<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For Fiscal Year Ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period ______________ to ______________.
Commission File No. 1-9547
INTERSYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3256265
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
537 Steamboat Road, Greenwich, CT 06830
(Address of Principal Executive Offices) (Zip Code)
(203) 629-1400
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title Of Each Class Name of Each Exchange On Which Registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $.01 par value American Stock Exchange
Common Stock Purchase Warrants American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant is approximately $7,739,825 based upon the
closing price of the registrant's common stock, $.01 par value, as reported by
the American Stock Exchange on March 15, 2000, which was $1.25.
The number of shares of the registrant's common stock, $.01 par value,
outstanding on March 15, 2000: 7,925,989.
Documents incorporated by reference: NONE
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PART I
ITEM 1: BUSINESS
INTRODUCTION AND BUSINESS DEVELOPMENT
InterSystems, Inc. was originally organized under the laws of the state of
Delaware in 1984. The Company's principal line of business today consist of the
operations of its wholly-owned subsidiary, CHEMTRUSION, INC. ("Chemtrusion"),
based in Houston, Texas and Jeffersonville, Indiana. Chemtrusion provides
various out-sourcing services to the petro-chemical industry including research,
manufacturing and facilities operations for major multi-national companies.
Chemtrusion is a leader in specialty plastics compound processing that combines
thermoplastic resins with various additives to enhance and customize plastic
materials for specific end uses. Chemtrusion's Indiana division is a dedicated
facility (the "Mytex facility") providing design, construction and operating
services exclusively for Mytex Polymers, a joint venture of ExxonMobil Chemical
and Mitsubishi Chemicals America ("Mytex").
The Company had revenues from continuing operations of $14,746,000, $11,504,000
and $10,704,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. For the year ended December 31, 1999, the Company reported a loss
from continuing operations of $(679,000), and a net profit for the year of
$3,192,000, as compared to a loss from continuing operations of $(775,000) and a
net profit of $443,000 for the year ended December 31, 1998. The net profit for
the year ended December 31, 1999 included $821,000 income from discontinued
operations and $3,184,000 gain on the sale of the business of the Company's
Nebraska subsidiary, discussed below. The net profit for the year ended December
31, 1998 included $1,218,000 income from discontinued operations. For the year
ended December 31, 1997, the Company reported a net loss from continuing
operations of $(140,000), and a net profit for the year of $569,000. The net
profit for the year ended December 31, 1997 included $559,000 income from
discontinued operations and a $150,000 gain from discontinued operations.
RECENT DEVELOPMENTS
SALE OF INTERSYSTEMS NEBRASKA
On December 1, 1999, the Company's Nebraska subsidiary, also known as
InterSystems, Inc. (hereinafter "InterSystems Nebraska"), completed the sale of
substantially all of its assets to, and the assumption of certain liabilities
by, Enduro Systems, Inc. ("Enduro"), a privately held manufacturing company
based in Houston, Texas. The purchase price, $11,010,948, was based upon a
multiple of earnings. The purchase price was subject to adjustment for the
decrease in working capital from June 1, 1999 through October 31, 1999 and other
miscellaneous adjustments. After repayment by InterSystems Nebraska of long-term
debt and capital leases in the amount of $2,529,000, as well as related
expenses, the transaction yielded approximately $5,600,000 in cash to the
subsidiary, plus a $500,000 subordinated promissory note due in 42 months.
InterSystems Nebraska is also entitled to a royalty from Enduro on sales of
enclosed belt conveyors for a limited period of time. In connection with this
sale, the Company has guaranteed the representations and warranties made by
InterSystems Nebraska to Enduro, and $250,000 of the purchase price has been
placed in an escrow account for one year to be used to satisfy legitimate
claims, if any, for breach of representation and warranty.
Simultaneously with the completion of the sale, Mr. Fred S. Zeidman, President
of the Company and a Director, resigned his position as President and joined
Enduro, while retaining his position as a Director of the Company. In the
interim, Mr. Herbert M. Pearlman, Chairman of the Company, assumed the title of
Acting President of the Company. Mr. Pearlman was appointed President of the
Company in January 2000.
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InterSystems Nebraska, which is based in Omaha, designs, manufactures and
markets specialized equipment used in handling, weighing and sampling of
granular materials, including agricultural products, chemicals, cement, minerals
and plastic pellets.
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. 1999 production was approximately 27,563,030 pounds compared to
approximately 24,121,667 pounds in 1998. The increase in production is discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 8.
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 Chemicals America and ExxonMobil
Chemical Company, a division of ExxonMobil 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 two 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.
Mytex provided the initial construction financing for the project. The plant was
completed in October 1996 and has been expanded in 1997, 1998 and 1999. Mytex
provided $14,000,000 permanent financing for the original construction of the
facility, and has provided an aggregate of $6,163,050 additional financing for
the expansions. See Note 4 to Notes to Consolidated Financial Statements for a
discussion of the terms of this financing.
At the Mytex facility, Chemtrusion produces an array of polypropylene-based
compounds exclusively for the benefit of Mytex using raw materials and
specifications provided by Mytex. Chemtrusion is paid a monthly fee for its
operation of the plant. The fee includes recovery of direct operating expenses,
debt service and a management fee. The actual management fee amount is
determined by adjusting a target management fee according to actual monthly
operating performance. The target management fee is based upon the aggregate
capacity of each compounding line in the facility; therefore each expansion of
the facility results in an increase in the target management fee. The actual
management fee exceeds the target when the performance of the facility exceeds
expected performance criteria. The facility is penalized by a reduction in the
actual management fee as compared to the target management fee when the converse
is true.
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In 1997, Chemtrusion and Mytex amended the Definitive Agreement to provide a
fifth production line, 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 this expansion,
which was 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. In
early 1999, Chemtrusion completed the installation of this new line. Under the
terms of the Agreement, Mytex provided permanent financing of the new line under
terms similar to those contained in the initial Agreement and Chemtrusion's
management fee was further significantly increased as a result of this sixth
line.
DURATION OF THE MYTEX AGREEMENT.
The initial term of the Mytex Agreement is five years, expiring December 31,
2001, and Mytex has the option to renew the Agreement for two additional
five-year terms.
Upon expiration of the initial term or any renewal term, or in the event of the
termination of the Agreement by default, Mytex has an option to purchase the
entire facility from Chemtrusion (the "Option"). In the event that Mytex does
not renew the Agreement at the end of the initial or any renewal term, or in the
event of termination by default, Chemtrusion has the right to require Mytex to
purchase the entire facility (the "Put"). The purchase price under the Option is
equal to assumption of unamortized construction financing, plus $1.5 million
reduced by certain increases in the Management Fee and other amounts. The
purchase price under the Put is equal to the unamortized construction financing
less $700,000.
All construction financing, regardless of when incurred, will be fully amortized
in 2011, or fifteen years after the execution of the Definitive Agreement.
Management expects that upon the expiration of the current term of the Agreement
on December 31, 2001, the construction financing attributable to the facility in
its present configuration will be significantly reduced, and that aggregate
increases in the management fee will have significantly reduced the $1.5 million
Option price.
Pursuant to the terms of the Definitive Agreement, as amended, Mytex has the
right to terminate the Mytex Agreement in the event that Scott Owens, President
of Chemtrusion, is no longer associated with Chemtrusion in an executive
capacity, and in the event of a change in control of Chemtrusion.
SOURCES AND AVAILABILITY OF 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.
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PATENTS AND TRADEMARKS
Chemtrusion does not currently hold any patents or registered trademarks.
Chemtrusion protects its process technology through confidentiality agreements
with customers.
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.
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 1999, 90%
of Chemtrusion's revenues were attributable to three customers: Mytex accounted
for approximately 60% of total revenues of Chemtrusion and two other customers
accounted for an aggregate of 30% 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. The Definitive Agreement with Mytex
currently expires in December 31, 2001. See "Mytex Facility" on page 3.
Marketing efforts are conducted through involvement of Chemtrusion executive
officers in industry and trade networks, attendance at trade and technology
conferences and symposia and other venues where resin producers or independent
consumers of compounded materials can learn of Chemtrusion's capabilities.
Chemtrusion does not have an outside or field sales force. In 1998, Chemtrusion
created and filled a new position of Business Development Manager 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.
BACKLOG
Chemtrusion does not maintain backlog figures as it seeks to fulfill customer
orders immediately as they are received. The company is provided with forecasts
of customers projected needs and endeavors to budget its production accordingly.
Production at the Mytex facility is on a take or pay basis pursuant to the
Definitive Agreement.
Chemtrusion maintains only a limited amount of inventory for use by its
customers. When requested by a customer, the materials are consumed according to
material type using the oldest material first or as otherwise required by the
customer. Chemtrusion's customers are generally large, reputable companies, and
are typically manufacturers in the chemical industry. Before accepting credit
terms from any customer, Chemtrusion requires the pertinent credit information
from the customer, and the customer must be in good standing in accordance with
generally accepted industry standards. Chemtrusion works diligently, throughout
the process of providing its services, to ensure the quality of services it
provides. In the interest of maintaining its long standing relationships with
its customers, if the services provided by Chemtrusion are found not to have
complied with requirements agreed to with the customer prior to providing its
services, Chemtrusion uses all reasonable efforts to accommodate the needs of
its customers. Under no circumstances does Chemtrusion accept liability for
product performance that is not a direct result of the services; provided,
however, Chemtrusion uses all reasonable efforts to assist the customer in
determining the cause of poor product performance.
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COMPETITION
Chemtrusion competes with numerous compounding businesses, and its operations
represent an insignificant percentage of the overall compounding activities in
the United States. The primary competitive factors in compounding of resins are
the ability to provide high quality, precise, high yield, value added services
to the customer on a timely basis, in accordance with customer specifications.
Price is typically a secondary concern due to the sophisticated or technological
nature of the business. Chemtrusion has sought to position itself as a value
added custom compounder capable of handling a broad spectrum of compounding jobs
in a timely and precise manner.
RESEARCH AND DEVELOPMENT
During the two fiscal years ended December 31, 1999 and 1998, the Company spent
minimal amounts on company-sponsored research and development activities
determined in accordance with generally accepted accounting principles. All such
amounts are expensed.
