SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
5855 Interface Drive
Ann Arbor, Michigan 48103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 769-5900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10
Indicate 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, and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by non-
affiliates as of December 6, 1996, computed by reference to the closing
price per share for such stock on the Nasdaq Stock Market National Market on
such date, was approximately $21,294,083.04 (assuming, but not admitting for
any purpose, that all executive officers and directors of the registrant may
be deemed affiliates).
The number of shares outstanding of the registrant's common stock as of
December 6, 1996 was 4,535,879.
<PAGE>
PART I
ITEM 1. BUSINESS
Interface Systems, Inc. ("Interface Systems") was organized under
the laws of the State of Delaware in 1969 as a result of the consolidation
of Kencorp, Inc. with Interface, Inc. Interface Systems and its
subsidiaries are referred to herein as the "Company". The Company's
executive offices are located at 5855 Interface Drive, Ann Arbor, Michigan
48103 and its telephone number is (313) 769-5900.
The Company designs, manufactures and markets two families of
products and services, all of which are used primarily to connect remote
users in large enterprises to legacy applications on IBM mainframe and
AS/400 computers. The Company's Presentation Products include printers and
Oasis software for managing printing and viewing in client-server
environments.
The Cleo Products Group of the Company ("Cleo") designs and
manufactures specialty data communications systems. These systems are
largely aimed at linking personal and mini computers to large IBM mainframe
computers via IBM's 3270 and 3780 protocols. Cleo specializes in providing
UNIX capability to IBM users. Cleo's 3780 products are used for file
transfer in the EDI (Electronic Data Interchange) marketplace.
Through one of its wholly-owned subsidiaries, I.G.K. Industries,
Inc. ("IGK"), the Company manufactures and markets printed circuit boards
which are utilized in a variety of applications, including personal
computers, computer peripherals, medical instrumentation and robotic
modules, as well as printer controllers and communications cards assembled
and marketed by the Company.
In 1992, the Company acquired its European distributor Sintec
Peripherals, Ltd. ("Sintec"). Sintec, which has been renamed Interface
Systems International, Ltd. ("ISIL"), distributes the Company's printer and
communications products throughout Europe. Located outside of London,
England in Slough, and in Birmingham, England, ISIL also distributes laser
printers, personal computers and supplies from other manufacturers.
On February 26, 1993, the Company distributed all of the outstanding
stock of its wholly-owned subsidiary, Nematron Corporation ("Nematron"), to
Interface's shareholders.
On August 1, 1994, ISIL acquired the assets relating to the
distribution business of Mekom, plc., a wholly-owned subsidiary of Copymore,
plc. The purchased business distributes computer products and accessories
to dealers throughout the United Kingdom. As of August 1, 1995, the Company
terminated its use of the Mekom name and incorporated the functions of the
Mekom business into ISIL.
This "Business" section contains forward looking statements that
involve uncertainties. Actual results could alter materially from those in
the forward looking statements due to a number of uncertainties, including
but not limited to those discussed below and in Management's Discussion and
Analysis of Financial Condition and Results of Operations - Uncertainty
Relating to Forward - Looking Statements.
Products
Printers
The Company currently produces approximately 15 models of
IBM-compatible mainframe and midrange system printers ranging in price from
$1,000 to $16,000. These products generally feature design and performance
advantages over their IBM equivalents including higher speed, unique
large-character and bar code printing capabilities, and versatile paper feed
and handling options. The Company competes in the medium and high
performance desktop segments of the market for IBM printers where users
require reliable printers principally for information processing, word
processing, graphics and other business or manufacturing applications. The
Company does not compete in the low-end personal computer segment of the
market.
<PAGE>
Dot Matrix Printers
The Company produces the 7224 series of printers, which is
plug-compatible with the IBM 4224 printers, a series of dot matrix printers.
The IBM 4224 is different from previous IBM dot matrix printer products in
that it supports "Intelligent Printer Data Stream" ("IPDS") which is a page
description and printer management language. This language is a subset of
AFP "Advanced Function Presentation", IBM's stated long range architectural
strategy for managing computer output. Since the introduction of the 7224
series of printers, management believes that the Company has been the first
printer manufacturer to deliver a printer product compatible with each new
IBM desktop IPDS printer series. The Company also manufactures its 7230
series of dot matrix printers which compete with the IBM 4230 printer.
These products are similar to the 7224 series except that they have
additional features to emulate the IBM 4230 printer. Late in 1996, higher
speed dot matrix printers were being evaluated for two new models which may
be released in fiscal 1997.
Laser Printers
The Company manufactures an 8 page per minute ("ppm") laser printer,
Model 7028, which competes with the IBM 4028, a 10 ppm laser printer, and a
model 7817, 17 ppm laser printer. The Company's 7028 and the 7817 laser
printers include features which are unavailable in the IBM printers and are
designed to help solve printing problems for banks, insurance companies, and
other industries, which utilize distributed data processing, a method
whereby documents are produced in one area but can be printed at remote
locations. The Model 7817T, a 17 ppm RISC processor based laser printer, was
introduced early in fiscal 1995. Also, late in 1995, the Company introduced
the 9508, a unique desktop AFP printer with support for duplex, 11" X 17"
and a number of other advantages. In 1996, the Company introduced the 9624,
a 24 ppm printer. Late in 1996, the printer business unit began looking
into the addition of new laser printer product models for possible release
in fiscal 1997.
Other printer enhancements, such as MICR check printing, and AFP
Resource Caching (ARC), were introduced into Interface printers late in
fiscal 1993. ARC is the ability to save fonts and overlay forms in the
printer, eliminating the need to download the forms from the host at each
printing session. These features continue to be enhanced and are included
in the Company's models that were introduced in fiscal 1995 and fiscal
1996.
Circuit Boards
The Company, through its wholly owned subsidiary I.G.K.,
manufactures printed circuit boards. The circuit boards are single sided,
double sided and multi-layered, with up to 10 layers.
Software for managing printing and viewing
In fiscal 1993, the Company began development of a new product,
"Oasis", a software product which distributes AFP and other host printing
capabilities to client-server environments in remote branch offices. Oasis,
enables users to print or view business critical documents on LAN-attached
printers and work-stations on their desktop. "Oasis" was introduced in 1994
and further software development has continued throughout fiscal 1994, 1995
and 1996. Oasis is designed to improve business processes by distributing
critical documents to branch offices where they are needed. The Company
believes that Oasis can also decrease customer costs by reducing or
eliminating the need for high speed page printers, mail rooms, and mailing
costs. The Company is developing Oasis on popular branch office operating
systems, including Windows NT, OS/2 for the IBM PC, and AIX for IBM's
RS/6000 in fiscal 1996. In 1996, the Windows NT version of Oasis began
generating modest revenue. Oasis, for the other platforms listed above and
the AS/400, is expected to be released in early calendar 1997.
<PAGE>
In addition to Oasis, in 1996, the Company remarketed other software
applications and tools for managing AFP printing and viewing. In 1996, the
Company began offering faxing and archiving products in conjunction with its
Oasis product. The Company has also begun offering consulting and training
services in conjunction with Oasis products.
Data Communications
The Company's Cleo Products Group designs and manufactures products
used to connect personal computers, work-stations, and midrange computers to
IBM-compatible mainframes. A typical Cleo product combines terminal
emulation software and a communications board, which are installed in the
PC, work-station, or midrange system.
Cleo also focuses on providing connections to mainframe-based SNA
(Systems Network Architecture) networks for personal computers running UNIX
operating systems. Cleo's LINKix, recently renamed Cleo 3270, family of
UNIX-to-SNA connectivity solutions has expanded to include 3270 emulation,
3770 RJE emulation, HLLAPI (High-Level Language Application Program
Interface), and APPC (Advanced Program-to-Program communications)
capabilities.
Since 1994, IBM mainframe users have looked beyond traditional SNA
to explore alternative enterprise networking solutions. In response, the
Company extended its Cleo line of Unix-to-mainframe connectivity products to
work in TCP/IP, X.25, and Token-Ring networks. The Company is also
developing new Cleo packages to support the Company's Oasis products and the
client/server approach to distributed computing. Cleo 3270 client/server
product was completed in fiscal 1995.
Cleo also specializes in communications for EDI, the automated
transfer of standard business documents, such as purchase orders, invoices,
and shipping notices, over computer networks. Cleo's 3780Plus is the EDI
industry's leading product for 3780/2780 RJE (Remote Job Entry) emulation in
BSC (Binary Synchronous Communications) networks. 3780Plus has now been
installed on over 85,000 computer systems worldwide. Changes continue to
occur in the Company's EDI communications business and, accordingly, the
Company has continued the development and enhancement of its 3780Plus
products to ensure compatibility with virtually every major PC and
work-station platform. For example, the Company developed a new Microsoft
Windows-compatible version of its popular 3780Plus batch file transfer
package and added 3780Plus support for Digital Equipment Corporation's new
Alpha AXP work-stations. In fiscal 1995, the Company introduced a
synchronous communications product line called A+, which in fiscal 1996, the
Company expanded to many additional platforms.
Distribution Business
In 1994, the Company's wholly owned subsidiary ISIL in the UK
acquired the Mekom distribution business, a division of Copymore Plc. The
Mekom business, located in Birmingham and ISIL's distribution business in
Slough now operate as the ISIL distribution business and supply dealers in
the UK. The primary products distributed include Canon printers, Kyocera
printers and Toshiba lap top personal computers. ISIL also provides
supplies and consumables for the products it distributes. In fiscal 1996,
ISIL was selected as one of two distribution businesses in the UK to
distribute IBM's complete desktop printer line.
Marketing
The Company's customers include end-users, original equipment
manufacturers, distributors and system integrators. The Company sells or
leases its products domestically utilizing direct advertising, Company sales
personnel, independent manufacturers' representatives and distributors. The
Company has sales offices and personnel in Ann Arbor, Michigan; Boston,
Massachusetts; Loves Park, Illinois; King of Prussia, Pennsylvania; and
Irvine, California; and manufacturers' representatives in New York, North
Carolina, Michigan, Kentucky, Illinois, Indiana, and Ohio.
<PAGE>
The Company's product sales in Europe are made through the Company's
wholly-owned subsidiary, ISIL, a master distributor in the United Kingdom
which sells to OEM's and other distributors throughout Europe and handles
export sales throughout the Eastern Hemisphere. Export sales to South
America and Canada are made from the Company in the U.S. The Company has
written agreements with most of its foreign distributors.
The following table sets forth certain information with respect to
the Company's domestic and export sales during the fiscal years ended
September 30, 1996, 1995, and 1994:
Year Ended September 30,
1996 1995 1994
---- ---- ----
Domestic Revenues $15,175 $17,109 $21,674
Foreign Revenues 59,408 53,134 17,338
------ ------ ------
Net Revenues $74,583 $70,243 $39,012
====== ====== ======
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Fiscal 1996 Compared to Fiscal 1995 and Fiscal 1995 Compared
to Fiscal 1994."
The Company markets its line of 3270-compatible printers and Oasis
printing and viewing solutions primarily to Fortune 1,000 companies. The
AS/400 printers extend the Company's market to small and medium-sized
companies. The Company's Cleo products are sold to companies which have IBM
mainframes or which access IBM mainframes from micro or midrange computers.
The Company has combined its communications sales and marketing with the
printer sales and marketing, as customer prospects for the Company's
products continue to overlap. The Company's customers include Alcatel
Business Systems, Ltd., Chrysler Corp., Digital Equipment Corp., Electronic
Data Systems Corp., International Business Machines Corporation, Lucent
Technologies, Boeing Computer Services, Honda of America MFG, Inc.,
McDonnell Douglas Aerospace Information Services Co., Mercy Center Hospital,
Northwest Airlines, Sears Roebuck and Co., Standard Electrik Lorenz Aktieng
Ensellschaft, Sterling Commerce, Inc., Morristown Memorial Hospital,
Tennessee Valley Authority and Union Pacific Railroad, Allstate, Inc.,
Charles Schwab, and Kroger Company.
The Company maintains a printer service department which provides
direct service for customers in Southeastern Michigan, Columbus, Ohio and
Southern California. Elsewhere, the Company provides service through third
parties, Bell Atlantic Business System Services and Vanstar Corporation,
each of which has offices throughout the United States. Service to export
customers is performed by the personnel of each foreign distributor. The
Company trains and supports the personnel of Bell Atlantic Business System
Services, Vanstar Corporation and its foreign distributors at the Company's
headquarters. Communication products are serviced by a technical support
group located at corporate headquarters in Ann Arbor, Michigan.
Manufacturing and Supply
The Company's manufacturing operations consist primarily of the
assembly of parts purchased from other sources, including printer
mechanisms, logic boards, and power supplies. These parts are assembled
into finished products which support the software developed at the Company.
IGK manufactures printed circuit boards which are sold to the Company and to
others. The Company has purchased and designed a variety of assembly and
test equipment to reduce the cost and ensure the quality of the assembly
process. A computerized system developed for the Company is used to manage
purchasing, production, scheduling and inventory.
Some components used in the Company's products are currently
purchased from single or limited sources of supply. The Company purchases
most of its printer mechanisms from Bull Italia, and Canon. ISIL
distribution purchases the majority of their products from Canon, Kyocera,
Toshiba, and IBM. The Company believes that the loss of one or more
suppliers would not have a material long-term impact on its operations.
<PAGE>
The Company believes that backlog is not significant in its business
because of the relatively short time span (approximately 24 hours to 30
days) between receipt of customer orders and product delivery. In addition,
orders on hand may be subject to cancellation by the customer without
substantial penalty.
Competition
The Company operates in a highly competitive environment with
several well-established competitors, many of which have substantially
greater resources than the Company. Several of these competitors are
independent suppliers, offering one or more types of products in competition
with the Company. The Company believes that its major competitor is IBM.
Previously, the Company competed primarily on price; today, the
Company is differentiating itself through the unique features of its
hardware and software products, as well as the products' reputation for
reliability and ease of use, and the quality of the Company's support
services. With respect to printers, the Company competes primarily on the
basis of its ability to offer IBM plug-compatible printers that feature
advantages in software and hardware design and performance over their IBM
counterparts. Competition is becoming more difficult as IBM is no longer
obligated to purchase their desk top printers from a single source
(Lexmark). Significant reductions in IBM printer prices could adversely
affect the Company's revenues and margins.
The Company's printers are designed to be compatible with the IBM
mainframe, AS/400 and RS/6000 product lines. As IBM has periodically
introduced new products or modified its lines of products, the Company has
made appropriate modifications to its printers. If IBM discontinued or
significantly redesigned its product lines, the Company's printer business
could be adversely affected. With respect to Oasis printing and viewing
software, the Company competes primarily with IBM products on the basis of
features. Several other smaller companies have also entered the market,
with products that are competitive with Oasis.
Competition for Cleo products consists of many large and smaller
companies selling competing IBM 3270 products, and a limited number of small
companies selling IBM 3780 products. Cleo has an excellent reputation in
the IBM 3780 market, and in the UNIX to IBM mainframe connectivity market.
Management believes that Cleo is viewed by the IBM connectivity
communications industry as a company offering quality and high performance
products, and engineering services capable of customizing user requirements.
The Company's business is subject to the computer industry trend
toward distributed data processing and downsizing or "rightsizing". The
Company believes that this trend, along with a greater interest in Open
Systems and LANS (Local Area Networks) at the branch office, offer new
opportunities as well as new competition, for the Company's printer, Oasis
and Cleo products.
The Company is adapting to the changing marketplace by merging its
printer and communications technology for some of its new product
development, including the Company's new Oasis products. For some platforms,
the Oasis products use the Company's Cleo product technology for
connectivity from the LAN to the headquarters mainframe and printer product
software technology to provide mainframe printing capability on the LAN. In
fiscal 1996, the Company has noticed a slight resurgence of interest in the
mainframe as the source of data from legacy systems. While the environment
continues to be favorable for our Oasis products, there is competition from
companies, including IBM, which have products capable of performing
functions similar to Oasis.
