-----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, GhNZZOc16nWOltLCBPKsddzLQjA75br5Jm7TXofFLyDoGjsNxdy2+VdxT5/ttdsC JYDOoGevHPHx7lWiBw9bqQ== 0000950124-00-003261.txt : 20000516 0000950124-00-003261.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950124-00-003261 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: MI FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10902 FILM NUMBER: 635030 BUSINESS ADDRESS: STREET 1: 5855 INTERFACE DR CITY: ANN ARBOR STATE: MI ZIP: 48103 BUSINESS PHONE: 7347695900 MAIL ADDRESS: STREET 1: 5855 INTERFACE DR CITY: ANN ARBOR STATE: MI ZIP: 48103 10-Q 1 FORM 10-Q 1 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 MARCH 31, 2000 [ ] 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) MICHIGAN 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) (734) 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, no par value, 4,686,432 shares as of April 30, 2000. 1 2 INTERFACE SYSTEMS, INC. FORM 10-Q INDEX
Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets at March 31, 2000 and September 30, 1999 3 Consolidated Statements of Operations for the Quarter and Six Month Periods Ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 9 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 9 Item 5. Other Information 9 Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 10
2 3 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements INTERFACE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, September 30, 2000 1999 ------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 931,201 $ 1,575,139 Accounts receivable, net 2,655,961 3,689,511 Refundable income taxes -- 6,723 Inventories 527,499 915,977 Current portion of note receivable 6,751 -- Prepaid expenses and other 311,172 303,676 ------------ ------------ Total current assets 4,432,584 6,491,026 Property and equipment, net 2,407,446 3,188,071 Goodwill, net 696,266 789,140 Note Receivable 262,972 -- Other assets 32,713 55,194 ------------ ------------ $ 7,831,981 $ 10,523,431 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 877,718 $ 912,018 Accrued expenses 1,132,866 1,140,155 Deferred revenue 472,027 431,252 Current portion of long-term debt 50,200 50,200 ------------ ------------ Total current liabilities 2,532,811 2,533,625 Long-term debt 45,633 70,633 Stockholders' equity: Common stock, no par value, 12,500,000 shares authorized; 4,686,432 and 4,539,529 shares issued and outstanding at March 31, 2000 and September 30, 1999, respectively 11,799,884 11,324,418 Cumulative translation adjustment (56,106) (53,117) Accumulated deficit (6,490,241) (3,352,128) ------------ ------------ Total stockholders' equity 5,253,537 7,919,173 ------------ ------------ $ 7,831,981 $ 10,523,431 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 4 INTERFACE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter ended Six months ended March 31, March 31, 2000 1999 2000 1999 ---- ---- ---- ---- (unaudited) (unaudited) Net revenues $ 2,975,201 $ 4,862,042 $ 6,394,575 $ 10,073,228 Cost of revenues 591,852 2,066,374 1,959,428 4,167,813 ------------ ------------ ------------ ------------ Gross profit 2,383,349 2,795,668 4,435,147 5,905,415 Expenses: Product development 752,175 400,734 1,436,844 804,320 Selling, general and administrative 3,318,024 2,850,340 6,296,076 5,466,485 ------------ ------------ ------------ ------------ Operating loss (1,686,850) (455,406) (3,297,773) (365,390) Interest expense (12,036) (3,572) (14,791) (17,112) Other income 23,836 8,233 181,175 70,855 ------------ ------------ ------------ ------------ Loss before income taxes (1,675,050) (450,745) (3,131,389) (311,647) Income tax expense (benefit) -- (9,000) 6,723 -- ------------ ------------ ------------ ------------ Net loss $ (1,675,050) $ (441,745) $ (3,138,112) $ (311,647) ============ ============ ============ ============ Basic and diluted loss per share $ (0.36) $ (0.10) $ (0.68) $ (0.07) ============ ============ ============ ============ Weighted average shares outstanding 4,652,387 4,469,626 4,607,993 4,463,867 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 5 INTERFACE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 2000 1999 ---- ---- (unaudited) Cash flows from operating activities: Net loss $(3,138,112) $ (311,647) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Gain on sale of IGK (36,736) -- Depreciation and amortization 403,464 558,040 Change in operating assets and liabilities: Accounts receivable 633,608 809,432 Refundable income taxes 6,723 1,459,874 Inventories (37,447) 577,523 Prepaid expenses and other (27,427) (54,354) Other assets 22,481 1,774 Accounts payable 199,752 (121,881) Accrued expense (44,479) (530,461) Deferred