SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to _______________________________________ Commission File Number 0-11704 COMPUTER IDENTICS CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2443539 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 Shawmut Road, Canton, Massachusetts 0202l (Address of principal executive offices) (Zip Code) (617) 821-0830 (Registrant's telephone number, including area code) ________________________________ (Former name, former address and former fiscal year, if changed since last report) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 31, 1996 Common Stock, $.l0 par value 10,866,793 COMPUTER IDENTICS CORPORATION TABLE OF CONTENTS 										 Page PART 1.	FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. 1 			Consolidated Balance Sheets -- March 31, 1996, and December 31, 1995 1 			Consolidated Statements of Operations -- 			Three Months ended March 31, 1996, and March 31, 1995 2 			Consolidated Statements of Cash Flows -- 			Three Months ended March 31, 1996, and March 31, 1995 3 Notes to Consolidated Financial Statements 4 	ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF 			FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5 PART II.	OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 7 COMPUTER IDENTICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1996 AND DECEMBER 31, 1995 (Unaudited) March 31, December 31, (In thousands, except share amount 1996 1995 Assets Current Assets: Cash and cash equivalents $ 2,200 $ 1,752 Accounts receivable (less allowance for doubtful accounts of $245 in 1996 and $225 in 1995) 6,204 6,062 Inventory 3,745 3,625 Other 446 380 Total current assets 12,595 11,819 Property and equipment: Equipment 3,348 3,674 Furniture and fixtures 313 324 Leasehold improvements 46 64 Total property and equipment 3,707 4,062 Less accumulated depreciation and amortization (2,617) (3,133) Net property and equipment 1,090 929 Total assets $13,685 $12,748 Liabilities and Stockholders' Equity Current Liabilities: Notes payable to bank 974 1,002 Obligation under capital lease 16 15 Accounts payable 3,109 2,402 Accrued compensation and related benefits 1,099 1,063 Accrued income taxes 22 29 Other current liabilities 621 684 Deferred revenue 496 289 Total current liabilities 6,337 5,484 Long-term capital lease obligation 53 57 Stockholders' equity : Common stock, $.10 par value - authorized 14,000,000 shares, 10,866,793 shares at March 31,1996 and 10,856,793 shares at December 31,1995 1,087 1,086 Additional paid-in capital 24,013 24,005 Deferred compensation (53) (60) Accumulated deficit (17,784) (17,889) Cumulative translation adjustments 32 65 Total stockholders' equity 7,295 7,207 Total liabilities and stockholders' equity $13,685 $12,748 See notes to consolidated financial statements. COMPUTER IDENTICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Unaudited) Three months ended (In thousands, except per share amounts) March 31, 1996 1995 Revenues: Net product sales $6,136 $5,969 Customer support services 1,130 811 Total revenues 7,266 6,780 Cost and expenses: Cost of products sold 3,493 3,001 Cost of customer support services 449 309 Selling, general and administrative 2,578 2,473 Research and development 629 715 Total costs and expenses 7,149 6,498 Income from operations 117 282 Interest income 0 8 Interest expense 6 3 Income before provision for income taxes 111 287 Provision for income taxes 6 30 Net income $ 105 $ 257 Net income per share $ .01 $ .02 Primary weighted average number of common shares 11,071 10,707 See notes to consolidated financial statements. COMPUTER IDENTICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Unaudited) Three months ended (In thousands) March 31, 1996 1995 OPERATING ACTIVITIES: Net income $ 105 $ 257 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 154 91 Non-cash compensation 7 14 Increase (decrease) in cash from: Accounts receivable (144) 1,047 Inventory (167) (439) Other current assets (71) (14) Accounts payable 705 (349) Accrued compensation and related benefits 51 (97) Accrued income taxes (6) 47 Other current liabilities (36) (189) Deferred revenue 209 146 Total adjustments 702 257 Cash provided by operating activities 807 514 INVESTING ACTIVITIES: Acquisition of property and equipment (319) (147) Decrease in other assets 0 3 Net cash used for investing activities (319) (144) FINANCING ACTIVITIES Principal payments under capital lease obligations (4) (11) Proceeds from exercise of stock options 8 88 Net cash provided by financing activities 4 77 Effect of exchange rate changes on cash and cash equivalents (44) 75 Net increase in cash and cash equivalents 448 522 Cash and cash equivalents, beginning of year 1,752 755 Cash and cash equivalents, end of period $2,200 $1,277 Supplemental information: Cash paid for interest $ 22 $ 4 Cash paid for income taxes $ 13 $ 3 See notes to consolidated financial statements. COMPUTER IDENTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995, contain information pertinent to the accompanying financial statements. There has been no material change in the information contained in such notes except as set forth below. The Balance Sheet at March 31, 1996, the Statements of Operations for the three months ended March 31, 1996 and 1995 and the Statements of Cash Flows for the three months ended March 31, 1996 and 1995, are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accrual entries) necessary for a fair presentation of such financial results have been included. 1.	PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Computer Identics Corporation (the Company) and its wholly-owned subsidiaries, Computer Identics N.V./S.A. (CINV), Computer Identics Ltd., Computer Identics GmbH, Computer Identics S.A., and Computer Identics, Inc. 2. 	RECLASSIFICATION Certain amounts in the prior year have been reclassified to conform to the 1996 presentation. 3.	