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EXCEL - IDEA: XBRL DOCUMENT - INTERPHASE CORP | Financial_Report.xls |
EX-31.A - EX-31.A - INTERPHASE CORP | d83423exv31wa.htm |
EX-31.B - EX-31.B - INTERPHASE CORP | d83423exv31wb.htm |
EX-32.B - EX-32.B - INTERPHASE CORP | d83423exv32wb.htm |
EX-32.A - EX-32.A - INTERPHASE CORP | d83423exv32wa.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-35267
INTERPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Texas | 75-1549797 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Parkway Centre I
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
(Address of Principal Executive Offices and Zip Code)
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
(Address of Principal Executive Offices and Zip Code)
(214) 654-5000
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such 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 þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
As of
August 3, 2011, shares of common stock outstanding totaled
6,895,085.
INTERPHASE CORPORATION
Index to Form 10-Q
Quarterly Period Ended June 30, 2011
Quarterly Period Ended June 30, 2011
Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 8,252 | $ | 4,772 | ||||
Marketable securities |
2,987 | 6,005 | ||||||
Trade accounts receivable, less allowances
of $68 and $70, respectively |
5,045 | 4,633 | ||||||
Inventories |
1,524 | 1,645 | ||||||
Prepaid expenses and other current assets |
483 | 623 | ||||||
Total current assets |
18,291 | 17,678 | ||||||
Machinery and equipment |
6,285 | 6,840 | ||||||
Leasehold improvements |
327 | 327 | ||||||
Furniture and fixtures |
400 | 398 | ||||||
7,012 | 7,565 | |||||||
Less-accumulated depreciation and amortization |
(6,641 | ) | (7,151 | ) | ||||
Total property and equipment, net |
371 | 414 | ||||||
Capitalized software, net |
369 | 485 | ||||||
Other assets |
652 | 737 | ||||||
Total assets |
$ | 19,683 | $ | 19,314 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Liabilities |
||||||||
Accounts payable |
$ | 1,634 | $ | 1,388 | ||||
Deferred revenue |
110 | 39 | ||||||
Accrued liabilities |
1,390 | 2,486 | ||||||
Accrued compensation |
678 | 648 | ||||||
Total current liabilities |
3,812 | 4,561 | ||||||
Deferred lease obligations |
212 | 243 | ||||||
Long-term debt |
3,500 | 3,500 | ||||||
Total liabilities |
7,524 | 8,304 | ||||||
Commitments and Contingencies |
||||||||
Shareholders Equity |
||||||||
Common stock, $0.10 par value; 100,000,000
shares authorized; 6,892,835 and
6,815,600 shares issued and outstanding,
respectively |
689 | 682 | ||||||
Additional paid in capital |
44,008 | 43,355 | ||||||
Retained deficit |
(31,655 | ) | (32,203 | ) | ||||
Cumulative other comprehensive loss |
(883 | ) | (824 | ) | ||||
Total shareholders equity |
12,159 | 11,010 | ||||||
Total liabilities and shareholders equity |
$ | 19,683 | $ | 19,314 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 6,177 | $ | 3,858 | $ | 12,865 | $ | 7,617 | ||||||||
Cost of sales |
2,930 | 2,077 | 6,366 | 3,977 | ||||||||||||
Gross margin |
3,247 | 1,781 | 6,499 | 3,640 | ||||||||||||
Research and development |
1,016 | 1,818 | 2,048 | 3,911 | ||||||||||||
Sales and marketing |
872 | 1,271 | 1,876 | 2,531 | ||||||||||||
General and administrative |
1,029 | 954 | 2,014 | 1,958 | ||||||||||||
Total operating expenses |
2,917 | 4,043 | 5,938 | 8,400 | ||||||||||||
Income (loss) from operations |
330 | (2,262 | ) | 561 | (4,760 | ) | ||||||||||
Interest income, net |
8 | 41 | 11 | 87 | ||||||||||||
Other loss, net |
(6 | ) | (1 | ) | (1 | ) | (79 | ) | ||||||||
Income (loss) before income tax |
332 | (2,222 | ) | 571 | (4,752 | ) | ||||||||||
Income tax expense (benefit) |
15 | (11 | ) | 23 | (178 | ) | ||||||||||
Net income (loss) |
$ | 317 | $ | (2,211 | ) | $ | 548 | $ | (4,574 | ) | ||||||
Net income (loss) per share: |
||||||||||||||||
Basic EPS |
$ | 0.05 | $ | (0.32 | ) | $ | 0.08 | $ | (0.67 | ) | ||||||
Diluted EPS |
$ | 0.04 | $ | (0.32 | ) | $ | 0.08 | $ | (0.67 | ) | ||||||
Weighted average common shares |
6,852 | 6,832 | 6,819 | 6,851 | ||||||||||||
Weighted average common and
dilutive shares |
7,139 | 6,832 | 7,097 | 6,851 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 548 | $ | (4,574 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
||||||||
Provision for uncollectible accounts and returns |
3 | (12 | ) | |||||
Provision for excess and obsolete inventories |
| 100 | ||||||
Depreciation and amortization |
280 | 393 | ||||||
Amortization of stock-based compensation |
191 | 184 | ||||||
Change in assets and liabilities: |
||||||||
Trade accounts receivable |
(415 | ) | 1,518 | |||||
Inventories |
121 | (151 | ) | |||||
Prepaid expenses and other current assets |
146 | (110 | ) | |||||
Other assets |
140 | | ||||||
Accounts payable, deferred revenue and accrued liabilities |
(920 | ) | (719 | ) | ||||
Accrued compensation |
4 | (180 | ) | |||||
Deferred lease obligations |
(31 | ) | (25 | ) | ||||
Net cash provided by (used in) operating activities |
67 | (3,576 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(93 | ) | (36 | ) | ||||
Purchase of capitalized software |
(64 | ) | (25 | ) | ||||
Proceeds from the sale of marketable securities |
4,052 | 3,118 | ||||||
Purchase of marketable securities |
(1,050 | ) | (2,795 | ) | ||||
Net cash provided by investing activities |
2,845 | 262 | ||||||
Cash flows from financing activities: |
||||||||
Borrowings under credit facility |
3,500 | 5,500 | ||||||
Payments on credit facility |
(3,500 | ) | (5,500 | ) | ||||
Proceeds from the exercise of stock options |
469 | | ||||||
Net cash provided by financing activities |
469 | | ||||||
Effect of exchange rate changes on cash and cash equivalents |
99 | (199 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
3,480 | (3,513 | ) | |||||
Cash and cash equivalents at beginning of period |
4,772 | 8,115 | ||||||
Cash and cash equivalents at end of period |
$ | 8,252 | $ | 4,602 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
Interphase Corporation and subsidiaries (Interphase or the Company) delivers solutions for LTE
and WiMAX, interworking gateways, packet processing, network connectivity, and security for key
applications for the communications and enterprise markets. The company also offers a
comprehensive portfolio of desktop virtualization solutions. Founded in 1974, Interphase provides
expert engineering design and electronics manufacturing services, in addition to its
commercial-off-the-shelf (COTS) product portfolio. Interphase is headquartered in Plano, Texas,
with sales offices in the United States and Europe. Clients include Alcatel-Lucent, Emerson
Network Power, Fujitsu Ltd., Genband, Hewlett Packard, ip.access, Nokia Siemens Networks, Samsung,
and Sun Microsystems. See Note 11 for information regarding the Companys revenues related to
North America and foreign regions.
