-----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, LnSQ1ool94q6UouLdzPQJvJeJ1HHzMah2IdZFQ8NS44Yy0OzCmqiuegbuZAUjFUX P8fE2BmnNi118dAgZkLgvQ== 0000926236-01-500140.txt : 20010815 0000926236-01-500140.hdr.sgml : 20010815 ACCESSION NUMBER: 0000926236-01-500140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1934 Act SEC FILE NUMBER: 000-13071 FILM NUMBER: 1712330 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 ipc01q2c.txt QUARTER ENDED JUNE 30, 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 June 30, 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 August 1, 2001 ---------------------------- ----------------------------- Common Stock, $.10 par value 5,722,806 INTERPHASE CORPORATION INDEX Part I - Financial Information Item 1. Consolidated Interim Financial Statements Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations for the three months and six months ended June 30, 2001 and 2000 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 5 Notes to Consolidated Interim Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Part II - Other Information Item 6. Reports on Form 8-K and Exhibits 14 Signature 15 INTERPHASE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except number of share data) (unaudited) June 30, Dec. 31, ASSETS 2001 2000 ---------------------- Cash and cash equivalents $ 14,156 $ 10,587 Marketable securities 7,272 6,886 Trade accounts receivable, less allowances for uncollectible accounts of $163 and $273, respectively 4,995 14,085 Inventories 8,414 13,193 Prepaid expenses and other current assets 3,682 941 Deferred income taxes 827 844 ---------------------- Total current assets 39,346 46,536 Machinery and equipment 7,804 8,033 Leasehold improvements 2,913 2,954 Furniture and fixtures 584 490 ---------------------- 11,301 11,477 Less-accumulated depreciation and amortization (9,965) (9,755) ---------------------- Total property and equipment, net 1,336 1,722 Capitalized software, net 315 490 Deferred income taxes, net 1,146 1,146 Acquired developed technology, net - 1,680 Goodwill, net 2,470 2,590 Other assets 191 309 ---------------------- Total assets $ 44,804 $ 54,473 ====================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 1,029 $ 1,417 Deferred revenue 484 1,093 Accrued liabilities 2,752 2,816 Accrued compensation 1,182 1,947 Income taxes payable - 78 Current portion of debt 529 1,683 ---------------------- Total current liabilities 5,976 9,034 Long term debt, net of current portion 3,500 3,500 ---------------------- Total liabilities 9,476 12,534 Commitments and contingencies Common stock redeemable; 203,330 and 284,664 shares, respectively 1,271 1,780 SHAREHOLDERS' EQUITY Common stock, $.10 par value; 100,000,000 shares authorized; 5,722,806 and 5,480,550 shares issued and outstanding, respectively 572 548 Additional paid in capital 37,028 36,805 Retained (deficit) earnings (3,016) 3,178 Cumulative other comprehensive loss (527) (372) ---------------------- Total shareholders' equity 34,057 40,159 ---------------------- Total liabilities and shareholders' equity $ 44,804 $ 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 June 30, Six Months Ended June 30, ------------------------- -------------------- 2001 2000 2001 2000 --------------------- -------------------- $ 7,108 $ 13,332 Revenues $ 17,059 $ 26,917 8,403 6,067 Cost of sales 13,294 12,156 --------------------- -------------------- (1,295) 7,265 Gross margin 3,765 14,761 2,087 2,516 Research and development 4,300 5,070 2,172 3,019 Sales and marketing 4,222 5,451 1,031 1,108 General and administrative 2,126 2,207 Restructuring costs 2,091 - and other special charges 2,091 - --------------------- -------------------- 7,381 6,643 Total operating expenses 12,739 12,728 --------------------- -------------------- (8,676) 622 Operating (loss) income (8,974) 2,033 --------------------- -------------------- 103 124 Interest, net 186 201 (184) 401 Other, net (221) 169 --------------------- -------------------- (Loss) income from continuing operations before (8,757) 1,147 income taxes (9,009) 2,403 (Benefit) provision (2,751) 451 for income taxes (2,815) 984 --------------------- -------------------- (Loss) income from (6,006) 696 continuing operations (6,194) 1,419 --------------------- -------------------- Discontinued Operations Gain on disposal of - - VOIP business, net of tax - 571 --------------------- -------------------- $ (6,006) $ 696 Net (loss) income $ (6,194) $ 1,990 ===================== ==================== (Loss) income from continuing operations per share $ (1.05) $ 0.12 Basic EPS $ (1.08) $ 0.24 --------------------- -------------------- $ (1.05) $ 0.11 Diluted EPS $ (1.08) $ 0.22 --------------------- -------------------- Net (loss) income per share $ (1.05) $ 0.12 Basic EPS $ (1.08) $ 0.34 --------------------- -------------------- $ (1.05) $ 0.11 Diluted EPS $ (1.08) $ 0.31 --------------------- -------------------- 5,727 5,801 Weighted average common shares 5,742 5,823 --------------------- -------------------- Weighted average common and 5,727 6,214 dilutive shares 5,742 6,324 --------------------- -------------------- The accompanying notes are an integral part of these consolidated