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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For Fiscal Year Ended December 31, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
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Commission File No. 1-9547
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INTERSYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3256265
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1011 Highway 71, Spring Lake, NJ 07762
(Address of Principal Executive Offices) (Zip Code)
(732) 282 - 1411
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class Name of Each Exchange On Which Registered
Common Stock, $.01 par value American Stock Exchange
Common Stock Purchase Warrants American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant is approximately $1,227,283 based upon the
closing price of the registrant's common stock, $.01 par value, as reported by
the American Stock Exchange on March 15, 2001, which was $.21.
The number of shares of the registrant's common stock, $.01 par value,
outstanding on March 15, 2001: 7,597,000.
Documents incorporated by reference: Proxy Statement for 2001 Annual Meeting
incorporated in Part III
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PART I
ITEM 1: BUSINESS
INTRODUCTION AND BUSINESS DEVELOPMENT
InterSystems, Inc. was originally organized under the laws of the state of
Delaware in 1984. The Company's principal line of business today consists of the
operations of its wholly-owned subsidiary, Chemtrusion, Inc. ("Chemtrusion"),
based in Houston, Texas and Jeffersonville, Indiana. Chemtrusion provides
various out-sourcing services to the petro-chemical industry including research,
manufacturing and facilities operations for major multi-national companies.
Chemtrusion is a leader in specialty plastics compound processing that combines
thermoplastic resins with various additives to enhance and customize plastic
materials for specific end uses. Chemtrusion's Indiana division is a dedicated
facility (the "Mytex facility") providing design, construction and operating
services exclusively for Mytex Polymers, a joint venture of ExxonMobil Chemical
and Mitsubishi Chemicals America ("Mytex").
In addition to the operations of Chemtrusion, during 2000, the Company's Board
of Directors determined that the credit and capital markets for small, mid-size
companies was becoming restricted. As a consequence, the Company retained its
new president who had experience in structured capital placements and authorized
the Company to embark on a strategic new initiative of providing capital funding
for small and mid-sized enterprises.
The Company had revenues from continuing operations of $16,761,000, $14,746,000
and $11,504,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. For the year ended December 31, 2000, the Company reported a loss
from continuing operations of $(605,000), and a net loss for the year of
$(795,000), as compared to a loss from continuing operations of $(679,000) and a
net profit of $3,192,000 for the year ended December 31, 1999. The net loss for
the year ended December 31, 2000 included a loss from discontinued operations of
$190,000. The net profit for the year ended December 31, 1999, included $821,000
income from discontinued operations and a $3,184,000 gain on the sale of the
business of the Company's subsidiary, InterSystems, Inc., a Nebraska corporation
("InterSystems Nebraska"). For the year ended December 31, 1998, the Company
reported a net loss from continuing operations of $(775,000), and a net profit
for the year of $443,000. The net profit for the year ended December 31, 1998
included $1,218,000 income from discontinued operations.
THE BUSINESS OF CHEMTRUSION
Chemtrusion provides the value-added service of custom compounding thermoplastic
resins for resin producers. Custom resin compounding involves the combining of a
resin with various additives such as pigments, impact modifiers, mineral fillers
or stabilizers to customize the product to a particular end use. The end use may
require color, opaqueness, toughness, stiffness, flame or chemical retardance
characteristics or other specified qualities not available in standard
thermoplastic resins. These compounds are used extensively in consumer products,
packaging materials, automotive parts, and in the electrical, agricultural and
office equipment industries. A variety of compounds are manufactured by
Chemtrusion, including mineral and glass filled polyolefins, specialty resin
alloys and additive concentrates.
COMPOUNDING OPERATIONS
HOUSTON FACILITY: Chemtrusion provides custom compounding services using four
twin screw extruders, various blenders and other equipment at its Houston
facility. The fourth extrusion line, added in 1997, offers the latest generation
of compounding technology and provides manufacturing capacity for smaller volume
products bringing the total annualized capacity of the facility to 46 million
pounds. 2000 production was
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approximately 27,482,530 pounds compared to approximately 27,563,030 pounds in
1999. The level of production is discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 9.
MYTEX FACILITY: In January 1996, Chemtrusion entered into a Definitive Agreement
for Compounding Services with Mytex Polymers ("Mytex"), a Delaware general
partnership of affiliates of Mitsubishi Chemicals America and ExxonMobil
Chemical Company, a division of ExxonMobil Corporation.
Pursuant to the Agreement, Chemtrusion originally acquired 16.4 acres of land in
Jeffersonville, Indiana, on which it constructed and equipped in accordance with
agreed upon plans and specifications a plastics compounding plant at a cost of
$12.8 million. As originally designed, the plant contained four production lines
with an annual capacity of 35 million pounds of product, and sufficient space to
add two additional production lines, if desirable, at a future date. Pursuant to
the original Agreement, Mytex has the right to require Chemtrusion to add
production lines as well as expand the plant at any time. Mytex provided the
initial construction financing for the project under this Agreement. The plant
was completed in October 1996 and the addition of another production line was
completed in each of 1998 and 1999, bringing the total production capacity of
the facility to 80 million pounds of product. Mytex provided $14,000,000
permanent financing for the original construction of the facility, and provided
an aggregate of $6,163,050 additional financing for the two new production
lines.
During the first quarter of 2000, the Company undertook an expansion of the
plant itself. The Company acquired a 14.901 acre tract of land, adjacent to the
original 16.4 acres, on which to construct the new facility. This expansion will
initially contain one production line with sufficient space to add additional
production lines. Through December 31, 2000, the Company has expended $8,417,000
on this expansion which was funded by a loan from MyTex. The expansion was
substantially completed by, and became operational in, September 2000. See Note
4 to Notes to Consolidated Financial Statements for a discussion of the terms of
this financing.
At the Mytex facility, Chemtrusion produces an array of polypropylene-based
compounds exclusively for the benefit of Mytex using raw materials and
specifications provided by Mytex. Chemtrusion is paid a monthly fee for its
operation of the plant. The fee includes recovery of direct operating expenses,
debt service and a management fee. The actual management fee amount is
determined by adjusting a target management fee according to actual monthly
operating performance. The target management fee is based upon the aggregate
capacity of each compounding line in the facility; therefore, each addition of a
production line and expansion of the facility results in an increase in the
target management fee. The actual management fee exceeds the target when the
performance of the facility exceeds expected performance criteria. The facility
is penalized by a reduction in the actual management fee as compared to the
target management fee when the converse is true.
In 1997, Chemtrusion and Mytex amended the Definitive Agreement to provide a
fifth production line, as well as additional rail siding in support of both
current and future bulk shipment requirements of the facility. Pursuant to the
Agreement, Chemtrusion arranged for design and installation of these additions,
which were funded by Mytex through interim short-term financing. In 1998, when
the additions were completed, Mytex replaced the short-term financing with
permanent financing under terms similar to those contained in the initial
Agreement. Chemtrusion's management fee was increased significantly as a result
of the new line.
During 1998, Chemtrusion and Mytex further amended the Definitive Agreement to
provide for design, installation and operation of a sixth production line. In
early 1999, Chemtrusion completed the installation of this new line. Under the
terms of the Agreement, Mytex provided permanent financing of the new line under
terms similar to those contained in the initial Agreement and Chemtrusion's
management fee was further significantly increased as a result of this sixth
line.
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During 2000, Chemtrusion and Mytex further amended the Definitive Agreement (the
"2000 Amendment") to provide for design, installation and operation of a new
facility adjacent to the original plant facility. This new facility was
substantially completed by, and became operational in, September 2000. Under the
terms of the Agreement, Mytex has provided permanent financing of the new
facility under terms similar to those contained in the initial Agreement and
Chemtrusion's management fee has been proportionally increased as a result of
this expansion.
DURATION OF THE MYTEX AGREEMENT
The initial term of the Mytex Agreement was originally five years, expiring
December 31, 2001. Pursuant to the 2000 Amendment, the initial term has been
extended to be ten years, expiring December 31, 2006. Mytex has the option to
renew the Agreement for two additional five-year terms.
Upon expiration of the initial term or any renewal term, or in the event of the
termination of the Agreement by default, Mytex has an option to purchase the
entire facility from Chemtrusion (the "Option"). In the event that Mytex does
not renew the Agreement at the end of the initial or any renewal term, or in the
event of termination by default, Chemtrusion has the right to require Mytex to
purchase the entire facility (the "Put"). The purchase price under the Option or
the Put is equal to assumption of unamortized construction financing and other
contractual obligations relating to the plant and the property. If the Option or
the Put is exercised as a result of Mytex's failure to renew the Agreement at
the end of the initial term or Chemtrusion exercises its Put upon termination of
the Agreement prior to the expiration of the initial term as a result of a
default by Mytex, then, in addition to Mytex's assumption of such liabilities,
the purchase price will include $1.5 million reduced by a portion of the
increases in the Management Fee paid to Chemtrusion. In the event the Put is
exercised upon termination of the Agreement as a result of a default by
Chemtrusion, then the purchase price under the Put is equal to the assumption of
such liabilities less $700,000 (which is deemed liquidated damages).
All construction financing incurred with respect to the original facility (i.e.
the facility completed in 1996 and the two production lines added in 1998 and
1999) will be fully amortized in 2011, or fifteen years after the execution of
the Definitive Agreement. The permanent construction financing incurred with
respect to the facility that became operational in September 2000 is anticipated
to be fully amortized by 2016. Management expects that upon the expiration of
the current term of the Agreement aggregate increases in the management fee will
have significantly reduced the $1.5 million Option price.
Pursuant to the terms of the Definitive Agreement, as amended, Mytex has the
right to terminate the Mytex Agreement in the event that Scott Owens, President
of Chemtrusion, is no longer employed by Chemtrusion in an executive capacity,
and in the event of a change in control of Chemtrusion.