The accompanying condensed consolidated financial statements include the accounts of Interphase
Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated. While the accompanying condensed consolidated 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. All such adjustments are
of a normal, recurring nature. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Operating results for the three and six months ended June
30, 2011 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2011. These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2010.
NOTE 2. STOCK-BASED COMPENSATION
Stock Options: During the six months ended June 30, 2011, the Company issued 215,000 stock options
that vest over a three to four year period and expire ten years from date of grant. The weighted
average exercise price of these stock options is $2.00. During the six months ended June 30, 2010,
the Company issued 23,700 stock options that vest over a four year period and expire ten years from
the date of grant. The weighted average exercise price of these stock options is $2.63.
Compensation expense related to these stock options was approximately $46,000 and $4,000 for the
three months ended June 30, 2011 and 2010, respectively. Compensation expense related to these
stock options was approximately $71,000 and $4,000 for the six months ended June 30, 2011 and 2010,
respectively.
During the six months ended June 30, 2011, the Company issued 10,000 stock options with
performance-based vesting criteria through December 31, 2014 and which expire ten years from the
date of grant. The weighted average exercise price of these stock options is $6.20. Of the stock
options outstanding at June 30, 2011, 178,500 are subject to the achievement of certain performance
conditions. The performance conditions related to 16,750 of these stock options were deemed
probable during the six months ended June 30, 2011. Compensation expense related to
performance-based stock options was approximately $4,000 and $15,000 for the three and six months
ended June 30, 2011, respectively. The Company did not recognize any compensation expense related
to performance-based stock options during the three or six months ended June 30, 2010. The
performance conditions related to the remaining options were not deemed probable at June 30, 2011,
and therefore no compensation expense related to these options has been recorded.
The weighted-average remaining contractual life of stock options outstanding and exercisable at
June 30, 2011 and 2010 is 1.65 years and 2.67 years, respectively.
The following table summarizes the combined stock option activity under all of the plans:
5
Table of Contents
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Number of | Weighted Average | ||||||||
Options | Option Price | ||||||||
Balance, December 31, 2010 |
1,470,222 | $ | 5.00 | ||||||
Granted |
225,000 | 2.19 | |||||||
Exercised |
(93,000 | ) | 5.04 | ||||||
Canceled |
(364,033 | ) | 6.03 | ||||||
Balance, June 30, 2011 |
1,238,189 | $ | 4.18 | ||||||
Option Valuation: The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with weighted-average assumptions based on the grant date.
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted average risk free interest rates |
3.39 | % | 3.87 | % | 3.60 | % | 3.87 | % | ||||||||
Weighted average life (in years) |
10 | 10 | 10 | 10 | ||||||||||||
Volatility |
65.47 | % | 66.09 | % | 63.79 | % | 66.11 | % | ||||||||
Expected dividend yield |
| | | | ||||||||||||
Weighted average grant-date fair value
per share of options granted |
$ | 4.33 | $ | 1.99 | $ | 1.63 | $ | 1.99 | ||||||||
Restricted Stock: The Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for
grants of bonus stock awards (restricted stock) to its directors and certain employees at no cost
to the recipient. Holders of restricted stock are entitled to cash dividends, if any, and to vote
their respective shares. Restrictions limit the sale or transfer of these shares during a
predefined vesting period, currently ranging from one to four years, and in some cases vesting is
subject to the achievement of certain performance conditions. During the three months ended June
30, 2011, the Company issued 72,000 shares of restricted stock. There were no shares of restricted
stock issued during 2010. Upon issuance of restricted stock under the plan, unearned compensation
equivalent to the market value at the date of grant is recorded as a reduction to shareholders
equity and subsequently amortized to expense over the respective restriction periods. Compensation
expense related to restricted stock was approximately $50,000 and $87,000 for the three months
ended June 30, 2011 and 2010, respectively. Compensation expense related to restricted stock was
approximately $106,000 and $180,000 for the six months ended June 30, 2011 and 2010, respectively.
As of June 30, 2011, there is approximately $618,000 of total unamortized compensation cost related
to unvested restricted stock remaining to be recognized. The expense is expected to be recognized
over a weighted-average period of 3.4 years. As of December 31, 2010, there was approximately
$566,000 of total unamortized compensation cost related to unvested restricted stock which was
expected to be recognized over a weighted-average period of 3.2 years. The following summarizes
the restricted stock activity for the six months ended June 30, 2011:
Restricted Stock | Weighted Average | |||||||
Shares | Grant Date Value | |||||||
Nonvested restricted stock at December 31, 2010 |
318,555 | $ | 2.52 | |||||
Granted |
72,000 | 4.41 | ||||||
Vested |
(55,107 | ) | 4.62 | |||||
Cancelled/Forefeited |
(87,765 | ) | 1.87 | |||||
Nonvested restricted stock at June 30, 2011 |
247,683 | $ | 2.84 | |||||
6
Table of Contents
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. MARKETABLE SECURITIES
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures,
defines fair value, establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company follows
ASC 820 in its valuation of its marketable securities. ASC 820 defines fair value as the price
that would be received upon the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC 820 classifies the levels used
to measure fair value into the following hierarchy:
1. | Level 1 Valuations based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to obtain at the measurement date. This level provides the most reliable evidence of fair value. | ||
2. | Level 2 Valuations based on one or more quoted prices in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs that are observable other than quoted prices for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. | ||
3. | Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The Companys investments in marketable securities primarily consist of investments in debt
securities, which are classified as available for sale and presented as current assets on the
balance sheet. Earnings from debt securities are calculated on a yield to maturity basis and
recorded in the results of operations. Unrealized gains or losses for the periods presented were
included in other comprehensive loss. Realized gains and losses are computed based on the specific
identification method and were not material for the periods presented. Marketable securities are
used to secure the Companys credit facility.