revenue 40,775 (75,686) ----------- ----------- Net cash provided by (used in) operating activities (1,977,398) 2,312,614 ----------- ----------- Cash flows from investing activities: Proceeds from sale of IGK 1,078,556 -- Proceeds received on Note issued on sale of IGK 80,277 -- Additions to property and equipment (272,850) (233,886) ----------- ----------- Net cash provided by (used in) investing activities 885,983 (233,886) ----------- ----------- Cash flows from financing activities: Change in notes payable -- (1,350,000) Proceeds from issuance of stock 475,466 44,056 Reduction of long-term debt (25,000) (25,000) ----------- ----------- Net cash provided by (used in) financing activities 450,466 (1,330,944) ----------- ----------- Effect of exchange rate changes on cash (2,989) 49,632 ----------- ----------- Net increase (decrease) in cash and cash equivalents (643,938) 797,416 Cash and cash equivalents, beginning of period 1,575,139 301,206 ----------- ----------- Cash and cash equivalents, end of period $ 931,201 $ 1,098,622 =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest $ 14,791 $ 17,112 =========== =========== Cash refunded for income taxes $ -- $ 1,558,221 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 INTERFACE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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, 1999 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 March 31, 2000 may not be indicative of the results to be expected for future quarters or the fiscal year ending September 30, 2000. For comparative purposes, certain amounts reported in prior years' financial statements have been reclassified to conform to current year presentations. 2. Line-of-Credit In May 2000, the Company and it's bank entered into a commitment to renew the credit facility expanding the borrowing capability from $3.5 to $5.0 million with a maturity date of May 31, 2001. As of March 31, 2000, there were no borrowings outstanding under its current $3.5 million facility. Advances bear interest at the bank's prime rate (9.0% at March 31, 2000) plus 1%, are payable on demand and are collateralized by substantially all of the Company's assets. The amount available for borrowing at any time is based on borrowing base formulae relating to levels of accounts receivable and other bank covenants. Under such formulae, $4.2 million will be available to the Company upon renewal. Under the terms of its existing credit agreement, the Company is required to maintain certain minimum working capital, net worth, and other specific financial ratios. In addition, the credit agreement prohibits the payment of cash dividends and contains 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 was in compliance with the bank covenants prior to and upon renewal. In connection with its renewal, the Company will issue the bank warrants to purchase 20,000 shares of common stock at fair market value at the date of issuance. The warrants will be fully exercisable and expire three years from the date of issuance. 3. Impact of Recently Issued Accounting Standards 6 7 The Financial Accounting Standards Board has issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." The Company is required to adopt the provisions of SFAS No. 133 in its current fiscal year. The Company expects the adoption will not affect results of operations or financial statements. 4. Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income", establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity. The components of comprehensive income, are as follows:
Quarters ended March 31, Six months ended March 31, ------------------------ -------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net Loss $ (1,675,050) $ (441,745) $ (3,138,112) $ (311,647) Change in foreign currency translation 16,883 28,329 ( 2,989) 49,632 ------------- --------------- -------------- -------------- Comprehensive Loss $ (1,658,167) $ (413,416) $ (3,141,101) $ (262,015) ============== ================ ============= ===============
