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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 June 30, 1999
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 August 10, 1999: 5,236,556 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
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 3 - 4
and September 30, 1998
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Operations for the Nine 6
Months Ended June 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1999 and 1998 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>
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PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements.
INTERSCIENCE COMPUTER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999 and September 30, 1998
<TABLE>
<CAPTION>
Unaudited Audited
ASSETS June 30, September 30,
1999 1998
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 67,486 $ 522,060
Accounts receivable, net of allowance for doubtful
accounts of $65,654 and $209,754 119,488 520,848
Inventory 162,600 --
Deferred income taxes 250,000 250,000
---------- ----------
Total current assets 599,574 1,292,908
Property and Equipment, net of accumulated depreciation 8,605 11,703
of $21,956 and $18,858
OTHER ASSETS
Patents, net of accumulated amortization 206,409 242,395
Deposits 11,280 11,280
---------- ----------
Total other assets 217,689 253,675
Total assets $ 825,868 $1,558,286
</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
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INTERSCIENCE COMPUTER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999 and September 30, 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY Unaudited Audited
June 30, September 30,
1999 1998
<S> <C> <C>
Current Liabilities
Current portion of long term debt $ 122,850 $ 373,482
Trade accounts payable 221,331 204,918
Accrued liabilities 93,825 292,718
----------- -----------
Total current liabilities 438,006 871,118
Long term debt 86,905 571,650
----------- -----------
Total liabilities 524,911 1,442,768
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 5,236,556 shares 8,439,230 8,439,230
Accumulated deficit (8,138,273) (8,323,712)
----------- -----------
Total shareholders' equity 300,957 115,518
Total liabilities and shareholders' equity $ 825,868 $ 1,558,286
</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
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INTERSCIENCE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
June 30,
1999 1998
<S> <C> <C>
SALES $ 338,655 $ 762,392
COST OF SALES 123,599 384,874
----------- -----------
GROSS PROFIT 215,056 377,518
OPERATING EXPENSES
Sales and administrative 274,828 217,363
Depreciation and amortization 18,028 27,257
----------- -----------
Total operating expenses 292,856 244,620
Operating income (77,800) 132,898
OTHER INCOME (expense)
Interest income -- 5,548
Interest expense (3,506) (23,379)
----------- -----------
Total other income (expense) (3,506) (17,831)
Earnings from continuing operations (81,306) 115,067
Reorganization Items
Loss on sale of PLC -- (67,500)
Professional fees -- (98,390)
Gain on settlement with unsecured creditors -- 590,356
----------- -----------
Total reorganization items -- 424,466
Income tax (benefit) -- (702,203)
----------- -----------
Net Income ($ 81,306) $ 1,241,736
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,236,556 3,402,156
----------- -----------
Net income per common share ($ 0.02) $ 0.36
=========== ===========
</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
5
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INTERSCIENCE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
June 30,
1999 1998
<S> <C> <C>
SALES $ 1,486,289 $ 3,761,326
COST OF SALES 608,946 2,560,842
----------- -----------
GROSS PROFIT 877,343 1,200,484
OPERATING EXPENSES
Sales and administrative 617,011 1,231,177
Development -- 3,230
Depreciation and amortization 54,084 90,178
----------- -----------
Total operating expenses 671,095 1,324,585
Operating income (loss) 206,248 (124,101)
OTHER INCOME (expense)
Gain on asset sale -- 666,263
Gain on legal settlement -- 118,038
Interest income 43 18,376
Interest expense (20,852) (79,206)
----------- -----------
Total other income (expense) (20,809) 723,471
Earnings from continuing operations 185,439 599,370
Reorganization Items
Loss on sale of PLC -- (67,500)
Professional fees -- (98,390)
Gain on settlement with unsecured creditors -- 567,054
----------- -----------
Total reorganization items -- 401,164
Income tax expense (benefit) -- (702,203)
----------- -----------
Net Income $ 185,439 $ 1,702,737
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,236,556 3,402,156
Net income per common share (basic and diluted)
From continuing operations $ 0.04 $ 0.18
From reorganization items -- 0.32
----------- -----------
Net income per common share $ 0.04 $ 0.50
=========== ===========
</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
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INTERSCIENCE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
June 30,
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 185,439 $ 1,702,737
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 39,084 92,831
Changes in operating assets and liabilities:
Accounts receivable 401,360 145,020
Inventories (162,600) 477,054
Prepaid expenses and other receivables -- 145,918
Deposits and other -- (9,931)
Accounts payable and accrued expenses (182,480) (540,806)
Deferred revenue -- (141,966)
Income taxes payable and deferred -- (171,703)
Insurance Settlement -- 275,000
Settlement with unsecured creditors 86,904 (871,331)
----------- -----------
Net cash provided by (used in) operating activities 367,707 1,102,823
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of assets -- 132,641
----------- -----------
Net cash provided by (used in) investing activities -- 132,641
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of short-term and long-term
obligations (Pre-payment bank notes) (822,281) (1,230,932)
----------- -----------
Net cash provided by (used in) financing activities (822,281) (1,230,932)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (454,574) 4,532
CASH AND CASH EQUIVALENTS, beginning of period 522,060 586,811
----------- -----------
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 67,486 $ 591,343
=========== ===========
Supplemental cash flow information
The Company paid $20,852 in interest during the current nine month period
</TABLE>
See accompanying note to Condensed Consolidated Financial Statements
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INTERSCIENCE COMPUTER CORPORATION AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1.
