<PAGE> 1
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, 1997
[ ] 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)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code (734) 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 1, 1997, computed by reference to the closing
price per share for such stock on the Nasdaq Stock Market National Market on
such date, was approximately $12,628,000 (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
1, 1997 was 4,424,944.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENT
--------
<S> <C>
Portions of Proxy Statement for the Part of Form 10-K Report
1998 Annual Meeting of Stockholders into which it is incorporated
(the "1998 Proxy Statement") Part III
</TABLE>
<PAGE> 2
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 (734)
769-5900.
The Company designs, manufactures and markets computer hardware and
software products and services (collectively referred to herein as "core
business products"), which are used primarily to connect remote users in large
enterprises to legacy applications on IBM mainframe computers. The Company's
core business products include Oasis document management software, Cleo data
communications products and IBM-compatible IPDs printers.
Oasis enables the distribution of IBM AFP documents throughout enterprise
networks to a variety of destinations such as fax machines, desktop viewers and
HP-compatible laser printers. The Cleo Products Group of the Company ("Cleo")
designs, manufactures and markets specialty data communications systems. These
systems are largely aimed at linking personal and mini computers to other
personal computers and to large IBM mainframe computers via IBM's 3270, 3770,
APPC and 3780 protocols. Cleo specializes in connecting UNIX and Windows users
to IBM mainframe systems. Cleo's 3780 and A+ products are used for file transfer
in the EDI ("Electronic Data Interchange") and Electronic Commerce marketplaces.
The Company's wholly-owned subsidiary, I.G.K. Industries, Inc. ("IGK"),
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.
The Company's other wholly-owned subsidiary, Interface Systems
International, Ltd. ("ISIL") is a wholesale distributor of laser printers,
personal computers and supplies from other manufacturers. Located outside of
London, England in Slough, and in Birmingham, England, ISIL was also responsible
for selling and marketing the Company's core business products throughout Europe
until, effective July 1, 1997, the Company's operations in the United Kingdom
were restructured into two separate operating units, distribution and core
business products. ISIL is now solely responsible for the distribution business
and a newly-formed branch is responsible for core business products.
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 differ 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 -- Uncertainties Relating to
Forward- Looking Statements."
CORE BUSINESS PRODUCTS
DOCUMENT MANAGEMENT PRODUCTS
The Company's "Oasis" product allows customers to distribute IBM AFP
documents to branch office locations where the documents can be viewed or
printed. This change in business process can result in substantial savings over
the existing method of centralized printing and courier delivery. The advent of
Microsoft's Windows NT as a preferred network server has allowed the Company to
concentrate its Oasis
<PAGE> 3
development efforts on this single platform. Core product functions include the
ability to deliver documents to Internet/Intranet attached printers as well as
LAN printers and viewers.
In addition, Oasis delivers fax-compatible TIFF images to popular fax
servers for delivery of documents to remote fax machines. It also integrates
with archiving products to allow for storage and retrieval of a company's
strategic AFP documents.
The Company also offers consulting, training and turnkey solutions in
conjunction with its Oasis offerings.
DATA COMMUNICATIONS PRODUCTS
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. The 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. The Cleo TN3270E display emulator provides
mainframe access over TCP/IP (Internet/Intranet) networks.
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
technology to support the Company's Oasis products and the client/server
approach to distributed computing. The Cleo 3270 client/server product was
completed in fiscal 1995.
Cleo also specializes in communications for EDI and Electronic Commerce,
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 an asynchronous communications product line called A+, which
in fiscal 1996, the Company expanded to many additional platforms. A+ has also
been enhanced to include TCP/IP connections for communicating over intranets and
the Internet.
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 network 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.
DOT MATRIX PRINTERS
The Company produces dot matrix printers that are plug compatible
replacements for various IBM printers. Most of these printers support IBM's
proprietary intelligent printer control language, Intelligent Printer Data
Stream (IPDS). This language is a subset of IBM's Advanced Function Presentation
2
<PAGE> 4
architecture (AFP), which is IBM's stated long-term architectural strategy for
managing printers connected to IBM mainframe and mid-range systems. The ISI 7224
replaces IBM's 4224, the ISI 7230 replaces IBM's 4230, the ISI 9210 replaces the
IBM 7210. The new ISI 9247 replaces IBM's 4247 and comes in 400 character per
second (cps) and 700 cps versions.
LASER PRINTERS
The Company manufactures or adds unique value to IBM compatible laser
printers that offer throughput from 8 pages per minute (ppm) to 60 ppm. ISI's
laser printers offer features that are generally available only on larger and
more expensive IBM models, such as the ability to save electronic resources at
the printer (ARC AFP Resource Caching). This feature can greatly reduce the
time-to-first-print for complex forms and reduce network traffic. These features
provide unique advantages for large companies such as banks and manufacturing
companies. The Company continues to sell the 7028 and 7817 model printers. New
models introduced in 1997 included the 9308 and 9324 that offer modular
expandability and printing capability on paper measuring up to 11" x 17". The
Company also introduced 9140 and 9160 laser printers that are heavy duty 40 ppm
and 60 ppm models designed for printing up to one million pages per month with
very low cost per page.
DISTRIBUTION BUSINESS
In 1994, the Company's wholly-owned subsidiary ISIL in the U.K. acquired
the Mekom distribution business, a division of Copymore, plc. The Mekom
business, located in Birmingham, England and ISIL's distribution business in
Slough now operate as the ISIL distribution business. The primary products
distributed include Canon printers, Kyocera printers, IBM desktop printers and
Toshiba laptop personal computers. ISIL also provides supplies and consumables
for the products it distributes.
CIRCUIT BOARD BUSINESS
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.
MARKETING
The Company's customers include end-users, original equipment
manufacturers, distributors, value-added-resellers 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.
Sales of the Company's core business products in Europe are made through
the Company's U.K. sales branch which sells to OEM's and other distributors
throughout Europe and the Eastern Hemisphere. 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,
1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Domestic Revenues.................................. $17,157 $15,175 $17,109
Foreign Revenues................................... 64,688 59,408 53,134
------- ------- -------
Net Revenues....................................... $81,845 $74,583 $70,243
======= ======= =======
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company markets its line of 3270-compatible printers and Oasis printing
and viewing solutions primarily to Fortune 1,000 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's customers include
Chrysler Corp., CVS Corporation, Digital Equipment Corp., Electronic Data
Systems Corp.,
3
<PAGE> 5
International Business Machines Corporation, Lucent Technologies, Boeing
Computer Services, Honda of America MFG, Inc., Mercy Center Hospital, Northwest
Airlines, Sears Roebuck and Co., Standard Electrik Lorenz Aktieng Ensellschaft,
Sterling Commerce, Inc., Morristown Memorial Hospital, 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 and Columbus, Ohio. Elsewhere,
the Company provides service through third parties, primarily Vanstar
Corporation, 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 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 other customers. 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 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.
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 there is no single competitor across all business lines.
However, IBM and Microsoft can have a major impact on most of the Company's
markets.
Previously, the Company competed primarily on price. The Company currently
differentiates itself from its competitors through unique product features and
value-added services for reliability and ease of use. With respect to printers,
the Company competes primarily on the basis of its ability to offer IBM
plug-compatible printers that offer 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 its desk top printers from a
single source (Lexmark). Significant reductions in IBM printer prices have
adversely affected the Company's revenues and margins. The Company does not
expect any further significant industry-wide price reductions.
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 the features it offers. Several
other smaller companies have also entered the market with products that are
competitive with Oasis.
4
<PAGE> 6
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, client server technology and the extension of
legacy systems to intranets. The Company believes these trends 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
Oasis products. The Company continues to see a 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 business product sales is similar to that in
the United States. Competition for the Company's distribution business in the
U.K. consists of several distributors who are larger and carry broader product
lines than those of the Company, as well as many smaller competitors.
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
Oasis products which utilize both connectivity and printing software. The
Company currently has a staff of approximately 28 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, 1997, 1996 and 1995, the Company expended approximately $3.7 million, $2.0
million and $1.5 million, respectively, for product development. 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, of approximately $1.0 million, $2.3 million and $2.0 million for the fiscal
years ended September 30, 1997, 1996 and 1995, respectively. See Note 1 of Notes
to Consolidated Financial Statements. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
EMPLOYEES
As of December 1, 1997, the Company employed approximately 220 employees.
None of the Company's employees are represented by a collective bargaining
agreement, 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 Slough and Birmingham, England;
Massachusetts; Pennsylvania and Illinois, with an annual rental expense expected
of $502,000 for fiscal 1998.
5
<PAGE> 7
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
6
<PAGE> 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on 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 Stock Market National Market:
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter............................................... $12.75 $ 4.75
Second Quarter.............................................. 19.50 10.75
Third Quarter............................................... 18.50 7.75
Fourth Quarter.............................................. 9.00 5.62
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter............................................... $ 6.50 $ 3.37
Second Quarter.............................................. 6.37 3.62
Third Quarter............................................... 5.37 2.62
Fourth Quarter.............................................. 4.62 2.87
</TABLE>
The last reported sale price for the Company's Common Stock on December 1,
1997, as reported on the Nasdaq Stock Market National Market, was $3.00. On
December 1, 1997, there were approximately 800 holders of record of the
Company's Common Stock.
The Company had warrants, which were granted in August 1983 and extended in
May 1995. 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.
The Company initiated the payment of cash dividends during fiscal 1994.
Dividends of $0.04 per share, when declared, were 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. The payment of dividends in
the future will depend on the Company's business prospects and other factors
considered by the Company's Board of Directors, including any restrictions on
such payment under the Company's credit facilities. The Company's credit
facilities currently restrict the payment of cash dividends.
On August 8, 1997, the Company issued an aggregate 16,566 shares of its
Common Stock to 21 of its employees in lieu of accrued vacation time. In issuing
these shares of Common Stock, the Company valued each share at $4.00. The
closing price of the Common Stock on that date was $3.13. The Company did not
register, and does not plan to register, such Common Stock under the Securities
Act of 1933, as amended (the "Act"), based upon exemptions from registration set
forth in Section 4(2) of the Act and Regulation D. The Company relied upon these
exemptions based upon the limited number of employees involved, investment
representations made to the Company by each employee and the negotiated nature
of the transactions.
7
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data were derived from the Company's
audited Consolidated Financial Statements. The information set forth below
should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes included elsewhere in this report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $ 81,845 $74,583 $70,243 $39,012 $33,782
Gross profit.................................. 6,742 10,786 12,727 14,512 13,248
Operating income (loss)....................... (12,368) (2,792) 767 4,418 3,222
Net income (loss)............................. (10,879) (1,963) 166 2,835 1,705
Net income (loss) per share................... (2.47) (.44) .04 .68 .41
Dividends per share........................... -- -- .16 .16 --
Weighted average shares outstanding........... 4,411 4,440 4,239 4,170 4,141
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................... $ 3,605 $10,533 $11,622 $12,420 $11,328
Total assets.................................. 28,831 38,879 33,952 31,899 25,362
Long-term debt................................ 171 235 287 334 487
Stockholders' equity.......................... 9,743 21,253 21,214 21,421 19,139
</TABLE>
NOTES:
(1) The operating loss for fiscal 1997 includes non-recurring charges of $6.2
million related to the write-off of inventory and capitalized software
development costs and $2.0 million related to write-off of goodwill and
restructuring the Company's operations in the United Kingdom. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) The above includes the operating results of the distribution business
acquired from Mekom, plc. since August 1, 1994.
(3) Fiscal 1994 includes a $127,000 charge for an accounting change which
reflects the Company's adoption of SFAS 109, "Accounting for Income Taxes"
in the first quarter of 1994.
(4) Fiscal 1993 includes non-recurring expenses of $163,000 related to the net
loss for the period of Nematron, a former wholly-owned subsidiary of the
Company which was spun-off in February 1993, and the cost of the spin-off.
8
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net revenues.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues............................................ 91.8 85.5 81.9
----- ----- -----
Gross profit................................................ 8.2 14.5 18.1
Product development costs................................... 4.5 2.6 2.1
Selling, general and administrative expenses................ 18.8 15.6 15.0
----- ----- -----
Operating income (loss)..................................... (15.1) (3.7) 1.1
Interest and other income................................... 0.1 0.3 0.3
Interest expense............................................ (0.9) (0.5) (0.4)
----- ----- -----
Income (loss) before income taxes........................... (15.9) (3.9) 1.0
Provision (benefit) for income taxes........................ (2.6) (1.3) 0.8
----- ----- -----
Net income (loss)........................................... (13.3)% (2.6)% 0.2%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased 9.7% to $81.8 million for fiscal 1997
from $74.6 million for fiscal 1996, and increased 6.2% for fiscal 1996 from
$70.2 million for fiscal 1995. The increase for both years was primarily due to
increased ISIL distribution revenue, which comprised 77.0% and 75.1% of net
revenues for fiscal 1997 and 1996, respectively. Core product sales for fiscal
1997 were slightly higher than for fiscal 1996, and for fiscal 1996 decreased
approximately 16% from fiscal 1995. During fiscal 1997, the Company increased
its focus on core business products and plans to continue to do so in the
future. Cleo EN sales, which are impacted by large corporate orders, were up
significantly in fiscal 1997 but down in fiscal 1996. Printer products sales
decreased in both fiscal 1997 and 1996 as a result of increased competition and
greater emphasis on selling Oasis products. Oasis sales increased for both years
but were not significant in relation to total sales.
Cost of Revenues. Cost of revenues was 91.8%, 85.5% and 81.9% of net
revenues for fiscal 1997, 1996 and 1995, respectively. For fiscal 1997, cost of
revenues included $6.2 million of non-recurring charges related to the write-off
of inventory and capitalized software development costs. The inventory
adjustments consisted of $2.1 million for core product printer inventory and
$1.4 million for slow moving distribution business inventory and related fair
market value reductions, that resulted from a decline in market conditions and
continued product price erosion; and of $1.1 million that resulted from several
accounting errors related to the recording of inventory at ISIL. The capitalized
software development costs write-off of $1.6 million for fiscal 1997 reflects
the Company's shift towards greater emphasis on software products.
Cost of revenues, excluding the effect of the non-recurring charges,
decreased to 84.2% of net revenues for fiscal 1997 from 85.5% for the prior
year. The decrease resulted from improved gross margins for distribution sales
and increased sales of core business software products, which have higher gross
margins, offset by increased distribution sales as a percentage of total net
revenues and an increase of $237,000 in amortization of capitalized software
development costs. Margins in the distribution business are 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.
The increase in cost of revenues for fiscal 1996 compared to fiscal 1995
was primarily due to increased distribution sales as a percentage of total net
revenues. In addition, the increase was due to higher core product costs due to
$180,000 in charges from a printer products vendor for cancellation of purchase
orders, $100,000 of higher royalty payments on licensed software and an increase
of $225,000 in amortization of capitalized software development costs.
9
<PAGE> 11
Product Development Costs. Product development costs were $3.7 million,
$2.0 million and $1.5 million, or 4.5%, 2.6% and 2.1% of net revenues for fiscal
1997, 1996 and 1995, respectively. The absolute dollar increase for both years
was primarily due to a decrease of $1.4 million and $336,000 for fiscal 1997 and
1996, respectively, in the amount of expense deferred through capitalization of
internally developed software as compared with the prior fiscal year. The
reduction in capitalization of internally developed software reflects a change
in the Company's strategy towards greater emphasis on developing software
products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $15.4 million, $11.6 million and $10.5 million, or
18.8%, 15.6% and 15.0% of net revenues for fiscal 1997, 1996 and 1995,
respectively. The absolute dollar increase for fiscal 1997 was due to a $1.5
million write-off of goodwill related to the Company's investment in its
operations in the United Kingdom; a $540,000 charge for restructuring the U.K.
operations; increased selling and marketing personnel to support the growth in
the U.K. distribution business; marketing expenses incurred to promote the Oasis
products; and to various expenses associated with an interim management team,
the hiring of a new CEO in January 1997 and other organizational and management
changes.
In July 1997, the Company's U.K. operations were restructured into two
separate entities, distribution and core, to focus each unit on its respective
market and on a return to profitability. Separate managing directors have been
appointed to run the new operating units. In addition, the combined ISIL
workforce was reduced by 15 employees, or approximately 18%.
Interest Expense. Interest expense was $730,000, $340,000 and $264,000 for
fiscal 1997, 1996 and 1995, respectively. The increases were due to increased
borrowing, primarily at ISIL, for working capital purposes.
Income Taxes. The Company recorded an income tax benefit of 16.2% and 33.0%
for fiscal 1997 and 1996, respectively, as a result of its ability to carry back
a portion of each year's net operating loss to recover income taxes paid in
prior years. The tax benefit for these years was below the statutory rate
because the losses at ISIL and the amortization and write-off of goodwill are
not eligible for tax benefit. For fiscal 1995, the provision for income taxes
resulted in an effective tax rate of 76.4%, which reflected the non-deductible
ISIL losses and non-deductible amortization of goodwill.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's primary sources of liquidity included
cash and cash equivalents of $830,000 and short-term credit facilities with a
bank providing for approximately $11.5 million of borrowings, of which $600,000
was available.
