Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - INTERPHASE CORP | Financial_Report.xls |
EX-31.B - EX-31.B - INTERPHASE CORP | d84592exv31wb.htm |
EX-32.A - EX-32.A - INTERPHASE CORP | d84592exv32wa.htm |
EX-32.B - EX-32.B - INTERPHASE CORP | d84592exv32wb.htm |
EX-31.A - EX-31.A - INTERPHASE CORP | d84592exv31wa.htm |
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 September 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 | 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 November 1, 2011, shares of common stock outstanding totaled 6,895,085.
INTERPHASE CORPORATION
Index to Form 10-Q
Quarterly Period Ended September 30, 2011
Quarterly Period Ended September 30, 2011
2 | ||||
3 | ||||
4 | ||||
5 | ||||
13 | ||||
18 | ||||
19 | ||||
19 | ||||
20 | ||||
20 | ||||
20 | ||||
20 | ||||
20 | ||||
20 |
1
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)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 8,113 | $ | 4,772 | ||||
Marketable securities |
3,281 | 6,005 | ||||||
Trade accounts receivable, less allowances
of $53 and $70, respectively |
4,871 | 4,633 | ||||||
Inventories |
1,535 | 1,645 | ||||||
Prepaid expenses and other current assets |
343 | 623 | ||||||
Total current assets |
18,143 | 17,678 | ||||||
Machinery and equipment |
6,205 | 6,840 | ||||||
Leasehold improvements |
327 | 327 | ||||||
Furniture and fixtures |
400 | 398 | ||||||
6,932 | 7,565 | |||||||
Less-accumulated depreciation and amortization |
(6,540 | ) | (7,151 | ) | ||||
Total property and equipment, net |
392 | 414 | ||||||
Capitalized software, net |
291 | 485 | ||||||
Other assets |
621 | 737 | ||||||
Total assets |
$ | 19,447 | $ | 19,314 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Liabilities |
||||||||
Accounts payable |
$ | 1,700 | $ | 1,388 | ||||
Deferred revenue |
154 | 39 | ||||||
Accrued liabilities |
1,122 | 2,486 | ||||||
Accrued compensation |
417 | 648 | ||||||
Total current liabilities |
3,393 | 4,561 | ||||||
Deferred lease obligations |
196 | 243 | ||||||
Long-term debt |
3,500 | 3,500 | ||||||
Total liabilities |
7,089 | 8,304 | ||||||
Commitments and Contingencies |
||||||||
Shareholders Equity |
||||||||
Common stock, $0.10 par value; 100,000,000
shares authorized; 6,895,085 and
6,815,600 shares issued and outstanding,
respectively |
690 | 682 | ||||||
Additional paid in capital |
44,146 | 43,355 | ||||||
Retained deficit |
(31,596 | ) | (32,203 | ) | ||||
Cumulative other comprehensive loss |
(882 | ) | (824 | ) | ||||
Total shareholders equity |
12,358 | 11,010 | ||||||
Total liabilities and shareholders equity |
$ | 19,447 | $ | 19,314 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 5,521 | $ | 4,770 | $ | 18,386 | $ | 12,387 | ||||||||
Cost of sales |
2,926 | 2,439 | 9,292 | 6,416 | ||||||||||||
Gross margin |
2,595 | 2,331 | 9,094 | 5,971 | ||||||||||||
Research and development |
923 | 1,605 | 2,971 | 5,516 | ||||||||||||
Sales and marketing |
834 | 1,103 | 2,710 | 3,634 | ||||||||||||
General and administrative |
753 | 950 | 2,767 | 2,908 | ||||||||||||
Restructuring charge |
| 3,339 | | 3,339 | ||||||||||||
Total operating expenses |
2,510 | 6,997 | 8,448 | 15,397 | ||||||||||||
Income (loss) from operations |
85 | (4,666 | ) | 646 | (9,426 | ) | ||||||||||
Interest income, net |
5 | | 16 | 87 | ||||||||||||
Other loss, net |
| | (1 | ) | (79 | ) | ||||||||||
Income (loss) before income tax |
90 | (4,666 | ) | 661 | (9,418 | ) | ||||||||||
Income tax expense (benefit) |
31 | (374 | ) | 54 | (552 | ) | ||||||||||
Net income (loss) |
$ | 59 | $ | (4,292 | ) | $ | 607 | $ | (8,866 | ) | ||||||
Net income (loss) per share: |
||||||||||||||||
Basic EPS |
$ | 0.01 | $ | (0.63 | ) | $ | 0.09 | $ | (1.30 | ) | ||||||
Diluted EPS |
$ | 0.01 | $ | (0.63 | ) | $ | 0.09 | $ | (1.30 | ) | ||||||
Weighted average common shares |
6,895 | 6,830 | 6,845 | 6,844 | ||||||||||||
Weighted
average common and dilutive shares |
7,182 | 6,830 | 7,125 | 6,844 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 607 | $ | (8,866 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
