Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - INTERPHASE CORPFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR9.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR25.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR37.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR33.htm
EX-32.B - EXHIBIT 32(B) - INTERPHASE CORPex32-b.htm
EX-32.A - EXHIBIT 32(A) - INTERPHASE CORPex32-a.htm
EX-31.B - EXHIBIT 31(B) - INTERPHASE CORPex31-b.htm
EX-31.A - EXHIBIT 31(A) - INTERPHASE CORPex31-a.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR4.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR7.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR8.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR5.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR1.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR3.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR2.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR6.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR34.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR18.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR20.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR14.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR12.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR30.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR15.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR23.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR22.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR21.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR24.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR11.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR36.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR16.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR13.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR19.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR29.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR26.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR28.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR27.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR10.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR35.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR17.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR32.htm
XML - IDEA: XBRL DOCUMENT - INTERPHASE CORPR31.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
OR
 
¨
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)
 
  (214) 654-5000
(Registrant’s 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  x    No  ¨
 
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  x   No  ¨

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.  (Check one):
 
Large accelerated filer  ¨      Accelerated filer  ¨      Non-accelerated filer  ¨ Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 
As of October 31, 2012, shares of common stock outstanding totaled 7,000,010.
 


 
 

 
 
INTERPHASE CORPORATION

Index to Form 10-Q
Quarterly Period Ended September 30, 2012
 
 
Part I - Financial Information
 
     
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
     
  Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011
2
     
 
Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2012 and 2011
3
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2012 and 2011
4
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011
5
     
 
Notes to Condensed Consolidated Financial Statements
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
     
Item 4.
Controls and Procedures
18
     
     
Part II - Other Information
 
     
Item 1.
Legal Proceedings
19
     
Item 1A.
Risk Factors
20
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
20
     
Item 3.
Defaults Upon Senior Securities
20
     
Item 4.
Mine Safety Disclosures
20
     
Item 5.
Other Information
20
     
Item 6.
Exhibits
20
 
 
 

 
 
PART I
FINANCIAL INFORMATION

Item 1.               CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 
   
September 30,
2012
   
December 31,
2011
 
ASSETS
           
Cash and cash equivalents
  $ 4,655     $ 7,470  
Marketable securities
    4,601       4,355  
Trade accounts receivable, less allowances of $35 and $43, respectively
    2,507       2,998  
Inventories
    2,443       1,556  
Prepaid expenses and other current assets
    424       414  
Total current assets
    14,630       16,793  
                 
Machinery and equipment
    6,033       6,233  
Leasehold improvements
    332       327  
Furniture and fixtures
    400       400  
      6,765       6,960  
Less-accumulated depreciation and amortization
    (6,397 )     (6,591 )
Total property and equipment, net
    368       369  
                 
Capitalized software, net
    181       225  
Other assets
    498       431  
Total assets
  $ 15,677     $ 17,818  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Accounts payable
  $ 633     $ 1,008  
Deferred revenue
    141       164  
Accrued liabilities
    1,108       1,231  
Accrued compensation
    95       393  
Total current liabilities
    1,977       2,796  
                 
Deferred lease obligations
    123       180  
Long-term debt
    3,500       3,500  
Total liabilities
    5,600       6,476  
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock, $0.10 par value; 100,000,000 shares authorized; 7,000,010 and 6,895,085 shares issued and outstanding, respectively
    700       690  
Additional paid in capital
    45,547       44,232  
Retained deficit
    (35,300 )     (32,708 )
Cumulative other comprehensive loss
    (870 )     (872 )
Total shareholders' equity
    10,077       11,342  
Total liabilities and shareholders' equity
  $ 15,677     $ 17,818  
 
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)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues:
                       
Product
  $ 2,120     $ 4,690     $ 8,115     $ 16,671  
Service
    1,047       831       2,536       1,715  
Total revenues
    3,167       5,521       10,651       18,386  
Cost of sales:
                               
Product
    1,037       2,483       4,013       8,284  
Service
    666       443       1,748       1,008  
Total cost of sales
    1,703       2,926       5,761       9,292  
Gross margin
    1,464       2,595       4,890       9,094  
                                 
Research and development
    690       923       2,476       2,971  
Sales and marketing
    658       834       2,700       2,710  
General and administrative
    648       753       2,319       2,767  
Total operating expenses
    1,996       2,510       7,495       8,448  
(Loss) income from operations
    (532 )     85       (2,605 )     646  
                                 
Other income, net
    -       5       13       15  
(Loss) income before income tax
    (532 )     90       (2,592 )     661  
                                 