ENVIRONMENTAL MATTERS
The Company has not experienced any material effect, and 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 which have been adopted or enacted.
EMPLOYEES
The Company currently employs 167 persons at Chemtrusion who are full time
employees, in executive, administrative and clerical, and production,
engineering and laboratory personnel capacities. In addition, 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.
ITEM 2: PROPERTIES
THE COMPANY: The Company's executive offices are located at 537 Steamboat Road,
Greenwich, Connecticut, where it shares occupancy with two other corporations of
4,500 square feet of office space. 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.
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 including the termination of the Definitive Agreement with Mytex.
The facility is also subject to a mortgage of $16,739,000 to secure construction
financing at 7% due in December 31, 2011. See "The Business of
Chemtrusion--Mytex Facility" on page 3.
The Company believes that the facilities of its subsidiaries are adequate for
the current and reasonably foreseeable future needs, are adequately insured and
are in good operating condition.
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ITEM 3: LEGAL PROCEEDINGS
At the present time, the Company is not a party to any lawsuits that 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
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. MARKET INFORMATION. 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 of the Common Stock.
<TABLE>
<CAPTION>
Fiscal 1998 High Low
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<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 High Low
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<S> <C> <C>
First Quarter $1 1/16 $5/8
Second Quarter 1 1/8 5/8
Third Quarter 15/16 5/8
Fourth Quarter 3/4 7/16
</TABLE>
The closing price of the Common Stock on March 15, 2000 was $1.25.
b. HOLDERS. As of March 15, 2000, there were, to the best of the Company's
knowledge, approximately 165 holders of record and 1,600 beneficial holders of
the Company's Common Stock.
c. DIVIDENDS. The Company has not declared or 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 foreseeable future.
In August 1999, the Board of Directors of the Company resolved to
extend the expiration date of the Company's outstanding publicly traded common
stock purchase warrants (AMEX: IIWS) from December 31, 1999 to December 31,
2001, and to lower the exercise price of these warrants from $3.50 to $2.00 per
share. These public warrants were issued as a dividend in October 1991, and as
of December 31, 1999, there were 1,114,852 public warrants outstanding.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain historical consolidated financial data of
the Company (in thousands, except per share amounts) and is qualified in its
entirety by the more detailed consolidated financial statements and notes
thereto included in Item 8 hereof. All items in the following table have been
restated for the effect of the Company's discontinued operations of InterSystems
Nebraska:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997 1998 1999
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<S> <C> <C> <C> <C> <C>
Revenues $ 3,969 $ 5,992 $ 10,704 $ 11,504 $ 14,746
Loss from
Continuing operations (788) (1,106) (140) (775) (679)
Loss per share --
Continuing operations (.19) (.18) (.02) (.10) (.09)
Total assets 5,455 21,007 22,165 25,171 28,826
Long-term obligations 3,718 18,631 18,497 17,001 17,178
Cash and equivalents 5 1,153 -- 132 4,877
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS-SALE OF INTERSYSTEMS NEBRASKA
On December 1, 1999, the Company's Nebraska subsidiary, also known as
InterSystems, Inc. (hereinafter "InterSystems Nebraska"), completed the sale of
substantially all of its assets to, and the assumption of certain liabilities
by, Enduro Systems, Inc. ("Enduro"), a privately held manufacturing company
based in Houston, Texas. The purchase price, $11,010,948, was based upon a
multiple of earnings. The purchase price was subject to adjustment for the
decrease in working capital from June 1, 1999 through October 31, 1999 and other
miscellaneous adjustments. After repayment by InterSystems Nebraska of long-term
debt and capital leases in the amount of $2,528,792, as well as related
expenses, the transaction yielded approximately $5,600,000 in cash to the
subsidiary, plus a $500,000 subordinated promissory note due in 42 months.
InterSystems Nebraska is also entitled to a royalty from Enduro on sales of
enclosed belt conveyors for a limited period of time. In connection with this
sale, the Company has guaranteed the representations and warranties made by
InterSystems Nebraska to Enduro, and $250,000 of the purchase price has been
placed in an escrow account for one year to be used to satisfy legitimate
claims, if any, for breach of representation and warranty.
RESULTS OF OPERATIONS FOR 1999, 1998 AND 1997
The Company's revenues grew 7% from 1997 to 1998 and 28% from 1998 to 1999. The
revenue growth from 1998 to 1999 was attributable to increases in toll
compounding volume at both the Mytex and Texas facilities. The Mytex facility
added one new compounding line in mid-1998 and an additional compounding line in
the first quarter of 1999. After installation of these two new lines, the
effective capacity of the Mytex facility has more than doubled. An increase in
the Houston facility revenue for 1999 complemented the overall increase in
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revenue for 1999. The Houston facility's revenue increased 16.9% compared to the
prior two years as a result of increased production utilization and price per
pound as well as the addition of new customers.
Gross profit increased $877,000 in 1999 after suffering a $216,000 decline
during 1998 as compared to 1997. The majority of costs at Chemtrusion are fixed.
In 1998, the Houston facility added fixed costs as it positioned itself for
anticipated increases in toll compounding volume. Chemtrusion's national
marketing director, hired in 1998, has generated business at the Houston
facility that has increased the facility's overall sales volume and gross
profit. Gross profit as a percentage of sales was 38.9%, 34.3% and 32.7% for the
years ended December 31, 1997, 1998 and 1999, respectively. The Mytex facility
recognizes revenue as cost plus a management fee. The cost of goods sold at the
Mytex facility increases at a rate faster than the increase in management fee,
especially during years of plant expansion. Therefore, the rise in cost of sales
as compared to the increase in management fee from this facility results in
lower gross margins during these periods.
Chemtrusion's combined income from operations was approximately $330,000 for the
year ended December 31, 1999. The parent company contributed approximately
$1,009,000 in expenses, which resulted in a consolidated loss from continuing
operations of $679,000 for 1999. With the sale of the business of InterSystems
Nebraska, certain additional parent company expenses have been eliminated. The
full effect of this reduction will be realized in year 2000, which will assist
in improving the profitability of the Company.
Selling, general and administrative expenses remained constant as a percentage
of sales for the years ended December 31, 1997 and 1998. For the year ended
December 31, 1999, as a result of increased tolling volume at both the Mytex and
Houston facilities, the percentage of selling, general and administrative
expenses to sales decreased approximately 4% to 26%. With the sale of the
business of InterSystems Nebraska, certain parent company expenses have been
eliminated and the full effect of this reduction will be experienced in year
2000. Selling, general and administrative expense increased approximately
$367,000 from the year ended December 31, 1997 to December 31, 1998 and $333,000
from the year ended December 31, 1998 to December 31, 1999. The dollar increase
is attributable to the plant expansion at the Mytex facility and the increase in
fixed costs at the Texas facility to accommodate anticipated increases in
tolling volume.
Interest expense increased $453,000 in 1999 as compared to 1998. Installation of
two new compounding lines in the third quarter 1998 and first quarter 1999,
respectively, at the Mytex facility contributed $332,000 of the increase. The
Texas facility completed major improvements to one of its compounding lines in
1999, which were financed through a financial institution. Interest expense
during 1999 for these improvements was approximately $32,000. The parent company
borrowed funds for working capital during 1999. The interest expense for 1999
associated with this loan was approximately $66,000.
Subsequent to December 31, 1999, the outstanding principal amount of the
Company's 10% Subordinated Convertible Debentures, Series A, due June 30, 2001,
were prepaid utilizing proceeds from the sale of InterSystems Nebraska. The
prepayment of these bonds will save the Company $65,000 of interest expense in
the year 2000 and $32,500 in the year 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities were $1,331,000, $925,000, and $1,600,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease
from the 1997 period to the 1998 period was primarily a result of an increase in
trade receivables. The increase from the 1998 period to the 1999 period was
attributable to an increase in depreciation expense coupled with a non-cash
charge for the cumulative effect of change in accounting principle.
Additionally, changes in current assets and liabilities were not as great for
the year ended December 31, 1999 as compared to the year ended December 31,
1998.
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Cash flows from investing activities were ($2,349,000), ($3,881,000) and
$4,101,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
The dramatic change from the 1998 period to the 1999 period was due principally
to net proceeds from the disposal of the business of InterSystems Nebraska of
$5,603,000.
Cash flows from financing activities increased $1,888,000 from the 1997 period
to the 1998 period, primarily as a result of increased financing attributable to
plant expansion at the Mytex facility. As compared to the 1998 period, cash
flows from financing activities for the 1999 period decreased $2,973,000.
Proceeds from borrowings under promissory notes in 1999 were $1,354,000. The
proceeds were used primarily to finance equipment purchases for the Mytex
facility. Repayments of long-term debt and capital lease obligations amounted to
$2,066,000 during 1999.
The Company anticipates that its future working capital and cash needs will be
satisfied from the operations of Chemtrusion, which is 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 January 1999, the Company arranged for short-term working capital financing
by executing a note in the amount of $200,000 with a private lender. The note
bore interest at an annual rate of 15%, with monthly interest payments of
$2,500. The note was paid in full in December 1999.
Chemtrusion is party to a credit agreement that provides for advances of up to
$300,000 and expires April 21, 2000. The agreement, which provides working
capital for the Houston facility, bears interest at the bank's prime rate plus
1% (9.5% at December 31, 1999) and is collateralized by Chemtrusion's inventory
and accounts receivable. As of December 31, 1999, borrowings were $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.
During March 1999, Chemtrusion arranged for a $410,000 capital lease with a
financial institution to provide for capital improvements to one of its
compounding lines at the Houston facility. The financing arrangement requires 47
monthly principal and interest payments in the amount of $9,975 each, bears
interest at the rate of 10.42% per annum, and contains a purchase option of
$40,000 at the end of the lease term.
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 additional equipment for the Mytex facility.
During 1999, the Company and Mytex finalized a term loan agreement governing
these advances, as well as additional advances of $1,338,672 made during 1999 to
complete the project, with terms similar to those contained in the original
Mytex Agreement and subsequent amendments entered into with Mytex to construct
and add additional equipment and improvements at Mytex facility.
