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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File Number 0-13071
INTERPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1549797
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
13800 Senlac, Dallas, Texas 75234
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (214) 654-5000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 2, 1998 was approximately $37,032,542. As of
March 2, 1998, registrant had outstanding 5,517,118 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into this
annual report on Form 10-K Report: (1) Portions of the Definitive Proxy
Statement for Annual Meeting of Shareholders to be held on April 30, 1998
(Part III).
PART I
ITEM 1. BUSINESS.
Introduction
Interphase Corporation and subsidiaries ("Interphase" or the
"Company") designs, develops, manufactures, markets and supports
high-performance network and mass storage products based on advanced
technologies for some of today's most powerful computer systems.
Interphase's network and mass storage products include high
performance network adapters, concentrators and computer network
operating system software drivers. The Company's local area network
("LAN") products implement high speed networking technologies such as
Fiber Distributed Data Interface ("FDDI"), Asynchronous Transfer Mode
("ATM"), fast ethernet (both 100 VG-AnyLAN and 100 Base T), as well
as ethernet (10Base T) and Token Right technologies that facilitate
the high speed movement of information across computer networks. The
Company's wide area network ("WAN") products serving both the server
class and client class utilize Integrated Services Digital Network
("ISDN") and X.25 technologies. In addition, the Company announced,
in early 1997, its first Digital Subscriber Loop "(xDSL") product, an
Asynchronous DSL ("ADSL") adapter card. The Company's mass storage
controllers are currently based on Small Computer Systems Interface
("SCSI") technology and high speed Fibre Channel technology to
facilitate the movement of data to and from mass storage devices.
Fibre Channel can also be used for a high speed interconnect in
clustered applications. The Company's products are designed to not
only comply with the appropriate open system technical standards but
also optimize the performance of the customer's network and mass
storage environments.
The Company's LAN adapters and mass storage controllers consist of
both hardware and software. The hardware is essentially printed
circuit boards which plug into the backplane of a computer and
incorporate industry standard bus architectures of the most popular
client/server platforms such as PCI, Sbus, EISA, VME, GIO and PMC, as
well as input-output front-ends for many performance oriented
computer systems. The Company's network adapters support a variety
of media including fiber optic cabling and unshielded twisted pair
("UTP") and shielded twisted pair ("STP") copper wire. The Company's
software consists of drivers for the most popular client/server
operating systems such as Windows NT, Netware, HP-UX, IRIX, O/S2,
Solaris, SunO/S, AIX and certain real-time operating systems. In
addition the software may include diagnostics, station management
("SMT") and in certain cases off loads the processing of the protocol
stack from the server to the adapter card. The Company's FDDI
concentrator products are stand-alone network devices which serve as
a single point of connection for multi-port local area networks as
well as perform certain network traffic management tasks. The mass
storage controllers provide a high-speed connection to computer
peripheral devices, such as disk drives, tape drives and printers.
The Company's WAN adapters are complete ISDN packages that allow
standalone desktops and notebooks to connect to Shiva Lan Rover,
PPP/ISDN routers, and FTP software ONnet as well as X.25 remote
access products. The Company's products are used in a wide range of
computer applications including graphics workstations, high
performance work groups, CPU clusters, medical imaging, telephone
switching, on-line transaction processing and financial services
networks.
With respect to the client/server computer market, the majority of
the Company's products have traditionally been installed in the
server (or "host") as opposed to the client (or "desktop") side of
the network. This reflects the Company's historical focus on the
development of high-performance, fully featured products that are
targeted for the most demanding computer networks. Given the recent
emergence of more powerful desktop computing environments and a
growth in demand for data intensive applications, the Company
believes that its strengths in certain network and mass storage
technologies will create significantly more opportunities for desktop
installations of its products in future years.
The Company believes that its success in gaining significant market
share in its selected markets is dependent upon not only the
development and manufacturing of high performance, high quality
products but also in establishing and maintaining the appropriate
distribution channels. The Company has original equipment
manufacturer ("OEM") agreements with some of the best known companies
in the computer business for its network products and mass storage
controllers. The Company's customers include OEM's of computer
systems and network switches, systems integrators, value added
resellers ("VAR"), distributors and end-users. The Company
believes that it must maintain an ongoing synergistic relationship
with its customers and demonstrate technology leadership coupled with
sophisticated manufacturing and customer support capabilities. The
Company's manufacturing and development activities are certified
under the ISO 9001 international quality standard. This standard,
considered the most comprehensive of the ISO 9000 standards, applies
to not only manufacturing quality, but design, development and
support quality systems as well. Certain companies in the United
States and Europe now require ISO certification of their key
suppliers. The Company's headquarters and manufacturing facilities
are located in Dallas, Texas.
Effective June 29, 1996, the Company purchased all the issued and
outstanding capital stock of Synaptel S.A. ("Synaptel"). Synaptel
designs and distributes a broad line of remote access and ISDN
products, which include both significant software content and
interoperability with a broad range of networking protocols.
The Company, a Texas corporation, was founded in 1977.
Product Overview
The bus structure of a computer system is the pathway over which data
flows among the system's components, such as the central processing
units ("CPU"), disk or tape drives and network adapters. The bus
structure of a computer coordinates the timing and routing of data,
as well as defines the system architecture for components which
interface with each other. The Company develops and sells products
based on high performance bus architectures such as PCI, Sbus, EISA,
VME, GIO and PMC. These bus architectures were developed by
computer system manufacturers and are considered "open systems" since
certain specifications of the architecture are published. The
concept of open systems has gained significant momentum in recent
years and has allowed end-users to configure a computing and network
environment that incorporates desired technology, features,
scalibility and support from a variety of product and service
providers.
The CPU of a computer performs basic arithmetic, local memory access
and input/output functions for communication with peripheral
equipment as well as other functions associated with data transfers
within a network such as protocol processing. When commanded by the
CPU, a network adapter facilitates the high-speed communication of
data among computer systems over a network as well as validates data
completeness and integrity. Network adapters also perform varying
levels of protocol processing and network management tasks. A
network protocol is the set of rules or conventions used to govern
the exchange of information between networked nodes or LANs. Most
computer applications require immediate access to a greater volume of
data than can be stored in the computer's local memory. This
necessitates external data storage capacity provided by disk or tape
drives. A disk controller directs the data storage and retrieval
operations of the disk drive and controls the flow of data between
the CPU and disk drive. The disk controller locates and formats the
data stored on the disk, performs data validity checking, data error
detection and correction and informs the CPU of the status of these
operations and of the controller itself. A tape controller performs
the same functions as a disk controller but interfaces with a tape
drive. Multifunction controllers operate like a disk controller but
allow the CPU to access disk drives and tape drives simultaneously.
Intelligent controllers designed by the Company incorporate
proprietary firmware (i.e., programs developed by the Company and
stored in memory on the product) and software to perform these
functions simultaneously and independently from the CPU, which allows
the CPU to perform other operations at the same time as network
communications, data storage or retrieval occurs.
Network Products
Revenues derived from networking products represented approximately
77% and 71% of consolidated revenues for the years ended December 31,
1997 and 1996, respectively and 61% of consolidated revenues during
the year ended October 31, 1995.
LAN
Over the past several years the Company has developed a diverse line
of LAN products targeted for the VME, Sbus, EISA, PCI, GIO and PMC
bus marketplace. The majority of these products are sold directly to
OEMs but a substantial portion are also sold to VAR's, system
integrators, distributors and large end-users.
The Company's products included within this broad grouping can be
further divided into board level controller (adapter) products and
stand-alone network devices.
Board Level Products-
FDDI Product Line-
FDDI is a stable, standardized, 100Mbit per second technology. Its
combination of speed and stability make FDDI ideal for reliable high-
performance workgroup connections. FDDI high performance adapters are
often used for movement of large graphical images such as color
prepress and medical imaging applications. These adapters are also
used in enterprise servers for high-demand transaction processing
networks in corporate systems.
PMC/FDDI 4511 provides reliable, high-performance 100 Mbps FDDI
connectivity for PMC-based systems. It supports multimode fiber and
copper wiring.
EISA/FDDI 4811 is a high performance FDDI network adapter for EISA
bus systems. It provides for full implementation of FDDI Station
Management (SMT) on-board, freeing the host CPU to execute
applications and upper level protocols.
VME/FDDI 5211 represents a third generation FDDI network adapter from
Interphase. This host based product is capable of supporting varying
types of media (e.g., fiber or copper) and contains an optical bypass
control. It can be used in VME64 systems and is capable of link
level or on-board protocol processing. Its RISC-based architecture
can be configured for either single or dual attachment to an FDDI
network and is available in a 9U or 6U form factor (refers to
standard form factors of the printed circuit board).
