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, 2000 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 1, 2000
---------------------------- -----------------------------
Common Stock, $.10 par value 5,801,081
<PAGE>
INTERPHASE CORPORATION
INDEX
Part I -Financial Information
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the three
months and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 5
Notes to Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II- Other Information
Item 6. Reports on Form 8-K and Exhibits 13
Signature 13
<PAGE>
<TABLE>
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of share data) (unaudited)
Sep. 30, Dec. 31,
ASSETS 2000 1999
----------------------
<S> <C> <C>
Cash and cash equivalents $ 13,593 $ 10,988
Marketable securities 7,248 5,288
Trade accounts receivable, less allowances
for uncollectible accounts of $319 and
$260, respectively 10,290 14,005
Inventories, net 13,286 11,678
Prepaid expenses and other current assets 629 1,383
Deferred income taxes, net 1,075 774
----------------------
Total current assets 46,121 44,116
----------------------
Machinery and equipment 9,790 9,149
Leasehold improvements 2,950 2,907
Furniture and fixtures 500 475
----------------------
13,240 12,531
Less-accumulated depreciation and amortization (11,231) (10,334)
----------------------
Total property and equipment, net 2,009 2,197
Capitalized software, net 576 684
Deferred income taxes, net 1,458 1,458
Acquired developed technology, net 1,830 2,280
Goodwill, net 2,650 2,830
Other assets 292 1,106
----------------------
Total assets $ 54,936 $ 54,671
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,086 $ 2,129
Accrued liabilities 4,368 2,156
Accrued compensation 1,350 2,131
Income taxes payable 852 754
Current portion of debt 2,192 2,202
----------------------
Total current liabilities 9,848 9,372
Long term debt 3,519 5,164
----------------------
Total liabilities 13,367 14,536
Commitments and contingencies
Common stock redeemable; 325,331 and 447,332
shares, respectively 2,034 2,796
SHAREHOLDERS' EQUITY
Common stock, $.10 par value; 100,000,000 shares
authorized; 5,475,350 and 5,391,296 shares
issued and outstanding, respectively 547 539
Additional paid in capital 36,621 35,998
Retained earnings 2,570 207
Cumulative other comprehensive income (203) 595
----------------------
Total shareholders' equity 39,535 37,339
----------------------
Total liabilities and shareholders' equity $ 54,936 $ 54,671
======================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except
per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
Sep 30, Sep 30,
--------------------- --------------------
2000 1999 2000 1999
--------------------- --------------------
<S> <C> <S> <C> <C>
$ 13,260 $ 20,511 Revenues $ 40,177 $ 55,337
6,193 10,666 Cost of sales 18,349 29,401
--------------------- --------------------
7,067 9,845 Gross profit 21,828 25,936
2,694 2,590 Research and development 7,764 7,892
2,612 2,850 Sales and marketing 8,063 7,814
1,051 1,673 General and administrative 3,258 4,278
--------------------- --------------------
6,357 7,113 Total operating expenses 19,085 19,984
--------------------- --------------------
710 2,732 Operating income 2,743 5,952
--------------------- --------------------
287 114 Interest income 755 309
(155) (235) Interest expense (422) (604)
(167) (224) Other, net 2 (674)
--------------------- --------------------
Income from continuing
675 2,387 operations before income taxes 3,078 4,983
302 997 Provision for income taxes 1,286 1,894
--------------------- --------------------
Income from continuing
373 1,390 operations 1,792 3,089
--------------------- --------------------
Discontinued Operations
Gain on disposal of VOIP
- 140 business, net of tax 571 326
Operating losses from VOIP
- (252) business, net of tax - (1,193)
--------------------- --------------------
$ 373 $ 1,278 Net income $ 2,363 $ 2,222
===================== ====================
Income from continuing
operations per share
$ 0.06 $ 0.24 Basic EPS $ 0.31 $ 0.56
--------------------- --------------------
$ 0.06 $ 0.22 Diluted EPS $ 0.28 $ 0.52
--------------------- --------------------
Net income per share
$ 0.06 $ 0.22 Basic EPS $ 0.41 $ 0.40
--------------------- --------------------
$ 0.06 $ 0.20 Diluted EPS $ 0.38 $ 0.37
--------------------- --------------------
5,805 5,709 Weighted average common shares 5,817 5,522
--------------------- --------------------
Weighted average common and
6,278 6,288 dilutive shares 6,292 5,984
--------------------- --------------------
