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, 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 August 1, 2000
---------------------------- -----------------------------
Common Stock, $.10 par value 5,837,774
<PAGE>
INTERPHASE CORPORATION
INDEX
Part I -Financial Information
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six
months ended June 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 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Reports on Form 8-K and Exhibits 14
Signature 14
<PAGE>
<TABLE>
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except number of share data)
<CAPTION>
(unaudited)
June 30, Dec. 31,
ASSETS 2000 1999
----------------------
<S> <C> <C>
Cash and cash equivalents $ 13,223 $ 10,988
Marketable securities 6,415 5,288
Trade accounts receivable, less allowances
for uncollectible accounts of $283 and
$260, respectively 11,324 14,005
Inventories, net 11,163 11,678
Prepaid expenses and other current assets 728 1,383
Deferred income taxes, net 1,141 774
----------------------
Total current assets 43,994 44,116
----------------------
Machinery and equipment 9,743 9,149
Leasehold improvements 2,952 2,907
Furniture and fixtures 502 475
----------------------
13,197 12,531
Less-accumulated depreciation and amortization (10,940) (10,334)
----------------------
Total property and equipment, net 2,257 2,197
Capitalized software, net 622 684
Deferred income taxes, net 1,458 1,458
Acquired developed technology, net 1,980 2,280
Goodwill, net 2,710 2,830
Other assets 868 1,106
----------------------
Total assets $ 53,889 $ 54,671
======================
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,271 $ 2,129
Accrued liabilities 2,446 1,586
Accrued compensation 1,554 2,131
Income taxes payable 560 754
Current portion of debt 2,192 2,202
----------------------
Total current liabilities 8,023 8,802
Other liabilities 364 570
Long term debt 4,068 5,164
----------------------
Total liabilities 12,455 14,536
Commitments and contingencies
Common stock redeemable; 365,998 and 447,332
shares respectively 2,288 2,796
SHAREHOLDERS' EQUITY
Common stock, $.10 par value; 100,000,000 shares
authorized; 5,471,776 and 5,391,296 shares
issued and outstanding, respectively 547 539
Additional paid in capital 36,598 35,998
Retained earnings 2,197 207
Cumulative other comprehensive income (196) 595
----------------------
Total shareholders' equity 39,146 37,339
----------------------
Total liabilities and shareholders' equity $ 53,889 $ 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)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2000 1999 2000 1999
--------------------- --------------------
<S> <C> <S> <C> <C>
$ 13,332 $ 17,657 Revenues $ 26,917 $ 34,826
6,067 9,385 Cost of sales 12,156 18,735
--------------------- --------------------
7,265 8,272 Gross profit 14,761 16,091
2,516 2,747 Research and development 5,070 5,303
3,019 2,715 Sales and marketing 5,451 4,962
1,108 1,405 General and administrative 2,207 2,605
--------------------- --------------------
6,643 6,867 Total operating expenses 12,728 12,870
622 1,405 Operating income 2,033 3,221
--------------------- --------------------
259 63 Interest income 468 195
(135) (127) Interest expense (267) (369)
401 (227) Other, net 169 (451)
--------------------- --------------------
1,147 1,114 Income from continuing 2,403 2,596
operations before
income taxes
451 352 Provision for income taxes 984 898
--------------------- --------------------
696 762 Income from continuing 1,419 1,698
operations
--------------------- --------------------
Discontinued Operations
Gain on disposal of VOIP
- - business, net of tax 571 -
Operating losses from VOIP
- (242) business, net of tax - (754)
--------------------- --------------------
$ 696 $ 520 Net income $ 1,990 $ 944
===================== ====================
<PAGE>
Net income from continuing
operations per share
$ 0.12 $ 0.14 Basic EPS $ 0.24 $ 0.31
--------------------- --------------------
$ 0.11 $ 0.13 Diluted EPS $ 0.22 $ 0.30
--------------------- --------------------
Net income per share
$ 0.12 $ 0.10 Basic EPS $ 0.34 $ 0.17
--------------------- --------------------
$ 0.11 $ 0.09 Diluted EPS $ 0.31 $ 0.17
--------------------- --------------------
5,801 5,422 Weighted average common shares 5,823 5,418
--------------------- --------------------
Weighted average common
6,214 5,801 and dilutive shares 6,324 5,698
--------------------- --------------------
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) Six Months ended June 30,
-------------------------
2000 1999
----------------------
<S> <C> <C>
Cash flow from operating activities:
Income from continuing operations $ 1,419 $ 1,698
Gain on disposal of VOIP business
571 -
Operating loss from VOIP business
- (754)
Adjustment to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 1,270 1,978
Deferred income tax benefit (367) -
Change in assets and liabilities:
Trade accounts receivable 2,681 397
Inventories 515 (140)
Prepaid expenses and other current assets 655 (587)
Accounts payable and accrued liabilities (204) (543)
Accrued compensation (577) (446)
Income taxes payable (194) (1,071)
