Share (the "Target Market Price"), then within 15 days after the First Anniversary Seller shall transfer to Buyer" for no further consideration a number of shares of Common Stock (the "Additional Public Shares") determined by dividing $2,600,000 by the Average Fair Market Value per Share on the First Anniversary, subtracting 50,537 (the number of Shares) from that number, and rounding up to the nearest whole number of shares. For purpose of this subsection 2(a), "Average Fair Market Value per Share on the First Anniversary" shall mean the average for the last 20 trading days before the First Anniversary (or if such public sale was closed during such 20 trading-day-period, the average for the number of trading days immediately following such public sale and 3 before the First Anniversary) of either (i) or (ii) below, whichever is applicable: (i) if the Common Stock is traded on a national securities exchange, the closing sales price of a share of Common Stock, regular way, on such exchange on each such trading day; or (ii) if the Common Stock is not traded on any national securities exchange, the average of the closing high bid and low-asked prices of the Common Stock on the over-the-counter market on each such trading day, or in the absence of closing bids on a particular trading day, the closing bids on the next preceding trading day on which there were bids. Such transfer shall be accomplished by Seller delivering to Buyers certificates representing the Additional Public Shares in such separate denominations as Buyers shall determine, endorsed in blank for transfer to Buyers or accompanied by stock transfer powers executed in blank. (b) If PaySys is a Private Company in One Year. If by the First Anniversary the Company has not sold shares of the Common Stock to the public pursuant to a registration statement effective under the Securities Act of 1933 in a firm commitment underwritten public offering, then within 15 days after the First Anniversary Seller shall transfer to Buyers for no further consideration an aggregate of 18,377 shares of Common Stock (the "Additional Private Shares"). Such transfer shall be accomplished by Seller delivering to Buyers certificates representing the Additional Private Shares in such separate denominations as Buyers shall determine, endorsed in blank for transfer to Buyers or accompanied by stock transfer powers executed in blank. (c) Adjustments Under Subsections (a) and (b). (i) If before the First Anniversary the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of PaySys by reason of a stock split, reverse stock split, combination, stock dividend, recapitalization or reclassification, the Target Market Price and the aggregate number and kind of Additional Public Shares or Additional Private Shares shall be appropriately adjusted. (ii) For purposes of determining the number of Additional Private Shares, if before the First Anniversary PaySys shall issue any options or warrants exercisable for Common Stock or for any securities convertible into Common Stock (other than any options or warrants already identified on Exhibit A hereto), or shall issue any securities convertible into Common Stock, and the aggregate price per share of Common Stock to be paid upon the exercise of such options or warrants, or upon the conversion of such convertible securities (when added to the price, if any, paid for such convertible securities and allocable to the shares of Common Stock issuable upon conversion), is less than 2 4 $39.575 per share (adjusted if appropriate in any of the events identified in subsection (c)(i) above), the number of Additional Private Shares shall be appropriately adjusted to account for the proportionate potential dilution to the value of the Shares caused by the issuance of such options, warrants or convertible securities. (d) Restrictions on Transfer. In connection with the contingent obligation of Seller to transfer either the Additional Public Shares or the Additional Private Shares to Buyer, Seller agrees that it shall not sell, transfer, pledge or otherwise encumber 25,000 shares of Common Stock (the "Restricted Shares") for 13 months after the date hereof, and that a legend will be affixed to the certificate(s) representing the Restricted Shares referencing the restrictions contained in this subsection (d). (e) Registration Rights; Further Assurances. Seller shall use its best efforts to cause PaySys to grant registration rights to Buyers on the same terms and conditions as any such rights heretofore or hereafter granted by PaySys to Seller, and shall use its best efforts to provide that the Shares, any Additional Public Shares and any Additional Private Shares be freely transferable by Buyers promptly after the consummation of an initial public offering by PaySys; provided, however, Seller shall not be required to do anything under this subsection (e) that would, or reasonably could be expected to, adversely impact PaySys' ability to raise additional funding in a public offering or otherwise, or SelIer's ability to participate as a selling shareholder in any such transaction, or otherwise adversely impact the existing PaySys shareholders. 3. Representations and Warranties of Seller. Seller hereby represents and warrants to Buyers as follows: (a) Organization of PaySys. PaySys is a corporation duly incorporated and validly existing under the laws of Florida and has all requisite power and authority, corporate or otherwise, to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets. (b) Capitalization of PaySys. The authorized capital stock of PaySys consists of 30,000,000 shares of Common Stock and 10,000,000 shares of $.01 par value preferred stock. At the date hereof, 1,333,494 shares of Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable, and no shares of preferred stock are issued and outstanding. Except as disclosed on Exhibit A hereto, as of the date hereof there are no options, warrants, convertible securities or other rights or agreements under which PaySys may be required to issue additional shares of Common Stock. (c) Organization of Seller. Seller is a corporation duly incorporated and validly existing under the laws of Georgia and has all requisite power and authority, corporate or otherwise, to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets. 3 5 (d) Authority. Seller has full power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by Seller of this Agreement and all transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of Seller, and this Agreement constitutes the legal, valid and binding obligation of Seller, enforceable in accordance with its terms, except as the same may be limited by (i) bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally and general equitable principles (whether applied in law or equity) and (ii) judicial discretion in the enforcement of legal or equitable remedies. (e) No Conflict. The execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated herein will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions of any articles of incorporation or bylaws of Seller, or (ii) conflict with, violate, or constitute a default under, any mortgage, agreement, lease, license, permit or other instrument to which Seller is a party or by which any of its assets or properties is bound or affected, or (iii) result in the creation of any lien or encumbrance on any of the Shares. (f) Title to Shares. Seller is the record and beneficial owner of the Shares, and holds good and marketable title to the Shares free and clear of all transfer restrictions, security interests, liens, encumbrances, claims and options; and immediately after Seller's sale of the Shares to Buyers hereunder, Buyers will hold good and marketable title to the Shares free and clear of all transfer restrictions, security interests, liens, encumbrances, claims and options, other than those created or suffered to exist by Buyers or either of them. (g) Financial Statements. Attached hereto as Schedule 3(g) are the audited balance sheet of PaySys as of December 31, 1996 and the related audited statements of operations, cash flows and stockholders' equity for the year ended December 31, 1996, in each case certified by Ernst and Young LLP. All such financial statements (i) are true, correct, and complete; (ii) are in accordance with the books and records of PaySys; (iii) present fairly the financial position and results of operations of PaySys as of the dates and periods indicated; and (iv) have been prepared in accordance with generally accepted accounting principles. (h) Use of Proceeds. Seller will use the proceeds of the sale of the Shares to make an investment in Visibility Inc., a Georgia corporation, pursuant to the terms of a Convertible Note Purchase Agreement dated March 31, 1997 by and among Visibility Date Inc., Seller, Buyers, Grubb & Williams, Ltd., GW Investments, Ltd. and Mentec Limited. 