Financial assets, measured at fair value, by level within the fair value hierarchy were as follows
(in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||
Unrealized | Estimated | Estimated | ||||||||||||||||||||||||||
Fair Value | Gain | Fair | Unrealized | Fair | ||||||||||||||||||||||||
Hierarchy | Cost | (Loss) | Value | Cost | Gain | Value | ||||||||||||||||||||||
Agencies |
Level 2 | $ | | $ | | $ | | $ | 304 | $ | 1 | $ | 305 | |||||||||||||||
Asset Backed |
Level 2 | 1,022 | 4 | 1,026 | 1,675 | 8 | 1,683 | |||||||||||||||||||||
Corporate Bonds |
Level 2 | 907 | 4 | 911 | 1,411 | 6 | 1,417 | |||||||||||||||||||||
Municipal Bonds and US
Treasuries |
Level 2 | 1,050 | | 1,050 | 2,590 | 10 | 2,600 | |||||||||||||||||||||
Total |
$ | 2,979 | $ | 8 | $ | 2,987 | $ | 5,980 | $ | 25 | $ | 6,005 | ||||||||||||||||
NOTE 4. INVENTORIES
Inventories are valued at the lower of cost or market and include material, labor and manufacturing
overhead. Cost is determined on a first-in, first-out basis (in thousands):
June 30, 2011 | December 31, 2010 | |||||||
Raw Materials |
$ | 1,175 | $ | 1,236 | ||||
Work-in-Process |
238 | 384 | ||||||
Finished Goods |
111 | 25 | ||||||
Total |
$ | 1,524 | $ | 1,645 | ||||
Valuing inventory at the lower of cost or market involves an inherent level of risk and uncertainty
due to technology trends in the industry and customer demand for the Companys products. Future
events may cause
7
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
significant fluctuations in the Companys operating results. Inventories are
written down when needed to ensure the Company carries inventory at the lower of cost or market.
There were no such writedowns during the three months ended June 30, 2011 and 2010. In addition,
there were no such writedowns during the six months ended June 30, 2011. Writedowns for the six
months ended June 30, 2010 were $100,000.
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to adverse movements in foreign currency exchange rates because it conducts
business on a global basis and in some cases in foreign currencies. The Companys former operations
in France were transacted in the local currency and converted into U.S. Dollars based on published exchange rates for the
periods reported and were therefore subject to risk of exchange rate fluctuations.
In an attempt to mitigate the risk described above, we have entered into, from time to time,
foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a
fixed rate determined at the contract date. These derivative financial instruments do not meet the
criteria to qualify as hedges. Changes in the market value of these contracts result in gains or
losses recognized in other loss, net in the period of change. We held no foreign exchange
contracts at any point during the six months ended June 30, 2011, and thus there was no related
gain or loss. For the three months ended June 30, 2010, the Company recognized a gain of
approximately $5,000 related to a foreign exchange contract. For the six months ended June 30,
2010, the Company recognized a loss of approximately $62,000 related to a foreign exchange
contract. At June 30, 2011 and December 31, 2010, there were no foreign exchange contracts
outstanding.
NOTE 6. INCOME TAXES
The Company records a valuation allowance when it is more likely than not that all or a portion
of a deferred tax asset will not be realized. Management reviews all available positive and
negative evidence, including the Companys current and past performance, the market environment in
which the Company operates, the utilization of past tax credits, length of carry back and carry
forward periods, existing contracts or sales backlog that will result in future profits, as well as
other factors. The Company continues to maintain a valuation allowance on all of the net deferred
tax assets for the periods presented. Until an appropriate level of profitability is sustained,
the Company expects to continue to record a full valuation allowance on future tax benefits except
for those that may be generated in foreign jurisdictions.
The effective income tax rates for the periods presented differ from the U.S. statutory rate as we
continue to provide a full valuation allowance for our net deferred tax assets at June 30, 2011 and
June 30, 2010. The income tax benefit for the three and six months ended June 30, 2010 was
primarily due to a 30% research and development tax credit earned by our operations in France. The
benefit from the research and development tax credit was partially offset by tax expense related to
income generated in France. We no longer generate tax credits from French research and development
because we closed our French operations at the end of 2010.
NOTE 7. RESTRUCTURING CHARGE
On September 30, 2010, we initiated a restructuring plan to mitigate gross margin erosion by
reducing manufacturing and procurement costs, streamline research and development expense and focus
remaining resources on key strategic growth areas, and reduce selling and administrative expenses
through product rationalization and consolidation of support functions. Under the 2010
restructuring plan, we reduced our worldwide work force by 39 employees, including the closure of
our European engineering and support center located in Chaville, France. As a result of the 2010
restructuring plan, we recorded a restructuring charge of approximately $3.3 million classified as
an operating expense in the third quarter of 2010 related to future cash expenditures to cover
employee severance and benefits and other related costs. The following table summarizes the timing
of payments under the restructuring plan (in thousands):
8
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash | ||||||||||||||||||||||||
payments, net | Cash | |||||||||||||||||||||||
of currency | payments, net | |||||||||||||||||||||||
Reclassification | translation | Cash payments, | of currency | |||||||||||||||||||||
of restructuring | adjustments, during | net of currency | translation | |||||||||||||||||||||
charge, net of | quarter | translation | adjustments, | Remaining | ||||||||||||||||||||
currency | ended | adjustments, during | during quarter | liability | ||||||||||||||||||||
Restructuring | translation | December 31, | quarter ended | ended | as of | |||||||||||||||||||
Description | charge | adjustments | 2010 | March 31, 2011 | June 30, 2011 | June 30, 2011 | ||||||||||||||||||
Severance &
Fringe
Benefits |
$ | 3,181 | $ | (111 | ) | $ | 2,057 | $ | 957 | $ | 27 | $ | 29 | |||||||||||
Other
Related
Costs |
158 | 111 | 93 | 62 | 114 | | ||||||||||||||||||
Total |
$ | 3,339 | $ | | $ | 2,150 | $ | 1,019 | $ | 141 | $ | 29 | ||||||||||||
On December 11, 2009, the Company adopted a plan to restructure its worldwide operations. The
primary goal of the restructuring program was to align the Companys current spending with recent
revenue trends and to enable additional investments in strategic growth areas for the Company.