Competition in Europe for core products sold by ISIL is similar to
that in the United States. Competition for our distribution business in the
UK consists of several distributors who are larger and carry broader product
lines than the Company's distribution business, as well as many smaller
competitors.
<PAGE>
Product Development
Since its inception, the Company has maintained a product
development program and continues to supplement existing research and
development capabilities through active recruiting of technical personnel
and development of proprietary technology. In addition to merging the
Company's sales and marketing for its communications and printer
products,the Company is combining product development personnel. This
combination supports development of the Company's new Oasis product(s) which
utilize both connectivity and printing software. The Company currently has
a staff of approximately 35 persons who work closely with marketing and
field personnel to determine emerging user needs in data processing, and who
continually review and evaluate technological changes affecting the
Company's primary market.
The Company places emphasis on research and product development and
the employment of highly skilled and motivated individuals in these areas.
Management believes that a strong product development staff is an important
factor contributing to the Company's ability to compete successfully in the
markets in which its products are sold. During the fiscal years ended
September 30, 1996, 1995 and 1994, the Company expended approximately
$865,000, $712,000, and $619,000 respectively, for research, development and
engineering. All of such costs were sponsored by the Company. These
figures do not include software development costs which are capitalized
under Financial Accounting Standards No. 86, equalling $2,333,675,
$1,998,022, and $1,991,416 for the years ended September 30, 1996, 1995 and
1994, respectively. See Note 1 of Notes to Consolidated Financial
Statements. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fiscal 1996 Compared to Fiscal 1995."
Employees
The Company currently employs approximately 220 employees. None of
the Company's employees are represented by collective bargaining unit, and
the Company believes its employee relations to be good.
ITEM 2. PROPERTIES
The Company's principal office and manufacturing facilities occupy
approximately 66,000 square feet in two buildings located in Ann Arbor,
Michigan. The facilities were designed and built to the Company's
specifications and the Company believes that they are adequate for its
present and for its future operations.
The Company also rents office space in London, England; Birmingham,
England; Massachusetts, California, Pennsylvania, Illinois, and France, with
an annual rental expense expected of $422,000 for fiscal 1997. See Note 9
of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common stock is traded in The Nasdaq Stock Market
National Market under the symbol "INTF". The following table sets forth,
for the periods indicated, the range of high and low sales prices for the
Common Stock as reported on the Nasdaq National Market:
<PAGE>
High Low
---- ---
Fiscal 1995
-----------
First Quarter $10.00 $ 4.50
Second Quarter 9.25 6.75
Third Quarter 8.00 5.375
Fourth Quarter 6.25 4.875
Fiscal 1996
-----------
First Quarter $12.75 $ 4.75
Second Quarter 19.5 10.75
Third Quarter 18.5 7.75
Fourth Quarter 9.0 5.625
The last reported sale price for the Company's Common Stock on
December 6, 1996, as reported on the Nasdaq National Market, was $5.38. On
December 6, 1996, there were approximately 812 holders of record of the
Company's Common Stock.
The Company had warrants, which were extended in May 1995, and
expired on December 29, 1995. See Note 10 of Notes to Consolidated
Financial Statements for information relating to the conversion of the
Warrants.
The Company initiated the payment of cash dividends during fiscal
1994. Dividends of $0.04 per share, when declared are paid quarterly to
holders of common stock. A quarterly dividend of $0.04 per share was paid
through November 1995. At a Board of Directors meeting on January 12, 1996
the Directors suspended indefinitely the payment of a dividend. In the
future, the payment of dividends again will depend on the Company's
business, prospects and other factors considered by the Company's Board of
Directors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data were derived from the
Company's Consolidated Financial Statements which were audited by BDO
Seidman, LLP. The information set forth below should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
set forth elsewhere in this report.
Year Ended September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share data)
Income Statement Data (1)(2):
Net $74,583 70,243 39,012 33,782 42,533
Cost of Revenues ......... 63,798 57,516 24,500 20,534 26,440
------ ------ ------ ------ ------
Gross Profit.............. 10,786 12,727 14,512 13,248 16,093
Product Development
Costs, Selling,
General and
Administrative
Expenses................. 13,578 11,960 10,094 10,026 13,133
------ ------ ------ ------ ------
Operating Income(loss).... (2,792) 767 4,418 3,222 2,960
Dividend and Interest
Income................... 200 186 131 39 174
Interest Expense.......... (340) (264) (172) (210) (318)
Net Losses and Costs of
Spin-off of Subsidiary(2) --- --- --- (163) (400)
Miscellaneous............. --- 17 13 (6) (66)
---- ---- ---- ---- ----
Income(loss)Before Taxes
on Income (tax benefit)
and Accounting Change.... (2,932) 706 4,390 2,882 2,350
Taxes on Income (tax
benefit)(3).............. (969) 540 1,428 1,177 868
----- ----- ----- ----- -----
Income (loss)
before Accounting
Change................... (1,963) 166 2,962 1,705 1,482
Accounting Change(4) --- --- (127) --- ---
===== ===== ===== ===== =====
Net Income (loss)......... (1,963) 166 2,835 1,705 1,482
===== ===== ===== ===== =====
Earnings(loss) per
Share(4)(5).............. ($.44) $ .04 $ .68 $ .41 $ .35
Dividends per Share....... --- $ .16 $ .16 --- ---
Weighted Average Shares
Outstanding (5).......... 4,440 4,239 4,170 4,141 4,263
<PAGE>
As of September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data (1)(2):
Working Capital....... $10,533 $11,622 $12,420 $11,328 $ 9,754
Total Assets.......... 38,879 33,952 31,899 25,362 29,809
Long-Term Debt........ 235 287 334 487 663
Stockholders' Equity.. 21,253 21,214 21,421 9,139 24,344
(1) Reflects the operating results of ISIL since February 1, 1992 and
the operating results of the distribution business acquired from
Mekom, plc. since August 1, 1994.
(2) The 1992 financial statements include the accounts of Nematron, a
former wholly-owned subsidiary of the Company which was spun-off in
February 1993. At September 30, 1992, the measurement date of this
transaction, the net assets of Nematron were separately classified
in the balance sheet as "Net Assets of Subsidiary Held for Disposal"
and a provision of $400,000 was recorded for the estimated 1993
losses of and costs of the spin-off. The 1993 results of operations
of Nematron are not reflected in the financial statements; however,
the net loss of Nematron for the five months ended February 28, 1993
and the 1993 costs of the spin-off in excess of the amount provided
for at September 30, 1992 are recorded as an Other Expense.
(3) See Note 7 of Notes to Consolidated Financial Statements.
(4) The accounting change reflects the Company's adoption of SFAS 109,
"Accounting for Income Taxes" in the first quarter of 1994. This
accounting change reduced net income by $127,000, or $0.03 per
share. See Note 1 of Notes to Consolidated Financial Statements.
(5) See Note 1 of Notes to Consolidated Financial Statements.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table is included as an aid to understanding the
Company's operating results and should be read in conjunction with the
selected financial data and Consolidated Financial Statements (including the
Notes thereto) appearing elsewhere in this report.
Percentage Relationship to Net Revenues
Year Ended September 30,
1996 1995 1994
---- ---- ----
Net Revenues..................... 100.0% 100.0% 100.0%
Cost of Revenues................. 85.5 81.9 62.8
----- ----- -----
Gross Profit..................... 14.5 18.1 37.2
Product Development, Costs,
Selling, General and
Administrative Expenses......... 18.2 17.0 25.9
----- ----- -----
Operating Income(loss)........... (3.7) 1.1 11.3
Other Income..................... 0.3 0.3 0.4
Interest Expense................. (0.5) (0.4) (0.4)
----- ----- -----
Income(loss) Before Taxes on
Income(tax benefits) and Accounting
Change ........................ (3.9) 1.0 11.3
Accounting Change ............... --- --- (0.3)
Taxes on Income(tax benefit)..... (1.3) 0.8 3.7
----- ----- -----
Net Income(loss)................. (2.6)% 0.2% 7.3%
===== ===== =====
Overview
The Company has established itself in Advanced Function
Presentation(AFP) by offering a broad line of printers (printer products)
and software for network servers that support printing and viewing of the
output from IBM mainframe and mini (AS/400) computers. The Company is
active in XPLOR, the national trade association for companies which offer
electronic document management solutions for large corporations. XPLOR's
membership consists of many Fortune 500 companies and others.
The Company's Cleo 3270 products (now called Cleo Enterprise Network
products) which made their first significant contribution to revenues in
fiscal 1992 gained in importance in fiscal 1993 and 1994. Installation of
these products pursuant to several major contracts with large retail
companies began in fiscal 1993 and was completed in fiscal 1994. In fiscal
1995, the Cleo Enterprise Network Group completed its Cleo 3270 client
server product and in 1996, has further enhanced this product. In 1995 the
Cleo 3780 group (now known as Electronic Commerce Products) introduced A+, a
synchronous file transfer product. The 3780Plus product enhancements,
introduced over the last two years, continued to be well received by the
electronic data interchange (EDI) market. In 1996, the A+ product was
modified to operate on an expanded number of platforms.
In fiscal 1993, the Company began the process of combining printer
AFP engineering and 3270 LINKix engineering to design new products which the
Company anticipates will be responsive to the changing industry. "Oasis" is
the first product resulting from this combination and was announced in
November 1993 at the annual XPLOR conference. The development of Oasis
began the integration of the Company's major product lines which heretofore
had been separate. In fiscal 1994 and 1995, the Company has continued the
development and improvement of its Oasis product technology. The Company
began aggressively marketing the expanded and improved Oasis product in
fiscal 1996.
<PAGE>
In fiscal 1995, the Company moved the Cleo Enterprise Network group
into a 12,000 square foot addition to its corporate headquarters. This
physical combination of sales, marketing and engineering is part of the
Company's continuing efforts to expand areas of synergy between printing
connectivity and communication products.
In fiscal 1996 IGK continued to supply printed circuit boards to the
Company and outside customers throughout the midwest and the southeast.
Fiscal 1996 compared to Fiscal 1995
Net revenues for the fiscal year ended September 30, 1996 increased
6.2% over the previous fiscal year. The increase was due to higher revenues
from the ISIL distribution business in Slough and Birmingham, England. See
Note 13 of Notes to Consolidated Financial Statements. Core product sales
which consist of Printer products, Oasis products, Cleo Enterprise Network
products and Cleo Electronic Commerce products were down approximately 16%
over the prior year. The reduced sales of core products were in the Printer
products and the Cleo Enterprise Network products areas. Revenues from
printer products decreased as a result of increased competition and greater
sales emphasis on Oasis products. Cleo Enterprise Network products revenues
were down primarily due to a continuing lack of large Cleo 3270
communication product sales. While there is no assurance that the core
product revenues will increase in fiscal 1997, the Company is taking steps
to address the declining sales. Specifically Product Management Teams have
been established for each core product line (Printers, Oasis, Enterprise
Network and Electronic Commerce). These teams have bottom line
responsibility for their products and are charged with addressing areas such
as inventory, product costs, sales margins, overhead costs, marketing and
sales programs. As a result of the Product Teams each product line is
receiving focused attention, and the Company believes that such focus will
show positive results.
Cost of revenues for fiscal 1996 was 85.5% of net revenues versus
81.9% in fiscal 1995. The increase is primarily due to the increased
distribution business which carries much lower margins than the core product
business. Margins in the distribution business were very low due to the
nature of the business which has gross margins of 6% to 8%, as well as
competitive pressures which can drive margins even lower on very large
sales. Cost of revenues in the distribution business increased slightly in
fiscal 1996 versus fiscal 1995. While there can be no assurance that the
cost of revenues in the distribution business will decline in the future,
the Company is implementing programs to improve the distribution business
margins and is introducing a new product line that carries higher than
average margins. Cost of revenues in the core product business went up
approximately 5% primarily due to higher printer cost of sales which include
approximately $180,000 in charges from a printer vendor for cancellation of
printers and accessory orders and approximately $100,000 of higher royalty
payments on licensed software. In addition, cost of revenues was up due to
an increase of approximately $225,000 in the amortization of capitalized
development costs. Cost of revenues as a percentage of revenues also went
up due to fixed manufacturing expenses. While there can be no assurance
that cost of revenue will come down in fiscal 1997, management, through the
new business unit organizations and increased management attention, is
focused on reversing this trend.
Product development, selling and general and administrative expenses
(operating expenses) were 18.2% of net revenues for fiscal 1996 versus 17%
for fiscal 1995. The increase represents increases in every category of
operating expenses, product development, sales and marketing, and general
and administrative. Product development expenses were up in the Enterprise
Network product area and in the Oasis product area. The Enterprise Network
product development expenses were up due to a reduction in the amount of
capitalized Research and Development. Sales and marketing expenses were up
primarily due to the expansion of the Company's export market through the
establishment of new distribution channels in the Middle East and Pacific
Rim areas. General and Administrative expenses were up due to a number of
specific factors. In June of 1996, the President and CEO resigned his
position and was replaced by an Executive Committee of the Board of
Directors until a replacement CEO could be found. As a result of the CEO,
<PAGE>
resignation, approximately $550,000 of expenses were incurred, including
consulting expenses, in preparation for the executive search, the search
itself, compensation for the Executive Committee members, including the
interim CEO, and compensation to the former CEO as part of a termination
agreement.
The first quarter and possibly the second quarter of fiscal 1997
will continue to have some expenses associated with interim management and
the hiring of a new CEO. In addition, General and Administrative expenses
were up approximately $440,000 for legal expense from the settlement of
three unrelated law suits and their associated legal costs, and additional
legal expenses due to the services required by the changes in the Company's
management.
Operating loss was 3.7% of revenues in fiscal 1997 versus income of
1.1% in fiscal 1995. The decrease was due to the higher cost of revenues
and increased operating expenses as described in the paragraphs above.
Taxes on Income (tax benefit) on income(loss) was (1.3%) of net
revenues in fiscal 1996 versus 0.8% in fiscal 1995. The effective tax rate
in fiscal 1996 was (33%) versus 76% in fiscal 1995. The tax benefit in 1996
was due primarily to the loss incurred during the year. The high effective
rate for fiscal 1995 was primarily due to the non-deductible losses of our
foreign subsidiary ISIL and non-deductible amortization of goodwill. See
Note 7 of Notes to Consolidated Financial Statements.
As a result of the above factors, a net loss of 2.6% of net revenues
was incurred in fiscal 1996 down from net income of 0.2% of net revenues in
fiscal 1995.
Fiscal 1995 compared to Fiscal 1994
Net revenues for the fiscal year ended September 30, 1995 increased
80.1% over the previous fiscal year. The increase was due to higher revenues
from the ISIL distribution business in Slough and Birmingham, England
(Mekom). In fiscal 1995 we operated the Mekom business for 12 months versus
2 months in fiscal 1994. See Note 13 of Notes to Consolidated Financial
Statements. Core product sales (printers and communications) were down
approximately 20% from fiscal 1994. The majority of the reduction in core
product revenue was attributable to the lack of large corporate
communications sales of Cleo 3270 product in fiscal 1995. In fiscal 1994,
the Company had significant deliveries on four large corporate contracts for
its Cleo 3270 products.
Cost of revenues for fiscal 1995 was 81.9% of net revenues versus
62.8% in fiscal 1994. The increase is primarily due to the increased
distribution business which has very high cost of sales. Margins in the
distribution business were very low due to the nature of the business which
has gross margins of 6% to 8%, as well as competitive pressures which can
drive margins even lower on very large sales. In the core product area the
Company's cost of revenues were up approximately 4.5% due to the product mix
of reduced high margin Cleo 3270 software sales, the write down of slow
moving printer inventory and amortization of software development cost
increases in fiscal 1995 versus 1994.