The Company adjusts the deferred tax asset valuation allowance based on
judgments as to the future realization of the deferred tax benefits supported by
demonstrated trends in the Company's operating results. At December 31, 1999 and
1998, the Company provided a 100% valuation allowance for the deferred tax asset
because it could not determine whether it was more likely than not that the
deferred tax asset would be realized.
NEW ACCOUNTING PRONOUNCEMENT: NONE APPLICABLE
Page 10
<PAGE> 11
YEAR 2000 COMPLIANCE
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. Neither the Company nor its subsidiary experienced any Y2K disruptions,
nor did any entity expend any significant amounts during 1999 to ensure Y2K
compliance. There can be no assurance that a Year 2000 problem will not occur.
However, most key dates relating to potential Year 2000 problems have passed.
FORWARD LOOKING STATEMENTS
This annual report for the year ended December 31, 1999 as well as other public
documents of the Company contains forward-looking statements which involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievement of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such statements include, without limitation,
the Company's expectations and estimates as to future financial performance,
cash flows from operations, capital expenditures and the availability of funds
from refinancing of indebtedness. Readers are urged to consider statements which
use the terms "believes," "intends," "expects," "plans," "estimates,"
"anticipated," or "anticipates" to be uncertain and forward looking. In addition
to other factors that may be discussed in the Company's filings with the
Securities and Exchange Commission, including this report, the following
factors, among others, could cause the Company's actual results to differ
materially from those expressed in any forward-looking statement made by the
Company: (i) general economic and business conditions, acts of God and natural
disasters which may effect the demand for the Company's products and services or
the ability of the Company to manufacture and/or provide such products and
services; (ii) the loss, insolvency or failure to pay its debts by a significant
customer or customers; (iii) increased competition; (iv) changes in customer
preferences and the inability of the Company to develop and introduce new
products to accommodate these changes; 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 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include time deposits, notes receivable,
notes payable and long-term debt. 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.
In determining that the carrying value of the 7% long-term debt approximates
market value, the Company considered its relationship with the lender and the
ability of the Company to require the lender to acquire the facility in which
the proceeds of the long-term debt was used to construct. See "Mytex Facility"
on page 3 and Note 4 to Notes to Consolidated Financial Statements for a
discussion of the terms of this financing.
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of trade accounts receivable. Concentrations
of credit risk with respect to such receivables are limited due to generally
short payment terms and their dispersion across geographic areas.
Available-for-sale securities are based on quoted market prices.
The Company's interest rates on lines of credit fluctuate based on the financial
institutions' prime lending rate.
Page 11
<PAGE> 12
ITEM 8: FINANCIAL STATEMENTS: The financial statements filed as part of this
report include:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants ..... F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1988 ............................. F-3
Consolidated Statements of Income
for the years Ended December 3l, 1999, 1998 and 1997 ... F-4
Consolidated Statements of Comprehensive Income
for the Years Ended December 3l, 1999, 1998 and 1997 ... F-5
Consolidated Statements of
Shareholders' Equity
for the Years Ended December
31, 1999, 1998 and 1997 ................................ F-6
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 1999, 1998 and 1997 ....................... F-7
Notes to Consolidated Financial
Statements ............................................. F-8 to F-22
</TABLE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None.
[The rest of this page intentionally left blank.]
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<PAGE> 13
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
The Directors and the Executive Officers of the Company are set forth below. In
1988, the Company adopted a classified Board of Directors. At each annual
meeting, the successors to the class of directors whose term expires at that
meeting are elected to serve a three-year term and until their successors are
elected and qualified.
<TABLE>
<CAPTION>
Name Age First Elected Term Expires
- ---- --- ------------- ------------
<S> <C> <C> <C>
Daniel T. Murphy 61 1986 2000
William Lurie 69 1995 2000
Herbert M. Pearlman 67 1984 2001
Fred S. Zeidman 53 1993 2001
John E. Stieglitz 69 1991 2001
David S. Lawi 65 1984 2002
Walter M. Craig, Jr. 46 1993 2002
</TABLE>
PRINCIPAL OCCUPATION OVER THE PAST FIVE YEARS AND OTHER DIRECTORSHIPS OF NOMINEE
OR DIRECTOR
HERBERT M. PEARLMAN Mr. Pearlman has been Chairman of the Company's Board of
Directors since March 1984, and he assumed the title of acting president of the
Company in December 1999 following the sale of the business of InterSystems
Nebraska. He was appointed President of the Company in January 2000. Since 1980,
he has served as President, Chief Executive Officer and a Director of Helm
Capital Group, Inc., a public holding company and the holder of 15% 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.
WALTER M. CRAIG, JR. For the past seven years, Mr. Craig has been 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. He has also served as 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 1982 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 Chairman and a Director of The
Foundation for Prevention & Early Resolution of Conflicts. He also
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<PAGE> 14
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, and from July 1999 to date. 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 Environmental Systems, Inc. ("Teletrak"), a public company
engaged in the manufacturing of mucking pumps for environmental and industrial
applications.
JOHN E. STIEGLITZ Mr. Stieglitz was elected 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.
FRED S. ZEIDMAN In December 1999, Mr. Zeidman was appointed Executive Vice
President of Enduro Systems, Inc., a manufacturer of engineered or technically
oriented products and the purchaser of the business of InterSystems Nebraska.
From 1993 until December 1999, he served as President and Chief Executive
Officer of the Company. 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 when Interpak was sold by
Helm. Previously, Mr. Zeidman served as Chairman of Unibar Energy Services
Corporation, one of the largest independent drilling fluids company in the
United States, from 1985 to 1991, when it was acquired by Anchor Drilling Fluids
of Norway. From April 1992 until July 1993, Mr. Zeidman served as President of
Service Enterprises, Inc., which is primarily engaged in plumbing, heating, air
conditioning and electrical installation and repair. From 1983 to 1993, Mr.
Zeidman served as President of Enterprise Capital Corporation, a federally
licensed small business investment company specializing in venture capital
financings.
COMMITTEES AND ATTENDANCE
During 1999, the Company's Board of Directors held four meetings, which
were attended by all of the directors then in office, except that Mr. Zeidman
did not attend those meetings which concerned the approval of the sale of the
business of the Company's Nebraska subsidiary to Enduro Systems, Inc. due to a
conflict of interest.
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 1999. 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 1999.
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 deferred. The Company reimburses
the directors for expenses reasonably incurred in the furtherance of their
duties.
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<PAGE> 15
SIGNIFICANT EMPLOYEES
In addition to Messrs. Pearlman, Murphy and Lawi, the Company has one
additional significant employee. Scott Owens, 36, has served as President of
Chemtrusion since 1993. In this capacity, he is responsible for the operations,
and oversees all aspects of facility expansion, at both the Houston and Mytex
facilities. Prior to 1993, Mr. Owens was employed by Chemtrusion in various
capacities including Project Engineer, Site Manager, Vice President of
Manufacturing and Executive Vice President.
Messrs. Pearlman, Murphy and Lawi allocate their business time to the
Company and other affiliated businesses including Helm, Unapix and Seitel.
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.
ITEM 10: EXECUTIVE COMPENSATION
Set forth below is certain information with respect to cash and non-cash
compensation awarded to, earned by or paid to the Company's Chief Executive
Officer and other executive officers who earned at least $100,000 during 1999.
See "Employment Arrangements; Termination of Employment Arrangements" below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal ------------------- All Other
Position Year Salary Bonus(1) Compensation(2)
- -------- ---- ------ -------- ---------------
<S> <C> <C> <C> <C>
FRED S. ZEIDMAN, 1999 $110,000 $117,180 $ 30,308
President and 1998 100,000 15,000 33,063
Chief Executive 1997 100,000 15,000 --
Officer until 12/1/99
HERBERT M. PEARLMAN, 1999 100,000 146,476 60,246
Chairman; Chief Executive 1998 100,000 20,934 76,250
Officer after 12/1/99 1997 100,000 -- 57,496
DAVID S. LAWI, 1999 50,000 73,238 36,180
Chairman of Executive 1998 50,000 10,467 36,180
Committee; Secretary 1997 50,000 -- 36,180
SCOTT OWENS 1999 125,000 26,759 --
President and Chief Executive 1998 125,000 6,729 --
Officer, Chemtrusion, Inc. 1997 125,000 11,222 --
</TABLE>
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<PAGE> 16
(1) For 1999 consists primarily of bonus based upon gain of sale of business of
InterSystems Nebraska.
(2) 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(s). All options
were out-of-the-money at December 31, 1999. No options were granted to officers
in 1999.
<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 ($) Unexercisable Unexercisable
- ---- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
FRED S.
ZEIDMAN -- -- 500,000/ - - / -
HERBERT M.
PEARLMAN -- -- 100,000/ - - / -
DAVID S. LAWI -- -- 50,000/ - - / -
SCOTT OWENS -- -- 75,000/ - - / -
</TABLE>
EMPLOYMENT ARRANGEMENTS; TERMINATION OF EMPLOYMENT ARRANGEMENTS
The specific material terms of the agreements for the named executive officers
of the Company are set forth below. At December 31, 1999, the Company had not
entered into an employment agreement with Mr. Owens.
ZEIDMAN AGREEMENT AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
In 1993, Mr. Zeidman and the Company entered into a three-year
employment agreement pursuant to which Mr. Zeidman served as President and Chief
Executive Officer of the Company. The agreement was renewable on a year to year
basis provided that notice of termination was not given. In 1997, Mr. Zeidman's
agreement was amended to provide 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.
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 originally expired in 1998, were extended for
an additional three years at $2.25 per share and $2.75 per share, respectively.
