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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to_______________.
COMMISSION FILE NUMBER 1-12312
INTERSCIENCE COMPUTER CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 95-3880130
(State of incorporation) (I.R.S. Employer Identification No.)
5171 CLARETON DRIVE, AGOURA HILLS, CALIFORNIA 91301
(Address of principal executive offices) (zip code)
Issuer's telephone number: (818) 707-2000
Securities to be registered pursuant to Section 12(b) of the Act: NONE
Securities to be registered pursuant to Section 12(g) of the Act: COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to filing requirements for the past 90 days.
YES X NO
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Check mark indicates that disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $11,253,383.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 27, 1996 was approximately $7,625,000.
There were 2,541,666 shares outstanding of registrant's common stock as of
December 27, 1996.
The following documents are incorporated by reference into this report:
Portions of registrant's Proxy Statement for its 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within 120
days after the close of registrant's fiscal year, are incorporated herein by
reference in Part III of this Annual Report.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Interscience Computer
Corporation undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risks described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q to be filed by the Company in 1997
and any Current Reports on Form 8-K by the Company.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
Interscience Computer Corporation (the "Company") is an established,
national, independent service and maintenance provider for high-speed production
printers, computers, and other computer-driven equipment. During the fiscal year
ended September 30, 1996 (the "1996 Fiscal Year"), the Company's principal
sources of revenues were (i) fees from the maintenance and support of large data
center equipment, particularly the high-speed production printers manufactured
by Siemens AG ("Siemens") and by Xerox Corporation ("Xerox"), and (ii) the
distribution and sale, to the Company's maintenance clients and to others, of
consumable products used by high-speed production printers (such as fusing
agent, toner and developer).
Until the end of June 1995, the principal focus of the Company's
maintenance operations was on the Siemens Model 2200 Laser Printer (the "Model
2200 Siemens Printer"), and the Company's consumable product sales efforts were
directed almost exclusively at the distribution and sale of the Company's
patented fusing agent that is used in Model 2200 Siemens Printers. Since June
30, 1995, the Company has significantly expanded its business and scope of
operations, primarily through four acquisitions, to include (i) maintenance and
support services for the Xerox high-speed production printers and, to a lesser
extent, for the Delphax and Olympus page printers, and (ii) the distribution and
sale of consumable products for the Xerox, Delphax and Olympus printers. The
foregoing acquisitions have provided the Company with the expertise, equipment,
inventory, remanufacturing capabilities, personnel and customer base to
effectively compete nationally in the Xerox high-speed production printer
maintenance and support market. The U.S. Xerox high-speed printer market is
significantly larger than the U.S. Siemens high-speed printer market.
As a result of the foregoing acquisitions, the Company on September 30,
1996 had a total of nine offices and warehouses located in seven states
throughout the United States. In order to consolidate and integrate the
operations of the various businesses that the Company has acquired during the
past 18 months, and in order to reduce operating costs, the Company (i) recently
commenced a company-wide reorganization and (ii) is currently completing the
installation of a new intra-company computer network that will link and update
all of the Company's communications, inventory, billing and accounting systems.
The Company expects to consolidate four of its existing offices and warehouses
in its reorganization, and anticipates that its new computer network will be
fully operational by the end of the fiscal quarter ended March 31, 1997. The
Company believes that its reorganization and the new computer network will
enable it to reduce its overhead costs, reduce and/or reallocate its overall
inventory levels, and improve its billing and customer service procedures.
The Company also has operations in Europe. Interscience PLC, a
wholly-owned subsidiary that the Company established in the United Kingdom in
1993, is primarily engaged in the distribution and sale of the Company's
patented fusing agent, and Interscience GmbH, the Company's new German
wholly-owned subsidiary, in October 1996 commenced providing maintenance
services in Germany for Xerox production printers. During the 1996 Fiscal Year,
Interscience PLC generated approximately 9% of the Company's gross revenues. The
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Company expects that revenues from its two European subsidiaries will constitute
an increased percentage of the Company's total revenues in the future.
To date, the Company's principal consumable product has been a liquid
fusing agent (the "Fusing Agent") used by the Model 2200 Siemens Printer. The
U.S. Patent and Trademark Office issued a U.S. patent to the Company for the use
of the Fusing Agent as a fusing agent in the cold or vapor fusion laser printing
process in July 1994. The Company currently sells the Fusing Agent directly to
its maintenance clients and distributes the Fusing Agent to other operators of
the Model 2200 Siemens Printer through a five-year supply agreement that the
Company recently entered into with OCE Printing Systems USA, Inc. ("OCE"), the
successor to Siemens Nixdorf Printing Systems. The Company also sells the Fusing
Agent to NCR Corporation, StorageTek, and the Bradshaw Group. During the 1996
Fiscal Year, sales of Fusing Agent constituted 41% of the Company's total
revenues. The Company expects that U.S. sales of the Fusing Agent will decrease
in the future as the Model 2200 Siemens Printer is gradually replaced by newer
models of printers that do not use the Fusing Agent. However, as a result of a
patent on the Fusing Agent that was issued in the United Kingdom to Interscience
PLC in January 1996, sales of the Fusing Agent by Interscience PLC have
increased significantly and are expected to continue to represent an additional
source of revenue in the near future.
Interscience Computer Company was organized in 1983 to be a third-party
provider of maintenance services for computer hardware and related peripheral
equipment. Unless otherwise specified herein, all references to the "Company"
shall mean Interscience Computer Corporation and all of its subsidiaries. On
September 15, 1993, the Company effected an initial public offering (the "Public
Offering") of units, each of which consisted of one share of common stock and a
warrant to purchase an additional share of common stock. The warrants expired in
September 1996. The Company's principal executive offices are currently located
in Agoura Hills, California, but are expected to be relocated to other
facilities in Southern California during the fiscal quarter ended March 31, 1997
in connection with the on-going reorganization.
BUSINESS GOALS AND STRATEGY -- RECENT ACQUISITIONS
The goal of the Company is to both increase its maintenance service
customer base and to increase the amount of peripheral equipment parts and
consumable products it develops, manufactures and/or sells. In addition to
constituting a separate source of revenues, the Company believes that the
consumable products that it develops, manufactures and/or sells will enable it
to increase its maintenance service customer base.
The Company plans to increase its maintenance service customer base by
increasing its service capabilities to include printers manufactured by Xerox
and, to a lesser extent, by others (including the new printers currently being
sold by Siemens), and by developing and selling to its customers consumable
products (such as fusing agents and toners) required to operate the equipment
that the Company maintains. Since many of the Company's clients that operate
high-speed production printers have more than one type of printer, by acquiring
or developing additional maintenance capabilities to service such other
machines, the Company believes it can increase revenues from its existing
service base by maintaining more machines at each site. The Company also plans
to increase its maintenance operations by expanding its operations into
additional geographic locations. Since June 30, 1995, the Company has increased
both the type of equipment it maintains and the geographic area in which it
provides such maintenance services through the following four transactions:
- Effective June 30, 1995, the Company acquired all of the outstanding
shares of Laser Support & Engineering, Inc. ("LSE") for $1,678,000 in cash and
promissory notes. LSE is a privately held company engaged in training Xerox
printer field engineers and in providing maintenance services for Xerox high
speed printers. The maintenance and training expertise acquired in the LSE
acquisition has been used to train the Company's field engineers who were not
qualified to maintain Xerox printers. Since all of LSE's maintenance contracts
are located in Southern California, the acquisition provided the Company with
Xerox maintenance contracts and capabilities throughout Southern California. The
facilities of LSE and the Company's other Southern California operations are
currently being consolidated in the on-going reorganization. See, "Item 2.
Description of Property," and "Item 3. Legal Proceedings."
- In October 1995, the Company acquired the Page Printing Division
("PPD") of Miltope Business Products, Inc. for approximately $260,000. PPD is a
third-party maintenance provider for Delphax and Olympus
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page printers. The PPD operations are currently conducted solely in the
Northeastern U.S., and the PPD facilities have been consolidated with the
Company's New Jersey offices.
- In June 1996, the Company acquired certain Xerox printer maintenance
contracts, equipment and spare parts inventory from BancTec, Inc. for a purchase
price of $2,050,000 in cash and a promissory note. The Company also hired some
of BancTec's field engineers. The BancTec transaction provided the Company with
Xerox printer maintenance operations in 11 states and the District of Columbia.
- In October 1996, the Company acquired substantially all of the assets
of Laser Printing Services, Inc. ("LPS") for $600,000 in cash and a promissory
note. LPS is a Xerox laser printer maintenance provider based in Fairfax,
Virginia. Although the acquisition of LPS has increased the Company's Xerox
maintenance business and capabilities in the Northeastern U.S., LPS also has the
capability of repairing and remanufacturing Xerox parts and equipment. The
Company believes that this ability will reduce the Company's cost of parts for
all of its Xerox maintenance operations. The Company intends to relocate its
Maryland facilities to the Fairfax, Virginia facilities of LPS. See, "Item 2.
Description of Property."
The Company believes that manufacturers of high-speed production
printers generally charge higher prices for the maintenance, spare parts and
consumable products used by their equipment than the Company charges. The
Company's strategy has been to provide maintenance services at a lower cost than
that charged by the equipment manufacturers and to provide or sell, where
possible, spare parts and consumable products to maintenance clients at costs
below those typically charged by the equipment manufacturers. The Company is
able to sell spare parts at a lower cost by remanufacturing parts in-house and
by reselling the same toners, developers and other consumable products used by
the equipment manufacturers under the Company's private label. In addition, the
Company attempts to develop consumable products for printers that are either
better or less expensive than the products sold by the equipment manufacturer.
For example, the Company recently developed and commenced selling a toner for
use with Delphax printers.
The Company has targeted the Xerox printer market as the principal
market for its expansion because the market is substantially larger than the
Siemens market that the Company has previously focused on. In addition, the
Company believes that opportunities exist in the Xerox maintenance market
because of certain recent anti-trust lawsuits that were filed against Xerox and
the elimination of certain factors that have previously restricted competition
for Xerox maintenance business.
Although the Company's goal is to develop, manufacture and sell
consumable products for use with high-speed printers, the Company does not
currently intend to manufacture most of such products in-house. Accordingly, to
date, substantially all of the Fusing Agent, toner and developer sold by the
Company has been manufactured and packaged for the Company by third party
vendors.
HARDWARE SERVICES
The Company provides third-party, multi-vendor computer hardware and
peripheral equipment maintenance services primarily to private commercial and
institutional enterprises and, to a lesser extent, to agencies of the U.S.
government. The equipment currently maintained and serviced by the Company
consists primarily of high-speed production printers and, to a lesser extent,
other equipment located in large data or printing centers, including a wide
range of peripheral subsystems (i.e. disk drives, tape drives and printers) and
the mainframe, midrange and minicomputers on which such peripheral subsystems
are dependent. The equipment maintained by the Company ranges from individual
high-speed production printers to many printers, computers and pieces of
equipment located in a mainframe computer room or printing facility.
Most of the high-speed production printers currently maintained by
the Company are manufactured by Xerox and Siemens. Additionally, the Company
also maintains certain medium-speed printers manufactured by Delphax, Olympus,
Dataproducts, and Printronix. The peripheral equipment currently serviced by the
Company is manufactured by numerous companies.
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The computers maintained and serviced by the Company are primarily
manufactured by International Business Machines Corp. ("IBM"), although the
Company also provides such services for computers manufactured by certain other
companies.
Maintenance Services: The services provided by the Company consist
primarily of scheduled preventive maintenance and emergency remedial services.
Preventive maintenance includes inspections, diagnostic analysis, cleaning,
adjustments, and replacement of components and parts. The Company also provides
installation and deinstallation support, on-site operator training, and off-site
repair of printers, computers and peripheral equipment.
As of September 30, 1996, maintenance services were provided by the
Company in the United States to clients located in 15 states and the District of
Columbia. The Company's maintenance operations were coordinated through the
Company's Agoura Hills, California, headquarters and through its two regional
offices located at Anaheim, California and Lanham, Maryland. In addition to the
regional offices, the Company maintained smaller, local offices at the
facilities of certain of its clients. In connection with its on-going
reorganization, the Company in November 1996 closed its Maryland facilities and
moved the operations of the Maryland facilities to the Fairfax, Virginia,
facilities that the Company acquired in its recent purchase of LPS. Accordingly,
the Fairfax facility has now replaced the Lanham, Maryland, facility as the
regional office for the Eastern U.S. In addition, the Company expects to
consolidate four additional offices and warehouses and to relocate its principal
executive offices. See "Item 2. Description of Property."
The two regional offices are each responsible for maintaining all
customer accounts, including providing all required field engineers and
scheduling and performing all preventive or remedial maintenance, and for
supporting the sale of consumable products to maintenance clients. The regional
offices also maintain an inventory of spare parts and consumables commensurate
with the maintenance needs of clients serviced from such offices. The Company's
regional centers contain, in addition to a large inventory of new and
remanufactured spare parts, an inventory of consumable products (such as toner
and fusing agents used by printers). The centers also act as training facilities
and provide depot repair services for equipment that cannot be repaired on site.
As of September 30, 1996, the Company provided maintenance services to
eight U.S. government agencies and approximately 225 nongovernment commercial
and institutional accounts.
Maintenance Contracts: The Company provides most of its services
pursuant to maintenance contracts having terms of one or more years. With some
exceptions, all of the Company's maintenance agreements with non-governmental
organizations are one year contracts. The Company's standard maintenance
contract provides that it is automatically renewed for an additional year unless
canceled by either party within a 30-day period prior to the expiration of the
contract.
Most of the Company's maintenance contracts with agencies of the U.S.
government are entered into as multi-year arrangements pursuant to which the
Company is bound by the terms of the agreement during the entire multi-year
term. However, since the procuring governmental agencies are only funded on a
year-to-year basis, all such maintenance contracts expire each year unless
renewed at the agency's option. Revenues from governmental agencies for future
periods are therefore dependent upon the renewal of the agreement. Although
government contracts expire annually by their terms, the Company's past
experience with such contracts is that such agreements normally are renewed
annually until the expiration of the specified multi-year term. Less than five
percent of the Company's annual maintenance revenues for the 1996 Fiscal Year
were derived from contracts with the government.
The Company, as a government contractor, is subject to various statutes
and regulations governing governmental contracts generally, including provisions
regarding periodic audits, limitations on the Company's ability to transact
business with certain foreign or sanctioned persons, and the requirements
imposed by the government's affirmative action/equal opportunity policies. In
addition, certain of the Company's personnel are required to obtain and maintain
security clearances.
Substantially all of the Company's maintenance contracts are fixed-fee
arrangements. Under such contracts, the client agrees to pay a fixed amount,
normally payable monthly, and the Company agrees to provide all parts (other
than expendable parts and consumables) and labor necessary to maintain or repair
the equipment during the term of the contract, regardless of the actual costs
incurred. Accordingly, the Company may incur losses under
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such fixed-fee agreements in the event that the equipment requires unanticipated
repairs or maintenance. Occasionally, the Company provides services on a
time-and-materials basis, where the client agrees to pay a specified rate for
each particular service to be performed and to purchase any parts used.