PCI/FDDI 5511 is a high performance FDDI network adapter for PCI
based systems. It provides Single Attach (SAS) connectivity for FDDI
workstations or server connectivity to a concentrator in a workgroup
topology. It also comes with a Dual Attach (DAS) option for direct
A-B connectivity to an FDDI ring or concentrator, or for dual homing
between two concentrators. The 5511 provides connections for
multimode fiber and TP-PMD compliant Category 5 Unshielded Twisted
Pair copper wiring.
Sbus/FDDI 5611 is a high performance FDDI network adapter for SBus
systems. The 5611 is designed to capitalize on the high performance
of Sun SPARC and compatible systems with a direct memory access (DMA)
architecture.
Sbus/FDDI CDDI WA-C303 adapter provides high performance, 100-Mbps
connectivity to FDDI networks for SPARC-based worstations and
servers. It supports single attachment and fault-tolerant, dual
attachment connections.
EISA/FDDI CDDI WA-C323 adapter provides high performance 100 Mbps
connectivity to workgroup servers and workstations.
Ethernet and Fast Ethernet Product Line-
VME/Ethernet 4207 provides a connection to an ethernet network for
VMEbus systems. It is a high performance protocol processor that is
capable of data rate transfers of over 30 Mbytes/second.
VME Ethernet 4221 adapter is a 10 Base-T product. This adapter is
an intelligent network interface which can provide up to four
Ethernet ports from a single VME or VME64 slot.
PMC/100 Base T 4524 adapter provides 802.3u 100Base-T connectivity
for most PMC-compliant systems. Driver support includes: AIX,
Solaris and Window NT.
SBus /100VG-AnyLan 4622 adapter provides Sun SPARC stations and 100%
compatibles with selectable connectivity to networks based either on
10Base-T or 100VG-AnyLAN technology.
EISA/100 Base-T 4824 adapter provides either 100 Mbps or 10 Mbps
automatically configured based on the type of network connection.
ATM Product Line-
ATM is a scalable network technology capable of providing enhanced
quality of service in managing video, audio and data transmissions
compared to other existing network technologies. The scalable
capability of ATM allows the deployment of products with data
transfer rates of 25 Mb, 51 Mb, 100 Mb, 155 Mb and 622 Mb, based upon
the same core technology and operating within the same network.
ATM will also provide enhanced network management capabilities and is
expected to be suitable for many desktop and server computing
environments. This developing industry standard is expected to gain
wide acceptance among both network and computer system manufacturers
as well as large cable system operations and telecommunications firms
(by whom it was initially developed and promoted). The ATM adapter
market is anticipated to grow rapidly over the next several years.
These adapters can connect stations over ATM using multimode fiber,
single-mode fiber, or Category 5 Unshielded Twisted Pair copper
cable.
PMC ATM 4515 adapter provides reliable, high performance ATM
connectivity for PMC-based systems. This adapter supports SONET OC-3
155 Mpbs connectivity.
SBus ATM 4615 adapter provides full duplex ATM connectivity for
virtually all Sun Sbus platforms from 600 MP Servers to the
SPARCcenter 2000. This adapter supports SunOS 4.1.3. and Solaris 2.3
or greater.
EISA ATM 4815 adapter provides full duplex ATM connectivity for many
EISA-compliant systems from high performance PCs and workstations to
powerful mutiprocessing servers running Windows NT and Novell
GIO ATM 4915 adapter provides full duplex ATM connectivity for
virtually all Silicon Graphics GIO-based platforms. This adapter
supports SGI's IRIX operating system version 5.3.
VME ATM 5215 adapter provides full duplex ATM connectivity for SGI
Onyz and Challenge systems running the IRIX
PCI ATM 5515 / 5575 adapter provides full duplex ATM connectivity
for most PCI-compliant systems. This adapter supports Windows NT,
Novell NetWare UnixWare, Solaris and AIX. NetWare.
PCI ATM 5525 adapter provides full duplex 25 Mbps ATM connectivity
for most PCI-compliant systems.
Stand Alone Network Devices-
M1600 FDDI Concentrator provides multiport connectivity to an FDDI
network. It supports up to 16 master ports and facilitates high
speed FDDI networking between a variety of computing devices and
across different types of FDDI media including fiber and copper.
This device is "hot swappable" meaning that individual modules may be
replaced, removed or added without interrupting the entire network.
Other fault tolerance features include an external optical bypass
control and an optional redundant power supply, making the M1600
well-suited for demanding FDDI backbone environments.
M800 FDDI Concentrator contains many of the same high performance
features as the M1600 FDDI Concentrator but is designed for smaller
workgroups with large data transfer requirements. It is available in
a table top or rack mountable design.
M400 FDDI Concentrator is a compact, fixed port concentrator ideal
for small workgroup cluster. Available in either 4 or 8 port
configurations, the M400 provides options for fiber or copper media
connectivity and the ability to select managed or unmanaged
operations.
WAN
Interphase has a line of WAN products that provide optimal WAN and
ISDN connectivity solutions for servers, remote LANs and PCs in
multi-vendor networking environments. Interphase WAN products are
compatible with Novell, Microsoft, IBM, Sun, Unix, SNA, X.25 Frame
Relay and ISDN.
Server Class products include fully featured, multi-purpose and
multi-operating systems products for ISDN or X.25 technologies.
These products are used by networking professionals to outfit remote
offices or central offices with ISDN/WAN adapter that can manage
multiple ISDN channels or multiple communication modes.
Client Class products are passive ISDN or modem, board level products
which are used in desktop and laptop computers. Typical products are
Syncard Modems, Syncard PCMCIA ISDN, and Syncard ISDN, and are
dedicated primarily to Windows operating systems for desktop and
laptop applications.
Mass Storage Controller Products
Revenues derived from mass storage controller products represented
approximately 12% and 14% of consolidated revenues for the years
ended December 31, 1997 and 1996, respectively and 34% of
consolidated revenues during the year ended October 31, 1995.
The Company's mass storage product line includes products that
function in VMEbus, EISA bus, Multibus and PCIbus systems.
Presently, SCSI is the most popular mass storage technology for both
desktop and server applications since it is "device independent"
whereas many technologies prior to SCSI were not. Device independent
refers to the fact that the controller can access and send data to
and from a variety of peripheral devices (e.g., disk drives, tape
drives or printers). Historically, the primary market for these
products has been computer system OEM's. The Company introduced its
first Fibre Channel product in 1996. Fibre Channel is an emerging
high-speed data transfer technology. Fibre Channel is regarded as a
follow-on migration path from SCSI. It is 10 to 250 times faster
than existing technologies, including SCSI, capable of transmitting
at rates of one gigabit per second simultaneously in both directions.
This kind of performance is a practical necessity when sizable files
containing x-rays or MRI scans are retrieved from a storage device.
Fibre Channel can also operate over distances up to 10 km. For
disaster recovery purposes it is an ideal technology for backing up
mission critical data to mass storage device at a secure remote
location.
SCSI
V/SCSI 4210 is a high performance dual channel SCSI host adapter for
VMEbus applications. It supports up to seven SCSI devices per
channel and can be configured with one or two independent SCSI
channels. By utilizing the BUSpacket Interface it can provide
transfer rates of up to 5 MBytes/second in synchronous mode and up to
1.5 MBytes/second in the asynchronous mode. This product is available
in either a 6U or 9U form factor.
V/SCSI-2 4220 is designed for VMEbus and VME64 systems. It complies
with the industry standard SCSI-2 interface. It also contains two
channels that support up to 14 SCSI-1 or SCSI-2 devices. It is
capable of data rates of up to 10 MBytes/second in the synchronous
mode and 5 MBytes/second in the asynchronous mode. This product is
available in either a 6U or 9U form factor. Additionally, an
optional daughter card is available which allows for a connection to
an Ethernet network. The incorporation of an Ethernet daughter card
with a SCSI adapter in this manner utilizes only one slot in a
computer backplane.
Fibre Channel
PCI/Fibre Channel 5526 adapter provides single port connection,
powered by the Hewlett-Packard Tachyon Fibre Channel protocol engine.
PCI/Fibre Channel 6526 adapter is a 3U CompactPCI adapter which
delivers full 100mbps throughput for next generation mass storage
applications.
Interphase (i)chipTPI is a single chip solution which allows the
Hewlett-Packard Tachyon Fibre Channel controller to be used in
conjunction with the industry standard PCI bus.