In connection with the sale of the business of InterSystems Nebraska,
Mr. Zeidman resigned his position with the Company to join the purchaser
effective December 1, 1999. His employment agreement with the Company was
terminated by mutual agreement effective the closing date. Pursuant to the terms
of his
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<PAGE> 17
termination agreement, Mr. Zeidman surrendered to the Company 100,000 shares of
Common Stock, which he had purchased in 1993 in exchange for a promissory note
in the amount of $100,000. The principal amount of the note, together with
accrued interest thereon, less the market value of the stock surrendered, was
written off by the Company in 1999. Mr. Zeidman presently has retained his
position as a director of the Company and, accordingly, all stock options
granted to him during the course of his employment with the Company will remain
in effect in accordance with their respective terms so long as he serves the
Company in this capacity.
PEARLMAN AGREEMENT
Mr. Pearlman is a party to an employment agreement which provides for
his employment as Chairman of the Company for a term ending December 31, 1997,
and renewable thereafter at the Company's option on a year to year basis. The
agreement, as amended, provides for a base salary of approximately $240,000,
which has been voluntarily reduced to $100,000. In addition, Mr. Pearlman is
entitled to an annual bonus equal to 5% of the Company's consolidated pre-tax
profits.
Upon a change in 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.
LAWI AGREEMENT
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The Compensation Committee of the Board of Directors consists of
Messrs. John Stieglitz and William Lurie, neither of who is or was an officer of
the Company or its subsidiaries. No executive officer of the Company served as a
member of the compensation committee, or in the absence of such a committee, as
a director of another entity, one of whose executive officers served as a member
of the Company's compensation committee.
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<PAGE> 18
BOARD COMPENSATION COMMITTEE REPORT OF EXECUTIVE COMPENSATION.
The Company, with the approval of the full Board of Directors, has
adopted a policy of long-term employment contracts for its executive officers,
the terms of which are described elsewhere in this Annual Report. In addition,
the Compensation Committee, comprised solely of non-employee directors, has
implemented performance-based compensation in the form of bonuses based upon
earnings and stock option awards.
Upon his appointment in 1993, the Company entered into an employment
agreement with Mr. Zeidman, who served as President of the Company until
December 1, 1999. Mr. Zeidman's agreement provided for a base salary of
$150,000, with the opportunity to earn additional compensation in the form of
bonuses tied to the Company's operating performance and stock option grants. Mr.
Zeidman resigned as President of the Company effective December 1, 1999 in
connection with the sale of the business of InterSystems Nebraska, but remains a
member of the Board of Directors. The terms of his termination agreement are
described in "Employment Arrangements; Termination of Employment Arrangements"
above.
In view of the Company's inconsistent profitability and declining stock
prices over the past several years, the executive officers have, from time to
time, agreed to voluntary salary reductions. Most recently, in 1997, Messrs.
Pearlman, Zeidman and Lawi agreed to further salary reductions for an additional
year to $100,000, $100,000 and $50,000, respectively, subject to adjustments for
increases in earnings before taxes. These reductions were offset in part by
contingent bonuses of 5%, 4% and 2.5% of net profits, if any, of the Company
payable to Messrs. Pearlman, Zeidman and Lawi, respectively. These arrangements
were approved by the entire Board of Directors in 1997, with Messrs. Pearlman,
Zeidman and Lawi abstaining, and remain in effect.
With the resignation of Mr. Zeidman, Mr. Pearlman assumed the title of
Acting President of the Company effective December 1, 1999 and was appointed
President on January 12, 2000 by the Board of Directors. His compensation
arrangements, discussed above, which are principally based upon performance,
were not amended in connection with this appointment.
Bonuses earned during 1999, as reported in the Summary Compensation
Table on page 15, are considerably higher than in prior years due to the gain on
the sale of the business of InterSystems Nebraska.
Options
In 1997, the Company, with the approval of the Compensation Committee,
adopted the 1997 Incentive Stock Option Plan (the "1997 Plan"). After approval
of the 1997 Plan by the stockholders, the Company granted approximately 440,000
incentive stock options to employees of the Company, exercisable at $2.125. On
December 11, 1998, the Board of Directors, with the approval of the Compensation
Committee, unanimously resolved to adjust the price of these options, 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 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 had been
profitable for 1997 and 1998, the price of its common stock fell considerably
during 1998.
The options which were repriced included 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 included 100,000 held by Mr. Pearlman, 100,000 held by Mr.
Zeidman, 50,000 held by Mr. Lawi and 50,000 held by Mr. Owens.
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<PAGE> 19
In 1999, contemporaneously with the sale of the business of the
Nebraska subsidiary, the Board of Directors resolved to pay $.20 per incentive
stock option granted under the 1997 Plan and held by employees of the
InterSystems Nebraska subsidiary whose employment with the Company (and options)
terminated effective the closing date. The total cost to the Company on account
of this payment was $34,400.
The Compensation Committee
William Lurie
John E. Stieglitz
PERFORMANCE GRAPH
The graph set forth below presents a comparison of cumulative shareholder
return for the Company's common stock for the preceding five years, as compared
to the AMEX Broad Market Index and a selected group of 20 companies listed on
the AMEX with similar market capitalization. The Company selected an index based
upon similar market capitalization because it was unable to identify a peer
group of companies since, to the Company's knowledge, there are no companies
listed on the AMEX which are engaged in the business of the Company's
subsidiary. The companies comprising the peer group index are AMEX listed
companies with a market capitalization on December 31, 1999 of between $4
million and $5million and are identified below:
Peer Group Companies
Airport Systems International Inc. (ASY)
Avenue Entertainment Group Inc. (PIX)
Capital Alliance Income Trust (CAA)
Dairy Mart Convenience Stores, Convertible Class B (DMC)
Digital Power Corp (DPW)
Driver-Harris Company (DRH)
Exx Inc. Class B (EXX.B)
Farmstead Telephone Group Inc. (FTG)
Hallmark Financial Services Inc. (HAF)
Mcrae Industries Inc. Class B (MRI.B)
Multigraphics Inc. (MTI.UX)
Oriole Homes Corp. Class B (OHC.B)
OTR Express Inc. (OTR)
QC Optics Inc. (OPC)
Stage II Apparel Corp. (SA)
Surety Capital Corp. (SRY)
Teletouch Communications Inc. (TLL)
Thermwood Corp. (THM)
Top Air Manufacturing Inc. (TPC)
Wellington Properties Trust (WLPT.UX)
Page 19
<PAGE> 20
(1) Assumes $100 invested on December 31, 1994 in InterSystems, Inc. common
stock, the AMEX Broad Market and the peer group companies described above, and
assumes reinvestment of dividends.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG INTERSYSTEMS, INC.,
AMEX MARKET INDEX AND PEER GROUP INDEX
[LINE GRAPH]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INTERSYSTEMS, INC 100.00 154.55 77.27 136.36 72.73 40.91
PEER GROUP INDEX 100.00 81.19 73.27 72.35 38.17 25.02
AMEX MARKET INDEX 100.00 128.90 136.01 163.66 161.44 201.27
</TABLE>
ASSUMES $100 INVESTED ON JAN. 01, 1995
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 1999
Page 20
<PAGE> 21
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information as of March 15, 2000 concerning the
beneficial ownership of Common Stock (the Company's only class of voting
securities) held by each person who is the beneficial owner of more than 5% of
the Common Stock, and by each director and by all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name Ownership (1)(2) Class (2)
- ---- ---------------- ---------
<S> <C> <C>
BENEFICIAL HOLDERS
Helm Capital Group, Inc. 1,188,399(3) 15.0%
537 Steamboat Road
Greenwich, CT 06830
Strategic Growth 678,000(4) 8.1%
International, Inc.
111 Great Neck Road
Great Neck, N.Y. 11021
William Walters 441,500 5.6%
c/o Whale Securities Co., L.P.
650 Fifth Avenue
New York, N.Y. 10019
OFFICERS AND DIRECTORS
Fred S. Zeidman 683,163(5) 8.1%
7115 Clinton Drive
Houston, Texas 77020
Herbert M. Pearlman 606,957(6) 7.3%
537 Steamboat Road
Greenwich, CT 06830
David S. Lawi 354,923(7) 4.3%
537 Steamboat Road
Greenwich, CT 06830
Walter M. Craig, Jr 17,220(8) *
Daniel T. Murphy 25,232(9) *
John E. Stieglitz 48,290(10) *
William Lurie 20,000(11) *
Scott Owens 75,156(12) *
All executive officers
and directors
as a group (8 persons) 1,830,941(13) 39.2%
</TABLE>
- ----------------------
* Less than 1%
(1) Except as otherwise indicated, each named holder has, to the best of the
Company's knowledge, sole voting and investment power with respect to the
shares indicated.
(2) Includes shares that may be acquired within 60 days by any of the named
persons upon exercise of any right.
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<PAGE> 22
(3) Includes shares issuable upon exercise of Common Stock Purchase Warrants
expiring December 31, 2001 at $2.00 per share (the "Dividend
Warrants")(6,035). In August 1999, the Company extended the expiration
date of the Dividend Warrants from December 31, 1999 to December 31,
2001, and lowered the exercise price from $3.50 to $2.00 per share.
(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 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").
(6) Includes shares issuable upon exercise of 1997 Options (100,000),
Dividend Warrants (77,551), Warrants (45,000), and 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).
(7) Includes shares issuable upon exercise of 1997 Options (50,000), Dividend
Warrants (73,875), Employment Warrants (50,000) and 1996 Warrants
(60,000).
(8) Includes shares issuable upon exercise of Dividend Warrants (4,000).
(9) Includes shares issuable upon exercise of Dividend Warrants (3,750).
(10) Includes shares issuable upon exercise of Warrants (5,000) and 1997
Warrants (10,000).
(11) Includes 20,000 shares issuable upon exercise of stock options.
(12) Includes 75,000 shares issuable upon exercise of stock options.
(13) Includes shares issuable upon exercise of stock options (430,000), 1997
Options (325,000), Dividend Warrants (159,176), Warrants (65,000),
Employment Warrants (150,000) and 1996 Warrants (150,000).
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, 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 1999, the
Company paid $58,980 to Helm on account of these services. Messrs. Pearlman,
Lawi and Stieglitz are officers and directors, and Messrs. Craig and Murphy are
officers, of Helm. Helm owns 15% of the Common Stock of the Company.
