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UNITED STATES
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 September 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 November 12, 2001
----- --------------------------------
Common Stock, $.10 par value 5,641,472
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INTERPHASE CORPORATION
INDEX
<Table>
PART I -FINANCIAL INFORMATION
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 5
Notes to Consolidated Interim Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K and Exhibits 17
Signature 17
</Table>
2
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of share data)
(unaudited)
<Table>
<Caption>
Sep. 30, Dec. 31,
ASSETS 2001 2000
------------ ------------
Cash and cash equivalents $ 15,571 $ 10,587
Marketable securities 4,757 6,886
Trade accounts receivable, less allowances for uncollectible
accounts and returns of $303 and $473, respectively 2,695 14,085
Inventories 7,606 13,193
Prepaid expenses and other current assets 4,369 941
Deferred income taxes 729 844
------------ ------------
Total current assets 35,727 46,536
Machinery and equipment 7,752 8,033
Leasehold improvements 2,937 2,954
Furniture and fixtures 603 490
------------ ------------
11,292 11,477
Less-accumulated depreciation and amortization (10,106) (9,755)
------------ ------------
Total property and equipment, net 1,186 1,722
Capitalized software, net 381 490
Deferred income taxes, net 1,146 1,146
Acquired developed technology, net -- 1,680
Goodwill, net 2,410 2,590
Other assets 158 309
------------ ------------
Total assets $ 41,008 $ 54,473
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 296 $ 1,417
Deferred revenue 230 1,093
Accrued liabilities 2,111 2,816
Accrued compensation 937 1,947
Income taxes payable -- 78
Current portion of debt -- 1,683
------------ ------------
Total current liabilities 3,574 9,034
Long term debt, net of current portion 3,500 3,500
------------ ------------
Total liabilities 7,074 12,534
Commitments and contingencies
Common stock redeemable; 162,663 and 284,664 shares,
respectively 1,017 1,780
SHAREHOLDERS' EQUITY
Common stock, $.10 par value; 100,000,000 shares
authorized; 5,682,139 and 5,480,550 shares issued and
outstanding, respectively 568 548
Additional paid in capital 37,033 36,805
Retained (deficit) earnings (4,472) 3,178
Cumulative other comprehensive loss (212) (372)
------------ ------------
Total shareholders' equity 32,917 40,159
------------ ------------
Total liabilities and shareholders' equity $ 41,008 $ 54,473
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</Table>
3
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<Table>
<Caption>
Three Months Ended Sep. 30, Nine Months Ended Sep. 30,
- ------------------------------ ------------------------------
2001 2000 2001 2000
- ------------ ------------ ------------ ------------
$ 4,603 $ 13,260 Revenues $ 21,662 $ 40,177
2,833 6,193 Cost of sales 16,127 18,349
- ------------ ------------ ------------ ------------
1,770 7,067 Gross margin 5,535 21,828
1,818 2,694 Research and development 6,118 7,764
1,320 2,612 Sales and marketing 5,542 8,063
795 1,051 General and administrative 2,921 3,258
Restructuring costs and other special
-- -- charges 2,091 --
- ------------ ------------ ------------ ------------
3,933 6,357 Total operating expenses 16,672 19,085
- ------------ ------------ ------------ ------------
(2,163) 710 Operating (loss) income (11,137) 2,743
- ------------ ------------ ------------ ------------
231 132 Interest, net 417 333
(395) (167) Other, net (616) 2
- ------------ ------------ ------------ ------------
(Loss) income from continuing
(2,327) 675 operations before income taxes (11,336) 3,078
(871) 302 (Benefit) provision for income taxes (3,686) 1,286
- ------------ ------------ ------------ ------------
(Loss) income from continuing
(1,456) 373 operations (7,650) 1,792
- ------------ ------------ ------------ ------------
Discontinued Operations
Gain on disposal of VOIP business, net
-- -- of tax -- 571
- ------------ ------------ ------------ ------------
$ (1,456) $ 373 Net (loss) income $ (7,650) $ 2,363
============ ============ ============ ============
(Loss) income from continuing
operations per share
$ (0.26) $ 0.06 Basic EPS $ (1.34) $ 0.31
$ (0.26) $ 0.06 Diluted EPS $ (1.34) $ 0.28
- ------------ ------------ ------------ ------------
Net (loss) income per share
$ (0.26) $ 0.06 Basic EPS $ (1.34) $ 0.41
- ------------ ------------ ------------ ------------
$ (0.26) $ 0.06 Diluted EPS $ (1.34) $ 0.38
- ------------ ------------ ------------ ------------
5,689 5,805 Weighted average common shares 5,724 5,817
- ------------ ------------ ------------ ------------
Weighted average common and
5,689 6,278 dilutive shares 5,724 6,292
- ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements.