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) Nine Months ended Sep. 30,
--------------------------
2000 1999
----------------------
<S> <C> <C>
Cash flow from operating activities:
Income from continuing operations $ 1,792 $ 3,089
Gain on disposal of VOIP business 571 326
Operating loss from VOIP business - (1,193)
Adjustment to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 1,941 2,940
Deferred income tax benefit (301) -
Change in assets and liabilities:
Trade accounts receivable 3,715 (740)
Inventories (1,608) (1,500)
Prepaid expenses and other current assets 754 (56)
Accounts payable and accrued liabilities 1,169 70
Accrued compensation (781) 366
Income taxes payable 98 (183)
----------------------
Net adjustments 4,987 897
----------------------
Net cash provided by operating activities 7,350 3,119
Cash flows from investing activities:
Additions to property, equipment, leasehold
improvements and capitalized software (1,015) (1,748)
Decrease in other assets 814 253
Cash received in sale of VOIP - 600
Increase in marketable securities (1,960) (401)
----------------------
Net cash used by investing activities (2,161) (1,296)
Cash flows from financing activities:
Payments on debt (1,655) (1,693)
Change in comprehensive income (798) (104)
Purchase of redeemable common stock (762) (763)
Proceeds from the exercise of stock options 631 3,258
----------------------
Net cash (used) provided by financing activities (2,584) 698
----------------------
Net increase in cash and cash equivalents 2,605 2,521
Cash and cash equivalents at beginning of period 10,988 4,531
----------------------
Cash and cash equivalents at end of period $ 13,593 $ 7,052
======================
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 1,539 $ 16
Interest paid $ 468 $ 531
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
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.
The Company has completed the sale of its Voice over Internet Protocol
("VOIP") businesses; accordingly, the Company's Consolidated financial
statements and notes included herein, for all periods presented reflect the
VOIP business as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30. See further discussion of sale in Footnote
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 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, 1999.
2. NET INCOME PER COMMON AND COMMON DILUTIVE SHARE
<TABLE>
The following table shows the calculations of the Company's weighted average
common and dilutive equivalent shares outstanding (in thousands):
Three months ended Nine months ended
Sep. 30, Sep. 30,
------------------ ----------------
2000 1999 2000 1999
--------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 5,805 5,709 5,817 5,522
Dilutive impact of stock options 473 579 475 462
--------------------------------------
Total weighted average common and
common equivalent shares outstanding 6,278 6,288 6,292 5,984
--------------------------------------
Anti-dilutive weighted shares
excluded from shares outstanding 378 - 289 48
</TABLE>
<PAGE>
3. CREDIT FACILITY
The Company maintains a credit facility with BankOne Texas NA that 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, 2002. Marketable securities, accounts
receivable and equipment collateralize the credit facility. 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 September 30, 2000, the Company had
borrowings of $5,711,000 and availability under the revolving credit
facility was $1,500,000.
4. COMPREHENSIVE INCOME
<TABLE>
The following table shows the Company's comprehensive income (in thousands):
Three months ended Nine months ended
Sep. 30, Sep. 30,
------------------ ----------------
2000 1999 2000 1999
--------------------------------------
<S> <C> <C> <C> <C>
Net income $ 373 $ 1,278 $ 2,363 $ 2,222
Other comprehensive income
Unrealized holding gains (losses) 128 12 (581) (65)
arising during period, net of tax
Foreign currency translation
adjustment (135) 42 (217) (39)
--------------------------------------
Comprehensive income $ 366 $ 1,332 $ 1,565 $ 2,118
======================================
</TABLE>
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
its 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 September 30, 2000, 334,669
shares have been repurchased for $2,091,681 and retired.
<PAGE>
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 January 2000, the remaining $830,000 due for the
technology license fee was collected and recorded as a gain on disposal of
discontinued operations. In addition, the Company sold the remainder of its
20% interest in Quescom for $400,000, resulting in a gain of $91,000.