||||||||
Recovery of uncollectible accounts and returns |
(12 | ) | (12 | ) | ||||
Provision for excess and obsolete inventories |
| 100 | ||||||
Depreciation and amortization |
416 | 567 | ||||||
Amortization of stock-based compensation |
272 | 262 | ||||||
Change in assets and liabilities: |
||||||||
Trade accounts receivable |
(226 | ) | 865 | |||||
Inventories |
110 | (416 | ) | |||||
Prepaid expenses and other current assets |
282 | 1,466 | ||||||
Other assets |
139 | (516 | ) | |||||
Accounts payable, deferred revenue and accrued liabilities |
(1,031 | ) | 2,426 | |||||
Accrued compensation |
(257 | ) | (68 | ) | ||||
Deferred lease obligations |
(47 | ) | (39 | ) | ||||
Net cash provided by (used in) operating activities |
253 | (4,231 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(169 | ) | (38 | ) | ||||
Purchase of capitalized software |
(69 | ) | (30 | ) | ||||
Proceeds from the sale of marketable securities |
5,503 | 5,094 | ||||||
Purchase of marketable securities |
(2,800 | ) | (2,950 | ) | ||||
Net cash provided by investing activities |
2,465 | 2,076 | ||||||
Cash flows from financing activities: |
||||||||
Borrowings under credit facility |
7,000 | 5,500 | ||||||
Payments on credit facility |
(7,000 | ) | (5,500 | ) | ||||
Proceeds from the exercise of stock options |
527 | | ||||||
Net cash provided by financing activities |
527 | | ||||||
Effect of exchange rate changes on cash and cash equivalents |
96 | (160 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
3,341 | (2,315 | ) | |||||
Cash and cash equivalents at beginning of period |
4,772 | 8,115 | ||||||
Cash and cash equivalents at end of period |
$ | 8,113 | $ | 5,800 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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, Oracle,
and Samsung. 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 nine months ended
September 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 nine months ended September 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 nine months ended
September 30, 2010, the Company issued 198,200 stock options that vest over a three to four year
period and expire ten years from the date of grant. The weighted average exercise price of these
stock options is $1.78. Compensation expense related to these stock options was approximately
$44,000 and $17,000 for the three months ended September 30, 2011 and 2010, respectively.
Compensation expense related to these stock options was approximately $114,000 and $21,000 for the
nine months ended September 30, 2011 and 2010, respectively.
During the nine months ended September 30, 2011, the Company issued 20,000 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 $5.40. Of the stock
options outstanding at September 30, 2011, 178,500 are subject to the achievement of certain
performance conditions. The performance conditions related to 7,000 of these stock options were
deemed probable at September 30, 2011. During the three months ended September 30, 2011, it was
determined that performance targets related to 9,750 performance-based stock options were no longer
probable of being achieved, and, as a result, the Company recognized a benefit of $7,000 related to
performance-based stock options during the third quarter of 2011. Compensation expense related to
performance-based stock options was approximately $8,000 for the nine months ended September 30,
2011. The Company did not recognize any compensation expense related to performance-based stock
options during the three or nine months ended September 30, 2010. The performance conditions
related to the remaining options were not deemed probable at September 30, 2011; therefore no
compensation expense related to these options has been recorded.
The weighted-average remaining contractual life of stock options outstanding and exercisable at
September 30, 2011 and 2010 is 2.07 years and 1.71 years, respectively.