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 June 30, 1999, and the statements of its
operations and its cash flows for the three and nine month periods ended June
30, 1999 and 1998 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. These interim
financial statements for the period ended June 30, 1999, reflect continuing
operations; discontinued or sold subsidiaries have been included on a separate
line item.
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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, 1998, 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. 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.
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"). The Plan was confirmed on April 20, 1998. As a result, the Company was
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. Distributions to approved creditors, as required
under the Plan, have been made. All claim objections have been resolved, and the
Bankruptcy Court approved settlement of the outstanding claims. On December 16,
1998, the Bankruptcy Court issued a final decree formally closing the bankruptcy
proceedings.
The Company is the assignee of the entire right, title and interest in
and to U.S. Patent Number 5,333,042 (the "Patent") directed to a method for
using fusing agent in cold fusion laser printers. On October 16, 1995, the
Patent Office issued a notice to the Company that an unnamed party had copied a
claim of the Patent for purposes of instituting an Interference proceedings
under 35 U.S.C. 135 to determine priority of invention. In February 1997, the
Patent Office declared Interference Number 103692 with a patent application
filed in the name of Gerd Goldman (the "Goldman Application"). The Company
understands that the Goldman Application is owned by OCE Printing Systems GmbH.
The Company is identified as the Junior Party in the Interference. In May 1997,
pursuant to the Company's request, the Interference was stayed and the Company
was ordered to notify the Administrative Patent Judge within fifteen days of the
Company's discharge from bankruptcy. Once notified of the discharge from
bankruptcy, the Patent Office continued the formal proceedings to determine who
was the first inventor of
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the copied claim. Such proceedings could take several years to resolve and be
expensive to defend. The Company intends to vigorously defend its rights to the
Patent in the Interference Proceedings. The Company filed on December 7, 1998
its claim to priority on the Patent. The interference proceedings continue at
this time.
The Company has been informed that OCE Printing Systems USA Inc. has
purchased the rights of a former employee as to the ownership of the Patent. In
February, 1999 the former employee and OCE Printing Systems USA Inc. filed a
lawsuit against the Company in the U.S. District Court in Maryland claiming the
employee was the sole inventor and owner of the Patent. The Company believes
that the lawsuit is without merit and intends to defend its rights vigorously,
although no assurance can be given as to the outcome of the litigation. The
lawsuit proceedings also continue at this time.
RESULTS OF OPERATIONS
The Three Month Periods Ended June 30, 1999 and June 30, 1998.
Sales for the current quarter decreased by $423,737 or 56% compared to
sales for the fiscal quarter ended June 30, 1998. The decrease was attributable
to the sale of the Siemens maintenance business during the third quarter of
1998. During the current quarter, the Company had no revenue related to
maintenance. Although the revenue for the current quarter decreased, the gross
profit as a percentage of sales increased during the current quarter to 64% as
compared to 50% in the comparable quarter in 1998. The increased gross profit
percentage is attributable to the higher margins associated with product and
consumable sales which are now the Company's main source of revenue. The
Company's principal product is a liquid Fusing Agent used by the Model 2200
Siemens Printer. The Company sells the Fusing Agent to distributors of the
product including OCE Printing Systems, Inc., The Bradshaw Group and NCR
Corporation. During the current quarter, sales of Fusing Agent constituted
approximately 90% of total revenues compared to 72% for the comparable quarter
in 1998.
Cost of sales decreased by $261,275 or 68% during the current fiscal
quarter from the comparable quarter in 1998, again as a result of the sale of
the Siemens maintenance service business and reduction of the related costs.
Cost of sales as a percentage of sales decreased from 50% in 1998 to 36% for the
comparable three month period in 1999. The reduction is related to sale of the
Siemens maintenance business and reduction of the employee and parts related
expenses associated with the maintenance business. The increase in the
percentage of sales of higher profit fusing agent also contributed to reduction
in cost of sales as a percentage of sales for the current three month period.
Selling and administrative expenses increased by approximately $57,000
or 26% during the current three month period as compared 1998. This increase was
due to legal fees during the current quarter of approximately $145,000
associated with the ongoing patent interference and Maryland lawsuit. Normal and
recurring selling and administrative expense for the quarter decreased by
approximately $88,000 or 40% due to the Company's completion of the
reorganization program, consolidating all out of state warehouses and offices,
and reducing staff and administrative expense. Depreciation and amortization
decreased by approximately $9,200 from the comparable quarter in 1998, but
increased to 5.3% from 3.6% of sales. This was a result of certain assets
relating to the Xerox and Siemens maintenance business and other discontinued
operations being liquidated and written off during the 1998 fiscal year although
depreciation relating to the Company's patents remain at the same level.