financial statements. INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months ended June 30, ---------------------- 2001 2000 ---------------------- Cash flow from operating activities: (Loss) income from continuing operations $ (6,194) $ 1,419 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 1,143 1,270 Deferred income taxes 17 (367) Tax benefit from stock option exercises 94 231 Non-cash restructuring costs and other special charges 7,544 - Change in assets and liabilities: Trade accounts receivable 9,090 2,681 Inventories (1,157) 515 Prepaid expenses and other current assets (2,741) 655 Accounts payable, deferred revenue and accrued liabilities (1,061) (204) Accrued compensation (765) (577) Income taxes payable (78) (194) ---------------------- Net adjustments 12,086 4,010 ---------------------- Net cash provided by operating activities 5,892 6,000 Cash flows from investing activities: Additions to property, equipment, capitalized software and leasehold improvements (459) (848) Decrease (increase) in other assets 84 (590) Cash received in sale of VOIP business - 1,230 Proceeds from the sale of marketable securities 6,429 5,586 Purchases of marketable securities, net of unrealized holding period gain or loss (6,867) (7,906) ---------------------- Net cash used by investing activities (813) (2,528) Cash flows from financing activities: Payments on debt (1,154) (1,106) Purchase of redeemable common stock (509) (508) Proceeds from the exercise of stock options 153 377 ---------------------- Net cash used by financing activities (1,510) (1,237) ---------------------- Net increase in cash and cash equivalents 3,569 2,235 Cash and cash equivalents at beginning of period 10,587 10,988 ---------------------- Cash and cash equivalents at end of period $ 14,156 $ 13,223 ====================== Supplemental Disclosure of Cash Flow Information: Income taxes paid $ 178 $ 1,513 Interest paid $ 213 $ 317 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 2000 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 6. 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. RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES In the second quarter 2001, the Company announced a restructuring program designed to allow the Company to continue aggressive funding of its development organizations, while preserving cash levels and securing new design-ins. As a result of the restructuring program, continued decline in predicted revenue and customers' cautious expectations that the market recovery may now be delayed until 2002, the Company recorded restructuring costs and other special charges of $2.1 million, classified as operating expenses, and an additional excess and obsolete inventory charge of $4.4 million, classified as cost of sales. The following paragraphs provide specific information regarding the restructuring costs and other special charges which were recorded during the second quarter of 2001. The restructuring program resulted in the reduction of approximately 22% of the Company's workforce, impacting all business functions in North America. As a result, the Company recorded a workforce reduction charge of $483,000 relating to severance and fringe benefits. In addition, the Company wrote off $123,000 of non-utilized fixed assets. Due to the decline in current business conditions, decline in legacy product revenues and the diminished expected future benefits from the purchased intangibles related to the acquisition of Synaptel, S.A. in 1996, the Company recorded a charge of $1.5 million related to the impairment of developed technology and assembled workforce. These intangible assets, purchased in the acquisition of Synaptel, S.A., relate to the Company's legacy product lines. In the second quarter 2000, the Company developed a strategy to end-of-life many of its legacy products in an effort to focus its resources on its new product lines. This strategy resulted in increased sales of legacy products in 2000; however, legacy product sales declined in the first quarter of 2001 and declined further in the second quarter of 2001. Management does not expect significant revenues from its legacy product lines in future periods. The Company wrote off $5.9 million of excess and obsolete inventory during the second quarter of 2001, resulting in an additional charge to cost of sales of $4.4 million. Approximately 74% of the write-off relates to the Company's legacy product lines. The remaining $1.5 million of excess and obsolete inventory written off was charged against the already established reserve. This additional excess and obsolete inventory charge was due to a sudden and significant decrease in predicted revenue and was calculated in accordance with the Company's established policy. Only the severance and fringe benefit payments relating to the workforce reduction impacted cash flow. Most remaining cash expenditures relating to workforce reductions and termination of agreements will be paid by the fourth quarter of 2001. A summary of the restructuring costs and other special charges is outlined as follows (in thousands): Second Quarter Accrual Total Cash Payments and Balance at Charge Non-Cash Charges June 30, 2001 ---------------------------------------------- Workforce reduction $ 483 $ 17 $ 466 Fixed asset write-off 123 123 - Impairment of purchased intangibles 1,485 1,485 - Excess and obsolete inventory charge 4,394 4,394 - ---------------------------------------------- $ 6,485 $ 6,019 $ 466 ============================================== 3. 