SOURCES AND AVAILABILITY OF RAW MATERIALS
In Chemtrusion's custom compounding operations, the customer supplies all or
most of the raw materials including resins and other additives. Chemtrusion
supplies the operating equipment and process technology to precisely melt, mix
or physically blend the various feedstock components into finished products.
Chemtrusion consults with each customer regarding use of its process technology
in order to achieve the optimal product performance of each formulation,
particularly when the objective is support of the customer's research and
development activities for new products. Once parameters are established,
Chemtrusion's process technology is generally used to support commercial
manufacturing of products.
Chemtrusion is required to purchase maintenance related supplies for its
compounding equipment. These supplies are commonly available from numerous
suppliers and vendors. Chemtrusion has not experienced, nor does it reasonably
anticipate, any material interruption in the supply of materials for its
compounding operations.
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PATENTS AND TRADEMARKS
Chemtrusion does not currently hold any patents or registered trademarks.
Chemtrusion protects its process technology through confidentiality agreements
with customers.
SEASONALITY
Although there are minor fluctuations in demand for custom compounding services
resulting from new automobile model introductions in the fall and plastic
outdoor product sales in the spring and summer, these fluctuations are not
significant.
CUSTOMERS
The customer base for Chemtrusion's compounding business consists primarily of
resin producers, although end product distributors and independent consumers
also represent a small portion of the company's customer base. During 2000, 86%
of Chemtrusion's revenues were attributable to two customers: Mytex accounted
for approximately 75% of the total revenues and one other customer accounted for
approximately 11% of the total revenues. Chemtrusion is under a long-term
contract with Mytex, but is not under a long-term contract with the other
customer, although it has done business with the other customer for several
years. The Company believes that the loss of either of these customers would
have a material adverse effect on its business and revenues. The Definitive
Agreement with Mytex currently expires in December 31, 2006. See "Mytex
Facility" on page 3.
Marketing efforts are conducted through involvement of Chemtrusion executive
officers in industry and trade networks, attendance at trade and technology
conferences and symposia and other venues where resin producers or independent
consumers of compounded materials can learn of Chemtrusion's capabilities.
Chemtrusion does not have an outside or field sales force.
BACKLOG
Chemtrusion does not maintain backlog figures as it seeks to fulfill customer
orders immediately as they are received. The Company is provided with forecasts
of customers projected needs and endeavors to budget its production accordingly.
Production at the Mytex facility is on a take or pay basis pursuant to the
Definitive Agreement.
Chemtrusion maintains only a limited amount of inventory for use by its
customers. When requested by a customer, the materials are consumed according to
material type using the oldest material first or as otherwise required by the
customer. Chemtrusion's customers are generally large, reputable companies, and
are typically manufacturers in the chemical industry. Before accepting credit
terms from any customer, Chemtrusion requires the pertinent credit information
from the customer, and the customer must be in good standing in accordance with
generally accepted industry standards. Chemtrusion works diligently, throughout
the process of providing its services, to ensure the quality of services it
provides. In the interest of maintaining its long standing relationships with
its customers, if the services provided by Chemtrusion are found not to have
complied with requirements agreed to with the customer prior to providing its
services, Chemtrusion uses all reasonable efforts to accommodate the needs of
its customers. Under no circumstances does Chemtrusion accept liability for
product performance that is not a direct result of the services; provided,
however, Chemtrusion uses all reasonable efforts to assist the customer in
determining the cause of poor product performance.
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COMPETITION
Chemtrusion competes with numerous compounding businesses, and its operations
represent an insignificant percentage of the overall compounding activities in
the United States. The primary competitive factors in compounding of resins are
the ability to provide high quality, precise, high yield, value added services
to the customer on a timely basis, in accordance with customer specifications.
Price is typically a secondary concern due to the sophisticated or technological
nature of the business. Chemtrusion has sought to position itself as a value
added custom compounder capable of handling a broad spectrum of compounding jobs
in a timely and precise manner.
RESEARCH AND DEVELOPMENT
During the two fiscal years ended December 31, 2000 and 1999, the Company spent
minimal amounts on company-sponsored research and development activities
determined in accordance with generally accepted accounting principles. All such
amounts are expensed.
ENVIRONMENTAL MATTERS
The Company has not experienced any material effect, and does not currently
anticipate any material effect, upon its capital expenditures, earnings or
competitive position as a result of its compliance with federal, state and local
environmental laws and regulations which have been adopted or enacted.
THE FINANCE BUSINESS
In August 2000, the Company's Board of Directors retained a new president and
authorized the Company to embark on a strategic new initiative to provide
structured capital for small and mid-sized enterprises. During 2000 the Company
purchased participations in third party accounts receivables factored by
Mezzanine Financial Fund, L.P. ("Mezzanine"), an affiliated party. As of
December 31, 2000, the Company's investment in such accounts receivable totaled
$1,100,000 of an aggregate of $1,254,000 invested by both participants with
respect to the acquisition of approximately $1,700,000 of gross amount of
receivables (which were sold by nine unaffiliated companies located throughout
the United States). These enterprises are engaged in various service and
distribution businesses. The terms of the accounts receivable that were
purchased require payment typically within 30 to 60 days from the date of the
invoice giving rise to the receivable. The Company's participation is structured
such that the Company's participation is paid a monthly return of 1.25% and is
repaid before the payment to others who might have participated in the funding
of such receivables. The Company has, and anticipates, purchasing additional
participations from Mezzanine or others in the future.
In the future, the Company will seek to initiate structured capital
accommodations to small and midsize business enterprises primarily through
senior secured loans, subordinated loans, bridge loans, convertible loans, the
purchase of accounts receivable, participations in secured loans, loan
guarantees and other similar opportunistic situations. The Company anticipates
that its credit accommodations could be extended to either publicly held or
privately held enterprises, as well as enterprises in which the Company might
hold an equity position.
In extending such accommodations, the Company anticipates that its objective
will be to realize aggressive current yields from its investments, while, in
most cases, securing its capital against assets of the borrowing enterprise.
Additionally, the Company will look to obtain enhanced returns through
structured fees or small equity positions from the companies to which it places
to capital. In order to achieve this objective, the Company expects that it will
provide financing facilities to enterprises that might not be able to obtain
funding through more traditional sources. The Company anticipates that it will
be presented with opportunities to provide financing through the ongoing
discussions and relationships that members of its management have with
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regional lenders and finance companies, investment bankers, attorneys and
business brokers who refer and discuss investment opportunities for
consideration by the Company. The Company competes against other enterprises who
provide structured financing that have greater financial resources than the
Company and longer operating histories. There can be no assurance that the
Company will provide any new structured capital accommodations, achieve or not
alter its expected objective with respect to such accommodations or increase or
terminate its participation with Mezzanine.
EMPLOYEES
The Company currently employs 160 persons at Chemtrusion who are full time
employees, in executive, administrative and clerical, and production,
engineering and laboratory personnel capacities. In addition, the Company
employs four (4) persons in executive and administrative capacities. Of this
group, the Company's President and Chief Financial Officer devote their full
time to the business of the Company. None of the Company's employees are
represented by a union.
ITEM 2: PROPERTIES
The Company shares with another company, on a month-to-month basis, 2,000 square
feet of executive office space which is located at 1011 Highway 71 in Spring
Lake, New Jersey. The Company's allocated monthly rent is $2,300.
The Company also jointly occupies 4,500 square feet of office space which is
located at 537 Steamboat Road, Greenwich, Connecticut. The lease commenced in
June 1995, and an option to extend the lease for an additional four years was
exercised in January 1998 at a rental of $112,500 for the first option year,
$117,500 for the second option year, $121,500 for the third option year and
$125,500 for the fourth option year. The other corporation sharing this space is
a public corporation as to which the Company's Chairman serves as a director and
to which he devotes a portion of his work-related time. The rent is apportioned
between these two corporations.
CHEMTRUSION: Chemtrusion conducts its non-Mytex business in a leased 106,530
square foot facility located in Houston, Texas. The current annual rent is
$297,000 plus common area maintenance charges. This lease expires in April 2002.
The Company's facility located in Jeffersonville, Indiana was completed in 1996
(the "1996 Facility") and is comprised of 178,000 square feet. The facility that
was constructed in 2000 and located adjacent to the 1996 Facility is 58,800
square feet (the "2000 Facility"). The 1996 Facility and the 2000 Facility are
state-of-the-art compounding plants. Both facilities are owned by Chemtrusion,
but are subject to the right of Mytex to repurchase them under certain
circumstances including the termination of the Definitive Agreement with Mytex.
The 1996 Facility is subject to a mortgage of $16,739,000 to secure construction
and equipment financing at 7% due in December 31, 2011. The 2000 Facility is
expected to be subject to a mortgage to secure construction and equipment
financing at 7% due 2016, the principal amount of such financing through
December 31, 2001 was $8,417,000. See "The Business of Chemtrusion--Mytex
Facility" on page 3.
The Company believes that the facilities of its subsidiaries are adequate for
the current and reasonably foreseeable future needs, are adequately insured and
are in good operating condition.
ITEM 3: LEGAL PROCEEDINGS
At the present time, the Company is not a party to any lawsuits that are
expected to have a material adverse effect on the business, operations or
financial condition of the Company.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. MARKET INFORMATION. The Company's Common Stock presently is listed on the
American Stock Exchange and is presently traded under the symbol "II".
The table below sets forth, for the period indicated, the high and low
closing prices of the Common Stock.