</Table>
4
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<Table>
<Caption>
Nine Months ended Sep. 30,
-------------------------------
2001 2000
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations $ (7,650) $ 1,792
Gain on disposal of VOIP business -- 571
Adjustment to reconcile (loss) income from continuing operations to net cash
provided by operating activities:
Noncash realized holding period loss on marketable securities 334 --
Depreciation and amortization 1,503 1,941
Deferred income taxes 115 (301)
Tax benefit from stock option exercises 94 240
Noncash restructuring costs and other special charges 6,002 --
Change in assets and liabilities:
Trade accounts receivable 11,390 3,715
Inventories 1,193 (1,608)
Prepaid expenses and other current assets (3,428) 754
Accounts payable, deferred revenue, and accrued liabilities (2,689) 1,169
Accrued compensation (1,010) (781)
Income taxes payable (78) 98
------------ ------------
Net adjustments 13,426 5,227
------------ ------------
Net cash provided by operating activities 5,776 7,590
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, equipment, capitalized software and
leasehold improvements (516) (1,232)
Decrease (increase) in other assets 9 (415)
Cash received in sale of VOIP business -- 1,230
Proceeds from the sale of marketable securities 5,929 4,349
Purchases of marketable securities, net of unrealized holding
period gain or loss (3,922) (6,891)
------------ ------------
Net cash provided (used) by investing activities 1,500 (2,959)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (1,683) (1,655)
Purchase of redeemable common stock (763) (762)
Proceeds from the exercise of stock options 154 391
------------ ------------
Net cash used by financing activities (2,292) (2,026)
------------ ------------
Net increase in cash and cash equivalents 4,984 2,605
Cash and cash equivalents at beginning of period 10,587 10,988
------------ ------------
Cash and cash equivalents at end of period $ 15,571 $ 13,593
============ ============
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 178 $ 1,539
Interest paid $ 282 $ 468
The accompanying notes are an integral part of these consolidated financial statements.
</Table>
5
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Interphase Corporation and subsidiaries ("Interphase" or the "Company") designs,
develops, manufactures, markets and supports high-performance connectivity
products utilizing advanced technologies being used in next-generation
telecommunication networks and enterprise data/storage networks. Interphase's
products include telecom server communication controllers, server-based adapter
cards, network operating system device drivers, software development tools and
management software applications.
The accompanying consolidated interim financial statements include the accounts
of Interphase Corporation and its wholly owned subsidiaries. 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
6
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
nonutilized 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
continued to decline through 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):
<Table>
<Caption>
Second
Quarter
Cash Third Accrual
Payments and Quarter Balance at
Total Noncash Cash September 30,
Charge Charges Payments 2001
------------- ------------- ------------- -------------
Workforce reduction $ 483 $ 17 $ 384 $ 82
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 $ 384 $ 82
============= ============= ============= =============
</Table>
7
3. CREDIT FACILITY
In October 2001, the Company extended its $5 million revolving credit facility
with a bank. The revolving credit facility now matures on June 30, 2003 and will
be secured throughout the term of the credit facility by a ninety-day
certificate of deposit issued by the bank in the principal amount equal to the
stated principal amount of the promissory note. The certificate of deposit will
be reflected as restricted cash in future balance sheets. The credit facility
bears interest at the rate of 1% per annum above the certificate of deposit
rate, currently 1.83%, and includes certain restrictive covenants including,
among others, a tangible net worth restriction. At September 30, 2001, the
Company was in compliance with all restrictive covenants included in the newly
extended revolving credit facility. At September 30, 2001, the Company had
borrowings of $3.5 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):
<Table>
<Caption>
Three months ended Sept. 30, Nine months ended Sept. 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net (loss) income $ (1,456) $ 373 $ (7,650) $ 2,363
Other comprehensive income:
Unrealized holding gain (loss)
arising during period, net of tax 161 128 212 (581)
Foreign currency translation 154 (52) (217)
adjustment (135)
------------- ------------- ------------- -------------
Comprehensive (loss) income $ (1,141) $ 366 $ (7,490) $ 1,565
============= ============= ============= =============
</Table>
8
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):
<Table>
<Caption>
Three months ended Sept. 30, Nine months ended Sept. 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Weighted average shares outstanding 5,689 5,805 5,724 5,817
Dilutive impact of stock options -- 473 -- 475
------------ ------------ ------------ ------------
Total weighted average common and
common equivalent shares outstanding 5,689 6,278 5,724 6,292
============ ============ ============ ============
Anti-dilutive weighted shares
excluded from shares outstanding 2,050 378 1,660 289
</Table>
6. DISPOSITION OF ASSETS
In June 1999, the Company sold an 80% interest in part of its VOIP business,
Quescom, for $1,130,000 to the former owner of Interphase's Paris Operation. The
sales proceeds consisted of $300,000 due at closing with an $830,000 technology
license fee. In January 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 January 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 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.