5. Sale of Wholly Owned Subsidiary On December 22, 1999, the Company sold its subsidiary, IGK Industries, Inc. for $1,450,000, which resulted in a $37,000 gain. The purchaser acquired all assets and assumed all current liabilities of IGK. Also included in the sale was the building that housed IGK's operations, which was owned by the Company and leased by IGK. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATIONS The Company is currently completing a transition plan that is focused on the movement from the manufacturing of hardware (printers, circuit boards, and peripheral equipment) to the development and marketing of higher margin and higher growth software solutions. The progress related to the plan is evidenced by the current structure of the Company. Currently, the Company is organized around two software solutions groups: L2i(TM) (Legacy-to-Internet) and Cleo. RESULTS OF OPERATIONS Net Revenues. Revenues for the second quarter ended March 31, 2000 were $3.0 million, a decrease of 38.8% over revenues of $4.9 million for the second quarter of fiscal 1999. Revenues for the first six months of fiscal 2000 were $6.4 million, a decrease of 36.5% over revenues of $10.1 million for the same period of fiscal 1999. The decrease for the quarter and the six-month period was primarily due to the planned curtailment of the printer business, the sale of IGK that occurred at the end of the first quarter, and decreased sales of the Cleo solutions group. The above declines were partially offset by the increased sales of the L2i solutions; MyCopy(TM), e-Bill Bridge(TM), Document Server, and related 7 8 professional services. Cost of Revenues. Cost of revenues were $592,000 and $2.1 million or 19.9% and 42.5% of net revenues for the quarters ended March 31, 2000 and 1999, respectively; and $2.0 million and $4.2 million, or 30.6% and 41.4% of net revenues for the first half of fiscal 2000 and 1999, respectively. The decrease for the quarter and the six-month period resulted from a decline in overall sales as well as a change in the sales mix from lower margin hardware products to the more profitable L2i software solutions and consulting services. Product Development Costs. Product development costs were $752,000 and $401,000, or 25.3% and 8.2% of net revenues for the quarters ended March 31, 2000 and 1999, respectively; and $1.4 million and $804,000, or 22.5% and 8.0% of net revenues for the first half of fiscal 2000 and 1999, respectively. The increase for the quarter and six month periods was primarily due to the investment the Company is making to enhance its L2i software solutions. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses were $3.3 million and $2.9 million, or 111.5% and 58.6% of net revenues for the quarters ended March 31, 2000 and 1999, respectively; and $6.3 million and $5.5 million, or 98.5% and 54.3% of net revenues for the first half of fiscal 2000 and 1999, respectively. The increase was primarily due to the addition of sales and marketing staff located at the Company's headquarters facility and the East Coast. Furthermore, the Company has invested in the creation of a consulting team that has a broad array of technical capabilities and is instrumental in the implementation of its L2i solutions. Interest and Other Income. Interest and other income for the first half of fiscal 2000 was mainly composed of the $37,000 gain on the sale of substantially all assets of IGK Industries, Inc. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company's primary sources of liquidity included cash and cash equivalents of $931,000 and a short-term credit facility with a bank providing for $3.5 million of borrowing prior to the renewal discussed below, of which $1.3 million was available. In May 2000, the Company and its bank entered into a commitment to renew the credit facility expanding the borrowing capability from $3.5 to $5.0 million with a maturity date of May 31, 2001. Advances bear interest at the bank's prime rate (9.0% at March 31, 2000) plus 1%, are payable on demand and are collateralized by substantially all of the Company's assets. The amount available for borrowing at any time is based on borrowing base formulae relating to levels of accounts receivable and other bank covenants. Under such formulae, $4.2 million will be available to the Company upon renewal. Under the terms of its existing credit agreement, the Company is required to maintain certain minimum working capital, net worth, and other specific financial ratios. In addition, the credit agreement prohibits the payment of cash dividends and contains 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 was in compliance with the bank covenants prior to and upon renewal. Cash provided by investing activities was $886,000 in the first half of fiscal 2000 primarily due to the proceeds received from the sale of IGK. Cash provided by financing activities was $450,000 in the first half of fiscal 2000 and was primarily composed of the proceeds from the issuance of stock. 