Product development, selling and general and administrative expenses
("operating expenses") were 17% of net revenues for fiscal 1995 versus 25.9%
for fiscal 1994. The large reduction in operating expenses as a percent of
revenues was due primarily to the large increase in revenues from UK the
Company's distribution business which has much lower operating expenses as a
percent of revenue than the Company's core businesses. Fiscal 1995 included
twelve months of revenues from the Mekom acquisition versus only two months
in fiscal 1994. In an absolute sense, Product Development expenses were up
11.2% in 1995 compared to 1994, while capitalized software development costs
remained flat. The increase was due to higher expenditures for Oasis and
Cleo new product development. Selling and general and administrative
expenses were up 19.6% in an absolute sense and were required to support
growth in the distribution business. In addition, a $669,000 bad debt
charge was incurred in the UK distribution business, due to a single
<PAGE>
customer filing receivership. The Company has modified its procedures to
reduce the probability of similar bad debt occurrences in the future.
Operating Income was 1.1% of net revenues in fiscal 1995 versus 11.3
% in fiscal 1994. This decrease was primarily due to the poor performance
of ISIL which had an operating loss of $851,895 in fiscal 1995 versus an
operating loss of $53,918 in fiscal 1994. The increased operating loss at
ISIL was primarily due to the $669,000 bad debt loss previously mentioned.
The Company's Operating Income was also negatively impacted by a
significant reduction in revenue from the Company's Cleo 3270 products in
fiscal 1995 versus fiscal 1995 versus fiscal 1994, due to the absence of
large customers in 1995. (See paragraph one above)
Taxes on income were 0.8% of net revenues in fiscal 1995 versus 3.7%
in fiscal 1994. The effective tax rate in fiscal 1995 was 76.44% versus
32.5% in fiscal 1994. The higher effective tax rate in fiscal 1995 was
primarily due to the non-deductible losses of Company's foreign subsidiary
ISIL and increased amortization of goodwill combined with lower pre-tax
income. See Note 7 of Notes to Consolidated Financial Statements.
As a result of the above factors, net income in fiscal 1995
decreased to 0.2% of net revenues versus 7.3% of net revenues in fiscal
1994.
Liquidity and Capital Resources
Internally generated funds, supplemented by borrowing under the
Company's bank line of credit, and the exercise of the Company's stock
warrants in fiscal 1996 were the primary sources used to fund the Company's
needs for working capital and capital expenditures. The Company believes
that internally generated funds and existing lines of credit will be
sufficient to meet its working capital needs and to fund anticipated capital
expenditures for the upcoming fiscal year.
As of September 30, 1996, the Company's working capital was
$10,533,000. The Company's working capital as of September 30, 1995 and
1994 was $11,622,000 and $12,420,000, respectively.
At September 30, 1996, the Company had $1,694,725 in cash and short
term investments. The Company has lines of credit agreements for working
capital which currently permit it to borrow up to $9,583,000 on an unsecured
basis. These lines expire at various dates through June 30, 1997 and are
subject to annual renewal thereafter. As of September 30, 1996, $5,691,546
was outstanding under these lines of credit. See Note 5 of Notes to
Consolidated Financial Statements.
Cash Flows
Net cash used in operating activities was $1,038,452 in fiscal 1996
compared to net cash provided by operating activities of $2,433,934 in
fiscal 1995. The decrease was primarily due to the large reduction in net
income. In addition, the change was caused by decreased cash flows from
other operating activities, primarily increases in receivables, prepaid
expenses and offset by accrued expenses. The trend in cash flows used in
(provided from) operating activities has been declining since 1994. The
largest single factor in the decline has been declining net income (loss).
The second factor is the increase in inventory. While there can be no
assurance, the Company believes that operating results in 1997 will show
improvement from fiscal 1996. In addition, inventory for core operations
should decrease and inventory for the distribution business should only
increase in proportion to revenue increases or less.
Net cash used in investing activities in fiscal 1996 was $4,277,007
up from $3,754,258 in fiscal 1995. This change is primarily due to the net
addition in notes receivable.
Net cash provided from financing activities in fiscal 1996 was
$3,312,308 compared to $1,704,893 provided from financing activities in
fiscal 1995. The increase in fiscal 1996 was primarily due to the exercise
<PAGE>
of warrants and to an increase in notes payable to support the expanding
distribution business in the UK.
Uncertainties Relating to Forward-Looking Statements
"Item 7. Management's Discussion and Analysis of Results of
Operations" and other parts of this Form 10-K contain "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended, based on current management expectations. Actual results could
differ materially from those in the forward-looking statements due to a
number of uncertainties, including, but not limited to, those discussed in
this section. Factors that could cause future results to differ from these
expectations include general economic conditions particularly related to
demand for the Company's products and services, changes in Company strategy,
product life cycles, competitive factors (including the introduction or
enhancement of competitive products), pricing pressures, component price
increases, delays in introduction of planned hardware and software products,
software defects and latent technological deficiencies in new products,
changes in operating expenses, inability to attract or retain sales and/or
engineering talent, changes in customer requirements and evolving industry
standards.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules filed herewith are set forth
in the Index to Financial Statements and Supplementary Data (on Page F-1 of
the separate financial section which follows page 25 of this report) and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information relating to the directors and
executive officers of the Company. The Company's directors are elected
annually at the Annual Meeting of the Company's Shareholders. The executive
officers of the Company are elected annually by the Board of Directors and
serve at the pleasure of the Board. David C. Seigle and Robert A. Seigle
are first cousins. Except as otherwise noted, each person indicated below
exercises sole voting and investment power with respect to the shares of the
Company's Common Stock owned by him.
Except as discussed below, each of the following directors has been
engaged or employed in the principal occupation reflected in the table for
more than five years. Mr. Bixby served as President and Chief Executive
Officer and President of the Company from 1967 to his resignation in 1996.
Mr. Graber retired in 1994, prior to which time he was Chairman and Chief
Executive Officer of Applied Dynamics International for at the least the
five years preceding such retirement. In 1996, upon the resignation of Mr.
Carl Bixby, Mr. Graber was appointed acting Chief Executive Officer of the
Company. Mr. Horst was President of Nematron Corporation for at least five
years until he retired in May 1994. Mr. David Seigle retired in November
1991 and, in 1996, became the President of Technology Edge, Inc. Prior to
1991, Mr. Seigle was Vice-President of File Net Corporation, a manufacturer
of document image processors.
December 6, 1996
----------------
Shares
Benefi- Percent
Principal Director cially of
Name and Age Occupation Since Owned(1) Class(1)
- ------------ ---------- -------- -------- -------
Carl L. Bixby, 57 Retired. 1969 220,500 4.9%
Garnel F. Graber, 65 Retired. 1971 63,154(2) 1.4%
Milton Handelman, 80 Independent 1990 8,700 *
Business
Consultant.
G. Paul Horst, 46 Retired. 1988 133,809 2.9%
George W. Perrett, 59 Secretary and 1985 66,690(3) 1.5%
Vice President
of Corp. Opera-
tions of the
Company; Presi-
dent of I.G.K.
Industries, Inc.,
a subsidiary of
the Company.
David O. Schupp, 60 Vice President, 1969 61,102(4) 1.3%
Chief Financial
Officer and
Treasurer of the
Company.
David C. Seigle, 56 President of 1969 33,406 *
Technology Edge,
Inc., a value-
added reseller
franchising
company.
<PAGE>
Robert A. Seigle, 69 President of 1969 86,010 1.9%
Concord Person-
nel, Inc., a
personnel
recruiting
company.
Lloyd A. Semple, 57 Attorney, 1996 1,000 *
Dykema Gossett,
PLLC, a Michigan
law firm.
- ---------------------------
(*) Less than one percent.
(1) Includes shares which the following directors have a right to
acquire within 60 days pursuant to the exercise of stock options:
Mr. Schupp--15,500 shares; Mr. David Seigle--7,700 shares; Mr.
Robert Seigle--13,200 shares; Mr. Graber--13,200 shares; Mr.
Perrett--37,500 shares; Mr. Horst--7,700 shares and Mr.
Handelman--1,700 shares. For purposes of computing the individual
percentages, the shares which can be acquired upon the exercise of
options within 60 days were added to the shares owned beneficially
or of record by such persons on December 6, 1996 and to the shares
outstanding on that date.
(2) Mr. Graber has sole voting power over 552 shares of Common Stock
beneficially owned by him, and shares investment power with his
son, Glen F. Graber, with respect to such shares. Mr. Graber also
serves on the board of directors of Nematron Corporation.
(3) Includes 16,969 shares held by the George W. Perrett, Jr. Trust, of
which Mr. Perrett is a Trustee and a beneficiary. Does not include
750 shares owned by Mr. Perrett's children, as to which Mr. Perrett
disclaims beneficial ownership.
(4) Includes 45,602 shares held by the David O. Schupp Revocable
Trustee, of which Mr. Schupp is a Trustee and beneficiary.
Reporting of Beneficial Ownership by Directors, Executive Officers and Ten
Percent Holders
Under the securities laws of the United States, the Company's
directors, its executive officers, and any persons holding more than ten
percent of the Company's Common Stock are required to report their ownership
of the Company's Common Stock and any changes in that ownership to the
Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. Specific due dates for these reports have been
established and the Company is required to report in this annual report on
Form 10-K any failure to file by these dates during the Company's last
fiscal year. All of these filing requirements were satisfied by the
Company's officers, directors and ten percent shareholders. In making these
statements, the Company has relied on the written representations of its
directors, officers and ten percent shareholders and copies of the reports
that have been filed with the Commission.
ITEM II. EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation paid by the
Company as well as other compensation paid or accrued during the Company's
last three fiscal years ended September 30, 1996 to the Acting Chief
Executive Officer, the Company's former Chief Executive Officer, and each
of the two most highly compensated executive officers of the Company for
services rendered in all capacities to the Company:
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Awards
----------------------
Securities
Underlying
Name and Annual Compensation (1) Stock All Other
Principal Occupation Fiscal Year Salary Bonus Options Compensation (2)
- -------------------- ---------------------------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Garnel F. Graber (3) 1996 $ 45,200 $ -- 5,100
Acting Chief Executive
Officer and Chairman of
the Board
Carl L. Bixby (4) 1996 237,259 -- 18,314
Chief Executive 1995 185,380 7,248 -- 20,043
Officer and President 1994 165,375 147,978 -- 17,166
George W. Perrett, Jr. 1996 89,000 -- 9,560
Secretary and Director 1995 85,000 3,624 -- 15,164
1994 85,000 38,150 -- 7,389
David O. Schupp 1996 89,901 -- -- 9,773
Vice President, 1995 86,008 7,248 -- 16,321
Treasurer and 1994 82,688 74,326 -- 10,901
Director
</TABLE>
(1) Includes compensation deferred at the election of the executive in
the category and year earned.
(2) "All Other Compensation" is comprised of (i) contributions made by
the Company to the accounts of each of the named executive officers
under the Company's 401(k) Plan with respect to each of the fiscal
years ended September 30, 1996, 1995 and 1994, respectively, as
follows: Mr. Bixby $8,613, $9,196 and $13,860; Mr. Perrett $4,080,
$9,684 and $7,389; and Mr. Schupp $4,128, $10,676 and $9,421; (ii)
the dollar value of any life insurance premiums paid by the Company
in the fiscal years ended September 30, 1996, 1995 and 1994
respectively, with respect to term life insurance for the benefit of
each of the named executives as follows: Mr. Bixby $3,071, $4,217
and $3,306; and Mr. Schupp $1,480, $1,480 and 1,480 and (iii) a car
allowance paid by the Company in the fiscal years ended September
30, 1996 and 1995, respectively, as follows, for Mr. Bixby $6,630
and $6,630, Mr. Perrett $5,480 and $5,480 and Mr. Schupp $4,165 and
$4,165.
(3) Mr. Graber was appointed acting Chief Executive Officer of the
Company in June 1996.
(4) Mr. Bixby resigned as Chief Executive Officer of the Company in June
1996.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year ("FY")-end Option/SAR Values
The following table provides information with respect to the named
executive officers concerning the exercise of options during 1996 and
unexercised options held as of the Company's most recent fiscal year end,
September 30, 1996. All options were granted under the Company's 1992 Stock
Option Plan or the now terminated 1982 Stock Option Plan.
<PAGE>
Number of
securities
underlying Value of
unexercised unexercised
options in-the-money
Share Value at FY-End (#) options
acquired on realized exercisable/ exercisable/
Name exercise (#) ($) (1) unexercisable unexercisable($)(1)
- ---- ------------ -------- ------------- -------------------
Carl L. Bixby 6,000 $13,872 -0- -0-
George W. Perrett 478 3,155 37,500/15,000 6,748/13,125
David O. Schupp -0- -0- 15,500/15,000 6,748/13,125
- --------------
(1) The dollar values in these columns represent the total gain which
would have been realized if such options had been exercised on
September 30, 1996 (the Company's fiscal year end) and are
calculated by determining the difference between the fair market
value of the securities underlying the options on September 30, 1996
and the exercise price of the option. The dollar values in this
table as well as all other tables contained in this proxy are
calculated on a pre-tax basis.
Employment and Termination Arrangements
The Company has entered into a Release and Settlement Agreement
with Mr. Carl Bixby dated as of June 20, 1996. The Agreement provides,
among other things, that Mr. Bixby would resign as Chief Executive Officer
and President of the Company in June 1996 and would provide consulting
services to the Company for a period of 24 months beginning July 1, 1996 at
a rate of $16,000 a month. Mr. Bixby has also agreed not to use or disclose
the Company's confidential information and, until July 1, 1998, not to
engage in any business which is in substantial and direct competition with
the Company. Further, the Agreement provides for the release by Mr. Bixby
of certain past and future claims against the Company.
Director Compensation
Non-employee directors receive an annual retainer of $4,000 and a
fee of $1,000 per meeting for attendance at regular board meetings and $500
per meeting for attendance at committee meetings not held in conjunction
with a meeting of the Board. Travel and lodging expenses incurred by
directors residing outside of the metropolitan Detroit area in order to
attend meetings of the board are typically paid by the Company.
As additional consideration for their services to the Company, on
April 24, 1987, the non-employee directors were each granted options to
purchase 5,000 shares of the Company's Common Stock at the fair market value
of $7.75 per share. After adjustment for the Company's stock dividends and
stock split, Messrs. Graber, David Seigle and Robert Seigle each currently
hold options to acquire 5,500 shares at $7.04 per share. The options are
exercisable for a ten-year period from the date of grant or until the
grantee ceases to serve on the Board, whichever is earlier.
On March 26, 1993, pursuant to the Company's Non-Employee Directors
Stock Option Plan, the non-employee directors were each granted options to
purchase 5,100 shares of the Company's Common Stock at the fair market value
of $5.25 per share. The options are exercisable for a ten-year period from
the date of grant or until the grantee ceases to serve on the Board,
whichever is earlier.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of December 6, 1996,
except as otherwise indicated, concerning all shareholders known by the
Company to be the beneficial owners of more than 5% of its outstanding
Common Stock, and all officers and directors as a group. Except as noted
below, each shareholder exercises sole voting and investment power with
respect to the shares beneficially owned.
<PAGE>
Amount and
Nature of
Name and Address of Beneficial Percent
Beneficial Owner Ownership of Class
- ------------------- ----------- --------
All officers and directors as
a group (9 persons) (1) 674,371 14.3%
- ---------------
(1) Includes shares which certain directors and officers have a right to
acquire within 60 days pursuant to the exercise of stock options.
See Item 10 for information regarding stock options and the shared
voting and investment powers of officers and directors. For
purposes of computing the percentage of class, the shares which can
be acquired within 60 days pursuant to the exercise of stock options
were added to the shares owned beneficially or of record by such
persons on December 6, 1996 and to the shares outstanding on that
date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In October, 1995, the Board of Directors of the Company adopted the
Interface Systems, Inc. Executive Loan Program (the "Executive Loan
Program") which provides for the making of loans to the executive officers
of the Company to enable such officers to purchase shares of the Company's
Common Stock on the open market or in privately negotiated sales.
The Executive Loan Program was adopted to encourage key executives
in acquiring and maintaining a significant equity interest in the Company's
Common Stock thereby aligning their interests with the interests of the
Company's stockholders. The following summarizes the principal features of
the Executive Loan Program.
