e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-13071
INTERPHASE CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Texas
(State or Other Jurisdiction of Incorporation or Organization)
|
|
75-1549797
(I.R.S. Employer Identification No.) |
Parkway Centre I
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
(Address of Principal Executive Offices and Zip Code)
(214) 654-5000
(Registrants 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. Yes þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
As of May 5, 2011, shares of common stock outstanding totaled 6,886,835.
INTERPHASE CORPORATION
Index to Form 10-Q
Quarterly Period Ended March 31, 2011
PART I
FINANCIAL INFORMATION
|
|
|
Item 1. |
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,057 |
|
|
$ |
4,772 |
|
Marketable securities |
|
|
2,551 |
|
|
|
6,005 |
|
Trade accounts receivable, less allowances
of $88 and $70, respectively |
|
|
6,011 |
|
|
|
4,633 |
|
Inventories |
|
|
1,530 |
|
|
|
1,645 |
|
Prepaid expenses and other current assets |
|
|
1,191 |
|
|
|
623 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
18,340 |
|
|
|
17,678 |
|
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
|
6,246 |
|
|
|
6,840 |
|
Leasehold improvements |
|
|
327 |
|
|
|
327 |
|
Furniture and fixtures |
|
|
398 |
|
|
|
398 |
|
|
|
|
|
|
|
|
|
|
|
6,971 |
|
|
|
7,565 |
|
Less-accumulated depreciation and amortization |
|
|
(6,590 |
) |
|
|
(7,151 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
|
381 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
Capitalized software, net |
|
|
394 |
|
|
|
485 |
|
Other assets |
|
|
649 |
|
|
|
737 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
19,764 |
|
|
$ |
19,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,699 |
|
|
$ |
1,388 |
|
Deferred revenue |
|
|
49 |
|
|
|
39 |
|
Accrued liabilities |
|
|
1,837 |
|
|
|
2,486 |
|
Accrued compensation |
|
|
733 |
|
|
|
648 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
4,318 |
|
|
|
4,561 |
|
|
|
|
|
|
|
|
|
|
Deferred lease obligations |
|
|
229 |
|
|
|
243 |
|
Long-term debt |
|
|
3,500 |
|
|
|
3,500 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
8,047 |
|
|
|
8,304 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
Common stock, $0.10 par value; 100,000,000
shares authorized; 6,814,835 and
6,815,600 shares issued and outstanding,
respectively |
|
|
681 |
|
|
|
682 |
|
Additional paid in capital |
|
|
43,889 |
|
|
|
43,355 |
|
Retained deficit |
|
|
(31,972 |
) |
|
|
(32,203 |
) |
Cumulative other comprehensive loss |
|
|
(881 |
) |
|
|
(824 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
11,717 |
|
|
|
11,010 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
19,764 |
|
|
$ |
19,314 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Revenues |
|
$ |
6,688 |
|
|
$ |
3,759 |
|
Cost of sales |
|
|
3,436 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
Gross margin |
|
|
3,252 |
|
|
|
1,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,032 |
|
|
|
2,093 |
|
Sales and marketing |
|
|
1,004 |
|
|
|
1,260 |
|
General and administrative |
|
|
985 |
|
|
|
1,004 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,021 |
|
|
|
4,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
231 |
|
|
|
(2,498 |
) |
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
3 |
|
|
|
46 |
|
Other income (loss), net |
|
|
5 |
|
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax |
|
|
239 |
|
|
|
(2,530 |
) |
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
8 |
|
|
|
(167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
231 |
|
|
$ |
(2,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
0.03 |
|
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.03 |
|
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
6,787 |
|
|
|
6,871 |
|
|
|
|
|
|
|
|
Weighted average common and dilutive shares |
|
|
6,911 |
|
|
|
6,871 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
231 |
|
|
$ |
(2,363 |
) |
Adjustments to reconcile net income (loss) to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
Provision for uncollectible accounts and returns |
|
|
18 |
|
|
|
(10 |
) |
Provision for excess and obsolete inventories |
|
|
|
|
|
|
100 |
|
Depreciation and amortization |
|
|
145 |
|
|
|
203 |
|
Amortization of stock-based compensation |
|
|
91 |
|
|
|
93 |
|
Write-off of impaired capitalized software |
|
|
|
|
|
|
2 |
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(1,396 |
) |
|
|
942 |
|
Inventories |
|
|
115 |
|
|
|
(301 |
) |
Prepaid expenses and other current assets |
|
|
(549 |
) |
|
|
(24 |
) |
Other assets |
|
|
128 |
|
|
|
(176 |
) |
Accounts payable, deferred revenue and accrued liabilities |
|
|
(430 |
) |
|
|
(306 |
) |
Accrued compensation |
|
|
71 |
|
|
|
13 |
|
Deferred lease obligations |
|
|
(14 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,590 |
) |
|
|
(1,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(53 |
) |
|
|
(14 |
) |
Purchase of capitalized software |
|
|
(6 |
) |
|
|
(5 |
) |
Proceeds from the sale of marketable securities |
|
|
3,441 |
|
|
|
1,917 |
|
Purchase of marketable securities |
|
|
|
|
|
|
(1,641 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
3,382 |
|
|
|
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings under credit facility |
|
|
|
|
|
|
3,500 |
|
Payments on credit facility |
|
|
|
|
|
|
(3,500 |
) |
Proceeds from the exercise of stock options |
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
51 |
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
2,285 |
|
|
|
(1,637 |
) |
Cash and cash equivalents at beginning of period |
|
|
4,772 |
|
|
|
8,115 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
7,057 |
|
|
$ |
6,478 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
Interphase Corporation and subsidiaries (Interphase or the Company) delivers solutions for LTE
and WiMAX, interworking gateways, packet processing, network connectivity, and security for key
applications for the communications and enterprise markets. Founded in 1974, Interphase provides
expert engineering design and electronics manufacturing services, in addition to its
commercial-off-the-shelf (COTS) portfolio of products. Interphase is headquartered in Plano,
Texas, with sales offices in the United States and Europe. Clients include Alcatel-Lucent, Emerson
Network Power, Fujitsu Ltd., Genband, Hewlett Packard, ip.access, Nokia Siemens Networks, Samsung,
and Sun Microsystems. See Note 11 for information regarding the Companys revenues related to
North America and foreign regions.