Fiscal 1999 High Low
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First Quarter $1 1/16 $5/8
Second Quarter 1 1/8 5/8
Third Quarter 15/16 5/8
Fourth Quarter 3/4 7/16
Fiscal 2000 High Low
----------- ---- ---
First Quarter $1 7/16 $1/2
Second Quarter 15/16 7/16
Third Quarter 5/8 3/8
Fourth Quarter 1/2 3/32
The closing price of the Common Stock on March 15, 2001 was $.21.
b. HOLDERS. As of March 15, 2001, there were, to the best of the Company's
knowledge, approximately 145 holders of record of the Company's Common
Stock.
c. DIVIDENDS. The Company has not declared or paid any cash dividends during
the last two fiscal years. The Company currently intends to retain all
of its earnings to support the development of its business and does not
anticipate paying any cash dividends for the foreseeable future.
In August 1999, the Board of Directors of the Company resolved to extend the
expiration date of the Company's outstanding publicly traded common stock
purchase warrants (AMEX: IIWS) from December 31, 1999 to December 31, 2001, and
to lower the exercise price of these warrants from $3.50 to $2.00 per share.
These public warrants were issued as a dividend in October 1991, and as of
December 31, 2000, there were 1,114,852 public warrants outstanding.
d. RECENT SALES OF UNREGISTERED SECURITIES.
There were no sales of unregistered securities during 2000.
ITEM 6: SELECTED FINANCIAL DATA
The following table summarizes certain historical consolidated financial data of
the Company (in thousands, except per share amounts) and is qualified in its
entirety by the more detailed consolidated financial statements and notes
thereto included in Item 8 hereof. All items in the following table have been
restated for the effect of the Company's discontinued operations of InterSystems
Nebraska:
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YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Revenues .............. $ 5,992 $ 10,704 $ 11,504 $ 14,746 $ 16,761
Loss from
Continuing operations (1,106) (140) (775) (679) (605)
Loss per share -
Continuing operations (.18) (.02) (.10) (.09) (.08)
Total assets .......... 21,007 22,165 25,171 28,826 33,474
Long-term obligations . 18,631 18,497 17,001 17,178 23,083
Cash and equivalents .. 1,153 -- 132 4,877 1,042
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR 2000, 1999 AND 1998
The Company's revenues grew 28% from 1998 to 1999 and 14% from 1999 to 2000. The
revenue growth from 1998 to 1999 was attributable to increases in toll
compounding volume at both the MyTex and Texas facilities. The MyTex facility
added one new compounding line in mid-1998 and an additional compounding line in
the first quarter of 1999. An increase in the Houston facility revenue for 1999
complemented the overall increase in revenue for 1999 as a result of increased
production utilization and price per pound, as well as the addition of new
customers. The revenue increase in 2000 was attributable to the MyTex facility
which operated six compounding lines for the full year and an additional line,
in the plant expansion, which became operational in September.
Gross profit increased $877,000 in 1999 compared to 1998 and decreased slightly
by $14,000 in 2000 compared to 1999. Gross profit as a percentage of sales was
34.3%, 32.7% and 28.7% for the years ended December 31, 1998, 1999 and 2000,
respectively. The MyTex facility recognizes revenue as cost plus a management
fee. The cost of goods sold at the MyTex facility increases at a rate faster
than the increase in the management fee, especially during years of plant
expansion. Therefore the rise in cost of sales as compared to the increase in
management fee from this facility results in lower gross margins during these
periods.
Selling, general and administrative expenses were 30%, 25% and 24% of sales for
the years ended December 31, 1998, 1999 and 2000, respectively. The decreasing
percentages were a result of the revenue increases at the Houston and MyTex
facilities. These expenses increased by $454,000 in 1999 compared to 1998 and
$306,000 in 2000 compared to 1999 for the compounding operations and were offset
by decreases of $121,000 and $97,000 in parent company expenses.
Interest income increased to $209,000 in 2000 from nominal amounts recorded in
1999 and 1998 as a result of the investment and cash proceeds from the sale of
InterSystems-Nebraska and interest received on the $500,000 note received as
proceeds.
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Interest expense increased $453,000 in 1999 compared to 1998 of which $332,000
was the result of the installation of two new compounding lines at the MyTex
facility. Interest expense decreased $188,000 in 2000 due primarily to the
repayment of a short-term working capital note in December 1999 and 10%
subordinated debentures in early 2000.
In the fourth quarter of 2000, the Company determined that a decline in the
market value of certain marketable equity securities was other than temporary
and recorded a loss of $106,000 which is reflected in the statement of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $684,000 for the year 2000. For
investing activities, $9,110,000 was used to purchase fixed assets, $1,100,000
was invested in participations in receivables and $250,000 was received from the
escrow account set up at the closing of the InterSystems-Nebraska sale in 1999.
A total of $3,026,000 was used primarily to repay debt (including $646,000 of
subordinated debentures and a $300,000 line of credit) and $8,467,000 proceeds
were received from long-term debt obligations for the purchase of fixed assets.
The net decrease in cash balances amounted to $3,835,000, which reduced the
$4,877,000 cash balance at the beginning of the year to $1,042,000.
The Company anticipates that future working capital and cash needs will be
satisfied from the operations of Chemtrusion, available cash balances and future
financings. The Company expects from time-to-time that it may seek to borrow
funds for actual or anticipated capital needs. There can be no assurances that
management will be able to obtain such financing or favorable terms.
In January 1999, the Company arranged for short-term working capital financing
by executing a note in the amount of $200,000 with a private lender. The note
bore interest at an annual rate of 15% and was paid in full in December 1999.
Chemtrusion was a party to a credit arrangement that provided for advances of up
to $300,000. The agreement provided working capital for the Houston facility and
had an interest rate of prime plus 1%. The outstanding balance of $300,000 was
repaid in October 2000 and the agreement was not renewed.
The Company adjusts the deferred tax valuation allowance based on judgments as
to the future realization of the deferred tax benefits supported by demonstrated
trends in the Company's operating results. At December 31, 2000, a 100%
valuation allowance was provided for the deferred tax asset because the Company
could not determine whether it was more likely than not that the deferred tax
asset would be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 outlines the basic criteria that must be met to recognize
revenue, and provides guidance for disclosure related to revenue recognition
policies. In June 2000, the SEC issued SAB 101B, that delayed the implementation
date of SAB 101 until the quarter ended December 31, 2000, with retroactive
application to the beginning of our fiscal year. Adoption of SAB 101 did not
have a material impact on its financial position or results of operations.
In March 2000, the FASB issued interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - An Interpretation of APB No. 25
("FIN 44"). FIN 44 clarified the application of Opinion No. 25 for certain
issues, including: a) the definition of employee for purposes of applying
Opinion No. 25; b) the criteria for determining whether a plan qualifies as a
non-compensatory plan; c) the accounting consequences of various modifications
to the terms of a
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previously fixed stock option or award; and d) the accounting for an exchange of
stock compensation awards in a business combination. In general, FIN 44 is
effective July 1, 2000. The Company does not expect the adoption of FIN 44 to
have a material impact on its financial position or results of operation.
FORWARD LOOKING STATEMENTS
This annual report for the year ended December 31, 2000 as well as other public
documents of the Company contains forward-looking statements which involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievement of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such statements include, without limitation,
the Company's expectations and estimates as to future financial performance,
cash flows from operations, capital expenditures and the availability of funds
from refinancing of indebtedness. Readers are urged to consider statements which
use the terms "believes," "intends," "expects," "plans," "estimates,"
"anticipated," or "anticipates" to be uncertain and forward looking. In addition
to other factors that may be discussed in the Company's filings with the
Securities and Exchange Commission, including this report, the following
factors, among others, could cause the Company's actual results to differ
materially from those expressed in any forward-looking statement made by the
Company: (i) general economic and business conditions, acts of God and natural
disasters which may effect the demand for the Company's products and services or
the ability of the Company to manufacture and/or provide such products and
services; (ii) the loss, insolvency or failure to pay its debts by a significant
customer or customers; (iii) increased competition; (iv) changes in customer
preferences and the inability of the Company to develop and introduce new
products to accommodate these changes; (v) the maturing of debt and the ability
of the Company to raise capital to repay or refinance such debt on favorable
terms; (vi) the success or failure of the Company's efforts to implement its
business strategy with respect to credit accommodations, which could depend
upon, among other factors, the availability of capital on favorable cost terms
to the Company and the effects of economic conditions on the Company's borrowers
and the capital markets.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include time deposits, notes receivable,
notes payable and long-term debt. The carrying value of these instruments
approximate market values because the rates of return and borrowing rates are
similar to other financial instruments with similar maturities and terms.
In determining that the carrying value of the 7% long-term debt approximates
market value, the Company considered its relationship with the lender and the
ability of the Company to require the lender to acquire the facility in which
the proceeds of the long-term debt was used to construct. See "Mytex Facility"
on page 3 and Note 4 to Notes to Consolidated Financial Statements for a
discussion of the terms of this financing.
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of trade accounts receivable. Concentrations
of credit risk with respect to such receivables are limited due to generally
short payment terms and their dispersion across geographic areas.
Available-for-sale securities are based on quoted market prices.
The Company also has participations in third party receivables held by an
affiliated company. The participation includes receivables from nine
unaffiliated companies located throughout the United States engaged in various
service and distribution businesses. The collateral coverage supporting the loan
and the historic collection percentages of the receivables derived from the
enterprises selling the accounts receivable, mitigate the credit risk to the
Company.
Page 11
12
ITEM 8: FINANCIAL STATEMENTS: The financial statements filed as part of this
report include:
Page
----
Report of Independent Certified Public
Accountants .................................................... F-2
Consolidated Balance Sheets as of
December 3l, 2000 and 1999 ..................................... F-3
Consolidated Statements of Operations
for the Years Ended December 3l, 2000, 1999 and 1998............ F-4
Consolidated Statements of Comprehensive Income (loss)
for the Years Ended December 3l, 2000, 1999 and 2000............ F-5
Consolidated Statements of
Shareholders' Equity
for the Years Ended December
31, 2000, 1999 and 1998 ........................................ F-6
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 2000, 1999 and 1998 ............................... F-7
Notes to Consolidated Financial
Statements ..................................................... F-8 to F-21
Schedule II - Valuation and Qualifying
Accounts for the Years Ended
December 31, 2000, 1999 and 1998 ............................... F-22
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None.
