-----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, Doh7UZ9qK09V9aTFpaLREljZ5mlxhomylb9BufpiSLe90L10iYNuo3OZoVnkhNtz W62eVbr16BipwnAiyRIe4A== 0000926236-01-500068.txt : 20010516 0000926236-01-500068.hdr.sgml : 20010516 ACCESSION NUMBER: 0000926236-01-500068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERPHASE CORP CENTRAL INDEX KEY: 0000728249 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 751549797 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13071 FILM NUMBER: 1635727 BUSINESS ADDRESS: STREET 1: 13800 SENLAC DR CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 2146545000 MAIL ADDRESS: STREET 1: 13800 SENLAC DR STREET 2: 13800 SENLAC DR CITY: DALLAS STATE: TX ZIP: 75234 10-Q 1 ipc01q1.txt 10Q FOR QUARTER ENDED MARCH 31, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2001 Commission File Number 0-13071 INTERPHASE CORPORATION (Exact name of registrant as specified in its charter) Texas 75-1549797 (State of incorporation) (IRS Employer Identification No.) 13800 Senlac, Dallas, Texas 75234 (Address of principal executive offices) (214)-654-5000 (Registrant's telephone number, including area code) ____________________________________________________________________________ Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for a much 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 [ ] ____________________________________________________________________________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 1, 2001 ---------------------------- ----------------------------- Common Stock, $.10 par value 5,758,593 INTERPHASE CORPORATION INDEX Part I -Financial Information Item 1. Consolidated Interim Financial Statements Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 3 Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 5 Notes to Consolidated Interim Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Reports on Form 8-K and Exhibits 12 Signature 13 INTERPHASE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except number of share data) (unaudited) Mar. 31, Dec. 31, ASSETS 2001 2000 ---------------------- Cash and cash equivalents $ 13,025 $ 10,587 Marketable securities 6,972 6,886 Trade accounts receivable, less allowances for uncollectible accounts of $270 and $273, respectively 9,401 14,085 Inventories 13,825 13,193 Prepaid expenses and other current assets 749 941 Deferred income taxes 797 844 ---------------------- Total current assets 44,769 46,536 Machinery and equipment 8,029 8,033 Leasehold improvements 2,954 2,954 Furniture and fixtures 480 490 ---------------------- 11,463 11,477 Less-accumulated depreciation and amortization (9,989) (9,755) ---------------------- Total property and equipment, net 1,474 1,722 Capitalized software, net 430 490 Deferred income taxes, net 1,146 1,146 Acquired developed technology, net 1,530 1,680 Goodwill, net 2,530 2,590 Other assets 318 309 ---------------------- Total assets $ 52,197 $ 54,473 ====================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 1,588 $ 1,417 Deferred revenue 1,017 1,093 Accrued liabilities 2,214 2,816 Accrued compensation 1,081 1,947 Income taxes payable 16 78 Current portion of debt 1,116 1,683 ---------------------- Total current liabilities 7,032 9,034 Long term debt, net of current portion 3,500 3,500 ---------------------- Total liabilities 10,532 12,534 Commitments and contingencies Common stock redeemable; 243,997 and 284,664 shares, respectively 1,526 1,780 SHAREHOLDERS' EQUITY Common stock, $.10 par value; 100,000,000 shares authorized; 5,756,193 and 5,480,550 shares issued and outstanding, respectively 576 548 Additional paid in capital 36,975 36,805 Retained earnings 2,990 3,178 Cumulative other comprehensive loss (402) (372) ---------------------- Total shareholders' equity 40,139 40,159 ---------------------- Total liabilities and shareholders' equity $ 52,197 $ 54,473 ====================== The accompanying notes are an integral part of these consolidated financial statements. INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited) Three Months Ended Mar. 31, -------------------- 2001 2000 -------------------- Revenues $ 9,951 $ 13,585 Cost of sales 4,891 6,089 -------------------- Gross profit 5,060 7,496 -------------------- Research and development 2,213 2,554 Sales and marketing 2,050 2,432 General and administrative 1,095 1,099 -------------------- Total operating expenses 5,358 6,085 -------------------- Operating (loss) income (298) 1,411 -------------------- Interest, net 83 77 Other, net (37) (232) -------------------- (Loss) income from continuing (252) 1,256 operations before income taxes (Benefit) provision for income taxes (64) 533 -------------------- (Loss) income from continuing operations (188) 723 Discontinued Operations Gain on disposal of VOIP business, net of tax - 571 -------------------- Net (loss) income $ (188) $ 1,294 ==================== (Loss) income from continuing operations per share Basic $ (0.03) $ 0.12 -------------------- Diluted $ (0.03) $ 0.11 -------------------- Net (loss) income per share Basic $ (0.03) $ 0.22 -------------------- Diluted $ (0.03) $ 0.20 -------------------- Weighted average common shares 5,758 5,813 -------------------- Weighted average common and dilutive shares 5,758 6,395 -------------------- The accompanying notes are an integral part of these consolidated financial