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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[]TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number 1-9547
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INTERSYSTEMS, INC.
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(Exact Name of registrant as specified in charter)
Delaware 13-3256265
-------------------- ---------------------
(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification number)
5120 Woodway, Suite 9029
Houston, Texas 77056
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(Address of principal executive offices)
(Zip Code)
713-622-7710
- ------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or of 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 _____
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of November 13, 1997 there were 7,555,314 shares of the Company's common
stock, par value $.01 per share, outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
InterSystems, Inc. And Subsidiaries
Condensed Consolidated Balance Sheet
September 30, 1997
(In thousands, unaudited)
Assets
- ------
CURRENT ASSETS:
Cash $ 323
Trade Receivables 4,759
Inventories 2,045
Prepaid expenses and other 398
------------
7,525
Equipment and leasehold improvements, net 19,562
Other Assets including investment in affiliated
company at cost 415
------------
$ 27,502
============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 2,032
Current portion of long-term debt 522
Accounts payable 2,184
Accrued expenses 1,332
Net liabilities of discontinued operations 429
------------
6,499
Convertible subordinated debentures 1,967
Long term debt - net of current portion 16,999
SHAREHOLDER'S EQUITY:
Preferred stock, $.01 par value, 5,000 shares
authorized; none issued and outstanding
Common stock $.01 par value, 20,000
shares authorized; 6,707
shares issued and outstanding 67
Additional paid-in capital 5,923
Outstanding options & warrants 223
Retained earnings (deficit) (3,959)
Note receivable - sale of common stock (100)
Treasury stock - 70 shares at cost (117)
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TOTAL SHAREHOLDER'S EQUITY 2,037
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$ 27,502
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Page 2 of 12
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InterSystems, Inc. And Subsidiaries
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Amounts, Unaudited)
Three months ended September 30
1997 1996
---- ----
Net Sales $ 8,095 $ 5,855
Cost of Sales 5,676 4,229
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Gross Profit 2,419 1,626
Selling, general and administrative
expenses 1,745 1,394
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Operating income 674 232
Interest income -- (12)
Interest expense 352 178
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Net income $ 322 $ 66
========= ==========
Per share net income $ .05 $ .01
========= ==========
Average number of common shares
outstanding 6,431,501 6,378,135
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Page 3 of 12
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InterSystems, Inc. And Subsidiaries
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Amounts, Unaudited)
Nine months ended September 30
1997 1996
---- ----
Net sales $ 21,060 $ 14,826
Cost of sales 14,177 10,453
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Gross Profit 6,883 4,373
Selling, general and administrative
expenses 5,027 3,980
Settlement of note receivable-
sale of Trading Business -- 48
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Operating income 1,856 345
Interest income (6) (32)
Interest expense 1,217 501
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Income (loss) from continuing operations 645 (124)
Discontinued operations:
Loss from operations of
Tropical Systems, Inc. -- (480)
Loss on disposal -- (250)
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Loss from discontinued operations -- (730)
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Net income (loss) $ 645 $ (854)
========= =========
Per Share
Continuing operations .10 (.02)
Discontinued operations -- (.12)
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Net income (loss) $ .10 $ (.14)
========= =========
Average number of common shares
outstanding 6,400,176 5,946,243
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Page 4 of 12
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InterSystems, Inc. And Subsidiaries
Condensed Consolidated Statement of Cash Flows
(In thousands)
Nine months ended September 30
1997 1996
---- ----
Net cash used by operating activities $ (253) $ (1,335)
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Cash flows from investing activities:
Acquisition of fixed assets (1,980) (12,571)
Proceeds from sale of
Trading Business -- 482
Additions to other assets -- (230)
Advances to subsidiaries
affiliates -- (489)
-------- ---------
Net cash used in investing activities (1,980) (12,808)
Cash from financing activities:
Net borrowings 965 --
Repayments of long-term debt -- (709)
Proceeds from promissory notes -- 13,204
Issuance of common stock and
warrant exercise 107 2,022
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Net cash provided by financing activities 1,072 14,517
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Net increase (decrease) in cash (1,161) 374
Cash at beginning of period 1,484 6
-------- --------
Cash at end of period $ 323 $ 380
======== ========
Cash paid during the periods for:
Interest $ 444 $ 482
Taxes $ 37 $ 30
Page 5 of 12
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InterSystems, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1997
NOTE 1. The accompanying condensed consolidated financial statements are
unaudited, but, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
financial position and results of operations. Interim results are not
necessarily indicative of results for a full year.
