<PAGE> 1
FORM 10-QSB
U.S. 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, 1998
OR
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number 1-9547
------
INTERSYSTEMS, INC.
------------------
(Exact Name of registrant as specified in charter)
Delaware 13-3256265
-------------------- ---------------------
(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification number)
7115 Clinton Drive
Houston, Texas 77020
---------------------
(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 October 28, 1998 there were 7,796,677 shares of the Company's common
stock, par value $.01 per share, outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
InterSystems, Inc. And Subsidiaries
Condensed Consolidated Balance Sheet
September 30, 1998
(In thousands, unaudited)
<TABLE>
<S> <C>
Assets
- ------
CURRENT ASSETS:
Cash $ 477
Marketable equity securities 85
Trade Receivables 4,431
Inventories 2,426
Prepaid expenses and other 381
------------
7,800
Equipment and leasehold improvements, net 23,050
Other assets 251
------------
$ 31,101
============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 2,263
Current portion of long-term debt 887
Accounts payable 2,279
Accrued expenses 1,740
------------
7,169
Convertible subordinated debentures 641
Long term debt - net of current portion 19,369
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; 7,916
shares issued and 7,797 shares outstanding 79
Additional paid-in capital 7,768
Retained earnings (deficit) (3,575)
Unrealized holding losses (32)
Note receivable - sale of common stock (100)
Treasury stock - 122,360 shares at cost (218)
------------
TOTAL SHAREHOLDER'S EQUITY 3,922
------------
$ 31,101
============
</TABLE>
Page 2 of 13
<PAGE> 3
InterSystems, Inc. And Subsidiaries
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Amounts, Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30
1998 1997
---- ----
<S> <C> <C>
Net Sales $ 8,599 $ 8,095
Cost of Sales 6,297 5,676
--------- ----------
Gross Profit 2,302 2,419
Selling, general and administrative
expenses 1,868 1,745
--------- ----------
Operating income 434 674
Interest expense (net) 414 352
--------- ----------
Net income $ 20 $ 322
========= ==========
Per share - Basic and assuming dilution $ -- $ .05
========= ==========
Average number of common shares
outstanding 7,801,399 6,431,501
--------- ---------
</TABLE>
Page 3 of 13
<PAGE> 4
InterSystems, Inc. And Subsidiaries
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Amounts, Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
1998 1997
---- ----
<S> <C> <C>
Net sales $ 26,589 $ 21,060
Cost of sales 19,310 14,177
--------- ---------
Gross Profit 7,279 6,883
Selling, general and administrative
expenses 5,570 5,027
--------- ---------
Operating income 1,709 1,856
Interest expense (net) 1,249 1,211
--------- ---------
Net income $ 460 $ 645
========= =========
Per share - Basic and assuming dilution $ .06 $ .10
========= =========
Average number of common shares
outstanding 7,794,763 6,400,176
--------- ---------
</TABLE>
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<PAGE> 5
InterSystems, Inc. and Subsidiaries
Condensed Consolidated Statement of Comprehensive Income
(In Thousands)
<TABLE>
<CAPTION>
Three months ended September 30
1998 1997
---- ----
<S> <C> <C>
Net income $ 20 $ 322
Other comprehensive income:
Unrealized holding losses arising
during period (63) --
--------- --------
Comprehensive income $ (43) $ 322
========= ========
Nine months ended September 30
1998 1997
---- ----
Net income $ 460 $ 645
Other comprehensive income:
Unrealized holding (losses) arising
during period (63) --
--------- --------
Comprehensive income $ 397 $ 645
========= ========
</TABLE>
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<PAGE> 6
InterSystems, Inc. And Subsidiaries
Condensed Consolidated Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine months ended September 30
1998 1997
---- ----
<S> <C> <C>
Net cash provided (used) by
operating activities $ 1,241 $ (253)
----------- ---------
Cash flows from investing activities:
Acquisition of fixed assets ( 3,438) ( 1,980)
Cash from financing activities:
Net borrowings 302 619
Process from promissory notes 3,534 1,472
Repayments under long-term debt obligations (2,018) (1,126)
Issuance of common stock and
warrant exercise 92 107
Purchase of treasury stock (38) --
----------- ---------
Net cash provided by financing activities 1,872 1,072
----------- ---------
Net decrease in cash (325) (1,161)
Cash at beginning of period 802 1,484
----------- ---------
Cash at end of period $ 477 $ 323
=========== =========
Cash paid during the periods for:
Interest $ 418 $ 444
Taxes $ 23 $ 37
</TABLE>
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<PAGE> 7
InterSystems, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
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. The information included in this Form 10-QSB should be read in
conjunction with Management's Discussion and Analysis and financial
statements and notes thereto included in the InterSystems, Inc. 1997
Form 10-KSB.