Net cash used in operating activities was $2.2 million for fiscal 1997
compared to net cash used in operating activities of $1.0 million for fiscal
1996. The increase in cash used in operating activities for fiscal 1997 was
primarily due to a net operating loss of $10.9 million and an increase in
accounts receivable of $1.2 million partially offset by non-cash charges of $7.7
million for write-offs of inventory, capitalized software development costs and
goodwill, and by depreciation and amortization of $3.4 million.
Net cash used in investing activities was $1.5 million for fiscal 1997
compared to $4.3 million for the same period of fiscal 1996. The decrease in
cash used in investing activities for fiscal 1997 was primarily due to a
decrease in additions to property and equipment and software development costs.
At September 30, 1997, the Company did not have any material capital expenditure
requirements.
Net cash provided by financing activities was $2.9 million for fiscal 1997
compared to $3.3 million for the same period of fiscal 1996. For fiscal 1997,
cash was provided primarily from borrowings under the Company's credit
facilities. For fiscal 1996, cash was provided from borrowings as well as from
the exercise of the Company's stock warrants.
Working capital was $3.6 million as of September 30, 1997 compared to $10.5
million as of September 30, 1996. The decrease in working capital was primarily
due to the decrease in cash and cash equivalents and inventory and the increase
in notes payable, offset by the decrease in accounts payable.
10
<PAGE> 12
The Company has bank credit facilities which provide for aggregate
borrowings of up to $11.5 million. As of September 30, 1997, $8.6 million was
outstanding under these facilities. The borrowings are used primarily by ISIL in
the operation of its distribution business. Advances under these facilities bear
interest at the bank's prime rate (8.5% at September 30, 1997) plus 1%, are
payable on demand and are collateralized by substantially all of the Company's
assets. The credit facilities expire February 28, 1998 and are subject to
renewal thereafter.
Under the terms of the agreements, the Company is required to maintain
certain minimum working capital, net worth and profitability levels and other
specific financial ratios. The Company was in compliance with the bank covenants
at September 30, 1997. In addition, the agreements prohibit the payment of cash
dividends and contain certain restrictions on the Company's ability to borrow
money or purchase assets or interests in other entities without the prior
written consent of the bank.
The Company has guaranteed up to 4.9 million pounds sterling ($7.9 million)
of ISIL's trade payables to two of ISIL's vendors for inventory purchases.
The Company believes that its existing cash balances, available credit
facilities and future operating cash flows will be sufficient for near term
operating needs. The Company believes it will renew the bank credit facilities
prior to expiration of the facilities. The foregoing statements are "forward
looking statements" within the meaning of the Securities Exchange Act of 1934.
The extent to which such sources will be sufficient to meet the Company's
anticipated cash requirements is subject to a number of uncertainties including
the ability of the Company's operations to generate sufficient cash to support
operations, and other uncertainties described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Uncertainties
Relating to Forward-Looking Statements."
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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 12 of this report) and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
11
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference
to the Company's 1998 Proxy Statement under the captions "Election of
Directors", "Further Information -- Executive Officers" and "Reporting of
Beneficial Ownership by Directors and Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Company's 1998 Proxy Statement under the caption "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Company's 1998 Proxy Statement under the captions "Further Information --
Principal Stockholders" and "Further Information -- Stock Ownership of
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Company's 1998 Proxy Statement under the caption "Certain Relationships
and Related Transactions."
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 12 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.
The following are the Company's management contracts and compensatory plans
and arrangements which are required to be filed as Exhibits to this Form
10-K:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.01 1982 Incentive Stock Option Plan, effective May 21, 1982, as
amended, with Form of Stock Option Agreement with Stock
Appreciation Rights -- incorporated by reference to the
Company's Registration Statement on Form S-1, filed on July
15, 1983 (File No. 2-84204).
10.02 Amended and Restated 1992 Stock Option Plan.
10.03 Amended and Restated 1993 Stock Option Plan for Non-Employee
Directors.
10.04 Letter Agreement between the Company and Robert A. Nero
dated January 10, 1997 relating to employment terms.
</TABLE>
(b) The Company filed no current reports on Form 8-K during the last
quarter of the Company's fiscal year ended September 30, 1997.
12
<PAGE> 14
INTERFACE SYSTEMS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Report of Independent Certified Public Accountants.......... F-3
Financial Statements
Consolidated Statements of Operations..................... F-4
Consolidated Balance Sheets............................... F-5
Consolidated Statements of Cash Flows..................... F-6
Consolidated Statements of Stockholders' Equity........... F-7
Notes to Consolidated Financial Statements.................. F-8 - F-15
Financial Statement Schedule
Schedule II -- Consolidated Schedule of Valuation and
Qualifying Accounts.................................... S-1
</TABLE>
F-1
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Interface Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Interface
Systems, Inc. (a Delaware corporation) and subsidiaries as of September 30,
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. The consolidated balance sheet of
Interface Systems, Inc. and subsidiaries as of September 30, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended September 30, 1996, were
audited by other auditors whose report dated November 14, 1996, expressed an
unqualified opinion on those statements. 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 audit.
We conducted our audit 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 audit provides 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 as of September 30, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
November 6, 1997
F-2
<PAGE> 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Interface Systems, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheet of Interface
Systems, Inc. and subsidiaries as of September 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended September 30, 1996. We have also
audited the schedule listed in the accompanying index for each of the two years
in the period ended September 30, 1996. These financial statements and the
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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 the results of their operations and
their cash flows for each of the two years in the period ended September 30,
1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material
respects, the information set forth therein for each of the two years in the
period ended September 30, 1996.
/s/ BDO SEIDMAN, LLP
Troy, Michigan
November 14, 1996
F-3
<PAGE> 17
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues......................................... $ 81,845,463 $74,583,111 $70,243,216
Cost of revenues..................................... 75,103,139 63,797,610 57,516,563
------------ ----------- -----------
Gross profit.................................... 6,742,324 10,785,501 12,726,653
Product development costs............................ 3,718,807 1,956,404 1,453,605
Selling, general and administrative expenses......... 15,391,857 11,621,102 10,506,062
------------ ----------- -----------
19,110,664 13,577,506 11,959,667
------------ ----------- -----------
Operating income (loss)......................... (12,368,340) (2,792,005) 766,986
Interest expense..................................... (730,979) (340,376) (263,758)
Interest and other income............................ 119,427 200,343 203,158
------------ ----------- -----------
Income (loss) before income taxes............... (12,979,892) (2,932,038) 706,386
Provision (benefit) for income taxes................. (2,100,810) (969,000) 540,000
------------ ----------- -----------
Net income (loss).................................... $(10,879,082) $(1,963,038) $ 166,386
============ =========== ===========
Net income (loss) per share.......................... $(2.47) $(0.44) $0.04
============ =========== ===========
Weighted average shares outstanding.................. 4,411,328 4,440,262 4,238,889
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 18
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $830,086 $1,694,725
Accounts receivable, less allowance for doubtful accounts
of $283,180 in 1997 and $165,000 in 1996............... 12,221,257 11,007,983
Refundable income taxes................................... 1,182,182 1,378,093
Inventories............................................... 6,284,833 10,478,322
Prepaid expenses and other................................ 913,314 1,232,423
Deferred income taxes..................................... 475,000 549,000
----------- -----------
Total current assets.............................. 21,906,672 26,340,546
Property and equipment, net................................. 4,602,696 4,816,815
Goodwill, net............................................... 1,160,634 2,881,481
Software development costs, net............................. 874,652 3,570,545
Notes receivable............................................ -- 810,173
Other assets................................................ 285,853 459,399
----------- -----------
$28,830,507 $38,878,959
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $8,640,611 $5,691,546
Accounts payable.......................................... 8,124,581 9,088,765
Accrued expenses.......................................... 847,970 693,767
Deferred revenue.......................................... 638,709 280,703
Current portion of long-term debt......................... 50,004 52,400
----------- -----------
Total current liabilities......................... 18,301,875 15,807,181
Long-term debt, less current portion........................ 170,829 234,794
Deferred income taxes....................................... 615,000 1,584,000
Commitments
Stockholders' equity:
Common stock, $.10 par value, 20,000,000 shares
authorized; 4,424,950 and 4,535,879 shares issued and
outstanding in 1997 and 1996 respectively.............. 442,495 453,588
Additional paid-in-capital................................ 10,547,447 11,122,063
Cumulative translation adjustment......................... (281,441) (236,051)
Retained earnings (deficit)............................... (965,698) 9,913,384
----------- -----------
Total stockholders' equity........................ 9,742,803 21,252,984
----------- -----------
$28,830,507 $38,878,959
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 19
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(10,879,082) $(1,963,038) $ 166,386
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation.................................... 912,384 895,800 811,778
Amortization.................................... 2,466,299 2,370,065 2,160,499
Inventory write-off and obsolescence
provision..................................... 4,660,472 371,314 1,047,652
Deferred income taxes........................... (895,000) 67,000 151,000
Gain on sale of securities...................... (74,777) -- --
Loss on sale of fixed assets.................... 176,829 38,468 24,727
Write-off of software development costs......... 1,616,358 -- --
Write-off of goodwill........................... 1,456,320 -- --
Change in operating assets and liabilities:
Accounts receivable........................... (1,213,274) (939,155) (621,373)
Refundable income taxes....................... 195,911 (918,066) (460,027)
Inventories................................... (466,983) (3,489,432) (672,627)
Prepaid expenses and other.................... 339,866 (577,194) (159,632)
Other assets.................................. (119,750) (306,335) 10,591
Accounts payable.............................. (964,184) 3,018,691 389,276
Accrued expenses.............................. 205,971 343,390 (445,743)
Deferred revenue.............................. 358,006 50,040 31,427
------------ ----------- -----------
Net cash provided by (used in) operating
activities.................................... (2,224,634) (1,038,452) 2,433,934
------------ ----------- -----------
Cash flows from investing activities:
Additions to property and equipment................ (787,837) (1,133,159) (1,756,236)
Additions to software development costs............ (953,675) (2,333,675) (1,998,022)
Change in notes receivable......................... 86,581 (810,173) --
Proceeds from sale of securities................... 177,612 -- --
------------ ----------- -----------
Net cash used in investing activities........... (1,477,319) (4,277,007) (3,754,258)
------------ ----------- -----------
Cash flows from financing activities:
Increase in notes payable.......................... 2,949,065 1,324,228 2,224,258
Reduction of long-term debt........................ (66,361) (51,752) (142,270)
Sale of stock...................................... -- 2,039,832 292,797
Cash dividends paid................................ -- -- (669,892)
------------ ----------- -----------
Net cash provided by financing activities....... 2,882,704 3,312,308 1,704,893
------------ ----------- -----------
Effect of exchange rate changes on cash.............. (45,390) (37,882) 3,907
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (864,639) (2,041,033) 388,476
Cash and cash equivalents, beginning of period....... 1,694,725 3,735,758 3,347,282
------------ ----------- -----------
Cash and cash equivalents, end of period............. $ 830,086 $ 1,694,725 $ 3,735,758
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 720,566 $ 340,376 $ 263,758
Cash paid (refunded) for income taxes.............. (1,323,683) 332,136 712,682
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 20
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE RETAINED
-------------------- PAID-IN TRANSLATION EARNINGS
SHARES AMOUNT CAPITAL ADJUSTMENT (DEFICIT) TOTAL
------ ------ ---------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
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
Net loss........... -- -- -- -- (10,879,082) (10,879,082)
Sale of stock...... 16,566 1,657 50,111 -- -- 51,768
Retirement of
stock........... (127,495) (12,750) (624,727) -- -- (637,477)
Foreign currency
translation..... -- -- -- (45,390) -- (45,390)
--------- -------- ----------- --------- ------------ ------------
Balance, September
30, 1997........... 4,424,950 $442,495 $10,547,447 $(281,441) $ (965,698) $ 9,742,803
========= ======== =========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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.") and Interface Systems International, Ltd.
("ISIL"). All significant intercompany transactions and balances have been
eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company and its subsidiaries develop, manufacture and sell computer
peripherals and data communications software primarily in the United States and
Europe.
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.
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 amounts reported for cash and cash equivalents, accounts receivable,
accounts payable, notes payable and accrued expenses approximate fair value due
to the short maturity of these items.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the costs of developing new software products are
capitalized after technological feasibility is established. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenues, estimated economic product lives
and changes in software and hardware technology.
Amortization of capitalized 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 or three years, whichever
is less. Accumulated amortization was $2,365,749 and $3,928,353 at September
30, 1997 and 1996, respectively. Amortization expense was $2,033,210,
$1,796,117 and $1,572,096 for the years ended September 30, 1997, 1996 and
1995, respectively, and is included in cost of revenues.
On an ongoing basis, management reviews the valuation and amortization of
capitalized software development costs. As part of its review, management
considers the value of future cash flows attributable to the capitalized
development costs in evaluating potential impairment of the asset. Based on such
review, the
F-8
<PAGE> 22
Company wrote off $1,616,358 of capitalized software development costs as a
component of cost of revenues during fiscal 1997.
FOREIGN CURRENCY TRANSLATION
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes investments in highly liquid investments
with maturities of ninety days or less.
INVENTORIES
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market. At September 30, inventories consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Finished goods....................................... $3,974,354 $ 4,709,066
Purchased parts...................................... 2,596,273 4,173,938
Work-in-process...................................... 321,300 1,153,172
Service and demo..................................... 643,432 797,768
---------- -----------
7,535,359 10,833,944
Less: valuation allowance....................... 1,250,526 355,622
---------- -----------
$6,284,833 $10,478,322
========== ===========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the following estimated useful lives of the
assets: buildings and improvements -- 33 years; and machinery and equipment -- 3
to 10 years. At September 30, the components of property and equipment are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land.................................................. $ 231,383 $ 231,383
Buildings and improvements............................ 2,709,863 2,680,088
Machinery and equipment............................... 6,073,832 6,309,387
---------- ----------
9,015,078 9,220,858
Less: accumulated depreciation................... 4,412,382 4,404,043
---------- ----------
$4,602,696 $4,816,815
========== ==========
</TABLE>
GOODWILL
Goodwill represents the cost in excess of fair value of the net assets of
businesses acquired and is being amortized using the straight-line method over
15 years. Accumulated amortization expense at September 30, 1997 and 1996 was
$1,527,776 and $1,934,142, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which requires an evaluation of long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
F-9
<PAGE> 23
not be recoverable. During the third quarter of fiscal 1997, management's
evaluation indicated that the goodwill related to the Company's investment in
its operations in the United Kingdom was impaired and, consequently, the
$1,456,320 carrying value of the related goodwill was written off as a component
of operating expense during fiscal 1997.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses 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.
STOCK PLANS
The Company uses the intrinsic value method prescribed in APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Under APB 25, when the exercise price of
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized. As
supplemental information, the Company has provided pro forma disclosure of the
fair value of stock options granted during fiscal 1997 and 1996 in accordance
with the requirements of SFAS 123, "Accounting for Stock-Based Compensation."
INCOME (LOSS) PER SHARE
Income (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 of the
Company is excluded from the earnings (loss) per share calculations presented in
the consolidated statements of operations.
In February 1997, SFAS 128, "Earnings per Share," was issued and is
required to be adopted for the quarter ended December 31, 1997. At that time,
the Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating earnings per share, the dilutive effect of stock options will be
excluded. There is no impact on primary earnings per share for the years ended
September 30, 1997, 1996 and 1995. Diluted earnings per share is not materially
different for the fiscal years ended September 30, 1997, 1996, and 1995, as
reported.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
For comparative purposes, amounts in prior years have been reclassified to
conform to current year presentations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, SFAS 130, "Reporting Comprehensive Income," SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information," and SOP 97-2,
"Software Revenue Recognition," were issued and are effective for fiscal years
commencing after December 15, 1997. The Company is required to adopt the
provisions of SFAS 130 and 131 and SOP 97-2 in fiscal year 1999 and expects the
adoption will not impact results of operations or financial position but will
require additional disclosures.
F-10
<PAGE> 24
2. NOTES RECEIVABLE
Notes receivable consist of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note receivable due from a former officer of the Company,
(see Note 7)........................................... $ -- $600,000
Notes receivable due from two officers of the Company,
bearing interest at 5.50%, collateralized by common
stock, due February 1998............................... 105,000 125,000
Note receivable due from a former officer of the Company,
bearing interest at 5.79% due in monthly installments,
through June 1998, unsecured........................... 18,592 85,173
-------- --------
$123,592 $810,173
======== ========
</TABLE>
The notes receivable balance of $123,592 at September 30, 1997 is included
in prepaid expenses and other in the accompanying consolidated balance sheet.
