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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1998 [FEE REQUIRED]
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period to .
Commission File No. 1-8292
HELM CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-0786066
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
537 Steamboat Road
Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 629-1400
Securities registered pursuant to Section l2(g) of the Act:
Common Stock, par value $.0l
Check whether the registrant (l) has filed all reports required to be filed by
Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding
l2 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
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. [ ]
The issuer's revenues for the year ended December 31, 1998 were $298,000. The
aggregate market value of the voting stock held by non-affiliates of the issuer
is approximately $602,675 based upon the average of the bid and ask price of the
issuer's common stock, $.01 par value, as reported by the NASD Electronic
Bulletin Board on March 31, 1999 which was $.205.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on March 31, 1999: 3,833,947.
Documents incorporated by reference: NONE
Transitional Small Business Format: Yes ____ No X
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PART I
ITEM 1. BUSINESS
INTRODUCTION
HELM CAPITAL GROUP, INC. ("Helm" or the "Company") is principally
engaged in the financial services business through a wholly-owned subsidiary.
Helm also maintains investments in several other entities described below.
Formed in 1997, MEZZANINE FINANCIAL CORP. ("Mezzanine"), a Delaware
corporation and a wholly-owned subsidiary of Helm, is engaged in the business of
making collateralized loans to small businesses.
In addition, a 14.9% owned affiliate and a public company,
INTERSYSTEMS, INC. (together with its wholly-owned subsidiaries, hereinafter
"ISI") (AMEX:II), designs, manufactures, sells and leases various agricultural
and industrial products primarily used in handling, cleaning and weighing of
grain products and for sampling the quality and grade of various industrial and
agricultural products through a subsidiary, INTERSYSTEMS, INC., a Nebraska
corporation, and provides custom resin compounding services for thermoplastic
resin producers through a subsidiary, CHEMTRUSION, INC.
Through a 19.4% ownership in CORE CAPITAL, INC. ("CCI"), a
privately-held Delaware corporation, the Company is engaged in the business of
providing credit and credit-related services to small and mid-market business
enterprises primarily through the factoring of accounts receivables and through
initiating revolving lines of credit and term loans which are secured by the
assets of the borrower.
The Company also maintains a $204,000 limited partnership interest in
THE MEZZANINE FINANCIAL FUND, L.P. (the "Fund"), a Delaware limited partnership
which makes collateralized loans to companies in a manner similar to Mezzanine
Financial Corp.
Helm maintains an 18% interest in TELETRAK ENVIRONMENTAL SYSTEMS, INC.
(OTC Bulletin Board:TAES). See "Recent Developments."
RECENT DEVELOPMENTS
In November 1998, the Company and its majority owned subsidiary,
Teletrak Advanced Technology Systems, Inc. (OTC Bulletin Board:TATS), completed
the previously announced merger of Teletrak with Advanced Environmental Systems,
Inc. ("AES") of Webster, Massachusetts. Under the transaction, AES became a
wholly owned subsidiary of Teletrak, and the AES stockholders received shares of
Teletrak common stock in exchange for their AES stock. Immediately prior to the
transaction, Teletrak effected a reverse stock split and recapitalization, and
changed its name to Teletrak Environmental Systems, Inc. The 7.5 million common
shares outstanding immediately following the transaction are traded on the NASD
Electronic Bulletin Board under the symbol TAES.
AES, a privately held company, specializes in the manufacture,
distribution and licensing of industrial "mucking pumps" and related equipment.
The design of these pumps, based upon jet pump technology, makes this equipment
a highly effective portable tool for the removal of granular wet or dry
materials (including sludge, scale and slurries) -- particularly for
environmental cleanup of hazardous matter such as asbestos and lead. The motive
power, compressed air or pressurized liquid, provides operating flexibility for
hopper loading, vacuum cleaning and submersible application, as well as the
ability to collect and transport materials over long
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distances. With no moving parts, the AES pump is designed to be virtually
maintenance free and to require no skilled labor to operate.
More than 1,000 pumps are in use today in a wide range of industries,
including power plants, steel mills and foundries, oil refineries, chemical and
petrochemical plants, food processing facilities, shipyards and marine vessel
operators and water treatment plants.
Teletrak had been an inactive public company since 1993 as management
sought an appropriate merger partner. It had no employees or facilities.
Immediately after the merger, Helm became a minority stockholder with
approximately 1,353,000 shares, or 18%, of the outstanding common stock and
retained two seats on Teletrak's seven member board of directors. Teletrak
Environmental Systems, Inc. is located in Webster, Massachusetts. Helm wrote off
its investment in Teletrak prior to 1996. On March 31, 1999, the average of the
bid and ask prices of Teletrak common stock on the OTB Bulletin Board was $.50.
RESULTS OF OPERATIONS
The Company realized a net loss of $194,000 in 1998. These results are
compared to net income of $2,613,000 in 1997, which was attributable principally
to a gain on the sale of Interpak Terminals, Inc. ("Interpak"), historically the
Company's principal operating subsidiary.
The Company is a Delaware corporation with its principal offices at 537
Steamboat Road, Greenwich, Connecticut 06830. Its telephone number is (203)
629-1400. Set forth below is a discussion of the principal subsidiary,
affiliates and investments of Helm Capital Group, Inc.
MEZZANINE FINANCIAL CORP.
With the completion of the 1997 sale of Interpak Terminals, Inc.
("Interpak"), historically the Company's principal operating subsidiary, the
Company was positioned to bring its primary business activity into the financial
services area. Mezzanine Financial Corp. ("Mezzanine"), based in Spring Lake,
New Jersey, was organized in 1997 as a wholly-owned subsidiary of the Company to
provide capital in high yield "mezzanine" debt situations of small and
mid-market companies and to provide asset-based lending directly to or in
participation with other commercial lenders to such sector.
The Company capitalized Mezzanine with $1,550,000 of cash proceeds from
the sale of Interpak in exchange for the issuance by Mezzanine of a like
principal amount of 9 1/2% Senior Convertible Notes due December 31, 2001 (the
"Notes"). In an effort to reduce the Company's debt, the Notes were issued to
the holders of the Company's 12% Subordinated Debentures due August 31, 1999 in
exchange for the retirement of the Company's 12% Debentures pursuant to an
exchange offer commenced by the Company in October 1997. One half of the
outstanding principal amount of the Notes are convertible into shares of the
Company's common stock at $1.25 per share, and one half of the outstanding
principal amount of the Notes are convertible into shares of ISI common stock at
$2.75 per share. The Company, which has guaranteed the payment of the Notes, has
listed and as of December 31, 1998 has reserved for issuance 600,000 shares of
its common stock and approximately 273,000 shares of the Company's ISI common
stock for issuance upon conversion of the Notes. As of December 31, 1998,
$100,000 of the Notes had been converted, leaving $1,450,000 principal amount of
Notes outstanding.
As of March 31, 1999, Mezzanine had two loan participations outstanding
in the aggregate amount of $1,377,000, one with a rate of return of 22% per
annum and the other with a rate of return of 15% per annum.
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INVESTMENTS
INTERSYSTEMS, INC.
InterSystems, Inc.., based in Houston, Texas, was originally
organized under the laws of the state of Delaware in 1984. ISI's two principal
lines of business today consist of the operations of its wholly-owned
subsidiary, INTERSYSTEMS, INC., a Nebraska corporation ("InterSystems
Nebraska"), which designs, manufactures and sells specialized materials handling
equipment, and the custom resin compounding operations conducted by its
wholly-owned subsidiary, CHEMTRUSION, INC. ("Chemtrusion"). For each of the two
years ended December 31, 1998 and 1997, approximately 66% and 60%, respectively,
of ISI's revenues were attributable to the business of InterSystems Nebraska and
approximately 34% and 40%, respectively, of ISI's revenues were attributable to
the business of Chemtrusion.
ISI had revenues from continuing operations of $33,322,000, and
$27,008,000, respectively, for the years ended December 31, 1998 and 1997. For
the year ended December 31, 1998, ISI reported a net profit from continuing
operations and a net profit for the year of $443,000, as compared to a net
profit from continuing operations of $419,000 and a net profit $569,000 for the
year ended December 31, 1997. The net profit for the year ended December 31,
1997 included a $150,000 gain from discontinued operations.
As of December 31, 1998, the Company held 1,182,177 shares, or
approximately 14.9%, of the outstanding of common stock of ISI, of which 600,000
shares were pledged as collateral for a loan to a bank and an additional 273,000
shares were reserved for issuance to the holders of the Mezzanine Financial
Corp. 9 1/2% Series B Senior Convertible Notes due December 31, 2001 upon
exercise of conversion rights. Directors or officers of the Company comprise
five of the seven members of the ISI board of directors.
InterSystems Nebraska designs, manufactures, sells and leases equipment
for sampling, conveying, elevating, weighing and cleaning a wide variety of
products for the industrial and agricultural sectors of the economy, including
the following industries: grain and animal feed, fertilizer, petrochemical,
milling, plastics, chemical, pharmaceutical, food, minerals and paper and pulp.
The equipment that InterSystems Nebraska designs and manufactures includes
automatic samplers, mechanical truck and rail probes, conveyors, bucket
elevators, screeners and bulk weighing systems.
InterSystems Nebraska's products are designed and manufactured at its
two Omaha facilities with a combined area of 70,000 square feet, of which
approximately 60,000 square feet are dedicated to manufacturing operations. The
subsidiary utilizes advanced robotics, integrated software and automated
production systems in its manufacturing processes, and has invested in a CNC
turret punch, computerized machining and fabrication equipment and automatic
welding equipment. In addition, engineering utilizes a Computer Aided Design
(CAD) system.
Chemtrusion provides the value-added service of custom compounding
thermoplastic resins for resin producers. Custom resin compounding involves the
combining of a resin with various additives such as pigments, impact modifiers,
mineral fillers or stabilizers to customize the product to a particular end use.
The end use may require color, opaqueness, toughness, stiffness, flame or
chemical retardance characteristics or other specified qualities not available
in standard thermoplastic resins. These compounds are used extensively in
consumer products, packaging materials, automotive parts, and in the electrical,
agricultural and office equipment industries. A variety of compounds are
manufactured by Chemtrusion, including mineral and glass filled polyolefins,
specialty resin alloys and additive concentrates.
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Chemtrusion provides custom compounding services using four twin screw
extruders, various blenders and other equipment at its Houston facility which
contains four production lines with a total annualized capacity 46 million
pounds. Chemtrusion also operates a dedicated compounding services facility for
Mytex Polymers ("Mytex"), a Delaware general partnership of Mitsubishi Chemical
America and Exxon Chemical Company, a division of Exxon Corporation, located in
Jeffersonville, Indiana. This plant, which has recently been expanded, now
contains six production lines with an annual capacity of 75 million pounds of
product. At the Mytex facility, Chemtrusion produces an array of
polypropylene-based compounds exclusively for Mytex using raw materials and
specifications provided by Mytex. Mytex is a leading supplier of engineered
polypropylene to the auto manufacturing industry. Chemtrusion is paid a monthly
management fee for its operation of the plant, which covers most operating
expenses of the plant and construction financing debt service, and which
provides significant net profits to Chemtrusion.
The initial term of the Mytex agreement, which commenced in 1997, is
five years, and Mytex has the option to renew the agreement for two additional
five year terms. The agreement may be terminated by either party upon the
default of the other, except that certain defaults require notice and an
opportunity to cure. Termination of the agreement triggers purchase rights on
behalf of Mytex and put rights on behalf of Chemtrusion with respect to the
facility as specified in the Mytex agreement.
CORE CAPITAL, INC.
Since 1992, Core Capital, Inc. ("CCI"), a privately-held Delaware
corporation based in Spring Lake, New Jersey, has been engaged in the business
of providing credit and credit-related services to small and mid-market business
enterprises. Credit is extended primarily through providing factoring services
which involve the outright purchase of accounts receivable and through
initiating revolving lines of credit and term loans that are secured by the
assets of the borrower. Credit-related services involve limited billing
functions and collections of accounts receivable generated in the normal course
of business together with the management of information and office functions
related thereto. CCI provides its financial accommodations either directly or
through its wholly-owned subsidiary, MediFin, Inc. It maintains a processing
center located in Tampa, Florida. The financial accommodations provided by CCI
are an important source of financing to enterprises that are unable to obtain
traditional commercial bank or asset-based financing.
In providing its factoring services, CCI purchases accounts
receivable from its customers at a discount, with the discounted amount
representing income to CCI. On revolving loans of credit, CCI's income is
generated through an interest charge on monies advanced, together with a
collateral management fee. In addition to providing factoring and revolving
credit facilities, CCI also provides collecting and limited billing services
related to accounts receivable generated in the normal course of an account's
business. CCI charges various fees for the different services it performs in
this segment of its business.
The Company presently owns 418,483 shares, representing
approximately 19.4%, of the common stock of CCI. For the year ended December 31,
1998, CCI is expected to report a loss from operations of approximately
$1,922,000, as compared to a loss of approximately $1,053,000 for the year ended
December 31, 1997. CCI's operating loss for the year, which includes a $750,000
provision for bad debts incurred by prior management, is the result of its need
for additional capital to expand its portfolio of loans, thereby increasing
revenue to cover the fixed expenses associated with this type of business. The
Company does not expect to earn significant revenues from this investment in the
future and carries its investment in CCI at $2,000.
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THE MEZZANINE FINANCIAL FUND, L.P.
The Company presently holds a $204,000, or 6%, limited partnership
interest in the Mezzanine Financial Fund, L.P., a Delaware limited partnership
(the "Fund"). The Fund was formed to provide capital in high yield "mezzanine"
debt situations of small and mid-market companies and to provide asset-based
lending directly to or in participation with other commercial lenders. A total
of $3,400,000 of limited partnership interests have been sold and are
outstanding, including a $200,000 contribution from the Fund's general partner.
In addition, the Fund received additional capital of $1,000,000 in the form of
year to year notes that were issued by the Fund. As of December 31, 1998, the
Fund had financial accomodations outstanding in the aggregate amount of
approximately $5,494,000 to 18 entities. The Fund has been profitable for each
of its eight years of operation.
Pursuant to the terms of the limited partnership agreement under
which the Fund was organized, the Fund by its terms terminated on December 31,
1998. Fund management has obtained limited partner approval of a one year
extension of the term of the Fund in order to pursue an orderly liquidation of
the outstanding loans to enable the Fund to return the original limited
partnership investments to the limited partners. Directors of Helm control the
general partner of the Fund.
EMPLOYEES
THE COMPANY. The Company has 5 employees, 4 of whom serve in executive
capacities and 1 who serves principally in administrative capacities.
MEZZANINE FINANCIAL CORP., together with the Fund, currently employs 2 full-time
and one part-time persons, one of whom serves in an executive capacity and 2 who
serve principally in administrative capacities.
The Company believes it and its subsidiary have good relations with their
employees.
ITEM 2. PROPERTIES
THE COMPANY. The Company shares occupancy with three other corporations of 4,500
square feet of office space located at 537 Steamboat Road, Greenwich,
Connecticut. The lease commenced in June 1995, and an option to extend the lease
for an additional three years was exercised in January 1998 at a rental of
$112,500 for the first year, $117,500 for the second year and $121,500 for the
third year. The other corporations sharing this space are ISI and two other
corporations as to which Messrs. Herbert Pearlman and David Lawi serve as
directors and to which they devote some of their business time. The rent is
apportioned among these three corporations.
MEZZANINE FINANCIAL CORP.: Mezzanine leases a 2,000 square foot office in Spring
Lake, New Jersey, which it shares with the Fund and Core Capital. The lease,
which expires December 31, 2002, provides for a current monthly rent of $2,200,
which is apportioned among the three entities.
The Company believes that its properties and the properties of its subsidiaries
are in good operating condition and adequate for it and their present levels of
operation. The Company's affiliated companies have office and operating
facilities that are adequate for their present operations. The Company does not
deem any one of its affiliated company's facilities to be materially important
to the Company.
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ITEM 3. LEGAL PROCEEDINGS
The Company has received a claim for indemnification as guarantor in
the amount of approximately $700,000 arising out of alleged breaches of
representations and warranties made in connection with the sale of Interpak
Terminals, Inc. in July 1997. At the closing of the sale, $250,000 of the
purchase price was placed in escrow to be used to satisfy legitimate
indemnification claims. Management believes that this claim is overstated and is
endeavoring to settle the matter, without the necessity of arbitration, within
the escrow amount. At the present time, it appears that the matter will be
referred to arbitration. Management intends to mount a vigorous defense. No
assurance can be given, however, that management will be successful in this
effort.
The Company and its subsidiaries and its affiliates are parties to
lawsuits arising out of the ordinary course of business, which, either
individually or in the aggregate, are not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) MARKET INFORMATION
The Company's common stock was listed on the American Stock Exchange
("AMEX") under the symbol "HHH" until October 9, 1998 at which time the common
stock was delisted by the AMEX for failure to satisfy continued listing
requirements. Following delisting, the Company's common stock began trading on
the NASD Electronic Bulletin Board under the symbol "HCGI." The following table
sets forth the high and low closing sale prices for the Company's common stock
for the periods indicated as reported on the AMEX - Composite Tape through the
date of delisting, and thereafter the high and low bid prices as reported by the
Bulletin Board.
<TABLE>
<CAPTION>
l997 High Low
---- ---- ---
<S> <C> <C>
First Quarter $ .8125 $.625
Second Quarter .875 .50
Third Quarter 1.25 .6875
Fourth Quarter 1.3125 .75
</TABLE>
<TABLE>
<CAPTION>
l998 High Low
---- ---- ---
<S> <C> <C>
First Quarter $1.25 $.8125
Second Quarter 1.0625 .875
Third Quarter .875 .50
Fourth Quarter .125 .125
</TABLE>
On March 31, l999, the closing bid price of the Company's common stock
was $.16.
(b) HOLDERS As of March 31, 1999, there were, to the best of the Company's
knowledge, approximately 1,900 holders of record (not beneficial holders) of the
Company's Common Stock.
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(c) DIVIDEND POLICY The Company has not paid any cash dividends during the last
two fiscal years. The Company currently intends to retain all of its earnings to
support the development of its business and does not anticipate paying any cash
dividends for the forseeable future.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
The Company's revenues of $298,000 in 1998 consisted of interest
income from lending activities, compared to $40,000 in 1997 which consisted
primarily of participating interests in seismic data sales. Future revenues are
expected to be derived primarily from the Company's focus on financial services.
General and administrative expenses decreased $282,000 in 1998
due to reductions in salary expense and other expenses not required for the
Company's current level of operations.
Increase in underlying equity of affiliates in 1997 represents
the Company's percentage ownership share in increases in InterSystems'
shareholders equity as explained in Note 3 to Consolidated Financial Statements.
Gain on sale of securities in 1998 included a gain of $37,000 on
InterSystems common stock issued at market to retire $100,000 principal amount
of 9 1/2% senior convertible notes and a $20,000 gain on InterSystems common
stock issued at market value to retire $30,000 principal amount of 8%
convertible debentures held by two officers of the company. For 1997, the
Company sold 88,700 shares of Unapix Entertainment, Inc. common stock at a gain
of $415,000 and realized a gain of $284,000 from the issuance of common stock to
InterSystems in payment of various amounts due as detailed in Note 3 to the
Consolidated Financial Statements.
