Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

INTERPHASE CORPORATION

Parkway Centre I
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
(Address of Principal Executive Offices)

(214)-654-5000
(Registrant’s telephone number, including area code)

Table of Contents

INTERPHASE CORPORATION

INDEX

2

Table of Contents

INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of share data)

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

3

Table of Contents

INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

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

4

Table of Contents

INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

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

5

Table of Contents

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.     BASIS OF PRESENTATION

Interphase Corporation and subsidiaries (“Interphase” or the “Company”) enables rapid platform design and integration for the global voice and data communications markets through custom and off-the-shelf communications equipment, embedded software development suites, and systems integration and consulting services for telecom and enterprise networks. The Company’s products connect computer and telecommunication servers to Wide Area Networks (WANs), Local Area Networks (LANs) and Storage Area Networks (SANs) using Asynchronous Transfer Mode (ATM), Ethernet, Signaling System 7 (SS7), IP, Fibre Channel, HDLC, Frame Relay and Integrated Services Digital Network (ISDN) technologies. See Note 8 for information regarding the Company’s revenues related to North America and foreign countries.

The accompanying consolidated interim financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated.

While the accompanying interim financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all material adjustments and disclosures necessary to fairly present the results of such periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with 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. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002.

Certain prior period amounts within the Statements of Cash Flows have been reclassified to conform with the current year presentation.

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires Company management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving estimates are the allowance for doubtful accounts and returns, warranty and inventory reserves and deferred taxes.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations in accounting for its employee stock options. Under APB 25, compensation expense is recorded when the exercise price of employee stock options is less than the fair value of the underlying stock on the date of grant. The Company has implemented the disclosure-

6

Table of Contents

only provisions of Statement of Financial Accounting Standards Board No. (“SFAS”) 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” Had the Company elected to adopt the expense recognition provisions of SFAS 123, the pro forma impact on net income and earnings per share would have been as follows:

The Company utilizes the Black-Scholes option-pricing model to calculate its pro forma stock-based compensation expense, and the assumptions used for each period are as follows:

2. 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):

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

7

Table of Contents

Company’s products. Future events may cause significant fluctuations in the Company’s operating results.

3. DEFERRED TAXES

SFAS No.109, “Accounting for Income Taxes” (“SFAS 109”) requires that a valuation allowance be established when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a 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.

Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Cumulative losses weigh heavily in the overall assessment. As a result of a review undertaken at December 31, 2002, the Company concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets. The Company continues to maintain a full valuation allowance on the tax benefits. Until an appropriate level of profitability is sustained, the Company expects to continue to record a full valuation allowance on future tax benefits and does not expect to recognize any significant tax benefits in future results of operations.

The Company has received preliminary tax assessments for the years 1996 to 2001 from the French tax authorities proposing tax deficiencies, including related interest, of approximately $225,000. The Company has filed protests to the assessments with respect to such years and believes that a significant portion of the assessments is without merit. No assurance can be given that the Company’s tax matters will be favorably resolved due to the inherent uncertainties involved in tax proceedings. The Company believes that it has provided adequate accruals for additional taxes and related interest expense which may ultimately result for all such examinations and believes that the ultimate disposition of such examinations should not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

4. CREDIT FACILITY

At June 30, 2003, the Company had a $5 million revolving bank credit facility (“current credit facility”). The current credit facility matures on June 30, 2004 and is secured throughout the term of the credit facility by a ninety-day certificate of deposit issued by the bank in the principal amount equal to the stated principal amount of the promissory note. The certificate of deposit is reflected as restricted cash on the accompanying balance sheet. The current credit facility bears interest at the rate of approximately 1% per annum above the certificate of deposit rate, which was 0.90% at June 30, 2003, and includes certain restrictive covenants including, among others, a tangible net worth restriction. As of June 30, 2003, the Company was in compliance with all restrictive covenants included in the current credit facility. At June 30, 2003, the Company had borrowings of $3.5 million

8

Table of Contents

classified as long-term debt on the balance sheet and the remaining availability under the current credit facility was $1.5 million.