3. LINES-OF-CREDIT AND NOTES PAYABLE
The Company has bank credit facilities which provide for aggregate
borrowings of up to $11.5 million. As of September 30, 1997, $8,640,611 was
outstanding under these facilities. Advances under these facilities bear
interest at the bank's prime rate (8.5% at September 30, 1997) plus 1%, are
payable on demand and are collateralized by substantially all of the Company's
assets. The credit facilities expire February 28, 1998 and are subject to
renewal thereafter. The amount available for borrowing at any time under the
facilities is based on borrowing base formulas relating to levels of accounts
receivable, inventories and other bank covenants. Under such formulas,
approximately $600,000 was available to the Company as of September 30, 1997.
Under the terms of the credit agreements, the Company is required to
maintain certain minimum working capital, net worth and profitability levels and
other specific financial ratios. In addition, the credit agreements prohibit the
payment of cash dividends and contain certain restrictions on the Company's
ability to borrow money or purchase assets or interests in other entities
without the prior written consent of the bank. As of September 30, 1997, the
Company was in compliance with the bank covenants.
4. LONG-TERM DEBT
At September 30, long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Installment loan payable to a bank in monthly
installments of $4,167 plus interest at the bank's
prime rate (8.5% at September 30, 1997) plus 1%, due
February 2002, collateralized by substantially all of
the Company's assets................................... $220,833 $259,039
Installment loan payable to a bank, paid in full during
1997................................................... -- 28,155
-------- --------
220,833 287,194
Less current maturities.................................. 50,004 52,400
-------- --------
$170,829 $234,794
======== ========
</TABLE>
5. RETIREMENT PLAN
The Company has a 401(k) plan which covers substantially all domestic
employees. Participants may make contributions equal to a percentage of their
compensation, subject to Internal Revenue Code limitations. The Company matches
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
F-11
<PAGE> 25
approximately $274,000, $298,000 and $299,000 of expense related to this plan
for the years ended September 30, 1997, 1996 and 1995, respectively. In
addition, ISIL maintains a defined contribution pension plan for all eligible
employees. ISIL recognized approximately $100,333, $140,000 and $112,000 of
expense related to this plan for the years ended September 30, 1997, 1996 and
1995, respectively.
6. COMMITMENTS
The Company has various operating leases which require future minimum
rental payments in excess of one year as follows: 1998 - $502,000; 1999 -
$330,000; 2000 - $265,000; 2001 - $216,000; and 2002 - $172,000. Rent expense
for the years ended September 30, 1997, 1996 and 1995 was approximately
$552,000, $200,000 and $375,000, respectively.
7. STOCKHOLDERS' EQUITY
In January 1997, the Company acquired 127,495 shares of its Common Stock
valued at $637,477, upon the default in payment of all principal and interest
due and owing as of such date by a former officer of the Company under the terms
of a note payable owed by such officer to the Company. The value of the shares
is equal to all indebtedness which was owed to the Company at the time of
default.
In August 1997, the Company issued 16,566 shares of common stock to
employees in exchange for accrued vacation.
8. STOCK OPTIONS
The Company currently grants stock options under two plans, the 1992 Stock
Option Plan (the "1992 Plan") and the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors Plan"). The Company had previously granted options
under the 1982 Stock Option Plan which expired in 1992. At September 30, 1997,
options to purchase 30,700 shares of common stock were outstanding and
exercisable under this Plan.
The 1992 Plan provides for the grant of both incentive stock options and
non-qualified options to officers and key employees. Options under the 1992 Plan
are granted at not less than market price on the date of grant, are exercisable
at the rate of 33% per year after one year from the date of grant and have a
term of ten years. The 1992 Plan has 800,000 shares of common stock authorized
for grant. At September 30, 1997, options to purchase 402,433 shares of common
stock were available for grant, 397,567 were outstanding and 41,332 were
exercisable under the 1992 Plan.
Effective June 10, 1997, the Company offered current option holders except
for executive officers the opportunity to exchange outstanding options for an
equal number of options of the Company's common stock, at a price of $4 per
share (market price $3). Option holders representing 106,067 shares of common
stock accepted this offer and the Company canceled the previous options and
granted new options under the 1992 Plan. The options vest over three years
effective from the new date of grant.
The Directors Plan provides for the issuance of non-qualified options to
non-employee directors and has 175,000 shares of common stock authorized for
grant. Options under the Directors Plan are granted at market price on the date
of grant, are exercisable at the rate of 33% per year after one year from the
date of grant and have a term of ten years. The Directors Plan provides for an
initial grant of 5,100 to a non-employee director upon joining the Board of
Directors and grants of 5,100 on every third anniversary thereafter. In
addition, the Plan was recently amended, subject to shareholder approval, to
provide discretionary grants with vesting determined at the time of grant. On
August 8, 1997, the Board of Directors approved a one time grant to each
non-employee director of an option to purchase 12,000 shares of common stock at
$4.00 (market price $3.13). The grant is subject to shareholder approval and
will become immediately exercisable if shareholder approval is obtained. At
September 30, 1997, options to purchase 71,500 shares of common stock were
available for grant, 103,500 were outstanding and 24,800 were exercisable under
the Directors Plan.
The weighted average fair value of options granted during fiscal 1997 and
fiscal 1996 was $2.32 and $5.15 respectively. At September 30, 1996, 270,523
options were exercisable at a weighted average exercise price of $5.71.
F-12
<PAGE> 26
The following table summarizes stock option activity through September 30,
1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance, September 30, 1995.......................... 449,399 $ 6.61
Granted............................................ 101,700 10.59
Exercised.......................................... (59,011) (5.44)
Canceled........................................... (83,422) (7.07)
Balance, September 30, 1996.......................... 408,666 6.86
Granted............................................ 419,268 3.94
Canceled........................................... (296,167) (7.10)
Balance, September 30, 1997.......................... 531,767 $ 4.59
</TABLE>
The following table summarizes information about options outstanding as of
September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
WEIGHTED AVERAGE
CONTRACTUAL WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3.22 - $ 3.81................. 60,800 8.29 $ 3.58 12,700 $3.63
4.00 - 4.75................. 372,067 9.48 4.07 6,000 4.31
5.25 - 5.38................. 62,000 6.04 5.35 57,332 5.27
7.19 - 16.25................. 36,900 6.03 10.43 20,800 9.23
------- ------
Total..................... 531,767 8.71 $ 4.59 96,832 $5.85
======= ======
</TABLE>
Using the intrinsic value method of accounting for the value of stock
options granted during fiscal 1997 and 1996, no compensation cost was recorded
in the accompanying consolidated statement of operations. Pro forma information
regarding net loss and related per share data is required by SFAS 123, and has
been determined as if the Company had accounted for its stock options using the
fair value method of SFAS 123. The fair value for these options was estimated at
the date of the grant using a Black-Scholes option pricing model with the
following weighted average assumptions for fiscal 1997 and 1996: risk free
interest rate of 6.3% and 5.6%, respectively; dividend yield of 0%; expected
volatility of 67.8% and 64.7%, respectively; and expected life of the options of
3 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net loss as reported............................... $(10,879,802) $(1,963,038)
Pro forma net loss................................. (11,142,206) (2,068,661)
Net loss per share as reported..................... $ (2.47) $ (0.44)
Pro forma net loss per share....................... (2.53) (0.47)
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's stock options. Because the SFAS 123 method of accounting has not been
applied to options granted prior to October 1, 1995, the resulting pro forma
compensation cost may not be representative of that to expect in future years.
F-13
<PAGE> 27
9. INCOME TAXES
A summary of income (loss) before income taxes and components of the
provision (benefit) for income taxes for the fiscal years ended September 30, is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic........................................ $ (7,572,504) $(2,950,287) $ 1,558,281
Foreign......................................... (5,407,388) 18,249 (851,895)
------------ ----------- -----------
$(12,979,892) $(2,932,038) $ 706,386
============ =========== ===========
Provisions (benefit) for income taxes:
Current-federal................................. $ (1,205,810) $(1,036,000) $ 389,000
Deferred-federal................................ (895,000) 67,000 151,000
------------ ----------- -----------
$ (2,100,810) $ (969,000) $ 540,000
============ =========== ===========
</TABLE>
A reconciliation of the consolidated income tax provision (benefit) at the
Federal statutory rate and the consolidated income tax provision (benefit) at
the Company's effective rate for the fiscal years ended September 30 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory provision (benefit).................... $(4,413,000) $(997,000) $ 240,000
Losses without tax benefit............................... 1,958,000 (6,000) 289,000
Amortization and write-off of goodwill................... 240,000 97,000 97,000
Benefits of FSC non-taxable income....................... -- (18,000) (51,000)
Research and development credits......................... -- -- (33,000)
Other.................................................... 114,190 (45,000) (2,000)
----------- --------- ---------
Consolidated income tax provision (benefit).............. $(2,100,810) $(969,000) $ 540,000
=========== ========= =========
</TABLE>
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. The components of
the Company's deferred taxes at September 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities --
Depreciation and amortization...................... $ 615,000 $1,584,000
=========== ==========
Deferred tax assets --
ISIL net operating loss carryforwards................ $ 1,400,000 $ 544,000
Receivable and inventory reserves.................... 349,000 --
Tax credits.......................................... 174,000 291,000
Accrued liabilities.................................. 126,000 206,000
Other................................................ -- 52,000
Valuation allowance.................................. (1,574,000) (544,000)
----------- ----------
Net long-term deferred income taxes............. $ 475,000 $ 549,000
=========== ==========
</TABLE>
ISIL has net operating loss carry forwards of approximately $4,100,000
available for tax reporting purposes which can be used to offset its future
taxable income through the year 2012. The related deferred tax benefit is fully
offset by an evaluation allowance as realizability of the tax benefit is not
assured.
F-14
<PAGE> 28
10. GEOGRAPHIC AND INDUSTRY SEGMENT INFORMATION
The Company operates in two geographic regions: the United States and
Europe. The Company operates in a single business segment, the development,
manufacture and sale of computer peripherals and data communications software.
The following table shows net revenues, net income (loss) and identifiable
assets by geographic region for the fiscal years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues:
United States...................................... $ 18,505,583 $16,981,582 $19,664,665
Europe............................................. 64,688,347 59,407,749 53,134,600
Intercompany....................................... (1,348,467) (1,806,220) (2,556,049)
------------ ----------- -----------
Total net revenues.............................. $ 81,845,463 $74,583,111 $70,243,216
============ =========== ===========
Net income (loss):
United States...................................... $ (5,471,694) $(1,981,287) $ 1,018,281
Europe............................................. (5,407,388) 18,249 (851,895)
------------ ----------- -----------
Total net income (loss)......................... $(10,879,082) $(1,963,038) $ 166,386
============ =========== ===========
Identifiable assets:
United States...................................... $ 17,860,727 $24,217,086 $23,462,758
Europe............................................. 14,041,919 17,187,624 12,925,606
Eliminations....................................... (3,072,139) (2,525,751) (2,435,914)
------------ ----------- -----------
Total identifiable assets....................... $ 28,830,507 $38,878,959 $33,952,450
============ =========== ===========
</TABLE>
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30 FISCAL YEAR
------------ --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1997
- ------------------------------
Net Revenues.................. $19,594,397 $23,319,188 $19,243,265 $19,688,613 $81,845,463
Gross Profit.................. 2,628,890 1,875,135 (1,312,669) 3,550,968 6,742,324
Net Income (Loss)............. (725,053) (1,499,729) (6,904,725) (1,749,575) (10,879,082)
Net Earnings (Loss) Per
Share....................... (0.16) (0.34) (1.57) (0.40) (2.47)
1996
- ------------------------------
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....................... 0.05 0.08 (0.33) (0.23) (0.44)
</TABLE>
F-15
<PAGE> 29
INTERFACE SYSTEMS, INC.
SCHEDULE II
CONSOLIDATED SCHEDULE
OF VALUATION & QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE BALANCE
BEGINNING END OF
DESCRIPTION OF PERIOD PERIOD
----------- --------- -------
<S> <C> <C>
Allowance for doubtful accounts
For the year ended September 30:
1997................................................. $165,000 $283,180
1996................................................. $248,000 $165,000
1995................................................. $133,000 $248,000
</TABLE>
S-1
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 29, 1997
By: /s/ ROBERT A. NERO
------------------------------------
Robert A. Nero, President and
and 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT A. NERO President, Chief Executive Officer December 29, 1997
- --------------------------------------------- and Director (Principal Executive
Robert A. Nero Officer)
/s/ JOHN R. TERNES Vice President and Chief Financial December 29, 1997
- --------------------------------------------- Officer (Principal Financial and
John R. Ternes Accounting Officer)
/s/ GEORGE W. PERRETT, JR. Vice President -- Operations, December 29, 1997
- --------------------------------------------- Secretary and Director
George W. Perrett, Jr.
/s/ DAVID O. SCHUPP Vice President, Treasurer and December 29, 1997
- --------------------------------------------- Director
David O. Schupp
/s/ GARNEL F. GRABER Chairman and Director December 29, 1997
- ---------------------------------------------
Garnel F. Graber
/s/ BRUCE E. RHOADES Director December 29, 1997
- ---------------------------------------------
Bruce E. Rhoades
/s/ DAVID C. SEIGLE Director December 29, 1997
- ---------------------------------------------
David C. Seigle
/s/ ROBERT A. SEIGLE Director December 29, 1997
- ---------------------------------------------
Robert A. Seigle
/s/ LLOYD A. SEMPLE Director December 29, 1997
- ---------------------------------------------
Lloyd A. Semple
</TABLE>
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.01 Certificate of Incorporation of the Company, as amended --
incorporated by reference to Exhibit 3(a) to the Company's
Form 10-K Report for the fiscal year ended September 30,
1996........................................................
3.02 Bylaws of the Company, as amended -- incorporated by
reference to Exhibit 3(b) to the Company's Form 10-K Report
for the fiscal year ended September 30, 1996................
4.01 Credit Authorization Agreement dated February 19, 1997
between Interface Systems, Inc. (the "Company") and NBD Bank
("NBD") -- incorporated by reference to Exhibit 10.01 to the
Company's Form 10-Q Report for the quarter ended March 31,
1997........................................................
4.02 Credit Authorization Agreement dated February 19, 1997
between I.G.K. Industries and NBD -- incorporated by
reference to Exhibit 10.02 to the Company's Form 10-Q Report
for the quarter ended March 31, 1997........................
4.03 Debenture dated March 10, 1997 between Interface Systems
International Limited and The First National Bank of Chicago
-- incorporated by reference to Exhibit 10.03 to the
Company's Form 10-Q Report for the quarter ended March 31,
1997........................................................
4.04 Master Demand Business Loan Note dated February 19, 1997
(the "Company") -- incorporated by reference to Exhibit
10.04 to the Company's Form 10-Q Report for the quarter
ended March 31, 1997........................................
4.05 Master Demand Business Loan Note dated February 19, 1997
(I.G.K.) -- incorporated by reference to Exhibit 10.05 to
the Company's Form 10-Q Report for the quarter ended March
31, 1997....................................................
4.06 Continuing Pledge Agreement dated February 19, 1997 between
the Company and NBD -- incorporated by reference to Exhibit
10.06 to the Company's Form 10-Q Report for the quarter
ended March 31, 1997........................................
4.07 Continuing Security Agreement dated February 19, 1997
between the Company and NBD -- incorporated by reference to
Exhibit 10.07 to the Company's Form 10-Q Report for the
quarter ended March 31, 1997................................
4.08 Continuing Security Agreement dated February 19, 1997
between I.G.K. and NBD -- incorporated by reference to
Exhibit 10.08 to the Company's Form 10-Q Report for the
quarter ended March 31, 1997................................
4.09 Future Advance Mortgage dated February 19, 1997 between
Interface and NBD -- incorporated by reference to Exhibit
10.09 to the Company's Form 10-Q Report for the quarter
ended March 31, 1997........................................
4.10 Future Advance Mortgage dated February 19, 1997 between
I.G.K. and NBD -- incorporated by reference to Exhibit 10.10
to the Company's Form 10-Q Report for the quarter ended
March 31, 1997..............................................
4.11 Continuing Guaranty between the Company and NBD --
incorporated by reference to Exhibit 10.11 to the Company's
Form 10-Q Report for the quarter ended March 31, 1997.......
4.12 Continuing Guaranty and Indemnity for International Credits
between the Company and NBD -- incorporated by reference to
Exhibit 10.12 to the Company's Form 10-Q Report for the
quarter ended March 31, 1997................................
4.13 Continuing Guaranty and Indemnity for International Credits
between I.G.K. and NBD -- incorporated by reference to
Exhibit 10.13 to the Company's Form 10-Q Report for the
quarter ended March 31, 1997................................