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 6.75%). Management intends to extend the revolving credit facility past the current expiration date. The term loan is payable in equal quarterly installments of $548,000 plus accrued interest, with the remaining balance scheduled to be paid in the third quarter of 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 and quick ratio and is subject to a borrowing base calculation. Due to the loss from operations and the restructuring costs and other special charges incurred during the second quarter 2001, the Company was out of compliance with certain of its covenants at June 30, 2001, however, the Company obtained a waiver from its bank. At June 30, 2001, the Company had borrowings of $4 million and availability under the revolving credit facility was $1.5 million. 4. COMPREHENSIVE INCOME The following table shows the Company's comprehensive income (in thousands): Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 --------------------------------------- Net (loss) income $ (6,006) $ 696 $ (6,194) $ 1,990 Other comprehensive income: Unrealized holding (loss) gain arising during period, net of tax (49) (732) 52 (709) Foreign currency translation adjustment (76) (12) (207) (82) --------------------------------------- Comprehensive (loss) income $ (6,131) $ (48) $ (6,349) $ 1,199 ======================================= 5. 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 Six months ended June 30, June 30, 2001 2000 2001 2000 ---------------------------------------- Weighted average shares outstanding 5,727 5,801 5,742 5,823 Dilutive impact of stock options - 413 - 501 ---------------------------------------- Total weighted average common and common equivalent shares outstanding 5,727 6,214 5,742 6,324 ---------------------------------------- Anti-dilutive weighted shares excluded from shares outstanding 2,009 319 1,117 271 6. 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. 7. SEGMENT INFORMATION The Company is principally engaged in the design, development and manufacturing of high-performance connectivity products utilizing advanced technologies being used in next generation telecommunication networks and enterprise data/storage networks. Except for revenue performance, which is monitored by product line, the chief operating decision-makers generally 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 and six month period ended June 30, 2001 and 2000 are as follows: (in thousands) Three months ended June 30: Six months ended June 30: Revenue 2001 2000 2001 2000 --------------------------------------------------------------------- North America $ 5,769 $ 11,293 $ 14,004 $ 22,547 Europe 1,127 1,501 2,565 3,359 Pac Rim 212 538 490 1,011 -------------------------------------------- Total $ 7,108 $13,332 $ 17,059 $26,917 ============================================ Geographic long-lived assets exclude corporate assets. Corporate assets include cash and cash equivalents, marketable securities and intangibles. Long lived assets June 30, 2001 Dec. 31, 2000 ---------------------------------------------------------------- North America $ 1,464 $ 1,995 Europe 183 215 Pacific Rim 4 2 ------------------------------ Total $ 1,651 $ 2,212 ============================== Additional information regarding revenue by product line is as follows: (in thousands) Three months ended June 30: Six months ended June 30: Revenue 2001 2000 2001 2000 ----------------------------------------------------------------------- Storage $ 2,361 $ 5,075 $ 4,830 $ 12,330 Broadband Telecom 1,382 4,148 3,941 6,716 Combo 2,075 262 3,201 370 LAN 953 3,069 3,916 6,116 WAN 186 522 526 913 Other 151 256 645 472 ------------------------------------------------ Total $ 7,108 $ 13,332 $ 17,059 $ 26,917 ================================================ 8. RECENTLY ISSUED ACCOUNTING POLICIES On January 1, 2001, the Company adopted Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 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. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets." The most significant changes made by SFAS No. 141 are: 1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; and 2) establishing specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 142 primarily addresses the accounting for acquired goodwill and intangible assets. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. The most significant changes made by SFAS No. 142 are: 1) goodwill and indefinite-lived intangible assets will no longer be amortized; 2) goodwill will be tested, annually and whenever events or circumstances occur indicating that goodwill might be impaired; and 3) the amortization period of intangible assets with finite lives will no longer be limited to forty years. The Company will adopt SFAS No. 141 effective July 1, 2001, and SFAS No. 142 effective January 1, 2002. In connection with the adoption of SFAS No. 142, the Company will be required to perform a transitional goodwill impairment assessment. The adoption of this standard in 2002 will result in an annual reduction in amortization expense of $240,000 related to the Company's existing goodwill. The Company has not yet determined if there will be an impairment of its goodwill as it is currently assessing the accounting implications of adopting of adopting SFAS No. 141 and No. 142. 