Income tax expense
    9       31       -       54  
Net (loss) income
  $ (541 )   $ 59     $ (2,592 )   $ 607  
                                 
Net (loss) income per share:
                               
Basic
  $ (0.08 )   $ 0.01     $ (0.37 )   $ 0.09  
Diluted
  $ (0.08 )   $ 0.01     $ (0.37 )   $ 0.09  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
 
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net (loss) income
  $ (541 )   $ 59     $ (2,592 )   $ 607  
Other comprehensive (loss) income:
                               
Foreign currency translation adjustment
    (12 )     6       (1 )     (37 )
Unrealized holding gain (loss) arising during period, net of tax
    2       (5 )     3       (21 )
Other comprehensive (loss) income
    (10 )     1       2       (58 )
Comprehensive (loss) income
  $ (551 )   $ 60     $ (2,590 )   $ 549  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
   
Nine Months Ended
September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net (loss) income
  $ (2,592 )   $ 607  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
               
Recovery of uncollectible trade accounts receivable and product returns
    (8 )     (12 )
Provision for excess and obsolete inventories
    65       -  
Depreciation and amortization
    311       416  
Stock-based compensation expense
    501       272  
Change in assets and liabilities:
               
Trade accounts receivable
    499       (226 )
Inventories
    (952 )     110  
Prepaid expenses and other current assets
    (11 )     282  
Other assets
    (70 )     139  
Accounts payable, deferred revenue and accrued liabilities
    (516 )     (1,031 )
Accrued compensation
    (298 )     (257 )
Deferred lease obligations
    (57 )     (47 )
Net cash (used in) provided by operating activities
    (3,128 )     253  
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (162 )     (169 )
Purchase of capitalized software
    (104 )     (69 )
Proceeds from the sale of marketable securities
    7,213       5,503  
Purchases of marketable securities
    (7,456 )     (2,800 )
Net cash (used in) provided by investing activities
    (509 )     2,465  
                 
Cash flows from financing activities:
               
Borrowings under credit facility
    10,500       7,000  
Payments on credit facility
    (10,500 )     (7,000 )
Proceeds from the exercise of stock options
    824       527  
Net cash provided by financing activities
    824       527  
                 
Effect of exchange rate changes on cash and cash equivalents
    (2 )     96  
                 
Net (decrease) increase in cash and cash equivalents
    (2,815 )     3,341  
Cash and cash equivalents at beginning of period
    7,470       4,772  
Cash and cash equivalents at end of period
  $ 4,655     $ 8,113  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
NOTE 1.  -  BASIS OF PRESENTATION

Interphase Corporation and its subsidiaries (“Interphase” or the “Company”) is a diversified information and communications technology company, committed to innovation through the process of identifying, developing and introducing new products and services.  The Company is known in the industry as a premier provider of solutions for connectivity, interworking, packet processing, electronic manufacturing services, and electronic engineering design services.  Clients of the Company’s communications networking products include Alcatel-Lucent, Emerson Network Power, Fujitsu Ltd., Genband, Hewlett Packard, Nokia Siemens Networks, Oracle, and Samsung.  Interphase recently expanded its business to include penveu®, a handheld device that enhances the functionality of installed projectors and large screen displays; making any flat surface, from pull down screens to HDTVs, an interactive display system. penveu is an affordable and portable solution that targets the education and enterprise markets.  The Company, founded in 1974, is headquartered in Plano, Texas, with manufacturing facilities in Carrollton, Texas, and sales offices throughout the Americas and Europe.  See Note 10 for information regarding the Company’s 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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011.

NOTE 2.  - STOCK-BASED COMPENSATION

Stock Options

During the nine months ended September 30, 2012, the Company issued 138,500 stock options that vest over a one to four year period and expire ten years from date of grant.  The weighted average exercise price of these stock options is $5.25.  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 the date of grant. The weighted average exercise price of these stock options is $2.00.  Compensation expense related to these stock options was $108,000 and $44,000 for the three months ended September 30, 2012 and 2011, respectively.  Compensation expense related to these stock options was $285,000 and $114,000 for the nine months ended September 30, 2012 and 2011, respectively.