Income from discontinued operations relates to Interpak
Terminals, Inc. as detailed in Note 14 to the Consolidated Financial Statements.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's
prospects or operations.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided cash of $6,000 in 1998. Cash of
$1,483,000 was used for lending activities and $870,000 was provided by
financing activities. The resulting decrease in cash for 1998 was $607,000.
Future liquidity sources for the Company will consist of
revenues generated from its financial service activities, reduction in selling,
general and administrative expenses, reimbursement of general and administrative
expenses from affiliates, and sales of investment securities. On a longer term
basis, the Company may be required to seek additional liquidity through debt or
equity offerings.
NEW ACCOUNTING PRONOUNCEMENTS: None
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YEAR 2000 COMPLIANCE
The Company's Compliance Program. Computer equipment using microprocessors that
use only two digits to identify a year may be unable to accurately process data
after December 31, 1999. In early 1998, the Company initiated its Year 2000
("Y2K") compliance project. The evaluation addressed internal hardware and
software, key vendors, customers and other significant third parties at all
Company locations.
The Company's State of Readiness. In its office operations, the Company utilizes
recently purchased computer hardware and software which has been deemed Y2K
compliant. In the fourth quarter of 1997, Helm replaced all Greenwich office
computers with compliant equipment and software.
Mezzzanine has undertaken an analysis of all Spring Lake equipment and software
to determine Y2K compliance. The Company does not expect that the cost, if any,
to complete its and to replace parts for those machines not yet tested will be
material to the financial condition of the Company. The Company estimates that
all such equipment will be tested and in compliance by the second quarter of
1999.
The Company is also evaluating the readiness of its third party supply chains
and major customers. The Company has requested Y2K compliance certification from
each of its major vendors, suppliers and customers. To date, no non-compliance
issues have arisen which pose a material problem for the Company.
Risks of Non-compliance and Contingency Plans. The major factors which pose the
greatest Y2K risks for the Company if the implementation of the Y2K compliance
program is not successful is the reliance on key third party vendors and major
customers. If those parties do not achieve compliance, the Company's operational
subsidiaries could experience interruption in production scheduling. Based on
initial information received from our vendors and customers, the Company does
not expect such delays.
The estimated costs of, and timetable for, becoming Y2K compliant constitute
forward looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such estimates are based upon
numerous assumptions by management, including accuracy of representations made
by third parties concerning their compliance with Y2K issues, and other factors.
The estimated costs of Y2K compliance also do not give effect to any future
corporate acquisitions or divestitures made by the Company or its subsidiaries.
FORWARD LOOKING STATEMENTS
This annual report for the year ended December 31, 1998 as well
as other public documents of the Company contains forward-looking statements
which involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievement of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such statements
include, without limitation, the Company's expectations and estimates as to
future financial performance, cash flows from operations, capital expenditures
and the availability of funds from refinancing of indebtedness. Readers are
urged to consider statements which use the terms "believes", "intends",
"expects", "plans", "estimates", "anticipated" or "anticipates" to be uncertain
and forward-looking. In addition to other factors that may be discussed in the
Company's filings with the Securities and Exchange Commission, including this
report, the following factors, among others, could cause the Company's actual
results to differ materially from those expressed in any forward-looking
statement made by the Company: (i) general economic and business conditions,
acts of God and natural disasters, as well as the demand for the Company's
services, or the ability of the Company to provide such services; (ii) the
insolvency or failure to pay its debts by a significant creditor of the Company
or its subsidiaries or affiliates, or the inadequacy or uncollectibility of any
collateral pledged to secure such creditor's debts to the Company or its
subsidiaries or
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affiliates; (iii) increased competition; (iv) changes in
customer preferences and the inability of the Company's subsidiaries or
affiliates to develop and introduce new services to accommodate these changes;
and (v) the maturing of debt at the Company, subsidiary or affiliate level and
the inability of the Company, the subsidiary or affiliate to raise capital to
repay or refinance such debt on favorable terms, or the insufficiency of
collateral pledged to secure any such debt.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item are set forth below:
Financial Statements of the Registrant Page
Report of Independent Certified Public
Accountants..................................... F-1
Consolidated Balance Sheet as of
December 31, l998............................... F-2
Consolidated Statements of
Operations for the Years Ended
December 3l, 1998 and l997...................... F-4
Consolidated Statements of
Comprehensive Income (Loss) for the
Years Ended December 3l, 1998 and l997.......... F-5
Consolidated Statements of
Changes in Shareholders' Capital
(Deficit) for the Years Ended December
31, 1998 and 1997............................... F-6
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 1998 and 1997...................... F-8
Notes to Consolidated Financial
Statements...................................... F-9 - F-29
Financial Statements of InterSystems, Inc., a Delaware corporation
The financial statements of InterSystems, Inc., a Delaware
corporation are hereby incorporated by reference to the InterSystems, Inc.
Annual Report on Form 10-KSB for the year ended December 31, 1998 as filed with
the Securities and Exchange Commission.
ITEM 7A. MARKET RISK: None
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are set forth below. The
directors serve until the next annual shareholders meeting and until their
successors are elected and qualified.
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION
OVER PAST FIVE YEARS AND DIRECTOR OF
OTHER DIRECTORSHIPS OF NOMINEE AGE COMPANY SINCE
- ------------------------------ --- -------------
<S> <C> <C>
Herbert M. Pearlman................... 66 l980
</TABLE>
Mr. Pearlman has been the Company's president and chief executive
officer since l980 and became the chairman of the Company's board of directors
in June 1984. Mr. Pearlman is a co-founder and since l982 has been a director of
Seitel, Inc. ("Seitel"), a New York Stock Exchange company which is engaged in
acquiring and marketing seismic data. In March l987, he was elected as the
chairman of Seitel's board of directors. Since l984, Mr. Pearlman has been
chairman of the board of directors of InterSystems, Inc., a public company
engaged in the design and manufacture of industrial and agricultural equipment
and in chemical compounding ("ISI"). In 1990, Mr. Pearlman became chairman of
the board of directors of Unapix Entertainment, Inc. ("Unapix"), a Delaware
corporation and a public company engaged in the business of marketing and
distributing television programs and motion pictures. In February 1999, Mr.
Pearlman assumed the additional role of chief executive officer of Unapix. Mr.
Pearlman has been chairman of the board of Core Capital, Inc. ("Core"), a
Delaware corporation engaged in the business of financing receivables of
healthcare and other enterprises since 1993, and chairman of the board of
Mezzanine Financial Corp. ("Mezzanine"), a Delaware corporation engaged in the
business of making collaterialized loans to small businesses since 1997.
Walter M. Craig, Jr.................. 45 1993
Mr. Craig has been the Company's executive vice president and chief
operating officer since 1993. Since 1993, he has also served as president and a
director of Core, and president and a director of PLB Management Corp., the
general partner of The Mezzanine Financial Fund, L.P. Since 1997, Mr. Craig has
been president and a director of Mezzanine. Mr. Craig has been a director of
Seitel since 1987, a director of Unapix since 1993 and a director of ISI since
1993. Prior thereto, Mr. Craig served as vice president for business and legal
affairs for Helm.
David S. Lawi......................... 64 l980
Mr. Lawi has been the Company's executive vice president and secretary
from l980 until 1992, when he was appointed secretary-treasurer and chairman of
the Executive Committee. Since l984, Mr. Lawi has been a director and secretary
of ISI and since 1986 he has been chairman of ISI's Executive Committee. Since
l982, Mr. Lawi has been a director of Seitel and in 1989 he was elected chairman
of Seitel's Executive Committee. In 1990, Mr. Lawi became a director of Unapix,
and in 1993, he became treasurer and secretary of Unapix and chairman of the
Executive Committee of Unapix. Since 1993, he has also served as
secretary-treasurer and a director of Core, and since 1997, as vice president
and secretary and a director of Mezzanine.
11
<PAGE> 12
Joseph J. Farley...................... 76 l982
From l982 until February 1991, Mr. Farley served as the Company's vice
president for marketing and engineering. Prior to joining the Company, Mr.
Farley had been a senior executive with International Business Machines
Corporation ("IBM") for 32 years, where he held various positions in
engineering, marketing and field engineering. His final assignment at IBM was
corporate director of marketing/standard practices.
William Lerner........................ 66 l985
Mr. Lerner is an attorney engaged in the private practice of law. From
May 1990 until December 1990, he was General Counsel to Hon Development Company,
a California real estate development company. Mr. Lerner has been a director of
Seitel since l984. Mr. Lerner is also a director of Rent-Way, Inc., the owner of
a chain of retail stores in the rental-purchase industry, and a director of
Micros-to-Mainframes, Inc., a provider of advanced technology services and
computer equipment to Fortune 2000 companies with headquarters and significant
operations in the states of New Jersey, New York and Connecticut.
John E. Stieglitz..................... 68 l986
Mr. Stieglitz is Chairman Emeritus of Conspectus, Inc., a
privately-held company engaged in providing consulting services to the
professional investment communities in the area of executive recruiting. Mr.
Stieglitz has been a director of ISI since 1991 and a director of Seitel since
1989.
EXECUTIVE OFFICERS
In addition to Messrs. Pearlman, Craig and Lawi, the Company has one
additional executive officer. Daniel T. Murphy, 59, joined the Company in May
1984 as vice president and chief financial officer. In April 1992 he was
appointed executive vice president-finance. In May 1984 he became vice
president-finance and operations, and in 1985 he became executive vice president
of operations and chief financial officer, of ISI, a position he held until
September 1997. He became a director of Teletrak Environmental Systems, Inc. in
1998, a director of ISI in 1986, and chief financial officer of Unapix in 1996.
In 1997, Mr. Murphy was appointed chief financial officer of Mezzanine.
All of the Company's executive officers spend a majority of their
work-related time on the various businesses of the Company and its subsidiaries
and affiliates, and allocate their time among these entities according to the
relative need of each for executive assistance.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who own more than 10% of a registered
class of the Company's equity securities to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes of ownership of common stock and other equity securities of the Company.
Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) reports they
file. Based upon a review of reports and amendments thereto furnished to the
Company during, and with respect to, its most recent fiscal year, and written
representations furnished to the Company, it appears that all such reports
required to be filed were filed on a timely basis, except for that Gerson I.
Fox's Form 5 for 1997 reporting the receipt of common stock as interest on
promissory notes of the Company was filed 10 days late.
12
<PAGE> 13
ATTENDANCE AT MEETINGS; COMMITTEES
During 1998, the Company's Board of Directors held two meetings, which
were attended by all of the directors.
The Board of Directors has a standing Audit Committee, Compensation and
Stock Option Committee and Executive Committee. During 1998, the Audit Committee
as well as the Compensation and Stock Option Committee consisted of Messrs.
Lerner and Stieglitz. The function of the Audit Committee is to select the
independent public accountants of the Company, to review with them the Company's
financial statements, to review the Company's financial systems and controls and
to oversee other matters relating to the integrity of the Company's finances and
financial statements as the Committee may consider appropriate. The function of
the Compensation and Stock Option Committee is to determine the compensation of
the officers of the Company and to administer the Company's stock option plans.
The Executive Committee is comprised of Messrs. Pearlman, Farley and Lawi, who
is the Chairman. The function of the Executive Committee is to act on an interim
basis for the full Board. The Audit Committee, the Compensation and Stock Option
Committee and the Executive Committee did not meet separate from the entire
Board of Directors during 1998.
ITEM 10. EXECUTIVE COMPENSATION
Set forth below is certain information with respect to compensation
awarded to, earned by or paid to the Chief Executive Officer of the Company. No
executive officers of the Company earned in excess of $100,000 for services
rendered to the Company and its subsidiaries during 1998. No options were
granted to any executive officers in 1998.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND OTHER
PRINCIPAL ANNUAL
POSITION YEAR SALARY (1) COMPENSATION(2)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Herbert M. 1998 $ -- $67,400
Pearlman, 1997 58,000 54,800
CEO and Chairman 1996 100,000 84,320
</TABLE>
- ----------------
(1) Represents salary paid by the Company's former wholly-owned subsidiary,
Interpak Terminals, Inc., to Mr. Pearlman. Interpak was sold in July
1997.
(2) Includes life insurance premiums.
[The rest of this page intentionally left blank.]
13
<PAGE> 14
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUE TABLE
The following table sets forth aggregated option exercises in the last
fiscal year, the number of unexercised options and fiscal year end values of the
in-the-money options for the Chief Executive Officer. Al options were
out-of-the-money at December 31, 1998.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Unexercised In-the-money
Acquired Options at Options at
On Fiscal y/e Fiscal y/e
Exercise Exercisable/ Exercisable/
Name (#) Realized ($) Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HERBERT M.
PEARLMAN - - 150,000/0 n/a
</TABLE>
COMPENSATION OF DIRECTORS
Each year, the outside directors of the Company receive an option to
purchase 10,000 shares of common stock at market on the date of grant. Expenses
reasonably incurred in the furtherance of their duties are reimbursed by the
Company.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
PEARLMAN EMPLOYMENT AGREEMENT
On January 1, 1990, the Company entered into an employment contract with
Herbert M. Pearlman, the Company's President and Chief Executive Officer (the
"Pearlman Agreement"), with a continuous five-year term and a base salary of
$404,475 per year, subject to adjustment for increases in the CPI, payable by
the Company or its subsidiaries, and a bonus each year equal to five percent of
the Company's consolidated pre-tax profits. To the extent Mr. Pearlman receives
a portion of his salary from a subsidiary or affiliate, the amount of salary
payable by the Company is similarly reduced.
Beginning in 1993, Mr. Pearlman agreed to a voluntary reduction in his
base salary to $340,000, of which $100,000 has been paid by InterSystems, Inc.
since that date and $100,000 had been paid by Interpak Holdings, Inc. until its
sale in July 1997. Since 1994 and until June 30, 1997, an additional $100,000
had been accrued annually representing amounts payable in common stock of the
Company based upon certain average stock prices, and $40,000 has been accrued
annually as payable in cash by the Company.
Following the sale of Interpak, Mr. Pearlman agreed to an employment
arrangement with the Company for the twelve months ended June 30, 1998 pursuant
to which, in lieu of current contractual salary and bonus, as adjusted, Mr.
Pearlman will receive 7.5% of earnings before taxes, calculated prior to payment
of any bonus based upon earnings before tax to any individual and prior to any
gain on the sale of Interpak. This arrangement was extended for an additional
twelve months in 1998.
If Mr. Pearlman is unable to discharge his duties for a period of six
consecutive months, the Company may terminate the Pearlman Agreement, in which
event Mr. Pearlman will be entitled to receive his adjusted
14
<PAGE> 15
salary for two years form the date of termination. Pursuant to the Agreement, he
is not required to devote his full business time to the Company and may seek to
acquire businesses for enterprises other than the Company as long as he obtains
prior approval of the Board of Directors of the Company before acquiring any
business with sales, net income before taxes and stockholders equity of more
than $4,000,000, $600,000 and $750,000, respectively.
If, at any time during the term of the Pearlman Agreement the majority
of the Company's Board of Directors are comprised of members recommended by a
party not supported by the Company's present Chairman (hereinafter "Change of
Control"), Mr. Pearlman, at his option, will receive, no later than the date
upon which such Change of Control occurs, the following (hereafter the "Change
in Control Payments"):
(i) a lump sum cash payment equal to 2.99 times the average of
all forms of compensation paid to Mr. Pearlman by the Company and all of
its subsidiaries and affiliates during the prior five years reduced by
the amounts received pursuant to terms (ii) and (iii) below;
(ii) a lump sum cash payment equal to the difference between the
exercise price of all stock options, warrants, convertible preferred
stock and convertible debentures held by Mr. Pearlman and the then
current market price for the Company's common stock; and
(iii) a continuation of all medical and disability insurances
and benefits for Mr. Pearlman (and his family) for a period of five
years.
By way of illustration, if a Change in Control occurred during 1998, it
is estimated that Mr. Pearlman would receive Change of Control Payments of
$883,000. The Company believes that the Change in Control Payment provisions in
these officers' agreements may tend to discourage attempts to acquire a
controlling interest in the Company and may also tend to make the removal of
management more difficult; however, the Company believes such provisions provide
security and decision making independence for its executive officers.
The Pearlman Agreement further provides (i) that upon the expiration of
the term, if Mr. Pearlman's employment is not continued, he will be entitled to
a severance payment of two years' salary and (ii) for certain company-paid
fringe benefits such as life insurance, with the beneficiary to be specified by
Mr. Pearlman, disability insurance and health insurance providing one hundred
(100%) per cent coverage of most medical expenses.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND_MANAGEMENT
Set forth below is certain information as of March 31, l999 concerning
the beneficial ownership of common stock (the Company's only class of voting
securities) by each director individually, and by all officers and directors of
the Company as a group and by all beneficial owners of more than 5% of the
outstanding shares of the Company's common stock.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name Ownership(l)(2) Class(2)
- ---- --------------- --------
<S> <C> <C>
Gerson I. Fox ........................... 745,917(3) 18.0%
1230 Huntington Drive
Duarte, CA 91010
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
Clarence Y. Palitz ...................... 562,500(4) 12.9%
650 Allamuchy Road
Allamuchy, NJ 07820
Directors and Officers
- ----------------------
Herbert M. Pearlman* .................... 1,284,603(5) 28.0%
David S. Lawi* .......................... 664,657(6) 15.9%
Walter M. Craig, Jr ..................... 80,680(7) 2.1%
Joseph J. Farley ........................ 67,500(8) 1.7%
John E. Stieglitz ....................... 58,825(9) 1.5%
William Lerner .......................... 58,358(10) 1.5%
Daniel T. Murphy ........................ 48,675(11) 1.3%
All officers and directors
as a group (7 persons) .................. 2,263,298(5)-(11) 43.5%
</TABLE>
* address is 537 Steamboat Road, Greenwich, CT 06830
(l) Except as otherwise indicated, each named holder has, to the best of
the Company's knowledge, sole voting and investment power with respect
to the shares indicated.
(2) Includes shares that may be acquired within 60 days by any of the named
persons upon exercise of any contractual right.
(3) Includes 312,766 shares that may be acquired from the Company upon
conversion of Series B 8% Cumulative Convertible Preferred Stock
(212,766) and 1993 Class B warrants (100,000). Does not include shares
held by Mr. Fox's wife, as to which he disclaims beneficial ownership.
(4) Includes 520,833 shares that may be acquired from the Company upon
conversion of Series A 8% Cumulative Convertible Preferred Stock held
by Mr. Palitz (104,166) and by a limited partnership as to which Mr.
Palitz is the president of the corporate general partner (416,667).
