SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, l995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from -------- to --------
Comission 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
N/A
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 [ ]
Number of shares outstanding of common stock, $.10 par value, as of May 1,
1995: 4,201,268 shares
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
INTERFACE SYSTEMS, INC.
CONS0LIDATED BALANCE SHEETS
March 31, September 30,
1995 1994
ASSETS (unaudited)
Current Assets:
Cash $ 3,742,213 $ 3,347,282
Accounts Receivable 12,746,216 9,447,455
Inventories 7,663,099 7,735,229
Prepaid Expense and Other
Current Assets 999,635 495,596
---------- ----------
TOTAL CURRENT ASSETS 25,151,163 21,025,562
Products--Leased or rented to
Customers 54,499 71,559
Property, Plant and Equipment 4,037,770 3,698,l94
Other Assets 6,746,207 6,742,989
---------- ----------
TOTAL ASSETS $35,989,639 $31,538,304
========== ==========
<PAGE>
CONSOLIDATED BALANCE SHEETS (Cont'd.)
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Notes Payable $ 1,092,340 $ 2,143,060
Accounts Payable 9,873,256 5,680,799
Accrued Compensation 454,700 574,515
Accrued Expenses 226,631 221,604
Deferred Revenue 234,483 199,236
Current Portion of Long-Term Debt 147,400 147,400
---------- ----------
TOTAL CURRENT LIABILITES 12,028,810 8,966,614
Long-Term Debt 311,188 333,816
Defereed Income Taxes 852,000 817,000
---------- ----------
TOTAL LIABILITIES 13,191,998 10,117,430
Stockholders' Equity: ---------- ----------
Common Stock, $.10 Par value
Shares Authorized--8,000,000
Outstanding--4,200,268 and
4,153,368 420,027 4l5,337
Additional Paid-In Capital 9,052,192 8,827,685
Foreign Currency Translation
Adjustment (170,294) (202,076)
Retained Earnings 13,495,716 12,379,928
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 22,797,641 21,420,874
TOTAL LIABILITIES AND ---------- ----------
STOCKHOLDERS' EQUITY $35,989,639 $31,538,304
========== ==========
<PAGE>
INTERFACE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
(unaudited) (unaudited)
Net Revenues $19,840,268 $9,961,551 $35,755,029 $19,029,536
Cost of Revenues 16,104,000 6,212,268 28,169,797 ll,671,554
---------- --------- ---------- ----------
Gross Profit 3,736,268 3,749,283 7,585,232 7,357,982
Product Development
Costs 352,580 387,684 667,166 748,734
Selling, General and
Administrative
Expenses 2,499,678 2,266,141 4,959,975 4,468,040
------- --------- --------- ---------
Operating Income 884,010 1,095,458 1,958,091 2,141,208
Other Income 44,541 27,738 82,851 40,137
Currency Gain (Loss) -- 8,412 -- 9,449
Interest Expense (43,945) (48,214) (100,928) (99,446)
-------- --------- --------- ---------
Income Before Taxes on
Income and Cumulative
Effect of Change in
Accounting Principle 884,606 1,083,394 1,940,0l4 2,091,348
Taxes on Income l92,600 345,722 490,735 629,764
------- -------- -------- --------
Income Before Cumulative
Effect of Change in
Accounting Principle 692,006 737,672 1,449,279 1,46l,584
Cumulative Effect of
Change in Accounting
Principle -- -- -- (127,000)
------- ------- --------- ---------
NET INCOME $692,006 $737,672 $l,449,279 $1,334,584
======= ======= ========= =========
EARNINGS PER SHARE:
Before Cumulative
Effect of Change in
Accounting Principle $0.16 $0.18 $0.33 $0.35
Cumulative Effect of
Change in Accounting
Principle -- -- -- (0.03)
Net Earnings per share 0.16 0.18 0.33 0.32
<PAGE>
INTERFACE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Month Period Ended
March 31,
1995 1994
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $l,449,279 $1,334,584
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 1,473,081 1,198,680
Deferred income taxes 35,000 247,000
(Increase) in Accounts receivable (3,298,762) (739,267)
Decrease in Inventories 72,130 l,520,303
(Increase) in Prepaid expenses and
other current assets (517,486) (533)
Decrease in Leased assets 1,012 31,229
Increase in Accounts payable 4,192,458 1,428,734
(Decrease) in Accrued expenses (79,675) (8,530)
--------- ---------
Net Cash Provided By Operating Activities 3,327,037 5,012,200
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in Marketable Securities 13,447 696
Proceeds from disposal of assets 6,768 --