Under the restructuring plan, the Company reduced its workforce by 12 positions. As a result of
the restructuring plan, the Company recorded a restructuring
charge of $1.2 million, classified as an operating expense, in the fourth quarter of 2009 of which
approximately $1.1 million resulted cash expenditures to cover employee severance and benefits. The
remaining $173,000 included in the restructuring charge related to certain non-cash software
impairment charges. Cash payments, net of currency translation adjustments, during the three and
six months ended June 30, 2010 were approximately $132,000 and $662,000, respectively. The
remaining liability as of June 30, 2010 was approximately $317,000. These amounts were paid out
under the restructuring plan by the end of 2010.
NOTE 8. CREDIT FACILITY
The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2013.
The applicable interest rate on outstanding balances is LIBOR plus 1.0% to 1.5% based on certain
factors included in the credit agreement. At June 30, 2011 and December 31, 2010, the Companys
interest rate on the $3.5 million outstanding balance was 1.7% and 1.8%, respectively. The unused
portion of the credit facility is subject to an unused facility fee ranging from .25% to .75%
depending on total deposits with the creditor. All borrowings under this facility are secured by
marketable securities. The outstanding balance of $3.5 million as of June 30, 2011 and December
31, 2010 is classified as long-term debt on the Companys balance sheets. Subsequent to June 30,
2011 and prior to the Companys filing of the condensed consolidated financial statements, the
outstanding balance on the credit facility was repaid.
NOTE 9. COMPREHENSIVE INCOME (LOSS)
The following table shows the Companys comprehensive income (loss) (in thousands):
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 317 | $ | (2,211 | ) | $ | 548 | $ | (4,574 | ) | ||||||
Other comprehensive (loss) income: |
||||||||||||||||
Unrealized holding (loss) gain
arising during period, net of tax |
(3 | ) | 5 | (16 | ) | (9 | ) | |||||||||
Foreign currency translation
adjustment |
1 | (95 | ) | (43 | ) | (83 | ) | |||||||||
Comprehensive income (loss) |
$ | 315 | $ | (2,301 | ) | $ | 489 | $ | (4,666 | ) | ||||||
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. EARNINGS PER SHARE
Basic earnings per share are computed by dividing reported earnings available to common
shareholders by weighted average common shares outstanding. Diluted earnings per share give effect
to dilutive potential common shares. Earnings per share are calculated as follows (in thousands,
except per share data):
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 317 | $ | (2,211 | ) | $ | 548 | $ | (4,574 | ) | ||||||
Weighted average common shares outstanding |
6,852 | 6,832 | 6,819 | 6,851 | ||||||||||||
Basic net income (loss) per share |
$ | 0.05 | $ | (0.32 | ) | $ | 0.08 | $ | (0.67 | ) | ||||||
Diluted net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 317 | $ | (2,211 | ) | $ | 548 | $ | (4,574 | ) | ||||||
Weighted average common shares outstanding |
6,852 | 6,832 | 6,819 | 6,851 | ||||||||||||
Dilutive stock options |
287 | | 278 | | ||||||||||||
Weighted average common shares outstanding
assuming dilution |
7,139 | 6,832 | 7,097 | 6,851 | ||||||||||||
Diluted net income (loss) per share |
$ | 0.04 | $ | (0.32 | ) | $ | 0.08 | $ | (0.67 | ) | ||||||
Outstanding stock options that were not included in
the diluted calculation because their effect
would be anti-dilutive |
658 | 1,167 | 759 | 1,167 |
NOTE 11. SEGMENT INFORMATION
The Company is principally engaged in delivering solutions for LTE and WiMAX, interworking
gateways, packet processing, network connectivity, and security for key applications for the
communications and enterprise markets. 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.
Geographic revenues related to North America and foreign regions is as follows (in thousands):
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Pacific Rim |
$ | 2,856 | $ | 1,786 | $ | 4,883 | $ | 2,528 | ||||||||
North America |
2,155 | 977 | 3,853 | 2,344 | ||||||||||||
Europe |
1,166 | 1,095 | 4,129 | 2,745 | ||||||||||||
Total |
$ | 6,177 | $ | 3,858 | $ | 12,865 | $ | 7,617 | ||||||||
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Additional information regarding revenues by product-line is as follows (in thousands):
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Product Revenues: |
||||||||||||||||
Telecommunications |
$ | 5,256 | $ | 3,204 | $ | 10,715 | $ | 6,414 | ||||||||
Services |
497 | 264 | 816 | 555 | ||||||||||||
Enterprise |
361 | 346 | 1,201 | 563 | ||||||||||||
Other |
63 | 44 | 133 | 85 | ||||||||||||
Total |
$ | 6,177 | $ | 3,858 | $ | 12,865 | $ | 7,617 | ||||||||
NOTE 12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This
update requires that all nonowner changes in stockholders equity be presented in either a single
continuous statement of comprehensive income or in two separate but consecutive statements. This
ASU is effective for interim and annual periods beginning after December 15, 2011 and is to be
applied retrospectively. We are currently evaluating the impact of our adoption of ASU 2011-05 on
our condensed consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The
amendments in this ASU generally represent clarification of Topic 820, but also include instances
where a particular principle or requirement for measuring fair value or disclosing information
about fair value measurements has changed. This update results in common principles and
requirements for measuring fair value and for disclosing information about fair value measurements
in accordance with Generally Accepted Accounting Principles (GAAP) and International Financial
Reporting Standards (IFRS). The amendments are effective for interim and annual periods
beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted.
We are currently evaluating the impact of our adoption of ASU 2011-04 on our condensed consolidated
financial statements.
