<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-9547
------
INTERSYSTEMS, INC.
------------------
(Exact Name of registrant as specified in charter)
Delaware 13-3256265
-------------------- ---------------------
(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification number)
7115 Clinton Drive
Houston, Texas 77020
---------------------
(Address of principal executive offices)
(Zip Code)
713-622-7710
------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or of such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __x__ No _____
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of May 3, 1999 there were 7,925,989 shares of the Company's common stock, par
value $.01 per share, outstanding.
<PAGE>
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1999 (Unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Interim Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Page 2 of 14
<PAGE>
InterSystems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
------- -------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash $ 202 $ 133
Marketable equity securities 94 94
Trade receivables 3,308 3,329
Inventories 3,028 2,273
Prepaid expenses and other 297 360
Time deposits -- 123
------- -------
6,929 6,312
Equipment and leasehold improvements, net 24,260 23,479
Other assets 582 262
------- -------
Total Assets $31,771 $30,053
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 1,845 2,405
Current portion of long-term debt 1,196 2,332
Accounts payable 1,771 1,459
Accrued expenses 1,415 1,528
Unearned revenue 301 --
------- -------
6,528 7,724
Convertible subordinated debentures 643 642
Long term debt - net of current portion 21,073 17,806
------- -------
Total Liabilities 28,244 26,172
------- -------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000 shares
authorized; none issued and outstanding
Common stock $.01 par value, 20,000
shares authorized; 7,926
shares issued and outstanding 79 79
Additional paid-in capital 7,774 7,769
Deficit (3,973) (3,617)
Accumulated other comprehensive loss (96) (96)
Treasury stock - 91 shares at cost (157) (154)
Note receivable - sale of common stock (100) (100)
------- -------
TOTAL SHAREHOLDERS' EQUITY 3,527 3,881
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,771 $30,053
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
Page 3 of 14
<PAGE>
InterSystems, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts, Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
1999 1998
------ ------
<S> <C> <C>
Net sales $6,324 $8,187
Cost of sales 4,282 5,787
------ ------
Gross Profit 2,042 2,400
Selling, general and administrative
expenses 1,792 1,770
Interest expense - net 471 400
------ ------
Income (loss) from operations (221) 230
Cumulative effect of change in
accounting principle (134) --
------ ------
Net income (loss) $ (355) $ 230
====== ======
Per share - basic and assuming
dilution
Continuing operations $ (.03) $ .03
Cumulative effect of change in
accounting principle (.02) --
------ ------
Net income (loss) $ (.05) $ .03
====== ======
Average number of common shares
outstanding 7,833 7,878
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
Page 4 of 14
<PAGE>
InterSystems, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands, Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $(355) $230
Other comprehensive income:
Unrealized holding gains arising during period -- 42
----- ----
Comprehensive income (loss) $(355) $272
===== ====
</TABLE>
See accompanying notes to consolidated financial statements
Page 5 of 14
<PAGE>
InterSystems, Inc. And Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands, Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (355) $ 230
Adjustments to reconcile net income to net cash
Provided (used) in operating activities:
Depreciation and amortization 506 500
Changes in:
Operating working capital (179) (725)
Non-current assets and liabilities 152 (176)
------- ------
Net cash provided by (used in)
operating activities 124 (171)
------- ------
Net cash used in investing activities:
Acquisition of fixed assets (1,708) ( 24)
------- ------
Cash flows from financing activities:
Net borrowings 360 304
Proceeds from long-term debt obligations 1,828 --
Repayment of long-term debt (532) (386)
Purchase of Treasury stock (3) --
Issuance of common stock -- 67
------- ------
Net cash provided by (used in)
financing activities 1,653 (15)
------- ------
Net increase (decrease) in cash 69 ( 210)
Cash at beginning of period 133 802
------- ------
Cash at end of period $ 202 $ 592
======= ======
Cash paid during the periods for:
Interest $ 127 $ 130
Taxes $ 17 $ 10
</TABLE>
See accompanying notes to consolidated financial statements
Page 6 of 14
<PAGE>
InterSystems, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
NOTE 1. The accompanying condensed consolidated financial statements are
unaudited, but, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for a a fair
presentation of financial position and results of operations. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis and Consolidated Financial
Statements and notes thereto included in the InterSystems, Inc. 1998
Form 10-KSB.