All senior executives of the Company are eligible to participate in
the Executive Loan Program. The maximum amount of any loan or loans
currently permitted to be outstanding to any one executive cannot exceed
Six Hundred Thousand Dollars ($600,000).
Loans under the Executive Loan Program bear interest at a rate equal
to the greater of the Applicable Federal Rate for the month in which the
loan was issued or the interest rate paid by the Company on its corporate
borrowings but shall not exceed the maximum rate permitted by law. Such
interest is payable annually. Loans under the Executive Loan Program are
required to be secured by collateral. Collateral can include among other
things, a pledge of common stock of the Company owned by the executive or a
security interest on the real or other personal property of the executive.
The Company has the right to offset from the amounts owing by the Company to
the executive any amount of the loan that remains unpaid.
The Program is administered by Garnel F. Graber or such other
individual or entity selected by the Company's Board of Directors. The
administrator shall have the power to make all determinations needed in
connection with the Executive Loan Program, to adopt forms of loan
documents, to exercise all rights and powers allocated to the Company and to
do anything else which is helpful or necessary to the proper operation of
the Executive Loan Program.
On December 1, 1995 and March 27, 1996, the Company made loans
under the Executive Loan Program to Carl L. Bixby in the principal amount
of $650,000 and $100,000, respectively. The loan on March 27, 1996 was
made after repayment under the $650,000 loan reduced the outstanding
principal amount to $500,000. Both loans bear interest at an annual
rate of 5.79% and are secured by shares of Common Stock of the Company
owned by Mr. Bixby. As of December 6, 1996, approximately $638,000 was
outstanding under the loan.
On February 21, 1996, the Company made loans under the Executive
Loan Program to George Perrett and David O. Schupp, in the principal amounts
of $55,000 and $80,000, respectively. Each such loan bears interest at a
rate of 5.50%. Mr. Perrett's and Mr. Schupp's loans are secured by shares
of Common Stock of the Company owned by Mr. Perrett and shares of Common
Stock of the Company, and other public company common stock, owned by Mr.
<PAGE>
Schupp, respectively. As of December 6, 1996, $55,000 and $50,000 in
principal amount were outstanding under Mr. Perrett's and Mr. Schupp's
loans, respectively.
<PAGE>
Interface Systems, Inc., and Subsidiaries
Consolidated Financial Statements
Years Ended September 30, 1996, 1995 and 1994
Report of Independent Certified Public Accountants
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules
Report of Independent Certified Public Accountants
Schedule II - Valuation and Qualifying Accounts
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
Interface Systems, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of Interface
Systems, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interface Systems, Inc.
and subsidiaries at September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
/S/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Troy, Michigan
November 14, 1996
F-2
<PAGE>
Interface Systems, Inc., and Subsidiaries
Consolidated Balance Sheets
September 30,
1996 1995
----------- -----------
Assets:
Current Assets
Cash and equivalents $ 1,694,725 $ 3,735,758
Accounts receivable, less
allowance for doubtful accounts
of $165,000 and $248,000 11,007,983 10,068,828
Refundable income taxes 1,378,093 460,027
Inventories (Note 2) 10,478,322 7,360,204
Prepaid expenses and other
current assets 1,232,423 655,229
Deferred income taxes (Note 7) 549,000 413,000
--------- ----------
Total Current Assets 26,340,546 22,693,046
---------- ----------
Property and Equipment (Note 6)
Land 231,383 231,383
Buildings and improvements 2,680,088 2,603,851
Machinery and equipment 6,309,387 5,425,570
--------- ---------
9,220,858 8,260,804
Less accumulated depreciation (4,404,043) (3,642,880)
---------- ----------
Net Property and Equipment 4,816,815 4,617,924
--------- ---------
Other
Goodwill, less accumulated
amortization of $1,934,142
and $1,620,983 (Note 3) 2,881,481 3,204,694
Software development costs,
less accumulated amortization
of $3,928,353 and $2,927,340 3,570,545 3,032,987
Notes receivable (Note 4) 810,173 ---
Miscellaneous 459,399 403,799
--------- ---------
Total Other Assets 7,721,598 6,641,480
--------- ---------
$38,878,959 $33,952,450
========== ==========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Interface Systems, Inc., and Subsidiaries
Consolidated Balance Sheets
(continued)
September 30,
1996 1995
--------- -----------
Liabilities and Stockholders' Equity:
Current Liabilities
Notes payable (Note 5) $ 5,691,546 $ 4,367,318
Accounts payable 9,088,765 6,070,074
Accrued expenses 693,767 350,377
Deferred revenue 280,703 230,663
Current maturities of
long-term debt (Note 6) 52,400 52,400
---------- ----------
Total Current Liabilities 15,807,181 11,070,832
Long-Term Debt, less current
maturities (Note 6) 234,794 286,546
Deferred Income Taxes (Note 7) 1,584,000 1,381,000
---------- ----------
Total Liabilities 17,625,975 12,738,378
---------- ----------
Commitments and Contingencies
(Notes 9 and 15)
Stockholders' Equity (Notes 10 and 11)
Common stock, $.10 par value,
shares authorized 20,000,000;
outstanding 4,535,879 and
4,212,418 453,588 421,242
Additional paid-in capital 11,122,063 9,114,577
Cumulative foreign currency
translation adjustment (236,051) (198,169)
Retained earnings 9,913,384 11,876,422
---------- ----------
Total Stockholders' Equity 21,252,984 21,214,072
---------- ----------
$38,878,959 $33,952,450
========== ==========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Interface Systems, Inc., and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net Revenues $ 74,583,111 $ 70,243,216 $ 39,012,086
Cost of Revenues 63,797,610 57,516,563 24,500,363
---------- ---------- ----------
Gross Profit 10,785,501 12,726,653 14,511,723
---------- ---------- ----------
Product Development Costs 1,956,404 1,453,605 1,307,523
Selling, General and Administrative
Expenses 11,621,102 10,506,062 8,786,591
---------- ---------- ----------
13,577,506 11,959,667 10,094,114
---------- ---------- ----------
Operating Income (Loss) (2,792,005) 766,986 4,417,609
--------- -------- ---------
Other Income (Expense)
Interest expense (340,376) (263,758) (171,701)
Dividend and interest income 200,343 186,064 131,030
Miscellaneous --- 17,094 12,839
------- ------- -------
Net Other Expenses (140,033) (60,600) (27,832)
------- ------- -------
Income (Loss) Before Tax Benefit
(Taxes On Income) and Cumulative Effect
of Change in Accounting Principle (2,932,038) 706,386 4,389,777
Tax Benefit (Taxes On Income) (Note 7) 969,000 (540,000) (1,428,000)
--------- ------- ---------
Income (Loss) Before Cumulative Effect
of Change in Accounting Principle (1,963,038) 166,386 2,961,777
Cumulative Effect of Change in
Accounting Principle (Note 1) --- --- (127,000)
--------- ------- ---------
Net Income (Loss) $(1,963,038) $166,386 $2,834,777
========= ======= =========
Earnings (Loss) Per Share Before
Cumulative Effect of Change in
Accounting Principle $(.44) $.04 $.71
Cumulative Effect of Change in
Accounting Principle -- -- (.03)
---- ---- ----
Net Earnings (Loss) Per Share $(.44) $.04 $.68
==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Interface Systems, Inc., and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1996, 1995 and 1995
<TABLE>
<CAPTION>
Cumulative
Additional Foreign Total
Common Stock Paid-In Currency Retained Stockholders'
Shares Amount Capital Translation Earnings Equity
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
October 1, 1993 4,132,891 $413,289 $8,762,905 $(246,710) $10,209,264 $19,138,748
Net income --- --- --- --- 2,834,777 2,834,777
Sale of stock 20,477 2,048 64,780 --- --- 66,828
Cash dividends -
$.16 per share --- --- --- --- (664,113) (664,113)
Foreign currency
translation --- --- --- 44,634 --- 44,634
- -----------------------------------------------------------------------------------------------
Balance,
September 30, 1994 4,153,368 415,337 8,827,685 (202,076) 12,379,928 21,420,874
Net income --- --- --- --- 166,386 166,386
Sale of stock 59,050 5,905 286,892 --- --- 292,797
Cash dividends -
$.16 per share --- --- --- --- (669,892) (669,892)
Foreign currency
translation --- --- --- 3,907 --- 3,907
- -----------------------------------------------------------------------------------------------
Balance,
September 30, 1995 4,212,418 421,242 9,114,577 (198,169) 11,876,422 21,214,072
Net loss --- --- --- --- (1,963,038) (1,963,038)
Sale of stock 323,461 32,346 2,007,486 --- --- 2,039,832
Foreign currency
translation --- --- --- (37,882) --- (37,882)
- -----------------------------------------------------------------------------------------------
Balance,
September 30, 1996 4,535,879 $453,588 $11,122,063 $(236,051) $ 9,913,384 $21,252,984
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Interface Systems, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $(1,963,038) $ 166,386 $2,834,777
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities
Depreciation and amortization 3,265,865 2,972,277 2,524,367
Deferred income taxes 67,000 151,000 372,000
Loss on sale of fixed assets 38,468 24,727 ---
Accounts receivable (939,155) (621,373) (4,561,440)
Refundable income taxes (918,066) (460,027) ---
Inventories (3,118,118) 375,025 1,406,909
Prepaid expenses and other
current assets (577,194) (159,632) 140,532
Other assets (306,335) 10,591 40,955
Accounts payable 3,018,691 389,276 3,844,025
Accrued expenses 343,390 (445,743) 191,844
Deferred revenue 50,040 31,427 (47,504)
--------- --------- ---------
Net Cash Provided By (Used In)
Operating Activities (1,038,452) 2,433,934 6,746,465
--------- --------- ---------
Cash Flows From Investing Activities
Additions to notes receivable (985,000) --- ---
Reduction of notes receivable 174,827 --- ---
Proceeds from disposals of property
and equipment 22,185 21,134 ---
Additions to property and equipment (1,155,344) (1,777,370) (797,863)
Additions to software development costs (2,333,675) (1,998,022) (1,991,416)
Cash paid for purchase of Mekom Distribution --- --- (2,017,200)
--------- --------- ---------
Net Cash Used In Investing Activities (4,277,007) (3,754,258) (4,806,479)
--------- --------- ---------
Cash Flows From Financing Activities
Net increase in notes payable 1,324,228 2,224,258 207,146
Reduction of long-term debt (51,752) (142,270) (88,963)
Sale of stock 2,039,832 292,797 66,828
Cash dividends paid --- (669,892) (664,113)
--------- --------- --------
Net Cash Provided By (Used In)
Financing Activities 3,312,308 1,704,893 (479,102)
--------- --------- --------
Foreign Currency Translation (37,882) 3,907 44,634
--------- --------- --------
Net Increase (Decrease) In Cash
and Equivalents (2,041,033) 388,476 1,505,518
Cash and Equivalents, beginning of year 3,735,758 3,347,282 1,841,764
--------- --------- ---------
Cash and Equivalents, end of year $1,694,725 $3,735,758 $3,347,282
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Interface Systems, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of
Interface Systems, Inc. (the "Company") and its wholly-owned subsidiaries,
I.G.K. Industries, Inc. ("I.G.K."), Interface Systems International, Ltd.
("ISIL"), Interface Systems International, Inc. ("FSC"), and Scitronix
Corporation. All significant intercompany transactions and balances have
been eliminated in consolidation.
Nature of Operations
- --------------------
The Company and its subsidiaries develop, manufacture, and sell computer
peripherals and data communications software primarily in the United States
and Europe.
Concentrations of Credit Risk
- -----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents
and accounts receivable. At times such cash and equivalents in banks are in
excess of the respective financial institution's FDIC insurance limit. With
respect to accounts receivable, the Company attempts to minimize credit risk
by reviewing all customers' credit history before extending credit and by
monitoring customers' credit exposure on a continuing basis. The Company
establishes an allowance for possible losses on accounts receivable based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Fair Values of Financial Instruments
- ------------------------------------
The carrying amounts of cash and equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value because of the short
maturity of these items.
The carrying amounts of the notes payable and long-term debt issued pursuant
to the Company's bank credit agreements approximate fair value because the
interest rates on these instruments change with market rates.
Use of Estimates
- ----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect (1) the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of
the financial statements, and (2) revenues and expenses during the reporting
period. Actual results could differ from those estimates.
At September 30, 1996, some portion of the Company's computer peripheral
inventory exceeds current requirements based on recent sales activity.
Although management has developed a plan to reduce this inventory to desired
levels over the near term and believes no loss will be incurred upon
disposition, no estimate can be made of the range of loss that is reasonably
possible if this program is unsuccessful.
Inventories
- -----------
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
Property, Equipment and Depreciation
- ------------------------------------
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets, ranging from 3 to 33 years, using
primarily the straight-line method for financial reporting purposes and
accelerated methods for tax reporting purposes. Depreciation expense was
$895,800, $811,778 and $752,908 for the years ended September 30, 1996, 1995
and 1994, respectively.
<PAGE>
Goodwill
- --------
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at dates of acquisition and is being
amortized on the straight-line method over periods not exceeding 15 years.
The Company reviews goodwill for impairment based upon undiscounted cash
flows over the remaining life of the goodwill. If necessary, impairment will
be measured based on the difference between undiscounted future cash flows
and the net book value of the related goodwill.
Software Development Costs
- --------------------------
In compliance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," certain computer software development costs have been
capitalized. Capitalization of computer software development costs begins
upon the establishment of technological feasibility. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable
judgment by management with respect to certain external factors, including,
but not limited to, anticipated future gross revenues, estimated economic
life and changes in software and hardware technology.
Amortization of capitalized computer software development costs is provided
on a product-by-product basis using the straight-line method over the
remaining estimated economic lives of the respective products, ranging from
two to five years. Amortization amounted to $1,796,117, $1,572,096, and
$1,221,715 for the years ended September 30, 1996, 1995 and 1994,
respectively, and is included in cost of revenues.
Foreign Currency Translation
- ----------------------------
All assets and liabilities of foreign subsidiaries are translated at
exchange rates in effect on the balance sheet date, and revenue and expenses
are translated using a weighted average exchange rate during the period.
Cumulative adjustments resulting from translation of financial statements
are reflected as a separate component of stockholders' equity.
Revenue Recognition
- -------------------
Revenues from product sales are recognized upon shipment to the customer.
Lease and service revenues are recognized ratably over the contractual
period or as the services are performed. Revenues from licenses of software
products are recognized when the product is shipped and the Company has no
further obligation to the customer. Deferred revenue represents advance
billings on service contracts.
Research and Development Costs
- ------------------------------
Research and development costs, excluding the costs capitalized as computer
software development costs, are expensed in the period incurred. These
costs, representing engineering salaries, fringe benefits, other direct
expenses and a portion of the Company's overhead, are included in the
accompanying consolidated financial statements as product development costs.
Research and development expenses for the years ended September 30, 1996,
1995 and 1994 were approximately $865,000, $712,000 and $619,000,
respectively.
Taxes on Income
- ---------------
Deferred income taxes are recorded to reflect the future tax consequences of
temporary differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end.
Effective October 1, 1993, the Company changed its method of accounting for
income taxes to the liability method required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The cumulative
effect of adopting Statement No. 109 as of October 1, 1993 was to decrease
net income for the year ended September 30, 1994 by $127,000.
<PAGE>
Earnings (Loss) Per Share
- -------------------------
Earnings (loss) per share amounts have been calculated using the weighted
average number of shares and common stock equivalents outstanding for the
respective periods. The antidilutive effect of outstanding options and
warrants of the Company is excluded from the earnings (loss) per share
calculations presented in the consolidated statements of operations. Shares
used in the computation were 4,440,262, 4,238,889 and 4,169,781 for fiscal
years 1996, 1995 and 1994, respectively.
Consolidated Statements of Cash Flows
- -------------------------------------
For the purposes of this statement, the Company considers money market funds
to be cash equivalents.
Recent Accounting Pronouncements
- --------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets Being Disposed Of,"
which provides guidance on how and when impairment losses are recognized on
long-lived assets. The Company will adopt this statement October 1, 1996 and
does not expect it to have a material impact on the Company.