[The rest of this page intentionally left blank.]
Page 12
13
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
The information required by Item 10 is incorporated herein by reference to the
information set forth under the sections entitled "Election of Directors" and
"Executive Officers" in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders for 2001 to be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 2000.
ITEM 11: EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the material under this heading in the Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
information under this heading in the Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
Information under this heading in the Proxy Statement.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public
Accountants .................................................... F-2
Consolidated Balance Sheets as of
December 3l, 2000 and 1999 ..................................... F-3
Consolidated Statements of Operations
for the Years Ended December 3l, 2000, 1999 and 1998............ F-4
Consolidated Statements of Comprehensive Income (loss)
for the Years Ended December 3l, 2000, 1999 and 1998............ F-5
Consolidated Statements of
Shareholders' Equity
for the Years Ended December
31, 2000, 1999 and 1998 ........................................ F-6
Consolidated Statements of
Cash Flows for the Years Ended
December 3l, 2000 and 1999 ..................................... F-7
Notes to Consolidated Financial
Statements ..................................................... F-8 to F-21
Page 13
14
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts F-22
For the Years Ended December 31, 2000, 1999 and 1998
(3) EXHIBITS
FILED AS AN EXHIBIT TO THE
COMPANY'S [DOCUMENT]
NUMBER DESCRIPTION OR FILED HEREWITH
- ------ ----------- -----------------
3.1 Restated Certificate of Incorporation dated March 22, 1999 1998 10-KSB
3.2 By-Laws, as amended and restated on January 8, 1998 1997 10-KSB
4.1 Form of Common Stock Purchase Warrant expiring October 29, 2001 1996 10-KSB
10.1 The Company's 1997 Employee Stock Option Plan S-8 (No. 333-46035)
10.2 Employment and Deferred Compensation Agreement between Company and 1988 10-K
Herbert M. Pearlman
10.3 Employment and Deferred Compensation Agreement between Company and 1988 10-K
David S. Lawi
10.4 Amendment to Employment Agreement between Company and Herbert M. 1994 10-KSB
Pearlman
10.5 Amendment to Employment Agreement between Company and David S. 1994 10-KSB
Lawi
10.6 Investment Agreement dated as of June 24, 1993 between the Company 1993 10-K
and Fred Zeidman
10.7 Definitive Agreement for Compounding Services between Chemtrusion, 1995 10-KSB
Inc. and Mytex Polymers (Confidential Treatment has been requested
and obtained from the Securities and Exchange Commission with
respect to certain portions of this Agreement through May 15,
2001).
22.1 Subsidiaries: Chemtrusion, Inc., a Delaware corporation
Page 14
15
23.1 Consent of BDO Seidman, LLP to incorporation by reference of their Filed Herewith
opinion into filed registration statements
(b) REPORTS ON FORM 8-K - None
Page 15
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 30th day of
March 2001.
INTERSYSTEMS, INC.
By:/s/ Walter M. Craig, Jr
------------------------
Walter M. Craig, Jr.
President,
Chief Executive Officer
By:/s/ Daniel T. Murphy
--------------------------
Daniel T. Murphy
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Herbert M. Pearlman Chairman of the Board March 30, 2001
- ------------------------
Herbert M. Pearlman
/s/ Fred S. Zeidman Director March 20, 2001
- ------------------------
Fred S. Zeidman
/s/ Daniel T. Murphy Director March 30, 2001
- ------------------------
Daniel T. Murphy
/s/ David S. Lawi Director March 30, 2001
- ------------------------
David S. Lawi
/s/ Walter M. Craig, Jr. Director March 30, 2001
- ------------------------
Walter M. Craig, Jr.
/s/ John Stieglitz Director March 30, 2001
- ------------------------
John Stieglitz
Page 16
17
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INTERSYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.............. F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 ... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 ............................. F-4
Consolidated Statements of Comprehensive Income (Loss) for
the Years Ended December 31, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 2000, 1999 and 1998 ......... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 ............................. F-7
Notes to Consolidated Financial Statements...................... F-8 - F-21
Schedule II - Valuation and Qualifying Accounts................. F-22
F-1
18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
InterSystems, Inc.
We have audited the accompanying consolidated balance sheets of InterSystems,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, comprehensive income (loss), shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. In connection
with our audits of the consolidated financial statements, we also have audited
the financial schedule listed in the accompanying index. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement and financial statement schedule
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 10, in 1999 the Company sold the business of its Nebraska
subsidiary ("InterSystems Nebraska"), which represented the industrial products
segment of the Company. Accordingly, the accompanying consolidated financial
statements presents InterSystems Nebraska as a discontinued operation for all
periods presented.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
InterSystems, Inc. at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 13, the Company changed its method of accounting for
start-up and organization costs during the year ended December 31, 1999.
Also, in our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Houston, Texas
March 2, 2001
F-2
19
INTERSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PAR VALUE)
2000 1999
---- ----
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 1,042 $ 4,877
Marketable equity securities .............................................. 60 65
Trade receivables, less allowance of $34 and $38 (Note 12) ................ 1,924 1,507
Participation in receivables of affiliate, less allowance of $50 (Note 2) . 1,050 --
Inventories ............................................................... 156 78
Prepaid expenses and other ................................................ 202 166
-------- --------
Total Current Assets ................................................... 4,434 6,693
Cash in escrow (Note 10) ...................................................... -- 250
Note receivable (Note 10) ..................................................... 500 500
Property, equipment and leasehold improvements, net
(Notes 3 and 4) ........................................................... 28,533 21,329
Other assets .................................................................. 7 54
-------- --------
$ 33,474 $ 28,826
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 4) ................................ $ 2,392 $ 2,205
Subordinated debentures, current (Note 6) ................................. -- 646
Accounts payable .......................................................... 684 539
Accrued expenses:
Compensation (Note 10) ................................................. 223 732
Liability for discontinued operations (Note 10) ........................ 271 81
Other .................................................................. 521 465
-------- --------
Total Current Liabilities .............................................. 4,091 4,668
Long-term debt, less current maturities (Note 4) .............................. 23,083 17,178
-------- --------
Total Liabilities ...................................................... 27,174 21,846
-------- --------
Commitments and Contingencies (Notes 8 and 9)
Shareholders' Equity (Note 8):
Preferred stock, $.01 par value, 5,000 shares authorized;
-0- shares issued and outstanding ...................................... -- --
Common stock, $.01 par value, 20,000 shares authorized;
7,926 shares issued .................................................... 79 79
Additional paid-in capital ................................................ 7,992 7,992
Accumulated other comprehensive loss ...................................... (49) (150)
Deficit ................................................................... (1,437) (642)
Treasury stock, 329 and 357 shares at cost ................................ (285) (299)
-------- --------
Total Shareholders' Equity ............................................. 6,300 6,980
-------- --------
$ 33,474 $ 28,826
======== ========
See accompanying notes to consolidated financial statements
F-3
20
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
---- ---- ----
Net sales (Notes 9(a) and 12) ................................ $ 16,761 $ 14,746 $ 11,504
Cost of sales ................................................ 11,952 9,923 7,558
-------- -------- --------
Gross profit .......................................... 4,809 4,823 3,946
Selling, general and administrative expenses ................. 3,969 3,760 3,427
Interest income .............................................. (209) (25) (9)
Interest expense ............................................. 1,582 1,770 1,317
Loss on marketable equity securities for other than temporary
decline in market value ................................... 106 -- --
Other ........................................................ (34) (3) (14)
-------- -------- --------
Loss from continuing operations ....................... (605) (679) (775)
-------- -------- --------
Discontinued operations (Note 10):
Income from discontinued operations of
InterSystems Nebraska ................................. -- 821 1,218
Gain (loss) on disposal of InterSystems Nebraska ......... (190) 3,184 --
-------- -------- --------
Income (loss) from discontinued operations ............ (190) 4,005 1,218
-------- -------- --------
Net Income (Loss) Before Cumulative Effect of Change in
Accounting Principle ............................. (795) 3,326 443
Cumulative Effect of Change in
Accounting Principle (Note 13) ................... -- 134 --
-------- -------- --------
Net Income (Loss) ..................................... $ (795) $ 3,192 $ 443
======== ======== ========
Net income (loss) per common share (Note 1):
Basic and assuming dilution:
Continuing operations ............................... $ (.08) $ (.09) $ (.10)
Income from discontinued operations ................. -- .10 .16
Gain (loss) on disposal ............................. (.03) .42 --
Cumulative effect of change in accounting
principle ...................................... -- (.02) --
-------- -------- --------
$ (.11) $ .41 $ .06
======== ======== ========
Weighted average number of common shares
outstanding - basic and assuming dilution .................. 7,569 7,799 7,798
======== ======== ========
See accompanying notes to consolidated financial statements
F-4
21
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
---- ---- ----
Net income (loss) .................................. $ (795) $ 3,192 $ 443
Other comprehensive loss:
Unrealized loss on available-for-sale securities (5) (54) (127)
Add: reclassification adjustment for other than
temporary decline in market value ........... 106 -- --
------- ------- -------
Comprehensive income (loss) ........................ $ (694) $ 3,138 $ 316
======= ======= =======
See accompanying notes to consolidated financial statements
F-5
22
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
---------------------- PAID-IN INCOME
SHARES AMOUNT CAPITAL (LOSS)
------ ------ ------- ------
Balance at December 31, 1997 ............. 7,846,376 $ 78 $ 7,678 $ 31
Sale of common stock ..................... 70,000 1 85 --
Common stock issued for directors fees ... 3,127 -- 6 --
Purchase of treasury stock ............... -- -- -- --
Sale of treasury stock ................... -- -- -- --
Unrealized loss on available-for-sale
securities ........................ -- -- -- (127)
Net income ............................... -- -- -- --
--------- --------- --------- ---------
Balance at December 31, 1998 ............. 7,919,503 79 7,769 (96)
Common stock issued for directors' fees .. 6,486 -- 6 --
Surrender of common stock (Note 7(c)) .... -- -- -- --
Purchase of treasury stock ............... -- -- -- --
Unrealized loss on available-for-sale
securities ............................ -- -- -- (54)
Dividend warrant repricing (Note 8(d)) ... -- -- 217 --
Net income ............................... -- -- -- --
--------- --------- --------- ---------
Balance at December 31, 1999 ............. 7,925,989 79 7,992 (150)
Treasury stock issued for directors' fees -- -- -- --
Purchase of treasury stock ............... -- -- -- --
Unrealized loss on available-for-sale
securities ............................ -- -- -- (5)
Reclassification adjustment for other than
temporary decline in market value ..... -- -- -- 106
Net loss ................................. -- -- -- --
--------- --------- --------- ---------
Balance at December 31, 2000 ............. 7,925,989 $ 79 $ 7,992 $ (49)
========= ========= ========= =========
NOTE
TREASURY STOCK RECEIVABLE TOTAL
------------------------- FOR SALE SHAREHOLDERS'
DEFICIT SHARES AMOUNT OF STOCK EQUITY
------- ------ ------ -------- ------
Balance at December 31, 1997 ............. $ (4,035) 102,060 $ (180) $ (100) $ 3,472
Sale of common stock ..................... -- -- -- -- 86
Common stock issued for directors fees ... -- -- -- -- 6
Purchase of treasury stock ............... -- 33,000 (52) -- (52)
Sale of treasury stock ................... (25) (46,666) 78 -- 53
Unrealized loss on available-for-sale
securities ........................ -- -- -- -- (127)
Net income ............................... 443 -- -- -- 443
-------- -------- -------- -------- --------
Balance at December 31, 1998 .............
