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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [Fee Required] For Fiscal Year Ended December 31, 1998
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
incorporation or organization) Identification No.)
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) 622-7710
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. [X]
The issuer's revenues for the year ended December 31, 1998 were $33,322,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer is approximately $6,126,468 based upon the closing price of the issuer's
common stock, $.01 par value, as reported by the American Stock Exchange on
March 4, 1999, which was $1.00.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on March 4,1999: 7,925,989.
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
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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 thermoplastic resin
compounding operations conducted by its wholly-owned subsidiary, Chemtrusion,
Inc. ("Chemtrusion"). For each of the two years ended December 31, 1998 and
1997, approximately 66% and 60%, respectively, of the Company's revenues were
attributable to the business of InterSystems Nebraska and approximately 34% and
40%, 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 14 to the Company's consolidated financial statements.
The Company had revenues from continuing operations of $33,322,063 and
$27,007,753, respectively, for the years ended December 31, 1998 and 1997. For
the year ended December 31, 1998, the Company reported a net profit from
continuing operations and a net profit for the year of $443,000, as compared to
a net profit from continuing operations of $419,000 and a net profit of $569,000
for the year ended December 31, 1997. 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.
RECENT DEVELOPMENTS
In January 1999, Chemtrusion completed a second major expansion of its
Jeffersonville, Indiana compounding facility, which increased maximum annual
capacity of that facility by 36%, or 20,000,000 pounds. Total annual capacity
at the plant is now 75,000,000 pounds, or more than twice the capacity of the
facility when it first began operations with four compounding lines in 1996. A
fifth line was added in 1998 which also increased capacity by 20,000,000 pounds.
The addition of this sixth compounding line will result in an increase in the
management fee currently paid to Chemtrusion by Mytex Polymers, Inc. See "The
Business of Chemtrusion - Compounding Operations - Mytex Facility" on page 5.
In January 1999, InterSystems Nebraska completed the engineering and development
of a new line of enclosed belt conveyors, which will have a wide variety of both
industrial and agricultural applications. The enclosed belt conveyor line will
greatly enhance the existing en-masse materials handling products offered by the
company. Moreover, the broad industrial application of this product is expected
to offset the seasonal effects experienced by the company's existing
agricultural-based product lines. See "The Business of InterSystems Nebraska -
Enclosed Conveyors" on page 3.
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:
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Automatic samplers. Automatic samplers are used to sample materials such as
powders, pellets, granules and liquids in gravity, pneumatic or liquid
applications. Samplers are used at different stages of a material handling or
production process to take a random sample of the products being received,
produced or transported. Automatic samplers are sold to customers in
substantially all businesses served by InterSystems Nebraska and can be adapted
to extreme applications, such as high temperatures, toxic materials and non-
standard pressures.
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.
Enclosed Belt Conveyors. In January 1999, a new line of enclosed belt conveyors
was introduced. The enclosed belt conveyors have materials handling capacities
ranging from 6,000 to 50,000 cubic feet per hour and feature a variety of belt
widths from 18 to 54 inches, which should meet most of current market demand.
Larger capacity systems with 60 and 72 inch belts and capacities of up to
100,000 cubic feet per hour are presently under development. The enclosed belt
conveyors will be self-cleaning and completely enclosed for greater safety and
minimal maintenance.
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,
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InterSystems Nebraska typically enters into a three-year agreement with its
customer, generally a grain elevator, pursuant to which InterSystems Nebraska
installs the sampling system and maintains the system on a continuing basis. In
consideration for these services, 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. 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. Historical seasonal effects are
expected to be mitigated through increased sales of the company's new enclosed
belt conveyors which have broad industrial and agricultural applications.
Backlog
InterSystems Nebraska had a sales backlog of approximately $1,953,000 at
December 31, 1998, compared with $7,200,000 at December 3l, 1997. The backlog
at December 31, 1997 was attributable in part to one large international order
in the amount of $4,446,000, which was fulfilled in 1998. All orders at
December 3l, l998 are believed to be firm and are expected to be filled by
December 3l, l999. Backlog at March 1, 1999 was $3,802,000.
Customers
During 1998, 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 1998 or 1997 with the exception of one
international customer in 1998 which accounted for 20% of InterSystems
Nebraska's revenues in that year. InterSystems Nebraska does not believe that
the loss of any single customer would have a material adverse effect on its
business operations.
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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 fourth extrusion line, added in 1997, 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. 1998 production was approximately 24,121,667 pounds compared to
approximately 27,313,016 pounds in 1997. The reduction in production is
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 10.
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 originally designed, the plant contained 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, and
provided additional financing for the 1998 expansion. See Notes 4 and 5 to
Notes to Consolidated Financial Statements for a discussion of the terms of this
financing.
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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 provides significant
net profits to Chemtrusion.
In 1997, Chemtrusion and Mytex amended the Definitive Agreement to provide a
fifth production line, which increased compounding capacity by 20,000,000
pounds, as well as 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 these new facilities which
were funded by Mytex through interim short-term financing. In 1998, Mytex
provided permanent financing of the new facilities under terms similar to those
contained in the initial Agreement. Chemtrusion's management fee was increased
significantly as a result of the new line.
During 1998, Chemtrusion and Mytex further amended the Definitive Agreement to
provide for design, installation and operation of a sixth production line.
Chemtrusion completed the installation of this new line, which increased total
capacity of the facility to 75,000,000 pounds, more than twice its initial
capacity. Under the terms of the Agreement, Mytex provided permanent financing
of the new line 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 line, which covers operating
expenses as well as debt servicing. Management expects this fee to increase net
profits to Chemtrusion beginning in January 1999.
On expiration of the initial term or any renewal term or in the event of the
termination of the Agreement by default, as defined therein, Mytex will have an
option to purchase the plant at a price and on terms and conditions defined in
the Agreement. In the event that Mytex 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 Mytex to
purchase the plant at a price and on the terms and conditions defined in the
Agreement.
Suppliers and Raw Materials
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.
Chemtrusion is required to purchase 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 capabilites.
Chemtrusion does not have an outside or field sales force. In 1998, Chemtrusion
created and filled a new position of national marketing director based out of
its Houston facility. This individual's primary responsibility is to expand the
company's customer base so as to achieve maximum productivity and profitability
from the Houston facility.
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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 1998, 99%
of Chemtrusion's revenues were attributable to three customers: Mytex accounted
for approximately 61% of total revenues of Chemtrusion and two other customers
accounted for an aggregate of 38% 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.
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; Governmental Approval and Governmental Regulations
During the two fiscal years ended December 31, 1998 and 1997, the Company spent
minimal amounts on research and development activities. At the present time, no
governmental approval of any of the principal products of InterSystems Nebraska
or Chemtrusion is pending or required. The Company is not aware of any proposed
governmental regulation which may have any significant impact upon it business
or operations, or on the business or operations of its subsidiaries.
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 environmental laws and regulations.
Employees
The Company currently employs 154 persons at Chemtrusion and 122 persons at
InterSystems Nebraska who are full time employees, in executive, administrative
and clerical, and production, engineering and laboratory personnel capacities.
In addition, InterSystems Nebraska employs 8 part-time persons in clerical and
factory capacities, and the Company employs 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.
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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 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 $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 are 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 presently in the amount of $537,000.00 which bears 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 106,530
square foot facility located in Houston, Texas. The current annual rent is
$297,000 plus common area maintenance charges, 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 $6,093,052 to
secure construction financing at 7% due in December 31, 2011. See "The Business
of Chemtrusion--Mytex Facility" on page 5.
The Company believes that the facilities of its subsidiaries are adequate for
the current and reasonably forseeable future needs, are adequately insured and
are in good operating condition.
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
financial condition 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
STOCKHOLDER 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.
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
Fiscal 1998 High Low
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First Quarter $2 3/16 $1 11/16
Second Quarter 2 5/16 1 7/8
Third Quarter 2 1 1/4
Fourth Quarter 1 1/4 7/8
The closing price of the Common Stock on March 4, 1999 was $1.00. As of March
4, 1999, there were, to the best of the Company's knowledge, approximately 165
holders of record (not beneficial holders) of the Company's Common Stock.
b. Dividend Policy The Company has not paid any cash dividends during the last
two fiscal years. The Company currently intends to retain all of its earnings
to support the development of its business and does not anticipate paying any
cash dividends for the forseeable future. Furthermore, InterSystems Nebraska is
a party to certain debt agreements which prohibit the declaration or payment of
cash dividends by InterSystems Nebraska. This prohibition has the practical
effect of restricting the payment of dividends on the Company's common stock.
c. Sales of Unregistered Securities In December 1998, the Company sold 46,666
shares of common stock from treasury at $1.125 per share in a private placement
to three executive officers of the Company as follows: Messrs. Pearlman and
Lawi - 22,222 shares to each, and Mr. Zeidman - 2,222 shares. See "Certain
Relationships and Related Party Transactions."