5
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the combined stock option activity under all of the plans:
Number of | Weighted Average | |||||||
Options | Option Price | |||||||
Balance, December 31, 2010 |
1,470,222 | $ | 5.00 | |||||
Granted |
235,000 | 2.29 | ||||||
Exercised |
(107,250 | ) | 4.92 | |||||
Canceled |
(397,499 | ) | 5.80 | |||||
Balance, September 30, 2011 |
1,200,473 | $ | 4.21 | |||||
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 | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted average risk free interest rates |
2.28 | % | 2.75 | % | 3.54 | % | 2.83 | % | ||||||||
Weighted average life (in years) |
10 | 10 | 10 | 10 | ||||||||||||
Volatility |
66.16 | % | 63.51 | % | 63.89 | % | 63.69 | % | ||||||||
Expected dividend yield |
| | | | ||||||||||||
Weighted average grant-date fair value
per
share of options granted |
$ | 3.39 | $ | 1.22 | $ | 1.70 | $ | 1.27 | ||||||||
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
September 30, 2011, the Company issued no shares of restricted stock. During the nine months ended
September 30, 2011, the Company issued 72,000 shares of restricted stock. In addition, 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 $44,000
and $61,000 for the three months ended September 30, 2011 and 2010, respectively. Compensation
expense related to restricted stock was approximately $149,000 and $241,000 for the nine months
ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there is approximately
$521,000 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 3.2
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 nine months ended September 30, 2011:
6
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Weighted | ||||||||
Restricted Stock | Average Grant | |||||||
Shares | Date Value | |||||||
Nonvested restricted stock at December 31, 2010 |
318,555 | $ | 2.52 | |||||
Granted |
72,000 | 4.41 | ||||||
Vested |
(59,274 | ) | 4.85 | |||||
Cancelled/Forfeited |
(99,765 | ) | 2.17 | |||||
Nonvested restricted stock at September 30, 2011 |
231,516 | $ | 2.66 | |||||
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
accompanying condensed consolidated balance sheets. 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):
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||
Estimated | Estimated | |||||||||||||||||||||||||||
Fair Value | Unrealized | Fair | Unrealized | Fair | ||||||||||||||||||||||||
Hierarchy | Cost | Gain | Value | Cost | Gain | Value | ||||||||||||||||||||||
Agencies |
Level 2 | $ | | $ | | $ | | $ | 304 | $ | 1 | $ | 305 | |||||||||||||||
Asset Backed |
Level 2 | 930 | 2 | 932 | 1,675 | 8 | 1,683 | |||||||||||||||||||||
Corporate Bonds |
Level 2 | 748 | 1 | 749 | 1,411 | 6 | 1,417 | |||||||||||||||||||||
Municipal Bonds and US
Treasuries |
Level 2 | 1,600 | | 1,600 | 2,590 | 10 | 2,600 | |||||||||||||||||||||
Total |
$ | 3,278 | $ | 3 | $ | 3,281 | $ | 5,980 | $ | 25 | $ | 6,005 | ||||||||||||||||
7
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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):
September 30, 2011 | December 31, 2010 | |||||||
Raw Materials |
$ | 1,158 | $ | 1,236 | ||||
Work-in-Process |
331 | 384 | ||||||
Finished Goods |
46 | 25 | ||||||
Total |
$ | 1,535 | $ | 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 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 September 30, 2011 and 2010. In
addition, there were no such writedowns during the nine months ended September 30, 2011.
Writedowns for the nine months ended September 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 nine months ended September 30, 2011, and thus there was no
related gain or loss. There were no foreign exchange contracts held by the Company during the
three months ended September 30, 2010, and thus there was no related gain or loss during the
period. For the nine months ended September 30, 2010, the Company recognized a loss of
approximately $62,000 related to a foreign exchange contract. At September 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 and realization of the net deferred tax assets is reasonably assured, 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 September 30,
2011 and September 30, 2010. The income tax expense for the three and nine months ended September
30, 2011 was primarily due to tax in foreign jurisdictions. The income tax benefit for the three
and nine months ended September 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 activities as a result of the closure of our French operations at the end of 2010.