The FASB has issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans. This statement provides a choice to either adopt the
fair value based method of accounting or continue to apply APB Opinion No.
25, which would require only disclosure of the proforma net income and
earnings per share, determined as if the fair value based method had been
applied. The Company will adopt this statement October 1, 1996 and continue
to apply APB Opinion No. 25.
2. Inventories
Inventories are summarized as follows:
September 30,
1996 1995
----------- -----------
Finished goods $ 4,394,274 $ 2,648,988
Purchased parts and accessories 4,133,108 2,853,910
Work-in-process 1,153,172 1,005,203
Service parts and demo units 797,768 852,103
--------- ---------
$10,478,322 $ 7,360,204
========== =========
3. Business Acquisition
In August 1994, ISIL acquired certain assets of Mekom Computer Products PLC
("Mekom"), a British company, for $2,017,200. The acquisition was accounted
for as a purchase and, accordingly, the acquired assets have been recorded
on ISIL's books at the estimated fair values at the date of acquisition. The
excess of the total purchase price over the estimated fair value of assets
acquired was $1,121,617 and is included as goodwill in the accompanying
consolidated balance sheets. The consolidated statements of operations
include the operating results of Mekom from August 1994.
4. Notes Receivable
Notes receivable at September 30, 1996 consist of the following:
<PAGE>
Note receivable due from a former officer of the
Company, bearing interest at 5.79%, collateralized
by 158,000 shares of the Company's common stock,
due December 1996 $ 600,000
Notes receivable due from two officers of the Company,
bearing interest at 5.50%, collateralized by common
stock, due in February 1998 125,000
Note receivable due from a former officer of the
Company, bearing interest at 5.79%, due in monthly
installments through June 1998, unsecured 85,173
--------
$ 810,173
========
5. Lines-of-Credit and Notes Payable
The Company has a $3,500,000 working capital credit facility with a bank
which is renewed annually. Borrowings under this agreement are unsecured and
bear interest at the bank's prime rate. There were no borrowings outstanding
with respect to this agreement at September 30, 1996 and 1995.
ISIL has a short-term credit facility with a bank, which is renewed
annually, under which it may borrow up to $5,933,000. Borrowings under this
facility are guaranteed by the Company, bear interest at LIBOR plus 2%
(8.25% at September 30, 1996) and are due on demand. Borrowings outstanding
at September 30, 1996 and 1995 were $5,691,546 and $4,367,318, respectively.
The ISIL credit facility contains a restrictive covenant requiring ISIL to
maintain positive tangible net worth. ISIL was in compliance with this
covenant at September 30, 1996 and 1995.
IGK has a short-term credit facility with a bank under which it may borrow
up to $150,000. Borrowings are collateralized by accounts receivable,
inventory, and machinery and equipment and bear interest at .5% over the
bank's prime rate. There were no borrowings outstanding under this facility
at September 30, 1996 and 1995.
6. Long-Term Debt
Long-term debt consists of the following:
September 30,
1996 1995
-------- --------
Installment loan payable - bank,
payable in monthly installments of
$3,696 including interest at .25%
over the bank's prime rate (8.5%
at September 30, 1996), due March
1997, unsecured $ 259,039 $ 284,247
Installment loan payable - bank,
payable in monthly installments of
$2,212 plus interest at 7.65%,
through October 1997, collateralized
by equipment 28,155 54,699
-------- --------
287,194 338,946
Less current maturities 52,400 52,400
-------- --------
$ 234,794 $ 286,546
======== ========
The aggregate amounts of long-term debt maturing in each of the next two
fiscal years are as follows: 1997 - $52,400; and 1998 - $234,794.
7. Taxes on Income
Tax benefit (taxes on income) in the consolidated statements of operations
are made up of the following components:
<PAGE>
Year Ended September 30,
1996 1995 1994
Current - U.S. federal $1,036,000 $(389,000) $(1,056,000)
Deferred - U.S. federal (67,000) (151,000) (372,000)
--------- ------- ---------
$ 969,000 $(540,000) $(1,428,000)
========= ======= =========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
September 30,
1996 1995
---------- ----------
Deferred Tax Liabilities
Tax depreciation and amortization
greater than book amounts $ 1,584,000 $ 1,381,000
========= =========
Deferred Tax Assets
Net operating loss carryforwards
of ISIL $ 544,000 $ 612,000
Receivable and inventory reserves 291,000 248,000
Accruals deductible when paid 206,000 107,000
Inventory costs under uniform
capitalization rules 52,000 43,000
Other --- 15,000
--------- ---------
1,093,000 1,025,000
Valuation Allowance for Deferred Tax
Assets of ISIL (544,000) (612,000)
--------- ---------
Net Deferred Tax Assets $ 549,000 $ 413,000
========= =========
The following reconciles the statutory federal income tax rate to the
Company's effective tax rate:
Year Ended September 30,
1996 1995 1994
--------- --------- ---------
Tax benefit (income tax) based on
the federal statutory rate 34.00% (34.00)% (34.00)%
(Increase) decrease in taxes
resulting from:
Amortization of goodwill (3.31) (13.74) (2.21)
Benefits of FSC non-taxable
income .63 7.29 .40
Non-taxable income
(non-deductible losses) of
foreign subsidiaries .21 (41.00) (.42)
Research and development credits -- 4.67 2.74
Other 1.52 .34 .96
----- ----- -----
33.05% (76.44)% (32.53)%
The domestic and foreign components of income (loss) before taxes on income
were as follows:
Year Ended September 30,
1996 1995 1994
-------- --------- ---------
Domestic $(2,950,287) $1,558,281 $4,443,695
Foreign 18,249 (851,895) (53,918)
--------- --------- ---------
$(2,932,038) $ 706,386 $4,389,777
========= ========= =========
<PAGE>
ISIL has net operating loss carryforwards totalling approximately $1,600,000
at September 30, 1996.
8. Retirement Plan
The Company has established a defined contribution retirement plan for all
eligible employees. Participants may make basic contributions from 2% to 8%
of their compensation pursuant to Section 401(k) of the Internal Revenue
Code. The Company makes a basic contribution of 100% of the amount
contributed by participants, up to 4% of participant compensation, and may
make additional contributions as approved by the Board of Directors. The
Company recognized approximately $298,000, $299,000 and $223,000 of expense
related to this plan for the years ended September 30, 1996, 1995 and 1994,
respectively.
In addition, ISIL maintains a defined contribution pension plan for all
eligible employees. ISIL recognized approximately $140,000, $112,000 and
$105,000 of expense related to this plan for the years ended September 30,
1996, 1995 and 1994, respectively.
9. Commitments and Contingencies
The Company has various operating leases which require future minimum rental
payments in excess of one year as follows: 1997 - $422,000; 1998 -
$398,000; 1999 - $398,000; 2000 - $398,000; and 2001 - $398,000. Rent
expense for the years ended September 30, 1996, 1995 and 1994 was
approximately $200,000, $375,000 and $243,000, respectively.
10. Stock Warrants
On August 3, 1983, the Company sold 300,000 units (consisting of two shares
of common stock and one warrant) through a public offering at $15.00 per
unit. Each warrant entitled the holder to purchase one share of common
stock. During the year ended September 30, 1996, 264,450 of the warrants
were exercised at a price of $6.50 per warrant, and the remaining warrants
expired.
11. Stock Options
Incentive stock options are granted to executives and key employees for a
ten-year period with the option price being at least the fair market value
at date of grant. The incentive stock options can be exercised in three
annual installments starting one year after the date of the grant.
The Company has also granted non-qualified stock options to five
non-employee directors, which expire ten years and one day from date of
grant. All non-qualified stock options are cancelled if the grantee ceases
to be a director.
The Company has reserved approximately 1,056,000 shares of its common stock
for issuance under the various stock option plans ("Plans"). Approximately
648,000 shares are available for grant under the Plans at September 30,
1996.
Changes in stock options outstanding, adjusted to reflect stock dividends
and splits, are summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
Qualified Non-Qualified
Option Option
Shares Price Shares Price
------ ------ ------ ------
<S> <C> <C> <C> <C>
$ $
Balance, October 1, 1993 468,232 3.31-7.50 46,500 5.25-7.04
Granted --- --- --- ---
Exercised (20,477) 3.31-3.63 --- ---
Expired or terminated (30,123) 3.31-7.50 --- ---
------- --------- ------ ---------
Balance, September 30, 1994 417,632 3.31-7.50 46,500 5.25-7.04
Granted 78,000 5.38-7.19 --- ---
Exercised (55,700) 3.31-7.50 --- ---
Expired or terminated (37,033) 3.63-7.50 --- ---
------- --------- ------ ---------
Balance, September 30, 1995 402,899 3.31-7.50 46,500 5.25-7.04
Granted 76,200 9.25-11.00 25,500 11.00
Exercised (47,511) 3.31-7.50 (11,500) 5.25-7.04
Expired or terminated (83,422) 6.64-11.00 --- ---
------- ---------- ------ ---------
Balance, September 30, 1996 348,166 3.31-11.00 60,500 5.25-11.00
======= ========== ====== ==========
</TABLE>
At September 30, 1996, 235,523 of the qualified and 35,000 of the
non-qualified options are exercisable.
12. Supplemental Disclosures of Cash Flow Information
1996 1995 1994
-------- -------- --------
Cash Paid During The Year For
Taxes on income $ 332,136 $ 712,682 $ 970,694
Interest 340,376 263,758 171,701
13. Segment Information and Foreign Revenues
The Company and its subsidiaries are involved in one business segment; the
development, manufacture and sale of computer peripherals and data
communications software.
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1996
United States Europe Eliminations Consolidated
------------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenue
Unaffiliated customers $15,175,362 $59,407,749 $ --- $74,583,111
Inter-area transfers 1,806,220 --- (1,806,220) ---
---------- ---------- --------- ----------
Total $16,981,582 $59,407,749 $(1,806,220) $74,583,111
========== ========== ========= ==========
Net Income (Loss) $(1,981,287) $ 18,249 $ --- $(1,963,038)
========= ====== === =========
Total Assets $24,217,086 $17,187,624 $(2,525,751) $38,878,959
========== ========== ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30, 1995
United States Europe Eliminations Consolidated
------------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenue
Unaffiliated customers $17,108,616 $53,134,600 $ --- $70,243,216
Inter-area transfers 2,556,049 --- (2,556,049) ---
---------- ---------- --------- ----------
Total $19,664,665 $53,134,600 $(2,556,049) $70,243,216
========== ========== ========= ==========
Net Income (Loss) $(1,018,281) $ (851,895) $ --- $ 166,386
========= ====== === =========
Total Assets $23,462,758 $12,925,606 $(2,435,914) $33,952,450
========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1994
United States Europe Eliminations Consolidated
------------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenue
Unaffiliated customers $21,673,600 $17,338,486 $ --- $39,012,086
Inter-area transfers 2,685,930 --- (2,685,930) ---
---------- ---------- --------- ----------
Total $24,359,530 $17,338,486 $(2,685,930) $39,012,086
========== ========== ========= ==========
Net Income (Loss) $ 2,888,695 $ (53,918) $ --- $ 2,834,777
========= ====== === =========
Total Assets $22,962,685 $10,634,228 $(1,697,609) $31,899,304
========== ========== ========= ==========
</TABLE>
United States inter-area transfers represent shipments of equipment and parts
to foreign subsidiaries. These inter-area shipments are made at transfer
prices which are discounted from prices charged to unaffiliated customers
and have been eliminated from consolidated net revenues.
14. Selected Quarterly Financial Data (Unaudited)
The following is a summary of selected quarterly financial data for the
years ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
1996 Quarter Quarter Quarter Quarter Year
- ---- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Revenues $18,710,574 $21,906,167 $16,655,495 $17,310,875 $74,583,111
Gross Profit 3,308,153 3,511,844 2,107,490 1,858,014 10,785,501
Net Income (Loss) 200,024 363,994 (1,495,565) (1,031,491) (1,963,038)
Net Earnings (Loss)
Per Share .05 .08 (.33) (.23) (.44)
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
1996 Quarter Quarter Quarter Quarter Year
- ---- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Revenues $15,914,761 $19,840,268 $18,612,947 $15,875,240 $70,243,216
Gross Profit 3,805,435 3,422,306 3,276,755 2,222,157 12,726,653
Net Income (Loss) 713,743 378,045 (365,130) (560,272) 166,386
Net Earnings (Loss)
Per Share .17 .09 (.09) (.13) .04
</TABLE>
<PAGE>
During the fourth quarter of fiscal 1995, the Company recorded certain year
end accounting adjustments relating to inventories and royalty obligations
under license agreements. Such adjustments decreased net income in the
fourth quarter by approximately $298,000 or $.07 per share.
<PAGE>
Interface Systems, Inc., and Subsidiaries
Financial Statement Schedules
Report of Independent Certified Public Accountants
To the Board of Directors
Interface Systems, Inc.
Ann Arbor, Michigan
The audits referred to in our report dated November 14, 1996 relating to the
consolidated financial statements of Interface Systems, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K included the
audits of the financial statement schedules listed in the accompanying
index.
In our opinion, such financial statement schedules present fairly the
information set forth therein.
/S/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Troy, Michigan
November 14, 1996
S-1
<PAGE>
Interface Systems, Inc., and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Years Ended September 30, 1996, 1995, 1994
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Cost and at End
Description of Year Expenses Deductions of Year
- ----------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Year Ended September 30, 1996
Allowance for doubtful accounts
(deducted from accounts
receivable) $ 248,000 117,000 (1)200,000 $165,000
- -------------------------------------------------------------------------------------
Year Ended September 30, 1995
Allowance for doubtful accounts
(deducted from accounts
receivable) $ 133,000 251,000 (1)136,000 $248,000
- -------------------------------------------------------------------------------------
Year Ended September 30, 1994
Allowance for doubtful accounts
(deducted from accounts
receivable) $ 117,000 31,000 (1) 15,000 $133,000
- ----------
(1) Accounts deemed to be uncollectible.
</TABLE>
S-2
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Schedules and Exhibits
1-2. The financial statements and schedules filed herewith are set
forth in the Index to Consolidated Financial Statements (on page F-1 of the
separate financial section which follows page 25 of this report) and are
incorporated herein by reference.
3. The exhibits filed herewith are set forth in the Index to
Exhibits (on the first page of the separate exhibit section which follows
the financial section of this report) and are incorporated herein by
reference.
(b) The Company filed no current reports on Form 8-K during the
last quarter of the Company's fiscal year ended September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
INTERFACE SYSTEMS, INC.
Dated: December 23, 1996 By: /s/ Garnel F. Graber
----------------------------------------
Garnel F. Graber, Acting Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Garnel F. Graber Chief Executive December 27, 1996
- -------------------- Officer and Director
Garnel F. Graber (Principal Executive
Officer)
/s/ David O. Schupp Vice President, December 27, 1996
- --------------------
David O. Schupp Treasurer and Director
(Principal Financial
and Accounting Officer)
/s/ Carl L. Bixby Director December 23, 1996
- ---------------------
Carl L. Bixby
- --------------------- Director December , 1996
David C. Seigle
/s/ Robert C. Seigle Director December 22, 1996
- ---------------------
Robert A. Seigle
/s/ George W. Perrett Secretary and December 27, 1996
- --------------------- Director
George W. Perrett
- --------------------- Director December _, 1996
G. Paul Horst
/s/ Milton Handelman Director December 27, 1996
- ----------------------
Milton Handelman
/s/ Lloyd A. Semple Director December 27, 1996
- ----------------------
Lloyd A. Semple
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
3(a) Certificate of Incorporation of the Company, as amended to
date. (1)
3(b) Bylaws of the Company, as amended to date. (1)
4 Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of the
Registrant or its subsidiaries have not been filed because
(i) in each case the total amount of long-term debt
permitted thereunder does not exceed 10% of the Registrant's
consolidated assets, and (ii) the Registrant hereby agrees
that it will furnish such instruments, notes and extracts to
the Securities and Exchange Commission upon its request.
