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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-QSB
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
Commission file number 1-12312
INTERSCIENCE COMPUTER CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 95-3880130
(State of incorporation) (I.R.S. Employer Identification No)
5236 COLODNY DRIVE, SUITE 100, AGOURA HILLS, CALIFORNIA 91301
(Address of principal executive offices)
Issuer's telephone number: (818) 707-2000
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Number of shares outstanding of each of the issuer's classes of common stock, as
of May 10, 1998: 2,541,666 shares of common stock, no par value.
Transitional Small Business Disclosure Format:
YES [ ] NO [X]
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INTERSCIENCE COMPUTER CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997 3
and September 30, 1997
Condensed Consolidated Statement of Operations for the Three
Months Ended December 31, 1997 and 1996 5
Condensed Consolidated Statement of Cash Flows for the Three
Months Ended December 31, 1997 and 1996 6
Note to the Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis and Plan of Operation 8
PART II - OTHER INFORMATION 11
</TABLE>
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PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements.
INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1997 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 501,709 $ 586,811
Accounts receivable, net of allowance for
doubtful accounts 703,644 1,090,628
Inventories 413,421 868,475
Due from officers, net of allowance of $104,134 30,000 30,000
Prepaid expenses and other receivables, net of allowance 160,814 197,764
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Total current assets 1,809,588 2,773,678
Property and Equipment, net of accumulated depreciation 182,787 300,817
OTHER ASSETS
Patents, net of accumulated amortization 293,380 310,376
Deposits and other 47,212 37,281
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Total other assets 340,592 347,657
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Total assets $2,332,967 $3,422,152
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</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
December 31, September 30,
LIABILITIES NOT SUBJECT TO COMPROMISE 1997 1997
<S> <C> <C>
Current Liabilities
Trade accounts payable $ 238,465 $ 175,155
Accrued liabilities 688,608 999,359
Deferred revenues 30,000 141,967
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Total current liabilities 957,073 1,316,481
Liabilities subject to compromise (a) 4,317,118 5,375,889
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Total liabilities 5,274,191 6,692,370
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SHAREHOLDERS' DEFICIT
Preferred stock, no par value; authorized 1,000,000 shares;
issued and outstanding 40,000 shares 3,590,000 3,590,000
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,541,666 shares 4,241,748 4,241,748
Accumulated deficit (10,772,972) (11,101,966)
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Total shareholders' deficit (2,941,224) (3,270,218)
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Total liabilities and shareholders' deficit $ 2,332,967 $ 3,422,152
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(a) Liabilities subject to compromise consist of the following:
Trade accounts payable $ 2,246,485 $ 2,246,485
Long-term debt converted to current 2,070,633 3,129,404
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Total liabilities subject to compromise $ 4,317,118 $ 5,375,889
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</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
December 31,
1997 1996
----------- -----------
<S> <C> <C>
SALES $ 1,686,397 $ 3,171,207
COST OF SALES 1,406,436 2,253,311
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GROSS PROFIT 279,961 917,896
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OPERATING EXPENSES
Sales and administrative 636,294 957,799
Development 2,423 4,233
Depreciation and amortization 31,584 62,018
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Total operating expenses 670,301 1,024,050
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Loss from operations (390,340) (106,154)
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OTHER INCOME (expense)
Gain (loss) on asset sale 666,263
Gain (loss) on legal settlement 118,038
Interest income 11,479
Interest expense (30,155) (51,363)
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Total other income (expense) 765,625 (51,363)
INCOME (LOSS) BEFORE INCOME TAX 375,285 (157,517)
INCOME TAX EXPENSE (BENEFIT) (74,942)
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NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 375,285 (82,575)
EXTRAORDINARY ITEM (77,944)
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NET INCOME (LOSS) $ 297,341 ($82,575)
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 2,541,666 2,541,666
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INCOME (LOSS) PER COMMON SHARE $ 0.12 ($0.03)
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</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
December 31,
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 297,341 $ (82,575)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 31,584 61,071
Changes in operating assets and liabilities:
Accounts receivable 386,984 (149,993)
Inventories 486,707 7,207
Prepaid expenses and other receivables 36,950 (26,196)
Deposits and other (9,931) (22,398)
Accounts payable and accrued expenses (81,773) 444,140
Deferred revenue (111,966) 13,955
Income taxes payable and deferred (189,370) (152,803)
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Net cash provided by (used in) operating activities 846,526 92,408
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CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary 24,165
Sale of assets 103,442
Purchase of property and equipment (57,872)
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Net cash provided by (used in) investing activities 103,442 (33,707)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 346,435
Principal reductions of short-term and long-term
obligations (1,035,070) (375,404)
Cash dividend paid on preferred stock (75,000)
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Net cash provided by (used in) financing activities (1,035,070) (103,969)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (85,102) (45,268)
CASH AND CASH EQUIVALENTS, beginning of period 586,811 336,355
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CASH AND CASH EQUIVALENTS, end of period 501,709 291,087
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</TABLE>
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Introduction
The accompanying condensed consolidated financial statements of
Interscience Computer Corporation (the "Company") have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes included in the Company's latest Annual Report
on Form 10-KSB. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the financial
position of the Company as of December 31, 1997, and the statements of its
operations and its cash flows for the three month periods ended December 31,
1997 and 1996 have been included. The results of operations for interim periods
are not necessarily indicative of the results which may be realized for the full
year.