New Product Development
The markets for the Company's products are characterized by rapid
technological development, evolving industry standards, frequent new
product introductions and relatively short product life cycles. The
Company's success is substantially dependent upon its ability to
anticipate and react to these changes, maintain its technological
expertise, expand and enhance its product offerings in existing
technologies, and to develop in a timely manner new products in
emerging technologies, such as ATM-based networking, which achieve
market acceptance. The Company believes it must offer products to
the market which not only meet ever-increasing performance and
quality standards, but also provide compatibility and
interoperability with products and architectures offered by various
computer and network systems vendors. The continued utility of the
Company's products can be adversely affected by products or
technologies developed by others.
The Company has been engaged in the development of new products and
the refinement of its existing products since its inception.
Interphase has been active in the formulation of industry standards
sanctioned by groups such as the IEEE and ANSI and is a member of the
ATM Forum, VME International Trade Association (VITA), Fibre Channel
Association, RAID Advisory Board, PCI Bus Consortium, Fast Ethernet
Alliance, SCSI Committee, the LADDIS Group, ONC/NFS Consortium,
University of New Hampshire FDDI Interoperability Lab, FC-Open (Fibre
Channel) Consortium, and ANTC Consortium for FDDI interoperability
testing.
In 1997, the Company applied the majority of its engineering
development resources to products for the emerging ATM market. This
network technology provides for the integration of voice, video and
data transmission in local area networks and wide area networks,
significant improvements in network managability, and scalability of
speed from 25 megabits per second ("Mbps") to 51, 100, 155 and 622
Mbps.
In addition, the Company has continued its focus on FDDI products,
including PCI, GIO, and Sbus FDDI adapter cards and the M400 low cost
four or eight port FDDI concentrator with copper or fiber
connectivity and optional SNMP management.
Since the acquisition of Synaptel, engineering development activities
have also been focused on products for the WAN market. These
development efforts include products based upon ISDN, X.25 and xDSL
technologies.
Marketing and Customers
The Company's standard products are sold to OEM's for inclusion in
scientific, industrial, medical, engineering workstations, printing,
mini-supercomputer, graphics and other computer applications. These
purchasers incorporate the Company's products in proprietary systems
for resale to distributors, system integrators and VAR's (which add
specially designed software) prior to resale to end-users. Also, the
Company sells products directly to sophisticated end-users such as
large corporations, universities and scientific research
organizations. During 1997 sales to Hewlett Packard accounted for
$26,402,000 or 40% of consolidated revenue, and was the only customer
accounting for more than 10% of consolidated revenues. During 1996
no single customer accounted for more that 10% of consolidated
revenues. During the year ended October 31, 1995, sales to Pyramid
Corporation accounted for $7,039,000 or 15% of consolidated revenues,
and was the only customer accounting for more than 10% of
consolidated revenues.
In 1989, Motorola purchased 660,000 shares of common stock of the
Company at a price of $11.00 per share. In addition, Motorola
received warrants to purchase an additional 660,000 shares of common
stock at an exercise price of $15.40 per share. The warrants were
not exercised by Motorola and expired in March 1996. Sales to
Motorola approximated 3%, 6% and 6% of the Company's revenues for the
years ended December 31, 1997, 1996, and October 31, 1995,
respectively.
The Company markets its products through its own sales organization
and, to a lesser extent, through a network of independent sales
representatives. In addition to the Company's headquarters in
Dallas, Texas, the Company has sales offices located in or near
Santa Clara, California; Boston, Massachusetts; Phoenix, Arizona;
Minneapolis, Minnesota; Tokyo, Japan; London, England; and Paris,
France. The Company's sales personnel market products directly to key
customers as well as support the sales representative network. In
addition, the Company has entered into distribution agreements with
key national and international distribution partners, including
Anixter, Fuji-Xerox, Gates/Arrow and Westcon.
Interphase emphasizes its extensive product support, training and
field support to its customers. The Company's products are generally
sold with a one year warranty covering components and labor. After
the expiration of the warranty period, support services are generally
provided by the Company for a stated flat fee.
The Company and its customers generally enter into written agreements
specifying, among other items standard in commercial agreements,
product specifications, failure rates, shipping requirements,
shipment rescheduling terms, price/volume schedules and manufacturer
warranties. Substantially all of these agreements do not contain
determinable purchase commitments of the customers, providing instead
that actual purchase and shipments of products be made by specific
purchase order. Accordingly, any shipment rates stated in such
contracts are subject to rescheduling and/or cancellation, and
therefore are not indicative of the future purchase orders to be
submitted by such customer. In addition, the actual terms of the
contracts tend to be modified in the ordinary course of business by
means of subsequent purchase order terms and by course of dealing.
The Company does not believe that the level of backlog of orders is
either material or indicative of future results, since its contracts
are subject to revision through subsequent purchase orders and since
its customers are generally permitted to cancel purchase orders,
within certain parameters, prior to shipment without penalty.
The majority of the Company's sales are to OEMs with payment terms
typically being net 30-45 days from date of invoice.
Manufacturing and Supplies
Most manufacturing operations are currently conducted at the
Company's headquarters in Dallas, Texas. In addition, the Company
utilizes contract manufacturing operations for the assembly of
certain products, including those produced in France. The Company's
products consist primarily of various integrated circuits, other
electronic components and firmware assembled onto an internally
designed printed circuit board.
The Company uses internally designed, applications specific
integrated circuits ("ASIC"), some of which are sole-sourced, on most
of its products as well as standard off-the shelf items presently
available from two or more suppliers. Historically the Company has
not experienced any significant problems in maintaining an adequate
supply of these parts sufficient to satisfy customer demand, and the
Company believes that it has good relations with its vendors
The Company generally does not manufacture products to stock in
finished goods inventory, as substantially all of the Company's
production is dedicated to specific customer purchase orders. As a
result, the Company does not have any material requirements to
maintain significant inventories or other working capital items.
Intellectual Property and Patents
While the Company believes that its success is ultimately dependent
upon the innovative skills of its personnel and its ability to
anticipate technological changes, its ability to compete successfully
will depend, in part, upon its ability to protect proprietary
technology contained in its products. The Company does not currently
hold any patents relative to its current product lines. Instead, the
Company relies upon a combination of trade secret, copyright and
trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. The development of alternative,
proprietary and other technologies by third parties could adversely
affect the competitiveness of the Company's products. Further, the
laws of some countries do not provide the same degree of protection
of the Company's proprietary information as do the laws of the United
States. Finally, the Company's adherence to industry-wide technical
standards and specifications may limit the Company's opportunities to
provide proprietary product features capable of protection.
The Company is also subject to the risk of litigation alleging
infringement of third party intellectual property rights.
Infringement claims could require the Company to expend significant
time and money in litigation, pay damages, develop non-infringing
technology or acquire licenses to the technology which is the subject
of asserted infringement.
The Company has entered into several nonexclusive software licensing
agreements that allow the Company to incorporate software into its
product line thereby increasing its functionality, performance and
interoperability.
Employees
At December 31, 1997, the Company had 222 full-time employees, of
which 74 were engaged in manufacturing and quality assurance, 72 in
research and development, 50 in sales, sales support, service and
marketing and 26 in general management and administration.
The Company's success to date has been significantly dependent on the
contributions of a number of its key technical and management
employees. The Company does not maintain life insurance policies on
its key employees and, except for a few executive officers, does not
have employment agreements with key employees. The loss of the
services of one or more of these key employees could have a material
adverse effect on the Company. In addition, the Company believes
that its future success will depend in large part upon its ability to
attract and retain highly skilled and motivated technical,
managerial, sales and marketing personnel. Competition for such
personnel is intense.
None of the Company's employees are covered by a collective
bargaining agreement and there have been no work stoppages.
Additionally, the Company considers its relationship with its
employees to be good.
Competition
The computer network industry is intensely competitive and is
significantly affected by product introductions and market activities
of industry participants. The Company expects substantial
competition to continue. The Company's competition includes vendors
specifically dedicated to the mass storage controller and computer
network product markets. Traditionally the Company's major OEM
customers have chosen not to manufacture adapters for their products
or do not manufacture sufficient quantities or types of controllers
to meet their needs. Increased competition could result in price
reductions, reduced margins and loss of market share.
Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other
resources and larger installed bases than the Company. Several of
the Company's competitors have been acquired by major networking
companies. These acquisitions are likely to permit the Company's
competitors to devote significantly greater resources to the
development and marketing of new competitive products and the
marketing of existing competitive products to their larger installed
bases. The Company expects that competition will increase
substantially as a result of these and other industry consolidations
and alliances, as well as the emergence of new competitors. The
Company believes that it has been able to compete as a result of its
perceived technological leadership within the Company's market
segment and its reputation for high product performance.
ITEM 2. PROPERTIES.
The Company leases a 96,000 square foot facility located in Farmers
Branch, Texas, a suburb of Dallas. The facility includes
approximately $2.8 million in leasehold improvements that were made
by the Company. The lease, inclusive of renewal options, extends
through 2009. In addition the Company leases a facility in
Chaville, France (near Paris) which supports the European markets.
