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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[XX] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] For Fiscal Year Ended December 31, 1996
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. 1-9547
INTERSYSTEMS, INC.
(Name of Small Business Issuer in its charter)
___________DELAWARE____________ _____________13-3256265_____________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8790 Wallisville Road, Houston, Texas 77029
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (713) 675-0307
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
Common Stock Purchase Warrants American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes__X__ No ____
Check if no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained herein, and no disclosure will be contained,
to the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. [__]
The issuer's revenues for the year ended December 31, 1996 were
$20,387,000.
The aggregate market value of the voting stock held by non-affiliates of
the issuer is approximately $4,433,915, based upon the closing price of
the issuer's common stock, $.01 par value, as reported by the American
Stock Exchange on April 3, 1997, which was $1.00.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on April 3, 1997: 6,386,623
Documents incorporated by reference: NONE
Transitional Small Business Format: Yes ____ No __X__
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PART I
ITEM 1: BUSINESS
Introduction and Business Development
InterSystems, Inc. was originally organized under the laws of the state
of Delaware in 1984. The Company'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, 1996 and 1995, approximately 71%
and 75%, respectively, of the Company's revenues were attributable to
the business of InterSystems Nebraska and approximately 29% and 25%,
respectively, of the Company's revenues were attributable to the
business of Chemtrusion. Information regarding the dollar amount of
revenues, operating profit and identifiable assets for each of the
Company's lines of business is included in Note 15 to the Company's
consolidated financial statements.
The Company had revenues from continuing operations of $20,387,000 and
$15,703,000, respectively, for the years ended December 31, 1996 and
1995. For these same periods, losses from continuing operations were
($399,000), and ($478,000), respectively. The total losses for the years
ended December 31, 1996 and 1995 were ($2,319,000) and ($695,000),
respectively. The loss from discontinued operations was ($1,920,000) in
1996 and ($217,000) in 1995 of which ($1,440,000) was incurred in 1996
on the disposal of the Company's Tropical Systems, Inc. subsidiary
discussed below.
Recent Developments
At June 30, 1996, the Company elected to discontinue the operations of
its Tropical Systems, Inc. ("Tropical") subsidiary in Miami. Tropical
was engaged in the business of manufacturing and selling hurricane
resistant window and door products. This decision was reached after
the Company determined that the cost to continue the business was
significantly greater than originally projected, and would have a
negative impact on the financial situation of InterSystems Nebraska,
which was financing Tropical. See "Discontinued Operations--Tropical
Systems, Inc." on page 8.
In 1995, the Company announced that it was pursuing the possible
acquisition of Interpak Terminals, Inc. ("Interpak") from Interpak
Holdings, Inc. ("Holdings"), a subsidiary of Helm Resources, Inc., the
Company's principal stockholder ("Helm"). Interpak is a custom-
packager of thermoplastic resins and also provides warehousing and
delivery services to plastics producers and distributors. In late
October 1996, the Company's board of directors resolved to terminate
discussions with Helm and Holdings concerning the acquisition of
Interpak since after months of discussions, the board's Acquisition
Committee could not reach an agreement with Helm as to price, nor was
the Company able to arrange financing to complete the acquisition.
In January 1997, the board of directors reconsidered the acquisition of
Interpak and offered to purchase Interpak from Holdings for
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approximately $3.1 million consisting of a cash down payment of
$400,000 and the balance payable in cash and stock over two and one
half years. This purchase price was less than that originally sought
by Helm and Holdings, and the structure of the payment of the
consideration eliminated the need for third party financing, which the
Company was not able to obtain on acceptable terms during the original
negotiations. The board remained interested in Interpak if the price
and financing issues could be overcome since the thermoplastic resins
custom-packaging and warehousing services performed by Interpak would
complement the resins custom compounding operations of the Company's
Chemtrusion subsidiary.
The board of directors sought an opinion of an independent financial
appraiser to the effect that the consideration to be paid by the
Company to acquire Interpak is fair to the Company and to its
shareholders from a financial point of view. In addition, stockholder
approval of the issuance of shares of common stock as repayment of the
promissory note issued as partial consideration for this acquisition
would be required prior to issuance of the shares.
At a meeting of the board of directors in March 1997, the board
resolved not to proceed with this acquisition because it was unable to
satisfy certain conditions to the consummation of the acquisition, and
discussions with Helm were terminated. Shortly thereafter, Helm
announced that it has entered into negotiations for the sale of
Interpak to a European corporation.
---------------------------
THE BUSINESS OF INTERSYSTEMS NEBRASKA
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. A
brief description of the equipment is set forth below:
Automatic samplers. Automatic samplers are used to sample materials
such as powders, pellets, granules and liquids in gravity, pneumatic or
liquid applications. Samplers are used at different stages of a
material handling or production process to take a random sample of the
products being received, produced or transported. Automatic samplers
are sold to customers in substantially all businesses served by
InterSystems Nebraska and can be adapted to extreme applications, such
as high temperatures, toxic materials and non-standard pressures.
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Truck and Rail Probes. Truck and rail probes are used to mechanically
sample commodities being received by truck or railcar to determine
quality. Either a core or a compartmentalized probe is hydraulically
inserted into the load and a sample is retrieved. Examples of
commodities that can be sampled using truck and rail probes include
grains, soymeal, sunflowers, flax, cranberries and wood chips.
Conveyors. Conveyors are used to transport bulk materials horizontally
or at inclines of up to 60 degrees. The material is moved by using a
chain and a series of paddles to drag the material or to move it en
masse. Conveyors are frequently used for the movement of such
commodities as grain, feed, sugar, green barley malt, flour, minerals,
oyster shells and fertilizer.
Bucket_elevators. Bucket elevators are used to elevate material
vertically. The material is elevated by utilizing buckets attached to
a belt. Material flows into the buckets at the bottom and is
discharged when reaching the top. This equipment is typically required
by customers to elevate commodities such as wood chips, slate,
fertilizer, flour, grains and malt.
Screeners. Screeners are used to separate smaller particles from the
product stream. This is accomplished by running the product over
screens which separate the material by particle size. Screeners are
typically used for commodities such as grains, pellets, feed, pet food
and soymeal.
Bulk Weighing Systems. Bulk weighing systems are used to weigh free
flowing bulk commodities that are being continuously loaded into
trucks, railcars, barges or ships. During the weighing operation,
information can be obtained and assessed without interrupting the
material flow process. A typical system includes a structure with
several hoppers and an electronic package that controls the weighing
operation. These systems are generally sold for the bulk weighing of
grains, oil, flour, soymeal and fertilizer.
Sales and Marketing
InterSystems Nebraska's industrial samplers are sold by approximately
80 manufacturer's representatives who are independent sales
representatives and independent contractors of InterSystems Nebraska.
These representatives typically market various lines of industrial
products and equipment manufactured by InterSystems Nebraska as well as
five to ten other companies. However, the representatives do not offer
or sell products competitive with those of InterSystems Nebraska within
a given product line. Each representative has an exclusive territory
within which the representative operates. Compensation of such
representative is strictly on a commission basis.
Intersystems Nebraska's other products are sold by 6 sales personnel
who are employees of the Company. In addition, InterSystems Nebraska
leases its agricultural automatic sampling systems. In this
circumstance, InterSystems Nebraska typically enters into a three-year
agreement with its customer, generally a grain elevator, pursuant to
which InterSystems Nebraska installs the sampling system and maintains
the system on a continuing basis. In consideration for these services,
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the customer agrees to pay InterSystems Nebraska monthly for each
sample drawn and to pay for a minimum number of samples during each
l2-month period.
To date, a significant percentage of InterSystems Nebraska's equipment
has been sold within the grain, feed and grain processing industries.
InterSystems Nebraska is seeking to increase its sales volume by
marketing its products outside of the United States. InterSystems
Nebraska currently has the following foreign representatives: 4 in
Mexico, 8 in Canada, 4 in Europe, one in Australia and one servicing
the remainder of Central America and South America.
Manufacturing
InterSystems Nebraska fabricates, welds and assembles raw material and
other purchased components into its finished sampling and handling
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 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, all engineering utilizes a Computer Aided Design (CAD)
system.
Suppliers and Raw Materials
The principal raw materials used by InterSystems Nebraska in its
product manufacturing consist of steel, plastic and other stock, all of
which are commonly available from numerous suppliers and vendors.
InterSystems Nebraska has not experienced, nor does it reasonably
anticipate, any material interruption in the supply of raw materials
necessary to manufacture its products.
Backlog and Customers
InterSystems Nebraska had a sales backlog of approximately $2,266,000
at December 31, 1996, compared with $2,309,000 at December 3l, 1995.
All orders at December 3l, l996 are believed to be firm and are
expected to be filled by December 3l, l997.
During 1996, InterSystems Nebraska provided equipment to approximately
1,300 customers. No single customer has accounted for 10% or more of
InterSystems Nebraska's total revenues during 1996 or 1995.
InterSystems Nebraska does not believe that the loss of any single
customer would have a material adverse effect on its business
operations.
Competition
InterSystems Nebraska competes against numerous equipment manufacturers
and suppliers of products similar to those it manufactures. Many of
these manufacturers and suppliers have longer operating histories and
greater resources than InterSystems Nebraska. Competition in the
markets served by InterSystems Nebraska is mainly through product
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quality and performance, competitive pricing, engineering expertise
and timely service.
Patents and Trademarks
InterSystems Nebraska has a registered trademark in the United States
for its "I-S" logo. InterSystems Nebraska's marketing efforts are not
materially dependent in any way on any trademark, patent or other
intellectual property rights, although InterSystems Nebraska has
received certain design patents on aspects of its equipment, including
its wood pulp sampler, wood chip sampler, grain cleaner bypass and
radius bottom conveyor.
THE BUSINESS OF CHEMTRUSION
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 filled polyolefins, glass
reinforced thermoplastics of all kinds and additive concentrates for
the polyolefin film industry.
Compounding Operations
Chemtrusion provides custom compounding services using three twin screw
extruders, various blenders and other equipment at its Houston facility
and four twin screw extruders at its Mytex facility (discussed below).
Based on the rated capacity of its equipment and given the current mix
of the products manufactured by Chemtrusion, Chemtrusion's present
annual manufacturing capacity is approximately 70 million pounds at its
two facilities. 1996 production was approximately 23,820,635 pounds in
Houston, compared to approximately 28,943,000 pounds in 1995. This
decrease in Houston production is discussed in "Management's Discussion
of Financial Condition and Results of Operations" on page 12. 1996
production at the Mytex facility, which began compounding operations in
November 1996, was 5,444,731 pounds. 1997 aggregate production is
expected to be considerably greater than 1996 after a full year of
compounding activities at the Mytex facility.
In Chemtrusion's compounding operations, the customer supplies all or
most of the raw materials including resin and other additives.
Chemtrusion supplies the operating equipment and process technology for
combining the feedstocks and additives into finished compounded resins.
In most cases, Chemtrusion's customer supplies the specifications and
formulations for the end product. In others, a customer with a
specific end use for a compound requests Chemtrusion to modify the
customer's existing formulation. To an increasing extent, Chemtrusion
is assisting customers in developing products that have resulted from
the customers' research and development activities to a product that is
ready for commercial use.
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Mytex Facility
In January 1996, Chemtrusion entered into a Definitive Agreement for
Compounding Services with Mytex Polymers ("Mytex"), a Delaware general
partnership of affiliates of Mitsubishi Chemical America and Exxon
Chemical Company, a division of Exxon Corporation.
Pursuant to the Agreement, Chemtrusion acquired 16.4 acres of land in
Jeffersonville, Indiana, on which it constructed and equipped in
accordance with agreed upon plans and specifications a plastics
compounding plant at a cost of $12.8 million. As designed, the plant
contains four production lines with an annual capacity of 35 million
pounds of product, and contains sufficient space to add several
additional production lines, if desirable, at a future date. Mytex has
the right to require Chemtrusion to undertake the expansion of the
plant at any time, with adjustment in the management fee payable to
Chemtrusion.
Mytex guaranteed the initial construction financing which had been
provided by a financial institution. The plant was completed in
October 1996. In January 1997, Mytex provided $14,000,000 permanent
financing for the facility. See Note 5 to Notes to Consolidated
Financial Statements for a discussion of the terms of this financing.
At this facility, Chemtrusion produces an array of polypropylene-based
compounds exclusively for the exclusive benefit of Mytex using raw
materials and specifications provided by Mytex. 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 management currently expects to provide significant
net profits to Chemtrusion.
The initial term of the Agreement 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 (the "Option") and put rights on behalf of Chemtrusion
(the "Put") with respect to the facility. The purchase price under the
Option and Put ranges from $1.5 million plus assumption of the
construction financing, to assumption of construction financing less
$700,000, depending on when the rights are exercised and whether the
exercise follows a default by Mytex or Chemtrusion.
Suppliers and Raw Materials
Chemtrusion is typically not required to purchase any significant raw
materials for its compounding operations other than maintenance related
supplies for its compounding equipment. These supplies are commonly
available from numerous suppliers and vendors. Chemtrusion has not
experienced, nor does it reasonably anticipate, any material interruption
in the supply of materials for its compounding operations.
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Sales and Marketing
Marketing efforts are conducted through involvement of Chemtrusion
executive officers in industry and trade networks, attendance at trade and
technology conferences and symposia and other venues where resin producers
or independent consumers of compounded materials can learn of
Chemtrusion's capabilites. Chemtrusion does not have an outside or field
sales force. Chemtrusion believes its focus on quality has resulted in
the development of stable, long-term customer relationships.
Customers
The customer base for Chemtrusion's compounding business consists
primarily of resin producers, although end product distributors and
independent consumers also represent a small portion of the company's
customer base. For each of the last two fiscal years, approximately 70%
to 80% of total revenues of the compounding business were attributable to
between eight and ten regular customers. Of these, two customers, one of
which is Mytex, accounted for approximately 36% and 35% of total revenues
of the compounding business for the year ended December 31, 1996. One
customer accounted for 77% of Chemtrusion's revenues in 1995. In
addition, beginning in 1997, Mytex is expected to account for
approximately one half of the Company's total revenues. The Company
believes that the loss of either of these customers would have a material
adverse effect on its business and revenues.
Competition
Chemtrusion competes with numerous compounding businesses, and its
operations represent an insignificant percentage of the overall
compounding activities in the United States. The primary competitive
factors in compounding of resins are the ability to provide high quality,
precise, high yield, value added services to the customer on a timely
basis, in accordance with customer specifications. Price is typically a
secondary concern due to the sophisticated or technological nature of the
business. Chemtrusion has sought to position itself as a value added
custom compounder capable of handling a broad spectrum of compounding jobs
in a timely and precise manner.
Seasonality
Although there are minor fluctuations in demand for custom compounding
services resulting from new automobile model introductions in the fall and
plastic outdoor product sales in the spring and summer, these fluctuations
are not significant.
DISCONTINUED OPERATIONS: TROPICAL SYSTEMS, INC.