The accompanying condensed consolidated financial statements include the accounts of Interphase
Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated. While the accompanying condensed consolidated 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. All such adjustments are
of a normal, recurring nature. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Operating results for the three months ended March 31,
2011 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2011. These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2010.
NOTE 2. STOCK-BASED COMPENSATION
Stock Options: During the three months ended March 31, 2011, the Company issued 204,500 stock
options that vest over a three to four year period and expire ten years from date of grant. The
weighted average exercise price of these stock options is $1.83. During the three months ended
March 31, 2010, the Company issued 1,200 stock options that vest over a four year period and expire
ten years from the date of grant. The weighted average exercise price of these stock options is
$2.56. Additionally, during 2010, the Company issued 171,000 stock options which are subject to the
achievement of certain performance conditions. If the performance conditions are met, the stock
options vest between a one to four year period and expire ten years from the date of grant. The
weighted average exercise price of these stock options is $1.66. Of the stock options outstanding
at March 31, 2011, 168,500 are subject to the achievement of certain performance conditions. The
performance conditions related to 11,000 of these stock options were deemed probable at March 31,
2011, and the related compensation expense has been recorded in the first quarter of 2011. The
performance conditions related to the remaining options were not deemed probable at March 31, 2011,
and therefore no compensation expense related to these options has been recorded. Compensation
expense related to stock options was approximately $35,000 for the three months ended March 31,
2011. The Company did not recognize any compensation expense related to stock options during the
three months ended March 31, 2010. The weighted-average remaining contractual life of stock options
outstanding and exercisable at March 31, 2011 and 2010 is 1.64 years and 1.82 years, respectively.
The following table summarizes the combined stock option activity under all of the plans:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted Average |
|
|
|
Options |
|
|
Option Price |
|
Balance,
December 31, 2010 |
|
|
1,470,222 |
|
|
$ |
5.00 |
|
Granted |
|
|
204,500 |
|
|
|
1.83 |
|
Exercised |
|
|
(86,500 |
) |
|
|
5.11 |
|
Canceled |
|
|
(286,683 |
) |
|
|
5.46 |
|
|
|
|
|
|
|
|
Balance,
March 31, 2011 |
|
|
1,301,539 |
|
|
$ |
4.39 |
|
|
|
|
|
|
|
|
5
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Option Valuation: The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with weighted-average assumptions based on the grant date.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Weighted average risk free interest rates |
|
|
3.62 |
% |
|
|
3.87 |
% |
Weighted average life (in years) |
|
|
10 |
|
|
|
10 |
|
Volatility |
|
|
63.62 |
% |
|
|
66.48 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Weighted average grant-date fair value per share of options granted |
|
$ |
1.36 |
|
|
$ |
1.95 |
|
Restricted Stock: The Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for
grants of bonus stock awards (restricted stock) to its directors and certain employees at no cost
to the recipient. Holders of restricted stock are entitled to cash dividends, if any, and to vote
their respective shares. Restrictions limit the sale or transfer of these shares during a
predefined vesting period, currently ranging from one to four years, and in some cases vesting is
subject to the achievement of certain performance conditions. There were no shares of restricted
stock issued during 2010 or 2011. Upon issuance of restricted stock under the plan, unearned
compensation equivalent to the market value at the date of grant is recorded as a reduction to
shareholders equity and subsequently amortized to expense over the respective restriction periods.
Compensation expense related to restricted stock was approximately $56,000 and $93,000 for the
three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011, there is
approximately $351,000 of total unamortized compensation cost related to unvested restricted stock
remaining to be recognized. The expense is expected to be recognized over a weighted-average period
of 3.0 years. As of December 31, 2010, there was approximately $566,000 of total unamortized
compensation cost related to unvested restricted stock which was expected to be recognized over a
weighted-average period of 3.2 years. The following summarizes the restricted stock activity for
the first quarter of 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Restricted Stock |
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Value |
|
Nonvested restricted stock at December 31, 2010 |
|
|
318,555 |
|
|
$ |
2.52 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(33,295 |
) |
|
|
3.84 |
|
Cancelled/Forefeited |
|
|
(87,265 |
) |
|
|
1.87 |
|
|
|
|
|
|
|
|
Nonvested restricted stock at March 31, 2011 |
|
|
197,995 |
|
|
$ |
2.59 |
|
|
|
|
|
|
|
|
NOTE 3. MARKETABLE SECURITIES
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures,
defines fair value, establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures about fair value
measurements. The Company follows ASC 820 in its valuation of its marketable securities. ASC 820
defines fair value as the price that would be received upon the sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 classifies the levels used to measure fair value into the following hierarchy:
|
1. |
|
Level 1 Valuations based on quoted prices in active markets for identical
assets and liabilities that the reporting entity has the ability to obtain at the
measurement date. This level provides the most reliable evidence of fair value. |
|
2. |
|
Level 2 Valuations based on one or more quoted prices in markets that are
not active; quoted prices for similar assets or liabilities in active markets; inputs
that are observable other than quoted prices for the asset or the liability; or inputs
that are derived principally from or corroborated by observable market data by
correlation or other means. |
|
3. |
|
Level 3 Valuations based on inputs that are unobservable and significant to
the overall fair value measurement. |
6
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Companys investments in marketable securities primarily consist of investments in debt
securities, which are classified as available for sale and presented as current assets on the
balance sheet. Earnings from debt securities are calculated on a yield to maturity basis and
recorded in the results of operations. Unrealized gains or losses for the periods presented were
included in other comprehensive loss. Realized gains and losses are computed based on the specific
identification method and were not material for the periods presented. Marketable securities are
used to secure the Companys credit facility.
