<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------
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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period 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)
5236 COLODNY DRIVE, SUITE 100, AGOURA HILLS, CALIFORNIA
91301 (Address of principal executive offices)
Issuer's telephone number: (818) 707-2000
Check mark indicates whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Check mark indicates that the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after
distribution of securities under a plan confirmed by a court.
YES [X] NO [ ]
Check mark indicates that the 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. [X]
Issuer's revenues for its most recent fiscal year were $4,109,318.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 17, 1998 was approximately $2,618,000.
Number of shares outstanding of each of the issuer's classes of common stock, as
of November 17, 1998: 5,236,556 shares of common stock, no par value.
The following documents are incorporated by reference into this report:
None.
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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 and Plan of Operation." 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-QSB and any Current Reports on Form 8-K.
Item 1. DESCRIPTION OF BUSINESS.
OVERVIEW
The 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 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 located in Agoura Hills, California.
On March 6, 1997, the Company filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. The bankruptcy filing was caused by several factors.
The Company made four acquisitions, and the cash flows of the Company was not
sufficient to pay the operating expenses and the substantial debt assumed as
part of the acquisitions. In addition, the Company was incurring substantial
legal expense from six lawsuits which were then pending against the Company.
The Company's business plan had been to expand its maintenance services
through these acquisitions to include maintenance on Xerox machines as well as
those manufactured by Siemens AG ("Siemens"). The Company was not able to
operate the Xerox maintenance business on a profitable basis and it was sold
effective November 1, 1997 with the approval of the Bankruptcy Court. The
majority of the Company's revenues now are generated from sales to the Company's
clients and distributors of consumable products used by high speed production
printers.
The following acquisitions by the Company in 1995 and 1996 (the
"Acquisitions") are stated here for historical reasons only. All of these
businesses were sold or closed during the bankruptcy proceedings.
- In June 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 was a privately held company engaged in training
Xerox printer field engineers and in providing maintenance services for
Xerox high speed printers.
- 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 page
printers.
<PAGE> 3
- 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.
- In October 1996, the Company acquired substantially all of the assets
of Laser Printing Services, Inc. ("LPS"), a Xerox laser printer
maintenance provider, for $600,000 in cash and a promissory note.
On April 1, 1998 a hearing was held in the Bankruptcy Court to consider
confirmation of the Company's First Amended Plan of Reorganization (the "Plan").
The Plan was confirmed on April 20, 1998. As a result, the Company has been
revested with all of its assets. The Plan terms control all claims and equity
interests which existed as of March 6, 1997, the date when the Company filed its
Chapter 11 reorganization case. The Company can now conduct business as usual
without the requirement of obtaining Bankruptcy Court approval. Distributions to
approved creditors, as required under the Plan, have been made. All claim
objections have been resolved and the Bankruptcy Court has approved settlement
of the outstanding claims. On December 16, 1998, the Bankruptcy Court issued a
final decree formally closing the bankruptcy proceedings.
The Company's principal consumable product is a liquid fusing agent (the
"Fusing Agent") used by the Model 2200 Siemens Printer. The Company distributes
the Fusing Agent directly to its end user clients and other operators of the
Model 2200 Siemens Printer. The Company also sells the Fusing Agent to NCR
Corporation, OCE Printing Systems, Inc. ("OCE") and The Bradshaw Group. During
the 1998 Fiscal Year, sales of the Fusing Agent constituted approximately 74% of
the Company's total revenue.
RECENT DEVELOPMENTS
As indicated above, on November 1, 1997 the Company and its wholly
owned subsidiary, Laser Support & Engineering, Inc. ("LSE") sold its Xerox
maintenance business to Anacomp Corporation for $1,220,000 plus a possible
earn-out based on the first year's revenue. After the sale of the LSE Xerox
business, all proceeds from the LSE portion of the sale were distributed to the
Internal Revenue Service as payment in full for outstanding taxes due. On
December 12, 1997, the subsidiary's stock was abandoned and LSE ceased doing any
business. Prior to the sale of the Xerox maintenance business, the Company was
able to compromise a debt to the former owners of LSE at a savings of $118,000.
On December 5, 1997, the Fairfax Virginia repair, refurbishment and
warehouse facility had a break in and inventory was removed from the site. A
claim was filed with the Company's insurance carrier, Chubb Insurance Group on
December 6, 1997. The Company and Chubb agreed to a cash settlement of $275,000
which was paid in May 1998.
In January 1998, the Company closed its warehouse facility in Carlstadt,
New Jersey. After the sale of the Xerox maintenance business in November 1997,
there was no longer a need to maintain a parts distribution center for the
northeastern portion of the United States. The savings from closing of the 9,000
square foot facility, including reducing the warehouse staff, was approximately
$20,000 per month. Also in January 1998, the Company moved its Southern
California warehouse facility from Anaheim to Los Angeles, increasing the
warehouse size to accommodate parts and equipment from the east coast while
lowering the monthly lease payment by approximately $3,000. In March 1998, the
Company closed its repair, refurbishment and warehouse facility in Fairfax,
Virginia moving all of the remaining contents back to the new Los Angeles
warehouse. By closing this facility, the Company saved approximately $10,000 per
month in rent and related costs.
On April 1, 1998, Interscience PLC, the Company's subsidiary in the U.K.
was sold to Mr. Norman Baker. Payment for the acquisition included an initial
$10,000 payment and a royalty agreement that calls for a charge of $10 per case
of fusing agent sold by PLC starting in May of 1999. The
<PAGE> 4
Company and PLC continue to work on consumable distribution projects that
involve both U.S. and European sales efforts. Mr. Baker remains a current member
of the Company's Board of Directors.
In May 1998, the remaining maintenance business was sold to complete the
termination of the service division. The six Siemens laser printer contracts in
Southern California were sold as of May 1, 1998 to Landmark Computer Group
(L.C.G.). The purchase calls for a nine month payment plan based on 50% of the
annual service revenue for the acquired accounts. The remaining three Siemens
laser printer maintenance contracts in the Maryland and Virginia area were sold
for a nominal fee, which included a small inventory located at the three sites.
Currently, the Company has no service generated revenues. The parts in the
warehouse in Los Angeles are being advertised to other independent service
organizations and end users. The Company presently operates one warehouse in Los
Angeles and has a consignment arrangement with a parts distributor on the east
coast. The Company has six employees. Parts are being sold through various parts
distributors and the Company is preparing a web page to increase sales. For
accounting purposes, all parts have been written off although the Company will
attempt to sell these parts in the future.
In July 1998, the Company filed for a tax refund from the Internal
Revenue Service ("IRS"). Subsequently, in September 1998, the Company received
its refund from the IRS in the amount of $656,954 for the tax years 1994 and
1995. In an agreement with Sanwa Bank, the Company applied $500,000 of the
refund to pay down the note payable to Sanwa Bank. As of December 15, 1998, the
total balance due to Sanwa Bank is approximately $300,000, reflecting payments
during the fiscal year plus the agreed IRS refund payment on the note of
approximately $1,900,000.
