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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 March 31, 1998
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 22, 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 March 31, 1998 3
and September 30, 1997
Condensed Consolidated Statement of Operations for the Three
Months Ended March 31, 1998 and 1997 5
Condensed Consolidated Statement of Operations for the Six
Months Ended March 31, 1998 and 1997 6
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended March 31, 1998 and 1997 7
Note to the Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis and Plan of Operation 9
PART II - OTHER INFORMATION 12
</TABLE>
2
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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 March 31, September 30,
1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 884,242 $ 586,811
Accounts receivable, net of allowance for
doubtful accounts 445,558 1,090,628
Inventories 376,116 868,475
Due from officers, net of allowance of $104,134 30,000 30,000
Prepaid expenses and other receivables, net of allowance 125,508 197,764
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Total current assets 1,861,424 2,773,678
Property and Equipment, net of accumulated depreciation 168,446 300,817
OTHER ASSETS
Patents, net of accumulated amortization 276,385 310,376
Deposits and other 47,212 37,281
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Total other assets 323,597 347,657
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Total assets $2,353,467 $3,422,152
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</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
3
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
March 31, September 30,
LIABILITIES NOT SUBJECT TO COMPROMISE 1998 1997
<S> <C> <C>
Current Liabilities
Trade accounts payable $ 464,546 $ 175,155
Accrued liabilities 530,882 999,359
Deferred revenues 30,000 141,967
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Total current liabilities 1,025,428 1,316,481
Liabilities subject to compromise (a) 4,160,245 5,375,889
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Total liabilities 5,185,673 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 (10,663,954) (11,101,966)
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Total shareholders' deficit (2,832,206) (3,270,218)
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Total liabilities and shareholders' deficit $ 2,353,467 $ 3,422,152
(a) Liabilities subject to compromise consist of the following:
Trade accounts payable $ 2,246,485 $ 2,246,485
Long-term debt converted to current 1,913,760 3,129,404
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Total liabilities subject to compromise $ 4,160,245 $ 5,375,889
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</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
4
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31,
1998 1997
----------- -----------
<S> <C> <C>
SALES $ 1,312,537 $ 3,260,136
COST OF SALES 769,532 2,516,531
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GROSS PROFIT 543,005 743,605
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OPERATING EXPENSES
Sales and administrative 377,520 1,229,157
Development 808 3,262
Depreciation and amortization 31,336 35,348
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Total operating expenses 409,664 1,267,767
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Operating income (loss) 133,341 (524,162)
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OTHER INCOME (expense)
Gain (loss) on asset sale
Gain (loss) on legal settlement
Interest income 1,349
Interest expense (25,672) (16,361)
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Total other income (expense) (24,323) (16,361)
INCOME (LOSS) BEFORE INCOME TAX 109,018 (540,523)
INCOME TAX EXPENSE (BENEFIT) 149,382
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NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 109,018 (689,905)
EXTRAORDINARY ITEM
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NET INCOME (LOSS) $ 109,018 ($ 689,905)
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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 $ 0.04 ($ 0.27)
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</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
5
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
March 31,
1998 1997
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<S> <C> <C>
SALES $ 2,998,934 $ 6,431,546
COST OF SALES 2,175,968 4,769,841
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GROSS PROFIT 822,966 1,661,705
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OPERATING EXPENSES
Sales and administrative 1,013,814 2,186,956
Development 3,230 7,496
Depreciation and amortization 62,920 97,366
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Total operating expenses 1,079,964 2,291,818
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Income (loss) from operations (256,998) (630,113)
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OTHER INCOME (expense)
Gain (loss) on asset sale 666,263
Gain (loss) on legal settlement 118,038
Interest income 12,828
Interest expense (55,828) (67,724)
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Total other income (expense) 741,301 (67,724)
INCOME (LOSS) BEFORE INCOME TAX 484,303 (697,837)
INCOME TAX EXPENSE (BENEFIT) 5,667
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NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 484,303 (703,504)
EXTRAORDINARY ITEM (77,944)
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NET INCOME (LOSS) $ 406,359 ($ 703,504)
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES 2,541,666 2,541,666
OUTSTANDING
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INCOME (LOSS) PER COMMON SHARE $ 0.16 ($ 0.28)
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</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
6
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
March 31,
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 406,359 ($ 703,504)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 62,920 97,366
Changes in operating assets and liabilities:
Accounts receivable 645,070 158,504
Inventories 524,012 111,915
Prepaid expenses and other receivables 72,256 55,841
Deposits and other (9,931) (9,789)
Accounts payable and accrued expenses (64,289) 1,044,003
Deferred revenue (111,966) 25,516
Income taxes payable and deferred (189,370) (104,723)
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Net cash provided by (used in) operating activities 1,335,061 675,129
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CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary (189,289)
Sale of assets 103,442 (57,872)
Investment in equipment contracts receivable 55,146
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Net cash provided by (used in) investing activities 103,442 (192,015)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 346,435
Principal reductions of short-term and long-term
obligations (1,141,072) (485,339)
Cash dividend paid on preferred stock (75,000)
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Net cash provided by (used in) financing activities (1,141,072) (213,904)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 297,431 269,210
CASH AND CASH EQUIVALENTS, beginning of period 586,811 336,355
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CASH AND CASH EQUIVALENTS, end of period 884,242 605,565
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</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
7
<PAGE> 8
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 March 31, 1998, and the statements of its
operations and its cash flows for the three month periods ended March 31, 1998
and 1997 and the six month periods ended March 31, 1998 and 1997 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.