Since the amount of repair and maintenance that a printer will require
depends, to a significant extent, on the amount that the printer is used, the
Company's maintenance contracts for high-speed production printers also provide
for a variable usage fee in addition to the fixed fee. The amount payable as a
usage fee normally depends on the amount of materials printed by the printer.
Although the Company may sell toner, developer, or Fusing Agent to its
maintenance clients, maintenance contracts for high-speed production printers
typically do not require the Company to provide the consumable items used by the
printers, such as toner and fusing agents. However, at the request of one of the
Company's major customers, the Company has recently implemented a billing
arrangement under which all charges, including maintenance fees, per page fees,
and consumable costs are covered by a single fixed monthly fee. The Company is
considering making this arrangement available to its other customers.
The Company in October, 1996 formed Interscience GmbH, a wholly-owned
subsidiary established in Germany. Interscience GmbH was established for the
purpose of providing third-party maintenance services for Xerox high-speed
production printers in Germany. Initially, Interscience GmbH will provide all
maintenance services to its customers through a subcontract with an unaffiliated
service provider. Under Interscience GmbH's arrangement with the unaffiliated
provider, Interscience GmbH will enter into the maintenance contract with Xerox
operators in Germany, will provide all Xerox parts and equipment, and will
provide all training and supervision to the provider's engineers. Interscience
GmbH will pay the unaffiliated provider a percentage of all gross revenues that
Interscience GmbH receives under the maintenance contracts. To date,
Interscience GmbH has entered into seven Xerox maintenance agreements in
Germany.
The Company did not derive more than 10% of its annual maintenance
revenues in the fiscal year ended September 30, 1996 from any single contract or
customer.
Other Services and Sources of Revenues: In addition to its regular
maintenance services, the Company provides repair and remanufacturing services
for computers and related peripheral equipment at its regional offices for
companies that are not on-going maintenance clients of the Company. To date,
such other services have included remanufacturing Siemens and Xerox printers and
various components of those printers.
In July 1994, the Company introduced and commenced test marketing a
toner for use with the Model 2200 Siemens Printer. The toner is currently
manufactured by an unaffiliated toner manufacturer pursuant to the Company's
specifications and is being sold by the Company to its maintenance clients.
During the 1996 Fiscal Year, the Company completed its development of a toner
compatible with the Delphax line of high speed electron beam imaging systems
("EBI") and the Miltope Business Products line of page printer. The Company has
recently commenced selling its EBI toner to its EBI maintenance clients. Both
toners are currently marketed under the Company's label. Although revenues from
these recently developed toners have, to date, been relatively small, the
Company expects toner revenue to increase in 1997.
During the past few years the Company has leased new or remanufactured
equipment to certain of its maintenance clients. Such leases were entered into
primarily as an accommodation to the Company's clients, and revenues from such
arrangements have not constituted a material portion of the Company's gross
revenues.
Competition: The Company competes for equipment maintenance and service
contracts with both manufacturers of computers and peripheral equipment, and
with other third-party servicing companies. The manufacturers of the computers
and peripheral equipment serviced by the Company, which include Xerox, Siemens,
IBM and StorageTek, all have large maintenance divisions to support their
respective product lines. In addition, there are many large, well-established
national third-party service companies, including General Electric Computer
Services Corp., AT&T, Bell Atlantic Business Systems, Inc. (formerly Sorbus,
Inc.), and Grumman Corp. These companies, and most of the Company's other
competitors, have substantially greater financial resources, including larger
marketing budgets, and larger technical staffs than the Company. Most
manufacturers of equipment also have the advantage of greater familiarity with
their own equipment and have greater access to the buyers of such equipment. The
Company also competes regionally with other third-party maintenance companies
and with small specialty service companies.
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The Company believes that the principal factors of competition in the
computer and peripheral equipment maintenance market are technical capability,
name recognition and price. The Company believes that because it only undertakes
to maintain certain equipment with which its field engineers are highly
experienced, the Company is able to compete based on its technical capabilities
in maintaining such equipment. The Company's overhead and cost structure also
permit it to compete on the basis of price with many of its competitors. In
addition, the Company has traditionally competed against the maintenance
departments of equipment manufacturers on the basis of the Company's ability to
provide "one-stop" services for the equipment of various manufacturers located
at one site. However, the maintenance departments of certain equipment
manufacturers have also commenced servicing equipment manufactured by other
companies and, therefore, have become competitors of the Company.
Research and Development: During the past two years, the Company has
committed significant financial resources to various research and development
projects. Most of these projects were related to the development of new
consumable products for use in high speed production printers, including the
development of toner products for use with both monochrome and color printers.
Although the Company's research and development efforts have resulted in the
development of products that the Company currently markets, including the Fusing
Agent and two toners, the Company has decided to reduce its research and
development activities in the near future and to concentrate its efforts on
expanding its maintenance base and on selling its existing products.
FUSING AGENT
In 1992, the Company commenced marketing the Fusing Agent for use with
the Model 2200 Siemens Printer. Revenues realized by the Company from the sale
of the Fusing Agent during the fiscal year ended September 30, 1995, and 1996,
were approximately $4,980,000 and $4,668,000 or 53% and 41%, respectively, of
the Company's total revenues. Although, the Company believes that its sales of
the Fusing Agent, both in the U.S. and in Europe, will continue to constitute a
major source of revenues for the Company in the future, revenues from Fusing
Agent sales are expected to decline as the existing base of Siemens printers
declines.
Background: In 1984, the Siemens Printer was introduced in the U.S. The
Model 2200 Siemens Printer is a computer-driven high-speed, non-impact
production printing system. Typical uses for the Siemens Printer include
printing labels, bank statements, checks, bar codes, and "junk mail". The
Siemens Printer is the only commercially available printing system known to the
Company that utilizes a cold fusion (chemical) process to fuse print to the
printed materials. All other currently available high-speed production printers,
including the printers manufactured by IBM and Xerox and other printers
manufactured by Siemens, use heat and pressure to fuse print to the printed
materials. Most printed materials can be printed using standard printers that
rely on heat and pressure to fuse print and do not require cold fusion printing.
The cold fusion process, however, has certain advantages over the heat fusion
process, particularly when printing on plastic stocks (including credit cards),
on heat sensitive materials, such as gummed labels and envelopes, and on
preprinted color forms. The Model 2200 Siemens Printer can perform all standard
printing functions and can also be used for printing purposes where heat and
pressure fusion is inappropriate.
The cold fusion process of the Siemens Printer was previously dependent
on the use of CFC-113 (Freon), a fluorocarbon that has been identified as an
ozone-depleting chemical. Title VI of the Clean Air Act Amendments of 1990 (the
"Clean Air Act") established a comprehensive regime for phasing out
ozone-depleting substances, including CFC-113 and other chlorofluorocarbons
("CFCs") by the year 2000. As a result of these environmental regulations, the
Fusing Agent has effectively replaced the prior CFC-based fusing agent used in
the Siemens printers. Although the Fusing Agent, a halogenated hydrocarbon
(HCFC), does not use CFC-113, it is classified by the EPA as an ozone-depleting
substance. However, because HCFCs deplete the stratospheric ozone to a much
lesser extent than CFCs, the production of HCFCs is currently not required to be
phased out until January 1, 2015.
Product; Market. The Fusing Agent has been accepted and recommended by
Siemens as a substitute for the CFC-113-based fusing agent for the Model 2200
Siemens Printer. Independent tests have confirmed that the Fusing Agent meets
commercial standards of toxicity and safety. Tests performed by the Company
indicate that the Fusing Agent can be substituted for CFC-113 in the Siemens
Printer fusing process without any loss of printing efficiency or quality. Until
the Company introduced the Fusing Agent, all Model 2200 Siemens Printers used
the CFC-113 fusing agent that was sold exclusively by Siemens.
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The Company believes that there are approximately 800 printers
currently in use in the U.S., including the Model 2200 Siemens Printers that
were sold by StorageTek as the StorageTek Model 6100 Laser Printer and Model
2200 Siemens Printers that were incorporated into a printing system that was
packaged and sold by Datagraphics. However, the number of Siemens Printers in
service is declining and is not expected to increase due to the election by
Siemens AG to cease manufacturing the Model 2200 Siemens Printer. Accordingly,
the potential market for the Fusing Agent is expected to decline over the long
term as the existing Siemens Printers are withdrawn from use.
The Company formed Interscience PLC in the United Kingdom, in part, to
sell Fusing Agent in the United Kingdom and, possibly, in the rest of Western
Europe. In order to increase its marketing strength in Europe, the Company has
filed patent applications for the use of the Fusing Agent in the cold fusion
printing process with (i) the patent offices of the United Kingdom and Belgium,
and (ii) the European Patent Office. The Company's patent applications for the
United Kingdom and Belgium were approved in 1996. As a result, sales of Fusing
Agent by Interscience PLC increased from $382,000 and $666,000 during the fiscal
years ended September 30, 1994 and 1995, respectively, to $960,000 for the 1996
Fiscal Year. The increase in sale of the Fusing Agent during the 1996 Fiscal
Year is attributable primarily to sales made after the receipt of the United
Kingdom patent in January 1996. The Company expects that sale of the Fusing
Agent by Interscience PLC in the coming fiscal year will continue to increase
due to the grant of the patent. Although the Company has received a patent in
the United Kingdom and in Belgium, the Company's patent position with respect to
its pending European patent applications is subject to numerous uncertainties
that involve complex legal, factual and scientific issues, and, therefore, no
assurance can be given that the Company's claims in its European patent
applications will eventually issue as patents.
Sales and Marketing. The Company initiated sales of the Fusing Agent in
1992 to its existing maintenance customers under the Company's label. Since
February 1993, the Company has also been selling the Fusing Agent to both its
maintenance clients and to other distributors, including Siemens' U.S. printer
division, as "Siemens Fusing Agent, Part Number 888."
In July 1993, the Company entered into a purchase agreement with
Siemens Nixdorf Printing Systems pursuant to which the Company agreed to sell to
Siemens such amounts of the Fusing Agent as Siemens ordered from time to time
during the term of the agreement. Siemens resold the Fusing Agent to its
maintenance customers and to others for use in the Model 2200 Siemens Printer.
The initial agreement has expired, and in September 1996, the Company entered
into a new product purchase agreement (the "Supply Agreement") with OCE Printing
Systems USA, Inc.("OCE"), the company that acquired Siemens Nixdorf. Pursuant to
the Supply Agreement, OCE has agreed to purchase its Fusing Agent from the
Company and the Company has agreed to sell to OCE such amounts of Fusing
Agent as OCE may from time to time order. The price for the Fusing Agent is
a fixed price, which price escalates annually after the first year. The fixed
price may also be increased by the amount of any increase in the Company's cost
of Fusing Agent raw materials if the cost of such raw materials increases for
the Company by more that 10%. The Company has agreed not to solicit any new
distributors of the Fusing Agent during the term of the agreement, provided that
OCE purchases no less than 12,000 cartons of Fusing Agent during any 12-month
period. The Supply Agreement has a term of five years and may be extended by OCE
at its discretion for an additional year. Since the execution of the Supply
Agreement, OCE has placed orders for a total of 11,500 cartons of the Fusing
Agent.
The Company has agreed to transfer to OCE all of the Company's rights,
including its patent rights, its expertise and information pertaining to the use
of the Fusing Agent compound in the cold fusion printing process if and when the
Company (i) ceases to produce, distribute and sell the Fusing Agent and no
longer has any business activities relating to the Fusing Agent, or (ii) if the
quality of the Fusing Agent delivered by the Company is not sufficient for OCE's
requirements. Disputes regarding the quality of the Fusing Agent are required to
be resolved between the parties through binding arbitration.
The Company also sells the Fusing Agent to NCR Corporation, an owner
and operator of a significant number of the Siemens printers, and to the
Bradshaw Group, a third party maintenance provider. The Company allows these
purchasers to resell the Fusing Agent under their own private labels.
Sources of Supply: The Company has entered into a supply contact with
AlliedSignal, Inc. ("AlliedSignal") for the purchase of the HCFC compound that
is used as the Fusing Agent. The supply contract obligates the Company to
purchase from AlliedSignal and obligates AlliedSignal to sell to the Company,
subject to the terms of
7.
<PAGE> 9
the agreement, all of the HCFC compound the Company domestically needs for the
Fusing Agent during the period ending on December 31, 1996. The Company believes
that there are several other domestic or foreign companies that can provide the
Company with the HCFC that it expects to need in the future. The Company has
initiated discussions with AlliedSignal and such other suppliers regarding
future purchases of HCFC and will decide on who its future supplier will be
based on price and other considerations. The Company does not currently believe
that the expiration of the supply agreement with AlliedSignal will adversely
affect its ability to obtain HCFC at competitive prices.
The Company's United Kingdom subsidiary currently purchases the Fusing
Agent compound from a European supplier.
The Fusing Agent sold by the Company is dispensed into the Model 2200
Siemens Printer from a specially designed reusable canister capped with a valve
designed by the Company. The canister and valve are manufactured for the Company
by unaffiliated manufacturers. Although the manufacturers of the canister and
the valve are currently the Company's only sources for such components, the
Company believes that it could find alternate manufacturers for the valve and
canisters. Since the canisters are re-usable, any temporary delay in the
manufacture of such canisters would not be expected to have an immediate impact
on its ability to supply the Fusing Agent to its clients. Nevertheless, any
extended delay or disruption in the production of these components by the
current manufacturers could delay the Company's Fusing Agent shipments and could
have an adverse effect on the Company's Fusing Agent sales.
The Company currently purchases the various other products that it
sells for use with high-speed printers, including its proprietary toners, the
non-proprietary toners, and the developers, from various third-party independent
manufacturers. The terms under which these other products are manufactured,
packaged and shipped for the Company vary depending on the product and the
Company's needs.
PATENTS
On July 26, 1994, the United States Patent and Trademark Office (the
"Patent Office") issued a U.S. patent (the "Patent") to the Company for the use
of the Fusing Agent as an alternative fusing agent in the cold printing process.
A patent for the use of the Fusing Agent as a fusing agent in the cold printing
process has also been issued to the Company in the United Kingdom and in
Belgium, and the Company has applied for similar patent rights with the European
Patent Office. Although the Company has been awarded a patent in the United
Kingdom and Belgium, no assurance can be given that any of the claims in the
Company's patent applications will eventually issue as patents in the European
Patent Office.
On October 16, 1995 the Patent Office issued a notice to the Company
that an unnamed party had copied a claim of the Patent for purposes of
instituting an Interference Proceedings to determine priority of invention. As
of the date of this filing, the Company is waiting for the Patent Office to
determine whether or not an Interference will be declared. See "Item 3 - Legal
Proceedings." In addition, the Fusing Agent patent that was issued to the
Company in the United Kingdom has been challenged by a third party distributor
of the Fusing Agent. The Company does not believe that the challenge has any
merit and is vigorously defending the patent. However, should the Company's
United Kingdom patent be invalidated, the ability of Interscience PLC to
continue to distribute Fusing Agent in the United Kingdom would be severely
limited.