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. In 1998, the Company
had invested $72,500 in this private placement and satisfied its
Page 22
<PAGE> 23
commitment for an additional $25,000 in 1999. Helm, which had reserved the right
to dispose of the shares at any time subject to prior notice to the Company,
sold its position in September 1999 for $200,000.
In connection with the sale of the business of InterSystems Nebraska,
InterSystems Nebraska paid to Helm $76,000 in full settlement of all remaining
obligations to Helm under a royalty agreement between Helm and InterSystems
Nebraska which was terminated contemporaneously with the closing of the sale.
Pursuant to the royalty agreement, which by its terms expires September 1, 2008,
Helm received approximately $13,000 per year.
In connection with the sale of the business of InterSystems Nebraska,
Mr. Zeidman surrendered to the Company 100,000 shares of Common Stock which he
had purchased in 1993 in exchange for a promissory note in the amount of
$100,000. The principal amount of the note, together with accrued interest
thereon of $51,132, less the market value of the stock surrendered, was written
off by the Company in 1999.
On January 15, 2000, the Company prepaid $650,000 principal amount of
its outstanding 10% Convertible Debentures, Series A, due June 30, 2001, plus
accrued interest. The purpose of the prepayment was to reduce indebtedness which
carried a high rate of interest, utilizing proceeds from the sale of the
business of InterSystems Nebraska. Each of Messrs. Pearlman and Lawi held
$200,000 principal amount of these 10% Debentures
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public
Accountants ............................................. F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1999 .............................. F-3
Consolidated Statements of Income
for the years Ended December 3l, 1999, 1998 and 1997 ... F-4
Consolidated Statements of Comprehensive Income
for the Years Ended December 3l, 1999, 1998 and 1997 ... F-5
Consolidated Statements of
Shareholders' Equity
for the Years Ended December
31, 1999, 1998 and 1997 ................................. F-6
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 1999 and 1998 .............................. F-7
Notes to Consolidated Financial
Statements .............................................. F-8 to F-22
(2) FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts
For the Years Ended December 31, 1999, 1998
and 1997 ................................................ F-23
</TABLE>
Page 23
<PAGE> 24
(3) 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 1998 10-KSB
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, 2001 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 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 10-KSB
1994 between Chemtrusion, Inc. and Himont
U.S.A., Inc.
10.7 Employment Agreement dated as of July 26, 1993 1993 10-K
between the Company and Fred Zeidman
</TABLE>
Page 24
<PAGE> 25
<TABLE>
<S> <C> <C>
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: Chemtrusion, Inc., a Delaware corporation
23.1 Consent of BDO Seidman, LLP to incorporation by Filed Herewith
reference of their opinion into filed
registration statements
</TABLE>
(b) REPORTS OF FORM 8-K: The Company filed a Report of Form 8-K on December 16,
1999 which reported on the sale of the business of InterSystems Nebraska. The
8-K contains unaudited pro forma financial statements for the Company for the
nine months ended September 30, 1999, giving effect to the sale of assets.
Page 25
<PAGE> 26
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 29th day of
March, 2000.
INTERSYSTEMS, INC.
By: /s/ Herbert M. Pearlman
---------------------------
Herbert M. Pearlman
President,
Chief Executive Officer
By: /s/ Daniel T. Murphy
---------------------------
Daniel T. Murphy
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Herbert M. Pearlman Chairman of the Board March 29, 2000
- ------------------------
Herbert M. Pearlman
/s/ Fred S. Zeidman Director, President and March 29, 2000
- ------------------------ Chief Executive Officer
Fred S. Zeidman
/s/ Daniel T. Murphy Director March 29, 2000
- ------------------------
Daniel T. Murphy
/s/ David S. Lawi Director, Secretary March 29, 2000
- ------------------------
David S. Lawi
/s/ Walter M. Craig, Jr. Director March 29, 2000
- ------------------------
Walter M. Craig, Jr.
/s/ John Stieglitz Director March 29, 2000
- ------------------------
John Stieglitz
/s/ William Lurie Director March 29, 2000
- ------------------------
William Lurie
</TABLE>
Page 26
<PAGE> 27
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
INTERSYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Report of Independent Certified Public Accountants.............. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 ... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 ............................. F-4
Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 1999, 1998 and 1997.............. F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997 ......... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 ............................. F-7
Notes to Consolidated Financial Statements...................... F-8 - F-22
Schedule II - Valuation and Qualifying Accounts................. F-23
</TABLE>
F-1
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of InterSystems, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of InterSystems,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of income, comprehensive income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1999. In connection with our
audits of the consolidated financial statements, we also have audited the
financial schedule listed in the accompanying index. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule 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 and financial statement schedule. We believe
that our audits provide a reasonable basis for our opinion.
As discussed in Note 10, in 1999 the Company sold the business of its Nebraska
subsidiary ("InterSystems Nebraska"), which represented the industrial products
segment of the Company. Accordingly, the accompanying consolidated financial
statements presents InterSystems Nebraska as a discontinued operation for all
periods presented.
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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Houston, Texas
February 23, 2000
F-2
<PAGE> 29
INTERSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 4,877 $ 132
Marketable equity securities ............................ 65 94
Trade receivables, less allowance of $38 and $20 (Note 4) 1,507 1,391
Inventories (Note 4) .................................... 78 76
Prepaid expenses and other .............................. 166 276
Net assets of discontinued operations (Note 10) ......... -- 1,752
-------- --------
Total Current Assets .................................. 6,693 3,721
Cash in escrow (Note 10) ................................... 250 --
Note receivable (Note 10) .................................. 500 --
Property, equipment and leasehold improvements, net
(Notes 2, 3 and 4) ...................................... 21,329 21,240
Other assets ............................................... 54 210
-------- --------
$ 28,826 $ 25,171
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term advances (Note 3) ............................ $ -- $ 1,220
Current portion of long-term debt (Note 4) .............. 2,205 1,986
Subordinated debentures, current (Note 6) ............... 646 --
Accounts payable ........................................ 539 424
Accrued expenses:
Compensation (Note 10) ................................ 732 107
Other ................................................. 546 552
-------- --------
Total Current Liabilities ............................. 4,668 4,289
Long-term debt, less current maturities (Note 4) ........... 17,178 16,359
Subordinated debentures (Note 6) ........................... -- 642
-------- --------
Total Liabilities ..................................... 21,846 21,290
-------- --------
Commitments and Contingencies (Notes 8 and 9)
Shareholders' Equity (Note 8):
Preferred stock, $.01 par value, 5,000 shares authorized;
-0- shares issued and outstanding ..................... -- --
Common stock, $.01 par value, 20,000 shares authorized;
7,926 and 7,919 shares issued and outstanding ......... 79 79
Additional paid-in capital .............................. 7,992 7,769
Accumulated other comprehensive loss .................... (150) (96)
Deficit ................................................. (642) (3,617)
Treasury stock, 257 and 88 shares at cost ............... (299) (154)
Note receivable for sale of stock (Note 7(e)) ........... -- (100)
-------- --------
Total Shareholders' Equity ............................ 6,980 3,881
-------- --------
$ 28,826 $ 25,171
======== ========
</TABLE>
F-3
<PAGE> 30
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales (Notes 9(a) and 12) ....................... $ 14,746 $ 11,504 $ 10,704
Cost of sales ....................................... 9,923 7,558 6,542
-------- -------- --------
Gross profit ................................... 4,823 3,946 4,162
Selling, general and administrative expenses ........ 3,760 3,427 3,060
Interest income ..................................... (25) (9) (9)
Interest expense .................................... 1,770 1,317 1,267
Other ............................................... (3) (14) (16)
-------- -------- --------
Loss from continuing operations ................ (679) (775) (140)
-------- -------- --------
Discontinued operations (Note 10):
Income from discontinued operations of
InterSystems Nebraska .......................... 821 1,218 559
Gain on disposal of InterSystems Nebraska ........ 3,184 -- 150
-------- -------- --------
Income from discontinued operations ............ 4,005 1,218 709
-------- -------- --------
Net Income Before Cumulative Effect of Change in
Accounting Principle ...................... 3,326 443 569
Cumulative Effect of Change in
Accounting Principle (Note 13) ............ 134 -- --
-------- -------- --------
Net Income ..................................... $ 3,192 $ 443 $ 569
======== ======== ========
Net income (loss) per common share (Note 1):
Net income (loss) per common share:
Basic:
Continuing operations ........................ $ (.09) $ (.10) $ (.02)
Income from discontinued operations .......... .10 .16 .08
Gain on disposal ............................. .42 -- .02
Cumulative effect of change in Accounting
Principle (Note 13) ..................... (.02) -- --
-------- -------- --------
$ .41 $ .06 $ .08
======== ======== ========
Assuming dilution:
Continuing operations ........................ $ (.09) $ (.10) $ (.02)
Income from discontinued operations .......... .10 .15 .08
Gain on disposal ............................. .42 -- .02
Cumulative effect of change in Accounting
Principle (Note 13) ..................... (.02) -- --
-------- -------- --------
.41 $ .05 $ .08
======== ======== ========
Weighted average number of common shares
outstanding - basic ............................... 7,830 7,798 6,746
======== ======== ========
Weighted average number of common shares
outstanding - assuming dilution ................... 7,830 8,156 7,086
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 31
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- ----
<S> <C> <C> <C>
Net income ................................ $ 3,192 $ 443 $569
Other comprehensive income:
Unrealized gain (loss) on available-for-
sale securities ..................... (54) (127) 31
------- ----- ----
Comprehensive income ...................... $ 3,138 $ 316 $600
======= ===== ====
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 32
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 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 .......... 6,381,209 $64 $3,456 $ --
Common stock issued with exercise
of warrants (Note 8(a)) ............. 100,000 1 179 --
Issuance of common stock options
for services (Note 8(b)) ............ -- -- 96 --
Sale of common stock .................. 60,000 1 67 --
Common stock issued for repayment
of accrued liabilities (Note 7(d)) .. 36,000 -- 36 --
Common stock issued for services ...... 48,000 -- 35 --
Reclassification of common stock
no longer subject to redemption
(Note 8(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 7(c)) ..... 109,000 1 108 --
Conversion of 10% subordinated
debentures (Note 6) ................. 363,636 4 585 --
Conversion of 8% subordinated
debentures (Note 6) ................. 743,107 7 1,033 --
Net income ............................ -- -- -- --
--------- --- ------ -----
Balance at December 31, 1997 .......... 7,846,376 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 .......... 7,919,503 79 7,769 (96)
Common stock issued for directors' fees 6,486 -- 6 --
Surrender of common stock (Note 7(e)) . -- -- -- --