On July 25, 2003, the Company entered into a new $ 5 million revolving bank credit facility (“new credit facility”) designed to replace the current credit facility described above. The new credit facility matures on July 30, 2005 therefore; the borrowings of $3.5 million, under the current credit facility, are classified as long-term debt on the balance sheet at June 30, 2003. All borrowings under the new credit facility will be secured by marketable securities. The new credit facility bears interest at the rate of LIBOR plus 2.00%. The Company intends to borrow $3.5 million under the new credit facility during the third quarter and repay the current credit facility with the proceeds.

5. EXIT ACTIVITIES

During the second quarter 2003, the Company committed to an exit plan regarding one of its leased facilities. The Company had previously held this facility open for storage, overflow use, and anticipated growth. During the quarter, the Company determined that the facility would not be needed for overflow space and other arrangements could be made for storage. The lease for this facility will expire in the first quarter 2005, however the Company is pursuing subleasing opportunities. As a result of this exit plan, the Company recorded a charge of approximately $109,000, classified as operating expenses, related to net termination costs associated with the lease of the facility. Additional costs may be incurred in future periods if the Company is not successful in subleasing the facility.

6. COMPREHENSIVE LOSS

The following table shows the Company’s comprehensive loss (in thousands):

7. NET INCOME PER COMMON AND COMMON DILUTIVE SHARE

Diluted earnings per share consist only of the dilutive impact of stock options, using the treasury stock method. Due to the Company’s net losses for the periods presented, the effect of dilutive securities would have been antidilutive. Options that would have otherwise been included in the calculation of diluted earnings per common share were 103,018 and 12,869 stock options for the three-month periods ended June 30, 2003 and 2002, respectively and 31,750 and 31,778 stock options for the six-month periods ended June 30, 2003 and 2002, respectively.

9

Table of Contents

8. SEGMENT INFORMATION

The Company is principally engaged in the design, development, and manufacturing of high-performance connectivity products utilizing advanced technologies being used in next generation telecommunication networks and enterprise data/storage networks. Except for revenue performance, which is monitored by product line, the chief operating decision-makers review financial information presented on a consolidated basis, for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment.

Geographic revenues related to North America and foreign countries for the three-months and six-months ended June 30, 2003 and 2002 are as follows (in thousands):

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

9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On November 25, 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies” relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. For guarantees that fall within the scope of FIN 45, the Interpretation requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The Interpretation’s provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The guarantor’s previous accounting for guarantees that were issued before the date of FIN 45’s initial application may not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation. The disclosure requirements were effective for financial statements of both interim and annual periods that end after December 15, 2002.

Emerging Issues Task Force (“EITF”) Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” addresses the accounting treatment for an

10

Table of Contents

arrangement to provide the delivery or performance of multiple products and/or services where the delivery of a product or system or performance of services may occur at different points in time or over different periods of time. The arrangements are often accompanied by initial installation, initiation, or activation services and involve either a fixed fee or a fixed fee coupled with a continuing payment stream, which may be fixed or variable. The EITF reached conclusions regarding, among other issues, the applicability of the provisions regarding separation of contract elements in EITF Issue 00-21 to contracts where one or more elements fall within the scope of other authoritative literature, such as the AICPA’s Statement of Position (“SOP”) 81-1. The EITF does not impact the use of SOP 81-1 for contracts that fall within the scope of SOP 81-1, such as for implementation or building of an information technology system or product to client specifications for a client under a long-term contract. Where an implementation or development project is contracted with a client, and the vendor will also provide services or operate the system over a period of time, EITF Issue 00-21 provides the methodology for separating the contract elements and earnings processes. The provisions of EITF Issue 00-21 are applicable on a prospective basis to transactions entered into in fiscal years beginning after June 15, 2003. The Company does not believe that EITF Issue 00-21 will have a material impact on its consolidated financial statements.