Financial assets, measured at fair value, by level within the fair value hierarchy were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
Fair Value |
|
|
|
|
|
|
Unrealized |
|
|
Fair |
|
|
|
|
|
|
Unrealized |
|
|
Fair |
|
|
|
Hierarchy |
|
|
Cost |
|
|
Gain |
|
|
Value |
|
|
Cost |
|
|
Gain |
|
|
Value |
|
Agencies |
|
Level 2 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
304 |
|
|
$ |
1 |
|
|
$ |
305 |
|
Asset Backed |
|
Level 2 |
|
|
1,468 |
|
|
|
6 |
|
|
|
1,474 |
|
|
|
1,675 |
|
|
|
8 |
|
|
|
1,683 |
|
Corporate Bonds |
|
Level 2 |
|
|
1,072 |
|
|
|
5 |
|
|
|
1,077 |
|
|
|
1,411 |
|
|
|
6 |
|
|
|
1,417 |
|
Municipal Bonds and US
Treasuries |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,590 |
|
|
|
10 |
|
|
|
2,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
2,540 |
|
|
$ |
11 |
|
|
$ |
2,551 |
|
|
$ |
5,980 |
|
|
$ |
25 |
|
|
$ |
6,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4. INVENTORIES
Inventories are valued at the lower of cost or market and include material, labor and manufacturing
overhead. Cost is determined on a first-in, first-out basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
Raw Materials |
|
$ |
1,075 |
|
|
$ |
1,236 |
|
Work-in-Process |
|
|
391 |
|
|
|
384 |
|
Finished Goods |
|
|
64 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,530 |
|
|
$ |
1,645 |
|
|
|
|
|
|
|
|
Valuing inventory at the lower of cost or market involves an inherent level of risk and uncertainty
due to technology trends in the industry and customer demand for the Companys products. Future
events may cause significant fluctuations in the Companys operating results. Inventories are
written down when needed to ensure the Company carries inventory at the lower of cost or market.
There were no such writedowns during the three months ended March 31, 2011. Writedowns for the
three months ended March 31, 2010 were $100,000.
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to adverse movements in foreign currency exchange rates because it conducts
business on a global basis and in some cases in foreign currencies. The Companys former operations
in France were transacted in the local currency and converted into U.S. Dollars based on published
exchange rates for the periods reported and were therefore subject to risk of exchange rate
fluctuations.
In an attempt to mitigate the risk described above, we have entered into, from time to time,
foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a
fixed rate determined at the contract date. These derivative financial instruments do not meet the
criteria to qualify as hedges. Changes in the market value of these contracts result in gains or
losses recognized in other income (loss), net in the period of change. We held no foreign exchange
contracts at any point during the three months ended March 31, 2011, and thus there was no related
gain or loss. For the three months ended March 31, 2010, the Company recognized a loss of
approximately $67,000 related to a foreign exchange contract. At March 31, 2011 and December 31,
2010, there were no foreign exchange contracts outstanding.
7
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6. INCOME TAXES
The Company records a valuation allowance when it is more likely than not that all or a portion
of a deferred tax asset will not be realized. Management reviews all available positive and
negative evidence, including the Companys current and past performance, the market environment in
which the Company operates, the utilization of past tax credits, length of carry back and carry
forward periods, existing contracts or sales backlog that will result in future profits, as well as
other factors. The Company continues to maintain a valuation allowance on all of the net deferred
tax assets for the periods presented. Until an appropriate level of profitability is sustained,
the Company expects to continue to record a full valuation allowance on future tax benefits except
for those that may be generated in foreign jurisdictions.
The effective income tax rates for the periods presented differ from the U.S. statutory rate as we
continue to provide a full valuation allowance for our net deferred tax assets at March 31, 2011
and March 31, 2010. The income tax benefit for the three months ended March 31, 2010 was primarily
due to a 30% research and development tax credit earned by our operations in France. The benefit
from the research and development tax credit was partially offset by tax expense related to income
generated in France. We no longer generate tax credits from French research and development
because we closed our French operations at the end of 2010.