NOTE 2. Inventories consisted of the following at March 31, 1999 (in
thousands):
Raw materials and component parts 1,671
Finished goods 1,357
-----
Total inventory 3,028
=====
NOTE 3. 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.
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1999 1998
---------- ---------
<S> <C> <C>
Net income (loss):
Continuing operations $ (221) $ 230
Effect of change in accounting principle (134) --
------ ------
Net income (loss) $ (355) $ 230
====== ======
Weighted average shares outstanding:
Basic weighted average shares 7,833 7,878
Effect of dilutive securities:
Options and warrants -- 445
Shares issuable on conversion
of debentures -- --
------ ------
Dilutive weighted average shares 7,833 8,323
====== ======
</TABLE>
Page 7 of 14
<PAGE>
March 31, March 31,
1999 1998
------ ------
Earnings (loss) per common share:
Basic and assuming dilution:
Operations $ (.03) $ .03
Cumulative effect of change in
accounting principle (.02) --
------ ------
Net income (loss) $ (.05) $ .03
====== ======
For the period ended March 31, 1999 and 1998, certain securities
were not included in the calculation of diluted earnings (loss)
because of their anti-dilutive effect. Those securities are as
follows (in thousands):
1999 1998
------ ------
Stock options 1,039 970
Stock warrants 2,870 1,100
Shares issuable on conversion of debentures 512 512
NOTE 4. In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-up Activities." The statement is effective for fiscal Years
beginning after December 15, 1998. The statement requires costs of
start-up activities and organizational costs to be expensed as incurred
and to write off any previously deferred expenses. The Company adopted
SOP 98-5 for calendar year 1999, and accordingly, $134,000 of start-up
and organizational costs at Chemtrusion have been expensed, as a
cumulative effect of change in accounting principle, for the period
ending March 31, 1999.
NOTE 5. The Company's management has defined its operating segments by the type
of products and services provided and the related industries.
Accordingly, 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 equip-
ment 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 hand-
ling agricultural products and in manufacturing and other
industries.
Page 8 of 14
<PAGE>
March 31, March 31,
1999 1998
------ ------
(in thousands)
Revenues from unaffiliated customers:
Plastic resins
major customer $ 2,164 $1,640
all others 1,219 1,015
Industrial products
foreign country - Romania -- 1,900
all others 2,941 3,632
------- ------
Total revenues $ 6,324 $8,187
======= ======
Operating profit:
Plastic resins $ 469 $ 427
Industrial products 16 468
------- ------
Total operating profit 485 895
------- ------
Expenses and other:
General and administrative
Parent (235) (265)
------- ------
Interest expense:
Plastic resins 366 300
Industrial products 53 68
Corporate (net) 52 32
------- ------
(471) (400)
------- ------
Income (loss) from operations $ (221) $ 230
======= ======
Identifiable assets:
Plastic resins $23,333
Industrial products 6,288
Corporate 2,150
-------
$31,771
=======
Capital expenditures:
Plastic resins $ 1,659
Industrial products 40 $ 24
Corporate 9 0
------- ------
$ 1,708 $ 24
======= ======
Page 9 of 14
<PAGE>
March 31, March 31,
1999 1998
------ ------
(in thousands)
Depreciation and amortization:
Plastic resins $ 417 $ 415
Industrial products 60 56
Corporate 29 29
----- -----
$ 506 $ 500
===== =====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Three Month Periods Ended March 31, 1999 and 1998
- -----------------------------------------------------
Revenues for the first quarter 1999 decreased by $1,863,000 (29.5%) compared to
the first quarter 1998. The decrease is entirely due to the partial recording of
a large overseas export order to Romania at InterSystems Nebraska in the first
quarter 1998. Without the effect of such an unusually large export order in the
first quarter 1998, sales increased slightly in the first quarter 1999 as
compared to the first quarter 1998. First quarter 1999 sales levels are more in
line with historical levels for the Company's seasonal first quarter.
Chemtrusion Texas' quarterly revenues are still being negatively impacted by the
Company's commitment to two major customers that reduced their processing needs.
The Company is, however, anticipating increasing production volumes over the
balance of the year as a result of its new national marketing efforts to
diversify its customer base.
Gross margins were 32.3% in the first quarter 1999 as compared to 29.3% in the
first quarter 1998. InterSystems Nebraska's gross margin increased significantly
to 30.17% in the first quarter 1999 versus 24.75% in the first quarter 1998.