FUSING AGENT
In 1992, the Company commenced marketing the Fusing Agent for use in the
model 2200 Siemens Printer. Revenues realized by the Company from the sale of
the Fusing Agent during its fiscal years ended September 30, 1997 and 1998 were
approximately $4,270,000 and $3,041,000, respectively. Sale of the Company's
U.K. subsidiary Interscience PLC impacted total Fusing Agent sales for the
second half of the current fiscal year, as no Fusing Agent sales from the U.K.
are included. Since February 1993, the Company has been selling the Fusing Agent
to both its maintenance clients and to other distributors, including OCE (the
successor to Siemens Nixdorf Printing Systems), NCR Corporation and the Bradshaw
Group, a third party maintenance provider and consumable distributor. The
Company allows these purchasers to resell the Fusing Agent under their own
private labels. Revenues from the Fusing Agent are expected to decline as the
existing base of Siemens printers declines.
The Siemens Model 2200 Printer was introduced in the United States in
1984. 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
media (paper). 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 media. Most
media 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.
<PAGE> 5
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 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, 2004. The use of the Fusing Agent
will continue thereafter until the supply thereof has been depleted.
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.
The Company believes that there are approximately 400 Model 2200 Siemens
printers currently in use in the U.S., including printers that were sold by
StorageTek under the StorageTek label and 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 retired from
use.
SOURCES OF SUPPLY
The Company has numerous sources of supply. It has not entered into a
specific contract but believes that there are several domestic or foreign
companies that can provide the Company with HCFC that it expects to need in the
future. The Company makes purchase decisions based on current economic
conditions and does not believe that it will have any difficulty obtaining HCFC.
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
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 and the Company generally.
The Company currently purchases the various other products that its
sells for use with high-speed printers, including its proprietary toners
developed by the Company for use in Delphax printers. The Company also
distributes a variety of non-proprietary toners, and developers, for use in
Siemens and Xerox machines purchased from various third-party independent
manufacturers. These sales are small and are usually generated from end user
customers of the Company's other consumable products. 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.
<PAGE> 6
BUSINESS STRATEGY
The Company's Fusing Agent business has always been profitable and
continues to generate current profits. However, this business is declining as
the machines using this product age and are being replaced. In addition by law
the chemical used in the product cannot be manufactured after January 1, 2004.
Accordingly management is searching for an acquisition or merger partner to
augment the Fusing Agent business. The Company can provide current earnings,
cash flow and substantial tax loss carry-forward as well as the benefit of being
publicly traded. Management has reviewed several opportunities to date and
continues to search for the right business, although no assurance can be given
that the Company will be successful in this regard.
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. The rights to those patents have been sold. The Company also has
applied for similar patent rights with the European Patent Office but such
application has been denied.
In October 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. In February 1997,
the Patent Office declared Interference No. 103692 with a patent application
filed in the name of Gerd Goldman (the "Goldman Application"). The Company
understands that the Goldman Application is owned by OCE Printing Systems GmbH.
The Patent is identified as the Junior Party in the Interference. In May 1997,
pursuant to the Company's request, the Interference was stayed and the Company
was ordered to notify the Administrative Patent Judge within fifteen days of the
Company's discharge from bankruptcy. The Interference proceedings have been
reactivated and the parties filed Preliminary Statements and Motions on December
7, 1998. It is not possible to predict the outcome of the Interference
proceedings at this time. See Item 3, Legal Proceedings.
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 Goldman Application, 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 to 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. On November 10, 1998, the Patent Office issued U.S. Patent Number
5,834,150 entitled "Solvent Vapor Fixing Methods And Process Color Toners For
Use In Same". At this time the Company is not working on any color toner
products for use with cold fusion printing. Nevertheless, in the future, the
Company may choose to develop toner products for use with vapor fusing or for
possible use with other forms of print fusion that are covered under this
patent.
EMPLOYEES
As of Dec 1, 1998, the Company had 6 full-time employees, including two
executive officers.
<PAGE> 7
Item 2. DESCRIPTION OF PROPERTY
As of December 1, 1998, the Company leases one warehouse in Los Angeles
pursuant to a three-year lease expiring February 2001 at a rent of $4,700 per
month, and one office facility in Agoura Hills, California for the Company's
executive offices pursuant to a one-year lease extension expiring January 2000
at a rental of $2,780 per month. The warehouse in Los Angeles has 10,500 square
feet and the office in Agoura Hills has 2,362 square feet.
Item 3. LEGAL PROCEEDINGS
The Company is the assignee of the entire right, title and interest in
and to U.S. Patent Number 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. In February 1997, the
Patent Office declared Interference Number 103692 with a patent application
filed in the name of Gerd Goldman (the "Goldman Application"). The Company
understands that the Goldman Application is owned by OCE Printing Systems GmbH.
The Patent is identified as the Junior Party in the Interference. In May 1997,
pursuant to the Company's request, the Interference was stayed and the company
was ordered to notify the Administrative Patent Judge within fifteen days of the
Company's discharge from bankruptcy. Once notified of the discharge from
bankruptcy, the Patent Office continued the 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 intends to vigorously
defend its rights to the Patent in the Interference Proceedings. The Company
filed on December 7, 1998, its claim to priority on said patent.
Prior to the institution of the bankruptcy proceedings, the Company was
a defendant in a number of lawsuits. All of such lawsuits were settled during
such proceedings.
The Company was a plaintiff in a class action suit against Siemens
Nixdorf Printing Systems and NCR Corporation for antitrust violations. While
Interscience withdrew as a named plaintiff in 1997, the Company retained the
right to participate as a class member. A hearing on class certification is
expected in January 1999. The Company retained all rights to bring its
individual claim in the event the class is not certified. The Company's
attorneys have informed us that the case may be tried in 1999. The case Mailers
Data Services, Inc., et al., v. Siemens Nixdorf Printing Systems, L.P., et al.
is pending in the Circuit Court for Pinellas County, Florida.
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.
Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is currently traded in the OTC Electronic Bulletin
Board under the symbol "INTRQ". The following table sets forth the high and low
sales prices for the Common Stock 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
Year Ended September 30, 1997 High Low
----------------------------- ----- -------
<S> <C> <C>
October 1, 1996 - December 31, 1996 $4.00 $3.00
January 1, 1997 - March 31, 1997 $2.875 $ .25
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C>
April 1,1997 - June 30, 1997 $.3125 $.1875
July 1, 1997 - September 30, 1997 $.875 $.375
Year Ended September 30, 1998
-----------------------------
October 1, 1997 - December 31, 1997 $.938 $.563
January 1, 1998 - March 31, 1998 $.750 $.281
April 1, 1998 - June 30, 1998 $.750 $.375
July 1, 1998 - September 30, 1998 $.6875 $.4375
October 1, 1998 - December 15, 1998 $.500 $.28125
</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.
Item 6. SELECTED FINANCIAL DATA
See attached audited financial statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS AND
PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this Annual
Report.
OVERVIEW
The Company was organized in 1983 to be a third-party provider of
maintenance services for computer hardware and related peripheral equipment. On
March 6, 1997 the Company filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. The bankruptcy filing was caused by several factors. The
Company had made four acquisitions, and the cash flow of the Company was not
sufficient to pay the operating expenses and the substantial debt assumed as
part of the acquisitions. In addition, the Company was incurring substantial
legal expense from lawsuits which were then pending against the Company.
The Company's business plan had been to expand its maintenance services
through these acquisitions to include maintenance on Xerox machines as well as
those manufactured by Siemens. The Company was not able to operate the Xerox
maintenance business on a profitable basis and it was sold effective November 1,
1997 with the approval of the Bankruptcy Court. Subsequently, in May 1998, the
Company sold the remaining maintenance business as part of the reorganization
plan. As of the date of this report the Company has completely divested itself
of all contracted maintenance. The Company continues to sell parts associated
with Xerox and Siemens high speed laser printers as part of its continuing
operations. Substantially all of the Company's revenues are now generated from
the sale of consumable products used by high speed production printers to
historical maintenance clients and other users of the equipment.