The Company believes that its facilities and equipment are in good
operating condition and are adequate for its operations. The Company
owns most of the equipment used in its operations. Such equipment
consists primarily of engineering equipment, manufacturing and test
equipment, and fixtures.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
Since January 1984 shares of the Company's common stock have been
traded on The Nasdaq Stock Exchange under the symbol INPH. The
following table summarizes its high and low price for each fiscal
quarter during 1997 and 1996 as reported by Nasdaq.
Fiscal 1997 High Low
First Quarter 11.125 8.00
Second Quarter 8.875 6.25
Third Quarter 11.125 7.875
Fourth Quarter 8.625 5.75
Fiscal 1996
First Quarter 13.875 9.875
Second Quarter 20.25 13.50
Third Quarter 16.50 10.00
Fourth Quarter 16.375 10.00
The Company had approximately 900 beneficial owners of its Common
Stock, of which 94 are of record , as of March 2, 1998.
The Company has not paid dividends on its Common Stock since its
inception. The Board of Directors does not anticipate payment of any
dividends in the foreseeable future and intends to continue its
present policy of retaining earnings for reinvestment in the
operations of the Company.
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data:
(In Thousands, except per share data)
Two months
Twelve months ended Twelve months
ended Dec. 31, Dec. 31, ended Oct. 31,
1997 1996 1995 1995 1994 1993
Revenues $66,004 $56,752 $ 3,379 $47,368 $40,303 $38,496
Gross Profit 32,016 27,964 1,224 23,547 20,066 18,764
Research and 13,327 9,902 1,360 7,327 7,862 8,772
development
Sales and marketing 11,686 10,297 1,173 8,583 7,599 9,087
General and 6,248 4,905 634 4,004 4,146 4,847
Administrative
Special Charges - 11,646 - - 1,148 2,447
Operating income 755 (8,786) (1,943) 3,633 (689) (6,389)
(loss)
Other, net (1,525) (705) 94 589 278 404
Income (loss) before (770) (9,491) (1,849) 4,222 (411)) (5,985)
income tax
Net income (loss) $ (971) $(10,055) $(1,167) $ 2,759 $ (280) $4,201)
Net income loss per $ (0.18) $(1.99) $ (0.25) $ 0.60 $(0.06) $(0.94)
share (Basic)
Net income loss per $ (0.18) $(1.99) $ (0.25) $ 0.55 $(0.06) $(0.94)
share (Diluted)
Weighted average 5,496 5,062 4,663 4,561 4,484 4,472
common shares
Weighted average
common
& common equivalent 5,496 5,062 4,663 5,051 4,484 4,472
shares
December 31, October 31,
Balance Sheet Data: 1997 1996 1995 1994 1993
Working capital $25,244 $22,836 $24,328 $20,776 $19,053
Total assets 49,447 53,924 35,430 31,943 32,339
Total Liabilities 19,904 23,538 5,019 5,094 5,239
Shareholders' equity 29,543 30,386 30,411 26,849 27,100
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated Statement of Operations Percentage of Revenues
Two months
Year ended ended Year ended
Dec. 31, Dec. 31, Oct. 31,
1997 1996 1995 1995
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 51.5% 50.7% 63.8% 50.3%
Gross profit 48.5% 49.3% 36.2% 49.7%
Research and development 20.2% 17.4% 40.2% 15.4%
Sales and marketing 17.7% 18.1% 34.7% 18.1%
General and administrative 9.5% 8.6% 18.8% 8.5%
Acquired in-process R&D 0.0% 20.5% 0.0% 0.0%
Operating income (loss) 1.1% -15.3% -57.5% 7.7%
Interest income 0.7% 0.7% 2.8% 1.2%
Interest expense -1.7% -0.9% 0.0% 0.0%
Other, net -1.3% -1.0% 0.0% 0.0%
Income (loss) before income -1.2% -16.5% -54.7% 8.9%
taxes
Provision (benefit) for income 0.3% 1.0% -20.2% 3.1%
taxes
Net income (loss) -1.5% -17.5% -34.5% 5.8%
RESULTS OF OPERATIONS
Effective January 1, 1996, Interphase Corporation ("the Company")
changed its fiscal year end from October 31 to December 31. For
comparison purposes, results for the year ended December 31, 1996,
are being compared with results from the year ended October 31,
1995. The Company has not recast October 31, 1995 financial
information presented herein to conform to the new fiscal year ends,
as management does not believe such recasting would be as meaningful
for comparative purposes.
In June 1996, the Company acquired Synaptel, S.A ("Synaptel"), a
French company which designs and distributes a broad line of remote
access and ISDN products, which include both significant software
content and interoperability with a broad range of networking
protocols.
Revenues: Total revenues for the year ended December 31, 1997 and
1996 were $66,004,000 and $56,752,000, respectively and $47,368,000
for the year ended October 31, 1995. This represents a growth in
revenues of 16% from 1996 to 1997. The increase in revenues was led
by significant revenue growth in the Company's Fibre Channel product
line, a three-fold increase in sales of the Company's Fast Ethernet
product line, and 22% increase in sales of ATM products. This was
offset by a shift from the Company's FDDI, SCSI, and Ethernet
products by 20% from 1996 to 1997. In 1997, FDDI revenues accounted
for approximately 33% of total revenues, Fast Ethernet 30%, SCSI 9%,
WAN 8%, ATM 8%, Ethernet 6% and Fibre Channel 3%. Local area
networking products in total comprised 77% of total revenues for
1997, mass storage product revenues 12% and wide area networking
products 8%. North American revenues grew 26%, Pacific Rim revenues
declined 8%, and European revenues declined 12% compared to 1996.
The Company's current marketing strategy is to increase market
penetration through sales to major OEM customers. One of these
customers accounted for approximately 40% of the Company's revenue in
1997.
The increase in revenues from 1995 to 1996 was $9,384,000, which
represents a growth in revenues of approximately 20%. Revenues from
the WAN product line were approximately $7,100,000 since the
acquisition in mid-1996. The remaining increase in revenues was led
by a 17% increase in sales of the Company's FDDI product line, a 17%
increase in sales of Ethernet products, a 116% increase in sales of
ATM products and partially offset by a 51% decline in SCSI products.
In 1996 FDDI revenues accounted for approximately 43% of total
revenues, SCSI 13%, Ethernet 12%, ATM 8%, Fast Ethernet 8% and WAN
13%. Local area networking products in total comprised 71% of total
revenues for 1996, mass storage products revenues 14% of total
revenues and wide area networking products 13% of total revenues.
North America revenues grew 2%, Pacific Rim revenues declined 3% and
European revenues increased twofold compared to 1995, primarily due
to the acquisition of Synaptel.
Cost of Sales: Cost of sales expressed as a percentage of revenues
was 51%, 51% and 50% for the years ended December 31, 1997 and 1996,
and October 31, 1995, respectively. In 1997, the SCSI and WAN
products experienced improved gross margins over 1996, Ethernet, 100
Base T /VGAnyLan and Fibre Channel were relatively unchanged and
FDDI products experienced a slight increase in cost of sales as a
percentage of revenues compared to 1996. In 1996, the FDDI products
experienced improved gross margins over 1995, SCSI and ATM products
were unchanged and Ethernet experienced a slight improvement in cost
of sales as a percentage of revenues compared to 1995.
Research and Development: The Company's investment in the
development of new products through research and development was
$13,327,000, $9,902,000 and $7,327,000 in 1997, 1996, and 1995,
respectively. As a percentage of revenue, research and development
expenses were 20%, 17% and 15% for 1997, 1996 and 1995, respectively.
The increase in spending in 1997 reflected additional spending on
development for ATM, WAN, Fibre Channel and Fast Ethernet. The
increase in spending in 1996 was primarily the result of the
acquisition of Synaptel. As a percentage of revenue, research and
development expenses are expected to decrease in 1998.
Sales and Marketing: Sales and marketing expenses were $11,686,000,
$10,297,000, and $8,583,000 in 1997, 1996, and 1995, respectively. As
a percentage of revenue, sales and marketing expenses were 18%, for
each year. As a percentage of revenue, sales and marketing expenses
are expected to remain constant in 1998.
Special Charges: In the second quarter of 1996 the Company
recorded a charge of $11,646,000 for acquired in-process R&D in
association with the acquisition of Synaptel. Acquired in-process
research and development activities had no alternative future use and
had not achieved technological feasibility; accordingly, the amounts
were expensed in the accompanying consolidated statements of
operations for the period ended December 31, 1996.
