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 June 30, 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 (IRS Employer ID No.)
of incorporation or organization)
5855 Interface Drive, Ann Arbor, Michigan 48103
(Address of principal executive offices)
(313) 769-5900
Registrant's telephone number, including area code
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
August 8, 1995: 4,212,268 shares
<PAGE>
ITEM 1. - FINANCIAL STATEMENTS
INTERFACE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1995 AND FISCAL YEAR SEPTEMBER 30, 1994
JUN 30, 1995 SEP 30, 1994
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 4,741,216 $ 3,347,282
Accounts Receivable 10,815,005 9,447,455
Inventories 8,045,158 7,735,229
Prepaid Expense & Other Current Assets 1,239,019 495,596
---------- ----------
Total 24,840,398 21,025,562
PRODUCTS - LEASED OR RENTED TO CUSTOMERS 52,725 71,559
PROPERTY, PLANT AND EQUIPMENT 4,606,866 3,698,194
OTHER ASSETS 6,652,522 6,742,989
---------- ----------
Total Assets 36,152,511 31,538,304
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable 3,421,859 2,143,060
Accounts Payable 8,140,262 5,680,799
Accrued Compensation 523,647 574,515
Accrued Expenses 321,443 221,604
Deferred Revenue 140,663 199,236
Current Portion of Long-Term Debt 52,400 147,400
--------- ---------
Total 12,600,274 8,966,614
LONG-TERM DEBT 298,980 333,816
DEFERRED INCOME TAXES 852,000 817,000
---------- ----------
Total Liabilities 13,751,254 10,117,430
STOCKHOLDERS' EQUITY
Common Stock, $.10 Par value
Shares Authorized 8,000,000
Outstanding - 4,202,268 and 4,150,035 420,227 415,337
Additional Paid-In Capital 9,062,117 8,827,685
Foreign Currency Translation Adjustment (185,597) (202,076)
Retained Earnings 13,104,510 12,379,928
---------- ----------
Total Stockholders' Equity 22,401,257 21,420,874
---------- ----------
Total Liabilities and Stockholders' Equity $36,152,511 $31,538,304
========== ==========
<PAGE>
INTERFACE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED JUNE 30, 1995 AND 1994
QUARTER ENDED NINE MONTHS ENDED
JUN 30 JUN 30
1995 1994 1995 1994
(Unaudited)
NET REVENUES 18,612,947 7,749,323 54,367,976 26,778,859
COST OF REVENUES 15,194,084 4,578,082 43,363,881 16,249,636
---------- --------- ---------- ----------
GROSS PROFIT 3,418,863 3,171,241 11,004,095 10,529,223
PRODUCT DEVELOPMENT COSTS 343,931 231,370 1,011,097 980,104
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,144,949 2,115,329 8,104,924 6,583,369
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (70,017) 824,542 1,888,074 2,965,750
OTHER INCOME 63,191 49,272 146,042 89,408
CURRENCY GAIN (LOSS) -- 3,628 -- 13,077
INTEREST EXPENSE (70,157) (34,004) (171,085) (133,450)
-------- -------- -------- -------
INCOME (LOSS) BEFORE TAXES
ON INCOME AND CUMULATIVE
EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (76,983) 843,438 1,863,031 2,934,785
TAXES ON INCOME 146,039 347,839 636,774 977,603
------- ------- ------- ---------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (223,022) 495,599 1,226,257 1,957,182
------- ------- --------- ---------
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE -- -- -- (127,000)
------- ------- --------- ---------
NET INCOME (LOSS) (223,022) 495,599 1,226,257 1,830,182
======= ======= ========= =========
EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (0.05) 0.12 0.29 0.47
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE -- -- -- (0.03)
----- ---- ---- ----
NET EARNINGS (LOSS) PER SHARE (0.05) 0.12 0.29 0.44
<PAGE>
INTERFACE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND 1994
NINE MONTHS NINE MONTHS
JUN 30, 1995 JUN 30, 1994
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,226,257 $ 1,830,182
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 2,240,882 1,831,855
Deferred income taxes 35,000 372,000
(Increase) Decrease in Accounts receivables (1,367,550) (58,329)
(Increase) Decrease in Inventories (309,929) 1,382,489
(Increase) Decrease in Prepaid expenses
and other current assets (726,267) 499,304
(Increase) Decrease in Leased assets (5,020) 34,160
(Increase) Decrease in Other assets -- --
Increase (Decrease) in Accounts payable 2,459,463 483,328
Increase (Decrease) in Accrued expenses (9,602) 18,393
--------- --------
Net Cash Provided By Operating Activities 3,543,234 6,393,382
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in Marketable Securities (17,155) 696
Proceeds from disposal of assets 6,792 -
- Additions to Property, Plant and Equipment (1,524,065)
(508,504)
Additions to Software Development Costs (1,499,237) (1,490,938)
Additional Cash Paid, Purchase of Mecom Dist. (18,724) --
--------- ------
---
Net Cash Used In Investing Activities (3,052,389) (1,998,746)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable 1,278,799 (1,850,960)
Reduction of Long-Term Debt (129,836) (257,336)
Issuance of Stock 239,323 54,745
Cash Dividends Paid (501,675) (331,979)
------- ---------
Net Cash Provided by Financing Activities 886,611 (2,385,530)
------- ---------