Additions to Property, Plant and Equipment (745,749) (360,806)
Additions to Software Development Costs (1,060,846) (913,194)
--------- ---------
Net Cash Used In Investing Activities (1,786,380) (1,273,304)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) in notes payable (1,050,721) (136,353)
Reduction of Long-Term Debt (22,628) (45,243)
Issuance of Stock 229,198 53,751
Cash Dividends Paid (333,491) --
--------- -------
Net cash provided by financing activities (1,177,642) (127,845)
--------- -------
FOREIGN CURRENCY TRANSLATION 3l,917 (3,678)
NET INCREASE (DECREASE) IN CASH -------- ---------
AND CASH EQUIVALENTS $ 394,932 $3,607,373
CASH AND EQUIVALENTS, beginning of the year $3,347,282 $1,841,764
--------- ---------
CASH AND EQUIVALENTS, end of the period $3,742,214 $5,449,137
========= =========
<PAGE>
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 preceeding 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 and six months ended March 31, 1995 and 1994 are 4,326,297
and 4,165,869, 4,349,280 and 4,163,935, respectively.
Note C - Accounting for Income Taxes
The 1994 financial statements reflect the adoption of the liability method of
accounting for income taxes pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109 - "Accounting for Income Taxes". The cumulative
effect as of October 1, 1993 of adopting SFAS No. 109 was to reduce net
income by $127,000.
<PAGE>
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, 1995 were $19,840,268, up
99% from the prior year's second quarter revenue of $9,961,551. The large
increase in revenue is due to the strong performance of the distribution
business of Interface Systems International, Ltd. Revenues from the
acquisition of the distribution division of Mekom, PLC which took place on
August 1, 1994 have been higher than expected. As in the first quarter, core
product revenues were down somewhat from the prior year's quarter, as this
year's second quarter did not include a significant number of large branch
office installations as did the prior year's quarter.
Revenues for the six months were $35,755,029, up 88%, compared to $19,029,536
in the first six months of last year. As in the quarterly data, the increase
in revenues for the six month period is due to the strong performance of our
distribution business in the United Kingdom.
Cost of Revenues for the second quarter were 81.2% of the revenues compared
to 62.4% for the, prior year's second quarter. The increase in Cost of
Revenues is due to the large increase in the distribution business where
margins are very low. In addition, communication core product sales which
carry higher margins were down significantly from last year's sales which
included several large branch office installations. Core product margins in
the current quarter were approximately equal to last year's. Cost of
Revenues for the first six months this year were 78.8% compared to 61.3% for
the first six months last year. The explanation for the increase for the six
month period is the same as for the quarter.
Product Development, Selling and General and Administrative Expenses
(Operating Expenses) for the second quarter were 14.41% of revenues compared
to 26.6% of revenues in the same period last year. The primary reason for
the 12.2% reduction in Operating Expenses as a percentage of revenues was the
large volume of Mekom distribution business. Mekom was acquired as a
division with very low Operating Expenses. Most of the management overhead
for Mekom has been provided by existing Interface Systems, Inc. management.
For the six months, Operating Expenses were 15.7% of revenues compared to
27.4% in the first six months of last year.
Operating Income was $884,010, down 19.3% from $1,095,458 in last year's
second quarter. The decrease in Operating Income was due to reduced sales of
our core communications products to major branch office customers. Last
year's second quarter revenues included shipments to several large branch
office customers. Operating Income was increased by strong revenues from our
<PAGE>
United Kingdom distribution operations. Operating Income for the six months
was $1,958,091, down 8.6% from $2,141,208 in the first six months of last
year.