The increase is a result of two independent, and unrelated, items. First,
Nebraska's margins from the Romanian export order last year were significantly
lower than normal because a portion of this job was manufactured by outside
contractors thereby rendering InterSystems Nebraska unable to realize normal
manufacturing profit. Secondly, Nebraska has benefited from more effective
utilization of its production labor force in the first quarter 1999, typically
slow months due to seasonality, to construct inventory for use in its peak
season.
Chemtrusion's gross margin decreased to 32.8% in the first quarter 1999 as
compared to 37.1% in the first quarter 1998. The decrease is primarily
attributable to increased fixed costs at Chemtrusion Texas to accommodate
anticipated volume increases during the balance of 1999.
Interest expense increased $71,000 in the first quarter 1999 as compared to the
first quarter 1998. Interest expense at the Mytex facility increased
approximately $60,000 as a result of financing charges associated with a new
compounding line installed in the third quarter of 1998. Interest expense at
the Mytex facility is billed to Mytex and is included in sales for the facility.
Page 10 of 14
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the three months ended March 31, 1999
amounted to $124,000. Included in this number is an increase (use of funds) in
inventory of approximately $755,000 as a result of Nebraska's inventory build up
for future sales.
The Company purchased fixed assets during the first quarter 1999 in the amount
of $1,708,000. A significant portion of the fixed asset costs were for a new
compounding line installed at the Mytex facility ($1,298,000), with the balance
primarily used to fund improvements to a compounding line at Chemtrusion, Texas.
Net borrowings provided by financing activities amounted to $360,000. The
proceeds were used primarily to finance working capital needs. The proceeds from
long-term debt obligations of $1,828,000 were utilized primarily to finance the
new compounding line at the Mytex facility, along with improvements made to a
compounding line at Chemtrusion Texas. Repayment of long-term debt was
$532,000.
Cash increased $69,000 for the period ending March 31, 1999.
The Company anticipates that its future operating needs will be satisfied from
the operations of its subsidiaries which, on a combined basis, are expected to
generate positive cash flow. The Company from time to time may seek to borrow
funds for actual or anticipated capital needs. There can be no assurances that
management will be able to obtain such financing.
Parent Company
- --------------
In January 1999, the parent company arranged for short-term working capital
financing. The Company executed a note in the amount of $200,000 with a private
lender. The note bears interest at the rate of 15% per annum, with monthly
interest payments of $2,500. The entire principal balance of $200,000 is due
July 19, 1999.
InterSystems Nebraska
- ---------------------
InterSystems Nebraska has a revolving credit agreement with a bank. The
financing agreement provides for borrowings of up to $3,000,000 based upon
eligible collateral and is due on demand. At March 31, 1999, borrowings of
$1,545,000 were outstanding under this agreement and bear interest at the bank's
base rate plus .50% (8.25% at March 31, 1999). At March 31, 1999, $871,000 was
available under this line of credit. The net book value of the collateral
totaled approximately $4,380,000 at March 31, 1999. Under the terms of the
agreement, Nebraska is subject to certain covenant requirements that, among
other things, require maintenance of minimum net worth, working capital, debt to
net worth ratio, and also limits the amount of capital expenditures, payments to
affiliates, indebtedness, dividends and management fees. InterSystems Nebraska
has pledged its accounts receivable, inventory, equipment and fixtures and
intangibles as collateral for the debt.
Chemtrusion
- -----------
Chemtrusion is party to a credit agreement that provides for advances of up to
$300,000 and expires April 21, 2002. The agreement bears interest at the bank's
prime rate plus 1% (8.75% at March 31, 1999) and is collateralized by
Chemtrusion's accounts receivable. As of March 31, 1999, borrowings were
$300,000.
Page 11 of 14
<PAGE>
During March 1999, Chemtrusion Texas arranged for a $410,000 capital lease with
a financial institution to provide for capital improvements to one of its
compounding lines. The financing arrangement requires 47 monthly principal and
interest payments in the amount of $9,975 each, bears interest at the rate of
10.42% per annum, and contains a purchase option of $40,000 at the end of the
lease term.
In early 1999, Chemtrusion completed installation of a new line at the Mytex
facility. The approximate cost of the project is $2,500,000, of which
$1,298,000 was incurred in the first quarter of 1999. The finance agreement has
not been finalized, but Mytex will carry the note under terms similar to prior
financing agreements at the Mytex facility.