10(c) 1982 Incentive Stock Option Plan, effective May 21, 1982, as
amended, with Form of Stock Option Agreement with Stock
Appreciation Rights. (2)
10(h) Form of Non-Qualified Stock Option Agreement. (2)
10(1) 1992 Stock Option Plan, effective May 6, 1992. (3)
10(2) Amendment No. 1 to the 1992 Stock Option Plan. (4)
10(3) 1993 Stock Option Plan for Non-Employee DiIrectors. (5)
10(4) Amendment No. 1 to the Non-Employee Director Stock Option
Plan. (6)
10(6) Release and Settlement Amendment dated as of June 20, 1996
between the Company and Carl L. Bixby . (1)
21 Subsidiaries of the Registrant. (7)
23 Consent of BDO Seidman. (1)
27 Financial Data Schedule
______________________
(1) Filed herewith.
(2) These exhibits were filed under Item 16 of the Registrant's Form S-1
Registration Statement filed on July 15, 1983 pursuant to the
Securities Act of 1933, as amended, File No. 2-84204 and are
incorporated herein by reference. The exhibit numbers used herein
are identical to the exhibit numbers as originally filed with the
form S-1 Registration Statement.
(3) This exhibit was filed as Exhibit 19 to the Registrant's Form 10-Q
for the Quarter ended March 31, 1992.
(4) This exhibit was filed as Exhibit 10.1 to the Registrant's Form 10-Q
for the Quarter ended March 31, 1996.
(5) This exhibit was filed as Exhibit 19 to the Registrant's Form 10-Q
for the Quarter ended March 31, 1994 and is incorporated herein by
reference.
(6) This exhibit was filed as Exhibit 10.2 to the Registrant's Form 10-Q
for the Quarter ended March 31, 1996.
(7) This exhibit was filed as Exhibit 21 to the Registrant's Form 10-K
for the year ended September 30, 1994 and is incorporated herein by
reference.
<PAGE>
The Registrant will furnish to any stockholder a copy of any of the
exhibits listed above upon written request and upon payment of a specified
reasonable fee, which fee shall be equal to the Registrant's reasonable
expenses in furnishing the exhibit to the stockholder. Requests for
exhibits and information regarding the applicable fee shall be directed to:
David Schupp, at the address of the principal executive offices set forth on
the cover of this Report on Form 10-K.
Certificate of Incorporation
of
Interface Systems, Inc.
FIRST: The name of the Corporation is INTERFACE SYSTEMS, INC.
SECOND: The principal office or place of business of the
Corporation in the State of Delaware is to be located at No. 100 West Tenth
Street, in the City of Wilmington, County of New Castle. The name and post
office address of its resident agent in the State of Delaware is The
Corporation Trust Company, No. 100 West Tenth Street, Wilmington, Delaware.
THIRD: The nature of the business and the purpose of the
Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State
of Delaware. The Corporation shall possess and may exercise all powers and
privileges granted by the General Corporation Law of the State of Delaware
or by any other law or by this Certificate of Incorporation, together with
any powers incident thereto, so far as such powers and privileges are
necessary or convenient to the conduct, promotion or attainment of the
business or purposes set forth in this Certificate of Incorporation.
FOURTH: The total number of shares of stock which may be issued is
3,000,000 shares of Common Stock, par value $0.10 per share.
Common Stock
Holders of Common Stock shall be entitled to receive such dividends
as may be declared by the Board of Directors of the Corporation from time to
time and in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, to receive pro rata all the
remaining assets of the Corporation available for distribution.
Holders of Common Stock shall have equal voting and other rights
share for share, and each holder of Common Stock is entitled to one vote per
share.
General
The Corporation shall be entitled to treat the person in whose name
any share, right or option is registered as the owner thereof, for all
purposes, and shall not be bound to recognize any equitable or other claim
to or interest in such share, right or option on the part of any other
person, whether or not the Corporation shall have notice thereof, save as
may be expressly provided by the laws of the State of Delaware.
A director shall be fully protected in relying in good faith upon
the books of account of the Corporation or statements prepared by any of its
officers or by independent public accountants as to the value and amount of
the assets, liabilities and/or net profits of the Corporation, or any other
facts pertinent to the existence and amount of surplus or other funds from
which dividends might properly be declared and paid, or with which the
Corporation's stock might properly be purchased or redeemed.
Without action by the stockholders, shares of stock may be issued by
the Corporation from time to time for such consideration, not less than the
par value thereof in case of shares having a par value, as may be fixed from
time to time by the Board of Directors thereof, and any and all such shares
so issued, the full consideration for which has been paid or delivered,
shall be deemed fully paid stock and liable to any further call or
assessment thereon, and the holder of such shares shall not be liable for
any further call or assessment thereon or for any further payment thereon.
FIFTH: All corporate powers shall be exercised by the Board of
Directors, except as otherwise provided by statute or by Certificate of
Incorporation.
Election of directors need not be by ballot.
Any director may be removed, whether cause shall be assigned for
such removal or not, and his place filled at any meeting of the stockholders
by the vote of a majority of the outstanding stock of the Corporation
entitled to vote. Vacancies in the Board of Directors (except vacancies
arising from the removal of directors) andy newly created directorships may
be filled by a majority of the directors then in office, though less than a
quorum.
IN FURTHERANCE AND NOT IN LIMITATION OF THE POWERS CONFERRED BY
STATUTE, THE BOARD OF DIRECTORS IS EXPRESSLY AUTHORIZED:
(a) To fix, determine and vary from time to time the amount to
be maintained as surplus and the amount or amounts to be set
apart as working capital.
(b) To set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper
purposes and/or to abolish any such reserve in the manner in
which it was created.
(c) To make, amend, alter, change, add to or repeal bylaws for
the Corporation without any action on the part of the
stockholders. The bylaws made by the directors may be
amended, altered, changed, added to or repealed by the
stockholders.
(d) To authorize and cause to be executed mortgages and liens,
without limit as to amount, upon the real and personal
property of the Corporation, including after-acquired
property.
(e) From time to time to determine whether and to what extent,
at what time and place, and under what conditions and
regulations the accounts and books of the Corporation or any
of them shall be open to the inspection of any stockholders;
and not stockholder shall have any right to inspect any
account or book or document of the Corporation except as
conferred by statute or bylaws or as authorized by a
resolution of the stockholders or Board of Directors.
(f) To authorize the payment of compensation to the directors
for services to the Corporation, including fees for
attendance at meetings of the Board of Directors, of the
Executive Committee, and of other committees, and to
determine the amount of such compensation and fees.
SIXTH: Any contract, transaction or act of the Corporation or of
the Board of Directors which shall be ratified by the affirmative vote of
the holders of a majority of the stock of the Corporation represented at any
meeting at which a quorum is present and which is called for that purpose,
shall be as valid and binding as though ratified by every stockholder of the
Corporation; provided, however, that any failure of the stockholders to
approve or ratify such contract, transaction or act, when and if submitted,
shall not be deemed in any way to invalidate the same or to deprive the
Corporation, its directors or officers of their right to proceed with such
contract, transaction or action.
SEVENTH: Any property of the Corporation not essential to the
conduct of its corporate business may be sold, leased, exchanged or
otherwise disposed of by authority of its Board of Directors, and the
Corporation may sell, lease or exchange all of its property and assets,
including its goodwill and its corporate franchises, upon such terms and
conditions and for such consideration, which may be in whole or in part
shares of stock in, and/or other securities of, any other corporation or
corporations, as its Board of Directors shall deem expedient and for the
best interests of the Corporation, when and as authorized by the affirmative
vote of the holders of a majority of the stock issued and outstanding having
voting power given at a stockholders' meeting duly called upon at least 20
days notice containing notice of the proposed sale, lease or exchange, or
when authorized by the written consent of the holders of a majority of the
voting stock issued and outstanding.
EIGHTH: Upon the written consent or vote of the holders of a
majority in aggregate number of shares of stock of the Corporation then
outstanding and entitled to vote, every statute of the State of Delaware (a)
increasing, diminishing, or in any way affecting the rights, powers, or
privileges of stockholders of corporations organized under the general laws
of said State, or (b) giving effect to the action taken by any part, less
than all, of the stockholders of any such corporation, shall be binding upon
the Corporation and every stockholder thereof, to the same extent as if such
statute had been in force at the date of the making, filing and recording of
this Certificate of Incorporation of the Corporation.
NINTH: Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may on the application
in a summary way of this Corporation or of any creditor or stockholder
thereof, or on the application of any receiver or receivers appointed for
this Corporation under the provisions of Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors
or class of creditors, and/or of the stockholders or class of stockholders
of this Corporation, as the case may be, to be summoned in such manner as
the said court directs. If a majority in number representing three-fourths
in value of the creditors or class of creditors, and/or of the stockholders
or class of stockholders of this Corporation, s the case may be, agree to
any compromise or arrangement and to any reorganization of this Corporation
as consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders,
of this Corporation, as the case may be, and also on this Corporation.
TENTH: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation in
the manner now or hereafter prescribed by law, and all rights and powers
conferred herein on stockholders, directors and officers are subject to this
reserved power.
Certificate of Amendment
of
Certificate of Incorporation
Interface Systems, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Interface Systems,
Inc. resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment
to be advisable and calling a meeting of the shareholders of said
corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation
be amended by changing the first paragraph of Article Fourth
thereof, so that, as amended, the first paragraph of said Article
shall be and read as follows:
"FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is Eight Million (8,000,000) shares of
Common Stock, par value, $.10 per share."
SECOND: That thereafter, at the 1984 Annual Meeting of the Shareholders of
said corporation duly called and held upon notice in accordance with Section
222 of the General Corporation Law of the State of Delaware, the necessary
number of shares as required by statute were voted in favor of the
amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: That the capital of said corporation shall not be reduced under or
by reason of said amendment.
IN WITNESS WHEREOF, said Interface Systems, Inc. has caused this certificate
to be signed by Carl L. Bixby, its President, and Thomas E. Armstrong, its
Secretary, this 31st day of May, 1984.
BY: /S/ Carl L. Bixby
-----------------------------
Carl L. Bixby, President
ATTEST: /S/ Thomas E. Armstrong
------------------------------
Thomas E. Armstrong, Secretary
Certificate of Amendment
of
Certificate of Incorporation
INTERFACE SYSTEMS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Interface Systems,
Inc. resolution were duly adopted setting forth amendments of the
Certificate of Incorporation of said corporation, declaring said amendments
to be advisable and calling a meeting of the shareholders of said
corporation for consideration thereof. The resolutions setting forth the
proposed amendments are as follows:
RESOLVED, That the Certificate of Incorporation of this corporation
by amended by changing Article FIFTH thereof, so that, as amended,
the Article shall be and read in its entirety as follows:
"FIFTH: All corporation powers shall be exercised by the Board of
Directors, except as otherwise provided by statute or by Certificate
of Incorporation.
Election of directors need not be by ballot.
IN FURTHERANCE AND NOT IN LIMITATION OF THE POWERS CONFERRED BY
STATUTE, THE BOARD OF DIRECTORS IS EXPRESSLY AUTHORIZED:
(a) To fix, determine and vary from time to time the amount to be
maintained as surplus and the amount or amounts to be set apart as
working capital.
(b) To set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper purpose
and/or to abolish any such reserve in the manner in which it was
created.
(c) To make, amend, alter, change, add to or repeal bylaws for the
Corporation without any action on the part of the stockholders. The
bylaws may be amended, altered, changed, added to or repealed by the
stockholders only as provided in the bylaws.
(d) To authorized and cause to be executed mortgages and liens,
without limit as to amount, upon the real and personal property of
the Corporation, including after-acquired property.
(e) From time to time to determine whether and to what extent, at
what time and place, and under what conditions and regulations the
accounts and books of the Corporation or any of them shall be open
to the inspection of any stockholders; and no stockholder shall have
any right to inspect any account or book or document of the
Corporation except as conferred by statute or bylaws or as
authorized by a resolution of the stockholders or Board of
Directors.
(f) To authorize the payment of compensation to the directors for
services to the Corporation, including fees for attendance at
meetings of the Board of Directors, of the Executive Committee, and
of other committees, and to determine the amount of such
compensation and fees."
FURTHER RESOLVED, That the Certificate of Incorporation of this
corporation be amended by adding Article ELEVENTH so that said
Article shall be and read in its entirety as follows:
"ELEVENTH: Notwithstanding any other provision of this Certificate
of Incorporation, any amendment of this Certificate of
Incorporation, including, without limitation, the amendment of this
Article ELEVENTH, the effect of which would be to alter, amend,
supplement or repeal the Bylaws of the Corporation shall not be made
except by the same affirmative vote of the shareholders as is
required to make, alter, amend, supplement or repeal the Bylaws
pursuant to Section 22 of the Bylaws."
SECOND: That thereafter, at the 1985 Annual Meeting of the Shareholders of
said corporation duly called and held upon notice in accordance with Section
222 of the General Corporation Law of the State of Delaware, the necessary
number of shares as required by statute were voted in favor of the
amendments.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: That the capital of said corporation shall not be reduced under or
by reason of said amendment.
IN WITNESS WHEREOF, the Interface Systems, Inc. has caused this certificate
to be signed by Carl L. Bixby, its President, and George W. Perrett, its
Secretary, this 25th day of April, 1985.
By: /S/ Carl L. Bixby
----------------------------
Carl L. Bixby, President
ATTEST: /S/ George W. Perrett
-----------------------------
George W. Perrett
Certificate of Amendment
of
Certificate of Incorporation
INTERFACE SYSTEMS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Interface Systems,
Inc. a resolution was duly adopted setting forth an amendment of the
Certificate of Incorporation of said corporation, declaring said amendment
to be advisable and calling a meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, That the Certificate of Incorporation of this corporation
be amended by adding Article TWELFTH so that said Article shall be
and read in its entirety as follows:
"TWELFTH: A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State
of Delaware, as the same exists or hereafter may be amended, or (iv)
for any transaction from which the director derived an improper
personal benefit. If the General Corporation Law of the State of
Delaware hereafter is amended to authorize the further elimination
or limitation of the liability of directors, then the liability of a
director of the Corporation, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest
extent permitted by the amended Delaware General Corporation Law of
the State of Delaware. Any repeal or modification of this Article
TWELFTH by the stockholders of the Corporation shall be prospective
only, and shall not adversely affect any limitation on the personal
liability of a director of the Corporation existing at the time of
such repeal or modification."
SECOND: That thereafter, at the 1987 Annual Meeting of the
Stockholders of said corporation duly called and held upon notice in
accordance with Section 222 of the General Corporation Law of the
State of Delaware, the necessary number of shares as required by
statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the
State of Delaware.
FOURTH: That the capital of said corporation shall not be reduced
under or by reason of said amendment.
IN WITNESS WHEREOF, said Interface Systems, Inc. has caused this
certificate to be signed by David O. Schupp, its Vice President, and
George W. Perrett, its Secretary, this 12th day of May, 1987.
BY: /S/ David O. Schupp
-------------------------------
David O. Schupp, Vice President
ATTEST: /S/ George W. Perrett
--------------------------------
George W. Perrett, Secretary
Certificate of Amendment
of
Certificate of Incorporation
of
Interface Systems, Inc.
Interface Systems, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Interface
Systems, Inc., resolutions were duly adopted setting forth a proposed
amendment of the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and calling a meeting of the shareholders of
said corporation for consideration thereof. The resolution setting forth
the proposed amendment is as follows:
RESOLVED, THAT The Certificate of Incorporation shall be amended by
changing the first paragraph of Article FOURTH thereof, so that, as
amended, the first paragraph shall read as follows:
"FOURTH: The total number of shares of stock, which the Corporation
shall have authority to issue is Twenty Million (20,000,000) shares
of Common Stock, par value $.10 per share".
SECOND. That thereafter, at the 1996 Annual Meeting of the
Stockholders of said corporation duly called and held upon notice in
accordance with Section 222 of the General Corporation Law of Delaware, the
necessary number of shares as required by statute were voted in favor of the
amendment.