9
Geographic revenue and long lived assets related to North America and other
foreign countries as of and for the three-month and nine-month period ended
September 30, 2001 and 2000 are as follows: (in thousands)
<Table>
<Caption>
Three months ended September 30, Nine months ended September 30,
Revenue 2001 2000 2001 2000
- ------- ------------- ------------- ------------- -------------
North America $ 3,303 $ 11,005 $ 17,307 $ 33,552
Europe 1,300 1,253 3,865 4,612
Pac Rim -- 1,002 490 2,013
------------- ------------- ------------- -------------
Total $ 4,603 $ 13,260 $ 21,662 $ 40,177
============= ============= ============= =============
</Table>
Geographic long-lived assets exclude corporate assets. Corporate assets include
cash and cash equivalents, marketable securities, and intangibles.
<Table>
<Caption>
Long lived assets September 30, 2001 December 31, 2000
- ----------------- ------------------ -----------------
North America $ 1,396 $ 1,995
Europe 168 215
Pacific Rim 3 2
-------------- --------------
Total $ 1,567 $ 2,212
============== ==============
</Table>
Additional information regarding revenue by product line is as follows: (in
thousands)
<Table>
<Caption>
Three months ended September 30, Nine months ended September 30,
Revenue 2001 2000 2001 2000
- ------- ------------- ------------- ------------- -------------
Storage $ 568 $ 3,607 $ 5,398 $ 15,937
Broadband Telecom 1,307 2,583 5,230 9,298
Combo 1,649 822 4,877 1,192
LAN 894 5,817 4,828 11,933
WAN 19 271 545 1,184
Other 166 160 784 633
------------- ------------- ------------- -------------
Total $ 4,603 $ 13,260 $ 21,662 $ 40,177
============= ============= ============= =============
</Table>
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
10
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 adopted SFAS No. 141 effective July 1, 2001,
and will adopt 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 SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to all entities and legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and are subsequently allocated to expense over the asset's
useful life. This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company has not yet determined
the impact that SFAS No. 143 will have on its financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. This statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," however, this statement retains the fundamental provisions of
SFAS 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. This statement also supersedes the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" for segments of a
business to be disposed of. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company does not believe that the adoption of SFAS
144 will have a material effect on its financial position or results of
operations.
9. SUBSEQUENT EVENTS
In October 2001, the Company announced that its Board of Directors had
authorized the repurchase of up to $5 million of its common stock. Purchases are
authorized to be made from time to time during a twenty-four month period in the
open market or in privately
11
negotiated transactions depending on market conditions. The Company will cancel
all shares that it repurchases. The repurchase plan does not obligate the
Company to repurchase any specific number of shares and may be suspended at any
time.
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 ("SAB") 101, "Revenue
Recognition." Product revenues are recognized upon shipment, provided fees are
fixed and determinable, a customer purchase order is obtained, and collection is
probable. Revenues from reseller agreements are recognized when the product is
sold through to the end customer unless an established return history supports
recognizing revenue upon shipment, less a provision for estimated sales returns.
The Company maintains its allowance for returns as a reduction to accounts
receivable. Deferred revenue consists of revenue from reseller arrangements and
certain arrangements with extended payment terms. Revenue from extended payment
terms is recognized in the period the payment becomes due if all other revenue
recognition criteria have been met. Service revenue is recognized as the
services are performed. The Company offers to its customers a limited warranty
that its products will be free from defect in the materials and workmanship for
a specified period. The Company has established a warranty reserve, as a
component of accrued liabilities, for any potential claims.