4. Representations and Warranties of Buyer. Each Buyer hereby represents and warrants to Seller as follows: 4 6 (a) Organization. Buyer is a limited partnership duly organized and validly existing under the laws of Delaware and has all requisite power and authority to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets. (b) Authority. Buyer hen full power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by Buyer of this Agreement and all transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of Buyer and its partners, and this Agreement constitutes the legal, valid and binding obligation of Buyer, enforceable in accordance with its terms, except as the same may be limited by (i) bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally and general equitable principles (whether applied in law or equity) and (ii) judicial discretion in the enforcement of legal or equitable remedies. (c) No Conflict. The execution and delivery of this Agreement by Buyer and the consummation of the transactions contemplated herein will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions of Buyer's Agreement of Limited Partnership or other governing documents, or (ii) conflict with, violate, or constitute a default under, any mortgage, agreement, lease, license, permit or other instrument to which Buyer is a party or by which any of its assets or properties is bound or affected. (d) Investment Representations. (i) Buyer is acquiring the Shares for investment for its own account and not with a view to, or for, resale, transfer or distribution, and that Buyer has no intention of participating, directly or indirectly, in a distribution of the Shares or any portion thereof. (ii) Buyer understands and acknowledges that the transfer of the Shares has not been registered under the Securities Act of 1933, as amended (the "1933 Act"), or under the Georgia Securities Act of 1973 (the "Georgia Act") or the securities or Blue Sky laws of any other jurisdiction, and that the Shares will be transferred in reliance upon exemptions contained in the such Acts and such laws. Further, Buyer understands that PaySys is under no obligation to register the transfer of the Shares under the 1933 Act, the Georgia Act or any such other laws, or to take any other action necessary in order to comply with an available exemption. (iii) Buyer understands and acknowledges that a legend will be placed on the certificates evidencing the Shares, or any substitutions there fore, substantially to the effect of subsection (d)(ii) above. 5 7 5. Miscellaneous. (a) Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing; shall be delivered by U.S. mail (certified, return receipt requested), hand delivery, overnight courier (such as FedEx), or fax; shall be deemed to have been given at the earlier of the time it is actually received or, if sent by U.S. mail (certified, return receipt requested), five days after the day when deposited in the U.S. mail (the return receipt constituting prima facie evidence of the giving of such notice, request, demand or other communication) delivered or addressed to the address below or to such other address of which a party subsequently may give notice to the other party. To Buyers: Oak Investment Partners V, Limited Partnership Oak V Affiliates Fund, Limited Partnership One Gorham Island Westport, Connecticut 06880 Attention: Edward F. Glassmeyer FAX: (203) 227-0372 with a copy to: Julie M. Allen, Esq. O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, NY 10112 FAX: (212) 408-2420 To Seller: Intelligent Systems Corporation 4355 Shackleford Road Norcross, GA 30093 Attention: President FAX: (770) 381-2808 with a copy to: Nelson Mullins Riley & Scarborough, L.L.P. First Union Plaza, Suite 1400 999 Peachtree Street, N.E. Atlanta, Georgia 30309 Attention: Philip H. Moise, Esq. FAX: (404) 817-6050 (b) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their respective successors, successors-in-title, legal representatives, heirs, executors and lawful assigns. (c) Entire Agreement. The Agreement constitutes the entire agreement between the parties with respect to the Shares, and supersedes and is in full substitution for any and all prior 6 8 agreements and understandings, written or oral between the parties relating to the Shares. (d) Descriptive Headings. The descriptive headings of the sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. (e) Counterparts. This Agreement may be executed in more than one counterpart, each of which shall be an original, but all of which together shall constitute one instrument. (f) Amendments and Waivers. No modification, termination, extension renewal or waiver or any provision of this Agreement shall be binding upon a party unless made in writing and signed by such party. A waiver on one occasion shall not be construed as a waiver of any right on any future occasion. No delay or omission by a party in exercising any of its rights hereunder shall operate as a waiver of such rights. (g) Governing Law. This Agreement shall be governed by and construed under the laws of the State of Georgia. (h) Survival. The representations and warranties of Seller in Section 3 hereof and the representations and warranties of Buyers contained in Section 4 hereof shall survive the execution and delivery of this Agreement and the transfer of the Shares. ' (i) Fees. Seller and Buyers shall each pay one-half of the legal fees incurred by Seller and Buyers related to the preparation and review of this Agreement and the consummation of the transactions contemplated herein. ' The parties each have executed this Agreement as of the date stated on the first page. SELLER: Intelligent Systems Corporation By: /s/ J. Leland Strange --------------------------- J. Leland Strange President [Signatures continue on next page] 7 9 [STOCK PURCHASE AGREEMENT - continuation of signatures] BUYERS: Oak Investment Partners V, Limited Partnership By: Oak Associates V, L.L.C., as General Partner By: /s/ --------------------------- A Managing Member Oak V Affiliates Fund, Limited Partnership By: Oak V Affiliates, as General Partner By: /s/ --------------------------- A General Partner 8 10 Exhibit A to Stock Purchase Agreement Options, Warrants, Convertible Securities or Other Rights or Agreements
Number of Common Shares Subject to Holder of Right Form of Right Right - --------------- ------------- ----------------- Intelligent Systems Corp. Warrant 55,521 Sirrom Warrant 30,000 Employee TIP Option 350 David Black Warrant 10,535 Option 38,046 Option 16,194 Warrant 110,411 Jerry Vaughn Warrant 10,535 Dan Cone Option 13,000 Harry Hall Option 10,000 Mike Casey Option 10,000 Henry Stewart Option 5,000 Steve Grubb Option 82,016 Option 16,194 Warrant 110,411 Employee options issued 2/4/97 Options 43,415 TOTAL 561,628
9 EX-10.2 4 SECOND AMENDMENT TO LEASE AGREEMENT 1 EXHIBIT 10.2 SECOND AMENDMENT TO LEASE AGREEMENT THIS SECOND AMENDMENT TO LEASE AGREEMENT (hereinafter referred to as the "Second Amendment") is made as of the 19 day of June 1997, by and between WEEKS REALTY, L.P. (hereinafter referred to as "Landlord") and QUADRAM CORPORATION (hereinafter referred to as "Tenant"). WITNESSETH: WHEREAS, A.R. Weeks & Associates, Inc. and Tenant entered into that certain Lease Agreement dated March 11, 1985, as amended by that certain First Amendment to Lease Agreement dated November 16, 1990, (hereinafter collectively referred to as the "Agreement") for the lease of 137,100 square feet of office/warehouse space at 4355 Shackleford Road, Norcross, Georgia, Building 2 in Gwinnett Park which is more particularly described in Exhibit "A" to the Agreement and certain easements, rights and privileges appurtenant thereto (hereinafter referred to as the "Leased Premises"); and WHEREAS, Weeks Realty, L.P. succeeded to the interest of the landlord under the Agreement and is the Landlord with respect to the Leased Premises; and WHEREAS, the Agreement will expire by its terms on November 30, 1997 and Tenant desires to enter into this Second Amendment in order to extend the term of the Agreement; NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) paid by Landlord and Tenant to one another, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Landlord and Tenant, Landlord and Tenant amend the Agreement as follows: 1. The Agreement is hereby extended for an additional five (5) year term effective December 1, 1997 and continuing until midnight on November 30, 2002 on all of the same terms, covenants and conditions as the original Agreement with the same base year except that the base rental for the new term shall be as set forth below: December 1, 1997 - November 30, 2000 $59,981.25/month $719,775.00/year December 1, 2000 - November 30, 2002 $62,837.50/month $754,050.00/year
The base rental shall be due on or before the first day of each calendar month during the term together with any other additional rent as set forth in the Agreement. The landscaping service fee shall continue at its current rate. 2. As consideration for Tenant's performance of all obligations to be performed by Tenant under this Lease, Landlord shall contribute the sum of One Hundred Twelve Thousand One Hundred and 00/100 Dollars ($112,100.00) (the "Allowance") towards the cost of tenant improvements to the Leased Premises. The Allowance shall be used for alterations, improvements, fixtures and equipment which become part of or are attached or affixed to the Leased Premises, including walls, wall coverings and floor coverings, but excluding trade fixtures, furniture and furnishings or other personal property. In the event the cost of tenant improvements exceeds the cost of tenant improvement Allowance the excess shall be paid by Tenant within thirty (30) days of Tenant's receipt of Landlord's notice. 2 3. Tenant shall have the option to renew the Agreement for one (1) five (5) year term provided that Tenant gives written notice to Landlord of its intention to renew at least one hundred eighty (180) days prior to the end of the then current term of the Lease. The Extended Term shall be on the same terms and conditions as the initial term of the Agreement, except as expressly provided herein to the contrary with respect to Base Rent and except for such as are, by their terms, inapplicable to an Extended Term. The Base Rental for the Extended Term shall increase at a rate of seven percent (7%) above the ending rate for the preceding term, payable in monthly installments on or before the first day of each calendar month in the Extended Term. It is expressly understood that Tenant shall have no option to extend the term of the Agreement for the Extended Term if at the time of such attempted exercise of the Extended Term the Agreement is not then in full force and effect and if Tenant is then in default of any terms and conditions of the Agreement beyond any applicable notice and cure period provided for herein. 