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements a
consensus of the FASB Emerging Issues Task Force, to amend certain guidance in FASB ASC 605-25,
Revenue Recognition Multiple-Element Arrangements. The amended guidance in ASC 605-25 modifies
the separation criteria by eliminating the criterion that requires objective and reliable evidence
of fair value for the undelivered items and eliminates the use of the residual method of
allocation. Instead, the amended guidance requires that arrangement consideration be allocated at
the inception of the arrangement to all deliverables based on their relative selling price. The
amended guidance in ASC 605-25 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early application and
retrospective application permitted. We elected early application ASC 605-25 and it was effective
for us on January 1, 2010. Our adoption of this standard did not have any impact on our condensed
consolidated financial statements.
In October 2009, the FASB issued ASU 2009-14, Certain Revenue Arrangements That Include Software
Elementsa consensus of the FASB Emerging Issues Task Force, that reduces the types of
transactions that fall within the current scope of software revenue recognition guidance. Existing
software revenue recognition guidance requires that its provisions be applied to an entire
arrangement when the sale of any products or services containing or utilizing software when the
software is considered more than incidental to the product or service. As a result of the
amendments included in ASU No. 2009-14, many tangible products and services that rely on software
will be accounted for under the multiple-element arrangements revenue recognition guidance rather
than under the software revenue recognition guidance. Under the ASU, the following components
would be excluded from the scope of software revenue recognition guidance: the tangible element of
the product, software products bundled with tangible products where the software components and
non-software components function together to deliver the products essential functionality, and
undelivered components that relate to software that is essential to the tangible products
functionality. The ASU also provides guidance on how to allocate transaction consideration when an
arrangement contains both deliverables within the scope of software revenue guidance (software
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
deliverables) and deliverables not within the scope of that guidance (non-software deliverables).
We adopted and prospectively applied the provisions of this standard beginning January 1, 2011.
Our adoption of this standard did not have a material impact on our condensed consolidated
financial statements.
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements about the business, financial condition and
prospects of the Company. These statements are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The actual results of the Company could differ
materially from those indicated by the forward-looking statements because of various risks and
uncertainties, including (without limitation) effects of the ongoing issues in global credit and
financial markets, our reliance on a limited number of customers, our failure to see spending
improvements in the telecommunications and computer networking industries, significant changes in
product demand, the development and introduction of new products and services, changes in
competition, various inventory risks due to changes in market conditions and other risks and
uncertainties indicated in the Companys filings and reports with the Securities and Exchange
Commission. All of the foregoing risks and uncertainties are beyond the ability of the Company to
control, and in many cases, the Company cannot predict the risks and uncertainties that could cause
its actual results to differ materially from those indicated by the forward-looking statements.
When used in this report, the words believes, plans, expects, will, intends, and
anticipates and similar expressions as they relate to the Company or its management are intended
to identify forward-looking statements.
RESULTS OF OPERATIONS
Revenue
Total revenue increased 60% to $6.2 million for the three months ended June 30, 2011, compared to
$3.9 million for the same period in the prior year. This increase was generally due to revenues
now being generated from design wins that we won, in some cases, over two years ago along with a
general increase in orders from most of our customers. Our telecommunications product revenue
increased to $5.3 million for the three months ended June 30, 2011, compared to $3.2 million in the
comparable period in the prior year. Our services revenue increased to $497,000 for the second
quarter of 2011 compared to $264,000 for the same period in the previous year. Our enterprise
product revenue increased slightly to $361,000 for the three months ended June 30, 2011, compared
to $346,000 for the same period in the previous year. All other revenues increased to $63,000,
compared to $44,000 in the comparable period last year.
Total revenue increased 69% to $12.9 million for the six months ended June 30, 2011, compared to
$7.6 million for the same period in the prior year. This increase was generally due to revenues
now being generated from design wins that we won, in some cases, over two years ago along with a
general increase in orders from most of our customers. Our telecommunications product revenue
increased to $10.7 million for the six months ended June 30, 2011, compared to $6.4 million in the
comparable period in the prior year. Our enterprise product revenue increased to $1.2 million for
the first half of 2011 compared to $563,000 for the same period in the previous year. Our services
revenue increased to $816,000 for the six months ended June 30, 2011, compared to $555,000 for the
same period in the previous year. All other revenues increased to $133,000, compared to $85,000 in
the comparable period last year.
During the second quarter of 2011, sales to two customers individually accounted for approximately
27% and 20%, of total revenues, respectively. During the second quarter of 2010, sales to two
customers individually accounted for approximately 42% and 15% of total revenues, respectively. No
other customer accounted for more than 10% of our total revenue in the periods presented.
Gross Margin
For the three months ended June 30, 2011, gross margin, as a percentage of revenues, was 53%
compared to 46% for the same period in the prior year. The increase in our gross margin percentage
in the second quarter of 2011 was primarily due to increased utilization of our manufacturing
facility, partially offset by a shift in product mix toward lower margin products.
Gross margin as a percentage of revenues was 51% and 48% for the six months ended June 30, 2011 and
2010, respectively. The increase in gross margin was primarily due to increased utilization of our
manufacturing facility
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and a decrease of $100,000 in excess and obsolete inventory charges,
partially offset by a shift in product mix toward lower margin products.
Despite increases in margins during the three and six months ended June 30, 2011 compared to the
same periods in the prior year, we believe that pricing pressures in the industry and our
anticipated future product mix may reduce our gross margin percentage in future periods.
Research and Development
Our investment in the development of new products through research and development was $1.0 million
and $1.8 million for the three months ended June 30, 2011 and 2010, respectively. The decrease was
primarily due to the impact of the 2010 restructuring plan. See Note 7 in the Notes to the
condensed consolidated financial statements for more information regarding the restructuring plan.
As a percentage of revenues, research and development expenses were approximately 16% in the second
quarter of 2011 as compared to approximately 47% for the same period for the prior year. The
decrease in research and development expenses as a percentage of total revenue was due to revenue
increasing significantly while research and development expense decreased.
Our investment in research and development was $2.0 million and $3.9 million for the six months
ended June 30, 2011 and 2010, respectively. The decrease was primarily due to the impact of the
2010 restructuring plan. See Note 7 in the Notes to the condensed consolidated financial
statements for more information regarding the restructuring plan. As a percentage of total
revenue, research and development expense was approximately 16% for the six months ended June 30,
2011 and 51% for the six months ended June 30, 2010. The decrease in research and development
expense as a percentage of total revenue was due to revenue increasing significantly while research
and development expense decreased. We will continue to monitor the level of our investments in
research and development concurrently with actual revenue results.