Although the Company believes that the Fusing Agent was independently
developed and does not infringe on patents of others, third parties can claim
that the Company's Fusing Agent infringes on the rights of others. If it were
determined that the Fusing Agent does infringe on the property rights of third
parties, the Company may be required to modify the formula of the Fusing Agent
or obtain a license from such third party. No assurance can be given that the
Company will be able to do so in a timely manner or on acceptable terms and
conditions; and the failure to do either could have a material adverse effect on
the Company's business. The Company, in the past, has initiated litigation
against a number of companies that have sold the Fusing Agent without the
Company's permission, and the Company will continue to defend its rights in the
Patent.
The Company has also filed several other patent applications with the
Patent Office regarding the cold fusion process and consumable products used by
printers, including an application related to dry toners which may
8.
<PAGE> 10
advantageously be used in color imaging, security document imaging, magnetic ink
character recognition printing and other specialized imaging applications with
an electrophotographic, electrographic, or magnetographic imaging systems
designed for solvent vapor fixing. To date, no other patents have been issued to
the Company, and no assurance can be given that any additional patents will be
granted.
EMPLOYEES
As of September 30, 1996, the Company had 84 full-time employees,
including four executive officers, 60 field engineers, one salesman, eight
persons employed in administration, and eleven persons engaged in in-house
engineering and logistics. The Company also retains numerous technical
consultants and maintenance engineers, on a case by case or when needed basis.
The Company's field engineers are highly trained with substantial experience.
None of the Company's employees are represented by a union, and the Company
believes that its employee relations are good.
9.
<PAGE> 11
ITEM 2. DESCRIPTION OF PROPERTY.
As of September 30, 1996, the Company maintained its U.S. offices in
seven cities. In addition, Interscience PLC, the Company's U.K. subsidiary, also
leased an office in Ashford, England. All of the Company's leases were entered
into with unaffiliated third parties. The following is a summary of the
Company's office leases as of September 30, 1996:
<TABLE>
<CAPTION>
Base Lease Approx.
Monthly Expiration Square
Location Rent Date Feet
- -------- ------ ------ -----
<S> <C> <C> <C>
Agoura Hills, CA $7,350 month-to-month 10,572
Lanham, MD $5,000 month-to-month 15,000
Hackensack, NJ $3,399 March 31, 2000 6,300
Anaheim, CA ("LSE") $6,035 October 31, 1998 13,120
Dallas, TX $ 800 month-to-month 2,000
Bethel, CT $ 700 February 28, 1998 1,000
Anaheim, CA (the "Company") $3,321 month-to-month 7,723
Ashford, Middlesex, England pound sterling 1,000 month-to-month 1,000
</TABLE>
As of September 30, 1996, the Company also leased storage space for
parts and inventory in Anaheim, California, and in Mill Valley, California.
As part of the Company's recently initiated company-wide
reorganization, the Company has decided to consolidate and/or to relocate
certain of its facilities in order to reduce the Company's rental expenses and
in order to more efficiently organize the Company's operations. Accordingly,
since September 30, 1996, the Company has (i) closed the Lanham, Maryland
facility and moved it to the Fairfax, Virginia, facility that the Company
acquired in its acquisition of LPS in October 1996, and (ii) relocated the
Hackensack, New Jersey, and Bethel, Connecticut, facilities to a new facility in
Carlstadt, New Jersey. The new Carlstadt facility is a 9,000 square-foot
facility that is leased under a five-year lease that expires on November 1,
2001. The monthly rental payment for the Carlstadt offices is $4,875. The
Fairfax facility is a 7,000 square-foot office and warehouse facility that is
leased under a lease that expires on September 30, 1997. The monthly rent for
the Fairfax facility currently is $5,950. Also, the Company has informed the
landlord of its Agoura Hills executive offices and warehouse that it will move
out of this building during the next few months. The Company intends to move the
Agoura Hills warehouse to the Anaheim facility and to relocate the executive
offices to smaller office space in the greater Los Angeles, California area. The
Company does not believe that it will have any difficulty in obtaining suitable
office space for its executive offices. In addition, the Company intends to
close the Anaheim, California offices and warehouse of LSE and intends to move
these facilities to the Company's Anaheim warehouse. The Anaheim warehouse is
being expanded to accommodate the LSE offices and warehouse and the Company's
Agoura Hills warehouse, both of which are being moved to the expanded Anaheim
facility. This expanded Anaheim facility is leased pursuant to a five-year lease
at an initial cost of $7,569 per month.
ITEM 3. LEGAL PROCEEDINGS.
The Company is the assignee of the entire right, title and interest in
and to U.S. Patent No. 5,333,042 (the "Patent") directed to a method for using
fusing agent in cold fusion laser printers. On October 16, 1995, the Patent
Office issued a notice to the Company that an unnamed party had copied a claim
of the Patent for purposes of instituting an Interference Proceedings under 35
U.S.C. 135 to determine priority of invention. The Patent Office has not yet
notified the Company whether or not an Interference will be declared, and the
Company is unable to estimate when the Patent Office will issue its
determination on the claim. If an Interference is declared by the Patent Office,
the Patent Office will then institute formal proceedings to determine who was
the first inventor of
10.
<PAGE> 12
the copied claim. Such proceedings could take several years to resolve and be
expensive to defend. The Company believes that it was the first inventor of the
inventions claimed in the patent and that, accordingly, no Interference should
be declared. However, if an Interference is declared, the Company will
vigorously defend its rights to the Patent.
Pursuant to that certain Agreement of Purchase and Sale of Shares,
dated January 1996 and effective as of June, 30, 1995, Messrs. Greb, Lynn, Casey
and Hively (collectively, the "Sellers") sold all of the stock of Laser Support
& Engineering ("LSE") to the Company for $1,678,038. The purchase price was to
be paid be a $800,000 cash payment plus the delivery of two equal installment
payments pursuant to promissory notes secured by all of the LSE stock. Following
the acquisition, the Company informed the Sellers that the Sellers had breached
certain provisions of the Purchase Agreement. Until the matter was resolved the
Company deposited the first installment ($438,018) due under the purchase price
promissory notes in an interest-bearing account before the payment was due. The
Sellers responded to the Company's claim that there was a breach of the
representations and warranties by purportedly accelerating the notes, demanding
late fees, and purportedly re-electing themselves as the LSE directors. The
Sellers then sued the Company in the Superior Court of California, County of
Orange, on August 2, 1996 to enjoin the Company from interfering with their
management of LSE (John Greb, Barry N. Lynn, Dennis Casey, John G. Hively, v.
Interscience Computer Corporation). The Company countersued the Sellers in the
same court on August 6, 1996 (Interscience Computer Corporation vs. John Hively,
Barry N. Lynn, Dennis Casey, John Greb, Laser Support & Engineering) for breach
of contract, fraud and rescission. On September 5, 1996, the Company posted a
$952,000 bond for the full amount of the unpaid principal balance of the
promissory notes and the superior court accepted the parties' stipulation that
the dispute would be resolved by arbitration. John Greb, Barry N. Lynn, Dennis
Casey, and John G. Hively v. Interscience Computer Corporation, JAMS Arbitration
Link No. 960-258-046. As of the date of this Annual Report, the Sellers are not
involved in the operation of LSE and the Company is continuing to operate and
manage LSE. The Company anticipates that the arbitration will commence in
February 1997.
On August 13, 1996, Thomas Zirnite ("Zirnite") filed an action against
the Company for breach of contract and wrongful termination in Los Angeles
County Superior Court, North District, Zirnite v. Interscience Computer
Corporation, seeking unspecified damages. The Company has cross-complained for
$1,000,000 of damages and $10,000,000 of punitive damages based on slander. In
June 1995, the Company hired Zirnite as Vice President of Finance and
Administration to assist Company's Chief Financial Officer. The Company
subsequently terminated Zirnite's employment on December 7, 1995. Zirnite
alleges that the termination was in retaliation for his refusal to perform
accounting procedures which would have violated the law and generally accepted
accounting procedures. Zirnite made such allegations to the third parties, for
which the Company has filed a cross-complaint.
On August 30, 1996, Julie Zuniga filed a lawsuit in Los Angeles County
Superior Court alleging sexual harassment and naming Michael Brennan, the former
President of the Company, and the Company as defendants. Mr. Brennan's five-year
employment agreement expired in October 1996, and Mr. Brennan is no longer
employed by the Company. The complaint alleges inappropriate sexual comments and
conduct by Mr. Brennan and others on behalf of the Company. The complaint asks
for an unspecified amount of actual and punitive damages.
On September 23, 1996, Laura Brennan filed a complaint against the
Company and Jim Mitchelli, Vice President of the Company, for employment
discrimination and wrongful termination. The suit is pending in Los Angeles
County Superior Court, Northwestern District, Case No. LC038584. Ms. Brennan
alleges that she was terminated upon becoming pregnant. The complaint asks for
an unspecified amount of actual and punitive damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders.
11.
<PAGE> 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is currently traded in the Nasdaq National Market
under the symbol "INTR." The following table sets forth the high and low sales
prices for the Common Stock, as reported by the Nasdaq Stock Market, during the
two most recent fiscal years. The prices do not include retail mark-ups,
mark-downs or fees.
<TABLE>
<CAPTION>
Common Stock
Sales Prices
----------------------
High Low
---- ---
<S> <C> <C>
Year Ended September 30, 1995
October 1, 1994 - December 31, 1994 $6.00 $5.00
January 1, 1995 - March 31, 1995 $5.25 $4.75
April 1, 1995 - June 30, 1995 $5.625 $4.75
July 1, 1995 - September 30, 1995 $5.75 $4.875
Year Ended September 30, 1996
October 1, 1995 - December 31, 1995 $5.50 $4.875
January 1, 1996 - March 31, 1996 $5.50 $4.687
April 1, 1996 - June 30, 1996 $5.125 $4.50
July 1, 1996 - September 30, 1996 $5.00 $3.625
</TABLE>
To date, the Company has not declared or paid any cash dividends with
respect to its Common Stock, and the current policy of the Board of Directors is
to retain earnings, if any, to provide for the growth of the Company.
Consequently, no cash dividends are expected to be paid on the Common Stock in
the foreseeable future. Further, there can be no assurance that the proposed
operations of the Company will generate the revenues and cash flow needed to
declare a cash dividend or that the Company will have legally available funds to
pay dividends. Any dividends on the Common Stock would be subject to prior
payment of dividends on the Series A Preferred Stock and Series B Preferred
Stock.
The Company is obligated to make quarterly dividend payments on its
outstanding shares of Series A Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock") and Series B Cumulative Convertible Preferred Stock
(the "Series B Preferred Stock"). The dividends are payable quarterly on the
fifteenth day of April, July, October and January of each year at a quarterly
rate of $1.875 per share of Series A Preferred and Series B Preferred Stock,
respectively (subject to adjustment under certain circumstances). The Company
has timely paid the cash dividends required to be paid on the Series A Preferred
Stock and Series B Preferred Stock since the initial issuance of such shares.
On March 29, 1996, the Company sold 4,000 shares of its Series B
Preferred Stock to Renaissance Capital Growth & Income Fund III, Inc. for
$400,000. The shares of Series B Preferred Stock were sold without the use of an
underwriter or placement agent pursuant to the private placement exemption
available under Section 4(2) of the Securities Act of 1933, as amended.
The Series B Preferred Stock bears dividends at an annual rate of 7.5%
of the stated value, votes on an as-if-converted basis, and is convertible into
shares of Common Stock at the option of the holder at a conversion price of
$5.00 per share, subject to anti-dilution adjustments.
12.
<PAGE> 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
Annual Report.
OVERVIEW
Since its organization, the Company's principal business has been
providing maintenance services for computers and for a wide range of related
peripheral equipment, including high-speed printers. During the past few years,
the Company's maintenance activities were directed primarily at the Model 2200
Siemens Printer market. In 1992, the Company developed and commenced
commercially marketing the Fusing Agent and, since February 1993, has been
selling the Fusing Agent directly to end users and to unaffiliated distributors.
Revenues realized by the Company from the sale of the Fusing Agent constituted
53% and 41% of the Company's total revenues for the fiscal years ended September
30, 1995 and 1996, respectively.
During the past 18 months, the Company has been expanding its
maintenance business to include maintenance services for the Xerox line of
high-speed production printers and, to a lesser extent, other non-Siemens
printers. Accordingly, during the past 18 months, the Company has made a number
of acquisitions for the purpose of acquiring the parts and inventory, the
technical expertise, and the maintenance contracts that are required to
effectively compete in these other printer maintenance markets. These
acquisitions have consisted of the purchase of LSE, PPD, LPS and of certain of
the assets of BancTec, Inc. (collectively, the "Acquired Operations"). To date,
the Company has paid a total of $2,308,000 in cash for the purchase of these
assets and businesses, and has incurred $1,733,000 of additional indebtedness to
the sellers of these assets and businesses. In addition, during the 1996 Fiscal
Year, the Company incurred other expenses related to the acquisitions, including
the general and administrative expenses of the acquired operations and the
additional labor costs of employees of such operations. In order to fully
integrate the acquisitions with the Company's existing operations, and in order
to reduce redundant general and administrative expenses and excess labor
expenses, the Company recently initiated a company-wide reorganization pursuant
to which its labor force is being reduced to eliminate duplication, the offices
and warehouses are being consolidated, and the financial, reporting and
communications systems of the various operations are being connected by a new
computer network. The Company believes that the reorganization will reduce the
Company's operating expenses in the future.
RESULTS OF OPERATIONS
Fiscal Years Ended September 30, 1995 and September 30, 1996.
Sales for the fiscal year ended September 30, 1996 (the "1996 Fiscal
Year") increased by $1,858,000, or 20%, over sales for the fiscal year ended
September 30, 1995 ("Fiscal 1995"). The increase is attributable primarily to
the additional maintenance revenues generated by the Acquired Operations.
However, the increase in sales is also due, in part, to certain additional
revenues generated by the Company's existing maintenance operations. The
increase in maintenance revenues was partly offset by a $312,000 decrease in
revenues from the sale of Fusing Agent. During the 1996 Fiscal Year, the Company
generated $4,668,000 of sales revenues from the sale of Fusing Agent, compared
to $4,980,000 derived during Fiscal 1995. The decrease in the sale of Fusing
Agent is attributable to the decrease of Model 2200 Siemens Printers in use and
to the amount of Fusing Agent that Siemens ordered from the Company. The Company
believes that sales of the Fusing Agent during the fiscal year ending September
30, 1997 will increase slightly due to the new Supply Agreement that the Company
entered into with OCE in September 1996 (see, "Item 1. Description of
Business-Sales and Marketing") and to the patent that was issued to the Company
in the United Kingdom in January 1996. The patent issued in the United Kingdom
is expected to result in an increase in sales of Fusing Agent in the United
Kingdom by the Company's United Kingdom subsidiary. However, over the longer
term, sales of the Fusing Agent are expected to decrease.