InterSystems Nebraska, through a subsidiary, Tropical Systems, Inc.
("TSI") signed a letter of intent in September 1995 (the "Letter of
Intent") for the acquisition of the assets of The Tropical Manufacturing
Group, Inc. headquartered in Miami, Florida ("Tropical"), and entered into
an operating agreement with Tropical, which was engaged in the business of
manufacturing and selling commercial rolling doors and hurricane resistant
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doors and shutters in South Florida, Latin American and the Caribbean.
Under the operating agreement, Tropical (i) assigned to TSI its rights to
sell, market and distribute its products and (ii) manufactured its
products for the sole account of TSI, in exchange for the agreement of TSI
to pay Tropical cost plus 1% for each product so manufactured. This was
intended as an interim arrangement which could be terminated at any time
by TSI, and which would be terminated upon the purchase by TSI of all of
Tropical's assets and the assumption of certain liabilities of Tropical
pursuant to the Letter of Intent. The consummation of the purchase was
conditioned upon arranging the necessary financing to complete the
purchase and obtaining clear title to the assets of Tropical, which were
subject to various tax and other liens.
The capital needs of TSI proved to be significantly greater than
originally anticipated. While original estimates of the cost of clearing
title to the assets of Tropical to be purchased by TSI remained at
approximately $250,000, additional working capital was needed to maintain
the day to day operating expenses of this division while marketing and
sales were developed to cover future cash flow and working capital needs.
For the year ended December 31, 1995, TSI recorded revenues of $852,000
and a net loss from operations of $217,000. For the six months ended June
30, 1996, TSI operated at a loss of $480,000. Working capital needs for
this subsidiary through the end of 1996 were estimated at a minimum of
approximately $500,000 to $750,000. TSI was unable to generate sufficient
sales to meet its working capital needs, nor was TSI or its parent
companies able to raise sufficient funds needed to fund TSI for the
foreseeable future. Accordingly, at June 30, 1996, ISI elected to
discontinue TSI operations. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
Research and Development
During the two fiscal years ended December 31, 1996 and 1995, the Company
spent minimal amounts on research and development activities.
Employees
The Company currently employs 130 persons at Chemtrusion and 117 persons
at InterSystems Nebraska, all of whom are full time employees, in
executive, administrative and clerical, and production, engineering and
laboratory personnel capacities, as well as 8 persons in executive and
administrative capacities who allocate their time between the Company and
affiliated entities. None of the Company's employees are represented by a
union. The Company believes that its labor relations are good.
Environmental Matters
The Company does not currently anticipate any material effect upon its
capital expenditures, earnings or competitive position as a result of its
compliance with Federal, state and local provisions which have been
enacted or adopted relating to the protection of the environment.
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ITEM 2: PROPERTIES
The Company: The Company's executive offices are located at 8790
Wallisville Road, Houston, Texas where it shares 800 square feet of
office space with Interpak Terminals, Inc. pursuant to a lease
expiring in February 2003. The Company does not pay any rent in
connection with this space.
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 has a term of
three years with an annual base rent of $99,000 for the first year,
$103,500 for the second year and $108,000 for the third year. The
three other corporations sharing this space are 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 the four corporations occupying the space.
InterSystems Nebraska: InterSystems Nebraska owns a 40,000 square
foot office and manufacturing facility in Omaha, Nebraska, which was
originally subject to a mortgage of $840,000 which matured in
December 1996. The facility is subject to a second mortgage with
respect to a $432,435.00 term loan due in September 1999.
In November 1995, InterSystems Nebraska leased a facility comprising
30,000 square feet of additional manufacturing space in Omaha,
thereby nearly doubling total square footage under use to 70,000
square feet. The lease provides for an annual rental of
approximately $100,000 per year and expires in November 2000.
In connection with the expansion into the second Omaha facility, the
subsidiary arranged $1.1 million in operating leases and $250,000 in
equipment financing for advanced robotics, software and other
automated equipment to be installed in both its facilities.
Installation was completed by the end of April 1996.
Given the current mix of equipment manufactured by InterSystems
Nebraska and its current pricing, the Company believes that
InterSystems Nebraska utilized 70% of the productive capacity of its
original facility in 1996 and 70% of the productive capacity of its
second Omaha facility beginning in March 1996.
InterSystems Nebraska also leases approximately 1,079 square feet of
office space in Richardson, Texas for use as a regional sales office
at an annual rental of approximately $13,600. This lease expires in
December 1999, and is subject to renewal.
Chemtrusion: Chemtrusion conducts its non-Mytex business in a leased
77,910 square foot facility located in Houston, Texas. The current
annual rent is $217,200, and the lease expires in April 2002. The
Company estimates that this facility operated at approximately 70% of
the facility's practical capacity during 1996.
The Mytex facility located in Jeffersonville, Indiana is a 178,000
square foot state-of-the-art compounding plant which is owned by
Chemtrusion, but is subject to the right of Mytex to repurchase it
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from Chemtrusion under certain circumstances. The facility is also
subject to a mortgage of $14,000,000 to secure construction financing
at 7% due in January 31, 2011. See "Business of Chemtrusion--Mytex
Facility."
The Company believes that its facilities and the facilities of its
subsidiaries are adequate for the current and reasonably forseeable
future needs.
ITEM 3: LEGAL PROCEEDINGS
At the present time, the Company is not a party to any lawsuits which
are expected to have a material adverse effect on the business,
operations or finances of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
a. Market Price and Holders. The Company's Common Stock presently is
listed on the American Stock Exchange and is presently traded under
the symbol "II". The table below sets forth, for the period
indicated, the high and low closing prices on the respective dates of
such quotations.
<TABLE>
<S> <C> <C>
Fiscal 1995 High Low
First Quarter $1 3/4 $1
Second Quarter 1 1/2 1
Third Quarter 1 5/8 1 1/16
Fourth Quarter 2 1/8 1 1/4
Fiscal 1996
First Quarter $2 1/4 $1 3/8
Second Quarter 1 15/16 1 1/4
Third Quarter 1 5/8 1 5/16
Fourth Quarter 1 1/2 1
</TABLE>
The closing price of the Common Stock on April 3, 1997 was $1.00. As
of April 1, 1997, there were, to the best of the Company's knowledge,
approximately 165 holders of record (not beneficial holders) of the
Company's Common Stock.
b. 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. Furthermore, InterSystems Nebraska is a party to certain
debt agreements which prohibit the declaration or payment of cash
dividends by InterSystems Nebraska. This prohibition has the
practical effect or restricting the payment of dividends on the
Company's common stock.
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ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 1996 compared to December 31, 1995
Sales increased $4,684,000 (30%) in 1996 to $20,387,000 compared to
$15,703,000 in 1995. Chemtrusion's sales increased $2,023,000 (51%)
to $5,992,000 in 1996 from $3,696,000 in 1995 due to the third
quarter 1996 start-up of the Mytex Polymers, Inc. dedicated facility
located in Jeffersonville, Indiana (the "Mytex facility").
Essentially all revenue of both Chemtrusion locations is a result of
toll processing. InterSystems Nebraska's sales increased $2,661,000
(22.7%) to $14,395,000 in 1996 from $11,732,000 primarily a result of
the increase in sales volume of bulk material handling equipment
afforded through the 1996 plant expansion.
Gross margin as a percentage of sales decreased 2% to 29% as compared
to 31% in 1995. Chemtrusion's gross margin decreased 3% to 28% in
1996 from 31% in 1995. In the first six months of 1996, Chemtrusion
was adversely impacted by a lower plant utilization rate due to an
interruption in feedstock supply from one of its customers, an
internal restructuring by another customer and concentration on the
start-up of the Mytex facility. Production increased in the third
and fourth quarters of 1996. Nebraska's gross profit as a percentage
of sales decreased to 30% in 1996 from 32% in 1995. This was
primarily as a result of an increase in sales of lower margin
products and increased operating costs associated with plant
expansion.
Selling, general and administrative expense increased $993,000
(21.8%) in 1996 while decreasing 2% as a percentage of sales.
Nebraska's expenses increased $480,000 as a result of an increase in
personnel. Operating lease costs and other general and administrative
expenses associated with increased sales and the additional
production capacity of the plant expansion. Chemtrusion's expenses
increased $529,000 primarily due to the addition of the Mytex
facility beginning in the third quarter of 1996.
Interest expense increased approximately $87,000 in 1996 as compared
to 1995 primarily due to interest incurred on the interim
construction note after commencement of operations on the Mytex
facility.
For the six months ended June 30, 1996 and the year ended 1995,
Tropical Systems, Inc. ("TSI"), the Company's discontinued operation,
incurred operating losses of $480,000 and $217,000, respectively.
During 1996, InterSystems Nebraska recorded a loss on the disposal of
TSI totaling $1,440,000, which included $167,000 for operating losses
from July 1, 1996 through September 30, 1996, the date TSI ceased
operations. Of the total $1,440,000 recorded, $1,190,000 was
recorded in the fourth quarter of 1996.
PAGE 12 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 13
Liquidity and Capital Resources
Cash provided by operating activities in 1996 amounted to $33,000.
Proceeds from the note receivable from the sale of the trading
business was $490,000; $13,912,000 was provided from proceeds of
long-term debt to finance the construction of the Mytex facility;
$154,000 was provided from the proceeds of the sale of fixed assets;
$2,009,000 was provided from the proceeds of the Company's private
placement; and $22,000 was provided from the sale of common stock.
Fixed asset purchases amounted to $13,282,000, primarily for
Chemtrusion's Mytex facility; and long-term debt repayments amounted
to $1,860,000. At December 31, 1996, the Company had a net liability
associated with discontinued operations of $547,000. There was a net
increase in cash of $1,368,000 for the year ended December 31, 1996.
The Company anticipates that its future operating needs will be
satisfied from the operations of its subsidiaries which, on a
combined basis, are expected to generate positive cash flow. The
Company from time to time may seek to borrow funds for actual or
anticipated funding needs. There can be no assurances that management
will be able to obtain such financing.
Parent company. On December 1, 1995, the Company commenced a private
placement of Units consisting of 40,000 shares of Common Stock and
20,000 Common Stock Purchase Warrants for $55,000 per Unit. The
Company sold 39 Units, which yielded over $2,100,000 in proceeds to
the Company. The subscription agreement for this placement provides
that the holders of units will have the right at the end of the two
year period following the effective date of a registration statement
covering the Shares (August 9, 1996), to cause the Company to redeem
the Common Stock contained in the units, but not the Common Stock
underlying the warrants, unless during such period the closing price
of the common stock on the American Stock Exchange is at least $1.80
for any consecutive 30 trading days. The redemption price will equal
$1.80 per share, plus interest accruing from the second anniversary
of the effective date at 10% to be paid in four equal quarterly
installments commencing 90 days after such second anniversary date.
In April 1993, the Company sold the net assets and operations related
to the Company's resins trading business to certain members of
management. The Company remains liable under operating leases which
were either sublet or assigned to the purchaser. The leases expire
in years through 1998 and, at December 31, 1996, have aggregate
future minimum rentals of approximately $410,000.
InterSystems Nebraska. InterSystems Nebraska ordinarily manufactures
products to meet customer specification and, consequently, maintains
relatively small amounts of inventory, most of which is required to
meet existing contracts. At December 31, 1996, InterSystems Nebraska
had a revolving credit agreement with a bank. The financing
agreement provides for borrowings of up to $3,000,000 based upon a
borrowing base and is due on demand. At December 31, 1996,
borrowings of $990,000 were outstanding under this agreement, bearing
interest at the bank's base rate plus 1.25% (9.5% at December 31,
1996). InterSystems Nebraska has pledged its accounts receivable,
inventory, equipment and fixtures and intangibles as collateral for
the debt. The net book value of the collateral totalled
PAGE 13 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 14
approximately $3,582,000 at December 31, 1996. In addition, the
Company has pledged all outstanding shares of InterSystems Nebraska's
common stock as collateral.
During 1996, InterSystems Nebraska entered into an agreement with the
bank for an additional $250,000 loan with interest at the bank's
prime plus .5% and a maturity date of February 11, 2001 in connection
with the financing of equipment. The agreement has certain covenants
that, among other things, require maintenance of a minimum debt
service coverage ratio to allow for the payment of management fees,
and also limit dividends and other payments to the Company or related
entities. At December 31, 1996, InterSystems Nebraska was in
technical violation of certain covenants, which have been waived
through January 1998.
InterSystems Nebraska also entered into an agreement with the bank
for an additional $125,000 loan with interest at the bank's base rate
plus .5% (10.25% at December 31, 1996) and a maturity date of May 31,
1997. Under the terms of this agreement, InterSystems Nebraska is
subject to certain covenant requirements that, among other things,
require maintenance of minimum net worth, working capital and debt to
worth ratios, and also limit the amount of capital expenditures,
payments to affiliates, indebtedness, dividends and management fees.
At December 31, 1996, InterSystems Nebraska was in violation of
certain covenants, which have been waived through the maturity date.
InterSystems Nebraska entered into a lease for a second 30,000 square
foot facility in Omaha, thereby increasing total square footage under
use to 70,000 square feet. The expansion and automation was designed
to render the combined facility efficient and state-of-the-art
without changing the present workforce, and to increase manufacturing
capacity to permit InterSystems Nebraska to meet its backlog,
bring subcontracted work back into the plant and take on additional
customers. In connection with the expansion, the subsidiary has
arranged $1.1 million in operating leases and $250,000 in equipment
financing (discussed above) for advanced robotics, software and other
automated equipment to be installed in both of its facilities. This
equipment financing is pursuant to a 9.25% term loan agreement which
InterSystems Nebraska entered into with a bank in December 1995. The
agreement has substantially the same loan covenants and collateral as
the other debt agreements previously described. Subsequent to
entering into the $1.1 million in leases, InterSystems Nebraska
assigned the leases to the Company and entered into annual leases
with the Company for the use of the machinery and equipment. The
Company is accounting for these leases as capital leases. The leases
between the Company and InterSystems Nebraska are accounted for as
operating leases. The monthly payments required under the original
leases range from $6,563 to $26,385 and expire in years through
October 2001. The plant expansion is complete and fully operational.
InterSystems Nebraska, through a subsidiary, Tropical Systems,Inc.
("TSI") signed a letter of intent in September 1995 (the "Letter of
Intent") for the acquisition of the assets of The Tropical
Manufacturing Group, Inc. headquartered in Miami, Florida
("Tropical"). Tropical was engaged in the business of manufacturing
and selling commercial rolling doors and hurricane-resistant doors
PAGE 14 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 15
and shutters in South Florida, Latin American and the Caribbean.
As of June 30, 1996, the Company adopted a plan to dispose of this
subsidiary. This decision was reached after the Company determined
that the cost to continue this business was significantly greater
than originally projected, and would have a negative impact on the
financial condition of InterSystems Nebraska, which was financing
TSI. The Company has provided a liability reserve for discontinued
operations of $547,000. Accordingly, TSI has been presented as a
discontinued operation in the consolidated financial statements.