(5) Includes 747,868 shares that may be acquired from the Company upon
exercise of options (150,000) and Class A Warrants (66,145), and
conversion of Series A 8% Cumulative Convertible Preferred Stock
(421,875) and 8% debentures (109,848). Does not include shares held by
Mr. Pearlman's wife, as to which he disclaims beneficial ownership.
(6) Includes 425,680 shares that may be acquired from the Company upon
exercise of options (75,000) and 1993 Class A Warrants (27,763), and
conversion of Series A 8% Cumulative Convertible Preferred Stock
(260,417) and 8% debentures (62,500).
16
<PAGE> 17
(7) Includes 80,000 shares which may be acquired from the Company exercise
of options.
(8) Includes 30,000 shares which may be acquired from the Company exercise
of options.
(9) Includes 30,000 shares which may be acquired from the Company exercise
of options.
(10) Includes 30,000 shares which may be acquired from the Company exercise
of options.
(11) Includes 25,682 shares which may be acquired from the Company upon
exercise of options (20,000) and conversion of 8% debentures (5,682).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
THE COMPANY, MEZZANINE, THE FUND AND CORE CAPITAL
Messrs. Herbert M. Pearlman and David S. Lawi are principal
shareholders of, and control, PLB Management Corp. ("PLB"), a Delaware
corporation serving as general partner to The Mezzanine Financial Fund, L.P.
(the "Fund"). In addition, they hold 5.5% and 1%, respectively, limited
partnership interests in the Fund. Mr. Walter M. Craig, Jr. is President of PLB
and of the Fund.
In February 1993, the Fund made available a $750,000 line of credit to
MediFin, Inc. ("MediFin"), a wholly-owned subsidiary of Core Capital, Inc.
("CCI"), to enable MediFin to initiate its business activity. The line, which
was increased to $2,000,000 at December 31, 1997, matured on December 31, 1998.
The loan bears interest at 15% per annum. The Fund is entitled to receive an
additional fee in common stock of CCI equal to 10% of the loan provided by the
Fund each year (the "Fee"). The Fee is convertible into CCI common stock at
$2.00 per share. The loan terminated on December 31, 1998 and no further credit
has been extended since that date. At December 31, 1998, $1,615,000 was
outstanding under the loan. Messrs. Pearlman, Lawi and Craig are directors of
CCI, and Mr. Craig serves as President of CCI. In addition, Helm owns
approximately 19.4% of the outstanding common stock of CCI.
In December 1997, Mezzanine participated in the Fund's position in a
$750,000 note from a third party. The note is due November 30, 1999. Mezzanine
receives a return of 15% per annum plus an enhancement fee of 9% to 10%, as
defined, and is collateralized by the assets of the third party. As compensation
for administering the participation, the Fund receives 30% of the enhancement
fee. In 1998, Mezzanine entered into a participation arrangement with the Fund's
loan to MediFin. As of December 31, 1998, the balance payable under this
participation was $778,000. This participation carries a rate of return of 15%
and terminates on December 31, 1999.
In April 1998, PLB made a loan of $250,000 to Mezzanine. The loan is
payable on demand and bears interest at 12% per annum payable monthly. Interest
expense for 1998 amounted to $21,000.
In July 1998, MediFin defaulted on its loan to its principal lender.
The loan was guaranteed in part by the Company, Herbert Pearlman and David Lawi.
The bank demanded payment pursuant to the guarantees. In order to permit the
Company to make payment pursuant to its guaranty, Messrs. Pearlman and Lawi
advanced a total of $225,000 to the Company, $180,000 of which was repaid by
MediFin in September. As of December 31, 1998, the Company was indebted to Mr.
Pearlman and Mr. Lawi on account of these advances in the amounts of $30,000 and
$15,000, respectively, pursuant to promissory notes payable on demand and
bearing interest at 10% per annum. MediFin has agreed to pay to the Company all
amounts payable on account of principal and interest by the Company pursuant to
these notes. In addition, the Company borrowed $500,000 from The Chase
17
<PAGE> 18
Manhattan Bank to complete the payment pursuant to its guaranty. The Chase loan
is payable $100,000 on September 10, 1999 and $400,000 on September 10, 2000, is
guaranteed by Messrs. Pearlman and Lawi and is secured by 600,000 shares of
common stock of InterSystems, Inc. held by the Company. Mr. Pearlman's guaranty
is limited to $333,333 and Mr. Lawi's guaranty is limited to $166,667.
Similarly, Mr. Lawi paid $100,000 to the lender pursuant to his guaranty
on behalf of MediFin. In exchange for its agreement to repay Mr. Lawi all
amounts paid by him pursuant to his guaranty, MediFin increased its loan from
Mezzanine by $100,000 and directed Mezzanine to transfer to Mr. Lawi a $100,000
10% Convertible Subordinated Note due June 30, 2003 of Unapix Entertainment,
Inc. held by Mezzanine in full satisfaction of all amounts owing to him.
In November 1998, Mr. Pearlman loaned $100,000 to the Company, which in
turn was lent to Core Capital, Inc. in exchange for a participation on a loan
made by Core to MediFin. The participation bears a rate of return of 18%. Prior
to December 31, 1998, the Company repaid $25,000 to Mr. Pearlman in six equal
installments, and Mr. Lawi advanced an additional $25,000 to Helm which was
immediately used to repay in part the amount owing to Mr. Pearlman. At December
31, 1998, the Company is indebted to Messrs. Pearlman and Lawi in the amounts of
$50,000 and $25,000, respectively. These balances are represented by one year
convertible promissory notes bearing interest at 10% per annum. The notes are
convertible into common stock of Helm at a price based upon the average market
price of the common stock during the 30 days preceding the maturity date. The
notes may be extended for an additional year at the option of the holder.
In May 1998, the Company's Board of Directors resolved to reserve for
issuance 175,000 shares of Helm common stock to be issued pursuant to a like
number of Helm common stock options exercisable at $1.50 until August 31, 2007.
These Helm options may be issued to various holders of Core Capital options in
exchange for the Core Capital options in the event that Core Capital does not
complete a public offering or is not merged into a public entity on or before
December 31, 2002. For making these standby options available, the Company
received 25,000 Core Capital options exercisable at $2.00 per share. In
addition, the Company will receive the Core Capital options exchanged for Helm
options.
On December 10, 1997, the Board of Directors approved the sale of
$300,000 in market value of common stock of the Company, at a price of $1.00 per
share, to Core Capital, Inc. (formerly Professionals' Financial Services, Inc.)
in exchange for $300,000 in market value of common stock of Core Capital at
$2.00 per share, subject to adjustment as follows: the purchase price of the
Core Capital shares will be reduced by $.10 per share, or a pro rata amount
thereof, for every $200,000 in losses on receivables of Core Capital booked as
of January 1, 1997, which losses are incurred through December 31, 2000, but in
no event shall the price be reduced below $1.25 per share. Core's 300,000 shares
of common stock of the Company have been pledged to Mr. Herbert Pearlman as
security for a loan made by Mr. Pearlman to Core. Herbert M. Pearlman, David S.
Lawi and Walter M. Craig, Jr., officers and directors of the Company, are
officers, directors and shareholders of Core Capital.
In July 1998, the Company acquired from MediFin a 40% ownership interest
in Total Health Concepts, Inc. ("THC"), a Florida based business which provides
in home nursing care, in exchange for an agreement to provide up to $80,000 in
capital to THC on or before July 1999 as needed to cover cash operating needs.
THC was acquired by MediFin in a foreclosure action. Should the Company not pay
the agreed upon capital upon demand, its ownership interest will revert to
MediFin.
18
<PAGE> 19
THE COMPANY AND UNAPIX ENTERTAINMENT, INC.
During 1998, management of the Company provided various administrative,
managerial, financial, legal and accounting services to Unapix Entertainment,
Inc. ("Unapix"), for which the Company was paid $121,000 by Unapix in 1998.
Messrs. Pearlman, Lawi and Craig are directors of Unapix, and Mr. Murphy is the
Chief Financial Officer of Unapix.
In December 1997 and January 1998, Mezzanine advanced $750,000
($200,000 and $550,000, respectively) to Unapix in exchange for a promissory
note due December 31, 1998. The note provided for interest at 15% per annum and
a number of Unapix common stock purchase warrants based on the length of time
the loan is outstanding. The loan was repaid in February 1998 with a cash
payment of $650,000 and $100,000 principal amount of a Unapix 10% convertible
subordinated notes due 2003. Mezzanine received warrants to purchase 12,500
shares of Unapix common stock at $6.00 per share expiring June 30, 2003 under
the terms of the promissory note.
THE COMPANY AND INTERSYSTEMS, INC.
Messrs. Pearlman and Lawi are parties to employment agreements with
ISI. All salary amounts paid under the ISI agreements reduce the amount of
salary the Company is responsible to pay to these officers. The agreements, as
amended, provide for current annual salaries of approximately $238,000 and
$130,000 to Messrs. Pearlman and Lawi, respectively. Beginning in 1992, however,
Messrs. Pearlman and Lawi agreed to significant voluntary salary reductions and
are currently receiving $100,000 and $50,000, respectively, from ISI.
In addition to their current contractual salaries of $100,000 and
$50,000, respectively, they are to receive bonuses of 5% (HMP) and 2.5% (DSL) of
"EBT." For purposes of this proposal, "EBT" is to be calculated prior to payment
of any bonus based upon earnings before tax to any officer of ISI. For the years
1998, 1999 and 2000, EBT shall mean EBT over $0; for the years 2001, 2002 and
2003, EBT shall mean EBT over $250,000, and shall continue to increase by
$250,000 every three years. In addition, the Committee approved the following
salary increases:
<TABLE>
<CAPTION>
EBT Pearlman Lawi
--- -------- ----
<S> <C> <C>
$1.0 million + $125,000 $ 62,500
1.5 million + 150,000 75,000
2.0 million + 175,000 87,500
2.5 million + 200,000 100,000
</TABLE>
In addition, their contracts were to be extended for five years to June 30,
2002, with a two year evergreen feature.
If at any time the Company no longer is able to elect a majority of
ISI's Board of Directors, any of the officers may terminate their employment
under his respective agreement upon 18 months' notice and receive upon the
conclusion of that period a lump sum severance payment equal to 18 months'
salary. Each agreement also provides that upon the expiration of the term, if
the officer's employment is not continued, he will be entitled to a severance
payment of two years' salary (unless employment is secured elsewhere). If, upon
expiration of the employment term, continuation is offered but declined by the
officer, the officer is obligated to act as a consultant for two years at 50% of
his then current salary, during which time he will not provide services for any
competitor of ISI.
19
<PAGE> 20
The Company has an arrangement with ISI whereby ISI pays the Company an
amount equal to the expenses incurred by the Company and allocable to the
business of ISI. These expenses consist primarily of office-related and
administrative expenses and rent. During 1998, ISI paid a total of $48,190
during, and accrued an additional $58,000 at December 31, 1998, to the Company
pursuant to this arrangement.
In November 1998, the Company granted to ISI a five year option to
purchase all of Helm's 1,350,000 shares of common stock in Teletrak
Environmental Systems, Inc. for $.50 per share. The purpose of this grant was to
induce ISI to participate to the extent of $122,500 in a private placement of
Teletrak units consisting of one share of common stock and one-half common stock
purchase warrant for $.50 per unit. Helm reserved the right to dispose of the
shares at any time subject to prior notice to ISI.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this Report
3.l Certificate of Incorporation [incorporated by reference to
Exhibit(3)(i) to the Company's 1980 Form l 0-K ]
3.2 Certificate of Amendment to Certificate of Incorporation dated
June 7, l983 [incorporated by reference to Exhibit 3.2 to the
Company's 1985 Form 10-K]
3.3 Certificate of Amendment to Certificate of Incorporation dated
July 7, 1987 [incorporated by reference to Exhibit 3.5 to the
Company's 1987 Form 10-K]
3.4 Certificate of Amendment to Certificate of Incorporation dated
July 21, 1986 [incorporated by reference to Exhibit 3.6 to
Registration Statement on Form S-2 (Registration No. 33-32834)
(the "S-2")]
3.5 Certificate of Amendment to Certificate of Incorporation dated
December 8, 1989 [incorporated by reference to Exhibit 3.7 to
the S-2]
3.6 Certificate of Designation relating to Series A Preferred
Stock [incorporated by reference to Exhibit 4.21 to the 1985
Company's Form 10-K]
3.7 Certificate of Amendment to Certificate of Incorporation dated
December 16, 1993 [incorporated by reference to Exhibit 3.9 to
the Company's 1993 Form 10-K]
3.8 Certificate of Designation relating to Series A 8% Cumulative
Convertible Preferred Stock [incorporated by reference to
Exhibit 3.10 to the Company's 1995 Form 10-K]
3.9 Certificate of Designation relating to Series B 8% Cumulative
Convertible Preferred Stock [incorporated by reference to
Exhibit 3.11 to the Company's 1995 Form 10-K]
3.10 Certificate of Amendment to Certificate of Incorporation dated
October 31, 1997 [incorporated by reference to Exhibit 3.12 to
the Company's 1997 10-K]
3.11 By-laws as Restated on May 12, 1998 *
20
<PAGE> 21
4.1 Form of Helm Resources, Inc. 8% Subordinated Convertible
Debenture due September 30, 1999 [incorporated by reference to
Exhibit 4.5 to the Company's 1990 10-K]
4.2 Form of Helm Resources, Inc. Class A Common Stock Purchase
Warrant due January 31, 1999 [incorporated by reference to
Exhibit 4.4 to the Company's 1995 Form 10-K]
4.3 Form of Helm Resources, Inc. Class B Common Stock Purchase
Warrant due January 31, 1999 [incorporated by reference to
Exhibit 4.5 to the Company's 1995 Form 10-K]
4.4 Form of Helm Resources, Inc. Employee Warrant Agreement
granted October 29, 1997 [incorporated by reference to Exhibit
4.5 to the Company's 1997 Form 10-K]
4.5 Form of Mezzanine Financial Corp. 9 1/2% Series A Senior
Convertible Note due December 31, 2001*
4.6 Form of Mezzanine Financial Corp. 9 1/2% Series B Senior
Convertible Note due December 31, 2001*
10.1 Employment Agreement dated January 1, 1988 between
InterSystems, Inc. and Herbert M. Pearlman [incorporated by
reference to Exhibit 10.18 to the S-2].
10.2 Employment Agreement dated January 1, 1988 between
InterSystems, Inc. and David S. Lawi [incorporated by
reference to Exhibit 10.19 to the S-2].
10.3 Employment Agreement dated January 1, 1988 between
InterSystems, Inc. and Daniel T. Murphy [incorporated by
reference to Exhibit 10.20 to the S-2].
10.4 Employment Agreement dated January 1, 1988 between
InterSystems, Inc. and Walter M. Craig, Jr. [incorporated by
reference to Exhibit 10.21 to the S-2].
10.5 Employment Agreement dated as of January 1, 1990 between the
Company and Herbert M. Pearlman [incorporated by reference to
Exhibit 10.22 to Post-Effective Amendment No.1 to the S-2, as
filed with the Commission on October 10, 1990 ("Amendment No.
1")].
10.6 Employment Agreement dated as of January 1, 1990 between the
Company and David S. Lawi [incorporated by reference to
Exhibit 10.23 to Amendment No. 1]
21 List of Subsidiaries: Mezzanine Financial Corp., a Delaware
corporation organized in 1997
*Filed herewith
(c) Reports on Form 8-K: None.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 13th day of April,
1999.
HELM CAPITAL GROUP, INC.
By: /s/ Herbert M. Pearlman
------------------------------
Herbert M. Pearlman
President, Chief Executive
Officer, Director
(principal executive officer)
By: /s/ Daniel T. Murphy
------------------------------
Daniel T. Murphy
Exec. Vice President - Finance
(principal financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of l934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Herbert M. Pearlman President, Chief Executive April 13, l998
- ----------------------- Officer, Director (principal
Herbert M. Pearlman executive officer)
/s/ David S. Lawi Secretary-Treasurer, April 13, l998
- ----------------------- Director
David S. Lawi
/s/ Walter M. Craig Executive Vice April 13, 1998
- ----------------------- President, Director
Walter M. Craig, Jr.
/s/ Joseph Farley Director April 13, l998
- -----------------------
Joseph J. Farley
/s William Lerner Director April 13, l998
- -----------------------
William Lerner
/s/ John Stieglitz Director April 13, l998
- -----------------------
John Stieglitz
22
<PAGE> 23
Report on Independent Certified Public Accountants
To the Shareholders
Helm Capital Group, Inc.