General and Administrative: General and administrative expenses
were $6,248,000, $4,905,000 and $4,004,000 in 1997, 1996, and 1995,
respectively. As a percentage of revenue, general and administrative
expenses were 9% for each year. As a percentage of revenue, general
and administrative expenses are expected to remain constant in
1998.
Interest Income: Interest income was $438,000, $421,000 and
$586,000 in 1997, 1996 and 1995, respectively. The change in interest
income from year to year is a reflection of the increase and decrease
in the funds available for investment.
Interest Expense: Interest expense was $1,126,000, $535,000 and $0
in 1997, 1996 and 1995, respectively. The increase in interest
expense in 1997 is the result of the debt incurred by the Company to
fund the Synaptel acquisition in mid-1996 being outstanding for a
full year in 1997.
Other Expense: Other expense was $837,000 and $591,000 in 1997 and
1996, respectively. Other expense primarily reflects the
amortization of goodwill and acquired developed technologies related
to the Synaptel acquisition.
Provision (Benefit) for Income Taxes: The Company experienced a net
loss before taxes in 1997, however, due to the effects of non-
deductible goodwill and state income taxes, the Company had a tax
provision of $201,000. The provision decreased 64% from 1996 to 1997
primarily due to the write-off of acquired in-process research and
development in 1996 which was not tax benefited.
Net Income (Loss): The Company reported a net loss was $971,000 in
1997, a net loss of $10,055,000 in 1996, and net income of $2,759,000
in 1995. The loss in 1996 was attributable to the write-off of
acquired in-process research and development ($11,646,000)
associated with the acquisition of Synaptel.
Adoption of Accounting Standards: The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", for its December 31, 1997 consolidated financial statements.
As a result, the Company's reported earnings per share for all
periods presented were restated. SFAS No. 128 requires the
presentation of basic and diluted earnings per share. Basic earnings
per common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year.
Diluted earnings per common share is computed by dividing net income
by the weighted average number of common stock and common stock
equivalents outstanding during the year.
In 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," and SFAS No. 123, "Accounting for Stock-Based
Compensation." The adoption of SFAS No. 121 resulted in no
significant impact on the consolidated financial statements of the
Company. The Company adopted the footnote disclosure approach to
SFAS No. 123, and the Company's pro-forma disclosure can be found in
the notes to the consolidated financial statements.
Pending Accounting Pronouncements: In July 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 130 requires the
Company to report comprehensive income in the financial statements.
SFAS No. 131 requires the Company to disclose revenues, profit and
loss, and assets for business and geographical segments similar to
disclosures required under current standards. These statements are
effective for fiscal years beginning after December 15, 1997, with
earlier adoption permitted. The Company will adopt these statements
in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities
aggregated $5,519,000, $5,850,000 and $12,686,000 at December 31,
1997, 1996 and October 31, 1995, respectively. Cash, cash
equivalents and marketable securities remained relatively unchanged
from 1996 to 1997. The decrease of $6,836,000 from 1995 to 1996 is
primarily due to the acquisition of the CISCO product line and the
growth in accounts receivable and inventories. Expenditures for
equipment and purchased software were $1,150,000, $2,539,000 and
$2,728,000 in 1997, 1996 and 1995, respectively. At December 31,
1997, the Company had no material commitments to purchase capital
assets. The Company's significant long-term obligations are its
operating lease on its Dallas facility and future debt payments. The
Company has not paid any dividends since its inception and does not
anticipate paying any dividends in 1998. In connection with the
Synaptel acquisition in June 1996, the Company entered into a two-
year $16,000,000 credit facility with a financial institution,
subject to annual renewal provisions. This credit facility includes
an $8,500,000 term loan, a $2,500,000 equipment loan and a $5,000,000
revolving credit facility. The term loan and equipment loan are due
in quarterly installments beginning in November 1996, and expire in
November 2001. The revolving credit facility expires in June 1999.
In 1998, maturities of this credit facility will be approximately
$2,192,000.
The Company is currently assessing certain year 2000 issues on
various computer related systems, and it will initiate an
implementation plan before year 2000 to minimize potential material
adverse consequences. The cost to implement this plan has yet to be
determined, however the Company does not expect the cost to be
material to its financial position or results of operations. The
costs associated with this implementation will be expensed as
incurred. The Company expects that its cash, cash equivalents and
marketable securities will be adequate to meet foreseeable needs in
1998.
Use of Forward-Looking Statements: Certain statements contained in
MD&A are forward-looking, including statements concerning expected
expenses and the adequacy of the Company's sources of cash to finance
its current and future operations. Factors which could cause actual
results to materially differ from management's expectations include
the following: general economic conditions and growth in the high
tech industry; competitive factors and pricing pressures; changes in
product mix; the timely development and acceptance of new products;
inventory risks due to shifts in market domain; and the risks
described from time to time in the Company's SEC filings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 (a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on April
30, 1998, which is incorporatted herein by referece.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on April
30, 1998, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on April
30, 1998, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on April
30, 1998, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) (i) and (ii) Financial Statements and Schedules.
Reference is made to the listing on page F-1 of all financial
statements and schedules filed as a part of this report.
(iii) Exhibits.
Reference is made to the Index to Exhibits on page E-1 for a
list of all exhibits filed during the period covered by this report.
b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Registrant during the
quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 25, 1998 By: /s/ R. Stephen Polley
R. Stephen Polley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on March 25, 1998.
Name Title
Chairman of the Board of Directors,
Chief Executive Officer,
and President
/s/ R. Stephen Polley (Principal executive officer)
R. Stephen Polley
Chief Financial Officer,
Vice President of Financial
and Treasurer
/s/ Gregory B. Kalush (Principal finance officer)
Gregory B. Kalush
/s/ Gary W. Fiedler Director
Gary Fiedler
/s/ Dale Crane Director
Dale Crane
/s/ James F. Halpin Director
James F. Halpin
/s/ Paul N. Hug Director
Paul N. Hug
/s/ Willaim Voss Director
William Voss
/s/ David H. Segrest Director
David H. Segrest
/s/ S. Thomas Thawley Director
S. Thomas Thawley
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants -
ARTHUR ANDERSEN LLP F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Operations - Periods Ended
December 31, 1997, 1996, 1995 and October 31, 1995 F-4
Consolidated Statements of Shareholders' Equity - Periods Ended
December 31, 1997, 1996, 1995 and October 31, 1995 F-5
Consolidated Statements of Cash Flows - Periods Ended F-6 to F-7
December 31, 1997, 1996, 1995 and October 31, 1995
Notes to Consolidated Financial Statements F-8 to F-18
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Interphase Corporation:
We have audited the accompanying consolidated balance sheets of
Interphase Corporation (a Texas corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the years
ended December 31, 1997 and 1996, the two month period ended December
31, 1995 and the year ended October 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Interphase Corporation and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for
the years ended December 31, 1997 and 1996, the two month period
ended December 31, 1995 and the year ended October 31, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 4, 1998
F-2
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except number of shares)
Dec. 31, 1997 Dec. 31, 1996
Cash and cash equivalents $2,247 $2,271
Marketable securities 3,272 3,579
Trade accounts receivable, less allowances for
uncollectible
accounts of $544 and $503 respectively 13,030 15,182
Inventories, net 14,895 12,599
Prepaid expenses and other current assets 798 1,221
Deferred income taxes, net 686 886
Total current assets 34,928 35,738
Machinery and equipment 12,079 12,340
Leasehold improvements 2,890 2,863
Furniture and fixtures 417 278
15,386 15,481
Less-accumulated depreciation and amortization (11,817) (10,394)
Total property and equipment, net 3,569 5,087
Capitalized software, net 225 400
Deferred income taxes, net 862 392
Acquired developed technology, net 4,400 5,819
Goodwill, net 3,310 3,902
Other assets 2,153 2,586
Total assets $49,447 $53,924
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable $2,636 $4,279
Accrued liabilities 2,484 3,097
Accrued compensation 1,910 2,962
Income taxes payable 197 93
Current portion of debt 2,457 2,471
Total current liabilities 9,684 12,902
Other liabilities 600 1,192
Long term debt, net of current portion 9,620 9,444
Total liabilities 19,904 23,538
Commitments and contingencies
Shareholders' Equity
Common stock, no par value; 100,000,000 shares 35,326 35,195
authorized; 5,516,578
and 5,491,658 shares outstanding, respectively
Retained earnings (deficit) (5,930) (4,959)
Cumulative foreign currency translation 178 164
adjustment
Unrealized holding period loss (31) (14)
Total shareholders' equity 29,543 30,386
Total liabilities and shareholders' equity $49,447 $53,924
The accompanying notes are an integral part of these consolidated financial statements.