Chemtrusion. At December 31, 1996, Chemtrusion had a revolving line
of credit agreement with a bank. The agreement provides for a
maximum borrowing of $300,000 and expires September 5, 1997. The
agreement bears interest at the bank's base rate plus 2% (10.5% at
December 31, 1996) and is collateralized by Chemtrusion's accounts
receivable and inventory. At December 31, 1996, Chemtrusion had
borrowings outstanding totaling $298,000 under this line and the net
book value of collateral totalled approximately $722,000. The
agreement requires Chemtrusion, among other things, to maintain a
certain minimum net worth and debt to equity ratios.
On January 26, 1996, Chemtrusion entered into an exclusive long-term
contract with a non-related joint venture to provide custom
compounding of thermoplastics and related services. The agreement
required Chemtrusion to construct and operate a thermoplastics
compounding plant in Jeffersonville, Indiana. The cost of the plant
totaled approximately $12,788,000, with interim financing for the
construction of the plant provided by a financial institution and
guaranteed by the joint venture partners. The plant was fully
operational as of October 15, 1996. Management currently expects the
project to provide significant annual net profits to Chemtrusion.
On January 31, 1997, the joint venture provided the permanent
financing for the facility totalling $14,000,000. The note payable
bears interest at 7%, with interest only payments monthly for the
first two years; thereafter the agreement requires monthly
installments of $143,973, including interest, through January 2011.
The note is collateralized by the facility.
Chemtrusion will operate the plant exclusively for the joint venture
under an initial term of five years, with the joint venture having
the option to renew the agreement for two additional five year terms.
In accordance with the agreement, Chemtrusion will bill the joint
venture on a bi-monthly basis for the plant's operating costs along
with a management fee.
Upon expiration of the initial term or any renewal term or in the
event of the termination of the agreement by default, as defined, the
joint venture will have an option to purchase the plant at a price
and on terms and conditions, as defined in the agreement. In the
event that the joint venture does not renew the agreement at the end
of the initial term or the end of the renewal term or either party
terminates the agreement, as specified in the agreement, Chemtrusion
has the right to require the joint venture to purchase the plant at a
price and on the terms and conditions as defined in the agreement.
PAGE 15 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 16
Subsequent to the year ended December 31, 1996, Chemtrusion entered
into a loan agreement for $1,459,000 with a financial institution.
Proceeds of the note were used to purchase certain equipment that was
under capital lease at December 31, 1996, pay other related costs and
provide $250,000 in working capital. The note is payable in monthly
installments beginning April 1997 of $24,320, including interest at
prime plus 1.5% through April 2002 and is collateralized by the
equipment.
Impact of Inflation
Inflation has not had a significant impact on the Company's
operations. Since the Company has no long term fixed price
contracts, the Company believes it should be able to pass through to
its customers most cost increases resulting from inflation. However,
competitive factors may require the Company to absorb at least a
portion of these cost increases, particularly during periods of high
inflation.
Seasonality
A substantial portion of InterSystems Nebraska's revenues are derived
from the agricultural sector of the economy and, accordingly, are
subject to seasonal fluctuations. InterSystems Nebraska's revenues
are highest in the second and third quarter (29% of annual revenues
was recorded in 1996). While revenues for the remaining quarters are
generally constant, InterSystems Nebraska's success is, to some
extent, dependent upon weather conditions affecting domestic grain
production, conditions in the grain industry generally and the value
of the United States dollar against foreign currency.
New Accounting Pronouncements
In March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128). This pronouncement provides a different
method of calculating earnings per share than in currently used in
accordance with Accounting Board Opinion (APB) No. 15. "Earnings Per
Share." SFAS No. 128 provides for the calculation of "Basic" and
"Diluted" earnings per share to common shareholders by the weighted
average of the number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. The Company will adopt SFAS No.
128 in 1997 and its implementation is not expected to have a material
effect on the consolidated financial statements.
Forward Looking Statements
This annual report for the year ended December 31, 1996 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
PAGE 16 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 17
limitation, the Company's expectations and estimates as to future
financial performance, cash flows from operations, capital
expenditures and the availability of funds from refinancings 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
which may effect the demand for the Company's products and services
or the ability of the Company to manufacture and/or provide such
products and services; (ii) the loss, insolvency or failure to pay
its debts by a significant customer or customers; (iii) increased
competition; (iv) changes in customer preferences and the inability
of the Company to develop and introduce new products to accommodate
these changes; and (v) the maturing of debt and the ability of the
Company to raise capital to repay or refinance such debt on favorable
terms.
ITEM 7: FINANCIAL STATEMENTS
The financial statements filed as part of this report include:
<TABLE>
<S> <C>
Report of Independent Certified Public Page
Accountants.....................................F-2
Consolidated Balance Sheet as of
December 3l, l996...............................F-3
Consolidated Statements of
Loss for the Years Ended
December 3l, 1996 and 1995......................F-4
Consolidated Statements of
Shareholders' Equity (Capital Deficit)
for the Years Ended December
31, 1996 and 1995...............................F-5
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 1996 and 1995......................F-6
Notes to Consolidated Financial
Statements......................................F-7 to F-22
</TABLE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE None.
PAGE 17 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 18
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Directors and the Executive Officers of the Company are set
forth below. In 1988, the Company adopted a classified Board of
Directors. At each annual meeting, the successors to the class of
directors whose term expires at that meeting are elected to serve a
three-year term and until their successors are elected and qualified.
<TABLE>
<S> <C> <C> <C>
Name Age First Elected Term Expires
Daniel T. Murphy 58 1986 1997
William Lurie 66 1995 1997
Herbert M. Pearlman 64 1984 1998
Fred S. Zeidman 50 1993 1998
John E. Stieglitz 64 1991 1998
David S. Lawi 62 1984 1999
Walter M. Craig, Jr. 43 1993 1999
</TABLE>
Principal Occupation Over the Past Five Years
and Other Directorships of Nominee or Director
Herbert M. Pearlman Mr. Pearlman has been Chairman of the Company's
Board of Directors since March l984. He has served as President,
Chief Executive Officer and a Director of Helm Resources, Inc., a
diversified public holding company and the holder of approximately
22% of the Company's common stock ("Helm"), since 1980. Since June
1984 he has been Chairman of the Board of Helm. Mr. Pearlman is
Chairman of the Board of Directors of Seitel, Inc. ("Seitel") and is
currently Chairman of Seitel's Executive Committee. Seitel is a New
York Stock Exchange company engaged in acquiring and marketing
seismic information to the oil and gas industry. In 1990, Mr.
Pearlman became Chairman of the Board of Unapix Entertainment, Inc.
("Unapix"), an American Stock Exchange company which is engaged in
marketing and distributing films and television products.
Fred S. Zeidman Mr. Zeidman was appointed President, Chief Executive
Officer and a Director of the Company in July 1993. He also serves
as President of Interpak Terminals, Inc., a wholly-owned subsidiary
of Helm engaged in the packaging and distribution of thermoplastic
resins. Previously, Mr. Zeidman served as Chairman of Unibar Energy
Services Corporation, one of the largest independent drilling fluids
company in the United States, from 1985 to 1991, when it was acquired
by Anchor Drilling Fluids of Norway. From April 1992 until July
1993, Mr. Zeidman served as President of Service Enterprises, Inc.,
which is primarily engaged in plumbing, heating, air conditionaing
and electrical installation and repair. From 1983 to 1993, Mr.
Zeidman served as President of Enterprise Capital Corporation, a
federally licensed small business investment company specializing in
venture capital financings.
PAGE 18 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 19
Walter M. Craig, Jr. Mr. Craig has been President of Professionals'
Financial Services, Inc., a Delaware corporation which is in the
business of financing receivables of healthcare and other enterprises,
since 1993. He has also served as President and a Director of PLB
Management Corp., the general partner of The Mezzanine Financial Fund,
L.P. (the "Fund"), a Delaware limited partnership which makes
collateralized loans to companies, and as President of the Fund, since
1993. Mr. Craig has been a Director of Seitel since 1987 and a
director of Unapix since 1993. He has also served as a Director,
Executive Vice President and Chief Operating Officer of Helm since
1993. Prior thereto, Mr. Craig served as Vice President for business
and legal affairs for Helm.
David S. Lawi Mr. Lawi has been Secretary of the Company since March
1984. He was elected Chairman of the Executive Committee in October
1986. He has been Secretary and a Director of Helm since 1980, and
served as Executive Vice President of Helm from 1980 until 1992. Since
l982 he has been a Director of Seitel and has been Chairman of Seitel's
Executive Committee since 1989. In 1993 he became Secretary and
Treasurer of Unapix, and a Director and Chairman of the Executive
Committee of Unapix.
William Lurie Mr. Lurie was first elected to the Board of Directors in
November 1995 and became Chairman of the Acquisition Committee. Mr.
Lurie is presently serving as Co-Chairman and a Director of The Foundation
for Prevention & Early Resolution of Conflicts. Prior thereto, he spent
almost 20 years with General Electric Company and ten years with
International Paper Company in legal and management positions, including
General Counsel, and thereafter served as President of The Business
Roundtable for ten years. He also serves as a Director of Mineral
Technologies, Inc. and Seitel.
Daniel T. Murphy Mr. Murphy joined the Company in May 1984 as Vice
President-Finance and Operations and has been Executive Vice President
of Operations and Chief Financial Officer of the Company since July
1985. Mr. Murphy joined Helm in May 1984 as Vice President and Chief
Financial Officer. In January 1996, he was appointed Vice President
and Chief Financial Officer of Unapix.
John E. Stieglitz Mr. Stieglitz was appointed to the Board of
Directors of the Company in December 1991. Mr. Stieglitz is Chairman
Emeritus of Conspectus, Inc., a privately held company engaged in
providing services to the professional investment communities in the
area of executive recruiting. Mr. Stieglitz has been a director of Helm
since 1986, a director of Seitel since 1989.
Committees and Attendance
During 1996, the Company's Board of Directors held one meeting,
which was attended by all of the directors then in office.
The Board of Directors has an Executive Committee, an Audit
Committee and an Acquisition Committee. The Executive Committee is
comprised of Messrs. Pearlman, Lawi and Murphy. The function of the
Executive Committee is to act on an interim basis for the full Board.
PAGE 19 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 20
The Executive Committee did not meet separately from the full Board
of Directors during 1996. The Audit Committee and the Compensation
Committee presently is comprised of Mr. Stieglitz. The Audit Committee
and the Compensation Committee did not meet separately from the full
Board of Directors during 1996. The Acquisition Committee presently is
comprised of Mr. Lurie. Mr. Lurie held several meetings during 1996 in
connection with the proposed acquisition of Interpak Holdings, Inc.
See "Business--Recent Developments."
Compensation of Directors
Non-employee directors receive a fee of $6,000 in cash and $6,000
of common stock for services they render to the Company, payable on
December 31 of each year. All 1996 compensation to Mr. Lurie was paid
on a deferred basis. Expenses reasonably incurred in the furtherance
of the directors' duties are reimbursed by the Company.
Compliance with Section 16(a) Beneficial Ownership Reporting
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") and the American Stock
Exchange 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 that a report on Form 4 for Helm
Resources, Inc. reporting a private sale of 10,000 shares of common
stock was filed one day late.
[The rest of this page intentionally left blank.]
PAGE 20 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 21
ITEM 10: EXECUTIVE COMPENSATION
Set forth below is certain information with respect to cash and
noncash compensation awarded to, earned by or paid to the Company's
Chief Executive Officer during 1996. With the exception of Mr.
Pearlman, no executive officers of the Company earned over $100,000 for
the fiscal year ended December 31, 1996. See "Employment Arrangements"
below.
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C>
Name and Annual Compensation
Principal
Position Year Salary
Fred S. Zeidman, 1996 $ 50,000
President and 1995 50,000
Chief Executive 1994 50,000
Officer
Herbert Pearlman, 1996 100,000
Chairman 1995 100,000
1994 100,000
</TABLE>
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 in the money options for the Chief Executive
Officer. All options were out of the money at December 31, 1996.
Value of
Number of Unexercised
Shares Unexercised In-the-money
Acquired Options at Options at
on Fiscal year-end fiscal year end
Exercise Value Exercisable/ Exercisable/
Name __(#)___ Realized_($) Unexercisable Unexercisable
Fred S.
Zeidman - - 400,000/ - - / -
Herbert M.
Pearlman - - 31,250/ - - / -
[The rest of this page intentionally left blank.]
PAGE 21 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 22
EMPLOYMENT ARRANGEMENTS
The specific material terms of the agreements for the current
executive officers of the Company are set forth below.
Zeidman Agreement
Mr. Zeidman and the Company have entered into a three-year employment
agreement pursuant to which Mr. Zeidman will serve as President and Chief
Executive Officer of the Company. Pursuant to the employment agreement,
Mr. Zeidman will receive a base salary of $150,000 per year and a bonus
beginning in 1994 of 2% of the first $1 million in net income of the
Company, 3% of the second $1 million of net income and 4% of all net
income in excess of $2 million, not to exceed 150% of salary. Mr.
Zeidman has also received options to purchase 200,000 shares of Common
Stock at $2.00 per share and options to purchase 200,000 shares of Common
Stock at $3.00 per share which were fully vested at June 30, 1996.
Mr. Zeidman also serves as President and Chief Executive Officer of
Interpak Terminals, Inc. ("Interpak"), a wholly-owned subsidiary of Helm
Resources, Inc. Mr. Zeidman allocates his time between the Company and
Interpak, and Interpak contributes a portion of the Company's contracted
salary directly to Mr. Zeidman in compensation of his services based upon
the relative amount of time spent at each company, thereby reducing the
amount of salary payable by the Company. During 1996, 1995 and 1994, Mr.
Zeidman spent approximately 33% of his time on the business of the
Company and received approximately $100,000 in compensation from Interpak
for his services to that corporation in 1996, 1995 and 1994,
respectively. He also received a $10,000 bonus from Interpak in 1996,
1995 and 1994.
The Company's agreement with Mr. Zeidman also provides that the Board
of Directors will continue to cause Mr. Zeidman to be elected as a member
of the Board of Directors of the Company and a member of the Board of
Directors of Interpak Terminals, Inc., until the earlier of such time as
his ownership in the common stock of the Company is under 100,000 shares,
or his death or voluntary resignation. In addition, he has received from
Helm Resources, Inc. a five year option to purchase 16,667 shares of
common stock of Helm at $1.50 per share, which vests over a three year
period, and the right to receive from Interpak Terminals, Inc. an option
to purchase such number of shares of each class of capital stock of
Interpak Terminals, Inc. and any securities convertible or exchangeable
into or carrying the right to purchase such class of capital stock as
will equal two percent of such class on a fully diluted basis if a public
offering of Interpak Terminals securities is consummated before June
2003. The option price would be equal to the public offering price, less
applicable underwiting discounts and commissions.
