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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, 1997
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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.
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(Name of Small Business Issuer in its charter)
DELAWARE 13-3256265
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7115 Clinton Drive, Houston, Texas 77020
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (713) 622-7110
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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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
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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, 1997 were $27,007,753.
The aggregate market value of the voting stock held by non-affiliates of the
issuer is approximately $3,755,600 based upon the closing price of the issuer's
common stock, $.01 par value, as reported by the American Stock Exchange on
March 13, 1998, which was $2.1875.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on March 13, 1998: 7,906,376.
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, 1997 and 1996,
approximately 60 % and 71%, respectively, of the Company's revenues were
attributable to the business of InterSystems Nebraska and approximately 40% and
29%, 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 $27,007,753, and
$20,462,000, respectively, for the years ended December 31, 1997 and 1996. For
the year ended December 31, 1997, the Company reported a net profit from
continuing operations of $419,000 and a net profit for the year of $569,000, as
compared to a net loss from continuing operations of ($399,000) and a net loss
of ($2,319,000) for the year ended December 31, 1996. The net profit for the
year ended December 31, 1997 included a $150,000 gain from discontinued
operations due to the reversal of over-accruals arising from the 1996 disposal
of the Company's Tropical Systems, Inc. subsidiary, as compared to a loss from
discontinued operations of ($1,920,000) for the year ended December 31, 1996, of
which ($1,440,000) was incurred on the disposal of Tropical.
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
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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.
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
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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, 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, 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.
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 generally are highest in the
second and third quarter. The company did receive a very large international
order in late December 1997, although no revenues were derived therefrom in
1997. See "Backlog." 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.
Backlog
InterSystems Nebraska had a sales backlog of approximately $7,200,000 at
December 31, 1997, compared with $2,266,000 at December 3l, 1996. The increase
backlog at December 31, 1997 was attributable in part to one large international
order in the amount of $4,000,000. All orders at December 3l, l997 are believed
to be firm and are expected to be filled by December 3l, l998.
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Customers
During 1997, 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 1997 or 1996. 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 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 mineral and glass filled polyolefins, specialty resin
alloys and additive concentrates.
Compounding Operations
HOUSTON FACILITY: Chemtrusion provides custom compounding services using four
twin screw extruders various blenders and other equipment at its Houston
facility. The Houston facility completed installation of its fourth twin screw
extruder during November 1997. This new extrusion line offers the latest
generation of compounding technology and provides manufacturing capacity for
smaller volume products bringing the total annualized capacity of the facility
to 46 million pounds. 1997 production was approximately 27,313,016, compared to
approximately 23,820,635 pounds in 1996.
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In Chemtrusion's custom compounding operations, the customer supplies all or
most of the raw materials including resins and other additives. Chemtrusion
supplies the operating equipment and process technology to precisely melt mix or
physically blend the various feedstock components into finished products.
Chemtrusion consults with each customer regarding use of its process technology
in order to achieve the optimal product performance of each formulation,
particularly when the objective is support of the customer's research and
development activities for new products. Once parameters are established,
Chemtrusion's process technology is generally used to support commercial
manufacturing of products.
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 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 the Mytex 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.
During June 1997, Chemtrusion and Mytex amended the Definitive Agreement to
provide additional rail siding in support of both current and future bulk
shipment requirements of the facility. Pursuant to the Agreement, Chemtrusion
arranged for design and installation of the new facilities during 1997.
Currently, the project is being funded by Mytex through interim short-term
financing. Mytex will provide permanent financing of the new facilities under
terms similar to those contained in the initial Agreement. In accordance with
the terms of this amendment, no change was made to Chemtrusion's management fee
in conjunction with these new facilities.
Also during June 1997, Chemtrusion and Mytex further amended the Definitive
Agreement to provide for design, installation and operation of a new production
line. Pursuant to the Agreement, Chemtrusion is currently in the process of
procuring equipment for the new line which is designed to
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significantly increase output from the facility. Under the terms of the
Agreement, Mytex will again provide permanent financing of the new facilities
under terms similar to those contained in the initial Agreement. In accordance
with the terms of the Agreement, Chemtrusion will receive a management fee for
its operation of the new facilities, which covers operating expenses of the new
facilities and debt servicing. Management expects this fee to increase net
profits to Chemtrusion beginning in June 1998.
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.
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 capabilities.
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. During 1997, 97%
of Chemtrusion's revenues were attributable to three customers: Mytex accounted
for approximately 58% of total revenues of Chemtrusion and two other customers
accounted for an aggregate of 39% of total revenues of Chemtrusion. Other than
Mytex, Chemtrusion is not under long term contract with these customers,
although it has done business with both customers for several years. The Company
believes that the loss of any of these customers would have a material adverse
effect on its business and revenues.
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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.
Research and Development
During the two fiscal years ended December 31, 1997 and 1996, the Company spent
minimal amounts on research and development activities.
EMPLOYEES
The Company currently employs 130 persons at Chemtrusion and 150 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 5 part-time 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.
ITEM 2: PROPERTIES
THE COMPANY: The Company's executive offices are located at 7115 Clinton Drive,
Houston, Texas where it shares office space with Chemtrusion, Inc. pursuant to a
lease expiring in April 2002 as discussed below. The Company does not pay any
rent in connection with this space.
The Company shares occupancy with two other corporations of 4,500 square feet of
office space located at 537 Steamboat Road, Greenwich, Connecticut. The lease
commenced in June 1995, and an option to extend the lease for an additional
three years was exercised in January 1998 at a rental of
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$112,500 for the first year, $117,500 for the second year and $121,500 for the
third year. The other corporations sharing this space two other public
corporations as to which Messrs. Herbert Pearlman and David Lawi serve as
directors and to which they devote some of their business time. The rent is
apportioned among these three corporations.
INTERSYSTEMS NEBRASKA: InterSystems Nebraska owns a 40,000 square foot office
and manufacturing facility in Omaha, Nebraska. The facility is subject to a
mortgage with respect to a $656,000.00 term loan bearing interest at 8.82%. The
loan matures in July 2002 and the balance due at maturity is $450,000.
InterSystems Nebraska leases a second facility comprising 30,000 square feet of
additional manufacturing space in Omaha, for a total square footage under use of
70,000 square feet. The lease provides for an annual rental of approximately
$100,000 per year and expires in November 2000.
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 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 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 the facilities of its subsidiaries are adequate for
the current and reasonably forseeable future needs, and are adequately insured.
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
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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>
<CAPTION>
Fiscal 1996 High Low
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<S> <C> <C>
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
Fiscal 1997 High Low
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First Quarter $1 3/8 $1
Second Quarter 1 15/16 7/8
Third Quarter 2 3/4 1 5/8
Fourth Quarter 3 1/8 1 13/16
</TABLE>
The closing price of the Common Stock on March 13, 1998 was $2.1875. As of March
13, 1998, 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 fore seeable 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 of restricting the payment of dividends on the Company's common stock.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
There was a record sales increase of $6,546,000 (32%) in 1997 to $27,008,000
compared to $20,462,000 in 1996. Chemtrusion sales increased $4,637,000 (76.4%)
to $10,704,000 in 1997 from $6,067,000 in 1996. Chemtrusion's sales increase is
primarily due to the Mytex facility and higher tolling volumes at the Houston
facility. Essentially all revenues of both Chemtrusion locations are derived
from toll processing. Additionally, higher sales volumes of bulk materials
handling equipment ($1,909,000) resulting from the 1996 expansion of the
InterSystems Nebraska facility contributed to the Company's overall sales
increase.
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Gross margin as a percentage of sales increased 10% to 32.4% in 1997 as compared
to 29.5% in 1996. Chemtrusion's gross margin increased 34.6% to 38.9% in 1997
from 28.9% in 1996 primarily due to increased plant utilization at both
facilities. Nebraska's gross profit as a percentage of sales decreased to 28% in
1997 from 30% in 1996. This was primarily a result of an increase in sales of
lower margin products and increased operating costs associated with the plant
expansion.
Selling, general and administrative expense increased $1,143,000 (20.6%) in 1997
while decreasing 2% as a percentage of sales. Nebraska's expenses increased
$234,000 as a result of an increase in personnel, operating lease costs, and
other general and administrative expenses associated with increased sales and
additional production capacity. Chemtrusion's expenses increased $854,000
primarily due to the addition of the Mytex facility ($595,000) and an increase
in salary expense at Houston facility for the addition of two new upper level
management positions and other expenses of business operations as a result of
higher tolling volumes.
Net interest expense increased approximately $783,000 in 1997 as compared to
1996 primarily due to interest incurred on 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.
Chemtrusion is expanding the Mytex facility. Beginning in May of 1998, a new
production line is expected to be operational at that location. The line will be
financed by the joint venture. Management anticipates that the addition of the
new extruder will produce additional management fees in excess of $100,000
annually.
As of June 30, 1996, InterSystems Nebraska adopted a plan to discontinue
Tropical Systems, Inc., a wholly-owned subsidiary of Nebraska. Tropical ceased
operations as of September, 30, 1996 and was liquidated during 1997. For the six
months ended June 30, 1996, Tropical Systems incurred an operating loss of
$480,000. During 1996, InterSystems Nebraska recorded a loss on disposal of
Tropical totaling $1,440,000, which 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.
On December 19, 1997, InterSystems, Inc. announced the signing by its
InterSystems Nebraska subsidiary of a $4.0 million contract to supply grain
handling equipment to Silotrans, the joint venture operators of the new port
grain terminal project in Constanta, Romania. The order is the largest ever
received by InterSystems Nebraska and has resulted in a record backlog of $7.2
million as of the date of the announcement, compared with $2.3 million on
December 31, 1996. Shipments began in March of 1998 and are expected to be
completed by the end of May 1998, during what historically has been a slower
time of year for InterSystems Nebraska shipments.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in 1997 amounted to $1,242,000. Proceeds
from lines of credit and other short-term borrowings amounted to $1,094,000;
$2,851,000 was provided from borrowings on long-term debt
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obligations, primarily from a mortgage at InterSystems Nebraska ($675,000),
equipment financing at InterSystems Nebraska ($663,000) and approximately
$1,500,000 from the refinancing and acquisition of equipment previously under
capital lease at Chemtrusion's Houston facility. Proceeds from the sale of
common stock were $248,000. Capital expenditures for the purchase of fixed
assets amounted to $2,504,000. This amount is primarily for the aforementioned
equipment for the Houston facility, as well as fixed asset additions, including
a rail spur, at the Mytex facility. Payments under capital leases as well as
payments under various long-term debt obligations amounted to approximately
$3,440,000. There was a net decrease in cash of $572,000 for the year ended
December 31, 1997.
