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 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 0-10902
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
May 6, 1996:
4,524,379 shares
ITEM 1. - FINANCIAL STATEMENTS
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 AND FISCAL YEAR SEPTEMBER 30, 1995
MAR 31, 1996 SEPT 30, 1995
------------ -------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash 4,293,319 3,735,758
Accounts Receivable 14,743,167 10,068,828
Inventories 8,673,670 7,360,204
Prepaid Expense & Other Current Assets 921,395 1,115,256
Deferred Income Taxes 413,000 413,000
---------- ----------
Total Current Assets 29,044,551 22,693,046
PROPERTY, PLANT AND EQUIPMENT 4,810,682 4,617,924
NOTES RECEIVABLE - OFFICERS 735,000 -
OTHER ASSETS 6,887,261 6,641,480
---------- ----------
Total Assets 41,477,494 33,952,450
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable 4,283,119 4,367,318
Accounts Payable 11,160,636 6,070,074
Accrued Compensation 334,425 348,147
Accrued Expenses 69,983 2,230
Deferred Revenue 204,383 230,663
Current Maturities of Long-Term Debt 52,400 52,400
---------- ----------
Total Current Liabilities 16,104,946 11,070,832
LONG-TERM DEBT 260,939 286,546
DEFERRED INCOME TAXES 1,421,000 1,381,000
---------- ----------
Total Liabilities 17,786,885 12,738,378
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $.10 Par value
Shares Authorized 8,000,000
Outstanding - 4,518,379 and 4,212,418 451,838 421,242
Additional Paid-In Capital 11,027,685 9,114,577
Foreign Currency Translation Adjustment (229,141) (198,169)
Retained Earnings 12,440,227 11,876,422
---------- ----------
Total Stockholders' Equity 23,690,609 21,214,072
---------- ----------
Total Liabilities and Stockholders'
Equity 41,477,494 33,952,450
========== ==========
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER AND SIX MONTHS ENDED MARCH 31, 1996 AND 1995
QUARTER QUARTER SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
MAR 31, 1996 MAR 31, 1995 MAR 31, 1996 MAR 31, 1995
------------ ------------ ------------ ------------
(Unaudited)
NET REVENUES 21,906,167 19,840,268 40,616,741 35,755,029
COST OF REVENUES 18,394,323 16,417,962 33,796,744 28,527,288
---------- ---------- ---------- ----------
GROSS PROFIT 3,511,844 3,422,306 6,819,997 7,227,741
PRODUCT DEVELOPMENT
COSTS 430,909 352,580 867,748 667,166
SELLING, GENERAL
AND ADMINISTRATIVE
EXPENSES 2,527,274 2,499,677 4,961,449 4,959,975
---------- ---------- ---------- ----------
OPERATING INCOME 553,661 570,049 990,800 1,600,600
OTHER INCOME 55,433 44,541 108,323 82,851
INTEREST EXPENSE (114,687) (43,945) (217,533) (100,928)
---------- ---------- ---------- ----------
INCOME BEFORE TAXES 494,407 570,645 881,590 1,582,523
TAXES ON INCOME 130,413 192,600 317,785 490,735
---------- ---------- ---------- ----------
NET INCOME 363,994 378,045 563,805 1,091,788
========== ========== ========== ==========
EARNINGS PER SHARE 0.08 0.09 0.12 0.25
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1995
SIX MONTHS SIX MONTHS
MAR 31, 1996 MAR 31, 1995
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 563,805 1,091,788
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and Amortization 1,552,712 1,473,081
Deferred Income Taxes 40,000 35,000
Decrease (Increase) in Accounts
Receivables (4,674,338) (3,298,762)
Decrease (Increase) in Inventories (1,313,466) 429,621
Decrease (Increase) in Prepaid
Expenses and Other Current Assets 193,861 (504,039)
Decrease (Increase) in Other Assets (175,720) 1,012
Increase (Decrease) in Accounts
Payable 5,090,562 4,192,458
Increase (Decrease) in Accruals 54,031 (114,922)
Increase (Decrease) in Deferred Revenue (26,280) 35,247
--------- ----------
Net Cash Provided (Used) By Operating
Activities 1,305,167 3,340,484
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment (627,623) (745,749)
Proceeds from disposal of assets (2,144) 6,768
Additions to Software Development Costs (1,136,959) (1,060,846)
Investment in Foreign Subsidiary (48,806) -
Loans to Officers (735,000) -
--------- ---------
Net Cash Used In Investing Activities (2,550,532) (1,799,827)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Notes Payable (84,198) (1,050,721)
Reduction of Long-Term Debt (25,607) (22,628)
Issuance of Stock 1,943,704 229,198
Cash Dividends Paid - (333,491)
--------- ---------
Net cash provided (used) by financing
activities 1,833,899 (1,177,642)
--------- ---------
FOREIGN CURRENCY TRANSLATION (30,973) 31,917
--------- ---------
NET INCREASE (DECREASE) IN CASH 557,561 394,932
CASH, beginning of the period 3,735,758 3,347,282
--------- ---------
CASH, end of the period 4,293,319 3,742,214
========= =========
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 three months and the six months ended March 31,
1996 and 1995 are 4,765,316 and 4,326,297, 4,578,651 and 4,349,280
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Revenues for the second quarter ending March 31, 1996 were $21,906,167, up
10.4% from the prior year's second quarter revenue of $19,840,268. The
increase in revenue is primarily due to a increase in revenues from the
Interface System International, Ltd. (ISIL) distribution business.
Revenues for the six months were $40,616,741 up 13.6% compared to
$35,755,029 in the first six months last year. The increase is primarily
due to the increase in revenues from ISIL offset by a reduction of revenues
in our core product printer area.