In October 1996, the Company granted to Mr. Zeidman 30,000 common
stock purchase warrants with an exercise price of $1.375 and an
expiration date of October 29, 2001 as compensation for his services in
placing Units in the private placement which was completed in early 1996.
PAGE 22 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 23
Pearlman Agreement
Mr. Pearlman is a party to an employment agreement which provides for
his employment as Chairman of the Company for a term ending December 31,
1997, and renewable thereafter at the Company's option on a year to year
basis. The agreement, as amended, provides for a base salary of
approximately $240,000, which has been voluntarily reduced to $100,000.
In addition, Mr. Pearlman is entitled to an annual bonus equal to 5% of
the Company's consolidated pre-tax profits, less the amount paid to Mr.
Pearlman by Helm for the Company's consolidated earnings for the year,
which are reflected in Helm's financial statements as a result of Helm's
ownership in the Company.
Upon a change in Helm's control of the Board, the agreement provides
that each officer may terminate his employment under the agreement upon
18 months notice and receive, upon conclusion of that period, after
diligently carrying out his duties, a lump sum severance payment equal to
18 months salary. The agreement 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 continuation (unless
employment is secured elsewhere).
If employment continuation is offered but declined by the officer,
the officer must act as a consultant for two years at 50% of his latest
salary, during which time he may not provide services for any
competitors.
In October 1996, the Company granted to Mr. Pearlman 60,000 common
stock purchase warrants with an exercise price of $1.375 and an
expiration date of October 29, 2001 as compensation for his services in
placing Units in the private placement which was completed in early 1996.
David S. Lawi
Mr. Lawi's contract contains essentially the same provisions as Mr.
Pearlman's agreement, except that it provides for a current base salary
of $130,000, which has been voluntarily reduced to $50,000, and a bonus
of 2.5% of the Company's consolidated pre-tax profits for each fiscal
year, less the amount paid to Mr. Lawi by Helm for the Company's
consolidated earnings for the year which are reflected in Helm's
financial statements as a result of Helm's ownership in the Company.
In October 1996, the Company granted to Mr. Lawi 60,000 common stock
purchase warrants with an exercise price of $1.375 and an expiration date
of October 29, 2001 as compensation for his services in placing Units in
the private placement which was completed in early 1996.
Daniel T. Murphy
Mr. Murphy's contract contains essentially the same provisions as Mr.
Pearlman's agreement, except that it provides for a current base salary
of $90,000, and a bonus at the discretion of the Board of Directors.
Effective November 1, 1995, Mr. Murphy agreed to accept $56,000 from the
Company, with the balance to be paid by affiliates of the Company for
whom he renders services.
PAGE 23 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 24
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Set forth below is certain information as of March 15, 1997
concerning the beneficial ownership of Common Stock (the Company's
only class of voting securities) held by each person who is the
beneficial owner of more than 5% of the Common Stock, and by each
director and by all executive officers and directors of the Company
as a group.
<TABLE>
<S> <C> <C>
Amount and Nature
of Beneficial Percent of
Name Ownership (1)(2) Class (2)
Beneficial Holders
Helm Resources, Inc......... 1,447,733(3) 22.6%
537 Steamboat Road
Greenwich, CT 06830
John V. Winfield 576,000(4) 8.8%
2121 Avenue of the Stars
Los Angeles, CA 90067
Officers and Directors
Fred S. Zeidman ............ 675,000(5) 9.9%
8790 Wallisville Road
Houston, Texas 77029
Herbert M. Pearlman ........ 623,214(6) 9.1%
537 Steamboat Road
Greenwich, CT 06830
David S. Lawi .............. 447,467(7) 6.6%
537 Steamboat Road
Greenwich, CT 06830
Walter M. Craig, Jr......... 20,345(8) *
Daniel T. Murphy ........... 19,062(9) *
John E. Stieglitz........... 27,347(10) *
William Lurie............... 20,000(11)
All executive officers
and directors
as a group (7 persons) .... 1,832,435(12) 23.8%
* Less than 1%
</TABLE>
(1) 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 right.
PAGE 24 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 25
(3) Includes shares issuable upon exercise of Common Stock Purchase
Warrants expiring December 31, 1999 at $3.50 per share which were
issued as a dividend to the holders of common stock in October
1991 (the "Dividend Warrants") (6,035) and upon conversion of 10%
Convertible Subordinated Debentures due 2001 at $1.83 per share
(the "10% Debentures") (16,393).
(4) Includes 192,000 shares held by InterGroup Corporation, 2121
Avenue of the Stars, Los Angeles, CA 90067, with respect to
which Mr. Winfield is Chairman of the Board. Also includes
192,000 shares that are issuable upon exercise a like amount of
Common Stock Purchase Warrants expiring January 15, 2000 at $1.80
per share, 96,000 of which are held by Mr. Winfield directly and
96,000 of which are held by InterGroup Corporation.
(5) Includes shares issuable upon exercise of stock options
(400,000), Common Stock Purchase Warrants expiring June 30, 2000
at $1.50 per share (the "Warrants") (15,000) and Common Stock
Purchase Warrants expiring October 29, 2001 at $1.375 per share
(the "1996 Warrants") (30,000).
(6) Includes shares issuable upon exercise of stock options (31,250),
Dividend Warrants (77,551), Warrants (45,000), Common Stock
Purchase Warrants expiring July 11, 2000 at $1.125 per share
issued in lieu of compensation (the "Employment Warrants")
(66,667), 1996 Warrants (60,000), conversion of Series A 10%
Convertible Subordinated Debentures due June 30, 2001 at $1.32
per share (the "Series A 10% Debentures") (151,515), and
conversion of 8% Convertible Debentures due January 31, 2004 at
$1.43 per share (the "8% Debentures") (13,356). Does not include
shares held by Mr. Pearlman's wife and children as to which he
disclaims beneficial ownership.
(7) Includes shares issuable upon exercise of stock options (15,625),
Dividend Warrants (73,875), Employment Warrants (33,333), 1996
Warrants (60,000), Series A 10% Debentures (151,515) and 8%
Debentures (17,483). Does not include shares held by Mr. Lawi's
wife and children as to which he disclaims beneficial ownership.
(8) Includes shares issuable upon exercise of stock options (3,125)
and Dividend Warrants (3,750).
(9) Includes shares issuable upon exercise of stock options (3,906)
and Dividend Warrants (2,000) and conversion of 10% Debentures
(5,464) and 8% Debentures (7,692).
(10) Includes shares issuable upon exercise of Warrants (5,000) and
stock options (10,000) and conversion of 8% Debentures (1,923).
(11) Includes shares issuable upon exercise of stock options (20,000).
(12) Includes shares issuable upon exercise of stock options
(483,906), Dividend Warrants (157,176), Warrants (65,000) and
Employment Warrants (100,000), 1996 Warrants (150,000) and
conversion of Series A 10% Debentures (303,030), 10% Debentures
(5,464) and 8% Debentures (40,454).
PAGE 25 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 26
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During 1996, management of Helm provided various administrative,
managerial, financial, legal and accounting services to the Company for
which the Company is charged direct costs and expenses. Certain indirect
administrative and managerial costs are allocated to the Company based on
certain formulas which management deems to be reasonable. The Company
paid Helm $51,000 during the year ended December 31, 1996 for such
services. At December 31, 1996, the Company had net advances due from
Helm totalling $244,000. The net advances are for general corporate
matters, less unpaid allocated expenses totaling $32,000.
Interpak Holdings, Inc. ("Interpak"), a subsidiary of Helm, provides
management services to Chemtrusion. The allocated expenses for such
management services, based upon certain formulas which management deems
reasonable, amounted to $36,000 in 1996. In addition, during 1996
Interpak paid $ 137,000 in operating expenses of the Company and had a
balance due from Interpak at December 31, 1996 of $25,000.
In the fall of 1994, the Company obtained a line of credit in the
maximum amount of $250,000 from the Mezzanine Financial Fund, L.P. (the
"Fund"), a Delaware limited partnership in which Helm holds a 9% limited
partnership interest, which line was increased to $450,000 during 1995.
The loan bore interest at 15% per annum plus a 10% enhancement fee
thereafter payable in common stock of the Company at the rate of 2,000
common stock purchase warrants for each month that the loan is
outstanding. The loan matured on December 31, 1995 and was paid in full
in March 1996, and 35,000 common stock purchase warrants with an exercise
price of $3.50 per share and an expiration date of December 31, 1999 were
issued in connection with the enhancement fee. Messrs. Pearlman, Lawi
and Craig are limited partners of, and Mr. Craig is President of, the
Fund.
In January, 1995, Professionals' Financial Services, Inc. ("PFS"),
which is controlled by Messrs. Herbert Pearlman, David Lawi and Walter M.
Craig, Jr., made a $100,000 accounts receivable line of credit available
to The Tropical Manufacturing Group, Inc.("TMG"), which was a party to an
operating agreement and a letter of intent for the purchase of assets
with Tropical Systems, Inc. ("TSI"), a subsidiary of InterSystems
Nebraska. Effective upon the execution of the operating agreement in
October 1995, no further accounts receivable of TMG were purchased under
the line of credit, and PFS entered into a substitute accounts receivable
line of credit in the amount of $250,000 with TSI. On October 31, 1996,
an involuntary petition under Chapter 7 of the federal bankruptcy laws
was filed against TMG. The filing was later converted to a voluntary
petition and the operating agreement between TMG and TSI terminated. TSI
has guaranteed the amounts owing by TMG to PFS. At December 31, 1996,
$ 70,000 was outstanding under the TMG line of credit and $ 49,000
was outstanding under the TSI line of credit.
In September 1995, the Fund loaned TMG $50,000 and in October 1995,
the Fund loaned TSI $50,000 at the rate of interest charged to the
Company in connection with the Fund's loan to the Company. Both lines
are guaranteed by the Company. These loans were repaid in full in
February 1996.
PAGE 26 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 27
In December 1995, a corporation controlled by Mr. Fred Zeidman made a
$100,000 unsecured loan to the Company. The rate of interest on this
loan was 15%, payable monthly, and the loan was repaid in full in
February 1996.
Acquisition of InterSystems Nebraska
In connection with the August 1993 purchase from Helm of all of
the outstanding capital stock of InterSystems Nebraska, additional
consideration is payable to Helm in the form of an earnout and a
royalty.
Performance Earnout. Helm is entitled to receive a performance
earnout payable in the event that InterSystems Nebraska's average
earnings before federal income taxes, related party management fees
and non-recurring or extraordinary expense ("EBTME") in 1992 through
1995 inclusive, exceeds $550,000. If during this period, the average
EBTME of InterSystems Nebraska exceeds $550,000, the Company is
required to pay to Helm an amount equal to six (6) times such excess
(the "Earnout Payments"). The March 1996 Earnout Payment, which is
the last such payment, covers average EBTME for 1992 through and
including 1995. In the event of a reduction of average EBTME for any
period from the average EBTME for previous periods, no refund of
Earnout Payments will be made. However, the Payments due in March
1996 will reflect a credit of the payments previously made toward the
total earnout payment owed. Earnout Payments may be made, at the
Company's option, by delivering cash, shares of common stock (valued
at the average closing sale price on the American Stock Exchange for
the 60 days preceding delivery), by delivering to Helm shares of the
Company's common stock having an aggregate value of such Earnout
Payment or other agreed upon consideration or by the retirement of
indebtedness of Helm to the Company. InterSystems Nebraska's EBTME
for the years 1995, 1994, 1993 and 1992 was $567,000, $507,000,
$666,000 and $420,000, respectively. No Earnout Payment was due for
March 1994, March 1995 or March 1996.
Royalty Arrangements. In addition to the base purchase price and the
earnout payments, Helm also is entitled to receive royalties on three
classes of InterSystems Nebraska products that were developed with
the assistance of Helm, and that have not yet had a material impact
on InterSystems Nebraska's sales to date. These three products are:
a sampler used to sample, among other things, wood chips and coal; a
higher capacity sampler used to sample, among other things, wood
pulp, cement and coal; and a radius bottom conveyor.
With respect to each of these three products, Helm will receive a
royalty of 5% of all net sales of such products exceeding certain
established thresholds (which thresholds approximated the highest
annual net sales for each of the products during the last three
years), payable on an annual basis for the 15-year period following
the closing (the "Royalties"). In no case can the annual Royalties
paid to Helm in any year with respect any of the products licensed
exceed 10% of the annual gross profit of such product, calculated in
accordance with the accounting procedures and practices currently
employed by InterSystems Nebraska. Royalties to Helm on account of
1996 sales were approximately $13,000, which remained unpaid at
December 31, 1996, as compared to $7,000 in 1995.
PAGE 27 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 28
ITEM 13: Exhibits, List and Report on Form 8-K
(a) List of Exhibits
<TABLE>
<S> <C> <C>
Number Description Location
3.1 Certificate of Incorporation and
Amendments thereto i
3.2 By-Laws, as amended i
3.3 Certificate of Amendment to
Certificate of Incorporation
dated 9/28/85 ii
3.4 Certificate of Amendment to
Certificate of Incorporation
dated March 9, 1993, and filed
April 28, 1993 iii
3.5 Certificate of Amendment to
Certificate of Incorporation
dated December 17, 1993, and filed
January 10, 1994 vi
4.1 Form of 10% Convertible Debenture
due June 30, 2001 issued in the
1991 Private Placement iii
4.2 Form of Common Stock Purchase Warrant
expiring December 31, 1999 iii
4.3 Form of 8% Convertible Debenture
due 2003 issued in connection with the
acquisition of InterSystems Nebraska vi
4.4 Form of Common Stock Purchase Warrant
expiring June 30, 2000 viii
4.5 Form of Common Stock Purchase Warrant
expiring July 30, 2000 issued in lieu of x
compensation
4.6 Form of Common Stock Purchase Warrant x
expiring January 15, 2000 issued in
December 1995 Private Placement
4.7 Form of Common Stock Purchase Warrant Filed Herewith
expiring October 29, 2001 issued in
December 1995
10.1 The Company's 1986 Employee
Stock Option Plan i
</TABLE>
PAGE 28 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 29
<TABLE>
<S> <C> <C>
10.2 Employment and Deferred Compensation
Agreement between Company
and Herbert M. Pearlman ii
10.3 Employment and Deferred Compensation
Agreement between Company
and David S. Lawi ii
10.4 Employment and Deferred Compensation
Agreement between Company
and Daniel T. Murphy ii
10.5 Amendment to Employment Agreement between
Company and Herbert M. Pearlman ix
10.6 Amendment to Employment Agreement between
Company and David S. Lawi ix
10.7 Amendment to Employment Agreement between
Company and Daniel T. Murphy ix
10.8 Stock Purchase Agreement dated as of the
30th day of November, 1992 between the
Company, Helm Resources, Inc., and certain
subsidiaries of Helm Resources, Inc.,
as amended. iv
10.9 Toll Compounding Contract dated April 1, ix
1994 between Chemtrusion, Inc. and Himont
U.S.A., Inc.
