-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NrScI5CqXt/V57nwJNWLHqz/CounxjvfYHYBBaCnNsRsbOtgxyvokwAIlPMgCMEf dG3HJ4otEORgeYCZPOtynw== 0000913569-97-000130.txt : 19970815 0000913569-97-000130.hdr.sgml : 19970815 ACCESSION NUMBER: 0000913569-97-000130 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERFACE SYSTEMS INC CENTRAL INDEX KEY: 0000714981 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 381857379 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10902 FILM NUMBER: 97662240 BUSINESS ADDRESS: STREET 1: 5855 INTERFACE DR CITY: ANN ARBOR STATE: MI ZIP: 48103 BUSINESS PHONE: 3137695900 MAIL ADDRESS: STREET 1: 5855 INTERFACE DR CITY: ANN ARBOR STATE: MI ZIP: 48103 10-Q 1 FORM 10-Q REPORT FOR 3RD QUARTER 1997 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-10902 INTERFACE SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 38-1857379 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 5855 Interface Drive, Ann Arbor, Michigan 48103 (Address of principal executive offices) (313) 769-5900 (Registrant's telephone number, including area code) 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 (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. [ X ] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.10 par value, 4,408,383 shares as of July 31, 1997. INTERFACE SYSTEMS, INC. FORM 10-Q INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets at June 30, 1997 and September 30, 1996 Consolidated Statements of Operations for the Quarters and Nine Month Periods Ended June 30, 1997 and 1996 Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 1997 and 1996 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES INDEX TO EXHIBITS PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements INTERFACE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, September 30, 1997 1996 ------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 641,612 $ 1,694,725 Accounts receivable, net 12,288,517 11,007,983 Refundable income taxes 1,654,552 1,378,093 Inventories 7,660,164 10,478,322 Prepaid expenses and other 471,314 1,232,423 Deferred income taxes 988,000 549,000 ---------- ---------- Total current assets 23,704,159 26,340,546 Property and equipment, net 4,821,207 4,816,815 Goodwill, net 1,245,503 2,881,481 Software development costs, net 1,377,761 3,570,545 Other assets 568,356 1,269,572 ---------- ---------- $31,716,986 $38,878,959 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 9,123,747 $ 5,691,546 Accounts payable 8,312,157 9,088,765 Accrued expenses 1,471,446 693,767 Deferred revenue 166,064 280,703 Current portion of long-term debt 25,900 52,400 ---------- ---------- Total current liabilities 19,099,314 15,807,181 Long-term debt 207,433 234,794 Deferred income taxes 844,000 1,584,000 ---------- ---------- Total liabilities 20,150,747 17,625,975 ---------- ---------- Stockholders' equity: Common stock, $.10 par value, 20,000,000 shares authorized; 4,408,383 and 4,535,879 shares issued and outstanding 440,838 453,588 Additional paid-in-capital 10,497,336 11,122,063 Cumulative translation adjustment (155,802) (236,051) Retained earnings 783,867 9,913,384 Total stockholders' equity 11,566,239 21,252,984 ---------- ---------- $31,716,986 $38,878,959 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. INTERFACE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Quarters ended Nine months ended June 30, June 30, 1997 1996 1997 1996 ------------------------------------------------------------ (unaudited) (unaudited) Net revenues $19,243,265 $16,655,495 $62,121,468 $57,272,235 Cost of revenues 20,555,934 14,548,005 58,965,735 48,344,748 ---------- ---------- ---------- ---------- Gross profit (1,312,669) 2,107,490 3,155,733 8,927,487 Product development costs 967,809 543,729 2,105,465 1,411,477 Selling, general and administrative expenses 5,403,143 3,370,863 11,791,955 8,332,313 ---------- ---------- ---------- ---------- Loss from operations (7,683,621) (1,807,102) (10,741,687) (816,303) Interest expense (200,210) (112,910) (515,014) (330,443) Other income 113,956 55,772 383,727 164,096 Gain on sale of securities - - 74,777 - ---------- ---------- ---------- ---------- Loss before income taxes (7,769,875) (1,864,240) (10,798,197) (982,650) Income tax benefit (865,150) (368,675) (1,668,680) (50,890) ---------- ---------- ---------- ----------- Net loss $(6,904,725) $(1,495,565) $(9,129,517) $ (931,760) ========== ========== ========== ========== Net loss per share $(1.57) $ (0.33) $ (2.04) $ (0.21) ========== ========== ========== ========== Weighted average shares outstanding 4,408,383 4,517,901 4,472,132 4,412,473 ========== ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended June 30, 1997 1996 -------------------------- (unaudited) Cash flows from operating activities: Net loss $(9,129,517) $(931,760) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,141,173 2,397,846 Deferred income taxes (1,179,000) 40,000 Gain on sale of securities (74,777) - Loss on sale of fixed assets 2,056 27,857 Write-off of software development costs 1,616,358 - Write-off of goodwill 1,456,320 - Change in operating assets and liabilities: Accounts receivable (1,280,534) (1,331,264) Refundable income taxes (276,459) - Inventories 2,818,158 (1,994,419) Prepaid expenses and other 658,274 (720,978) Other assets 63,739 (185,378) Accounts payable (776,608) 1,659,012 Accrued expense 777,679 85,739 Deferred revenue (114,639) (109,850) ---------- --------- Net cash used in operating activities (3,297,777) (1,063,195) ---------- ---------- Cash flows from investing activities: Additions to notes receivable - (819,594) Additions to property and equipment (437,862) (912,156) Additions to software development costs (953,675) (1,692,290) Investment