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Year ended December 31, 1998 compared to December 31, 1997
InterSystems, Inc.'s two principal lines of business consist of the operations
of its wholly-owned subsidiary, InterSystems, Inc., a Nebraska corporation
("Nebraska"), which designs, manufactures and sells specialized materials
handling equipment, and the custom resin compounding operations conducted by
Chemtrusion, Inc. ("Chemtrusion") in Houston, Texas and Jeffersonville, Indiana.
For each of the two years ended December 31, 1998 and 1997, approximately 66%
and 60%, respectively, of the Company's revenues were attributable to the
business of Nebraska and approximately 34% and 40%, respectively, of the
Company's revenues were attributable to the business of Chemtrusion.
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Continuing its program of investing significant resources in equipment and
personnel to achieve the Company's next level of growth enabled the Company to
generate record sales for the year ended December 31, 1998. During 1998,
Nebraska hired a new chief operating officer to achieve that subsidiary's goal
of expanding its domestic and international market share as well as developing
new products. In addition, in early 1999, Nebraska completed the engineering and
development of a new line of enclosed belt conveyors, which will have a wide
variety of both industrial and agricultural applications. The enclosed belt
conveyor line will enhance the existing en-masse materials handling products
offered by the company. The broad industrial application of this product is
expected to positively impact the seasonal effects of Nebraska's existing
product lines.
During 1998, Chemtrusion employed a new national marketing director to achieve
that subsidiary's goal of operating at or near capacity at both of its
facilities and to aggressively implement its plans for growth. In addition,
during 1998 and into early 1999, Chemtrusion expanded its production capacity to
accommodate its anticipated growth at both the Texas and Indiana facilities.
The Texas facility purchased approximately $325,000 of lab equipment in 1998 for
its new materials testing division. A fifth line added to the Indiana facility
in the third quarter of 1998 is now fully operational and a sixth line began
operating in the first quarter of 1999. The addition of these two lines is
expected to increase net profits for 1999.
RESULTS OF OPERATIONS
Revenue increased $6,314,000 (23.4%) to $33,322,000 in 1998 over 1997, a result
of continued capital improvement purchases from Nebraska by the grain industry
as well as continued demand for Chemtrusion's combined technological services.
Nebraska's sales increased $5,513,000 (33.9%) to $21,817,000 in 1998 as compared
to 1997. The increase was primarily a result of the continued demand for
equipment manufactured at Nebraska as well as a large overseas order of
approximately $4,446,000 shipped during the first and second quarter of 1998.
Although Nebraska has not recorded an international order of such magnitude to
date in 1999, management is optimistic that international sales will continue to
increase during the year.
Chemtrusion's combined revenue at the Texas and Indiana facilities increased
$801,000 in 1998 as compared to the same period last year. Chemtrusion Indiana's
revenue increased $912,000 to $7,166,000 in 1998 as compared to $6,254,000 in
1997. The growth was primarily due to a new line installed in the early third
quarter of 1998. Chemtrusion Texas' 1998 revenues decreased $111,000 to
$4,339,000 compared to $4,450,000 a year earlier. Chemtrusion Texas experienced
a slowdown in production volume in 1998. The annual results were negatively
impacted by that facility's commitment to two major customers that reduced their
processing needs beginning mid-1998. Through the first two months of 1999,
Chemtrusion Texas continued to experience slower than anticipated recovery to
profitability. The company has initiated an aggressive marketing campaign to
increase its customer base. Successful implementation of this plan will
increase equipment utilization in order to achieve maximum productivity and
profitability from its compounding equipment.
Gross profit as a percentage of sales decreased to 28.5% in 1998 as compared to
31.8% in the 1997 period. The decrease was primarily a result of lower toll
processing volumes at Chemtrusion Texas coupled with increased overhead incurred
to facilitate future revenue growth. Nebraska's gross margin remained
relatively unchanged in 1998 compared to 1997.
The Company's selling, general and administrative expenses increased $910,000
during 1998 compared to 1997. Approximately $450,000 of the increase was
attributable to salary, bonus and associated payroll and recruitment costs in
connection with the hiring of a new chief operating officer at Nebraska and a
national marketing director at Chemtrusion Texas, as well as increases in
bonuses payable based upon earnings. In addition, approximately $135,000 was
attributable to rental and other costs associated with increased warehouse and
office space and related equipment at Chemtrusion Texas, an additional $110,000
was attributable to
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increased salary, bonus and related payroll costs including insurance at the
parent company level and an additional $55,000 was attributable to increased
investor relations expenses at the parent company level.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for 1998 amounted to $1,701,000.
The Company purchased $3,925,000 in fixed assets during 1998. These purchases
were primarily for equipment installed, or in process of being constructed, at
the Chemtrusion Indiana facility.
Net repayments on borrowing under the lines of credit amounted to $402,000.
Proceeds from promissory notes for 1998 was $3,977,000. The proceeds were used
primarily to finance equipment purchases for the Chemtrusion Indiana facility,
with a relatively small portion ($325,000) used for purchasing new lab equipment
for Chemtrusion Texas' new materials testing center. Repayments on long-term
debt and capital lease obligations amounted to $2,021,000 during 1998.
Cash decreased $669,000 for the period ending December 31, 1998.
The Company anticipates that its future operating needs will be satisfied from
the operations of its subsidiaries which, on a combined basis, are expected to
generate positive cash flow. The Company from time to time may seek to borrow
funds for actual or anticipated capital needs. There can be no assurances that
management will be able to obtain such financing on favorable terms.
In December 1998, Helm Capital Group, Inc., the Company's largest stockholder,
granted to the Company a five year option to purchase all of Helm's 1,353,013
shares of common stock in Teletrak Environmental Systems, Inc. (OTCBB:TAES) for
$.50 per share. The purpose of this grant was to induce the Company to
participate to the extent of $122,500 in a private placement of Teletrak units
consisting of one share of common stock and one-half common stock purchase
warrant for $.50 per unit. As of December 31, 1998, the Company had invested
$72,500 in this private placement and is committed to invest an additional
$50,000 in 1999. Helm reserved the right to dispose of the shares at any time
subject to prior notice to the Company. In order to raise funds to participate
in this private placement, the Company sold 46,666 shares of its common stock
held in treasury at $1.125 per share to Messrs. Pearlman (22,222 shares), Lawi
(22,222 shares) and Zeidman (2,222 shares).
InterSystems Nebraska
At December 31, 1998, Nebraska had a revolving credit agreement with a bank.
The financing agreement provides for borrowings of up to $3,000,000 based upon a
borrowing base and is due on demand. At December 31, 1998, borrowings of
$1,185,000 were outstanding under this agreement and bear interest at the bank's
base rate plus .50% (8.25% at December 31, 1998). At December 31, 1998, $
1,082,000 was available under this line of credit. Nebraska has pledged its
accounts receivable, inventory, equipment, fixtures and intangibles as
collateral for the debt. The net book value of the collateral totaled
approximately $5,707,000 at December 31, 1998. Under the terms of the agreement,
Nebraska is subject to certain covenant requirements that, among other things,
require maintenance of minimum net worth, working capital, debt to net worth
ratio, and also limits the amount of capital expenditures, payments to
affiliates, indebtedness, dividends and management fees. In addition, the
Company has guaranteed repayment of the debt.
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<PAGE>
Chemtrusion
In the second quarter 1998, Chemtrusion arranged new financing for its line of
credit with a different bank. The line of credit allows for a borrowing base of
$300,000 of eligible accounts receivable, bears interest at the bank's prime
rate plus 1% (currently 8.75%), expires April 21, 2002 and has been guaranteed
by the Company. As of December 31, 1998, the line of credit balance was
$300,000. The line of credit agreement requires Chemtrusion to satisfy certain
financial covenants including maintenance of minimum net worth, a debt to equity
ratio and a cash flow to debt coverage ratio. At December 31, 1998, Chemtrusion
was in violation of the debt to equity ratio and obtained a waiver of the
covenant from the bank through June 30, 1999. Accordingly, this debt has been
classified as short-term.
