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 June 30, 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 of Common Stock, $.10 par value, outstanding as of
August 1, 1996:
4,524,379 shares
ITEM 1. - FINANCIAL STATEMENTS
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996, AND FISCAL YEAR SEPTEMBER 30, 1995
JUN 30, 1996 SEPT 30, 1995
------------ -------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash 2,376,707 3,735,758
Accounts Receivable 11,400,092 10,068,828
Inventories 9,354,623 7,360,204
Prepaid Expense & Other
Current Assets 1,869,109 1,115,256
Deferred Income Taxes 413,000 413,000
---------- ----------
Total Current Assets 25,413,531 22,693,046
PROPERTY, PLANT AND EQUIPMENT 4,819,484 4,617,924
NOTES RECEIVABLE - OFFICERS 819,594 -
OTHER ASSETS 6,794,995 6,641,480
---------- ----------
Total Assets 37,847,604 33,952,450
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable 5,581,929 4,367,318
Accounts Payable 7,729,086 6,070,074
Accrued Compensation 422,693 348,147
Accrued Expenses 13,423 2,230
Deferred Revenue 120,813 230,663
Current Maturities of Long-Term Debt 52,400 52,400
---------- ----------
Total Current Liabilities 13,920,344 11,070,832
LONG-TERM DEBT 248,196 286,546
DEFERRED INCOME TAXES 1,421,000 1,381,000
---------- ----------
Total Liabilities 15,589,540 12,738,378
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $.10 Par value
Shares Authorized 8,000,000
Outstanding - 4,524,379 and
4,212,418 452,438 421,242
Additional Paid-In Capital 11,097,335 9,114,577
Foreign Currency Translation
Adjustment (236,371) (198,169)
Retained Earnings 10,944,662 11,876,422
---------- ----------
Total Stockholders' Equity 22,258,064 21,214,072
---------- ----------
Total Liabilities and
Stockholders' Equity 37,847,604 33,952,450
========== ==========
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER AND NINE MONTHS ENDED JUNE 30, 1996 AND 1995
QUARTER QUARTER NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
JUN 30, 1996 JUN 30, 1995 JUN 30, 1996 JUN 30, 1995
------------ ------------ ------------ ------------
(Unaudited)
NET REVENUES 16,655,495 18,612,947 57,272,235 54,367,976
COST OF REVENUES 14,548,005 15,336,192 48,344,748 43,863,480
---------- ---------- ---------- ----------
GROSS PROFIT 2,107,490 3,276,755 8,927,487 10,504,496
PRODUCT DEVELOPMENT
COSTS 543,729 343,931 1,411,477 1,011,097
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 3,370,863 3,144,949 8,332,313 8,104,924
--------- --------- --------- ---------
OPERATING INCOME(LOSS) (1,807,102) (212,125) (816,303) 1,388,475
OTHER INCOME 55,772 63,191 164,096 146,042
INTEREST EXPENSE (112,910) (70,157) (330,443) (171,085)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
TAXES (1,864,240) (219,091) (982,650) 1,363,432
TAXES ON INCOME (368,675) 146,039 (50,890) 636,774
--------- --------- --------- ---------
NET INCOME(LOSS) (1,495,565) (365,130) (931,760) 726,658
========= ========= ========= =========
EARNINGS (LOSS) PER
SHARE (0.33) (0.09) (0.21) 0.17
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
NINE MONTHS NINE MONTHS
JUN 30, 1996 JUN 30, 1995
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (931,760) 726,658
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation and Amortization 2,397,846 2,240,882
Deferred Income Taxes 40,000 35,000
Loss on Sale of Fixed Assets 27,857 -
Decrease (Increase) in Accounts
Receivables (1,331,264) (1,367,550)
Decrease (Increase) in
Inventories (1,994,419) 189,670
Decrease (Increase) in Prepaid
Expenses and Other Current
Assets (720,978) (726,267)
Decrease (Increase) in Other
Assets (185,378) (22,175)
Increase (Decrease) in Accounts
Payable 1,659,012 2,459,464
Increase (Decrease) in Accruals 85,739 48,971
Increase (Decrease) in Deferred
Revenue (109,850) (58,574)
--------- ---------
Net Cash Provided (Used) By
Operating Activities (1,063,195) 3,526,079
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and
Equipment (912,156) (1,524,065)
Proceeds from disposal of assets 15,309 6,792
Additions to Software Development
Costs (1,692,290) (1,499,237)
Investment in Foreign Subsidiary (39,137) (18,724)
Loans to Officers (819,594) -
--------- ---------
Net Cash Used In Investing Activities (3,447,868) (3,035,234)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Notes Payable 1,214,610 1,278,799
Reduction of Long-Term Debt (38,350) (129,836)
Issuance of Stock 2,013,954 239,323
Cash Dividends Paid - (501,675)
--------- ---------
Net cash provided (used) by
financing activities 3,190,214 886,611
--------- ---------
FOREIGN CURRENCY TRANSLATION (38,202) 16,478
--------- ---------
NET INCREASE (DECREASE) IN CASH (1,359,051) 1,393,934
CASH, beginning of the period 3,735,758 3,347,282
--------- ---------
CASH, end of the period 2,376,707 4,741,216
========= =========
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 (Loss) Per Share
The computation of primary earnings (loss) 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 nine months
ended June 30, 1996 and 1995 are 4,727,887 and 4,201,323, 4,624,957 and
4,272,840 respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Revenues for the third quarter ending June 30, 1996 were
$16,655,495, down 10.5% from the prior year's third quarter revenue of
$18,612,947. The decrease in revenue is due to reduced revenues from
printer products and Cleo SNA products. There was also a slight decrease in
Interface Systems International, Ltd. (ISIL) distribution revenues due to a
supplier shortage of laptop computers which prevented orders from being
filled and the absence of a large single sale of supplies in this year's
quarter compared to last year's third quarter.