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.
INTERSYSTEMS NEBRASKA
At December 31, 1997, 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, 1997,
borrowings of $1,508,000 were outstanding under this agreement and bear interest
at the bank's base rate plus 1.25% (9.75% at December 31, 1997). 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
totaled approximately $5,228,000 at December 31, 1997. In addition,
InterSystems, Inc., a Delaware corporation (the "Parent Company"), has pledged
all outstanding shares of InterSystems Nebraska's common stock as collateral for
this loan.
During 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. The Parent Company has pledged all outstanding shares of
InterSystems Nebraska's common stock as collateral for all of the above loans.
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 record 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 financing for advanced robotics, software and other
automated equipment to be installed
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<PAGE> 13
in both of their facilities. Subsequent to entering into the $1.1 million in
leases, InterSystems Nebraska assigned the leases to the Parent Company and
entered into annual leases with the Parent Company for the use of the machinery
and equipment. The Parent Company is accounting for these leases as capital
leases. The leases between the Parent 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, signed a letter of intent in
September 1995 for the acquisition of assets of the Tropical Manufacturing
Group, Inc.("Tropical"), headquartered in Miami, Florida. Tropical was engaged
in the business of manufacturing and selling commercial rolling doors and
hurricane-resistant doors and shutters in Florida and Latin America. 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 the business
was significantly greater than originally projected, and would have a negative
impact on the financial condition of InterSystems Nebraska, which was financing
Tropical. The Company had recorded a net liability from discontinued operations
in the amount of $547,000 as of December 31, 1996. For the year ended December
31, 1997, the gain on disposal of Tropical totalling $150,000 primarily
represented an over accrual of the prior year estimated loss on disposal.
Tropical has been presented as a discontinued operation in the consolidated
financial statements.
CHEMTRUSION
At December 31, 1997, 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, 1998. The agreement bears interest at the bank's base rate plus 2%
(10.50% at December 31, 1997) and is collateralized by Chemtrusion's accounts
receivable and inventory. At December 31, 1997, Chemtrusion had no borrowings
outstanding uner this agreement. The agreement requires Chemtrusion, among other
things, to maintain a certain minimum net worth and debt to equity ratio. As of
March 13, 1998, $50,000 was borrowed under the line of credit.
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 totalled 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.
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.
Page 13
<PAGE> 14
At December 31, 1997, Chemtrusion had advances payable to Mytex totalling
$1,299,214 under construction loan agreements bearing interest at 7%. The
advances were used for certain improvements and to acquire additional equipment
for the Mytex facility. The Company and Mytex are currently working on the
finalization of the term loan agreements which are expected to have similar
terms as the original agreement with Mytex for the construction of the Mytex
facility. Accordingly, all advances have been classified as current at December
31, 1997. Upon execution of the term agreements, a portion of this debt will be
classified as long term.
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 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 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.
During 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 at December 31, 1996, pay other related
costs and provide $250,000 in working capital. The note is payable in monthly
installments, which began April 1997, of $24,320, plus interest at prime plus
1.5% (10% as of December 31, 1997), 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 Houston facility and is fully operational. The cost of the
extruder is approximately $1,500,000 and is financed through a five year capital
lease with monthly payments of $32,100.
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 success is, to some extent,
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<PAGE> 15
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 June 1997, the Financial Accounting Standards Board issued two new reporting
and disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
SFAS 130, "Reporting Comprehensive Income", established standards for reporting
and display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
SFAS 131,"Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Adoption of SFAS 130 and 131 are not expected to
have any material effect on the Company's financial statement disclosures.
FORWARD LOOKING STATEMENTS
This annual report for the year ended December 31, 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 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
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<PAGE> 16
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>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public
Accountants..................................... F-2
Consolidated Balance Sheet as of
December 3l, l997............................... F-3
Consolidated Statements of
Operations for the Years Ended
December 3l, 1997 and 1996...................... F-4
Consolidated Statements of
Shareholders' Equity (Capital Deficit)
for the Years Ended December
31, 1997 and 1996............................... F-5
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 1997 and 1996...................... F-6
Notes to Consolidated Financial
Statements...................................... F-7 to F-23
</TABLE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None.
[The rest of this page intentionally left blank.]
Page 16
<PAGE> 17
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>
<CAPTION>
Name Age First Elected Term Expires
- ---- --- ------------- ------------
<S> <C> <C> <C>
Herbert M. Pearlman 65 1984 1998
Fred S. Zeidman 51 1993 1998
John E. Stieglitz 67 1991 1998
David S. Lawi 63 1984 1999
Walter M. Craig, Jr. 44 1993 1999
Daniel T. Murphy 59 1986 2000
William Lurie 67 1995 2000
</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. Since 1980, he has served as President, Chief
Executive Officer and a Director of Helm Capital Group, Inc., a public holding
company and the holder of 15.5% of the Company's common stock ("Helm"). 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"). 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 served as President of Interpak
Terminals, Inc., a wholly-owned subsidiary of Helm engaged in the packaging and
distribution of thermoplastic resins, from July 1993 until July 1997.
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
conditioning 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.
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<PAGE> 18
WALTER M. CRAIG, JR. Mr. Craig has been President of Core Capital, Inc.
(formerly Professionals' Financial Services, Inc.), a Delaware corporation which
is in the business of financing receivables of healthcare and other enterprises,
since 1993. He also serves 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 also serves 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. Mr. Lurie is presently serving as Co-Chairman and a Director of The
Foundation for Prevention & Early Resolution of Conflicts. He also serves as a
Director of Mineral Technologies, Inc. Since May 1997, Mr. Lurie has served as
Chairman of the Board of Eagle Geophysical, Inc., a public company engaged in
the business of the acquisition of seismic information. 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.
DANIEL T. MURPHY Mr. Murphy joined the Company in May 1984 as Vice
President-Finance and Operations and served as Executive Vice President of
Operations and Chief Financial Officer of the Company from 1985 until September
1997. 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 consulting services to the
professional investment communities in the area of executive recruiting. Mr.
Stieglitz has been a director of Helm since 1986 and a director of Seitel since
1989.
COMMITTEES AND ATTENDANCE
During 1997, the Company's Board of Directors held four meetings, which
were 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 Zeidman. The function of the Executive Committee is to act on
an interim basis for the full Board. The Executive
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<PAGE> 19
Committee did not meet separately from the full Board of Directors during 1997.
The Audit Committee and the Compensation Committee presently is comprised of Mr.
Stieglitz and Mr. Lurie. The Audit Committee and the Compensation Committee did
not meet separately from the full Board of Directors during 1997. The
Acquisition Committee presently is comprised of Mr. Lurie. Mr. Lurie held
several meetings during 1997 in connection the proposed acquisition of Interpak
Holdings, Inc. from Helm which did not take place.
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, except that for 1997, Mr. Lurie, who also served as Chairman of the
Acquisition Committee, received a fee of $12,000 in cash and $12,000 in common
stock for services rendered. All 1997 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.
SIGNIFICANT EMPLOYEES
In addition to Messrs. Pearlman, Zeidman and Lawi, the Company has three
additional significant employees. Wm. Chris Mathers, 38, joined the Company in
January 1994 as controller. In September 1997, he was appointed Chief Financial
Officer of the Company.
Kenneth Schrader, 59, has served as President of InterSystems Nebraska
since 1978.
Scott Owens, 34, has served as President of Chemtrusion since 1993. He
divides his time between the Houston and Mytex facilities.
Messrs. Pearlman and Lawi allocate their work-related time, and the
other executive officers of the Company spend all of their work-related time, on
the various businesses of the Company and its subsidiaries and affiliates.
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 John Stieglitz reporting the receipt
of 1,964 shares of common stock upon conversion of outstanding debentures was
filed five days late.
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<PAGE> 20
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 1997. With the exception of Mr. Pearlman and Mr. Zeidman, no
executive officers of the Company earned over $100,000 for the fiscal year ended
December 31, 1997. See "Employment Arrangements" below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Annual Compensation
Principal --------------------- All Other
Position Year Salary Compensation(1)
- -------- ---- ------ ---------------
<S> <C> <C> <C>
FRED S. ZEIDMAN 1997 $115,000 --
President and 1996 50,000 --
Chief Executive 1995 50,000 --
Officer
HERBERT M. PEARLMAN 1997 100,000 57,496
Chairman 1996 100,000 57,300
1995 100,000 19,344
</TABLE>
(1) Represents premiums on life insurance policies and auto allowance.
INDIVIDUAL OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent Of
Securities Total Options/
Underlying SARs Granted
Options/ To Employees Exercise Of
SARS Granted In Fiscal Year Base Price Expiration
Name (#) (%) ($/Sh) Date
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FRED S. 100,000 18.6 $2.125 9/3/02
ZEIDMAN
HERBERT M. 100,000 18.6 $2.125 9/3/02
PEARLMAN
</TABLE>
[The rest of this page intentionally left blank.]
Page 20
<PAGE> 21
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUE TABLE
The following table sets forth aggregated option exercises in the last
fiscal year, the number of unexercised options and fiscal year-end values of in
the money options for the Chief Executive Officer. All options were out of the
money at December 31, 1997.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Unexercised In-the-money
Acquired Options at Options at
on Fiscal y/e fiscal y/e
Exercise Value Exercisable/ Exercisable/
Name (#) Realized ($) Unexercisable Unexercisable
- ---- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
FRED S.
ZEIDMAN -- -- 500,000/ -- -- / --
HERBERT M.
PEARLMAN -- -- 100,000/ -- -- / --
</TABLE>
EMPLOYMENT ARRANGEMENTS
The specific material terms of the agreements for the current executive officers
of the Company are set forth below.
ZEIDMAN AGREEMENT
In 1993, Mr. Zeidman and the Company entered into a three-year
employment agreement pursuant to which Mr. Zeidman will serve as President and
Chief Executive Officer of the Company. The agreement is renewable on a year to
year basis thereafter provided that notice of termination is not given. Pursuant
to the employment agreement, Mr. Zeidman is entitled to a base salary of
$150,000 per year and a bonus 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. Upon execution of the
employment agreement, Mr. Zeidman 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 are fully vested.