Sales and Marketing
Sales and marketing expenses were $872,000 and $1.3 million for the three months ended June 30,
2011 and 2010, respectively. The decrease in sales and marketing expense was primarily the result
of two factors. First, sales and marketing expense decreased by approximately $240,000 during the
three months ended June 30, 2011 compared to the same period in the prior year as a result of the
2010 restructuring plan. See Note 7 in the Notes to the condensed consolidated financial statements
for more information regarding the restructuring plan. Second, there was an additional decrease in
compensation related expenses of approximately $150,000 due to employee turnover compared to the
same period in the prior year. As a percentage of revenue, sales and marketing expenses were
approximately 14% for the second quarter of 2011 and 33% for the second quarter of 2010. The
decrease in sales and marketing expenses as a percentage of revenue was primarily due to revenue
increasing significantly while sales and marketing expense decreased.
Sales and marketing expenses were $1.9 million and $2.5 million for the six months ended June 30,
2011 and 2010, respectively. The decrease in sales and marketing expense was primarily due to the
impact of the 2010 restructuring plan. See Note 7 in the Notes to the condensed consolidated
financial statements for more information regarding the restructuring plan. As a percentage of
revenue, sales and marketing expenses were approximately 15% for the six months ended June 30, 2011
and 33% for the six months ended June 30, 2010. The decrease in sales and marketing expenses as a
percentage of revenue was primarily due to revenue increasing significantly while sales and
marketing expense decreased. We will continue to monitor the level of sales and marketing costs
concurrently with actual revenue results.
General and Administrative
General and administrative expenses were $1.0 million for both the three months ended June 30, 2011
and 2010. As a percentage of revenue, general and administrative expenses were approximately 17%
in the second quarter of 2011 and 25% for the same period in the prior year. The decrease as a
percentage of revenue was primarily due to revenues increasing significantly while general and
administrative expenses increased only slightly for the period.
General and administrative expenses were $2.0 million for both the six months ended June 30, 2011
and 2010. As a percentage of total revenue, general and administrative expense was approximately
16% for the six months ended June 30, 2011 and 26% for the six months ended June 30, 2010. The
decrease as a percentage of revenue was due to revenues increasing significantly while general and
administrative expenses increased only slightly for the
14
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period. We will continue to monitor the
level of general and administrative costs concurrently with actual revenue results.
Interest Income, Net
Interest income, net of interest expense, decreased to $8,000 for the three months ended June 30,
2011 from $41,000 in the comparable period in the prior year. Interest income, net of interest
expense, was $11,000 for the
six months ended June 30, 2011 and $87,000 for the six months ended June 30, 2010. The decrease in
interest income, net, for each period primarily relates to lower investment balances and lower
rates of return on our investments during the three and six months ended June 30, 2011 compared to
the same periods in 2010.
Other Loss, Net
Other loss, net, was $6,000 and $1,000 for the three months ended June 30, 2011 and 2010,
respectively. Other loss, net, was $1,000 and $79,000 for the six months ended June 30, 2011 and
2010, respectively. The other loss, net, during the periods presented for 2010 primarily relates to
the change in market value of a foreign exchange derivative financial instrument. The financial
instrument resulted in a gain of approximately $5,000 during the three months ended June 30, 2010
and a net loss of $62,000 for the six months ended June 30, 2010. During the three and six months
ended June 30, 2011, we had no such foreign exchange derivative financial instruments. See Note 5
in the Notes to the condensed consolidated financial statements for more information regarding our
derivative financial instruments.
Income Taxes
Our tax expense rate for the six months ended June 30, 2011 was 4%, compared to a tax benefit rate
of 4% for the six months ended June 30, 2010.
The effective income tax rates for the periods presented differ from the U.S. statutory rate as we
continue to provide a full valuation allowance for our net deferred tax assets at June 30, 2011 and
June 30, 2010. The income tax expense for the six months ended June 30, 2011 was primarily due to
accrued interest and penalties for uncertain tax positions in foreign jurisdictions. The income
tax benefit for the six months ended June 30, 2010 was primarily due to a 30% research and
development tax credit earned by our operations in France. The benefit from the research and
development tax credit was partially offset by tax expense related to income generated in France.
We no longer generate tax credits from French research and development because we closed our French
operations at the end of 2010.
Net Income (Loss)
We reported a net income of $317,000 for the three months ended June 30, 2011 and net loss of $2.2
million for the three months ended June 30, 2010. Basic earnings per share for the three months
ended June 30, 2011 was $0.05. Diluted earnings per share for the three months ended June 30, 2011
was $0.04. Basic loss per share for the three months ended June 30, 2010 was ($0.32). The Company
reported a net income of $548,000 and a net loss of $4.6 million for the six months ended June 30,
2011 and June 30, 2010, respectively. Basic and diluted earnings per share for the six months ended
June 30, 2011 was $0.08. Basic loss per share for the six months ended June 30, 2010 was ($0.67).
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Cash and cash equivalents increased $3.5 million from December 31, 2010 to June 30, 2011 and
decreased $3.5 million from December 31, 2009 to June 30, 2010. Cash flows are impacted by
operating, investing and financing activities.
Operating Activities
Trends in cash flows from operating activities for the six months ended June 30, 2011 and 2010 are
generally similar to the trends in our earnings except for provision for uncollectible accounts and
returns, provision for excess and obsolete inventories, depreciation and amortization and
amortization of stock-based compensation.
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Cash provided by operating activities totaled $67,000
for the six months ended June 30, 2011, compared to a net income of $548,000. Provision for
uncollectible accounts and returns increased $15,000 for the six months ended June 30, 2011
compared to the same period in 2010. Provision for excess and obsolete inventories decreased
$100,000 for the six months ended June 30, 2011, compared to the same period in 2010. Depreciation
and amortization decreased $113,000 for the six months ended June 30, 2011 compared to the same
period in 2010. Amortization of stock-based compensation increased $7,000 for the six months ended
June 30, 2011, compared to the six months ended June 30, 2010. See Note 2 in the Notes to condensed
consolidated financial statements for more information on stock-based compensation.
Changes in assets and liabilities result primarily from the timing of production, sales, purchases
and payments. Such changes in assets and liabilities generally tend to even out over time and
result in trends in cash flows from operating activities generally reflecting earnings trends.