Note 2. Inventories consisted of the following at September 30, 1998 (in
Thousands)
<TABLE>
<S> <C>
Raw materials and component parts $1,558
Finished goods 868
------
Total inventory $2,426
======
</TABLE>
NOTE 3. Effective for the year ended December 31, 1997, the Company was
required to adopt Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). In accordance with SFAS 128,
the Company is required to provide basic and dilutive earnings per
common share information.
The basic net income per common share is computed by dividing the
net income available to common shareholders by the weighted average
number of common shares outstanding.
Diluted net income per common share is computed by dividing the net
income available to common shareholders, adjusted on an as if
converted basis, by the weighted average number of common shares
outstanding plus potential dilutive securities.
For the three-month periods ended September 30, 1998 and 1997,
certain securities were not included in the calculation of diluted
earnings because of their anti-dilutive effect, those securities are
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
(shares) (shares)
<S> <C> <C>
Stock options 1,640 1,640
Stock warrants 2,356 2,356
Shares issuable on conversion of debentures 512 1,533
</TABLE>
For the nine-month periods ended September 30, 1998 and 1997,
certain securities were not included in the calculation of diluted
earnings because of their anti-dilutive effect, those securities are
as follows (in thousands):
Page 7 of 13
<PAGE> 8
<TABLE>
<CAPTION>
1998 1997
---- ----
(shares) (shares)
<S> <C> <C>
Stock options 1,640 1,640
Stock warrants 2,356 2,356
Shares issuable on conversion of debentures 512 1,571
</TABLE>
NOTE 4. The Company has adopted FASB Statement no. 130, "Reporting
Comprehensive Income." Statement no. 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial
information that historically has not been recognized in the
calculation of net income.
The Company holds securities classified as available-for-sale, which
had unrealized losses of $63,000 during the period ended September
30, 1998.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
InterSystems, Inc.'s two principal lines of business consist of the operations
of its wholly-owned subsidiary, InterSystems, Inc., a Nebraska corporation
("Nebraska"), which designs, manufactures and sells specialized materials
handling equipment, and the custom resin compounding operations conducted by
Chemtrusion, Inc. ("Chemtrusion") in Houston, Texas and Jeffersonville, Indiana.
InterSystems, Inc. has continued its program of investing significant resources
in equipment and personnel to achieve the Company's next level of growth.
InterSystems, Inc. has recorded record sales levels year-to-date 1998. Nebraska
has hired a new Chief Operating Officer to achieve that subsidiary's goal of
expanding its domestic and international market shares as well as developing new
products.
Chemtrusion has recently employed a sales and marketing professional to
aggressively implement its plans for growth. Chemtrusion has also expanded its
production capacity to accommodate the Company's growth. Texas has purchased
approximately $475,000 of lab equipment this year for its new materials testing
division. In addition, the fourth line added to the Indiana plant is now fully
operational and is expected to add revenue in the fourth quarter. The total
investment for expansion year-to-date at the Indiana plant is over $2.8 million.
Chemtrusion experienced a slowdown in the third quarter 1998 at the Texas
facility due to inventory production adjustments by two major customers.
Chemtrusion has entered the fourth quarter 1998 with all extrusion lines in
Texas currently utilized.
RESULTS OF OPERATIONS
- ---------------------
Revenue increased $504,000 (6.2%) to $8,599,000 in the third quarter 1998 over
the third quarter 1997, a result of continued capital improvement purchases by
the grain industry as well as continued demand for Chemtrusion's technological
services. Nebraska's sales increased $324,000 (6%) to $5,727,000 in the third
quarter of 1998 as compared to the same quarter 1997. Chemtrusion experienced a
slowdown in the third quarter of 1998. The quarterly results were
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<PAGE> 9
negatively impacted by the Company's commitment to two major customers at the
Chemtrusion, Texas plant that reduced their processing needs. Chemtrusion's
combined revenue at Houston and Indiana increased $180,000 in the third quarter
1998 as compared to the same period last year. Chemtrusion Texas' third quarter
1998 revenues decreased $170,000 to $992,000 compared to $1,162,000 a year
earlier.