Greenwich, Connecticut
We have audited the accompanying consolidated balance sheet of Helm Capital
Group, Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' capital deficit and cash flows for each of the two years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 Helm
Capital Group, Inc. and Subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
New York, New York
March 26, 1999
F-1
<PAGE> 24
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
December 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15
Due from related party 50
Prepaid expenses 24
Notes receivable and advances due from affiliates 2,456
Other current assets 31
------
2,576
TOTAL CURRENT ASSETS
INVESTMENTS IN AFFILIATES 797
CASH HELD IN ESCROW, NET OF RESERVE 125
DEFERRED CHARGES AND OTHER ASSETS 38
------
$3,536
======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 25
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except par values)
December 31, 1998
(continued)
<TABLE>
<S> <C>
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIT
CURRENT LIABILITIES:
Accrued expenses $ 809
Advances due to affiliates 63
Notes due to related parties 370
Current portion of subordinated debentures 1,220
Current portion of long-term debt 100
--------
TOTAL CURRENT LIABILITIES 2,562
SUBORDINATED DEBENTURES 1,450
LONG-TERM DEBT 400
ACCRUED EXPENSES PAYABLE IN COMMON STOCK 575
OTHER LIABILITIES 37
--------
TOTAL LIABILITIES 5,024
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' CAPITAL DEFICIT:
Preferred stock, $.01 par value: shares authorized 5,000; issued
and outstanding 29 shares --
Common stock, $.01 par value: shares authorized 15,000; issued
3,779 shares 38
Additional paid-in capital 20,723
Deficit (22,220)
--------
(1,459)
Less: 6 shares of treasury stock, at cost (29)
--------
TOTAL SHAREHOLDERS' CAPITAL DEFICIT (1,488)
--------
$ 3,536
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 26
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except par values)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
REVENUES $ 298 $ 40
------- -------
COSTS, EXPENSES AND OTHER:
Selling, general and administrative expenses 229 511
Gain on sale of securities (57) (699)
Equity in net loss of affiliates 165 203
Increase in underlying equity of affiliates -- (726)
Distribution from affiliates (cost method) (12) (20)
Debt conversion loss -- 165
Interest expense 259 386
Interest income (7) (57)
Royalty income (44) --
------- -------
Total costs, expenses and other, net 533 (237)
------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (235) 277
------- -------
DISCONTINUED OPERATIONS:
Equity portion of investment gain on discontinued
operations -- 23
Income from operations of Interpak -- 95
Gain on disposal of Interpak, net of income taxes of $0
and $65 in 1998 and 1997, respectively 41 2,324
------- -------
41 2,442
------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (194) 2,719
DEBT DISCOUNT WRITTEN-OFF UPON EXTINGUISHMENT OF SUBORDINATED
DEBENTURES -- 106
------- -------
NET INCOME (LOSS) $ (194) $ 2,613
======= =======
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED:
Continuing operations $ (.09) $ .06
Discontinued operations .01 .92
Extraordinary item
-- (.04)
------- -------
$ (.08) $ .94
======= =======
Weighted average shares outstanding - basic and diluted 3,744 2,663
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 27
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
Net income (loss) $ (194) $ 2,613
Other comprehensive loss:
Unrealized loss on available-for-sale securities -- (315)
------- -------
Comprehensive income (loss) $ (194) $ 2,298
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 28
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' CAPITAL DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Preferred stock Common stock
Shares Amount Shares Amount
--------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 37,000 $ -- 2,501,305 $ 25
Common stock issued for interest payable
during the year on 14% notes payable -- -- 2,553 --
Shares issued for settlement of debts to
officers and affiliates -- -- 782,280 8
Preferred shares received from officers
in connection with retirement of debt (3,000) -- -- --
Preferred shares converted into common
shares (795) -- 82,813 1
Shares issued in connection with
directors' fees payable -- -- 34,476 --
Shares issued in connection with
investment -- -- 300,000 3
Change in unrealized gain on available
for sale securities -- -- -- --
Net income -- -- -- --
--------- --------------- --------- ---------
Balance at December 31, 1997 33,205 -- 3,703,427 37
Shares issued for settlement of debts to
officers and affiliates -- -- 50,000 1
Preferred shares received from officers
in connection with retirement of debt (3,500) -- -- --
Preferred shares converted into common
shares (250) -- 26,042 --
Net loss -- -- -- --
--------- --------------- --------- ---------
Balance at December 31, 1998 29,455 $ -- 3,779,469 $ 38
========= =============== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 29
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' CAPITAL DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In thousands, except number of shares)
(continued)
<TABLE>
<CAPTION>
Treasury stock
------------------------
Additional
capital Other
paid-in Comprehensive
capital Income Deficit Shares Amount
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 19,852 $ 315 $(24,639) 6,362 $ (29)
Common stock issued for interest
payable during the year on 14% notes
payable 1 -- -- -- --
Shares issued in settlement of debts to
officers and affiliates 824 -- -- -- --
Preferred shares received from officers
in connection with retirement of debt (150) -- -- -- --
Preferred shares converted into common
shares -- -- -- -- --
Shares issued in connection with
directors' fees payable 24 -- -- -- --
Shares issued in connection with
investments 297 -- -- -- --
Change in unrealized gain on available
for sale securities -- (315) -- -- --
Net income -- -- 2,613 -- --
-------- -------- -------- -------- --------
Balance at December 31, 1997 20,848 -- (22,026) 6,362 (29)
Shares issued in settlement of debts to
officers and affiliates 50 -- -- -- --
Preferred shares received from officers
in connection with retirement of debt (175) -- -- -- --
Preferred shares converted into common
shares -- -- -- -- --
-- -- (194) -- --
Net loss -------- -------- -------- -------- --------
Balance at December 31, 1998 $ 20,723 $ -- $(22,220) 6,362 $ (29)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 30
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (194) $ 2,613
------- -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary loss on extinguishment of debt -- 106
Gain on disposition of discontinued operations (41) (2,324)
Gain from discontinued operations -- (95)
Share of losses of affiliates 165 180
Gain on sale of securities (57) (699)
Increase in underlying equity of affiliates -- (726)
Other amortization 14 31
Interest costs paid through issuance of common stock -- 113
Directors' fee paid through issuance of common stock -- 10
Debt conversion loss -- 165
Other -- 111
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable -- 21
Other (26) (18)
Increase (decrease) in:
Accounts payable and accrued expenses 105 (67)
Other 40 17
------- -------
Total adjustments 200 (3,175)
------- -------
Net cash provided by (used in) operating activities 6 (562)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on sale of securities -- 415
Proceeds from sale of discontinued operations -- 1,950
Notes receivable and advances from affiliates (1,496) (960)
Advances from affiliates 63 --
Advances to related party (50) --
------- -------
Net cash provided by (used in) investing activities (1,483) 1,405
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from affiliates -- (282)
Borrowings from related parties 575 --
Payments to related parties (205) --
Proceeds from long-term debt 500 --
------- -------
Net cash provided by (used in) financing activities 870 (282)
------- -------
NET INCREASE (DECREASE) IN CASH (607) 561
CASH and cash equivalents, beginning of year 622 61
------- -------
CASH and cash equivalents, end of year $ 15 $ 622
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 31
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
(a) Business and Basis of Presentation
Helm Capital Group, Inc. (the "Company") provides financial services
and initiates, develops, acquires and oversees the management of various
business enterprises. Through a wholly owned subsidiary, Mezzanine Financial
Corp., ("Mezzanine Corp.") the Company is engaged in the business of making
collateralized loans to small businesses. Over the last two years, the Company
owned a controlling or large stock interest in the following operating entities:
(i) Interpak Terminals, Inc. ("Interpak"), a wholly-owned subsidiary
located primarily in Houston, Texas, provides packaging, warehousing,
distribution and bulk transfer services for plastic resin producers and
distributors. On July 31, 1997, Interpak sold its operating units, located in
Houston, Texas and Edison, New Jersey, to Katoen Natie, USA, Inc., a subsidiary
of Katoen Natie N.V., a privately-held Belgium corporation (see Note 14).
Interpak's operating units results of operations have been classified as
discontinued operations in the accompanying consolidated financial statements.
(ii) InterSystems, Inc., a Delaware Corporation ("ISI"), currently a
15% owned affiliate, which specializes in the custom-compounding of
thermoplastic resins for the petrochemical and automobile industries, through
ISI's wholly-owned subsidiary with operations in Houston, Texas and
Jeffersonville, Indiana, respectively. Through ISI's wholly-owned subsidiary in
Omaha, Nebraska, ISI is also engaged in the design, manufacture, sale and
leasing of equipment for sampling, conveying, elevating, weighing and cleaning a
wide variety of products for agriculture and other industries.
(iii) Core Capital, Inc. and its subsidiaries (collectively "Core"),
currently a 19.4% owned subsidiary, is engaged in providing capital and services
related thereto through the purchasing of accounts receivable and providing
revolving lines of credit to enterprises primarily in the health care industry.
F-9
<PAGE> 32
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (continued)
All significant intercompany balances and transactions have been
eliminated in consolidation, where appropriate.
(b) Revenue Recognition
Revenues are recorded when earned.
(c) Management's Estimates and Assumptions
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 reported
periods. The Company reviews all significant estimates affecting the financial
statements on a recurring basis and records the effect of any adjustments when
necessary.
(d) Long-Lived Assets
Long-lived assets, such as goodwill, are evaluated for impairment when
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated and undiscounted future cash
flows from the use of these assets. When any such impairment exists, the related
assets will be written down to fair value. No impairment losses have been
necessary through December 31, 1998.
(e) Stock-Based Compensation
The Company accounts for its stock option awards to employees under the
intrinsic value based method of accounting, prescribed by Accounting Principals
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. The Company makes pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied as required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
F-10
<PAGE> 33
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (continued)
(f) Earnings (Loss) Per Common Shares
Basic earnings (loss) per common share, includes no dilution and is
computed by dividing the net income (loss) available to common shareholders by
the weighted average number of common shares outstanding. Diluted earnings
(loss) per common share reflect, in periods in which they have a dilutive
effect, the effects of common shares issuable upon exercise of stock options and
convertible debt.
For the year ended December 31, 1998 and 1997, potential dilutive
securities had an anti-dilutive effect and accordingly were not included in the
calculation of diluted earnings (loss) per common share.
For the years ended December 31, 1998 and 1997, certain securities were
not included in the calculation of diluted earnings because of their
anti-dilutive effect, those securities are as follows (in thousands).
<TABLE>
<CAPTION>
1998 1997
----- -----
(shares) (shares)
<S> <C> <C>
Stock options 612 243
Stock warrants 299 349
Shares issuable on conversion of preferred
shares 1,585 1,622
Shares issuable on conversion of subordinated
debentures 1,333 698
----- -----
3,829 2,912
===== =====
</TABLE>
(g) Income Taxes
The Company follows Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes", which requires, among other things, a
liability approach to calculating deferred income taxes.
(h) Other Comprehensive Income
Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are excluded from net
income as these amounts are recorded directly as an adjustment to stockholders
equity. The Company's other comprehensive income is comprised of unrealized gain
on available for sale securities.
F-11
<PAGE> 34
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (continued)
(i) Investments
The Company generally accounts for all investments in which it owns 20%
or more of the investees' outstanding common stock and for investments over
which it has significant influence on the equity method. Other investments are
generally carried on the cost method. In accordance with Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 115"), the Company has classified marketable
equity securities as available-for-sale securities as recorded at fair value
with the resulting gain (or loss) credited (or charged) as a separate component
of equity.
(j) Changes in Underlying Equity of Affiliates
Where appropriate, the Company records changes in its underlying equity
of affiliates in its statement of operations, in compliance with SEC Staff
Accounting Bulletin No. 51.
(k) Goodwill
Goodwill, which represents the excess of the cost over the underlying
carrying value of the equity in the investment, is included in investments in
affiliates and is amortized over 20 years on a straight-line basis.
(l) Estimated Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Disclosure about Fair Value of Financial Instruments" requires disclosures of
fair value information about financial instruments for which it is practicable
to estimate the value, whether or not recognized on the balance sheet. The fair
value of financial instruments, including cash, amounts due from affiliates,
accounts payable and accrued expenses, approximate their carrying value because
of the current nature of these instruments. The carrying amounts of long-term
debt and subordinated debentures approximate their fair value because the
interest rates approximate current market rates for financial instruments with
similar maturities and terms.
(m) Cash and cash equivalents
The Company considers all highly liquid investments and other
short-term investments with an initial maturity of three months or less from
purchase date to be cash equivalents.
F-12
<PAGE> 35
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2: EARNINGS (LOSS) PER SHARE
The following illustrates the components' of income (loss) from
continuing operations utilized in the computation of earnings (loss) per share
(in thousands):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Income (loss) from continuing operations $(235) $ 277
Nonconvertible preferred stock dividends (117) (120)
----- -----
Numerator for basic and diluted income (loss) from
continuing operations $(352) $ 157
===== =====
</TABLE>
NOTE 3: INVESTMENTS IN AND NOTES RECEIVABLE
AND ADVANCES DUE FROM AFFILIATES
Investments in and advances to affiliates consist of the following at
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Notes Advances
Name Ownership % Investment Receivable Due
---- ----------- ---------- ---------- ---
<S> <C> <C> <C> <C>
ISI 15.0 $ 591 $ -- $ --
Mezzanine 6.0 204 600 446
Core 19.0 2 778 632
Teletrak 18.0 -- -- --
------ ------ ------
$ 797 $1,378 $1,078
====== ====== ======
</TABLE>
In December 1997, the Company entered into a participation in
Mezzanine's position in a note from a third party. The note was due November 30,
1998 and bears interest at 12% per annum plus an enhancement fee of 9% to 10%,
as defined, and is collateralized by the assets of the third party. The liens on
the third-party's assets are filed in the name of Mezzanine, which the Company,
through the participation agreement, shares in the liens and rights to the
assets of the third party. As compensation for administering the note, Mezzanine
receives 30% of the enhancement fee. On November 30, 1998, the Company agreed to
extend the due date on the note to November 30, 1999. At December 31, 1998, the
balance due is $600,000 including accrued interest of $14,500. The Company's
participation expires on December 31, 1999.
In 1998, the Company entered into a participation agreement in
Mezzanine's loan to a wholly owned subsidiary of Core. The amount receivable
under this participation totaled approximately $778,000 at December 31, 1998.
This participation agreement carries a rate of return of 15% per annum and
terminates on December 31, 1999.
Advances due represent monies advanced for general corporate and other
purposes and are due on demand and bear no interest.
F-13
<PAGE> 36
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3: INVESTMENTS IN AND NOTES RECEIVABLE
AND ADVANCES DUE FROM AFFILIATES
Equity in earnings (loss) for the equity method investments and
distributions from the cost method investments are as follows (in thousands) for
the years ended December 31):
<TABLE>
<CAPTION>
Name 1998 1997
---- ---- ----
<S> <C> <C>
ISI $ 73 $ 89
Core (238) (292)
----- -----
(165) (203)
Mezzanine 12 20
Teletrak -- --
----- -----
$(153) $(183)
===== =====
</TABLE>
INTERSYSTEMS, INC., ("ISI")
The Company accounts for its investment in ISI on the equity method as
ISI is controlled by affiliates of the Company The quoted market value of ISI's
common stock was approximately $1.00 as of December 31, 1998. Accordingly, the
value of the Company's investment in ISI was $1,182,364 at December 31, 1998.
In 1998, the Company exchanged 22,222 shares of ISI as partial payment
to satisfy the Company's obligation on a 9-1/2% convertible subordinated
debenture (see Note 5).
Additionally in 1998, the Company sold 16,000 shares of ISI to certain
officers of the Company. In lieu of cash, the Company exchanged 8% convertible
subordinated debentures held by the officers (see Note 4(a)).
In November 1998, the Company granted to ISI a five year option to
purchase all of the Company's 1,353,000 shares of common stock in Teletrak for
$.50 per share. The purpose of this grant was to induce ISI to participate to
the extent of $122,500 in a private placement of Teletrak units consisting of
one share of common stock and one-half common stock purchase warrant for $.50
per unit. The Company reserved the right to dispose of the shares at any time
subject to prior notice to ISI.
In 1997, the Company exchanged 84,659 and 70,060 shares, respectively,
of ISI in satisfaction of certain deferred compensation for certain officers of
the Company and to related third parties (see Note 4(a)).
In 1996, ISI adopted a plan to discontinue a portion of its business
and accordingly recorded a loss from discontinued operations. In 1997, the
Company's allocable share totaled $23,000 of income and was classified as
discontinued operations in the accompanying consolidated financial statements.
F-14
<PAGE> 37
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In 1996, ISI completed a private placement of 1,560,000 shares of
common stock and 780,000 warrants (the "Units"). Holders of the Units have the
right at the end of a two-year period, as defined, to have the common stock
contained in the Units redeemed by ISI unless during such period the closing ISI
stock price is at least $1.80 per share for any thirty consecutive trading days.
In 1997, ISI registered the shares and the stock traded at $1.80 for
the thirty consecutive trading days, as defined in the agreement. Accordingly,
the redemption features of the security was terminated and the redemption value
of $2,077,000 of ISI's stock was reclassified to ISI's shareholders equity. In
1997, ISI also issued shares of its common stock upon the conversion of
$1,680,000 of debentures.
The Company's percentage ownership share in these increases in ISI's
shareholders' equity for 1997 has been reflected as income, in compliance with
SEC Staff Accounting Bulletin No. 51.
Significant accounting policies for ISI are as follows:
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost. The
Company provides for depreciation and amortization on certain equipment by
utilizing the units of production method based upon the number of hours the
compounding equipment and leasehold improvements is provided using the
straight-line method over the estimated useful lives of the assets or the lease
period, whichever is less. For income tax purposes, depreciation on certain
assets is calculated using accelerated methods.
Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be
fully recoverable.
Revenue Recognition
Sales are recorded in the periods that products are shipped or as
services are performed.
F-15
<PAGE> 38
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Lease Accounting
ISI leases grain sampling systems to certain of its customers. The
leases generally provide for revenues based on samples taken on a monthly basis
with a minimum number on an annual basis. Revenue is recorded monthly based on
the number of samples and any differences between the number billed and the
minimum annual amount is recorded on the annual anniversary date of the lease.
Equipment leased to others is recorded at cost and is being depreciated
on a straight-line basis over eight years.
Summarized Financial Data
Summarized financial data for ISI as of December 31, 1998 and for the
years ended December 31, 1998 and 1997 is as follows (in thousands).
<TABLE>
<CAPTION>
1998
-------
<S> <C> <C>
Balance sheet data:
Current assets $ 6,312
Other assets 23,741
-------
Total assets 30,053
Current liabilities 7,724
Long-term liabilities 18,448
-------
Shareholders' equity $ 3,881
=======
1998 1997
------- -------
Income statement data:
Revenues $33,322 $27,008
Expenses 32,879 26,589
------- -------
Net income from continuing operations 443 419
Income from discontinued operations -- 150
------- -------
Net income $ 443 $ 569
======= =======
</TABLE>
CORE CAPITAL, INC. ("CORE")
Core, through its wholly-owned subsidiary, is in the business of
financing commercial receivables. Core is controlled by affiliates of the
Company and has been accounted for on the equity method.
F-16
<PAGE> 39
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In December 1997, the Company increased its ownership interest in Core
from 14% to 19% by issuing 300,000 shares of its common stock valued at $1.00
per share. The purchase price of the Core shares can be reduced by $.10 per
share or a pro rata amount thereof, for every $200,000 in losses on receivables
of Core booked as of January 1, 1997, which losses are incurred through December
31, 2000, but in no event shall the price be reduced below $1.25 per share.
Through December 31, 1998, Core had not incurred additional losses on the
aforementioned receivables but had established reserves on these receivables
totaling approximately $490,000.
The Company has recorded approximately $281,000 as goodwill for the
cost over the estimated fair value. This value was determined based on the book
value of Core at the time of the exchange. Amortization expense totaled
approximately $14,000 for the year ended December 31, 1998. Amortization expense
was not material for the year ended December 31, 1997.
Significant accounting policies for Core are as follows:
Furniture and equipment:
Furniture and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets, including assets held under capital leases.
Revenue recognition, client reserves and allowance for credit loss:
Core purchases accounts receivable form customers based on amounts it
deems collectible based on deductibles, coinsurance percentages, credit
histories, verification of claims and various fees that Core will be charging
the customer. The difference between the face amount of receivables purchased
and the payments for those receivables is accounted for as a client reserve.
Receivables are generally collectible within 30 to 90 days. Under the
factoring agreements, Core typically makes initial advances from 50 to 80
percent of the face amount of the gross receivables purchases and charges a fee
at the time of purchase ("purchase discount fee") as well as a fee for
receivables not collected within a prescribed period of time ("collection fee").
Core recognizes the purchase discount fee as revenue upon purchase of the
receivable since collection is expected within 30-90 days and all the services
related to transfer of title and investigation of credit-worthiness have been
performed. The collection fee is recognized monthly as earned. Fees charged vary
among clients and are based upon a credit evaluation and expected profit
contribution to Core from each customer. Should receivables be denied by the
payee or payment delayed for any reason, Core requires that the customer provide
additional collateral, generally in the form of additional receivables.
F-17
<PAGE> 40
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The allowance for estimated credit losses represents Core's recognition
of the assumed risk of financing receivables and quality of the receivables. The
allowance is maintained at a level Core believes to be adequate to provide for
potential losses based on an assessment of various factors affecting accounts
receivable collectibility, including loss experience, review of problem accounts
and business conditions. Because of the inherent uncertainties in estimating
credit losses, it is at least reasonably possible that these estimates may
change within the near term.