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Management's Discussion and Analysis
and Plan of Operation." Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. Interscience Computer Corporation undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risks described in other documents the Company files from time to time with
the Securities and Exchange Commission, including the Annual Report on Form
10-KSB for the fiscal year ended September 30, 1997, the Quarterly Reports on
Form 10-QSB to be filed by the Company and any Current Reports on Form 8-K by
the Company.
Item 2. Management's Discussion and Analysis and Plan of Operation.
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto in this quarterly report.
OVERVIEW
The Company was organized in 1983 to be a third-party provider of
maintenance services for computer hardware and related peripheral equipment.
Unless otherwise specified herein, all references to the "Company" shall mean
Interscience Computer Corporation and all of its subsidiaries. On September 15,
1993, the Company effected an initial public offering of units, each of which
consisted of one share of common stock and a warrant to purchase an additional
share of common stock. The warrants expired in September 1996. The Company's
principal executive offices are currently located in Agoura Hills, California.
On March 6, 1997, the Company filed for protection under Chapter 11
of the U.S. Bankruptcy Code. The bankruptcy filing was caused by several
factors. The Company had made four acquisitions, and the cash flow of the
Company was not sufficient to pay the operating expenses and the substantial
debts assumed as part of the acquisitions. In addition, the Company was
incurring substantial legal expense from six lawsuits which were then pending
against the Company.
The significant events which occurred during this quarter are as
follows:
(1) The Company and its wholly owned subsidiary Laser Support &
Engineering, Inc. ("LSE") sold its Xerox maintenance business
to Anacomp Corporation for $1,220,000 plus a possible earn-out
based on the first years revenue.
(2) The Company was able to compromise a debt to the former owners
of LSE at a savings of $118,000.
(3) After the sale of the LSE Xerox business, all proceeds were
distributed to the Internal Revenue Service and the
subsidiary's stock was abandoned.
The Company was not able to operate the Xerox maintenance business
on a profitable basis and it was sold effective November 1, 1997 with the
approval of the Bankruptcy Court. As of the quarter ended December 31, 1997, the
Company had no Xerox equipment under maintenance service contracts. The majority
of the Company's revenues are now generated from the sale of consumable products
used by high speed production printers. The Company's principal product is a
liquid fusing agent (the "Fusing Agent") used by the Model 2200 Siemens Printer.
The Company currently sells the Fusing Agent directly to end
8
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user clients who operate the printers. The Company also sells the Fusing Agent
to distributors of the product including NCR Corporation, OCE Printing Systems,
Inc. and The Bradshaw Group. During the quarter sales of the Fusing Agent
constituted approximately 62% of the Company's total revenue.
On April 1, 1998 a hearing was held in the Bankruptcy Court to
consider confirmation of the Company's First Amended Plan of Reorganization (the
"Plan"). After considering the evidence, the Bankruptcy Court ruled that the
Plan should be and was in fact confirmed on April 20, 1998. As a result, the
company is revested with all of its assets. The Plan terms control all claims
and equity interests which existed as of March 6, 1997, the date when the
Company filed its Chapter 11 reorganization case. The Company can now conduct
business as usual without the requirement of obtaining Bankruptcy Court
approval. Initial distributions to creditors, as required under the Plan, are
expected to be completed by the end of June, 1998. There are several claims
which will be the subject of claims objections. Once those objections are
resolved, the Company will seek a final decree from the Bankruptcy Court closing
the case.
RESULTS OF OPERATIONS
Fiscal Quarter Ended December 31, 1996 and December 31, 1997.
Sales for the current quarter decreased by $1,485,000 or 47% compared
to sales for the fiscal quarter ended December 31, 1996. The decrease was
attributed to the sale of the Xerox maintenance base as of November 1, 1997.
During the current quarter, maintenance revenues decreased by $1,413,000 or 75%
from the fiscal quarter ended December 31, 1996. This decrease includes a
reduction in maintenance revenue from LSE of $429,000 or 86%. As a result of the
sale of the Xerox maintenance business, the Board of Directors of LSE voted that
LSE cease doing business effective December 14, 1997. Other revenues from
equipment sales, repairs and refurbishments and parts sales also decreased for
the current quarter by $141,000 compared with the quarter ended December 31,
1996. The current quarter sales of fusing agent increased by $69,000 or 7% over
sales of Fusing Agent from the comparable period last year. Sales of fusing
agent as a percentage of total revenue increased from 31% to 62% for the three
month period ending December 31, 1996 and 1997.