Seasonality
- -----------
A substantial portion of InterSystems Nebraska's revenues are derived from the
agricultural sector of the economy and, accordingly, are subject to seasonal
fluctuations. InterSystems Nebraska's success is, to some extent, dependent upon
weather conditions affecting domestic grain production, conditions in the grain
industry generally and the value of the United States dollar against foreign
currency. As of April 30, 1999, InterSystems' backlog was $4.5 million compared
to $7.7 million as of April 30, 1998.
YEAR 2000
- ---------
Company's Compliance Program. Computer equipment using microprocessors that use
only two digits to identify a year may be unable to accurately process data
after December 31, 1999. In early 1998, InterSystems, Inc. and its subsidiaries
initiated their Year 2000 compliance project. The evaluation addressed internal
hardware and software, production machinery, key vendors, customers and other
significant third parties.
Company's State of Readiness. InterSystems, Inc. and its subsidiaries utilize
recently purchased computer hardware and software which has been deemed Year
2000 compliant. In the 1997 fourth quarter, our Nebraska subsidiary made a
significant transition to Year 2000 compliant equipment. Nebraska's System 36
and installed software was discarded and replaced with Pentium Processor's and
Year 2000 compliant manufacturing and accounting software. Our Chemtrusion
locations already had installed Year 2000 compliant hardware and software.
Since the Company's two subsidiaries are engaged in manufacturing activities and
place heavy reliance on their production equipment, the Company has undertaken
to determine whether this equipment is Year 2000 compliant. Production equipment
that contains embedded systems may be unable to process date sensitive data.
Key vendors of the Company, therefore, include those from whom the subsidiaries
purchase equipment. Chemtrusion has received vendor assurance that its
production equipment is Year 2000 compliant. Nebraska is undertaking an
investigation with respect to its production and office equipment, which it has
not yet completed. Equipment tested to date is compliant, with the exception of
one PC linking engineering to production which will cost less than $2,000 to
replace. The Company does not expect that the cost, if any, to investigate and
replace parts for those machines not yet tested will be material to the
financial condition of the Company. The Company estimates that all equipment
will be tested and in compliance by second quarter of 1999.
The Company is also evaluating the readiness of its third party supply chains
and major customers. The Company has requested Year 2000 compliance
certification from each of its major vendors, suppliers and customers.
Page 12 of 14
<PAGE>
Risks of Non-compliance and Contingency Plans. The major factors which pose the
greatest Year 2000 risks for the Company if implementation of the Year 2000
compliance program is not successful is the reliance on key third party vendors
and major customers. If those parties do not achieve compliance, the Company's
operating subsidiaries could experience interruption in production scheduling.
Based on initial information received from our vendors and customers, the
Company does not expect such delays.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including accuracy of
representations made by third parties concerning their compliance with Year 2000
issues, and other factors. The estimated costs of Year 2000 compliance also do
not give effect to any future corporate acquisitions or divestitures made by the
Company or its subsidiaries.
Forward Looking Statements
This quarterly report for the quarter ended March 31, 1999 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 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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.
Available-for-sale securities are based on quoted market prices.
The Company's interest rates on lines of credit fluctuate based on the financial
institutions prime lending rate.
Page 13 of 14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERSYSTEMS, INC.
Dated: May 7, 1999 /s/ Fred S. Zeidman
-------------------
Fred S. Zeidman
President
Chief Executive Officer
/s/ Wm. Chris Mathers
---------------------
Wm. Chris Mathers
Principal Financial Officer
Page 14 of 14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 202
<SECURITIES> 94
<RECEIVABLES> 3,308
<ALLOWANCES> 0
<INVENTORY> 3,028
<CURRENT-ASSETS> 6,929
<PP&E> 24,260
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,771
<CURRENT-LIABILITIES> 6,528
<BONDS> 643
0
0
<COMMON> 79
<OTHER-SE> 3,448
<TOTAL-LIABILITY-AND-EQUITY> 31,771
<SALES> 6,324
<TOTAL-REVENUES> 6,324
<CGS> 4,282
<TOTAL-COSTS> 6,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 471
<INCOME-PRETAX> (221)
<INCOME-TAX> 0
<INCOME-CONTINUING> (221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (134)
<NET-INCOME> (355)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