8
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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):
Severance & | Other | |||||||||||
Description | Fringe Benefits | Related Costs | Total | |||||||||
Restructuring charge |
$ | 3,181 | $ | 158 | $ | 3,339 | ||||||
Reclassification of restructuring charge,
net of currency translation adjustments |
(111 | ) | 111 | | ||||||||
Cash payments, net of currency translation
adjustments,
during quarter ended December 31, 2010 |
2,057 | 93 | 2,150 | |||||||||
Cash payments, net of currency translation
adjustments,
during quarter ended March 31, 2011 |
957 | 62 | 1,019 | |||||||||
Cash payments, net of currency translation
adjustments,
during quarter ended June 30, 2011 |
27 | 114 | 141 | |||||||||
Cash payments, net of currency translation
adjustments,
during quarter ended September 30, 2011 |
10 | | 10 | |||||||||
Remaining liability as of September 30, 2011 |
$ | 19 | $ | | $ | 19 | ||||||
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 nine months ended September 30, 2010 were
approximately $317,000 and $979,000, respectively. There was no remaining liability as of
September 30, 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 September 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 September 30, 2011 and
December 31, 2010 is classified as long-term debt on the Companys condensed consolidated balance
sheets. Subsequent to September 30, 2011 and prior to the Companys filing of the condensed
consolidated financial statements, the outstanding balance on the credit facility was repaid.
9
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. COMPREHENSIVE INCOME (LOSS)
The following table shows the Companys comprehensive income (loss) (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 59 | $ | (4,292 | ) | $ | 607 | $ | (8,866 | ) | ||||||
Other comprehensive income (loss): |
||||||||||||||||
Unrealized holding (loss) gain
arising
during period, net of tax |
(5 | ) | 9 | (21 | ) | | ||||||||||
Foreign currency translation
adjustment |
6 | 25 | (37 | ) | (58 | ) | ||||||||||
Comprehensive income (loss) |
$ | 60 | $ | (4,258 | ) | $ | 549 | $ | (8,924 | ) | ||||||
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 | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 59 | $ | (4,292 | ) | $ | 607 | $ | (8,866 | ) | ||||||
Weighted average common shares outstanding |
6,895 | 6,830 | 6,845 | 6,844 | ||||||||||||
Basic net income (loss) per share |
$ | 0.01 | $ | (0.63 | ) | $ | 0.09 | $ | (1.30 | ) | ||||||
Diluted net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 59 | $ | (4,292 | ) | $ | 607 | $ | (8,866 | ) | ||||||
Weighted average common shares outstanding |
6,895 | 6,830 | 6,845 | 6,844 | ||||||||||||
Dilutive stock options |
287 | | 280 | | ||||||||||||
Weighted average common shares outstanding
assuming dilution |
7,182 | 6,830 | 7,125 | 6,844 | ||||||||||||
Diluted net income (loss) per share |
$ | 0.01 | $ | (0.63 | ) | $ | 0.09 | $ | (1.30 | ) | ||||||
Outstanding stock options that were not included in the diluted calculation because their effect would be
anti-dilutive |
609 | 1,379 | 708 | 1,481 |
NOTE 11. SHAREHOLDERS EQUITY
The Board of Directors has adopted a Shareholder Rights Plan whereby each holder of record as of August 9, 2011
received a right to purchase from the Company one share of common stock of the Company at a price of $39 per
share for each share held. These rights can only be exercised after certain events occur, such as if a person or entity
acquires, or makes a tender or exchange offer to acquire, 15% or more of the Companys common stock and the
rights expire at the close of business on July 29, 2021. Upon acquisition of 15% or more of the Companys common
stock, each right not owned by the acquiring person or group will be adjusted to allow the purchase for $39 of a
number of shares having a then market value of $78. These rights are intended to provide the Company certain
antitakeover protections. The Board of Directors may terminate the Shareholder Rights Plan, or redeem the rights
for $0.001 per right, at any time until the tenth business day following a public announcement of a 15% or more
stock acquisition. The Company reserved 90,315,210 shares of common stock for this plan. The rights were
distributed to shareholders as of the record date as a nontaxable dividend. The rights are attached to and trade with
the Companys common stock until the occurrence of one of the triggering events, at which time the rights would
become detached from the Companys common stock.
NOTE 12. 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. The Company also offers a comprehensive portfolio of desktop
virtualization solutions. 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.