Cost of sales decreased by $847,000 or 38% during the current fiscal
quarter again as a result of the sale of the Xerox maintenance service business.
At the same time cost of sales as a percentage of sales increased from 71% to
83% for the comparable three month periods. This increase in cost of sales was
due to the final charges associated with the sale of the Xerox business and
related employee expenses. During the current quarter the Company reduced the
number of employees from 49 as of October 1, 1997 to 20 as of December 31, 1997.
The reduction consisted of employees whose jobs were related to the Xerox
maintenance business and included all employees of LSE.
Selling and administrative expenses decreased by $321,000 but
increased from 30% to 38% as a percentage of sales. This came about as a result
of the Company's reorganization program, consolidating and reducing
administrative expense. Depreciation and amortization decreased from 2.0% to
1.9% of sales. This was a result of certain assets relating to the Xerox
maintenance business being liquidated and written off during the period. The
Company had $2,400 in research and development expense for the current quarter
relating to the final phase of the Delphax toner development. Some revenue from
sales of this toner should be realized during the latter part of the current
fiscal year.
Net interest expense decreased by $32,687 from 1.6% to 1.1% as a
percentage of sales. This came about as a result of the reduction in principal
balances for notes payable to Sanwa Bank and Horizon Bank. During the current
quarter the principal balances for notes payable were reduced by approximately
$1,108,000, through monthly payments and a one time payment of $1,000,000 from
the proceeds of the Xerox maintenance business sale.
The extraordinary loss of $77,944 was the loss on abandonment of LSE
as previously described.
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LIQUIDITY AND CAPITAL RESOURCES
On March 6, 1997 the Company filed a petition for protection under
Chapter 11 of the U.S. Bankruptcy Code. During the current quarter the Company
has accomplished the following while operating under Chapter 11:
1. Sale of the losing Xerox maintenance business to Anacomp
Corporation on November 1, 1997. The purchase price was
$1,220,000 at closing and an earnout payment based on revenues
generated by the Xerox maintenance business to be made in the
13th month following closing. On December 1, 1997, the sale
was approved by the bankruptcy court. As a result of the sale
a $1,000,000 principal payment was made to Sanwa Bank reducing
the note payable to Sanwa to approximately $1,000,000. In
addition a $188,000 payment was made to the Internal Revenue
Service as payment in full for the federal tax liability for
LSE. The amount of the payment represents LSE's portion of the
Xerox business sale to Anacomp. Subsequently during the
quarter, the Board of Directors of LSE voted that LSE cease
doing business as of December 14, 1997.
2. Settlement with the sellers of LSE for a reduced amount of
$760,000 thus eliminating a larger judgment against the
Company. As a result of the settlement, the sellers of LSE
were paid in full for the settlement amount and the Company
realized a gain from the settlement of approximately $118,000.
The need for a bond to support the judgment against the
Company on behalf of the LSE sellers was also negated and the
Company saved approximately $15,000 in fees for the current
fiscal year.
Cash and cash equivalents increased by $210,622 from $291,087 to
$501,709 for the current quarter. The Company has been operating on a positive
cash basis since filing for protection under Chapter 11 of the U.S. Bankruptcy
Code. Rent lease expense has been reduced from $80,000 per month in fiscal year
1997 to a current rate of $8,000 per month. The Company has continued to reduce
expenses during the reorganization and the full effect of the reduced expenses
should be realized during the end of the current fiscal year. The number of
employees have been reduced from 85 prior to the filing of bankruptcy to 10 as
of April 1, 1998.
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PART II
OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Form 8-K Filed December 17, 1997, Announcement of Sale of Xerox
Maintenance Business to Anacomp.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INTERSCIENCE COMPUTER CORPORATION
Date: May 19, 1998 /s/ Walter Kornbluh
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Walter Kornbluh, Chairman of the Board,
President and Chief Executive Officer
/s/ Stephen Crosson
--------------------
Stephen Crosson, Vice President of
Operations and Chief Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 501,709
<SECURITIES> 0
<RECEIVABLES> 885,108
<ALLOWANCES> 181,464
<INVENTORY> 413,421
<CURRENT-ASSETS> 1,809,588
<PP&E> 864,053
<DEPRECIATION> 681,266
<TOTAL-ASSETS> 2,332,967
<CURRENT-LIABILITIES> 957,073
<BONDS> 0
0
3,590,000
<COMMON> 4,241,748
<OTHER-SE> (10,772,972)
<TOTAL-LIABILITY-AND-EQUITY> 2,332,967
<SALES> 1,045,966
<TOTAL-REVENUES> 1,686,397
<CGS> 575,281
<TOTAL-COSTS> 1,406,436
<OTHER-EXPENSES> 670,301
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,676
<INCOME-PRETAX> 375,285
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 77,944
<CHANGES> 0
<NET-INCOME> 297,341
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.12
</TABLE>