Note 2. The Company negotiated a settlement for the early collection of the
non-interest bearing non compete portion of the note receivable for the sale of
the Trading Business. Under the negotiated terms, the Company agreed to accept
$215,000 as full payment of the note, thereby resulting in a charge of $48,000
in 1996.
NOTE 3. During the nine months ended September 30, 1997, $185,900 principal
amount of 8% convertible debentures were converted into 130,000 shares of common
stock and $155,000 principal amount of 10% convertible debentures were converted
into 84,699 shares of common stock. Subsequent to September 30, 1997 an
additional $550,850 principal amount of 8% convertible debentures were converted
into 393,464 shares of common stock and $460,000 principal amount of 10%
convertible debentures were converted into 261,364 shares of common stock.
NOTE 4. 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 warrants are exercisable through January 15, 2000 at the exercise price of
$1.80 per share. The warrants may be called by the Company at $.05 per warrant
if during the three year period following the effectiveness of a Registration
Statement (August 9, 1996) covering the shares and 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. Holders of the
units had the right at the end of the two year period following the
effectiveness of a Registration Statement (August 9, 1996) 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 was at least $1.80 per share for any thirty consecutive days. During the
period ending September 30, 1997, the Company's common stock met the closing
price requirements to extinguish this put. As of September 30, 1997, the
contingent liability of $2,076,000 has been transferred to equity.
NOTE 5. As of June 30, 1996, InterSystems Nebraska adopted a plan to discontinue
its Miami based subsidiary Tropical Systems, Inc. ("Tropical"). Tropical ceased
operations as of September 30, 1996 and accordingly, Tropical has been presented
as a discontinued operation.
Page 6 of 12
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NOTE 6. Amounts due from Helm Capital Group, Inc. were paid in full during the
nine months by the transfer to the Company from Helm, of Company common stock
valued at market of $117,000, $30,000 of the Company's 10% convertible
subordinated debentures and by the transfer of 169,565 shares of Helm stock
valued at market of $117,000.
Note 7. In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 provides a different method of calculating earnings per share than is
currently used in APB Opinion 15. 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 stockholders by the
weighted average number of common shares outstanding for the period. Dilutive
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to existing fully diluted earnings
per share.
The Company is required to adopt this standard in the fourth quarter of 1997.
Using the principles set forth in SFAS 128, basic earnings per share would not
be materially different from that presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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Three Month Periods Ended September 30, 1997 and 1996
- -----------------------------------------------------
There was an increase of $2,240,000 (38.3%) in net sales for the three month
period ending September 30, 1997 (the "1997 period") compared to the three month
period ending September 30, 1996 (the "1996 period"). The sales increase was
primarily attributable to Chemtrusion's Mytex project in Jeffersonville, Indiana
($905,000), as well as higher sales volume of bulk materials handling equipment
at InterSystems Nebraska ($1,259,000).
Gross profit as a percentage of sales was 29.9% in the 1997 period as compared
to 27.8% in the 1996 period. Chemtrusion's gross profit as a percentage of sales
increased to 29.5% in the 1997 period from 27.6% in the 1996 period. The
increase in gross profit was primarily a result of the Chemtrusion Mytex project
which began operations in the fourth quarter 1996. Nebraska's gross profit as a
percentage of sales increased to 29.3% in the 1997 period as compared to 26.6%
in the 1996 period. The increase was primarily a result of an increase in
production afforded by the 1996 plant expansion.
The Company's selling, general and administrative expenses increased by
approximately $351,000 (25.2%) in the 1997 period as compared to the 1996
period. Nebraska's expenses increased approximately $170,000 primarily due to
the 1996 plant expansion. Parent company expenses increased approximately
$160,000 for certain expenses of business operations including compensation
based on profit.
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Interest expense increased approximately $174,000 in the 1997 period as compared
to the 1996 period. The increase was primarily a result of financing costs for
the Mytex facility. Interest expense for the Mytex facility is charged back to
Mytex under the facility operating agreement and is recaptured by the Company
through sales.