4.14 First Amendment to Credit Authorization Agreement dated
February 19, 1997 between the Company and NBD Bank dated
April 21, 1997..............................................
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.15 Second Amendment to Credit Authorization Agreement dated
February 19, 1997 between the Company and NBD Bank dated
August 11, 1997 -- incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q Report for the quarter ended June
30, 1997....................................................
4.16 Credit Authorization Agreement dated August 31, 1997 between
the Company and NBD Bank....................................
4.17 Installment Business Loan Note/Security Agreement dated
August 31, 1997 between the Company and NBD Bank............
4.18 First Amendment to Credit Authorization Agreement dated
August 31, 1997 between the Company and NBD Bank dated
December 10, 1997...........................................
4.19 Guarantee of the Company in favor of Toshiba Information
Systems (UK) Limited with respect to certain obligations of
ISIL dated November 18, 1994................................
4.20 Guarantee of the Company in favor of Canon (UK) Limited with
respect to certain obligations of ISIL dated November 14,
1994........................................................
10.01 1982 Incentive Stock Option Plan, effective May 21, 1982, as
amended, with Form of Stock Option Agreement with Stock
Appreciation Rights -- incorporated by reference to the
Company's Registration Statement on Form S-1, filed on July
15, 1983 (File No. 2-84204).................................
10.02 Amended and Restated 1992 Stock Option Plan.................
10.03 Amended and Restated 1993 Stock Option Plan for Non-Employee
Directors...................................................
10.04 Letter Agreement between the Company and Robert A. Nero
dated January 10, 1997, relating to Employment Terms........
21 Subsidiaries of the Registrant -- incorporated by reference
to Exhibit 21 to the Company's Form 10-K Report for the
fiscal year ended September 30, 1996........................
23.01 Consent of Arthur Andersen, LLP.............................
23.02 Consent of BDO Seidman, LLP.................................
27 Financial Data Schedule.....................................
</TABLE>
- -------------------------
* * *
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: John R. Ternes,
at the address of the principal executive offices set forth on the cover of this
Report on Form 10-K.
<PAGE> 1
EXHIBIT 4.14
FIRST AMENDMENT TO CREDIT AUTHORIZATION AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AUTHORIZATION AGREEMENT, dated as of
April 21, 1997 ( this "Amendment" ) by and between INTERFACE SYSTEMS, INC., a
Delaware Corporation, the ("Borrower" ) and NBD BANK, a Michigan banking
corporation ( the "Bank" ).
RECITALS
The Borrower and the Bank are parties to a Credit Authorization
Agreement dated as of February 19, 1997.( the "Agreement" ).
A. The Borrower has defaulted under the Agreement due to a breach of
the Net Worth covenant in section 9.3(i), for the month ended
March 31, 1997.
B. The Borrower has requested that the Bank waive such covenant
default, and the Bank is willing to do so strictly in accordance
with the terms hereof, and provided the Agreement is amended as
set forth herein, and the Borrower has agreed to such amendment.
AGREEMENT
Based upon these recitals, the parties agree as
follows:
1. Upon satisfaction of the conditions set forth in paragraph 4
hereof, the Agreement shall hereby be amended as of the effective
date hereof as follows:
A. The definition of " Net Worth " in section 9.3(i) shall be
deleted in its entirety and the following shall be
inserted in place thereof:
Net Worth . Permit its Net Worth to be less than
$17,900,000 at March 31, 1997 and increasing thereafter by 75% of monthly net
income, without reduction for any loss periods.
2. From and after the effective date of this Amendment, references to
the "Agreement" in the Credit Authorization Agreement, the Note, the Security
Documents, and all other documents executed pursuant to the Credit Authorization
Agreement shall be deemed references to the Credit Authorization Agreement as
amended hereby.
3. The Borrower represents to the Bank that:
(a) (i) The execution, delivery and performance of this
amendment by the Borrower and all agreements and documents
delivered pursuant hereto by the Borrower have been duly
authorized by all necessary action and do not and will not
require any consent or approval of its shareholders,
violate any provision of any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award
presently in effect having applicability to it or of its
articles of incorporation or by-laws; (ii) no
authorization, consent, approval, license, exemption of or
filing a registration with any court or governmental
department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be
necessary to the valid execution, delivery, or performance
by the Borrower of this amendment and all agreements and
documents delivered pursuant hereto and (iii) this
Amendment and all agreements and documents delivered
pursuant hereto by the Borrower are the legal, valid
binding obligations of the Borrower enforceable against it
in accordance with the terms thereof.
<PAGE> 2
(a) After giving effect to the amendment contained herein and
effected pursuant hereto, the representations and
warranties contained in Section 10.0 of the Agreement are
true and correct on and as of the effective date hereof
with the same force and effect as if made on and as of
such effective date.
(a) Other than the Existing Default, as defined in and to be
waived pursuant to paragraph 5, no Events of Acceleration
( as defined in Section 11.0 of the Agreement) and no
default shall have occurred and be continuing or will
exist under the Agreement as of the effective date hereof.
4. This Amendment shall not become effective until it shall be duly
executed by the Borrower and the Bank.
5. The Borrower acknowledges that an Events of Acceleration has
occurred because the Borrower has breached a covenant contained in
Section 9.3(i) of the Agreement for the month of the Borrower
ended March 31, 1997 ( the "Existing Default" ). The Borrower
acknowledges that the Bank has the ability to accelerate all
indebtedness and exercise all of its rights and remedies under the
Agreement. In consideration of the execution of this Amendment and
subject to the satisfaction of the condition required by Paragraph
4 hereof, the Bank agrees to waive the Existing Default, provided
that such waiver shall waive only the Existing Default and does
not waive any other Events of Acceleration, including without
limitation any future Events of Acceleration caused by any
violation of Section 9.3(i). This waiver shall not be deemed to be
a waiver, or a consent to any modification or amendment, of any
other term or condition of the Agreement or any term or condition
of any agreement, instrument, or document referred to therein or
executed pursuant thereto, or to prejudice any present or future
right or rights which the Bank now has or may have hereunder.
6. The terms used but not defined herein shall have the respective
meanings ascribed thereto in the Agreement. Except as expressly
contemplated hereby, the Agreement, and all related notes,
guaranties, certificates, instruments and other documents, are
hereby ratified and confirmed and shall remain in full force and
effect, and the Borrower acknowledges that it has no defense,
offset, or counterclaim thereunder.
7. This Amendment shall be governed by and in accordance with the
laws of the State of Michigan.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered as of the day and year first written
above.
INTERFACE SYSYEMS, INC.
By: _John Ternes____________________________
Its: _VP Finance_____________________
NBD BANK
By: ___Mike Kelly_________________________
Its: ___1 st VP___________________
<PAGE> 1
EXHIBIT 4.16
[NBD LOGO] CREDIT AUTHORIZATION AGREEMENT
NBD BANK (the "Bank"), whose address is 611 Woodward Avenue, Detroit, Michigan
48226-3947, has approved the credit facilities listed below (collectively, the
"Credit Facilities," and individually, as designated below) to INTERFACE
SYSTEMS, INC. (the "Borrower"), whose address is 5855 Interface Drive, Ann
Arbor, MI 48103, subject to the terms and conditions set forth in this
agreement.
CREDIT FACILITIES.
UNCOMMITTED CREDIT AUTHORIZATIONS. The Bank has approved the uncom-
mitted credit authorizations listed below (collectively, the
"Credit Authorizations," and individually, as designated below)
subject to the terms and conditions of this agreement and the
Bank's continuing satisfaction with the Borrower's financial
status. Disbursements un- der the Credit Authorizations are
solely at the Bank's discretion. Any disbursement on one or more
occasions shall not commit the Bank to make any subsequent
disbursement.
A. FACILITY A. The Bank has approved an uncommitted Credit
Authorization to the Borrower in the principal sum not to
exceed $3,500,000 in the aggregate at any one time
outstanding ("Facility A"). Credit under Facility A shall be
in the form of disbursements evidenced by credits to the
Borrower's account and shall be repayable as set forth in
a Master Demand Note executed concurrently (referred to in
this agreement both singularly and together with any other
promissory notes referenced in this Section 1 as the
"Notes"). The proceeds of Facility A shall be used for the
following purpose: working capital. Facility A shall expire
on February 28, 1998 unless earlier withdrawn.
TERM LOANS. The Bank agrees to extend credit to the Borrower in the
form of term loan(s) (whether one or more, the "Term Loans") in
the principal sum(s) of $224,999.98, respectively, bearing
interest and payable as set Forth in the Term Note(s) executed
concurrently (referred to in this agreement both singularly and
together with any other promissory notes referenced in this
Section 1 as the "Notes"). The proceeds of the Term Loans
shall be used for the following purpose: refinance existing term
loan maturing February 28, 2002.
2.0 CONDITIONS PRECEDENT.
2.1 CONDITIONS PRECEDENT TO INITIAL EXTENSION OF CREDIT. Before the
first extension of credit under this agreement, whether by
disbursement of a loan, issuance of a letter of credit, or
otherwise, the Borrower shall deliver to the Bank, in form and
substance satisfactory to the Bank:
A. LOAN DOCUMENTS. The Notes; the letter of credit applications
required by Section 1.2; the security agreements, financing
statements, and mortgages required by Section 5.1; the
guaranties required by Section 6.0; the subordination
agreements required by Section 7.0; and any other loan
documents which the Bank may reasonably require to give
effect to the transactions contemplated by this agreement;
B. EVIDENCE OF DUE ORGANIZATION AND GOOD STANDING. Evidence
satisfactory to the Bank of the due organization and good
standing of the Borrower and every other business entity that
is a party to this agreement or any other loan document
required by this agreement; and
C. EVIDENCE OF AUTHORITY TO ENTER INTO LOAN DOCUMENTS. Evidence
satisfactory to the Bank that (i) each party to this
agreement or any other loan document required by this
agreement is authorized to enter into the transactions
contemplated by this agreement and the other loan documents,
and (ii) the person signing on behalf of each such party is
authorized to do so.
2.2 CONDITIONS PRECEDENT TO EACH EXTENSION OF CREDIT. Before any
extension of credit under this agreement, whether by disbursement
of a loan, issuance of a letter of credit, or otherwise, the
following conditions shall have been satisfied:
<PAGE> 2
A. REPRESENTATIONS. The representations contained in Section 10
shall be true on and as of the date of the extension of credit;
B. NO EVENT OF ACCELERATION. No event of acceleration shall have
occurred and be continuing or would result from the extension of
credit;
C. CONTINUED SATISFACTION. The Bank shall have remained satisfied
with the Borrower's managerial and financial status;
ADDITIONAL APPROVALS, OPINIONS, AND DOCUMENTS. The Bank shall have
received such other approvals, opinions and documents as it may reasonably
request.
3.0 BORROWING BASE/ANNUAL PAY DOWN.
BORROWING BASE. Notwithstanding any other provision of this agreement, the
aggregate principal amount outstanding at any one time under Facility A
shall not exceed the lesser of the Borrowing Base or $3,500,000.
Borrowing Base means:
A. 75% of the Borrower's trade accounts receivable in which the Bank
has a perfected, first priority security interest, excluding
accounts more than 90 days past due from the date of invoice, accounts
subject to offset or defense, government, bonded, affiliate and
foreign accounts, accounts from trade debtors of which more than 50%
of the aggregate amount owing from the trade debtor to the Borrower is
more than 90 days past due, and accounts otherwise unacceptable to the
Bank, plus
Inventory of the Borrower in which the Bank has a perfected first priority
security interest, valued at the lower of cost or market in the
aggregate, as follows:
(1) 30% of purchased parts inventory; and
(2) 0% of work-in-process, service stock, and demos inventory; and
(3) 30% of finished goods inventory.
4.0 FEES AND EXPENSES.
4.1 FEES. Upon execution of this agreement, the Borrower shall pay the
Bank the following fees, all of which the Borrower acknowledges have
been earned by the Bank: documentation fees of $1000.
4.2 OUT-OF-POCKET EXPENSES. In addition to any fee set forth in Section
4.1 above, the Borrower shall reimburse the Bank for its out-of-
pocket expenses and reasonable attorney's fees (including the fees
of in-house counsel) allocated to the Credit Facilities.
5.0 SECURITY.
5.1 Payment of the borrowings under the Credit Facilities shall be
secured by a first security interest and/or real estate mortgage, as
the case may be, covering the following property and all its
additions, substitutions, increments, proceeds and products, whether
now owned or later acquired ("Collateral")
A. ACCOUNTS RECEIVABLE. All of the Borrower's accounts, chattel
paper, general intangibles, instruments, and documents (as those
terms are defined in the Michigan Uniform Commercial Code), rights
to refunds of taxes paid at any time to any governmental entity,
and any letters of credit and drafts under them given in support
of the foregoing, wherever located. The Borrower shall deliver to
the Bank executed security agreements and financing statements in
form and substance satisfactory to the Bank.
B. INVENTORY. All of the Borrower's inventory, wherever located. The
Borrower shall deliver to the Bank executed security agreements
and financing statements in form and substance satisfactory to the
Bank.
C. EQUIPMENT. All of the Borrower's equipment, wherever located. The
Borrower shall deliver to the Bank executed
<PAGE> 3
security agreements and financing statements in form and substance
satisfactory to the Bank.
D. REAL ESTATE. The real property, including improvements, located at
5855 Interface Drive, Ann Arbor, MI and 7232 Jackson Road, Ann
Arbor, MI. The Borrower shall deliver to the Bank an executed
mortgage, ALTA mortgage title insurance policy without exceptions,
mortgage survey certified to the Bank and, where applicable, an
assignment of rents, subordinations of leases, and/or collateral
assignments of land contracts, all in form and substance
satisfactory to the Bank.
E. PLEDGE of 65.5% or 1,400,000 shares of common stock of Interface
Systems International, Ltd.
5.2 No forbearance or extension of time granted any subsequent owner of
the Collateral shall release the Borrower from liability.
5.3 ADDITIONAL COLLATERAL/SETOFF. To further secure payment of the
borrowings under the Credit Facilities and all of the
Borrower's other liabilities to the Bank, the Borrower grants to the
Bank a continuing security interest in: (i) all securities and other
property of the Borrower in the custody, possession or control of the
Bank (other than property held by the Bank solely in a fiduciary
capacity) and (ii) all balances of deposit accounts of the Borrower
with the Bank. The Bank shall have the right at any time to apply its
own debt or liability to the Borrower, or to any other party liable
for payment of the borrowings under the Credit Facilities, in whole or
partial payment of such borrowings or other present or future
liabilities, without any requirement of mutual maturity.
5.4 CROSS LIEN. Any of the Borrower's other property in which the Bank has
a security interest to secure payment of any other debt,
whether absolute, contingent, direct or indirect, including the
Borrower's guaranties of the debts of others, shall also secure
payment of and be part of the Collateral for the Credit Facilities.
6.0 GUARANTIES. Payment of the Borrower's liabilities under the Credit
Facilities shall be guaranteed by I.G.K. Industries, Inc., by
execution of the Bank's form of guaranty agreement. The liability of
the guarantors, if more than one, shall be joint and several.
7.0 SUBORDINATION. The Credit Facilities shall be supported by the
subordination of all debt owing from the Borrower to n/a,
including without limitation debt currently owing in the amount of
$N/A, in manner and by agreement satisfactory to the Bank.
8.0 AFFIRMATIVE COVENANTS. So long as any debt remains outstanding under
the Credit Facilities, the Borrower, and each of its subsidiaries, if
any, shall:
8.1 INSURANCE. Maintain insurance with financially sound and reputable
insurers covering its properties and business against those
casualties and contingencies and in the types and amounts as shall be
in accordance with sound business and industry practices.
8.2 EXISTENCE. Maintain its existence and business operations as presently
in effect in accordance with all applicable laws and
regulations, pay its debts and obligations when due under normal
terms, and pay on or before their due date, all taxes, assessments,
fees and other governmental monetary obligations, except as they may
be contested in good faith if they have been properly reflected on its
books and, at the Bank's request, adequate funds or security has been
pledged to insure payment.
8.3 FINANCIAL RECORDS. Maintain proper books and records of account, in
accordance with generally accepted accounting principles where
applicable, and consistent with financial statements previously
submitted to the Bank. The Bank shall retain the right to inspect the
Collateral and business records related to it at such times and at
such intervals as the Bank may reasonably require.
8.4 NOTICE. Give prompt notice to the Bank of the occurrence of (i) any
event of acceleration, and (ii) any other development,
financial or otherwise, which would affect the Borrower's business,
properties or affairs in a materially adverse manner.
8.5 COLLATERAL AUDITS. Permit the Bank or its agents to perform
audits of the Collateral. The Borrower shall compensate the
Bank for such audits in accordance with the Bank's schedule of fees
as may be amended from time to time. Whether or
<PAGE> 4
not this section has been completed, the Bank shall retain the
right to inspect the Collateral and business records related to it at
such times and at such intervals as the Bank may reasonably require.