10.10 Employment Agreement dated as of July 26, 1993 vii
between the Company and Fred Zeidman
10.11 Investment Agreement dated as of June 24, 1993 vii
between the Company and Fred Zeidman
10.12 Definitive Agreement for Compounding Services x
between Chemtrusion, Inc. and Mytex Polymers
(Confidential Treatment has been requested
and obtained from the Securities and Exchange
Commission with respect to certain portions of
this Agreement through May 15, 2001)
22.1 Subsidiaries Filed
Herewith
23.1 Consent of BDO Seidman, LLP to incorporation by Filed
reference of their opinion into filed Herewith
registration statements
</TABLE>
_______________
i: Filed as an exhibit to the Company's Registration Statement (No.
33-10108) on Form S-1 and incorporated herein by reference
PAGE 29 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 30
ii: Filed as an exhibit to Company's Form 10-K for the year ended
December 31, 1988 and incorporated herein by reference.
iii: Filed as an exhibit to Company's Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference.
iv: Filed as an exhibit to the Company's Proxy Statement and Notice of
Special Meeting dated February 16, 1993 and incorporated herein by
reference.
v: Filed as an exhibit to Company's Form 10-K for the year ended December
31, 1992 and incorporated herein by reference.
vi: Filed as an exhibit to the Company's Registration Statement (No.
33-71582) on Form S-1 and incorporated herein by reference.
vii: Filed as an exhibit to Company's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
viii: Filed as an exhibit to the Company's Registration Statement (No.
333-00003) on Form S-3 and incorporated herein by reference.
ix: Filed as an exhibit to Company's Form 10-KSB for the year ended
December 31, 1994 and incorporated herein by reference.
x: Filed as an exhibit to Company's Form 10-KSB for the year ended
December 31, 1995 and incorporated herein by reference.
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K dated March 5, 1996 which
reported, in Item 5, the signing of the Definitive Agreement with Mytex
Polymers. The Company filed a Report on Form 8-K dated November 1, 1996
which reported, in Item 5, the termination of discussions with Helm
Resources, Inc. concerning the proposed acquisition of Interpak Holdings,
Inc.
PAGE 30 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 14th day of April, 1997.
INTERSYSTEMS, INC.
By:/s/ Fred S. Zeidman
Fred S. Zeidman
President,
Chief Executive Officer
By:/s/ Daniel T. Murphy
Daniel T. Murphy
Executive Vice President
Chief Financial Officer
By:/s/ Wm. Chris Mathers
Wm. Chris Mathers
Chief Accounting Officer and
Controller
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report is signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
/s/ Herbert M. Pearlman Chairman of the Board April 14, 1997
Herbert M. Pearlman
/s/ Fred S. Zeidman Director, President and April 14, 1997
Fred S. Zeidman Chief Executive Officer
PAGE 31 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 32
/s/ Daniel T. Murphy Executive Vice President April 14, 1997
Daniel T. Murphy Chief Financial
Officer
/s/ David S. Lawi Director, Secretary April 14, 1997
David S. Lawi
/s/ Walter M. Craig, Jr. Director April 14, 1997
Walter M. Craig, Jr.
/s/ John E. Stieglitz Director April 14, 1997
John Stieglitz
/s/ William Lurie Director April 14, 1997
William Lurie
PAGE 32 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 33
INDEX TO FINANCIAL STATEMENTS
PAGE
InterSystems, Inc. Consolidated Financial Statements:
Report of Independent Certified Public Accountants. . . . . . . F-2
Consolidated Balance Sheet as of December 31, 1996 . . . .. . . F-3
Consolidated Statements of Loss for the Years Ended
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity (Capital
Deficit) for the Years Ended December 31, 1996 and 1995 . . . F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 . .. . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . F-7 - F-22
PAGE 33 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
InterSystems, Inc.
We have audited the accompanying consolidated balance sheet of InterSystems,
Inc. as of December 31, 1996, and the related consolidated statements of
loss, shareholders' equity (capital deficit), and cash flows for the each
of the two years in the period ended December 31, 1996. 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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our 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 InterSystems, Inc. at December 31, 1996, and the results of its operations
and its cash flows for the each of the two years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Houston, Texas
March 14, 1997
PAGE 34 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 35
INTERSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1996
(In thousands, except par value)
<TABLE>
<S> <C>
1996
Assets
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 1,374
Trade receivables, less allowance of $21 (Notes 4 and 5). 2,623
Due from affiliate (Notes 8(a) and 8(c)). . . . . . . . . 269
Inventories (Notes 2, 4 and 5). . . . . . . . . . . . . . 1,621
Prepaid expenses and other. . . . . . . . . . . . . . . . 159
Total Current Assets . . . . . . . . . . . . . . . 6,046
Property, Equipment and Leasehold Improvements, Net
(Notes 3, 4 and 5). . . . .. . . . . . . . . . . . . . 18,810
Time Deposits (Note 10) . . . .. . . . . . . . . . . . . . 110
Other Assets. . . . . . . . . .. . . . . . . . . . . . . . 253
$ 25,219
Liabilities and Shareholders' Equity (Capital Deficit)
Current Liabilities:
Short-term notes payable (Note 4) . .. . . . . . . . . $ 1,413
Current portion of long-term debt (Note 5). . . . . . 585
Accounts payable. . . . . . . . . . . . . . . . . . . 1,981
Accrued expenses (Note 8(d)). . . . . . . . . . . . . 1,103
Net liabilities of discontinued operations (Note 11). 547
Total Current Liabilities. . . .. . . . . . . . . . 5,629
Long-term Debt, Less Current Maturities (Note 5). . . . . 16,370
Subordinated Debentures (Note 7). . . . . . . . . . . . . 2,327
Total Liabilities. . . . . . . . . . . . . . . . . 24,326
Redemption Value of 1,510.9 Shares of Common Stock (Note 9(a)). 2,077
Commitments and Contingencies (Notes 9 and 10)
Shareholders' Equity (Capital Deficit) (Note 9):
Preferred stock, $.01 par value, 5,000 shares authorized;
-0- shares issued and outstanding. . . . . . . . . . . .
Common stock, $.01 par value, 20,000 shares authorized;
6,378 shares issued and outstanding . . . . . . . . . . 64
Additional paid-in capital. . . . . . . . . . . . . . . . . 3,456
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (4,604)
Note receivable for sale of stock (Note 8(e)) . . . . . . . (100)
Total Shareholders' Equity (Capital Deficit) . . . . . . (1,184)
$ 25,219
</TABLE>
PAGE 35 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 36
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF LOSS
For the Years ended December 31, 1996 and 1995
(In thousands, except per share data)
1996 1995
<TABLE>
<S> <C> <C>
Net sales (Note 14) . . . . . . . . . . . . $ 20,387 $ 15,703
Cost of sales . . . . . . . . . . . . . . . 14,417 10,793
Gross profit . . . . . . . . . . . . 5,970 4,910
Selling, general and administrative expenses 5,557 4,564
Management fees to affiliate (Note 8(c)). . 36 36
Management fee income (Note 10(a)). . . . . (75)
Interest income . . . . . . . . . . . . . . (46) (67)
Interest expense (Note 8(d)). . . . . . . . 897 810
Loss on disposal of equipment . . . . . . . 45
Loss from continuing operations. . . (399) (478)
Loss from discontinued operations of
Tropical Systems, Inc. (Note 11). . . . (480) (217)
Loss on disposal of the Tropical
Systems, Inc. (Note 11) . . . . . . . . (1,440)
Loss from discontinued operations. . (1,920) (217)
Net loss . . . . . . . . . . . . . . $ (2,319) $ (695)
Loss per share:
Continuing operations . . . . . . . . . $ (.06) $ (.11)
Discontinued operations . . . . . . . . (.08) (.05)
Estimated loss on disposal. . . . . . . (.23)
Net loss . . . . . . . . . . . . . . $ (.37) $ (.16)
Average number of common shares outstanding 6,177 4,316
</TABLE>
PAGE 36 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 37
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
For The Years Ended December 31, 1996 and 1995
(In thousands, except share data)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total
Note Shareholders
Additional Receivable Equity
Common Stock Paid-In For Sale (Capital
Shares Amount Capital Deficit of Stock Deficit)
Balance at December 31, 1994. . . . 4,019,101 $ 40 $ 2,617 $ (1,590) $ (100) $ 967
Conversion of 10% subordinated
debentures (Note 7(a)) . . . . . 18,939 - 23 - - 23
Conversion of 8% subordinated
debentures (Note 7(b)) . . . . . 154,178 2 225 - - 227
Shares issued with exercise
of warrants (Note 9(e)). . . . . 275,000 3 162 - - 165
Shares sold to employees. . . . . . 12,000 - 18 - - 18
Net loss. . . . . . . . . . . . . . - - - (695) - (695)
Balance at December 31, 1995. . . . 4,479,218 45 3,045 (2,285) (100) 705
Conversion of 10% subordinated
debentures (Note 7(a)) . . . . . 36,792 - 60 - - 60
Conversion of 8% subordinated
debentures (Note 7(b)) . . . . . 294,154 3 422 - - 425
Sale of common stock subject
to redemption (Note 9(a)) . . . . 1,510,900 15 (15) - - -
Sale of common stock (Note 9(a)). . 49,100 1 68 - - 69
Costs associated with issuance
of redeemable common stock . . . - - (136) - - (136)
Shares sold to employees. . . . . . 8,000 - 12 - - 12
Net loss. . . . . . . . . . . . . . - - - (2,319) - (2,319)
Balance at December 31, 1996. . . . 6,378,164 $ 64 $ 3,456 $ (4,604) $ (100) $ (1,184)
</TABLE>
PAGE 37 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 38
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1996 and 1995
(In thousands)
(Note 13)
<TABLE>
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . $ (2,319) $ (695)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . 1,065 778
(Gain) loss on disposal of equipment . . (2) 45
Provision for losses on accounts receivable 34 27
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables . . . . . . . . . (60) (464)
Inventories . . . . . . . . . . . . 519 (579)
Due from affiliate. . . . . . . . . (179) (90)
Increase (decrease) in:
Accounts payable and accrued expenses 311 789
Net liabilities from discontinued operations 547 -
Other changes - net. . . . . . . . . . . . . . . 117 (207)
Total adjustments . . . . . . . . . . . 2,352 299
Net cash provided by (used in)
operating activities . . . . . . 33 (396)
Cash flows from investing activities:
Purchases of fixed assets . . . . . . . . . . . . (13,282) (531)
Payments on notes receivable - sale of Trading
Business . . . . . . . . . . . 490 265
Purchase of time deposits . . . . . . . . . . . . (110) -
Proceeds from sale of equipment . . . . . . . . . 154 -
Collections (advances) on note receivable . . . . 50 (50)
Net cash used in investing activities (12,698) (316)
Cash flows from financing activities:
Net proceeds (repayment) on lines of credit and
other short-term borrowings . . . . . . . . . . . (632) 413
Net proceeds (repayments) on line of credit,
affiliated company. . . . . . . . . . . . . . . . (438) 338
Proceeds (repayments) on notes payable, affiliated
company . . . . . . . . . . (100) 100
Proceeds from long-term debt obligations. . . . . . 13,862 351
Payments under various long-term debt obligations . (690) (699)
Proceeds from sale of common stock. . . . . . . . . 22 183
Net proceeds from private placement of
redeemable common stock . . . . . . . . . . . . . 2,009 -
Net cash provided by financing
activities . . . . . . . . . . . 14,033 686
Net increase (decrease) in cash and cash equivalents. 1,368 (26)
Cash and cash equivalents, beginning of year. . . . . 6 32
Cash and cash equivalents, end of year. . . . . . . . $ 1,374 $ 6
</TABLE>
PAGE 38 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 39
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
The consolidated financial statements include the accounts of
InterSystems, Inc., a Delaware corporation and Subsidiaries (the "Company"),
all of which are wholly-owned. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company, through its wholly-owned subsidiary, Chemtrusion, Inc.
("Chemtrusion"), a Texas corporation, specializes in the custom-compounding
of thermoplastic resins for the petrochemical and automobile
industries in Houston, Texas and Jeffersonville, Indiana, respectively.
Compounding entails combining a resin with various additives to enhance and
customize the thermoplastic resins for a particular end use. The Company,
through its wholly-owned subsidiary, InterSystems, Inc. a Nebraska corporation
("InterSystems Nebraska"), located in Omaha, Nebraska is 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.
On October 6, 1995, InterSystems Nebraska formed a wholly-owned
subsidiary, Tropical Systems, Inc. ("Tropical"). InterSystems Nebraska,
through Tropical, marketed rolling doors and hurricane shutters, primarily
to the construction, distribution and retail industries in South Florida,
Latin America and the Caribbean. As of June 30, 1996, the Company adopted a
formal plan to dispose of the operations of Tropical (see Note 11).
On August 31, 1993, the Company acquired all the outstanding capital
stock of InterSystems Nebraska from Helm Resources, Inc. ("Helm"), an
affiliated company. The acquisition was accounted for in a manner
similar to a pooling-of-interest.
Financial Instruments and Credit Risk Concentration
The Company's financial instruments include time deposits, notes
payable, long-term debt, subordinated debentures and letters of credit. The
carrying value of these instruments approximate market values because
the rates of return and borrowing rates are similar to other financial
instruments with similar maturities and terms.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Concentrations of credit risk with respect to such receivables are limited
due to generally short payment terms and their dispersion across geographic
areas, see Note 14 for major customer.
At December 31, 1996, the Company had cash deposits in financial
institutions that exceeded the federally insured deposit limit by
approximately $1,034,000.
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 operates. Depreciation and
amortization on other property, equipment and leasehold improvements is
PAGE 39 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 40
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.
Income Taxes
Deferred income taxes result from the temporary differences between
the financial statement and income tax basis of assets and liabilities (see
Note 6). The Company adjusts the deferred tax asset valuation allowance
based on judgments as to future realization of the deferred tax benefits
supported by demonstrated trends in the Company's operating results.
Revenue Recognition
Sales are recorded in the periods that products are shipped or as
services are performed.
Loss Per Share
Loss per share is computed on the basis of the weighted average number
of outstanding shares of common stock during the year. Stock options and
warrants were anti-dilutive and, therefore were not included
in calculating net loss per share.
Lease Accounting
The Company, through InterSystems Nebraska, 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 difference 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.
Stock Options and Warrants
The Company accounts for stock options and warrants issued to employees
in accordance with APB 25, "Accounting for Stock Issued to Employees." For
financial statement disclosure purposes and issuance of options
and warrants to non-employees for services rendered, the Company follows SFAS
Statement 123, "Accounting for Stock-Based Compensation" (see Note 9(b)).
Cash Equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
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
necessary adjustments prior to their issuance.
PAGE 40 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 41
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" (SFAS No. 121). SFAS No. 121 requires, among other things, that impairment
losses on assets to be held, and gains or losses from assets that are
expected to be disposed of, be included as a component of income from
continuing operations. The Company adopted SFAS No. 121 in 1996 and its
implementation did not have a material effect on the consolidated financial
statements.