Until July 31, 1997, Mr. Zeidman also served as President and Chief
Executive Officer of Interpak Terminals, Inc. ("Interpak"), a wholly-owned
subsidiary of Helm Resources, Inc. Mr. Zeidman allocated his time between the
Company and Interpak, and Interpak contributed 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 1997, Mr. Zeidman received
$45,769 from Interpak, which was sold in July 1997.
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
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<PAGE> 22
of the Board of Directors of the Company, 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.
In September 1997, Mr. Zeidman agreed to an amendment to his employment
agreement which provides for a base salary of $100,000, increasing to $125,000
when earnings before taxes ("EBT") exceeds $1 million and $150,000 when EBT
exceeds $1.5 million. In addition, his bonus will be 4% of EBT, reducing to 3%
of EBT when his salary reaches $150,000. For the years 1998, 1999 and 2000, EBT
shall mean EBT over $0; for the years 2001, 2002 and 2003, EBT shall mean EBT
over $250,000 and thereafter, EBT shall increase by $250,000 every three years.
In addition, in September 1997, the Company granted Mr. Zeidman 100,000
incentive stock options under the Company's newly adopted 1997 Stock Option Plan
with an exercise price of $2.125 and an expiration date of September 2002 (the
"Plan").
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 September 1997, the Company and Mr. Pearlman agreed to an amendment
to his employment agreement which provides for a bonus of 5% of EBT and an
increase in base salary to $125,000 when EBT exceeds $1 million, $150,000 when
EBT exceeds $1.5 million, $175,000 when EBT exceeds $2.0 million and $200,000
when EBT exceeds $2.5 million. In addition, the contract was extended for five
years until June 30, 2002, with a two year evergreen renewal feature thereafter.
In September 1997, the Company granted to Mr. Pearlman 100,000 incentive stock
options under the Plan.
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<PAGE> 23
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 September 1997, the Company and Mr. Lawi agreed to an amendment to
his employment agreement which provides for a bonus of 2.5% of EBT and an
increase in base salary to $62,500 when EBT exceeds $1 million, $75,000 when EBT
exceeds $1.5 million, $87,500 when EBT exceeds $2.0 million and $100,000 when
EBT exceeds $2.5 million. In addition, the contract was extended for five years
until June 30, 2002, with a two year evergreen renewal feature thereafter. In
September 1997, the Company granted to Mr.
Lawi 50,000 incentive stock options under the Plan.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information as of March 1, 1998 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>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name Ownership (1)(2) Class (2)
- ---- ----------------- ---------
<S> <C> <C>
BENEFICIAL HOLDERS
Helm Capital Group, Inc..... 1,226,621(3) 15.5%
537 Steamboat Road
Greenwich, CT 06830
Strategic Growth ........... 678,000(4) 8.1%
International, Inc.
111 Great Neck Road
Great Neck, N.Y. 11021
John V. Winfield ........... 576,000(5) 7.1%
2121 Avenue of the Stars
Los Angeles, CA 90067
OFFICERS AND DIRECTORS
Fred S. Zeidman ............ 780,000(6) 9.3%
7115 Clinton Drive
Houston, Texas 77020
Herbert M. Pearlman ........ 731,549(7) 8.7%
537 Steamboat Road
Greenwich, CT 06830
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C> <C>
David S. Lawi .............. 504,847(8) 6.1%
537 Steamboat Road
Greenwich, CT 06830
Walter M. Craig, Jr......... 17,220(9) *
Daniel T. Murphy ........... 25,232(10) *
John E. Stieglitz........... 27,388(11) *
William Lurie............... 20,000(12) *
All executive officers
and directors
as a group (7 persons) .... 2,009,361(13) 21.4%
</TABLE>
- ----------------------
* Less than 1%
(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.
(3) Includes shares issuable upon exercise of Common Stock Purchase Warrants
expiring December 31, 1999 at $3.50 per share (the "Dividend
Warrants")(6,035).
(4) Includes 60,000 shares held by each of two principals of Strategic
Growth International, Inc. ("SGII"), Stanley Altschuler and Richard
Cooper. Also includes 450,000 shares that are issuable upon exercise of
a like amount of Common Stock Purchase Warrants expiring June 11, 2002
at $1.125 per share held by SGII, and 30,000 shares that are issuable
upon exercise of a like amount of Common Stock Purchase Warrants
expiring June 11, 2002 at $1.375 per share held each of Messrs.
Altschuler and Cooper.
(5) Includes 192,000 shares held by Intergroup Corporation, 2121 Avenue of
the Americas, 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 of 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.
(6) 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) and
100,000 stock options expiring September 2002 with an exercise price of
$2.125 (the "1997 Options").
(7) Includes shares issuable upon exercise of 1997 Options (100,000),
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") (100,000), 1996 Warrants
Page 24
<PAGE> 25
(60,000) and upon conversion of Series A 10% Debentures due June 30,
2001 at $1.27 per share (157,480).
(8) Includes shares issuable upon exercise of 1997 Options (50,000),
Dividend Warrants (73,875), Employment Warrants (50,000), 1996 Warrants
(60,000) and upon conversion of Series A 10% Debentures (157,480).
(9) Includes shares issuable upon exercise of Dividend Warrants (4,000).
(10) Includes shares issuable upon exercise of Dividend Warrants (3,750).
(11) Includes shares issuable upon exercise of Warrants (5,000) and 1997
Warrants (10,000).
(12) Includes 20,000 shares issuable upon exercise of stock options.
(13) Includes shares issuable upon exercise of stock options (430,000), 1997
Options (250,000), Dividend Warrants (159,176), Warrants (65,000),
Employment Warrants (150,000), 1996 Warrants (150,000) and upon
conversion of Series A 10% Debentures (314,960).
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During 1997, 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 upon
certain formulas which management deems to be reasonable. During 1997, Helm had
net advances due to the Company of $400,000 which included a $250,000 down
payment for the acquisition by the Company of Interpak Terminals, Inc. which
never took place. This amount was repaid in 1997 by cancellation of a $30,000
InterSystems debenture held by Helm, transferring $117,000 of the Company's
common stock, or 70,060 shares at $1.67 per share, held by Helm to the Company,
issuing $117,000 of Helm common stock, or 169,565 shares at $.69 per share, to
the Company, and the payment of $136,000 in cash. For purposes of computing the
number of shares to be issued, the average stock price for the 30 days following
the date of the June 6, 1997 Helm board meeting which approved the transaction
was used.
In January, 1995, Core Capital, Inc. ("CCI") (formerly known as
Professionals' Financial Services, Inc.), 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 CCI 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 guaranteed the amounts owing by
TMG to
Page 25
<PAGE> 26
PFS. At June 30, 1997, TSI was indebted to CCI in the amount of $109,000 under
the TMG line of credit and pursuant to the TSI line of credit. In full
settlement of all amounts owing to CCI, the Company issued 109,000 shares of its
common stock, at $1.00 per share to CCI after completion of the bankruptcy
proceedings.
During 1996, the Company had borrowings outstanding under a line of
credit with an affiliated company, which were repaid in 1996 and the agreement
was terminated. The line of credit provided a maximum borrowing of $450,000 and
bore interest at 25%. During 1996, the Company incurred interest expense of
$3,000. At December 31, 1996, the Company had accrued interest payable totalling
$34,000 under this line of credit which was repaid in 1997 by issuance of 36,000
shares of the Company's common stock.
ITEM 13: EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
- ------ ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation and Amendments i
3.2 By-Laws, as amended and restated on January
8, 1998 Filed Herewith
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 v
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 Common Stock Purchase Warrant
expiring June 30, 2000 vii
4.4 Form of Common Stock Purchase Warrant
expiring July 30, 2000 issued in lieu of ix
compensation
</TABLE>
Page 26
<PAGE> 27
<TABLE>
<S> <C> <C>
4.5 Form of Common Stock Purchase Warrant ix
expiring January 15, 2000 issued in
December 1995 Private Placement
4.6 Form of Common Stock Purchase Warrant x
expiring October 29, 2001 issued in
December 1995
10.1 The Company's 1997 Employee xi
Stock Option Plan
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 viii
10.6 Amendment to Employment Agreement between
Company and David S. Lawi viii
10.7 Amendment to Employment Agreement between
Company and Daniel T. Murphy viii
10.8 Toll Compounding Contract dated April 1, viii
1994 between Chemtrusion, Inc. and Himont
U.S.A., Inc.
10.9 Employment Agreement dated as of July 26, 1993 vi
between the Company and Fred Zeidman
10.10 Investment Agreement dated as of June 24, 1993 vi
between the Company and Fred Zeidman
10.11 Definitive Agreement for Compounding Services ix
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)
21.1 Subsidiaries Filed Herewith
23.1 Consent of BDO Seidman, LLP to incorporation by Filed Herewith
reference of their opinion into filed
registration statements
</TABLE>
Page 27
<PAGE> 28
i: Filed as an exhibit to the Company's Registration Statement (No.
33-10108) on Form S-1 and incorporated herein by reference
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 the Company's Registration Statement (No.
33-71582) on Form S-1 and incorporated herein by reference.
vi: Filed as an exhibit to Company's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
vii: Filed as an exhibit to the Company's Registration Statement (No.
333-00003) on Form S-3 and incorporated herein by reference.
viii: Filed as an exhibit to Company's Form 10-KSB for the year ended
December 31, 1994 and incorporated herein by reference.
ix: Filed as an exhibit to Company's Form 10-KSB for the year ended
December 31, 1995 and incorporated herein by reference.
x: Filed as an exhibit to Company's Form 10-KSB for the year ended
December 31, 1996 and incorporated herein by reference.
xi: Filed as an exhibit to the Company's Registration Statement on Form
S-8 filed February 11, 1998 (No. 333-46035)
(b) Reports on Form 8-K: None
Page 28
<PAGE> 29
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 26th day of
March, 1998.
INTERSYSTEMS, INC.
By: /s/ Fred S. Zeidman
--------------------------
Fred S. Zeidman
President,
Chief Executive Officer
By: /s/ Wm. Chris Mathers
--------------------------
Wm. Chris Mathers
Chief Financial Officer
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.