8.6 FINANCIAL REPORTS. Furnish to the Bank whatever information, books,
and records the Bank may reasonably request, including at a minimum:
If the Borrower has subsidiaries, all financial statements required
will be provided on a consolidated and on a separate basis.
Within 30 days after each monthly period, a consolidating balance
sheet as of the end of that period and statements of income,
cash flows, and retained earnings from the beginning of that
fiscal year to the end of that period, certified as correct by
one of its authorized agents.
B. Within 45 days after each quarterly period, a 10-Q financial
report as of the end of that period.
C. Within 90 days after, and as of the end of, each of its fiscal
years, a detailed audit of the Borrower and Interface Systems
International, Ltd., including a balance sheet and statements of
income, retained earnings, and cash flows certified by an
independent certified public accountant of recognized standing.
D. Within 30 days after and as of the end of each calendar
month, the following lists, each certified as correct by one of
its authorized agents:
(1) a list of accounts receivable, aged from date of invoice
of the Borrower and Interface Systems International, Ltd.;
(2) a list of accounts payable, aged from date of receipt of the
Borrower;
E. Within 30 days after, and as of the end of, each monthly period,
a borrowing base exhibit indicating compliance with Section 3.1
of the Borrower, and including Interface Systems International,
LTD's compliance with its borrowing base requirements of its
borrowings and contingent obligations under First Chicago issued
bank guarantees limited to the lesser of GBP 5,200,000 or the sum
of the following borrowing base of: (i) 75% of accounts
receivable not over 90 days past due and excluding core business
receivables of the Electronic Document Delivery division of the
Borrower and accounts from trade debtors of which more than 50%
of the aggregate owing are more than 90 days past due and; (ii)
50% of finished goods inventory.
9.0 NEGATIVE COVENANTS.
9.1 DEFINITIONS. As used in this agreement, the following terms shall
have the following respective meanings:
A. "Net Worth" means total assets less total liabilities.
9.2 Unless otherwise noted, the financial requirements set forth in this
section shall be computed in accordance with generally accepted
accounting principles applied on a basis consistent with financial
statements previously submitted by the Borrower to the Bank.
Without the written consent of the Bank, so long as any debt remains
outstanding under the Credit Facilities, the Borrower shall not:
(where appropriate, covenants apply on a consolidated basis)
A. DIVIDENDS. Acquire or retire any of its shares of capital stock,
or declare or pay dividends or make any other distributions upon
any of its shares of capital stock, except dividends payable in
its capital stock and dividends payable to "Subchapter S"
corporation shareholders in amounts sufficient in amount to pay
the shareholders' income tax obligations related to the Borrower's
taxable income.
B. SALE OF SHARES. Issue, sell or otherwise dispose of any shares of
its capital stock or other securities, or rights, warrants or
options to purchase or acquire any such shares or securities.
<PAGE> 5
C. DEBT. Incur, or permit to remain outstanding, debt for borrowed
money or installment obligations, except debt reflected in the
latest financial statement of the Borrower furnished to the Bank
prior to execution of this agreement and not to be paid with
proceeds of borrowings under the Credit Facilities. For purposes
of this covenant, the sale of any accounts receivable shall be
deemed the incurring of debt for borrowed money.
D. GUARANTIES. Guarantee or otherwise become or remain secondarily
liable on the undertaking of another, except for endorsement of
drafts for deposit and collection in the ordinary course of
business.
E. LIENS. Create or permit to exist any lien on any of its property,
real or personal, except: existing liens known to the Bank; liens
to the Bank; liens incurred in the ordinary course of business
securing current nondelinquent liabilities for taxes, worker's
compensation, unemployment insurance, social security and pension
liabilities; and liens for taxes being contested in good faith.
F. ADVANCES AND INVESTMENTS. Purchase or acquire any securities of,
or make any loans or advances to, or investments in, any person,
firm or corporation, except advances to Interface Systems
International, Ltd. and obligations of the United States
Government, open market commercial paper rated one of the top two
ratings by a rating agency of recognized standing, or certificates
of deposit in insured financial institutions.
G. USE OF PROCEEDS. Use, or permit any proceeds of the Credit
Facilities to be used, directly or indirectly, for the purpose of
"purchasing or carrying any margin stock" within the meaning of
Federal Reserve Board Regulation U. At the Bank's request, the
Borrower shall furnish to the Bank a completed Federal Reserve
Board Form U-1.
H. NET WORTH. Permit its Net Worth to be less than $10,300,000 at
September 30, 1997 and thereafter increasing by 75% of monthly net
income, without reduction for any loss periods.
10.0 REPRESENTATIONS BY BORROWER. Each Borrower represents that: (a)
the execution and delivery of this agreement and the Notes and
the performance of the obligations they impose do not violate any law,
conflict with any agreement by which the Borrower is bound, or require
the consent or approval of any governmental authority or other third
party; (b) this agreement and the Notes are valid and binding
agreements, enforceable in accordance with their terms; and (c) all
balance sheets, profit and loss statements, and other financial
statements furnished to the Bank are accurate and fairly reflect the
financial condition of the organizations and persons to which they
apply on their effective dates, including contingent liabilities of
every type, which financial condition has not changed materially and
adversely since those dates. Each Borrower, if other than a natural
person, further represents that: (a) it is duly organized, existing
and in good standing under the laws of the jurisdiction under which it
was organized; and (b) the execution and delivery of this agreement
and the Notes and the performance of the obligations they impose (i)
are within its powers; (ii) have been duly authorized by all necessary
action of its governing body; and (iii) do not contravene the terms of
its articles of incorporation or organization, its bylaws, or any
partnership, operating or other agreement governing its affairs.
11.0 ACCELERATION.
11.1 EVENTS OF ACCELERATION. If any of the following events occurs, the
Credit Facilities shall terminate and all borrowings under them shall
be due immediately, without notice, at the Bank's option, whether or
not the Bank has made demand.
A. The Borrower or any guarantor of any of the Credit Facilities or
the Notes ("Guarantor") fails to pay when due any amount payable
under the Credit Facilities or under any agreement or instrument
evidencing debt to any creditor;
B. The Borrower or any Guarantor (a) fails to observe or perform any
other term of this agreement or the Notes; (b) makes any
materially incorrect or misleading representation, warranty, or
certificate to the Bank; (c) makes any materially incorrect or
misleading representation in any financial statement or other
information delivered to the Bank; or (d) defaults under the terms
of any agreement or instrument relating to any debt for borrowed
money (other than borrowings under the Credit Facilities) such
that the creditor declares the debt due before its maturity;
C. There is a default under the terms of any loan agreement,
mortgage, security agreement or any other document executed as
part of the Credit Facilities, or any guaranty of the borrowings
under the Credit Facilities becomes unenforceable in whole or in
part, or any Guarantor fails to promptly perform under its
guaranty;
D. A "reportable event" (as defined in the Employee Retirement Income
Security Act of 1974 as amended) occurs that
<PAGE> 6
would permit the Pension Benefit Guaranty Corporation to
terminate any employee benefit plan of the Borrower or any
affiliate of the Borrower;
E. The Borrower or any Guarantor becomes insolvent or unable to pay
its debts as they become due;
F. The Borrower or any Guarantor (a) makes an assignment for the
benefit of creditors; (b) consents to the appointment of a
custodian, receiver or trustee for it or for a substantial part of
its assets; or (c) commences any proceeding under any bankruptcy,
reorganization, liquidation or similar laws of any jurisdiction;
G. A custodian, receiver or trustee is appointed for the Borrower or
any Guarantor or for a substantial part of its assets without its
consent and is not removed within 60 days after such appointment;
H. Proceedings are commenced against the Borrower or any Guarantor
under any bankruptcy, reorganization, liquidation, or similar laws
of any jurisdiction, and such proceedings remain undismissed for
60 days after commencement; or the Borrower or Guarantor consents
to the commencement of such proceedings;
I. Any judgment is entered against the Borrower or any Guarantor, or
any attachment, levy or garnishment is issued against any property
of the Borrower or any Guarantor;
J. The Borrower or any Guarantor dies;
K. The Borrower or any Guarantor, without the Bank's written consent,
(a) is dissolved, (b) merges or consolidates with any third party,
(c) leases, sells or otherwise conveys a material part of its
assets or business outside the ordinary course of business, (d)
leases, purchases, or otherwise acquires a material part of the
assets of any other corporation or business entity, except in the
ordinary course of business, or (e) agrees to do any of the
foregoing, (notwithstanding the foregoing, any subsidiary may
merge or consolidate with any other subsidiary, or with the
Borrower, so long as the Borrower is the survivor);
L. The loan-to-value ratio of any pledged securities at any time
exceeds n/a%, and such excess continues for five (5) days after
notice from the Bank to the Borrower;
M. There is a substantial change in the existing or prospective
financial condition of the Borrower or any Guarantor which the
Bank in good faith determines to be materially adverse; or
N. The Bank in good faith shall deem itself insecure.
11.2 REMEDIES. If the borrowings under the Credit Facilities are not
paid at maturity, whether by demand, acceleration or
otherwise, the Bank shall have all of the rights and remedies provided
by any law or agreement. Any requirement of reasonable notice shall be
met if the Bank sends the notice to the Borrower at least seven (7)
days prior to the date of sale, disposition or other event giving rise
to the required notice. The Bank is authorized to cause all or any
part of the Collateral to be transferred to or registered in its name
or in the name of any other person, firm or corporation, with or
without designation of the capacity of such nominee. The Borrower
shall be liable for any deficiency remaining after disposition of any
Collateral. The Borrower is liable to the Bank for all reasonable
costs and expenses of every kind incurred in the making or collection
of the Credit Facilities, including, without limitation, reasonable
attorney's fees and court costs (whether attributable to the Bank's
in-house or outside counsel). These costs and expenses shall include,
without limitation, any costs or expenses incurred by the Bank in any
bankruptcy, reorganization, insolvency or other similar proceeding.
12.0 MISCELLANEOUS.
12.1 Notice from one party to another relating to this agreement shall
be deemed effective if made in writing (including
telecommunications) and delivered to the recipient's address, telex
number or fax number set forth under its name below by any of the
following means: (a) hand delivery, (b) registered or certified mail,
postage prepaid, with return receipt requested, (c) first class or
express mail, postage prepaid, (d) Federal Express, or like overnight
courier service or (e) fax, telex or other wire transmission with
request for assurance of receipt in a manner typical with respect to
communication of that type. Notice made in accordance with this
section shall be deemed delivered upon receipt if delivered by hand or
wire transmission, 3 business days after mailing if mailed by first
class, registered or certified mail, or one business day after mailing
or deposit with an overnight courier service if delivered by express
mail or overnight courier.
12.2 No delay on the part of the Bank in the exercise of any right or
remedy shall operate as a waiver. No single or partial exercise
by the Bank of any right or remedy shall preclude any other future
exercise of it or the exercise of any other right or remedy. No waiver
or indulgence by the Bank of any default shall be effective unless in
writing and signed by the Bank, nor shall a waiver on one occasion be
construed as a bar to or waiver of that right on any future occasion.
12.3 This agreement, the Notes, and any related loan documents embody
the entire agreement and understanding between the Borrower and
the Bank and supersede all prior agreements and understandings
relating to their subject matter. If any one
<PAGE> 7
or more of the obligations of the Borrower under this agreement or the
Notes shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining obligations of the
Borrower shall not in any way be affected or impaired, and such validity,
illegality or unenforceability in one jurisdiction shall not affect the
validity, legality or enforceability of the obligations of the Borrower
under this agreement or the Notes in any other jurisdiction.
12.4 The Borrower, if more than one, shall be jointly and severally
liable.
12.5 This agreement is delivered in the State of Michigan and governed
by Michigan law. This agreement is binding on the Borrower and
its successors, and shall inure to the benefit of the Bank, its
successors and assigns.
12.6 Section headings are for convenience of reference only and shall
not affect the interpretation of this agreement.
13.0 WAIVER OF JURY TRIAL: The Bank and the Borrower knowingly and
voluntarily waive any right either of them have to a trial by
jury in any proceeding (whether sounding in contract or tort) which is
in any way connected with this or any related agreement, or the
relationship established under them. This provision may only be
modified in a written instrument executed by the Bank and the
Borrower.
Effective Date: August 31, 1997.
NBD BANK BORROWER:
Interface Systems, Inc.
By: _Mike Kelly______ By: __John Ternes_______
Its: _1 st VP___________ Its: __VP Finance_______
ADDRESS FOR NOTICES: ADDRESS FOR NOTICES:
125 South Main Street 5855 Interface Drive
Ann Arbor, MI 48104 Ann Arbor, MI 48103
Fax/Telex No. 313-995-8000 Fax/Telex No. 313-769-1047____________
<PAGE> 1
EXHIBIT 4.17
APPROVED BY:
-----------------------
ORC# INITIALS
-----------------------
-----------------------
-----------------------
PRIMARY ORC #:
-----------------------
Installment Business Loan Note/Security Agreement
Due February 28, 2002 $224,999.98
No. _______________ Date: August 31, 1997
PROMISE TO PAY: For value received, the undersigned (the "Borrower") promises to
pay to NBD BANK (the "Lender") or order, at any office of the Lender in the
State of Michigan, the sum of Two Hundred Twenty-four Thousand Nine Hundred
Ninety-Nine and 98/100 DOLLARS ($224,999.98) plus interest computed on the basis
of the actual number of days elapsed in a year of 365 days at the rate of:
1% per annum above the rate in effect on the first day of each month as
the "prime" rate of NBD BANK (the "Note Rate"), which is not
necessarily the lowest rate charged to any of the Lender's customers,
until maturity, whether by acceleration or otherwise, and at the rate
of 3% per annum above the Note Rate on overdue principal from the date
when due until paid. Any change in the "prime" rate will not change the
Note Rate until the first of the month succeeding the change.
In no event shall the interest rate exceed the maximum rate allowed by law; any
interest payment which would for any reason be deemed unlawful under applicable
law shall be applied to principal.
PAYMENT TERMS: The Borrower will pay this sum: in 54 monthly installments of
$4,166.67 plus interest commencing September 30, 1997 until maturity, at which
time the balance, plus any accrued interest then unpaid shall be due and payable
immediately.
Each payment will be applied first to accrued interest and then to principal.
PREPAYMENT: If a fixed interest rate is specified above, the Borrower may prepay
all or any part of the principal balance of this note on one business day's
notice provided that, in addition to all principal, interest and costs owing at
the time of prepayment, the Borrower pays a prepayment premium equal to the
Current Value of (i) the interest that would have accrued on the amount prepaid
at the Note Rate, minus (ii) the interest that could accrue on the amount
prepaid at the Treasury Rate. In both cases, interest will be calculated from
the prepayment date to the maturity dates of the installments being prepaid.
Such maturity dates shall be determined by applying the prepayment to the
scheduled installments of principal in their inverse order of maturity.
"Treasury Rate" means the yield, as of the date of prepayment, on United States
Treasury bills, notes or bonds, selected by the Lender in its discretion, having
maturities comparable to the scheduled maturities of the installments being
prepaid. "Current Value" means the net present value of the dollar amount of the
interest to be earned, discounted at the Treasury Rate. In no event shall the
prepayment premium be less than zero. The Borrower's notice of its intent to
prepay shall be irrevocable. If the balance of this note is accelerated in
accordance with the terms of this note, the resulting balance due shall be
considered a prepayment due and payable as of the date of acceleration. The
Borrower agrees that the prepayment premium is a reasonable estimate of loss and
not a penalty. The prepayment premium is payable as liquidated damages for the
loss of bargain and its payment shall not in any way reduce, affect or impair
any other obligation of the Borrower under this note.
SECURITY AGREEMENT: To secure the payment of this note and any other present or
future liability of the Borrower, whether several, joint, or joint and several,
the Borrower pledges and grants to the Lender a continuing security interest in
the following described property and all of its additions, substitutions,
increments, proceeds and products, whether now owned or later acquired
("Collateral"):
1. All securities and other property of the Borrower in the custody,
possession or control of the Lender (other than property held by the
Lender solely in a fiduciary capacity).
2. All property or securities declared or acknowledged to constitute
security for any past, present or future liability of the Borrower to
the Lender.
3. All balances of deposit accounts of the Borrower with the Lender.
4. The following additional property: accounts receivable, inventory, machinery
and equipment, general intangibles, all now existing or hereafter
acquired, wherever located and mortgages on real property located at
5855 Interface Drive and 7232 Jackson Road, Ann Arbor, MI 48103.
LENDER'S RIGHT TO SETOFF: The Lender shall have the right at any time to apply
its own debt or liability to the Borrower or to any other party liable on this
note in whole or partial payment of this note or other present or future
liabilities, without any requirement of mutual maturity.