(3,617) 88,394 (154) (100) 3,881
Common stock issued for directors' fees ..
Surrender of common stock (Note 7(c)) .... -- -- -- -- 6
Purchase of treasury stock ............... -- 100,000 (50) 100 50
Unrealized loss on available-for-sale -- 168,400 (95) -- (95)
securities ............................
Dividend warrant repricing (Note 8(d)) ... -- -- -- -- (54)
Net income ............................... (217) -- -- -- --
3,192 -- -- -- 3,192
Balance at December 31, 1999 ............. -------- -------- -------- -------- --------
Treasury stock issued for directors' fees (642) 356,794 (299) -- 6,980
Purchase of treasury stock ...............
Unrealized loss on available-for-sale -- (37,069) 19 -- 19
securities ............................ -- 9,200 (5) -- (5)
Reclassification adjustment for other than
temporary decline in market value ..... -- -- -- -- (5)
Net loss .................................
-- -- -- -- 106
Balance at December 31, 2000 ............. (795) -- -- -- (795)
-------- -------- -------- -------- --------
$ (1,437) 328,925 $ (285) $ -- $ 6,300
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
23
INTERSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(Note 11)
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) .......................................... $ (795) $ 3,192 $ 443
------- ------- -------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ......................... 1,906 1,802 1,597
Loss on marketable equity securities for other than
temporary decline in market value ................... 106 -- --
Provision for losses on accounts receivable ........... -- 43 24
Provision for losses on participation in receivables of
affiliate ........................................... 50 -- --
Gain (loss) on disposal of InterSystems Nebraska ...... 190 (3,184) --
Forgiveness of note receivable ........................ -- 50 --
Cumulative effect of change in accounting principle ... -- 134 --
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables ................................ (417) (159) (454)
Inventories ...................................... (78) (2) (9)
Net assets from discontinued operations .......... -- -- (493)
Increase (decrease) in:
Accounts payable and accrued expenses ............ (289) (677) (72)
Other changes - net ................................... 11 132 (111)
------- ------- -------
Total adjustments ................................... 1,479 (1,861) 482
------- ------- -------
Net cash provided by operating activities ........... 684 1,331 925
------- ------- -------
Cash flows from investing activities:
Purchases of fixed assets ................................... (9,110) (1,477) (3,808)
Net proceeds from disposal of InterSystems Nebraska ......... -- 5,603 --
Cash received from escrow ................................... 250 -- --
Purchase of marketable securities ........................... -- (25) (73)
Participation in receivables of affiliate ................... (1,100) -- --
------- ------- -------
Net cash provided by (used in) investing activities . (9,960) 4,101 (3,881)
------- ------- -------
Cash flows from financing activities:
Net proceeds (repayment) on lines of credit and
other short-term borrowings .............................. (300) 120 --
Proceeds from long-term debt obligations .................... 8,467 1,354 3,924
Payments under capital lease obligations .................... (448) (466) (303)
Payments under various long-term debt obligations ........... (1,627) (1,600) (1,422)
Payment of subordinated debentures .......................... (646) -- --
Purchase of treasury stock .................................. (5) (95) (52)
Sale of treasury stock ...................................... -- -- 53
Proceeds from sale of common stock .......................... -- -- 86
------- ------- -------
Net cash provided by (used in) financing activities . 5,441 (687) 2,286
------- ------- -------
Net increase (decrease) in cash and cash equivalents .......... (3,835) 4,745 (670)
Cash and cash equivalents, beginning of year .................. 4,877 132 802
------- ------- -------
Cash and cash equivalents, end of year ........................ $ 1,042 $ 4,877 $ 132
======= ======= =======
F-7
24
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
InterSystems, Inc., a Delaware corporation and Subsidiaries (the "Company"), all
of which are wholly-owned. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company, through its wholly-owned subsidiary, Chemtrusion, Inc.
("Chemtrusion"), a Delaware corporation, specializes in the custom-compounding
of thermoplastic resins for the petrochemical and automobile industries in
Houston, Texas and Jeffersonville, Indiana, respectively. Compounding entails
combining a resin with various additives to enhance and customize the
thermoplastic resins for a particular end use. The Company, through its
wholly-owned subsidiary, InterSystems, Inc., a Nebraska corporation
("InterSystems Nebraska") located in Omaha, Nebraska, was engaged in the design,
manufacture, sale and leasing of equipment for sampling, conveying, elevating,
weighing and cleaning a wide variety of products for agriculture and other
industries.
Effective October 31, 1999, the Company sold InterSystems Nebraska.
Accordingly, the accompanying consolidated financial statements present
InterSystems Nebraska as a discontinued operation for all periods presented (see
Note 10). Subsequent to the sale of InterSystems Nebraska the only business
segment the Company has is the custom-compounding of thermoplastic resins.
FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
The Company's financial instruments include time deposits,
participation in receivables of affiliate, notes receivable and long-term debt.
The carrying value of these instruments approximate market values because the
rates of return and borrowing rates are similar to other financial instruments
with similar maturities and terms.
In determining that the carrying value of the 7% long-term debt
approximates market value, the Company considered its relationship with the
lender and the ability of the Company to require the lender to acquire the
facility in which the proceeds of the long-term debt was used to construct (see
Notes 4 and 9).
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable and
participation in receivables of affiliate. Concentrations of credit risk with
respect to trade accounts receivable are limited due to generally short payment
terms; see Note 12 for major customers. Concentration of credit risk with
respect to participation in receivables of affiliate is limited because the
Company's participation is structured as a "first-out" pay-off which provides
for payment first of the Company's participation before pay-off of others who
have provided funding for the purchase of these receivables. Due to the
collateral coverage supporting the participation and the historic collection
percentage of the receivables derived from the Companies selling these accounts
receivable, the risk of loss is limited.
At December 31, 2000, the Company had a money market account totaling
approximately $834,000 with a financial institution.
INVENTORIES
Inventories consist of additives that enhance and customize
thermoplastic resins and are valued at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
F-8
25
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost. The
Company provides for depreciation and amortization on certain equipment by
utilizing the units of production method based upon the number of hours the
compounding equipment operates. Depreciation and amortization on other property,
equipment and leasehold improvements is provided using the straight-line method
over the estimated useful lives of the assets or the lease period, whichever is
less. For income tax purposes, depreciation on certain assets is calculated
using accelerated methods.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate the carrying value of an asset may
not be fully recoverable.
MARKETABLE EQUITY SECURITIES
The Company accounts for its investment in marketable securities in
accordance with Statement of Financial Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115), and has classified
its marketable equity securities as available-for-sale. Available-for-sale
securities are recorded at fair value with the resulting gain (or loss) credited
(or charged) as a separate component of equity. At December 31, 2000 and 1999,
the Company had marketable securities totaling $59,348 and $64,689,
respectively, with an unrealized loss of $48,750 and $149,811, respectively.
During the fourth quarter of 2000, the Company determined that certain
marketable equity securities had an other than temporary decline in market
value. Accordingly, a loss on marketable equity securities of $106,000 was
recorded in the accompanying statement of operations.
INCOME TAXES
Deferred income taxes result from the temporary differences between the
financial statement and income tax bases of assets and liabilities as measured
by the enacted tax rates which will be in effect when these differences reverse
(see Note 5). The Company adjusts the deferred tax asset valuation allowance
based on judgments as to future realization of the deferred tax benefits
supported by demonstrated trends in the Company's operating results.
REVENUE RECOGNITION
Sales are recorded in the periods that services are performed.