<TABLE>
<S> <C> <C>
/s/ Herbert M. Pearlman Chairman of the Board March 26, 1998
- ----------------------------
Herbert M. Pearlman
/s/ Fred S. Zeidman Director, President and March 26, 1998
- ---------------------------- Chief Executive Officer
Fred S. Zeidman
/s/ Daniel T. Murphy Director March 26, 1998
- ----------------------------
Daniel T. Murphy
/s/ David S. Lawi Director, Secretary March 26, 1998
- ----------------------------
David S. Lawi
/s/ Walter M. Craig, Jr. Director March 26, 1998
- ----------------------------
Walter M. Craig, Jr.
/s/ John E. Stieglitz Director March 26, 1998
- ----------------------------
John Stieglitz
/s/ William Lurie Director March 26, 1998
- ----------------------------
William Lurie
</TABLE>
Page 29
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERSYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public
Accountants..................................... F-2
Consolidated Balance Sheet as of
December 3l, l997............................... F-3
Consolidated Statements of
Operations for the Years Ended
December 3l, 1997 and 1996...................... F-4
Consolidated Statements of
Shareholders' Equity (Capital Deficit)
for the Years Ended December
31, 1997 and 1996............................... F-5
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 1997 and 1996...................... F-6
Notes to Consolidated Financial
Statements...................................... F-7 to F-23
</TABLE>
F-1
<PAGE> 31
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, 1997, and the related consolidated statements of
operations, shareholders' equity (capital deficit), and cash flows for each of
the two years in the period ended December 31, 1997. 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, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Houston, Texas
March 9, 1998
F-2
<PAGE> 32
INTERSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
1997
----------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................... $ 802
Marketable equity securities (Note 8(a)) .................... 148
Trade receivables, less allowance of $36 (Notes 4 and 5) .... 3,162
Inventories (Notes 2, 4 and 5) .............................. 2,194
Time deposits (Note 10) ..................................... 110
Prepaid expenses and other .................................. 313
----------
Total Current Assets ..................................... 6,729
Property, equipment and leasehold improvements, net
(Notes 3, 4 and 5) .......................................... 21,131
Other assets .................................................... 264
----------
$ 28,124
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term notes payable and advances (Note 4) .............. $ 2,807
Current portion of long-term debt (Note 5) .................. 1,061
Accounts payable ............................................ 1,752
Accrued expenses ............................................ 1,481
Due to affiliate (Note 10(c)) ............................... 25
Net liabilities of discontinued operations (Note 11) ........ 68
----------
Total Current Liabilities ................................ 7,194
Long-term debt, less current maturities (Note 5) ................ 16,822
Subordinated debentures (Note 7) ................................ 636
----------
Total Liabilities ........................................ 24,652
----------
Commitments and Contingencies (Notes 9 and 10)
Shareholders' Equity (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;
7,843 shares issued and outstanding ...................... 78
Additional paid-in capital .................................. 7,678
Unrealized gain on available for sale securities ............ 31
Deficit ..................................................... (4,035)
Treasury stock, 102 shares at cost .......................... (180)
Note receivable for sale of stock (Note 8(e)) ............... (100)
----------
Total Shareholders' Equity ............................... 3,472
----------
$ 28,124
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 33
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net sales (Notes 10(a) and 14) ........................................ $ 27,008 $ 20,462
Cost of sales ......................................................... 18,248 14,417
---------- ----------
Gross profit ................................................... 8,760 6,045
Selling, general and administrative expenses .......................... 6,700 5,557
Management fees to affiliate (Note 8(c)) .............................. 15 36
Interest income ....................................................... (9) (46)
Interest expense (Note 8(d)) .......................................... 1,643 897
Other ................................................................. (8) --
---------- ----------
Income (loss) from continuing operations ....................... 419 (399)
---------- ----------
Loss from discontinued operations of
Tropical Systems, Inc. (Note 11) .................................. -- (480)
Gain (loss) on disposal of the Tropical
Systems, Inc. (Note 11) ........................................... 150 (1,440)
---------- ----------
Income (Loss) from discontinued operations ..................... 150 (1,920)
---------- ----------
Net Income (loss) .............................................. $ 569 $ (2,319)
========== ==========
Net income (loss) per common share (Notes 1 and 9):
Net income (loss) per common share - basic and assuming dilution:
Continuing operations .......................................... $ .06 $ (.06)
Discontinued operations ........................................ -- (.08)
Gain (loss) on disposal ........................................ .02 (.23)
---------- ----------
$ .08 $ (.37)
========== ==========
Weighted average number of common shares outstanding .................. 6,746 6,177
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 34
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
For The Years Ended December 31, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON STOCK ADDITIONAL AVAILABLE
------------------------- PAID-IN FOR SALE
SHARES AMOUNT CAPITAL SECURITIES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ........... 4,479,218 $ 45 $ 3,045 $ --
Conversion of 10% subordinated
debentures (Note 7) ................. 36,792 -- 60 --
Conversion of 8% subordinated
debentures (Note 7) ................. 294,154 3 422 --
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 --
Costs associated with issuance
of redeemable common stock .......... -- -- (136) --
Shares sold to employees ............... 8,000 -- 12 --
Net loss ............................... -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996 ........... 6,378,164 64 3,456 --
Common stock issued with exercise
of warrants (Note 9(a)) ............. 100,000 1 179 --
Issuance of common stock options
for services (Note 9(b)) ............ -- -- 96 --
Sale of common stock ................... 60,000 1 67 --
Common stock issued for repayment
of accrued liabilities (Note 8(d)) .. 36,000 -- 36 --
Common stock issued for services ....... 48,000 -- 35 --
Reclassification of common stock
no longer subject to redemption
(Note 9(a)) ......................... -- -- 2,077 --
Purchase of treasury stock ............. -- -- -- --
Common stock issued for directors fees . 5,424 -- 6 --
Unrealized gain on available for sale
securities .......................... -- -- -- 31
Common stock issued for repayment of
accrued liabilities (Note 8(b)) ..... 109,000 1 108 --
Conversion of 10% subordinated
debentures (Note 7) ................. 363,636 4 585 --
Conversion of 8% subordinated
debentures (Note 7) ................. 743,107 7 1,033 --
Net income ............................. -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1997 ........... 7,843,331 $ 78 $ 7,678 $ 31
========== ========== ========== ==========
<CAPTION>
TOTAL
NOTE SHAREHOLDERS
TREASURY STOCK RECEIVABLE EQUITY
------------------------- FOR SALE (CAPITAL
DEFICIT SHARES AMOUNT OF STOCK DEFICIT)
---------- ---------- ---------- ---------- ------------
Balance at December 31, 1995 ........... $ (2,285) -- $ -- $ (100) $ 705
Conversion of 10% subordinated
debentures (Note 7) ................. -- -- -- -- 60
Conversion of 8% subordinated
debentures (Note 7) ................. -- -- -- -- 425
Sale of common stock subject
to redemption (Note 9(a)) ............ -- -- -- -- --
Sale of common stock (Note 9(a)) ....... -- -- -- -- 69
Costs associated with issuance
of redeemable common stock .......... -- -- -- -- (136)
Shares sold to employees ............... -- -- -- -- 12
Net loss ............................... (2,319) -- -- -- (2,319)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ........... (4,604) -- -- (100) (1,184)
Common stock issued with exercise
of warrants (Note 9(a)) ............. -- -- -- -- 180
Issuance of common stock options
for services (Note 9(b)) ............ -- -- -- -- 96
Sale of common stock ................... -- -- -- -- 68
Common stock issued for repayment
of accrued liabilities (Note 8(d)) .. -- -- -- -- 36
Common stock issued for services ....... -- -- -- 35
Reclassification of common stock
no longer subject to redemption
(Note 9(a)) ......................... -- -- -- -- 2,077
Purchase of treasury stock ............. -- 102,060 (180) -- (180)
Common stock issued for directors fees . -- -- -- -- 6
Unrealized gain on available for sale
securities .......................... -- -- -- -- 31
Common stock issued for repayment of
accrued liabilities (Note 8(b)) ..... -- -- -- -- 109
Conversion of 10% subordinated
debentures (Note 7) ................. -- -- -- -- 589
Conversion of 8% subordinated
debentures (Note 7) ................. -- -- -- -- 1,040
Net income ............................. 569 -- -- -- 569
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ........... $ (4,035) 102,060 $ (180) $ (100) $ 3,472
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 35
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(Note 13)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ 569 $ (2,319)
---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................... 1,729 1,065
(Gain) loss on disposal of equipment .................... 7 (2)
Provision for losses on accounts receivable ............. 29 34
Gain on disposal of Tropical Systems, Inc. .............. (150) --
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables .................................. (568) (60)
Inventories ........................................ (573) 519
Due from affiliate ................................. 25 (179)
Increase (decrease) in:
Accounts payable and accrued expenses .............. 489 311
Due to affiliate ................................... 5 --
Net liabilities from discontinued operations ....... (220) 547
Other changes - net ..................................... (100) 117
---------- ----------
Total adjustments ............................... 673 2,352
---------- ----------
Net cash provided by operating activities ....... 1,242 33
---------- ----------
Cash flows from investing activities:
Purchases of fixed assets ..................................... (2,504) (13,282)
Payments on notes receivable - sale of Trading Business ....... -- 490
Purchase of time deposits ..................................... -- (110)
Proceeds from sale of equipment ............................... -- 154
Collections on note receivable ................................ -- 50
---------- ----------
Net cash used in investing activities ........... (2,504) (12,698)
---------- ----------
Cash flows from financing activities:
Net proceeds (repayment) on lines of credit and
other short-term borrowings ................................ 1,094 (632)
Net proceeds (repayments) on line of credit,
affiliated company ......................................... -- (438)
Proceeds (repayments) on notes payable, affiliated company .... -- (100)
Proceeds from long-term debt obligations ...................... 2,851 13,862
Purchase of treasury stock .................................... (63) --
Payments under capital lease obligations ...................... (1,288) --
Payments under various long-term debt obligations ............. (2,152) (690)
Proceeds from sale of common stock ............................ 248 22
Net proceeds from private placement of
redeemable common stock .................................... -- 2,009
---------- ----------
Net cash provided by financing activities ....... 690 14,033
---------- ----------
Net increase (decrease) in cash and cash equivalents ............ (572) 1,368
Cash and cash equivalents, beginning of year .................... 1,374 6
---------- ----------
Cash and cash equivalents, end of year .......................... $ 802 $ 1,374
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 36
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, the Company had cash deposits in financial
institutions that exceeded the federally insured deposit limit by $418,007.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
F-7
<PAGE> 37
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
MARKETABLE EQUITY SECURITIES
The Company accounts for its investment in marketable securities in
accordance with Statement of Financial Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115). In accordance with
SFAS 115, the Company has classified marketable equity securities as
available-for-sale. Available-for-sale securities are recorded at fair value
with the resulting gain (or loss) credited (or charged) as a separate component
of equity. At December 31, 1997, the Company had marketable securities totalling
$148,370 with an unrealized gain of $31,370.