During the nine months ended September 30, 2012, the Company also issued 448,000 stock options with performance-based vesting conditions for the years ending December 31, 2012, 2013, 2014, and 2015, the achievement of which would result in pro rata vesting per year in February 2013, 2014, 2015, and 2016, respectively. The weighted average exercise price of these stock options is $4.76.  During the nine months ended September 30, 2011, the Company issued 20,000 stock options with performance-based vesting conditions related to non-financial objectives for November 2011 and January 2012 and revenue objectives for the years ending December 31, 2012, 2013 and 2014, the achievement of which would result in vesting in February 2013, 2014 and 2015.  All stock options with performance-based conditions expire ten years from date of grant.  Of the stock options outstanding at September 30, 2012, 638,975 are subject to the achievement of certain performance conditions.  The performance conditions related to approximately 37,000 of these stock options were deemed probable as of September 30, 2012.  Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $28,000 for the three months ended September 30, 2012.  During the three months ended September 30, 2011, it was determined that performance targets related to certain 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, for which vesting was deemed probable, was $113,000 and $8,000 for the nine months ended September 30, 2012 and 2011, respectively.  The performance conditions related to the remaining options were not deemed probable at September 30, 2012; therefore no compensation expense related to these options has been recorded.
 
 
6

 
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2012 and 2011 was 3.42 years and 2.07 years, respectively.

The following table summarizes the combined stock option activity under all of the plans:
 
   
Number of Options
   
Weighted Average Option Price
 
Balance, December 31, 2011
    1,332,473     $ 4.21  
Granted
    586,500       4.88  
Exercised
    (168,915 )     4.83  
Cancelled
    (189,025 )     3.85  
Balance, September 30, 2012
    1,561,033     $ 4.44  

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
September 30,
   
Nine months ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Weighted average risk free interest rates
    1.53 %     2.28 %     1.93 %     3.54 %
Weighted average life (in years)
    10       10       10       10  
Volatility
    66.00 %     66.16 %     65.90 %     63.89 %
Expected dividend yield
    -       -       -       -  
Weighted average grant-date fair value per share of options granted
  $ 3.18     $ 3.39     $ 3.55     $ 1.70  

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 declared, and to vote their respective shares.  Restrictions limit the sale or transfer of these shares during a predefined vesting period, currently ranging from three to six years, and in some cases vesting is subject to the achievement of certain performance conditions. During the nine months ended September 30, 2012, the Company issued 9,000 shares of restricted stock.  During the nine months ended September 30, 2011, the Company issued 72,000 shares of restricted stock.  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 $34,000 and $44,000 for the three months ended September 30, 2012 and 2011, respectively.  Compensation expense related to restricted stock was $103,000 and $149,000 for the nine months ended September 30, 2012 and 2011, respectively.  As of September 30, 2012, there was $294,000 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 2.3 years.  As of December 31, 2011, there was $479,000 of total unamortized compensation cost related to unvested restricted stock which was expected to be recognized over a weighted-average period of 3.0 years.  The following table summarizes the restricted stock activity for the nine months ended September 30, 2012:
 
 
7

 
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

   
Restricted Stock Shares
   
Weighted Average Grant Date Value
 
Nonvested restricted stock at December 31, 2011
    225,941     $ 2.67  
Granted
    9,000       5.72  
Vested
    (44,236 )     3.47  
Cancelled/Forfeited
    (72,990 )     1.82  
Nonvested restricted stock at September 30, 2012
    117,715     $ 3.13  
 
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:

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.
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.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The Company’s 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) income. 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 Company’s credit facility.  The fair values of marketable securities were estimated using the market approach.

Financial assets, measured at fair value, by level within the fair value hierarchy were as follows (in thousands):
 
 

     
September 30, 2012
   
December 31, 2011
 
 
Fair Value Hierarchy
 
Cost
   
Unrealized Gain
   
Estimated Fair Value
   
Cost
   
Unrealized Gain
   
Estimated Fair Value
 
Asset Backed
Level 2
  $ 1,281     $ 4     $ 1,285     $ 2,136     $ 2     $ 2,138  
Corporate Bonds
Level 2
    615       1       616       616       1       617  
US Treasuries
Level 2
    2,700       -       2,700       1,600       -       1,600  
Total
    $ 4,596     $ 5     $ 4,601     $ 4,352     $ 3     $ 4,355  

 
8

 
INTERPHASE CORPORATION
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, determined on a first-in, first-out basis, is as follows (in thousands):

   
September 30, 2012
   
December 31, 2011
 
Raw Materials
  $ 1,878     $ 1,231  
Work-in-Process
    491       214  
Finished Goods
    74       111  
Total
  $ 2,443     $ 1,556  

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 Company’s products.  Future events may cause significant fluctuations in the Company’s operating results.  Inventories are written down when needed to ensure the Company carries inventory at the lower of cost or market.  The Company increased reserve requirements by $45,000 during the three months ended September 30, 2012.  There were no writedowns during the three months ended September 30, 2011.  The Company increased reserve requirements by $65,000 during the nine months ended September 30, 2012.  There were no writedowns during the nine months ended September 30, 2011.