<PAGE> 9
On April 20, 1998, the Bankruptcy Court confirmed the Company's Plan of
Reorganization. Distributions to creditors, as required under the Plan, have
been made and, on December 16, 1998, the Bankruptcy Court issued a final decree
formally closing the bankruptcy proceedings.
The Company's principal consumable product is Fusing Agent used by the
Model 2200 Siemens Printer. In July 1994, the U.S. Patent and Trademark Office
issued a patent to the Company for the use of the Fusing Agent in the cold or
vapor fusion laser printing process. The Company currently sells the Fusing
Agent directly to its historical maintenance clients and distributes the Fusing
Agent to other operators of the Model 2200 Siemens Printer. The Company also
sells the Fusing Agent to NCR Corporation, OCE, and the Bradshaw Group. During
the 1998 Fiscal Year, sales of the Fusing Agent constituted approximately 74% of
the Company's total revenue. 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.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Sales for the fiscal year ended September 30, 1998 decreased by
approximately 5, 046,000 or 55% from sales in the prior year. The decrease in
total sales for the current fiscal year was attributed to the sale of the
maintenance division, with the majority of the maintenance business being sold
in the first quarter of the fiscal year. Maintenance revenues for 1997 were 62%
of total sales or approximately $5,676,000, compared with 14% or approximately
$579,000 for fiscal year 1998. Sales of fusing agent during the current year
declined by approximately 356,000 or 10% from fiscal year 1997, while as a
percentage of total sales fusing agent increased from 47% in 1997 to 74% 1998.
The other 12% of revenues in 1998 were from sales of other consumables and parts
for use in high speed production printers.
Cost of sales decreased from approximately $7,341,000 or 80% of sales to
$2,667,000 or 65% of sales for the current year. The decrease in cost of sales
was also related to sale of the lower gross margin maintenance business. Gross
profit as a percentage of sales increased from 20% in 1997 to 35% in 1998
reflecting the increased percentage of consumable sales as part of the total
sales.
Selling and administrative expenses decreased by $1,852,000 from 32% to
26% as a percentage of sales. This 64% reduction in selling and administrative
expenses resulted from the Company's closure of offices and warehouses outside
of the state of California during the reorganization. Depreciation and
amortization expense remained approximately the same for fiscal year 1998 and
1997.
Total operating expenses decreased by approximately $11,378,000 for the
current year. In addition to reductions in selling and administrative and
depreciation and amortization expense during 1998, the Company had wrote down
inventory by $8,335,105 and wrote down goodwill by $1,191,862 in 1997 accounting
for the additional operating expenses in the prior year.
The Company posted net income during 1998 of approximately $2,789,000 in
contrast with a loss of $11,597,000 in fiscal year 1997. The profit in fiscal
year 1998 included net income on continuing operations of $1,006,781, which
includes an income tax benefit of $652,471 and deferred income tax of 250,000.
Also included in the overall net income of the Company was a gain of $332,471
from the sale of Interscience PLC in April 1998 and the sale and discontinuance
of Laser Support & Engineering, Inc. in December 1997. The final component of
net income for the current fiscal year was a gain of approximately $1,450,000 on
creditor settlements that were compromised during the reorganization.
The Company could receive future tax benefits based on the prior years
losses when the inventory that was written down is sold or abandoned.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
During the 1998 fiscal year, the Company's cash position increased by
approximately $22,000 from $500,000 on September 30, 1997 to $522,000 on
September 30, 1998. During the current fiscal year the Company's First Amended
Plan of Reorganization was approved on April 20, 1998. The Plan provided for
payments to general unsecured creditors of 25% of the allowed unsecured claim.
The Company paid approximately $872,000 to general unsecured creditors
completing the cash portion of the settlement. In addition, the Company
completed payments to other unsecured creditors in the plan during the current
fiscal year including approximately $14,000 to ex-employees, $25,000 for
administrative claims and $23,000 for priority tax claims. The Company also paid
approximately $328,000 in court approved legal fees during the current fiscal
year.
In addition to payments to unsecured creditors, the Company's Plan
provided for the secured claims of Sanwa and Horizon Banks. Under the terms of
the Plan, the class 1 secured claim of Sanwa Bank is to be paid in thirty six
(36) monthly payments with interest at a rate of Sanwa's reference rate, plus
three percent (3%) per annum commencing April 1998. At September 30, 1997, the
Company's principal balance due to Sanwa Bank was approximately $2,230,000.
During the current fiscal year, the Company reduced principal due by $1,343,000
for an ending principal balance due to Sanwa on September 30, 1998 of
approximately $887,000. The principal balance due on September 30, 1997 on the
class 2 secured claim of Horizon Bank was approximately $89,500. Principal
reductions during the year of $31,500 reduced the principal balance to
approximately $58,000. The Plan calls for Horizon Banks allowed secured claim to
be amortized over thirty six (36) months payable in twenty four (24) months at
9.5% per annum commencing April 1, 1998.
During the 1998 fiscal year, sale of the maintenance division for
approximately $1,300,000 and the IRS refund of $654,000 substantially increased
the Company's ability to complete the necessary payments called for by the Plan
of Reorganization. The Company believes that cash generated from continuing
operations will be sufficient to fund the Company's anticipated working capital
needs for the foreseeable future.
BACKLOG
The Company's total backlog as of September 30, 1998 for Fusing Agent
sales was approximately $269,000. Backlog consists of the total amount of orders
for products (such as the orders placed by distributors for the Fusing Agent)
that remain to be filled. All such backlog revenues are expected to be realized
during the three-month period ending December 31, 1998.
YEAR 2000 COMPLIANCE
The Company currently believes that it will be internally Year 2000
compliant in all material respects prior to January 1, 2000 and that the effort
to achieve Year 2000 compliance has not and will not have a significant impact
on the financial condition or results of future operations of the Company. The
costs associated with ensuring that the Company's systems are Year 2000
compliant are not expected to be material and will be incurred during the fiscal
year ending September 30, 1999. The Company remains concerned that the failure
to comply by a relatively small number of large customers and/or vendors,
including banking institutions, utilities, telecommunications and transportation
companies, could significantly disrupt operations at one or both of the
Company's facilities which could have a material effect on the business and
operations of the Company.
Item 8. FINANCIAL STATEMENTS
The following is a list of financial statements filed herewith:
Consolidated Balance Sheets as of September 30, 1998 and September 30,
1997
<PAGE> 11
Consolidated Statements of Operations for the years ended September 30,
1998 and 1997
Consolidated Statements of Shareholder's Equity (Deficit) for the years
ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended September 30,
1998 and 1997 Notes to Consolidated Financial Statements
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements during the fiscal
year covered by this report.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 15, 1998, the directors and executive officers of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph R. Mancuso,Ph.D. 56 Director
George O. Harmon 74 Director
Norman Baker 58 Director
Robert Pearson 63 Director
Walter Kornbluh 67 President, Chief Executive Officer
and Chairman of the Board
Stephen Crosson 39 Vice President of Operations, Secretary
and Treasurer
</TABLE>
Joseph Mancuso, Ph.D. Dr. Mancuso became a director to the Company in
September 1993 following the closing of the Company's initial public offering.