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS No. 128). This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Board Opinion (APB) No. 15, "Earnings Per Share". SFAS 128
provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share in
the earnings of an entity, similar to fully diluted earnings per share.
The Company will adopt SFAS No. 128 in 1997 and its implementation is not
expected to have a material effect on the consolidated financial statements.
NOTE 2 - INVENTORIES
Inventories consisted of the following at December 31, 1996
(in thousands):
<TABLE>
<S> <C>
Amount
Raw materials and component parts. . . . . . . . $ 1,065
Finished goods . . . . . . . . . . . . . . . . . 556
$ 1,621
</TABLE>
PAGE 41 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 42
NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements
consisted of the following at December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Amount
Land . . . . . . . . . . . . . . . . $ 593
Buildings. . . . . . . . . . . . . . . 7,882
Machinery and equipment. . . . . . . . 8,773
Other equipment. . . . . . . . . . . . 1,997
Equipment leased to others . . . . . . 967
Leasehold improvements . . . . . . . . 496
Equipment under capital leases . . . . 3,625
Furniture and fixtures . . . . . . . . 102
24,435
Less: Accumulated depreciation and amortization,
of which $736,000 relates to leased equipment. (5,625)
$ 18,810
</TABLE>
During 1996, Chemtrusion capitalized interest expense totalling
approximately $234,000 in association with the construction of the Jefferson-
ville, Indiana facility.
InterSystems Nebraska leases grain sampling equipment to certain of its
customers under operating leases with initial terms of three years. The
leases contain provisions for minimum annual rentals plus contingent
usage rentals. Contingent lease revenues were $328,000 and $238,000 in 1996
and 1995, respectively. At December 31, 1996, the approximate aggregate
minimum rentals to be received in future years are $217,000 in
1997; $159,000 in 1996; and $44,000 in 1999.
NOTE 4 - SHORT-TERM NOTES PAYABLE
At December 31, 1996, InterSystems Nebraska had a revolving credit
agreement with a bank. The financing agreement provides for borrowings of up
to $3,000,000 based upon a borrowing base (as defined) and
is due on demand. At December 31, 1996, borrowings of $990,000 were outstand-
ing under this agreement and bear interest at the bank's base rate plus 1.25%
(9.5% at December 31, 1996). InterSystems Nebraska has pledged its accounts
receivable, inventory, equipment and fixtures and intangibles as collateral
for the debt. The net book value of the collateral totalled approximately
$3,582,000 at December 31, 1996. In addition, InterSystems, Inc., a Delaware
corporation, has pledged all outstanding shares of InterSystems Nebraska's
common stock as collateral.
At December 1996, InterSystems Nebraska had additional borrowings with
the bank totalling $125,000. The note bears interest at the bank's base rate
plus 2% (10.25% at December 31, 1996) and is due on May 31, 1997.
At December 31, 1996, Chemtrusion had a revolving line of credit
agreement with a bank. The agreement provides for a maximum borrowing of
$300,000 and expires September 1997. The agreement bears
interest at the bank's base rate plus 2% (10.25% at December 31, 1996) and is
PAGE 42 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 43
collateralized by Chemtrusion's accounts receivable and inventory. At
December 31, 1996, Chemtrusion had borrowings outstanding totalling
$298,000 under this agreement and the net book value of collateral totalled
approximately $772,000. The agreement requires Chemtrusion, among other
things, to maintain a certain minimum net worth and debt to equity ratio, as
defined.
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996
(in thousands):
<TABLE>
<S> <C>
Amount
Note payable to bank, due January 31,
1997, interest at LIBOR plus .25%
(5.65% at December 31, 1996),
refinanced on January 31, 1997 (see below) . . $ 13,692
Subordinated 8.75% term note payable
$4,808 monthly, including interest,
through September 1, 1999, secured
by land. . . . . . . . . . . . . . . . . . . . 432
10.5% term note, payable $5,774 monthly,
including interest, through January
1998, secured by equipment . . . . . . . . . . 238
9.25% term note, payable $6,299 monthly,
including interest, through February
2001, secured by inventory and
equipment. . . . . . . . . . . . . . . . . . . $ 202
8.75% term note payable $16,500 quarterly,
plus interest monthly through May 1999,
secured by accounts receivable, inventory,
equipment and intangibles. . . . . . . . . . . 165
10.25% term note, payable $3,774 monthly,
including interest, through March 2000,
secured by equipment . . . . . . . . . . . . . 127
Obligations under capital lease. . . . . . . . . 2,009
Other obligations. . . . . . . . . . . . . . . . 90
Total . . . . . . . . . . . . . . . . . . . 16,955
Less: Current maturities . . . . . . . . . . . (585)
Total long-term debt. . . . . . . . . . . . $ 16,370
</TABLE>
Under the terms of a loan agreement, InterSystems Nebraska is subject
to certain covenant requirements that, among other things, require
maintenance of minimum net worth, working capital, debt to worth ratio, and
also limits the amount of capital expenditures, payments to affiliates,
indebtedness, dividends and management fees. InterSystems Nebraska was in
violation of certain covenants, which have been waived through January 1998.
PAGE 43 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 44
Under the terms of the 9.25% term note agreement, InterSystems Nebraska
is subject to certain covenant requirements that, among other things, require
maintenance of a minimum debt service coverage ratio to allow for the payment
of management fees and also limits dividends and other payments to
InterSystems, Inc. or related entities.
The note payable to a bank totalling $13,692,000, net of capital
recovery of $220,000 at December 31, 1996 (see Note 10(a)), was a
construction loan to Chemtrusion to finance the construction of its facility in
Jeffersonville, Indiana. The note was guaranteed by the partners of a non-
related joint venture. On January 31, 1997, the joint venture paid-off the
note and provided Chemtrusion permanent financing for the facility totalling
$14,000,000. The note payable bears interest at 7%, payable monthly for the
first two years, thereafter the agreement requires monthly installments of
$143,973, including interest, through January 2011. The note is
collateralized by the facility. At December 31, 1996, the note payable to a
bank has been classified to reflect the terms of the permanent debt agreement.
InterSystems, Inc. and Chemtrusion leased certain machinery and
equipment under capital leases expiring through 2002. At December 31, 1996,
future minimum lease payments under capital leases, together
with the present value of the net minimum lease payments, are as follows (in
thousands):
<TABLE>
<S> <C>
Amount
1997 . . . . . . . . . . . . . . . . . . . . $ 491
1998 . . . . . . . . . . . . . . . . . . . . 555
1999 . . . . . . . . . . . . . . . . . . . . 478
2000 . . . . . . . . . . . . . . . . . . . . 437
2001 . . . . . . . . . . . . . . . . . . . . 526
Thereafter . . . . . . . . . . . . . . . . . 63
Total minimum lease payments . . . . . . . . 2,550
Less: Amount representing interest
calculated at the incremental borrowing rate (541)
Present value of net minimum lease payments. . 2,009
Less: Current portion. . . . . . . . . . . . . (326)
Long-term portion of capital leases. . . . . . $ 1,683
</TABLE>
During 1996, InterSystems Nebraska entered into agreements for the
lease of certain machinery and equipment. Subsequent to entering into these
agreements, InterSystems Nebraska assigned the leases to InterSystems, Inc.
and entered into annual leases with InterSystems, Inc. for the use of the
machinery and equipment. InterSystems, Inc. is accounting for these leases
as capital leases. The leases between InterSystems, Inc. and InterSystems
Nebraska are accounted for as operating leases, with the rental income and
expense eliminating in consolidation.
The net book value of machinery and equipment under capital lease at
December 31, 1996 was $2,806,000.
Subsequent to the year ended December 31, 1996, Chemtrusion entered
into a loan agreement for $1,459,000 with a financial institution. Proceeds
of the note were used to purchase certain equipment that was
under capital lease at December 31, 1996, pay other related costs and provide
PAGE 44 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 45
$250,000 in working capital. The note is payable in monthly installments
beginning April 1997, of $24,320, including interest at prime plus 1.5%,
through April 2002, and is collateralized by the equipment. The remaining
capital lease obligations of $1,012,000 at December 31, 1996 has been
classified to reflect the terms of the new loan agreement.
Future maturities of long-term debt at December 31, 1996, including
capital leases summarized above are: 1997 - $585,000; 1998 - $662,000;
1999 - $1,663,000; 2000 - $1,320,000; 2001 - $1,381,000; and $11,344,000,
thereafter.
NOTE 6 - INCOME TAXES
Deferred taxes are determined based on temporary differences between
the financial statement and income tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse.
Net deferred income tax asset (liability) consisted of the following at
December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Amount
Net operating loss carryforwards . . . . . . . . . $ 2,130
Tax basis in excess of assets acquired
(InterSystems Nebraska). . . . . . . . . . . 497
Expenses accrued for financial reporting
purposes not deducted for tax purposes, net. 204
Tax credit carryforwards . . . . . . . . . . . . . 98
Deferred tax asset . . . . . . . . . . . . . . . . 2,929
Valuation allowance. . . . . . . . . . . . . . . . (2,057)
Net deferred tax asset . . . . . . . . . . . . . . 872
Deferred tax liability - depreciation. . . . . . . (872)
Net deferred income tax asset (liability). . . . . $ -
</TABLE>
For the years ended December 31, 1996 and 1995, the income tax
benefit differs from the amount of income tax benefit determined by applying
the statutory income tax rate to pre-tax loss as follows:
<TABLE>
<S> <C> <C>
1996 1995
(In thousands)
Statutory rate . . . . . . . . . . $ (788) $ (236)
Increase in valuation allowance. . 781 151
Other - net. . . . . . . . . . . . 7 85
$ - $ -
</TABLE>
PAGE 45 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 46
As of December 31, 1996, the Company had for income tax purposes,
net operating loss carryforwards of approximately $6,266,000, which expire in
years through 2011. The Company also has general business credit
carryforwards of approximately $98,000. The general business credits can be
carried forward indefinitely, however, these credits are subject to certain
future limitations in usage.
NOTE 7 - SUBORDINATED DEBENTURES
Subordinated debentures consist of the following at December 31, 1996
(in thousands):
<TABLE>
<S> <C>
Amount
10% debentures, net of discount of $35,000 (a) . $ 1,285
8% debentures (b). . . . . . . . . . . . . . . . 1,042
$ 2,327
</TABLE>
Included in the total above are debentures payable to affiliates of
$972,000 as of December 31, 1996.
(a) During May 1991, the Company issued a private-placement
consisting of approximately $1,837,500 of 10% convertible subordinated
debentures maturing June 30, 2001 (the "10% Debentures") and
367,500 stock-purchase warrants ("placement warrants"). These warrants were
subsequently exchanged on a one for one basis for dividend warrants (see
Note 9(d)). 10% Debentures aggregating $690,000 are currently
convertible into the Company's common stock at a per share price of $1.32,
reduced from the original conversion rate of $2.50, due to dilutive
provisions and other reductions in the conversion price in prior years. The
remaining amount of 10% Debentures are currently convertible at a per share
price of $1.83 reduced from the original conversion rate of $2.50, due to
dilutive provisions. The debt is subordinate to the senior debt of the Company,
as defined. Debentures totalling $62,500 and $25,000 were converted in 1996
and 1995, respectively, at conversion rates ranging from $1.32 to $1.83. The
10% Debentures also contain anti-dilution provisions entitling the holders
to receive the number of dividend warrants they would have been entitled to
receive had they converted all of the 10% Debentures held on the record date
of the warrant dividend (see Note 9(d)); however, dividend warrants
are only payable on the 10% Debentures if they are converted into common stock.
(b) In connection with the acquisition of InterSystems Nebraska
in 1993, the Company issued $2,100,000 aggregate principal amount of 8%
convertible subordinated debentures maturing August 31, 2003 (the
"8% Debentures"), which were then exchanged by Helm to retire Helm's outstand
- -ing debentures. The 8% Debentures are currently convertible into the
Company's common stock at a price per share of $1.43 reduced
from the original conversion rate of $1.48, due to dilutive provisions,
subject to adjustments in certain circumstances and are subordinate to the
senior debt of the Company, as defined. The 8% Debentures are
callable by the Company in the event that the market price of the common
stock exceeds $1.92 for any period of 20 consecutive days. Debentures
totalling $425,000 and $227,000 were converted in 1996 and 1995, respectively,
at conversion rates ranging from $1.43 to $1.46.
PAGE 46 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 47
NOTE 8 - RELATED PARTY TRANSACTIONS
(a) As of December 31, 1996 and 1995, Helm owned approximately
22% and 35%, respectively, of the Company's outstanding common stock. Helm
provides the Company with various managerial and administrative functions and
services for which the Company is charged direct costs and expenses. Certain
indirect administrative and managerial costs are allocated to the Company
based on certain formulas which management deems to be reasonable. The
allocations charged to the Company totalled $51,000 and $66,000 in
1996 and 1995, respectively. At December 31, 1996, the Company had net
advances due from Helm totalling $244,000. The net advances are for general
corporate matters, less unpaid allocated expenses totalling $32,000.
(b) During 1995, Tropical entered into an agreement with an
affiliated company (the Purchaser), which is 14% owned by Helm, to sell
certain accounts receivable without recourse. Effective with Tropical
ceasing operations on September 30,1996, the agreement was terminated. At
December 31, 1996, Tropical had unpaid accounts receivable held by the
affiliated company totalling $49,000 and liabilities to the affiliated
company totalling $126,000, which have been included in the net liability of
discontinued operations. For the years ended 1996 and 1995, Tropical
incurred fees totalling $23,000 and $9,000, respectively, which have been
included in loss from discontinued operations.
(c) Interpak Holdings, Inc. ("Interpak"), a subsidiary of Helm
(and a former subsidiary of the Company), provides management services to
Chemtrusion. The allocated expenses, for such management services, based on
certain formulas which management deems to be reasonable, amounted to $36,000
for both 1996 and 1995. In addition, during 1996 and 1995, Interpak paid
certain operating expenses on behalf of the Company. At December 31, 1996,
the Company had a balance due from Interpak totalling $25,000.
(d) During 1996 and 1995, the Company had borrowings
outstanding under a line of credit with an affiliated company, which were
repaid in February 1996 and the agreement was terminated. The line of credit
provided a maximum borrowing of $450,000 and bore interest at 25%. During
1996 and 1995, the Company incurred interest expense of $3,000 and $73,000,
respectively, of which $34,000 remained unpaid at December 31, 1996.
(e) In 1993, the Company sold 200,000 shares of common stock at
$1.00 per share to its new President in connection with his employment;
$100,000 was paid in cash and the Company received a note in the
principal amount of $100,000 with interest at the lesser of 12% per annum or
the prime rate. For the years ended December 31, 1996 and 1995, the Company
earned interest on the note receivable totalling $8,000 and $10,000,
respectively. At December 31, 1996, unpaid interest totalled $28,000 under
this note agreement.