Purchase of treasury stock ............ -- -- -- --
Unrealized loss on available-for-sale
securities .......................... -- -- -- (54)
Dividend warrant repricing (Note 8(d)) -- -- 217 --
Net income ............................ -- -- -- --
--------- --- ------ -----
Balance at December 31, 1999 .......... 7,925,989 $79 $7,992 $(150)
========= === ====== =====
</TABLE>
<TABLE>
<CAPTION>
TOTAL
NOTE SHAREHOLDERS'
TREASURY STOCK RECEIVABLE EQUITY
--------------------- FOR SALE (CAPITAL
DEFICIT SHARES AMOUNT OF STOCK DEFICIT)
------- ------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .......... $(4,604) -- $ -- $(100) $(1,184)
Common stock issued with exercise
of warrants (Note 8(a)) ............. -- -- -- -- 180
Issuance of common stock options
for services (Note 8(b)) ............ -- -- -- -- 96
Sale of common stock .................. -- -- -- -- 68
Common stock issued for repayment
of accrued liabilities (Note 7(d)) .. -- -- -- -- 36
Common stock issued for services ...... -- -- -- 35
Reclassification of common stock
no longer subject to redemption
(Note 8(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 7(c)) ..... -- -- -- -- 109
Conversion of 10% subordinated
debentures (Note 6) ................. -- -- -- -- 589
Conversion of 8% subordinated
debentures (Note 6) ................. -- -- -- -- 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
Common stock issued for directors' fees -- -- -- -- 6
Surrender of common stock (Note 7(e)) . -- -- (50) 100 50
Purchase of treasury stock ............ -- 168,400 (95) -- (95)
Unrealized loss on available-for-sale
securities .......................... -- -- -- -- (54)
Dividend warrant repricing (Note 8(d)) (217) -- -- -- --
Net income ............................ 3,192 -- -- -- 3,192
------- -------- ----- ----- -------
Balance at December 31, 1999 .......... $ (642) 256,794 $(299) $ -- $ 6,980
======= ======== ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 33
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(Note 11)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,192 $ 443 $ 569
------- ------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................... 1,802 1,597 1,339
Provision for losses on accounts receivable ...................... 43 24 29
Gain on disposal of InterSystems Nebraska ........................ (3,184) -- (150)
Forgiveness of note receivable ................................... 50 -- --
Cumulative effect of change in accounting principle .............. 134 -- --
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables ............................................ (159) (454) 610
Inventories .................................................. (2) (9) 21
Net assets from discontinued operations ...................... -- (493) (764)
Increase (decrease) in:
Accounts payable and accrued expenses ........................ (677) (72) (99)
Other changes - net .............................................. 132 (111) 45
------- ------- -------
Total adjustments .............................................. (1,861) 482 1,031
------- ------- -------
Net cash provided by operating activities ...................... 1,331 925 1,600
------- ------- -------
Cash flows from investing activities:
Purchases of fixed assets ........................................... (1,477) (3,808) (2,349)
Net proceeds from disposal of InterSystems Nebraska ................. 5,603 -- --
Purchase of marketable securities ................................... (25) (73) --
------- ------- -------
Net cash provided by (used in) investing activities ............ 4,101 (3,881) (2,349)
------- ------- -------
Cash flows from financing activities:
Net proceeds (repayment) on lines of credit and
other short-term borrowings ........................................ 120 -- 702
Proceeds from long-term debt obligations ............................ 1,354 3,924 1,735
Purchase of treasury stock .......................................... (95) (52) (63)
Sale of treasury stock .............................................. -- 53 --
Payments under capital lease obligations ............................ (466) (303) (1,083)
Payments under various long-term debt obligations ................... (1,600) (1,422) (1,141)
Proceeds from sale of common stock .................................. -- 86 248
------- ------- -------
Net cash provided by (used in) financing activities ............ (687) 2,286 398
------- ------- -------
Net increase (decrease) in cash and cash equivalents .................. 4,745 (670) (351)
Cash and cash equivalents, beginning of year .......................... 132 802 1,153
------- ------- -------
Cash and cash equivalents, end of year ................................ $ 4,877 $ 132 $ 802
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 34
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 Delaware 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.
Effective October 31, 1999, the Company sold InterSystems Nebraska.
Accordingly, the accompanying consolidated financial statements present
InterSystems Nebraska as a discontinued operation for all periods presented (See
Note 10). Subsequent to the sale of InterSystems Nebraska the only business
segment the Company has is the custom-compounding of theromoplastic resins.
FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
The Company's financial instruments include time deposits, notes
receivable, notes payable, long-term debt and subordinated debentures. 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.
In determining that the carrying value of the 7% long-term debt
approximates market value, the Company considered its relationship with the
lender and the ability of the Company to require the lender to acquire the
facility in which the proceeds of the long-term debt was used to construct (see
Notes 4 and 9).
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, see Note 12 for major customer.
At December 31, 1999, the Company had a money market account totaling
approximately $4,682,000 with a financial institution.
INVENTORIES
Inventories consist of additives that enhance and customize thermoplastic
resins and are valued at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
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.
F-8
<PAGE> 35
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998, the Company had marketable securities
totaling $64,689 and $93,696, respectively, with an unrealized loss of $149,811
and $95,804, respectively.
INCOME TAXES
Deferred income taxes result from the temporary differences between the
financial statement and income tax bases of assets and liabilities as measured
by the enacted tax rates which will be in effect when these differences reverse
(see Note 5). 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 services are performed.
EARNING PER COMMON SHARE
The Company provides basic and dilutive earnings (loss) per common share
information for each year presented. The basic net income (loss) per common
share is computed by dividing the net income (loss) available to common
shareholders by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share is computed by dividing the net
income (loss) available to common shareholders, adjusted on an as if converted
basis, by the weighted average number of common shares outstanding plus
potential dilutive securities.
The following is the effect of potential dilutive securities on weighted
average number of shares outstanding used in computing earnings (loss) per share
assuming dilution for the years ended December 31, 1999, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(Shares) (Shares) (Shares)
<S> <C> <C> <C>
Weighted average number of common shares used in
basic earnings per share .................... 7,830 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 .......................... 7,830 8,156 7,086
===== ===== =====
</TABLE>
For the year ended December 31, 1999, there was no adjustment to weighted
average number of common shares used in diluted earnings (loss) per share
because the stock options and warrants outstanding were anti-dilutive.
F-9
<PAGE> 36
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999, 1998 and 1997, there was no
adjustment to income (loss) available to common shareholders used in computing
earnings (loss) per share assuming dilution because the convertible debentures
were anti-dilutive.
For the years ended December 31, 1999, 1998 and 1997, certain securities
were not included in the calculation of diluted earnings (loss) because of their
anti-dilutive effect, those securities are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Stock options ............................. 888 400 970
Stock warrants ............................ 2,920 1,785 1,777
Shares issuable on conversion of debentures 513 513 513
----- ----- -----
4,321 2,698 3,260
===== ===== =====
</TABLE>
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 8(b)).
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. The Company reviews all significant estimates affecting the financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their issuance.
RECLASSIFICATIONS
Certain 1997 and 1998 amounts have been reclassified to conform with the
1999 financial statement presentation.
F-10
<PAGE> 37
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following
at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful
Lives 1999 1998
--------- ------- -------
(Years)
<S> <C> <C> <C>
Land ........................................... -- $ 458 $ 458
Buildings ...................................... 5-40 8,360 8,360
Machinery and equipment ........................ 10-15 15,538 12,914
Other equipment ................................ 3-7 1,518 1,473
Leasehold improvements ......................... 3-15 358 350
Railroad track ................................. 14 421 421
Equipment under capital leases ................. 10-15 2,336 1,890
Furniture and fixtures ......................... 3-7 132 143
Construction-in-progress ....................... -- -- 1,225
------- -------
29,121 27,234
Less: Accumulated depreciation and amortization 7,792 5,994
------- -------
$21,329 $21,240
======= =======
</TABLE>
During 1999, 1998 and 1997, Chemtrusion capitalized interest expense
totaling approximately $18,000, $35,000 and $17,000, respectively, in
association with the construction of the Jeffersonville, Indiana facility.
NOTE 3 - SHORT-TERM ADVANCES
At December 31, 1998, Chemtrusion had advances payable to a non-related
joint venture totaling $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. During 1999, the Company and the non-related
joint venture finalized the term loan agreement which has 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 4). All advances were classified as
current at December 31, 1998.
F-11
<PAGE> 38
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1999 and 1998
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <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 ....................................................... $10,998 $11,877
7% term note payable to a non-related joint venture, payable $25,864
monthly including interest, through December 2011, secured by certain
equipment at the Jeffersonville, Indiana facility ...................... 2,490 --
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 ...................... 2,314 2,506
Prime plus 1-1/2 (10% at December 31, 1999) term note, payable
$24,320 monthly plus interest, through March 2002, secured by
equipment .............................................................. 657 997
Term note payable to a non-related joint venture, interest payable monthly
at 7%, principal due December 2011, unsecured .......................... 570 450
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 ................... 367 398
Revolving credit agreement with a bank with maximum borrowings of
$300,000, interest payable monthly at Prime plus 1.0%,
(9.50% at December 31, 1999), principal due April 2000, secured
by inventory and accounts receivable and guaranteed by
the Company ............................................................ 300 300
Prime plus 1% (9.50% at December 31, 1999) note payable, payable $6,667
monthly, plus interest through April 2003, secured by equipment and
guaranteed by the Company .............................................. 258 345
Other .................................................................... 13 --
Obligations under capital lease .......................................... 1,416 1,472
------- -------
Total ................................................................ 19,383 18,345
Less: Current maturities ................................................. 2,205 1,986
------- -------
Total long-term debt ................................................. $17,178 $16,359
======= =======
</TABLE>
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, 1999, Chemtrusion was in compliance with all loan covenants.