NOTE 5.  -  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 Company’s 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 the Company continues to provide a full valuation allowance for the net deferred tax assets at September 30, 2012 and 2011.

NOTE 6.  -  RESTRUCTURING CHARGE

On September 30, 2010, the Company 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, the Company reduced its worldwide work force by 39 employees, including the closure of its European engineering and support center located in Chaville, France.  As a result of the 2010 restructuring plan, the Company 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.  Cash payments, net of currency translation adjustments, during the three and nine months ended September 30, 2011 were approximately $10,000 and $1.2 million, respectively.  The remaining liability as of September 30, 2011 was $19,000.  These amounts were paid out under the restructuring plan by the end of 2011.

NOTE 7.  -  CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2013.  The Company intends to extend or replace this credit facility during the fourth quarter of 2012.  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, 2012 and December 31, 2011, the Company’s interest rate on the $3.5 million outstanding balance was 1.9% 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, 2012 and December 31, 2011 is classified as long-term debt on the Company’s condensed consolidated balance sheets.  Subsequent to September 30, 2012 and prior to the Company’s 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)

NOTE 8.  -  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
September 30,
   
Nine months ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Basic net (loss) income per share:
                       
Net (loss) income
  $ (541 )   $ 59     $ (2,592 )   $ 607  
Weighted average common shares outstanding
    7,000       6,895       6,965       6,845  
Basic net (loss) income per share
  $ (0.08 )   $ 0.01     $ (0.37 )   $ 0.09  
                                 
Diluted net (loss) income per share:
                               
Net (loss) income
  $ (541 )   $ 59     $ (2,592 )   $ 607  
Weighted average common shares outstanding
    7,000       6,895       6,965       6,845  
Dilutive stock options
    -       287       -       280  
Weighted average common shares outstanding – assuming dilution
    7,000       7,182       6,965       7,125  
Diluted net (loss) income per share
  $ (0.08 )   $ 0.01     $ (0.37 )   $ 0.09  
                                 
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive
    717       609       713       708  
 
NOTE 9.  -  SHAREHOLDERS’ EQUITY

The Board of Directors adopted a Shareholder Rights Plan (the “Plan”) and, under the Plan, declared a non-taxable dividend, paid at the close of business on August 9, 2011 (the “Record Date”), of one common share purchase right (a “Right”) for each outstanding share of Common Stock.  From the Record Date until the Rights become exercisable, the Rights will be attached to all outstanding shares of Common Stock and, therefore, will be represented by the certificates evidencing the shares of Common Stock and transferrable only with the shares of Common Stock.  A Right will be exercisable, upon certain conditions, to purchase one share of Common Stock from the Company at a price of $39, subject to adjustment.  The Rights will become exercisable, and separate from the shares of Common Stock, upon the earlier of:

(1)
ten business days following the date of the first public announcement (the “Stock Acquisition Date”) that a person or a group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (an “Acquiring Person”), or
 
(2)
ten business days (or such later date as the Board of Directors may determine) following the commencement of a tender or exchange offer that, if consummated, would result in a person or group of persons becoming an Acquiring Person.
 
 
10

 
INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Upon a Stock Acquisition Date, each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon exercise of the Right, shares of Common Stock at a 50% discount.  Also, if, at any time following a Stock Acquisition Date, the Company is acquired in a merger or business combination and its Common Stock is exchanged or converted, or if 50% or more of the Company’s assets, cash flow or earning power is sold or transferred, then each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon exercise of the Right, shares of the acquirer’s common stock at a 50% discount.  Further, at any time after a person or group of persons becomes an Acquiring Person, but before any person or group of persons becomes the beneficial owner of 50% or more of the outstanding shares of Common Stock, the Company may cause each exercisable Right to be exchanged for one share of Common Stock.  The Rights will expire at the close of business on July 29, 2021, or such other date as the Board of Directors may determine under certain circumstances.  The Board of Directors may terminate the Plan or cause the Company to redeem the Rights, at a price of $0.001 per Right, at any time before the earlier of a Stock Acquisition Date or the expiration of the Rights.  The Company has reserved 90,315,210 shares of Common Stock for possible issuance upon exercise of Rights under the Plan.

NOTE 10.  -  SEGMENT INFORMATION

The Company is principally engaged in delivering embedded communications networking and computing solutions, interworking gateways, packet processing, network connectivity, and security for key applications for the communications and enterprise markets.  Except for revenues, which are 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 have only a single reporting segment.