Gross profits increased by $428,000, from $3,898,000 in Fiscal 1995 to
$4,326,000 in the 1996 Fiscal Year, due to the increase in sales. However, the
11% increase in the gross profits in the 1996 Fiscal Year over Fiscal 1995 is
less than the 20% increase in sales due to the 26% increase in cost of sales.
Cost of sales as a
13.
<PAGE> 15
percentage of sales increased from 59% in Fiscal 1995 to 62% for the 1996 Fiscal
Year due, in particular, to the additional costs attributable to the Acquired
Operations. Such additional costs included redundant labor costs and the cost of
acquiring the parts and equipment that are necessary to service the newly
expanded operations. The Company increased its inventory levels during the past
fiscal year (i) in order to enable it to expand its operations into the Xerox
high-speed production printer market and (ii) in connection with the purchase of
the Acquired Operations. As of September 30, 1995, the Company employed 40 field
engineers. By September 30, 1996, the number of field engineers had increased to
60. Although the number of field engineers generally will increase as the
Company's maintenance operations increase, the Company believes that certain
labor redundancies existed due to its purchase of the Acquired Operations.
Accordingly, the Company has, since September 30, 1996, reduced the number of
its field engineers by ten in connection with its on-going reorganization.
Sales and administrative expenses increased by $2,235,000, or by 92%,
from Fiscal 1995 to the 1996 Fiscal Year. The increase is due primarily to the
additional costs associated with the operations of the Acquired Operations. The
Company expects to reduce a certain portion of these expenses in its currently
on-going reorganization. In addition, the Company also incurred significant
legal expenses related to the various lawsuits that the Company is currently
defending, all of which were filed during the 1996 Fiscal Year. In addition to
paying its own legal expenses, the Company is currently also paying the legal
expenses of Mr. Brennan's separate counsel in the lawsuit that was filed against
both the Company and Mr. Brennan. Mr. Brennan is the former President of the
Company. See "Item 3. Legal Proceedings." Because the Company intends to
vigorously defend each of the pending lawsuits, these fees are not expected to
decrease in the near future. In addition, because of the expenses that the
Company expects to incur in connection with the various lawsuits in which the
Company is currently involved, the Company for the 1996 Fiscal Year reserved
$200,000 as a loss contingency.
The Company's development expenses decreased by $758,000 in the 1996
Fiscal Year as the development of certain consumable products was completed and
the development of other consumable products was delayed. Although the Company
intends to continue to develop consumable products in the future, the Company
does not expect such development expenses to be as significant in the future as
during Fiscal 1995.
Depreciation and amortization increased by $113,000, or 72%, during the
1996 Fiscal Year over the past year due primarily to the significant increase in
the amount of its equipment and amortization of Goodwill.
As a result of the significant increase in the Company's sales and
administrative expenses and the increase in the Company's cost of sales
percentage, the Company posted a loss of $1,052,000 from its operations for the
1996 Fiscal Year compared to operating income of $469,000 during Fiscal 1995. As
discussed elsewhere in this Annual Report on Form 10-KSB, the Company is
currently attempting to reduce its sales and administrative expenses and is
attempting to reduce its cost of sales. No assurance can be given that the
Company will be able to reduce these and other costs in its reorganization or
otherwise or that any such reduction will be sufficient to enable the Company in
the future to generate a profit from operations.
The Company's interest income decreased from $89,196 in Fiscal 1995 to
$5,100 in the 1996 Fiscal Year due to the use of the Company's cash to pay
portions of the purchase price of its acquisitions, to pay the additional
expenses related to the acquisitions, to the maintenance of additional
facilities, and to the increased level of litigation expenses. Likewise, the
Company's interest expense increased from $9,020 in Fiscal 1995 to $228,000 in
the 1996 Fiscal Year due to the indebtedness that the Company incurred in
connection with the recent acquisitions and the accrual of interest related to
unpaid income taxes. As of September 30, 1996, the Company owed the sellers of
the various businesses that it had acquired a total of $1,733,000. In addition,
the Company has borrowed $1,333,000 from its bank to fund the purchase of the
Acquired Operations. Interest on this acquisition indebtedness will continue to
accrue in the future until the indebtedness is repaid in full. Accordingly, the
Company's interest expense is not expected to decrease significantly in the near
future.
For the 1996 Fiscal Year, the Company had an income tax benefit of
$81,000. The amount of the income tax benefit was reduced due to certain tax
expenses, including (i) an adjustment to the provision of the prior year's tax
liability of $208,000, which amount is included in the current year's tax
expenses, and (ii) a change in the valuation allowance of $69,000.
14.
<PAGE> 16
Dividends paid on preferred stock increased in the 1996 Fiscal Year
from dividends paid in Fiscal 1995 due to the issuance of additional shares of
preferred stock. The additional shares, issued for $400,000, bear dividends at a
rate of 7.5% per annum on stated value ($400,000) of the shares.
Fiscal Years Ended September 30, 1994 and September 30, 1995
Sales for Fiscal 1995 decreased by approximately $126,000, or 1%, to
$9,396,000, from sales for the fiscal year ended September 30, 1994, ("Fiscal
1994") of $9,552,000. The $126,000 decrease in Fiscal 1995 revenues is
attributable to a $2,384,000, decrease in the U.S. sales of the Fusing Agent to
Siemens Nixdorf Printing Systems ("Siemens Nixdorf"), the predecessor of OCE.
Additionally, there was a decline in revenues from equipment leasing activities
by $414,000, or 56%, to $324,000, compared with Fiscal 1994 lease revenues of
$738,000. However, the Company realized offsetting increases in maintenance
revenues of $549,000, increased sales of the Fusing Agent in Europe by
Interscience PLC, and $250,000 of revenue generated from the sale of spare
parts, printers and other assets to an unaffiliated European based company. In
Fiscal 1995, revenues from maintenance services constituted 40% of the Company's
total revenues, compared with 30% for Fiscal 1994. Sales in the U.S. and abroad
of the Fusing Agent and consumables constituted 58% of Fiscal 1995 revenues,
compared with 62% of total revenues in Fiscal 1994. The increase in maintenance
revenues is attributable to revenues generated by JCACS and LSE, the
subsidiaries that were acquired during Fiscal 1994 and 1995, respectively.
During Fiscal 1994, the Company realized revenues of $4,300,000, or 45% of total
revenue, compared with Fiscal 1995 revenues of $1,916,000, or 20% of total
revenue from the sale of Fusing Agent to Siemens Nixdorf.
Gross profits increased by 2% in Fiscal 1995, from approximately
$3,824,000 in Fiscal 1994 to approximately $3,898,000 in Fiscal 1995. The slight
increase in gross margins is attributable to increased sales of Fusing Agent and
consumable products by the Company directly to end-users, which realize higher
prices than sales of those products to distributors.
Sales and administrative expenses increased from $1,589,000 in Fiscal
1994 to $2,424,000 in Fiscal 1995, due primarily to the additional costs
associated with the operations of JCACS and LSE. The increase in the amount of
sales and administrative expenses, $809,000, relate to approximately $54,000 in
management fees; $147,000 in bad debt expense from JCACS receivables from Fiscal
1994; $308,000, in direct sales and management wage expense; $120,000, in
increased facility costs; $80,000, in professional fees; and $100,000, in
miscellaneous expenses, including insurance, communications and travel. Such
expenses as a percentage of total revenue substantially changed from 16.7%, in
Fiscal 1994 to 25.8% in Fiscal 1995.
During Fiscal 1995, the Company's research and development expenses
increased by 300% from $248,000 to $826,000, or an increase of $578,000, due to
the Company's increased research and development activities, which increase was
primarily related to the development of new toners that take advantage of the
Fusing Agent's properties for both monochrome and color printing, and the
integration of a Company designed cold or vapor fusion system integrated with
high speed print engines manufactured by Delphax Imaging Systems, Inc
("Delphax"). The first such product under development was a monochromatic toner
compatible with the Delphax print engine and the vapor fusing system employing
the Fusing Agent. Delphax (Canton, MA) is the leading worldwide supplier of high
speed production printers employing electron beam imaging technology, which
competes with electrophotographic technology employed in high speed printers
manufactured by Xerox, IBM and Siemens.
The Company's operating income for Fiscal 1995 decreased by $1,313,000,
from $1,724,000 to $433,000. The rate of the decrease in operating income, on
essentially level comparable revenues, can be attributed to the increases of
$703,000 and $578,000, related to sales and administration, and development
expenses, respectively, which together total $1,281,000.
Net interest income in Fiscal 1995 was $90,000 compared to interest
income of $22,000 in Fiscal 1994 due to the interest earned in fiscal 1995 by
the Company on the net proceeds derived from the Public Offering.
15.
<PAGE> 17
During December 1995, the Company arbitrated a contract dispute with a
vendor for products to be delivered during Fiscal 1995 and 1996. The Company
claimed approximately $400,000 with respect to the inability of the vendor to
supply product under a supply agreement. The vendor's claim was for $639,000,
based on the contention that the Company was in default in not purchasing agreed
quantities of product. By direction of the American Arbitration Association,
dated December 8, 1995, the vendor was awarded $194,000, and administration and
Arbitrator fees. Consequently, the Company has expensed $200,000, related to the
loss on the arbitration settlement.
Income taxes for Fiscal 1995 decreased by $810,000 to an income tax
benefit of $35,000, resulting from research and development tax credits, from
$775,000 during the prior year. In October 1993, the Company effected a change
in its accounting policies to conform to Statement of Financial Accounting
Standards No. 109. The change in accounting policies resulted in a one-time
income recognition of $242,000 during Fiscal 1994 and in the addition of $70,000
of deferred income taxes to the Company's assets on its September 30, 1994
balance sheet.
As result of the Company's decreased operating income and the one-time
$200,000 expense related to the arbitrated dispute, the net income for Fiscal
1995 decreased to $468,000 from Fiscal 1994 net income of $1,213,000.
LIQUIDITY AND CAPITAL RESOURCES
During the 1996 Fiscal Year, the Company's liquidity decreased
significantly due to the Company's purchase of the Acquired Operations. As of
September 30, 1996, the Company's current ratio was 1.2:1 compared to a current
ratio of 1.8:1 on as of September 30, 1995. Notwithstanding the foregoing
decrease in the Company's liquidity, the Company believes that cash generated by
its operations will be sufficient to fund the Company's anticipated working
capital needs for the foreseeable future. However, the Company does not have the
financial resources to make any additional acquisitions of businesses without
obtaining additional financing and, accordingly, the Company's ability to grow
through such acquisitions will be negatively impacted.
During the 1996 Fiscal Year, the Company's cash position was reduced by
$1,710,000, from $2,046,000 on September 30, 1995 to $336,000 on September 30,
1996. The reduction in cash was due to certain non-recurring expenditures, to
certain expenses that the Company is attempting to reduce, and to the Company's
operating loss during the past fiscal year. The non-recurring expenditures
included approximately $593,000 paid by the Company to the sellers of the
business recently acquired by the Company as part of the purchase price of the
businesses/assets (including $498,000 paid at the closing and $95,000 paid as
part of the deferred portion of the purchase prices), and the purchase of
inventory and other equipment necessary to operate the Company's new Xerox
maintenance operations. The Company also expended cash on rent of facilities of
the Acquired Operations and on other general and administrative expenses related
to these acquisitions, which expenses the Company believes will be reduced as it
consolidates and reorganizes the businesses that it acquired.
On July 30, 1996, the Company entered into a credit agreement (the
"Credit Agreement") with Sanwa Bank of California (the "Bank") pursuant to which
the Bank has agreed to make a revolving credit facility and a term loan facility
available to the Company. Under the revolving credit facility, the Company is
entitled to borrow, from time to time as requested by the Company, an amount not
to exceed an aggregate of $1,000,000 at any time. The rate of interest on all
borrowings under the line of credit facility is, at the Company's option, either
a variable rate equal to the Bank's reference rate plus 1/2%, or a fixed rate
equal to 2 3/4% over the Bank's cost of acquiring funds on the date that the
fixed rate is set. The revolving credit facility expires on February 28, 1998.
As of December 31, 1996, the Company had used approximately $997,000 of the
amount available under the revolving credit facility. Of this amount,
approximately $45,000 represented cash advances made to the Company and the
balance, $952,000, represented a letter of credit that the Company obtained in
order to secure the surety bond obtained by the Company in connection with the
on-going litigation with the former shareholders of LSE. See, "Item 3. Legal
Proceedings." All loans extended under the Credit Agreement are secured by a
blanket lien on the Company's assets and by guarantees executed by Interscience
PLC and by LSE.
The Credit Agreement also provides the Company with a term loan
facility pursuant to which, until August 30, 1996, the Company could borrow an
amount up to $2,000,000 for the purposes of funding its corporate acquisitions.
The Company initially borrowed a total of $800,000 under the term loan facility
in connection with the
16.
<PAGE> 18
Company's acquisition of certain assets from BancTec, Inc. in June 1996 and
$800,000 to pay part of the purchase price of LSE. As of December 1, 1996, the
outstanding principal balance of the term loan made pursuant to the Credit
Agreement was $1,267,000, and the interest rate on the term loan was 9%. The
Company currently is required to make monthly payments of principal in the
amount of $33,334, plus interest, under the term loan credit facility. The
entire outstanding balance of the term loan is due and payable on February 28,
1998.
As of September 30, 1996, the Company was not in compliance with
certain of the covenants contained in the Credit Agreement. However, the Company
has timely made all required payments under both the revolving line of credit
and term loan facility, and the Bank has not yet declared the loans made under
the Credit Facility to be in default. Pursuant to the terms of the Credit
Facility, if the Company is in non-compliance with the covenants, the Bank is
entitled to stop making additional advances to the Company under the revolving
line of credit. In addition, should the Bank declare an event of default under
the Credit Facility due to the Company's non-compliance with certain of the
covenants, the loans would immediately become due and payable and, unless the
loans are repaid, would entitle the Bank to foreclose on the Company's assets.
Should the Bank accelerate the maturity dates of the loans due to the foregoing
non-compliance, the Company would attempt to refinance the loans under the
Credit Facility with another bank or would attempt to otherwise obtain
sufficient debt or equity financing to repay the loans. The Bank has orally
informed the Company that it does not intend to accelerate the loans and has
also indicated that it is considering changing certain of the covenants so that
the Company would be brought into compliance with the Credit Facility. However,
no assurance can be given that the Bank will not declare the loans to be in
default or, if the loans do become due and payable, that the Company could
repay the loans before its assets are lost in foreclosure.
The Company's liquidity will continue to be negatively impacted by the
dividends that the Company is required to pay (at a rate of 7.5% per annum) on
its currently outstanding shares of preferred stock (having an aggregate stated
value of $4,000,000).