Since 1978, Dr. Mancuso has been the publisher of the Entrepreneurial Manager's
Newsletter and the principal of both the Center for Entrepreneurial Management,
Inc., and the Chief Executive Officers Club. He is a director of Globus Growth
Group, a venture capital firm.
George Harmon. Mr. Harmon became a director of the Company in September
1993 following the closing of the Company's initial public offering. From March
1988 to the present, Mr. Harmon has been the Chairman of the Board and the Chief
Executive Officer of Harmon Associates, and since March 1987 he has been the
Chairman of the Board of Omnidata Corporation, a netware company. Mr. Harmon is
a director of Cirvis Inc. also a netware company.
Norman Baker. Mr. Baker, a U.K. national, joined the Company in January
1994, as Managing Director of Interscience Computer Corporation - PLC. Mr. Baker
has for the past fifteen years been a director and associate of N.B. Direct Mail
Ltd., a U.K. domiciled direct marketing, research and mailing operation. Mr.
Baker was appointed to the Company's board in March 1995. Mr. Baker purchased
Interscience PLC in April 1998, (see "Related Party Transactions").
<PAGE> 12
Robert Pearson. Mr. Pearson has been associated with Renaissance Capital
since April of 1994. Presently, Mr. Pearson serves as a Senior Vice President,
Director of Corporate Finance of Renaissance Capital. He served as Executive
Vice President of the Thomas Group from May 1990 to March 1994. For 25 years,
Mr. Pearson held various senior management positions at Texas Instruments,
including Vice President of Finance from October 1983 to June 1985. Mr. Pearson
holds directorships in the following companies: Poore Brothers, Inc. which
manufactures and distributes snack food products and Tava Technologies, a
provider of systems integration and information technology.
Walter Kornbluh: Mr. Kornbluh joined the Company in May 1997. Mr.
Kornbluh is a Certified Public Accountant. For the past 10 years, he has been
the President and majority owner of Workout Specialist Inc., a firm that
specializes in assisting companies with financial problems. He spent 17 years as
President of Marathon Office Supply, Inc., which distributes office supplies and
is a public company whose stock was listed on the American Stock Exchange.
Stephen Crosson: Mr. Crosson became Director of Operations in March of
1992. In April of 1995, Mr. Crosson became Vice President of Operations. In
1997, Mr. Crosson became its Secretary and in April 1998 Mr. Crosson became
Treasurer.
DIRECTOR COMPENSATION
Directors do not receive any annual compensation. Outside directors
receive $1,000 each for each meeting attended and reimbursement for
out-of-pocket expenses for attending meetings. During the current fiscal year,
three outside directors were issued warrants to purchase 50,000 shares of common
stock each at $1.00 per share. The warrants are exercisable during a three year
period commencing August 12, 1998.
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
Section 16 (a) of the Securities Exchange Act of 1934 requires the
Company's directors and certain of its officers, and persons who own more than
10 percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and greater than 10 percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Section 16 (a) forms they file. The Company believes that all
forms required to be filed under Section 16 (a) were timely filed.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for
its fiscal years ended September 30, 1998, and September 30, 1997 to its Chief
Executive Officer (the "Named Executive Officer"). No other executive officer
received compensation which exceeded $100,000 for the fiscal year ended
September 30, 1998.
ANNUAL COMPENSATION(1)
<TABLE>
<CAPTION>
FISCAL YEAR ALL
NAME AND ENDED OTHER
PRINCIPAL POSITION SEPTEMBER 30, SALARY BONUS COMPENSATION
- ------------------ ------------- ------ ----- ------------
<S> <C> <C> <C> <C>
Walter Kornbluh 1998 $150,000 -- --
President, Chief Executive 1997 $ 33,500 -- --
Officer and Chairman of
The Board
</TABLE>
<PAGE> 13
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
All existing employment agreements were canceled pursuant to the Plan.
Pursuant to the Plan, Renaissance Capital Corporation ("RCC") exchanged its
preferred stock (Series A and Series B Cumulative Convertible Preferred Stock)
into 1,750,000 shares of Common Stock. RCC was also granted warrants to purchase
500,000 shares of Common Stock at $1.00 per share for a period of three years.
The management agreement with RCC was also canceled and all back fees were
forgiven.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of December 15, 1998 by
(i) each person who is known by the Company to own beneficially more than 5% of
the Company's outstanding Common Stock; (ii) each of the Company's directors;
(iii) the named Executive Officer; and (iv) executive officers and directors of
the Company as a group:
<TABLE>
<CAPTION>
COMMON STOCK(1)
------------------------------
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS(2) SHARES OUTSTANDING(3)
-------------------- --------- --------------
<S> <C> <C>
Frank J. LaChapelle...........(4) 835,000 14.07
George O. Harmon.............. 70,000(6) --
Joseph R. Mancuso............. 56,500(6) --
Robert Pearson................(5) -- --
Norman Baker.................. 85,000(6) --
Walter Kornbluh............... 626,000(8) 11.00
Stephen Crosson............... 336,000(9) 6.00
Renaissance Capital Growth &
Income Fund III, Inc. ........ 2,250,000(7) 37.9
8080 N. Central Expressway
Suite 210
Dallas, Texas 75206
All executive officers and
directors as a group
(6 persons)................. 473,500 8.0
</TABLE>
- -------------------
(1) As used herein, the term beneficial ownership is defined by Rule 13d-3
under the Securities Exchange Act of 1934 as consisting of sole or shared
voting power and/or sole or shared investment power subject to community
property laws where applicable.
(2) The address of each person is c/o the Company at 5236 Colodny Drive, #100,
Agoura Hills, California 91301.
<PAGE> 14
(3) Based on 5,936,556 shares of Common Stock outstanding which includes all
warrants outstanding, as of November 17, 1998, represents the Company's
estimate of shares outstanding on the date of filing this report.
(4) All shares are held in the LaChapelle Family Trust with respect to which
Mr. LaChapelle exercises voting and investment power.
(5) Does no include any shares owned by RCC. Mr. Pearson is an executive
officer of RCC.
(6) Includes three year warrants to purchase 50,000 shares of Common Stock of
the Company at $1.00 per share.
(7) According to Schedule 13D, dated September 13, 1994, filed with the
Commission, RCC is the investment advisor of Renaissance Capital Growth &
Income Fund III, Inc. (the "Fund"). As a part of the Plan, the Fund
exchanged all of its shares of Preferred Stock for 1,750,000 shares of
Common Stock of the Company and three year warrants to purchase 500,000
shares of Common Stock at $1.00 per share.
(8) Includes currently exercisable options to purchase 300,000 shares from RCC
at $2.00 per share and 120,000 shares from Frank LaChapelle at $3.00 per
share.
(9) Includes currently exercisable options to purchase 200,000 shares from RCC
at $2.00 per share and 80,000 shares from Frank LaChapelle at $3.00 per
share.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year the Company paid $40,000 in consulting fees to a firm
owned by Walter Kornbluh, the President of the Company.
On April 1, 1998, Interscience PLC, the Company's subsidiary in the U.K.
was sold to Mr. Norman Baker. Payment for the acquisition included an initial
$10,000 payment and a royalty agreement that calls for a charge of $10 per case
to be paid for each case of fusing agent sold by PLC starting in May 1999. The
Company and PLC continue to work on consumable distribution projects that
involve both U.S. and European sales efforts. Mr. Baker remains a current member
of the Company's Board of Directors.