8
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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) In the month of January 1998, the Company closed its warehouse
facility in Carlstadt New Jersey. After the sale of the Xerox
maintenance business in November of 1997, the need for a parts
distribution center for the northeastern portion of the United
States did not exist. The savings from closing the 9,000
square foot facility, including reducing the warehouse staff,
is approximately $20,000 per month.
(2) Also during the month of January 1998, the Company moved its
Southern California warehouse facility from Anaheim to Los
Angeles increasing the warehouse size to accommodate parts and
equipment coming from the east coast while lowering the
monthly lease payment by $3,000.
9
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(3) During the month of March 1998 the Company closed its repair
and refurbishment facility in Fairfax Virginia moving all of
the contents back to the new Los Angeles warehouse. By closing
this facility, the Company will save $10,000 per month in rent
and related costs.
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 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 current quarter, sales
of the Fusing Agent constituted approximately 88% 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 March 31, 1998 and March 31, 1997.
Sales for the current quarter decreased by $1,948,000 or 60% compared
to sales for the fiscal quarter ended March 31, 1997. The decrease is attributed
to the sale of the Xerox maintenance base as of November 1, 1997. During the
current quarter, maintenance revenues decreased to approximately $109,000
representing only 8% of the total revenue for the current quarter. The low
percentage of maintenance revenue is a result of the sale of the Xerox
maintenance business and reductions in the areas of service provided by the
Company. Current service revenue is generated by a small base of Siemens laser
printers under contract in Southern California and the Maryland and Virginia
area.
Cost of sales decreased by $1,747,000 or 69% during the current
fiscal quarter again as a result of the sale of the Xerox maintenance service
business and reductions in service areas covered by the Company. Cost of sales
as a percentage of sales decreased from 77% to 59% for the comparable three
month periods. This decrease in cost of sales is attributed to the greater gross
profit margin from sales of consumables which now generate the majority of the
revenue. During the current quarter the Company reduced the number of employee's
from 20 as of December 31, 1997 to 10 as of March 31, 1998. The reduction
consisted of employees whose jobs were related to the maintenance business and
included 3 warehouse staff from the east coast operations that were closed.
Selling and administrative expenses decreased by approximately
$852,000 and decreased from 38% to 29% as a percentage of sales. This came about
as a result of the Company's reorganization program involving consolidating and
reducing administrative expense.
Net interest expense increased by $7,962 from 0.5% to 1.9% as a
percentage of sales. The increase in the current quarter interest expense is due
to the fact that the revolving credit portion of the lending agreement with
Sanwa Bank did not have an interest payment associated with it during the
comparable quarter last year.
10
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The Six Month Periods Ended March 31, 1998 and March 31, 1997.
Sales for the current six month period decreased by $3,433,000 or 53%
from the comparable six month period in 1997. The decrease was the result of the
sale of the Xerox business and reductions in the remaining service areas covered
by the Company. Maintenance revenue for the current six month period of $506,000
was a decrease of $3,153,000 from the prior six month period. Revenues realized
from the sale of Fusing Agent constituted 73% of sales for the current six month
period and only 31% of sales for the prior period. Fusing Agent sales increased
by $202,000 or 10% over the prior period as a result of a positive cash flow
during the current period.
Cost of sales decreased by $2,594,000 or 54% for the current six
month period again a result of a reduction in the maintenance division. Cost of
sales as a percentage of sales decreased from 74% to 73% for the current six
month period. The decline was impacted by final charges during the first quarter
relating to the sale of the Xerox business.
Selling and administrative expenses decreased by $1,173,000 or 54%
from the prior period. Selling and administrative expense of 34% as percentage
of sales remained unchanged for both periods. The Company will continue is its
consolidation and expense reduction program during the remainder of the current
fiscal year with the objective to further reduce these expenses.
Net interest expense decreased by $24,700 or 37% for the current
period as a result of the principal balance of the notes payable being reduced
by over $1,200,000 during the current six month period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $278,677 from $605,565 to
$884,242 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 9 as of
May 1, 1998.
The Company now has sufficient funds to complete its reorganization
plan. Payments to all creditors should be completed by June 30, 1998. The
Company's cash reserves will be depleted by these payments. It is expected that
cash flow from operations will be sufficient to meet all remaining debt
obligations and to rebuild the Company's cash reserves.
11
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PART II
OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
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 28, 1998 /s/ Walter Kornbluh
-------------------
Walter Kornbluh, Chairman of the Board,
President and Chief Executive Officer
/s/ Stephen Crosson
-------------------
Stephen Crosson, Vice President of
Operations and Chief Accounting Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 884,242
<SECURITIES> 0
<RECEIVABLES> 627,022
<ALLOWANCES> 181,464
<INVENTORY> 376,116
<CURRENT-ASSETS> 1,861,424
<PP&E> 864,052
<DEPRECIATION> 695,606
<TOTAL-ASSETS> 2,353,467
<CURRENT-LIABILITIES> 1,025,428
<BONDS> 0
0
3,590,000
<COMMON> 4,241,748
<OTHER-SE> 10,663,954
<TOTAL-LIABILITY-AND-EQUITY> 2,353,467
<SALES> 1,155,032
<TOTAL-REVENUES> 1,312,537
<CGS> 635,267
<TOTAL-COSTS> 769,532
<OTHER-EXPENSES> 409,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,323
<INCOME-PRETAX> 109,018
<INCOME-TAX> 0
<INCOME-CONTINUING> 109,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,018
<EPS-PRIMARY> 0
<EPS-DILUTED> .04
</TABLE>