Cost of Revenues for the second quarter were 84% of revenues compared with
82.6% of revenues for the prior year's second quarter. The increase in cost
of revenues is due to higher sales from our distribution business combined
with lower margins in that business. Cost of revenues for the six months
this year were 83.2% compared to 79.8% for the first six months last year.
The increase in cost of revenues for six months is attributable to the same
reasons as for the quarter.
Product Development, Selling and General and Administrative Expenses
(Operating Expenses) for the second quarter were 13.5% of revenues compared
to 14.4% of revenues in the same period last year. The decrease is
primarily due to increased distribution business, which has lower operating
expenses as a percent of revenues than core products. For the six months,
Operating Expenses were 14.4% of revenues, compared to 15.7% in the first
six months last year. Product Development was up for the quarter and six
months due to additional personnel added for Oasis product development.
Operating Income for the quarter was $553,661, down 2.9% from $570,049 in
last year's second quarter. The decrease in Operating Income is due to with
lower margins in the distribution business combined with lower core product
sales. Operating Income for the first six months was $990,800, down 38.1%
from 1,600,600 in the first six months last year. The decrease in Operating
Income is due to lower margins in the distribution business combined with
lower core product sales.
Interest Expense for the quarter increased from $43,945 to $114,687 due to
increased borrowing at ISIL, relating to the distribution business.
Interest Expense for the six months increased from $100,928 to $217,533 for
the same reason.
Income Before Taxes was $494,407, down 13.4% from $570,645 in last year's
second quarter. The decrease was due to the lower Operating Income
described above. Income Before Taxes for the first six months was $881,590,
down 44.3% from $1,582,523 in the first six months last year.
Income Tax for the period was $130,413, or 26.4%, compared with $192,600, or
33.8%, in last year's quarter. Taxes for this year's period are lower than
the statutory rate due to the fact that ISIL, which operated at a profit in
this quarter, compared to a small loss in the same quarter last year, was
able to utilize a tax loss carry forward. Income Tax for the six months was
$317,785, or 36%, compared to $490,735, or 31%, for the six months last
year. This year's six months tax rate is higher than the statutory rate due
to a small year to date loss at ISIL, where, during the same period last
year, there was a year to date profit.
As a result of the foregoing, net income for the quarter was $363,994
compared to $378,045 in last year's second quarter. Net Income for the six
months was $563,805 compared to $1,091,788 in the first six months last
year.
Sales of the Company's new Oasis products for the quarter did not contribute
significantly to this quarter's performance. Oasis sales were higher than
in the previous quarter and management expects that such sales will continue
to grow during the Company's third fiscal quarter. The Company's actual
results from sales of Oasis products may differ from management's
expectations as a result of many factors, including release and acceptance
of Oasis products, competitive pressures and pricing pressures.
Liquidity and Capital Resources
During the first six months, cash increased $557,561. Major factors
increasing cash included an increase in Accounts Payable of $5,090,562
related to the purchase of increased inventories required by the expanding
business at ISIL and proceeds from the exercise of warrants and exercise of
stock options of $1,943,904. Major uses of cash included an increase in
Accounts Receivable of $4,674,338 due to the expanding distribution
business, an increase in Inventories of $1,313,466 and Loans to Officers of
$735,000 made under the 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 $12,939,605. 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 March
31, 1996, $4,283,119 was outstanding under these lines of credit. The
lines of credit are used primarily by ISIL in the operations 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 Systems, 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 alleged 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 were seeking relief for
compensatory and punitive damages, together with pre-judgement 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 sought court approval to do so. The order of dismissal
was signed U.S. District Court on February 15, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on April 23, 1996 in
Ann Arbor, Michigan, and was adjourned and reconvened on April 30, 1996. The
Company's shareholders acted on the following matters:
1. The Shareholders approved the election of the following directors
for a three year term as follows:
FOR WITHHELD
--- --------
Robert A. Seigle 3,318,960 390,434
Garnel F. Graber 3,533,304 176,090
Lloyd A. Semple 3,532,965 176,429
2. The Shareholders approved an Amendment to the Company's Certificate
of Incorporation to Increase the Number of Shares of Common Stock
Authorized for issuance from 8,000,000 to 20,000,000 at a par value
of $0.10 per share as follows:
FOR AGAINST ABSTAIN
--- ------- -------
3,066,253 638,693 4,4448
3. The Shareholders approved a Proposal to Amend the Stock Option Plan
to increase the number of shares of Common Stock reserved for
issuance under the 1992 Plan from 400,000 to 800,000 as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
1,610,413 652,287 16,872 1,615,936
4. The Shareholders approved an amendment to the Company's 1993 Stock
Plan for Non-Employee Directors to increase the number shares of
Common Stock reserved for issuance under the Directors Plan from
42,000 shares to 175,000 shares. In addition, the Directors Plan
would be amended to provide for an initial grant to each eligible
director an option to purchase 5,100 shares of the Company's Common
Stock and subsequent grants to each eligible director on the later
of January 11, 1996 or the date such director joins the Board of
Directors, and thereafter, on every third anniversary of the date
the director received the prior subsequent grant, until the
Directors Plan is terminated. The vote on such proposal was as
follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
1,845,009 496,624 17,359 1,536,516
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No. Description
10.1 First Amendment to the Company's 1992 Stock Option Plan
10.2 First Amendment to the Company's 1993 Stock Plan for Non-
Employee Directors
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 thereunto duly authorized.
May 14, 1996 INTERFACE SYSTEMS, INC.
BY: /S/ David O. Schupp
-------------------------------
David O. Schupp, Vice President,
Treasurer, and Chief Financial
Officer and Accounting Officer
(Duly Authorized Officer)