NOTE 7. RESTRUCTURING CHARGE
On September 30, 2010, we initiated a restructuring plan to mitigate gross margin erosion by
reducing manufacturing and procurement costs, streamline research and development expense and focus
remaining resources on key strategic growth areas, and reduce selling and administrative expenses
through product rationalization and consolidation of support functions. Under the 2010
restructuring plan, we reduced our worldwide work force by 39 employees, including the closure of
our European engineering and support center located in Chaville, France. As a result of the 2010
restructuring plan, we recorded a restructuring charge of approximately $3.3 million classified as
an operating expense in the third quarter of 2010 related to future cash expenditures to cover
employee severance and benefits and other related costs. The following table summarizes the timing
of payments under the restructuring plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of |
|
|
Cash payments, net of |
|
|
Cash payments, net of |
|
|
Remaining |
|
|
|
|
|
|
|
restructuring charge, |
|
|
currency translation |
|
|
currency translation |
|
|
liability |
|
|
|
|
|
|
|
net of currency |
|
|
adjustments, during |
|
|
adjustments, during |
|
|
as of |
|
|
|
Restructuring |
|
|
translation |
|
|
quarter ended |
|
|
quarter ended |
|
|
March 31, |
|
Description |
|
charge |
|
|
adjustments |
|
|
December 31, 2010 |
|
|
March 31, 2011 |
|
|
2011 |
|
Severance & Fringe
Benefits |
|
$ |
3,181 |
|
|
$ |
(111 |
) |
|
$ |
2,057 |
|
|
$ |
957 |
|
|
$ |
56 |
|
Other Related Costs |
|
|
158 |
|
|
|
111 |
|
|
|
93 |
|
|
|
62 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,339 |
|
|
$ |
|
|
|
$ |
2,150 |
|
|
$ |
1,019 |
|
|
$ |
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 11, 2009, the Company adopted a plan to restructure its worldwide operations. The
primary goal of the restructuring program was to align the Companys current spending with recent
revenue trends and to enable additional investments in strategic growth areas for the Company.
Under the restructuring plan, the Company reduced its workforce by 12 positions. As a result of
the restructuring plan, the Company recorded a restructuring charge of $1.2 million, classified as
an operating expense, in the fourth quarter of 2009 of which approximately $1.1 million resulted
cash expenditures to cover employee severance and benefits. The remaining $173,000 included in the
restructuring charge related to certain non-cash software impairment charges. Cash payments, net
of currency translation adjustments, during the quarter ended March 31, 2010 were approximately
$530,000. The remaining liability as of March 31, 2010 was approximately $449,000. These amounts
were paid out under the restructuring plan by the end of 2010.
8
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8. CREDIT FACILITY
The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2013.
The applicable interest rate on outstanding balances is LIBOR plus 1.0% to 1.5% based on certain
factors included in the credit agreement. At March 31, 2011 and December 31, 2010, the Companys
interest rate on the $3.5 million outstanding balance was 1.8%. The unused portion of the credit
facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits
with the creditor. All borrowings under this facility are secured by marketable securities. The
outstanding balance of $3.5 million as of March 31, 2011 and December 31, 2010 is classified as
long-term debt on the Companys balance sheets. Subsequent to March 31, 2011 and prior to the
Companys filing of the condensed consolidated financial statements, the outstanding balance on the
credit facility was repaid.
NOTE 9. COMPREHENSIVE INCOME (LOSS)
The following table shows the Companys comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Net income (loss) |
|
$ |
231 |
|
|
$ |
(2,363 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized holding loss arising during
period, net of tax |
|
|
(13 |
) |
|
|
(14 |
) |
Foreign currency translation adjustment |
|
|
(44 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
174 |
|
|
$ |
(2,365 |
) |
|
|
|
|
|
|
|
NOTE 10. EARNINGS PER SHARE
Basic earnings per share are computed by dividing reported earnings available to common
shareholders by weighted average common shares outstanding. Diluted earnings per share give effect
to dilutive potential common shares. Earnings per share are calculated as follows (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Basic net income (loss) per share: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
231 |
|
|
$ |
(2,363 |
) |
Weighted average common shares outstanding |
|
|
6,787 |
|
|
|
6,871 |
|
Basic net income (loss) per share |
|
$ |
0.03 |
|
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
231 |
|
|
$ |
(2,363 |
) |
Weighted average common shares outstanding |
|
|
6,787 |
|
|
|
6,871 |
|
Dilutive stock options |
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding assuming dilution |
|
|
6,911 |
|
|
|
6,871 |
|
Diluted net income (loss) per share |
|
$ |
0.03 |
|
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options that were not included
in the diluted calculation because their effect
would be anti-dilutive |
|
|
978 |
|
|
|
1,336 |
|
9
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 11. SEGMENT INFORMATION
The Company is principally engaged in delivering solutions for LTE and WiMAX, interworking
gateways, packet processing, network connectivity, and security for key applications for the
communications and enterprise markets. Except for revenue performance, which is monitored by
product line, the chief operating decision-makers review financial information presented on a
consolidated basis for purposes of making operating decisions and assessing financial performance.
Accordingly, the Company considers itself to be in a single industry segment.
Geographic revenue related to North America and foreign regions is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
Europe |
|
$ |
2,963 |
|
|
$ |
1,650 |
|
Pacific Rim |
|
|
2,027 |
|
|
|
742 |
|
North America |
|
|
1,698 |
|
|
|
1,367 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,688 |
|
|
$ |
3,759 |
|
|
|
|
|
|
|
|
Additional information regarding revenue by product-line is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Product Revenues: |
|
|
|
|
|
|
|
|
Telecommunications |
|
$ |
5,459 |
|
|
$ |
3,210 |
|
Enterprise |
|
|
840 |
|
|
|
217 |
|
Services |
|
|
319 |
|
|
|
291 |
|
Other |
|
|
70 |
|
|
|
41 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,688 |
|
|
$ |
3,759 |
|
|
|
|
|
|
|
|
NOTE 12. RECENTLY ISSUED ACCOUNTING PROUNOUCEMENTS
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements a
consensus of the FASB Emerging Issues Task Force, to amend certain guidance in FASB ASC 605-25,
Revenue Recognition Multiple-Element Arrangements. The amended guidance in ASC 605-25 modifies
the separation criteria by eliminating the criterion that requires objective and reliable evidence
of fair value for the undelivered items and eliminates the use of the residual method of
allocation. Instead, the amended guidance requires that arrangement consideration be allocated at
the inception of the arrangement to all deliverables based on their relative selling price. The
amended guidance in ASC 605-25 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early application and
retrospective application permitted. We elected early application ASC 605-25 and it was effective
for us on January 1, 2010. Our adoption of this standard did not have any impact on our condensed
consolidated financial statements.