The Borrower warrants and covenants to the Lender that:
1. The Borrower is or will become the owner of the Collateral free from
any liens, encumbrances or security interests, except for this security
interest and existing liens disclosed to and accepted by the Lender in
writing, and will defend the Collateral against all claims and demands
of all persons at any time claiming any interest in it;
2. The Borrower will keep the Collateral free of liens, encumbrances and
other security interests, maintain it in good repair, not use it
illegally and will exhibit it to the Lender on demand;
3. At its own expense, the Borrower will maintain comprehensive casualty
insurance on the Collateral against such risks, in such amounts, with
such deductibles and with such companies as may be satisfactory to the
Lender. Each insurance policy shall contain a lender's loss payable
endorsement satisfactory to the Lender and a prohibition against
cancellation or amendment of the policy or removal of the Lender as
loss payee without at least 30 days prior written notice to the Lender.
In all events, the amounts of such insurance coverages shall conform to
prudent business practices and shall be in such minimum amounts that
the Borrower will not be deemed a co-insurer.
4. The Borrower will not sell or offer to sell or otherwise transfer the
Collateral, nor change the location of the Collateral, without the
written consent of the Lender, except in the ordinary course of
business;
5. The Borrower will pay promptly when due all taxes and assessments upon the
Collateral or for its use or operation;
<PAGE> 2
6. No financing statement covering all or any part of the Collateral, or
any proceeds, is on file in any public office, unless the Lender has
approved that filing. At the Lender's request, the Borrower will
execute one or more financing statements in form satisfactory to the
Lender and will pay the cost of filing them in all public offices
wherever filing is deemed by the Lender to be desirable.
7. The Borrower will immediately notify the Lender in writing of any name change
or any change in business organization.
8. The Borrower will provide any information the Lender may reasonably request
and will permit the Lender upon prior notice, to inspect and copy its
books and records during normal business hours.
EVENTS OF DEFAULT/ACCELERATION: If any of the following events occurs:
1. The Borrower or any guarantor of this note ("Guarantor") fails to pay
when due any amount payable under this note or under any agreement or
instrument evidencing debt to any creditor;
2. The Borrower or any Guarantor (a) fails to observe or perform any other
term of this note; (b) makes any materially incorrect or misleading
representation, warranty, or certificate to the Lender; (c) makes any
materially incorrect or misleading representation in any financial
statement or other information delivered to the Lender; or (d) defaults
under the terms of any agreement or instrument relating to any debt for
borrowed money (other than the debt evidenced by this note) such that
the creditor declares the debt due before its maturity;
3. There is a default under the terms of any loan agreement, mortgage,
security agreement, or any other document executed as part of the loan
evidenced by this note, or any guaranty of the loan evidenced by this
note becomes unenforceable in whole or in part, or any Guarantor fails
to promptly perform under its guaranty;
4. A "reportable event" (as defined in the Employee Retirement Income
Security Act of 1974 as amended) occurs that would permit the Pension
Benefit Guaranty Corporation to terminate any employee benefit plan of
the Borrower or any affiliate of the Borrower;
5. The Borrower or any Guarantor becomes insolvent or unable to pay its debts as
they become due;
6. The Borrower or any Guarantor (a) makes an assignment for the benefit
of creditors; (b) consents to the appointment of a custodian, receiver,
or trustee for itself or for a substantial part of its assets; or (c)
commences any proceeding under any bankruptcy, reorganization,
liquidation, insolvency or similar laws of any jurisdiction;
7. A custodian, receiver, or trustee is appointed for the Borrower or any
Guarantor or for a substantial part of its assets without the consent
of the party against which the appointment is made and is not removed
within 60 days after such appointment;
8. Proceedings are commenced against the Borrower or any Guarantor under
any bankruptcy, reorganization, liquidation, or similar laws of any
jurisdiction, and such proceedings remain undismissed for 60 days after
commencement; or the Borrower or Guarantor consents to the commencement
of such proceedings;
9. Any judgment is entered against the Borrower or any Guarantor, or any
attachment, levy, or garnishment is issued against any property of the
Borrower or any Guarantor;
10.The Borrower or any Guarantor dies;
11.The Borrower or any Guarantor, without the Lender's written consent,
(a) is dissolved, (b) merges or consolidates with any third party, (c)
leases, sells or otherwise conveys a material part of its assets or
business outside the ordinary course of business, (d) leases, purchases
or otherwise acquires a material part of the assets of any other
corporation or business entity except in the ordinary course of
business, or (e) agrees to do any of the foregoing (notwithstanding the
foregoing, any subsidiary may merge or consolidate with any other
subsidiary, or with the Borrower so long as the Borrower is the
survivor);
12.The loan-to-value ratio of any pledged securities at any time exceeds N/A%,
and such excess continues for five (5) days after notice from the
Lender to the Borrower;
13.There is a substantial change in the existing or prospective financial
condition of the Borrower or any Guarantor which the Lender in good
faith determines to be materially adverse;
14.The Lender in good faith deems itself insecure; then this note shall
become due immediately, without notice, at the Lender's option.
REMEDIES: If this note is not paid at maturity, whether by acceleration or
otherwise, the Lender shall have all of the rights and remedies provided by any
law or agreement. Any requirement of reasonable notice shall be met if the
Lender sends the notice to the Borrower at least seven (7) days prior to the
date of sale, disposition or other event giving rise to the required notice. The
Lender is authorized to cause all or any part of the Collateral to be
transferred to or registered in its name or in the name of any other person,
firm or corporation, with or without designation of the capacity of such
nominee. The Borrower shall be liable for any deficiency remaining after
disposition of any Collateral. The Borrower is liable to the Lender for all
reasonable costs and expenses of every kind incurred in the making or collection
of this note, including, without limitation, reasonable attorneys' fees and
court costs. These costs and expenses shall include, without limitation, any
costs or expenses incurred by the Lender in any bankruptcy, reorganization,
insolvency or other similar proceeding.
REPRESENTATIONS: Each Borrower that is not an individual represents: (a) it is
duly organized, existing and in good standing under the laws of the state of its
formation; (b) the execution and delivery of this note and the performance of
the obligations it imposes (i) are within its powers and have been duly
authorized by all necessary action of its governing body; (ii) do not contravene
the terms of its charter, articles, by-laws or any other document or agreement
which governs its affairs, and (iii) do not violate any law, conflict with any
agreement by which it is bound, or require the consent or approval of any
governmental authority or any third party; and (c) this note is a valid and
binding agreement, enforceable according to its terms. Each Borrower further
represents that all financial statements and information furnished to the Lender
are accurate and fairly reflect the financial condition of the organizations and
persons to which they apply on their effective dates, including contingent
liabilities of every type, which financial condition has not changed materially
and adversely since those dates.
WAIVER: Each endorser and any other party liable on this note severally waives
demand, presentment, notice of dishonor and protest, and consents to any
extension or postponement of time of its payment without limit as to the number
or period, to any substitution, exchange or release of all or part of the
Collateral, to the addition of any party, and to the release or discharge of, or
suspension of any rights and remedies against, any person who may be liable for
the payment of this note. No delay on the part of the Lender in the exercise of
any right or remedy shall operate as a waiver. No single or partial exercise by
the Lender of any right or remedy shall preclude any other future exercise of it
or the exercise of any other right or remedy. No waiver or indulgence by the
Lender of any default shall be effective unless in writing and signed by the
Lender, nor shall a waiver on one occasion be construed as a bar to or waiver of
that right on any future occasion.
MISCELLANEOUS: The Borrower, if more than one, shall be jointly and severally
liable, and the term "Borrower" shall mean any one or more of them. This note
shall be binding on the Borrower and its successors, and shall inure to the
benefit of the Lender, its successors and assigns. Any reference to the Lender
shall include any holder of this note. This note is delivered in the State of
Michigan and governed by Michigan law. Section headings are for convenience of
reference only and shall not affect the interpretation of this note.
WAIVER OF JURY TRIAL: The Bank and the Borrower knowingly and voluntarily waive
any right either of them have to a trial by jury in any
<PAGE> 3
proceeding (whether sounding in contract or tort) which is in any way connected
with this or any related agreement, or the relationship established under them.
This provision may only be modified in a written instrument executed by the Bank
and the Borrower.
PAYMENT GUARANTEED BY: I.G.K. Industries, Inc.
Signature: Address:
By:_ George Perrett______________ 7232 Jackson Road
Ann Arbor, MI 48103
Its:_VP Operations_________________
Date: August 31, 1997
NBD Bank
By: __Mike Kelly_______
Its: __1 st VP_________
Address: Borrower: Interface Systems, Inc.
5855 Interface Drive By: ___John Ternes________
Ann Arbor, MI 48103
Its: ___VP Finance_____
<PAGE> 1
EXHIBIT 4.18
FIRST AMENDMENT TO CREDIT AUTHORIZATION AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AUTHORIZATION AGREEMENT, dated as of
December 10, 1997 ( this "Amendment" ) by and between INTERFACE SYSTEMS, INC., a
Delaware Corporation, the ( "Borrower" ) and NBD BANK, a Michigan banking
corporation ( the "Bank" ).
RECITALS
The Borrower and the Bank are parties to a Credit Authorization
Agreement dated as of August 31, 1997, ( the "Agreement" ).
A. The Borrower has defaulted under the Agreement due to a breach of
the NET WORTH covenant in Section 9.3(h), for the period ended
September 30, 1997.
B. The Borrower has requested that the Bank waive such covenant
default, and the Bank is willing to do so strictly in accordance
with the terms hereof, and provided the Agreement is amended as
set forth herein, and the Borrower has agreed to such amendment.
AGREEMENT
Based upon these recitals, the parties agree as
follows:
1. Upon satisfaction of the conditions set forth in paragraph 4
hereof, the Agreement shall hereby be amended as of the effective
date hereof as follows:
A. The definition of " Net Worth " in section 9.3(h) shall be
deleted in its entirety and the following shall be
inserted in place thereof:
Net Worth . Permit its Net Worth at any time to be less than
$9,700,000 and increasing by the sum of (A) $9,700,000 plus (B) 75% of quarterly
net income, without reduction for any loss periods, for each fiscal quarter,
commencing with the quarterly period ending December 31, 1997.
2. From and after the effective date of this Amendment, references to
the "Agreement" in the Credit Authorization Agreement, the Note, the Security
Documents, and all other documents executed pursuant to the Credit Authorization
Agreement shall be deemed references to the Credit Authorization Agreement as
amended hereby.
3. The Borrower represents to the Bank that:
(a) (i) The execution, delivery and performance of this
amendment by the Borrower and all agreements and documents
delivered pursuant hereto by the Borrower have been duly
authorized by all necessary action and do not and will not
require any consent or approval of its shareholders,
violate any provision of any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award
presently in effect having applicability to it or of its
articles of incorporation or by-laws; (ii) no
authorization, consent, approval, license, exemption of or
filing a registration with any court or governmental
department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be
necessary to the valid execution, delivery, or performance
by the Borrower of this amendment and all agreements and
documents delivered pursuant hereto and (iii) this
Amendment and all agreements and documents delivered
pursuant hereto by the Borrower are the legal, valid
binding obligations of the Borrower enforceable against it
in accordance with the terms thereof.
<PAGE> 2
(a) After giving effect to the amendment contained herein and
effected pursuant hereto, the representations and
warranties contained in Section 10.0 of the Agreement are
true and correct on and as of the effective date hereof
with the same force and effect as if made on and as of
such effective date.
(a) Other than the Existing Default, as defined in and to be
waived pursuant to paragraph 5, no Events of Acceleration
( as defined in Section 11.0 of the Agreement) and no
default shall have occurred and be continuing or will
exist under the Agreement as of the effective date hereof.
4. This Amendment shall not become effective until it shall be duly
executed by the Borrower and the Bank and the Borrower shall have
paid to the Bank an amendment fee of $10,000, which the Borrower
acknowledges has been earned by the Bank .
5. The Borrower acknowledges that an Event of Acceleration has
occurred because the Borrower has breached a covenant contained in
Section 9.3(h) of the Agreement for the period of the Borrower
ended September 30, 1997 ( the "Existing Default" ). The Borrower
acknowledges that the Bank has the ability to accelerate all
indebtedness and exercise all of its rights and remedies under the
Agreement. In consideration of the execution of this Amendment and
subject to the satisfaction of the condition required by Paragraph
4 hereof, the Bank agrees to waive the Existing Default, provided
that such waiver shall waive only the Existing Default and does
not waive any other Events of Acceleration, including without
limitation any future Events of Acceleration caused by any
violation of Section 9.3(h). This waiver shall not be deemed to be
a waiver, or a consent to any modification or amendment, of any
other term or condition of the Agreement or any term or condition
of any agreement, instrument, or document referred to therein or
executed pursuant thereto, or to prejudice any present or future
right or rights which the Bank now has or may have hereunder.
6. The terms used but not defined herein shall have the respective
meanings ascribed thereto in the Agreement. Except as expressly
contemplated hereby, the Agreement, and all related notes,
guaranties, certificates, instruments and other documents, are
hereby ratified and confirmed and shall remain in full force and
effect, and the Borrower acknowledges that it has no defense,
offset, or counterclaim thereunder.
7. This Amendment shall be governed by and in accordance with the
laws of the State of Michigan.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered as of the day and year first written above.
NBD BANK INTERFACE SYSYEMS, INC.
By: /S/ Mike Kelly By: /s/ John R. Ternes
-------------------- ------------------------
Its: First Vice President Its: Vice President Finance
-------------------- ------------------------
<PAGE> 1
EXHIBIT 4.19
GUARANTEE
IN CONSIDERATION OF Toshiba Information Systems (UK) Limited (registered number
918861), a company incorporated under the laws of England, whose registered
office is at Toshiba Court, Weybridge Business Park, Addlestone Road,
Weybridge, Surrey KT15 2UL, United Kingdom ("Toshiba"), agreeing to enter and
entering into an agreement ("the Agreement") with Interface Systems
International Limited (registered number 2100227), a company incorporated under
the laws of England, whose registered office is at 881/882 Plymouth Road,
Slough, Berkshire, SL1 4LP, United Kingdom ("the Dealer"), to supply Toshiba
portable computers to the Dealer.
1) Interface Systems Inc. ("the Guarantor"), (registered number 38-1857379)
a company incorporated under the laws of the State of Delaware, whose
registered office is at 5855 Interface Drive, Ann Arbor, Michigan 48103,
USA, and which is the sole shareholder in the Dealer.
HEREBY GUARANTEES to Toshiba the payment of all monies now or at
any time hereafter to become due to Toshiba under the Agreement,
but so that the Guarantor's liability to Toshiba is in no event to
exceed the sum of two million pounds sterling (L.2,000,000).
2) The Guarantor HEREBY AGREES as follows:
A. Toshiba is to be at liberty to grant to the Dealer such
extension of credit or time for payment, or other indulgences as
Toshiba thinks proper without in any way discharging or impairing
the Guarantor's liability toward Toshiba under this Guarantee.
B. The Guarantee is to be a continuing guarantee.
C. For all purposes the liability of the Guarantor to Toshiba
under this Guarantee, every sum of money which may from time to time
become due or owing to Toshiba shall be deemed to continue to be due
and owing to Toshiba by the Dealer until the same be actually repaid
to Toshiba, notwithstanding the bankruptcy or winding up of the
Dealer. All dividends, compositions and payments received by the
Dealer or from the Dealer's estate, whether in bankruptcy or
otherwise, or if the Dealer is a company, in the event of
liquidation, wind-up or reconstruction, shall be taken and applied
by Toshiba as payments in gross and the right of the Guarantor to be
subrogated to Toshiba shall not arise until Toshiba has received the
full amount of all its claims against the Dealer, and this Guarantee
shall be a security to Toshiba for the payment of any ultimate
balance that may remain due to Toshiba.
D. When the Dealer is a partnership or individual this Guarantee
shall not be affected by any change, whether by death, retirement,
or addition, etc., in respect of the trading style of the firm or by
any other means, but shall remain valid continuing and
<PAGE> 2
effective as folly and in all respects as if, in the case of a
partnership the persons constituting such partnership or, in the
case of an individual his executors or administrators, at the date
of any demand for payment made by Toshiba under this Guarantee or
at any time previously were the same at the date hereof.
E. In order to give effect to the Guarantee, the Guarantor
declares that Toshiba shall be at liberty to act as though it were
the principal debtor and the Guarantor hereby waives all and any of
its rights as Guarantor which may at any time be inconsistent with
any of the above provisions.
F. The Guarantor may cancel this Guarantee prospectively as to
future orders by the Dealer upon thirty (30) days prior written
notice to Toshiba. However, no such cancellation shall impair or
affect sums guaranteed by the Guarantor hereunder prior to the
giving of such notice.