In September 1999, the Company sold the remainder of its VOIP business,
Zirca Corporation ("Zirca") along with the technologies developed by Zirca
for $300,000 cash and stock valued at $517,680 to UniView Technologies,
resulting in a gain of $140,000, net of $86,000 tax. The UniView securities
received as part of the agreement are included on the Balance Sheet in
Marketable Securities, and accounted for as available-for-sale securities.
During the first quarter of 2000, the Company completed the sale of its VOIP
business; accordingly the Company's consolidated financial statements and
notes included herein, for all periods presented reflect the VOIP business
as a discontinued operation in accordance with Accounting Principles Board
Opinion No. 30. The following are the results of operations for the
discontinued operations for the periods presented: (in thousands)
<TABLE>
Three months ended Nine months ended
Sep. 30, Sep. 30,
------------------ ----------------
2000 1999 2000 1999
--------------------------------------
<S> <C> <C> <C> <C>
Gain (loss) from Discontinued
operations before tax - $ (406) $ 921 $ (1,924)
Income tax provision (benefit) - (154) 350 (731)
--------------------------------------
Net gain (loss) from discontinued
operations - $ (252) $ 571 $ (1,193)
======================================
</TABLE>
<PAGE>
7. SEGMENT DATA
<TABLE>
Revenue related to North America and other foreign countries for the three
month and nine month period ended September 30, 2000 and 1999 are as
follows. (in thousands)
Three months ended Sep. 30: Nine months ended Sep. 30:
Revenue 2000 1999 2000 1999
-------------------------------------------------
<S> <C> <C> <C> <C>
North America $ 11,005 $ 17,990 $ 33,552 $ 45,211
Europe 1,253 1,426 4,612 8,551
Pac Rim 1,002 1,095 2,013 1,575
-------------------------------------------------
Total $ 13,260 $ 20,511 $ 40,177 $ 55,337
=================================================
</TABLE>
Long lived assets related to North America and other foreign countries as of
September 30, 2000 and December 31, 1999 are as follows. (in thousands)
Long lived assets Sep. 30, 2000 Dec. 31, 1999
-----------------------
North America $ 2,383 $ 2,658
Europe 202 223
Pacific Rim - -
-----------------------
Total $ 2,585 $ 2,881
=======================
8. SHAREHOLDERS' EQUITY
At the annual meeting of Shareholders on May 3, 2000, the Shareholders of
the Company ratified and approved an amendment to the Company's Articles of
Incorporation to change the par value of the Company's Common Stock from no
par value to a par value of $.10 per share. As such, the financial
statements have been changed to reflect this amendment for all periods
presented.
9. RECENTLY ISSUED ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board, issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives
be recognized at fair value in the balance sheet, and the corresponding
gains or losses be reported either in the statement of operations or as a
components of comprehensive income, depending on the type of hedge
relationship that exists. SFAS 133 as amended by SFAS 137 will be effective
for fiscal years beginning after June 15, 2000. The Company does not expect
SFAS 133 to have a material effect on our financial position or results of
operations.
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
The Company will adopt SAB 101 as required in the fourth quarter of fiscal
2000. The Company believes that SAB 101 will not have a significant effect
on its consolidated financial position or results of operations
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the first quarter 2000, the Company completed the sale of its VOIP
business; accordingly the Company's consolidated financial statements and
notes included herein, for all periods presented reflect the VOIP business
as a discontinued operation in accordance with Accounting Principles Board
Opinion No. 30.
Revenue from product sales is recorded when the earnings process has been
completed, as evidenced by a delivery, a fixed and determinable price and
when collectibility is reasonably assured.
Revenues for the three months ended September 30, 2000 ("third quarter
2000") were $13,260,000. Revenues for the same period in 1999 ("comparative
period") were $20,511,000. While the Company's Storage product revenues
have declined in the third quarter of 2000 as compared to the comparative
period, the Networking product revenues and Broadband Telecommunication
controller revenues have increased. The decrease in revenue is primarily
attributable to the effects of the transitional period where the Company
is refocusing its efforts on its new Fibre Channel and Broadband
Telecommunication controller products. In addition, the Company developed
a strategy to end-of-life many of its legacy products, which began in the
second quarter 2000. Further more, 44% of the revenues for the comparable
period were from Hewlett Packard's purchase of a Fiber Channel card, that
the Company announced in December 1999 would be going away by the end of
1999.