EARNING PER COMMON SHARE
The Company provides basic and dilutive earnings (loss) per common
share information for each year presented. The basic net income (loss) per
common share is computed by dividing the net income (loss) available to common
shareholders by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share is computed by dividing the net
income (loss) available to common shareholders, adjusted on an as if converted
basis, by the weighted average number of common shares outstanding plus
potential dilutive securities.
For the year ended December 31, 2000, 1999 and 1998, there was no
adjustment to weighted average number of common shares used in diluted earnings
(loss) per share because the stock options and warrants outstanding were
anti-dilutive.
For the year ended December 31, 1999 and 1998, there was no adjustment
to income available to common shareholders used in computing earnings per share
assuming dilution because the convertible debentures were anti-dilutive.
F-9
26
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998, certain
securities were not included in the calculation of diluted earnings (loss)
because of their anti-dilutive effect, those securities are as follows (in
thousands):
2000 1999 1998
---- ---- ----
Stock options ............................. 800 888 1,039
Stock warrants ............................ 1,825 2,920 2,920
Shares issuable on conversion of debentures -- 513 513
----- ----- -----
2,625 4,321 4,472
===== ===== =====
STOCK OPTIONS AND WARRANTS
The Company accounts for stock options and warrants issued to employees
in accordance with APB 25, "Accounting for Stock Issued to Employees." For
financial statement disclosure purposes and issuance of options and warrants to
non-employees for services rendered, the Company follows SFAS Statement 123,
"Accounting for Stock-Based Compensation" (see Note 8(b)).
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. The Company reviews all significant
estimates affecting the financial statements on a recurring basis and records
the effect of any necessary adjustments prior to their issuance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 outlines the basic criteria that must be met to recognize
revenue, and provides guidance for disclosure related to revenue recognition
policies. In June 2000, the SEC issued SAB 101B, that delayed the implementation
date of SAB 101 until the quarter ended December 31, 2000, with retroactive
application to the beginning of our fiscal year. Adoption of SAB 101 did not
have a material impact on its financial position or results of operations.
In March 2000, the FASB issued interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - An Interpretation of APB No.
25 ("FIN 44"). FIN 44 clarified the application of Opinion No. 25 for certain
issues, including: a) the definition of employee for purposes of applying
Opinion No. 25; b) the criteria for determining whether a plan qualifies as a
non-compensatory plan; c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or various modifications to the
terms of a previously fixed stock option or award; and d) the accounting for an
exchange of stock compensation awards in a business combination. In general, FIN
44 is effective July 1, 2000. The Company does not expect the adoption of FIN 44
to have a material impact on its financial position or results of operation.
F-10
27
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain 1998 and 1999 amounts have been reclassified to conform with
the 2000 financial statement presentation.
NOTE 2 - PARTICIPATION IN RECEIVABLES OF AFFILIATE
At December 31, 2000, the Company had purchased participations of
$1,100,000 in third party receivables totaling approximately $1,700,000 held by
a company affiliated by common ownership and management. Interest accrues on the
outstanding balance at the rate of 1.25% per month and the Company has
recognized interest income of $43,600 for the year ended December 31, 2000.
The participation includes nine companies located throughout the United
States engaged in various service and distribution businesses. Terms of the
purchased receivables require payment typically within thirty to sixty days from
invoice date.
The Company's participation is structured as a "first-out" pay-off
which provides for payment first of the Company's participation before payoff of
others who have provided funding for the purchase of these receivables. At
December 31, 2000, the Company has provided a $50,000 reserve for potential
losses that may occur due to any non-collection of the purchased receivables.
NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the
following at December 31, 2000 and 1999 (in thousands):
Estimated
Useful
Lives 2000 1999
----- ---- ----
(Years)
Land ........................................... -- $ 1,035 $ 458
Buildings ...................................... 14-15 12,961 8,360
Machinery and equipment ........................ 10-15 18,967 15,538
Other equipment ................................ 3-7 1,618 1,518
Leasehold improvements ......................... 3-5 358 358
Railroad track ................................. 14 818 421
Equipment under capital leases ................. 10-15 2,336 2,336
Furniture and fixtures ......................... 3-7 138 132
------- -------
38,231 29,121
Less: Accumulated depreciation and amortization 9,698 7,792
------- -------
$28,533 $21,329
======= =======
The net book value of machinery and equipment under capital lease at
December 31, 2000 and 1999 was approximately $1,689,000 and $1,766,000,
respectively.
During 2000, 1999 and 1998, Chemtrusion capitalized interest expense
totaling approximately $250,000, $18,000 and $35,000, respectively, in
connection with the expansion of the Jeffersonville, Indiana facility.
F-11
28
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2000 and 1999
(in thousands):
2000 1999
---- ----
7% term notes payable to a non-related joint venture secured by the
Jeffersonville, Indiana facility, including equipment, payable as
follows:
Interest only payable through January 1999, thereafter monthly
installments of $137,473 including interest, through December 2011 .. $10,121 $10,998
Payable $72,994 monthly including interest, through December 2016 ... 8,417 --
Payable $25,864 monthly including interest, through December 2011 ... 2,314 2,490
Payable $25,560 monthly including interest, through December 2011 ... 2,116 2,314
Interest payable monthly with principal due December 2011 ........... 570 570
Payable $3,976 monthly including interest, through December 2011 .... 336 367
------- -------
23,874 16,739
Prime plus 1-1/2 (10% at December 31, 2000) term note, payable $24,320
monthly plus interest, through March 2002, secured by
equipment ........................................................... 389 657
Revolving credit agreement with a bank repaid during 2000 ............. -- 300
Prime plus 1% (9.50% at December 31, 2000) note payable, payable $6,667
monthly, plus interest through April 2003,
secured by equipment and guaranteed by the Company .................. 185 258
Other ................................................................. 59 13
Obligations under capital lease ....................................... 968 1,416
------- -------
Total ............................................................ 25,475 19,383
Less: Current maturities .............................................. 2,392 2,205
------- -------
Total long-term debt ............................................. $23,083 $17,178
======= =======
Chemtrusion leases certain machinery and equipment under capital leases
expiring through 2003. At December 31, 2000, future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments, are as follows (in thousands):
Amount
------
2001................................................ $ 631
2002................................................ 357
2003................................................ 60
--------
Total minimum lease payments........................ 1,048
Less: Amount representing interest
calculated at the incremental borrowing rate...... 80
--------
Present value of net minimum lease payments......... 968
Less: Current portion............................... 573
--------
Long-term portion of capital leases................. $ 395
========
F-12
29
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future maturities of long-term debt at December 31, 2000, including
capital leases summarized above are: 2001 - $2,392,000; 2002 - $2,005,000; 2003
- - $1,716,000; 2004 - $1,639,000; 2005 - $1,692,000; and $16,031,000, thereafter.
NOTE 5 - INCOME TAXES
Deferred taxes are determined based on temporary differences between
the financial statement and income tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse.
Net deferred income tax asset (liability) consisted of the following at
December 31, 2000 and 1999 (in thousands):
2000 1999
---- ----
Net operating loss carryforwards ............................. $ 2,287 $ 1,745
Expenses accrued for financial reporting purposes not deducted
for tax purposes, net ..................................... 113 53
Tax credit carryforwards ..................................... -- 98
------- -------
Deferred tax asset ........................................... 2,400 1,896
Valuation allowance .......................................... (473) (277)
------- -------
Net deferred tax asset ....................................... 1,927 1,619
Deferred tax liability - depreciation ........................ (1,927) (1,619)
------- -------
Net deferred income tax asset (liability) .................... $ -- $ --
======= =======
At December 31, 2000 and 1999, the Company provided a 100% valuation
allowance for the deferred tax asset because it could not determine whether it
was more likely than not that the deferred tax asset would be realized.
For the years ended December 31, 2000, 1999 and 1998, the income tax
expense (benefit) differs from the amount of income tax expense determined by
applying the statutory income tax rate to pre-tax income as follows (in
thousands):
2000 1999 1998
---- ---- ----
Statutory rate.............................................. $ (243) $ 1,085 $ 151
Increase (decrease) in valuation allowance.................. 196 (1,311) (207)
Adjustment to prior years net operating
loss carryforwards...................................... -- 192 --
Other - net................................................. 47 34 56
------ ------- -----
$ -- $ -- $ --
====== ======= =====
As of December 31, 2000, the Company had for income tax purposes, net
operating loss carryforwards of approximately $6,726,000, which expire in years
through 2020.
During the year ended December 31, 1999, the Company utilized a net
operating loss carryforward of approximately $2,740,000 which reduced income tax
expense by approximately $932,000.
F-13
30
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SUBORDINATED DEBENTURES
At December 31, 1999, the Company had 10% convertible subordinated
debentures totaling $646,000, net of discounts of $4,000, payable to affiliates.
During January 2000, the bonds were retired for face value with proceeds from
the sale of InterSystems Nebraska (see Note 10). Accordingly, the debentures
were classified as current as of December 31, 1999.
NOTE 7 - RELATED PARTY TRANSACTIONS
(a) As of December 31, 2000, 1999 and 1998, Helm Capital Group, Inc.
("Helm") owned approximately 15% of the Company's outstanding common stock. Helm
provides the Company with various managerial and administrative functions and
services for which the Company is charged direct costs and expenses. Certain
indirect administrative and managerial costs are allocated to the Company based
on certain formulas which management deems to be reasonable. The allocations
charged to the Company totaled $60,000, $59,000 and $58,000 in 2000, 1999 and
1998, respectively. In addition, on the sale of InterSystems Nebraska, the
Company paid Helm approximately $76,000 (which represented the same multiple of
earnings paid to the Company) in full settlement of a royalty agreement.
(b) During 1999, the Company purchased 50,000 shares of common stock in
Teletrak Environmental Systems, Inc. ("Teletrak") for $25,000. A former director
of Teletrak is also a director of the Company. This investment is accounted for
as marketable securities available-for-sale.