The Company currently is a party to certain legal proceedings,
including those listed in "Item 3. Legal Proceedings." The Company's liquidity
will be affected by the legal fees that the Company will incur in defending and
prosecuting the various matters. In addition, the Company may determine that it
is more cost effective or otherwise in the Company's best interests to settle
one or more of the pending proceedings. Any such potential settlement payment
may also adversely affect the Company's liquidity.
BACKLOG
The Company's total backlog as of September 30, 1996, was approximately
$9,000,000. Total backlog consists of (i) the fixed amount of contract revenues
remaining to be earned by the Company at a given time over the life of the
contracts, plus (ii) management's estimate of the variable usage fees to be
received from maintenance contracts for printers over the remaining life of the
contract, plus (iii) the total amount of orders for products (such as the orders
placed by distributors for the Fusing Agent) that remain to be filled. All of
such backlog revenues are expected to be realized during the twelve-month period
ending September 30, 1997.
17.
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements of Interscience Computer Corporation
are included in this report:
- Consolidated Balance Sheets -- September 30, 1995 and 1996
- Consolidated Statements of Operations -- Years ended September
30, 1995 and 1996
- Consolidated Statement of Shareholders' Equity -- Years ended
September 30, 1995 and 1996
- Consolidated Statements of Cash Flows -- Years ended September
30, 1995 and 1996
- Notes to Consolidated Financial Statements
18.
<PAGE> 20
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Interscience Computer Corporation
We have audited the accompanying consolidated balance sheets of
Interscience Computer Corporation and Subsidiaries as of September 30, 1995 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
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 financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Interscience Computer Corporation and Subsidiaries as of September 30, 1995 and
1996, and the consolidated results of operations, shareholders' equity and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
HOLLANDER, GILBERT & CO.
Los Angeles, California
December 20, 1996
19
<PAGE> 21
INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................................... $ 2,046,017 $ 336,355
Accounts receivable, net of allowance for doubtful accounts
of $15,000 in 1995 and $265,000 in 1996 .................................... 1,776,254 2,020,399
Due from officers, net of allowance of $104,134 in 1996 (Note 7) ............ 88,534 30,000
Inventories (Notes 2 and 4) ................................................. 2,505,444 3,555,318
Prepaid expenses and other receivables, net of allowance of $51,846 in 1996.. 145,473 60,525
Current portion of notes receivable (Note 7) ................................ 62,500
Current portion of net investment in equipment
contracts receivable (Note 6) ............................................. 136,998 55,146
Deferred income taxes (Note 11) ............................................. 99,000 424,000
----------- -----------
TOTAL CURRENT ASSETS ..................................................... 6,860,220 6,481,743
REPLACEMENT PARTS INVENTORY (Note 4) .......................................... 3,286,907 5,648,261
PROPERTY AND EQUIPMENT, net (Notes 5 and 8) ................................... 756,900 434,086
OTHER ASSETS
Net investment in equipment contracts receivable,
less current portion (Note 6) .............................................. 405,438
Notes receivable, net of current portion (Note 7) ........................... 187,500
Patents, net of accumulated amortization of
$36,323 in 1995 and $97,511 in 1996 ........................................ 366,695 378,357
Goodwill, net of accumulated amortization of
$97,663 in 1995 and $196,414 in 1996 (Note 3) .............................. 1,262,975 1,191,862
Deferred income taxes (Note 11) ............................................. 378,000
Deposits and other .......................................................... 102,853 96,272
----------- -----------
TOTAL OTHER ASSETS ....................................................... 2,703,461 1,666,491
----------- -----------
$13,607,488 $14,230,581
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
20
<PAGE> 22
INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank (Note 8) ..................... $ 200,000 $
Current portion of long-term debt and obligations
under capital leases (Notes 5 and 8) ............. 1,271,088 2,645,056
Accounts payable .................................. 1,180,998 1,486,000
Accrued liabilities ............................... 101,922 480,068
Accrued arbitration settlement (Note 12) .......... 200,000
Deferred revenue .................................. 47,002 168,392
Income taxes payable (Note 11) .................... 852,692 497,178
----------- -----------
TOTAL CURRENT LIABILITIES ...................... 3,853,702 5,276,694
DEFERRED REVENUE .................................... 157,285
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES, net of current portion (Notes 5 and 8) ..... 479,731 469,686
----------- -----------
TOTAL LIABILITIES .............................. 4,333,433 5,903,665
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY (Note 10)
Preferred stock, no par value; authorized 1,000,000
shares; issued and outstanding 36,000 shares ..... 3,200,000 3,590,000
in 1995 and 40,000 shares in 1996
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 2,541,666 shares .. 4,241,748 4,241,748
Retained earnings ................................. 1,832,307 495,168
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ..................... 9,274,055 8,326,916
----------- -----------
$13,607,488 $14,230,581
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
21
<PAGE> 23
INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
SALES ........................................................................ $ 9,395,934 $ 11,253,383
COST OF SALES ................................................................ 5,497,821 6,927,149
------------ ------------
GROSS PROFIT ................................................................. 3,898,113 4,326,234
------------ ------------
OPERATING EXPENSES
Sales and administrative ................................................... 2,423,708 4,658,929
Development ................................................................ 825,563 67,799
Depreciation and amortization .............................................. 157,782 270,343
------------ ------------
TOTAL OPERATING EXPENSES ................................................ 3,407,053 4,997,071
------------ ------------
491,060 (670,837)
------------ ------------
OTHER INCOME (EXPENSE)
Loss on arbitration settlement (Note 12) ................................... (200,000)
Loss contingency (Note 9) .................................................. (200,000)
Gain (loss) on asset sale (Note 7) ......................................... 61,929 (39,460)
Interest income ............................................................ 89,196 5,100
Interest expense ........................................................... (9,020) (227,695)
------------ ------------
(57,895) (462,055)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX .............................................. 433,165 (1,132,892)
INCOME TAX EXPENSE (BENEFIT) (Note 11) ....................................... (35,000) (81,000)
------------ ------------
NET INCOME (LOSS) ............................................................ $ 468,165 $ (1,051,892)
============ ============
LESS DIVIDENDS ON PREFERRED STOCK ............................................ $ 276,750 $ 285,247
============ ============
INCOME (LOSS) APPLICABLE TO COMMON STOCK ..................................... $ 191,415 $ (1,337,139)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING .......................................................... 2,541,666 2,541,666
============ ============
EARNINGS (LOSS) PER COMMON SHARE ............................................. $ .08 $ (.53)
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
22
<PAGE> 24
INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ------------------------- Retained
Shares Amount Shares Amount Earnings Total
------ ----------- --------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1994 36,000 $ 3,200,000 2,541,666 $ 4,241,748 $ 1,640,892 $ 9,082,640
Cash dividends paid on
Preferred stock (Note 10) (276,750) (276,750)
Net income 468,165 468,165
------ ----------- --------- ----------- ----------- -----------
BALANCE, September 30, 1995 36,000 3,200,000 2,541,666 4,241,748 1,832,307 9,274,055
Private placement (Note 10) 4,000 390,000 390,000
Cash dividends paid on
Preferred stock (Note 10) (285,247) (285,247)
Net loss (1,051,892) (1,051,892)
------ ----------- --------- ----------- ----------- -----------
BALANCE, September 30,1996 40,000 $ 3,590,000 2,541,666 $ 4,241,748 $ 495,168 $ 8,326,916
====== =========== ========= =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
23
<PAGE> 25
INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .......................................................... $ 468,165 $(1,051,892)
Adjustments to reconcile net income (loss) to net
cash (used) by operating activities:
Depreciation and amortization ............................................. 157,782 270,343
Provision for doubtful accounts ........................................... 405,980
Gain from asset sale ...................................................... (61,929)
Loss from rescission of asset sale ........................................ 61,929
Loss contingency .......................................................... 200,000
Changes in operating assets and liabilities:
Accounts receivable .................................................... (147,147) (257,239)
Inventories ............................................................ (1,198,485) (2,549,345)
Prepaid expenses and other receivables ................................. (10,373) 28,000
Deposits and other ..................................................... (34,621) (3,919)
Accounts payable and accrued expenses .................................. 325,519 143,136
Deferred revenue ....................................................... 4,758 24,374
Income taxes payable and deferred ...................................... (768,578) (302,514)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES ................................... (1,264,909) (3,031,147)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary ................................................... 145,361 (27,638)
Rescission of asset sale ................................................... 51,809
Advance to officer ......................................................... (30,000)
Investment in equipment contracts receivable ............................... 195,981 487,290
Sale of assets ............................................................. (51,809) 585,000
Patent acquisition costs ................................................... (120,652) (72,849)
Purchase of property and equipment ......................................... (49,289) (65,594)
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES ............................... 119,592 928,018
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans ................................................... 200,000 3,645,000
Principal reductions of short-term and long-term obligations ............... (137,506) (3,356,286)
Proceeds of preferred stock placement ...................................... 390,000
Cash dividend paid on preferred stock ...................................... (276,750) (285,247)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ............................. (214,256) 393,467
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. (1,359,573) (1,709,662)
CASH AND CASH EQUIVALENTS, Beginning of period ............................... 3,405,590 2,046,017
----------- -----------
CASH AND CASH EQUIVALENTS, End of period ..................................... $ 2,046,017 $ 336,355
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
24
<PAGE> 26
INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest received .................... $ 89,196
========
Interest paid ........................ $ 9,020 $ 69,493
======== ========
Income taxes paid .................... $662,246 $212,988
======== ========
NON-CASH TRANSACTIONS
Leases capitalized for the acquisition
of equipment ........................ $ 38,143
========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
25
<PAGE> 27
INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Nature of Operations. Interscience Computer
Corporation (the "Company") was incorporated under the laws of the State of
California on October 14, 1983, to be a third-party provider of maintenance
services for computer hardware and related peripheral equipment. The Company
currently provides technical support, training, spare parts resale and
maintenance for the Siemens, Xerox and Delphax families of high speed production
printers. In 1992, the Company introduced a non-chloroflurocarbon fusing agent,
developed by the Company and patented on July 26, 1994, for use with certain
high speed laser printers. Soon thereafter, the Company initiated a toner
development program. As a result of the Company's development of the Fusing
Agent and toner, gross revenues from these items constituted approximately 41%
of Company revenues.
Principles of Consolidation. The consolidated financial statements
include the accounts of Interscience Computer Corporation and its subsidiaries,
all of which are wholly-owned. All significant intercompany transactions have
been eliminated. The accompanying consolidated financial statements include the
results of operations and cash flows of acquired subsidiaries from their
respective dates of acquisition.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Such cash equivalents, at times, may exceed federally insured
limits. The Company maintains its accounts with financial institutions with high
credit ratings.
Inventories. Inventories consist of consumables held for sale in the
normal course of business and replacement parts. Consumables are recorded at the
lower of cost, on a first-in/first-out basis, or market. The Company
periodically reviews its components of replacement parts and establishes a
provision for excess quantities and obsolescence.
Sales Type Leases. Certain equipment leases to which the Company is the
lessor have been classified as sales type leases.
Property and Equipment. Property and equipment is stated at cost.
Depreciation is computed on the straight-line method based upon the estimated
useful life of the asset, substantially 5 years.
Intangibles. Goodwill represents the excess of the cost of companies
acquired over the fair value of their net assets at the date of acquisition and
is being amortized on the straight-line method over fifteen years.
The cost of patents acquired are being amortized on the straight-line
method over seven years.
Impairment of Long-Lived Assets. The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets, including
intangible assets. A loss is recognized when expected undiscounted future cash
flows are less than the carrying amount of the asset. The impairment loss is
the difference by which the carrying amount of the asset exceeds its fair
value. The Company does not expect to have any significant losses resulting
from its review of impairment of long-lived assets.
Stock-Based Compensation. The Company plans to account for stock
options under SFAS No. 123, which retains the original accounting prescribed by
APB Opinion No. 25. As a result, options granted at fair value will not result
in charges to earnings. Disclosures will be made, however, of compensation
costs determined under SFAS No. 123's fair value methodology.
Deferred Revenue. Service revenue is recognized ratably over the
contract period. Deferred service revenue represents billings in advance of the
service period. Included in the deferred revenue at September 30, 1996 is a
deferred gain in the amount of $247,000 on a sale/leaseback of certain equipment
which is being amortized over the term of the lease (3 years) on the
straight-line method.
Foreign Currency Translation. Results of operations for the Company's
foreign subsidiary are translated
26
<PAGE> 28
using the average exchange rates during the period. Resulting translation
adjustments are not material.
Earnings (Loss) Per Share. Primary earnings (loss) per share are based
upon the weighted average number of common shares outstanding during each year
and the assumed exercise of dilutive stock options and warrants less the number
of treasury shares assumed to be purchased from the proceeds using the average
market price of the Company's common stock. For earnings (loss) per share
calculation purposes, net income (loss) per common share is based upon net
income (loss) as reflected in the accompanying consolidated statement of
operations, less dividends accrued on preferred shares. Earnings (loss) per
common share, assuming full dilution, is considered to be the same as primary
since the effect of the common stock equivalents would be antidilutive.
Reclassification. Certain 1995 balances have been reclassified to
conform with 1996 presentation.
2. DISCLOSURE OF CERTAIN RISKS AND UNCERTAINTIES
Liquidity. On September 30, 1996, the Company did not meet certain
financial covenants contained in its existing credit facility provided by Sanwa
Bank California. This agreement provides for a Revolving Line of Credit in the
amount of $1,000,000, payable interest only and a Term Loan in the amount of
$2,000,000, payable at $33,334 plus interest monthly, both facilities have
maturity dates of February 28, 1998. The indebtedness under the agreement is
collateralized by a Broad Form UCC filing on all corporate assets. The agreement
contains various financial covenants, some of which the Company is in breach of.
These principal covenants in default include (1) Requirement to maintain minimum
Effective Tangible Net Worth of at least $8,000,000, and (2) A net profit after
taxes of not less than $1.00 at the end of each fiscal quarter. If the Bank
gives notice of the default to the Company, the Bank can demand payment of both
facilities fifteen days after notice. The Company is in the process of
negotiating with the Bank to restructure the credit facility to eliminate this
default condition. Additionally, the Company is pursuing other banking
relationships. The inability of the Company to resolve with its existing bank or
to provide other credit facilities would create substantial cash problems. There
is no assurance that the Company will be able to restructure its existing credit
facility or negotiate a favorable credit facility with another bank.