10
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Geographic revenues related to North America and foreign regions is as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
North America |
$ | 2,274 | $ | 1,607 | $ | 6,127 | $ | 3,951 | ||||||||
Pacific Rim |
1,872 | 1,923 | 6,755 | 4,451 | ||||||||||||
Europe |
1,375 | 1,240 | 5,504 | 3,985 | ||||||||||||
Total |
$ | 5,521 | $ | 4,770 | $ | 18,386 | $ | 12,387 | ||||||||
Additional information regarding revenues by product-line is as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Product Revenues: |
||||||||||||||||
Telecommunications |
$ | 4,439 | $ | 3,738 | $ | 15,154 | $ | 10,152 | ||||||||
Services |
831 | 510 | 1,675 | 1,065 | ||||||||||||
Enterprise |
192 | 438 | 1,393 | 1,001 | ||||||||||||
Other |
59 | 84 | 164 | 169 | ||||||||||||
Total |
$ | 5,521 | $ | 4,770 | $ | 18,386 | $ | 12,387 | ||||||||
NOTE 13. 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. Our adoption of this update is not expected to have a material impact on
our condensed consolidated financial statements, as it only requires a change in the format of
presentation.
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. Our adoption of this update is not expected to have a material 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
11
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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.
12
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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, the lack of 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 16% to $5.5 million for the three months ended September 30, 2011, compared
to $4.8 million for the same period in the prior year. This increase was due to revenues
being generated from design wins that we won, in some cases, over two years ago along with an increase in orders from most of our customers. Our telecommunications product revenue
increased to $4.4 million for the three months ended September 30, 2011, compared to $3.7 million
in the comparable period in the prior year. Our services revenue increased to $831,000 for the
third quarter of 2011, compared to $510,000 for the same period in the previous year. Our
enterprise product revenue decreased to $192,000 for the three months ended September 30, 2011,
compared to $438,000 for the same period in the previous year. All other revenues decreased to
$59,000, compared to $84,000 in the comparable period last year.
Total revenue increased 48% to $18.4 million for the nine months ended September 30, 2011, compared
to $12.4 million for the same period in the prior year. This increase was due to
revenues being generated from design wins that we won, in some cases, over two years ago along
with an increase in orders from most of our customers. Our telecommunications product
revenue increased to $15.2 million for the nine months ended September 30, 2011, compared to $10.2
million in the comparable period in the prior year. Our services revenue increased to $1.7 million
for the nine months ended September 30, 2011, compared to $1.1 million for the same period in the
previous year. Our enterprise product revenue increased to $1.4 million for the nine months ended
September 30, 2011, compared to $1.0 million for the same period in the previous year. All other
revenues decreased to $164,000, compared to $169,000 in the comparable period last year.
During the third quarter of 2011, sales to two customers individually accounted for approximately
38% and 17%, of total revenues, respectively. During the third quarter of 2010, sales to three
customers individually accounted for approximately 21%, 18% and 12% 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 September 30, 2011, gross margin, as a percentage of revenues, was 47%
compared to 49% for the same period in the prior year. The decrease in our gross margin percentage
in the third quarter of
13
2011 was primarily due to a shift in product mix toward lower margin
products and services, partially offset by increased utilization of our manufacturing facility.
Gross margin as a percentage of revenues was 49% and 48% for the nine months ended September 30,
2011 and 2010, respectively. The increase in gross margin was primarily due to increased
utilization of our manufacturing facility and a decrease of $100,000 in excess and obsolete
inventory charges, partially offset by a shift in product mix toward lower margin products and
services.
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 $923,000 and
$1.6 million for the three months ended September 30, 2011 and 2010, respectively. The decrease was
primarily due to the closure of our European engineering and support center located in Chaville, France 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.
As a percentage of revenues, research and development expenses were approximately 17% in the third
quarter of 2011, as compared to approximately 34% 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 while research and development expense decreased.
Our investment in research and development was $3.0 million and $5.5 million for the nine months
ended September 30, 2011 and 2010, respectively. The decrease was primarily due to the closure of our European engineering and support center located in Chaville, France 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. As a percentage of total
revenue, research and development expense was approximately 16% for the nine months ended September
30, 2011 and 45% for the nine months ended September 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 $834,000 and $1.1 million for the three months ended September
30, 2011 and 2010, respectively. The decrease in sales and marketing expense was primarily due to
the closure of our European engineering and support center located in Chaville, France 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. As a percentage of
revenue, sales and marketing expenses were approximately 15% for the third quarter of 2011 and 23%
for the third quarter of 2010. The decrease in sales and marketing expenses as a percentage of
revenue was primarily due to revenue increasing while sales and marketing expense decreased.