NET INCOME (LOSS) PER SHARE Net income per common share is computed based on the weighted average number of common and the dilutive effect of common equivalent shares outstanding for the period. 4.	INVENTORY Inventory is recorded at the lower of cost (first in, first out method) or market. At March 31, 1996 and December 31, 1995, inventory consisted of the following: (In thousands) March 31, 1996 December 31, 1995 Raw Materials $ 1,862 $ 1,821 Work-in-Process 95 336 Finished Goods 1,788 1,468 Total $ 3,745 $ 3,625 5.	INCOME TAXES The provisions for income taxes were $6,000 in 1996 versus a provision of $30,000 in 1995. Due to the Company's ability to use its U.S. net operating loss carryforwards, the provision for income taxes is comprised primarily of state and foreign income taxes for which net operating loss carryforwards are not available. Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue for the first quarter of 1996 was 7% above the comparable 1995 period. The 1996 revenue gains were reflected in all three geographic areas of the Company, North America, Europe and Rest of World. First quarter bookings decreased 3% for 1996 compared to the same quarter in the prior year. Backlog decreased from $3.5 million at December 31, 1995, to $3.3 million at March 31, 1996. The $3.3 million in backlog is lower than the comparable first quarter 1995 total of $3.8 million. 	Sales by the Company's four European subsidiaries, the Canadian subsidiary, and exports to Rest of World were 64% of total revenue for the first quarter of 1996 compared to 65% for 1995. Since over half the Company's revenue was derived from foreign sources, its operating results can be sensitive to foreign currency fluctuations. In the first quarter, these foreign currency fluctuations did not work in the Company's favor. The Company does have available a program to hedge its foreign denominated accounts receivable in an effort to minimize foreign currency exposure. At March 31, 1996, the Company did not have any hedging contracts outstanding. We may utilize limited hedging in the future should the Company foresee the need. 	Gross Margin from product and services was 46% compared to 51% for the first quarters of 1996 and 1995, respectively. Product gross margin decreased from 50% in 1995 to 43% in 1996 primarily reflecting a higher mix of lower margin non-CI manufactured product sales in Europe, a change in distribution strategy in North America from direct to lower margin indirect channels, and the unfavorable foreign currency impact due to a stronger dollar. This trend will continue unless the Company can achieve further material and labor cost reductions in manufacturing which more than offset the effect of the larger mix of international revenues with lower margins and the change in distribution strategy in North America. Service gross margin decreased in 1996 to 60% from 62% in 1995. Selling, General and Administrative expenses as a percentage of revenue were 35% in the first quarter of 1996 versus 36% in the comparable 1995 period, reflecting a continued emphasis on controlling gross spending while increasing revenue. Research and Development expenses were 9% and 10% of revenuesin the first quarter of 1996 and 1995, respectively as the Company continued its planned program to invest in its future by improving performance of existing products, expanding its overall product line, and exploring new technology. 	As a result of the foregoing, net income for the first quarter of 1996 and 1995 was $105,000 and $257,000, respectively. Liquidity and Capital Resources 	Management believes that continued profitable operations and the current level of working capital are sufficient to finance its needs through 1996. From a capital expenditures viewpoint, in the first quarter of 1996 the Company completed the acquisition of a new management information system which cost approximately $200,000. March 31, December 31, 1996 1995 Working Capital $6,258,000 $6,335,000 Current Ratio 2.0 to 1 2.2 to 1 Total Liability to Net Worth Ratio .9 to 1 .8 to 1 	Each of the liquidity factors listed have remained relatively stable over the two periods listed. Working capital has decreased by $77,000 during the first three months of 1996 compared to December 31, 1995, primarily resulting from increases in cash of $448,000, inventory of $120,000, accounts receivable of $142,000, accounts payable of $707,000, and deferred revenue of $207,000. 	The Company currently has two bank lines of credit available. A small line of credit is held with a Belgium bank for 5 million Belgium Francs (approximately $170,000). The principal line of credit is held with a commercial bank and was increased from $1 to $2 million during the quarter ended March 31, 1996. Borrowings, however, did not change during the quarter. Computer Identics GmbH, a wholly owned German subsidiary, has in DM $1 million of this line of credit outstanding. Therefore the Company still has available $1 million of this credit line. PART II Item 6.	Exhibits and Reports on Form 8-K (a)	Exhibits 	3.1	Restated Articles of Organization effective December 21, 1984, and Amendment thereto effective June 1, 1987, (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31,1990, and incorporated herein by reference). 	3.2	By-laws of the Company (filed as Exhibit 3.4 to Registration Statement No. 2-85807, and incorporated herein by reference). 	4.1	Copy of Common Stock Certificate (filed a Exhibit 4.1 to Registration Statement No. 2-85807, and incorporated herein by reference). 	11.	Statement regarding computation of per share earnings. (See footnote 3 to Notes to Consolidated Financial Statements). 	27.	Financial Data Schedule. (b)	Reports on Form 8-K 	 	None 	 SIGNATURES Pursuant to the requirements 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. 			 COMPUTER IDENTICS CORPORATION Registrant DATE: May 7, 1996 		 ________________________________________ 		 Jeffrey A. Weber Duly Authorized Officer and Chief Financial Officer (Senior Vice President, Operations and Finance and 			 Chief Financial Officer)