Item 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K. None
<PAGE> 15
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
By /s/ WALTER KORNBLUH
----------------------------------------
Walter Kornbluh, Chairman of the Board,
President and 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/ WALTER KORNBLUH Chairman of the Board, December 28, 1998
- ------------------------ President and Chief
Walter Kornbluh Executive Officer
/s/ STEPHEN CROSSON Vice President of Operations, December 28, 1998
- ------------------------ Secretary and Treasurer
Stephen Crosson and Principal Financial and
Accounting Officer
/s/ JOSEPH R. MANCUSO Director December 28, 1998
- ------------------------
Joseph R. Mancuso
/s/ GEORGE O. HARMON Director December 28, 1998
- ------------------------
George O. Harmon
/s/ NORMAN BAKER Director December 28, 1998
- ------------------------
Norman Baker
/s/ ROBERT PEARSON Director December 28, 1998
- ------------------------
Robert Pearson
</TABLE>
<PAGE> 16
INTERSCIENCE COMPUTER
CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<PAGE> 17
INTERSCIENCE COMPUTER CORPORATION
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT 3
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 4
Statements of operations 5-6
Statements of shareholders' equity (deficit) 7
Statements of cash flows 8-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10-24
</TABLE>
2
<PAGE> 18
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
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, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Interscience
Computer Corporation and Subsidiaries as of September 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
December 16, 1998
3
<PAGE> 19
================================================================================
<TABLE>
<CAPTION>
September 30, 1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 12) $ 522,060 $ 499,874
Accounts receivable, net of allowance for doubtful
accounts of $209,754 and $290,129 (Note 8) 520,848 942,385
Inventories (Notes 3 and 8) -- 166,717
Due from officers, net of allowance of $104,134 in 1997
(Note 6) -- 30,000
Prepaid expenses and other receivables, net of allowance
of $174,326 in 1997 -- 197,764
Deferred income taxes (Note 9) 250,000 --
---------- ----------
Total current assets 1,292,908 1,836,740
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $18,858 and $14,643 (Note 4) 11,703 15,918
OTHER ASSETS
Patents, net of accumulated amortization of $233,473
and $165,492 (Note 2) 242,395 310,376
Deposits and other 11,280 37,281
Net assets in discontinued operations, includes $86,937 in
cash -- 897,539
---------- ----------
Total other assets 253,675 1,245,186
---------- ----------
Total assets $1,558,286 $3,097,844
========== ==========
</TABLE>
<PAGE> 20
INTERSCIENCE COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
September 30, 1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Trade accounts payable $ 204,918 $ 121,746
Accrued liabilities 292,718 739,838
Deferred revenues -- 141,967
Current portion of long-term debt (Notes 8 and 12) 373,482 --
------------ ------------
Total current liabilities 871,118 1,003,551
LONG-TERM DEBT (Notes 8 and 12) 571,649 --
LIABILITIES SUBJECT TO COMPROMISE (Note 1) -- 5,375,889(a)
------------ ------------
Total liabilities 1,442,767 6,379,440
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 2 and 7)
SHAREHOLDERS' EQUITY (DEFICIT) (Note 5)
Preferred stock, no par value; authorized 1,000,000
shares; issued and outstanding 0 and 40,000 shares -- 3,590,000
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 5,188,487 and
2,541,666 shares 8,439,230 4,241,748
Accumulated deficit (8,323,712) (11,113,344)
------------ ------------
Total shareholders' equity (deficit) 115,518 (3,281,596)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,558,286 $ 3,097,844
============ ============
(A) LIABILITIES SUBJECT TO COMPROMISE
Trade accounts payable $ -- $ 2,246,485
Long-term debt converted to current -- 3,129,404
============ ============
Total liabilities subject to compromise $ -- $ 5,375,889
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 21
INTERSCIENCE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
------------ ------------
<S> <C> <C>
SALES (Note 2) $ 4,109,318 $ 9,154,855
------------ ------------
COST OF SALES 2,667,270 7,340,950
------------ ------------
GROSS PROFIT 1,442,048 1,813,905
------------ ------------
OPERATING EXPENSES
Sales and administrative 1,050,132 2,902,381
Depreciation and amortization 72,117 71,295
Write-down of inventory (Note 3) -- 8,335,105
Write-down of goodwill (Note 11) -- 1,191,862
------------ ------------
Total operating expenses 1,122,249 12,500,643
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 319,799 (10,686,738)
------------ ------------
REORGANIZATION ITEMS
Professional fees 139,246 137,644
OTHER INCOME (EXPENSE)
Interest income 17,894 614
Interest expense (94,137) (158,922)
------------ ------------
Total other (expense) (76,243) (158,308)
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAX 104,310 (10,982,690)
INCOME TAX EXPENSE (BENEFIT) (Note 9) (902,471) 1,233
------------ ------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 1,006,781 (10,983,923)
------------ ------------
</TABLE>
5
<PAGE> 22
INTERSCIENCE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
------------ ------------
<S> <C> <C>
DISCONTINUED OPERATIONS (Note 10):
Loss from discontinued operations, net of
income tax benefit of $27,500 (80,961) (538,211)
Gain on disposal, net of income taxes of $140,600 413,432 --
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 1,339,252 (11,522,134)
------------ ------------
EXTRAORDINARY ITEM:
Gain on creditor settlements (Note 1) 1,450,380 --
------------ ------------
NET INCOME (LOSS) $ 2,789,632 $(11,522,134)
============ ============
DIVIDENDS ON PREFERRED STOCK $ -- $ 75,000
============ ============
INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 2,789,632 $(11,597,134)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 2,880,929 2,541,666
============ ============
NET INCOME (LOSS) PER COMMON SHARE (BASIC AND DILUTED):
From continuing operations $ .35 $ (4.32)
From discontinued operations .12 (.21)
Extraordinary item .50 --
------------ ------------
NET INCOME (LOSS) per common share $ .97 $ (4.56)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 23
INTERSCIENCE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- ---------------------------
Shares Amount Shares Amount
------ ------------ --------- ------------
<S> <C> <C> <C> <C>
BALANCE, at October 1, 1996 40,000 $ 3,590,000 2,541,666 $ 4,241,748
Cash dividends paid on preferred stock -- -- -- --
Net loss -- -- -- --
------ ------------ --------- ------------
BALANCE, at September 30, 1997 40,000 3,590,000 2,541,666 4,241,748
------ ------------ --------- ------------
Common stock issued as partial settlement
of unsecured creditors (Note 1) -- -- 896,821 607,482
Preferred stock converted to common
stock (Note 1) (40,000) (3,590,000) 1,750,000 3,590,000
Net income -- -- -- --
------ ------------ --------- ------------
BALANCE, at September 30, 1998 -- $ -- 5,188,487 $ 8,439,230
====== ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
(deficit) Total
----------- ------------
<S> <C> <C>
BALANCE, at October 1, 1996 483,790 $ 8,315,538
Cash dividends paid on preferred stock (75,000) (75,000)
Net loss (11,522,134) (11,522,134)
----------- ------------
BALANCE, at September 30, 1997 (11,113,344) (3,281,596)
----------- ------------
Common stock issued as partial settlement
of unsecured creditors (Note 1) -- 607,482
Preferred stock converted to common
stock (Note 1) -- --
Net income 2,789,632 2,789,632
---------- ------------
BALANCE, at September 30, 1998 (8,323,712) $ 115,518
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 24
INTERSCIENCE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,789,632 $(11,522,134)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Loss from write-down of inventory -- 8,335,105