F-3
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Two months Year
Year ended ended ended
Dec. 31, Dec. 31, Oct. 31
1997 1996 1995 1995
Revenues $66,004 $56,752 $3,379 $47,368
Cost of sales 33,988 28,788 2,155 23,821
Gross profit 32,016 27,964 1,224 23,547
Research and development 13,327 9,902 1,360 7,327
Sales and marketing 11,686 10,297 1,173 8,583
General and administrative 6,248 4,905 634 4,004
Acquired in-process R&D - 11,646 - -
Total operating expenses 31,261 36,750 3,167 19,914
Operating income (loss) 755 (8,786) (1,943) 3,633
Interest income 438 421 94 586
Interest expense (1,126) (535) - -
Other, net (837) (591) - 3
Income (loss) before income taxes (770) (9,491) (1,849) 4,222
Provision (benefit) for income 201 564 (682) 1,463
taxes
Net income (loss) $(971)$(10,055) $(1,167) $2,759
Net income (loss) per share
Basic earnings per share $(0.18) $(1.99) $(0.25) $0.60
Diluted earnings per share $(0.18) $(1.99) $(0.25) $0.55
Weighted average common shares 5,496 5,062 4,663 4,561
Weighted average common and common
equivalent shares 5,496 5,062 4,663 5,051
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
INTERPHASE CORPORATION
CONSOLIDATE STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Cumulative
Retained Unrealized Foreign
Common Stock Earnings Holdings Currency
Shares Amount (Deficit) Period Loss Translation Total
Balance at October 31, 1994 4,513 $23,493 $3,504 $(148) $- $26,849
Option exercises, including related 148 684 - - - 684
tax benefit
Unrealized holding period gain - - - 119 - 119
Net income - - 2,759 - - 2,759
Balance at October 31, 1995 4,661 24,177 6,263 (29) - 30,411
Option exercises, including related 6 17 - - - 17
tax benefit
Unrealized holding period gain - - - - - -
Net loss - - (1,167) - - (1,167)
Balance at December 31, 1995 4,667 $24,194 $5,096 $(29) $- $29,261
Option exercises, including related 230 1,801 - - - 1,801
tax benefit
Common stock issued in Synaptel 595 9,200 - - - 9,200
acquisition
Cumulative foreign currency - - - - 164 164
translation
Unrealized holding period gain - - - 15 - 15
Net loss - - (10,055) - - (10,055)
Balance at December 31, 1996 5,492 $35,195 $(4,959) $(14) $164 $30,386
Option exercises, including related 24 131 - - - 131
tax benefit
Cumulative foreign currency - - - - 14 14
translation
Unrealized holding period gain - - - (17) - (17)
Net loss - - (971) - - (971)
Balance at December 31, 1997 5,516 $35,326 $(5,930) $(31) $178 $29,543
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Two months
Year ended Year ended ended Year ended
Dec. 31, Dec. 31, Dec. 31, Oct. 31,
1997 1996 1995 1995
Cash flows from operating activities:
Net income (loss) $(971) $(10,055) $(1,167) $2,759
Adjustment to reconcile net income (loss) to net
cash provided (used) by operating activities:
Write off of acquired in-process research 0 11,646 0 0
and development
Depreciation and amortization 4,739 4,234 525 2,814
Deferred income taxes (270) (358) 1 170
Change in assets and liabilities, net of
Synaptel acquisition
Trade accounts receivable 2,152 (8,584) 3,575 (1,863)
Inventories (2,296) (1,345) (2,173) (909)
Refundable income taxes 0 0 0 219
Prepaid expenses and other current 423 (151) 93 (224)
assets
Accounts payable and accrued (2,081) (409) (304) (28)
liabilities
Accrued compensation (1,052) (258) 43 (106)
Income taxes payable 104 0 (366) 366
Net adjustments 1,719 4,775 1,394 439
Net cash provided (used) by operating 748 (5,280) 227 3,198
activities
Cash flows from investing activities:
Additions to property, equipment, (1,150) (2,539) (511) (2,728)
capitalized software and leasehold
improvements
Decrease (increase) in other assets 373 (200) (71) (93)
Decrease (increase) in marketable 307 5,788 (1) (1,528)
securities
Cash acquired in Synaptel acquisition 0 11 0 0
Change in unrealized holding period loss (17) 15 0 0
on marketable securities
Acquisition of developed technologies 0 (2,500) 0 0
Net cash (used) provided by investing (487) 575 (583) (4,349)
activities
Cash flows from financing activities:
Increase (decrease) in other long term (592) 1,093 (4) (27)
liabilities
Payments of debt (2,338) (1,134) 0 0
Proceeds from debt 2,500 2,075 0 0
Increase in foreign currency translation 14 164 0 0
adjustment
Increase in common stock from exercise of 131 1,801 17 684
options
Net cash provided by financing (285) 3,999 13 657
activities
Net increase (decrease) in cash and cash (24) (706) (343) (494)
equivalents
Cash and cash equivalents at beginning of 2,271 2,977 3,320 3,814
year
Cash and cash equivalents at end of year $2,247 $2,271 $2,977 $3,320
Supplemental Disclosure of Cash Flow
Information:
Interest paid $996 $438 $0 $0
Taxes refunded 27 40 283 244
Taxes paid 389 476 0 1,014
The accompanying notes are an integral part of these consolidated financial statements.
F-6
INTERPHASE CORPORATION
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
(in thousands)
Supplemental schedule of non-cash investing and financing activities
In June 1996, the Company purchased all of the capital stock of
Synaptel.
Fair value of assets acquired $(27,403)
Liabilities assumed 8,414
Acquisition debt 8,000
Common stock issued 9,200
Aquisition costs 1,800
Cash acquired in Synaptel $ 11
acquisition
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
INTERPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation: The
consolidated financial statements include the financial statements of
Interphase Corporation ("the Company") and its wholly owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Effective January 1, 1996, the Company changed its fiscal year end
from October 31 to December 31. For comparison purposes, results for
the year ended December 31, 1996, are being compared with results
from the year ended October 31, 1995. The Company has not recast
October 31, 1995 financial information presented herein to conform to
the new fiscal year end, as management does not believe such
recasting would be as meaningful for comparative purposes.
In 1996, the Company acquired Synaptel, S.A ("Synaptel"), a French
company which designs and distributes a broad line of remote access
and ISDN products, which include both significant software content
and interoperability with a broad range of networking protocols.
Cash and Cash Equivalents: The Company considers cash and temporary
investments with original maturities of less than three months, as
well as interest bearing money market accounts, to be cash
equivalents.
Marketable Securities: As of December 31, 1997 and 1996, the fair
market value of marketable securities was $3,272,000 and $3,579,000,
respectively. In accordance with the requirements of the Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," all marketable
securities are classified as "available-for-sale securities" and
reported at fair value. Unrealized gains and losses are excluded
from earnings and reported as a separate component of shareholders'
equity, net of related deferred taxes. The Company's results of
operations will continue to include earnings from such securities as
calculated on a yield-to-maturity basis. During 1997 the Company
realized a net gain of $34,000 from the sale of securities. During
1996 the Company realized a loss of $16,000 from the sale of
securities. As of December 31, 1997 and 1996, the Company had
recorded a valuation loss of $31,000 and $14,000 (net of taxes),
respectively with respect to certain available-for-sale securities.
Allowance for doubtful accounts: As of December 31, 1997, 1996 and
October 31, 1995, the allowance for doubtful accounts was $544,000,
$503,000, and $238,000. The activity in this account was as follows
(in thousands):
Balance at Write-offs Balance
Beginning Charged to Net of Synaptel at End
Year Ended: of Period Expense Recoveries Acquisition of Period
December 31, 1997 $ 503 $ 337 $ (296) $ - $ 544
December 31, 1996 238 50 (50) 265 503
October 31, 1995 240 - (2) - 238
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):
Dec. 31,1997 Dec. 31, 1996
Raw Materials $ 7,922 $ 6,040
Work-in-process 5,943 5,193
Finished Goods 1,030 1,366
Total $14,895 $12,599
F-8
Property and Equipment: Property and equipment are recorded at cost.