10
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In October 2009, the FASB issued ASU 2009-14, Certain Revenue Arrangements That Include Software
Elementsa consensus of the FASB Emerging Issues Task Force, that reduces the types of
transactions that fall within the current scope of software revenue recognition guidance. Existing
software revenue recognition guidance requires that its provisions be applied to an entire
arrangement when the sale of any products or services containing or utilizing software when the
software is considered more than incidental to the product or service. As a result of the
amendments included in ASU No. 2009-14, many tangible products and services that rely on software
will be accounted for under the multiple-element arrangements revenue recognition guidance rather
than under the software revenue recognition guidance. Under the ASU, the following components
would be excluded from the scope of software revenue recognition guidance: the tangible element of
the product, software products bundled with tangible products where the software components and
non-software components function together to deliver the products essential functionality, and
undelivered components that relate to software that is essential to the tangible products
functionality. The ASU also provides guidance on how to allocate transaction consideration when an
arrangement contains both deliverables within the scope of software revenue guidance (software
deliverables) and deliverables not within the scope of that guidance (non-software deliverables).
We adopted and prospectively applied the provisions of this standard beginning January 1, 2011.
Our adoption of this standard did not have a material impact on our condensed consolidated
financial statements.
11
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements about the business, financial condition and
prospects of the Company. These statements are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The actual results of the Company could differ
materially from those indicated by the forward-looking statements because of various risks and
uncertainties, including (without limitation) effects of the ongoing issues in global credit and
financial markets, our reliance on a limited number of customers, our failure to see spending
improvements in the telecommunications and computer networking industries, significant changes in
product demand, the development and introduction of new products and services, changes in
competition, various inventory risks due to changes in market conditions and other risks and
uncertainties indicated in the Companys filings and reports with the Securities and Exchange
Commission. All of the foregoing risks and uncertainties are beyond the ability of the Company to
control, and in many cases, the Company cannot predict the risks and uncertainties that could cause
its actual results to differ materially from those indicated by the forward-looking statements.
When used in this report, the words believes, plans, expects, will, intends, and
anticipates and similar expressions as they relate to the Company or its management are intended
to identify forward-looking statements.
RESULTS OF OPERATIONS
Revenue
Total revenue increased 78% to $6.7 million for the three months ended March 31, 2011, compared to
$3.8 million for the same period in the prior year. This increase is generally due to leveraging
design wins that we won, in some cases, over two years ago and are now beginning to generate
revenue. Our telecommunications product revenue, increased to $5.5 million for the three months
ended March 31, 2011, compared to $3.2 million in the comparable period in the prior year. Our
enterprise product revenue increased to $840,000 for the first quarter of 2011 compared to $217,000
for the same period in the previous year. Our services revenues increased slightly to $319,000 for
the three months ended March 31, 2011, compared to $291,000 for the same period in the previous
year. All other revenues increased to $70,000, compared to $41,000 in the comparable period last
year.
During the first quarter of 2011, sales to three customers individually accounted for approximately
31%, 23% and 13% of total revenues, respectively. During the first quarter of 2010, sales to three
customers individually accounted for approximately 37%, 12%, and 11% of total revenues,
respectively. No other customer accounted for more than 10% of our consolidated revenue in the
periods presented.
Gross Margin
Gross margin as a percentage of revenue was 49% for the three months ended March 31, 2011 and 2010.
Increased utilization of our manufacturing facility and a decrease of $100,000 in excess and
obsolete inventory charges in the first quarter of 2011 compared to the same period in the prior
year offset by a shift in product mix toward lower margin products resulted in a consistent gross
margin percentage for the periods presented. We believe that pricing pressures in the industry and
our anticipated future product mix may reduce our gross margin percentage in future periods.
Research and Development
Our investment in the development of new products through research and development was $1.0 million
the first quarter of 2011 compared to $2.1 million for the three months ended March 31, 2010. The
decrease was primarily due to the impact of the 2010 restructuring plan. See Note 7 in the Notes
to the condensed consolidated financial statements for more information regarding the restructuring
plan. As a percentage of revenue, research and development expenses were approximately 15% in the
first quarter of 2011 compared to approximately 56% for the same period in the prior year. The
decrease in research and development expenses as a percentage of total revenue was due to revenue
increasing significantly while research and development expenses decreased. We will continue to
monitor the level of our investments in research and development concurrently with actual revenue
results.
12
Sales and Marketing
Sales and marketing expenses were $1.0 million and $1.3 million for the three months ended March
31, 2011 and March 31, 2010, respectively. The decrease in sales and marketing expense was
primarily due to the impact of the 2010 restructuring plan offset by an increase in compensation
related expenses. See Note 7 in the Notes to the condensed consolidated financial statements for
more information regarding the restructuring plan. As a percentage of revenue, sales and marketing
expenses were approximately 15% in the first quarter of 2011, compared to approximately 34% for the
same period in the prior year. The decrease in sales and marketing expenses as a percentage of
total revenue was primarily due to revenue increasing significantly while sales and marketing
expenses decreased slightly. We will continue to monitor the level of sales and marketing costs
concurrently with actual revenue results.