Gain from discontinued operations (332,471) --
Gain on creditor settlements (1,450,380) --
Loss from write-down of goodwill -- 1,191,862
Depreciation and amortization 72,117 336,627
Change in allowance for doubtful accounts (80,375) --
Deferred income taxes (250,000) --
Write-off of due from officers 30,000 --
Changes in operating assets and liabilities net of effects of
divestitures:
Accounts receivable 501,912 929,770
Inventories 166,717 (208,555)
Prepaid expenses and other receivables 197,764 (137,239)
Deposits and other 26,001 58,991
Accounts payable and accrued expenses (552,491) 1,312,308
Deferred revenue (141,967) (26,425)
Net cash provided by operating activities 976,459 270,310
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in equipment contracts receivable -- (55,146)
Proceeds for sale of businesses 1,230,000 --
------------ ------------
Net cash provided by (used in) investing activities 1,230,000 (55,146)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on preferred stock -- (75,000)
Payment of long-term debt (2,184,273) --
------------ ------------
Net cash used in financing activities (2,184,273) (75,000)
------------ ------------
</TABLE>
8
<PAGE> 25
INTERSCIENCE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
------------ ------------
<S> <C> <C>
NET INCREASE IN CASH AND CASH EQUIVALENTS 22,186 250,456
CASH AND CASH EQUIVALENTS, beginning of period 499,874 249,418
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 522,060 $ 499,874
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 93,760 $ 158,922
============ ============
Income taxes paid $ 4,483 $ 12,610
============ ============
</TABLE>
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES
The reorganization plan was approved by the Bankruptcy court (see Note 1)
which required the conversion of $3,590,000 of shares of preferred stock
into shares of common stock, and the settlement of Pre-petition
liabilities in the amount of $2,764,119 by paying $706,257 in cash,
exchanging shares of common stock valued at $607,482 and the forgiveness
of the remaining balance.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
9
<PAGE> 26
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
SIGNIFICANT
ACCOUNTING Interscience Computer Corporation (the "Company"
POLICIES or the "Debtor") 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 spare parts for the Siemens, Xerox, and
Delphax families of business, as well as
technical support for Siemens. 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 74% and
47% of Company sales, for the years ended 1998
and 1997.
PETITION FOR RELIEF UNDER CHAPTER 11
On March 6, 1997, the Debtor filed petitions for
relief under Chapter 11 of the federal
bankruptcy laws in the United States Bankruptcy
Court in Los Angeles, California. Under Chapter
11, certain claims against the Debtor in
existence prior to the filing of the petitions
for relief under the federal bankruptcy laws are
stayed while the Debtor continues business
operations as Debtor-in-possession. These claims
are reflected in the September 30, 1997 balance
sheet as "liabilities subject to compromise."
The Reorganization Plan (the "Plan") was
approved by the Bankruptcy Court on April 20,
1998. The confirmed plan provided for the
following:
1. Administrative expenses were paid in
cash shortly after confirmation.
2. Tax liabilities will be paid over a
six-year period in equal quarterly
payments.
10
<PAGE> 27
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF PETITION FOR RELIEF UNDER CHAPTER 11 (Continued)
SIGNIFICANT
ACCOUNTING
POLICIES
(CONTINUED)
3. Sanwa Bank received $1,000,000 and the
balance of the loan will be paid over
three years at prime interest plus 3%.
4. Horizon Bank will be paid in 36 equal
installments of principal and interest.
5. All vendors under $500 were paid in full
at closing.
6. All unsecured creditors received 25% of
their approved debt shortly after
closing plus one (1) share of stock for
every five dollars ($5.00) of approved
debt. There is a possibility of an
additional payment based on future sales
of Xerox parts. The Company realized a
gain of $1,450,380 as a result of the
settlement of this class of claims.
7. The preferred shareholders agreed to
accept 1,750,000 shares of common stock
with two year warrants to purchase an
additional 500,000 shares of common
stock at $1.00 per share. All delinquent
dividends were forgiven.
8. Original shareholders retained their
shares. They were diluted by issuance of
common stock to the preferred
shareholders and unsecured creditors.
9. An additional 250,000 shares of common
stock were issued to management.
In April, 1998, during the course of evaluating
creditor claims submitted to the Bankruptcy
Court, the Court allowed approximately $94,000
of additional liabilities against the Company.
11
<PAGE> 28
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF PETITION FOR RELIEF UNDER CHAPTER 11 (Continued)
SIGNIFICANT
ACCOUNTING After considering the evidence, the Bankruptcy
POLICIES Court ruled that the Plan should be and was in
(CONTINUED) fact confirmed on April 20, 1998. As a result,
the Company has been revested with all of its
assets. The Plan terms control all claims and
equity interests which existed as of March 6,
1997, the date when the Company filed its
Chapter 11 reorganization case. The Company can
now conduct business as usual without the
requirement of obtaining Bankruptcy Court
approval. Distributions to approved creditors,
as required under the Plan have been made. All
claim objections have been resolved and the
Bankruptcy Court has approved settlement of the
outstanding claims. On December 16, 1998, the
Bankruptcy Court issued a final decree formally
closing the bankruptcy proceedings.
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 an original 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.
12
<PAGE> 29
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF FAIR VALUE OF FINANCIAL INSTRUMENTS
SIGNIFICANT
ACCOUNTING Statement of Financial Accounting Standards No.
POLICIES 107 "Disclosures About Fair Value of Financial
(CONTINUED) Instruments," requires disclosure of the fair
value of certain financial instruments. Accounts
receivable and accounts payable and liabilities
as reflected in the financial statements
approximate fair value because of the short-term
maturity of these instruments.
The carrying amount of long-term debt
approximates fair value because the interest
rates of these instruments approximates the rate
the Company could borrow at September 30, 1998
and 1997.
The fair value of receivables for officers
cannot be determined due to their related party
nature.
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 or market. Cost is determined on the
first-in, first-out method. The Company
periodically reviews its components of
replacement parts and establishes a provision
for excess quantities and obsolescence. (See
Note 3)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost.
Depreciation is computed on the straight-line
and accelerated methods based upon the estimated
useful life of the asset, primarily 5 years.
INTANGIBLES
The cost of patents acquired are being amortized
on the straight-line method over seven years.
13
<PAGE> 30
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF IMPAIRMENT OF LONG-LIVED ASSETS
SIGNIFICANT
ACCOUNTING The Company periodically assesses the
POLICIES recoverability of the carrying amounts of
(CONTINUED) 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. See Notes 3 and
11.
DEFERRED REVENUE
Service revenue is recognized ratably over the
contract period. Deferred service revenue
represents billing in advance of the service
period.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Foreign
Subsidiary were translated from British Pounds,
the functional currency into U.S. dollars.
Results of operations for the Company's foreign
subsidiary are translated using the average
exchange rates during the period. Resulting
translation adjustments are not material.