Geographic revenue related to North America and foreign regions is as follows (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
North America
  $ 2,092     $ 2,274     $ 5,989     $ 6,127  
Pacific Rim
    623       1,872       2,869       6,755  
Europe
    452       1,375       1,793       5,504  
Total
  $ 3,167     $ 5,521     $ 10,651     $ 18,386  

Additional information regarding revenue by product line is as follows (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Product Revenues:
                       
Telecommunications
  $ 1,925     $ 4,439     $ 7,681     $ 15,154  
Services
    1,047       831       2,536       1,715  
Enterprise
    158       192       346       1,393  
Other
    37       59       88       124  
Total
  $ 3,167     $ 5,521     $ 10,651     $ 18,386  

NOTE 11.  -  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  This ASU deferred the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income on the face of the financial statements.  Companies are still required to present reclassifications out of AOCI on the face of the financial statements or disclose those amounts in the notes to the financial statements.  This ASU also defers the requirement to report reclassification adjustments in interim periods.  This ASU is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively.  The Company’s adoption of this update did not have a material impact on the consolidated financial statements.
 
 
11

 
 INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
In June 2011, the FASB issued 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.  The Company’s adoption of this update did not have a material impact on the 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 U.S. 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.  The Company’s adoption of this update did not have a material impact on the consolidated financial statements.

NOTE 12. - SUBSEQUENT EVENT

On October 19, 2012, the Company committed to a restructuring plan intended to result in savings of approximately $1.0 million to $1.6 million in annualized operating costs.  These actions aim to improve the balance between the Company’s telecommunications product expense and the reduced revenue levels of this product line.  As part of this plan, the Company expects to reduce the number of its employees by approximately 12% to 16%.  The Company expects to incur charges for one-time termination benefits in the range of $200,000 to $700,000, most of which will be cash expenditures.  The Company expects to substantially complete the actions associated with this plan during the fourth quarter of 2012.

 
12

 
 
Item 2.               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and other material included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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 Company’s 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 decreased 43% to $3.2 million for the three months ended September 30, 2012, compared to $5.5 million for the same period in the prior year.  Our telecommunications product revenue decreased to $1.9 million for the three months ended September 30, 2012, compared to $4.4 million in the comparable period in the prior year.  This decrease was primarily driven by two factors.  First, we experienced significantly reduced sales of an interworking product where the primary customer has delayed, until November 2012, the launch of its product.  This customer purchased inventory during the three months ended September 30, 2011 in anticipation of an earlier launch.  Second, the slowdown in telecommunications equipment spending worldwide has had a negative impact on our major customers and has impacted their purchase volume from us.  Our services revenues increased to $1.0 million for the three months ended September 30, 2012, compared to $831,000 for the same period in the previous year, because of increases in electronic manufacturing services and, to a lesser degree, increases in electronic engineering design services.  Our enterprise product revenue decreased to $158,000 for the three months ended September 30, 2012 compared to $192,000 for the same period in the previous year.  All other revenues decreased to $37,000, compared to $59,000 in the comparable period last year.

Total revenue decreased 42% to $10.7 million for the nine months ended September 30, 2012, compared to $18.4 million for the same period in the prior year.  Our telecommunications product revenue decreased to $7.7 million for the nine months ended September 30, 2012, compared to $15.2 million in the comparable period in the prior year.  This decrease was primarily driven by two factors.  First, the slowdown in telecommunications equipment spending worldwide has had a negative impact on our major customers and has impacted their purchase volume from us.  Second, we experienced significantly reduced sales of an interworking product where the primary customer has delayed, until November 2012, the launch of its product.  This customer purchased inventory during the nine months ended September 30, 2011 in anticipation of an earlier launch.  Our services revenues increased to $2.5 million for the nine months ended September 30, 2012, compared to $1.7 million for the same period in the previous year, because of increases in electronic manufacturing services and, to a lesser degree, increases in electronic engineering design services.  As expected, our enterprise product revenue decreased to $346,000 for the nine months ended September 30, 2012 compared to $1.4 million for the same period in the previous year because the major customer roll-out driving this product line has been completed.  All other revenues decreased to $88,000, compared to $124,000 in the comparable period last year.
 
 
13

 

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line.  See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

During the third quarter of 2012, sales to one customer individually accounted for approximately 27% of total revenues.  During the third quarter of 2011, sales to two customers individually accounted for approximately 38% and 17% of total revenues, respectively.  No other customers individually accounted for more than 10% of our consolidated revenues in the periods presented.

Included in accounts receivable at September 30, 2012 was $693,000 and $322,000 due from Alcatel-Lucent and Genband, respectively.  Included in accounts receivable at December 31, 2011 was $786,000 and $734,000, due from Alcatel-Lucent and Nokia Siemens Networks, respectively.  No other customers individually accounted for more than 10% of our accounts receivable in the periods presented.