Net interest expense decreased by $19,873 from the three month period
ending in 1998, and decreased from 3% to 1% as a percentage of sales. The
expense reduction came about as a result of the reduction in principal balances
for notes payable to Sanwa Bank and Horizon Bank. Total bank debt has been
reduced by approximately $822,000 since September 30, 1998.
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The Nine Month Periods Ended June 30, 1999 and June 30, 1998.
Sales for the current nine month period decreased by approximately
$2,275,000 or 60% from the comparable nine month period in 1998. The decrease
was the result of the sale of the Siemens maintenance business in the third
quarter of 1998. Sales from the current nine month period were all derived from
sales of parts, equipment or consumables. There were no maintenance related
sales during the current nine month period. The sale of Interscience PLC as of
April 1, 1998, also reduced sales for the current nine month period. PLC
contributed $715,000 of fusing agent sales to the comparable period in 1998.
Cost of sales decreased by approximately $1,951,900 or 76% for the
current nine month period again as a result of the sale of the maintenance
business. Cost of sales as a percentage of sales decreased from 68% to 41% for
the current nine month period. The decline in cost of sales was due to higher
gross margins on consumable and product sales which constituted the majority of
sales during the current fiscal year. As a result, gross profit as a percentage
of sales increased from 32% to 59% during the current nine month period.
Selling and administrative expenses decreased by $614,166 or 50% from
the prior year nine month period. The decrease in selling and administrative
expense was achieved in spite of an increase in legal fees as a result of the
patent interference and Maryland lawsuit. Selling and administrative expense as
a percentage of sales increased from 33% in 1998, to 42% in the nine month
period in 1999. The Company had no development expense during the current fiscal
year compared to approximately $3,200 during the prior year nine month period.
Depreciation and amortization expense decreased by $36,094 or 40% from the nine
month ended June 30, 1998. The decrease is a result of sale or disposal of
assets related to the Company's discontinued or sold maintenance operations.
Net interest expense decreased by $58,354 or 74% from the comparable
nine month period in 1998. Reductions in the principal balances for notes
payable resulted in the reduced interest expense for the current nine month
period.
During the current year there were no gains from asset sales or
reorganization items which for the nine month period in 1998 resulted in a total
gain of approximately $1,888,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by approximately $455,000 from
$522,060 for the period ended September 30, 1998, to $67,486 for the current
quarter. As referenced above the Company reduced the principal balance on notes
payable to Sanwa and Horizon banks during the nine months since September 30,
1998, by approximately $822,000. The reduction was achieved using funds from the
Company's IRS tax refund received in October of 1998 and by making monthly
principal and interest payments during the nine month period in the current
fiscal year. The Company believes that its working capital and projected cash
flow from operations will be sufficient to meet its ongoing operational
requirements over the next twelve months. The legal expenses of the patent
interference and the Maryland lawsuit have been a drain on the Company's cash.
The Company has tendered the lawsuits to its Insurance carriers and has taken
the position that its defense costs should be covered by its Insurance policies.
As of this date the Insurance Companies have not accepted responsibility. The
Company has reached an agreement in principal for a $500,000 one year loan from
Renaissance Capital Group, Inc. to assist in the future funding of the lawsuits
and other matters.
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PART II
OTHER INFORMATION
Item 2. Legal Proceedings
The Company has been informed that OCE Printing Systems USA Inc. has
purchased the rights of a former employee as to the ownership of the Patent. In
February, 1999 the former employee and OCE Printing Systems USA Inc. filed a
lawsuit against the Company in the U.S. District Court in Maryland claiming the
employee was the sole inventor and owner of the Patent. The Company believes
that the lawsuit is without merit and intends to defend its rights vigorously,
although no assurance can be given as to the outcome of the litigation.
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: August 10, 1999 /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-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 67,486
<SECURITIES> 0
<RECEIVABLES> 185,142
<ALLOWANCES> 65,654
<INVENTORY> 162,600
<CURRENT-ASSETS> 599,574
<PP&E> 30,561
<DEPRECIATION> 21,956
<TOTAL-ASSETS> 825,868
<CURRENT-LIABILITIES> 438,006
<BONDS> 0
0
0
<COMMON> 8,439,230
<OTHER-SE> (8,138,273)
<TOTAL-LIABILITY-AND-EQUITY> 825,868
<SALES> 338,655
<TOTAL-REVENUES> 338,655
<CGS> 123,599
<TOTAL-COSTS> 123,599
<OTHER-EXPENSES> 292,856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,506
<INCOME-PRETAX> (81,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (81,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81,306)
<EPS-BASIC> 0
<EPS-DILUTED> (.02)
</TABLE>
