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)