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 2000 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 No. 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 June 30, 2001 ("second quarter 2001") were $7.1 million. Revenues for the same period in 2000 ("comparative period") were $13.3 million. The reduction in revenues is generally due to the continued market slowdown, which has significantly reduced computer and communications equipment purchasing by key customers, as well as the discontinuance of several lines of legacy technologies. The decrease in revenues was partially offset by revenue growth in Combo technologies. Combo technologies grew to $2.1 million in the second quarter 2001 from just $262,000 in the comparative period. Two customers individually accounted for 36% and 17% of the Company's second quarter 2001 revenue. In the comparative period, two customers individually accounted for 21% and 12% of the Company's revenue. Total revenues for the six months ended June 30, 2001 were $17.1 million. Revenues for the six months ended June 30, 2000 were $26.9 million. The reduction in revenues is generally due to the continued market slowdown, which has significantly reduced computer and communications equipment purchasing by key customers, as well as the discontinuance of several lines of legacy technologies. In addition, approximately 17% of the revenues for the six months ended June 30, 2000 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 $3.2 million for the six months ended June 30, 2001 from just $370,000 for the six months ended June 30, 2000. Gross Margin: Gross margin as a percentage of sales was a negative 18% for the second quarter 2001 and 54% for the comparative period. The gross margin percentage for the six months ended June 30, 2001 and 2000 was 22% and 55%, respectively. Most of the decline in the gross margin rate is attributable to the additional excess and obsolete inventory charge of $4.4 million incurred in the second quarter 2001, as described in Note 2. However, the change in product mix, as well as the under-utilization of the Company's manufacturing facility also contributed to the reduction. Gross margin as a percentage of sales, before considering the additional excess and obsolete inventory charge, was 44% and 48% for the second quarter 2001 and the six months ended June 30, 2001 respectively. Research and Development: The Company's investment in the development of new products through research and development was $2.1 million in the second quarter 2001 and $2.5 million in the comparative period. As a percentage of revenue, research and development expenses were 29% in the second quarter 2001 and 19% in the comparative period. Research and development expenses for the six months ended June 30, 2001 and 2000 were $4.3 million and $5.1 million, respectively. 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. Sales and Marketing: Sales and marketing expenses were $2.2 million in the second quarter 2001 and $3 million in the comparative period. As a percentage of revenue, sales and marketing expenses were 30% in the second quarter 2001 and 23% in the comparative period. Sales and marketing expenses for the six months ended June 30, 2001 and 2000 were $4.2 million and $5.5 million, respectively. 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 period. General and Administrative: General and administrative expenses were $1 million in the second quarter 2001 and $1.1 million in the comparative period. As a percentage of revenue, general and administrative expenses were 15% in the second quarter 2001 and 8% in the comparative period. General and administrative expenses for the six months ended June 30, 2001 and 2000 were $2.1 million and $2.2 million, respectively. The increase as a percentage of revenue is due to decreased sales volume. Interest, Net: Interest income, net of interest expense, was $103,000 in the second quarter 2001, down slightly from $124,000 in the comparative period. Interest income, net of interest expense, for the six months ended June 30, 2001 and 2000 was $186,000 and $201,000, respectively. The decrease relates to the decline in investment rates of return partially offset by lower debt levels and a lower borrowing interest rate. Other Expense, Net: Other expense, net, was $184,000 in the second quarter 2001 and was in an income position of $401,000 in the comparative period. Other expense, net for the six months ended June 30, 2001 was $221,000 and was in an income position of $169,000 for the six months ended June 30, 2000. Other expense, net primarily reflects the amortization of goodwill and purchased intangibles related to a 1996 acquisition of Synaptel. However, during the second quarter of 