SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 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 May 3, 2000
---------------------------- --------------------------
Common Stock, $.10 par value 5,817,374
<PAGE>
INTERPHASE CORPORATION
INDEX
Part I -Financial Information
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 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 12
Signature 12
<PAGE>
<TABLE>
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
Mar. 31, Dec. 31,
ASSETS 2000 1999
-----------------------
<S> <C> <C>
Cash and cash equivalents $ 13,951 $ 10,988
Marketable securities 6,852 5,288
Trade accounts receivable, less allowances
for uncollectible accounts of $262 and
$164, respectively 10,078 14,005
Inventories, net 10,813 11,678
Prepaid expenses and other current assets 885 1,383
Deferred income taxes, net 732 774
-----------------------
Total current assets 43,311 44,116
-----------------------
Machinery and equipment 9,562 9,149
Leasehold improvements 2,921 2,907
Furniture and fixtures 478 475
-----------------------
12,961 12,531
Less-accumulated depreciation and amortization (10,618) (10,334)
-----------------------
Total property and equipment, net 2,343 2,197
Capitalized software, net 636 684
Deferred income taxes, net 1,458 1,458
Acquired developed technology, net 2,130 2,280
Goodwill, net 2,770 2,830
Other assets 850 1,106
-----------------------
Total assets $ 53,498 $ 54,671
=======================
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,219 $ 2,129
Accrued liabilities 1,102 1,586
Accrued compensation 960 2,131
Income taxes payable 1,453 754
Current portion of debt 2,199 2,202
-----------------------
Total current liabilities 6,933 8,802
Other liabilities 427 570
Long term debt 4,615 5,164
-----------------------
Total liabilities 11,975 14,536
Commitments and contingencies
Common stock redeemable 2,542 2,796
SHAREHOLDERS' EQUITY
Common stock, $.10 par value 5,852 5,457
Additional paid in capital 31,080 31,080
Retained earnings 1,501 207
Cumulative other comprehensive income 548 595
-----------------------
Total shareholders' equity 38,981 37,339
-----------------------
Total liabilities and shareholders' equity $ 53,498 $ 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 March 31,
------------------------
2000 1999
------------------------
<S> <C> <C>
Revenues $ 13,585 $ 17,169
Cost of sales 6,089 9,350
------------------------
Gross profit 7,496 7,819
Research and development 2,554 2,556
Sales and marketing 2,432 2,247
General and administrative 1,099 1,200
------------------------
Total operating expenses 6,085 6,003
------------------------
Operating income 1,411 1,816
------------------------
Interest income 209 132
Interest expense (132) (242)
Other, net (232) (224)
------------------------
Income from continuing operations before
income taxes 1,256 1,482
Provision for income taxes 533 546
------------------------
Income from continuing operations 723 936
------------------------
Discontinued Operations
Gain on disposal of VOIP business, net of tax 571 -
Operating losses from VOIP business, net of tax - (512)
------------------------
Net income $ 1,294 $ 424
========================
Net income from continuing operations per share
Basic EPS $ 0.12 $ 0.17
------------------------
Diluted EPS $ 0.11 $ 0.17
------------------------
Net income per share
Basic EPS $ 0.22 $ 0.08
------------------------
Diluted EPS $ 0.20 $ 0.08
------------------------
Weighted average common shares 5,813 5,438
------------------------
Weighted average common and dilutive shares 6,395 5,596
------------------------
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) Three Months ended March 31,
----------------------
2000 1999
----------------------
<S> <C> <C>
Cash flow from operating activities:
Net income from continuing operations $ 723 $ 936
Gain on disposal of VOIP business 571 -
Operating loss from disposal of VOIP business - (512)
Adjustment to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 637 930
Change in assets and liabilities:
Trade accounts receivable 3,927 (1,553)
Inventories 865 (46)
Prepaid expenses and other current assets 540 (346)
Accounts payable and accrued liabilities (1,394) 590
Other liabilities (143) -
Accrued compensation (1,171) (606)
Income taxes payable 699 (543)
----------------------
Net adjustments 3,960 (1,574)
----------------------
Net cash provided (used) by operating activities 5,254 (1,150)
Cash flows from investing activities:
Additions to property, equipment, leasehold
improvements and capitalized software (525) (956)
Decrease in other assets 256 (78)
(Increase) decrease in marketable securities (1,564) (92)
----------------------
Net cash (used) by investing activities (1,833) (1,126)
Cash flows from financing activities:
Payments on debt (552) (667)
Change in comprehensive income (47) (48)
Purchase of redeemable common stock (254) (254)
Proceeds from the exercise of stock options 395 130
----------------------
Net cash (used) by financing activities (458) (839)
----------------------
Net increase (decrease) in cash and
cash equivalents 2,963 (3,115)
Cash and cash equivalents at beginning of period 10,988 4,531
----------------------
Cash and cash equivalents at end of period $ 13,951 $ 1,416
======================
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 184 $ 774
Interest paid $ 160 $ 186
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 March 31,
2000 1999
---------------
<S> <C> <C>
Weighted average shares outstanding 5,813 5,438