Chemtrusion also arranged a new term loan in the amount of $400,000 which bears
interest at the bank's prime rate plus 1% (8.75% at December 31, 1998). The
proceeds were used to consolidate three existing equipment loans and to provide
capital for office space expansion within the existing Texas facility. The note
is payable in monthly installments of $6,667, plus interest, matures April 2003
and has been guaranteed by the Company.
Chemtrusion expanded its technological capabilities in 1998 by pursuing an
additional line of business in materials testing. In order to achieve this
expansion, new equipment was placed in service in the third quarter 1998. The
cost of the equipment was approximately $325,000. Financing for the new
equipment has been secured through a financial institution under a 9.68%, fifty-
five month lease with a 10% buyout at the end of the term.
During 1998, two expansions were completed to the Indiana facility. In March
1998, a new rail spur was added to the facility to accommodate increased volume.
The rail spur cost approximately $420,000 and has been financed under a note
bearing interest at 7.0% annually, with monthly principal and interest payments
of $3,976 through December 2011. In the third quarter of 1998, a new
compounding line was placed into service at the Indiana facility. The cost of
this line, approximately $2,600,000, has been financed under a long-term note
bearing interest at 7% annually, with monthly principal and interest payments of
$25,560 through December 2011. The monthly principal and interest payments on
these two loans are charged back to Mytex under the facility operating agreement
and the interest is recaptured by Chemtrusion though sales.
At December 31, 1998, Chemtrusion had advances payable to Mytex totaling
$1,220,520 under a construction loan agreement bearing interest at 7%. The
advances were used to acquire a sixth compounding line for the Indiana facility.
The Company and Mytex are currently working on the finalization of the term loan
agreement replacing this construction loan agreement which is expected to have
terms similar to the terms of the original and subsequent financing agreements
with Mytex with respect to the Indiana facility. Accordingly, all advances
under the construction loan agreement have been classified as current at
December 31, 1998. Upon execution of the term agreement, a portion of this debt
will be reclassified as long-term.
In order for Chemtrusion to expand its customer base and meet the developing
needs of existing customers, certain enhancements and modifications to the
Company's compounding equipment have been deemed necessary and ordered. The
estimated cost of this additional equipment is $400,000. Financing for this
additional equipment has been secured through a financial institution under a
10.4%, forty-seven month lease with a 10% buyout at the end of the term.
Monthly payments are $9,975.
Seasonality
A substantial portion of Nebraska's revenues are derived from the agricultural
sector of the economy and, accordingly, are subject to seasonal fluctuations.
Nebraska's success is, to some extent, dependent upon weather conditions
affecting domestic grain production, conditions in the grain industry generally
and the value of the United States dollar against foreign currency. It is
expected that the seasonal effects experienced from sales to
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<PAGE>
the agricultural sector will be mitigated in part by sales of the new enclosed
belt conveyors which have year-round appeal to a wide variety of industries.
Although there are minor fluctuations in demand for Chemtrusion's 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.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. The statement generally provides for matching the timing of gain
or loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of hedged asset or liabilities that are attributable to
the hedged risk or (b) the earnings effect of the hedged forecasted transaction.
The statement is effective for all fiscal quarters for all fiscal years
beginning after June 15, 1999, with early application encouraged, and shall not
be applied retroactively to financial statements of prior periods. Adoption of
SFAS 133 is expected to have no effect on the Company's financial statements.
Year 2000 Compliance
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, Nebraska made a significant
transition to Year 2000 compliant equipment. Nebraska's System 36 and installed
software was discarded and replaced with Pentium processors and Year 2000
compliant manufacturing and accounting software. The 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 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.
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.
Page 13
<PAGE>
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 annual report for the year ended December 31, 1998 as well as other public
documents of the Company contains forward-looking statements which involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievement of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such statements include, without limitation,
the Company's expectations and estimates as to future financial performance,
cash flows from operations, capital expenditures and the availability of funds
from refinancings of indebtedness. Readers are urged to consider statements
which use the terms "believes," "intends," "expects," "plans," "estimates,"
"anticipated," or "anticipates" to be uncertain and forward looking. In
addition to other factors that may be discussed in the Company's filings with
the Securities and Exchange Commission, including this report, the following
factors, among others, could cause the Company's actual results to differ
materially from those expressed in any forward-looking statement made by the
Company: (i) general economic and business conditions, acts of God and natural
disasters which may effect the demand for the Company's products and services or
the ability of the Company to manufacture and/or provide such products and
services; (ii) the loss, insolvency or failure to pay its debts by a significant
customer or customers; (iii) increased competition; (iv) changes in customer
preferences and the inability of the Company to develop and introduce new
products to accommodate these changes; and (v) the maturing of debt and the
ability of the Company to raise capital to repay or refinance such debt on
favorable terms.
ITEM 7: FINANCIAL STATEMENTS: The financial statements filed as part of this
report include:
Page
Report of Independent Certified Public
Accountants....................................... F-2
Consolidated Balance Sheet as of
December 3l, l998................................. F-3
Consolidated Statements of Income
for the years Ended December 3l, 1998 and 1997... F-4
Consolidated Statements of Comprehensive Income
for the Years Ended December 3l, 1998 and 1997... F-5
Consolidated Statements of
Shareholders' Equity
for the Years Ended December
31, 1998 and 1997................................. F-6
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 1998 and 1997........................ F-7
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<PAGE>
Notes to Consolidated Financial
Statements...................................... F-8 to F-24
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None.
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.
Name Age First Elected Term Expires
- ---- --- ------------- ------------
David S. Lawi 64 1984 1999
Walter M. Craig, Jr. 45 1993 1999
Daniel T. Murphy 60 1986 2000
William Lurie 68 1995 2000
Herbert M. Pearlman 66 1984 2001
Fred S. Zeidman 52 1993 2001
John E. Stieglitz 68 1991 2001
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 Captial Group, Inc., a public holding
company and the holder of 14.9% 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. In
February 1999, Mr. Pearlman assumed the additional role of Chief Executive
Officer of Unapix.
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
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<PAGE>
small business investment company specializing in venture capital financings. In
1998, Mr. Zeidman became a director of Teletrak Environmental Systems, Inc.
("Teletrak"), a public company engaged in the manufacturing of mucking pumps for
environmental and industrial applications.
Walter M. Craig, Jr. Mr. Craig has been President of Core Capital, 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 has also served as a Director, Executive Vice President and
Chief Operating Officer of Helm since 1993. Prior thereto, Mr. Craig served as
Vice President for business and legal affairs for Helm.
David S. Lawi Mr. Lawi has been Secretary of the Company since March 1984. He
was elected Chairman of the Executive Committee in October 1986. He has been
Secretary and a Director of Helm since 1980, and served as Executive Vice
President of Helm from 1980 until 1992. Since l982 he has been a Director of
Seitel and has been Chairman of Seitel's Executive Committee since 1989. In
1993 he became Secretary and Treasurer of Unapix, and a Director and Chairman of
the Executive Committee of Unapix.
William Lurie Mr. Lurie was first elected to the Board of Directors in November
1995. 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. In 1998, Mr. Murphy became a director of Teletrak.
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 1998, the Company's Board of Directors held three meetings, which
were attended by all of the directors then in office.
The Board of Directors has an Executive Committee, an Audit Committee and a
Compensation 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 Committee did not meet
separately from the full Board of Directors during 1998. The Audit Committee
and the Compensation Committee presently are comprised of Messrs. Stieglitz and
Lurie. The Audit Committee and the Compensation Committee did not meet
separately from the full Board of Directors during 1998.
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<PAGE>
Compensation of Directors
Non-employee directors receive a fee of $6,000 in cash and $6,000 of common
stock for services they render to the Company, payable on December 31 of each
year. All compensation to Mr. Lurie was paid on a deferred basis. The Company
reimburses the directors for expenses reasonably incurred in the furtherance of
their duties.
Significant Employees
In addition to Messrs. Pearlman, Zeidman and Lawi, the Company has three
additional significant employees. Wm. Chris Mathers, 39, joined the Company in
January 1994 as controller. In September 1997, he was appointed Chief Financial
Officer of the Company.