Networking product revenues, consisting of FDDI, Ethernet, ATM, Fast
Ethernet and WAN, represented 56% of total revenues for the third quarter
2000, as compared to 31% for the comparative period. FDDI product revenues
increased 119%, Ethernet product revenues decreased 100%, ATM product
revenues decreased 15%, Fast Ethernet product revenues declined 44%, and WAN
product revenues decreased 37% as compared to the comparative period. FDDI,
Ethernet, ATM, Fast Ethernet and WAN product revenues represented 39%, 0%,
6%, 9% and 2% of total Networking revenues, respectively for the third
quarter 2000.
Mass storage product revenues, consisting of SCSI and Fibre Channel adapter
cards, represented 27% of total revenues for the third quarter 2000, as
compared to 62% for the comparative period. SCSI product revenues increased
147% while Fibre Channel product revenues decreased 79% over the comparative
period.
Broadband telecommunication controller revenues represented 14% of total
revenues for the third quarter 2000, as compared to 6% for the comparative
period. Broadband telecommunication controller revenues grew 58% from the
comparative period.
<PAGE>
Revenues for the nine-month period ended September 30, 2000 were $40,177,000
as compared to $55,337,000 for the nine-month period ended September 30,
1999. Revenues from Networking LAN, Mass storage, Networking Broadband
Telecommunication controller and Networking WAN were 36%, 40%, 18%, and 3%
of total revenues respectively, for the nine-month period ended September
30, 2000.
The Company will continue to focus on revenues from Fibre Channel adapter
and Broadband Telecommunication controller products, which are expected to
offset revenue declines in older technologies such as FDDI and Ethernet.
One customer accounted for 11% and 56% of the Company's revenue in the third
quarter of 2000 and 1999, respectively.
The gross margin percentage for the third quarter 2000 was 53% and 48% for
the comparative period. The gross margin percentage for the nine-month
period ended September 30, 2000 and 1999 was 54% and 47% respectively. The
increase in gross margin is primarily due to a continued focus on product
cost improvements, selling a higher percentage of products with a greater
gross margin than the comparative period, and a reduction in product sales
to certain OEM's at a lower gross margin related to volume discounts. Since
the Company is in a migration of older products to new Fibre Channel and
Broadband Telecommunication controller products, the gross margin is
expected to be between 48% to 50% in subsequent quarters, as these new
products are expected to be priced competitively.
Operating expenses for the third quarter 2000 were $6,357,000 as compared to
$7,113,000 for the comparative period. Operating expenses for the nine-month
period ended September 30, 2000 and 1999 were $19,085,000 and $19,984,000
respectively. Operating expenses have decreased slightly compared to a year
ago, with an increase in sales and marketing activities, offset by decreases
in general and administrative expenses. Operating expenses are expected to
remain consistent as a percentage of revenues.
Interest income increased during the third quarter 2000 as compared to the
comparative period, attributable to an increase in interest income earned on
larger cash balances deposited in interest bearing accounts.
Interest expense decreased during the third quarter 2000 as compared to the
comparative period, attributable to a continued reduction of interest
bearing debt.
Other income increased $676,000 for the nine-month period ending September
30, 2000, primarily as a result of a hedging transaction on certain
marketable securities received in the sale of the Company's VOIP business.
As of June 30, 2000 these hedging transactions resulted in a gain of
approximately $613,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities aggregated
$20,841,000 at September 30, 2000, and $16,276,000 at December 31, 1999.
The Company's increased cash position is primarily due to the collection of
cash related to the disposition of Quescom (see note 6), and the collection
of accounts receivable, offset by the purchase of inventory, fixed assets,
payment on debt, tax payments and purchase of common stock. In the next
twelve months, scheduled debt payments on the Company's credit facility are
approximately $2,192,000.
<PAGE>
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
its 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 September 30, 2000, 334,669
shares have been repurchased for $2,091,681 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.
PART II
OTHER INFORMATION
Item 6. Reports on form 8-K
None
Exhibits
Exhibit 27 Financial Data Schedule
<PAGE>
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 13, 2000
/s/ Steven P. Kovac
------------------------------
Steven P. Kovac
Chief Financial Officer,
Vice President of Finance and
Treasurer
(Principal Financial and
Accounting Officer)