8 9 The Company believes that its existing cash balances, available credit facility and future operating cash flows will be sufficient for near term operating needs. The foregoing statements are "forward looking statements" within the meaning of the Securities Exchange Act of 1934. The extent to which such sources will be sufficient to meet the Company's anticipated cash requirements is subject to a number of uncertainties including the ability of the Company's operations to generate sufficient cash to support operations, and other uncertainties described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Uncertainties Relating to Forward-Looking Statements." YEAR 2000 We have not experienced any known material adverse impacts on our products, services, or systems as a result of the Year 2000 issue. The Company believes that its efforts to address Year 2000 issues for which it is responsible have been successful. However, we cannot be sure that various factors relating to the Year 2000 compliance issues will not have a material adverse impact on our business or operating results. The costs associated with our Year 2000 efforts were not material. UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS "Management's Discussion and Analysis of Results of Operations" contain "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, as amended, based on current management expectations. Actual results could differ materially from those in the forward-looking statements due to a number of uncertainties, including, but not limited to, those discussed in this section. Factors that could cause future results to differ from these expectations include general economic conditions particularly related to demand for the Company's products and services; changes in Company strategy; product life cycles; competitive factors (including the introduction or enhancement of competitive products); pricing pressures; the Company's success in and expense associated with developing, introducing and shipping new products; software defects and latent technological deficiencies in new products; changes in operating expenses; inability to attract or retain consulting, sales and/or engineering talent; changes in customer requirements; evolving industry standards; and the impact of undetected errors or defects associated with the Year 2000 date function on the Company's current products and internal systems. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no material market risk exposure. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on February 18, 2000 in Ann Arbor, Michigan. There was voting on the following three issues: election of directors, approval to increase the authorized common shares from 12.5 to 25 million, and an amendment to the 1992 Stock Option Plan increasing the available shares by 300,000. The following table sets forth the results of the voting. ITEM 5. OTHER INFORMATION Policy on Sale or Other Disposition of Shares by Officers and Directors On February 18, 2000, the Board of Directors adopted a policy with respect to the sale or other disposition of shares of the Company's common stock. Under this policy, officers and directors of the Company are permitted annually to sell or otherwise dispose of up to 10% of the Company's securities held by such officer or director. Company securities includes all outstanding common stock of the Company as well as options to acquire the Company's common stock (to the extent such options are vested). The Board of Directors has determined that it is in the best interest of the Company's shareholders that officers and directors of the Company share in the ownership of the Company's common stock. The Board believes that adoption of this policy reaffirms that belief. 9 10
(1) Name Votes For Votes Withheld ---- --------- -------------- Garnel F. Graber 3,873,907 172,465 Robert A. Nero 3,875,407 170,965 Bruce E. Rhoades 3,874,301 172,071 David C. Seigle 3,872,114 174,258 Robert A. Seigle 3,874,392 171,980 Lloyd A. Semple 3,874,812 171,560 Thomas L. Thomas 3,872,525 173,847
(2) Approval to Increase the Number of Shares of Common Stock
Votes For Votes Against Votes Withheld --------- ------------- -------------- 3,744,412 297,552 4,408
(3) Amendment to 1992 Stock Option Plan
Votes For Votes Against Votes Withheld --------- ------------- -------------- 1,968,635 255,864 10,882
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Financial Data Schedule (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. 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: May 15, 2000 /S/ Brian D. Brooks ------------------- Brian D. Brooks Vice President and Chief Financial Officer 10 11 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS SEP-30-2000 JAN-01-2000 MAR-31-2000 931,201 0 2,655,961 0 527,499 4,432,584 2,407,446 0 7,831,981 2,532,811 0 0 0 11,799,884 (6,546,347) 7,831,981 2,975,201 2,975,201 591,852 0 0 0 12,036 (1,675,050) 0 (1,675,050) 0 0 0 (1,675,050) (.36) (.36)
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