General and Administrative
General and administrative expenses were $1.0 million for the three months ended March 31, 2011 and
2010. Although general and administrative expenses remained unchanged, this was the result of
several offsetting factors. General and administrative expenses decreased by approximately $70,000
due to employee turnover and extended absences and by approximately $100,000 as a result of the
2010 restructuring plan. See Note 7 in the Notes to the condensed consolidated financial
statements for more information regarding the restructuring plan. These decreases were offset by
increases of approximately $70,000 related to legal services and approximately $70,000 related to
variable compensation expense. As a percentage of revenue, general and administrative expenses
were approximately 15% in the first quarter 2011 and 27% for the same period in the prior year.
The decrease in general and administrative expenses as a percentage of total revenue was primarily
due to revenue increasing significantly while general and administrative expense decreased
slightly. We will continue to monitor the level of general and administrative costs concurrently
with actual revenue results.
Interest Income, Net
Interest income, net of interest expense, decreased to $3,000 for the three months ended March 31,
2011 from $46,000 in the comparable period in the prior year. The decrease in interest income, net
of interest expense, for the three month period in 2011 compared to 2010 was primarily due to lower
investment balances and lower rates of return on our investments.
Other Income (Loss), Net
Other income, net was $5,000 for the three months ended March 31, 2011. Other loss, net was
$78,000 for the three months ended March 31, 2010. Other loss, net for the three months ended
March 31, 2010 primarily relates to the change in market value of a foreign exchange derivative
financial instrument which resulted in a loss of approximately $67,000. We did not hold any
foreign exchange contracts during the three months ended March 31, 2011. See Note 5 of the
accompanying notes to the condensed consolidated financial statements for more information
regarding our derivative financial instruments.
Income Taxes
Our tax expense rate was 3% for the three months ended March 31, 2011, compared to a tax benefit
rate of 7% for the three months ended March 31, 2010.
The effective income tax rates for the periods presented differ from the U.S. statutory rate as we
continue to provide a full valuation allowance for our net deferred tax assets at March 31, 2011
and March 31, 2010. The income tax benefit for the three months ended March 31, 2010 was primarily
due to a 30% research and development tax credit earned by our operations in France. The benefit
from the research and development tax credit was partially offset by tax expense related to income
generated in France. We no longer generate tax credits from French research and development
because we closed our French operations at the end of 2010.
13
Net Income (Loss)
We reported a net income of $231,000 for the three months ended March 31, 2011 and a net loss of
$2.4 million for the three months ended March 31, 2010. Basic and diluted earnings per share for
the three months ended March 31, 2011 was $0.03. Basic loss per share for the three months ended
March 31, 2010 was ($0.34).
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Cash and cash equivalents increased approximately $2.3 million for the three months ended March 31,
2011. Cash and cash equivalents decreased approximately $1.6 million for the three months ended
March 31, 2010.
Operating Activities
Trends in cash flows from operating activities for the three months ended March 31, 2011 and 2010
are generally similar to the trends in our earnings except for provision for uncollectible accounts
and returns, provision for excess and obsolete inventories, depreciation and amortization,
amortization of stock-based compensation and write-off of impaired capitalized software. Cash used
in operating activities totaled $1.6 million for the three months ended March 31, 2011, compared to
net income of $231,000. Provision for uncollectible accounts and returns increased $28,000 for the
three months ended March 31, 2011 compared to the same period in 2010. Provision for excess and
obsolete inventories decreased $100,000 for the three months ended March 31, 2011, compared to the
same period in 2010. Depreciation and amortization decreased $58,000 for the three months ended
March 31, 2011, compared to the same period in 2010. Amortization of stock-based compensation
decreased $2,000 for the three months ended March 31, 2011, compared to the three months ended
March 31, 2010. See Note 2 in the notes to condensed consolidated financial statements for more
information on stock-based compensation. Write-off of impaired capitalized software decreased
$2,000 for the three months ended March 31, 2011, compared to the same period in 2010.
Changes in assets and liabilities result primarily from the timing of production, sales and
purchases. Such changes in assets and liabilities generally tend to even out over time and result
in trends in cash flows from operating activities generally reflecting earnings trends.
Investing Activities
Cash provided by investing activities totaled $3.4 million and $257,000 for the three months ended
March 31, 2011 and March 31, 2010, respectively. Cash provided by investing activities in each of
the periods related principally to additions to property and equipment, capitalized software
purchases and our investments in marketable securities. Additions to property and equipment and
capitalized software were $59,000 for the three months ended March 31, 2011, compared to $19,000
for the three months ended March 31, 2010. The additions for the three months ended March 31, 2011
primarily related to equipment purchases for our manufacturing, engineering and administrative
functions. The additions for the three months ended March 31, 2010, primarily related to software
and equipment purchases for our engineering and sales and marketing functions. There were no
purchases of marketable securities for the three months ended March 31, 2011. Purchases of
marketable securities were $1.6 million for the three months ended March 31, 2010. Proceeds from
the sale of marketable securities increased to $3.4 million for the three months ended March 31,
2011, compared to $1.9 million for the three months ended March 31, 2010.