RESULTS OF OPERATIONS
- ---------------------
Nine Months Ended September 30, 1997 and 1996
- ---------------------------------------------
There was a record increase of $6,234,000 (42.1%) in net sales for the nine
months ending September 30, 1997 (the "1997 period") compared to the nine months
ended September 30, 1996 (the "1996 period"). Chemtrusion's sales increased
$4,384,000 (122.0%) due to the Mytex project and higher tolling volumes in
Texas. Additionally, higher sales volumes of bulk materials handling equipment
($1,850,000) resulting from the recently expanded InterSystems Nebraska facility
contributed to the Company's overall sales increase.
Gross profit as a percentage of sales increased to 32.7% in the 1997 period as
compared to 29.5% in the 1996 period. Chemtrusion's gross profit as a percentage
of sales rose considerably to 36.9% in the 1997 period from 24.5% in the 1996
period. This increase was a result of higher toll processing volumes at
Chemtrusion, Texas without an associated increase in fixed costs and the
contribution of the Mytex facility. Nebraska's gross profit as a percentage of
sales dropped slightly to 29.1% in the 1997 period from 30.7% in the 1996
period.
Selling, general and administrative expenses increased $1,047,000 (26.3%) in the
1997 period as compared to the 1996. Chemtrusion's expenses increased $708,000
primarily due to the addition of the Mytex facility ($576,000) and an increase
in salary expense at Chemtrusion, Texas for the addition of two new upper level
management positions. Nebraska's expenses increased $269,000 as a result of an
increase in personnel, operating lease costs, and other general and
administrative expenses associated with the increased production capacity of the
plant expansion. Parent Company expenses increased due to certain expenses of
business operations including compensation based on profit.
Interest expense increased $716,000 in the 1997 period as compared to the 1996
period. The increase was primarily a result of financing for the Mytex facility.
Interest expense for the Mytex facility is charged back to Mytex under the
facility operating agreement and is recaptured by the Company through sales.
Liquidity and Capital Resources
- -------------------------------
Cash used by operating activities for the nine months ended September 30, 1997
amounted to $253,000. This is primarily due to an increase in accounts
receivable at InterSystems Nebraska resulting from increased sales volume.
The Company received cash in the amount of $107,000 from the exercise of common
stock warrants.
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The Company purchased fixed assets year-to-date in the amount of $1,980,000.
These purchases were primarily for assets acquired for the Mytex facility.
Net borrowing provided by financing activities amounted to $965,000. The
proceeds were used primarily to finance the increase in accounts receivables and
to refinance the real property at InterSystems Nebraska.
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 capital needs. There can be no assurances that
management will be able to obtain such financing on favorable terms.
InterSystems Nebraska
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InterSystems Nebraska has 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 September 30, 1997, borrowings of
$1,198,212 were outstanding under this agreement and bear interest at the bank's
base rate plus 1.25% (9.75% at September 30, 1997). At September 30, 1997,
$809,000 was available under this line of credit. InterSystems Nebraska has
pledged its accounts receivable, inventory, equipment, fixtures and intangibles
as collateral for the debt. The net book value of the collateral totaled
approximately $3,616,000 at September 30, 1997. Under the terms of the
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.
During the period ending September 30, 1997, InterSystems Nebraska
entered into a refinancing agreement with a bank for their building and certain
equipment. The refinancing for the building totaled $675,000 with a fixed
interest rate of 2.75% over the 5 year T-bill rate (8.82%). The note matures on
7/1/2002 with monthly payments of $3,750 plus interest with the remaining
balance of $450,000 due at maturity. The refinancing for the equipment totaled
$663,000 with a fixed interest rate of 9.31%. The note is amortized over 7 years
with monthly payments of $7,892 and matures July 1, 2004. The notes contain
essentially the same covenants as the line of credit. After repayments on
remaining balances of the pre-existing notes and loan transaction fees, $484,000
was available to InterSystems Nebraska for working capital. InterSystems, Inc.,
a Delaware corporation, has pledged all outstanding shares of InterSystems
Nebraska's common stock as collateral for all of the above loans.