statements. INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months ended Mar. 31, ---------------------- 2001 2000 ---------------------- Cash flow from operating activities: (Loss) income from continuing operations $ (188) $ 723 Gain on disposal of VOIP business - 571 Adjustment to reconcile (loss) income from continuing operations to net cash provided by operating activities: Depreciation and amortization 567 637 Deferred income taxes 47 42 Tax benefit from stock option exercises 75 150 Change in assets and liabilities: Trade accounts receivable 4,684 3,927 Inventories (632) 865 Prepaid expenses and other current assets 192 498 Accounts payable, deferred revenue and accrued liabilities (507) (1,394) Other liabilities - (143) Accrued compensation (866) (1,171) Income taxes payable (62) 699 ---------------------- Net adjustments 3,498 4,110 ---------------------- Net cash provided by operating activities 3,310 5,404 Cash flows from investing activities: Additions to property, equipment, capitalized software and leasehold improvements (49) (525) Decrease (increase) in other assets 62 (974) Cash received in sale of VOIP business - 1,230 Proceeds from the sale of marketable securities 4,286 - Purchases of marketable securities, net of unrealized holding period gain or loss (4,473) (1,611) ---------------------- Net cash used by investing activities (174) (1,880) Cash flows from financing activities: Payments on debt (567) (552) Purchase of redeemable common stock (254) (254) Proceeds from the exercise of stock options 123 245 ---------------------- Net cash used by financing activities (698) (561) ---------------------- Net increase in cash and cash equivalents 2,438 2,963 Cash and cash equivalents at beginning of period 10,587 10,988 ---------------------- Cash and cash equivalents at end of period $ 13,025 $ 13,951 ====================== Supplemental Disclosure of Cash Flow Information: Income taxes paid $ - $ 184 Interest paid $ 120 $ 160 The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated interim financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated. In September 1999, the Company completed the sale of its Voice over Internet Protocol ("VOIP") businesses. Accordingly, the Company's consolidated financial statements and notes included herein, for all periods presented reflect the VOIP business as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30. See further discussion of the sale in Note 5. While the accompanying interim financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all material adjustments and disclosures necessary to fairly present the results of such periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2000. Certain prior period amounts have been reclassified to conform with the 2001 presentation. 2. CREDIT FACILITY The Company maintains a credit facility with a bank. The credit facility consists of an $8.5 million acquisition term loan, a $2.5 million equipment financing facility and a $5 million revolving credit facility. The revolving credit facility matures June 30, 2002, and bears interest at the bank's base rate (currently 8.5%). The term loan is payable in equal quarterly installments of $548,000 plus accrued interest with the remaining balance due November 30, 2001. The Company has the ability to satisfy the quarterly payments on the term notes through borrowings under the revolving credit component of the credit facility. The credit facility is collateralized by marketable securities, accounts receivable and equipment. The credit facility includes certain restrictive financial covenants including, among others, tangible net worth, total liabilities to tangible net worth, interest coverage, quick ratio and debt service coverage and is subject to a borrowing base calculation. At March 31, 2001, the Company was in compliance with all covenants. At March 31, 2001, the Company had borrowings of $4.6 million and availability under the revolving credit facility was $1.5 million. 3. COMPREHENSIVE INCOME The following table shows the Company's comprehensive income (in thousands): Three months ended Mar. 31, 2001 2000 ----------------- Net (loss) income $ (188) $ 1,294 Other comprehensive income Unrealized holding gains 101 23 arising during period, net of tax Foreign currency translation adjustment (131) (70) ----------------- Comprehensive (loss) income $ (218) $ 1,247 ================= 4. NET INCOME PER COMMON AND COMMON DILUTIVE SHARE The following table shows the calculations of the Company's weighted average common and dilutive equivalent shares outstanding (in thousands): Three months ended Mar. 31, 2001 2000 ----------------- Weighted average shares outstanding 5,758 5,813 Dilutive impact of stock options - 582 ----------------- Total weighted average common and common equivalent shares outstanding 5,758 6,395 ----------------- Anti-dilutive weighted shares excluded from shares outstanding 1,139 12 5. DISPOSITION OF ASSETS In June 1999, the Company sold an 80% interest in part of its VOIP business, Quescom, for $1,172,000 to the former owner of Interphase's Paris Operation. The sales proceeds consisted of $300,000 due at closing with a $830,000 technology license fee. In 2000, the remaining $830,000 due for the technology license fee was collected and recorded as a gain on disposal of discontinued operations. Additionally, in 2000, the Company sold its 20% interest in Quescom for $400,000, resulting