THIRD. That said amendment was duly adopted in accordance with
Section 242 of the General Corporation Law of the Sate of Delaware.
FOURTH. That the capital of said corporation shall not be reduced
by reason of said amendment.
IN WITNESS WHEREOF, Interface Systems, Inc. has caused this
certificate to be signed by Carl L. Bixby, its President, and George W.
Perrett, its Secretary, on the day of May, 1996.
INTERFACE SYSTEMS, INC.
By: /S/ Carl L. Bixby
--------------------------
Carl L. Bixby
President
Attest: /S/ George W. Perrett
--------------------------
George W. Perrett
Secretary
As of June 14, 1996
Exhibit 3(b)
AMENDED BYLAWS
OF
INTERFACE SYSTEMS, INC.
SECTION 1. OFFICES. In addition to its principal office in the
State of Delaware, the Corporation may also have offices at such other
places within or without the State of Delaware as the Board of Directors
shall from time to time determine.
SECTION 2. PLACE OF MEETINGS. Meetings of the stockholders and
meetings of the Board of Directors may be held at any place or places within
or without the State of Delaware.
SECTION 3. ANNUAL STOCKHOLDERS MEETING. The annual meeting of the
stockholders of the Corporation for the election of directors and for the
transaction of such other business as may properly come before the meeting
shall be held on such date and at such time and place as may be specified in
the notice of annual meeting to be sent to the stockholders. The Board of
Directors acting by resolution may postpone and reschedule any previously
scheduled annual meeting of stockholders. Any annual meeting of
stockholders may be adjourned by the Chairman of the meeting or pursuant to
a resolution of the Board of Directors.
SECTION 4. SPECIAL STOCKHOLDERS MEETING. Special meetings of
the stockholders may be called by the Chairman of the Board, or by the
President, or pursuant to resolution of the Board of Directors. Business
transacted at a special meeting of stockholders shall be confined to the
purpose or
purposes of the meeting as stated in the notice of the meeting. The Board
of Directors acting by resolution may postpone and reschedule any previously
scheduled special meeting of stockholders. Any special meeting of
stockholders may be adjourned by the Chairman of the meeting or pursuant to
resolution of the Board of Directors.
SECTION 5. NOTICE OF STOCKHOLDERS MEETINGS. Notice of the time and
place of every meeting of stockholders and of the business to be acted on at
such meeting shall be mailed by the Secretary or the officer performing his
duties, not less than ten days (or not less than twenty days when such is
required by Delaware law) nor more than fifty days before the meeting to
each stockholder of record entitled to vote thereat and entitled to such
notice at his last known post office address; provided, however, that if a
stockholder be present at a meeting or waive notice thereof in writing
before or after the meeting, notice of the meeting to such stockholder shall
be unnecessary. When a meeting of stockholders is adjourned to
another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken; provided, however, that if the adjournment is for more
than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote thereat.
SECTION 6. QUORUM OF STOCKHOLDERS. The holders of a
majority of the stock of the Corporation having voting power present in
person or by proxy shall constitute a quorum, except as otherwise provided
by law or by the Certificate of Incorporation or Bylaws of the Corporation,
but less than a quorum shall have power to adjourn any meeting from time to
time. The holders of a majority of the stock present and entitled to vote
at a duly qualified meeting of stockholders shall have power to act.
SECTION 7. PROXIES. At every meeting of stockholders each
stockholder entitled to vote thereat shall be entitled to one vote for each
share of stock held by him, and may vote and otherwise act in person or by
proxy, but no proxy shall be voted upon more than three (3) years after its
date unless such proxy provides for a longer period.
SECTION 8. LIST OF STOCKHOLDERS. At least ten (10) days
before each stockholders' meeting, a complete list, arranged in alphabetical
order, of the stockholders entitled to vote at the meeting, showing the name
and address of each stockholder and the number of shares registered in the
name of each stockholder, shall be prepared and filed in the place where the
meeting is to be held, or such other place within the city where the meeting
is to be held as shall be specified in the notice of the meeting, and shall,
during the usual hours of business for said ten (10) days, be open to the
examination of any stockholders for any purpose germane to the meeting at
the place where it is filed. The list of stockholders shall also be
produced and kept at the time and place of the meeting, during the whole
time thereof, and may be inspected by any stockholder who is present.
SECTION 9. STOCK CERTIFICATES. Certificates of stock shall
be of such form as the Board of Directors may elect and shall be signed by
the President or a Vice-President and the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary, but where any such
certificate is signed by a transfer agent or an assistant transfer agent or
transfer clerk acting on behalf of the Corporation and by a registrar, the
signatures of any such officers of the Corporation may be facsimiles,
engraved or printed.
SECTION 10. STOCK TRANSFERS AND RECORDS. The stock of the
Corporation shall be transferable or assignable only on the books of the
Corporation by the holders in person, or by attorney, on the surrender of
the certificates therefor. The Board of Directors may appoint one or more
transfer agents and registrars of the stock. Any stockholder, in person or
by his attorney or other duly authorized agent, shall, upon written demand
under oath stating the purpose thereof, have the right during the usual
hours of business, to inspect for any proper purpose the stock ledger of the
Corporation, a list of its stockholders and its other books and records, and
to make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to the stockholder's interest as such. In every instance
where an attorney or other agent shall be the person who seeks the right to
inspection, the demand of the stockholder under oath shall be accompanied by
a power of attorney or such other writing which authorizes the attorney or
other agent to so act on behalf of the stockholder. Such demand under oath
shall be directed to the Corporation at its registered office in the State
of Delaware or at its principal place of business within or without the
State of Delaware.
SECTION 11. RECORD DATES. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board
of Directors shall have the power to fix in advance a record date, which
shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other such
action. In every case in which a record date is fixed, such stockholders
and only such stockholders as shall be stockholders of record on the date so
fixed shall be entitled to notice of and to vote at such meeting, or to
express consent to such corporate action in writing without a meeting, or to
receive payment of such dividend or other distribution, or to receive such
allotment, or to exercise such rights, as the case may be, notwithstanding
any transfer of any stock on the books of the Corporation. If no record
date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at the meeting of stockholders
shall be at the close of business on the date next preceding the date on
which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held, and the record
date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for any adjourned meeting.
SECTION 11.1. NOMINATION AND STOCKHOLDER BUSINESS PROPOSAL:
(A) Annual Meetings of Stockholders. (1) Nominations of
persons for election to the Board of Directors of the Corporation and the
proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the Corporation who was a stockholder of record at the time
of giving of notice provided for in this Bylaw, who is entitled to vote at
the meeting and who complied with the notice procedures set forth in this
Bylaw.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A) (1) of this Bylaw, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60
days from such anniversary date, notice by the stockholder to be timely must
be so delivered not earlier than the 90th day prior to such annual meeting
and not later than the close of business on the later of the 60th day prior
to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes
to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director
if elected); (b) as to any other business that the stockholder proposes to
bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; (c) as
to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made (i) the name and address of
such stockholder, as they appear on the Corporation's books, and of such
beneficial owner and (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A) (2) of this Bylaw to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the
Corporation is increased and there is no public announcement naming all of
the nominees for director or specifying the size of the increased Board of
Directors made by the Corporation at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice
required by this Bylaw shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it
shall be delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on the 10th day
following the day on which such public announcement is first made by the
Corporation.
(B) Special Meetings of Stockholders. Only such business
shall be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting.
Nominations of persons for election to the Board of Directors may be made at
a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the direction
of the Board of Directors or (b) by any stockholder of the Corporation who
is a stockholder of record at the time of giving of notice provided
hereunder, who shall be entitled to vote at the meeting and who complies
with the notice procedures set forth in this Bylaw. Nominations by
stockholders of persons for election to the Board of Directors may be made
at such a special meeting of stockholders if the stockholder's notice
required by paragraph (A) (2) of this Bylaw shall be delivered to the
Secretary at the principal executive offices of the Corporation not earlier
than the 90th day prior to such special meeting and not later than the close
of business on the later of the 60th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
(C) General. (1) Only such persons who are nominated in
accordance with the procedures set forth in this Bylaw shall be eligible to
serve as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance
with the procedures set forth in this Bylaw. The Chairman of the meeting
shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made in accordance
with the procedures set forth in this Bylaw and, if any proposed nomination
or business is not in compliance with this Bylaw, to declare that such
defective proposal shall be disregarded.
(2) For purposes of this Bylaw, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this
Bylaw, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed
to affect any rights of stockholders to request inclusion of proposals in
the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act.
SECTION 11.2. VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
The Board of Directors shall appoint, prior to any annual, special or other
meeting of stockholders, one or more inspectors of elections. The
inspectors will be responsible for ascertaining the number of shares
outstanding and the voting power of each, determining the shares represented
at the annual, special or other meeting of stockholders and the validity of
proxies and ballots, counting all votes and ballots, determining and
retaining for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and certifying their
determination of the number of shares represented at the annual, special, or
other meeting of stockholders, and their count of all votes and ballots.
The inspectors may appoint or retain other persons or entities to assist in
the performance of the duties of the inspectors. In determining the
validity and counting of proxies and ballots, the inspectors shall be
limited to an examination of the proxies, any envelopes submitted with those
proxies, any information provided in accordance with the General Corporation
Law of the State of Delaware, ballots and the regular books and records of
the Corporation.
The date and time of the opening and the closing of the polls
for each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless the Court of Chancery of the State of Delaware
upon application by a stockholder shall determine otherwise.
SECTION 12. BOARD OF DIRECTORS. The affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors. The number of directors constituting the entire Board shall not
be less than three nor more than twelve, the exact number of directors to be
fixed from time to time only by vote of a majority of the entire Board.
Directors need not be stockholders of the Corporation or residents of the
State of Delaware.
Directors shall be elected at each annual meeting of the
stockholders, each to hold office until the next annual meeting of
stockholders and until the director's successor is elected and qualified, or
until the director's resignation or removal.
During the intervals between annual meetings of stockholders,
any vacancy occurring in the Board of Directors caused by resignation,
removal, death or other incapacity, and any newly created directorships
resulting from an increase in the number of directorships shall be filled by
a majority vote of the directors then in office, whether or not a quorum.
If the Board of Directors accepts the resignation of any director or officer
to take effect at a future time, it shall have the power to elect a
successor to take office when the resignation becomes effective. Each
director chosen to fill a vacancy or chosen to fill a newly created
directorship shall hold office until the next election of directors by the
stockholders and until his successor is elected and qualified, or until his
earlier death, resignation or removal. The Board of Directors shall have
the power to authorize the payment of compensation to the directors for
services to the Corporation including fees for attendance at meetings of the
Board of Directors, and to determine the amount of such compensation and
fees.
Any director may be removed from office as a director at any
time, but only for cause, by the affirmative vote of stockholders of record
holding a majority of the outstanding shares of stock of the corporation
entitled to vote in elections of directors given at a meeting of the
stockholders called for that purpose.
SECTION 13. BOARD OF DIRECTORS MEETINGS. Meetings of the
Board of Directors shall be held at the times fixed by resolution of the
Board or upon call of the Chairman of the Board, the President or any two
directors and may be held outside of the State of Delaware. The Secretary
or officer performing his duties shall give reasonable notice (which need
not in any event exceed two (2) days) of all meetings of directors, provided
that a meeting may be held without notice immediately after the annual
stockholder's meeting, and notice need not be given of regular meetings held
at times fixed by resolution of the Board. Meetings may be held at any time
without notice if all the directors are present or if those not present
waive notice either before or after the meeting. Notice by mail or
telegraph to the usual business or residence address of the directors not
less than the time above specified before the meeting shall be sufficient.
A majority of the total number of directors shall constitute a quorum for
the transaction of business and the act of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors. Less than such a quorum shall have power to adjourn the
meeting from time to time without notice.
SECTION 14. OFFICERS. The Board of Directors, as soon as
may be practicable after the election of directors in each year, shall
appoint one of their number Chairman of the Board and shall appoint one of
their number President of the Corporation, and shall also appoint one or
more Vice-Presidents, a Secretary and a Treasurer, and shall from time to
time appoint such other officers as they may deem proper. If so appointed
by the Board of Directors, the same person may hold more than two offices,
other than the offices of President and Secretary.
SECTION 15. COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board, appoint two or more of
their number to act as an executive committee to exercise the authority of
the Board of Directors at such times as it is not actively in session. The
Board of Directors may appoint such other committees from time to time to
have such authority as shall be specified by the Board of Directors in the
resolutions taking such appointments. The Board of Directors may designate
one or more directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting thereof.
SECTION 16. OFFICERS' TERMS OF OFFICE. The term of office
of all officers shall be until the first meeting of the Board of Directors
after the next annual meeting of stockholders subsequent to their
appointment and until their respective successors are chosen and qualified,
or until they shall die or resign, but any officer may be removed from
office at any time by the Board of Directors with or without cause if they
deem such action to be in the best interests of the Corporation. Vacancies
in any office may be filled by the Board at any meeting.
SECTION 17. OFFICERS' POWERS AND DUTIES. The President
shall be the chief executive officer of the Corporation with full powers to
manage its affairs, subject to the powers of the Board of Directors. The
officers of the Corporation shall otherwise have such powers and duties as
usually pertain to their offices, except as modified by the Board of
Directors, and shall also have such additional powers and duties as may from
time to time be conferred upon them by the Board of Directors.
SECTION 18. ACTION WITHOUT A MEETING. Whenever the vote of
the Board of Directors or of any committee thereof at a meeting is required
or permitted to be taken, the meeting and vote may, subject to the
provisions of law, be dispensed with, if all of the directors or committee
members who should have been entitled to vote upon the action if such
meeting were held, shall severally and/or collectively consent in writing to
such corporate action being taken.
SECTION 19. BANKING. The Board of Directors are authorized
to select such depositories as they shall deem proper for the funds of the
Corporation. All checks and drafts against such deposited funds shall be
signed and countersigned by persons to be specified by the Board of
Directors.
SECTION 20. SEAL. The corporate seal of the Corporation
shall be in such form as the Board of Directors shall prescribe.
SECTION 21. FISCAL YEAR. The fiscal year of the Corporation
shall be such year as may be fixed from time to time by the Board of
Directors.
SECTION 22. AMENDMENT. A majority of the members of the
Board of Directors then in office may from time to time make, alter, amend,
supplement or repeal any or all provisions of these Bylaws. In addition,
the shareholders may from time to time adopt, alter, amend, supplement or
repeal any or all provisions of these Bylaws, including the provisions of
this Section 22; provided such action is approved at a meeting of
shareholders called for such purpose, by the affirmative vote of the holders
of not less than 80% of the outstanding shares of the capital stock of the
Corporation entitled to vote generally in the elections of directors.
Nothing contained herein shall detract from the authority of the Board of
Directors to make, alter, amend, supplement or repeal any or all provisions
of the Bylaws as provided herein.
SECTION 23. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
OR AGENTS.
(a) Right to Indemnification. Each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she, or a person of whom he or she is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the request
of the Corporation as a director or officer of another corporation or of a
partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding
is alleged action in an official capacity as director or officer or in any
other capacity while serving as a director or officer, shall be indemnified
and held harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be
amended, (but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts to be
paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to be a director or officer and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that
except as provided in paragraph (b) hereof with respect to proceedings
seeking to enforce rights to indemnification, the Corporation shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Section shall
be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that if the Delaware
General Corporation Law requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not
in any other capacity in which service was or is rendered by such person
while a director or officer, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the Corporation of an undertaking, by or
on behalf of such director or officer, to repay all amounts so advanced if
it shall ultimately be determined that such director or officer is not
entitled to be indemnified under this Section or otherwise.
(b) Right of Director or Officer Claimant to Bring Suit.
