SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999 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 April 29, 1999
Common Stock, No par value 5,471,591
INTERPHASE CORPORATION
INDEX
Part I -Financial Information
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 5
Notes to Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II- Other Information
Item 6. Reports on Form 8-K and Exhibits 12
Signature
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, Dec 31,
ASSETS 1999 1998
-------------------------
Cash and cash equivalents $ 1,416 $ 4,531
Marketable securities 3,522 3,430
Trade accounts receivable, less allowances
for uncollectible accounts of $196 and
$164, respectively 15,269 13,716
Inventories, net 13,534 13,488
Prepaid expenses and other current assets 1,202 856
Deferred income taxes, net 516 516
-------------------------
Total current assets 35,459 36,537
-------------------------
Machinery and equipment 10,414 10,135
Leasehold improvements 3,024 2,909
Furniture and fixtures 533 515
-------------------------
13,971 13,559
Less-accumulated depreciation and amortization (10,433) (10,339)
-------------------------
Total property and equipment, net 3,538 3,220
Capitalized software, net 778 773
Deferred income taxes, net 1,376 1,376
Acquired developed technology, net 3,124 3,365
Goodwill, net 3,010 3,070
Other assets 2,025 1,947
-------------------------
Total assets $ 49,310 $ 50,288
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,068 $ 2,883
Accrued liabilities 1,044 1,639
Accrued compensation 1,435 2,041
Income taxes payable 865 1,408
Current portion of debt 2,233 2,252
-------------------------
Total current liabilities 9,645 10,223
Other liabilities 776 873
Long term debt 6,816 7,367
-------------------------
Total liabilities 17,237 18,463
Commitments and contingencies
Common stock redeemable 3,559 3,813
SHAREHOLDER'S EQUITY
Common stock, no par value 31,351 31,221
Retained deficit (2,797) (3,217)
Cumulative other comprehensive income (40) 8
-------------------------
Total shareholders' equity 28,514 28,012
-------------------------
Total liabilities and shareholders' equity $ 49,310 $ 50,288
=========================
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
-------------------------
31-Mar-99 31-Mar-98
-------------------------
Revenues $ 17,346 $ 17,589
Cost of sales 9,531 9,446
-------------------------
Gross profit 7,815 8,143
Research and development 2,961 2,866
Sales and marketing 2,665 2,386
General and administrative 1,200 1,329
-------------------------
Total operating expenses 6,826 6,581
-------------------------
Operating income 989 1,562
-------------------------
Interest income 132 83
Interest expense (242) (240)
Other, net (224) (225)
-------------------------
Income before income taxes 655 1,180
Provision for income taxes 231 472
-------------------------
Net income $ 424 $ 708
=========================
Net income per share
Basic EPS $ 0.08 $ 0.13
=========================
Diluted EPS $ 0.08 $ 0.13
=========================
Weighted average common shares 5,438 5,516
=========================
Weighted average common and
dilutive shares 5,596 5,640
=========================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months ended
-----------------------
30-Mar-99 30-Mar-98
-----------------------
Cash flow from operating activities:
Net income $ 424 $ 708
Adjustment to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 930 989
Change in assets and liabilities:
Trade accounts receivable (1,553) 2,700
Inventories (46) 560
Prepaid expenses and other current assets (346) 50
Accounts payable and accrued liabilities 590 (1,016)
Accrued compensation (606) (2)
Income taxes payable (543) 470
-----------------------
Net adjustments (1,574) 3,751
-----------------------
Net cash (used) provided by
operating activities (1,150) 4,459
Cash flows from investing activities:
Additions to property, equipment
and leasehold improvements (956) (679)
Decrease in other assets (78) 1
(Increase) decrease in marketable securities (92) (403)
-----------------------
Net cash used by investing activities (1,126) (1,081)
Cash flows from financing activities:
Payment on debt (570) (588)
Other long term liabilities (97) (160)
Change in foreign currency translation (48) (44)
Purchase of redeemable common stock (254) -
Sale of common stock 130 -
-----------------------
Net cash (used) by financing activities (839) (792)
------------------------
Net increase in cash and cash equivalents (3,115) 2,586
Cash and cash equivalents at beginning of period 4,531 2,247
-----------------------
Cash and cash equivalents at end of period $ 1,416 $ 4,833
=======================
Supplemental Disclosure of Cash Flow Information:
Income taxes paid 774 10
Income taxes refunded - -
Interest paid 225 225
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.