Sales and marketing expenses were $2.7 million and $3.6 million for the nine months ended September
30, 2011 and 2010, respectively. The decrease in sales and marketing expense was primarily due to
the closure of our European engineering and support center located in Chaville, France 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. As a percentage of
revenue, sales and marketing expenses were approximately 15% for the nine months ended September
30, 2011 and 29% for the nine months ended September 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 $753,000 and $950,000 for the three months ended September
30, 2011 and 2010, respectively. General and administrative expense decreased by approximately
$100,000 related to variable compensation expense and approximately $100,000 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. As a percentage of revenue,
general and administrative expenses were approximately 14% in the third quarter of 2011 and 20% for
the same period in the prior year. The decrease as a percentage of revenue was primarily due to
revenues increasing while general and administrative expenses decreased.
14
General and administrative expenses were $2.8 million and $2.9 million for the nine months ended
September 30, 2011 and 2010, respectively. General and administrative expenses decreased by
approximately $180,000 due to lower headcount related expenses and by approximately $280,000 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. These decreases were
partially offset by increases of approximately $350,000 related to legal services. See Part II, Item 1, for more information regarding legal proceedings. As a percentage
of total revenue, general and administrative expense was approximately 15% for the nine
months ended September 30, 2011 and 23% for the nine months ended September 30, 2010. The decrease
as a percentage of revenue was due to revenues increasing significantly while general and
administrative expenses decreased. We will continue to monitor the level of general and
administrative costs concurrently with actual revenue results.
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. At September 30, 2011, $19,000 of
the restructuring charge remained. See Note 7 in the Notes to condensed consolidated financial
statements for more information on the 2010 restructuring plan.
Interest Income, Net
Interest income, net of interest expense, increased to $5,000 for the three months ended September
30, 2011 from zero in the comparable period in the prior year. Interest income, net of interest
expense, was $16,000 for the nine months ended September 30, 2011 and $87,000 for the nine months
ended September 30, 2010. The decrease in interest income, net, primarily relates to lower
investment balances and lower rates of return on our investments during the nine months ended
September 30, 2011 compared to the same period in 2010.
Other Loss, Net
Other loss, net, was zero for both the three months ended September 30, 2011 and 2010. Other loss,
net, was $1,000 and $79,000 for the nine months ended September 30, 2011 and 2010, respectively.
The other loss, net, during the nine months ended September 30, 2010 primarily relates to the
change in market value of a foreign exchange derivative financial instrument. The financial
instrument resulted in a net loss of $62,000 for the nine months ended September 30, 2010. During
the three and nine months ended September 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 nine months ended September 30, 2011 was 8%, compared to a tax benefit
rate of 6% for the nine months ended September 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 September 30,
2011 and September 30, 2010. The income tax expense for the nine months ended September 30, 2011
was primarily due to tax in foreign jurisdictions. The income tax benefit for the nine months
ended September 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 activities because we closed our French operations at the end
of 2010.
15
Net Income (Loss)
We reported net income of $59,000 for the three months ended September 30, 2011 and net loss of
$4.3 million for the three months ended September 30, 2010. Basic and diluted earnings per share
for the three months ended September 30, 2011 was $0.01. Basic loss per share for the three months
ended September 30, 2010 was ($0.63). The Company reported net income of $607,000 and net loss of
$8.9 million for the nine months ended September 30, 2011 and September 30, 2010, respectively.
Basic and diluted earnings per share for the nine months ended September 30, 2011 was $0.09. Basic
loss per share for the nine months ended September 30, 2010 was ($1.30).
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Cash and cash equivalents increased $3.3 million from December 31, 2010 to September 30, 2011 and
decreased $2.3 million from December 31, 2009 to September 30, 2010. Cash flows are impacted by
operating, investing and financing activities.