in a gain of $91,000. The total gain in 2000 was $571,000 net of $350,000 tax. In September 1999, the Company sold its other VOIP business, Zirca Corporation ("Zirca"), along with the technologies developed by Zirca for $300,000 cash and stock valued at $517,680 on the date of disposition, to UniView Technologies, resulting in a gain of $140,000, net of $86,000 tax. 6. SEGMENT INFORMATION The Company is principally engaged in the design, development and manufacturing of advanced technologies for enterprise networks and storage environments. The chief operating decision-makers review financial information presented on a consolidated basis, accompanied by information by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment. Geographic revenue and long lived assets related to North America and other foreign countries as of and for the three month period ended March 31, 2001 and 2000 are as follows: (in thousands) Three months ended Mar. 31: Revenue 2001 2000 ---------------------------------------------- North America $ 8,235 $ 11,254 Europe 1,438 1,858 Pacific Rim 278 473 ----------------------- Total $ 9,951 $ 13,585 ======================= Geographic long-lived assets exclude corporate assets. Corporate assets include cash and cash equivalents, marketable securities and intangibles. Long lived assets Mar. 31, 2001 Dec. 31, 2000 ----------------------------------------------- North America $ 1,708 $ 1,995 Europe 195 215 Pacific Rim 1 2 ----------------------- Total $ 1,904 $ 2,212 ======================= Additional information regarding revenue by product line is as follows: (in thousands) Three months ended Mar. 31: Revenue 2001 2000 ----------------------------------------------- Storage $ 2,469 $ 7,255 Broadband Telecom 2,559 2,568 Combo 1,126 108 LAN 2,963 3,047 WAN 340 391 Other 494 216 ----------------------- Total $ 9,951 $ 13,585 ======================= 7. RECENTLY ISSUED ACCOUNTING POLICIES On January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138. SFAS 133 requires all derivatives to be recorded at fair value. Changes in the fair values of derivatives are recorded in either the statement of operations or as a component of comprehensive income, depending on whether the derivative qualifies as a hedge, and depending on the type of hedging relationship that exists. Adoption of this standard did not have a material effect on the Company's financial statements. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements with respect to financial results and certain other matters. These statements are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation, fluctuations in demand, the quality and price of similar or comparable networking products, access to sources of capital, general economic conditions in the Company's market areas and that future sales and growth rates for the industry and the Company could be lower than anticipated. RESULTS OF OPERATIONS In September 1999, the Company completed the sale of its remaining VOIP business. Accordingly the Company's consolidated financial statements and notes included herein, for all periods presented reflect the VOIP business as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30. Revenues consist of product and service revenues and are recognized in accordance with SEC Staff Accounting Bulletin (SAB) 101, "Revenue Recognition." Product revenues are recognized upon shipment, provided fees are fixed and determinable, a customer order is obtained, and collection is probable. Revenues from reseller agreements are typically recognized when the product is sold through to the end customer. Deferred revenue consists of revenue from reseller arrangements and certain arrangements with extended payment terms. Service revenue is recognized as the services are performed. Revenues: Total revenues for the three months ended March 31, 2001 ("first quarter 2001") were $10 million. Revenues for the same period in 2000 ("comparative period") were $13.6 million. The reduction in revenues is generally due to the overall economic conditions which have significantly reduced computer and communications equipment purchasing by key customers. In addition, 33% of the comparative period's revenues were attributable to Hewlett Packard's purchase of a single Fibre Channel product, which ceased in the first quarter of 2000. The decrease in revenues was partially offset by revenue growth in Combo technologies. Combo technologies grew to $1.1 million in the first quarter 2001 from just $108,000 in the comparative period. Three customers individually accounted for 21%, 16% and 10% of the Company's first quarter 2001 revenue. In the comparative period, one customer accounted for 36% of the Company's revenue. Gross Profit: Gross profit as a percentage of sales was 51% for the first quarter 2001 and 55% for the comparative period. The reduction in the gross profit rate is primarily the result of under-utilization of the Company's manufacturing facility and obsolete inventory charges. Research and Development: The Company's investment in the development of new products through research and development was $2.2 million in the first quarter 2001 and $2.6 million in the comparative period. As a percentage of revenue, research and development expenses were 22% in the first quarter 2001 and 19% in the comparative period. Research and development costs, in total, decreased as spending