Financing Activities
Net cash provided by financing activities totaled $442,000 for the three months ended March 31,
2011; it was solely proceeds from the exercise of stock options. There was no net cash provided by
or used in financing activities for the three months ended March 31, 2010.
14
Restructuring Charge
On September 30, 2010, we initiated a restructuring plan to mitigate gross margin erosion by
reducing manufacturing and procurement costs, streamline research and development expense and focus
remaining resources on key strategic growth areas, and reduce selling and administrative expenses
through product rationalization and consolidation of support functions. Under the 2010
restructuring plan, we reduced our worldwide work force by 39 employees, including the closure of
our European engineering and support center located in Chaville, France. As a result of the 2010
restructuring plan, we recorded a restructuring charge of approximately $3.3 million classified as
an operating expense in the third quarter of 2010 related to future cash expenditures to cover
employee severance and benefits and other related costs. The following table summarizes the timing
of payments under the restructuring plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of |
|
|
Cash payments, net of |
|
|
Cash payments, net of |
|
|
Remaining |
|
|
|
|
|
|
|
restructuring charge, |
|
|
currency translation |
|
|
currency translation |
|
|
liability |
|
|
|
|
|
|
|
net of currency |
|
|
adjustments, during |
|
|
adjustments, during |
|
|
as of |
|
|
|
Restructuring |
|
|
translation |
|
|
quarter ended |
|
|
quarter ended |
|
|
March 31, |
|
Description |
|
charge |
|
|
adjustments |
|
|
December 31, 2010 |
|
|
March 31, 2011 |
|
|
2011 |
|
Severance &
Fringe Benefits |
|
$ |
3,181 |
|
|
$ |
(111 |
) |
|
$ |
2,057 |
|
|
$ |
957 |
|
|
$ |
56 |
|
Other Related
Costs |
|
|
158 |
|
|
|
111 |
|
|
|
93 |
|
|
|
62 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,339 |
|
|
$ |
|
|
|
$ |
2,150 |
|
|
$ |
1,019 |
|
|
$ |
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 11, 2009, the Company adopted a plan to restructure its worldwide operations. The
primary goal of the restructuring program was to align the Companys current spending with recent
revenue trends and to enable additional investments in strategic growth areas for the Company.
Under the restructuring plan, the Company reduced its workforce by 12 positions. As a result of
the restructuring plan, the Company recorded a restructuring charge of $1.2 million, classified as
an operating expense, in the fourth quarter of 2009 of which approximately $1.1 million resulted
cash expenditures to cover employee severance and benefits. The remaining $173,000 included in the
restructuring charge related to certain non-cash software impairment charges. Cash payments, net
of currency translation adjustments, during the quarter ended March 31, 2010 were approximately
$530,000. The remaining liability as of March 31, 2010 was approximately $449,000. These amounts
were paid out under the restructuring plan by the end of 2010.
Commitments
At March 31, 2011, we had no material commitments to purchase capital assets; however, planned
capital expenditures for the remainder of 2011 are estimated at approximately $250,000, a
significant portion of which relates to enhancements to our manufacturing equipment and product
development and engineering tools. Our significant long-term obligations are operating leases on
facilities and future debt payments. We have not paid any dividends since our inception and do not
anticipate paying any dividends in 2011.
Off-Balance Sheet Arrangements
In an attempt to mitigate foreign currency risk, we have entered into, from time to time, foreign
exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a fixed
rate determined at the contract date. At March 31, 2011 and December 31, 2010, we had no foreign
exchange contracts outstanding.
Other
Management believes that cash generated from operations and borrowing availability under the
revolving credit facility, together with cash on hand, will be sufficient to meet our liquidity
needs for working capital, capital expenditures and debt service. To the extent that our actual
operating results or other developments differ from our expectations, our liquidity could be
adversely affected.
We periodically evaluate our liquidity requirements, alternative uses of capital, capital needs and
available resources in view of, among other things, our capital expenditure requirements and
estimated future operating cash flows. As a result of this process, we have in the past and may in
the future seek to raise additional capital, refinance or restructure indebtedness, issue
additional securities, repurchase shares of our common stock or take a combination of such steps to
manage our liquidity and capital resources. In the normal course of business, we may review
opportunities for acquisitions, joint ventures or other business combinations. In the event of any
such transaction, we may consider using available cash, issuing additional equity securities or
increasing the indebtedness of the Company or its subsidiaries.
Managements Discussion and Analysis of Financial Condition and Results of Operations in this Form
10-Q should be read in conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and other material included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2010.
15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
We are exposed to adverse movements in foreign currency exchange rates because we conduct business
on a global basis and, in some cases, in foreign currencies. The Companys operations in France
were transacted in the local currency and converted into U.S. Dollars based on published exchange
rates for the periods reported and were therefore subject to risk of exchange rate fluctuations.
The Euro to U.S. Dollar translation accounted for charges of approximately $3,000 and $434,000 for
the three months ended March 31, 2011 and 2010, respectively. This risk was significantly reduced
due to the closure of our French operations at the end of 2010.
In an attempt to mitigate the risk described above, we have entered into, from time to time,
foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a
fixed rate determined at the contract date. These derivative financial instruments do not meet the
criteria to qualify as hedges under ASC Topic 815, Derivatives and Hedging, and therefore any
change in the market value of these contracts resulting in a gain or loss is recognized as other
(loss) income, net in the period of the change. There were no foreign exchange contracts held by
the Company at any point during the three months ended March 31, 2011, and thus there was no
related gain or loss. For the three months ended March 31, 2010, the Company recognized a loss of
approximately $67,000 related to a foreign exchange contract. At March 31, 2011 and December 31,
2010, there were no foreign exchange contracts outstanding.