SUMMARIZED FINANCIAL DATA
Summarized financial data for Core as of December 31, 1998 and for the
years ended December 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Balance sheet data:
Current assets $ 3,793
Other assets 1,180
-------
Total assets 4,973
Current liabilities 2,328
Long-term liabilities 4,008
-------
Shareholders' equity $(1,363)
=======
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income statement data:
Revenues $1,429 $1,742
Expenses 3,351 2,642
Net loss 1,922 1,053
</TABLE>
MEZZANINE FINANCIAL FUND, L.P. ("MEZZANINE")
Mezzanine, a limited partnership, is engaged in a variety of
investments and loans. Certain officers of the Company are the principal
shareholders of the general partner that provides management services to
Mezzanine. The Company accounts for this investment on the cost method, the
carrying value of which approximately market.
Pursuant to the terms of the limited partnership agreement under which
the Fund was organized, the Fund was scheduled to terminate on December 31,
1998. Fund management has obtained limited partner approval of a one year
extension of the term of the Fund in order to pursue an orderly liquidation of
the outstanding loans to enable the Fund to return the original limited
partnership investments to the limited partners.
F-18
<PAGE> 41
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
TELETRAK ENVIRONMENTAL SYSTEMS, INC. ("TELETRAK")
In November 1998, the Company's majority owned subsidiary, Teletrak
Advanced Technology Systems, Inc., merged with Advanced Environmental Systems,
Inc. ("AES"). Under the transaction, AES became a wholly owned subsidiary of
Teletrak, and the AES stockholders received shares of Teletrak common stock in
exchange for their AES stock. Immediately prior to the transaction, Teletrak
effected a 10 for 1 reverse stock split and recapitalization, and changed its
name to Teletrak Environmental Systems, Inc.
AES, a privately held company, specializes in the manufacture,
distribution and licensing of industrial "mucking pumps" and related equipment.
The design of these pumps, based upon jet pumps technology, makes its equipment
an effective portable tool for the removal of granular wet or dry materials
(including sludge, scale and slurries) - particularly for environmental cleanup
of hazardous matter such as asbestos and lead.
Teletrak had been an inactive public company since 1993 as management
sought an appropriate merger partner. It had no employees or facilities. After
the merger the Company became a minority stockholder with approximately
1,353,000 shares, or 18%, of the outstanding common stock and retained two seats
on Teletrak's seven member board of directors. The Company wrote off its
investment in Teletrak prior to 1996 (see Note 15).
UNAPIX ENTERTAINMENT, INC. ("UNAPIX")
Unapix is engaged in the worldwide distribution of feature films,
documentaries, live action children series and other special interest
programming.
The shares of Unapix common stock held by the Company were classified
as Available for Sale Securities and, accordingly, any unrealized gain (loss)
from this investment has been credited (debited) to a component of equity.
During 1997, the Company, in the normal course of business, sold its
remaining shares of Unapix held for investment (see Note 4(a)).
F-19
<PAGE> 42
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4: RELATED PARTY TRANSACTIONS
(a) Sale and Exchange of Securities
During 1998, the Company exchanged $30,000 of 8% convertible
subordinated debentures (see Note 5), held by three officers of the Company for
16,000 shares of ISI. The excess of the proceeds over the fair value of the
shares resulted in a gain of approximately $20,000.
During 1997, the Company reduced its 8% convertible subordinated
debentures, held by three officers of the Company by $375,000 by offsetting
$125,000 of certain promissory note receivables and the issuance of 285,713
shares of common stock of the Company. The issuance of additional shares of
common stock over the stated conversion amounts resulted in a loss of $165,000.
The Company also issued 268,213 shares for the payment of approximately $258,000
of accrued interest due on the 8% convertible subordinated debentures.
Additionally, during 1997, the Company also exchanged a one-third
interest in Mezzanine (value of $100,000) for the surrender of $100,000 of 14%
notes payable to the shareholder.
Also in 1997, the Company exchanged 49,659 shares of ISI for certain
deferred compensation and 10% promissory notes with a value of approximately
$184,000 from certain officers of the Company. The Company also exchanged
169,565 of the Company's shares, valued at $117,000 and 70,060 shares of ISI,
valued at $100,000, with ISI for amounts due to ISI. These transaction were
approved by the Board of Directors and the Company realized a gain from these
transactions of $284,000 which has been included in gain on sale of securities.
In 1997, the Company exchanged 58,789 shares of the Company's common
stock, valued at $55,000 and 35,000 shares of ISI, valued at $77,000 with
Mezzanine for amounts due to Mezzanine.
Additionally, in 1997, the Company had nonrelated party transactions in
which it sold 88,700 shares of Unapix, resulting in total gains of $415,000.
F-20
<PAGE> 43
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(b) Borrowings
In July 1998, a wholly-owned subsidiary of Core ("the subsidiary")
defaulted on a loan a bank. The loan was guaranteed in part by the Company, and
two of its officers. The bank demanded payment pursuant to the loan's
guarantees. In order to permit the Company to make payment pursuant to its
guaranty, two officers of the Company advanced a total of $225,000 to the
Company, $180,000 of which was repaid by the subsidiary in September. As of
December 31, 1998, the Company was indebted to two officers of the Company for
these advances in the amounts of $30,000 and $15,000, respectively, pursuant to
promissory notes payable on demand and bearing interest at 10% per annum. The
subsidiary has agreed to pay the Company all amounts paid, both principal and
interest, pursuant to these notes.
In addition, the Company borrowed $500,000 from a bank to complete the
payment pursuant to its guaranty. (see Note 6).
In relation to the repayment of the subsidiary loan, an officer of the
Company paid $100,000 to the bank pursuant to his guaranty on behalf of the
subsidiary. In exchange for its agreement to repay the officer of the Company
all amounts paid by him pursuant to his guaranty, the subsidiary increased its
loan from Mezzanine by $100,000 and directed Mezzanine to transfer to the
officer of the Company a $100,000 10% Convertible Subordinated Note due June 30,
2002 of Unapix Entertainment, Inc. held by Mezzanine in full satisfaction of all
amounts owing to him.
In November 1998, another officer of the Company loaned $100,000 to the
Company which in turn was lent to Core, in exchange for participation on a loan
made by Core to the subsidiary. The participation bears a rate of return of 18%.
Prior to December 31, 1998, the Company repaid $25,000 to the officer of the
Company in six equal installments and the other officer of the Company advanced
an additional $25,000 to the Company which was immediately used to repay in part
the amount owning to the other officer of the Company. At December 31, 1998, the
Company is indebted to the two officers of the Company in the amounts of $50,000
and $25,000, respectively pursuant to one year convertible promissory notes
bearing interest at 10% per annum. The notes are convertible into common stock
of the Company at a price based upon the average market price of the common
stock during the 30 days preceding the maturity date. The notes may be extended
for an additional year at the option of the holder.
In April 1998, a company, owned jointly by several officers of the
Company, loaned $250,000 to the Company. The loan is payable on demand and bears
interest at 12% per annum, payable monthly. For 1998, interest expense amounted
to approximately $21,000.
F-21
<PAGE> 44
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(c) Other
Management and administrative salaries of the Company are allocated to
affiliates based upon estimated time devoted to the respective operations. All
other allocation of general corporate expense are recorded on a specific
identification method. In 1998 and 1997, approximately $526,000 and $510,000,
respectively, were allocated to affiliates and deducted from the Company's
expenses.
NOTE 5: SUBORDINATED DEBENTURES AND CONVERTIBLE NOTES
Subordinated debentures and convertible notes of the Company consist of
the following at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
12% subordinated debentures, due 1999 $ 75
9-1/2% senior convertible notes, due 2001 1,450
8% convertible subordinated debentures due 1999 1,145
------
Total 2,670
Less current portion 1,220
------
Total long-term debentures $1,450
======
</TABLE>
12% Subordinated Debentures, due 1999
These bonds mature on August 31, 1999. Interest is payable in cash
semi-annually.
On October 30, 1997, the Company commenced an exchange offer of its 12%
subordinated debentures with a principal balance of $1,625,000 for 9-1/2% senior
convertible notes of Mezzanine Financial Corp., a wholly-owned subsidiary of the
Company, due December 31, 2001. Through December 31, 1998, the Company had
exchanged $1,550,000 of the 12% subordinated debentures for an equal amount of
9-1/2% senior convertible notes and $100,000 of the notes were converted.
In connection with the exchange, the Company wrote off, in the fourth
quarter of 1997, approximately $106,000 of original issuance discount related to
the 12% subordinated debentures, which has been classified as an extraordinary
item in the accompanying consolidated financial statements.
F-22
<PAGE> 45
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9-1/2% Senior Convertible Notes
Mezzanine Financial Corp., the Company's wholly owned subsidiary,
recently formed to engage in the business of providing capital in high yield
debt situations of mid-market companies and to provide asset-based lending
directly to or in participation with other commercial lenders.
The 9-1/2% senior convertible notes, which are guaranteed by the
Company, consist of two separate notes ("Note A", "Note B", and collectively the
"Notes") of equal value and are due December 31, 2001. Note A is convertible, at
the option of the holder, into common stock of the Company ("Helm Shares") (at a
conversion price of $1.25 per share). Note B is convertible, at the option of
the holder, into common stock of ISI, held by the Company, at a conversion price
of $2.75 per share.
ISI will not be obligated, directly or indirectly, to provide principal
or interest payments with respect to the Notes. Interest on the Notes will be
paid semi-annually on June 30 and December 31, of each year commencing December
31, 1997. Although Mezzanine Financial Corp. and the Company are the only
obligors with respect to the payment of principal and interest with respect to
the Notes, Mezzanine Financial Corp., Helm and ISI jointly agree to provide the
registration rights with respect to the Helm Shares or ISI Shares.
During 1998, Mezzanine Financial Corp. converted $100,000 of the 9-1/2%
senior convertible notes for 50,000 Helm shares and 22,222 shares of ISI. The
Company's Board of Directors authorized a one time adjustment to the conversion
prices to $1.00 per share for Note A and $2.25 per share for Note B to induce
the exchange. Mezzanine Financial Corp. recognized a gain on this exchange of
$37,000.
8% Convertible Subordinated Debentures, due 1999
The 8% subordinated convertible debentures are held by certain officers
of the Company. The debentures bear interest at 8% per annum, payable on a
quarterly basis, and are convertible, at the option of the holder, into common
stock of the Company at a conversion price of $6.60 per share and will mature on
December 1, 1999. The debentures were purchased by the officers with their
individual promissory notes in the face amount of the debentures, each bearing
interest at 9% per annum. At December 31, 1998, accrued interest totaled
$92,000.
In 1998, the remaining $175,0000 of promissory notes receivable was
paid in securities of the Company (see Note 9).
F-23
<PAGE> 46
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6: LONG-TERM DEBT
In 1998, the Company borrowed $500,000 from a bank to complete payment
pursuant to its guaranty of a loan from a second bank to a wholly-owned
subsidiary of Core (see Note 4(a)). Core, through its subsidiary, defaulted on
the loan. The Core loan was guaranteed in part by the Company and one of its
officers. The bank demanded payment pursuant to the guarantees. The loan is
payable $100,000 and $400,000 on September, 1999 and 2000, respectively, and
interest at prime rate (7.75% at December 31, 1998) is payable monthly. The loan
is guaranteed by two officers of the Company and secured by 600,000 shares of
ISI.
NOTE 7: LIABILITIES
Accrued expenses consist of the following at December 31, 1998 (in
thousands):
<TABLE>
<S> <C>
Accrued interest $ 97
Payroll related expenses 231
Other 481
----
$809
===
</TABLE>
NOTE 8: INCOME TAXES
The Company and its eligible subsidiaries file a consolidated Federal
income tax return. Other subsidiaries and affiliates file separate income tax
returns.
The Company has approximately $22,403,000 of net operating loss
carryovers for Federal income tax purposes, of which $5,500,000, $3,400,000 and
$186,000 expire in 1999, 2000 and 2001, respectively, the remainder of which
expire through 2018.
Net deferred income taxes as of December 31, 1998 consisted of the
following (in thousands):
<TABLE>
<S> <C>
Tax benefit of net operating loss carryovers $ 7,841
Tax basis in excess of book basis of investments in
unconsolidated subsidiaries 1,402
Other 1
-------
Deferred tax asset 9,244
Valuation allowance (9,244)
-------
Net deferred tax asset $ --
=======
</TABLE>
At December 31, 1998, the Company provided a 100% valuation allowance
for the deferred tax asset because it could not determine whether it was more
likely than not that the deferred tax asset would be realized.
F-24
<PAGE> 47
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9: PREFERRED STOCK
The Company has authorized the issuance of 5,000,000 shares of $.01 par
preferred stock, which have been issued in three types of series which, as of
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Series A preferred stock 14,750
Series A 8% cumulative convertible preferred stock 12,705
Series B 8% cumulative convertible preferred stock 2,000
------
29,455
======
</TABLE>
The Series A preferred stock has a stated value of $50.00 per share and
each share is convertible into 3.3 shares of common stock at the greater of
$15.00 or 6-2/3% of the then common stock market price.
During 1998, the Company redeemed 3,500 shares of Series A preferred
stock from an officer of the Company in satisfaction of a $175,000 promissory
note held by the Company.
The Series A 8% cumulative convertible preferred stock with a stated
value of $100.00 per share was issued in connection with a debenture refinancing
in 1993. The shares are convertible into common shares at an exercise price of
$0.96 for each $1.00 of stated value.
During 1998, 250 shares of Series A 8% convertible preferred stock were
converted to common stock.
The Series B 8% cumulative convertible preferred stock with a stated
value of $100.00 per share was also issued in connection with the debenture
refinancing. The shares are convertible into common shares at an exercise price
of $0.94 for each $1.00 of stated value.
Series A and B 8% cumulative preferred stock provide the holders with
voting rights in proportion with the respective shares of common stock that may
be converted. The aggregate amount of unpaid dividends in arrears on the Series
A and Series B preferred stock was $616,000 at December 31, 1998.
F-25
<PAGE> 48
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10:STOCK OPTIONS AND WARRANTS
The Company applies APB No. 25 and related interpretations in
accounting for its employee stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
The 1982 Incentive Stock Option Plan (the "Plan"), as amended, provides
for the issuance of options to purchase up to 116,667 shares of common stock.
Options are granted at market value on the date of the grant. In 1998 and 1997,
no options were granted under this plan. The plan has been terminated and no
further options can be granted thereunder.
No options were exercised during 1998 and 1997. During 1998 and 1997,
66,667 and 25,369 options expired, respectively.
A summary of the Company's stock options and the related transactions
for the years ended December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- --------------------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------------------------ ------------ ----------------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 473,668 $2.27 99,037 $8.89
Granted 30,000 .81 400,000 1.11
Exercised - - - -
Forfeited (66,667) 9.375 (25,369) 7.50
------------------------ ------------ ----------------------- --------------
Outstanding at end of year 437,001 $1.00 473,668 $2.27
------------------------ ------------ ----------------------- --------------
Options exercisable at year-end 407,001 $1.13 443,668 $2.40
Weighted average fair value of
options granted during the year $0.39 $ .51
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------------
Weighted
average Weighted Weighted
Range of exercise Number remaining average Number average
prices outstanding contractual life exercise price exercisable exercise price
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.81 to $1.13 430,000 3.8 $ .95 400,000 $1.10
$3.75 to $4.69 7,001 2.1 4.02 7,001 4.02
----------------- ----------------- ----------------- ----------------- -----------------
437,001 $1.00 407,001 1.13
</TABLE>
In 1998, the Company granted to its outside directors, in consideration
of services provided, 30,000 options at an exercise price of $0.8125, which vest
over a three-year period and expire in July 2003. At December 31, 1998, 15,000
options were exercisable. The fair value of the options granted was minimal. No
options were exercised as of December 31, 1998.
F-26
<PAGE> 49
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In 1997, the Company granted 225,000 options to two executives and
115,000 to other employees of the Company with an exercise price of $1.125, fair
market value at the date of grant. The options vested immediately and expire in
October 2002. Also, in 1997, the Company granted to its outside directors, in
consideration of services provided, 60,000 options at an exercise price of
$1.00, which vest over a three-year period and expire in October 2002. At
December 31, 1998, 45,000 options were exercisable. The fair value of the
options granted was minimal.
In 1996, the Company issued 86,098 warrants at an exercise price of
$1.25 expiring on December 15, 2006, in exchange for the cancellation of certain
8% debentures.
The Company also has 112,945 warrants at an exercise price of $0.96 and
100,000 warrants at an exercise price of $0.90, expiring on January 31, 2002
which were issued prior to 1997.
SFAS No. 123 requires the Company to provide pro forma information
regarding net earnings (loss) and earnings (loss) per share as if compensation
cost for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option at the grant date by using the Black-Sholes
option-pricing model with the following weighted average assumptions used for
the 1998 and 1997 grants; no dividend yield, expected violatility of 46%, risk
free interest rate of $5.3%, expected life of five years.
The proforma effect of applying the provisions of SFAS No. 123 would be
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Net income (loss)
As reported $(194) $2,613
Proforma $ - $2,440
Net income (loss) per common share
- basic and diluted
As reported $(.08) $.94
Proforma $(.08) $.87
</TABLE>
F-27
<PAGE> 50
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 11: SHARES RESERVED FOR FUTURE ISSUANCE
Shares reserved for future issuance at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Conversion of preferred stock 1,584,879
Conversion of 10% convertible promissory notes 580,000
Conversion of 9-1/2% senior convertible notes 580,000
Conversion of 8% convertible subordinated debentures 173,485
Warrants to purchase common stock 299,043
Shares reserved for stock options including options granted 437,001
Shares reserved for stock options exchangeable for Core
stock options 175,000
---------
Total shares reserved for future issuance 3,829,408
=========
</TABLE>
In May 1998, the Company's Board of Directors resolved to reserve for
issuance 175,000 shares of Helm common stock to be issued pursuant to a like
number of Helm common stock options exercisable at $1.50 until August 31, 2007.
These Helm options may be issued to various holders of Core options in exchange
for the Core options in the event that Core does not complete a public offering
or is not merged into a public entity on or before December 31, 2002. For making
these standby options available, the Company received 25,000 Core options
exercisable at $2.00 per share. In addition, the Company will receive the Core
options exchanged for Helm options.
NOTE 12: COMMITMENTS AND CONTINGENCIES
(a) Employment Contracts
The Company has agreements with two of its officers which provide for
continuous five-year terms. As part of the agreement, the officers will receive,
in lieu of annual base compensation, 7.5% and 3.75% of EBT, as defined. As of
December 31, 1998, no amounts were due under these contracts. The employment
agreements, along with those for two additional officers of the Company, also
include a provision for lump-sum payments in the event of a change in control of
the Company. Payments to each officer are limited to 2.99 times their average
compensation (as defined) during the prior five-year period. The change in
control payments would approximate $2 million at December 31, 1998. The
agreements also provide for severance and other payments in the event the
officers do not complete the original terms of the agreements or do not stay at
the Company until age 65.