4. Landlord and Tenant hereby agree to cooperate with each other in the construction of 10 to 12 parking spaces ("Additional Parking") to be added to the existing parking area per the attached plan marked Exhibit "A". The cost of constructing the Additional Parking shall be paid by Landlord. 5. Landlord has agreed to renovate the landscaping and sprinkler system, at Landlord's sole cost and expense per the attached plan marked Exhibit "B" and to construct a new storefront entrance to the Premises on the Meca Way side of the Building, per the attached plan marked Exhibit "C". 6. Landlord agrees to provide preventive maintenance on the HVAC system for the Leased Premises, at its sole cost, provided that Landlord shall not have any obligation to make any corrections, repairs or replacements to the systems. 7. Except as expressly modified by this Second Amendment, all provisions, terms and conditions of the Agreement shall remain in full force and effect. 8. In the event a provision of this Second Amendment conflicts with a provision of the Agreement, the Second Amendment shall supersede and control. 9. All terms and phrases used herein shall have the same meaning as assigned to them in the Agreement. 10. This Second Amendment shall not be of any legal effect or consequence unless signed by Landlord and Tenant, and once signed by Landlord and Tenant it shall be binding upon and inure to the benefit of Landlord, Tenant, and their respective legal representatives, successors and assigns. 11. This Second Amendment has been executed and shall be construed under the laws of the State of Georgia. 3 IN WITNESS WHEREOF, the undersigned have caused this Second Amendment to be executed under seal and delivered as of the day and year first above written. LANDLORD: Signed, sealed and delivered in the presence of: WEEKS REALTY, L.P., a Georgia limited partnership /s/ Kelly A. Kinnery - ---------------------------------- Witness By: Weeks GP Holdings, Inc., a Georgia corporation, /s/ Stephanie Pongetti its sole general partner - ---------------------------------- Notary Public By: /s/ Forrest Robinson ------------------------------- Name: Forrest Robinson ----------------------------- Its: President/C.O.O. ------------------------------ [SEAL] TENANT: Signed, sealed and delivered QUADRAM CORPORATION in the presence of: /s/ Sonja Lee By: /s/ J. L. Strange - ---------------------------------- ------------------------------- Witness Name: J. L. Strange ----------------------------- Its: President /s/ Sherry L. Wilhelm ------------------------------ - ---------------------------------- Notary Public ATTEST: By: /s/ Bonnie Herron ------------------------------- Name: Bonnie Herron ----------------------------- Its: Secretary ------------------------------ [Corporate Seal] EX-10.5 5 FORM OF PROMISSORY NOTE 1 EXHIBIT 10.5 Form of Promissory Note PROMISSORY NOTE Principal Amount: $__________ Atlanta, Georgia July 1, 1997 FOR VALUE RECEIVED, Intelligent Systems Corporation, a Georgia corporation (hereinafter called "Maker") promises to pay to ____________________ (hereinafter called "Holder"), at _____________________________________________, or at such other place as Holder may request, the principal sum of ___________________ Dollars ($_________), plus simple interest accruing from the date hereof on the unpaid principal balance at eight and one/half percent (8.5%) per annum. The principal shall be payable in three equal installments on July 1, 1998, July 1, 1999 and July 1, 2000. Interest on the outstanding principal shall be payable quarterly on January 1, April 1, July 1 and October 1 of each year beginning October 1, 1997 as long as any principal shall remain outstanding. Principal and all interest shall be paid in lawful money of the United States of America. If the due date for any payment of principal or interest falls on a weekend or federal holiday, such payment shall be due the next business day. Maker may, at its discretion, prepay this Note, in whole or in part, without penalty or premium, from time to time. Any payment under this Note shall be applied first to the discharge of any interest accrued and unpaid at the time, and the balance, if any, shall be applied to installments of principal in the order designated by Maker at the time of prepayment. This Note is subject to the terms and conditions of that certain Stock Purchase Agreement dated as of July 1, 1997, between Maker, the "Shareholders" identified therein including Holder, and Q.S., Inc. (the "Purchase Agreement"). Capitalized terms used herein and not herein defined shall have the meanings set forth in the Purchase Agreement. In the event of any conflict between the terms of this Note and the Purchase Agreement, the Purchase Agreement shall control. Amounts payable under this Note are subject to certain setoff rights under the Purchase Agreement. If QS consummates an SEC-registered public offering of its common stock or of the common stock of a successor to the QS Business that engages in the same business as QS, all principal and interest outstanding under this Note shall be due and payable by Maker thirty (30) days thereafter. This Note shall be governed by the laws of Georgia, USA. This Note shall not be transferred or assigned by Holder without Maker's express prior written consent. If all or any portion of the indebtedness evidenced hereby shall be collected by or through a legal representative or agent, Holder shall be entitled to collect from Maker all costs of collection, including reasonable legal fees, actually and reasonably incurred by Holder. PRESENTMENT, DEMAND FOR PAYMENT, PROTEST, NOTICE OF PROTEST OR DISHONOR, AND ALL OTHER NOTICES ARE HEREBY WAIVED BY MAKER. 1 2 IN WITNESS WHEREOF, the undersigned has executed this Note, as Maker on the day and year first written above. MAKER: INTELLIGENT SYSTEMS CORPORATION By: --------------------------- Its: -------------------------- 2 EX-10.6 6 LOAN AGREEMENT 1 EXHIBIT 10.6 NATIONSBANK, N.A. LOAN AGREEMENT This Loan Agreement (the "Agreement") dated as of February 17, 1998, by and between NationsBank, N.A., a national banking association ("Bank") and the Borrower described below. In consideration of the Loan or Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: A. BORROWER: Intelligent Systems Corporation, a Georgia corporation B. BORROWER'S ADDRESS: 4355 Shackleford Road Norcross, Georgia 30093 C. CURRENT ASSETS. Current Assets means the aggregate amount of all of Borrower's assets which would, in accordance with GAAP, properly be defined as current assets. D. HAZARDOUS MATERIALS. Hazardous Materials include all materials defined as hazardous materials or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos. E. LOAN. Any loan described in Section 2 hereof and any subsequent loan which states that it is subject to this Loan Agreement. F. LOAN DOCUMENTS. Loan Documents means this Loan Agreement and any and all promissory notes executed by Borrower in favor of Bank that certain Negative Pledge Agreement from Borrower in favor of Lender dated as of February 17, 1998, and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Borrower, any guarantor or third party in connection with any Loan. G. ACCOUNTING TERMS. All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under generally accepted accounting principles ("GAAP"), as in effect from time to time, consistently applied, with respect to the financial statements referenced in Section 3.H. hereof. 2. LOANS. A. LOAN. Bank hereby agrees to make (or has made) one or more loans to Borrower in the aggregate principal face amount of S1,000,000.00. The obligation to repay the loans is evidenced by a promissory note or notes dated February 17, 1998, (the promissory note together with any and all renewals, extensions or rearrangements thereof being hereafter collectively referred to as the "Note") having a maturity date, repayment terms and interest rate as set forth in the Note. 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: A. GOOD STANDING. Borrower is a corporation, duly organized, validly existing and in good standing under the laws of Georgia and has the power and authority to own its property and to carry on its business in each jurisdiction in which Borrower does business. 2 B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Borrower. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower is in compliance with all laws and regulatory requirements to which it is subject. C. BINDING AGREEMENT. This Agreement and the other Loan Documents executed by Borrower constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms. D. LITIGATION. There is no proceeding involving Borrower pending or, to the knowledge of Borrower, threatened before any court or governmental authority, agency or arbitration authority, except as disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock provision, partnership agreement or other document pertaining to the organization, power or authority of Borrower and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Agreement and the other Loan Documents. F. OWNERSHIP OF ASSETS. Borrower has good title to its assets, and its assets are free and clear of liens, except those granted to Bank and as disclosed to Bank in writing prior to the date of this Agreement. G. TAXES. All taxes and assessments due and payable by Borrower have been paid or are being contested in good faith by appropriate proceedings and the Borrower has filed all tax returns which it is required to file. H. FINANCIAL STATEMENTS. The financial statements of Borrower heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrower's financial condition as of the date or dates thereof, and there has been no material adverse change in Borrower's financial condition or operations since February 17, 1998. All factual information furnished by Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. I. PLACE OF BUSINESS. Borrower's chief executive office is located at 4355 Shackleford Road, Norcross, Georgia 30093 J. ENVIRONMENTAL The conduct of Borrower's business operations and the condition of Borrower's property does not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency, any applicable local or state law, rule, regulation or rule of common law or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. K. CONTINUATION OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any advance under any Loan. 3 4. AFFIRMATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): A. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows, determined in accordance with GAAP applied on a consistent basis throughout the period involved B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower's books and records will be located at Borrower's chief executive office set forth above. All financial statements called for below shall be prepared in form and content acceptable to Bank and by independent certified public accountants acceptable to Bank. In addition, Borrower will furnish to Bank audited financial statements of Borrower for each fiscal year of Borrower, within 120 days after the close of each such fiscal year. C. INSURANCE. Maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, business interruption insurance, workers compensation insurance and liability insurance, all to be with such companies and in such amounts as are satisfactory to Bank and providing for at least 30 days prior notice to Bank of any cancellation thereof. Satisfactory evidence of such insurance will be supplied to Bank prior to funding under the Loan(s) and 30 days prior to each policy renewal. D. EXISTENCE AND COMPLIANCE. Maintain its existence, good standing and qualification to do business, where required and comply with all laws, regulations and governmental requirements including, without limitation, environmental laws applicable to it or to any of its properly, business operations and transactions. E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that would or might materially adversely affect Borrower's financial condition or operations or Bank's rights under the Loan Documents, (ii) any litigation filed by or against Borrower, (iii) any event that has occurred that would constitute an event of default under any Loan Documents and (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an aggregate of $100,000. F. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes, costs or other expenses arising out of this transaction, as the same become due and payable, except to the extent the same are being contested in good faith by appropriate proceedings in a diligent manner. G. MAINTENANCE. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business. H. ENVIRONMENTAL. Immediately advise Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws, ordinances or regulations relating to any Hazardous Materials affecting Borrower's business operations; and (ii) all claims made or threatened by any third party against Borrower relating to damages, contribution, cost recovery, compensation, loss or 4 injury resulting from any Hazardous Materials. Borrower shall immediately notify Bank of any remedial action taken by Borrower with respect to Borrower's business operations. Borrower will not use or permit any other party to use any Hazardous Materials at any of Borrower's places of business or at any other property owned by Borrower except such materials as are incidental to Borrower's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Borrower agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Borrower's places of business or any other property of Borrower at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Borrower is complying with this covenant and Borrower shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Borrower shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefore. 5. NEGATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents): A. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or otherwise dispose of or transfer any assets, except in the normal course of its business, or enter into any merger or consolidation, or transfer control or ownership of the Borrower or form or acquire any subsidiary. B. LIENS. Grant, suffer or permit any contractual or noncontractual lien on or security interest in its assets. except in favor of Bank, or fail to promptly pay when due all lawful claims, whether for labor, materials or otherwise. C. EXTENSIONS OF CREDIT. Make or permit any subsidiary to make, any loan or advance to any person or entity, or purchase or otherwise acquire, or permit any subsidiary to purchase or other wise acquire, any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise. except in the ordinary course of business, invest in or acquire any interest in any entity, or participate as a partner or joint venturer with any person or entity, except for the purchase of direct obligations of the United States or any agency thereof with maturities of less than one year. D. BORROWINGS. Create, incur, assume or become liable in any manner for any indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor for the debt for another, or otherwise) other than to Bank, except for normal trade debts incurred in the ordinary course of Borrower's business, and except for existing indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. E. CHARACTER OF BUSINESS. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted. F. MANAGEMENT CHANGE. Make any substantial change in its present executive or management personnel. 6. DEFAULT. Borrower shall be in default under this Agreement and under each of the other Loan Documents if it shall default in the payment of any amounts due and owing under the Loan or should it fail to timely and properly observe, keep or perform any term, covenant, agreement or condition in any Loan Document or in any other loan agreement, promissory note, security agreement, deed of trust, deed to secure debt, mortgage, assignment or other contract securing or evidencing payment of any indebtedness of Borrower to Bank or any affiliate or subsidiary of NationsBank Corporation. 5 7. REMEDIES UPON DEFAULT. If an event of default shall occur, Bank shall have all rights, powers and remedies available under each of the Loan Documents as well as all rights and remedies available at law or equity. 8. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address: Borrower: Intelligent Systems Corporation 4355 Shackleford Road Norcross, Georgia 30093 Fax No.: 770-381-2808 Bank: NationsBank, N.A. - Technologies Group 600 Peachtree Street, 19th Floor Atlanta, Georgia 30308 Fax No.: (404) 607-6338 or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made as follows: A. If sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid; B. If sent by any other means, upon delivery. 9. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel if permitted by applicable law), incurred by Bank in connection with (a) negotiation and preparation of this Agreement and each of the Loan Documents, and (b) all other costs and attorneys' fees incurred by Bank for which Borrower is obligated to reimburse Bank in accordance with the terms of the Loan Documents. 10. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. B. APPLICABLE LAW. This Loan Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Georgia and applicable United States federal law. C. AMENDMENT. No modification, consent, amendment or waiver of any provision of this Loan Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specified 6 instance and for the purpose for which given. This Loan Agreement is binding upon Borrower, its successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Loan Agreement. D. DOCUMENTS. All documents, certificates and other items required under this Loan Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel. E. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of this Loan Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. F. INDEMNIFICATION. Notwithstanding anything to the contrary contained in Section 10(G), Borrower shall indemnify, defend and hold Bank and its successors and assigns harmless from and against any and all claims, demands, suits, losses, damages, assessments, fines, penalties, costs or other expenses (including reasonable attorneys' fees and court costs) arising from or in any way related to any of the transactions contemplated hereby, including but not limited to actual or threatened damage to the environment, agency costs of investigation, personal injury or death, or property damage, due to a release or alleged release of Hazardous Materials, arising from Borrower's business operations, any other property owned by Borrower or in the surface or ground water arising from Borrower's business operations, or gaseous emissions arising from Borrower's business operations or any other condition existing or arising from Borrower's business operations resulting from the use or existence of Hazardous Materials, whether such claim proves to be true or false. Borrower further agrees that its indemnity obligations shall include, but are not limited to, liability for damages resulting from the personal injury or death of an employee of the Borrower, regardless of whether the Borrower has paid the employee under the workmen' s compensation laws of any state or other similar federal or state legislation for the protection of employees. The term "property damage" as used in this paragraph includes, but is not limited to, damage to any real or personal property of the Borrower, the Bank, and of any third parties. The Borrower's obligations under this paragraph shall survive the repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any Deed to Secure Debt, Deed of Trust, Security Agreement or Mortgage securing the Loan. G. SURVIVABILITY. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding or the obligation of the Bank to make any advances under the Line shall not have expired. 11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S/ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM 7 TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (1) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (111) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP; REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 12. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal by their duly authorized representatives as of the date first above written. BORROWER: BANK: NationsBank, N.A. By: /s/ Henry H. Birdsong (Seal) By: /s/ Deborah W. Levin ----------------------------- ----------------------------- (Seal) Name: Henry H. Birdsong Name: Deborah W. Levin Title: Chief Financial Officer Title: Vice President [Corporate Seal] Attest: /s/ Bonnie L. Herron (Seal) ------------------------- Name: Bonnie Herron --------------------------- Title: VP/Sec -------------------------- EX-10.7 7 PLEDGE AGREEMENT 1 EXHIBIT 10.7 Customer #3620179 Date: FEBRUARY 17, 1998 PLEDGE AGREEMENT BANK/SECURED PARTY: NationsBank, N.A. Banking Center: High Tech/Healthcare 600 Peachtree Street, N.E. Atlanta, Georgia 30308 County: Fulton (Name and street address including county) PLEDGOR(S)/DEBTOR(S): Intelligent Systems Corporation 4355 Shackleford Road Norcross, Georgia 30093 County: Gwinnett (Name and street address including county) Pledgor/Debtor is: CORPORATION Address is Pledgor's/Debtor's: 4355 SHACKLEFORD ROAD NORCROSS, GEORGIA 30093 1. SECURITY INTEREST. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor/Debtor (hereinafter referred to as "Pledgor") pledges, assigns and grants to Bank a security interest and lien in the Collateral (hereinafter defined) to secure the payment and the performance of the Obligation (hereinafter defined). 2. COLLATERAL. The security interest is granted in the following collateral (the "Collateral"): A. DESCRIPTION OF COLLATERAL. SPECIFIC INVESTMENT PROPERTY/SECURITIES: The following investment property and/or securities, together with all investment property and/or securities hereafter delivered to Bank in substitution therefor or in addition thereto: SEE "EXHIBIT A" ATTACHED HERETO MADE A PART HEREOF BY REFERENCE. It is contemplated by the parties that Pledgor may provide additional collateral from time to time hereunder as additional security for the Obligation, and may from time to time with the prior written consent of Bank sell or otherwise dispose of any Collateral provided that Pledgor provides Bank with substitute collateral. At the time of each addition or substitution of Collateral, the securities added or substituted shall be identified on a Pledge Certificate, substantially in the form of Schedule II attached hereto (the "Pledge Certificate"), and delivered to Bank. Bank has no obligation to make any advances requested in connection therewith unless (i) such additional and/or substituted Collateral is satisfactory to Bank and (ii) the perfected security interest granted to Bank therein is completed to the satisfaction of Bank. All such additional and/or substituted Collateral shall be Collateral for purposes of this Agreement, and shall secure the Obligation in the same manner as the Collateral for which it is added to and/or, B. PROCEEDS. All additions, substitutes and replacements for and proceeds of the above Collateral (including all income and benefits resulting from any of the above, such as dividends payable or distributable in cash, property or stock, interest, premium and principal payments; redemption proceeds and subscription rights; and shares or other proceeds of conversions or splits of any securities in the Collateral). Any investment property and/or securities received by Pledgor, which shall comprise such additions, substitutes and replacements for, or proceeds of, the Collateral, shall be held in trust for Bank and shall be delivered immediately to Bank. Any cash proceeds shall be held in trust for Bank and upon request shall be delivered immediately to Bank. C. DEPOSIT ACCOUNTS. The balance of every deposit account of Pledgor maintained with Bank and any other claim of Pledgor against Bank, now or hereafter existing, liquidated or unliquidated, and all money, instruments, investment property, securities, documents, chattel paper, credits, claims, demands, income, and any other property, rights and Interests of Pledgor which at any time shall come into the possession or custody or under the control of Bank or any of its agents or affiliates, for any purpose, and the proceeds of any thereof. Bank shall be deemed to have possession of any of the Collateral in transit to or set apart for it or any of its agents or affiliates. 3. OBLIGATION. A. DESCRIPTION OF OBLIGATION. The following obligations ("Obligation") are secured by this Agreement: i. ALL DEBT: All debts, obligations, liabilities and agreements of Pledgor and/or N/A to Bank, now or hereafter existing, arising directly or indirectly between Pledgor and Bank whether absolute or contingent, joint or several, secured or unsecured, due or not due, liquidated or unliquidated, arising by operation of law or otherwise, and all renewals, extensions and rearrangements of any of the above; ii. All costs and expenses incurred by Bank, including attorney's fees, to obtain, preserve, perfect, enforce and defend this Agreement and maintain, preserve, collect and realize upon the Collateral, together with interest thereon at the highest rate allowed by law, or if none, 25% per annum; iii. All amounts which may be owed to Bank pursuant to all other loan documents executed in connection with the indebtedness described in subpart i. above. In the event any amount paid to Bank on any Obligation is subsequently recovered from Bank in or as a result of any bankruptcy, insolvency or fraudulent conveyance proceeding involving an obliger of the Obligation other than Pledgor, Pledgor shall be liable to Bank for the amounts so recovered up to the fair market value of the Collateral whether or not the Collateral has been released or the security interest terminated. In the event the Collateral has been released or the security interest terminated, the fair market value of the Collateral shall be determined, at Bank's option, as of the date the Collateral was released, the security interest terminated, or said amounts were recovered. B. Use of Proceeds. The proceeds of any indebtedness or obligation secured by the Collateral "WILL NOT BE" used directly or indirectly to purchase or carry any "margin stock" as that term is defined in Regulation U of the Board of 1- 2 Governors of the Federal Reserve System, or extend credit to or invest in other parties for the purpose of purchasing or carrying any such "margin stock, or to reduce or retire any indebtedness incurred for such purpose or otherwise in a manner which would violate Regulations G, T or U. 4. PLEDGOR'S WARRANTIES. Pledgor hereby represents and warrants to Bank as follows: A. FINANCING STATEMENTS. Except as may be noted by schedule attached hereto and incorporated herein by reference, no financing statement covering the Collateral is or will be on file in any public office, except the financial statements relating to this security interest, and no security interest, other than the one herein created, has attach or been perfected in the Collateral or any part thereof. B. OWNERSHIP. Pledgor owns, or will use the proceeds of any loans by Bank to become the owner of, the Collateral free from any set off, claim, restriction, lien, security interest or encumbrance except liens for taxes not yet due and payable and the security interest hereunder. C. POWER AND AUTHORITY. Pledgor has full power and authority to make this Agreement, and all necessary consents and approvals of any persons, entities, governmental or regulatory authorities and securities exchanges have been obtained to effectuate the validity of this Agreement. 5. PLEDGOR'S COVENANTS. Until full payment and performance of all of the Obligation and termination or expiration of any obligation or commitment of Bank to make advances or loans to Pledgor, unless Bank otherwise consents in writing: A. OBLIGATION AND THIS AGREEMENT. Pledgor shall perform all of its agreements herein and in any other agreements between it and Bank. B. OWNERSHIP OF COLLATERAL. Pledgor shall defend the Collateral against all claims and demands of all person at any time claiming any interest therein adverse to Bank. Pledgor shall keep the Collateral free from all liens and security interests except those for taxes not yet due and payable and the security interest hereby created. C. BANK'S COSTS. Pledgor shall pay all costs necessary to obtain, preserve, perfect, defend and enforce the security interest created by this Agreement, collect the Obligation, and preserve, defend, enforce and collect the Collateral, including but not limited to taxes, assessments, reasonable attorney's fees, legal expenses and expenses of sales. Whether the Collateral is or is not in Bank's possession, and without any obligation to do so and without waiving Pledgor's default for failure to make any such payment, Bank at its option may pay any such costs and expenses and discharge encumbrances on the Collateral, and such payments shall be a part of the Obligation and bear interest at the rate set out in the Obligation. Pledgor agrees to reimburse Bank on demand for any costs so incurred. D. INFORMATION AND INSPECTION. Pledgor shall (i) promptly furnish Bank any information with respect to the Collateral requested by Bank; (ii) allow Bank or its representatives to inspect and copy, or furnish Bank or its representatives with copies of, all