(f) At December 31, 1995, the Company had unsecured borrowings
totalling $100,000 from a company in which an officer of the Company is a
stockholder. In February 1996, the borrowings were repaid, including
interest at 15%. Interest expense incurred by the Company during 1996 and
1995 was minimal.
NOTE 9 - COMMON STOCK, STOCK OPTIONS AND WARRANTS
(a) During the year ended December 31, 1996, the Company completed
a private placement of 1,560,000 shares of the Company's common stock and
780,000 common stock purchase warrants. Proceeds from the placement totalled
$2,145,000. Each unit offered for sale consisted of 40,000 shares of the
PAGE 47 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 48
Company's common stock, priced at the average of the closing price of the
common stock during the ten trading days preceding the Board of Directors'
approval of the placement, and 20,000 common stock purchase warrants for
a total price of $55,000, per unit. The warrants are exercisable beginning
July 15, 1996, through January 15, 2000 at an exercise price of $1.80 per
share, the warrants may be called by the Company at $0.5 per warrant if during
the three year period following August 9, 1996, the effective date of the
Registration Statement covering the shares and the shares underlying the
warrants, the closing price of the Company's common stock equals or
exceeds $2.50 per share for at least thirty consecutive trading days. As of
December 31, 1996, no warrants are eligible for redemption by the Company.
Holders of the units have the right at the end of the two year
period following the effective date of the Registration Statement covering
the shares, to cause the Company to redeem the common stock contained in
the units, but not the common stock underlying the warrants, for $1.80 per
share as defined by the agreement, unless during such period the closing
price of the Company's common stock is at least $1.80 per share for any
thirty consecutive trading days.
During 1996, 49,100 shares of common stock issued during the private
placement were subsequently traded in the open market, at which time the
redemption feature was forfeited. Accordingly, the Company has
reclassified these shares as shareholders' capital. At December 31, 1996, the
Company had redeemable common stock outstanding totalling $2,077,000.
In association with the private placement, the Company issued
150,000 common stock purchase warrants to certain officers and directors of
the Company. The warrants are exercisable upon issuance through October
29, 2001 at an exercise price of $1.375 per share.
(b) The Company has a stock option plan, whereby options to
purchase up to 325,000 shares of the Company's common stock may be granted
to employees at the market value of the common stock on the date
of the grant. The options may be incentive stock options, as defined by the
Internal Revenue Code, or non-qualified stock options. Options are generally
exercisable for a term of ten years. The options vest at a rate of
25% per year.
The Company has elected to continue to account for stock options
issued to employees in accordance with APB opinion 25, "Accounting for Stock
Issued to Employees." Effective for the year ended December 31,
1996, the Company was required to adopt the disclosure portion of SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement requires the
Company to provide pro forma information regarding net loss and
loss per share as if compensation cost for the Company's stock options
granted had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. During the years ended December
31, 1996 and 1995, the Company issued no stock options under the plan.
Accordingly, the disclosure requirements of SFAS No. 123 as it pertains to
the pro forma effect on net loss and loss per share, are not applicable for
1996 and 1995.
PAGE 48 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 49
A summary of the status of the Company's stock options to employees
as of December 31, 1996 and 1995, and changes during the years ending on
those dates is presented below:
<TABLE>
<S> <C> <C> <C> <C>
1996 1995
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year. . . . . . . . . . 171,228 $ 3.83 171,228 $ 3.83
Granted . . . . . . . . . . . . . . . . . . . . . . - - - -
Exercised . . . . . . . . . . . . . . . . . . . . . - - - -
Expired . . . . . . . . . . . . . . . . . . . . . . (66,797) 5.60 - -
Outstanding at end of year. . . . . . . . . . . . . 104,431 $ 2.60 171,228 $ 3.83
Options exercisable at year-end . . . . . . . . . . 104,431 $ 2.60 171,228 $ 3.83
Weighted average fair value of
options granted during the
year . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<S> <C> <C> <C>
Weighted
Average
Remaining
Contract
Number -ual Number
Exercise Outstanding Life Exercisable
Price At 12/31/96 (Years) at 12/31/96
$ 4.00 53,931 .83 53,931
$ 8.20 500 1.67 500
$ 1.25 50,000 7.67 50,000
</TABLE>
As a result of certain anti-dilution provisions provided for
within the options, the exercise price of the options issued prior to
December 1990 may be subject to reduction.
(c) During 1995, the Company granted to certain directors,
options to purchase 40,000 shares of common stock at an exercise price of
$1.625 which equaled the current market price of the Company's common stock
at the date of grant. These options vest 50% on the date of grant and 25% on
the next two anniversaries of the grant and may be exercised at any time
through December 2000. No options have been exercised as of December 31, 1996.
In June 1993, the Company granted to its new
President, options to purchase 200,000 shares of common stock at an exercise
price of $2 and an additional 200,000 shares at an exercise price of $3.
These options vested 50% on the first anniversary and 25% in each of the next
two anniversaries and may be exercised at any time through June 1998. No
options have been exercised as of December 31, 1996.
PAGE 49 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 50
(d) In October 1991, the Company issued a warrant dividend
of .25 warrants for each common share outstanding. Approximately 766,000
stock purchase warrants were issued with an exercise price of $3.50
per share and they expire on December 31, 1999. In addition, if at any time
after September 23, 1993, the market price of the common stock equals or exceeds
$5.00 for 30 consecutive business days, then the Company has the
right to shorten the expiration date upon 60 days public notice to warrant
holders. Pursuant to certain anti-dilution provisions, holders of the
placement warrants (see Note 7) became entitled to receive the number of
dividend warrants they would have been entitled to receive had they exercised
the warrants owned by them on the dividend record date. Therefore, holders of
the placement warrants received an aggregate of 91,875 warrants
as a result of the dividend. The dividend was payable with respect to the
placement warrants on or about the record date, and payment did not require
prior exercise of the placement warrants issued with the Debentures.
Upon conversion of the Debentures, pursuant to anti-dilution provisions, the
holders thereof are entitled to receive an aggregate of 140,750 dividend
warrants (see Note 7).
(e) During 1995, the holders of the 275,000 stock purchase
warrants that they had purchased in June 1994 from a bank that had received
them in connection with the sale of the Trading Business exercised
the warrants at a reduced exercise price of $.60 per share. Of the 275,000
warrants exercised, 146,300 were held by directors, officers and employees of
the Company. Compensation expense associated with the 146,300
warrants for the difference between the reduced exercise price plus the warrant
cost and the market price of the Company's common stock was minimal.
Simultaneously, the Company issued the holders additional warrants
to purchase 275,000 shares of common stock, at an exercise price of $1.50 per
share. The fair market value of warrants issued to officers and employees
as computed in accordance with SFAS No. 123 was minimal.
Accordingly, the pro forma information regarding the effect on the 1995 net loss
and loss per share has not been presented.
(f) At December 31, 1996, shares reserved for future issuance are as
follows:
<TABLE>
<S> <C>
Shares
Conversion of Debentures. . . . . . . . . . . . . . . . 1,595,660
Shares reserved for stock option plan, including 104,431
options outstanding . . . . . . . . . . . . . . . . . 325,000
Stock options outstanding . . . . . . . . . . . . . . . 440,000
Warrants to purchase common stock . . . . . . . . . . . 2,435,352
Total shares reserved for issuance. . . . . . . . . . . 4,796,012
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(a) On January 26,1996, Chemtrusion entered into an exclusive
long-term contract with a non-related joint venture to provide custom
compounding of thermoplastics and related services. The agreement
required Chemtrusion to construct a thermoplastics compounding plant in
Jeffersonville, Indiana. The cost of the plant totalled approximately
$12,788,000, with the interim financing for the construction of the plant
provided by a financial institution and guaranteed by the joint venture
PAGE 50 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 51
partners. The plant was completed and on line as of October 15, 1996. On
January 31, 1997, the joint venture provided the permanent financing for the
facility (see Note 5).
Chemtrusion will operate the plant exclusively for the joint
venture under an initial term of five years, with the joint venture having
an option to renew the agreement for two additional five year terms. In
accordance with the agreement, Chemtrusion will bill the joint venture on a
bi-monthly basis for the plant's operating costs, including capital recovery
and interest, along with a management fee.
The capital recovery and interest portion of the billings
discussed above is for the debt service in accordance with the long-term debt
agreement between Chemtrusion and the joint venture (see Note 5). The
terms of the permanent financing agreement requires interest payments only for
the first two years, accordingly, Chemtrusion has recorded billings to the
joint venture for deferred capital recovery costs. This billing represents
deprecation expense as it is being incurred by Chemtrusion during the two year
period and thereafter, until such time as the depreciation expense equals or
exceeds the principal reduction on the note payable in accordance
with the terms of the note agreement, at which time the deferred capital
recovery costs will begin to reverse as reduction of the outstanding debt
over the remaining term of the note. At December 31, 1996, the balance of
the deferred capital recovery costs totalled approximately $220,000 and is
recorded as a reduction of the outstanding debt due to the joint venture.
On expiration of the initial term or any renewal term or in
the event of the termination of the agreement by default, as defined, the
joint venture will have an option to purchase the plant at a price and on
terms and conditions, as defined in the agreement. In the event that the joint
venture does not renew the agreement at the end of the initial term or the
end of any renewal term or either party terminates the agreement,
as defined, Chemtrusion has the right to require the joint venture to purchase
the plant at a price and on the terms and conditions, as defined in the
agreement.
(b) The Company is obligated under various long-term
noncancelable operating leases, for office and warehouse facilities, certain
vehicles and office equipment expiring through 2002 at minimum annual rentals
as follows (in thousands):
<TABLE>
<S> <C>
Amount
1997. . . . . . . . . . . . . . . . . . . $ 597
1998. . . . . . . . . . . . . . . . . . . 604
1999. . . . . . . . . . . . . . . . . . . 520
2000. . . . . . . . . . . . . . . . . . . 475
2001. . . . . . . . . . . . . . . . . . . 400
Thereafter . . . . . . . . . . . . . . . . . 73
$2,669
</TABLE>
Rent and lease expense was $540,000 and $368,000 for the years ended
December 31, 1996 and 1995, respectively.
PAGE 51 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 52
In connection with the sale of the Trading Business, the Company
remains liable under certain operating leases which were either sublet or
assigned to the purchaser. The leases expire in years through 1998 and, at
December 31, 1996, have aggregate future minimum rentals of approximately
$410,000.
(c) In connection with the purchase of InterSystems Nebraska, the
Company is obligated to pay Helm additional consideration in the form of
contingent consideration (based on earnings, as defined) and a royalty on the
sale of certain products.
Since August 31, 1993, date of acquisition, through December
31, 1996, no additional consideration was paid for the purchase of
InterSystems Nebraska. Royalties to Helm totalled approximately
$13,000 and $7,000 for 1996 and 1995, respectively.
(d) The Company has a savings and profit-sharing plan which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The Company matches contributions at the
rate of $.50 per dollar up to 2% of the employee's salary. Contributions are
fully vested to the employee when made. Contributions to the plan were
$60,000 and $54,000 for the years ended December 31, 1996 and 1995,
respectively.
(e) At December 31, 1996, InterSystems Nebraska had various
letters of credit outstanding totalling $110,000. The letters of credit
mature December 31, 1998 and are collateralized by certificates of deposit.
(f) The Company is involved in various legal actions arising in
the normal course of business. Management is of the opinion that their
outcome will not have a material adverse effect on the Company's financial
position or results of operations.
NOTE 11 - DISCONTINUED OPERATIONS
As of June 30, 1996, InterSystems Nebraska adopted a plan to
discontinue Tropical. Tropical ceased operations as of September 30, 1996 and
InterSystems Nebraska anticipates that Tropical will be disposed of by
September 30, 1997 through liquidation. Accordingly, Tropical has been
presented as a discontinued operation and the statements of loss have been
restated to conform with this presentation.
Revenues from Tropical for the years ended December 31, 1996 and 1995
totalled approximately $1,889,000 and $852,000, respectively.
For the six months ended June 30, 1996 and the year ended December 31,
1995, Tropical incurred operating losses of $480,000 and $217,000,
respectively. During 1996, InterSystems Nebraska recorded a loss on
disposal of Tropical totalling $1,440,000, which consisted primarily of the
write-down of assets and included $167,000 for operating losses from July 1,
1996 through September 30, 1996, the date Tropical ceased operations.
Of the $1,440,000 recorded, $1,190,000 was recorded in the fourth quarter of
1996.
PAGE 52 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 53
At December 31, 1996, net liabilities of Tropical consisted of the
following (in thousands):
<TABLE>
<S> <C>
Amount
Assets:
Cash. . . . . . . . . . . . . . . . . . . .$ 14
Accounts receivable . . . . . . . . . . . . 190
Total current assets. . . . . . . . . . .$ 204
Liabilities:
Accounts payable:
Trade . . . . . . . . . . . . . . . . . $ 327
Related parties . . . . . . . . . . . . 160
Accrued expenses. . . . . . . . . . . . 264
Total current liabilities . . . . . . 751
Net liabilities of discontinued
operations. . . . . . . . . . . . . . ..$ 547
</TABLE>
NOTE 12 - NOTES RECEIVABLE FROM SALE OF TRADING BUSINESS
At December 31, 1995, the Company had a remaining non-interest bearing
note receivable due from the sale of the Trading Business (the Company's
prior main operating business) totalling $519,000, net of imputed interest of
$109,000 at 9.7%. In order to accelerate the collection of the note receivable
from its original terms, the Company forgave $29,000 of the note receivable
and collected the balance of $490,000 during 1996.
NOTE 13 - STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
December 31, December 31,
1996 1995
(In thousands)
Supplemental disclosures of cash flow
information:
Interest paid . . . . . . . . . . . $ 998 $ 776
Income taxes paid . . . . . . . . . . . . $ - $ 6
Non-cash transactions relating to financing
activities:
Conversion of Debentures into common stock $ 485 $ 250
Capital lease obligation. . . . . . . . . $ 1,319 $ -
</TABLE>
NOTE 14 - MAJOR CUSTOMER
The Company's custom compounding business segment had sales to two
customers in 1996 totalling $2,128,000 and $2,098,000, and one customer in
1995 totalling $3,022,000.
PAGE 53 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 54
NOTE 15 - BUSINESS SEGMENTS
The Company has two reportable business segments, as noted below. The
information for 1995 has been restated to give effect to the discontinued
operation of Tropical which was previously included in the Industrial
Products Group:
Plastic Resins Group: custom-compounding of thermoplastic resins.
Industrial Products Group: designs, manufactures and sells equipment
utilized by the agricultural industry in weighing or moving grain, soybeans
and other agricultural products and develops, manufactures, leases and
sells sampling equipment for use in handling agricultural products and in
manufacturing and other industries.
