L e t t e r  t o  S h a r e h o l d e r s

For more than twenty-five years, we have created and grown technology-related companies. Ten years ago, we developed a strategy to help entrepreneurs start and build great companies by partnering with them to provide early stage equity capital, practical business advice and services, and a technology business incubator. Today, we are a solid, long-term player in an industry that is gaining widespread recognition and acceptance as a way to build shareholder value in entrepreneurial companies and their partners.

Our business model is focused on building value in the companies we partner with and, on an irregular basis, demonstrating this value through transactions such as initial public offerings, sale or merger of a partner company with another entity, or operating profits. There is no doubt that the embrace of the Internet by businesses and consumers worldwide has accelerated start-up company creation and market valuations of Internet-related businesses. By aggressively seeking out opportunities to continue to apply our business model and strategy, we expect to benefit from these trends.

We Take an Active Role in Many Partner Companies

The companies we become involved with are usually private, early stage businesses with limited operating history, incomplete management teams and limited financial resources. In addition to providing early-stage capital, we work hard to help entrepreneurs build their companies by leveraging our operating experience, our relationships within the financial, professional services and educational sectors, our network of partner companies, and our incubator program for their benefit. Depending on a number of factors, we may be a very small equity holder or may own most of the partner company. Our ownership position and role in the company usually changes over time. Several examples demonstrate how this works.

  • PaySys – Originally we owned more than 50 percent of PaySys and were very active in strategic and day-to-day operational issues. In the past several years, PaySys built a solid management team, raised additional capital from well-known venture capital firms and developed a strong technical and customer base. We now own approximately 29 percent of the company on a fully diluted basis, are active on the board of directors, and provide incubator facility management services.
  • 2order.com – As an early investor, we retained our board of advisor role through successive funding rounds even though our ownership percentage declined. With 2order.com’s recent acquisition by a publicly traded company, the value of our investment increased dramatically from an initial basis of $500,000 to more than $5 million at the time of the acquisition.
  • MediZeus – We are helping this Internet healthcare start-up recruit senior management talent, develop its strategic focus, initiate partnerships, and raise a second round of capital.
  • ChemFree – Our team has been very active at various stages of ChemFree’s development, including early product design, marketing and sales initiatives, human resources administration, financing and incubator facilities.
  • Risk Laboratories – We assisted this start-up with early-stage capital, helped round out the management team and recently negotiated a significant strategic investment in Risk along with the sale of part of our investment in Risk for $8.8 million.

 The Intelligent Systems Incubator Attracts and Supports Entrepreneurs

Long before it become popular to do so, we created our technology incubator to identify and nurture emerging companies. The Intelligent Systems Incubator is recognized as one of the largest and longest running privately funded incubators in the country. In 1999, our incubator manager became the first representative of a privately funded incubator elected to the board of directors of the National Business Incubation Association and our ChemFree subsidiary was named Incubator Client of the Year by the same organization. Our incubator clients can focus on building their business while increasing their chance of success by accessing our business assistance, networking and educational opportunities, telecommunication and Internet infrastructure, facility management and shared meeting rooms. Our incubator program greatly increases the number of start-up opportunities we see. Occasionally we invest in promising incubator companies but we do not place artificial constraints on partnership opportunities by limiting them only to resident incubator companies.

Accounting Treatments Often Obscure Underlying Values

Different accounting treatments apply to our partner companies depending upon our ownership percentage (which frequently changes over time), a situation that makes it difficult to see the underlying value that we believe is being created in our companies. If we own more that 50 percent of a company, we consolidate its results of operations and balance sheet but if we own less than 20 percent of a privately held company, we record this investment at cost and do not write up the value even when the company raises capital at higher valuations. If we own between 20 percent and 50 percent, we account for the investment on the equity method and each quarter we include our pro rata share of the income or losses of that business as investment income in our financial statements. Generally, it takes an event such as an initial public offering or the sale of our interest to another entity before we can demonstrate the increase in value of our partner company. As an example, due to the equity method of accounting, our investments in Risk and PaySys are recorded as zero on our year-end balance sheet, but it is clear from the recent Risk transaction that the market value is substantially more.

We Do Not Make Public Projections on Future Valuations

We are often asked to estimate what our various companies are worth, either individually or in the aggregate. There are a number of reasons why we do not do this publicly. First, all of our companies are private when we first partner with them and they should not be impacted in their dealings with customers and capital sources by information we make public. Secondly, valuations are not stable and are subject to a number of factors, including financial market conditions and specific industry conditions. Thirdly, one company can have very different valuations as a stand-alone private company, as a potential public company or as a strategic acquisition – and individual situations can change very quickly. We encourage you to visit our company website, www.intelsys.com, and follow the links to those of our partner companies to learn more about each business.

We are pleased that the market is recognizing the value we have built over time. Based on the first few months of 2000, we expect to have the opportunities and resources to support one new early stage company per month this year. While we cannot predict how long the superior values for Internet-based businesses will last, we intend to continue the strategy that has allowed us to create solid value even in less favorable markets.

J. Leland Strange

Chairman of the Board and President