records relating to the Collateral and the Obligation; and (iii) promptly furnish Bank or its representatives with any other information Bank may reasonably request. E. ADDITIONAL DOCUMENTS. Pledgor shall sign and deliver any papers furnished by Bank which are necessary or desirable in the judgment of Bank to obtain, maintain and perfect the security interest hereunder and to enable Bank to comply with any federal or state law in order to obtain or perfect Bank's interest in the Collateral or to obtain proceeds of the Collateral. F. NOTICE OF CHANGES. Pledgor shall notify Bank immediately of (i) any material change in the Collateral (ii) a change in Pledgor's residence or location, (iii) a change in any matter warranted or represented by Pledgor in this Agreement, or in any of the loan documents relating to the Obligation or furnished to Bank pursuant to this Agreement, and (iv) the occurrence of an Event of Default as defined herein. G. POSSESSION OF COLLATERAL. Pledgor shall deliver a copy of this Agreement (or other notice acceptable to Bank) to any Broker, financial intermediary, or any other person in possession of any of the Collateral or on whose books the interest of Pledgor in the Collateral appears, and such delivery shall constitute notice to such person of Bank's security interest in the Collateral and shall constitute Pledgor's instruction to such person to note Bank's security interest on their books and records, or deliver to Bank certificates or other evidence of the Collateral promptly upon Bank's request. Pledgor shall deliver all investment securities and other instruments and documents which are a part of the Collateral and in Pledgor's possession to Bank immediately, or if hereafter acquired, immediately following acquisition, in a form suitable for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures appropriately guaranteed in form and substance suitable to Bank. H. CHANGE OF NAME/STATUS. Pledgor shall not change its name, change its corporate status, use any trade name or engage in any business not reasonably related to its business as presently conducted. I. POWER OF ATTORNEY. Pledgor appoints Bank and any officer thereof as Pledgor's attorney-in-fact with full power in Pledgor's name and on Pledgor's behalf to do every act which Pledgor is obligated to do or may be required to do hereunder; however, nothing in this paragraph shall be construed to obligate Bank to take any action hereunder nor shall Bank be liable to Pledgor for failure to take any action hereunder. This appointment shall be deemed a power coupled with an interest and shall not be terminable as long as the Obligation is outstanding and shall not terminate on the disability or incompetence of Pledgor. Without limiting the generality of the foregoing, Bank shall have the right and power to receive, indorse and collect all checks and other orders for the payment of money made payable to Pledgor representing any dividend, interest payment or other distribution payable in respect of the Collateral or any part thereof. J. OTHER PARTIES AND OTHER COLLATERAL. No renewal or extensions of or any other indulgence with respect to the Obligation or any part thereof, no modification of the document(s) evidencing the Obligation, no release of any security, no release of any person (including any maker, indorser, guarantor or surety) liable on the Obligation, no delay in enforcement of payment, and no delay or omission or lack of diligence or care in exercising any right or power with respect to the Obligation or any security therefor or guaranty thereof or under this Agreement shall in any manner impair or affect the rights of Bank under any law, hereunder, or under any other agreement pertaining to the Collateral Bank need not file suit or assert a claim for personal judgment against any person for any part of the Obligation or set to realize upon any other security for the Obligation, before foreclosing or otherwise realizing upon the Collateral. Pledgor waives any right that can be waived to the benefit of or to require or control application of any other security or proceeds thereof, and agrees that Bank shall have no duty or obligation to Pledgor to apply to the Obligation any such other security or proceeds thereof. K. WAIVERS BY PLEDGOR. Pledgor waives notice of the creation, advance, increase, existence, extension or renewal of, and of any indulgence with respect to, the Obligation; waives presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Obligation outstanding at any time, notice of any change in financial condition of any person liable for the Obligation or any part thereof, notice of any Event of Default, and all other 2- 3 notices respecting the Obligation; and agrees that maturity of the Obligation and any part thereof may be accelerated, extended or renewed one or more times by Bank in its discretion, without notice to Pledgor. Pledgor waives any right to require that any action be brought against any other person or to require that resort be had to any other security or to any balance of any deposit account. Pledgor further waives any right of subrogation or to enforce any right of action against any other Pledgor until the Obligation is paid in full. L. WAIVER OF NOTICE FOR IMMEDIATE WRIT OF POSSESSION. Pledgor hereby acknowledges that the indebtedness arises out of a 'commercial transaction" as that term is defined in the O.C.G.A. Sec. 44-12-260(1) concerning foreclosure of mortgages on personally, and agrees that if a default has occurred and is continuing, Bank shall have the right to an immediate writ of possession without notice of hearing, and Pledgor hereby knowingly and intelligently waives any and all rights it may have to any notice and posting of a bond prior to seizure by Bank, its transferees, assigns or successors in interest of the Collateral or any portion thereof. The foregoing is intended by Pledgor as a "waiver" as that term is defined in the O.C.G.A. Sec 44-14-260 (3) relating to foreclosure of mortgages on personalty. M. ADDITIONAL PROVISIONS. If one or more Riders to this Agreement are executed by Pledgor, the covenants and provisions of each such Rider shall be incorporated by reference into this Agreement. RULE 144 RIDER: The Collateral is comprised in whole or in part of control and/or restricted securities, which shall be subject to the additional terms and provisions described on the Rule 144 Rider attached hereto and made a part hereof for all purposes. 6. MAINTENANCE OF COLLATERAL. A. MAINTENANCE OF COLLATERAL. At all times during the term of the Agreement, Pledgor agrees to maintain as security for the Obligation Collateral of a type described on Schedule I with an Adjusted Collateral Value (as determined herein) in excess of the unpaid principal balance of the Obligation. The Adjusted Collateral Value shall be determined by multiplying the Collateral Value As defined in subparagraph B below) by the Margin Call Percentage shown on Schedule I for the type of Collateral securing the Obligation. No advance requested by Pledgor shall be made to Pledgor if the sum of (i) the outstanding principal balance of the Obligation plus (ii) the amount of the advance requested, equals or exceeds the sum of the amounts determined by multiplying the Collateral Value by the Original Advance Percentage for each type of Collateral securing the Obligation. B. VALUE OF COLLATERAL. The "Collateral Value" of Collateral shall be determined at any given time as follows: i. If stock, the Collateral Value shall be determined by multiplying (i) the per share price of such stock at the most recent close of trading on a trading exchange for such stock, times (ii) the number of shares of such stock held by Bank as Collateral. In the event that stock held as Collateral is not traded on an exchange, the Collateral Value of such stock shall be determined by obtaining the quoted value of such stock from a reputable brokerage firm selected by Bank. If no such quote is available, the value will be determined by Bank in its sole discretion. ii. If a mutual fund, the Collateral Value shall be determined by multiplying (i) the most recent per share asset value of such mutual fund obtained from the Wall Street Journal, times (ii) the number of shares of such mutual fund held by Bank as Collateral. In the event that such net asset value is not available in the Wall Street Journal, the Collateral Value shall be the value quoted to Bank by a reputable brokerage firm selected by Bank. iii. If corporate bonds, the Collateral Value shall be determined from the most recent closing price for such bonds obtained from the Wall Street Journal. If such closing price is not available in the Wall Street Journal, the Collateral Value shall be the value quoted to Bank by a reputable brokerage firm selected by Bank. iv. If government or agency obligations or bonds, the Collateral Value shall be determined from the most recent closing bid price for such bonds obtained from the Wall Street Journal. If such closing bid price is not available in the Wall Street Journal, the Collateral Value shall be the value quoted to Bank by a reputable brokerage firm selected by Bank. v. If other than stock, mutual funds, corporate bonds, or government or agency obligations or bonds, the Collateral Value shall be determined by the Bank in its sole discretion. C. BREACH OF COLLATERAL MAINTENANCE. Pledgor agrees that the failure to maintain Collateral with an Adjusted Collateral Value as set forth above shall constitute an Event of Default under this Agreement. In such event, the Pledgor shall have two business days from the date Pledgor is notified by Bank (in writing or orally) of such noncompliance, or such notice is otherwise delivered to Pledgor, to either pledge additional Collateral satisfactory to Bank, in its sole discretion, or reduce the unpaid