F-28
<PAGE> 51
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 13: LEGAL PROCEEDINGS
The Company has received a claim for indemnification as
guarantor in the amount of approximately $700,0000 arising out of alleged
breaches of representations and warranties made in connection with the sale of
Interpak Terminals, Inc. in July 1997. At the closing of the sale, $250,000 of
the purchase price was placed in escrow to be used to satisfy legitimate
indemnification claims. Management believes that this claim is overstated and is
endeavoring to settle the matter, without the necessity of arbitration, within
the escrow amount. At the present time, it appears that the matter will be
referred to arbitration. Management intends to mount a vigorous defense. No
assurance can be given, however, that management will be successful in this
effort.
NOTE 14: DISCONTINUED OPERATIONS
On July 31, 1997, the Company's subsidiary, Interpak Holdings,
Inc. sold its Interpak Terminal units, located in Houston, Texas and Edison, New
Jersey, to Katoen Natie N.V., a privately-held Belgium corporation, for a cash
purchase price of $2.2 million, of which $250,000 is held in reserve (the
"escrow") until July 31, 2000. The Company has recorded a reserve of
approximately $125,000 in connection with the escrow in anticipation of certain
post-closing adjustments, as defined.
The results of Interpak have been classified as discontinued
operations in the accompanying financial statements, as follows:
<TABLE>
<CAPTION>
Seven months
ended July 31,
1997
--------------
(in thousands)
<S> <C>
Revenues $10,608
-------
Operating expenses 8,330
Selling, general and administrative expense 1,947
Equity in affiliates (58)
Expense related to settlement of lawsuit -
Nonrecurring warehouse organization -
Interest expense, net 294
-------
10,513
-------
Net income $ 95
=======
</TABLE>
F-29
<PAGE> 52
HELM CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Interest paid $162 $240
</TABLE>
Non-cash transactions relating to investing and financing
activities:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Repayment of officer's notes receivable by exchange of
preferred stock $175 $150
Issuance of stock for directors fees - 24
Issuance of stock in exchange for debts to affiliates - 408
Exchange of investment in Mezzanine for reduction in notes
payable - 100
Reduction of notes payable and interest accrued expenses
in exchange for common stock of affiliates 22 199
Exchange of promissory note receivable for reduction of
notes payable - 125
Issuance of stock in exchange for stock of affiliate - 300
Issuance of stock for interest previously accrued - 165
Reduction of notes payable in exchange for common stock of
the Company 50 -
</TABLE>
NOTE 16: SUBSEQUENT EVENT
In February 1999, Teletrak began trading shares of its common
stock on the Over-the-Counter Bulletin Board. The Company owns 1,353,000 shares
of Teletrak, or 18%. Accordingly, the Company records its investment in equity
securities as available-for-sale securities as prescribed by SFAS No. 115. The
securities are recorded at fair value with the resulting gain (or loss) credited
(or charged) as a separate component of equity.
At December 31, 1998, the shares had no trading value and accordingly the
Company has not recorded any investment.
F-30
<PAGE> 1
EXHIBIT 3.11
BY-LAWS
OF
HELM CAPITAL GROUP, INC.
(ORIGINALLY ADOPTED ON DECEMBER 23, 1980;
RESTATED ON MAY 12, 1998)
1. MEETINGS OF STOCKHOLDERS.
1.1 ANNUAL MEETING. The annual meeting of stockholders shall be held on
the third thursday of May in each year, or as soon thereafter as practicable,
and shall be held at a place and time determined by the Board of Directors (the
"Board").
1.2 SPECIAL MEETINGS. Special Meetings of the stockholders may be called
by resolution of the Board or by the president or vice president and shall be
called by the president or secretary upon written request (stating the purpose
or purposes of the meeting) of a majority of the directors then in office. Only
business related to the purposes set forth in this notice of the meeting may be
transacted at a special meeting.
1.3 PLACE AND TIME OF MEETING. Stockholders may be held in or outside
Delaware at the place and time specified by the Board or officers or
stockholders requesting the meeting.
1.4 NOTICE OF MEETINGS; WAIVER OF NOTICE. Written notice of each meeting
of stockholders shall be given to each stockholder entitled to vote at the
meeting, except that (a) it shall not be necessary to give notice to any
stockholder who submits a waiver of notice before or after the meeting, and (b)
no notice of an adjourned meeting need by given except when required under
Section 1.5 of these by-laws or by law. Each notice of a meeting shall be given,
personally or by mail, not less than 10 nor more than 60 days before the meeting
and shall state the time and place of the meeting, and unless it is the annual
meeting, shall state at whose direction or request the meeting is called and the
purposes for which it is called. If mailed, notice shall be considered given
when mailed to a stockholder at his address on the corporation's records. The
attendance of any stockholder at a meeting, without protesting at the beginning
of the
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<PAGE> 2
meeting that the meeting is not lawfully called or convened, shall constitute a
waiver of notice by him.
1.5 QUORUM. At any meeting of stockholders, the presence in person or by
proxy of the holders of a majority of the shares entitled to vote shall
constitute a quorum for the transaction of any business. In the absence of a
quorum, a majority in voting interest of those present or, if no stockholders
are present, any officer entitled to preside at or to act as secretary of the
meeting, may adjourn the meeting until a quorum is present. At any adjourned
meeting at which a quorum is present, any action may be taken if it could have
been taken at the meeting as originally called. No notice of an adjourned
meeting need be given if the time and place are announced at the meeting at
which the adjournment is taken except that if adjournment is for more than 30
days or if after the adjournment, a new record date is fixed for the meeting,
notice of the adjourned meeting shall be given pursuant to Section 1.4.
1.6 VOTING; PROXIES. Each stockholder of record shall be entitled to one
vote for every share registered in his name. Corporate action to be taken by
stockholder vote, other than the election of directors, shall be authorized by a
majority of the votes cast at a meeting of stockholders, except as otherwise
provided by law. Directors shall be elected in the manner provided in Section
2.1 of these by-laws. Voting need not be by ballot unless ordered by the
chairman of the meeting; however, all elections of directors shall be by written
ballot. Each stockholder entitled to vote at any meeting of stockholders may
authorize another person to act for him by proxy. Every proxy must be signed by
the stockholder or his attorney in fact. No proxy shall be valid after three
years from its date unless it otherwise provides.
1.7 LIST OF STOCKHOLDERS. Not less than 10 days prior to the date of any
meeting of stockholders, if there is more than one stockholder, the secretary of
the corporation shall prepare a complete list of stockholders entitled to vote
at the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in his name. For a period of not
less than 10 days prior to the meeting, the list shall be available during
ordinary business hours for inspection by any stockholder for any purpose
germane to the meeting. During this period, the list shall be kept either (a) at
a place within the city where the meeting is to be held, if that place shall
have been specified in the notice of the meeting, or (b) if not so specified, at
the place where the meeting is to be held. The list shall also be available for
inspection by stockholders at the time and place of the meeting.
1.8 ACTION BY CONSENT WITHOUT A MEETING. Any action required or
permitted to be taken at any meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voting. Prompt notice of
24
<PAGE> 3
the taking of any such action shall be given to those stockholders who did not
consent in writing.
1.9 RECORD DATE FOR CONSENT WITHOUT A MEETING. In order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board, and which date shall not be more than ten
(10) days after the date upon which the resolution fixing the record date is
adopted by the Board. Any stockholder of record seeking to have the stockholders
authorize or take corporate action by written consent shall, by written notice
to the secretary, request the Board to fix a record date. The Board shall
promptly, but in all events within ten (10) days after the date on which such a
request is received, adopt a resolution fixing the record date. If no record
date has been fixed by the Board within such ten (10) day period, when no prior
action by the Board is required by applicable law, the record date shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the corporation having custody of the book in which
proceedings of stockholders meetings are recorded, to the attention of the
secretary of the corporation. Delivery shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board and prior action by the Board is required by applicable law, the
record date for determining stockholders entitled to consent to corporate action
without a meeting shall be the close of business on the date on which the Board
adopts the resolution taking such prior action.
1.10 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. Only persons nominated in
accordance with the procedures set forth in this Section 1.10 shall be eligible
for election as directors. Nominations of persons for election to the Board may
be made at a meeting of stockholders by or at the direction of the Board or by
any stockholder of the corporation entitled to vote for the election of
directors who complies with the notice procedures set forth in this Section
1.10. Such nominations, other than those made by or at the direction of the
Board, shall be made pursuant to timely notice in writing to the secretary of
the corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the corporation no
less than 50 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 60 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation's capital stock which are beneficially owned by such person and (iv)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for
25
<PAGE> 4
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
without limitation such persons' written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the stockholder giving the notice (i) the name and address, as they appear on
the corporation's books, of such stockholder and (ii) the class and number of
shares of the corporation's capital stock which are beneficially owned by such
stockholder. At the request of the Board, any person nominated by the Board for
election as director shall furnish to the secretary of the corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the procedures
set forth in this Section 1.10. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the by-laws, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
1.11 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS. At an annual meeting of
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board, (b) otherwise properly
brought before the meeting by or at the direction of the Board, or (c) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have give timely notice thereof in writing to the secretary of the corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the corporation no less than 50 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 60 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the by-laws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section 1.11.
The chairman of the annual meeting shall, if the facts warrant, determine and
declare to the meeting that the proposed business was not properly brought
before the meeting and in accordance with the procedures prescribed by the
bylaws, and if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted.
26
<PAGE> 5
2. BOARD OF DIRECTORS.
2.1 NUMBER, QUALIFICATION, ELECTION AND TERM OF DIRECTORS. The business
of the corporation shall be managed by the Board, which shall consist of not
less than three and not more than nine directors. The number of directors may be
changed by resolution of a majority of the Board, but no decrease may shorten
the term of any incumbent director. Directors shall be elected at each annual
meeting of stockholders by a plurality of the votes cast and shall hold office
until the next annual meeting of stockholders and until the election and
qualification of their respective successors, subject to the provisions of
Section 2.9. As used in these by-laws, the term "entire Board" means the total
number of directors that the corporation would have if there were no vacancies
on the Board.
2.2 QUORUM AND MANNER OF ACTING. A majority of the directors present,
but not less than two, shall constitute a quorum for the transaction of business
at any meeting, except as provided in Section 2.10 of these by-laws. Action of
the Board shall be authorized by the vote of a majority of the directors present
at the time of the vote if there is a quorum, unless otherwise provided by law
or these by-laws, In the absence of a quorum a majority of the directors present
may adjourn any meeting from time to time until a quorum is present.
2.3 PLACE OF MEETINGS. Meetings of the Board may be held in or outside
Delaware.
2.4 ANNUAL AND REGULAR MEETINGS. Annual meetings of the Board, for the
election of officers and consideration of other matters, shall be held either
(a) without notice immediately after the annual meeting of stockholders and at
the same place, or (b) as soon as practicable after the annual meeting of
stockholders, on notice as provided in Section 2.6 of these by-laws. Regular
meetings of the Board may be held without notice at such times and places as the
Board determines. If the day fixed for a regular meeting is a legal holiday, the
meeting shall be held on the next business day.
2.5 SPECIAL MEETINGS. Special meetings of the Board may be called by the
president or by any one of the directors. Only business related to the purposes
set forth in the notice of meeting may be transacted at a special meeting.
2.6 NOTICE OF MEETINGS; WAIVER OF NOTICE. Notice of the time and place
of each special meeting of the Board, and of each annual meeting not held
immediately after the annual meeting of stockholders and at the same place,
shall be given to each director by mailing it to him at his residence or usual
place of business at least three days before the meeting, of by delivering,
telephoning or faxing it to him at least two days before the meeting. Notice of
a special meeting shall also state the purpose or purposes for which the meeting
is called. Notice need not be given to any director who submits a signed waiver
of notice before or after the meeting or who attends the meeting without
protesting at the beginning of the meeting the transaction of any
27
<PAGE> 6
business because the meeting was not lawfully called or convened. Notice of any
adjourned meeting need not be given, other than by announcement at the meeting
at which the adjournment is taken.
2.7 BOARD OR COMMITTEE ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Board or by any committee of the Board may be taken
without a meeting if all of the members of the Board or of the committee consent
in writing to the adoption of a resolution authorizing the action. The
resolution and the written consents by the members of the Board or the committee
shall be filed with the minutes of the proceedings of the Board or of the
committee.
2.8 PARTICIPATION IN BOARD OR COMMITTEE MEETINGS BY CONFERENCE
TELEPHONE. Any or all members of the Board or any committee of the Board may
participate in a meeting of the Board or of the committee by means of a
conference telephone or similar communication equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at the meeting.
2.9 RESIGNATION AND REMOVAL OF DIRECTORS. Any director may resign at any
time by delivering his resignation in writing to the president or secretary of
the corporation, to take effect at the time specified in the resignation; the
acceptance of a resignation, unless required by its terms, shall not be
necessary to make it effective. Any or all of the directors may be removed at
any time only for cause by vote of the stockholders.
2.10 VACANCIES. Any vacancy in the Board, including one created by an
increase in the number of directors, may be filled for the unexpired term by a
majority vote of the remaining directors, though less than a quorum.
2.11 COMPENSATION. Directors shall receive such compensation as the
Board determines, together with reimbursement of their reasonable expenses in
connection with the performance of their duties. A director may also be paid for
serving the corporation, its affiliates or subsidiaries in other capacities.
3. COMMITTEES.
3.1 EXECUTIVE COMMITTEE. The Board, by resolution adopted by a majority
of the entire Board, may designate an Executive Committee of one or more
directors which shall have all the powers and authority of the Board, except as
otherwise provided in the resolution, section 141(c) of the Delaware General
Corporation Law, or any other applicable law. The members of the Executive
Committee shall serve at the pleasure of the Board. All action of the Executive
Committee shall be reported to the Board at its next meeting.
28
<PAGE> 7
3.2 OTHER COMMITTEES. The Board, by resolution adopted by a majority of
the entire Board, may designate other committees of directors of one or more
directors, which shall serve at the Board's pleasure and have such powers and
duties as the Board determines.
3.3 RULES APPLICABLE TO COMMITTEES. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of any member of a committee, the member or members present at
a meeting of the committee and not disqualified, whether or not a quorum, may
unanimously appoint another director to act at the meeting in place of the
absent or disqualified member. All action of a committee shall be reported to
the Board at its next meeting. Each committee shall adopt rules of procedure and
shall meet as provided by those rules or by resolutions of the Board.
4. OFFICERS.
4.1 NUMBER; SECURITY. The executive officers of the corporation shall
be the president, one or more vice presidents (including an executive vice
president, if the Board so determines), a secretary and a treasurer. Any two or
more offices may be held by the same person. The Board may require any officer,
agent or employee to give security for the faithful performance of his duties.
4.2 ELECTION; TERM OF OFFICE. The executive officers of the corporation
shall be elected annually by the Board, and each such officer shall hold office
until the next annual meeting of the Board and until the election of his
successor, subject to the provisions of Section 4.4.
4.3 SUBORDINATE OFFICERS. The Board may appoint subordinate officers
(including assistant secretaries and assistant treasurers), each of whom shall
hold office for such period and have such powers and duties as the Board
determines. The Board may delegate to any executive officer or to any committee
the power to appoint and define the powers and duties of any subordinate
officers, agents or employees.
4. 4 RESIGNATION AND REMOVAL OF OFFICERS. Any officer may resign at any
time by delivering his resignation in writing to the president or secretary, to
take effect at the time specified in the resignation; the acceptance of a
resignation, unless required by its terms, shall not be necessary to make it
effective. Any officer elected or appointed by the Board or appointed by an
executive officer or by a committee may be removed by the Board, either with or
without cause, and in the case of an officer appointed by an executive officer
or by a committee, by the officer or committee which appointed him or by the
president.
29
<PAGE> 8
4.5 VACANCIES. A vacancy in any office may be filled for the unexpired
term in the manner prescribed in Sections 4.2 and 4.3 of these by-laws for
election or appointment to the office.
4.6 THE PRESIDENT. The president shall be the chief executive officer
and shall report to the Board. Subject to the control of the Board, the
president shall have general supervision over the business of the corporation
and shall have such other powers and duties as officers of corporations usually
have or as the Board assigns to them.
4.7 VICE PRESIDENT. Each vice president shall have such powers and
duties as the Board or the president assigns to him.
4.8 THE TREASURER. The treasurer shall report to the chief financial
officer of the corporation and shall be in charge of the corporation's books and
accounts. Subject to the control of the Board, he shall have such other powers
and duties as the Board, the president or chief financial officer assigns to
him.
4.9 THE SECRETARY. The secretary shall be the secretary of, and keep
the minutes of, all meetings of the Board and of the stockholders, shall be
responsible for giving notice of all meetings of stockholders and of the board,
and shall keep the seal and, when authorized by the Board, apply it to any
instrument requiring it. Subject to the control of the Board, he shall have such
powers and duties as the Board, the chairman of the board and the president
assigns to him. In the absence of the secretary from any meeting, the minutes
shall be kept by the person appointed for that purpose by the presiding officer.
4.10 SALARIES. The Board may fix the officers' salaries, if any, or it
may authorize the president to fix the salary of any other officer.
5. SHARES.
5.1 CERTIFICATES. The corporation's shares shall be represented by
certificates in the form approved by the Board. Each certificate shall be signed
by the president or a vice president, and by the secretary or an assistant
secretary or treasurer or an assistant treasurer, and shall be sealed with the
corporation's seal or a facsimile of the seal. Any or all of the signatures on
the certificate may be a facsimile.
5.2 TRANSFERS. Shares shall be transferable only on the corporation's
books, upon the surrender of the certificate for the shares, properly endorsed.
The Board may require satisfactory surety before issuing a new certificate to
replace a certificate claimed to have been lost or destroyed.
5.3 DETERMINATION OF STOCKHOLDERS OF RECORD. The Board may fix in
advance a date as the record date for determination of stockholders entitled to
notice of or to
30
<PAGE> 9
vote at any meeting of the stockholders, or to express consent to or dissent
from any proposal without a meeting, or to receive payment of any dividend or
the allotment of any rights, or for the purpose of any other action. The record
date may not be more than 60 or less than 10 days before the date of the meeting
or more than 60 days before any other action.
6. INDEMNIFICATION.
The corporation shall indemnify each person who is or was an officer or
director of the corporation to the fullest extent permitted by Section 145 of
the General Corporation Law of Delaware as amended from time to time.
7. MISCELLANEOUS.
7.1 SEAL. The Board shall adopt a corporate seal, which shall be in the
form of a circle and shall bear the corporation's name and the year and state in
which it was incorporated.
7.2 FISCAL YEAR. The Board may determine the corporation's fiscal year.
Until changed by the Board, the corporation's fiscal year shall begin January 1
and end December 31.
7.3 VOTING OF SHARES IN OTHER CORPORATIONS. Shares in other corporations
that are held by the corporation may be represented and voted by the president
or a vice president of this corporation or by a proxy or proxies appointed by
one of them. The Board may, however, appoint some other person to vote the
shares.