REVENUES: Total revenues for the three months ended September 30, 2001 were $4.6
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. Legacy revenues decreased from $7.2 million for the three
months ended September 30, 2000 to $1.3 million for the three months ended
September 30, 2001. The decrease in revenues was partially offset by revenue
growth in Combo technologies. Combo technologies revenues grew to $1.6 million
in the third quarter 2001 from $822,000 in the third quarter 2000.
12
One customer individually accounted for 42% of the Company's third quarter 2001
revenue. In the comparative period, one customer individually accounted for 11%
of the Company's revenue.
Total revenues for the nine months ended September 30, 2001 were $21.7 million.
Revenues for the nine months ended September 30, 2000 were $40.2 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. Legacy revenues decreased from $16.8 million for the nine months
ended September 30, 2000 to $6.5 million for the nine-months ended September 30,
2001. In addition, approximately 11% of the revenues for the nine-months ended
September 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 revenues grew to $4.9 million for the nine months ended September
30, 2001 from $1.2 million for the nine months ended September 30, 2000.
GROSS MARGIN: Gross margin as a percentage of sales was 38% for the third
quarter 2001 and 53% for the comparative period. The gross margin percentage for
the nine months ended September 30, 2001 and 2000 was 26% and 54%, respectively.
The gross margin rate for the three month period declined approximately six
percentage points due to the shift in product mix away from higher margin legacy
products and the remaining decline primarily related to the under-utilization of
the Company's manufacturing facility. The gross margin rate for the nine-month
period declined by approximately twenty percentage points due to the excess and
obsolete inventory charge of $4.4 million incurred in the second quarter 2001,
as described in Note 2. The remaining portion of the decline was due to the
shift in product mix away from higher margin legacy products and
under-utilization of the Company's manufacturing facility.
RESEARCH AND DEVELOPMENT: The Company's investment in the development of new
products through research and development was $1.8 million in the third quarter
2001 and $2.7 million in the comparative period. As a percentage of revenue,
research and development expenses were 40% in the third quarter 2001 and 20% in
the comparative period. Research and development expenses for the nine months
ended September 30, 2001 and 2000 were $6.1 million and $7.8 million,
respectively. Approximately 53% and 28% of the decrease in research and
development expenses for the three months and nine months ended September 30,
2001, respectively, was due to the Company's restructuring program and other
cost reduction initiatives implemented at the end of the second quarter 2001.
The remaining portion of the decrease primarily related to decreased spending on
legacy sustaining engineering, partially offset by an increase in
telecommunications development spending. Research and development costs as a
percentage of sales increased for both the three and nine month periods due to
the decrease in revenues.
SALES AND MARKETING: Sales and marketing expenses were $1.3 million in the third
quarter 2001 and $2.6 million in the comparative period. As a percentage of
revenue, sales and marketing expenses were 29% in the third quarter 2001 and 20%
in the comparative period. Sales and marketing expenses for the nine months
ended September
13
30, 2001 and 2000 were $5.5 million and $8.1 million, respectively.
Approximately 28% and 35% of the decrease in sales and marketing expense for the
three months and nine months ended September 30, 2001, respectively, is due to
decreased revenues, which resulted in reduced sales commissions and bonuses. The
remaining portion of the decrease for both periods primarily relates to the
Company's restructuring program and other cost reduction initiatives implemented
at the end of the second quarter 2001. Sales and Marketing expenses as a
percentage of sales increased for both the three and nine- month periods due to
the decrease in revenues.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $0.8
million in the third quarter 2001 and $1.1 million in the comparative period. As
a percentage of revenue, general and administrative expenses were 17% in the
third quarter 2001 and 8% in the comparative period. General and administrative
expenses for the nine months ended September 30, 2001 and 2000 were $2.9 million
and $3.3 million, respectively. The decrease in general and administrative
expenses for the three months and nine months ended September 30, 2001, is
primarily the result of the Company's restructuring program and cost reduction
initiatives implemented at the end of the second quarter 2001. General and
administrative expenses, as a percentage of sales, increased for both the three
and nine-month periods due to the decrease in revenues.