principal balance of the Obligations such that, in either case, the unpaid principal balance of the Obligation is less than the sum of the amounts determined by multiplying the Collateral Value by the Original Advance Percentage shown on Schedule I for each type of Collateral securing the Obligation. Any reduction in unpaid principal of the Obligation shall not affect or reduce any future principal payments due except to the extent such reductions are applied in accordance with the documents evidencing or securing the Obligation In the event Pledgor fails to comply with the terms hereof, Bank may, without any further notice of any kind, exercise any of the following rights and remedies, at Bank's option: i. The rights and remedies set out in Section 8.B. of this Agreement, including without limitation the right to accelerate the Obligation and liquidate the Collateral. ii. Sell all or any part of the Collateral and apply the proceeds of such sale to the Obligation to bring the Obligation back into compliance ( that is, to reduce the unpaid principal of the Obligation such that the unpaid principal of the Obligation is less than the sum of the amounts determined by multiplying the Collateral Value by the Original Advance Percentage shown on Schedule I for each type of Collateral securing the Obligation). If an Event of Default exists hereunder and the Collateral is declining in value or threatens to decline speedily in value, Bank shall have no obligation to notify Pledgor of the failure to maintain Collateral with an Adjusted Collateral Value as set forth in subparagraph A above or to provide Pledgor with an opportunity to cure such noncompliance, and in such case Pledgor agrees that Bank may immediately at Bank's sole option (i) declare amounts due under the Obligation to be immediately due and payable, and/or (ii) sell all or any part of the Collateral and apply the proceeds of such Collateral to the Obligation. D. SALE OR SUBSTITUTION OF COLLATERAL. If no Event of Default has occurred under this Agreement or would result from such action, Pledgor may (i) sell, trade, or withdraw any part of the Collateral; or (ii) substitute new Collateral for existing Collateral, provided that, in either event, the new Collateral shall be acceptable to Bank in its sole discretion and the unpaid principal balance of the Obligation shall be less than the sum of the amounts determined by multiplying the Collateral Value by the Original Advance Percentage for each type of Collateral securing the Obligation. 3- 4 7. RIGHTS AND POWERS OF BANK. A. GENERAL. Bank, before or after default, without liability to Pledgor may: take control of proceeds, including stock received as dividends or by reason of stock splits; release the Collateral in its possession to any Pledgor, temporarily or otherwise; require additional Collateral; reject as unsatisfactory any property hereafter offered by Pledgor as Collateral; take control of funds generated by the Collateral, such as cash dividends, interest and proceeds, and use same to reduce any part of the Obligation and exercise all other rights which an owner of such Collateral may exercise, except the right to vote or dispose of the Collateral before an Event of Default; and at any time transfer any of the Collateral or evidence thereof into its own name or that of its nominee. Bank shall not be liable for failure to collect any account or instruments, or for any act or omission on the part of Bank, its officers, agents or employees, except for its or their own willful misconduct or gross negligence. The foregoing rights and powers of Bank will be in addition to, and not a limitation upon, any rights and powers of Bank given by law, elsewhere in this Agreement, or otherwise. B. CONVERTIBLE COLLATERAL. Bank may present for conversion any Collateral which is convertible into any other instrument or investment security or a combination thereof with cash, but Bank shall not have any duty to present for conversion any Collateral unless it shall have received from Pledgor detailed written instructions to that effect at a time reasonably far in advance of the final conversion date to make such conversion possible. 8. DEFAULT. A. EVENT OF DEFAULT. An event of default ("Event of Defaults") shall occur (a) if Pledgor or any other obligor on all or part of the Obligation shall fail to timely and properly pay or observe, keep or perform any term, covenant, agreement or condition in this Agreement or in any other agreement between Pledgor and Bank of between Bank and any other obliger on the Obligation, including but not limited to any other note or instrument, loan agreement, security agreement, deed of trust, mortgage, promissory note, assignment or other agreement or instrument concerning the Obligation; or (b) if Pledgor or such other obliger shall fail to timely and properly pay or observe, keep or perform any term, covenant, agreement or condition in any agreement between such party and any affiliate or subsidiary of NationsBank Corporation. B. RIGHTS AND REMEDIES. If any Event of Default shall occur, then, in each and every such case, Bank may without (a) presentment, demand, or protest, (b) notice of default, dishonor, demand, non-payment, or protest, (c) notice of intent to accelerate all or any part of the Obligation, (d) notice of acceleration of all or any part of the Obligation, or (e) notice of any other kind, all of which Pledgor hereby expressly waives (except for any notice required under this Agreement, any other loan document or which may not be waived under applicable law), at any time thereafter exercise and/or enforce any of the following rights and remedies, at Bank's option: i. ACCELERATION. The Obligation shall, at Bank's option, become immediately due and payable, and the obligation, if any, of Bank to permit further borrowings under the Obligation shall at Bank's option immediately cease and terminate. ii. LIQUIDATION OF COLLATERAL. Sell, or instruct any Agent or Broker to sell, all or any part of the Collateral in a public or private sale, direct any Agent or Broker to liquidate all or any part of any Account and deliver all proceeds thereof to Bank, and apply all proceeds to the payment of any or all of the Obligation in such order and manner as Bank shall, in its discretion, choose. iii. UNIFORM COMMERCIAL CODE. All of the rights, powers and remedies of a secured creditor under the Uniform Commercial Code ("UCC") as adopted in the jurisdiction to which Bank is subject under this Agreement. iv. RIGHT OF SET OFF. Without notice or demand to Pledgor, set off and apply against any and all of the Obligation any and all deposits (general or special, time or demand, provisional or final) and any other indebtedness at any time held or owing by Bank or by any of Bank's affiliates or correspondents to or for the credit of the account of Pledgor or any guarantor or indorser of Pledgor's Obligation. Pledgor specifically understands and agrees that any sale by Bank of all or part of the Collateral pursuant to the terms of this Agreement may be effected by Bank at times and in manners which could result in the proceeds of such sale as being significantly and materially less than might have been received if such sale had occurred at different times or in different manners, and Pledgor hereby releases Bank and its officers and representatives from and against any and all obligations and liabilities arising out of or related to the timing or manner of any such sale. If, in the opinion of Bank, there is any question that a public sale or distribution of any Collateral will violate any state or federal securities law, Bank may offer and sell such Collateral in a transaction exempt from registration under federal securities law, and any such sale made in good faith by Bank shall be deemed "commercially reasonable." 9. GENERAL. A. PARTIES BOUND. Bank's rights hereunder shall inure to the benefit of its successors and assigns, and in the event of any assignment or transfer of any of the Obligation or the Collateral, Bank thereafter shall be fully discharged from any responsibility with respect to the Collateral so assigned or transferred, but Bank shall retain all rights and powers hereby given with respect to any of the Obligation or the Collateral not so assigned or transferred. All representation warranties and agreements of Pledgor if more than one are joint and several and all shall be binding upon the person representatives, heirs, successors and assigns of Pledgor. B. WAIVER. No delay of Bank in exercising any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. No waiver by Bank of any right hereunder or of any default by Pledgor shall be binding upon Bank unless in writing, and no failure by Bank to exercise any power or right hereunder or waiver of any default by Pledgor shall operate as a waiver of any other or further exercise of such right or power or of any further default. Each right power and remedy of Bank as provided for herein or in any of the loan documents related to the Obligation, or which shall now or hereafter exist at law or in equity or by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by Bank of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by Bank of any or all other such rights, powers or remedies. C. AGREEMENT CONTINUING. This Agreement shall constitute a continuing agreement. If the Obligation consists of All Debt, this Agreement shall apply to all future as well as existing transactions, whether or not of the character, contemplated at the date of this Agreement, and if all transactions between Bank and Pledgor shall be closed at any time, shall be equally applicable to any new transactions thereafter. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. Time is of the essence of this Agreement. D. DEFINITIONS. Unless the context indicates otherwise, definitions in the UCC apply to words and phrases in this Agreement: if UCC definitions conflict, Article 8 and/or 9 definitions apply. 