Chemtrusion Indiana's revenue increased for the third quarter 1998 increased by
$350,000 in 1998 to $1,880,000 as compared to $1,529,000 for the third quarter
1997.
Revenue increased $5,529,000 (26.2%) to a record $26,589,000 year-to-date 1998
over the same period 1997. The revenue growth was primarily a result of the
continued demand at Nebraska as well as a large overseas order in the first and
second quarter of 1998. Nebraska's sales increased $5,136,000 year-to-date 1998
as compared to the 1997 period. Chemtrusion's combined revenue increased
$393,000 year-to-date 1998 over the same period last year.
Gross profit as a percentage of sales decreased to 26.8% in the third quarter
1998 as compared to 29.9% in the 1997 period. The decrease was primarily a
result of product mix at Nebraska. Nebraska's gross margin was 25.1% for the
three-month period 1998 as compared with 29.2% for the same period last year.
Chemtrusion's gross profit as a percentage of sales was relatively constant for
the three-month period 1998 (28.4%) as compared with the same period last year
(29.5%).
Year-to-date 1998 gross margin declined to 27.4% as compared to 32.7% for the
same period last year. Nebraska's gross margin declined to 24% for the 1998
period as compared to 29% for the same period 1997. The decline was primarily
attributable to the large overseas order. Since a portion of this order was
manufactured by outside contractors, Nebraska did not realize its normal
manufacturing profit on the order. Chemtrusion's gross margin declined from 29%
in 1997 to 25% for the same period 1998. The decrease was primarily a result of
lower toll processing volumes at Chemtrusion, Texas.
The Company's selling, general and administrative expenses increased $123,000
during the third quarter 1998 compared to the same period in 1997. For the nine
months ending September 30, 1998, selling, general and administrative expenses
increased $543,000 over the same period ending 1997. The increase was primarily
due to the hiring of strategic personnel at Nebraska and Chemtrusion, Texas, as
well as the addition of equipment, warehouse space and associated fixed costs at
Chemtrusion. Chemtrusion's expenses increased $374,000 for the nine-month period
1998.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the nine months ended September 30,
1998 amounted to $1,241,000.
The Company received cash in the amount of $92,000 from the issuance of common
stock. The Company is continuing its ongoing process of repurchasing its common
stock in the open market. During the 1998 period the Company has purchased and
placed $38,000 of its common stock into treasury.
The Company purchased fixed assets year-to-date in the amount of $3,438,000.
These purchases were primarily for equipment installed at the Mytex facility.
Net borrowing provided by lines of credit amounted to $302,000. Net proceeds
from promissory notes for the nine-month period 1998 was $1,516. The proceeds
were used primarily to finance equipment purchases for the Mytex facility.
Page 9 of 13
<PAGE> 10
Cash decreased $325,000 for the period ending September 30, 1998.
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
- ---------------------
At September 30, 1998, 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 September 30, 1998, borrowings of
$1,568,000 were outstanding under this agreement and bear interest at the bank's
base rate plus .50% (8.75% at September 30, 1998). At September 30, 1998,
$1,153,000 was available under this line of credit. 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 $5,056,000 at September 30, 1998. Under the terms of the
agreement, Nebraska is subject to certain covenant requirements that, among
other things, require maintenance of minimum net worth, working capital, debt to
net worth ratio, and also limits the amount of capital expenditures, payments to
affiliates, indebtedness, dividends and management fees.
Chemtrusion
- -----------
Chemtrusion is a party to a credit agreement that provides for advances of up to
$300,000 and expires April 21, 2002. The agreement bears interest at the bank's
prime rate plus 1% (currently 9.25%) and is collateralized by Chemtrusion's
accounts receivable. As of September 30, 1998, the line of credit balance was
$300,000.