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

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, the Company’s reliance on a limited number of customers, failure to see spending improvements in the telecommunications and computer networking industries, significant changes in product demand, the availability of products, 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 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,” “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

Revenues: Total revenues for the three months ended June 30, 2003 were $7.4 million. Revenues for the same period in 2002 (“comparative period”) were $6 million. Telecom product revenues increased to $3.8 million for the three months ended June 30, 2003, from $2.8 million in the comparative period. Telecom product revenues continue to grow steadily as some of the Company’s design wins move into production levels. We expect to see this growth trend continue throughout the year, however, the telecommunications equipment market continues to struggle through a prolonged contraction and customer forecasts have continued to be unpredictable and therefore unreliable or inconsistent.

11

Table of Contents

Combo product revenues also increased to $2.8 million for the three months ended June 30, 2003 compared to $2.1 million in the comparative period. These combined increases were partially offset by the continued and anticipated decline in revenues from the Company’s legacy and storage product lines. Legacy and storage product revenues decreased from $0.8 million in the comparative period to $0.6 million for the three months ended June 30, 2003.

Three customers individually accounted for 42%, 31% and 12% of the Company’s second quarter 2003 revenues. In the comparative period, two customers individually accounted for 35% and 33% of the Company’s revenues.

Total revenues for the six months ended June 30, 2003 were $14.9 million. Revenues for the six months ended June 30, 2002 were $12.3 million. Telecom product revenues increased to $7.2 million for the six months ended June 30, 2003, from $5 million for the six months ended June 30, 2002. Combo product revenues increased to $5.6 million for the six months ended June 30, 2003 from $4.7 million for the six months ended June 30, 2002. These combined increases were partially offset by the continued and anticipated decline in revenues from the Company’s legacy and storage product lines. Legacy and storage product revenues decreased from $2.1 million for the six months ended June 30, 2002 to $1.3 million for the six months ended June 30, 2003.

Gross Margin: Gross margin as a percentage of sales was 50% for the second quarter 2003 and 26% for the comparative period. The increase in the gross margin percentage primarily relates to an excess and obsolete inventory charge of $1.1 million incurred during the second quarter 2002 compared to an excess and obsolete inventory charge of $200,000 incurred during the second quarter 2003. Along with the reduction in excess and obsolete inventory charges, the Company’s product mix contributed to the increase in gross margin as a percentage of sales due to increased sales of high margin telecommunication controllers. In addition, the Company improved manufacturing efficiencies and achieved reductions in material costs of certain product lines due to increased production volumes and lower overall overhead costs.

Gross margin for the six months ended June 30, 2003 and 2002 was 50% and 33%, respectively. The increase in the gross margin percentage primarily relates to an excess and obsolete inventory charge of $1.4 million incurred during the six months ended June 30, 2002 compared to an excess and obsolete inventory charge of $400,000 incurred during the six months ended June 30, 2003. Along with the reduction in excess and obsolete inventory charges, the Company’s product mix contributed to the increase in gross margin as a percentage of sales due to increased sales of high margin telecommunication controllers and services revenues. In addition, the Company improved manufacturing efficiencies and achieved reductions in material costs of certain product lines due to increased production volumes and lower overall overhead costs.

Research and Development: The Company’s investment in the development of new products through research and development was $2 million and $1.7 million for the three months ended June 30, 2003 and 2002, respectively. As a percentage of revenues, research and development expenses were 27% in the second quarter 2003 and 28% in the comparative period. Approximately 67% of the increase in research and development expenses for the three months ended June 30, 2003, related to foreign currency changes as

12

Table of Contents

the dollar dropped significantly (see Item 3 — Foreign Currency Risk) in value relative to the Euro. The remainder of the difference was primarily due to investment in a future telecommunications product.

The Company’s investment in the development of new products through research and development was $3.9 million and $3.4 million for the six months ended June 30, 2003 and 2002, respectively. As a percentage of revenues, research and development expenses were 26% for the six months ended June 30, 2003 and 27% for the six months ended June 30, 2002. Approximately 57% of the increase in research and development expenses for the six months ended June 30, 2003, related to foreign currency changes as the dollar dropped significantly (see Item 3 — Foreign Currency Risk) in value relative to the Euro. The remainder of the difference was primarily due to investment in a future telecommunications product.