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 generally accepted accounting principles 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, 1998.
2. NET INCOME PER COMMON AND COMMON DILUTIVE SHARE
The following table shows the calculations of the Company's weighted
average common and dilutive equivalent shares outstanding (in thousands):
Three Months ended:
Mar 31, 1999 Mar 31, 1998
------------ ------------
Weighted average shares outstanding 5,438 5,516
Dilutive impact of stock options 158 124
----- -----
Total weighted average common and common
equivalent shares outstanding 5,596 5,640
===== =====
Anti-dilutive options of 705,601 and 1,164,300 were excluded from the
dilutive calculations for the quarters ended March 31, 1999 and 1998,
respectively.
3. CREDIT FACILITY
The Compnay maintains a credit facility with BankOne Texas NA which
consists of an $8,500,000 acquisition term loan, a $2,500,000 equipment
financing facility and a $5,000,000 revolving credit facility. The
facility is a two-year facility with an annual renewal provision, and
bears interest at the bank's base rate (currently 8.5%). The term loan
is payable in equal quarterly installments of $548,000 plus accrued
interest with final payment due November 30, 2001. The Company has the
ability to satisfy the quarterly payments on the term notes through
borrowings under the revolving credit component of the credit facility.
The revolving portion of the loan has been renewed and is due June 30,
2000. The credit facility is collateralized by marketable securities,
assignment of accounts receivable and equipment. The credit facility
includes certain restrictive financial covenants including, among others,
tangible net worth, total liabilities to tangible net worth, interest
coverage, quick ratio, debt service coverage, and is subject to a
borrowing base calculation. At March 31, 1999, the Company had borrowings
of $9,000,100 and remaining availability under the revolving credit
facility was $1,500,000.
4. COMPREHENSIVE INCOME
The following table shows the Company's comprehensive income (in
thousands):
Three months Three months
ended ended
Mar 31, 1999 Mar 31, 1998
------------ ------------
Net income $ 424 $ 708
Other comprehensive income,
Unrealized holding gains (losses) arising
During period , net of tax 0 0
Foreign currency translation adjustment (48) (44)
---- ----
Comprehensive iome $ 376 $ 664
==== ====
5. STOCK REPURCHASE
Effective October 1998, the Company approved a stock repurchase agreement
with Motorola, Inc. to purchase all of the shares owned by Motorola for
$4,125,000, ratably from October 1998 to July 2002. Under the terms of
the agreement, Motorola retains the right as an equity owner and has
assigned it voting rights to the Company. The Company plans to cancel
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 Sheet. As of March 31,
1999, 90,667 shares have been repurchased for $566,668 and retired.
6. SEGMENT DATA
The Company manages its business segments on an industry basis. The
Company's reportable segments are composed of high performance
networking/storage adapters and voice over Internet Protocol (VOIP)
products and services. The Company evaluates the performance of its
segments based on revenue and operating profits. Segment operating income
(loss) excludes general and administrative expenses. (Amounts in
thousands):
Quarter ended Mar. 31, 1999 Quarter ended Mar. 31, 1998
Networking VOIP Total Networking VOIP Total
---------------------------------------------------------
Revenues 17,169 177 17,346 17,589 - 17,589
Operating Income 3,016 (827) 3,016 2,891 - 2,891
Fixed Assets 2,497 1,041 3,538 3,794 - 3,794
Reconciliation of Segment Operating Income to Consolidated Operating Income:
Quarter ended
31-Mar-99 31-Mar-98
-------------------------
Networking 3,016 2,891
VOIP (827) -
General and Administrative (1,200) (1,329)
----- -----
Consolidated Operating Income 989 1562
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1999 ("first quarter
1999") were $17,346,000. Revenues for the same period in 1998
("comparative period") were $17,589,000. The decrease in revenues from
the comparative period was attributable to decreases in ATM, SCSI, Fast
Ethernet, FDDI and Ethernet product revenues, partially offset by
increases in WAN and Fibre Channel product revenues.