(c) At December 31, 1998, the Company had a note receivable of $100,000
due from the Company's president for the purchase of the Company's common stock.
For the years ended December 31, 1999 and 1998, the Company earned interest on
the note receivable totaling $5,860 and $8,000, respectively. In connection with
the sale of InterSystems Nebraska, the president terminated his employment with
the Company and surrendered the 100,000 shares of common stock at $.50 per
share, the market value of the stock on the day of the surrender. Accordingly,
the Company recorded the receipt of the stock as treasury stock for $50,000,
wrote off the remaining note balance of $50,000 and the accrued interest
receivable of $51,000 to the gain on the disposal of InterSystems Nebraska.
NOTE 8 - COMMON STOCK, STOCK OPTIONS AND WARRANTS
(a) In association with a 1996 private placement of the Company's
common stock, the Company issued 150,000 common stock purchase warrants to
certain officers and directors of the Company. The warrants are exercisable
through October 29, 2001 at an exercise price of $1.375 per share. As of
December 31, 2000 no warrants had been exercised.
(b) During 1997, the Company adopted the "1997 Stock Option Plan",
whereby options to purchase up to 635,000 shares of the Company's common stock
may be granted to employees at the market value of the common stock on the date
of the grant. Of these options, 500,000 may be granted as incentive stock
options, as defined by the Internal Revenue Code, and 135,000 may be granted as
non-qualified stock options. Options are exercisable for a term of five years
and vest at a rate of 33% per year.
The Company has elected to continue to account for stock options issued
to employees in accordance with APB Opinion 25, "Accounting for Stock Issued to
Employees" (APB Opinion 25). During the years ended December 31, 1999 and 1998,
all options issued to employees were granted at an exercise price which equaled
or exceeded the market price per share at date of grant; accordingly, no
compensation was recorded. No options were granted during the year ended
December 31, 2000. During 1998, certain options previously granted had a
modification of their exercise price and expiration date which constitutes a new
issuance of options in accordance with APB Opinion 25. The modified exercise
price equaled or exceeded the market price per share at this modification date;
accordingly, no compensation was recorded.
F-14
31
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 123 requires the Company to provide pro forma information
regarding net income (loss) applicable to common shareholders and net income
(loss) per share as if compensation cost for the Company's stock options granted
had been determined in accordance with the fair value based method prescribed in
SFAS 123. The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999 and 1998 as follows:
2000 1999 1998
---- ---- ----
Dividend yield .... -- 0% 0%
Expected volatility -- 69% 61%
Risk free interest -- 5.67% 4.34% to 5.58%
Expected lives .... -- 3.1 yrs. 3.75 to 5 yrs.
Under the accounting provisions of SFAS Statement 123, the Company's
net income (loss) applicable to common shareholders and income (loss) per share
for 2000, 1999 and 1998 would have been decreased to the pro forma amounts
indicated below:
Net income (loss) applicable to common shareholders (in thousands):
2000 1999 1998
---- ---- ----
As reported ................ $ (795) $ 3,192 $ 443
====== ======= =======
Pro forma .................. $ (797) $ 3,184 $ (41)
====== ======= =======
Net income (loss) per share:
Basic and assuming dilution:
As reported ............. $ (.11) $ .41 $ .06
====== ======= =======
Pro forma ............... $ (.11) $ .41 $ (.01)
====== ======= =======
Due to the fact that the Company's stock option plans vest over many
years and additional awards may be made each year, the above pro forma numbers
are not indicative of the financial impact had the disclosure provisions of SFAS
Statement 123 been applicable to all years of previous options grants. The above
numbers do not include the effect of options granted prior to 1995 vested in
2000, 1999 and 1998.
During January 2000, the Company repurchased 20,000 options at $.20 per
option from a former employee and recorded $4,000 of compensation expense.
During December 1999, the Company repurchased 152,000 options at $.20
per option from certain employees of InterSystems Nebraska in connection with
the sale of the business of InterSystems Nebraska. The resulting expense of
$30,400 was charged against the gain on the disposal of InterSystems Nebraska.
F-15
32
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock options to employees as
of December 31, 2000, 1999 and 1998, and changes during the years ending on
those dates is presented below:
2000 1999 1998
---------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year .. 465,000 $1.46 599,000 $1.47 589,500 $2.02
Reissued for repricing -- -- -- -- 10,000 1.50
Granted .............. -- -- 25,000 1.50 529,000 2.13
Surrendered .......... (45,000) 1.36 (7,000) 1.50 -- --
Surrendered for
repricing .......... -- -- -- -- (529,000) 2.13
Repurchased .......... (20,000) 1.50 (152,000) 1.50 -- --
Expired .............. -- -- -- -- (500) 8.20
--------- ----- --------- ----- --------- -----
Outstanding at
end of year ......... 400,000 $1.46 465,000 $1.46 599,000 $1.47
========= ===== ========= ===== ========= =====
Options exercisable
at year-end ........ 391,666 $1.46 448,333 $1.46 417,830 $1.46
========= ===== ========= ===== ========= =====
Weighted average fair
value of options
granted during the
year ................ $ -- $ .31 $ .43
===== ===== =====
The following table summarizes information about fixed stock options
outstanding at December 31, 2000:
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Price At 12/31/00 (Years) Price at 12/31/00 Price
----- ----------- ------- ----- ----------- -----
$ 1.25 50,000 2.75 $ 1.25 50,000 $ 1.25
$ 1.50 350,000 1.67 $ 1.50 341,666 $ 1.50
---------- -----------
$ 1.25 - $1.50 400,000 1.78 $ 1.46 391,666 $ 1.46
========== ===========
In accordance with SFAS Statement 123, the Company is required to account
for options issued to non-employees for services rendered at the fair value
based method over their vesting period.
During 1997, the Company issued 560,000 stock warrants to consultants for
services rendered and debt financing. These warrants vested in 1997 and have
exercise prices ranging from $1.00 to $1.375 and expire through July 2002. At
December 31, 2000, none of these options have been exercised.
(c) In June 1993, the Company granted to its then President, options
to purchase 200,000 shares of common stock at an exercise price of $2 and an
additional 200,000 shares at an exercise price of $3. These options vested 50%
on the first anniversary and 25% in each of the next two anniversaries and were
exercisable at any time through June 1998. No options had been exercised as of
June 1998. During 1998, these options were repriced with an exercise price of
$2.25 and $2.75 and the exercisable date was extended through June 2003. No
options have been exercised as of December 31, 2000. These modifications
constitute a new issuance of options in accordance with APB opinion 25. The
modified exercise price equaled or exceeded the market price per share at the
modification date; accordingly, no compensation was recorded.
F-16
33
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) In August 1999, the Board of Directors of the Company resolved to
extend the expiration date of the Company's outstanding publicly traded common
stock purchase warrants from December 31, 1999 to December 31, 2001, and to
lower the exercise price of these warrants from $3.50 to $2.00 per share. These
warrants were issued as a dividend in October 1991, and as of December 31, 2000,
there were 1,114,852 warrants outstanding. The modification of the terms of the
warrants constitutes a new issuance. Accordingly, the incremental value of the
warrants of approximately $217,000 on the date of the modification was recorded
as a deemed dividend in the accompanying consolidated statement of shareholders'
equity.
(e) At December 31, 2000, shares reserved for future issuance are as
follows:
Shares
------
Shares reserved for stock option plan, including
400,000 plan options outstanding.......................... 635,000
Stock options outstanding..................................... 400,000
Warrants to purchase common stock............................. 1,824,852
----------
Total shares reserved for issuance............................ 2,859,852
==========
NOTE 9 - COMMITMENTS AND CONTINGENCIES
(a) On January 26, 1996, Chemtrusion entered into an exclusive
long-term contract with a non-related joint venture to provide custom
compounding of thermoplastics and related services. The agreement required
Chemtrusion to construct a thermoplastics compounding plant in Jeffersonville,
Indiana. The cost of the plant totaled approximately $12,788,000, with the
interim financing for the construction of the plant provided by a financial
institution and guaranteed by the joint venture partners. The plant was
completed and on line as of October 15, 1996. On January 31, 1997, the joint
venture provided the permanent financing for the facility (see Note 4). In
addition, subsequent to the initial financing the joint venture provided
additional financing for additional equipment and improvement to the facility
(see Note 4).
Chemtrusion operates the plant exclusively for the joint venture under
an initial term of five years which was extended through December 31, 2006
during the year ended 2000 by an amendment to the agreement. In addition, the
joint venture has the option to renew the agreement for two additional five year
terms. In accordance with the agreement, Chemtrusion bills the joint venture on
a monthly basis for the plant's operating costs, including capital recovery and
interest, along with a management fee.
The capital recovery and interest portion of the billings discussed
above is for the debt service in accordance with the long-term debt agreements
between Chemtrusion and the joint venture (see Note 4). The terms of the
permanent financing agreement requires interest payments only for the first two
years; accordingly, Chemtrusion has recorded a deferred capital recovery cost
account. This account represents the difference between depreciation expense
incurred for the plant and equipment for financial statement presentation and
the principal reduction on the outstanding debt incurred for the construction of
the plant and equipment, until such time as the depreciation expense equals or
exceeds the principal reduction on the note payable in accordance with the terms
of the note agreement, at which time the deferred capital recovery cost account
will begin to reverse, over the remaining term of the note. At December 31, 2000
and 1999, the balance of the deferred capital recovery cost account totaled
approximately $2,452,000 and $2,312,000, respectively, and is recorded as a
reduction of the outstanding debt due to the joint venture.
In addition, the Company has recorded deferred capital recovery cost
accounts, as discussed above, for the additional financing agreements between
Chemtrusion and the joint venture. At December 31, 2000, the balance of these
deferred capital recovery cost accounts for the additional equipment and
improvement financing totaled approximately $323,000 and $217,000, respectively,
and are recorded as a reduction of the outstanding debt due to the joint
venture.