Kenneth Schrader, 60, has served as President of InterSystems Nebraska since
1978.
Scott Owens, 35, 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
executive 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. Executive 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.
[The rest of this page intentionally left blank.]
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<PAGE>
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 1998. 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, 1998. See "Employment Arrangements" below.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------
Name and Annual Compensation
Principal ------------------- All Other
Position Year Salary Bonus Compensation(1)
- -------- --- ------ ----- ---------------
<S> <C> <C> <C> <C>
Fred S. Zeidman 1998 $100,000 $15,000 $33,063
President and 1997 100,000 15,000 -
Chief Executive 1996 50,000 - -
Officer
Herbert M. Pearlman, 1998 100,000 20,934 76,250
Chairman 1997 100,000 - 57,496
1996 100,000 - 57,300
</TABLE>
(1) Represents premiums on insurance policies and auto allowance.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
The following table sets forth aggregated option exercises in the last
fiscal year, if any, the number of unexercised options and fiscal year-end
values of in the money options for the Chief Executive Officer. All options
were out of the money at December 31, 1998.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Unexercised In-the-money
Acquired Options at Options at
on Fiscal year end Fiscal year end
Exercise Value Exercisable/ Exercisable/
Name (#) Realized($) Unexecisable Unexercisable
- ---- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Fred S. Zeidman - - 500,000/ - - / -
Herbert M. Pearlman - - 100,000/ - - / -
</TABLE>
REPRICING OF OPTIONS
On December 11, 1998, the Board of Directors unanimously resolved to adjust
the price of stock options granted in September 1997 to employees, including
executive officers, from $2.125 to $1.50 per share. On that date, the closing
price of the common stock as reported on the American Stock Exchange was
$1.0625. The purpose of this adjustment was to incentivize management and
employees by bringing the exercise price of the
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<PAGE>
options within range of the current trading price of the stock. When the options
were granted in September 1997, the common stock was trading at prices much
higher than historical levels. Although the Company has been profitable for the
past two years, the price of its common stock fell considerably during 1998.
The options which were repriced include 414,000 incentive stock options
granted under the 1997 Stock Option Plan with an original exercise price of
$2.125, and 115,000 non-plan options granted simultaneously with the Plan
options, also with an exercise price of $2.125. Repriced options held by
executive officers include 100,000 held by Mr. Pearlman, 100,000 held by Mr.
Zeidman and 50,000 held by Mr. Lawi.
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. These options, which expired
in 1998, were extended for an additional three years at $2.25 per share and
$2.75 per share, respectively.
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 Capital Group, 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.
The Company's agreement with Mr. Zeidman also provides that the Board of
Directors will continue to cause Mr. Zeidman to be elected as a member of the
Board of Directors of the Company, 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 is fully vested.
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.
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
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<PAGE>
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.
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.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information as of March 1, 1999 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.
Amount and Nature
of Beneficial Percent of
Name Ownership (1)(2) Class (2)
- ----- ------------------ -----------
Beneficial Holders
Helm Capital Group, Inc. 1,182,177(3) 14.9%
537 Steamboat Road
Greenwich, CT 06830
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<PAGE>
Strategic Growth 678,000(4) 8.1%
International, Inc.
111 Great Neck Road
Great Neck, N.Y. 11021
John V. Winfield 470,700(5) 5.8%
2121 Avenue of the Stars
Los Angeles, CA 90067
Officers and Directors
Fred S. Zeidman 782,222(6) 9.2%
7115 Clinton Drive
Houston, Texas 77020
Herbert M. Pearlman 753,771(7) 8.9%
537 Steamboat Road
Greenwich, CT 06830
David S. Lawi 507,069(8) 6.2%
537 Steamboat Road
Greenwich, CT 06830
Walter M. Craig, Jr 17,220(9) *
Daniel T. Murphy 25,232(10) *
John E. Stieglitz 37,001(11) *
William Lurie 20,000(12) *
All executive officers
and directors
as a group (7 persons) 2,142,515(13) 22.7%
_____________________
* 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 136,250 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,
Page 21
<PAGE>
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 $1.50 (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 (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 1998, 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 1998, the Company paid $48,190 to
Helm on account of these services, and accrued and additional $58,000 in respect
of such expenses at December 31, 1998.
In December 1998, Helm granted to the Company a five year option to purchase
all of Helm's 1,353,013 shares of common stock in Teletrak Environmental
Systems, Inc. (OTCBB:TAES) for $.50 per share. The purpose of this grant was to
induce the Company to participate to the extent of $122,500 in a private
placement of Teletrak units consisting of one share of common stock and one-half
common stock purchase warrant for $.50 per unit. As of December 31, 1998, the
Company had invested $72,500 in this private placement and is committed to
invest an additional $50,000 in 1999. Helm reserved the right to dispose of the
shares at any time subject to prior notice to the Company. In order to raise
funds to participate in this private placement, the Company sold 46,666 shares
of its common stock at $1.125 per share to Messrs. Pearlman (22,222 shares),
Lawi (22,222 shares) and Zeidman (2,222 shares).
Page 22
<PAGE>
ITEM 13: Exhibits, List and Reports on Form 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
Filed as an exhibit to the
Company's [Document]
Number Description or Filed Herewith
- ------ ---------- -----------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation dated
March 22, 1999 Filed Herewith
3.2 By-Laws, as amended and restated on January
8, 1998 1997 10-KSB
4.1 Form of 10% Convertible Debenture
due June 30, 2001 1991 10-K
4.2 Form of Common Stock Purchase Warrant
expiring December 31, 1999 1991 10-K
4.3 Form of Common Stock Purchase Warrant
expiring June 30, 2000 S-3 (No. 333-00003)
4.4 Form of Common Stock Purchase Warrant
expiring July 30, 2000 1995 10-KSB
4.5 Form of Common Stock Purchase Warrant
expiring January 15, 2000 1995 10-KSB
4.6 Form of Common Stock Purchase Warrant
expiring October 29, 2001 1996 10-KSB
10.1 The Company's 1997 Employee
Stock Option Plan S-8 (No. 333-46035)
10.2 Employment and Deferred Compensation
Agreement between Company
and Herbert M. Pearlman 1988 10-K
10.3 Employment and Deferred Compensation
Agreement between Company
and David S. Lawi 1988 10-K
10.4 Amendment to Employment Agreement between
Company and Herbert M. Pearlman 1994 10-KSB
10.5 Amendment to Employment Agreement between
Company and David S. Lawi 1994 10-KSB
10.6 Toll Compounding Contract dated April 1,
1994 between Chemtrusion, Inc. and Himont
U.S.A., Inc. 1994 10-KSB
</TABLE>
Page 23
<PAGE>
<TABLE>
<CAPTION>
Filed as an exhibit to the
Company's [Document]
Number Description or Filed Herewith
- ------ ---------- -----------------------------
<S> <C> <C>
10.7 Employment Agreement dated as of July 26, 1993 1993 10-K
between the Company and Fred Zeidman
10.8 Investment Agreement dated as of June 24, 1993 1993 10-K
between the Company and Fred Zeidman
10.9 Definitive Agreement for Compounding Services 1995 10-KSB
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
(b) Reports of Form 8-K: None
</TABLE>
Page 24
<PAGE>
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 24th day of March,
1999.
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.
/s/ Herbert M. Pearlman Chairman of the Board March 24, 1999
- ----------------------------
Herbert M. Pearlman
/s/ Fred S. Zeidman Director, President and March 24, 1999
- ---------------------------- Chief Executive Officer
Fred S. Zeidman
/s/ Daniel T. Murphy Director March 24, 1999
- ----------------------------
Daniel T. Murphy
/s/ David S. Lawi Director, Secretary March 24, 1999
- ----------------------------
David S. Lawi
/s/ Walter M. Craig, Jr. Director March 24, 1999
- ----------------------------
Walter M. Craig, Jr.