Gross Margin

Gross margin as a percentage of revenue was 46% and 47% for the three months ended September 30, 2012 and 2011, respectively.  The decrease in gross margin percentage in the third quarter of 2012 compared to the same period in the prior year was primarily due to decreased utilization of our manufacturing facility, partially offset by a shift in product mix toward higher margin products.

Gross margin as a percentage of revenue was 46% and 49% for the nine months ended September 30, 2012 and 2011, respectively.  The decrease in gross margin was primarily due to decreased utilization of our manufacturing facility, partially offset by a shift in product mix toward higher margin products.

We believe that pricing pressures in the industry and our anticipated future product mix may further reduce our gross margin percentage in future periods.

Research and Development

Our investment in research and development was $690,000 and $923,000 for the three months ended September 30, 2012 and 2011, respectively.  The decrease in research and development expense was primarily due to a decrease in variable project-related expenses.  As a percentage of revenue, research and development expenses were approximately 22% in the third quarter of 2012 compared to approximately 17% for the same period in the prior year.  The increase in research and development expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than research and development expenses.

Our investment in research and development was $2.5 million and $3.0 million for the nine months ended September 30, 2012 and 2011, respectively.  During the first nine months of 2012, there was an increase in professional services activities, which resulted in an increase in services revenues.  Engineering costs associated with these activities generate revenue; therefore, the related expenses are recorded as cost of sales rather than research and development operating expenses, resulting in a decrease of $255,000 in research and development expenses during the period.  In addition, there was a decrease in other variable project-related expenses of $177,000 during the period.  As a percentage of revenue, research and development expenses were approximately 23% for the nine months ended September 30, 2012 compared to approximately 16% for the same period in the prior year.  The increase in research and development expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than research and development expenses.

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line.  See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

Sales and Marketing

Sales and marketing expenses were $658,000 and $834,000 for the three months ended September 30, 2012 and 2011, respectively. The decrease in sales and marketing expense was primarily due to a decrease in professional sales and marketing services expense of $86,000 and a decrease in personnel-related expense of $79,000.  As a percentage of revenue, sales and marketing expenses were approximately 21% for the third quarter of 2012, compared to approximately 15% for the same period in the prior year.  The increase in sales and marketing expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than sales and marketing expenses.
 
 
14

 

Sales and marketing expenses were $2.7 million for each of the nine months ended September 30, 2012 and 2011. In the nine months ended September 30, 2012, the increase in marketing, public relations and tradeshow activities related to the introduction of our new product, penveu®, was offset by a decrease in personnel-related expense.  As a percentage of revenue, sales and marketing expenses were approximately 25% for the nine months ended September 30, 2012, compared to approximately 15% for the same period in the prior year.  The increase in sales and marketing expenses as a percentage of total revenue was due to revenue decreasing while sales and marketing expenses were flat.

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line.  See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

General and Administrative

General and administrative expenses were $648,000 and $753,000 for the three months ended September 30, 2012 and 2011, respectively.  The decrease in general and administrative expenses was primarily due to a decrease in legal services expense of $57,000 and a decrease in depreciation and amortization expense of $45,000.  As a percentage of revenue, general and administrative expenses were approximately 20% for the third quarter of 2012 and 14% for the same period in the prior year.  The increase in general and administrative expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than general and administrative expenses.

General and administrative expenses were $2.3 million and $2.8 million for the nine months ended September 30, 2012 and 2011, respectively.  The decrease in general and administrative expenses was primarily due to a decrease in personnel-related expense of $195,000, a decrease in legal services expense of $129,000, and a decrease in depreciation of $45,000.  As a percentage of revenue, general and administrative expenses were approximately 22% for the nine months ended September 30, 2012 and 15% for the same period in the prior year.  The increase in general and administrative expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than general and administrative expenses.  We will continue to monitor the level of general and administrative costs concurrently with actual revenue results.

Income Taxes

Our tax rate was 0% for the nine months ended September 30, 2012, compared to a tax expense rate of 8% for the nine months ended September 30, 2011.  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, 2012 and September 30, 2011.  The tax expense for the nine months ended September 30, 2011 primarily relates to tax in a foreign jurisdiction.