Sales and Marketing: Sales and marketing expenses were $1.6 million in both the second quarter of 2003 and in the comparative period. As a percentage of revenues, sales and marketing expenses were 21% in the second quarter 2003 and 27% in the comparative period.

Sales and marketing expenses were $3.4 million and $3 million for the six months ended June 30, 2003 and 2002, respectively. As a percentage of revenues, sales and marketing expenses were 23% for the six months ended June 30, 2003 and 24% for the six months ended June 30, 2002. Approximately 31% of the increase in sales and marketing expenses for the six months ended June 30, 2003, related to foreign currency changes as the dollar dropped significantly (see Item 3 — Foreign Currency Risk) in value relative to the Euro. The remainder of the increase is due to increased spending, primarily in the first quarter of 2003, on headcount, travel-related and marketing communication activities aimed at increasing our brand awareness, messaging and ability to generate and close on sales leads.

General and Administrative: General and administrative expenses were $835,000 in the second quarter 2003 and $815,000 in the comparative period. As a percentage of revenues, general and administrative expenses were 11% in the second quarter 2003 and 14% in the comparative period.

General and administrative expenses were $1.7 million and $1.6 million for the six months ended June 30, 2003 and 2002, respectively. As a percentage of revenues, general and administrative expenses were 12% for the six months ended June 30, 2003 and 13% for the six months ended June 30, 2002. The increase in general and administrative expenses primarily resulted from uncontrollable increases in business insurance premiums and other accounting related expenses. However, general and administrative expenses decreased as a percentage of revenues.

Interest Income, Net: Interest income, net of interest expense, was $57,000 in the second quarter 2003 and $134,000 in the comparative period. Interest income, net of interest expense, was $127,000 for the six months ended June 30, 2003 and $327,000 for the six months ended June 30, 2002. The decrease, during both the three months and the six months ended June 30, 2003, primarily relates to lower daily cash and investments levels and lower investment rates of return.

13

Table of Contents

Other Income (Expense), Net: Other income, net, was $19,000 in the second quarter 2003. Other expense, net was $55,000 in the comparative period. Other income, net was $36,000 for the six months ended June 30, 2003 and $1,000 for the six months ended June 30, 2002. The increase in other income, net during both the three months and the six months ended June 30, 2003 was primarily due to an increase in the amount of net gains on the sale of marketable securities and the sale of miscellaneous obsolete parts.

Income Taxes: The Company’s effective tax benefit rate was zero for the six months ended June 30, 2003 compared to a benefit rate of 42% for the six months ended June 30, 2002.

The Company continues to provide a full valuation allowance for its net deferred tax assets at June 30, 2003. The effective tax benefit rate for the comparative period differed from the statutory rate due to foreign income, which was offset by foreign loss carry forwards. The foreign loss carry forwards expired at December 31, 2002.

Net Loss: The Company reported a net loss of $521,000 in the second quarter 2003 and a net loss of $1.5 million in the comparative period. The Company reported a net loss of $1.3 million for the six months ended June 30, 2003 and a net loss of $2.1 million for the six months ended June 30, 2002.

During the second quarter 2003, the Company committed to an exit plan regarding one of its leased facilities. The Company had previously held this facility open for storage, overflow use, and anticipated growth. During the quarter, the Company determined that the facility would not be needed for overflow space and other arrangements could be made for storage. The lease for this facility will expire in the first quarter 2005, however the Company is pursuing subleasing opportunities. As a result of this exit plan, the Company recorded a charge of approximately $109,000, classified as operating expenses, related to net termination costs associated with the lease of the facility. Additional costs may be incurred in future periods if the Company is not successful in subleasing the facility.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Operating Activities: Trends in cash flows from operating activities for the three months ended June 30, 2003 and 2002, are generally similar to the trends in the Company’s earnings except for provision for uncollectible accounts and returns, provision for excess and obsolete inventory, depreciation and amortization and deferred income taxes. Cash used by operating activities totaled $640,000 for the six months ended June 30, 2003, compared to a net loss of $1.3 million. Cash provided by operating activities was $4 million for the six months ended June 30, 2002, compared to a net loss of $2.1 million. Provision for uncollectible accounts and returns decreased for the six months ended June 30, 2003 compared to the six months ended June 30, 2002 due to improved aging statistics. Provision for excess and obsolete inventory has decreased as the Company is in the final stages of its migration from legacy product lines. Depreciation and amortization increased slightly for the six months ended June 30, 2003