/s/ John E. Stieglitz Director March 24, 1999
- ----------------------------
John Stieglitz
/s/ William Lurie Director March 24, 1999
- ----------------------------
William Lurie
Page 25
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INTERSYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheet as of December 31, 1998.......... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1998 and 1997............................... F-4
Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 1998 and 1997............... F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1998 and 1997........... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997............................... F-7
Notes to Consolidated Financial Statements.................. F-8-F-24
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
InterSystems, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of InterSystems,
Inc. as of December 31, 1998, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1998. 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, 1998, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Houston, Texas
February 19, 1999
F-2
<PAGE>
INTERSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PAR VALUE)
1998
--------
Assets
------
Current Assets:
Cash and cash equivalents................................... $ 133
Marketable equity securities................................ 94
Trade receivables, less allowance of $50 (Notes 4 and 5).... 3,329
Inventories (Notes 2, 4 and 5).............................. 2,273
Time deposits (Note 10)..................................... 123
Prepaid expenses and other.................................. 360
-------
Total Current Assets...................................... 6,312
Property, equipment and leasehold improvements, net
(Notes 3, 4 and 5).......................................... 23,479
Other assets................................................. 262
-------
$30,053
=======
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Short-term notes payable and advances (Note 4).............. $ 2,405
Current portion of long-term debt (Note 5).................. 2,332
Accounts payable............................................ 1,459
Accrued expenses (Notes 10(c) and 11)....................... 1,528
-------
Total Current Liabilities................................. 7,724
Long-term debt, less current maturities (Note 5)............. 17,806
Subordinated debentures (Note 7)............................. 642
-------
Total Liabilities......................................... 26,172
-------
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;
7,916 shares issued and outstanding....................... 79
Additional paid-in capital.................................. 7,769
Accumulated other comprehensive loss........................ (96)
Deficit..................................................... (3,617)
Treasury stock, 88 shares at cost........................... (154)
Note receivable for sale of stock (Note 8(f))............... (100)
-------
Total Shareholders' Equity................................ 3,881
-------
$30,053
=======
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997
---- ----
Net sales (Notes 10(a) and 13)................. $33,322 $27,008
Cost of sales.................................. 23,834 18,429
------- -------
Gross profit.......................... 9,488 8,579
Selling, general and administrative expenses... 7,429 6,519
Management fees to affiliate (Note 8(d))....... - 15
Interest income................................ (9) (9)
Interest expense............................... 1,639 1,643
Other.......................................... (14) (8)
------- -------
Income from continuing operations..... 443 419
------- -------
Gain on disposal of Tropical
Systems, Inc. (Note 11).................... - 150
------- -------
Income from discontinued operations... - 150
------- -------
Net Income............................ $ 443 $ 569
======= =======
Net income per common share (Note 1):
Net income per common share:
Basic:
Continuing operations............... $ .06 $ .06
Gain on disposal.................... - .02
------- -------
$ .06 $ .08
======= =======
Assuming dilution:
Continuing operations............... $ .05 $ .06
Gain on disposal.................... - .02
------- -------
$ .05 $ .08
======= =======
Weighted average number of common shares
outstanding - basic.......................... 7,798 6,746
======= =======
Weighted average number of common shares
outstanding - assuming dilution.............. 8,156 7,086
======= =======
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
------ -----
Net income................................................. $ 443 $ 569
Other comprehensive income:
Unrealized gain (loss) on available-for-sale securities... (127) 31
----- -----
Comprehensive income....................................... $ 316 $ 600
===== =====
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
----------------------- PAID-IN INCOME
SHARES AMOUNT CAPITAL (LOSS)
----------------------- ----------- --------------
<S> <C> <C> <C> <C>
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(e))............. 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(c))................ 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
Sale of common stock............................. 70,000 1 85 -
Common stock issued for directors fees........... 3,127 - 6 -
Purchase of treasury stock....................... - - - -
Sale of treasury stock........................... - - - -
Unrealized loss on available for
sale securities................................. - - - (127)
Net income....................................... - - - -
--------- ---------- ------ --------
Balance at December 31, 1998..................... 7,916,458 $ 79 $7,769 $ (96)
========= ========== ====== ========
TOTAL
NOTE SHAREHOLDERS
TREASURY STOCK RECEIVABLE EQUITY
----------------- FOR SALE (CAPITAL
DEFICIT SHARES AMOUNT OF STOCK DEFICIT)
------- ----------------- ----------- ------------
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(e))............. - - - - 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(c))................ - - - - 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
Sale of common stock............................. - - - - 86
Common stock issued for directors fees........... - - - - 6
Purchase of treasury stock....................... - 33,000 (52) - (52)
Sale of treasury stock........................... (25) (46,666) 78 - 53
Unrealized loss on available for
sale securities................................. - - - - (127)
Net income....................................... 443 - - - 443
------- ------- ------ ------ -------
Balance at December 31, 1998..................... $(3,617) 88,394 $ (154) $ (100) $ 3,881
======= ======= ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
(Note 12)
1998 1997
-------- --------
Cash flows from operating activities:
Net income........................................... $ 443 $ 569
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 1,882 1,729
Loss on disposal of equipment..................... - 7
Provision for losses on accounts receivable....... 24 29
Gain on disposal of Tropical Systems, Inc......... - (150)
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables.............................. (191) (568)
Inventories.................................... (79) (573)
Due from affiliate............................. - 25
Increase (decrease) in:
Accounts payable and accrued expenses.......... (333) 494
Net liabilities from discontinued operations... - (220)
Other changes - net............................... (45) (100)
------- -------
Total adjustments............................ 1,258 673
------- -------
Net cash provided by operating activities.... 1,701 1,242
------- -------
Cash flows from investing activities:
Purchases of fixed assets............................ (3,925) (2,504)
Purchase of time deposits............................ (13) -
Purchase of marketable securities.................... (73) -
------- -------
Net cash used in investing activities........ (4,011) (2,504)
------- -------
Cash flows from financing activities:
Net proceeds (repayment) on lines of credit and
other short-term borrowings......................... (402) 1,094
Proceeds from long-term debt obligations............. 3,977 2,851
Purchase of treasury stock........................... (52) (63)
Sale of treasury stock............................... 53 -
Payments under capital lease obligations............. (499) (1,288)
Payments under various long-term debt obligations.... (1,522) (2,152)
Proceeds from sale of common stock................... 86 248
------- -------
Net cash provided by financing activities.... 1,641 690
------- -------
Net decrease in cash and cash equivalents............. (669) (572)
Cash and cash equivalents, beginning of year.......... 802 1,374
------- -------
Cash and cash equivalents, end of year................ $ 133 $ 802
======= =======
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
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).
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 13 for
major customer.
At December 31, 1998, the Company had cash deposits in financial institutions
that exceeded the federally insured deposit limit by approximately $99,000.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
F-8
<PAGE>
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.
The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be
fully recoverable.
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, 1998, the Company had marketable securities totalling
$93,696 with an unrealized loss of $95,804.
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 PER COMMON SHARE
The Company provides basic and dilutive earnings per common share information
for each year presented. The basic net income per common share is computed by
dividing the net income available to common shareholders by the weighted average
number of common shares outstanding. Diluted net income per common share is
computed by dividing the net income available to common shareholders, adjusted
on an as if converted basis, by the weighted average number of common shares
outstanding plus potential dilutive securities.
F-9
<PAGE>
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, 1998 and 1997 (in thousands):
1998 1997
-------- --------
(Shares) (Shares)
Weighted average number of common shares used in
basic earnings per share................................ 7,798 6,746
Effect of dilutive securities:
Stock options........................................... 75 215
Stock warrants.......................................... 283 125
----- -----
Weighted number of common shares and dilutive potential
common stock used in diluted earnings per share......... 8,156 7,086
===== =====
For the year ended December 31, 1998 and 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 years ended December 31, 1998 and 1997, certain securities were not
included in the calculation of diluted earnings because of their anti-dilutive
effect, those securities are as follows (in thousands):
1998 1997
----- -----
Stock options................................. 400 970
Stock warrants................................ 1,785 1,777
Shares issuable on conversion of debentures... 513 513
----- -----
2,698 3,260
===== =====
LEASE ACCOUNTING
The Company, through InterSystems Nebraska, leases grain sampling systems
to certain of its customers. The leases generally provide for revenues based on
samples taken on a monthly basis with a minimum number on an annual basis.
Revenue is recorded monthly based on the number of samples and any difference
between the number billed and the minimum annual amount is recorded on the
annual anniversary date of the lease.
Equipment leased to others is recorded at cost and is being depreciated on
a straight-line basis over eight years.
STOCK OPTIONS AND WARRANTS
The Company accounts for stock options and warrants issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees." For
financial statement disclosure purposes and issuance of options and warrants to
non-employees for services rendered, the Company follows SFAS Statement 123,
"Accounting for Stock-Based Compensation" (see Note 9(b)).