Net (Loss) Income

We reported a net loss of $541,000 for the three months ended September 30, 2012 and a net income of $59,000 for the three months ended September 30, 2011.  Basic loss per share for the three months ended September 30, 2012 was ($0.08).  Basic and diluted earnings per share for the three months ended September 30, 2011 was $0.01.  We reported a net loss of $2.6 million for the nine months ended September 30, 2012 and a net income of $607,000 for the nine months ended September 30, 2011.  Basic loss per share for the nine months ended September 30, 2012 was ($0.37).  Basic and diluted earnings per share for the nine months ended September 30, 2011 was $0.09.

Recently Announced Product

On April 18, 2012 we announced the debut of penveu®.  penveu is a handheld device that enhances the functionality of installed projectors and large screen displays; making any flat surface, from pull down screens to HDTVs, an interactive display system.  Using embedded computer vision technology, penveu works with any device with a VGA connection and requires no software or driver installation, no particular operating system, and no periodic calibration.  penveu is targeted at the education and enterprise markets.  An independent source estimates the interactive whiteboard market to grow to approximately $1.85 billion in revenue in 2017.  However, penveu also has the unique ability to turn the estimated over 51 million projectors and 7 million large screen displays that are currently installed worldwide into interactive display devices.  The retail price of penveu will be less than 25% of the average price of a typical installed interactive whiteboard and, unlike an interactive whiteboard, penveu will not require the time and expense of installation.  penveu will be offered and sold through our website, other online retailers and catalogs.  We continue to make significant investments in development, marketing and infrastructure associated with penveu to position this important product for a successful launch.
 
 
15

 

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents decreased $2.8 million from December 31, 2011 to September 30, 2012 and increased $3.3 million from December 31, 2010 to September 30, 2011.  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, 2012 and 2011 are generally similar to the trends in our earnings except for the recovery of uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization and amortization of stock-based compensation.  Cash used in operating activities totaled $3.1 million for the nine months ended September 30, 2012, compared to net loss of $2.6 million.  Recovery of uncollectible accounts and returns decreased $4,000 for the nine months ended September 30, 2012 compared to the same period in 2011.  Provision for excess and obsolete inventories increased $65,000 for the nine months ended September 30, 2012 compared to the same period in 2011.  Depreciation and amortization decreased $105,000 for the nine months ended September 30, 2012 compared to the same period in 2011.  Amortization of stock-based compensation increased $229,000 for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to stock options issued during the first half of 2012. 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 except for the increase in inventory during the nine months ended September 30, 2012, which was primarily due to the purchase of parts for penveu and parts associated with an interworking product where the primary customer has delayed the launch of its product.  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 used in investing activities totaled $509,000 and cash provided by investing activities totaled $2.5 million for the nine months ended September 30, 2012 and 2011, respectively. Cash used in or provided by investing activities in each of the periods related principally to our investments in marketable securities, additions to property and equipment and capitalized software purchases.  Additions to property and equipment and capitalized software were $266,000 for the nine months ended September 30, 2012, compared to $238,000 for the nine months ended September 30, 2011.  The additions for the nine months ended September 30, 2012 primarily related to software and equipment purchases for our newly announced product, penveu®, and for our manufacturing function.  The additions for the nine months ended September 30, 2011 primarily related to software and equipment purchases for our engineering, manufacturing, and administrative functions.  Purchases of marketable securities were $7.5 million and $2.8 million for the nine months ended September 30, 2012 and 2011, respectively.  Proceeds from the sale of marketable securities increased to $7.2 million for the nine months ended September 30, 2012, compared to $5.5 million for the nine months ended September 30, 2011.

Financing Activities

Net cash provided by financing activities totaled $824,000 for the nine months ended September 30, 2012, consisting solely of proceeds from the exercise of stock options.  Net cash provided by financing activities totaled $527,000 for the nine months ended September 30, 2011, also consisting solely of proceeds from the exercise of stock options.
 
 
16

 

Restructuring Charge

On September 30, 2010, the Company 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, the Company reduced its worldwide work force by 39 employees, including the closure of its European engineering and support center located in Chaville, France.  As a result of the 2010 restructuring plan, the Company 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.  Cash payments, net of currency translation adjustments, during the three and nine months ended September 30, 2011 were approximately $10,000 and $1.2 million, respectively.  The remaining liability as of September 30, 2011 was $19,000.  These amounts were paid out under the restructuring plan by the end of 2011.

Commitments

At September 30, 2012, we had no material commitments to purchase capital assets; however, planned capital expenditures for the remainder of 2012 are estimated at approximately $30,000, which primarily relates to software for penveu.  At September 30, 2012, we had $124,000 of non-cancelable purchase commitments for inventory and product tooling as part of the normal course of business.  Our significant long-term obligations are operating leases on facilities and our phone system and future debt payments.  We have not paid any dividends since our inception and do not anticipate paying any dividends in 2012.