Patent. The Company is the assignee of the entire right, title and
interest in and to U.S. Patent No. 5,333,042 (the "Patent") directed to a method
for using fusing agent in cold fusion laser printers. The Fusing Agent
represents approximately 41% of the Company's revenue for the fiscal year ended
September 30, 1996. A loss of this Patent would have a material adverse effect
on the business of the Company. On October 16, 1995, the Patent Office issued a
notice to the Company that an unnamed party had copied a claim of the Patent for
purposes of instituting an Interference Proceedings under 35 U.S.C. 135 to
determine priority of invention. The Patent Office has not yet notified the
Company of whether or not an interference will be declared, and the Company is
unable to estimate when the Patent Office will issue its determination on the
claim. If an Interference is declared by the Patent Office, the Patent Office
will then institute formal proceedings to determine who was the first inventor
of the copied claim. Such proceedings could take several years to resolve and be
expensive to defend. The Company believes that it was the first inventor of the
inventions claimed in the patent and that, accordingly, no Interference should
be declared. However, if an Interference is declared, the Company will
vigorously defend its rights to the Patent.
Sources of Supply. The Company has entered into a supply contract with
AlliedSignal, Inc. ("AlliedSignal") for the purchase of the HCFC compound that
is used as the Fusing Agent. The supply contract obligates the Company to
purchase from AlliedSignal and obligates AlliedSignal to sell to the Company,
subject to the terms of the agreement, all of the HCFC compound the Company
domestically needs for the Fusing Agent during the period ending on December 31,
1996. The Company believes that there are several other domestic or foreign
companies that can provide the Company with the HCFC that it expects to need in
the future. The Company has initiated discussions with AlliedSignal and such
other suppliers regarding future purchases of HCFC and will decide on who its
future supplier will be based on price and other considerations. The Company
does not
27
<PAGE> 29
currently believe that the expiration of the supply agreement with AlliedSignal
will adversely affect its ability to obtain HCFC at competitive prices.
Customer Concentration. During 1995 and 1996, one customer accounted
for approximately 20% and 15%, respectively of total sales.
Inventory Concentration. In order to fulfill terms of the Company's
maintenance agreements with customers, it is necessary for the Company to
maintain significant levels of replacement parts inventory.
3. ACQUISITIONS
J.C. Alltime Computer Services, Inc. On March 10, 1994, the Company
purchased all of the issued and outstanding capital stock of J.C. Alltime
Computer Services, Inc. ("Alltime") effective January 1, 1994. Alltime is a
computer service maintenance company that provides third-party computer
maintenance services in Massachusetts, Connecticut, New York, New Jersey and
Pennsylvania.
The common stock purchase agreement, as amended in November, 1994,
pursuant to which Alltime was acquired required the Company to pay a total of
$300,000 to the shareholder of Alltime for 100% of the outstanding stock of
Alltime. Additionally, the Company agreed to assume all obligations and
liabilities of Alltime except for "unassumed liabilities" defined in that
agreement.
The transaction was accounted for as a purchase and resulted in an
excess of purchase price over net assets acquired of $749,852. Amortization of
such goodwill amounted to $49,990 in 1995 and 1996.
Laser Support & Engineering, Inc. On January 9, 1996, the acquisition
of all of the issued and outstanding stock of Laser Support & Engineering, Inc.
("LSE") closed, effective July 1, 1995. LSE provides technical support,
training, spare parts resale and maintenance for the Xerox family of high speed
production printers, primarily in the Southern California area.
The purchase price of the LSE stock, as specified in the stock
purchase agreement is $1,678,038, and is subject to adjustments related to any
undisclosed tax liabilities, uncollected receivables and legal and accounting
fees (see Notes 8 and 9).
The transaction was accounted for as a purchase and resulted in an
excess of purchase price over net assets of $610,786. Certain costs related to
the acquisition of LSE of $27,638 was included in Goodwill.
Amortization of goodwill amounted to $10,180 in 1995 and $48,761 in 1996.
BancTec USA, Inc. Effective June 1, 1996, the Company acquired certain
Xerox maintenance agreements and inventories of BancTec USA, Inc. ("BancTec")
for a total purchase price of $2,050,000 of which $1,100,000 was initially paid
and the balance of $950,000 is payable in 30 equal monthly installments of
$31,667. The total purchase price, net of imputed interest at 8% of $74,791 on
the note payable, was allocated to inventories.
28
<PAGE> 30
4. INVENTORIES
Inventories consist of the following at September 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Current Portion
Consumables, equipment and parts for sale $ 356,921 $ 1,059,987
Replacement parts ....................... 2,148,523 2,495,331
----------- -----------
Total Current Portion ................. $ 2,505,444 $ 3,555,318
=========== ===========
Non-Current Portion
Replacement parts ....................... $ 4,114,476 $ 5,654,385
Less: Provision for obsolescence ........ (827,569) (6,124)
----------- -----------
Net Non-Current Portion ............... $ 3,286,907 $ 5,648,261
=========== ===========
</TABLE>
During the year ended September 30, 1996, the Company provided for
additional obsolescence of $336,707 and wrote-off $1,158,152 of inventory
against the provision for obsolescence.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 1995
and 1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Furniture and fixtures .......... $ 63,978 $ 64,778
Test and training equipment ..... 1,242,644 939,581
Transportation equipment ........ 39,722 39,722
Leasehold equipment ............. 60,910 60,910
----------- -----------
1,407,254 1,104,991
Less accumulated depreciation and
amortization ................... (650,354) (670,905)
----------- -----------
$ 756,900 $ 434,086
=========== ===========
</TABLE>
Included above is test and training equipment under capital lease in
the amount of $188,033 in 1995 and 1996.
6. SALES TYPE LEASES
The following is a summary of the Company's net investment in sales
type leases for equipment at September 30, 1996:
<TABLE>
<S> <C>
Gross minimum lease payments receivable ........ $ 60,661
Less unearned interest income .................. (5,515)
--------
Net investment in equipment contracts receivable 55,146
Less current portion ........................... (55,146)
--------
$
========
</TABLE>
29
<PAGE> 31
7. RELATED PARTY TRANSACTION
On January 4, 1996, the Company sold substantially all of the assets,
consisting of inventory, spare parts, capital equipment and receivables, subject
to certain related liabilities, of its foreign subsidiary, Interscience PLC, to
N.B. Sales Limited, an entity controlled by an officer/director of the Company.
The sale was effective September 30, 1995. The sale price of $250,000 resulted
in a gain to the Company of $61,929, and is to be paid as follows:
<TABLE>
<S> <C>
Unsecured note receivable with interest at 6%, due $31,000 on January
31, 1996, with the balance due in four equal annual installments
beginning September 30, 1996. The note is personally guaranteed by the
Officer/Director. $ 77,500
Secured notes receivable (2 notes) with interest at 6%, due in four
equal annual installments, beginning September 30, 1996. 172,500
--------
$250,000
========
</TABLE>
During the year ended September 30, 1996, the Company received a patent
for the Fusing Agent in England. Accordingly, the Company and N.B. Sales Limited
agreed to rescind the sale of Interscience PLC and to reinstate the operations
of Interscience PLC. The Company incurred a loss of approximately $62,000 due to
the reversal of the sale.
During the year ended September 30, 1995 and 1996, the Company paid
management fees to N.B. Sales Limited of $136,400 and $137,950, respectively.
As of September 30, 1996, the Company had outstanding receivables of
$30,000 from its Chief Executive Officer, $85,000 plus accrued interest of
$8,634 from its Vice President of Sales and Service, and $10,500 from its former
President. During the year ended September 30, 1996, the Company classified
$104,134 of these receivables as doubtful accounts. As of September 30, 1995,
the Company had outstanding receivables of $85,000 plus accrued interest of
$3,534 from its Vice President of Sales and Service.
8. NOTE PAYABLE, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Note Payable to Bank. On April 12, 1995 the Company entered into a
$500,000 unsecured revolving credit agreement with National Bank of California.
The credit line was due January 31, 1996 and bore interest at the prime rate
plus 1%. At September 30, 1995, direct borrowings under this agreement amounted
to $200,000. On January 9, 1996, the credit line was increased to $1,000,000 and
extended through July 1996. On April 15, 1996, the credit line was increased to
$3,000,000 and was secured by all assets of the Company. During the year ended
September 30, 1996, the Company borrowed an additional $1,400,000 and repaid
$1,600,000. As of September 30, 1996, the Company had no outstanding balance and
the revolving credit agreement had already expired.
Long-Term Debt and Obligations Under Capital Leases. Long-term debt and
obligations under capital leases consist of the following at September 30, 1995
and 1996:
30
<PAGE> 32
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Obligations relating to the LSE stock acquisition:
Cash paid on closing (January 9, 1996) $ 800,000 $
Stock purchase notes payable (4 notes), due in
two equal installments plus accrued interest at 6% on July 9, 1996 and
January 9, 1997
Secured by the common stock of LSE (see (a) Note 9) 878,038 878,038
Term loan and revolving line of credit (a) 1,378,332
Note payable on BancTec asset acquisition (see
Note 3) 797,195
Obligations under capital lease (b) ..................................... 72,781 61,177
----------- ----------
Total ............................................................... 1,750,819 3,114,742
Less current portion .................................................... (1,271,088) (2,645,056)
----------- ----------
$ 479,731 $ 469,686
=========== ==========
</TABLE>
31
<PAGE> 33
Annual maturities of the long-term debt, excluding obligations under
capital leases are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
1997 $ 2,612,990
1998 357,680
1999 82,895
-------------
$ 3,053,565
=============
</TABLE>
(a). On July 30, 1996, the Company entered into a credit agreement with
Sanwa Bank California ("Sanwa"). On terms and conditions as set forth in the
credit agreement, Sanwa agreed to make advances to the Company on a maximum line
of credit of $1,000,000. Sanwa also agreed to make a term loan to the Company in
the principal amount of $2,000,000 which can only be used for the purpose of
funding the Company's cost of corporate acquisitions. The line of credit and
term loan expire on February 28, 1998 and bear interest at a variable rate or
the fixed rate at the Company's option. The principal balance of the term loan
shall be paid in equal monthly payments of $33,334 and all unpaid principal and
accrued interest are due on the expiration date. The line of credit and term
loan are secured by all assets of the Company. As of September 30, 1996, the
Company had outstanding balances on the line of credit and term loan of $45,000
and $1,333,332 with interest accruing at 8.75% and 9%, respectively. On
September 5, 1996, the Company pledged as collateral an irrevocable letter of
credit issued by Sanwa in favor of SAFECO Insurance Company ("Surety") in the
amount of $952,000 to protect the Surety from all loss and expense by reason of
the execution of the Bond issued to the Company (see Note 9). The letter of
credit was issued under the Company's line of credit with Sanwa.
The Company is also required to maintain certain financial covenants.
As of September 30, 1996, the Company is not in compliance with these covenants.
The credit agreement provides that if the noncompliance with the covenants
continue for more than 15 days after written notice from Sanwa then the Company
will be in default. In any Event of Default, Sanwa may, at its sole and absolute
election, without demand and only upon such notice as may be required by law,
exercise the remedies set forth in the credit agreement.
(b). Minimum future lease payments under capital leases as of
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
1997 $ 41,967
1998 9,691
1999 9,691
2000 5,887
---------
Total minimum lease payments 67,236
Less amount representing interest (6,059)
---------
Present value of net minimum
lease payment $ 61,177
=========
</TABLE>
32
<PAGE> 34
9. COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company leases its facilities pursuant to various
leases.
Minimum annual lease payments required under noncancelable leases as of
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
1997 $ 121,608
1998 115,708
1999 46,823
2000 30,591
---------
$ 314,730
=========
</TABLE>
Total rent expense for the years ended September 30, 1995 and 1996
amounted to $162,005 and $311,608, respectively.
Employment Agreements.
In December 1994, the Company entered into a five-year employment
agreement with James Mitchelli, the Company's Vice President of Sales and
Service. Pursuant to the employment agreement Mr. Mitchelli is entitled to an
annual salary of $140,000, and is entitled to participate in the Company's stock
option plan.
In August 1996, the Company entered into a three-year employment
agreement with J. Kenneth Loewen, the Company's Vice President and Controller.
Pursuant to the employment agreement Mr. Loewen is entitled to an annual salary
of $75,000, and is entitled to participate in the Company's stock option plan.
Tax-Qualified Savings Plan. The Company has adopted a tax-qualified
savings plan (the "401(k) Plan") which is intended to qualify under Section
401(k) of the Internal Revenue Code. The Company pays the administrative
expenses of the 401(k) Plan and currently matches 25% of an employee's
contribution, up to 1% of an employee's salary, by making additional
contributions to the plan. Generally, an employee becomes eligible for
participation in the 401(k) Plan after six months of employment with the
Company. Each employee may elect to contribute to the 401(k) Plan, through
payroll deductions, up to the statutory limitation. Salary reduction
contributions are immediately 100% vested. Company contributions vest 20% after
two years of service and 20% each service year thereafter. As of September 30,
1996, 22 of the 48 eligible employees were enrolled in the 401(k) Plan.
Legal Proceedings.
Pursuant to that certain Agreement of Purchase and Sale of Shares,
dated January 1996 and effective as of June 30, 1995, Messrs. Greb, Lynn, Casey
and Hively (collectively, the "Sellers") sold all of the stock of Laser Support
and Engineering, Inc. (LSE) to the Company for $1,678,038. The purchase price
was to be paid by an $800,000 cash payment plus the delivery of two equal
installment payments pursuant to promissory notes secured by all of the LSE
stock. Following the acquisition, the Company informed the Sellers that the
Sellers had
33
<PAGE> 35
breached certain provisions of the Purchase Agreement. Until the matter was
resolved, the Company deposited the first installment ($438,018) due under the
purchase price promissory notes in an interest-bearing account before the
payment was due. The Sellers responded to the Company's action by purportedly
accelerating the notes, demanding late fees, and purportedly re-electing
themselves as the LSE directors. The Sellers then sued the Company in the
Superior Court of California, County of Orange, on August 2, 1996 to enjoin the
Company from interfering with their management of LSE. The Company countersued
the Sellers in the same court on August 6, 1996 for breach of contract, fraud,
and rescission. On September 5, 1996, the Company posted a $952,000 bond for the
full amount of the unpaid principal balance of the promissory notes and the
Superior Court accepted the parties' stipulation that the dispute would be
resolved by arbitration. As of the date of this Annual Report, the Company is
continuing to operate and manage LSE. The Company anticipates that the
arbitration will commence in February 1997.
On August 13, 1996, Thomas Zirnite ("Zirnite") filed an action against
the Company for breach of contract and wrongful termination in the Los Angeles
County Superior Court, North District, seeking unspecified damages. The Company
has cross-complained for $1,000,000 of damages and $10,000,000 of punitive
damages based on slander. In June 1995, Interscience hired Zirnite as Vice
President of Finance and Administration to assist the Company's Chief Financial
Officer. The Company subsequently terminated Zirnite's employment on December 7,
1995. Zirnite alleges that the termination was in retaliation for his refusal to
perform accounting procedures that would violate the law and generally accepted
accounting procedures. Zirnite made such allegations to the third parties, for
which the Company has filed a cross-complaint.