F-10
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1997 amounts have been reclassified to conform with the 1998
financial statement presentation.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. The statement generally provides for matching the timing of gain
or loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of hedged asset or liabilities that are attributable to
the hedged risk or (b) the earnings effect of the hedged forecasted transaction.
The statement is effective for all fiscal quarters for all fiscal years
beginning after June 15, 1999, with early application encouraged, and shall not
be applied retroactively to financial statements of prior periods. Adoption of
SFAS 133 is expected to have no effect on the Company's financial statements.
NOTE 2 - INVENTORIES
Inventories consisted of the following at December 31, 1998 (in thousands):
Amount
------
Raw materials and component parts........... $1,232
Finished goods............................. 1,041
-------
$ 2,273
=======
F-11
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following
at December 31, 1998:
<TABLE>
<CAPTION>
Estimated
Useful
Lives Amount
-------- -------------
(Years) (In Thousands)
<S> <C> <C>
Land............................................................. $ 593
Buildings....................................................... 15-40 9,210
Machinery and equipment......................................... 10-15 14,199
Other equipment................................................. 3-7 2,246
Equipment leased to others...................................... 3-8 851
Leasehold improvements.......................................... 3-15 704
Railroad track.................................................. 14 421
Equipment under capital leases.................................. 10-15 2,962
Furniture and fixtures.......................................... 3-7 143
Construction-in-progress; estimated cost to complete $1,008,000. - 1,240
-------
32,569
Less: Accumulated depreciation and amortization,
of which $682,000 relates to leased equipment.................. 9,090
-------
$23,479
=======
</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 $208,000 and $231,000 in 1998 and 1997,
respectively. At December 31, 1998, the approximate aggregate minimum rentals to
be received in future years are $189,000 in 1999, $80,000 in 2000 and $49,000 in
2001.
During 1998 and 1997, Chemtrusion capitalized interest expense totalling
approximately $35,000 and $17,000, respectively, in association with the
construction of the Jeffersonville, Indiana facility.
NOTE 4 - SHORT-TERM NOTES PAYABLE AND ADVANCES
At December 31, 1998, 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, 1998, the borrowing base under this agreement was approximately
$2,267,000 with borrowings outstanding of $1,185,000 bearing interest at the
bank's base rate plus .5% (8.25% at December 31, 1998). 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 $5,707,000 at December 31, 1998. The agreement subjects
InterSystems Nebraska to certain covenant requirements that include, among other
things, maintenance of minimum net worth, working capital, liabilities to net
worth ratio and also limits the amounts of capital expenditures, payments to
affiliates, indebtedness and management fees. In addition, InterSystems, Inc.,
a Delaware corporation, has guaranteed repayments of the debt.
At December 31, 1998, Chemtrusion had advances payable to a non-related
joint venture totalling $1,220,520 under a construction loan agreement bearing
interest at 7%. The advances were used 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 agreement which is
expected to have similar terms as the original agreement and subsequent
financing agreements with the non-related joint venture to construct and add
additional equipment and improvements at the Jeffersonville, Indiana facility
(see Note 5). All advances have been classified as current at December 31,
1998. Upon execution of the term agreement, a portion of this debt will be
classified as long-term.
F-12
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
Amount
-------
(In Thousands)
<S> <C>
7% term note payable to a non-related joint venture with interest
only payable through January 1999, thereafter monthly
installments of $137,473 including interest, through
December 2011, secured by the Jeffersonville, Indiana facility....... $11,877
7% term note payable to a non-related joint venture, payable $25,560
monthly including interest, through December 2011, secured by
certain equipment at the Jeffersonville, Indiana facility............ 2,506
Prime plus 1-1/2 (9.25% at December 31, 1998) term note, payable
$24,320 monthly plus interest, through March 2002, secured by
equipment............................................................ 997
9.31% term note, payable $7,893 monthly, including interest,
through July 2004, secured by equipment.............................. 615
8.82% term note, payable $3,750 monthly, plus interest,
through July 2002, at which time the remaining balance
is due, secured by land.............................................. 537
Term note payable to a non-related joint venture, interest payable
monthly at 7%, principal due December 2011, unsecured................ 450
7% term note payable to a non-related joint venture, payable $3,976
monthly including interest, through December 2011, secured by
land improvements at the Jeffersonville, Indiana facility............ 398
Prime plus 1% (8.75% at December 31, 1998) note payable,
payable $6,667 monthly, plus interest through April 2003,
secured by equipment and guaranteed by the Company................... 345
Revolving credit agreement with a bank with maximum borrowings of
$300,000, interest payable monthly at Prime plus 1.0%,
(8.75% at December 31, 1998), principal due April 2000, secured
by inventory and accounts receivable and guaranteed by
the Company.......................................................... 300
Obligations under capital lease........................................ 2,038
Other obligations...................................................... 75
-------
Total............................................................ 20,138
Less: Current maturities............................................... 2,332
-------
Total long-term debt............................................. $17,806
=======
</TABLE>
F-13
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 9.31% and 8.82% term notes outstanding at December 31, 1998 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.
Chemtrusion's $300,000 revolving credit agreement is subject to certain
covenant requirements that, among other things, require maintenance of a minimum
net worth, debt to equity ratio, and cash flow to debt coverage ratio. At
December 31, 1998, Chemtrusion was in violation of the debt to equity ratio and
obtained a waiver of the covenant from the bank through June 30, 1999.
Accordingly, at December 31, 1998 the borrowings have been classified as short-
term.
InterSystems, Inc. and Chemtrusion leased certain machinery and equipment
under capital leases expiring through 2002. At December 31, 1998, future
minimum lease payments under capital leases, together with the present value of
the net minimum lease payments, are as follows (in thousands):
Amount
------
1999............................................ $ 728
2000............................................ 648
2001............................................ 736
2002............................................ 237
------
Total minimum lease payments.................... 2,349
Less: Amount representing interest
calculated at the incremental borrowing rate... 311
------
Present value of net minimum lease payments..... 2,038
Less: Current portion........................... 577
------
Long-term portion of capital leases............. $1,461
======
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, 1998 was approximately $2,579,000.
Future maturities of long-term debt at December 31, 1998, including capital
leases summarized above are: 1999 - $2,332,000; 2000 - $2,369,000; 2001 -
$2,260,000; 2002 - $2,085,000; 2003 - $1,289,000; and $10,103,000, thereafter.
F-14
<PAGE>
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, 1998 (in thousands):
Amount
---------
Net operating loss carryforwards................. $ 2,612
Tax basis in excess of assets acquired
(InterSystems Nebraska)....................... 133
Expenses accrued for financial reporting
purposes not deducted for tax purposes, net... 213
Tax credit carryforwards......................... 98
---------
Deferred tax asset............................... 3,056
Valuation allowance.............................. (1,588)
---------
Net deferred tax asset........................... 1,468
Deferred tax liability - depreciation............ (1,468)
---------
Net deferred income tax asset (liability)........ $ -
=========
For the years ended December 31, 1998 and 1997, the income tax expense
differs from the amount of income tax expense determined by applying the
statutory income tax rate to pre-tax income as follows:
1998 1997
------ ------
(In thousands)
Statutory rate.................... $ 151 $ 193
Decrease in valuation allowance... (207) (262)
Other - net....................... 56 69
----- -----
$ - -
===== =====
As of December 31, 1998, the Company had for income tax purposes, net
operating loss carryforwards of approximately $7,685,000, which expire in years
through 2018. 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-15
<PAGE>
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, 1998, the
Company had 10% debentures totalling $642,000, net of discounts of $8,000,
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 were converted in 1997, at conversion rates ranging from $1.27 to
$1.76, less deferred offering costs and original discounts totalling $51,000.
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 were converted in 1997 at a conversion rate of $1.40. As
of December 31, 1997 all the 8% debentures were converted.
NOTE 8 - RELATED PARTY TRANSACTIONS
(a) As of December 31, 1998 and 1997, Helm owned approximately 15% and
16%, 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 $58,000 and $55,000 in 1998 and 1997,
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 1998, the Company purchased 145,000 shares of common stock in
Teletrak Environmental Systems, Inc. ("Teletrak") for $72,500. Teletrak is
affiliated with the Company by common directors and shareholders. This
investment is accounted for as marketable securities available-for-sale.