COMPUTATION OF EARNINGS PER SHARE
For the year ended September 30, 1998, the
Company adopted SFAS No. 128, which requires the
presentation of Basic and Dilutive earnings per
share, which replaces primary and fully diluted
earnings per share, the retroactive application
of this SFAS had no impact on previously
reported amounts. Basic net loss per share is
computed using the weighted average number of
common shares outstanding during the period.
Dilutive net loss per share is computed using
the weighted average number of common shares
outstanding during the period, plus the dilutive
effect of common stock equivalents. Shares
outstanding for dilutive earnings per share
consist of common stock warrants which were
issued during the year ended September 30, 1998.
The dilutive computations do not include common
stock purchase warrants for the year ended
September 30, 1998, as their inclusion would be
anti-dilutive.
14
<PAGE> 31
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF NEW ACCOUNTING PRONOUNCEMENTS
SIGNIFICANT
ACCOUNTING Statement of Financial Accounting Standards
POLICIES ("FASB") No. 133, "Accounting for Derivative
(CONTINUED) Instruments and Hedging Activities" ("SFAS No.
133") issued by the FASB is effective for all
fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS 133 requires companies to
recognize all derivatives contracts as either
assets or liabilities in the balance sheet and
to measure them at fair value. If certain
conditions are met, a derivative may be
specifically designated as a hedge, the
objective of which is to match the timing of
gain or loss recognition on the hedging
derivative with the recognition of (i) the
changes in the fair value of the hedged asset or
liability that are attributable to the hedged
risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or
loss is recognized in income in the period of
change.
Historically, the Company has not entered into
derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly,
the Company does not expect adoption of the new
standard on January 1, 2000 to affect its
financial statements.
2. DISCLOSURE OF PATENT
CERTAIN RISKS
AND UNCERTAINTIES 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 74% and 47% of the Company's sales
for the years ended 1998 and 1997. 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 notified the Company that an interference
was declared, and the Company is unable to
estimate when the Patent Office will issue its
determination on the 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. The Company filed on
December 7, 1998, its claim to priority on said
patent.
15
<PAGE> 32
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. DISCLOSURE OF SOURCES OF SUPPLY
CERTAIN RISKS
AND UNCERTAINTIES The Company believes that there are several
(CONTINUED) domestic or foreign companies that can provide
the Company with the hydro chloro-flouro carbon
("HCFC") that it expects to need in the future
for the manufacture of its fusing agent. The
Company has initiated discussions with several
suppliers regarding future purchases of HCFC and
will decide on who its future supplier will be
based on price and other considerations.
MAJOR CUSTOMERS
Three customers accounted for approximately 68%
of total sales in 1998. Two of the same
customers accounted for approximately 19% of
total sales in 1997.
3. INVENTORIES Inventories consist of the following at
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ --------
<S> <C> <C>
Equipment and parts for sale $ -- $ 90,050
Replacement parts -- 76,667
------------ --------
Total inventory $ -- $166,717
============ =========
</TABLE>
In September 1997, the Company recorded special
charges of $8,335,105 to write-off inventory
associated with operations which would require
additional working capital to continue. The
Company has been unable to obtain additional
working capital since it was in bankruptcy
reorganization. This inventory was primarily
related to the Xerox and Delphax maintenance
business. Some of this inventory still exists
and has been written-down to zero due to the
undeterminable future value.
16
<PAGE> 33
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. PROPERTY AND Property and equipment consists of the following
EQUIPMENT at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30, 1998 1997
------- -------
<S> <C> <C>
Furniture and fixtures $ 9,905 $ 9,905
Test and training equipment 20,656 20,656
------- -------
30,561 30,561
Less accumulated depreciation 18,858 14,643
------- -------
$11,703 $15,918
======= =======
</TABLE>
5. COMMON STOCK PURCHASE In connection with its bankruptcy
WARRANTS reorganization, the Company exchanged 1,750,000
shares of its common stock and warrants to
purchase 500,000 shares of common stock at $1.00
per share for all outstanding preferred stock.
The warrants are exercisable during the three
year period commencing August 12, 1998. No
warrants were exercised as of September 30,
1998. No value was recorded for the warrants
issued as the value was not material.
The Company issued warrants to purchase 200,000
shares of common stock at $1.00 per share to its
directors and an individual. The warrants are
exercisable during the three year period
commencing August 12, 1998. No warrants were
exercised as of September 30, 1998. No value was
recorded for the warrants issued as the value
was not material.
6. RELATED PARTY During fiscal 1998 the Company paid $40,000 in
TRANSACTION consulting fees to a firm owned by Company's
Chairman of the Board.
On April 1, 1998, Interscience PLC, the
Company's subsidiary in the U.K., was sold to
Mr. Norman Baker, a related party. Payment for
the acquisition included an initial $10,000
payment and a royalty agreement that calls for a
charge of $10 per case to be paid for each case
of fusing agent sold by PLC starting in May
1999. The Company and PLC continue to work on
consumable distribution projects that involve
both U.S. and European sales efforts. Mr. Baker
remains a current member of the Company's Board
of Directors.
17
<PAGE> 34
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. RELATED PARTY As of September 30, 1997, the Company had
TRANSACTION outstanding receivables of $30,000 from its
(CONTINUED) former Chief Executive Officer, $85,000 plus
accrued interest of $8,634 from its former Vice
President of Sales and Services, and $10,500
from its former President. During the year ended
September 30, 1997, the Company classified
$104,134 of these receivables as doubtful
accounts. All of these amounts were written-off
during fiscal 1998.
7. COMMITMENTS OPERATING LEASES
AND
CONTINGENCIES The Company leases its facilities pursuant to
various leases.
Minimum annual lease payments required under
non-cancelable leases as of September 30, 1998
are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30, Amount
-------
<S> <C>
1999 $59,774
2000 15,951
-------
$75,725
=======
</TABLE>
Total rent expense for the years ended September
30, 1998 and 1997 amounted to $118,588 and
$331,035, respectively.
18
<PAGE> 35
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. COMMITMENTS TAX-QUALIFIED SAVINGS PLAN
AND
CONTINGENCIES The Company has adopted a tax-qualified savings
(CONTINUED) 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.
The Company's matching contributions were $6,316
and $8,105 in 1998 and 1997, respectively. The
Company has discontinued the 401(k) Plan and is
in the process of obtaining approval from the
IRS for final termination during the year ended
September 30, 1999.
8. NOTES PAYABLE In connection with the Company's bankruptcy
reorganization, on April 1, 1998 the Company
restructured a $62,897 loan from a bank at prime
plus one percent (9.5% at September 30, 1998).
The loan has a term of two years requiring
monthly payments of principle and interest of
approximately $2,518 with an irregular last
payment estimated at $9,816. The loan is secured
by certain receivables and inventory of the
Company. The loan may be prepaid at any time
without any penalties. As of September 30, 1998,
$53,107 remained unpaid on this loan.
19
<PAGE> 36
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. NOTES PAYABLE In connection with the Company's bankruptcy
(CONTINUED) reorganization, on April 1, 1998, the Company
restructured a $12,034 loan from a bank at ten
and one half percent. The loan has a term of two
years requiring monthly payments of principle
and interest of approximately $2,047. The loan
is secured by certain receivables and inventory
of the Company. The loan may be prepaid at any
time without any penalties. As of September 30,
1998, $4,805 remained unpaid on this loan.