2000, the Company engaged in hedging transactions on certain marketable securities received in the sale of its VOIP business resulting in a gain of approximately $613,000. Other income for the six months ended June 30, 2001 includes proceeds received in the first quarter of 2001 related to the settlement of a lawsuit for approximately $130,000. All of the Company's goodwill is associated with the entire company rather than any specific identifiable asset or product line. Each quarter the Company evaluates whether an impairment of this enterprise goodwill may exist by comparing the book value of its common stock to the product of (i) the number of shares of common stock issued and outstanding at the end of the quarter and (ii) the market price of the common stock at the end of the quarter. If the product of shares and market price exceeds the book value, impairment does not exist. If the product of shares and market price is less than book value, the Company evaluates whether the condition is other than temporary based (i) primarily on whether fluctuations in the Company's stock price subsequent to the quarter-end result in a product of shares and market price that exceeds book value and (ii) on all other available evidence. If the product of shares and market price is continuously less than book value based on daily closing market prices for the prior six months, the Company evaluates whether the condition is other than temporary considering all other available evidence. If the Company determines the condition is other than temporary, additional amortization is recorded for the impairment, equal to the excess book value at the end of the quarter. The Company may record an additional goodwill amortization charge as of the end of any quarter when the product of the number of shares issued and outstanding and the closing market price of its common stock is less than the book value of its common stock. Management does not believe that they can predict the common stock price and accordingly, are unable to predict when, if ever, such additional goodwill amortization might be recorded. At June 30, 2001, the Company had 5.7 million common shares issued and outstanding with a book value of $37.6 million; therefore, the common stock price would had to have been below $6.60 per share before consideration would have been given to recording additional goodwill amortization. At June 30, 2001, the common stock price was $5.15. No impairment loss was recognized because the Company believed, after considering all available evidence, the condition to be a temporary decline in the price of its stock caused by market volatility, as prior to June 30, 2001, the product of shares and market price exceeded book value for substantially the entire preceding six months. Future calculations of whether an impairment may exist will be affected by any future issuances or purchases of common stock, by amortization of existing goodwill, by any goodwill recorded in connection with future acquisitions, by any other changes to the book value of the common stock, and by the future common stock price. The Company is adopting SFAS No. 142 effective January 1, 2002, and will conform its accounting policy on assessing impairment of goodwill to that standard at that time. Income Taxes: The Company's effective income tax rate was 31% for the second quarter 2001 and 39% for the comparative period. The Company's effective income tax rate was 31% for the six months ended June 30, 2001 and 41% for the six months ended June 30, 2000. The rate reduction is due to an increase in non-deductible intangible amortization related to the impairment of developed technology and assembled workforce as described in Note 2. Net (Loss) Income: The Company reported a net loss of $6 million in the second quarter 2001 and net income of $696,000 in the comparative period. The Company reported a net loss of $6.2 million for the six months ended June 30, 2001 and net income of $2 million for the six months ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities aggregated $21.4 million at June 30, 2001, and $17.5 million at December 31, 2000. The growth in cash, cash equivalents and marketable securities is primarily attributable to strong cash collections on accounts receivable. At June 30, 2001, the Company had no material commitments to purchase capital assets. The Company's significant long-term obligations are its operating leases on its facilities, 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 loan and equipment loans are due in quarterly installments with the remaining balance scheduled to be paid in the third quarter of 2001. The revolving credit facility expires in June 2002. Management intends to extend the revolving credit facility past the current expiration date. As of June 30, 2001, the current portion of this credit facility is approximately $529,000. 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 June 30, 2001, 456,670 shares have been repurchased for $2.9 million and retired; 203,330 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 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: August 14, 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-----