(c) 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 1997, Tropical incurred fees totalling
$9,000, which have been included in loss from discontinued operations.
(d) 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
for 1997. In addition, during 1997, Interpak paid certain operating expenses on
behalf of the Company. At December 31, 1998, the Company had a balance due to
Interpak totalling $7,000 for these expenses. In July 1997, Helm sold Interpak
and management services provided to Chemtrusion ceased.
F-16
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) 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 1997, the Company issued 36,000
shares of the Company's common stock for payment of accrued interest totalling
$36,000 under this line of credit agreement.
(f) 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, 1998 and 1997, the Company earned interest on the note receivable
totalling $8,000. At December 31, 1998, unpaid interest totalled $45,000 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, 1998 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.
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, 1998 no warrants 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.
F-17
<PAGE>
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" (APB opinion 25). During the years ended December 31, 1998 and
1997, all options issued to employees were granted at an exercise price which
equalled the market price per share at date of grant, accordingly, no
compensation was recorded. During 1998, certain options previously granted had
a modification of their exercise price and expiration date which constitutes a
new issuance of options in accordance with APB opinion 25. The modified
exercise price equalled or exceeded the market price per share at this
modification date, accordingly, no compensation was recorded.
SFAS No. 123 requires the Company to provide pro forma information regarding
net income applicable to common shareholders and net income 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 123. The Company
estimates 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 used for grants in 1998 and 1997 as follows:
1998 1997
--------------- --------------
Dividend yield........ 0% 0%
Expected volatility... 61% 45.0% to 50%
Risk free interest.... 4.34% to 5.58% 6.21% to 6.39%
Expected lives........ 3.75 to 5 yrs. 5 years
Under the accounting provisions of SFAS Statement 123, the Company's net
income applicable to common shareholders and income per share for 1998 and 1997
would have been decreased to the pro forma amounts indicated below:
Net income applicable to common shareholders (in thousands):
1998 1997
------ -----
As reported................ $ 443 $ 569
===== =====
Pro forma.................. $ (41) $ 442
===== =====
Net income (loss) per share:
Basic:
As reported............. $ .06 $ .08
===== =====
Pro forma............... $(.01) $ .07
===== =====
Assuming dilution:
As reported............. $ .05 $ .08
===== =====
Pro forma............... $(.01) $ .07
===== =====
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 1998 and 1997.
F-18
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock options to employees as of
December 31, 1998 and 1997, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............. 589,500 $ 2.02 104,431 $ 2.60
Reissued for repricing....................... 10,000 1.50 - -
Granted...................................... 529,000 2.13 539,000 2.09
Exercised.................................... - - - -
Surrendered for repricing.................... (529,000) 2.13 - -
Expired...................................... (500) 8.20 (53,931) 4.00
-------- ------- ------- --------
Outstanding at end of year................... 599,000 $ 1.47 589,500 $ 2.02
======== ======= ======= ========
Options exercisable at year-end.............. 417,830 $ 1.46 228,370 $ 1.92
======== ======= ======= ========
Weighted average fair value of
options granted during the
year........................................ $ .43 $ 1.06
======= ========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Price At 12/31/98 (Years) Price at 12/31/98 Price
- --------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.25 50,000 4.76 $ 1.25 50,000 $ 1.25
$1.1875 20,000 3.67 $1.1875 13,400 $1.1875
$1.50 529,000 3.67 $ 1.50 354,430 $ 1.50
</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 warrants 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
warrants vested in 1997 and have exercise prices ranging from $1.00 to $1.375
and expire through July 2002. At December 31, 1998, 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, 1998.
F-19
<PAGE>
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 were exercisable
at any time through June 1998. No options had been exercised as of June 1998.
During 1998, these options were repriced with an exercise price of $2.25 and
$2.75 and the exercisable date was extended through June 2003. No options have
been exercised as of December 31, 1998. These modifications constitutes a new
issuance of options in accordance with APB opinion 25. The modified exercise
price equalled or exceeded the market price per share at the modification date,
accordingly, no compensation was recorded.
(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, 1998, shares reserved for future issuance are as
follows:
Shares
---------
Conversion of Debentures........................... 512,990
Shares reserved for stock option plan, including
599,000 options outstanding...................... 635,000
Stock options outstanding.......................... 440,000
Warrants to purchase common stock.................. 2,919,852
---------
Total shares reserved for issuance................. 4,507,842
=========
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). In addition, during 1998 the
joint venture provided additional financing for additional equipment and
improvement to 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 monthly basis for the plant's operating
costs, including capital recovery and interest, along with a management fee.
F-20
<PAGE>
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 agreements 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 depreciation 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, 1998,
the balance of the deferred capital recovery costs totalled approximately
$2,123,000 and is recorded as a reduction of the outstanding debt due to the
joint venture.
In addition, the 1998 financing agreement between Chemtrusion and the joint
venture contain similar billings by Chemtrusion to the joint venture for capital
recovery and interest. At December 31, 1998, the balance of the deferred
capital recovery costs for the additional equipment and improvement financing
totalled approximately $116,000 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 2003 at minimum annual rentals as follows (in
thousands):
Amount
------
1999............ $ 671
2000............ 586
2001............ 418
2002............ 119
2003............ 18
------
$1,812
======
Rent and lease expense for all short-term and long-term operating leases were
$798,000 and $689,000 for the years ended December 31, 1998 and 1997,
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 $12,000 and $8,000 for 1998 and 1997, respectively.
At December 31, 1998, InterSystems Nebraska had a balance due Helm totalling
$13,000 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 $103,000
and $84,000 for the years ended December 31, 1998 and 1997, respectively.
(e) At December 31, 1998, InterSystems Nebraska had various letters of credit
outstanding totalling $123,000. The letters of credit expire July 31, 1999 and
are collateralized by certificates of deposit.
F-21
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(f) The Company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that their outcome will not
have a material adverse effect on the Company's financial position or results of
operations.
NOTE 11 - DISCONTINUED OPERATIONS
As of June 30, 1996, InterSystems Nebraska adopted a plan to discontinue
Tropical. Tropical ceased operations as of September 30, 1996 and was liquidated
during 1997.
At December 31, 1998, the net liabilities of discontinued operations totalling
$61,072 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.
NOTE 12 - STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid..................................................... $1,630 $1,703
====== ======
Income taxes paid................................................. $ 23 $ 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 (loss) on available for sale securities... $ (127) $ 31
====== ======
Non-cash transactions relating to financing activities:
Conversion of debentures into common stock........................ $ - $1,629
====== ======
Capital lease obligation.......................................... $ 299 $1,517
====== ======
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.......... $ 6 $ 42
====== ======
Common stock issued for loan fees................................. $ - $ 35
====== ======
</TABLE>
F-22
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - MAJOR CUSTOMERS AND FOREIGN SALES
The Company's custom compounding business segment had sales to a single
customer in 1998 and 1997, totalling approximately $7,174,000 and $6,254,000,
respectively. In 1998, InterSystems Nebraska had sales to a single customer
located in Romania totalling approximately $4,446,000.
NOTE 14 - BUSINESS SEGMENTS
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 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.
For the Year Ended
December 31,
1998 1997
------- -------
(In thousands)
Revenues from unaffiliated customers:
Plastic resins..................................... $11,505 $10,704
Industrial products................................ 21,817 16,304
------- -------
Total revenues................................... $33,322 $27,008
======= =======
Operating profit:
Plastic resins..................................... $ 1,515 $ 2,007
Industrial products................................ 1,594 892
------- -------
Total operating profit........................... 3,109 2,899
------- -------
Expenses and other:
General and administrative expense - parent........ (1,036) (846)
------- -------
Interest expense:
Plastic resins.................................... 1,223 1,057
Industrial products............................... 251 283
Corporate......................................... 165 303
------- -------
Total interest expense........................... (1,639) (1,643)
------- -------
Interest income:
Plastic resins.................................... - -
Industrial products............................... - -
Corporate......................................... 9 9
------- -------
Total interest expense........................... 9 9
------- -------
Income from continuing operations.................. $ 443 $ 419
======= =======
F-23
<PAGE>
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December
31,
1998
--------
(In thousands)
Identifiable assets:
Plastic resins....................................... $23,124
Industrial products.................................. 5,883
Corporate............................................ 1,046
-------
$30,053
=======
For the year December 31,
1998 1997
------- -------
(In thousands)
Capital expenditures:
Plastic resins.................. $ 4,074 $ 3,883
Industrial products............. 110 138
Corporate....................... 40 -
------- -------
$ 4,224 $ 4,021
======= =======
Depreciation and amortization:
Plastic resins.................. $ 1,593 $ 1,355
Industrial products............. 160 243
Corporate....................... 129 131
------- -------
$ 1,882 $ 1,729
======= =======
Revenues by Country:(a)
United States................... $26,021 $25,517
Romania......................... 4,595 -
Canada.......................... 1,406 1,000
Other foreign countries......... 1,300 491
------- -------
$33,322 $27,008
======= =======
_________________________
(a) Revenues are attributed to countries based on location of customer.
