SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
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 0-10902
INTERFACE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-1857379
(State or other jurisdiction of (IRS employer id. no.)
incorporation or organization)
5855 Interface Drive, Ann Arbor, Michigan 48103
(Address of principal executive offices)
Registrant's telephone number, including area code (313) 769-5900
Former name, former address and former fiscal year, if changed since last
report.
Indicated 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all
documents and reports required to be filed by section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock, $.10 par value, as of
February 5, 1996:
4,496,368 shares
ITEM 1. - FINANCIAL STATEMENTS FORM 10-Q
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995, AND FISCAL YEAR SEPTEMBER 30, 1995
DEC 31, 1995 SEPT 30, 1995
ASSETS (Unaudited)
CURRENT ASSETS
Cash 3,978,212 3,735,758
Accounts Receivable 11,901,038 10,068,828
Inventories 8,173,634 7,360,204
Prepaid Expense & Other Current Assets 1,603,280 1,115,256
Deferred Income Taxes 413,000 413,000
---------- ----------
Total Current Assets 26,069,164 22,693,046
PROPERTY, PLANT AND EQUIPMENT 4,759,375 4,617,924
NOTES RECEIVABLE FROM OFFICERS 500,000 --
OTHER ASSETS 6,678,405 6,641,480
---------- ----------
Total Assets 38,006,944 33,952,450
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable 4,414,789 4,367,318
Accounts Payable 8,188,580 6,070,074
Accrued Compensation 420,149 348,147
Accrued Expenses 16,642 2,230
Deferred Revenue 183,002 230,663
Current Maturities of Long-Term Debt 52,400 52,400
----------- ----------
Total Current Liabilities 13,275,562 11,070,832
LONG-TERM DEBT 273,941 286,546
DEFERRED INCOME TAXES 1,381,000 1,381,000
Total Liabilities 14,930,503 12,738,378
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $.10 Par value
Shares Authorized 8,000,000
Outstanding - 4,468,968 and 4,212,418 446,897 421,242
Additional Paid-In Capital 10,756,497 9,114,577
Foreign Currency Translation Adjustment (203,399) (198,169)
Retained Earnings 12,076,446 11,876,422
---------- ----------
Total Stockholders' Equity 23,076,441 21,214,072
---------- ----------
Total Liabilities and Stockholders'
Equity 38,006,944 33,952,450
========== ==========
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER ENDED DECEMBER 31, 1995 AND 1994
QUARTER ENDED QUARTER ENDED
DEC 31, 1995 DEC 31, 1994
(Unaudited)
NET REVENUES $ 18,710,574 $ 15,914,761
COST OF REVENUES 15,402,421 12,109,326
---------- ----------
GROSS PROFIT 3,308,153 3,805,435
PRODUCT DEVELOPMENT COSTS 436,839 314,586
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,433,962 2,460,298
--------- ---------
OPERATING INCOME 437,352 1,030,551
OTHER INCOME 52,890 38,310
INTEREST EXPENSE (102,847) (56,983)
--------- ---------
INCOME BEFORE TAXES 387,395 1,011,878
TAXES ON INCOME 187,371 298,135
--------- ----------
NET INCOME 200,024 713,743
========= ==========
EARNINGS PER SHARE 0.05 0.17
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTERS ENDED DECEMBER 31, 1995 AND 1994
QUARTER QUARTER
ENDED ENDED
DEC 31, 1995 DEC 31, 1994
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 200,024 713,743
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and Amortization 764,835 733,507
Decrease (Increase) in Accounts
Receivables (1,832,210) (2,151,404)
Decrease (Increase) in Inventories (813,430) (790,442)
Decrease (Increase) in Prepaid
Expenses and Other Current Assets (488,024) 8,533
Decrease (Increase) in Other Assets (79,221) (1,826)
Increase (Decrease) in Accounts
Payable 2,118,507 1,251,566
Increase (Decrease) in Accruals 86,415 5,849
Increase (Decrease) in Deferred Revenue (47,662) 31,426
--------- ----------
Net Cash Provided (Used) By Operating
Activities (90,766) (199,048)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and
Equipment (353,385) (276,418)
Proceeds from disposal of assets 947 1,273
Additions to Software Development Costs (511,552) (516,203)
Loans to Officers (500,000) --
--------- ---------
Net Cash Used In Investing Activities (1,363,990) (791,348)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Notes Payable 47,471 499,897
Reduction of Long-Term Debt (12,605) (11,232)
Stock Warrants Exercised 1,667,575 136,273
Cash Dividends Paid -- (166,135)
--------- ---------
Net cash provided (used) by financing
activities 1,702,441 458,803
--------- ---------
FOREIGN CURRENCY TRANSLATION (5,231) (12,852)
--------- ---------
NET INCREASE (DECREASE) IN CASH 242,454 (544,445)
CASH, beginning of the period 3,735,758 3,347,282
--------- ---------
CASH, end of the period 3,978,212 2,802,837
========= =========
INTERFACE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note A - Basis of Presentation
In the opinion of management, all adjustments considered necessary for a
fair presentation of the consolidated financial statements for the interim
period have been included.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include
all disclosures. It is presumed that users of these interim financial
statements have read or have access to the audited financial statements for
the preceding fiscal year. The Form 10-Q should be read in conjunction with
such audited financial statements.