Investing Activities
Cash provided by investing activities totaled $2.8 million and $262,000 for the six months ended
June 30, 2011 and 2010, respectively. Cash provided by investing activities in each of the periods
related principally to additions to property and equipment, capitalized software purchases and our
investments in marketable securities. Additions to property and equipment and capitalized software
were $157,000 for the six months ended June 30, 2011 compared to $61,000 for the six months ended
June 30, 2010. The additions for the six months ended June 30, 2011 primarily related to software
and equipment purchases for our engineering, manufacturing and administrative functions. The
additions for the six months ended June 30, 2010 primarily related to software and equipment
purchases for our engineering and manufacturing functions. Purchases of marketable securities were
$1.1 million and $2.8 million for the six months ended June 30, 2011 and 2010, respectively.
Proceeds from the sale of marketable securities increased to $4.1 million for the six months ended
June 30, 2011 compared to $3.1 million for the same period in 2010.
Financing Activities
Net cash provided by financing activities totaled $469,000 for the six months ended June 30, 2011;
it was solely proceeds from the exercise of stock options. There was no net cash provided by or
used in financing activities for the six months ended June 30, 2010.
Restructuring Charge
On September 30, 2010, we initiated a restructuring plan to mitigate gross margin erosion by
reducing manufacturing and procurement costs, streamline research and development expense and focus
remaining resources on key strategic growth areas, and reduce selling and administrative expenses
through product rationalization and consolidation of support functions. Under the 2010
restructuring plan, we reduced our worldwide work force by 39 employees, including the closure of
our European engineering and support center located in Chaville, France. As a result of the 2010
restructuring plan, we recorded a restructuring charge of approximately $3.3 million classified as
an operating expense in the third quarter of 2010 related to future cash expenditures to cover
employee severance and benefits and other related costs. The following table summarizes the timing
of payments under the restructuring plan (in thousands):
Cash | ||||||||||||||||||||||||
payments, net | Cash | |||||||||||||||||||||||
of currency | Cash payments, | payments, net | ||||||||||||||||||||||
Reclassification | translation | net of currency | of currency | |||||||||||||||||||||
of restructuring | adjustments, | translation | translation | |||||||||||||||||||||
charge, net of | during quarter | adjustments, | adjustments, | |||||||||||||||||||||
currency | ended | during quarter | during quarter | Remaining | ||||||||||||||||||||
Restructuring | translation | December 31, | ended | ended | liability as of | |||||||||||||||||||
Description | charge | adjustments | 2010 | March 31, 2011 | June 30, 2011 | June 30, 2011 | ||||||||||||||||||
Severance &
Fringe
Benefits |
$ | 3,181 | $ | (111 | ) | $ | 2,057 | $ | 957 | $ | 27 | $ | 29 | |||||||||||
Other
Related
Costs |
158 | 111 | 93 | 62 | 114 | | ||||||||||||||||||
Total |
$ | 3,339 | $ | | $ | 2,150 | $ | 1,019 | $ | 141 | $ | 29 | ||||||||||||
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On December 11, 2009, the Company adopted a plan to restructure its worldwide operations. The
primary goal of the restructuring program was to align the Companys current spending with recent
revenue trends and to enable additional investments in strategic growth areas for the Company.
Under the restructuring plan, the Company reduced its workforce by 12 positions. As a result of
the restructuring plan, the Company recorded a restructuring charge of $1.2 million, classified as
an operating expense, in the fourth quarter of 2009 of which approximately $1.1 million resulted
cash expenditures to cover employee severance and benefits. The remaining $173,000 included in the
restructuring charge related to certain non-cash software impairment charges. Cash payments, net
of currency translation adjustments, during the three and six months ended June 30, 2010 were
approximately $132,000 and $662,000, respectively. The remaining liability as of June 30, 2010 was
approximately $317,000. These amounts were paid out under the restructuring plan by the end of
2010.
Commitments
At June 30, 2011 we had no material commitments to purchase capital assets; however, planned
capital expenditures for the remainder of 2011 are estimated at approximately $200,000, a
significant portion of which relates to our product development and engineering tools. Our
significant long-term obligations are operating leases on facilities and future debt payments. We
have not paid any dividends since our inception and do not anticipate paying any dividends in 2011.
Off-Balance Sheet Arrangements
In an attempt to mitigate foreign currency risk, we have entered into, from time to time, foreign
exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a fixed
rate determined at the contract date. At June 30, 2011 and December 31, 2010, we had no foreign
exchange contracts outstanding.
Other
Management believes that cash generated from operations and borrowing availability under the
revolving credit facility, together with cash on hand, will be sufficient to meet our liquidity
needs for working capital, capital expenditures and debt service. To the extent that our actual
operating results or other developments differ from our expectations, our liquidity could be
adversely affected.
We periodically evaluate our liquidity requirements, alternative uses of capital, capital needs and
available resources in view of, among other things, our capital expenditure requirements and
estimated future operating cash flows. As a result of this process, we have in the past and may in
the future seek to raise additional capital, refinance or restructure indebtedness, issue
additional securities, repurchase shares of our common stock or take a combination of such steps to
manage our liquidity and capital resources. In the normal course of business, we may review
opportunities for acquisitions, joint ventures or other business combinations. In the event of any
such transaction, we may consider using available cash, issuing additional equity securities or
increasing the indebtedness of the Company or its subsidiaries.
Managements Discussion and Analysis of Financial Condition and Results of Operations in this Form
10-Q should be read in conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and other material included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2010.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies from those disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2010.
Recently Issued Accounting Pronouncements
See Note 12 in the Notes to the condensed consolidated financial statements for more information
regarding recently issued accounting pronouncements, including the expected dates of adoption and
estimated effects on our condensed consolidated financial statements.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
We are exposed to adverse movements in foreign currency exchange rates because we conduct business
on a global basis and, in some cases, in foreign currencies. The Companys operations in France
were transacted in the local currency and converted into U.S. Dollars based on published exchange
rates for the periods reported and were therefore subject to risk of exchange rate fluctuations.
The Euro to U.S. Dollar translation accounted for charges of approximately $15,000 and $204,000 for
the three months ended June 30, 2011 and 2010, respectively. The Euro to U.S. Dollar translation
accounted for charges of approximately $18,000 and $709,000 for the six months ended June 30, 2011
and 2010, respectively. This risk was significantly reduced due to the closure of our French
operations at the end of 2010.