F-24
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION OF
INTERSYSTEMS, INC.
InterSystems, Inc. (the "Corporation") was originally incorporated under the
laws of the State of Delaware under the name IPB, Inc. on March 2, 1984.
FIRST: The name of the Corporation is InterSystems, Inc.
SECOND: The registered office of the Corporation is located at c/o United
Corporate Services, Inc., 15 East North Street, in the City of Dover, County of
Kent, State of Delaware 19901. The name of its registered agent at that address
is United Corporate Services, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
FOURTH: (a) The aggregate number of shares of all classes of stock which the
Corporation shall have the authority to issue is twenty five million
(25,000,000), consisting of and divided into:
(i) one class of twenty million (20,000,000) shares of common stock, par value
$.01 per share; and
(ii) one class of five million (5,000,000) shares of preferred stock, par value
$.01 per share, which may be divided into and issued in series, as
hereinafter provided.
(b) Each share of common stock of the Corporation shall be entitled to one vote
on all matters requiring a vote of the stockholders and, subject to the
rights of the holders of any outstanding shares of preferred stock, shall
be entitled to receive such dividends, in cash, securities or property, as
may from time to time be declared by the board of directors. In the event
of any liquidation, dissolution, or winding up of the Corporation, either
voluntarily or involuntarily, subject to the rights of the holders of any
outstanding shares of preferred stock, the holders of common stock shall be
entitled to share ratably, according to the number of shares held by them,
in all remaining assets of the Corporation available for distribution.
(c) The Board of Directors is authorized, at any time or from time to time, to
issue preferred stock and (i) to divide the shares of preferred stock into
series; (ii) to determine the distinguishing designation for any such
series; (iii) to determine the number of shares in
<PAGE>
any such series; and (iv) any other terms and conditions relating to such
shares including but not limited to:
(A) whether the holders thereof shall be entitled to cumulative,
noncumulative, or partially cumulative dividends and, with respect to
shares entitled to dividends, the dividend rate or rates, and any other
terms and conditions relating to such dividends;
(B) whether, and if so to what extent and upon what terms and
conditions, the holders thereof shall be entitled to rights upon the
liquidation of, or upon any distribution of the assets of, the
Corporation;
(C) whether, and if so upon what terms and conditions, such shares
shall be convertible into, or exchangeable for, other securities or
property;
(D) whether, and if so upon what terms and conditions, such shares
shall be redeemable;
(E) whether the shares shall be subject to any sinking fund for
the purchase or redemption of such shares and, if so the terms of such
fund;
(F) whether the holder thereof shall be entitled to voting rights
and, if so, the terms and conditions of the exercise thereof; and
(G) whether the holder thereof shall be entitled to other
preferences or rights and, if so, the qualifications, limitations, or
restrictions of such preferences or rights.
FIFTH: All power of the Corporation shall be exercised by or under the
direction of the Board of Directors except as otherwise provided herein or
required by law.
For the management of the business and for the conduct of the affairs
of the Corporation, and in further creation, definition, limitation and
regulation of the power of the Corporation and of its directors and its
stockholders, it is further provided:
(i) Election of Directors. Election of directors need not be by written ballot
unless the Bylaws of the Corporation shall so provide.
(ii) Number, Election and Terms of Directors. The number of directors of the
Corporation shall be fixed from time to time by or pursuant to the Bylaws.
The directors shall be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
possible, as shall be provided in the manner specified in the Bylaws, one
class to hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1989, another class to hold office initially for
a term expiring at the annual meeting of
<PAGE>
stockholders to be held in 1990, and another class to hold office initially
for a term expiring at the annual meeting of stockholders to be held in
1991, with members of each class to hold office until their successors are
elected and qualified. At each annual meeting of stockholders, the
successors to the class of directors whose term expires at that meeting
shall be elected to hold office for a term expiring at the annual meeting
of stockholders held in the third year following the year of their
election. Except as otherwise provided by law, if the number of directors
is changed, any increase or decrease shall be apportioned among the classes
so as to maintain the number of directors in each class as nearly as equal
as possible. In no case shall a decrease in the number of directors shorten
the term of any incumbent director. Any director, or directors, may be
removed from office only for cause and only by vote of the stockholders.
Any vacancy on the Board of Directors that results from any reason,
including an increase in the number of directors, may be filled by the
affirmative vote of a majority of the directors then in office.
(iii) Amendment, Repeal, etc. Notwithstanding anything contained in this
Restated Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 80% of the voting power of all shares of
the Corporation entitled to vote generally in the election of directors,
voting together as a single class, shall be required to alter, amend or
adopt any provision inconsistent with, or repeal, this Article Fifth or
any provision hereof.
SIXTH: The Corporation shall, to the full extent permitted by Section 145 of
the Delaware General Corporation Law, as amended, from time to time, indemnify
all persons whom it may indemnify pursuant thereto.
SEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
<PAGE>
EIGHTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation in the
manner now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors and officers are subject to this reserved
power.
NINTH: No director shall be personally liable to the Corporation or any
stockholder for monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director shall be liable under
Section 174 of Title 8 of the Delaware Code (relating to the Delaware General
Corporation Law) or any amendment thereto or successor provision thereto or
shall be liable by reason that, in addition to any and all other requirements
for such liability, he (i) shall have breached his duty of loyalty to the
Corporation or its stockholders, (ii) shall not have acted in good faith, or, in
failing to act, shall not have acted in good faith, (iii) shall have acted in a
manner involving intentional misconduct or knowing violation of the law or (iv)
shall have derived an improper personal benefit. Neither the amendment nor
repeal of this Article Ninth, nor the adoption of any provision of this Restated
Certificate of Incorporation inconsistent with this Article Ninth, shall
eliminate or reduce the effect of this Article Ninth in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
Ninth would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
This Restated Certificate of Incorporation of the Corporation was duly
adopted in accordance with the provisions of Section 245 of the General
Corporation Law of the State of Delaware by resolution of the Board of Directors
of the Corporation without the vote of the stockholders. This Restated
Certificate of Incorporation restates and integrates and does not further amend
the provisions of the Corporation's Certificate of Incorporation as amended or
supplemented, and there is no discrepancy between these provisions and the
provisions of the Restated Certificate of Incorporation.
IN WITNESS WHEREOF, the undersigned have executed and signed this Restated
Certificate of Incorporation this 22nd day of March, 1999 and affirm the same to
be true under penalties of perjury.
/s/ Herbert M. Pearlman
-----------------------------
Herbert M. Pearlman, Chairman
/s/ David S. Lawi
-----------------------------
David S. Lawi, Secretary
<PAGE>
Exhibit 21.1
List of Subsidiaries
Jurisdiction
Subsidiaries Name of Incorporation
------------------ ----------------
Chemtrusion, Inc. Delaware
InterSystems, Inc. Nebraska
<PAGE>
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
February 19, 1999 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, 1998.
BDO Seidman, LLP
Houston, Texas
March 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 133
<SECURITIES> 94
<RECEIVABLES> 3,329
<ALLOWANCES> 0
<INVENTORY> 2,273
<CURRENT-ASSETS> 6,312
<PP&E> 23,479
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,053
<CURRENT-LIABILITIES> 7,724
<BONDS> 642
0
0
<COMMON> 79
<OTHER-SE> 3,802
<TOTAL-LIABILITY-AND-EQUITY> 30,053
<SALES> 33,322
<TOTAL-REVENUES> 33,322
<CGS> 23,834
<TOTAL-COSTS> 31,209
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,630
<INCOME-PRETAX> 443
<INCOME-TAX> 0
<INCOME-CONTINUING> 443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 443
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