Operating Activities
Trends in cash flows from operating activities for the nine months ended September 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. Cash provided by operating activities totaled
$253,000 for the nine months ended September 30, 2011, compared to a net income of $607,000.
Provision for uncollectible accounts and returns remained consistent for the nine months ended
September 30, 2011 compared to the same period in 2010. Provision for excess and obsolete
inventories decreased $100,000 for the nine months ended September 30, 2011 compared to the same
period in 2010. Depreciation and amortization decreased $151,000 for the nine months ended
September 30, 2011 compared to the same period in 2010. Amortization of stock-based compensation
increased $10,000 for the nine months ended September 30, 2011 compared to the nine months ended
September 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 $2.5 million and $2.1 million for the nine months
ended September 30, 2011 and 2010, respectively. Cash provided by investing activities in each of
the periods related principally to our investments in marketable securities, offset by additions to
property and equipment and capitalized software purchases. Additions to property and equipment and
capitalized software were $238,000 for the nine months ended September 30, 2011 compared to $68,000
for the nine months ended September 30, 2010. The additions for the nine months ended September 30,
2011 primarily related to software and equipment purchases for our engineering, manufacturing and
administrative functions. The additions for the nine months ended September 30, 2010 primarily
related to software and equipment purchases for our engineering and manufacturing functions.
Purchases of marketable securities were $2.8 million and $3.0 million for the nine months ended
September 30, 2011 and 2010, respectively. Proceeds from the sale of marketable securities
increased to $5.5 million for the nine months ended September 30, 2011 compared to $5.1 million for
the same period in 2010.
Financing Activities
Net cash provided by financing activities totaled $527,000 for the nine months ended September 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 nine months ended September 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
16
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):
Severance & | Other | |||||||||||
Description | Fringe Benefits | Related Costs | Total | |||||||||
Restructuring charge |
$ | 3,181 | $ | 158 | $ | 3,339 | ||||||
Reclassification of restructuring charge,
net of currency translation adjustments |
(111 | ) | 111 | | ||||||||
Cash payments, net of currency translation
adjustments,
during quarter ended December 31, 2010 |
2,057 | 93 | 2,150 | |||||||||
Cash payments, net of currency translation
adjustments,
during quarter ended March 31, 2011 |
957 | 62 | 1,019 | |||||||||
Cash payments, net of currency translation
adjustments,
during quarter ended June 30, 2011 |
27 | 114 | 141 | |||||||||
Cash payments, net of currency translation
adjustments,
during quarter ended September 30, 2011 |
10 | | 10 | |||||||||
Remaining liability as of September 30, 2011 |
$ | 19 | $ | | $ | 19 | ||||||
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 nine months ended September 30, 2010 were
approximately $317,000 and $979,000, respectively. There was no remaining liability as of
September 30, 2010.
Commitments
At September 30, 2011 we had no material commitments to purchase capital assets; however, planned
capital expenditures for the remainder of 2011 are estimated at approximately $100,000, 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 September 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,
17
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.
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.
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 $7,000 and $238,000 for
the three months ended September 30, 2011 and 2010, respectively. The Euro to U.S. Dollar
translation accounted for charges of approximately $25,000 and $947,000 for the nine months ended
September 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 nine months ended September 30, 2011, and thus there was
no related gain or loss. In addition, there were no foreign exchange contracts held by us during
the three months ended September 30, 2010; thus there was no related gain or loss during the
period. For the nine months ended September 30, 2010, we recognized a loss of approximately
$62,000 related to a foreign exchange contract. At September 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 September 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 September 30, 2011. This
potential change is based on sensitivity analyses performed on our marketable securities at
September 30, 2011. Actual results may differ
18
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 on December 19, 2013 with an
applicable interest rate on any outstanding balances under the credit facility based on London
Interbank Offered Rate (LIBOR), plus a 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 September 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 September 30,
2011 and prior to the Companys filing of the condensed consolidated financial statements, the
outstanding balance on the credit facility was repaid.
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 September 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 $3.8 million at September
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
19
(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.
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 Label Linkbase Document. * | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document. * |
* | Furnished electronically herewith, but (in accordance with Rule 406T of Regulation S-T) not deemed filed. |
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERPHASE CORPORATION (Registrant) |
||||
Date: November 7, 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) |
||||
21