in foreign subsidiary - (39,137) Proceeds from sale of securities 177,612 15,309 ---------- --------- Net cash used in investing activities (1,213,925) (3,447,868) ---------- --------- Cash flows from financing activities: Increase in notes payable 3,432,201 1,214,610 Reduction of long-term debt (53,861) (38,350) Sale of stock - 2,013,954 ----------- --------- Net cash provided by financing activities 3,378,340 3,190,214 ----------- --------- Effect of exchange rate changes on cash 80,249 (38,202) ----------- --------- Net decrease in cash and cash equivalents (1,053,113) (1,359,051) Cash and cash equivalents, beginning of period 1,694,725 3,735,758 ----------- --------- Cash and cash equivalents, end of period $ 641,612 $ 2,376,707 ========== ========= The accompanying notes are an integral part of these consolidated financial statements. INTERFACE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The interim consolidated financial statements of Interface Systems, Inc. have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The information included in this report should be read in conjunction with the financial statements for the year ended September 30, 1996 and notes thereto included in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying interim consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. The results for the quarter ended June 30, 1997 are not necessarily indicative of the results to be expected for any future period or for the entire year. NOTE B - BORROWINGS On February 19, 1997, the Company renewed its credit facilities with a bank which provide for aggregate borrowings of up to $11.5 million. As of June 30, 1997, $9.1 million was outstanding under these facilities. Advances under these facilities bear interest at the bank's prime rate (8.5% at June 30, 1997) plus 1/2%, are payable on demand and are collateralized by substantially all of the Company's assets. The credit facilities expire August 31, 1997 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. 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. NOTE C - TREASURY SHARES ACQUIRED In January 1997, the Company acquired 127,495 shares of its Common Stock valued at $637,476, 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net Revenues. Revenues for the third quarter ended June 30, 1997 were $19.2 million, an increase of 15.0% over revenues of $16.7 million for the third quarter of fiscal 1996. Revenues for the first nine months of fiscal 1997 were $62.1 million, an increase of 8.4% over revenues of $57.3 million for the same period of fiscal 1996. The increases for both the quarter and nine month periods were primarily due to increased distribution revenue of Interface Systems International Ltd. ("ISIL") and increased sales of Enterprise Networking core products, offset by a decrease in sales of printer products. Cost of Revenues. Cost of revenues were $20.6 million and $14.5 million, or 106.8% and 87.4% of net revenues for the quarters ended June 30, 1997 and 1996, respectively. For the quarter ended June 30, 1997, cost of revenues included non-recurring charges of $4.6 million consisting of a $1.3 million write-off of capitalized software development; a $1.4 million reserve for ISIL slow moving inventory and fair market value reductions due to a decline in market conditions and continued product price erosion; a $1.1 million write-off that resulted from several accounting errors related to the recording of inventory at ISIL; and $800,000 in various adjustments resulting from an audit, which is in process, of the June 30, 1997 balance sheet of the ISIL distribution business. As a result of the accounting errors, the Company is taking corrective action, including the balance sheet audit discussed above. Cost of revenues were $59.0 million and $48.3 million, or 94.9% and 84.4% of net revenues for the nine months ended June 30, 1997 and 1996, respectively. For the nine months ended June 30, 1997, cost of revenues included non-recurring charges of $6.2 million consisting of the charges discussed above, and in addition, a $1.4 million reserve for printer inventory and a $320,000 write-off of capitalized software development costs. Cost of revenues for the third quarter and the first nine months of fiscal 1997, excluding the effect of the non-recurring charges, was 82.9% and 84.9% of net revenues, respectively. Excluding the effect of the non-recurring charges, cost of revenues as a percentage of net revenues for the third quarter declined due to higher sales of core business software products which have higher gross profit margins. Product Development Costs. Product development costs were $1.0 million and $544,000, or 5.0% and 3.3% of net revenues for the quarters ended June 30, 1997 and 1996, respectively. Product development costs were $2.1 million and $1.4 million, or 3.3% and 2.5% of net revenues for the nine months ended June 30, 1997 and 1996, respectively. The absolute dollar increase for both periods primarily reflects a decrease of $460,000 and $560,000 in the amount of expense deferred through capitalization of internally developed software for the quarter and nine month periods ended June 30, 1997 as compared with the same periods in the prior fiscal year. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.4 million and $3.4 million, or 28.1% and 20.2% of net revenues for the quarters ended June 30, 1997 and 1996, respectively. Selling, general and administrative expenses were $11.8 million and $8.3 million, or 19.0% and 14.6% of net revenues for the nine months ended June 30, 1997 and 1996, respectively. The absolute dollar increase for the third quarter was primarily due to the write-off of $1.5 million in goodwill related to the Company's investment in its operations in the United Kingdom. For the nine months ended June 30, 1997, the absolute dollar increase was due to the goodwill write-off, increased selling and marketing personnel in the United Kingdom to support the growth in ISIL's distribution business 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 addition, the increase for the first nine months of fiscal 1997 is due to marketing expenses incurred to promote the Company's Oasis products. In July, 1997, the ISIL operations were restructured into two separate units, 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%. The reductions were made in July 1997, and the related expense will be taken in the fourth quarter. Interest Expense. For the third quarter of fiscal 1997, interest expense increased to $200,000 from $113,000 for the same period of 1996. For the first nine months of fiscal 1997, interest expense increased to $515,000 from $330,000 for the same period of 1996. The increases were due to increased borrowing, primarily at ISIL for working capital purposes. Income Taxes. The effective tax rate for the quarter and nine month periods ended June 30, 1997 was a benefit of 11.1% and 15.5%, respectively. The tax benefit for these periods was below the statutory rate because the losses at ISIL and the goodwill write-off are not eligible for tax benefit. Liquidity and Capital Resources At June 30, 1997, the Company's primary sources of liquidity included cash and cash equivalents of $642,000 and short-term credit facilities with a bank providing for $11.5 million of borrowings, of which $2.4 million was available. For the first nine months of fiscal 1997, net cash of $3.3 million was used in operating activities compared to net cash of $1.1 million used in operating activities for the same period of fiscal 1996. Cash was used in operating activities for the first nine months of fiscal 1997 primarily as a result of net operating losses for the period and increased accounts receivable partially offset by decreased inventory and non-cash charges. Net cash used in investing activities was $1.2 million for the first nine months of fiscal 1997 compared with $3.4 million for the same period of fiscal 1996. In February 1997, the Company renewed its credit facilities with a bank which provide for aggregate borrowings of up to $11.5 million. As of June 30, 1997, $9.2 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 plus 1/2%, are payable on demand and are collateralized by substantially all of the Company's assets. The credit facilities expire August 31, 1997 and are subject to renewal thereafter. The Company currently is conducting discussions with the bank to renew the credit facilities. 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 violation of the minimum net worth covenant of the credit facilities at June 30, 1997. The bank waived this default through an amendment to the facilities, which amendment also changed the minimum net worth requirement. 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 believes that its existing cash balances, available credit facility and future operating cash flows are sufficient for near term operating needs. The Company believes it will renew the bank credit facilities prior to expiration of the facilities. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable. PART 2 - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) The Exhibits included herewith are set forth on the Index to Exhibits. (b) A report on Form 8-K dated June 24, 1997 was filed on June 27, 1997. All other items omitted are not applicable or the answers thereto are negative. SIGNATURES Pursuant to the requirements 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. Date: August 14, 1997 /s/ John R. Ternes ------------------------ John R. Ternes Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and a duly authorized officer of the Registrant) INDEX TO EXHIBITS 10.1 Second Amendment to Credit Authorization Agreement between the Company and NBD Bank dated August 11, 1997 27 Financial Data Schedule EX-10.1 2 SECOND AMENDMENT TO CREDIT AUTHORIZATION AGREEMENT SECOND AMENDMENT TO CREDIT AUTHORIZATION AGREEMENT THIS SECOND AMENDMENT TO CREDIT AUTHORIZATION AGREEMENT, dated as of August 11, 1997 (this "Amendment") by and between Interface Systems, Inc., a Delaware Corporation, the ("Borrower") and NBD Bank, a Michigan banking corporation (the "Bank"). RECITALS A. The Borrower and the Bank are parties to a Credit Authorization Agreement dated as of February 19, 1997, as amended by a First Amendment To Credit Authorization Agreement dated as of April 21, 1997 (as amended the "Agreement"). B. 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 June 30, 1997. C. 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 $11,500,000 at June 30, 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. (b) 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. (c) 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 Event 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 June 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(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 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 SYSTEMS, INC. /S/ ---------------------------- By: David O. Shupp Its: Treasurer NBD BANK /S/ --------------------------- By: Michael Kelly Its: First Vice President EX-27 3 FINANCIAL DATA SCHEDULE
5 1 9-MOS SEP-30-1997 OCT-01-1996 JUN-30-1997 641,612 0 12,288,517 0 7,660,164 23,704,159 4,821,207 0 31,716,986 19,099,314 0 10,938,174 0 0 628,055 31,716,986 62,121,468 62,121,468 58,965,735 72,863,155 0 0 (515,014) (10,798,197) (1,668,680) (10,798,197) 0 0 0 (9,129,517) (2.04) (2.04)
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