Revenues for the nine months were $57,272,235, up 5.3% compared to
$54,367,976 in the first nine months last year. The increase is primarily
due to the increase in revenues from ISIL Distribution offset by a reduction
of revenues in our core product printer and Cleo SNA areas.
Cost of Revenues for the third quarter were 87.3% of revenues
compared with 82.4% of revenues for the prior year's third quarter. The
increase in cost of revenues is due to reduced sales of our high margin core
products, reduced margins in our distribution business and a nonrecurring
cost associated with the cancellation of orders for material. Cost of
Revenues for the nine months this year were 84.4% compared to 80.7% for the
first six months last year. The increase in cost of revenues for nine
months is attributable to the same reasons as for the quarter.
Product Development, Selling and General and Administrative Expenses
(Operating Expenses) for the third quarter were 23.5% of revenues compared
to 18.7% of revenues in the same period last year. The increase in
Operating Expense was due to increased Product Development and sales
expenses associated with the Company's new Oasis product line. In addition,
General and Administrative expenses included approximately $220,000 for
nonrecurring legal expense and $150,000 in receivable reserve. Last year's
General and Administrative Expense included a Bad Debt write off of
$669,412. After accounting for non-recurring expenses, the net increase for
Operating Expenses in this quarter compared to the same quarter last year is
primarily due to increased corporate legal costs and increases in sales and
administrative personnel costs at ISIL. For the nine months operating
expenses were 17.0% of revenues compared to 16.8% in the first nine months
last year.
Operating Loss for the quarter was ($1,807,102), down from a loss of
($212,125) in last year's third quarter. The decrease in Operating Income
is due to lower revenue, increased cost of revenues and operating expenses
as described above. Operating Loss for the first nine months was
($816,303), down from income of $1,388,475 in the first nine months last
year.
Interest Expense for the quarter increased from $70,157 to $112,910
due to increase borrowing at ISIL related to the distribution business.
Interest Expense for the nine months increased from $171,085 to $330,443 for
the same reason.
Loss Before Taxes was ($1,864,240), down from a loss of ($219,091)
in last year's third quarter. The decrease was due to the lower Operating
Income described above. Loss Before Taxes for the first nine months was
($982,650), down from income of $1,363,432 in the first nine months last
year.
Income Tax for the period was ($368,675), compared with $146,039 in
last year's quarter. This year's taxes would have included a larger credit
if it had not been for a loss at ISIL that cannot be used to reduce the
Company's tax obligation. Income tax for the nine months was ($50,890),
compared to $636,774 for the nine months last year. This year's nine month
tax credit also would have been larger if it were not for losses in the UK
that cannot be used to reduce the Company's tax obligation. As a result of
the foregoing, the net loss for the quarter was ($1,495,565) compared to a
loss of ($365,130) in last year's third quarter. Net Loss for the nine
months was ($931,760) compared to earnings of $726,658 in the first nine
months last year.
Liquidity and Capital Resources
During the first nine months, cash decreased $1,359,051. Major
factors decreasing cash included an increase in Accounts Receivable of
$1,331,264 primarily due to the expanding business at ISIL, an increase in
Inventories of $1,994,419 due to the expanding ISIL distribution business
and increased printer inventory, additions to Property, Plant & Equipment of
$912,156 and Loans to Officers of $819,594 made under the Executive Loan
Program. The Executive Loan Program provides loans to the Company's
executive officers for the purpose of acquiring and maintaining shares of
the Company's Common Stock. Major sources of cash included proceeds from
the exercise of warrants and of stock options of $2,013,954, and increase in
Accounts Payable of $1,659,012 related to the inventory increase and an
increase in notes payable of $1,214,610 associated with borrowing for the
ISIL distribution business.
The Company has working capital of $11,493,187. 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 $9,386,200 on an unsecured basis. These lines expire at various dates
through June 30, 1997 and are subject of renewal thereafter. As of June 30,
1996, $5,581,928 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 4. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No. Description
27 Financial Data Schedule (EDGAR filing only)
(b) A current report on Form 8-K dated June 14, 1996 was 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.
August 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)