INTEREST, NET: Interest income, net of interest expense, was $231,000 in the
third quarter 2001 and $132,000 in the comparative period. Interest income, net
of interest expense, for the nine months ended September 30, 2001 and 2000 was
$417,000 and $333,000, respectively. The increase relates to higher daily cash
levels available for investment, lower debt levels and lower borrowing interest
rates.
OTHER EXPENSE, NET: Other expense, net, was $395,000 in the third quarter 2001
and $167,000 in the comparative period. Other expense, net for the nine months
ended September 30, 2001 was $616,000 and was in an income position of $2,000
for the nine months ended September 30, 2000. Other expense, net includes the
amortization of goodwill and purchased intangibles related to a 1996 acquisition
of Synaptel. However, as described in Note 2, the Company wrote off the impaired
purchased intangibles during the second quarter of 2001, as part of its
restructuring program. These purchased intangibles were generating amortization
expense at a rate of $165,000 per quarter. The increase in other expense for the
third quarter 2001 over the comparative period primarily relates to a charge of
$334,000 due to the other than temporary impairment of certain marketable
securities received in the sale of the Company's VOIP business, partially offset
by the elimination of the purchased intangibles amortization expense. Other
income for the nine months ended September 30, 2000 includes a gain of
approximately $685,000 related to hedging transactions on certain marketable
securities received in the sale of the Company's VOIP business.
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
14
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 September 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
$6.62 per share before consideration would have been given to recording
additional goodwill amortization. At September 30, 2001, the common stock price
was $3.38. 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. 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 other
changes to the book value of the common stock, and by the future common stock
price. The Company will adopt 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 (37%) for the third
quarter 2001 and 45% for the comparative period. The rate reduction for the
three-month period is due to a decrease in foreign income which is offset by
foreign operating losses. The Company's effective income tax rate was (33%) for
the nine months ended September 30, 2001 and 42% for the nine months ended
September 30, 2000. The rate reduction for the nine-month period is primarily
due to an increase in nondeductible 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 $1.5 million in the third
quarter 2001 and net income of $373,000 in the comparative period. The Company
reported a net loss of $7.7 million for the nine months ended September 30, 2001
and net income of $2.4 million for the nine months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, cash and cash equivalents totaled $15.6 million, an
increase of $5 million from the December 31, 2000 balance of $10.6 million. The
increase was attributable to cash provided by operating activities of $5.8
million and cash provided by investing activities of $1.5 million, partially
offset by cash used by financing activities of $2.3 million. Cash provided by
operating activities was comprised primarily of a decrease
15
in accounts receivable of $11.4 million, noncash restructuring costs and other
special charges of $6 million, depreciation and amortization of $1.5 million and
a decrease in inventories of $1.2 million, which was partially offset by cash
used to fund operations of $7.7 million, an increase in prepaid expenses and
other current assets of $3.4 million, a decrease in accounts payable, deferred
revenue and accrued liabilities of $2.7 million and a decrease in accrued
compensation of $1 million. Cash provided by investing activities was primarily
the result of net proceeds from the sale of marketable securities of $2 million.
Cash used by financing activities was primarily comprised of payments on debt of
$1.7 million and the purchase of redeemable common stock of $763,000.
At September 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.
In October 2001, the Company announced that its Board of Directors had
authorized the repurchase of up to $5 million of its common stock. Purchases are
authorized to be made from time to time during a twenty-four month period in the
open market or in privately negotiated transactions depending on market
conditions. The Company will cancel all shares that it repurchases. The
repurchase plan does not obligate the Company to repurchase any specific number
of shares and may be suspended at any time.
The Company has a $5 million revolving credit facility with a financial
institution. The revolving credit facility expires in June 2003. As of September
30, 2001, the Company had borrowings of $3.5 million classified as long-term
debt on its balance sheet.
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 September 30, 2001, 497,337 shares have been repurchased for $3.1
million and retired; 162,663 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 twelve months. However, it is possible that the Company may
require additional sources of financing earlier than anticipated, as a result of
unexpected cash needs or opportunities, an expanded growth strategy or
disappointing operating results. Additional funds may not be available on
satisfactory terms when needed, whether within the next twelve to eighteen
months or thereafter.
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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: November 14, 2001
/s/ Steven P. Kovac
---------------------------------------
Steven P. Kovac
Chief Financial Officer,
Vice President of Finance and Treasurer
(Principal Financial and Accounting
Officer)
17