LAN product revenues, consisting of FDDI, Ethernet, ATM and Fast
Ethernet, represented 46% of total revenues for the first quarter 1999,
as compared to 72% for the comparative period. FDDI product revenues
declined 41%, Ethernet product revenues declined 98%, ATM product
revenues declined 35% and Fast Ethernet product revenues declined 26% as
compared to the comparative period. FDDI, Ethernet, ATM and Fast
Ethernet product revenues represented 12%, 0%, 6% and 28% of total
revenues, respectively for the first quarter 1999.
Mass storage product revenues, consisting of SCSI and Fibre Channel
adapter cards, represented 31% of total revenues for the first quarter
1999, as compared to 19% for the comparative period. SCSI product
revenues declined 64% while Fibre Channel product revenues increased 231%
over the comparative period.
WAN product revenues comprised 20% of revenues for the first quarter
1999, as compared to 7% for the comparative period. WAN product revenues
increased 168% as compared to the comparative period.
Geographically, North America revenues comprised 75% of consolidated
revenues in the first quarter 1999 compared to 70% in the comparative
period. European revenues comprised 24% of consolidated revenues in the
first quarter 1999 and 25% in the comparative period. Pacific Rim
revenues comprised 1% of consolidated revenues in the first quarter 1999
and 5% in the comparative period.
The Company's current marketing strategy is to increase market
penetration through sales to major OEM customers. One of these customers
accounted for approximately 51% of the Company's revenue for the first
quarter of 1999, and 44% in the first quarter of 1998. Another customer
accounted for 12% of the Company's revenue for the first quarter of 1999,
and 5% in the first quarter of 1998.
The gross margin percentage for the three month period ended March 31,
1999 and 1998 was 45% and 46%, respectively.
Operating expenses for the three month period ended March 31, 1999 were
$6,826,000 as compared to $6,581,000 for the comparable period. The
increase in operating expenses is dues to expenses relating to the
Company's new subsidiaries Zirca.com and Quescom.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities aggregated
$4,938,000 at March 31, 1999, and $7,961,000 at December 31, 1998. The
Company's decreased cash position is primarily due to the purchase of in
fixed assets, increased accounts receivable, payment on debt, tax payment
and repurchase of common stock. In the next twelve months, scheduled
debt payments on the Company's credit facility are approximately
$2,192,000.
Effective October 1998, the Company approved a stock repurchase agreement
with Motorola, Inc. to purchase all of the shares owned by Motorola for
$4,125,000, ratably from October 1998 to July 2002. Under the terms of
the agreement, Motorola retains the right as an equity owner and has
assigned it voting rights to the Company. The Company plans to cancel
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 Sheet. As of March 31,
1999, 90,667 shares have been repurchased for $566,668 and retired.
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.
Year 2000
The Company has recognized the need to ensure that its operations and
relationships with vendors and other third parties will not be adversely
impacted by software processing errors arising from the calculations
using the Year 2000 ("Y2K") and beyond.