Income Before Taxes was $884,606, down 18.3% from $1,083,394 in last year's
second quarter. This decrease is due to the lower operating income as
described above. Income Before Taxes for the first six months was
$1,940,014, down 7.2% from $2,091,348 in the first six months of last year.
Income Tax for the period was $192,600, or 21.8%, compared with $345,722, or
31.9%, in last year's quarter. This year's taxes are less than the statutory
rate primarily due to the fact that Interface Systems International, Ltd.
operated at a profit and had no tax due to a net operating loss carry
forward. Income Tax for the first six months was $490,735, or 25.3%,
compared with $629,764, or 30.1%, in the first six months last year. The
lower tax rate this year is again due to the net operating loss carry forward
of Interface Systems International, Ltd.
Not Income for the quarter was $692,006 compared to $737,672 for the second
quarter last year. The decrease in net income was due to reduced core
product sales and attendant profitability partially mitigated by the lower
tax rate.
Net Income for the six months was $1,449,279 compared to $1,334,584 for last
year's first six months after a reduction of $127,000 due to the effect of
change in accounting principle in connection with SFAS 109 and deferred
taxes. (See Note C of Notes to Consolidated Financial Statements.)
Liquidity and Capital Resources
For the six month period, cash increased $394,931. Accounts Receivable and
Accounts Payable are up $3,298,761 and $4,192,457, respectively. These large
changes are due to the increased volume of the distribution business in the
UK. Notes Payable decreased by $1,050,720 due to reduced borrowing in the
UK.
The Company has working capital of $13,122,353. The Company's primary source
of liquidity is cash from operations. The Company has bank lines of credit
of $5,845,250, with a current available balance of $4,752,911. All lines are
renewed annually. Management anticipates no problem in the renewal of any
bank line of credit.
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The regular Annual Meeting of Shareholders was held on March 24, 1995
in Ann Arbor, Michigan. At the meeting there was an uncontested election of
three Directors seeking a term of three years. Nominated for election were
Milton Handelman, George W. Perrett, Jr. and David C. Seigle. Out of
4,192,268 shares outstanding, there were 3,618,938 shares represented by
proxy or in person.
FOR WITHHELD
RESULTS: Milton Handelman 3,600,240 10,566
George W. Perrett 3,604,267 8,929
David Seigle 3,607,285 11,253
REMAINING ON THE BOARD: Garnel F. Graber, Carl L. Bixby,
David O. Schupp, Robert Seigle and
G. Paul Horst.
Item 5. OTHER INFORMATION.
Mekom Acquisition. Effective August 1, 1994, Interface Systems
International, Ltd., a wholly owned subsidiary of Interface Systems, Inc.,
acquired the Mekom distribution division of Mekom Computer Products, PLC, a
distributor of computer products in the UK. The newly acquired Mekom
division will continue to operate out of its facilities in Birmingham,
England, as part of Interface Systems International, Ltd. Mekom is a leading
distributor of Canon, Toshiba and Kyocera computer products in the UK. The
purchase of Mekom was an asset purchase for cash.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No. Description
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.
<PAGE>
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)
DATED: May 11, 1995
EXHIBIT INDEX
No. Description
11 See Note B of Notes to Consolidated Financial Statements.
27 Financial Data Schedule (EDGAR filing only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-END> MAR-31-1995
<CASH> 3,742,213
<SECURITIES> 0
<RECEIVABLES> 12,746,216
<ALLOWANCES> 0
<INVENTORY> 7,663,099
<CURRENT-ASSETS> 25,151,163
<PP&E> 7,573,843
<DEPRECIATION> 3,536,073
<TOTAL-ASSETS> 35,989,639
<CURRENT-LIABILITIES> 12,028,810
<BONDS> 0
<COMMON> 9,472,219
0
0
<OTHER-SE> 13,325,422
<TOTAL-LIABILITY-AND-EQUITY> 35,989,639
<SALES> 35,755,029
<TOTAL-REVENUES> 35,755,029
<CGS> 28,169,797
<TOTAL-COSTS> 28,169,797
<OTHER-EXPENSES> 5,544,290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100,928
<INCOME-PRETAX> 1,940,014
<INCOME-TAX> 490,735
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,449,279
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