Such notice shall be sent by Air Mail letter for the attention of:
C M Lintell - Company Secretary, Toshiba Information Systems (UK)
Ltd. Toshiba Court, Weybridge Business Park, Addlestone Road,
Weybridge, Surrey KT15 2UL, UK
The notice shall simultaneously be addressed to the above party by
facsimile using the following number 44-932829091.
G. Toshiba shall serve notice of its intention to enforce the
Guarantee by Air Mail letter for the attention of:
Name David O. Schupp Title Finance, Treasurer
Address 5855 Interface Drive, Ann Arbor, Michigan 48103
The notice shall simultaneously be addressed to the above party by
facsimile using the following number 313-769-5900.
H. This Guarantee replaces any prior Guarantees from Interface
Systems, Inc. that are held by Toshiba Information Systems (UK)
Limited.
Dated: November 18, 1994 Signed: /s/ David O. Schupp
---------------------------- --------------------------
Position: Treasurer Name: David O. Schupp
---------------------------- --------------------------
UNDER THE COMMON SEAL OF INTERFACE SYSTEMS INC.
<PAGE> 1
EXHIBIT 4.20
GUARANTEE
IN CONSIDERATION OF Canon (UK) Limited (registered number 1264300), a company
incorporated under the laws of England, whose registered office is at Canon
House, Manor Road, Wallington, Surrey 6M6 0AJ, United Kingdom ("Canon"),
agreeing to enter and entering into an agreement ("the Agreement") with
Interface Systems International Limited (registered number 2100227), a company
incorporated under the laws of England, whose registered office is at 881/882
Plymouth Road, Slough, Berkshire, SL1 4LP, United Kingdom ("the Distributor"),
to supply Canon products to the Distributor.
1) Interface Systems Inc. ("the Guarantor"), (registered number 38-1857379)
a company incorporated under the laws of the State of Delaware, whose
registered office is at 5855 Interface Drive, Ann Arbor, Michigan 48103,
USA, and which is the sole shareholder of the Distributor.
HEREBY GUARANTEES to Canon the payment of all monies now or at any
time hereafter to become due to Canon under the Agreement, but so
that the Guarantor's liability to Canon is in no event to exceed
the sum of two million five-hundred thousand pounds sterling
(L.2,500,000).
2) The Guarantor HEREBY AGREES as follows:
A. Canon is to be at liberty to grant to the Distributor such
extension of credit or time for payment, or other indulgences as
Canon thinks proper without in any way discharging or impairing the
Guarantor's liability toward Canon under this Guarantee.
B. The Guarantee is to be a continuing guarantee.
C. For all purposes the liability of the Guarantor to Canon
under this Guarantee, every sum of money which may from time to time
become due or owing to Canon shall be deemed to continue to be due
and owing to Canon by the Distributor until the same be actually
repaid to Canon, notwithstanding the bankruptcy or winding up of the
Distributor. All dividends, compositions and payments received by
the Distributor or from the Distributor's estate, whether in
bankruptcy or otherwise, or if the Distributor is a company, in the
event of liquidation, wind-up or reconstruction, shall be taken and
applied by Canon as payments in gross and the right of the Guarantor
to be subrogated to Canon shall not arise until Canon has received
the full amount of all its claims against the Distributor, and this
Guarantee shall be a security to Canon for the payment of any
ultimate balance that may remain due to Canon from the Distributor.
D. In order to give effect to the Guarantee, the Guarantor
declares that Canon shall be at liberty to act as though it were the
principal debtor and the Guarantor hereby
<PAGE> 2
waives all and any of its rights as Guarantor which may at any time
be inconsistent with any of the above provisions.
E. Enforcement of this agreement will be made under English law
in the United Kingdom. Canon shall have the right to assign the
benefit and any liability arising under the guarantee to another
company within the Canon Group or its agents.
F. The Guarantor may cancel this Guarantee prospectively as to
future orders by the Distributor upon thirty (30) days prior written
notice to Canon. However, no such cancellation shall impair or
affect sums guaranteed by the Guarantor hereunder prior to the
giving of such notice.
Such notice shall be sent by Air Mail letter for the attention of:
C.P. Thompson
Credit Control Manager
Canon (UK) Limited
Canon House
Manor Road
Wallington
Surrey 6M6 0AJ
The notice shall simultaneously be addressed to the above party by
facsimile using the following number 44-81773-2156.
G. Canon shall serve notice of its intention to enforce the
Guarantee by Air Mail letter for the attention of:
Name David O. Schupp Title Finance, Treasurer
--------------- ------------------
Address 5855 Interface Drive, Ann Arbor, Michigan 48103
------------------------------------------------
The notice shall simultaneously be addressed to the above party by
facsimile using the following number 313-769-1047.
H. This Guarantee replaces any prior Guarantees from Interface
Systems, Inc. that are held by Canon (UK) Limited.
Dated: November 18, 1994 Signed: /s/David O. Schupp
---------------------------- --------------------------
Position: Treasurer Name: David O. Schupp
---------------------------- --------------------------
UNDER THE COMMON SEAL OF INTERFACE SYSTEMS INC.
<PAGE> 1
EXHIBIT 10.02
INTERFACE SYSTEMS, INC.
1992 STOCK OPTION PLAN
(AS AMENDED AND RESTATED ON AUGUST 8, 1997)
1. CERTAIN DEFINITIONS.
A "Change in Control" shall mean a change in control of the Company of
a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or
not the Company is then subject to such reporting requirement; provided that,
without limitation, a Change in Control shall be deemed to have occurred if (i)
any individual, partnership, firm, corporation, association, trust,
unincorporated organization or other entity (other than a Subsidiary or an
employee benefit plan or employee benefit plan trust maintained by the Company
or a Subsidiary), or any syndicate or group deemed to be a person under Section
14(d)(2) of the Exchange Act, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting power
of the Company's then outstanding securities entitled to vote in the election
of directors of the Company, provided that a person shall not be deemed to
beneficially own shares solely because such person has the right to vote such
shares pursuant to a revocable proxy or proxies given in response to a public
solicitation made in accordance with the applicable rules promulgated under the
Exchange Act; (ii) consummation of any merger, consolidation or similar
transaction with respect to which the Company or any Parent is a constituent
corporation (other than a transaction for the purpose of changing the Company's
corporate domicile), if a majority of the members of the Board of Directors of
the surviving company are not Continuing Directors; (iii) any liquidation or
dissolution of the Company, or any sale of all or substantially all of the
Company's assets to an entity not controlled by persons who were members of the
Board of Directors or officers of the Company as of the 1997 Annual Meeting of
Stockholders or by any employee benefit plan or employee benefit plan trust
maintained by the Company or a Subsidiary; and (iv) a change in the identity
of a majority of the members of the Company's Board of Directors within any
twelve-month period, which change or changes are not recommended by the
incumbent directors immediately prior to any such change or changes.
The "Code" is the Internal Revenue Code of 1986, as amended.
The "Committee" is a committee of two or more directors of the
Company, each of whom is a "non-employee director" as defined in Rule 16b-3
under the Exchange Act.
The "Common Stock" is the common stock, $.10 par value per share, of
the Company.
The "Company" is Interface Systems, Inc., a Delaware corporation.
1
<PAGE> 2
"Continuing Directors" means persons (A) who are members of the Board
of Directors immediately prior to the merger, consolidation or similar
transaction and (B) who also were members of the Board of Directors of the
Company immediately following the 1997 Annual Meeting of Stockholders or are
new directors whose election by the Board of Directors, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the directors in office at the time of such election or nomination
who either were directors immediately following the 1997 Annual Meeting of
Stockholders or whose election or nomination for election was previously
approved as provided above.
"Disabled" or "Disability" means permanently disabled as defined in
Section 22(e)(3) of the Code.
"Employee" means an individual with an "employment relationship" with
the Company, or any Parent or Subsidiary, as defined in Regulation 1.421-7(h)
promulgated under the Code, and shall include, without limitation, employees
who are directors of the Company, or any Parent or Subsidiary.
"Employment" means the state of being an Employee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean the last sale price on the Nasdaq Stock
Market National Market, as reported in the Wall Street Journal, for the last
preceding day on which the Common Stock was traded prior to the date with
respect to which the fair market value is to be determined, as determined by
the Committee in its sole discretion.
An "Incentive Stock Option" is an option intended to meet the
requirements of Section 422 of the Code.
A "Nonqualified Stock Option" is an option granted under the Plan
other than an Incentive Stock Option.
"Parent" means any "parent corporation" of the Company as defined in
Section 424(e) of the Code.
The "Plan" is the 1992 Stock Option Plan.
"Subsidiary" means any "subsidiary corporation" of the Company as
defined in Section 424(f) of the Code.
2
<PAGE> 3
2. PURPOSE.
The purpose of the Plan is to promote the best interests of the
Company and its shareholders by encouraging participants to acquire a
proprietary interest in the Company, thus identifying their interests with
those of its shareholders and encouraging the participants to make greater
efforts on behalf of the Company.
3. ADMINISTRATION.
The selection of participants in the Plan and decisions concerning the
timing, pricing and amount of any grant of options under the Plan shall be made
by the Committee. Except as provided in Section 13 of the Plan, the Committee
shall interpret the Plan, prescribe, amend, and rescind rules and regulations
relating to the Plan, and make all other determinations necessary or advisable
for its administration. The decision of the Committee on any question
concerning the interpretation of the Plan or any option granted under the Plan
shall be final and binding upon all participants.
4. PARTICIPANTS.
Participants in the Plan shall be such key Employees as the Committee
may select from time to time. The Committee may grant options to an individual
upon the condition that the individual become an Employee, provided that the
option shall be deemed to be granted only on the date the individual becomes an
Employee.
5. STOCK.
The stock subject to options under the Plan shall be the Common Stock,
and may be either authorized and unissued shares or treasury shares held by the
Company. The total amount of Common Stock on which options may be granted
under the Plan shall not exceed 800,000 shares, subject to adjustment in
accordance with Section 11. Shares subject to any unexercised portion of a
terminated, canceled or expired option granted under the Plan may again be
subjected to options under the Plan.
6. AWARD OF OPTIONS.
Subject to the limitations set forth in the Plan, the Committee from
time to time may grant options to such participants and for such number of
shares of Common Stock and upon such other terms as it shall designate. Each
option shall be evidenced by a stock option agreement in such form and
containing such provisions as the Committee shall deem appropriate, provided
that such terms shall not be inconsistent with the Plan. The Committee may
designate any option granted as either an Incentive Stock Option or a
Nonqualified Stock Option, or the Committee may designate a portion of an
option as an Incentive Stock Option or a Nonqualified Stock Option. Any
participant may hold more than one option under the Plan and any other stock
option plan of the Company. The
3
<PAGE> 4
date on which an option is granted shall be the date of the Committee's
authorization of the option or such later date as shall be determined by the
Committee at the time the option is authorized.
Incentive Stock Options. Any option intended to constitute an
Incentive Stock Option shall comply with the following requirements in
addition to the other requirements of the Plan: (a) the exercise price per
share for each Incentive Stock Option granted under the Plan shall not be less
than the Fair Market Value per share of Common Stock on the date the option is
granted; provided that no Incentive Stock Option shall be granted to any
participant who owns (within the meaning of Section 424(d) of the Code) stock
of the Company or any Parent or Subsidiary possessing more than 10% of the
total combined voting power of all classes of stock of such Company, Parent or
Subsidiary unless, at the date of grant of an option to such participant, the
exercise price for the option is at least 110% of the Fair Market Value of the
shares subject to option and the option, by its terms, is not exercisable more
than five years after the date of grant; (b) the aggregate Fair Market Value of
the underlying Common Stock at the time of grant as to which Incentive Stock
Options under the Plan (or a plan of a Parent or Subsidiary) may first be
exercised by a participant in any calendar year shall not exceed $100,000 (to
the extent that an option intended to constitute an Incentive Stock Option
shall exceed the $100,000 limitation, the portion of the option that exceeds
such limitation shall be deemed to constitute a Nonqualified Stock Option); (c)
an Incentive Stock Option shall not be exercisable after the tenth anniversary
of the date of grant or such lesser period as the Committee may specify from
time to time.
Nonqualified Stock Options. A Nonqualified Stock Option shall not be
exercisable after the tenth anniversary of the date of grant. The
exercise price per share of a Nonqualified Stock Option shall not be less than
the Fair Market Value per share of the Common Stock on the date of grant.
7. EXERCISE OF OPTIONS.
Subject to any limitations on exercise contained in the stock option
agreement relating to a particular option which is not inconsistent with this
Section, options may be exercised in installments as follows:
(a) Beginning on the date after the first anniversary of
the date of grant, an option may be exercised up to 1/3 of the shares subject
to the option;
(b) After the expiration of each succeeding anniversary
date of the date of grant, the option may be exercised up to an additional 1/3
of the shares subject to option, so that after the expiration of the third
anniversary of the date of grant the option shall be exercisable in full; and
(c) To the extent not exercised, installments shall be
cumulative and may be exercised in whole or in part.
4
<PAGE> 5
8. PAYMENT FOR SHARES.
The purchase price for shares of Common Stock to be acquired upon
exercise of an option granted hereunder shall be paid in full, at the time of
exercise, in cash, by certified check, bank draft or money order or by
tendering to the Company shares of Common Stock then owned by the participant,
duly endorsed for transfer or with duly executed stock power attached, which
shares shall be valued at their Fair Market Value as of the date of such
exercise and payment. Notwithstanding the foregoing, the option exercise price
may be paid by delivery to the Company of a properly executed exercise notice,
acceptable to the Company, together with irrevocable instructions to the
participant's broker to deliver to the Company a sufficient amount of cash to
pay the exercise price and any applicable income and employment withholding
taxes, in accordance with a written agreement between the Company and the
brokerage firm ("Cashless Exercise").
9. WITHHOLDING TAXES.
The Company shall have the right to withhold from a participant's
compensation or require a participant to remit sufficient funds to satisfy
applicable withholding for income and employment taxes upon the exercise of an
option.
10. NON-ASSIGNABILITY.
No option shall be transferable by a participant except by will or the
laws of descent and distribution or, in the case of a Nonqualified Stock
Option, pursuant to a qualified domestic relations order as defined by the Code
or Title I of the Employee Retirement Income Security Act, or the rules
thereunder. During the lifetime of a participant, an option shall be exercised
only by the optionee. No transfer of an option shall be effective to bind the
Company unless the Company shall have been furnished with written notice
thereof and such evidence as the Company may deem necessary to establish the
validity of the transfer and the acceptance by the transferee of the terms and
conditions of the option.
11. TERMINATION OF EMPLOYMENT.
Unless otherwise provided in the stock option agreement relating to a
particular option: (a) if, prior to the date that such option shall first
become exercisable, the participant's Employment shall be terminated, with or
without cause, or by the act, death, Disability, or retirement of the
participant, the participant's right to exercise the option shall terminate and
all rights thereunder shall cease; and (b) if, on or after the date that such
option shall first become exercisable, a participant's Employment shall be
terminated for any reason other than death or Disability, the participant shall
have the right, prior to the earlier of (i) the expiration of the option or
(ii) three months after such termination of Employment, to exercise the option
to the extent that it was exercisable and is unexercised on the date of such
termination of Employment, subject to any other limitation on the exercise of
the option in effect at the date of exercise; and (c) if, on or after the date
that such option shall have become exercisable, the participant shall die or
become Disabled while an Employee or
5
<PAGE> 6
while such option remains exercisable, the participant or the executor or
administrator of the estate of the participant (as the case may be), or the
person or persons to whom the option shall have been transferred by will or by
the laws of descent and distribution, shall have the right, prior to the
earlier of (i) the expiration of the option or (ii) one year from the date of
the participant's death or termination due to such Disability to exercise the
option to the extent that it was exercisable and unexercised on the date of
death, subject to any other limitation on exercise in effect at the date of
exercise.
The transfer of an Employee from one corporation to another among the
Company, any Parent and any Subsidiary, or a leave of absence with the written
consent of the Company, shall not constitute a termination of Employment for
purposes of the Plan.
12. ADJUSTMENTS.
In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, Common Stock, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Common Stock or other securities of the Company,
issuance of warrants or other rights to purchase Common Stock, or other
securities of the Company, or other similar corporate transaction or event
affects the Common Stock such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits
or potential benefits intended to be made available under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(a) the number and type of shares of Common Stock which thereafter may be made
the subject of options, (b) the number and type of shares of Common Stock
subject to outstanding options, and (c) the exercise price with respect to any
option, or, if deemed appropriate, make provision for a cash payment to the
holder of an outstanding option; provided, however, in each case, that with
respect to the Incentive Stock Options no such adjustment shall be authorized
to the extent that such authority would case the Plan to violate Section 422 of
the Code or any successor provision thereto; and provided further, however,
that the number of shares of Common Stock subject to any option shall always be
a whole number. In the event of a Change of Control and under such other
circumstances as the Committee may designate, options under the Plan shall be
treated as the Committee may determine (including acceleration of vesting and
settlements of options) at the time of grant or at a subsequent date as
provided in the stock option agreement reflecting the grant of such options.