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.
EARNING (LOSS) PER COMMON SHARE
Effective for the year ended December 31, 1997, the Company was
required to adopt Statement of Financial Standards No. 128, "Earnings Per Share"
("SFAS 128"). In accordance with SFAS 128, the Company is required to provide
basic and dilutive earnings (loss) per common share information.
The basic net income (loss) per common share is computed by dividing
the net income (loss) available to common shareholders by the weighted average
number of common shares outstanding.
Diluted net income (loss) per common share is computed by dividing the
net income (loss) available to common shareholders, adjusted on an as if
converted basis, by the weighted average number of common shares outstanding
plus potential dilutive securities.
F-8
<PAGE> 38
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is the effect of potential dilutive securities on
weighted average number of shares outstanding used in computing earnings per
share assuming dilution for the year ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Shares
--------
<S> <C>
Weighted average number of common shares used in
basic earnings per share ................................ 6,746
Effect of dilutive securities:
Stock options ........................................... 215
Stock warrants .......................................... 125
--------
Weighted number of common shares and dilutive potential
common stock used in diluted earnings per share ......... 7,086
========
</TABLE>
For the year ended December 31, 1997, there was no adjustment to income
available to common shareholders used in computing earnings per share assuming
dilution because the convertible debentures were anti-dilutive.
For the year ended December 31, 1996, potential dilutive securities had
an anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.
For the years ended December 31, 1997 and 1996, 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>
1997 1996
--------- ---------
(shares) (shares)
<S> <C> <C>
Stock options .................................. 970 544
Stock warrants ................................. 1,777 2,435
Shares issuable on conversion of debentures .... 513 1,597
--------- ---------
3,260 4,576
========= =========
</TABLE>
The adoption of SFAS 128 had no effect on net loss per common share for
the year ended December 31, 1996, accordingly, no restatement was necessary.
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.
F-9
<PAGE> 39
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
financial statement presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new
reporting and disclosure standards. Results of operations and financial position
will be unaffected by implementation of these new standards.
SFAS 130, "Reporting Comprehensive Income", established standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are required to
be recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise",
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Adoption of SFAS 130 and 131 are not expected
to have any material effect on the Company's financial statement disclosures.
F-10
<PAGE> 40
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
Inventories consisted of the following at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
Raw materials and component parts......................... $ 1,397
Finished goods............................................ 797
-----------
$ 2,194
===========
</TABLE>
NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the
following at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
Land ............................................................... $ 594
Buildings............................................................ 9,168
Machinery and equipment.............................................. 11,571
Other equipment...................................................... 2,140
Equipment leased to others........................................... 897
Leasehold improvements............................................... 548
Railroad track....................................................... 388
Equipment under capital leases....................................... 2,417
Furniture and fixtures............................................... 96
Construction-in-progress; estimated cost to complete $1,902,000...... 534
-----------
28,353
Less: Accumulated depreciation and amortization,
of which $704,000 relates to leased equipment.................. (7,222)
-----------
$ 21,131
===========
</TABLE>
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 $231,000 and $328,000 in 1997 and 1996,
respectively. At December 31, 1997, the approximate aggregate minimum rentals to
be received in future years are $174,000 in 1998; $137,000 in 1999; and $55,000
in 2000.
During 1997 and 1996, Chemtrusion capitalized interest expense
totalling approximately $17,000 and $234,000, respectively, in association with
the construction of the Jeffersonville, Indiana facility.
NOTE 4 - SHORT-TERM NOTES PAYABLE AND ADVANCES
At December 31, 1997, 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, 1997, borrowings of $1,507,624 were outstanding under this
agreement and bear interest at the bank's base rate plus 1.25% (9.75% at
December 31, 1997). 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 $5,228,096 at
December 31, 1997. In addition, InterSystems, Inc., a Delaware corporation, has
pledged all outstanding shares of InterSystems Nebraska's common stock as
collateral.
F-11
<PAGE> 41
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997, Chemtrusion had advances payable to a non-related
joint venture totalling $1,299,214 under construction loan agreements bearing
interest at 7%. The advances were used for certain improvements and to acquire
additional equipment for the Jeffersonville, Indiana facility. The Company and
the non-related joint venture are currently working on the finalization of the
term loan agreements which are expected to have similar terms as the original
agreement with the non-related joint venture to construct the Jeffersonville,
Indiana facility (see Note 5). Accordingly, all advances have been classified as
current at December 31, 1997. Upon execution of the term agreements a portion of
this debt will be classified as long-term.
At December 31, 1997, Chemtrusion had a revolving line of credit
agreement with a bank. The agreement provides for a maximum borrowing of
$300,000 and expires September 1998. The agreement bears interest at the bank's
base rate plus 2% (10.50% at December 31, 1997) and is collateralized by
Chemtrusion's accounts receivable and inventory. At December 31, 1997,
Chemtrusion had no borrowings outstanding under this agreement. 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, 1997 (in
thousands):
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
7% term note payable to a non-related joint venture with interest
only payable through January 1999, thereafter monthly
installments of $143,973 including interest, through
January 2011, secured by the Jeffersonville, Indiana facility.......................... $ 12,851
Prime plus 1.5% (10% at December 31, 1997) note payable,
payable $24,320 monthly, plus interest through March 2002,
secured by equipment................................................................... 1,240
8.82% term note, payable $3,750 monthly, plus interest,
through July 2002, at which time the remaining balance
is due, secured by land................................................................ 656
9.31% term note, payable $7,893 monthly, including interest,
through July 2004, secured by equipment................................................ 624
10.5% term note, payable $5,774 monthly, including
interest, through January 2001, secured by equipment................................... 191
Obligations under capital lease.......................................................... 2,238
Other obligations........................................................................ 83
--------
Total ...................................................................... 17,883
Less: Current maturities...................................................... (1,061)
--------
Total long-term debt ....................................................... $ 16,822
========
</TABLE>
F-12
<PAGE> 42
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 8.82% and 9.31% term notes outstanding at December 31, 1997 are
collateralized by InterSystems' Nebraska accounts receivable, inventories and
equipment. In accordance with the loan agreements, 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. In addition, the Company has guaranteed the debt
and has pledged InterSystems' Nebraska stock as additional collateral.
InterSystems, Inc. and Chemtrusion leased certain machinery and
equipment under capital leases expiring through 2002. At December 31, 1997,
future minimum lease payments under capital leases, together with the present
value of the net minimum lease payments, are as follows (in thousands):
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
1998................................................... $ 682
1999................................................... 605
2000................................................... 564
2001................................................... 653
2002................................................... 128
--------
Total minimum lease payments........................... 2,632
Less: Amount representing interest
calculated at the incremental borrowing rate......... (394)
--------
Present value of net minimum lease payments............ 2,238
Less: Current portion.................................. (524)
--------
Long-term portion of capital leases.................... $ 1,714
========
</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, 1997 was $2,210,000.
Future maturities of long-term debt at December 31, 1997, including
capital leases summarized above are: 1998 - $1,061,000; 1999 - $1,720,000; 2000
- - $1,815,000; 2001 - $1,927,000; 2002 - $1,717,000; and $9,643,000, thereafter.
F-13
<PAGE> 43
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 (in thousands):
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
Net operating loss carryforwards............................. $ 2,320
Tax basis in excess of assets acquired
(InterSystems Nebraska)................................ 249
Expenses accrued for financial reporting
purposes not deducted for tax purposes, net............ 246
Tax credit carryforwards..................................... 98
--------
Deferred tax asset........................................... 2,913
Valuation allowance.......................................... (1,795)
--------
Net deferred tax asset....................................... 1,118
Deferred tax liability - depreciation........................ (1,118)
--------
Net deferred income tax asset (liability).................... $ --
========
</TABLE>
For the years ended December 31, 1997 and 1996, 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>
<CAPTION>
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Statutory rate ............................... $ 193 $ (788)
Increase (decrease) in valuation allowance ... (262) 781
Other - net .................................. 69 7
--------- ---------
$ -- $ --
========= =========
</TABLE>
As of December 31, 1997, the Company had for income tax purposes, net
operating loss carryforwards of approximately $6,823,000, which expire in years
through 2012. 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.
F-14
<PAGE> 44
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SUBORDINATED DEBENTURES
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)). At December 31, 1997, the
Company had 10% debentures totalling $636,000, net of discounts of $14,000,
payable to affiliates. The 10% Debentures aggregating $650,000 are currently
convertible into the Company's common stock at a per share price of $1.27,
reduced from the original conversion rate of $2.50, due to dilutive provisions
and other reductions in the conversion price in prior years. The debt is
subordinate to the senior debt of the Company, as defined. Debentures totalling
$640,000 and $62,500 were converted in 1997 and 1996, respectively, at
conversion rates ranging from $1.27 to $1.76, less deferred offering costs and
original discounts totalling $51,000 and $2,000, respectively. Also, during
1997, debentures totalling $30,000 were forfeited by Helm as partial payment of
amounts due the Company from Helm (see Note 8(a)). 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.
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 outstanding debentures. Debentures
totalling $1,040,350 and $425,000 were converted in 1997 and 1996, respectively,
at conversion rates ranging from $1.40 to $1.43. As of December 31, 1997, all
the 8% debentures were converted.
NOTE 8 - RELATED PARTY TRANSACTIONS
(a) As of December 31, 1997 and 1996, Helm owned approximately 16% and
22%, 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 $55,000 and $51,000 in 1997 and 1996,
respectively. During 1997, the Company received 169,565 shares of Helm common
stock with an estimated fair value totalling $117,000, forfeiture of $30,000 of
debentures payable to Helm, the return of 70,060 shares of the Company's common
stock held by Helm and cash of $136,000 as payment on amounts due from Helm.