On August 30, 1996, Julie Zuniga filed a lawsuit in the Los Angeles
County Superior Court alleging sexual harassment and naming Michael Brennan, the
former President of the Company, and the Company as defendants. Michael Brennan
is no longer employed by the Company. The complaint alleges inappropriate sexual
comments and conduct by Mr. Brennan and others on behalf of the Company. The
complaint asks for an unspecified amount of actual and punitive damages.
On September 23, 1996, Laura Brennan filed a complaint against the
Company and James Mitchelli, Vice President of the Company, for employment
discrimination and wrongful termination. The suit is pending in Los Angeles
Superior Court, Northwestern District, Case No. LC038584. Ms. Brennan alleges
that she was terminated upon becoming pregnant. The complaint asks for an
unspecific amount of actual and punitive damages.
Included in the consolidated statements of operations for the fiscal
year ended September 30, 1996 is a one-time pre-tax provision of $200,000 in
connection with the above legal proceedings. Although the outcome of the cases
cannot be predicted, the Company believes the provision is adequate to cover
losses related to these proceedings.
10. SHAREHOLDERS' EQUITY
The authorized capital stock of the Company consists of 10,000,000
shares of common stock with no par value and 1,000,000 shares of preferred stock
with no par value.
Stock Option Plan. In June 1993, the Board of Directors approved the
Company's 1993 Incentive Stock Option Plan (the "Option Plan"), which was
subsequently approved by the Company's shareholders. The Option Plan provides
for the grant of options to officers, directors and other key employees of the
Company to purchase up to an aggregate of 200,000 shares of common stock. The
Option Plan is administered by the Stock Option Committee of the Board of
Directors, which has complete discretion to select the optionee and to establish
the terms and conditions of each option, subject to the provisions of the Option
Plan. Options granted under the Option Plan may be "incentive stock options" as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonqualified options, and will be designated as such.
The exercise price of incentive stock options may not be less than 100%
of the fair market value of the
34
<PAGE> 36
Company's common stock as of the date of grant (110% of the fair market value if
the grant is to an employee who owns more than 10% of the total combined voting
power of all classes of capital stock of the Company). The Code currently limits
to $100,000 the aggregate value of common stock that may be acquired in any one
year pursuant to incentive stock options under the Option Plan or any other
option plan adopted by the Company. Nonqualified options may be granted under
the Option Plan at an exercise price less than the fair market value of the
common stock on the date of grant. Nonqualified options also may be granted
without regard to any restrictions on the amount of common stock that may be
acquired pursuant to such options in any one year.
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination would immediately terminate, and any options that are exercisable
would terminate 90 days (one year in the case of termination by reason of
disability) following termination of employment except in the event of
termination for cause. In the event of termination for cause, all unexercised
options would terminate 30 days after termination.
Options may not be exercised more than ten years after the grant (five
years after the grant if the grant is an incentive stock options to any employee
who owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). Options granted under the Option Plan are not
transferable and may be exercised only by the respective grantees during their
lifetime or by their heirs, executors or administrators in the event of death.
Under the Option Plan, shares subject to canceled or terminated options are
reserved for subsequently granted options. The number of options outstanding and
the exercise price thereof are subject to adjustment in the case of certain
transactions such as mergers, recapitalization, stock splits or stock dividends.
The Option Plan is effective for ten years, unless sooner terminated or
suspended. The following stock options, granted by the company's Stock Option
Committee pursuant to the above described Stock Option Plan, were outstanding at
September 30, 1996:
<TABLE>
<CAPTION>
Exercise Price Per
Number of Shares Share Date of Grant Date Exercisable Date of Expiration
---------------- ----- ------------- ---------------- ------------------
<S> <C> <C> <C> <C>
6,666 $5.00 Oct. 15, 1993 Oct. 15, 1994 Oct. 15, 2003
16,668 $5.00 Oct. 15, 1993 Oct. 15, 1995 Oct. 15, 2003
16,666 $5.00 Oct. 15, 1993 Oct. 15, 1996 Oct. 15, 2003
13,636 $5.50 Oct. 15, 1993 Oct. 15, 1994 Oct. 15, 2003
17,273 $5.00 Oct. 1, 1994 Oct. 1, 1995 Oct. 1, 2004
20,000 $5.00 Dec. 1, 1994 Dec. 1, 1995 Dec. 1, 2004
20,000 $5.00 June 1, 1995 June 1, 1996 June 1, 2005
6,667 $5.50 April 15, 1995 April 15, 1996 April 15, 2005
6,667 $5.50 April 15, 1995 April 15, 1997 April 15, 2005
6,667 $5.50 April 15, 1995 April 15, 1998 April 15, 2005
-------
130,910
=======
</TABLE>
On September 7, 1995, the Company's Board of Directors granted options
to purchase 100,000 shares and 200,000 shares of the Company's common stock to
Frank LaChapelle and Michael Brennan, respectively, outside of the above Stock
Option Plan. Such options became exercisable at $6.00 per share
35
<PAGE> 37
and expire on September 7, 2005.
Private Placements of Preferred Stock. On September 22, 1994, the
Company sold 36,000 shares of its Series A Cumulative Convertible Preferred
Stock having a stated value of $100 per share. The preferred stock carries a
dividend rate of 7.5% per annum and is payable quarterly. Additionally, it is
convertible into shares of common stock at $6.00 per share, subject to
anti-dilution adjustments, and is callable by the Company after five years at
115% of face value. The Company also consented to a monthly management
consulting fee of $4,500 payable to the preferred shareholder for financial
advisor services. Costs incurred in connection with the placement of preferred
stock amounted to $400,000, including the issuance of 16,667 shares of the
Company's common stock valued at $100,000. Net proceeds from the placement of
the Company's Series A Cumulative Convertible Preferred Stock was $3,200,000.
On March 28, 1996, the Company sold 4,000 shares of its Series B
Cumulative Convertible Preferred Stock having a stated value of $100 per share.
The preferred stock carries a dividend rate of 7.5% per annum and is payable
quarterly. Additionally, it is convertible into shares of common stock at $5.00
per share, subject to anti-dilution adjustments, and is callable by the Company
after September 23, 1999 at $115 per share. The Company also consented to a
monthly management consulting fee of $500 payable to the preferred shareholder
for financial advisor services. Costs incurred in connection with the placement
of preferred stock amounted to $10,000. Net proceeds from the placement of the
Company's Series B Cumulative Convertible Preferred Stock was $390,000.
11. INCOME TAXES
The components of income tax for the years ended September 30, 1995 and
1996, are as follows:
<TABLE>
<CAPTION>
Foreign Federal State Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1995:
-----
Current ............................... $ 181,000 $ 52,000 $ 233,000
Deferred .............................. (230,000) (38,000) (268,000)
--------- --------- ---------
Total ................................. $ (49,000) $ 14,000 $ (35,000)
========= ========= =========
1996
----
Current ............................... $ 27,000 $ 187,000 $ 28,000 $ 242,000
Deferred .............................. (274,000) (49,000) (323,000)
--------- --------- --------- ---------
Total ................................. $ 27,000 $ (87,000) $ (21,000) $ (81,000)
========= ========= ========= =========
</TABLE>
The components of deferred tax assets are as follows at September 30,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $ 92,000 $140,000
Asset realizability reserves .... 358,000 172,000
State income tax ................ 92,000 1,000
</TABLE>
36
<PAGE> 38
<TABLE>
<S> <C> <C>
Employee benefit plans ............ 32,000 31,000
Capitalized inventory costs ....... 31,000 72,000
Goodwill amortization ............. 26,000 69,000
Cash basis tax reporting .......... 154,000
Valuation allowance ............... (26,000) (69,000)
--------- ---------
Total deferred tax assets ....... 605,000 570,000
--------- ---------
Deferred tax liability:
Depreciation ...................... 89,000 99,000
Cash basis tax reporting .......... 37,000
Foreign operations ................ 1,000 47,000
Other ............................. 1,000
--------- ---------
Total deferred tax liability .... 128,000 146,000
--------- ---------
Net deferred taxes .................. $ 477,000 $ 424,000
========= =========
</TABLE>
Income tax expense (benefit) amounted to $(35,000) in 1995 and $81,000
in 1996 (effective tax rates of (8%) and (7%), respectively). The actual tax
expense differs from the expected tax expense (computed by applying the federal
corporate tax rate of 34% to earnings before income taxes) as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Expected statutory tax................................ $ 147,000 $ (385,000)
State income tax, net of federal tax benefit.......... 9,000 (14,000)
Research tax credit................................... (55,000)
Penalties............................................. 21,000
Entertainment expenses................................ 9,000
Foreign taxes paid.................................... 27,000
Adjustment to provision for prior years'
tax liability....................................... 208,000
Change in valuation allowance......................... (153,000) 69,000
Other................................................. 17,000 (16,000)
---------- ----------
Actual tax............................................ $ (35,000) $ (81,000)
========== ==========
</TABLE>
Income taxes payable consists of the following at September 30, 1996:
37
<PAGE> 39
<TABLE>
<CAPTION>
Federal State Interest
Income Income and
Taxes Taxes Penalties Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Obligation of LSE for calendar year 1994 in
existence at the time of its acquisition. LSE had
previously arranged with the Internal Revenue
Service for this obligation to be extinguished
at the rate of $10,000 per month, subject to
periodic review by the Service. A lien against
the assets of LSE has been filed with respect
to this obligation $ 223,194 $ $ 79,002 $ 302,196
Obligations of LSE for the period January 1, 1995
through the date of its acquisition by the
Company 98,467 25,533 37,032 161,032
Obligations of the Company for the period
October 1, 1993 through September 30, 1994 28,987 2,365 31,352
Obligations of the Company for the period
October 1, 1994 through September 30, 1995 257,980 70,468 46,150 374,598
Obligations of the Company for the period
October 1, 1995 through September 30, 1996 3,000 3,000
--------- --------- --------- ---------
579,641 127,988 164,549 872,178
Less income taxes refundable as a result
of net operating loss carryback from fiscal
year ended September 30, 1996 (375,000) (375,000)
--------- --------- --------- ---------
$ 204,641 $ 127,988 $ 164,549 $ 497,178
========= ========= ========= =========
</TABLE>
As of December 20, 1996, the Company's federal income tax return for
the year ended September 30, 1994 and its California state income tax return for
the year ended September 30, 1993 were under examination by the respective
taxing authorities. Furthermore, the Company was delinquent with respect to the
filing of its various state returns for the year ended September 30, 1995.
12. ARBITRATION SETTLEMENT
On December 7, 1995, the American Arbitration Association ruled against
the Company in a matter involving the performance of a certain vendor with
respect to the Company. The amount of the arbitrators award was $193,560. The
Company estimates that the award plus related costs was approximately $200,000.
During the year ended September 30, 1996, the Company paid the full amount of
the settlement.
38
<PAGE> 40
13. FOURTH QUARTER ADJUSTMENTS
During the quarter ended September 30, 1996, the Company made the
following adjustments pertaining to prior quarters:
<TABLE>
<S> <C>
- - Reversal of legal and accounting fees previously capitalized
to Goodwill $ 217,000
- - Adjustment to estimates of prior years' tax liability 208,000
- - Accrual of penalties and interest on income taxes 111,000
- - Other, net (12,800)
---------
$ 523,200
=========
</TABLE>
39
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Company intends to file with the Securities and Exchange Commission
a definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A
in connection with the Annual Meeting of Shareholders expected to be held in
March 1997, which will involve the election of directors, within 120 days of the
end of the fiscal year covered by this Annual Report on Form 10-KSB. Information
regarding directors and executive officers of the Company will be in the Proxy
Statement and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation will be in the Proxy
Statement and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management will be in the Proxy Statement and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will be included in the Proxy Statement and is incorporated herein by reference.
40.
<PAGE> 42
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
--- ----------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Bylaws of the Company. (1)
3.3 First Amendment to Restated Bylaws of the Company. (1)
4.1 Form of Common Stock certificate. (1)
4.2 Certificate of Determination for the Series A Preferred Stock. (2)
4.3 Certificate of Determination for the Series B Preferred Stock. (3)
10.1 Interscience Computer Corporation 1993 Incentive Stock Option
Plan. (1)
10.2 Agreement for Purchase and Sale of All of the Shares of Laser
Support & Engineering, Inc. (4)
10.3 Product Purchase Agreement between OCE Printing Systems USA, Inc.
and the Company.
21 List of subsidiaries.
27 Financial Data Schedule
</TABLE>
- --------------
(1) Previously filed as exhibits to the Company's Registration Statement on
Form SB-2, Registration No. 33- 65434-LA, and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated October 6, 1994, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated September 23, 1994, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB filed for the period ending March 31, 1996, and
incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
41.
<PAGE> 43
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.
INTERSCIENCE COMPUTER CORPORATION
December 27, 1996 By /s/ FRANK J. LaCHAPELLE
---------------------------------
Frank J. LaChapelle
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ FRANK L. LaCHAPELLE Chief Executive Officer and December 27, 1996
- ---------------------------------- Chairman of the Board (Principal
Frank J. LaChapelle Executive Officer)
/s/ J. KENNETH LOEWEN Vice President, Controller and December 27, 1996
- ----------------------------------- Principal Accounting Officer
J. Kenneth Loewen
/s/ JOSEPH R. MANCUSO Director December 27, 1996
- -----------------------------------
Joseph R. Mancuso
/s/ GEORGE O. HARMON Director December 27, 1996
- -----------------------------------
George O. Harmon
/s/ NORMAN BAKER Director December 27, 1996
- -----------------------------------
Norman Baker
</TABLE>
42.
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
--- ----------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Bylaws of the Company. (1)
3.3 First Amendment to Restated Bylaws of the Company. (1)
4.1 Form of Common Stock certificate. (1)
4.2 Certificate of Determination for the Series A Preferred Stock. (2)
4.3 Certificate of Determination for the Series B Preferred Stock. (3)
10.1 Interscience Computer Corporation 1993 Incentive Stock Option
Plan. (1)
10.2 Agreement for Purchase and Sale of All of the Shares of Laser
Support & Engineering, Inc. (4)
10.3 Product Purchase Agreement between OCE Printing Systems USA, Inc.
and the Company.
21 List of subsidiaries.
27 Financial Data Schedule
</TABLE>
- --------------
(1) Previously filed as exhibits to the Company's Registration Statement on
Form SB-2, Registration No. 33-65434-LA, and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated October 6, 1994, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated September 23, 1994, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB filed for the period ending March 31, 1996, and
incorporated herein by reference.
43.
<PAGE> 1
EXHIBIT 10.3
PRODUCT PURCHASE AGREEMENT
This Product Purchase Agreement is made and entered into as of the
__________ day of September, 1996, the "Commencement Date", by and between
Interscience Computer Corporation, a California corporation with its executive
offices located at 5171 Clareton Drive, Agoura Hills, California 91301
(hereinafter referred to as "Interscience") and OCE Printing Systems USA, Inc.,
a Delaware corporation with its principal place of business located at 5600
Broken Sound Boulevard, Boca Raton, Florida 33487 (hereinafter referred to as
"OPS").