Depreciation and amortization are provided over the estimated useful
lives of depreciable assets using the straight-line method. When
property and equipment are sold or otherwise retired, the cost and
accumulated depreciation applicable to such assets are eliminated
from the accounts, and any resulting gain or loss is reflected in
current operations. Related depreciation expense and accumulated
depreciation were as follows (in thousands):
Depreciation Accumulated
Expense Depreciation
Year ended December 31, 1997 $ 2,781 $ 11,817
Year ended December 31, 1996 2,782 10,394
Year ended October 31, 1995 2,414 8,820
The depreciable lives of property and equipment are as follows:
Machinery and equipment 3-5 years
Leasehold improvements 3-10 years
Furniture and fixtures 5-7 years
Capitalized Software: Capitalized software represents various
software licenses purchased by the Company and utilized in connection
with the Company's network and mass storage products as well as the
general operations of the Company. Capitalized software is amortized
over 3-5 years utilizing the straight-line method. Related
amortization expense and accumulated amortization were as follows (in
thousands):
Amortization Accumulated
Expense Amortization
Year ended December 31, 1997 $223 $ 1,950
Year ended December 31, 1996 362 2,128
Year ended October 31, 1995 400 1,441
Research and Development Subsidy: Included in other assets at
December 31, 1997, is a receivable for a subsidy of $1,651,000 due
from the French government related to the research and development
activities of Synaptel.
Intangibles: As a result of the acquisition of Synaptel, S.A.
("Synaptel") and certain product rights acquired from Cisco Systems,
Inc. ("Cisco"), the Company acquired intangible assets related to
developed technologies, assembled workforce and goodwill (See Note
2). Developed technology and assembled workforce are amortized on a
straight-line basis over a 7-year period. Goodwill related to the
Synaptel acquisition is amortized on a straight-line basis over a 10-
year period. Acquired product rights from Cisco are amortized
ratably over the anticipated revenue stream of such products sold.
The December 31, 1997 intangible balances at cost and related
amortization expense and accumulated amortization were as follows (in
thousands):
Amortization Expense Accum. Ending
Intangibles 1997 1996 1995 Amortization Balance
Developed technology $4,230 $600 $150 $- $750 $3,480
Assembled workforce 390 60 15 - 75 315
Goodwill-Synaptel 3,596 263 23 - 286 3,310
Acquired Product Rights-Cisco 2,500 812 768 - 1,580 920
Intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Any impairment would be recognized in operating results
if a permanent reduction in value were to occur.
F-9
Revenue Recognition: Revenue from product sales is recorded when the
earnings process has been completed, which is at the time of
shipment.
Concentration of Credit Risk: Financial instruments which
potentially expose the Company to concentrations of credit risk, as
defined by SFAS No. 105, consist primarily of trade accounts
receivable. The majority of the Company's sales have been to
original equipment manufacturers of computer systems.
The Company conducts credit evaluations of its customers' financial
condition and limits the amount of trade credit extended when
necessary. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends, and other information.
Research and Development: Research and development costs are charged
to expense as incurred.
Foreign Currency Translation: Assets and liabilities of certain non-
U.S. subsidiaries are translated at current exchange rates, and
related revenues and expenses are translated at average exchange
rates in effect during the period. Resulting translation adjustments
are reflected in shareholders' equity.
Income Taxes: The Company utilizes the liability method to determine
deferred taxes. Deferred tax assets and liabilities are based on the
estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the
provisions of enacted tax law. The Company's consolidated financial
statements include deferred income taxes arising from the recognition
of revenues and expenses in different periods for income tax and
financial reporting purposes.
Net Income (Loss) Per Common and Common Equivalent Share: The
Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share", for its December 31, 1997 consolidated
financial statements. As a result, the Company's reported earnings
per share for all periods presented are restated. Under SFAS No.
128, basic earnings per common share are computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share are
computed by dividing net income by the weighted average of common
stock and common stock equivalents outstanding during the year.
Weighted average common and common equivalent shares (in thousands):
Two months
ended Year ended
Year ended Dec. 31, Dec. 31, Oct. 31,
1997 1996 1995 1995
Outstanding weighted average
shares outstanding 5,496 5,062 4,663 4,561
Dilutive impact of stock - - - 490
options
Total outstanding weighted
average common and common
equivalent shares 5,496 5,062 4,663 5,051
Anit-dilutive options of 101,000, 371,000 and 435,000 were excluded
from the dilutive calculation in 1997, 1996, and the two month period
ended December 31, 1995, respectively.
F-10
Recently Issued Accounting Policies: In 1996, the Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. The adoption of SFAS No. 121
did not have a material effect on the consolidated financial
statements of the Company.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation". SFAS No. 123 requires companies to either
recognize compensation expense related to employee stock options in
the income statement or disclose the pro-forma effect on earnings of
the stock options in the footnotes to the financial statements. The
Company adopted the footnote disclosure approach of SFAS No. 123, and
the Company's pro forma disclosure can be found in Note 5 to the
consolidated financial statements.
In 1997, the Company adopted SFAS No. 128, Earnings per Share, for
its December 31, 1997 consolidated financial statements.
Effective July 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 requires the Company to report
comprehensive income in the financial statements. SFAS No. 131
requires the Company to disclose revenues, profit and loss, and
assets for business and geographical segments similar to disclosures
required under current standards. These statements are effective for
fiscal years beginning after December 15, 1997, with earlier adoption
permitted. The Company will adopt these statements in 1998 and
anticipates no material impact on the financial statements or
footnotes to the financial statements.
Certain Reclassifications: Certain prior year amounts have been
reclassified to conform with the 1997 presentation.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles 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.
2. ACQUISITIONS
SYNAPTEL
Effective June 29, 1996, the Company acquired all the capital stock
of Synaptel, S.A. ("Synaptel"), a French company , for approximately
$19,000,000. The purchase consideration consisted of $8,000,000 in
cash, 594,595 shares of the Company's common stock, valued at
approximately $9,200,000, and $1,800,000 of accrued acquisition
costs. The Company financed the cash portion of the consideration
through a credit facility with a financial institution. This
acquisition was accounted for using the purchase method of accounting
from the effective date of the acquisition. The total purchase
consideration in excess of the fair value of the tangible and
identified intangible assets acquired was included in goodwill.
Identified intangibles acquired included approximately $11,600,000 of
in-process research and development, $4,230,000 of developed
technology and $390,000 related to Synaptel's assembled workforce.
Acquired in-process research and development activities had no
alternative future use and had not achieved technological
feasibility; accordingly, the amounts were expensed in the
accompanying consolidated statement of operations for the year
ended December 31, 1996.
In addition to the purchase consideration discussed above, the
purchase agreement included provisions for additional consideration
of $3,500,000 cash and 450,000 options to purchase the Company's
common stock at an exercise price of $18.50 per share if Synaptel
attains certain revenue and operating income targets through 1998.
The actual cash earn-out and number of employee stock options may
increase or decrease depending upon performance against targets. The
cash payments pursuant to these provisions will be accounted for as
additional purchase consideration when payment is probable. The
compensatory elements, if any, for these stock options will be
expensed over the exercise periods. In 1997 and 1996, no additional
consideration was paid.
F-11
The unaudited pro forma financial information is presented for the
years ended December 31, 1996 and October 31, 1995. This unaudited
pro forma financial information gives effect to the purchase of
Synaptel as if such transaction had occurred as of November 1, 1994,
and excludes the $11,646,000 write-off of acquired in-process
research and development (in thousands):
Year ended Year ended
December 31, 1996 October 31, 1995
Net sale $ 59,845 $ 58,115
Net income (loss) (1,388) 2,317
Basic earnings per share (0.26) 0.45
Diluted earnings per share (0.26) 0.41
Unaudited pro forma financial information for the two-month period
ended December 31, 1995 is not available.
The unaudited pro forma financial information does not purport to
represent what the results of operations of the Company would
actually have been if the aforementioned transactions had occurred
on November 1, 1994, nor do they project the results of operations or
financial position for any future periods or at any future date.
ACQUIRED PRODUCT RIGHTS
In June 1996, the Company acquired the rights to manufacture, market,
and sell certain FDDI products from Cisco for a purchase price of
$2,500,000. The acquired product rights are included in acquired
developed technology in the accompanying December 31, 1997 and 1996,
consolidated balance sheet.
3. CREDIT FACILITY
Prior to and in conjunction with the Synaptel acquisition discussed
in Note 2, the Company entered into a credit facility with BankOne
Texas NA. The credit facility consists of an $8,500,000 acquisition
term loan, a $2,500,000 equipment financing facility and a
$5,000,000 revolving credit facility. The revolving credit facility
is a two-year facility with an annual renewal provision, and bears
interest at the bank's base rate (currently 8.5%). The term loan and
equipment loan are payable in equal quarterly installments totaling
$548,000 plus accrued interest commencing on November 30, 1996, with
final payment due November 30, 2001. The Company has the ability to
satisfy the quarterly payments on the term notes through borrowing
under the revolving credit component of the credit facility. The
revolving portion of the loan is due June 30, 1999. The credit
facility is collateralized by marketable securities, assignment of
accounts receivable and equipment. The credit facility includes
certain restrictive financial covenants including, among others,
tangible net worth, total liabilities to tangible net worth, interest
coverage, quick ratio, debt service coverage, and is subject to a
borrowing base calculation. At December 31, 1997, the Company was in
compliance with all covenants. At December 31, 1997, total
availability under this credit facility was $1,500,000.