FOREIGN CURRENCY TRANSLATION 16,478 16,707
------- ---------
NET INCREASE IN CASH AND EQUIVALENTS 1,393,934 2,025,813
CASH AND EQUIVALENTS, beginning of the year 3,347,282 1,841,764
--------- ---------
CASH AND EQUIVALENTS, end of the period $ 4,741,216 $ 3,867,577
========= =========
<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 June 30, 1995 and
1994 are 4,201,323 and 4,173,683, 4,272,840, and 4,167,416, 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 third quarter ending June 30, 1995 were $18,612,947 up 140%
from the prior year's third quarter revenue of $7,749,323. The increase in
revenue is primarily due to the revenues from Mekom PLC acquired by
Interface Systems International, LTD. in August of 1994. Core product sales
were down slightly compared to last years third quarter due to the absence
of any major 3270 UNIX gateway product sales and reduced printer sales.
Revenues for the nine months were $54,367,976 up 103% compared to
$26,778,859 in the first nine months last year.
Cost of revenues were 81.6% of sales compared to 59.1% in last year's third
quarter. The large increase in cost revenues is a result of the large
volume of low margin business generated by the Mekom distribution business
in the UK. Core product margins have remained steady and vary only by
product mix. Cost of revenue for the first nine months were 79.8% compared
to 60.7% for last year's nine month period, the large increase again
attributable to the distribution business in the UK.
Product Development, Selling and General Administrative expenses (Operating
expenses) were 18.7% in the third quarter compared to 30.3% for the same
period last year. The large difference between the current quarter and last
years quarter is the addition of major revenue from the Mekom acquisition
without the proportionate addition of Operating expenses. However, Product
Development expenses were up in the quarter due to the move of the Cleo
operation into our Headquarters facility. The higher Product development
costs reflect costs not capitalized during the move. Operating expenses
were actually higher than normal as a bad debt write off at our wholly owned
subsidiary Interface Systems International, Ltd. of $669,412 was included
in this quarter. Operating expenses for the nine month period were 16.77%
compared to 28.24% for the first nine months last year.
Operating Loss for the third quarter was ($70,017) down from income of
$824,542 in the prior year's third quarter. The decrease is primarily due
to the bad debt of $699,412 written off due to a major customer and creditor
filing receivership in the UK. The decrease is also due to lower core
product sales as well as higher Product Development costs in the quarter.
Operating Income for the nine month period was $1,863,031 down 37.2% from
$2,965,750 in the first nine months last year.
Loss before taxes for the quarter was ($76,983) down from income of $843,438
in last year's third quarter. Income before taxes for the nine months was
$1,863,031 down 36.5% from 2,934,875 for the first nine months last year.
Income tax for the quarter was $146,039 even though there were no pretax
profits. This is due to the fact that losses in the UK are not deductible
for US tax purposes. Income tax for the third quarter last year was
$347,839 or 41.2% of pretax earnings. Income tax for the nine months was
$636,774 or 34.2% compared to $977,603 or 33.3% for the first nine months
last year.
Net income for the quarter was ($223,022) compared to $495,599 in last
year's third quarter. Net income for the nine months was $1,226,257
compared to $1,957,182 last year before a reduction of $127,000 due to a
cumulative effect of change in accounting principle in connection with SFAS
109 and deferred taxes. After the reduction, net income last year was
$1,830,182.
Liquidity and Capital Resources
For the nine month period cash increased $1,393,934. Accounts Receivable
and Accounts Payable were up $1,367,550 and $2,459,463, respectively. These
large increases are due to the increased volume of the distribution business
in the UK. Notes Payable increased by $1,278,799 due to increased borrowing
requirements in the UK. Prepaid expenses and other current assets increased
by approximately $743,000, primarily due to federal income tax and value
added tax (VAT) refunds.
Property Plant and Equipment has increased by $908,672 which primarily
represents our new building addition which was paid for with cash.
The Company has working capital of $12,240,124. 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 $2,423,391. All
lines are renewed annually. Management anticipates no problem with the
renewal of any line of credit.
PART II - OTHER INFORMATION
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.
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: August 10, 1995
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<PP&E> 8,315,446
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<CGS> 43,363,881
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