F-12
<PAGE> 39
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Chemtrusion leases certain machinery and equipment under capital leases
expiring through 2003. At December 31, 1999, future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments, are as follows (in thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
2000............................................ $ 589
2001............................................ 588
2002............................................ 357
2003............................................ 60
-----
Total minimum lease payments.................... 1,594
Less: Amount representing interest
calculated at the incremental borrowing rate.. 178
-----
Present value of net minimum lease payments..... 1,416
Less: Current portion........................... 491
-----
Long-term portion of capital leases............. $ 925
=====
</TABLE>
The net book value of machinery and equipment under capital lease at
December 31, 1999 and 1998 was approximately $1,766,000 and $1,827,000,
respectively.
Future maturities of long-term debt at December 31, 1999, including
capital leases summarized above are: 2000 - $2,205,000; 2001 - $2,021,000; 2002
- - $1,686,000; 2003 - $1,324,000; 2004 - $1,271,000; and $10,876,000, thereafter.
NOTE 5 - INCOME TAXES
Deferred taxes are determined based on temporary differences between the
financial statement and income tax bases 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, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards ............................. $ 1,745 $ 2,612
Tax basis in excess of assets acquired (InterSystems Nebraska) -- 133
Expenses accrued for financial reporting purposes not deducted
for tax purposes, net ...................................... 53 213
Tax credit carryforwards ..................................... 98 98
------- -------
Deferred tax asset ........................................... 1,896 3,056
Valuation allowance .......................................... (277) (1,588)
------- -------
Net deferred tax asset ....................................... 1,619 1,468
Deferred tax liability - depreciation ........................ (1,619) (1,468)
------- -------
Net deferred income tax asset (liability) .................... $ -- $ --
======= =======
</TABLE>
At December 31, 1999 and 1998, the Company provided a 100% valuation
allowance for the deferred tax asset because it could not determine whether it
was more likely than not that the deferred tax asset would be realized.
F-13
<PAGE> 40
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1999, 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 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Statutory rate ........................ $ 1,085 $ 151 $ 193
Decrease in valuation allowance ....... (1,311) (207) (262)
Adjustment to prior years net operating
loss carryforwards ................. 192 -- --
Other - net ........................... 34 56 69
------- ----- -----
$ -- $ -- $ --
======= ===== =====
</TABLE>
During the year ended December 31, 1999, the Company utilized a net
operating loss carryforward of approximately $2,740,000 which reduced income tax
expense by approximately $932,000.
As of December 31, 1999, the Company had for income tax purposes, net
operating loss carryforwards of approximately $5,132,000, 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.
NOTE 6 - SUBORDINATED DEBENTURES
At December 31, 1999 and 1998, the Company had 10% convertible
subordinated debentures totaling $646,000 and $642,000, respectively, net of
discounts of $4,000 and $8,000, respectively, payable to affiliates. Subsequent
to December 31, 1999, the bonds were retired for face value with proceeds from
the sale of InterSystems Nebraska (see Note 10). Accordingly, the debentures are
classified as current as of December 31, 1999. Debentures totaling $640,000 were
converted in 1997, at conversion rates ranging from $1.27 to $1.76, less
deferred offering costs and original discounts totaling $51,000. Also, during
1997, debentures totaling $30,000 were forfeited by Helm as partial payment of
amounts due the Company from Helm (see Note 7(a)).
Convertible subordinated 8% debentures totaling $1,040,350 were converted
in 1997 at a conversion rate of $1.40, which represented the remaining
outstanding balance.
NOTE 7 - RELATED PARTY TRANSACTIONS
(a) As of December 31, 1999, 1998 and 1997, Helm owned approximately 15%,
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 totaled $59,000, $58,000 and $55,000 in 1999, 1998 and
1997, respectively. In addition, on the sale of InterSystems Nebraska, the
Company paid Helm approximately $76,000 (which represented the same multiple of
earnings paid to the Company) in full settlement of a royalty agreement. During
1997, the Company received 169,565 shares of Helm common stock with an estimated
fair value totaling $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 1999 and 1998, the Company purchased 50,000 and 145,000 shares
of common stock in Teletrak Environmental Systems, Inc. ("Teletrak") for $25,000
and $72,500, respectively. A director of Teletrak is also a director of the
Company. This investment is accounted for as marketable securities
available-for-sale.
F-14
<PAGE> 41
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) During 1997, the Company issued 109,000 shares of its common stock for
payment of liabilities due an affiliated company which was 14% owned by Helm.
(d) During 1997, the Company issued 36,000 shares of the Company's common
stock to an affiliated company for payment of accrued interest totaling $36,000
under a line of credit agreement which expired February 1996.
(e) At December 31, 1998, the Company had a note receivable of $100,000
due from the Company's president for the purchase of the Company's common stock.
For the years ended December 31, 1999, 1998 and 1997, the Company earned
interest on the note receivable totaling $5,860, $8,000 and $8,000,
respectively. In connection with the sale of InterSystems Nebraska, the
president terminated his employment with the Company and surrendered the 100,000
shares of common stock at $.50 per share, the market value of the stock on the
day of the surrender. Accordingly, the Company recorded the receipt of the stock
as treasury stock for $50,000, wrote off the remaining note balance of $50,000
and the accrued interest receivable of $51,000 to the gain on the disposal of
InterSystems Nebraska.
NOTE 8 - 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 totaled $2,145,000.
The warrants were exercisable beginning July 15, 1996, through January 15, 2000
at an exercise price of $1.80 per share. During 1997, 100,000 of these warrants
were exercised and the remaining 680,000 warrants expired January 15, 2000.
Holders of the common stock 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 which was net of 49,000 shares which 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 through October 29, 2001 at an exercise price of
$1.375 per share. As of December 31, 1999 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-15
<PAGE> 42
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, 1999, 1998 and
1997, all options issued to employees were granted at an exercise price which
equaled or exceeded 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 equaled 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 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Dividend yield................... 0% 0% 0%
Expected volatility.............. 69% 61% 45.0% to 50%
Risk free interest............... 5.67% 4.34% to 5.58% 6.21% to 6.39%
Expected lives................... 3.1 yrs. 3.75 to 5 yrs. 5 years
</TABLE>
Under the accounting provisions of SFAS Statement 123, the Company's net
income applicable to common shareholders and income per share for 1999, 1998 and
1997 would have been decreased to the pro forma amounts indicated below:
Net income applicable to common shareholders (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
As reported ............. $ 3,192 $ 443 $ 569
============ ============ ============
Pro forma ............... $ 3,184 $ (41) $ 442
============ ============ ============
Net income (loss) per share:
Basic:
As reported .......... $ .41 $ .06 $ .08
============ ============ ============
Pro forma ............ $ .41 $ (.01) $ .07
============ ============ ============
Assuming dilution:
As reported .......... $ .41 $ .05 $ .08
============ ============ ============
Pro forma ............ $ .41 $ (.01) $ .07
============ ============ ============
</TABLE>
Due to the fact that the Company's stock option plans vest over many years
and additional awards are made each year, the above pro forma numbers are not
indicative of the financial impact had the disclosure provisions of SFAS
Statement 123 been applicable to all years of previous options grants. The above
numbers do not include the effect of options granted prior to 1995 vested in
1999, 1998 and 1997.
During December 1999, the Company repurchased 152,000 options at $.20 per
option from certain employees of InterSystems Nebraska in connection with the
sale of the business of InterSystems Nebraska. The resulting expense of $30,400
was charged against the gain on the disposal of InterSystems Nebraska.
F-16
<PAGE> 43
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock options to employees as of
December 31, 1999, 1998 and 1997, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year ..... 599,000 $1.47 589,500 $2.02 104,431 $2.60
Reissued for repricing .. -- -- 10,000 1.50 -- --
Granted ................. 25,000 1.50 529,000 2.13 539,000 2.09
Exercised ............... -- -- -- -- -- --
Surrendered ............. (7,000) 1.50 -- -- -- --
Surrendered for
repricing ............. -- -- (529,000) 2.13 -- --
Repurchased ............. (152,000) 1.50 -- -- -- --
Expired ................. -- -- (500) 8.20 (53,931) 4.00
-------- ----- -------- ----- -------- -----
Outstanding at
end of year ............ 465,000 $1.46 599,000 $1.47 589,500 $2.02
======== ===== ======== ===== ======== =====
Options exercisable
at year-end ........... 448,333 $1.46 417,830 $1.46 228,370 $1.92
======== ===== ======== ===== ======== =====
Weighted average fair
value of options granted
during the year ........ $ .31 $ .43 $1.06
===== ===== =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Price At 12/31/99 (Years) Price at 12/31/99 Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.25 50,000 3.76 $ 1.25 50,000 $ 1.25
$ 1.1875 20,000 2.67 $ 1.1875 20,000 $ 1.1875
$ 1.50 395,000 2.67 $ 1.50 378,333 $ 1.50
------- -------
$1.1875-$1.50 465,000 2.78 $1.875 - $150 448,333 $ 1.46
======= =======
</TABLE>
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, 1999, 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, 1999.
F-17
<PAGE> 44
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, 1999. These modifications
constitutes a new issuance of options in accordance with APB opinion 25. The
modified exercise price equaled or exceeded the market price per share at the
modification date, accordingly, no compensation was recorded.
(d)In August 1999, the Board of Directors of the Company resolved to
extend the expiration date of the Company's outstanding publicly traded common
stock purchase warrants from December 31, 1999 to December 31, 2001, and to
lower the exercise price of these warrants from $3.50 to $2.00 per share. These
warrants were issued as a dividend in October 1991, and as of December 31, 1999,
there were 1,114,852 warrants outstanding. The modification of the terms of the
warrants constitutes a new issuance. Accordingly, the incremental value of the
warrants of approximately $217,000 on the date of the modification was recorded
as a deemed dividend in the accompanying consolidated statement of shareholders'
equity.