As of June 30, 1996, InterSystems Nebraska adopted a plan to discontinue its
Miami subsidiary Tropical Systems, Inc. ("Tropical"). At June 30, 1997, the
Company had a net liability associated with discontinued operations of $429,000.
Chemtrusion
- -----------
Chemtrusion is a party to a credit agreement that provides for advances of up to
$300,000 and expires in September 1998. The agreement bears interest at 10.5%
and
Page 9 of 12
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is collateralized by Chemtrusion's accounts receivable. As of September 30, 1997
$113,000 was borrowed on the line of credit. There were no borrowings under the
line of credit as of November 12, 1997.
During the second quarter 1997, 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, pay other related costs
and provide $250,000 in working capital. The note is payable in monthly
installments of $24,320, plus interest at prime plus 1.5%, through April 2002,
and is collateralized by the equipment.
Chemtrusion is in the process of expanding its technological and volume
capabilities. In order to achieve this expansion, a new extruding line has been
delivered to the Texas facility and installation is complete. The equipment is
presently in the testing phase and should be operable late November 1997. The
cost of the extruder is $1,500,000 and is financed through a five year capital
lease with monthly payments of $32,100.
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 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. As of September 30, 1997, InterSystems' backlog was $3,532,000
compared to $2,444,000 as of September 30, 1996. The backlog as of November 10,
1997 was $3,097,000.
Item 4. Submission of Matters to a Vote of Security-Holders
On September 3, 1997, the Company held its 1996 Annual Meeting of Shareholders,
at which the shareholders elected Daniel T. Murphy and William Lurie to serve as
Class C directors until the year 2000 annual meeting of shareholders and until
their successors are elected, and approved the adoption of the Company's 1997
Stock Option Plan. The holders of record of 5,755,434 shares of common stock of
the Company out of a total 6,386,623 shares of common stock outstanding on the
record date were present, in person or by proxy, at the annual meeting of
shareholders.
The holders of record of the respective number of shares of common stock of the
Company set forth below voted for, or withheld authority for, the election of
the following individuals as members of the board of directors:
No. of No. of Votes
Name Votes for Withheld
- ---- --------- ------------
Daniel T. Murphy 5,725,922 29,512
William Lurie 5,727,922 27,512
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The holders of record of the respective number of shares of common stock of the
Company set forth herein voted for (3,323,586), against (143,441) or abstained
(33,400) with respect to the proposal to adopt the Company's 1997 Stock Option
Plan.
Forward Looking Statements
This quarterly report on Form 10QSB for the quarter ended and nine months ended
September 30, 1997 as well as other public documents of the Company contains
forward-looking statements which involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or achievement
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
statements include, without limitation, the Company's expectations and estimates
as to future financial performance, cash flows from operations, capital
expenditures and the availability of funds from refinancing of indebtedness.
Readers are urged to consider statements which use the terms "believes,"
"intends," "expects," "plans," "estimates," "anticipated," or "anticipates" to
be uncertain and forward looking. In addition to other factors that may be
discussed in the Company's filings with the Securities and Exchange Commission,
including this report, the following factors, among others, could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statement made by the Company: (i) general economic and business
conditions, acts of God and natural disasters 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; (v)
cancellation or termination of significant customer contracts; and (vi) the
maturing of debt and the ability of the Company to raise capital to repay or
refinance such debt on favorable terms.
Page 11 of 12
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERSYSTEMS, INC.
Dated: November 14, 1997 /s/ Fred S. Zeidman
-------------------
Fred S. Zeidman
President
Chief Executive Officer
Page 12 of 12
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EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 323
<SECURITIES> 0
<RECEIVABLES> 4,759
<ALLOWANCES> 0
<INVENTORY> 2,045
<CURRENT-ASSETS> 7,525
<PP&E> 19,562
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,502
<CURRENT-LIABILITIES> 6,499
<BONDS> 1,967
0
0
<COMMON> 67
<OTHER-SE> 1,970
<TOTAL-LIABILITY-AND-EQUITY> 27,502
<SALES> 21,060
<TOTAL-REVENUES> 21,060
<CGS> 14,177
<TOTAL-COSTS> 14,177
<OTHER-EXPENSES> 5,027
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,211
<INCOME-PRETAX> 645
<INCOME-TAX> 0
<INCOME-CONTINUING> 645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 645
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