Note B - Earnings Per Share
The computation of primary earnings per common share equivalent is
determined by dividing net earnings by the weighted average number of common
shares and common share equivalents outstanding during the period. The
computation assumes that the outstanding stock options were exercised and
proceeds used to purchase shares of common stock. The weighted average
shares outstanding for the quarters ended December 31, 1995 and 1994 are
4,309,530 and 4,317,748 respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Revenues for the first quarter ended December 31, 1995 were $18,710,574, up
18% from the prior year's first quarter revenue of $15,914,761. The
increase in revenue is due to increased revenues of the distribution
business of Interface Systems International, Ltd. ("ISIL") in the UK.
Revenues from the Cleo product group were comparable to last year's, while
Printer sales were down from the same quarter last year.
Cost of revenues were 82.3% compared to 76.1% for the prior year's quarter.
The increase in cost of revenues is due to the increase in distribution
business where margins are very low and were lower than in the prior year's
quarter. Core product margins in the current quarter were slightly higher
than in last year's comparable quarter.
Product Development, Selling and General and Administrative expenses
(Operating Expenses) were 15.3% vs. 17.4% in last year's first quarter. The
primary reason for the difference in operating expenses as a percentage of
revenues was the 18% increase in revenue without a corresponding percentage
increase in operating expenses. Operating expenses increased by $95,917, in
absolute dollars.
Operating Income was $437,352, down 57.6% from $1,030,551 in last year's
first quarter. The decrease in operating income was primarily due to the
lower Gross Margin.
Interest Expense increased from $56,983 to $102,847 due to increased
borrowing at ISIL.
Income tax for the period was $187,371 or 48.4% compared with $298,135 or
29.5% in last year's quarter. This year's taxes are higher than the
statutory rate primarily due to the fact that ISIL operated at a loss that
can not be deducted for U.S. income tax purposes.
As a result of foregoing, net income for the quarter was $200,024 compared
to $713,743 in last year's first quarter.
While sales of the Company's OASIS products did not contribute significantly
to this quarter's performance, the prospects for future quarters are
positive. The Company has begun to form strategic partnerships with other
companies who offer specialty software in the document management area.
These partnerships should increase the Company's ability to reach what
management believes to be a large market for our OASIS products. With the
recent release of the Company's OASIS products for NT platforms, the
Company's appointment as a "Master Partner" of Microsoft's MCS Group, (A
Group focused in the business sector involving organizations with large or
mid-range computer systems), and the Company's expanding direct and indirect
sales efforts, management anticipates that significant OASIS sales will be
forthcoming in this fiscal year. There is no assurance, however, that such
sales will be forthcoming.
The foregoing discussion includes forward-looking statements based on
current management expectations. Such forward-looking statements involve
certain risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause future results to differ from these expectations
include: release and acceptance of OASIS products, success of these
partnerships, competitive products and pricing pressures.
Liquidity and Capital Resources
During the first quarter, cash increased by $242,454. Major factors
increasing cash included an increase in Accounts Payable of $2,118,507
primarily due to a build up of inventory purchases at ISIL in preparation
for expanding sales and proceeds from the sale of warrants of $1,667,575.
Major uses of cash included an increase in accounts receivable of $1,832,210
due to the expanding distribution business, an increase in inventories of
$813,430, an increase in Prepaid Expenses and Other Assets of $488,024,
which was primarily due to overpayment of income taxes, and Notes Payable
from officers of $500,000 made under the Company's Executive Loan Program.
The Executive Loan Program provides loans to the Company's executive
officers for the purpose of acquiring shares of the Company's Common Stock.
The Company has working capital of $12,793,602. The Company's primary
source of liquidity is cash from operations. The Company has lines of
credit agreements for working capital which currently permit it to borrow up
to $8,388,500 on an unsecured basis. These lines expire at various dates
through June 30, 1996 and are subject to renewal thereafter. As of December
31, 1995, $4,414,788 was outstanding under these lines of credit. The lines
of credit are used primarily by ISIL in the operation of the distribution
business. All lines are renewed annually. Management does not anticipate
any difficulty in the renewal of any bank line of credit.
PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On November 15, 1995, a class action complaint was filed by Albert Socolov,
in the United States District Court, Eastern District of Michigan, against
the Company, Carl L. Bixby, David O. Schupp and George W. Perrett, Jr., and
notice of the action was provided to the Company on December 22, 1995
(Socolov vs. Interface System, Inc., Carl L. Bixby, David O. Schupp and
George W. Perrett, Jr., U.S.D.C., E.D. 95 CV 40413FL). Messrs. Bixby,
Schupp and Perrett are all directors of the Company and hold the offices of
President, Treasurer and Secretary, respectively, of the Company. The
complaint alleges violations of Rule 10b-5 of the Securities Exchange Act of
1934 (the "Exchange Act"), liability under Section 20 of the Exchange Act
and claims of common law fraud and deceit and negligent misrepresentation,
based upon certain non-disclosures by the Company and its named officers
related primarily to the effect of the acquisition of the Mekom distribution
business on the Company. The plaintiffs seek relief for compensatory and
punitive damages, together with pre-judgment interest, and plaintiffs' costs
and disbursements, including reasonable allowances for fees for plaintiffs'
attorneys and experts.
Mr. Socolov has voluntarily determined to dismiss his case with prejudice as
to himself and is seeking court approval to do so.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No. Description
10 Executive Loan Program,
form of note and security
agreement
11 See Note B of Notes to Consolidated Financial
Statements
27 Financial Data Schedule (EDGAR filing only)
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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 thereinto duly authorized.
INTERFACE SYSTEMS, INC.
BY: /S/ DAVID O. SCHUPP
------------------------------
David O. Schupp, Vice President,
Treasurer, and Chief Financial
Officer and Accounting Officer
(Duly Authorized Officer)