(e) At December 31, 1999, shares reserved for future issuance are as
follows:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Conversion of debentures ....................... 512,990
Shares reserved for stock option plan, including
465,000 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
=========
</TABLE>
NOTE 9 - 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 totaled 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 4). In addition, during 1999 and
1998 the joint venture provided additional financing for additional equipment
and improvement to the facility (see Note 4).
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-18
<PAGE> 45
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 4). 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, 1999
and 1998, the balance of the deferred capital recovery costs totaled
approximately $2,312,000 and $2,123,000, respectively, and is recorded as a
reduction of the outstanding debt due to the joint venture.
In addition, the 1999 and 1998 financing agreements between Chemtrusion
and the joint venture contain similar billings by Chemtrusion to the joint
venture for capital recovery and interest. At December 31, 1999, the balance of
the deferred capital recovery costs for the additional equipment and improvement
financing totaled approximately $217,000 and $116,000, respectively, and is
recorded as a reduction of the outstanding debt due to the joint venture.
On expiration of the initial term or any renewal term or in the event of
the termination of the agreement by default, as defined, the joint venture will
have an option to purchase the plant at a price and on terms and conditions, as
defined in the agreement. In the event that the joint venture does not renew the
agreement at the end of the initial term or the end of any renewal term or
either party terminates the agreement, as defined, Chemtrusion has the right to
require the joint venture to purchase the plant at a price and on the terms and
conditions, as defined in the agreement.
(b) The Company is obligated under various long-term noncancelable
operating leases, for office and warehouse facilities, certain vehicles and
office equipment expiring through 2002 at minimum annual rentals as follows (in
thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
2000......................... $ 470
2001......................... 435
2002......................... 125
------
$1,030
======
</TABLE>
Rent and lease expense for all short-term and long-term operating leases
were $544,000, $521,000 and $399,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
(c) In connection with the purchase of InterSystems Nebraska from Helm in
1993, the Company was obligated to pay Helm a royalty on the sale of certain
products. Royalties to Helm totaled approximately $17,000, $12,000 and $8,000
for 1999, 1998 and 1997, respectively.
(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 $32,000,
$19,000 and $18,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
(e) The Company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that their outcome will not
have a material adverse effect on the Company's financial position or results of
operations.
F-19
<PAGE> 46
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DISCONTINUED OPERATIONS
Effective October 31, 1999, the Company sold certain assets of
InterSystems Nebraska, which represented the industrial products segment of the
Company, for cash and a note receivable with the purchaser assuming certain
liabilities. Accordingly, InterSystems Nebraska has been presented as a
discontinued operation for the year ended December 31, 1999 and the balance
sheet as of December 31, 1998 and the statements of income and cashflows for the
years ended December 31,1998 and 1997 have been restated to conform with this
presentation.
Revenues from InterSystems Nebraska for the ten months ended October 31,
1999 and years ended December 31, 1998 and 1997 totaled approximately
$14,729,000, $21,818,000 and $16,304,000, respectively.
For the ten months ended October 31, 1999 and years ended December 31,
1998 and 1997, the Company recognized operating net income from InterSystems
Nebraska of approximately $821,000, $1,218,000 and $559,000, respectively.
During the year ended December 31, 1999, the Company recorded a gain on disposal
of InterSystems Nebraska of approximately $3,184,000 from the sale, net of
bonuses paid to certain executives totaling approximately $477,000, of which
approximately $374,000 remained unpaid at December 31, 1999.
As a condition of the sale of Nebraska, the Company received an unsecured
promissory note for $500,000 due May 31, 2003, which pays interest at 10%
quarterly. The note is convertible into common stock of the purchaser at a rate
of total principal plus interest due on the note at the conversion date divided
by $7.50. In addition, $250,000 of the purchase proceeds were deposited into an
escrow account which will be disbursed within one to two years, as defined in
the purchase agreement. Concurrent with the sale, the purchaser executed a
royalty agreement, whereby the purchaser is required to pay a percentage of
sales collected of certain equipment over the next six years not to exceed
$649,000.
At December 31, 1998, net assets of InterSystems Nebraska consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Assets:
Cash and time deposits.................................... $ 124
Accounts receivable....................................... 1,938
Inventories............................................... 2,197
Other assets.............................................. 136
Property, plant and equipment............................. 2,239
--------
Total assets.............................................. $ 6,634
========
Liabilities:
Accounts payable.......................................... $ 1,035
Accruals.................................................. 869
Notes payable and long-term debt.......................... 2,978
--------
Total liabilities......................................... $ 4,882
========
Net assets of discontinued operations....................... $ 1,752
========
</TABLE>
As of June 30, 1996, the Company adopted a formal plan to dispose of the
operations of a subsidiary of InterSystems Nebraska which manufactured rolling
doors and hurricane shutters. The subsidiary ceased operations as of September
30, 1996 and was liquidated in 1997. In 1997, a gain on disposal of $150,000
primarily represented an over accrual of the estimated loss on disposal.
F-20
<PAGE> 47
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ------
(In thousands) (In thousands) (In thousands)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid ............................................................ $ 1,780 $ 1,630 $1,703
========== ========== ======
Income taxes paid ........................................................ $ -- $ 23 $ 17
========== ========== ======
Non-cash transactions relating to operating activities:
Accrual of bonuses included in gain on disposal of
InterSystems Nebraska ................................................ $ 477 $ -- $ --
========== ========== ======
Accrual of compensation and other expenses included
in gain on disposal of InterSystems Nebraska ......................... $ 273 $ -- $ --
========== ========== ======
Lease commitments and other expenses incurred in association with the sale
of InterSystems Nebraska paid directly by the closing agent
from the proceeds .................................................... $ 667 $ -- $ --
========== ========== ======
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 ...................................................... $ (54) $ (127) $ 31
========== ========== ======
Issuance of note receivable for sale of
InterSystems Nebraska ................................................ $ 500 $ -- $ --
========== ========== ======
Escrow account deposit at closing for the sale of
InterSystems Nebraska ................................................ $ 250 $ -- $ --
========== ========== ======
Non-cash transactions relating to financing activities:
Conversion of debentures into common stock ............................... $ -- $ -- $1,629
========== ========== ======
Capital lease obligation ................................................. $ 410 $ 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 $ 6 $ 42
========== ========== ======
Common stock issued for loan fees ........................................ $ -- $ -- $ 35
========== ========== ======
Surrender of common stock to treasury .................................... $ 50 $ -- $ --
========== ========== ======
Deemed dividend due to warrant repricing ................................. $ 217 $ -- $ --
========== ========== ======
</TABLE>
F-21
<PAGE> 48
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - MAJOR CUSTOMERS
The Company had sales to three major customers in 1999, 1998 and 1997,
representing 90%, 99% and 97% of sales, respectively, as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Customer:
A ... $ 8,825 $ 7,166 $ 6,254
B ... 2,577 2,857 2,476
C ... 1,894 1,362 1,680
------- ------- -------
$13,296 $11,385 $10,410
======= ======= =======
</TABLE>
NOTE 13 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of 1999, the Company adopted Statement of
Position No. 98-5, "Reporting on the Costs of Start-Up Activities", which
requires costs of start-up activities and organization costs to be expensed as
incurred. Accordingly, start-up and organization costs previously capitalized
which related to the formation of the Chemtrusion - Indiana division totaling
approximately $83,000, and start-up costs for an analytical laboratory division
at the Chemtrusion - Texas facility totaling approximately $51,000 were expensed
during 1999. Such amounts are included in cumulative effect of change in
accounting principle in the accompanying consolidated statements of income.
If the amounts would have been expensed in the period they were incurred,
net income for the years ended December 31, 1998 and 1997 would have been
approximately $392,000 and $486,000, respectively. Net income per common share
basic and assuming dilution would have been $.05 and $.05, respectively, for
1998 and $.07 and $.07, respectively, for 1997.
F-22
<PAGE> 49
INTERSYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
----------------------
Balance Charged to Charged to Balance
at beginning costs and other at end of
Description of year expenses accounts Deductions year
- ----------- ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997 ..................... $ 7 $29 $ -- $ (15)(a) $ 21
1998 ..................... 21 24 -- (25)(a) 20
1999 ..................... 20 43 -- (25)(a) 38
Discontinued operations:
1997 ..................... $ 211 $-- $ -- $ (150)(b) $ 61
1998 ..................... 61 -- -- -- 61
1999 ..................... 61 -- -- -- 61
Deferred tax asset:
1997 ..................... $2,057 $-- $ -- $ (262)(c) $1,795
1998 ..................... 1,795 -- -- (207)(c) 1,588
1999 ..................... 1,588 -- -- (1,311)(c) 277
</TABLE>
- ------------------------
(a) Write-off of uncollectible accounts
(b) Revaluation of the discontinued operations liability
(c) Revaluation of the deferred tax asset valuation allowance
F-23
<PAGE> 1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
InterSystems, Inc.
Houston, Texas
We hereby consent to the incorporation by reference in Registration Statements
No. 333-46035 on Form S-8 and and No. 333-00003 and 333-42235 on Form S-3 of our
report dated February 23, 2000 relating to the consolidated financial statements
of InterSystems, Inc. appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
BDO Seidman, LLP
Houston, Texas
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,877
<SECURITIES> 65
<RECEIVABLES> 1,507
<ALLOWANCES> 0
<INVENTORY> 78
<CURRENT-ASSETS> 6,693
<PP&E> 21,329
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,826
<CURRENT-LIABILITIES> 4,668
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 6,901
<TOTAL-LIABILITY-AND-EQUITY> 28,826
<SALES> 14,746
<TOTAL-REVENUES> 0
<CGS> 9,923
<TOTAL-COSTS> 3,760
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,770
<INCOME-PRETAX> (679)
<INCOME-TAX> 0
<INCOME-CONTINUING> (679)
<DISCONTINUED> 4,005
<EXTRAORDINARY> 0
<CHANGES> (134)
<NET-INCOME> 3,192
<EPS-BASIC> .41
<EPS-DILUTED> .41
</TABLE>