Other

Management believes that 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.

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, 2011.

Recently Issued Accounting Pronouncements

See Note 11 in the notes to the condensed consolidated financial statements for more information regarding recently issued accounting pronouncements, including the dates of adoption and estimated effects on our condensed consolidated financial statements.

Subsequent Event

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line.  See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.
 
 
17

 

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 Company’s 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 $2,000 and $7,000 for the three months ended September 30, 2012 and 2011, respectively.  The Euro to U.S. Dollar translation accounted for charges of $14,000 and $25,000 for the nine months ended September 30, 2012 and 2011, respectively.  This risk was significantly reduced due to the closure of our French operations at the end of 2010.

Market Price Risk

We had no equity hedge contracts outstanding as of September 30, 2012 or December 31, 2011.

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, 2012.  This potential change is based on sensitivity analyses performed on our marketable securities at September 30, 2012.  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, 2011.

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 1.9% and 1.8% at September 30, 2012 and December 31, 2011, 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 50 basis point increase in LIBOR would increase annual interest expense on this credit facility by $17,500.  All borrowings under this facility are secured by marketable securities.  Subsequent to September 30, 2012 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.  The Company intends to extend or replace this credit facility during the fourth quarter of 2012.
 
Item 4.               CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s 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 Company’s 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 Company’s 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.
 
 
18

 
 
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, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II
OTHER INFORMATION

Item 1.               LEGAL PROCEEDINGS

French Restructuring Litigation

Twenty-five former employees (“Plaintiffs”) of Interphase SAS, a subsidiary of Interphase Corporation, 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 lawsuits were filed between November 2010 and April 2011 and are pending in the Labor Court of Boulogne-Billancourt, France and the Administrative Court of Cergy-Pontoise, France.  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 6 in the notes to the condensed consolidated financial statements for more information regarding the restructuring plan.  The updated statement of claim is for an aggregate payment of approximately €3.1 million, which translated to approximately $4.0 million at September 30, 2012, related to these claims.  The Company believes that the Plaintiffs’ claims are without merit and plans to continue to vigorously defend itself in this lawsuit.

On March 22, 2012, a hearing was conducted with the Labor Court of Boulogne-Billancourt, France related to the claims of twenty-three of the twenty-five former employees.  On May 31, 2012, the Court reported that the four judges’ votes were split; therefore, another hearing of the Court will be scheduled.  The same four judges will hear the case again, along with a professional judge from another court to ensure that a majority decision will be reached.  A date has not yet been scheduled for the new hearing.  The new hearing is not likely to take place before mid-2013.

On May 22, 2012, a hearing was conducted with the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees.  On July 31, 2012, the Court reported that the four judges’ votes were split; therefore, another hearing of the Court will be scheduled.  The same four judges will hear the case again, along with a professional judge from another court to ensure that a majority decision will be reached.  A date has not yet been scheduled for the new hearing.  The new hearing is not likely to take place before mid-2013.

On June 12, 2012, a hearing was conducted with the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees.  The Labor Court postponed the hearing on this case until May 28, 2013 or until the Administrative Court rules on this case.

Patent Infringement Litigation

On April 7, 2011, Interphase was named as one of the defendants in a lawsuit filed by Mosaid Technologies (“Mosaid”) pending in the United States District Court for the Eastern District of Texas.  The complaint includes allegations that Interphase has infringed and is still 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 Interphase’s products.
 
 
19

 

The complaint requests a judgment that Mosaid’s patents have been and are being infringed upon 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 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 Mosaid’s allegations.  Nevertheless, Interphase intends, and understands that Freescale intends, to vigorously defend the allegations; and to the extent that the infringement claim relates to the Freescale chips used in Interphase’s products, Freescale will also defend Interphase and indemnify Interphase against damages in the lawsuit.

In late-August 2012, after a hearing, the court denied Mosaid’s motion to limit the defendants' invalidity contentions regarding Mosaid’s patent claims and granted the defendants' motion to limit the number of asserted claims in this lawsuit.

In late-September 2012, after a hearing, the court denied the defendants' motion to sever Interphase from this lawsuit and transfer the remainder of the lawsuit to California.

In mid-October 2012, the parties to this lawsuit began the court-ordered mediation process.

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, 2011.

Item 2.               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.               DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.               MINE SAFETY DISCLOSURES

None.

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. *
101.DEF
XBRL Taxonomy Extension Definition 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 8, 2012                                                                                       By:/s/ Thomas N. Tipton Jr.
Thomas N. Tipton Jr.
Chief Financial Officer, Secretary,
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
 
 
 
21