on legacy sustaining engineering was down in line with the Company's exit from legacy technologies through its end-of- life program. Additionally, the first quarter 2001 research and development costs experienced a temporary drop as the Company finished and released two major products and completed an important new release of Fibre Channel drivers. Sales and Marketing: Sales and marketing expenses were $2.1 million in the first quarter 2001 and $2.4 million in the comparative period. As a percentage of revenue, sales and marketing expenses were 21% in the first quarter 2001 and 18% in the comparative period. The decrease in sales and marketing expense, in total, is primarily the result of decreased revenues, which resulted in reduced sales commissions and bonuses for the year, partially offset by increased marketing activity used to position the Company for future product releases. General and Administrative: General and administrative expenses were $1.1 million in both the first quarter 2001 and the comparative period. As a percentage of revenue, general and administrative expenses were 11% in the first quarter 2001 and 8% in the comparative period. The increase as a percentage of revenue is due to decreased sales volume. Interest, Net: Interest income, net of interest expense, was $83,000 in the first quarter 2001, up slightly from $77,000 in the comparative period. The increase is a reflection of the increase in funds available for investment. Other Expense, Net: Other expense, net, was $37,000 in the first quarter 2001 and $232,000 in the comparative period. Other expense primarily reflects the amortization of goodwill and acquired developed technologies related to a 1996 acquisition of Synaptel. However, the net decrease is primarily due to proceeds received in the first quarter 2001 related to the settlement of a lawsuit for approximately $130,000. Income Taxes: The Company's effective income tax rate was 25.4% for the first quarter 2001 and 42.4% for the comparative period. The decrease is due to an increase in foreign income which is offset by foreign operating losses. Net (Loss) Income: The Company reported a net loss of $188,000 in the first quarter 2001 and net income of $1.3 million in the comparative period. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities aggregated $20 million at March 31, 2001, and $17.5 million at December 31, 2000. The growth in cash, cash equivalents and marketable securities is primarily attributable to cash generated by the Company's operations. At March 31, 2001, the Company had no material commitments to purchase capital assets. The Company's significant long-term obligations are its operating lease on its Dallas facility, future debt payments and repurchase of Interphase common stock from Motorola, Inc. (described below). The Company has not paid any dividends since its inception and does not anticipate paying any dividends in 2001. The Company has a $16 million credit facility with a financial institution. This credit facility includes an $8.5 million term loan, a $2.5 million equipment loan and a $5 million revolving credit facility. The term and equipment loans are due in quarterly installments and expire in November 2001. The revolving credit facility expires in June 2002. As of March 31, 2001, the current portion of this credit facility is approximately $1.1 million. Effective October 1998, the Company approved a stock repurchase agreement with Motorola, Inc. to purchase ratably from October 1998 to July 2002, all of the shares owned by Motorola for $4.1 million at $6.25 per share. Under the terms of the agreement, Motorola retains the right as an equity owner and has assigned its voting rights to the Company. The Company cancels the stock upon each repurchase. Prior to the repurchase agreement, Motorola owned approximately 12% of the Company's outstanding common stock. The future scheduled payments are classified as redeemable common stock in the accompanying consolidated balance sheets. As of March 31, 2001, 416,003 shares have been repurchased for $2.6 million and retired; 243,997 shares remain to be repurchased. The Company expects that its cash, cash equivalents, marketable securities and proceeds from its credit facility will be adequate to meet foreseeable cash needs for the next 12 months. PART II OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 2, 2001, the annual meeting of shareholders of Interphase Corporation was held. The following matters were voted upon and approved at the meeting: An election of directors of the Company to serve until the next annual meeting for the Company was held. The following seven individuals were elected as Directors of the Company: Nominee Votes Cast For Votes Withheld ---------------------------------------------------------------- James F. Halpin 4,935,601 95,710 Paul N. Hug 4,924,731 106,580 Gregory B. Kalush 4,934,768 96,543 Randall D. Ledford 4,936,021 95,290 David H. Segrest 4,928,949 102,362 S. Thomas Thawley 4,925,668 105,643 William R. Voss 4,928,829 102,482 Item 6. REPORTS ON FORM 8-K None Exhibits None SIGNATURE 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. INTERPHASE CORPORATION (Registrant) Date: May 15, 2001 /s/ Steven P. Kovac ------------------------------ Steven P. Kovac Chief Financial Officer, Vice President of Finance and Treasurer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----