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. 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, 1998, Nebraska's backlog was $3,374,000 compared to $3,627,000
as of September 30, 1997. The backlog as of October 31, 1998 was $2,844,000.
YEAR 2000
- ---------
Company's Compliance Program. Computer equipment using microprocessors that use
only two digits to identify a year may be unable to accurately process data
after December 31, 1999. In early 1998, InterSystems, Inc. and its subsidiaries
initiated their Year 2000 compliance project. The evaluation addressed internal
hardware and software, production machinery, key vendors, customers and other
significant third parties.
Company's State of Readiness. InterSystems, Inc. and its subsidiaries utilize
recently purchased computer hardware and software which has been deemed Year
2000 compliant. In the 1997 fourth quarter, our Nebraska subsidiary made a
significant transition to Year 2000 compliant equipment. Nebraska's System 36
and installed software was discarded and replaced with Pentium Processor's and
Year 2000 compliant manufacturing and accounting software. Our Chemtrusion
locations already had installed Year 2000 compliant hardware and software.
Page 10 of 13
<PAGE> 11
InterSystems, Inc.'s two subsidiaries are engaged in manufacturing activities
and place heavy reliance on their production equipment. Key vendors therefore
include those from whom the subsidiaries purchase equipment. Production
equipment that contains embedded systems may be unable to process date sensitive
data. Chemtrusion has received vendor assurance that its production equipment is
Year 2000 compliant. Nebraska has not yet completed its investigation. The
equipment that has been tested, however, is Year 2000 compliant. Nebraska is
aware of one PC that links data from engineering to production that is not Year
2000 compliant. The estimated cost of replacement is less than $2,000. The
Company does not expect that the cost, if any, to investigate and replace parts
for those machines not yet tested will be material to the financial condition of
the Company. The Company estimates that all equipment will be tested and in
compliance by second quarter of 1999.
The Company is also evaluating the readiness of its third party supply chains
and major customers. The Company has requested Year 2000 compliance
certification from each of its major vendors, suppliers and customers.
Risks of Non-compliance and Contingency Plans. The major factors which pose the
greatest Year 2000 risks for the Company if implementation of the Year 2000
compliance program is not successful is the reliance on key third party vendors
and major customers. If those parties do not achieve compliance, our operational
companies could experience interruption in production scheduling. Based on
initial information received from our vendors and customers, the Company does
not expect such delays.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including accuracy of
representations made by third parties concerning their compliance with Year 2000
issues, and other factors. The estimated costs of Year 2000 compliance also do
not give effect to any future corporate acquisitions or divestitures made by the
Company or its subsidiaries.
Forward Looking Statements
This quarterly report on Form 10-QSB for the quarter ended and nine months ended
September 30, 1998 as well as other public documents of the Company contains
forward-looking statements which involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or achievement
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
statements include, without limitation, the Company's expectations and estimates
as to future financial performance, cash flows from operations, capital
expenditures and the availability of funds from refinancing of indebtedness.
Readers are urged to consider statements which use the terms "believes,"
"intends," "expects," "plans," "estimates," "anticipated," or "anticipates" to
be uncertain and forward looking. In addition to other factors that may be
discussed in the Company's filings with the Securities and Exchange Commission,
including this report, the following factors, among others, could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statement made by the Company: (i) general economic and business
conditions, acts of God and natural disasters 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
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<PAGE> 12
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 12 of 13
<PAGE> 13
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 5, 1998 /s/ Fred S. Zeidman
-------------------
Fred S. Zeidman
President
Chief Executive Officer
Page 13 of 13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 477
<SECURITIES> 85
<RECEIVABLES> 4,431
<ALLOWANCES> 0
<INVENTORY> 2,426
<CURRENT-ASSETS> 7,800
<PP&E> 23,050
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,101
<CURRENT-LIABILITIES> 7,169
<BONDS> 641
0
0
<COMMON> 79
<OTHER-SE> 3,843
<TOTAL-LIABILITY-AND-EQUITY> 31,101
<SALES> 26,589
<TOTAL-REVENUES> 26,589
<CGS> 19,310
<TOTAL-COSTS> 24,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,249
<INCOME-PRETAX> 460
<INCOME-TAX> 0
<INCOME-CONTINUING> 460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 460
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