In an attempt to mitigate the risk described above, we have entered into, from time to time,
foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a
fixed rate determined at the contract
date. These derivative financial instruments do not meet the criteria to qualify as hedges under
ASC Topic 815, Derivatives and Hedging, and therefore any change in the market value of these
contracts resulting in a gain or loss is recognized in other loss, net, in the period of the
change. There were no foreign exchange contracts held by the Company at any point during the three
or six months ended June 30, 2011, and thus there was no related gain or loss. For the three
months ended June 30, 2010, we recognized a gain of approximately $5,000 related to a foreign
exchange contract. For the six months ended June 30, 2010, we recognized a loss of $62,000. At
June 30, 2011 and December 31, 2010, there were no foreign exchange contracts outstanding.
Market Price Risk
We had no equity hedge contracts outstanding as of June 30, 2011 or December 31, 2010.
Interest Rate Risk
Our investments are subject to interest rate risk. Interest rate risk is the risk that our
financial condition and results of operations could be adversely affected due to movements in
interest rates. We invest our cash in a variety of interest-earning financial instruments,
including bank time deposits, money market funds, and variable rate and fixed rate obligations of
corporations and national governmental entities and agencies. Due to the demand nature of our
money market funds and the short-term nature of our time deposits and debt securities portfolio,
these assets are particularly sensitive to changes in interest rates. We manage this risk through
investments with shorter-term maturities and varying maturity dates.
A hypothetical 50 basis point increase in interest rates would result in an approximate decrease of
less than 1% in the fair value of our available-for-sale securities at June 30, 2011. This
potential change is based on sensitivity analyses performed on our marketable securities at June
30, 2011. Actual results may differ materially. The same hypothetical 50 basis point increase in
interest rates would have resulted in an approximate decrease of less than 1% in the fair value of
our available-for-sale securities at December 31, 2010.
We maintain a $5.0 million revolving bank credit facility maturing December 19, 2013 with an
applicable interest rate on any outstanding balances under the credit facility based on London
Interbank Offered Rate (LIBOR) plus 1.0% to 1.5% applicable margin rate based on certain factors
included in our credit agreement. The interest rate on the borrowings under the revolving credit
facility was 1.7% and 1.8% at June 30, 2011 and December 31, 2010, respectively. The unused
portion of the credit facility is subject to an unused facility fee ranging from .25% to .75%
depending on total deposits with the creditor. A hypothetical 100 basis point increase in LIBOR
would increase annual interest expense on this credit facility by approximately $35,000. All
borrowings under this facility are secured by marketable securities. Subsequent to June 30, 2011
and prior to the Companys filing of the condensed consolidated financial statements, the
outstanding balance on the credit facility was repaid.
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Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Companys management, under the supervision of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), performed an evaluation of the effectiveness of the design and operation
of the Companys disclosure controls and procedures as of the end of the period covered by this
quarterly report. Based on that evaluation, the CEO and CFO concluded that the Companys disclosure
controls and procedures are designed, and are effective, to give reasonable assurance that the
information required to be disclosed by the Company in reports that it files under the Securities
Exchange Act of 1934 is accumulated and communicated to management, including the CEO and CFO, to
allow timely decisions regarding disclosure and that information is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
Changes in Internal Controls
The Company maintains a system of internal controls that is designed to provide reasonable
assurance that its books and records accurately reflect, in all material respects, the transactions
of the Company and that its established policies and procedures are adhered to. From time to time
the Company may experience changes to its internal controls due, for example, to employee turnover,
re-balancing of workloads, extended absences and
promotions of employees. However, there were no changes in our internal controls over financial
reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
French Restructuring Litigation: Twenty-five former employees (Plaintiffs) of Interphase SAS, a
subsidiary of Interphase Corporation, have brought suit in France against Interphase SAS alleging
various causes of action and rights to damages relating to claims of wrongful dismissal of
employment, specific French employment indemnities, general economic losses, and contractual claims
relating specifically to their employment relationship and contracts entered into between the
individual and Interphase SAS. The various claims and assertions arise from and relate to the
Plaintiffs release from employment as part of the restructuring actions taken during the third
quarter of 2010. See Note 7 in the Notes to the condensed consolidated financial statements for
more information regarding the restructuring plan. The statement of claim is for an aggregate
payment of approximately 2.8 million, which translates to approximately $4.0 million at June 30,
2011, related to these claims. The Company believes that the Plaintiffs claims are without merit
and plans to vigorously defend itself in this lawsuit.
Patent-infringement Litigation: On April 7, 2011, Interphase was named as one of the defendants in
a lawsuit filed by Mosaid Technologies (Mosaid). The complaint includes allegations that
Interphase has infringed and is infringing upon a certain registered U.S. patent to which Mosaid
has enforcement rights. The sole infringement allegation directed at Interphase appears to concern
communications controller chips that Interphase purchases (indirectly) from Freescale
Semiconductor, Inc. (Freescale), another defendant in the infringement allegation, which are used
in several of Interphases products.
The complaint requests a judgment that Mosaids patents have been and are being infringed and,
accordingly, an award of an unspecified amount of damages, plus interest and costs, as well as
injunctive relief and any other remedies available under law. Because the complaint claims that
the alleged infringing conduct is willful, it also requests treble damages and attorneys fees
under the applicable U.S. patent statute.
Interphase does not know if there is any merit to Mosaids allegations. Nevertheless, Interphase
intends, and Interphase understands that Freescale intends, to vigorously defend the allegations;
and to the extent that the infringement claim relates to the Freescale chips used in Interphases
products, Freescale will also defend Interphase and indemnify Interphase against damages in the
lawsuit.
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Table of Contents
Item 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in our Annual Report on Form
10-K for the year ended December 31, 2010.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. (REMOVED AND RESERVED)
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
Exhibits
31 (a)
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
31 (b)
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | |
32 (a)
|
Section 1350 Certification of Chief Executive Officer. | |
32 (b)
|
Section 1350 Certification of Chief Financial Officer. | |
101.INS
|
XBRL Instance Document * | |
101.SCH
|
XBRL Taxonomy Extension Schema Document * | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document * | |
101.LAB
|
XBRL Taxonomy Extension Lebel Linkbase Document * | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document * | |
* | Furnished herewith |
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 8, 2011 | By: | /s/ Thomas N. Tipton Jr. | ||
Thomas N. Tipton Jr. | ||||
Chief Financial Officer, Vice President of Finance and Treasurer (Principal Financial and Accounting Officer) |
||||
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