<TABLE>
<S> <C> <C>
For the Year
December 31,
1996 1995
(In thousands)
Revenues from unaffiliated customers:
Plastic resins. . . . . . . . . . . . . $ 5,992 $ 3,969
Industrial products . . . . . . . . . . 14,395 11,734
Total revenues . . . . . . . . $ 20,387 $ 15,703
Operating profit:
Plastic resins. . . . . . . . . . . . . $ 433 $ 442
Industrial products . . . . . . . . . . 872 541
Total operating profit . . . . 1,305 983
Expenses and other:
General and administrative expense - parent (853) (718)
Interest expense. . . . . . . . . . . . . . (897) (810)
Interest income . . . . . . . . . . . . . . 46 67
Loss from continuing operations . . . . . . $ (399) $ (478)
</TABLE>
<TABLE>
<S> <C>
As of
December
31,
1996
(In thousands)
Identifiable assets:
Plastic resins. . . . . . . . . . . . . . . . $ 18,918
Industrial products . . . . . . . . . . . . . 4,608
Corporate . . . . . . . . . . . . . . . . . . 1,693
$ 25,219
</TABLE>
PAGE 54 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 55
<TABLE>
<S> <C> <C>
For the year December 31,
1996 1995
(In thousands)
Capital expenditures:
Plastic resins. . . . . . . . . . . . . . $ 13,201 $ 289
Industrial products . . . . . . . . . . . 327 242
Corporate . . . . . . . . . . . . . . . . 1,073 -
$ 14,601 $ 531
</TABLE>
<TABLE>
<S> <C> <C>
For the year December 31,
1996 1995
(In thousands)
Depreciation and amortization:
Plastic resins. . . . . . . . . . . . . . $ 717 $ 562
Industrial products . . . . . . . . . . . 240 216
Corporate . . . . . . . . . . . . . . . . 108 -
$ 1,065 $ 778
</TABLE>
PAGE 55 OF 63 PAGES; EXHIBITS BEGIN ON PAGE 56
<PAGE> 56
Exhibit 4.7
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF (COLLECTIVELY THE "SECURITIES") HAVE BEEN ACQUIRED FOR
INVESTMENT ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAW, AND MAY
NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO INTERSYSTEMS, INC. THAT
AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
INTERSYSTEMS, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
TO PURCHASE 0,000
SHARES OF COMMON STOCK
Certify. No. ISI-PPCOMP-
This Warrant Certificate certifies that or his
registered assigns is the registered Holder (the "Holder") of 00,000
Common Stock Purchase Warrants (the "Warrants") to purchase shares of
the common stock, $.01 par value (the "Common Stock") of INTERSYSTEMS,
INC., a Delaware corporation (the "Company").
1. EXERCISE OF WARRANT.
(A) Each Warrant enables the Holder, subject to the provisions
of this Warrant Certificate to purchase from the Company at any time
and from time to time commencing on the date hereof (the "Initial
Exercise Date") one (1) fully paid and non-assessable share of
Common Stock ("Shares") upon due presentation and surrender of this
Warrant Certificate accompanied by payment of the purchase price of
$1.375 per Share (the "Exercise Price"). The Warrants shall expire
on October 29, 2001 (the "Expiration Date"). Payment shall be made
in lawful money of the United States of America by certified check
payable to the Company at its principal office at 8790 Wallisville
Road, Houston, Texas 77029.
As hereinafter provided, the Exercise Price and number of Shares
purchasable upon the exercise of the Warrants may be subject to
modification or adjustment upon the happening of certain events.
(B) This Warrant Certificate is exercisable at any time on or
after the Initial Exercise Date in whole or in part by the Holder in
person or by attorney duly authorized in writing at the principal
office of the Company.
PAGE 56 OF 63 PAGES
<PAGE> 57
2. EXCHANGE, FRACTIONAL SHARES, TRANSFER.
(A) Upon surrender to the Company, this Warrant Certificate
may be exchanged for another Warrant Certificate or Warrant
Certificates evidencing a like aggregate number of Warrants. If
this Warrant Certificate shall be exercised in part, the Holder
shall be entitled to receive upon surrender hereof another Warrant
Certificate or Warrant Certificates evidencing the number of
Warrants not exercised;
(B) Anything herein to the contrary notwithstanding, in no
event shall the Company be obligated to issue Warrant Certificates
evidencing other than a whole number of Warrants or issue certificates
evidencing other than a whole number of Shares upon the exercise of
this Warrant Certificate; provided, however, that the Company shall
pay with respect to any such fraction of a Share an amount of cash
based upon the current public market value (or book value, if there
shall be no public market value) for Shares purchasable upon
exercise hereof. Market price for the purpose of this Section 2
shall mean the last reported sale price on the American Stock
Exchange or such primary exchange on which the Common Stock is traded.
(C) The Company may deem and treat the person in whose name
this Warrant Certificate is registered as the absolute true and lawful
owner hereof for all purposes whatsoever; and
(D) This Warrant Certificate may not be transferred except
in compliance with the provisions of the Act or applicable state
securities laws and in accordance with the provisions of Paragraph 8
hereof.
3. RIGHTS OF A HOLDER. No Holder shall be deemed to be the Holder
of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the Holder any of
the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof or to give or withhold consent to any corporate action
(whether upon any reorganization, issuance of stock, reclassification or
conversion of stock, change of par value, consolidation, merger,
conveyance, or otherwise) or to receive notice of meetings or to receive
dividends or subscription rights or otherwise until a Warrant shall have
been exercised and the Common Stock purchasable upon the exercise thereof
shall have become issuable.
4. REGISTRATION OF TRANSFER. The Company shall maintain books for
the transfer and registration of Warrants. Upon the transfer of any
Warrants in accordance with the provisions of Section 2(D) hereof, (a
"Permitted Transfer"), the Company shall issue and register the Warrants
in the names of the new Holders. The Warrants shall be signed manually
by the Chairman, Chief Executive Officer, President or any Vice President
and the Secretary or Assistant Secretary of the Company. The Company
shall transfer, from time to time, any outstanding Warrants upon the
books to be maintained by the Company for such purpose upon surrender
thereof for transfer properly endorsed or accompanied by appropriate
instructions for transfer. Upon any Permitted Transfer, a new Warrant
Certificate shall be issued to the transferee and the surrendered
- 2-
PAGE 57 OF 63 PAGES
<PAGE> 58
Warrants shall be cancelled by the Company. Warrants may be exchanged at
the option of the Holder, when surrendered at the office of the Company,
for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like
number of Shares. Subject to the terms of this Warrant Certificate, upon
such surrender and payment of the purchase price at any time after the
Initial Exercise Date, the Company shall issue and deliver with all
reasonable dispatch to or upon the written order of the Holder of such
Warrants and in such name or names as such Holder may designate, a
certificate or certificates for the number of full Shares so purchased
upon the exercise of such Warrants. Such certificate or certificates
shall be deemed to have been issued and any person so designated to be
named therein shall be deemed to have become the Holder of record of such
Shares as of the date of the surrender of such Warrants and payment of
the purchase price; provided, however, that if, at the date of surrender
and payment, the transfer books of the Shares shall be closed, the
certificates for the 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 certificate for such 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 20 days. The rights of
purchase represented by the Warrants shall be exercisable, at the
election of the Holders, either as an entirety or from time to time for
only part of the Shares at any time on or after the Initial Exercise
Date.
5. STAMP TAX. The Company will pay any documentary stamp taxes
attributable to the initial issuance of the Shares issuable upon the
exerciseof the Warrants; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issuance or delivery of any certificates for
Shares in a name other than that of the Holder in respect of which such
Shares are issued, and in such case the Company shall not be required to
issue or deliver any certificate for Shares or any Warrant until the
person requesting the same has paid to the Company the amount of such tax
or has established to the Company's satisfaction that such tax has been
paid.
6. LOST, STOLEN OR MUTILATED CERTIFICATES. In case this Warrant
Certificate 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 Warrant Certificate, or in
lieu of and substitution for the lost, stolen or destroyed Warrant
Certificate, a new Warrant Certificate of like tenor 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.
7. RESERVED SHARES. The Company warrants that there have been
reserved, and covenants that at all times in the future it shall keep
reserved, out of the authorized and unissued Common Stock, a number of
Shares sufficient to provide for the exercise of the rights of purchase
represented by this Warrant Certificate. The Company agrees that all
Shares issuable upon exercise of the Warrants shall be, at the time of
delivery of the certificates for such Shares, validly issued and
- 3-
PAGE 58 OF 63 PAGES
<PAGE> 59
outstanding, fully paid and non-assessable and that the issuance of
such Shares will not give rise to preemptive rights in favor of existing
stockholders.
8. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF l933.
(A) The Holder of this Warrant Certificate, each transferee
hereof and any Holder and transferee of any Shares, by his acceptance
thereof, agrees that (a) no public distribution of Warrants or Shares
will be made in violation of the Act, and (b) during such period as the
delivery of a prospectus with respect to Warrants or Shares may be
required by the Act, no public distribution of Warrants or Shares will be
made in a manner or on terms different from those set forth in, or
without delivery of, a prospectus then meeting the requirements of
Section l0 of the Act and in compliance with applicable state securities
laws. The Holder of this Warrant Certificate and each transferee hereof
further agrees that if any distribution of any of the Warrants or Shares
is proposed to be made by them otherwise than by delivery of a prospectus
meeting the requirements of Section l0 of the Act, such action shall be
taken only after submission to the Company of an opinion of counsel,
reasonably satisfactory in form and substance to the Company's counsel,
to the effect that the proposed distribution will not be in violation of
the Act or of applicable state law. Furthermore, it shall be a condition
to the transfer of the Warrants 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 Warrant Certificate.
(B) This Warrant or the Shares or any other security issued or
issuable upon exercise of this Warrant 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 Warrant or Shares 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
Warrant, Shares 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.
(C) Each certificate for Shares issued upon exercise of this
Warrant shall bear a legend relating to the non-registered status of such
Shares under the Act, unless at the time of exercise of this Warrant such
Shares are subject to a currently effective registration statement under
the Act.
- 4-
PAGE 59 OF 63 PAGES
<PAGE> 60
9. ADJUSTMENTS.
(A) In the event of a reorganization, recapitalization,
reclassification, stock split or exchange, stock dividend, combination of
shares, merger or consolidation in which the Company is the continuing
corporation or any other similar change in Common Stock of the Company,
the Board of Directors may, in its sole discretion, make such equitable,
proportionate adjustment, if any, as it deems appropriate in the number
of Shares covered by this Warrant Certificate and in the exercise price
hereunder, in order to preserve the Holder's proportionate interest in
the Company and to maintain the aggregate exercise price.
(B) In the event that the Company shall, at any time prior to
the exercise of this Warrant, (a) declare or pay to holders of Common
Stock a dividend payable in any security of the Company other than Common
Stock or securities convertible into common stock; (b) transfer its
property as an entirety or substantially as an entirety to any other
company; (c) 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; or (d) undergo a merger or consolidation in which the
Company is not the continuing corporation; then, upon the subsequent
exercise of this Warrant, the Holder shall receive, in addition to or in
substitution for the shares of Common Stock to which it would otherwise
be entitled upon such exercise, such additional securities of the
Company, or such shares of the securities or property of the Company
resulting from such transfer, or such assets of the Company, or such
shares of the securities or property of the continuing corporation in the
event of such merger or consolidation, which it would have been entitled
to receive had it exercised this Warrant prior to the happening of any of
the foregoing events.
10. MISCELLANEOUS.
(A) LAW TO GOVERN. This Warrant shall be governed by and
construed in accordance with the substantive laws of the State of Texas,
without giving effect to conflict of laws principles.
(B) ENTIRE AGREEMENT. This Warrant Certificate constitutes and
expresses the entire understanding between the parties hereto with
respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions
whether express or implied, oral or written. Neither this Warrant
Certificate nor any portion or provision hereof may be changed, waived or
amended orally or in any manner other than by an agreement in writing
signed by the Holder and the Company.
(C) NOTICES. Except as otherwise provided in this Warrant
Certificate, all notices, requests, demands and other communications
required or permitted under this Warrant Certificate or by law shall be
in writing and shall be deemed to have been duly given, made and received
only when delivered against receipt or when deposited in the United
States mails, certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
- 5-
PAGE 60 OF 63 PAGES
<PAGE> 61
Company: InterSystems, Inc.
8790 Wallisville Road
Houston, Texas 77029
Attn: President
Holder: At the address shown for the Holder in the
registration book maintained by the Company.
(D) SEVERABILITY. If any provision of this Warrant Certificate
is prohibited by or is unlawful or unenforceable under any applicable law
of any jurisdiction, such provision shall, as to such jurisdiction be in
effect to the extent of such prohibition without invalidating the
remaining provisions hereof; provided, however, that any such prohibition
in any jurisdiction shall not invalidate such provision in any other
jurisdiction; and provided, further that where the provisions of any such
applicable law may be waived, that they hereby are waived by the Company
and the Holder to the full extent permitted by law and to the end that
this Warrant instrument shall be deemed to be a valid and binding
agreement in accordance with its terms.
IN WITNESS WHEREOF, InterSystems, Inc. has caused this Warrant
Certificate to be signed by its duly authorized officers as of the 18th
day of November, 1996.
INTERSYSTEMS, INC.
By: _________________________________
Name: Herbert M. Pearlman
Title: Chairman of the Board of
Directors
Attest:
____________________
David S. Lawi
Secretary
- 6-
PAGE 61 OF 63 PAGES
<PAGE> 62
PURCHASE FORM
To: InterSystems, Inc.
, l99___
The undersigned hereby irrevocably elects to exercise the
attached Warrant Certificate, Certificate No. ISI-PPCOMP-_____, to the
extent of _________ Shares of Common Stock, $.0l par value per share
of INTERSYSTEMS, INC., and hereby makes payment of $________ in
payment of the aggregate exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:___________________________________________________________
(Please typewrite or print in block letters)
Address: _______________________________________________________
_______________________________________________________
__________________________
By: ______________________
- 7-
PAGE 62 OF 63 PAGES
<PAGE> 63
EXHIBIT 22.1
List of Subsidiaries with Active Business Operations
Name of Corporation Jurisdiction of Incorporation
Chemtrusion, Inc. Delaware
InterSystems, Inc. Nebraska
-8-
PAGE 63 OF 63 PAGES
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,374
<SECURITIES> 0
<RECEIVABLES> 2,623
<ALLOWANCES> 0
<INVENTORY> 1,621
<CURRENT-ASSETS> 6,046
<PP&E> 18,810
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,219
<CURRENT-LIABILITIES> 5,629
<BONDS> 2,327
0
0
<COMMON> 64
<OTHER-SE> (1,260)
<TOTAL-LIABILITY-AND-EQUITY> 25,219
<SALES> 20,387
<TOTAL-REVENUES> 20,387
<CGS> 14,417
<TOTAL-COSTS> 19,974
<OTHER-EXPENSES> 36
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 897
<INCOME-PRETAX> (399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (399)
<DISCONTINUED> (1,440)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,319)
<EPS-PRIMARY> (.23)
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</TABLE>