4- 5 E. NOTICE. Notice shall be deemed reasonable if mailed postage prepaid at Cast before the related action (or if the UCC elsewhere specifies a longer period, such longer period) to the address of Pledgor given above. Each notice, request and demand shall be deemed given or made, if sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid, or if sent by any other means, upon delivery. F. MODIFICATIONS. No provision hereof shall be modified or limited except by a written agreement expressly referring hereto and to the provisions so modified or limited and signed by Pledgor and Bank. The provisions of this Agreement shall not be modified or limited by course of conduct or usage of trade. G. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision herein, and the invalidity or unenforceability of any provision of any loan document related to the Obligation to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. H. APPLICABLE LAW AND VENUE. This Agreement has been delivered in the State of Georgia and shall be construed in accordance with the laws of that State. It is performable by Pledgor in the county or city of Bank's address set out above and Pledgor expressly waives any objection as to venue in any such location. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement. I. FINANCING STATEMENT. To the extent permitted by applicable law, a carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral shall be sufficient as a financing statement. J. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. i. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR, IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WlLL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARINGS FOR UP TO AN ADDITIONAL 60 DAYS. ii. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT, OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW, OR (III) LIMIT THE RIGHT OF BANK HERETO IA) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. K. CONTROLLING DOCUMENT. To the extent that this Agreement conflicts with or is in any way incompatible with any other loan document concerning the Obligation, any promissory note shall control over any other document, and if such promissory note does not address an issue, then each other loan document shall control to the extent that it deals most specifically with an issue. L. EXECUTION UNDER SEAL. This Agreement is being executed under seal by Pledgor(s). M. NOTICE OF FINAL AGREEMENT. THIS WRITTEN AGREEMENT AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal by their duly authorized representatives as of the date first above written. BANK/SECURED PARTY: DEBTOR(S)/PLEDGOR(S): NATIONSBANK. N.A. CORPORATE OR PARTNERSHIP DEBTOR/PLEDGOR INTELLIGENT SYSTEMS CORPORATION By: /s/ Debbie Levin By: /s/ Henry H. Birdsong ------------------------------- ------------------------------- Name: DEBBIE LEVIN Name: HENRY H. BIRDSONG Title: VICE PRESIDENT Title: C.F.O. /s/ B. Herron ---------------------------------- Attest (If Applicable) [Corporate Seal] 5- 6 SCHEDULE I TO PLEDGE AGREEMENT
ORIGINAL ADVANCE MARGIN CALL COLLATERAL TYPE PERCENTAGE PERCENTAGE --------------- ---------- ---------- STOCKS/BONDS Listed Stocks (NYSE or ASE)(1) (non-purpose loan) 70% 75% OTC Margin Stocks (non-purpose loan) 70% 75% OTC Non-Margin Stocks(1) 50% 55% U.S. Government Obligations 90% 95% U.S. Agency Bonds 80% 80% 85% State/Municipal Bonds 80% 85% (A or higher) Corporate Bonds(2) 80% 85% (BAA or higher) Cash Surrender Value of Life Insurance 95% 95% NationsBank Deposit Account 100% 100% Other Federally Insured Deposit Accounts 90% 90% Mutual Fund (quoted daily in WSJ or Barron's) Money Market 95% 95% U.S. Government Obligations 90% 95% Corporate/Municipal Bonds 80% 85% Equities 70% 75%
(1) Loans for the purpose of purchasing or carrying margin stocks are limited by Regulation U to a 50% Original Advance Percentage. (2) Does not apply to convertible bonds which are convertible into stocks which are limited to the applicable percentages for the stock to which they may convert. 6- 7 SCHEDULE II PLEDGE CERTIFICATE Reference is hereby made to that certain Pledge Agreement dated as of ________________________ ("Pledge Agreement"), between _________________________ ("Pledgor") and NationsBank, N.A., a national banking association ("Bank"). This Pledge Certificate is delivered pursuant to Section 2 of the Pledge Agreement. All capitalized terms used and not otherwise defined herein shall have their respective meanings as set forth in the Pledge Agreement. Pledgor hereby certifies that concurrently with the delivery of this Pledge Certificate, [ ] Pledgor is delivering to Bank the following items of Collateral as additional Collateral for the Obligation (collectively, the "Additional Collateral"): _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ __________________________, [ ] Pledgor is selling or otherwise disposing of the following items of Collateral: _______________________________________________________________________ _______________________________________________________________________ _________________________________________, and Pledgor is delivering to Bank the following items of Collateral being substituted therefor: _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ (collectively, the "Substituted Collateral"). Pledgor hereby acknowledges that Pledgor has granted to Bank a security interest in the Additional Collateral and/or Substituted Collateral pursuant to the Pledge Agreement to secure the Obligation and that the Collateral covered by the Pledge Agreement includes, without limitation, the Substituted Collateral and Additional Collateral. Pledgor hereby represents and warrants that all of the representations and warranties contained in the Pledge Agreement are true and correct in all material respects, including with respect to the Additional Collateral and Substituted Collateral, on the date hereof as though made as of the date hereof. EXECUTED this ___day of ________, 19___. ____________________________________________ Printed Name ____________________________________________ Printed Name 7- 8 EXHIBIT A INTELLIGENT SYSTEMS CORP./PAYSYS INTERNATIONAL INC. STOCK
- ---------------------------------------------------------------------------------------------- CERTIFICATE # # SHARES STOCK NAME HOLDER OF STOCK - ---------------------------------------------------------------------------------------------- 233 310,402 CCS Technology Group, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 237 290 CCS Technology Group, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 243 10,995 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 257 55,521 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 258 143,600 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 259 185,800 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 265 712,500 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 270 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 271 345,764 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 272 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 273 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 274 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 275 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 276 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 277 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 278 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 279 250,000 PaySys International, Inc. Intelligent Systems Corporation - ---------------------------------------------------------------------------------------------- 4,014,872 - ----------------------------------------------------------------------------------------------
CUSTOMER INITIAL: BLH EX-21 8 LIST OF SUBSIDIARIES 1 EXHIBIT 21.0 INTELLIGENT SYSTEMS CORPORATION LIST OF PRINCIPAL SUBSIDIARY COMPANIES AS OF MARCH 31, 1998
SUBSIDIARY NAME STATE OF ORGANIZATION --------------- --------------------- ChemFree Corporation Georgia HumanSoft LLC Georgia Intelligent Enclosures Corporation Georgia InterQuad Services Limited United Kingdom INTS Holdings, Inc. Delaware JK, Inc. Wyoming PsyCare America, LLC dba Rapha or Rapha Treatment Centers Georgia Quadram Corporation Georgia
EX-23.1 9 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K for the fiscal year ended December 31, 1997 into Intelligent Systems Corporation's previously filed Registration Statements on Form S-8 (File No. 33-99432 and No. 333-32157). ARTHUR ANDERSEN LLP Atlanta, Georgia April 15, 1998 EX-23.2 10 CONSENT OF MORLEY AND SCOTT 1 EXHIBIT 23.2 April 16, 1998 The Directors Intelligent Systems Corporation 4355 Shackleford Road Norcross GA 30093 USA Dear Sirs INTERQUAD SERVICES LIMITED As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K for the fiscal year ended December 31, 1997 into Intelligent Systems Corporation's previously filed Registration Statements on Form S-8 (File No. 33-99432 and No. 333-32157). Yours faithfully MORLEY & SCOTT EX-23.3 11 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.3 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-99432 and No. 333-32157) of Intelligent Systems Corporation of our report dated February 19, 1998, with respect to the consolidated financial statements of PaySys International, Inc. and Subsidiaries as of December 31, 1996 and 1997 and for the three years in the period ended December 31, 1997 included in this Form 10-K for the year ended December 31, 1997. /s/ Ernst & Young LLP April 15, 1998 Atlanta, Georgia EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 43 0 3,855 0 611 5,627 2,848 0 19,091 6,695 0 0 0 51 24,046 19,091 21,160 0 13,031 0 12,983 0 0 (7,150) 16 (7,176) 0 0 0 (7,176) (1.41) 0
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