On July 30, 1996, the Company obtained a
$2,230,234 loan from a bank at the bank's
reference rate plus three percent. As a result
of the Company's bankruptcy reorganization, the
loan was redated on April 1, 1998. The bank was
allowed a claim of $2,250,000 at that date. The
interest rate remained unchanged (interest is
9.25% at September 30, 1998). The redated loan
requires monthly payments for three years from
the redated date of principle and interest of
approximately $28,620 and a portion of the
proceeds of the Anacomp sale (see Note 10). The
loan is secured by certain receivables and
inventory of the Company and is subject to
certain covenants which the Company was in
compliance with at September 30, 1998. The loan
may be prepaid at any time without any
penalties. As of September 30, 1998,
approximately $887,219 remained unpaid on this
loan.
Estimated future maturities of the Company's
long-term debt as of September 30, 1998 is as
follows:
<TABLE>
<CAPTION>
September 30, Amount
--------
<S> <C>
1999 $373,482
2000 399,929
2001 171,720
--------
$945,131
========
</TABLE>
20
<PAGE> 37
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. INCOME TAXES Provision (benefit) for income taxes included in
the accompanying statements of operations
consist of the following components:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current:
Federal $(654,071) $ --
State 1,600 1,233
--------- ---------
(652,471) 1,233
--------- ---------
Deferred:
Federal (250,000) --
State -- --
--------- ---------
(250,000) --
--------- ---------
Income tax provision (benefit) $(902,471) $ 1,233
========= =========
</TABLE>
The effective tax rate on income (loss) before
income taxes differed from the federal statutory
tax rate. The following summary reconciles
income taxes at the federal statutory tax rate
with the actual taxes and the effective tax
rate:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Federal statutory tax rate 34% (34)%
Meals and entertainment 5% --
Change in valuation allowance (279)% 34
Federal tax refund (625)% --
------- -------
Effective tax rate (865)% --%
======= -------
</TABLE>
21
<PAGE> 38
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. INCOME TAXES At September 30, 1998, the Company has available
(CONTINUED) net operating loss carryforwards of
approximately $1,400,000 for income tax
purposes, which expire in varying amounts
through 2012. The temporary differences between
amounts reported for financial statements and
the tax basis of the assets amounted to
$6,466,772 of which $6,454,396 are inventory
related items. These differences give rise to a
deferred tax asset of $2,198,703. A portion of
the deferred tax asset was not recognized since
it is more likely than not that it will not be
realized. Accordingly, a valuation allowance of
$1,948,703 was provided.
At September 30, 1997, the Company has available
net operating loss carryforwards of
approximately $703,000 for income tax purposes,
which expire in varying amounts through 2012.
The Company also had approximately $8,264,000 of
deferred tax assets related to inventory
reserves.
These items generated a deferred tax asset of
approximately $3,710,000. The deferred tax asset
was not recognized since it is more likely than
not that they will not be realized. Accordingly,
a 100% valuation allowance was provided.
10. DISCONTINUED SALE OF XEROX MAINTENANCE BUSINESS
OPERATIONS AND
SALE OF XEROX The Company sold its Xerox maintenance business
MAINTENANCE to Anacomp corporation, an Indiana corporation
BUSINESS as of November 1, 1997. The purchase price
consisted of $1,220,000 cash paid at closing and
an earnout payment based on revenues generated
by the Xerox maintenance business to be made in
the 13th month following closing. The Company
realized a gain on this sale of approximately
$562,000.
In connection with the sale of the Xerox
maintenance business to Anacomp, the Company
abandoned assets with a net book value of
$199,183 and inventories valued at $191,421.
22
<PAGE> 39
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. DISCONTINUED On December 12, 1997, the Company's Board of
OPERATIONS AND Directors adopted a plan to sell and
SALE OF XEROX discontinued the operations of Laser Support and
MAINTENANCE Engineering, Inc. ("LSE"). Accordingly, the
BUSINESS Company realized a gain on disposal of $261,248
(CONTINUED) and a loss on LSE's operations of $26,319 have
been segregated from continuing operations and
reported as a loss from discontinued operations
on the consolidated statement of operations.
On April 1, 1998, the Company's Board of
Directors adopted a plan and discontinued the
operations of Interscience, PLC ("PLC").
Accordingly, the Company recognized a loss on
the disposal of $19,212 and a loss on PLC's
operations of approximately $54,642 have been
segregated from continuing operations and
reported as a loss from discontinued operations
on the consolidated statement of operations.
In May 1998, the remaining maintenance business
was sold to complete the termination of the
service division. The six Siemens laser printer
contracts in Southern California were sold as of
May 1, 1998 to Landmark Computer Group (L.C.G.).
The purchase agreement calls for a nine month
payment plan based on 50% of the annual service
revenue for the acquired accounts. The remaining
three Siemens laser printer maintenance
contracts in the Maryland and Virginia area were
sold for a nominal amount which included a small
inventory located at the three sites.
23
<PAGE> 40
INTERSCIENCE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. DISCONTINUED Net sales, income, and assets from discontinued
OPERATIONS AND operations are as follows:
SALE OF XEROX
MAINTENANCE
BUSINESS
(CONTINUED)
<TABLE>
<CAPTION>
Year ended September 30, 1997 1998
------- -------
(In thousands) (In thousands)
<S> <C> <C>
Net sales $ 2,080 $ 299
Operating income (loss) (527) (81)
Income tax expense 11 --
Income (loss) from discontinuing
operations (538) (81)
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, 1997 1998
------- -------
(In thousands) (In thousands)
<S> <C> <C>
Net Assets of Discontinued Operations
Current assets $ 2,080 $
Property, plant and equipment, net 285
Current liabilities (324)
Net assets of discontinued
operations 898
======= =======
</TABLE>
11. GOODWILL In September 1997, the Company recorded a
write-down of $1,191,862 to write-off the
unamortized portion of goodwill associated with
the JC Alltime and Laser Support and Engineering
lines of business. The Company was unable to
obtain additional working capital to continue
these operations and discontinued these
operations during the year ended September 30,
1998.
12. SUBSEQUENT On October 2, 1998, without the Company's
EVENTS permission, Sanwa Bank asserted a banker's
offset of approximately $658,000. The Company
and Sanwa Bank reached a tentative settlement of
this dispute during November 1998 in which Sanwa
agreed to return approximately $120,000. The
portion of these funds retained by Sanwa Bank
will be used to reduce the principal balance
owed by the Company.
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 522,060
<SECURITIES> 0
<RECEIVABLES> 730,602
<ALLOWANCES> 209,754
<INVENTORY> 0
<CURRENT-ASSETS> 1,292,908
<PP&E> 30,561
<DEPRECIATION> 18,858
<TOTAL-ASSETS> 1,558,286
<CURRENT-LIABILITIES> 871,118
<BONDS> 0
8,439,230
0
<COMMON> 0
<OTHER-SE> (8,323,712)
<TOTAL-LIABILITY-AND-EQUITY> 1,558,286
<SALES> 3,530,318
<TOTAL-REVENUES> 4,109,318
<CGS> 2,088,270
<TOTAL-COSTS> 2,667,270
<OTHER-EXPENSES> 1,122,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,243
<INCOME-PRETAX> 104,310
<INCOME-TAX> (902,471)
<INCOME-CONTINUING> 1,006,781
<DISCONTINUED> 332,471
<EXTRAORDINARY> 1,450,380
<CHANGES> 0
<NET-INCOME> 2,789,632
<EPS-PRIMARY> .97
<EPS-DILUTED> .97
</TABLE>