(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. During 1997, the Company
issued 109,000 shares of its common stock for payment of liabilities due the
affiliated company. For the year ended 1996, Tropical incurred fees totalling
$9,000, which have been included in loss from discontinued operations.
(c) Interpak Holdings, Inc. ("Interpak"), a former subsidiary of Helm
(and a former subsidiary of the Company), provided management services to
Chemtrusion. The allocated expenses, for such management services, based on
certain formulas which management deems to be reasonable, amounted to $15,000
and $36,000 for 1997 and 1996, respectively. In addition, during 1997 and 1996,
Interpak paid certain operating expenses on behalf of the Company. At December
31, 1997, the Company had a balance due to Interpak totalling $25,000 for these
expenses. In July 1997, Helm sold Interpak and management services provided to
Chemtrusion ceased.
(d) During 1996, 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, the Company incurred interest
expense of $3,000. At December 31, 1996, the company had accrued interest
payable totalling $34,000 under this line of credit which was paid in 1997 by
issuance of 36,000 shares of the Company's common stock.
F-15
<PAGE> 45
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1997 and 1996, the Company earned interest on the note
receivable totalling $8,000. At December 31, 1997, unpaid interest totalled
$37,000 under this note agreement.
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 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 $.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. During 1997, 100,000 of these warrants were exercised and at December 31,
1997 none of the remaining 680,000 warrants outstanding were eligible for
redemption by the Company.
Holders of the units had 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 1997, the Company registered the shares and the stock traded at a $1.80
for the thirty consecutive trading days, as defined by the agreement.
Accordingly, the redemption feature of the security was terminated and the
redemption value of 1,511,000 shares of the Company's common stock was
reclassified to shareholders' equity.
During 1996, 49,000 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 as of December 31, 1996.
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. As of December 31, 1997 no option had been
exercised.
(b) During 1997, the Company adopted the "1997 Stock Option Plan",
whereby options to purchase up to 635,000 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. Of these options, 500,000 may be granted as incentive stock
options, as defined by the Internal Revenue Code, and 135,000 may be granted as
non-qualified stock options. Options are exercisable for a term of five years
and vest at a rate of 33% per year.
In addition, 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.
F-16
<PAGE> 46
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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." During the year ended December 31, 1997, all options issued to
employees were granted at an exercise which equalled the market price per share
at date of grant, accordingly, no compensation was recorded. There were no
options granted to employees during 1996. 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 income (loss) and income
(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 year ended December 31, 1997, the Company estimated the
fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Dividend yield.................................. 0%
Expected volatility............................. 45.0% to 50.0%
Risk free interest.............................. 6.21% to 6.39%
Expected lives.................................. 5 years
</TABLE>
Under the accounting provisions of SFAS Statement 123, the Company's
net income applicable to common shareholders and income per share for 1997 would
have been decreased to the pro forma amounts indicated below:
Net income applicable to common shareholders (in thousands):
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
As reported........................................... $ 569
===========
Pro forma............................................. $ 442
===========
Net income per share:
Basic and assuming dilution:
As reported........................................ $ .08
===========
Pro forma.......................................... $ .07
===========
</TABLE>
Due to the fact that the Company's stock option plans vest over many
years and additional awards are made each year, the above pro forma numbers are
not indicative of the financial impact had the disclosure provisions of SFAS
Statement 123 been applicable to all years of previous options grants. The above
numbers do not include the effect of options granted prior to 1995 vested in
1997 and 1996.
F-17
<PAGE> 47
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock options to employees as
of December 31, 1997 and 1996, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........... 104,431 $ 2.60 171,228 $ 3.83
Granted.................................... 539,000 2.09 -- --
Exercised.................................. -- --
Expired.................................... (53,931) 4.00 (66,797) 5.60
---------- ------------- ---------- -------------
Outstanding at end of year................. 589,500 $ 2.02 104,431 $ 2.60
========== ============= ========== =============
Options exercisable at year-end............ 228,370 $ 1.92 104,431 $ 2.60
========== ============= ========== =============
Weighted average fair value of
options granted during the
year...................................... $ 1.06 $ --
============= =============
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Number Contractual Number
Exercise Outstanding Life Exercisable
Price At 12/31/97 (Years) at 12/31/97
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
$ 8.20 500 .63 500
$ 1.25 50,000 5.76 50,000
$ 1.1875 20,000 4.67 6,600
$ 2.125 519,000 4.67 171,270
</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.
In accordance with SFAS Statement 123, the Company is required to
account for options issued to non-employees for services rendered at the fair
value based method over their vesting period.
During 1997, the Company issued 560,000 stock options to consultants
for services rendered and debt financing with a fair value of $202,000 at the
grant date as calculated using the Black-Scholes option - pricing model. These
options vested in 1997 and have exercise prices ranging from $1.00 to $1.375 and
expire through July 2002. At December 31, 1997, none of these options have been
exercised.
(c) In 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, 1997.
F-18
<PAGE> 48
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997.
(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 65,000 dividend warrants (see
Note 7).
(e) At December 31, 1997, shares reserved for future issuance are as
follows:
<TABLE>
<CAPTION>
Shares
-----------
<S> <C>
Conversion of Debentures.............................. 512,990
Shares reserved for stock option plan, including
589,500 options outstanding....................... 960,000
Stock options outstanding............................. 1,050,000
Warrants to purchase common stock..................... 2,352,352
-----------
Total shares reserved for issuance.................... 4,875,342
===========
</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 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 operates 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 bills the joint venture on a bi-monthly basis for the
plant's operating costs, including capital recovery and interest, along with a
management fee.
F-19
<PAGE> 49
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, the balance of the deferred capital recovery costs
totalled approximately $1,149,000 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>
<CAPTION>
Amount
------
<S> <C>
1998.................................... $ 482
1999.................................... 440
2000.................................... 391
2001.................................... 251
2002.................................... 80
------
$1,644
======
</TABLE>
Rent and lease expense for all short-term and long-term operating
leases were $689,000 and $540,000 for the years ended December 31, 1997 and
1996, respectively.
(c) In connection with the purchase of InterSystems Nebraska, the
Company is obligated to pay Helm a royalty on the sale of certain products.
Royalties to Helm totalled approximately $8,000 and $13,000 for 1997 and 1996,
respectively. At December 31, 1997, InterSystems Nebraska had a balance due Helm
totalling $25,000 for royalties.
(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 $66,000
and $60,000 for the years ended December 31, 1997 and 1996, respectively.
(e) At December 31, 1997, InterSystems Nebraska had various letters
of credit outstanding totalling $110,000. The letters of credit expire 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.
F-20
<PAGE> 50
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
was liquidated during 1997.
At December 31, 1997, the net liabilities of discontinued operations
totalling $68,000 consisted of accrued liabilities. For the year ended December
31, 1997, the gain on disposal of Tropical totalling $150,000 primarily
represented an over accrual of the prior year estimated loss on disposal.
Revenues from Tropical for the year ended December 31, 1996 totalled
approximately $1,889,000.
For the six months ended June 30, 1996, Tropical incurred operating
losses of $480,000. 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.
NOTE 12 - NOTES RECEIVABLE FROM SALE OF TRADING BUSINESS
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>
<CAPTION>
December 31, December 31,
1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid ................................................ $ 1,703 $ 998
=========== ===========
Income taxes paid ............................................ $ 17 $ --
=========== ===========
Non-cash transactions relating to investing activities:
Helm stock received as payment on receivable due from Helm ... $ 117 $ --
=========== ===========
Return of the Company's common stock held by Helm as
payment on receivable due from Helm ....................... $ 117 $ --
=========== ===========
Helm's forfeiture of 10% debentures for payment on
receivable due from Helm .................................. $ 30 $ --
=========== ===========
Unrealized holding gain on available for sale securities ..... $ 31 $ --
=========== ===========
Non-cash transactions relating to financing activities:
Conversion of debentures into common stock ................... $ 1,629 $ 485
=========== ===========
Capital lease obligation ..................................... $ 1,517 $ 1,319
=========== ===========
Common stock no longer subject to redemption ................. $ 2,077 $ --
=========== ===========
Common stock issued for repayment of liabilities of
discontinued operations ................................... $ 109 $ --
=========== ===========
Costs associated with issuance of options .................... $ 202 $ --
=========== ===========
Common stock issued for repayment of accrued liabilities ..... $ 42 $ --
=========== ===========
Common stock issued for loan fees ............................ $ 35 $ --
=========== ===========
</TABLE>
F-21
<PAGE> 51
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - MAJOR CUSTOMER
The Company's custom compounding business segment had sales to one
customer in 1997 totalling $6,254,000 and two customers in 1996 totalling
$2,128,000 and $2,098,000.
NOTE 15 - BUSINESS SEGMENTS
The Company has two reportable business segments, as noted below:
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>
<CAPTION>
For the Year Ended
December 31,
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Revenues from unaffiliated customers:
Plastic resins ............................... $ 10,704 $ 6,067
Industrial products .......................... 16,304 14,395
---------- ----------
Total revenues ...................... $ 27,008 $ 20,462
========== ==========
Operating profit:
Plastic resins ............................... $ 2,007 $ 433
Industrial products .......................... 892 872
---------- ----------
Total operating profit .............. $ 2,899 $ 1,305
========== ==========
Expenses and other:
General and administrative expense - parent .. $ (846) $ (853)
Interest expense ............................. (1,643) (897)
Interest income .............................. 9 46
---------- ----------
Income (loss) from continuing operations ..... $ 419 $ (399)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of
December 31,
1997
----------
(In thousands)
<S> <C>
Identifiable assets:
Plastic resins............................................................. $ 20,613
Industrial products........................................................ 6,169
Corporate.................................................................. 1,342
----------
$ 28,124
==========
</TABLE>
F-22
<PAGE> 52
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the year December 31,
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Capital expenditures:
Plastic resins ............................ $ 3,883 $ 13,201
Industrial products ....................... 138 327
Corporate ................................. -- 1,073
---------- ----------
$ 4,021 $ 14,601
========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the year December 31,
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Depreciation and amortization:
Plastic resins ............................ $ 1,355 $ 717
Industrial products ....................... 243 240
Corporate ................................. 131 108
---------- ----------
$ 1,729 $ 1,065
========== ==========
</TABLE>
F-23
<PAGE> 53
LIST OF EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
- ------ ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation and Amendments i
3.2 By-Laws, as amended and restated on January
8, 1998 Filed Herewith
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 v
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 Common Stock Purchase Warrant
expiring June 30, 2000 vii
4.4 Form of Common Stock Purchase Warrant
expiring July 30, 2000 issued in lieu of ix
compensation
</TABLE>
<PAGE> 54
<TABLE>
<S> <C> <C>
4.5 Form of Common Stock Purchase Warrant ix
expiring January 15, 2000 issued in
December 1995 Private Placement
4.6 Form of Common Stock Purchase Warrant x
expiring October 29, 2001 issued in
December 1995
10.1 The Company's 1997 Employee xi
Stock Option Plan
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 viii
10.6 Amendment to Employment Agreement between
Company and David S. Lawi viii
10.7 Amendment to Employment Agreement between
Company and Daniel T. Murphy viii
10.8 Toll Compounding Contract dated April 1, viii
1994 between Chemtrusion, Inc. and Himont
U.S.A., Inc.