Dilutive impact of stock options 582 158
---------------
Total weighted average common and common
equivalent shares outstanding 6,395 5,596
---------------
Anti-dilutive weighted shares
excluded from shares outstanding 12 706
</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, 2001. 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 March 31, 2000, the Company had borrowings of
$6,808,000 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 March 31,
2000 1999
----------------
<S> <C> <C>
Net income $ 1,294 $ 424
Other comprehensive income
Unrealized holding gains (losses) arising
during period, net of tax 23 -
Foreign currency translation adjustment (70) (48)
----------------
Comprehensive income $ 1,247 $ 376
================
</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 March 31, 2000, 253,335
shares have been repurchased for $1,583,343 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 period presented: (in thousands)
<TABLE>
Three months ended March 31,
2000 1999
---------------
<S> <C> <C>
Gain (loss) from discontinued
operations before tax $ 921 $ (826)
Income tax provision (benefit) 350 (314)
---------------
Net gain (loss) from discontinued operations $ 571 $ (512)
---------------
</TABLE>
<PAGE>
7. SEGMENT DATA
<TABLE>
Revenue related to North America and other foreign countries for the three
month period ended March 31, 2000 and 1999 are as follows. (in thousands)
Three months ended March 31:
Revenue 2000 1999
--------------------
<S> <C> <C>
North America $ 11,254 $ 12,893
Europe 1,858 4,119
Pac Rim 473 157
--------------------
Total $ 13,585 $17,169
====================
Long lived assets related to North America and other foreign countries as of
March 31, 2000 and December 31, 1999 are as follows. (in thousands)
March 31, Dec. 31,
Long lived assets 1999 1999
--------------------
<S> <C> <C>
North America $ 2,777 $ 2,658
Europe 202 223
Pac Rim - -
--------------------
Total $ 2,979 $ 2,881
====================
</TABLE>
8. SHAREHOLDER' EQUITY
At the annual meeting of Shareholders on May 2, 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.
<PAGE>
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 March 31, 2000 ("first quarter 2000")
were $13,585,000. Revenues for the same period in 1999 ("comparative
period") were $17,169,000. While the Company's legacy Networking LAN and
WAN revenues have declined from the first quarter of 2000 to the comparative
period, our Fibre Channel 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.
Networking LAN product revenues, consisting of FDDI, Ethernet, ATM and Fast
Ethernet, represented 26% of total revenues for the first quarter 2000, as
compared to 45% for the comparative period. FDDI product revenues declined
26%, Ethernet product revenues increased 82%, ATM product revenues declined
40% and Fast Ethernet product revenues declined 92% as compared to the
comparative period. FDDI, Ethernet, ATM and Fast Ethernet product revenues
represented 46%, 31%, 13% and 10% of total Networking LAN revenues,
respectively for the first quarter 2000.
Mass storage product revenues, consisting of SCSI and Fibre Channel adapter
cards, represented 53% of total revenues for the first quarter 2000, as
compared to 31% for the comparative period. SCSI product revenues declined
25% while Fibre Channel product revenues increased 43% over the comparative
period.
Broadband telecommunication controller revenues represented 16% of total
revenues for the first quarter 2000, as compared to 3% for the comparative
period. Broadband telecommunication controller revenues grew 276% from as
compared to the comparative period.
WAN product revenues comprised 3% of revenues for the first quarter 2000, as
compared to 18% for the comparative period. WAN product revenues decreased
87% as compared to the comparative period.
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. One of these customers accounted for
approximately 36% of the Company's revenue for the first quarter of 2000 and
52% in the comparative period.
<PAGE>
The gross margin percentage for the first quarter 2000 was 55% and 46% for
the comparative period. 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 revenue 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 first quarter 2000 were $6,085,000 as compared to
$6,003,000 for the comparative period. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities aggregated
$20,803,000 at March 31, 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 fixed assets, payment on debt and
other liabilities, 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 March 31, 2000, 253,335
shares have been repurchased for $1,583,343 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.
<PAGE>
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: May 12, 2000
/s/ Steven P. Kovac
-------------------------
Steven P. Kovac
Chief Financial Officer,
Vice President of Finance
and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,951
<SECURITIES> 6,852
<RECEIVABLES> 10,340
<ALLOWANCES> 262
<INVENTORY> 10,813
<CURRENT-ASSETS> 43,311
<PP&E> 12,961
<DEPRECIATION> 10,618
<TOTAL-ASSETS> 53,498
<CURRENT-LIABILITIES> 6,933
<BONDS> 0
0
0
<COMMON> 36,932
<OTHER-SE> 2,049
<TOTAL-LIABILITY-AND-EQUITY> 53,498
<SALES> 13,585
<TOTAL-REVENUES> 13,585
<CGS> 6,089
<TOTAL-COSTS> 2,432
<OTHER-EXPENSES> 3,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 1,256
<INCOME-TAX> 533
<INCOME-CONTINUING> 723
<DISCONTINUED> 571
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,294
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.20
</TABLE>