7.4 AMENDMENTS. By-laws may be amended, repealed or adopted by the
stockholders or by a majority of the entire Board, but any by-law adopted by the
Board may be amended or repealed by the stockholders.
31
<PAGE> 1
EXHIBIT 4.5
THIS SUBORDINATED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE
PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE COMPANY OR OTHER COUNSEL TO THE HOLDER OF SUCH NOTE WHICH OTHER
COUNSEL IS REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH NOTE MAY BE PLEDGED,
SOLD, ASSIGNED, HYPOTHECATED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.
MEZZANINE FINANCIAL CORP.
9-1/2% SENIOR CONVERTIBLE NOTE
DUE DECEMBER 31, 2001
SERIES A
$00,000 No. N-XX-A-R
Date:
MEZZANINE FINANCIAL CORP., a Delaware corporation (the "Company"), for value
received, hereby promises to pay to ___________________________________,
residing at _________________________________________, or registered assigns
(the "Payee" or "Holder") upon due presentation and surrender of this Note, on
December 31, 2001 (the "Maturity Date"), the principal amount of _____ thousand
dollars ($00,000) and accrued interest thereon as hereinafter provided.
This note was issued pursuant to a Confidential Exchange Offer
Memorandum dated October 24, 1997 (the "Memorandum"). The series of Notes issued
in connection with the Memorandum are referred to hereafter as the "Notes".
1. PAYMENT OF PRINCIPAL AND INTEREST; METHOD OF
PAYMENT.
Payment of the principal and accrued interest on this Note shall be
made in such coin or currency of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts.
Interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid portion of said principal amount from time to time outstanding
32
<PAGE> 2
shall be paid by the Company at the rate of nine and one-half percent (9-1/2%)
per annum (the "Stated Interest Rate"), in like coin and currency, said interest
payable to the Payee quarterly on each June 30, and December 31 (commencing
December 31, 1997) (an "Interest Payment Date") and on the Maturity Date. The
first interest payment shall include interest accruing and deemed to accrue on
this note from June 30, 1997. Any installment of interest on this Note not paid
within ten (10) days of the applicable Interest Payment Date shall bear interest
at the rate of 2% in excess of the otherwise then applicable rate borne of this
Note to the extent that payment of such interest on overdue interest is
enforceable under applicable law. Both principal hereof and interest thereon are
payable in lawful money of the United States of America at the Holder's address
above or such other address as the Holder shall designate from time to time by
written notice to the Company. The Company will pay or cause to be paid all sums
becoming due hereon for principal and interest by check sent to the Holder's
above address or to such other address as Holder may designate for such purpose
from time to time by written notice to the Company, without any requirement for
the presentation of this Note or making any notation thereon except that the
Holder hereof agrees that payment of the final amount due shall be made only
upon surrender of this Note to the Company for cancellation. Prior to any sale
or other disposition of this instrument, the Holder hereof agrees to endorse
hereon the amount of principal paid hereon and the last date to which interest
has been paid hereon and to notify the Company of the name and address of the
transferee.
2. CONVERSION.
2.1 EXERCISE OF CONVERSION PRIVILEGE. At any time and from time
to time commencing the date the Note is issued (the "Initial Conversion Date")
until the Maturity Date, this Note is convertible at the Holder's option, in
whole or in part, into shares of common stock $.01 par value, per share of Helm
Resources, Inc., a Delaware corporation ("Helm") (the "Conversion Shares") upon
surrender of this Note, by mail, postage prepaid, at the office of the Company,
accompanied by a written notice of conversion in form satisfactory to the
Company duly executed by the registered holder or its duly authorized attorney.
This Note shall be convertible into the Conversion Shares at a conversion price
of $1.25 per Conversion Share as may from time to time be adjusted pursuant to
the provisions of Section 2.3 hereof (the "Conversion Price"); provided,
however, no fractional shares or scrip representing any fractional shares shall
be issued. The Company shall round-up the portion of the Note surrendered such
that an integral number of Conversion Shares shall be issued upon each
conversion of the Notes. Interest shall accrue to and including the business day
prior to the date of conversion and shall be paid on the last business day of
the month in which the conversion rights hereunder are exercised. No adjustments
in respect of dividends will be made upon any conversion. The Conversion Price
is subject to adjustments as provided in Section 2.3 hereof.
2.2 CONVERSION PROCEDURE. Subject to the terms of this Note at
any time after the Initial Conversion Date, upon surrender of this Note, the
Company shall cause the issuance and delivery with all reasonable dispatch, upon
the written order of the Holder of such Note and in such name or names as such
Holder may designate, a certificate or certificates for the number of full
Conversion Shares. Such certificates shall be deemed to have been issued and any
person
33
<PAGE> 3
so designated to be named therein shall be deemed to have become the Holder of
record of such Conversion Shares immediately prior to the close of business on
the date of such surrender of this Note; provided, however, that if at the date
of surrender the transfer books of any of the Conversion Shares shall be closed,
the certificates for the Conversion Shares shall be issuable as of the date on
which such books shall be opened and until such date the Company shall be under
no duty to deliver any certificates for such Conversion Shares; provided,
further, however, that such transfer books, unless otherwise required by law or
by applicable rule of any national securities exchange, shall not be closed at
any one time for a period longer than twenty (20) days. Notwithstanding anything
herein to the contrary, the Conversion Shares are to be provided by Helm and the
owner of 100% of the capital stock of the Company. Helm agrees to maintain a
reserve of the Conversion Shares in an amount necessary to satisfy a conversion
of all of the Notes. For purposes of the balance of this Section 2, Helm is
referred to as the Issuer.
2.3 SHARE AND CONVERSION PRICE ADJUSTMENT. In the event that the
Issue shall, at any time prior to the exercise of conversion rights hereunder:
(i) declare or pay to the holders of its common stock a dividend payable in any
kind of shares of stock of the Issuer; or (ii) change or divide or otherwise
reclassify its common stock into the same or a different number of shares with
or without par value, or in shares of any class or classes; or (iii) transfer
its property as an entirety or substantially as an entirety to any other
company; or (iv) make any distribution of its assets to holders of its common
stock as a liquidation or partial liquidation dividend or by way of return of
capital; then, upon the subsequent exercise of conversion rights, the holder
thereof shall receive, in addition to or in substitution for the shares of
common stock to which it would otherwise be entitled upon such conversion, such
additional shares of stock or scrip of the Issuer, or such reclassified shares
of stock of the Issuer, or such shares of the securities or property of the
Issuer resulting from such transfer, or such assets of the Issuer, which it
would have been entitled to receive had it exercised such conversion rights
prior to the happening of any of the foregoing events. Additionally, in the
event of any of the foregoing events or transactions, the Conversion Price shall
be appropriately adjusted, if necessary.
2.4 NOTICE TO HOLDER. If, at any time while this Note is
outstanding, the Issuer shall pay any dividend payable in cash or in common
stock, shall offer to the holders of its common stock for subscription or
purchase by them any shares of stock of any class or any other rights, or shall
enter into an agreement to merge or consolidate with another corporation, the
Company and the Issuer shall cause notice thereof to be mailed to the registered
holder of this Note at its address appearing on the registration books of the
Issuer, at least thirty (30) days prior to the record date as of which holders
of common stock shall participate in such dividend, distribution or subscription
or other rights or at least thirty (30) days prior to the effective date of the
merger or consolidation. Failure to give notice as required by this Section, or
any defect therein, shall not affect the legality or validity of any dividend,
distribution or subscription or other right.
2.5 ASSURANCES. The Company shall be under no obligation to
effect such conversion into Conversion Shares until either it has received such
assurances as it may require that the Conversion Shares to be so issued are
34
<PAGE> 4
being taken for investment and not for distribution or such issuance is exempt
from registration under the Act or a registration statement under the Act with
respect to such Conversion Shares has been declared effective.
3. REPRESENTATIONS WARRANTIES AND COVENANTS OF THE COMPANY.
3.1 CORPORATE STANDING. The Company represents and warrants to
the Holder that the Company:
(a) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware;
(b) has all requisite power and authority and all necessary
licenses and permits to own and operate its properties and to carry on its
business as now conducted and as presently proposed to be conducted; and
(c) is duly licensed or qualified and is in good standing as
a foreign corporation in each jurisdiction wherein the nature of the business
transacted by it or the nature of the property owned or leased by it makes such
licensing or qualification necessary.
3.2 LITIGATION. There are no proceedings pending or, to the
knowledge of the Company threatened, against or affecting the Company in any
court or before any governmental authority or arbitration board or tribunal
which involve the possibility of materially and adversely affecting the
properties, business, prospects, profits or condition (financial or otherwise)
of the Company. The Company is not in default with respect to any order of any
court or governmental authority or arbitration board or tribunal.
3.3 TITLE. The Company has good and marketable title in fee
simple (or its equivalent under applicable law) to all the real property and has
good title to all the other property it purports to own, including that
reflected in the most recent balance sheet referred to above except as sold or
otherwise disposed of in the ordinary course of business and except for liens
disclosed in notes to the financial statements referred to above.
3.4 NO DEFAULTS. No default or Event of Default as defined in
Section 4 hereof has occurred and is continuing. The Company is not in default
in the payment of principal or interest on any indebtedness for borrowed money
and is not in default under any instrument or instruments or agreements under
and subject to which any indebtedness for borrowed money has been issued and no
event has occurred and is continuing under the provision of any such instrument
or agreement which with the lapse of time or the giving of notice, or both,
would constitute an Event of Default hereunder.
3.5 CONSENTS, APPROVALS. No approval, consent or withholding of
objection on the part of any United States regulatory body, state, federal or
local, is necessary in connection
35
<PAGE> 5
with the execution and delivery by the Company of this Note or the compliance by
the Company with any of the provisions of this Note.
3.6 TAXES. All tax returns required to be filed by the Company
in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees
and other governmental charges upon the Company or upon any of its properties,
income or franchises, which are shown to be due and payable in such returns have
been paid. No material controversy in respect of additional income taxes due is
pending or, to the knowledge of the Company, threatened. The provisions for
taxes on the books of the Company are adequate for all open years, and for its
current fiscal period.
3.7 COVENANTS. The Company covenants with the holders of the
Notes to (i) maintain its corporate existence; (ii) comply in all material
respects with applicable laws, orders, regulations and similar legal
requirements; (c) maintain a register of holders of the Notes; (d) waive usury
defenses to the extent allowed by law in any action brought against the Company
on the Notes; and (e) maintain liquid and loan portfolio assets in an aggregate
amount at least equal to aggregate principal amount of the Notes then
outstanding.
3.8 COVENANTS WITH RESPECT TO COMPENSATING LOAN ASSET AMOUNT.
The Company will maintain an aggregate amount of cash, cash equivalent and loan
portfolio assets in an amount equal to or greater than the aggregate principal
amount of the Notes then outstanding (the "Compensating Loan Asset Amount"). The
Company will not permit a lien or encumbrance on the Compensating Loan Asset
Amount.
4. EVENTS OF DEFAULT.
It shall be an Event of Default with respect to this Note upon the
occurrence and continuation uncured of any of the following events:
(a) a default in the payment of the principal on this Note,
when and as the same shall become due and payable, either by the terms hereof or
upon redemption or otherwise; or
(b) payment is not made of one interest payment on this
Note, and such default shall continue uncured for ten (10) days after the date
fixed for the making of such interest payment;
(c) default in the performance, or breach, of any covenant
of the Company in this Note (other than a covenant or a default which is
elsewhere herein specifically dealt with as an Event of Default), and
continuance of such default or breach uncured for a period of sixty (60) days;
(d) the occurrence of a default under other indebtedness of
the Company which results in $50,000 or more of indebtedness becoming
immediately due and payable prior to its maturity;
36
<PAGE> 6
(e) the entry of a final judgment, which either alone or
together with other outstanding final judgments against the Company, exceeds
$25,000 in the aggregate, which judgments are not stayed or discharged within
ninety (90) days of entry; and
(f) the making by the Company of an assignment for the
benefit of creditors; the written admission by the Company of its inability to
pay its debts; the appointment of a receiver or trustee for the Company or
substantially all of its assets, which appointment is not stayed or discharged
within ninety (90) days thereof; the institution by or against the Company of
insolvency, bankruptcy, reorganization or similar proceedings which are not
dismissed or stayed within one hundred twenty (120) days of such institution;
and the issuance or levy or a writ of attachment or execution against the
Company or its properties which is not released, stayed, bonded or vacated
within one hundred twenty (120) days.
5. REMEDIES UPON DEFAULT.
5.1 ACCELERATION. Upon the occurrence of an Event of Default,
the holders of a majority of the principal amount of the Notes then outstanding
may, by written notice to the Company, declare all of the Notes to be
immediately due and payable; provided that after such declaration, if all
arrears of principal and interest on the Notes are paid and the holders of at
least a majority of the aggregate principal amount of the Notes then outstanding
have modified the obligations in default or extended the time for compliance
with such obligation or such default shall have been cured, then the holders of
a majority of the aggregate principal amount of the Notes then outstanding may
waive such Event of Default and its consequences.
5.2 PROCEEDINGS AND ACTIONS. During the continuation of any one
or more Events of Default, the holders of a majority of the principal amount of
the Notes may institute such actions or proceedings in law or equity as they
shall deem expedient for the protection of their rights and may prosecute and
enforce their claims, against all assets of the Company except as hereinafter
set forth and shall be entitled to receive therefrom payment on such claims up
to an amount not exceeding the principal amount of the Notes plus accrued
interest to the date of payment plus reasonable expenses of collection.
6. PREPAYMENT.
The Company has the right to prepay any Note, prior to maturity,
in whole or in part at any time without premium or penalty, at any time. In the
event of a partial prepayment, Notes shall be prepaid pro rata. Notice of
prepayment will be mailed at least 30 days but not more than 60 days before the
prepayment date to each record holder of Notes to be prepaid, at its registered
address. On and after the prepayment date, interest shall cease to accrue on the
Notes or such portion thereof called for prepayment unless the Company defaults
in such prepayment. No holder of any Note has a right to demand prepayment.
37
<PAGE> 7
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
7.1 The Holder of this Note and each permitted transferee hereof
by his acceptance thereof agrees that no public distribution of Notes will be
made in violation of the Act. Furthermore, it shall be a condition to the
transfer of this Note that any transferee thereof deliver to the Company his
written agreement to accept and be bound by all of the terms and conditions
contained in this Note.
7.2 This Note may not be sold or otherwise disposed of except as
follows:
(1) To a person who, in the opinion of counsel for the
Holder reasonably acceptable to the Company, is a person to whom this Note may
legally be transferred without registration and without the delivery of a
current prospectus under the Act with respect thereto and then only against
receipt of an agreement of such person to comply with the provisions of this
Section (1) with respect to any resale or other disposition of such securities
which agreement shall be satisfactory in form and substance to the Company and
its counsel; provided that the foregoing shall not apply to any such Note, or
other security as to which such Holder shall have received an opinion letter
from counsel to the Company as to the exemption thereof from the registration
under the Act pursuant to Rule 144(k) under the Act; or
(2) To any person upon delivery of a prospectus then meeting
the requirements of the Act relating to such securities and the offering thereof
for such sale or disposition.
8. MISCELLANEOUS.
8.1 NO RECOURSE. Other than with respect to Helm and its
obligations under Section 2 hereof, no recourse whatsoever, either directly or
through the Company or any trustee, receiver or assignee, shall be had in any
event or in any manner against any past, present or future stockholder, director
or officer of the Company for the payment of the redemption price, principal of
or interest on this Note or any of them or for any claim based thereon or
otherwise in respect of this Note, this Note being a corporate obligation only.
8.2 NOTICES. All communications provided hereunder shall be in
writing and, if to the Company, delivered or mailed by registered or certified
mail addressed to Mezzanine Financial Corp., c/o Helm Capital Group, Inc., 537
Steamboat Road, Greenwich, Connecticut 06830 Attention: General Counsel, if to
the Holder at the address shown for the Holder in the registration books
maintained by the Company.
8.3 LOST, STOLEN OR MUTILATED NOTES. In case this Note shall be
mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue
and deliver in exchange and substitution for and upon cancellation of the
mutilated Note, or in lieu of and substitution for the Note, lost, stolen or
destroyed, a new Note of like tenor and representing an equivalent right or
38
<PAGE> 8
interest, but only upon receipt of evidence satisfactory to the Company of such
loss, theft or destruction and an indemnity, if requested, also satisfactory to
it.
8.4 GOVERNING LAW. This Note shall be construed in accordance
with and governed by the laws of the State of Delaware, without giving effect to
conflict of laws principles.
8.5 AMENDMENTS. The Notes may be amended with written consent of
the holders of a majority of the aggregate principal amount of the Notes then
outstanding, however, except as provided in Section 5 hereof, no such amendment
shall be made which shall (i) change the maturity date, or the rate or time for
the payment of interest or the principal amount of any Note without the consent
of the holder of such Note; or (ii) reduce the percentage of principal amount of
the Notes the holders of which are required to consent to any amendment or
waiver, or increase the percentage of the principal amount of the Notes the
holders of which are required to accelerate payment of the Notes upon the
occurrence of an Event of Default, without, in each instance, the consent of the
holders of all the Notes then outstanding.
8.6 SUCCESSORS AND ASSIGNS. This Note and all of the covenants,
stipulations, promises and agreements of the Company herein shall be binding
upon the successors and assigns of the Company, if any, whether or not so
expressed in any provision hereof.
8.7 CONSOLIDATION OR MERGER. In the case of any consolidation or
merger of the Company with or into another corporation (other than a merger or
consolidation in which the Company is the continuing corporation) or in case of
any sale, lease or conveyance to another corporation (other than a wholly owned
subsidiary of the Company) of the property of the Company as an entirety or
substantially as an entirety in connection with the dissolution or winding up of
the Company's business, such successor, leasing or purchasing corporation, as
the case may be, shall execute with the Holder an agreement providing the Holder
with rights which shall be as nearly equivalent as practicable to the rights of
the Holder therein.
8.8 REGISTRATION RIGHTS. Holders of this Note and the Conversion
Shares are entitled to the registration rights set forth in the Subscription and
Registration Rights Agreement in the form attached to the Memorandum, which
registration rights are hereby incorporated by reference as if set forth at
length herein.
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<PAGE> 9
IN WITNESS WHEREOF, Mezzanine Financial Corp. has caused this Note to
be signed in its corporate name by its President and to be dated the day and
year first above written.
MEZZANINE FINANCIAL CORP.
By:
Name:
Title:
Attest:
Name:
Title:
[SEAL]
Dated: , 1997
Helm Capital Group, Inc., with respect to its obligations set forth in Section 2
hereof and the terms of the following guaranty: In consideration of the Exchange
Offer, Helm hereby absolutely, irrevocably and unconditionally guarantees to the
holder of the Note, the prompt and complete payment when due and payable
(whether at the stated maturity or by acceleration or otherwise) of all
obligations of Mezzanine Corp. to the holder of this Note and the performance by
Mezzanine Corp. of the covenants under this Note and all expenses incurred in
collecting the same.