14

Table of Contents

compared to the six months ended June 30, 2002. Deferred income taxes decreased for the six months ended June 30, 2003, due to a full valuation allowance for the Company’s deferred tax assets. See Note 3 for further information regarding the Company’s deferred tax assets.

Changes in assets and liabilities result primarily from the timing of production, sales and purchases. 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: The Company’s investing activities resulted in a net cash use of $683,000 and $267,000 for the six months ended June 30, 2003 and 2002, respectively. Cash flows from investing activities in each of the periods related principally to additions to property, equipment, capitalized software and leasehold improvements and the Company’s investments in marketable securities. Additions to property, equipment, capitalized software and leasehold improvements in each of the periods focused on the manufacturing, sales and engineering functions of the Company. The expenditures made during the six months ended June 30, 2003 related primarily to capitalized software used in the engineering and sales functions. Expenditures made during the six months ended June 30, 2002 related primarily to general equipment upgrades.

Financing Activities: Net cash provided by financing activities totaled $7,000 for the six months ended June 30, 2003 and related to proceeds from the exercise of stock options. Cash used from financing activities totaled $522,000 for the six months ended June 30, 2002 and includes the purchase of redeemable common stock of $508,000 and the purchase of common stock of $14,000.

Commitments and Contingencies

At June 30, 2003, the Company had no material commitments to purchase capital assets. The Company’s significant long-term obligations are its operating leases on its facilities and future debt payments. The Company has not paid any dividends since its inception and does not anticipate paying any dividends in 2003.

In October 2001, the Company announced that its Board of Directors had authorized the repurchase of up to $5 million of its common stock. Purchases are authorized to be made from time to time during a twenty-four month period in the open market or in privately negotiated transactions depending on market conditions. The Company will cancel all shares that it repurchases. The repurchase plan does not obligate the Company to repurchase any specific number of shares and may be suspended at any time.

At June 30, 2003, the Company had a $5 million revolving bank credit facility (“current credit facility”). The current credit facility matures on June 30, 2004 and is secured throughout the term of the credit facility by a ninety-day certificate of deposit issued by the bank in the principal amount equal to the stated principal amount of the promissory note. The certificate of deposit is reflected as restricted cash on the accompanying balance sheet. The current credit facility bears interest at the rate of approximately 1% per annum above

15

Table of Contents

the certificate of deposit rate, which was 0.90% at June 30, 2003, and includes certain restrictive covenants including, among others, a tangible net worth restriction. As of June 30, 2003, the Company was in compliance with all restrictive covenants included in the current credit facility. At June 30, 2003, the Company had borrowings of $3.5 million classified as long-term debt on the balance sheet and the remaining availability under the current credit facility was $1.5 million.

On July 25, 2003, the Company entered into a new $5 million revolving bank credit facility (“new credit facility”) designed to replace the current credit facility described above. The new credit facility matures on July 30, 2005 therefore; the borrowings of $3.5 million, under the current credit facility, are classified as long-term debt on the balance sheet at June 30, 2003. All borrowings under the new credit facility will be secured by marketable securities. The new credit facility bears interest at the rate of LIBOR plus 2.00%. The Company intends to borrow $3.5 million under the new credit facility during the third quarter and repay the current credit facility with the proceeds.

Other

Based on current operating levels, 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 the Company’s liquidity needs for working capital, capital expenditures and debt service during the next twelve months. To the extent that the Company’s actual operating results or other developments differ from the Company’s expectations, Interphase’s liquidity could be adversely affected.