F-17
34
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On expiration of the initial term, as amended, or any renewal term or
in the event of the termination of the agreement by default or change of
control, as defined, the joint venture will have an option to purchase the plant
at a price and on terms and conditions, as defined in the agreement. In the
event that the joint venture does not renew the agreement at the end of the
initial term or the end of any renewal term or either party terminates the
agreement, as defined, Chemtrusion has the right to require the joint venture to
purchase the plant at a price and on the terms and conditions, as defined in the
agreement.
(b) The Company is obligated under various long-term noncancelable
operating leases, for office and warehouse facilities, certain vehicles and
office equipment expiring through 2002 at minimum annual rentals as follows (in
thousands):
Amount
------
2001.................................... $ 478
2002.................................... 152
2003.................................... 15
------
$ 645
======
Rent and lease expense for all short-term and long-term operating
leases were $574,000, $544,000 and $521,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
(c) In connection with the purchase of InterSystems Nebraska from Helm
in 1993, the Company was obligated to pay Helm a royalty on the sale of certain
products. Royalties to Helm totaled approximately $17,000 and $12,000 for 1999
and 1998, respectively.
(d) The Company has a savings and profit-sharing plan which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The Company matches contributions at the
rate of $.50 per dollar up to 2% of the employee's salary. Contributions are
fully vested to the employee when made. Contributions to the plan were $36,000,
$32,000 and $19,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
(e) The Company is involved in various legal actions arising in the
normal course of business. Management is of the opinion that their outcome will
not have a material adverse effect on the Company's financial position or
results of operations.
NOTE 10 - DISCONTINUED OPERATIONS
Effective October 31, 1999, the Company sold certain assets of
InterSystems Nebraska, which represented the industrial products segment of the
Company, for cash and a note receivable with the purchaser assuming certain
liabilities. Accordingly, InterSystems Nebraska has been presented as a
discontinued operation for the years ended December 31, 1999 and 1998.
Revenues from InterSystems Nebraska for the ten months ended October
31, 1999 and year ended December 31, 1998 totaled approximately $14,729,000 and
$21,818,000, respectively.
For the ten months ended October 31, 1999 and year ended December 31,
1998, the Company recognized operating net income from InterSystems Nebraska of
approximately $821,000 and $1,218,000, respectively. During the year ended
December 31, 2000, the Company recorded a loss on disposal of InterSystems
Nebraska of approximately $190,000, which represented a change in estimate of
the gain on disposal primarily due to the under accrual of federal and state
income taxes. During the year ended December 31, 1999, the Company recorded a
gain on disposal of InterSystems Nebraska of approximately $3,184,000 from the
sale, net of bonuses paid to certain executives
F-18
35
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
totaling approximately $477,000, of which approximately $64,000 and $374,000
remained unpaid at December 31, 2000 and 1999, respectively.
As a condition of the sale of InterSystems Nebraska, the Company
received an unsecured promissory note for $500,000 due May 31, 2003, which pays
interest at 10% quarterly. The note is convertible into common stock of the
purchaser at a rate of total principal plus interest due on the note at the
conversion date divided by $7.50. In addition, $250,000 of the purchase proceeds
were deposited into an escrow account which was released during 2000. Concurrent
with the sale, the purchaser executed a royalty agreement, whereby the purchaser
is required to pay a percentage of sales collected for certain equipment over
the next six years not to exceed $649,000. The Company earned royalties for the
year ended December 31, 2000 of $37,000 in accordance with this agreement.
NOTE 11 - STATEMENTS OF CASH FLOWS
2000 1999 1998
---- ---- ----
(In thousands) (In thousands) (In thousands)
Supplemental disclosures of cash flow information:
Interest paid .......................................... $ 1,568 $ 1,780 $ 1,630
======= ======= =======
Income taxes paid ...................................... $ -- $ -- $ 23
======= ======= =======
Non-cash transactions relating to operating activities:
Accrual of bonuses included in gain on disposal of
InterSystems Nebraska .............................. $ -- $ 477 $ --
======= ======= =======
Accrual of compensation and other expenses included
in gain on disposal of InterSystems Nebraska ....... $ -- $ 273 $ --
======= ======= =======
Lease commitments and other expenses incurred in
association with the sale of InterSystems Nebraska
paid directly by the closing agent from the proceeds $ -- $ 667 $ --
======= ======= =======
Non-cash transactions relating to investing activities:
Unrealized holding loss on available-for-sale securities $ (5) $ (54) $ (127)
======= ======= =======
Issuance of note receivable for sale of
InterSystems Nebraska .............................. $ -- $ 500 $ --
======= ======= =======
Escrow account deposit at closing for the sale of
InterSystems Nebraska .............................. $ -- $ 250 $ --
======= ======= =======
Non-cash transactions relating to financing activities:
Capital lease obligation ............................... $ -- $ 410 $ 299
======= ======= =======
Common stock issued for repayment of accrued liabilities $ -- $ 6 $ 6
======= ======= =======
Surrender of common stock to treasury .................. $ -- $ 50 $ --
======= ======= =======
Deemed dividend due to warrant repricing ............... $ -- $ 217 $ --
======= ======= =======
Treasury stock issued for payment of accrued
liabilities ....................................... $ 19 $ -- $ --
======= ======= =======
F-19
36
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - MAJOR CUSTOMERS
The Company had sales to major customers in 2000, 1999 and 1998,
representing 86%, 90% and 99% of sales, respectively, as follows (in thousands):
2000 1999 1998
---- ---- ----
Customer:
A.................................................... $ 12,606 $ 8,825 $ 7,166
B.................................................... 1,772 2,577 2,857
C.................................................... - 1,894 1,362
--------- -------- --------
$ 14,378 $ 13,296 $ 11,385
========= ======== ========
At December 31, 2000 and 1999, accounts receivable from these major
customers are as follows (in thousands):
2000 1999
---- ----
Customer:
A.................................................... $ 1,330 $ 755
B.................................................... 193 231
C.................................................... - 443
------- -------
$ 1,523 $ 1,429
======= =======
NOTE 13 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of 1999, the Company adopted Statement of
Position No. 98-5, "Reporting on the Costs of Start-Up Activities", which
requires costs of start-up activities and organization costs to be expensed as
incurred. Accordingly, start-up and organization costs previously capitalized
which related to the formation of the Chemtrusion - Indiana division totaling
approximately $83,000, and start-up costs for an analytical laboratory division
at the Chemtrusion - Texas facility totaling approximately $51,000 were expensed
during 1999. Such amounts are included in cumulative effect of change in
accounting principle in the accompanying consolidated statements of operations.
If the amounts would have been expensed in the period they were
incurred, net income for the year ended December 31, 1998 would have been
approximately $392,000. Net income per common share basic and assuming dilution
would have been $.05 for 1998.
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37
INTERSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of the
Company's operations for the years ended December 31, 2000 and 1999 (in
thousands, except per share data):
1st 2nd 3rd 4th Full
Year Ended 2000: Quarter Quarter Quarter Quarter Year
- ---------------- ------- ------- ------- ------- ----
Net sales ............................................. $ 3,922 $ 4,388 $ 4,044 $ 4,407 $ 16,761
Gross profit .......................................... $ 1,217 $ 1,188 $ 1,107 $ 1,297 $ 4,809
Income (loss) from continuing operations .............. $ (93) $ (173) $ (275) $ (64) $ (605)
Discontinued operations:
Loss on disposal of discontinued operations ....... $ -- $ -- $ -- $ (190) $ (190)
Net loss .............................................. $ (93) $ (173) $ (275) $ (254) $ (795)
Net loss per common share - basic and assuming dilution $ (.01) $ (.02) $ (.04) $ (.04) $ (.11)
Year Ended 1999:
Net sales ............................................. $ 3,383 $ 3,610 $ 3,607 $ 4,146 $ 14,746
Gross profit .......................................... $ 1,109 $ 1,155 $ 1,166 $ 1,393 $ 4,823
Loss from continuing operations ....................... $ (107) $ (127) $ (283) $ (162) $ (679)
Discontinued operations:
Income (loss) from discontinued operations ........ $ (114) $ 358 $ 384 $ 193 $ 821
Gain on disposal of discontinued operations ....... $ -- $ -- $ -- $ 3,184 $ 3,184
Net income (loss) before cumulative effect of change in
accounting principle .............................. $ (221) $ 231 $ 101 $ 3,215 $ 3,326
Net income (loss) ..................................... $ (355) $ 231 $ 101 $ 3,215 $ 3,192
Net income (loss) per common share - basic and
assuming dilution ................................. $ (.05) $ .03 $ .01 $ .42 $ .41
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38
INTERSYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
Additions
-----------------------
Balance Charged to Charged to Balance
at beginning costs and other at end of
Description of year expenses accounts Deductions year
- ----------- ------- -------- -------- ---------- ----
Allowance for doubtful accounts:
1998 .......... $ 21 $ 24 $ -- (25)(a) $ 20
1999 .......... 20 43 -- (25)(a) 38
2000 .......... 38 50 -- (4)(a) 84
Discontinued operations:
1998 .......... $ 61 $ -- $ -- $ -- $ 61
1999 .......... 61 20(b) -- -- 81
2000 .......... 81 190(b) -- -- 271
Deferred tax asset:
1998 .......... $ 1,795 $ -- $ -- (207)(c) $ 1,588
1999 .......... 1,588 -- -- (1,311)(c) 277
2000 .......... 277 -- -- (196)(c) 473
- ------------------------
(a) Write-off of uncollectible accounts
(b) Revaluation of the discontinued operations liability
(c) Revaluation of the deferred tax asset valuation allowance
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