----------------------
Net adjustments 3,779 (412)
----------------------
Net cash provided by operating activities 5,769 532
Cash flows from investing activities:
Additions to property, equipment, leasehold
improvements and capitalized software (848) (1,352)
Decrease (increase) in other assets 238 (186)
Increase in marketable securities (1,127) (19)
----------------------
Net cash (used) by investing activities (1,737) (1,557)
Cash flows from financing activities:
Payments on debt (1,106) (1,136)
Change in comprehensive income (791) (158)
Purchase of redeemable common stock (508) (509)
Proceeds from the exercise of stock options 608 1,145
----------------------
Net cash (used) by financing activities (1,797) (658)
----------------------
Net increase (decrease) in cash and cash equivalents 2,235 (1,683)
Cash and cash equivalents at beginning of period 10,988 4,531
----------------------
Cash and cash equivalents at end of period $ 13,223 $ 2,848
======================
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 1,513 $ 1,509
Interest paid $ 317 $ 364
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 Six months ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
--------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 5,801 5,422 5,823 5,418
Dilutive impact of stock options 413 379 501 280
--------------------------------------
Total weighted average common and
common equivalent shares outstanding 6,214 5,801 6,324 5,698
--------------------------------------
Anti-dilutive weighted shares
excluded from shares outstanding 319 202 271 246
</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 June 30, 2000, the Company had borrowings of
$6,260,000 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 Six months ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
--------------------------------------
<S> <C> <C> <C> <C>
Net income $ 696 $ 520 $ 1,990 $ 944
Other comprehensive income
Unrealized holding gains (losses)
arising during period, net of tax (732) (77) (709) (77)
Foreign currency translation
adjustment (12) (34) (82) (81)
--------------------------------------
Comprehensive income (loss) ($ 48) $ 409 $ 1,199 $ 786
======================================
</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 June 30, 2000, 294,002
shares have been repurchased for $1,837,512 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.
As of March 31, 2000, the Company has 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 Six months ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
--------------------------------------
<S> <C> <C> <C> <C>
Gain (loss) from Discontinued
operations before tax - $ (390) $ 921 $ (1,216)
Income tax provision (benefit) - (148) 350 (462)
--------------------------------------
Net gain (loss) from discontinued
operations - $ (242) $ 571 $ (754)
======================================
</TABLE>
7. SEGMENT DATA
<TABLE>
Revenue related to North America and other foreign countries for the three
month and six month period ended June 30, 2000 and 1999 are as follows. (in
thousands)
Three months ended June 30: Six months ended June 30:
Revenue 2000 1999 2000 1999
-------------------------------------------------
<S> <C> <C> <C> <C>
North America $ 11,293 $ 14,329 $ 22,547 $ 27,222
Europe 1,501 3,006 3,359 7,125
Pac Rim 538 322 1,011 479
-------------------------------------------------
Total $ 13,332 $17,657 $ 26,917 $ 34,826
=================================================
</TABLE>
<PAGE>
Long lived assets related to North America and other foreign countries as of
June 30, 2000 and December 31, 1999 are as follows. (in thousands)
Long lived assets June 30, 2000 Dec. 31, 1999
-----------------------
North America $ 2,653 $ 2,658
Europe 226 223
Pacific Rim - -
-----------------------
Total $ 2,879 $ 2,881
=======================
8. SHAREHOLDER' 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As of March 31, 2000, the Company has 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.
Revenues for the three months ended June 30, 2000 ("second quarter 2000")
were $13,332,000. Revenues for the same period in 1999 ("comparative
period") were $17,657,000. While the Company's legacy Networking LAN and
Fibre Channel revenues have declined in the second quarter of 2000 as
compared to the comparative period, our WAN, SCSI and Networking Broadband
Telecommunications 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
Networking Broadband Telecommunication controller. In addition, the Company
has developed a strategy to end-of-life many of its legacy products
beginning the second quarter 2000.
Networking LAN product revenues, consisting of FDDI, Ethernet, ATM and Fast
Ethernet, represented 30% of total revenues for the second quarter 2000, as
compared to 42% for the comparative period. FDDI product revenues declined
19%, Ethernet product revenues decreased 100%, ATM product revenues
increased 17% and Fast Ethernet product revenues declined 81% as compared to
the comparative period. FDDI, Ethernet, ATM and Fast Ethernet product
revenues represented 18%, 0%, 7% and 5% of total Networking LAN revenues,
respectively for the second quarter 2000.