HELM CAPITAL GROUP, INC.
By:
Name:
Title:
40
<PAGE> 1
EXHIBIT 4.6
THIS SUBORDINATED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE
PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE COMPANY OR OTHER COUNSEL TO THE HOLDER OF SUCH NOTE WHICH OTHER
COUNSEL IS REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH NOTE MAY BE PLEDGED,
SOLD, ASSIGNED, HYPOTHECATED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.
MEZZANINE FINANCIAL CORP.
9-1/2% SENIOR CONVERTIBLE NOTE
DUE DECEMBER 31, 2001
SERIES B
$00,000 No. N-XX-B-R
Date:
MEZZANINE FINANCIAL CORP., a Delaware corporation (the "Company"),
for value received, hereby promises to pay to ___________________________,
residing at ___________________________________________________, or registered
assigns (the "Payee" or "Holder") upon due presentation and surrender of this
Note, on December 31, 2001 (the "Maturity Date"), the principal amount of _____
thousand dollars ($00,000) and accrued interest thereon as hereinafter provided.
This note was issued pursuant to a Confidential Exchange Offer
Memorandum dated October 24, 1997 (the "Memorandum"). The series of Notes issued
in connection with the Memorandum are referred to hereafter as the "Notes".
1. PAYMENT OF PRINCIPAL AND INTEREST; METHOD OF PAYMENT.
Payment of the principal and accrued interest on this Note shall be
made in such coin or currency of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts.
Interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid portion of said principal amount from time to time outstanding
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<PAGE> 2
shall be paid by the Company at the rate of nine and one-half percent (9-1/2%)
per annum (the "Stated Interest Rate"), in like coin and currency, said interest
payable to the Payee quarterly on each June 30, and December 31 (commencing
December 31, 1997) (an "Interest Payment Date") and on the Maturity Date. The
first interest payment shall include interest accruing and deemed to accrue on
this note from June 30, 1997. Any installment of interest on this Note not paid
within ten (10) days of the applicable Interest Payment Date shall bear interest
at the rate of 2% in excess of the otherwise then applicable rate borne of this
Note to the extent that payment of such interest on overdue interest is
enforceable under applicable law. Both principal hereof and interest thereon are
payable in lawful money of the United States of America at the Holder's address
above or such other address as the Holder shall designate from time to time by
written notice to the Company. The Company will pay or cause to be paid all sums
becoming due hereon for principal and interest by check sent to the Holder's
above address or to such other address as Holder may designate for such purpose
from time to time by written notice to the Company, without any requirement for
the presentation of this Note or making any notation thereon except that the
Holder hereof agrees that payment of the final amount due shall be made only
upon surrender of this Note to the Company for cancellation. Prior to any sale
or other disposition of this instrument, the Holder hereof agrees to endorse
hereon the amount of principal paid hereon and the last date to which interest
has been paid hereon and to notify the Company of the name and address of the
transferee.
2. CONVERSION.
2.1 EXERCISE OF CONVERSION PRIVILEGE. At any time and from time
to time commencing the date the Note is issued (the "Initial Conversion Date")
until the Maturity Date, this Note is convertible at the Holder's option, in
whole or in part, into shares of common stock $.01 par value, per share of
InterSystems, Inc., a Delaware corporation ("InterSystems") (the "Conversion
Shares") upon surrender of this Note, by mail, postage prepaid, at the office of
the Company, accompanied by a written notice of conversion in form satisfactory
to the Company duly executed by the registered holder or its duly authorized
attorney. This Note shall be convertible into the Conversion Shares at a
conversion price of $2.75 per Conversion Share as may from time to time be
adjusted pursuant to the provisions of Section 2.3 hereof (the "Conversion
Price"); provided, however, no fractional shares or scrip representing any
fractional shares shall be issued. The Company shall round-up the portion of the
Note surrendered such that an integral number of Conversion Shares shall be
issued upon each conversion of the Notes. Interest shall accrue to and including
the business day prior to the date of conversion and shall be paid on the last
business day of the month in which the conversion rights hereunder are
exercised. No adjustments in respect of dividends will be made upon any
conversion. The Conversion Price is subject to adjustments as provided in
Section 2.3 hereof.
2.2 CONVERSION PROCEDURE. Subject to the terms of this Note at
any time after the Initial Conversion Date, upon surrender of this Note, the
Company shall cause the issuance and delivery with all reasonable dispatch, upon
the written order of the Holder of such Note and in such name or names as such
Holder may designate, a certificate or certificates for the number of full
Conversion Shares. Such certificates shall be deemed to have been issued and any
person
43
<PAGE> 3
so designated to be named therein shall be deemed to have become the Holder of
record of such Conversion Shares immediately prior to the close of business on
the date of such surrender of this Note; provided, however, that if at the date
of surrender the transfer books of any of the Conversion Shares shall be closed,
the certificates for the Conversion Shares shall be issuable as of the date on
which such books shall be opened and until such date the Company shall be under
no duty to deliver any certificates for such Conversion Shares; provided,
further, however, that such transfer books, unless otherwise required by law or
by applicable rule of any national securities exchange, shall not be closed at
any one time for a period longer than twenty (20) days. Notwithstanding anything
herein to the contrary, the Conversion Shares are to be provided by Helm and the
owner of 100% of the capital stock of the Company. Helm agrees to maintain a
reserve of the Conversion Shares in an amount necessary to satisfy a conversion
of all of the Notes. For purposes of the balance of this Section 2, InterSystems
is referred to as the Issuer.
2.3 SHARE AND CONVERSION PRICE ADJUSTMENT. In the event that the
Issue shall, at any time prior to the exercise of conversion rights hereunder:
(i) declare or pay to the holders of its common stock a dividend payable in any
kind of shares of stock of the Issuer; or (ii) change or divide or otherwise
reclassify its common stock into the same or a different number of shares with
or without par value, or in shares of any class or classes; or (iii) transfer
its property as an entirety or substantially as an entirety to any other
company; or (iv) make any distribution of its assets to holders of its common
stock as a liquidation or partial liquidation dividend or by way of return of
capital; then, upon the subsequent exercise of conversion rights, the holder
thereof shall receive, in addition to or in substitution for the shares of
common stock to which it would otherwise be entitled upon such conversion, such
additional shares of stock or scrip of the Issuer, or such reclassified shares
of stock of the Issuer, or such shares of the securities or property of the
Issuer resulting from such transfer, or such assets of the Issuer, which it
would have been entitled to receive had it exercised such conversion rights
prior to the happening of any of the foregoing events. Additionally, in the
event of any of the foregoing events or transactions, the Conversion Price shall
be appropriately adjusted, if necessary.
2.4 NOTICE TO HOLDER. If, at any time while this Note is
outstanding, the Issuer shall pay any dividend payable in cash or in common
stock, shall offer to the holders of its common stock for subscription or
purchase by them any shares of stock of any class or any other rights, or shall
enter into an agreement to merge or consolidate with another corporation, the
Company and the Issuer shall cause notice thereof to be mailed to the registered
holder of this Note at its address appearing on the registration books of the
Issuer, at least thirty (30) days prior to the record date as of which holders
of common stock shall participate in such dividend, distribution or subscription
or other rights or at least thirty (30) days prior to the effective date of the
merger or consolidation. Failure to give notice as required by this Section, or
any defect therein, shall not affect the legality or validity of any dividend,
distribution or subscription or other right.
2.5 ASSURANCES. The Company shall be under no obligation to
effect such conversion into Conversion Shares until either it has received such
assurances as it may require that the Conversion Shares to be so issued are
being taken for investment and not for distribution
44
<PAGE> 4
or such issuance is exempt from registration under the Act or a registration
statement under the Act with respect to such Conversion Shares has been declared
effective.
3. REPRESENTATIONS WARRANTIES AND COVENANTS OF THE COMPANY.
3.1 CORPORATE STANDING. The Company represents and warrants to
the Holder that the Company:
(a) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware;
(b) has all requisite power and authority and all necessary
licenses and permits to own and operate its properties and to carry on its
business as now conducted and as presently proposed to be conducted; and
(c) is duly licensed or qualified and is in good standing as
a foreign corporation in each jurisdiction wherein the nature of the business
transacted by it or the nature of the property owned or leased by it makes such
licensing or qualification necessary.
3.2 LITIGATION. There are no proceedings pending or, to the
knowledge of the Company threatened, against or affecting the Company in any
court or before any governmental authority or arbitration board or tribunal
which involve the possibility of materially and adversely affecting the
properties, business, prospects, profits or condition (financial or otherwise)
of the Company. The Company is not in default with respect to any order of any
court or governmental authority or arbitration board or tribunal.
3.3 TITLE. The Company has good and marketable title in fee
simple (or its equivalent under applicable law) to all the real property and has
good title to all the other property it purports to own, including that
reflected in the most recent balance sheet referred to above except as sold or
otherwise disposed of in the ordinary course of business and except for liens
disclosed in notes to the financial statements referred to above.
3.4 NO DEFAULTS. No default or Event of Default as defined in
Section 4 hereof has occurred and is continuing. The Company is not in default
in the payment of principal or interest on any indebtedness for borrowed money
and is not in default under any instrument or instruments or agreements under
and subject to which any indebtedness for borrowed money has been issued and no
event has occurred and is continuing under the provision of any such instrument
or agreement which with the lapse of time or the giving of notice, or both,
would constitute an Event of Default hereunder.
45
<PAGE> 5
3.5 CONSENTS, APPROVALS. No approval, consent or withholding of
objection on the part of any United States regulatory body, state, federal or
local, is necessary in connection with the execution and delivery by the Company
of this Note or the compliance by the Company with any of the provisions of this
Note.
3.6 TAXES. All tax returns required to be filed by the Company
in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees
and other governmental charges upon the Company or upon any of its properties,
income or franchises, which are shown to be due and payable in such returns have
been paid. No material controversy in respect of additional income taxes due is
pending or, to the knowledge of the Company, threatened. The provisions for
taxes on the books of the Company are adequate for all open years, and for its
current fiscal period.
3.7 COVENANTS. The Company covenants with the holders of the
Notes to (i) maintain its corporate existence; (ii) comply in all material
respects with applicable laws, orders, regulations and similar legal
requirements; (c) maintain a register of holders of the Notes; (d) waive usury
defenses to the extent allowed by law in any action brought against the Company
on the Notes; and (e) maintain liquid and loan portfolio assets in an aggregate
amount at least equal to aggregate principal amount of the Notes then
outstanding.
3.8 COVENANTS WITH RESPECT TO COMPENSATING LOAN ASSET AMOUNT.
The Company will maintain an aggregate amount of cash, cash equivalent and loan
portfolio assets in an amount equal to or greater than the aggregate principal
amount of the Notes then outstanding (the "Compensating Loan Asset Amount"). The
Company will not permit a lien or encumbrance on the Compensating Loan Asset
Amount.
4. EVENTS OF DEFAULT.
It shall be an Event of Default with respect to this Note upon the
occurrence and continuation uncured of any of the following events:
(a) a default in the payment of the principal on this Note,
when and as the same shall become due and payable, either by the terms hereof or
upon redemption or otherwise; or
(b) payment is not made of one interest payment on this
Note, and such default shall continue uncured for ten (10) days after the date
fixed for the making of such interest payment;
(c) default in the performance, or breach, of any covenant
of the Company in this Note (other than a covenant or a default which is
elsewhere herein specifically dealt with as an Event of Default), and
continuance of such default or breach uncured for a period of sixty (60) days;
46
<PAGE> 6
(d) the occurrence of a default under other indebtedness of
the Company which results in $50,000 or more of indebtedness becoming
immediately due and payable prior to its maturity;
(e) the entry of a final judgment, which either alone or
together with other outstanding final judgments against the Company, exceeds
$25,000 in the aggregate, which judgments are not stayed or discharged within
ninety (90) days of entry; and
(f) the making by the Company of an assignment for the
benefit of creditors; the written admission by the Company of its inability to
pay its debts; the appointment of a receiver or trustee for the Company or
substantially all of its assets, which appointment is not stayed or discharged
within ninety (90) days thereof; the institution by or against the Company of
insolvency, bankruptcy, reorganization or similar proceedings which are not
dismissed or stayed within one hundred twenty (120) days of such institution;
and the issuance or levy or a writ of attachment or execution against the
Company or its properties which is not released, stayed, bonded or vacated
within one hundred twenty (120) days.
5. REMEDIES UPON DEFAULT.
5.1 ACCELERATION. Upon the occurrence of an Event of Default,
the holders of a majority of the principal amount of the Notes then outstanding
may, by written notice to the Company, declare all of the Notes to be
immediately due and payable; provided that after such declaration, if all
arrears of principal and interest on the Notes are paid and the holders of at
least a majority of the aggregate principal amount of the Notes then outstanding
have modified the obligations in default or extended the time for compliance
with such obligation or such default shall have been cured, then the holders of
a majority of the aggregate principal amount of the Notes then outstanding may
waive such Event of Default and its consequences.
5.2 PROCEEDINGS AND ACTIONS. During the continuation of any one
or more Events of Default, the holders of a majority of the principal amount of
the Notes may institute such actions or proceedings in law or equity as they
shall deem expedient for the protection of their rights and may prosecute and
enforce their claims, against all assets of the Company except as hereinafter
set forth and shall be entitled to receive therefrom payment on such claims up
to an amount not exceeding the principal amount of the Notes plus accrued
interest to the date of payment plus reasonable expenses of collection.
6. PREPAYMENT.
The Company has the right to prepay any Note, prior to maturity,
in whole or in part at any time without premium or penalty, at any time. In the
event of a partial prepayment, Notes shall be prepaid pro rata. Notice of
prepayment will be mailed at least 30 days but not more than 60 days before the
prepayment date to each record holder of Notes to be prepaid, at its registered
address. On and after the prepayment date, interest shall cease to accrue on the
Notes
47
<PAGE> 7
or such portion thereof called for prepayment unless the Company defaults in
such prepayment. No holder of any Note has a right to demand prepayment.
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
7.1 The Holder of this Note and each permitted transferee hereof
by his acceptance thereof agrees that no public distribution of Notes will be
made in violation of the Act. Furthermore, it shall be a condition to the
transfer of this Note that any transferee thereof deliver to the Company his
written agreement to accept and be bound by all of the terms and conditions
contained in this Note.
7.2 This Note may not be sold or otherwise disposed of except as
follows:
(1) To a person who, in the opinion of counsel for the
Holder reasonably acceptable to the Company, is a person to whom this Note may
legally be transferred without registration and without the delivery of a
current prospectus under the Act with respect thereto and then only against
receipt of an agreement of such person to comply with the provisions of this
Section (1) with respect to any resale or other disposition of such securities
which agreement shall be satisfactory in form and substance to the Company and
its counsel; provided that the foregoing shall not apply to any such Note, or
other security as to which such Holder shall have received an opinion letter
from counsel to the Company as to the exemption thereof from the registration
under the Act pursuant to Rule 144(k) under the Act; or
(2) To any person upon delivery of a prospectus then meeting
the requirements of the Act relating to such securities and the offering thereof
for such sale or disposition.
8. MISCELLANEOUS.
8.1 NO RECOURSE. Other than with respect to Helm and its
obligations under Section 2 hereof, no recourse whatsoever, either directly or
through the Company or any trustee, receiver or assignee, shall be had in any
event or in any manner against any past, present or future stockholder, director
or officer of the Company for the payment of the redemption price, principal of
or interest on this Note or any of them or for any claim based thereon or
otherwise in respect of this Note, this Note being a corporate obligation only.
8.2 NOTICES. All communications provided hereunder shall be in
writing and, if to the Company, delivered or mailed by registered or certified
mail addressed to Mezzanine Financial Corp., c/o Helm Capital Group, Inc., 537
Steamboat Road, Greenwich, Connecticut 06830 Attention: General Counsel, if to
the Holder at the address shown for the Holder in the registration books
maintained by the Company.
8.3 LOST, STOLEN OR MUTILATED NOTES. In case this Note shall be
mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue
and deliver in exchange and
48
<PAGE> 8
substitution for and upon cancellation of the mutilated Note, or in lieu of and
substitution for the Note, lost, stolen or destroyed, a new Note of like tenor
and representing an equivalent right or interest, but only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction and an
indemnity, if requested, also satisfactory to it.
8.4 GOVERNING LAW. This Note shall be construed in accordance
with and governed by the laws of the State of Delaware, without giving effect to
conflict of laws principles.
8.5 AMENDMENTS. The Notes may be amended with written consent of
the holders of a majority of the aggregate principal amount of the Notes then
outstanding, however, except as provided in Section 5 hereof, no such amendment
shall be made which shall (i) change the maturity date, or the rate or time for
the payment of interest or the principal amount of any Note without the consent
of the holder of such Note; or (ii) reduce the percentage of principal amount of
the Notes the holders of which are required to consent to any amendment or
waiver, or increase the percentage of the principal amount of the Notes the
holders of which are required to accelerate payment of the Notes upon the
occurrence of an Event of Default, without, in each instance, the consent of the
holders of all the Notes then outstanding.
8.6 SUCCESSORS AND ASSIGNS. This Note and all of the covenants,
stipulations, promises and agreements of the Company herein shall be binding
upon the successors and assigns of the Company, if any, whether or not so
expressed in any provision hereof.
8.7 CONSOLIDATION OR MERGER. In the case of any consolidation or
merger of the Company with or into another corporation (other than a merger or
consolidation in which the Company is the continuing corporation) or in case of
any sale, lease or conveyance to another corporation (other than a wholly owned
subsidiary of the Company) of the property of the Company as an entirety or
substantially as an entirety in connection with the dissolution or winding up of
the Company's business, such successor, leasing or purchasing corporation, as
the case may be, shall execute with the Holder an agreement providing the Holder
with rights which shall be as nearly equivalent as practicable to the rights of
the Holder therein.
8.8 REGISTRATION RIGHTS. Holders of this Note and the Conversion
Shares are entitled to the registration rights set forth in the Subscription and
Registration Rights Agreement in the form attached to the Memorandum, which
registration rights are hereby incorporated by reference as if set forth at
length herein.
49
<PAGE> 9
IN WITNESS WHEREOF, Mezzanine Financial Corp. has caused this Note to
be signed in its corporate name by its President and to be dated the day and
year first above written.
MEZZANINE FINANCIAL CORP.
By:
Name:
Title:
Attest:
Name:
Title:
[SEAL]
Dated: , 199
Helm Capital Group, Inc., with respect to its obligations set forth in Section 2
hereof and the terms of the following guaranty: In consideration of the Exchange
Offer, Helm hereby absolutely, irrevocably and unconditionally guarantees to the
holder of the Note, the prompt and complete payment when due and payable
(whether at the stated maturity or by acceleration or otherwise) of all
obligations of Mezzanine Corp. to the holder of this Note and the performance by
Mezzanine Corp. of the covenants under this Note and all expenses incurred in
collecting the same.
HELM CAPITAL GROUP, INC.
By:
Name:
Title:
50
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