10.9 Employment Agreement dated as of July 26, 1993 vi
between the Company and Fred Zeidman
10.10 Investment Agreement dated as of June 24, 1993 vi
between the Company and Fred Zeidman
10.11 Definitive Agreement for Compounding Services ix
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)
21.1 Subsidiaries Filed Herewith
23.1 Consent of BDO Seidman, LLP to incorporation by Filed Herewith
reference of their opinion into filed
registration statements
</TABLE>
<PAGE> 55
i: Filed as an exhibit to the Company's Registration Statement (No.
33-10108) on Form S-1 and incorporated herein by reference
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 the Company's Registration Statement (No.
33-71582) on Form S-1 and incorporated herein by reference.
vi: Filed as an exhibit to Company's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
vii: Filed as an exhibit to the Company's Registration Statement (No.
333-00003) on Form S-3 and incorporated herein by reference.
viii: Filed as an exhibit to Company's Form 10-KSB for the year ended
December 31, 1994 and incorporated herein by reference.
ix: Filed as an exhibit to Company's Form 10-KSB for the year ended
December 31, 1995 and incorporated herein by reference.
x: Filed as an exhibit to Company's Form 10-KSB for the year ended
December 31, 1996 and incorporated herein by reference.
xi: Filed as an exhibit to the Company's Registration Statement on Form
S-8 filed February 11, 1998 (No. 333-46035)
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
INTERSYSTEMS, INC.
(ORIGINALLY ADOPTED ON MARCH 2, 1987;
RESTATED ON JANUARY 9, 1998)
MEETINGS OF STOCKHOLDERS.
1.1 ANNUAL MEETING. The annual meeting of stockholders shall be held on
the third thursday of May in each year, or as soon thereafter as practicable,
and shall be held at a place and time determined by the Board of Directors (the
"Board").
1.2 SPECIAL MEETINGS. Special Meetings of the stockholders may be called
by resolution of the Board or by the president or vice president and shall be
called by the president or secretary upon written request (stating the purpose
or purposes of the meeting) of a majority of the directors then in office. Only
business related to the purposes set forth in this notice of the meeting may be
transacted at a special meeting.
1.3 PLACE AND TIME OF MEETING. Stockholders may be held in or outside
Delaware at the place and time specified by the Board or officers or
stockholders requesting the meeting.
1.4 NOTICE OF MEETINGS; WAIVER OF NOTICE. Written notice of each meeting
of stockholders shall be given to each stockholder entitled to vote at the
meeting, except that (a) it shall not be necessary to give notice to any
stockholder who submits a waiver of notice before or after the meeting, and (b)
no notice of an adjourned meeting need by given except when required under
Section 1.5 of these by-laws or by law. Each notice of a meeting shall be given,
personally or by mail, not less than 10 nor more than 60 days before the meeting
and shall state the time and place of the meeting, and unless it is the annual
meeting, shall state at whose direction or request the meeting is called and the
purposes for which it is called. If mailed, notice shall be considered given
when mailed to a stockholder at his address on the corporation's records. The
attendance of any stockholder at a meeting, without protesting at the beginning
of the meeting that the meeting is not lawfully called or convened, shall
constitute a waiver of notice by him.
1.5 QUORUM. At any meeting of stockholders, the presence in person or by
proxy of the holders of a majority of the shares entitled to vote shall
constitute a quorum for the transaction of any business. In the absence of a
quorum, a majority in voting interest of those present or, if no stockholders
are present, any officer entitled to preside at or to act as secretary of the
meeting, may adjourn the meeting until a quorum is present. At any adjourned
meeting at which a quorum is present, any action may be taken if it could have
been taken at the meeting as originally called. No notice of an adjourned
meeting need be given if the time and place are announced at the meeting at
which the adjournment is taken except that if adjournment is for more than 30
days or if after the adjournment, a new record date is fixed for the meeting,
notice of the adjourned meeting shall be given pursuant to Section 1.4.
1.6 VOTING; PROXIES. Each stockholder of record shall be entitled to one
vote for every share registered in his name. Corporate action to be taken by
stockholder vote, other than the election of directors, shall be authorized by a
majority of the votes cast at a meeting of stockholders, except as otherwise
provided by law. Directors shall be elected in the manner provided in Section
2.1 of these by-laws. Voting need not be by ballot unless ordered by the
chairman of the meeting; however, all elections of directors shall be by written
ballot. Each stockholder entitled to vote at any meeting of stockholders may
authorize another person to act for him by proxy. Every proxy must be signed by
the stockholder or his attorney in fact. No proxy shall be valid after three
years from its date unless it otherwise provides.
1.7 LIST OF STOCKHOLDERS. Not less than 10 days prior to the date of any
meeting of stockholders, if there is more than one stockholder, the secretary of
the corporation shall prepare a complete list of stockholders entitled to vote
at the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in his name. For a period of not
less than 10 days prior to the meeting, the list shall be available during
ordinary business hours for inspection by any stockholder for any purpose
germane to the meeting. During this period, the list shall be kept either (a) at
a place within the city where the meeting is to be held, if that place shall
have been specified in the notice of
30
<PAGE> 2
the meeting, or (b) if not so specified, at the place where the meeting is to be
held. The list shall also be available for inspection by stockholders at the
time and place of the meeting.
1.8 ACTION BY CONSENT WITHOUT A MEETING. Any action required or
permitted to be taken at any meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voting. Prompt notice of the taking of any such
action shall be given to those stockholders who did not consent in writing.
1.9 RECORD DATE FOR CONSENT WITHOUT A MEETING. In order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board, and which date shall not be more than ten
(10) days after the date upon which the resolution fixing the record date is
adopted by the Board. Any stockholder of record seeking to have the stockholders
authorize or take corporate action by written consent shall, by written notice
to the secretary, request the Board to fix a record date. The Board shall
promptly, but in all events within ten (10) days after the date on which such a
request is received, adopt a resolution fixing the record date. If no record
date has been fixed by the Board within such ten (10) day period, when no prior
action by the Board is required by applicable law, the record date shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the corporation having custody of the book in which
proceedings of stockholders meetings are recorded, to the attention of the
secretary of the corporation. Delivery shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board and prior action by the Board is required by applicable law, the
record date for determining stockholders entitled to consent to corporate action
without a meeting shall be the close of business on the date on which the Board
adopts the resolution taking such prior action.
1.10 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. Only persons nominated in
accordance with the procedures set forth in this Section 1.10 shall be eligible
for election as directors. Nominations of persons for election to the Board may
be made at a meeting of stockholders by or at the direction of the Board or by
any stockholder of the corporation entitled to vote for the election of
directors who complies with the notice procedures set forth in this Section
1.10. Such nominations, other than those made by or at the direction of the
Board, shall be made pursuant to timely notice in writing to the secretary of
the corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the corporation no
less than 50 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 60 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation's capital stock which are beneficially owned by such person and (iv)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including without limitation such persons' written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the corporation's books, of such stockholder and (ii)
the class and number of shares of the corporation's capital stock which are
beneficially owned by such stockholder. At the request of the Board, any person
nominated by the Board for election as director shall furnish to the secretary
of the corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the corporation unless nominated in accordance
with the procedures set forth in this Section 1.10. The chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by the
by-laws, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
1.11 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS. At an annual meeting of
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board, (b) otherwise properly
brought before the meeting by or at the direction of the Board, or (c) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have give timely notice thereof in writing to the secretary of the corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the
31
<PAGE> 3
corporation no less than 50 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 60 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. Such
stockholder's notice shall set forth (a) a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (b) the name and address, as they appear on
the corporation's books, of the stockholder proposing such business, (c) the
class and number of shares of the corporation which are beneficially owned by
the stockholder, and (d) any material interest of the stockholder in such
business. Notwithstanding anything in the by-laws to the contrary, no business
shall be conducted at any annual meeting except in accordance with the
procedures set forth in this Section 1.11. The chairman of the annual meeting
shall, if the facts warrant, determine and declare to the meeting that the
proposed business was not properly brought before the meeting and in accordance
with the procedures prescribed by the bylaws, and if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted.
2. BOARD OF DIRECTORS.
2.1 NUMBER, QUALIFICATION, ELECTION AND TERM OF DIRECTORS. The business
of the corporation shall be managed by the Board, which shall consist of not
less than three and not more than nine directors. The number of directors may be
changed by resolution of a majority of the Board, but no decrease may shorten
the term of any incumbent director. Directors shall be elected at each annual
meeting of stockholders by a plurality of the votes cast and shall hold office
until the next annual meeting of stockholders and until the election and
qualification of their respective successors, subject to the provisions of
Section 2.9. As used in these by-laws, the term "entire Board" means the total
number of directors that the corporation would have if there were no vacancies
on the Board.
2.2 QUORUM AND MANNER OF ACTING. A majority of the directors present,
but not less than two, shall constitute a quorum for the transaction of business
at any meeting, except as provided in Section 2.10 of these by-laws. Action of
the Board shall be authorized by the vote of a majority of the directors present
at the time of the vote if there is a quorum, unless otherwise provided by law
or these by-laws, In the absence of a quorum a majority of the directors present
may adjourn any meeting from time to time until a quorum is present.
2.3 PLACE OF MEETINGS. Meetings of the Board may be held in or outside
Delaware.