<PAGE>
Mass storage product revenues, consisting of SCSI and Fibre Channel adapter
cards, represented 38% of total revenues for the second quarter 2000, as
compared to 43% for the comparative period. SCSI product revenues increased
218% while Fibre Channel product revenues decreased 58% over the comparative
period.
Broadband telecommunication controller revenues represented 24% of total
revenues for the second quarter 2000, as compared to 12% for the comparative
period. Broadband telecommunication controller revenues grew 50% from the
comparative period.
WAN product revenues comprised 4% of revenues for the second quarter 2000,
as compared to 0% for the comparative period. WAN product revenues
increased 832% as compared to the comparative period.
Revenues for the six-month period ended June 30, 2000 were $26,917,000 as
compared to $34,826,000 for the six-month period ended June 30, 1999.
Revenues from Networking LAN, Mass storage, Embedded and Networking WAN were
28%, 46%, 20%, and 3% of total revenues respectively, for the six month
period ended June 30, 2000.
The Company will continue to focus on revenues from Fibre Channel adapter
and Broadband Telecommunication controller, which is expected to offset
revenue declines in older technologies such as FDDI and Ethernet.
The Company's current marketing strategy is to increase market penetration
through sales to major OEM customers. Three customers individually
accounted for 10% or more of the Company's second quarter revenue, in the
comparative period, one customer accounted for 52% of the Company's revenue.
The gross margin percentage for the second quarter 2000 was 54% and 47% for
the comparative period. The gross margin percentage for the six-month
period ended June 30, 2000 and 1999 was 55% and 46% 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, as well as 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
products and Broadband Telecommunication controller, 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 second quarter 2000 were $6,643,000 as compared
to $6,867,000 for the comparative period. Operating expenses for the six-
month period ended June 30, 2000 and 1999 were $12,728,000 and $12,870,000
respectively. Operating expenses have been held flat to a year ago, with an
increase in sales and marketing activities, offset by decreases in general
and administrative. Operating expenses are expected to remain consistent
with our revenues.
Other income increased $628,000 during the second quarter 2000 as compared
to the comparative period. During the second quarter 2000, the Company was
engaged in hedging transactions on certain marketable securities received
in the sale of its VOIP business. As of June 30, 2000 these hedging
transactions resulted in a gain of approximately $613,000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities aggregated
$19,638,000 at June 30, 2000, and $16,276,000 at December 31, 1999. The
Company's increased cash position is primarily due to cash generated from
operations, the collection of cash related to the disposition of Quescom
(see note 6), a reduction in inventory and the collection of accounts
receivable, offset by the purchase of marketable securities, 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.
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 June 30, 2000, 294,002
shares have been repurchased for $1,837,512 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 3, 2000, the Annual meeting of Shareholders of Interphase Corporation
was held. The following matters were voted upon and approved at the
meeting:
<TABLE>
An election of directors of the Company to serve until the next annual
meeting for the Company was held. The following six individuals were
elected as Directors of the Company;
Nominee Votes Cast For Votes Withheld
---------------------- -------------- --------------
<S> <C> <C>
James F. Halpin 4,498,219 115,672
Paul N. Hug 4,499,069 114,822
Gregory B. Kalush 4,499,019 114,872
David H. Segrest 4,498,869 115,022
S. Thomas Thawley 4,498,769 115,122
William Voss 4,498,569 115,322
</TABLE>
<PAGE>
An amendment to the Company's Amended and Restated Stock Option Plan to
increase the aggregate number of shares issuable upon exercise of options
thereunder from 2,350,000 to 3,500,000 was ratified and approved;
For Against Abstain
--------- ------- --------
1,611,765 262,290 18,528
An amendment to the Company's Amended and Restated Director Stock Option
plan to increase the aggregate number of shares issuable upon exercise of
options thereunder from 500,000 to 750,000, and to provide that each annual
grant is increased from 5,000 to 10,000 and to provide that the new director
grants be increased from 10,000 to 20,000, and to provide that the option
term is increased from five to ten years was ratified and approved;
For Against Abstain
--------- ------- --------
1,594,533 276,150 21,880
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 was ratified and approved;
For Against Abstain
--------- ------- --------
4,573,052 25,435 15,404
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: August 11, 2000
/s/ Steven P. Kovac
-----------------------------
Steven P. Kovac
Chief Financial Officer,
Vice President of Finance and
Treasurer
(Principal Financial and
Accounting Officer)