R E C I T A L S
A. Interscience desires to sell products as specified in the attached
Exhibit A ("Products") to OPS.
B. OPS desires to purchase said Products, for resale to current and
future customers of OPS.
THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, Interscience and
OPS hereby covenant and agree as follows:
A G R E E M E N T
1.01 PURCHASE/SALE. During the term of this Agreement Interscience
shall sell to OPS and OPS shall purchase from Interscience, the Products
described in the attached Exhibit A.
1.02 PURCHASE FORECASTING. Interscience will accept OPS's standard
purchase order for all OPS orders of Product. OPS's purchase order will specify
a delivery date. It is expressly acknowledged and agreed by both Interscience
and OPS, that any forecasts shall not be construed as firm commitments by either
party, but shall be used by Interscience for the sole purpose of estimating
Interscience's internal scheduling to allow for timely deliveries on any
purchase orders which may be issued by OPS.
1.03 DELIVERY SCHEDULE. Should Interscience fail within seven (7)
days following receipt of a purchase order from OPS, specifying a delivery date,
to specify an alternative delivery date acceptable to OPS, Interscience shall be
deemed to have agreed to the delivery date specified in OPS purchase order.
2.01 DEALER SOLICITATION. During the term of this Agreement,
Interscience agrees not to solicit any new distributors of the Product,
PROVIDED, HOWEVER, OPS must purchase not less than twelve thousand (12,000)
cartons of fusing agent from Interscience during any twelve (12) month period.
3.01 DELIVERY. All shipments of Products by Interscience to OPS
shall be FOB, Interscience's California manufacturing facility, via OPS
designated carriers. Products will be packaged for shipment in accordance with
OPS specifications and instructions. Interscience shall perform and document its
quality inspection of the Products prior to shipment. Interscience will pay
freight charges for the return of empty canisters.
4.01 PRICE AND PAYMENT TERMS. Prices paid by OPS to Interscience as
the purchase price for the Product are set forth in Exhibit A of this Agreement.
The price per carton set forth in Exhibit A of this Agreement shall not change,
except as provided for in this Paragraph 4.01 of this Agreement. NOTWITHSTANDING
THE FOREGOING, upon the furnishing of documented evidence by Interscience of an
increase in Interscience's cost of raw materials by an amount in excess of ten
percent (10%) over Interscience's cost as of the execution date of this
Agreement, Interscience shall have the opportunity to negotiate a new purchase
price for the Product
1.
<PAGE> 2
limited to the amount of the increase in Interscience's cost for raw materials.
Shipments shall be invoiced upon shipment from Interscience's manufacturing
plant in California. Payment terms shall be net thirty (30) days from receipt of
invoice.
5.01 TERM AND TERMINATION. The initial term of the Agreement is
sixty (60) months commencing upon the Commencement Date. Thereafter, OPS may
extend this Agreement for an additional one (1) year on the same terms and
conditions and at the price per carton as set forth in Exhibit A of this
Agreement upon ninety (90) days written notice prior to the initial expiration
date of this Agreement.
Notwithstanding the foregoing; (a) either Interscience or OPS may terminate this
Agreement, or any order placed hereunder, immediately, without prior written
notice, if the other party shall be or become insolvent or subject to any
liquidation, receivership, bankruptcy, reorganization, or creditor's proceeding,
either voluntary or involuntary, which proceeding shall not have been dismissed
within ninety (90) days after the commencement thereof, (b) either party may, by
written notice to the other, terminate this Agreement, or any order placed
hereunder, if the other party substantially and materially defaults in the
performance of its obligation(s) hereunder and fails to remedy such default
within thirty (30) days of receipt of written notice thereof, (c) OPS may
terminate this Agreement, or any order placed hereunder, if Interscience fails
to deliver any Product within thirty (30) days of its confirmed delivery date.
6.01 WARRANTY. Interscience represents and warrants:
(a) each Product is free from defects in design, materials and
workmanship:
(b) each Product performs in accordance with Interscience's
published specifications; See exhibit B
(c) title to each Product sold hereunder shall be free of any
lawful security interest, lien, or encumbrance; and
(d) the Products sold hereunder do not infringe upon the
intellectual property or proprietary rights of any third
party.
THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
6.02 REMEDY FOR BREACH OF WARRANTY. OPS agrees that OPS' primary
remedy for breach of warranty shall be Interscience's repair or replacement of
the defective Product(s). In the event Interscience does not repair or replace
defective Product(s) within thirty (30) days of written notice of a verified
claim of a defective Product by OPS, OPS may elect to receive a full refund of
the purchase price of the defective Product(s) in lieu of the repair/replace
remedy.
7.01 LIMITATION OF LIABILITY. OTHER THAN CLAIMS UNDER SECTION 8.01
AND 9.01, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR
CONSEQUENTIAL, SPECIAL, INDIRECT OR INCIDENTAL DAMAGES.
8.01 INTELLECTUAL PROPERTY INDEMNITY. Interscience represents to OPS
that, to the best of Interscience's knowledge, neither Products provided
pursuant to this Agreement, nor the use thereof, violates or infringes upon any
U.S. patent, copyright, trade secret, or any other right of a third party
("Intellectual Property Right"). In the event of any action brought against OPS
in which infringement of an Intellectual Property Right is claimed, Interscience
will defend or settle the claim at its own expense, and indemnify OPS against
any expenses, cost or damages incurred by OPS on account of such claim, but such
defense, settlement and payment are conditioned on the following:
(a) Interscience is notified of any claim promptly after OPS becomes
aware of any such claim;
(b) OPS provides Interscience with all information reasonably
available to OPS; and
(c) OPS provides Interscience with such assistance as may be
reasonably necessary to facilitate the settlement or defense of such claim.
2.
<PAGE> 3
8.02 CLAIM ALTERNATIVES. In the event such a claim occurs, or in
Interscience's sole opinion, is likely to occur, Interscience will, at its
option and expense, either procure for OPS the right to continue to market the
Products or replace or modify the Products so that they no longer infringe. If
despite the reasonable efforts of Interscience, neither alternative is feasible,
Interscience will accept return of the infringing Products for full refund,
without charge or penalty.
8.03 LIMITATIONS ON INDEMNIFICATION. Interscience shall not
indemnify OPS against any claim of infringement arising out of the use or sale
of Products in combination with equipment, alterations, attachments or software
not supplied by Interscience.
8.04 PARAGRAPH 7.01 NOT APPLICABLE. The limitations set forth in
Paragraph 7.01 of this Agreement are not applicable to the limitations on
liability as it pertains to indemnification as to any claims to patent
infringement.
9.01 INDEMNIFICATION OF OPS. Interscience shall indemnify and hold
harmless OPS against any liability, damage or expense which OPS may sustain,
incur or be required to pay, arising out or in connection with claims for
personal injury or damage to real or tangible personal property resulting from
any negligent action or inaction or willful misconduct of Interscience, a person
employed by Interscience, or any of its subcontractors in performance of this
Agreement; provided that:
(a) Interscience is notified of any claim promptly after OPS
becomes aware of it; and
(b) OPS gives Interscience information reasonably available
and assistance reasonably necessary to facilitate the
settlement or defense of such claim.
Interscience's indemnity obligation under this section shall
be reduced to the extent by which the liability, damage or expense results from
the negligence or misconduct of employees of OPS.
No limitation of liability provision of this Agreement shall
apply to the indemnification provided by this Paragraph.
10.01 AGENCY CERTIFICATIONS. Interscience warrants that all Products
provided hereunder are certified to be in compliance with applicable safety and
environmental laws and regulations promulgated by federal and state authorities.
Products shall be labeled accordingly and Interscience shall provide copies of
such certifications upon request.
11.01 TRANSFER OF RIGHTS. OPS acknowledges that Interscience has
developed certain expertise and information regarding the production, bottling,
and use of HCFC 141-b as a fusing agent in the cold fusion printing process
("HCFC Information") including, but not limited to, the composition and
production of the fusing agent, canister, and valves. In July 1994, Interscience
was awarded U.S. patent number ("5,333,042") entitled Cold Fusing Agent.
Interscience has incurred significant costs in acquiring, developing, perfecting
and protecting the HCFC Information. OPS is desirous of having access to the
HCFC information should Interscience no longer produce and/or sell HCFC 141-b,
should Interscience terminate this Agreement prior to the end of its term (other
than due to a material, uncured default by OPS), or if ICC is unable to make
timely delivery of Products after notice as provided for herein. Accordingly,
Interscience will transfer its rights with respect to the HCFC information to
OPS as follows:
(a) Should Interscience cease production, sales and
distribution of HCFC 141-b for use as a fusing agent in the cold fusion printing
process to all of its customers such that Interscience no longer has any
business activities relating to HCFC 141-b and its printing applications for a
period of ninety (90) continuous days, unless such cessation of production is
the result of:
(1) Materials shortage, through no fault of
Interscience;
(2) A natural disaster or act of God;
(3) An armed conflict making it difficult or impossible
to manufacture the Product; or
3.
<PAGE> 4
(4) Governmental decree, statute, ordinance or order
preventing Interscience from manufacturing or
delivering the Product;
or should Interscience be unable to deliver Products of a sufficient quality to
OPS and if Interscience is unable to cure any quality issue related to the
Products after three (3) months written notice from OPS given after an
arbitration determination made in accordance with Paragraph 11.01(b) below, then
in such event for valuable consideration, the receipt and sufficiency of which
are hereby acknowledged by Interscience, shall transfer any and all rights
including and related patent rights, proprietary or otherwise, which
Interscience may have in HCFC information to OPS.
(b) Should a dispute arise between Interscience and OPS
concerning the quality of the Products delivered to OPS, then such a dispute
shall be submitted to binding arbitration and mediation under the rules of the
Judicial Arbitration and Mediation Service ("JAMS").
11.02 SUPPORT. In the event customers of OPS experience difficulties
or poor performance using the Product and such cannot be remedied by OPS
technical support personnel, Interscience agrees to provide on-site support in
the form of experienced Interscience personnel, at Interscience's expense, to
assist OPS and OPS's customers in resolving such problems.
11.03 PRODUCT AND GENERAL LIABILITY INSURANCE. Interscience shall
maintain and provide proof of product and general liability insurance coverage
of no less than one (1) million dollars ($1,000.000.00) per occurrence with OPS
named as an additional insured. Each such insurance policy shall bear an
endorsement that such insurance shall be primary and shall not be cancelled
without thirty (30) days prior written notification to OPS.
12.01 ARBITRATION AND MEDIATION. All controversies or claims arising
out of, or relating to this Agreement, or the breach thereof shall be settled by
arbitration and Mediation in the City of Los Angeles. California in accordance
with the rules of the Judicial Arbitration and Mediation Service ('JAMS'), and
judgment upon the award rendered by the Arbitrator(s) may be entered in any
court having jurisdiction thereof. Nothing herein, however, shall prevent either
party from resorting to a court of competent jurisdiction in those instances
where injunctive relief may be appropriate.
13. GENERAL.
13.01 COMPLETE AGREEMENT. This Agreement constitutes the entire
Agreement between the parties with respect to the subject matter discussed
herein, and the terms hereof shall supersede all prior negotiations,
representations, or agreements. This Agreement may not be modified except in
writing, executed by both parties.
13.02 NON-WAIVER OF RIGHTS. Any failure by a party to enforce strict
performance by the other of any provision herein shall not constitute a waiver
of any rights to subsequently enforce such provision or any other provision of
this Agreement.
13.03 SEVERABILITY OF PROVISIONS. In the event that any term or
provision of this Agreement or any Supplements, Attachments, Amendments or
Schedules hereto, is held invalid or unenforceable by any court of competent
jurisdiction, the remainder of the Agreement will not be affected thereby and
each term and provision of this Agreement will be valid and enforceable to the
fullest extent permitted by law.
13.04 HEADINGS. The captions in this Agreement are for convenience
only and do not constitute a limitation of any of the terms and conditions
therein.
13.05 NON-ASSIGNMENT. The rights under this Agreement are not
assignable, and the duties are not delegable, by a party without the other
party's prior, written consent.
13.06 DUPLICATE ORIGINALS. This Agreement shall be executed in
duplicate and either of the two executed copies may function as the original
hereof.
4.
<PAGE> 5
13.07 GOVERNING LAW. The definition of terms used, the
interpretation of this Agreement, and the rights of all parties hereunder shall
be construed and governed by the laws of the State of California.
13.08 FORCE MAJEURE. The parties are excused from performance and
shall not be liable for any delay in whole or in part nor shall the provision of
Paragraph 11.01 caused by any cause or causes beyond the reasonable control of
the party claiming rights under this section, provided such party gives notice
within five (5) days of the commencement of such delay that it is relying on
this section.
13.09 SURVIVAL OF THIS AGREEMENT. The rights and obligations of
Paragraphs 5, 6, 7, 8, 9, 10, 11 and 12 of this Agreement shall survive and
continue after any expiration, cancellation or termination of this Agreement,
and shall bind the parties.
13.10 NOTICES. Any notices required to be given to either party for
all of the purposes hereof shall be mailed by registered or certified mail,
return receipt requested, or hand delivered, addressed as follows which
addresses may be changed by notice given as provided herein:
To ICC: Interscience Computer Corporation
C.E.O.
5171 Clareton Drive
Agoura Hills. CA 91301
To OPS: Siemens Nixdorf Printing Systems, L.P.
and/or OCE Printing Systems USA Inc.
Vice President, Logistics
5600 Broken Sound Boulevard
Boca Raton, FL 33487
13.11 INDEPENDENT CONTRACTORS. Interscience and OPS are independent
contractors and nothing herein contained shall be interpreted otherwise.
AGREED:
OCE Printing Systems USA Inc. Interscience
Computer Corporation
By:____________________________ By:___________________________
Print:_________________________ Print:________________________
Title:_________________________ Title:________________________
Date:__________________________ Date:_________________________
5.
<PAGE> 1
EXHIBIT 21
1. Interscience PLC
2. Interscience GmbH
3. Laser Support & Engineering, Inc.
4. J.C. Alltime Computer Service, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 336,355
<SECURITIES> 0
<RECEIVABLES> 2,285,399
<ALLOWANCES> 265,000
<INVENTORY> 3,555,318
<CURRENT-ASSETS> 6,481,743
<PP&E> 434,086
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,230,581
<CURRENT-LIABILITIES> 5,276,694
<BONDS> 0
0
3,590,000
<COMMON> 4,241,748
<OTHER-SE> 495,168
<TOTAL-LIABILITY-AND-EQUITY> 14,230,581
<SALES> 11,253,383
<TOTAL-REVENUES> 11,253,383
<CGS> 6,927,149
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,997,071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227,695
<INCOME-PRETAX> (1,132,892)
<INCOME-TAX> (81,000)
<INCOME-CONTINUING> (1,051,892)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,051,892)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> 0
</TABLE>