The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital needs and available resources in view of, among other things, its capital expenditure requirements, and estimated future operating cash flows. As a result of this process, the Company has in the past and may in the future seek to raise additional capital, refinance or restructure indebtedness, issue additional securities, repurchase shares of its common stock or take a combination of such steps to manage its liquidity and capital resources. In the normal course of business, the Company may review opportunities for acquisitions, joint ventures or other business combinations in the component products industry. In the event of any such transaction, the Company may consider using available cash, issuing additional equity securities or increasing the indebtedness of the Company or its subsidiaries.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On November 25, 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies” relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. For guarantees that fall within the scope of FIN 45, the Interpretation requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The Interpretation’s provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The guarantor’s previous accounting for

16

Table of Contents

guarantees that were issued before the date of FIN 45’s initial application may not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation. The disclosure requirements were effective for financial statements of both interim and annual periods that end after December 15, 2002.

Emerging Issues Task Force (“EITF”) Issue 00-21, “Accounting for Revenues Arrangements with Multiple Deliverables,” addresses the accounting treatment for an arrangement to provide the delivery or performance of multiple products and/or services where the delivery of a product or system or performance of services may occur at different points in time or over different periods of time. The arrangements are often accompanied by initial installation, initiation, or activation services and involve either a fixed fee or a fixed fee coupled with a continuing payment stream, which may be fixed or variable. The EITF reached conclusions regarding, among other issues, the applicability of the provisions regarding separation of contract elements in EITF Issue 00-21 to contracts where one or more elements fall within the scope of other authoritative literature, such as the AICPA’s Statement of Position (“SOP”) 81-1. The EITF does not impact the use of SOP 81-1 for contracts that fall within the scope of SOP 81-1, such as for implementation or building of an information technology system or product to client specifications for a client under a long-term contract. Where an implementation or development project is contracted with a client, and the vendor will also provide services or operate the system over a period of time, EITF Issue 00-21 provides the methodology for separating the contract elements and earnings processes. The provisions of EITF Issue 00-21 are applicable on a prospective basis to transactions entered into in fiscal years beginning after June 15, 2003. The Company does not believe that EITF Issue 00-21 will have a material impact on its consolidated financial statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

Due to the fact that the Company conducts business on a global basis and in some cases in foreign currencies, it is exposed to adverse movements in foreign currency exchange rates. The Company’s operations in France are measured in the local currency converted to the U.S. Dollar equivalent based on published exchange rates for the periods reported and are therefore subject to risk of exchange rate fluctuations. For the six months ended June 30, 2003 the Euro to U.S. Dollar translation accounted for a charge of approximately $237,000 compared to a benefit of $238,000 for the six months ended June 30, 2002.

Market Price Risk

The Company had no equity hedge contracts outstanding as of June 30, 2003 or December 31, 2002.

Interest Rate Risk

The Company’s investments are subject to interest rate risk. Interest rate risk is the risk that the Company’s financial condition and results of operations could be adversely affected due to movements in interest rates. The Company invests its cash in a variety of

17

Table of Contents

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 the Company’s money market funds and the short-term nature of the Company’s time deposits and debt securities portfolio, these assets are particularly sensitive to changes in interest rates. The Company manages this risk through investments with shorter-term maturities and varying maturity dates. If the Company’s short-term assets were reinvested in a declining interest rate environment, the Company would experience an immediate negative impact on interest income. The opposite holds true in a rising interest rate environment.

Item 4. 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 effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect disclosure controls subsequent to the date of this evaluation.

PART II

Item 1. LEGAL PROCEEDINGS

None.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

18

Table of Contents

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 7, 2003, the annual meeting of shareholders of the Company was held. The following matters were voted upon and approved at the meeting:

An election of directors of the Company to serve until the next annual meeting for the Company was held. The following seven individuals were elected as Directors of the Company:

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

     Exhibits

     Reports on Form 8-K

     None

19

Table of Contents

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.

20

Table of Contents

INDEX TO EXHIBITS