The Company has created a company-wide Y2K team to identify and resolve
Y2K issues associated with the Company's internal information systems,
internal non-information systems, the products sold by the Company, and
its major suppliers of products and services. The Company established a
Y2K program coordinator to ensure these programs are implemented across
the Company. The coordinator provides a single point of reference, both
internal, and external, for the Company. The products that the Company
sells are Y2K compliant, or will be compliant by mid year 1999. The
Company's internal reporting system is being replaced with a Y2K
compliant Enterprise Reporting Planning (ERP) system which is scheduled
to go live in mid-year 1999. In addition, the Company is communicating
with all its suppliers, customers, vendors and financial service
organizations regarding their Year 2000 compliance. The Company
anticipates that its full Year 2000 review, new information system
implementation, and other necessary remediation actions will be
substantially complete by mid 1999. Direct expenditures are expected to
be between $850,000 and $900,000. The Company will fund these
expenditures through its normal operating budget, and as required by
generally accepted accounting principles, these costs are being expensed
as incurred, excluding the capitalization of application software. The
capitalization for software will be approximately $300,000. The Company
does not believe that the costs associated with such actions will have a
material adverse effect on the Company's results of operations or
financial condition. However the costs of such actions may vary from
quarter to quarter, and there is no assurance that there will not be a
delay in the Company's implementation or increased costs associated with
the implementation of such changes. Failure to achieve Y2K readiness for
the Company could delay its ability to manufacture and ship products and
deliver services. The Company's inability to perform these functions
could have an adverse effect on future results of operations or financial
condition.
Non-IT systems include, but are not limited to, telephone/PBX systems;
fax machines; facilities systems regulating alarms, building access and
sprinklers; manufacturing, assembly and distribution equipment; and other
miscellaneous systems and processes. Y2K readiness for these internal
non-IT systems is the responsibility of the Company's Y2K coordinator, it
is anticipated that all Non-IT systems will be compliant if they are not
already compliant by mid 1999.
The Company regularly reviews and monitors the suppliers' Y2K readiness
plans and performance. Based on the Company's risk assessment, selective
on-site reviews may be performed. In some cases, to meet Y2K readiness,
the Company has replaced suppliers or eliminated suppliers from
consideration for new business. The Company has also contracted with
multiple transportation companies to provide product delivery
alternatives.
While the Company has contingency plans in place to address most issues
under its control, an infrastructure problem outside of its control could
result in a delay in product shipments depending on the nature and
severity of the problems. The Company would expect that most utilities
and service providers would be able to restore service within days
although more pervasive system problems involving multiple providers
could last two to four weeks or more depending on the complexity of the
systems and the effectiveness of their contingency plans. Although the
Company is dedicating substantial resources towards attaining Y2K
readiness, there is no assurance it will be successful in its efforts to
identify and address all Y2K issues. Even if the Company acts in a timely
manner to complete all of its assessments; identifies, develops and
implements remediation plans believed to be adequate; and develops
contingency plans believed to be adequate some problems may not be
identified or corrected in time to prevent material adverse consequences
to the Company. The discussion above regarding estimated completion
dates, costs, risks and other forward-looking statements regarding Y2K is
based on the Company's best estimates given information that is currently
available and is subject to change. As the Company continues to progress
with its Y2K initiatives, it may discover that actual results will differ
materially from these estimates.
Use of Forward-Looking Statements: Certain statements contained in MD&A
are forward-looking, including statements concerning expected expenses,
Year 2000 readiness, and the adequacy of the Company's sources of cash to
finance its current and future operations. Factors which could cause
actual results to materially differ from management's expectations
include the following: general economic conditions and growth in the
high tech industry; competitive factors and pricing pressures; changes in
product mix; the timely development and acceptance of new products;
inventory risks due to shifts in market domain; Year 2000 readiness of
the Company's suppliers, and the risks described from time to time in the
Company's SEC filings.
PART II
OTHER INFORMATION
Item 6. Reports on form 8-K
None
Exhibits
Exhibit 27 Financial Data Schedule
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 12, 1999
/s/ Gregory B. Kalush
Gregory B. Kalush
Chief Executive Officer and
President
(Principal Financial and
Accounting officer)