13. RIGHTS PRIOR TO ISSUANCE OF SHARES.
No participant shall have any rights as a shareholder with respect to
any shares covered by an option until the issuance of a stock certificate to
the participant for such shares. No adjustment shall be made for dividends or
other rights with respect to such shares for which the record date is prior to
the date such certificate is issued.
6
<PAGE> 7
14. TERMINATION AND AMENDMENT.
The Board of Directors (the "Board") may terminate the Plan, or the
granting of options under the Plan, at any time. No Incentive Stock Option
shall be granted under the Plan ten years after adoption of the Plan by the
Board or approval of the Plan by the Company's shareholders, whichever is
earlier. Termination of the Plan shall not affect the rights of the holders of
any options previously granted.
The Board may amend or modify the Plan at any time and from time to
time. No amendment, modification, or termination of the Plan shall in any
manner affect any option granted under the Plan without the consent of the
participant holding the option.
15. APPROVAL OF PLAN.
The Plan shall be subject to the approval of the holders of at least a
majority of the shares of Common Stock of the Company present and entitled to
vote at a meeting of shareholders of the Company held within 12 months after
adoption of the Plan by the Board. No option granted under the Plan may be
exercised in whole or in part until the Plan has been approved by the
shareholders as provided herein. If not approved by shareholders within such
12-month period, the Plan and any options granted hereunder shall become void
and of no effect.
16. EFFECT ON EMPLOYMENT.
Neither the adoption of the Plan nor the granting of any option
pursuant to it shall be deemed to create any right in any individual to be
retained as an Employee.
17. USE OF PROCEEDS.
The proceeds received from the sale of Common Stock pursuant to
exercises of options granted under the Plan will be used for general corporate
purposes of the Company.
BOARD OF DIRECTOR APPROVAL: March 27, 1992
SHAREHOLDER APPROVAL: May 6, 1992
AMENDED: February 21, 1996
AMENDED AND RESTATED: August 8, 1997
7
<PAGE> 1
EXHIBIT 10.03
INTERFACE SYSTEMS, INC.
1993 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
(AS AMENDED AND RESTATED ON AUGUST 8, 1997)
1. CERTAIN DEFINITIONS.
The "Board" is the Board of Directors of the Company.
The "Code" is the Internal Revenue Code of 1986, as amended.
The "Common Stock" is the common stock, $.10 par value per share, of
the Company.
The "Company" is Interface Systems, Inc., a Delaware corporation.
"Disabled" or "Disability" means permanently disabled as defined in
Section 22(e)(3) of the Code.
"Employee" means an individual with an "employment relationship" with
the Company, or any Parent or Subsidiary, as defined in Regulation 1.421-7(h)
promulgated under the Code, and shall include, without limitation, employees
who are directors of the Company, or any Parent or Subsidiary.
"Employment" means the state of being an Employee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean the last sale price on the Nasdaq Stock
Market National Market, as reported in the Wall Street Journal, for the last
preceding day on which the Common Stock was traded prior to the date with
respect to which the fair market value is to be determined, as determined by
the Board of Directors in accordance herewith.
A "Nonqualified Stock Option" is an option granted under the Plan
other than an Incentive Stock Option, intended to meet the requirements of
Section 422 of the Code.
The "Plan" is the 1993 Stock Option Plan for Non-Employee Directors.
2. PURPOSE.
The purpose of the Plan is to promote the best interests of the
Company and its shareholders by attracting and retaining the best available
personnel to serve as directors of the Company, to
<PAGE> 2
provide the non-employee directors with additional incentive to direct the
Company's future affairs in the long-term benefit of the Company and its
shareholders and to encourage continued service on the Board.
3. ADMINISTRATION.
The Board of Directors shall interpret the Plan as it deems necessary
or advisable for administration of the Plan. The decision of the Board on any
matter on which it may make a determination under the immediately preceding
sentence shall be final and binding on all participants.
4. PARTICIPANTS.
Participants in the Plan shall be directors of the Company who are not
Employees and who are members of the Board on the date an option is granted
under the Plan.
5. STOCK.
The stock subject to options under the Plan shall be the Common Stock.
The total amount of Common Stock on which options may be granted under the Plan
shall not exceed 175,000 shares, subject to adjustment in accordance with
Section 11. Shares subject to any unexercised portion of a terminated,
canceled, forfeited or expired option granted under the Plan may again be
available for subsequent option grants under the Plan.
6. AWARD OF OPTIONS.
(a) Automatic Grants.
On the later of the effective date of the Plan or the date on
which a participant first becomes a member of the Board, each
participant shall, automatically and without discretion, be granted an
initial option to purchase 6,000 shares of Common Stock (a "Pre-
Amendment Option") with an exercise price equal to the Fair Market
Value per share of Common Stock on the date of grant. Effective
January 11, 1996, on the later of the effective date of the Plan or
the date on which a participant becomes a member of the Board, each
participant shall automatically and without discretion be granted an
initial option to purchase 5,100 shares of Common Stock (an "Initial
Option") with an exercise price equal to the Fair Market Value per
share of Common Stock on the day of grant. Subsequent thereto, (a) on
January 11, 1996, and every third January 11 thereafter, until the
termination of the Plan, every participant who is a member of the
Board of Directors on January 11, 1996, shall automatically and
without discretion be granted an option to purchase 5,100 shares of
Common Stock (a "Subsequent Option") with an exercise price equal to
the Fair Market Value per share of Common Stock on the date of grant,
and (b) on the third anniversay of the date a person became a member
of the Board of Directors and, thereafter, on the third
2
<PAGE> 3
anniversary of the date of grant of the prior Subsequent Option until
the termination of the Plan, every participant who becomes a member of
the Board of Directors after January 11, 1996, shall automatically and
without discretion be granted a Subsequent Option to purchase 5,100
shares of Common Stock with an exercise price equal to the Fair Market
Value per share of Common Stock on the date of the grant.
Pre-Amendment, Initial and Subsequent Options may be exercised in
installments as follows: (i) Beginning on the date after the first
anniversary date of grant, an option may be exercised up to 1/3 of the
shares subject to the option; (ii) After the expiration of each
succeeding anniversary date of the grant, the option may be exercised
up to an additional 1/3 of the shares subject to option, so that after
the expiration of the third anniversary the option shall be
exercisable in full; (iii) To the extent no exercised, installments
shall be cumulative and may be exercised in whole or in part.
(b) Discretionary Grants.
Subject to the limitations set forth in the Plan, the Board of
Directors from time to time may grant options to such participants and
for such number of shares of Common Stock and upon such other terms
(including, without limitation, the exercise price and the times at
which the option may be exercised) as it shall designate (a
"Discretionary Option"). The exercise price per share for
Discretionary Options shall not be less than the Fair Market Value per
share of the Common Stock on the date of grant and the expiration date
shall be no later than the tenth anniversary of the date of grant.
(c) General.
References herein to Options shall mean Pre-Amendment,
Initial, Subsequent and Discretionary Options, unless otherwise
provided. Options granted pursuant to this Plan shall be Nonqualified
Stock Options. Each option granted under the Plan shall meet all the
terms and conditions of the Plan.
7. PAYMENT FOR SHARES.
The purchase price for shares of Common Stock to be acquired upon
exercise of an option granted hereunder shall be paid in full, at the time of
exercise, in cash, by certified check, bank draft or money order or by
tendering to the Company shares of Common Stock then owned by the participant,
duly endorsed for transfer or with duly executed stock power attached, which
shares shall be valued at their Fair Market Value as of the date of such
exercise and payment. Notwithstanding the foregoing, the option exercise price
may be paid by delivery to the Company of a properly executed exercise notice,
acceptable to the Company, together with irrevocable instructions to the
participant's broker to deliver to the Company a sufficient amount of cash to
pay the exercise price, in accordance with a written agreement, if any, between
the Company and the brokerage firm ("Cashless Exercise").
3
<PAGE> 4
8. NON-ASSIGNABILITY.
No option shall be transferable by a participant except by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder. During the lifetime of a participant,
an option shall be exercised only by the optionee. No transfer of an option
shall be effective to bind the Company unless the Company shall have been
furnished with written notice thereof and such evidence as the Company may deem
necessary to establish the validity of the transfer and the acceptance by the
transferee of the terms and conditions of the option.
9. TERMINATION OF DIRECTORSHIP.
(a) If, prior to the date that an option shall first become
exercisable, the participant shall cease to be a director of the Company, with
or without cause, or due to the act, death, Disability, or retirement of the
participant, the participant's right to exercise the option shall terminate and
all rights thereunder shall cease. (b) If, on or after the date that an option
shall first become exercisable, a participant shall cease to be a director of
the Company for any reason other than death or Disability, the participant
shall have the right, prior to the earlier of (i) the expiration of the option
or (ii) the day which is three months after the date on which the Participant
ceased to be a director of the Company, to exercise the option to the extent
that it was exercisable and is unexercised on the date the participant ceased
to be a director of the Company, subject to any other limitation on the
exercise of the option in effect at the date of exercise. (c) If, on or after
the date that an option shall have become exercisable, the participant shall
die or become Disabled which a director of the company or while such option
remains exercisable, the participant or the executor or administrator of the
estate of the participant (as the case may be), or the person or persons to
whom the option shall have been transferred by will or by the laws of descent
and distribution, shall have the right, prior to the earlier of (i) the
expiration of the option or (ii) the day which is one year after the date of
the participant's death or Disability to exercise the option to the extent that
it was exercisable and unexercised on the date of death, subject to any other
limitation on exercise in effect at the date of exercise.
10. ADJUSTMENTS.
In the event that any dividend or other distribution (whether in the
form of cash, Common Stock, other securities, or other property),
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
Common Stock, or other securities of the Company, issuance of warrants or other
rights to purchase Common Stock or other securities of the Company, or other
similar corporate transaction or event affects the common Stock such that an
adjustment is determined by the Board of Directors to be appropriate in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Board of Directors
shall, in such manner as it may deem equitable, adjust any or all of (a) the
number and type of shares of Common Stock or other securities which thereafter
may be made the subject of options, (b) the number and type of shares
4
<PAGE> 5
of Common Stock or other securities subject to outstanding options, and (c) the
exercise price with respect to any option, or, if deemed appropriate, make
provision for a cash payment to the holder of an outstanding option; provided,
however, that the number of shares of Common Stock subject to any option shall
always be a whole number.
11. RIGHTS PRIOR TO ISSUANCE OF SHARES.
No participant shall have any rights as a shareholder with respect to
any shares covered by an option until the issuance of a stock certificate to
the participant for such shares. No adjustment shall be made for dividends or
other rights with respect to such shares for which the record date is prior to
the date such certificate is issued.
12. TERMINATION AND AMENDMENT.
The Board may terminate the Plan, or the granting of options under the
Plan, at any time. No Option shall be granted under the Plan ten years after
adoption of the Plan by the Board or approval of the Plan by the Company's
shareholders, whichever is earlier. Termination of the Plan shall not affect
the rights of the holders of any options previously granted.
The Board may amend or modify the Plan at any time and from time to
time. No amendment, modification, or termination of the Plan shall in any
manner affect any option granted under the Plan without the consent of the
participant holding the option.
13. APPROVAL OF PLAN.
The Plan shall be subject to the approval of the holders of at least a
majority of the shares of Common Stock of the Company present and entitled to
vote at a meeting of shareholders of the Company. No option granted under the
Plan may be exercised in whole or in part until the Plan has been approved by
the shareholders as provided herein. If not approved by shareholders the Plan,
any options granted hereunder shall become void and of no effect.
APPROVED BY BOARD OF DIRECTORS: MARCH 26, 1993
APPROVED BY SHAREHOLDERS: MARCH 25, 1994
AMENDED: JANUARY 11, 1996
APRIL 17, 1997
AMENDED AND RESTATED: AUGUST 8, 1997
APPROVED BY SHAREHOLDERS: , 1998
5
<PAGE> 1
EXHIBIT 10.04
INTERFACE SYSTEMS, INC.
5855 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
January 10, 1997
Mr. Robert A. Nero
864 Gatehouse Lane
Columbus, Ohio 43235
Dear Bob:
This will confirm your employment as President and Chief Executive
Officer of Interface Systems effective January 13, 1997. During the term of
your employment you shall devote all of your business time, attention and
energy to the Company.
For your services (including services as a member of the Board of
Directors, officer, employee or otherwise), we shall pay you an annual salary
of $200,000. There will be an annual salary review and the Board may, at its
option, make such additional salary determination as it deems appropriate in
light of the your performance and that of the Company. We shall pay you a
fiscal year 1997 bonus in an amount of $2,000 for each $.01 of earnings per
share achieved by the Company for the fiscal year. Your bonus for calendar
1997 will be guaranteed at $50,000. Thereafter an annual discretionary bonus
award pursuant to a bonus plan whereby you could earn a bonus of 50% of your
salary if the Company meets plan will be considered. You will also be entitled
to fringe benefits, prerequisites, insurances, other benefits of employment
provided to salaried executives of the Company from time to time and an
automobile. We will pay all reasonable costs directly related to your
relocation to Ann Arbor and shall reimburse you for reasonable, temporary
housing expenses prior to your establishing a permanent residence which we
assume will not take more than a few months. Such payments will be "grossed
up" to substantially relieve you of their income tax effect.
As soon as practicable after the commencement of your employment, we
shall grant you an option to purchase 165,000 shares of Common Stock of the
Company, subject to the terms of the Interface Systems, Inc. 1992 Stock Option
Plan, as amended (the "Stock Option Plan") at the fair market value on the date
of grant. The options will fully vest upon any of the events described in
clauses (a), (b) and (c) of the paragraph below. On an annual basis the
Company will consider granting additional options to you pursuant to the Stock
Option Plan.
In the event of (a) a Change in Control of the Company (as defined in
our Stock Option Plan) followed by your resignation three months thereafter or
(b) a material diminution in your position, salary or other compensation, or
responsibility, and within three months thereafter you resign or (c)
<PAGE> 2
Robert A. Nero
January 10, 1997
Page 2
termination of your employment by the Company for any reason other than
termination for cause, the Company shall continue payment of your salary and
fringe benefits for a period of eighteen months after your resignation or
termination. As an "at will" employee under Michigan law this will be the only
payment obligation of the Company to you. "Termination for cause" means
termination by the Board of Directors of the Company upon its reasonable
determination that you have committed an act of dishonesty or willful
misconduct or have failed to materially perform your duties and
responsibilities. In the case of termination for cause, the Company shall
continue to be liable to you only for your salary and fringe benefits up to the
date of termination.
We are most pleased you have decided to join our Company and we all
look forward to your arrival next week. If the foregoing is satisfactory to
you, please sign the enclosed copy of this letter and return it to me at your
earliest convenience.
Very truly yours,
/s/ Garnel F. Graber
G.F. Graber
Chairman of the Board
AGREED AND ACCEPTED
/s/ Robert A. Nero
- ----------------------
Robert A. Nero
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report on the September 30, 1997 consolidated
financial statements of Interface Systems, Inc. and its subsidiaries dated
November 6, 1997, included in this Form 10-K, into the Company's previously
filed Form S-8 and Form S-3 registration statements (File No. 333-40979, File
No. 33-87434, File No. 33-87438, File No. 33-38235 and File No. 33-04626).
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
December 29, 1997
<PAGE> 1
EXHIBIT 23.02
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 report dated November 14, 1996 relating to the consolidated financial
statements and schedule as of September 30, 1996 and for each of the two years
in the period ended September 30, 1996 of Interface Systems, Inc. and
subsidiaries appearing in the Company's Annual Report on Form 10-K for the year
ended September 30, 1997.
/s/ BDO SEIDMAN, LLP
Troy, Michigan
December 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 830,086
<SECURITIES> 0
<RECEIVABLES> 12,504,437
<ALLOWANCES> 283,180
<INVENTORY> 6,284,833
<CURRENT-ASSETS> 21,906,672
<PP&E> 9,015,078
<DEPRECIATION> 4,412,382
<TOTAL-ASSETS> 28,830,507
<CURRENT-LIABILITIES> 18,301,875
<BONDS> 0
0
0
<COMMON> 442,495
<OTHER-SE> 9,300,308
<TOTAL-LIABILITY-AND-EQUITY> 28,830,507
<SALES> 81,845,463
<TOTAL-REVENUES> 81,845,463
<CGS> 75,103,139
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,110,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 730,979
<INCOME-PRETAX> (12,979,892)
<INCOME-TAX> (2,100,810)
<INCOME-CONTINUING> (10,879,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,879,082)
<EPS-PRIMARY> (2.47)
<EPS-DILUTED> (2.47)
</TABLE>