Market Price Risk
We had no equity hedge contracts outstanding as of March 31, 2011 or December 31, 2010.
Interest Rate Risk
Our investments are subject to interest rate risk. Interest rate risk is the risk that our
financial condition and results of operations could be adversely affected due to movements in
interest rates. We invest our cash in a variety of interest-earning financial instruments,
including bank time deposits, money market funds, and variable rate and fixed rate obligations of
corporations and national governmental entities and agencies. Due to the demand nature of our
money market funds and the short-term nature of our time deposits and debt securities portfolio,
these assets are particularly sensitive to changes in interest rates. We manage this risk through
investments with shorter-term maturities and varying maturity dates.
A hypothetical 50 basis point increase in interest rates would result in an approximate decrease of
less than 1% in the fair value of our available-for-sale securities at March 31, 2011. This
potential change is based on sensitivity analyses performed on our marketable securities at March
31, 2011. Actual results may differ materially. The same hypothetical 50 basis point increase in
interest rates would have resulted in an approximate decrease of less than 1% in the fair value of
our available-for-sale securities at December 31, 2010.
We maintain a $5.0 million revolving bank credit facility maturing December 19, 2013 with an
applicable interest rate on any outstanding balances under the credit facility based on London
Interbank Offered Rate (LIBOR) plus 1.0% to 1.5% applicable margin rate based on certain factors
included in our credit agreement. The interest rate on the borrowings under the revolving credit
facility was 1.8% at March 31, 2011 and December 31, 2010. The unused portion of the credit
facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits
with the creditor. A hypothetical 100 basis point increase in LIBOR would increase annual interest
expense on this credit facility by approximately $35,000. All borrowings under this facility are
secured by marketable securities. After March 31, 2011, all borrowings under this facility were
repaid.
16
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Companys management, under the supervision of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), performed an evaluation of the effectiveness of the design and operation
of the Companys disclosure controls and procedures as of the end of the period covered by this
quarterly report. Based on that evaluation, the CEO and CFO concluded that the Companys disclosure
controls and procedures are designed, and are effective, to give reasonable assurance that the
information required to be disclosed by the Company in reports that it files under the Securities
Exchange Act of 1934 is accumulated and communicated to management, including the CEO and CFO, to
allow timely decisions regarding disclosure and that information is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the Securities Exchange
Commission.
Changes in Internal Controls
The Company maintains a system of internal controls that is designed to provide reasonable
assurance that its books and records accurately reflect, in all material respects, the transactions
of the Company and that its established policies and procedures are adhered to. From time to time
the Company may experience changes to its internal controls due, for example, to employee turnover,
re-balancing of workloads, extended absences and promotions of employees. However, there were no
changes in our internal controls over financial reporting during the quarter
ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect
our internal controls over financial reporting.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
French Restructuring Litigation: Twenty-five former employees (Plaintiffs) of Interphase SAS, a
subsidiary of Interphase Corporation, have brought suit in France against Interphase SAS alleging
various causes of action and rights to damages relating to claims of wrongful dismissal of
employment, specific French employment indemnities, general economic losses, and contractual claims
relating specifically to their employment relationship and contracts entered into between the
individual and Interphase SAS. The various claims and assertions arise from and relate to the
Plaintiffs release from employment as part of the restructuring actions taken during the third
quarter of 2010. See Note 7 in the Notes to the condensed consolidated financial statements for
more information regarding the restructuring plan. The statement of claim is for an aggregate
payment of approximately 2.8 million ($3.9 million) related to these claims. The Company believes
that the Plaintiffs claims are without merit and plans to vigorously defend itself in this
lawsuit.
Patent-infringement Litigation: On April 7, 2011, Interphase was named as one of the defendants in
a lawsuit filed by Mosaid Technologies (Mosaid). The complaint includes allegations that
Interphase has infringed and is infringing upon a certain registered U.S. patent to which Mosaid
has enforcement rights. The sole infringement allegation directed at Interphase appears to concern
communications controller chips that Interphase purchases (indirectly) from Freescale
Semiconductor, Inc., (Freescale), another defendant in the infringement allegation, which are
used in several of Interphases products.
The complaint requests a judgment that Mosaids patents have been and are being infringed and,
accordingly, an award of an unspecified amount of damages, plus interest and costs, as well as
injunctive relief and any other remedies available under law. Because the complaint claims that
the alleged infringing conduct is willful, it also requests treble damages and attorneys fees
under the applicable U.S. patent statute.
Interphase does not know if there is any merit to Mosaids allegations. Nevertheless, Interphase
intends, and Interphase understands that Freescale intends, to vigorously defend the allegations;
and to the extent that the infringement claim relates to the Freescale chips used in Interphases
products, Freescale will also defend Interphase and indemnify Interphase against damages in the
lawsuit.
17
Item 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in our Annual Report on Form
10-K for the year ended December 31, 2010.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. (REMOVED AND RESERVED)
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
Exhibits
|
|
|
31 (a)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
31 (b)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
32 (a)
|
|
Section 1350 Certification of Chief Executive Officer. |
32 (b)
|
|
Section 1350 Certification of Chief Financial Officer. |
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 9, 2011 |
By: |
/s/ Thomas N. Tipton Jr.
|
|
|
|
Thomas N. Tipton Jr. |
|
|
|
Chief Financial Officer,
Vice President of Finance and
Treasurer
(Principal Financial and Accounting Officer) |
|
|
18