If a claim under paragraph (a) of this Section is not paid in full by the
Corporation within sixty (60) days after a written claim has been received
by the Corporation, except in a case of a claim for expenses incurred in
defending a proceeding in advance of its final disposition, in which case
the applicable period shall be twenty (20) days, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant
shall be entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking, if any is required,
has been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the Delaware General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
A determination that the claimant has not met the applicable standard of
conduct, when made: (l) by the Board of Directors by a majority vote of a
quorum consisting of directors who are not parties to such action, suit, or
proceeding; or (2) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion; or (3) by the stockholders, shall serve
as evidence in support of a contention by the Corporation that the claimant
has not met that standard of conduct.
(c) Non-Exclusivity of Rights. The right to
indemnification and the payment of expenses incurred in defending a
proceeding in advance of its final disposition conferred in this Section
shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
(d) Indemnification of Employees and Agents of the
Corporation. The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification, and to be
paid by the Corporation the expenses incurred in defending any proceeding in
advance of its final disposition, to any employee or agent of the
Corporation to the fullest extent of the provisions of this Section with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
(e) Insurance. The Corporation may maintain insurance,
at its expense, to protect itself and any director, officer, employee or
agent of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or
not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation Law.
SECTION 24. LOST OR DESTROYED STOCK CERTIFICATES. Upon the
presentation to the Corporation of a proper affidavit attesting to the loss,
destruction or mutilation of any certificate or certificates for shares of
stock of the Corporation, the Board of Directors shall direct the issuance
of a new certificate or certificates to replace the certificate or
certificates so alleged to be lost, destroyed or mutilated. The Board of
Directors may require, as a condition precedent to the issuance of any such
new certificates, any or all of the following: (a) presentation of
additional evidence or proof of the loss, destruction or mutilation claimed;
(b) advertisement of the loss in such manner as the Board of Directors may
direct or approve; (c) a bond or agreement of indemnity in such form and
amount and with such sureties, or without sureties, as the Board of
Directors may direct or approve; (d) the approval or order of a court or
judge.
SECTION 25. The Corporation shall not be governed by the
provisions of Section 203 of the General Corporation Law of the State of
Delaware. Notwithstanding anything to the contrary contained in these
Bylaws, this Section 25 shall not hereafter be amended by the Board of
Directors.
Exhibit 10(6)
RELEASE AND SETTLEMENT AGREEMENT
THIS AGREEMENT is made this 20th day of June, 1996, between Carl Bixby
("Bixby") and Interface Systems, Inc., a Delaware corporation ("Interface").
RECITALS
A.Bixby is presently employed by Interface but desires to resign effective
June 20, 1996 with respect to his position as President, Chief Executive
Officer and effective September 10, 1996 as an employee; and
B. Bixby desires to resign full-time employment for personal reasons; and
C.Bixby and Interface recognize that continued association and finalization
of all matters relating to Bixby's employment would be of assistance to
Bixby and Interface; and
D.Interface is not obligated to pay Bixby any additional compensation or
benefits other than that which he has earned through June 30, 1996 with the
understanding that Bixby will be on an unpaid leave of absence until
September 10, 1996.
In consideration of the foregoing and of the promises and the mutual
covenants contained herein, it is hereby agreed between Bixby and Interface
as follows:
AGREEMENT
1. Bixby voluntarily agrees to resign as President,
Chief Executive Officer and all other positions, except as a member of the
Board of Directors of Interface, which he holds with Interface or its
subsidiaries including, but not limited to, his position as a trustee of
Interface's 401(k) Plan effective June 20, 1996.
2. Bixby voluntarily agrees to resign as an employee of
Interface effective September 10, 1996 . Bixby understands and agrees that
he will be on an unpaid leave of absence from July 1, 1996 until September
10, 1996. Bixby further agrees that unless he exercises his right to
rescind the Agreement pursuant to paragraph 25, he will not and cannot
rescind the resignations set forth in paragraphs 1 and 2 hereof. Bixby
waives his right to all benefits and rights as an employee except for those
under any Interface Stock Option Plan.
3. Interface agrees to retain Bixby as an independent
contractor for a 24-month period beginning July 1, 1996, to consult with
Interface upon Interface's request regarding the business of Interface. For
making himself available at such time as specified by Interface and
rendering services as specified by Interface, Bixby shall be paid $16,000
per month payable at such times as his base compensation was payable when he
was still an employee.
4. Any rights Bixby has under any stock option plan of
Interface are not affected by this Agreement.
5. Bixby presently owes Interface $600,000 pursuant to
two (2) promissory notes and a pledge agreement. These notes remain in full
force and effect.
6. Bixby additionally owes Interface approximately
$100,000 for, among other things, advances outstanding. Bixby agrees to
sign a promissory note for such amount The amount of the note shall be
repaid in 18 equal monthly installments, which amount shall be deducted from
the payments set forth in Paragraph 3 above.
7. Bixby recognizes that the amounts to be paid to him
pursuant to this Agreement are in excess of any earned wages or benefits due
and owing Bixby through his separation date.
8. In exchange for the good and valuable consideration
set forth in this Agreement, Bixby, on behalf of himself, his heirs,
executor and assigns, releases, waives and discharges any and all manner of
action, causes of action, claims, rights, charges, suits, damages, debts,
demands, obligations, attorneys' fees, or any and all other liabilities or
claims of whatsoever nature, whether individually or derivatively, whether
in law or in equity, known or unknown, including, but not limited to, any
claim and/or claim of damages or other relief for tort, breach of contract,
personal injury, negligence, loss of consortium, age discrimination under
The Age Discrimination In Employment Act of 1967 (as amended), employment
discrimination prohibited by other federal, state or local laws including
sex, race, national origin, marital status, age, handicap, height, weight,
or religious discrimination, and any other claims for unlawful employment
practices which Bixby has claimed or may claim or could claim in any local,
state or federal forum, against Interface, its directors, officers,
employees, attorneys, agents, successors and assigns and affiliates and
subsidiaries, and their officers, directors, employees, attorneys, agents,
successors and assigns, and all others ("Interface Representatives").
9. Bixby may submit a letter of resignation which will
be placed in his file.
10. Bixby and Interface intend that this Agreement will
irrevocably bar any action or claim whatsoever by Bixby against Interface
and Interface Representatives for any resultant injuries or damages, whether
known or unknown, sustained or to be sustained, as a result of any acts,
omissions and conduct of Interface and Interface Representatives having
occurred up to the present date including, but not limited to, Bixby's
employment with Interface and the termination of that employment.
11. Bixby understands that he does not waive rights or
claims that may arise after the date this Agreement is executed, but Bixby
understands and agrees that this Agreement and the release language in
paragraph 8 apply to his decision to resign as an employee and his waiver of
any right to rescind that resignation except as set forth in paragraph 25 of
the Agreement.
12. Bixby further agrees that he has read this Agreement
carefully and understands all of its terms.
13. Bixby understands and agrees that he was advised to
consult with an attorney prior to executing this Agreement and that he has
entered into this Agreement with the advice of his attorney.
14. Bixby understands and agrees that he has been given
21 days (or more) within which to consider this Agreement.
15. Bixby and Interface acknowledge that this Agreement
reflects their desire to terminate all aspects of their employment
relationship in an orderly and amicable fashion. The parties in no way
acknowledge any fault or liability to the other party or any other person or
entity and this Agreement shall not in any way be construed as an admission
by either party or any other person or entity of any fault or liability to
the other party or any other person or entity.
16. Bixby agrees that he will not receive, is not
entitled to receive and will not claim any salary, bonus, benefits,
severance pay, other compensation, expenses or other payment of any kind
other than that which is specifically set forth in this Agreement.
17. Bixby represents and agrees that he has kept and will
keep the fact, amount and terms of his employment relationship and of this
Agreement completely confidential, and that he will not hereafter disclose,
except as required by law, any information concerning the fact, amount or
terms of this Agreement to any person other than his immediate family, his
attorney and his tax advisor (collectively, "Bixby's Confidants"), provided
each is informed of and agrees to be bound by this confidentiality
provision.
By way of illustration and without limitation, neither Bixby
nor any of Bixby's Confidants shall disclose the fact, amount, or terms of
this Agreement to anyone, including, but not limited to, any representative
of any print, radio or television media; to any past, present or prospective
employee of, Interface or others released in this Agreement, or to
Interface's shareholders or to the public at large.
Nothing in this paragraph shall prohibit any party or his/its
counsel from disclosing the fact, amount or terms of this Agreement to a
court, arbitrator, administrative agency or other tribunal of appropriate
jurisdiction for the purpose of effectuating the provisions of this
Agreement.
18. Bixby understands and agrees that he will not in any
fashion, form or manner, either directly or indirectly, solicit or use for
his own purposes or for the purposes of any third party, "confidential
business information" in any form concerning Interface. As used in this
Agreement, "confidential business information" means any information
concerning the business and operations of Interface, its agreements or
relations with agents, contractors, customers or employees, the status of
work in progress, its products, processes, costs, pricing, customers,
employees, trade secrets, plans, commercial intentions, business practices,
or financial condition; provided, however, that "confidential business
information" shall not include information which (a) has been publicly
disclosed by Interface or included in any publicly available filing, report
or analysis or which is generally available to the public through lawful
means; (b) was known to Bixby by lawful means prior to his employment by
Interface; or (c) was created, produced, compiled, or developed by Bixby or
any other person independently and without the use of or reference to any
"confidential business information" of Interface.
Nothing in this Agreement shall preclude Bixby from
describing, without in any way disclosing "confidential business
information," in any general terms to prospective employers and business
associates, and to no one else, specifically and solely for the purpose of
securing other employment or a business association, the general nature of
the work he performed at Interface and the results he obtained as contained
and revealed in any public information about Interface.
Nothing in this Agreement shall preclude Bixby from making
such disclosures of "confidential business information" as may be required
by law, government regulation or court order, or as may be requested by
governmental officials or investigators concerning matters within their
official authority. In the event that disclosures of "confidential business
information" are made by Bixby under such circumstances, he shall take all
reasonably available steps to ensure that such information does not become
known to Interface's competitors, such as through conditioning disclosure
upon entry of an appropriate protective order or a confidentiality
agreement.
In view of the nature of Bixby's employment and the
"confidential business information" which Bixby has received during the
course of his employment, Bixby agrees that Interface would be irreparably
harmed by any violation or threatened violation of this paragraph, and that,
therefore, Interface shall be entitled to an injunction prohibiting Bixby
from any violation or threatened violation of this paragraph. The
undertakings set forth in this paragraph shall survive the termination of
other arrangements contained in this Agreement.
19. Until July 1, 1998, Bixby shall not: (A) directly or
indirectly, either as an equity owner (except for the ownership of not more
than 1% of any class of equity securities traded actively over-the-counter
or through a national securities exchange), director, officer, employee,
sales person, consultant, advisor, agent, lender, or in any other capacity,
in any location in which Interface conducts its business, engage or be
interested in any business which is in substantial and direct competition
with the business of Interface or any of its subsidiaries; (B) take any
action with the intent of causing the termination of the business
relationship between Interface or any of its subsidiaries and any customer
or supplier of the Company; or (C) solicit for employment any person
employed in Interface's business or the business of its subsidiaries.
Bixby agrees that the Interface would be irreparably harmed
by any violation or threatened violation of this paragraph, and that,
therefore, Interface shall be entitled to an injunction prohibiting Bixby
from any violation or threatened violation of this paragraph. The
undertakings set forth in this paragraph shall survive the termination of
other arrangements contained in this Agreement.
20. Bixby agrees that he will not, and will use his best
efforts to see that his wife, attorney and accountant do not, make or
publish any negative, critical, disparaging, slanderous or libelous
statements about Interface or its subsidiary, affiliates, officers,
directors, agents, representatives or attorneys. Interface agrees that it
will not, and Interface will use its best efforts to see that its
subsidiary, affiliates, officers, directors, agents, representatives and
attorneys of Interface do not, make or publish any negative, critical,
disparaging, slanderous or libelous statements about Bixby.
21. Bixby represents and agrees that he will promptly
turn over to Interface all files, memoranda, records, all other documents,
badges, keys, credit cards and any other physical property of Interface,
which Bixby has in his possession, custody or control. Bixby agrees that he
will promptly vacate his office and remove from such office any personal
property which he may have in such office, and agrees that any property
which he does not remove shall become the personal property of Interface.
22.Bixby agrees that he will neither engage in nor support,
nor be a party to any shareholder action, derivative or otherwise, against
Interface or any of its officers, directors, employees, agents or attorneys
until the complete satisfaction of his obligations under the two promissory
notes referenced in paragraph 5 hereof.
23. Bixby agrees to comply with the volume limitations of
Rule No. 144 promulgated under the Securities Act of 1933 during the
24-month period commencing July 1, 1996.
24. Bixby hereby assigns and relinquishes any and all
claims he may have to any inventions, ideas, methods or concepts, whether or
not patentable, trademarkable or copyrightable for anything which he
developed, invented or worked on during his employment at Interface.
25. Bixby understands and agrees that he may revoke this
Agreement for a period of seven (7) calendar days following the execution of
this Agreement. The Agreement is not effective until this revocation period
has expired. Bixby understands that any revocation, to be effective, must
be in writing and either (a) postmarked within seven (7) days of execution
of this Agreement and addressed to Garnel F. Graber, Interface Systems,
Inc., 5855 Interface Drive, Ann Arbor, MI, or (b) hand delivered within
seven (7) days of execution of this Agreement to Garnel F. Graber. Bixby
understands that if revocation is made by mail, mailing by certified mail,
return receipt requested, is recommended to show proof of mailing.
26. In agreeing to sign this Release and Settlement
Agreement, Bixby is doing so completely voluntarily and based on the advice
of his attorney and agrees that he has not relied on any oral statements or
explanations made by Interface or its representatives.
27. This Agreement is in full accord and satisfaction and
compromise of the claims of Bixby and Interface and is not to be construed
as an admission of liability on the part of Interface.
28. This Agreement contains the entire Agreement between
Bixby and Interface. Any modification of this Agreement must be made in
writing and signed by Bixby and Garnel F. Graber on behalf of Interface
Systems, Inc.
/S/ Carl Bixby
- ----------------------------- ------------------------------
Witness Carl Bixby
Date: June 21, 1996
INTERFACE SYSTEMS, INC.
/S/ David Schupp
- ----------------------------- By: -----------------------------
Witness David Schupp
Its: Treasurer
Date:
NOTICE OF INTENTION TO SIGN BEFORE
EXPIRATION OF TWENTY-ONE (21) DAY REVIEW PERIOD
1. I understand that I have been offered twenty-one (21)
days to consider whether to sign and accept this Release and Settlement
Agreement. Nevertheless, it is my desire and intention to sign and accept
it at this time and I do so freely and voluntarily.
2. I understand that I have an opportunity to revoke the
Release and Settlement Agreement pursuant to its terms and that the time
period for revoking begins to run from the date of signature.
/S/ Carl Bixby
Dated: June 21, 1996 ----------------------------
Carl Bixby
Exhibit 23 (a)
Consent of Independent Certified Public Accountants
Interface Systems, Inc.
5855 Interface Drive
Ann Arbor, Michigan 48103
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the previously filed Registration Statement (Form S-
8) of our reports dated November 14, 1996 relating to the consolidated
financial statements and schedules of Interface Systems, Inc. and
subsidiaries appearing in the Company's Annual Report on Form 10-K for the
year ended September 30, 1996.
/S/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Troy, Michigan
December 24, 1996
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 1,694,725
<SECURITIES> 0
<RECEIVABLES> 11,172,983
<ALLOWANCES> 165,000
<INVENTORY> 10,478,322
<CURRENT-ASSETS> 26,340,546
<PP&E> 9,220,858
<DEPRECIATION> 4,404,043
<TOTAL-ASSETS> 38,878,959
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<BONDS> 0
<COMMON> 453,588
0
0
<OTHER-SE> 20,799,396
<TOTAL-LIABILITY-AND-EQUITY> 38,878,959
<SALES> 74,583,111
<TOTAL-REVENUES> 74,583,111
<CGS> 63,797,610
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,577,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 340,376
<INCOME-PRETAX> (2,932,038)
<INCOME-TAX> 969,000
<INCOME-CONTINUING> (1,963,038)
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<EXTRAORDINARY> 0
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