2.4 ANNUAL AND REGULAR MEETINGS. Annual meetings of the Board, for the
election of officers and consideration of other matters, shall be held either
(a) without notice immediately after the annual meeting of stockholders and at
the same place, or (b) as soon as practicable after the annual meeting of
stockholders, on notice as provided in Section 2.6 of these by-laws. Regular
meetings of the Board may be held without notice at such times and places as the
Board determines. If the day fixed for a regular meeting is a legal holiday, the
meeting shall be held on the next business day.
2.5 SPECIAL MEETINGS. Special meetings of the Board may be called by the
president or by any one of the directors. Only business related to the purposes
set forth in the notice of meeting may be transacted at a special meeting.
2.6 NOTICE OF MEETINGS; WAIVER OF NOTICE. Notice of the time and place
of each special meeting of the Board, and of each annual meeting not held
immediately after the annual meeting of stockholders and at the same place,
shall be given to each director by mailing it to him at his residence or usual
place of business at least three days before the meeting, of by delivering,
telephoning or faxing it to him at least two days before the meeting. Notice of
a special meeting shall also state the purpose or purposes for which the meeting
is called. Notice need not be given to any director who submits a signed waiver
of notice before or after the meeting or who attends the meeting without
protesting at the beginning of the meeting the transaction of any business
because the meeting was not lawfully called or convened. Notice of any adjourned
meeting need not be given, other than by announcement at the meeting at which
the adjournment is taken.
2.7 BOARD OR COMMITTEE ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Board or by any committee of the Board may be taken
without a meeting if all of the members of the Board or of the committee consent
in writing to the adoption of a resolution authorizing the action. The
resolution and the written consents by the members of the Board or the committee
shall be filed with the minutes of the proceedings of the Board or of the
committee.
32
<PAGE> 4
2.8 PARTICIPATION IN BOARD OR COMMITTEE MEETINGS BY CONFERENCE
TELEPHONE. Any or all members of the Board or any committee of the Board may
participate in a meeting of the Board or of the committee by means of a
conference telephone or similar communication equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at the meeting.
2.9 RESIGNATION AND REMOVAL OF DIRECTORS. Any director may resign at any
time by delivering his resignation in writing to the president or secretary of
the corporation, to take effect at the time specified in the resignation; the
acceptance of a resignation, unless required by its terms, shall not be
necessary to make it effective. Any or all of the directors may be removed at
any time only for cause by vote of the stockholders.
2.10 VACANCIES. Any vacancy in the Board, including one created by an
increase in the number of directors, may be filled for the unexpired term by a
majority vote of the remaining directors, though less than a quorum.
2.11 COMPENSATION. Directors shall receive such compensation as the
Board determines, together with reimbursement of their reasonable expenses in
connection with the performance of their duties. A director may also be paid for
serving the corporation, its affiliates or subsidiaries in other capacities.
3. COMMITTEES.
3.1 EXECUTIVE COMMITTEE. The Board, by resolution adopted by a majority
of the entire Board, may designate an Executive Committee of one or more
directors which shall have all the powers and authority of the Board, except as
otherwise provided in the resolution, section 141(c) of the Delaware General
Corporation Law, or any other applicable law. The members of the Executive
Committee shall serve at the pleasure of the Board. All action of the Executive
Committee shall be reported to the Board at its next meeting.
3.2 OTHER COMMITTEES. The Board, by resolution adopted by a majority of
the entire Board, may designate other committees of directors of one or more
directors, which shall serve at the Board's pleasure and have such powers and
duties as the Board determines.
3.3 RULES APPLICABLE TO COMMITTEES. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of any member of a committee, the member or members present at
a meeting of the committee and not disqualified, whether or not a quorum, may
unanimously appoint another director to act at the meeting in place of the
absent or disqualified member. All action of a committee shall be reported to
the Board at its next meeting. Each committee shall adopt rules of procedure and
shall meet as provided by those rules or by resolutions of the Board.
4. OFFICERS.
4.1 NUMBER; SECURITY. The executive officers of the corporation shall
be the chairman of the board, the president, one or more vice presidents
(including an executive vice president, if the Board so determines), a secretary
and a treasurer. Any two or more offices may be held by the same person. The
Board may require any officer, agent or employee to give security for the
faithful performance of his duties.
4.2 ELECTION; TERM OF OFFICE. The executive officers of the corporation
shall be elected annually by the Board, and each such officer shall hold office
until the next annual meeting of the Board and until the election of his
successor, subject to the provisions of Section 4.4.
4.3 SUBORDINATE OFFICERS. The Board may appoint subordinate officers
(including assistant secretaries and assistant treasurers), each of whom shall
hold office for such period and have such powers and duties as the Board
determines. The Board may delegate to any executive officer or to any committee
the power to appoint and define the powers and duties of any subordinate
officers, agents or employees.
4.4 RESIGNATION AND REMOVAL OF OFFICERS. Any officer may resign at any
time by delivering his resignation in writing to the president or secretary, to
take effect at the time specified in the resignation; the acceptance of a
resignation, unless required by its terms, shall not be necessary to make it
effective. Any officer elected or appointed by the Board or appointed by an
executive officer or by a committee may be removed by the Board, either with or
without cause, and in the case of an officer appointed by an executive officer
or by a committee, by the officer or committee which appointed him or by the
president.
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<PAGE> 5
4.5 VACANCIES. A vacancy in any office may be filled for the
unexpired term in the manner prescribed in Sections 4.2 and 4.3 of these by-laws
for election or appointment to the office.
4.6 THE CHAIRMAN OF THE BOARD AND THE PRESIDENT. The president shall be
the chief executive officer and shall report to the Chairman of the Board.
Subject to the control of the Board, the Chairman of the Board and the president
shall have general supervision over the business of the corporation and shall
have such other powers and duties as officers of corporations usually have or as
the Board assigns to them.
4.7 VICE PRESIDENT. Each vice president shall have such powers and
duties as the Board or the chairman of the board or the president assigns to
him.
4.8 THE TREASURER. The treasurer shall report to the chief financial
officer of the corporation and shall be in charge of the corporation's books and
accounts. Subject to the control of the Board, he shall have such other powers
and duties as the Board or the chairman of the board, the president or chief
financial officer assigns to him.
4.9 THE SECRETARY. The secretary shall be the secretary of, person
appointed for that purpose by the presiding officer and keep the minutes of, all
meetings of the Board and of the stockholders, shall be responsible for giving
notice of all meetings of stockholders and of the board, and shall keep the seal
and, when authorized by the Board, apply it to any instrument requiring it.
Subject to the control of the Board, he shall have such powers and duties as the
Board, the chairman of the board and the president assigns to him. In the
absence of the secretary from any meeting, the minutes shall be kept by the
person appointed for that purpose by the presiding officer.
4.10 SALARIES. The Board may fix the officers' salaries, if any, or it
may authorize the president to fix the salary of any other officer.
5. SHARES.
5.1 CERTIFICATES. The corporation's shares shall be represented by
certificates in the form approved by the Board. Each certificate shall be signed
by the president or a vice president, and by the secretary or an assistant
secretary or treasurer or an assistant treasurer, and shall be sealed with the
corporation's seal or a facsimile of the seal. Any or all of the signatures on
the certificate may be a facsimile.
5.2 TRANSFERS. Shares shall be transferable only on the corporation's
books, upon the surrender of the certificate for the shares, properly endorsed.
The Board may require satisfactory surety before issuing a new certificate to
replace a certificate claimed to have been lost or destroyed.
5.3 DETERMINATION OF STOCKHOLDERS OF RECORD. The Board may fix in
advance a date as the record date for determination of stockholders entitled to
notice of or to vote at any meeting of the stockholders, or to express consent
to or dissent from any proposal without a meeting, or to receive payment of any
dividend or the allotment of any rights, or for the purpose of any other action.
The record date may not be more than 60 or less than 10 days before the date of
the meeting or more than 60 days before any other action.
6. INDEMNIFICATION.
The corporation shall indemnify each person who is or was an officer or
director of the corporation to the fullest extent permitted by Section 145 of
the General Corporation Law of Delaware as amended from time to time.
7. MISCELLANEOUS.
7.1 SEAL. The Board shall adopt a corporate seal, which shall be in the
form of a circle and shall bear the corporation's name and the year and state in
which it was incorporated.
7.2 FISCAL YEAR. The Board may determine the corporation's fiscal year.
Until changed by the Board, the corporation's fiscal year shall begin January 1
and end December 31.
34
<PAGE> 6
7.3 VOTING OF SHARES IN OTHER CORPORATIONS. Shares in other corporations
that are held by the corporation may be represented and voted by the president
or a vice president of this corporation or by a proxy or proxies appointed by
one of them. The Board may, however, appoint some other person to vote the
shares.
7.4 AMENDMENTS. By-laws may be amended, repealed or adopted by the
stockholders or by a majority of the entire Board, but any by-law adopted by the
Board may be amended or repealed by the stockholders.
[The rest of this page intentionally left blank.]
35
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction
Subsidiaries Name of Incorporation
----------------- ----------------
<S> <C>
Chemtrusion, Inc. Delaware
InterSystems, Inc. Nebraska
</TABLE>
All the entities listed above are significant subsidiaries of the Company or a
significant subsidiary of a subsidiary of the Company, even though not
necessarily majority-owned by the Company. Certain subsidiaries considered
insignificant for the year covered by this report have been omitted.
36
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
InterSystems, Inc.
Houston, Texas
We hereby consent to the incorporation by reference in Registration Statements
No. 333-46035 and No. 333-42235 on Forms S-8 and S-3 of our report dated March
9, 1998, relating to the consolidated financial statements of InterSystems, Inc.
appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
BDO Seidman, LLP
Houston, Texas
March 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 802
<SECURITIES> 148
<RECEIVABLES> 3,162
<ALLOWANCES> 0
<INVENTORY> 2,194
<CURRENT-ASSETS> 6,729
<PP&E> 21,131
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,124
<CURRENT-LIABILITIES> 7,194
<BONDS> 636
0
0
<COMMON> 78
<OTHER-SE> 3,394
<TOTAL-LIABILITY-AND-EQUITY> 28,124
<SALES> 27,008
<TOTAL-REVENUES> 27,008
<CGS> 18,248
<TOTAL-COSTS> 24,946
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,643
<INCOME-PRETAX> 419
<INCOME-TAX> 0
<INCOME-CONTINUING> 419
<DISCONTINUED> 150
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 569
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