At December 31, 1997, the Company's outstanding debt consisted of the
following (in thousands):
Dec. 31, 1997 Dec. 31, 1996
Acquisition Term Loan $6,375 $8,075
Equipment Financing Loan 1,866 2,358
Borrowings under revolving 3,500 1,000
credit facility
Other 336 482
Total 12,077 11,915
Less current portion 2,457 2,471
Total long term debt $9,620 $9,444
The total scheduled debt principal payments are $2,457,000 in 1998,
$5,692,000 in 1999, $2,192,000 in 2000, $1,664,000 in 2001 and zero
thereafter.
F-12
4. INCOME TAXES
The provision (benefit) for income taxes for each period presented
was as follows (in thousands):
Two Month Year ended
Year ended Dec. 31, ended Dec. 31, Oct 31,
1997 1996 1995 1995
Current provision (benefit) $471 $922 $(683) $1,293
Deferred provision (benefit) (270) (358) 1 170
Total $201 $ 564 $(682) $1,463
Tax effect of temporary differences that give rise to significant
components of the deferred tax assets as of December 31, 1997 and
1996, are presented as follows (in thousands):
Year ended Year ended
Dec. 31, Dec. 31,
1997 1996
Current deferred tax assets:
Assets:
Inventory $ 155 $ 294
Accounts receivable 88 120
Vacation accrual 148 154
Other expenses 295 318
Total $ 686 $ 886
Noncurrent deferred tax assets
(liabilities), net:
Assets:
Depreciation 850 765
Amortization 459 -
$ 1,309 $ 765
Liabilities:
Other (447) (373)
Total $ 862 $392
The Company has not recorded a valuation allowance with respect to
the various deferred tax assets as management believes it is more
likely than not that these assets will be realized. Management
periodically reviews the realizability of the Company's deferred tax
assets, as appropriate, when existing conditions change the
probability of realization. The differences between the provision
(benefit) for income taxes computed on income before income taxes at
the U.S. federal statutory income tax rate (34%) and the amount shown
in the Consolidated Statements of Operations are presented below (in
thousands):
Two Month Year ended
Year ended Dec. 31, ended Dec. 31, Oct 31,
1997 1996 1995 1995
Income taxes at $(262) $(3,227) $ (628) $1,435
statutory rate
State income taxes 1 46 (35) 102
Write off of in-
process research and
development not tax benefited - 3,960 - -
Non-deductible goodwill
amortization 314 64 - -
Other 148 (279) (19) (74)
Provision (benefit) for $ 201 $ 564 $ (682) $1,463
income taxes
F-13
5. COMMON STOCK
Amended and Restated Stock Option Plan: In 1996, the Company
amended and restated its Stock Option Plan which, as amended,
authorizes the issuance to employees of up to 2,350,000 shares of
common stock in incentive stock options (as defined in section 422 of
the Internal Revenue Code of 1986, as amended) and nonqualified stock
options. The exercise price of the incentive stock options must be
at least equal to the fair market value of the Company's common stock
on the date of the grant, while the exercise price of nonqualified
stock options may be less than fair market value on the date of
grant, as determined by the board. Options generally vest ratably
over a 5-year period from the date of grant. The term of option
grants may be up to 10 years. Grants prior to June 1994 expire after
6 years. Options are canceled upon the lapse of three months
following termination of employment except in the event of death or
disability, as defined.
Stock Option Sub-Plan: This plan was adopted in 1988 for the benefit
of the Company's employees located in the United Kingdom. This plan
authorizes the issuance of options to purchase common stock of the
Company at prices at least equal to the fair market value of the
common stock on the date of the grant. The options vest after 3 years
and expire after 10 years. The options are canceled upon termination
of employment, except in the event of death, retirement or injury, as
defined. The following table summarizes the transactions under the
Stock Option Plan and the Stock Option Sub-Plan (in thousands, except
option prices):
Number of Range of Weighted Average
Options Option Price Option Price
Balance, October 31, 1994 757 4.00- 8.00 5.10
Granted 536 9.57- 16.13 11.35
Exercised (134) 4.00- 7.38 5.02
Canceled (102) 4.00- 11.44 7.25
Balance, October 31, 1995 1,057 4.00- 16.13 8.07
Exercised (3) 4.00- 11.44 5.77
Balance, December 31, 1995 1,054 4.00- 16.13 8.08
Granted 370 10.00- 16.00 13.91
Exercised (194) 4.00- 11.44 6.08
Canceled (118) 4.00- 12.07 8.36
Balance, December 31, 1996 1,112 4.00- 16.13 10.34
Granted 381 6.00- 10.37 7.95
Exercised (24) 6.00- 11.00 7.26
Canceled (59) 4.00- 15.00 10.17
Balance, December 31, 1997 1,410 4.00- 16.13 10.80
Exercisable at December 427 4.00- 16.13 9.08
31, 1997
F-14
Director Stock Options: In May 1994, the Company formalized its
program ("directors' plan") of granting stock options to its
directors. 500,000 common shares were made available for grant under
this plan. Stock Option grants pursuant to the directors' plan will
vest within one year and have a term of 5 years. The exercise prices
related to these options were equal to the market value of the
Company's stock on the date of grant. The following table summarizes
the transactions under the Director Stock Option Plan (in thousands,
except option prices):
Number of Range of Weighted Average
Options Option Price Option Price
Balance, October 31, 1994 144 4.38- 6.63 5.61
Granted 40 10.25- 16.88 11.91
Balance, October 31, 1995 184 4.38- 16.88 6.98
Granted 30 14.88- 14.88 14.88
Exercised (38) 4.75- 10.25 6.20
Balance, December 31, 1996 176 4.38- 16.88 8.52
Granted 55 6.75- 11.12 7.78
Balance, December 31, 1997 231 4.38- 16.88 8.35
Exercisable at December 31, 1997 185 4.38- 16.88 8.66
Accounting for Stock-Based Compensation: In 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company has two stock option plans, the Amended and Restated
Stock Option plan, which also includes the Sub-Plan, and the
Directors Plan. The Company accounts for these plans under APB
Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for these plans been determined pursuant to
the provisions of SFAS No. 123, the Company's pro forma net loss for
1997 and 1996 would have been $(2,121,000) and $(10,653,000),
respectively, resulting in basic loss per share of $(0.39) and
$(2.10), respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for
options granted in 1997 and 1996: risk-free interest rate of 6% in
1997 and 7% in 1996, expected dividend yield of zero, expected term
of 4.48 years in 1997 and 6.4 years in 1996, and expected volatility
of 93.6% in 1997 and 112.96% in 1996. The weighted average fair
valuation per share was $5.56 in 1997, and $9.19 in 1996.
Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to January 1, 1995, the resulting pro-forma
compensation cost may not be representative of that to be expected in
future years.
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
December 31, December 31,
1997 1996
Accrued royalties $ 70 $ 265
Accrued outside 320 354
commissions
Accrued property tax 182 211
Accrued acquisition 479 546
cost
Accrued other 1,433 1,721
$ 2,484 $ 3,097
F-15
7. RELATED PARTY TRANSACTIONS
The Company paid approximately $347,000 and $668,000 for the year
ended December 31, 1997 and 1996, respectively, $67,000 for the two
months ended December 31, 1995, and $397,000 for the year ended
October 31, 1995, to certain outside directors of the Company or
their firms as remuneration for their professional services.
8. TRANSACTIONS WITH MOTOROLA, INC.
Motorola owns 660,000 shares of the Company's common stock.
Motorola has the right to require registration and to designate one
member of the board of directors. Shipments to Motorola comprised
the following percentage of the Company's revenues for the periods
indicated:
% of Total Revenues
Year ended December 31, 1997 3 %
Year ended December 31, 1996 6 %
Two month period ended 4 %
December 31, 1995
Year ended October 31, 1995 6 %
9. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan for those employees
who meet the plan's length of service requirements. Under the
defined contribution plan, employees may make voluntary contributions
to the plan, subject to certain limitations, and the Company matches
employee's contributions up to 3% of the employees' annual salary. At
the Company's option, a discretionary contribution to the plan can be
made. The total expense under this plan was $171,000 and $262,000
for the years ended December 31, 1997 and 1996 respectively, $27,000
for the two-month transition period ended December 31, 1995, and
$282,000 for the year ended October 31, 1995. The Company offers no
post-retirement or post-employment benefits.
10. OTHER FINANCIAL INFORMATION
Major Customers: The Company had one customer in 1997, no customers
in 1996, no customers in the two-month transition period and one
customer in 1995 accounting for more than 10% of the Company's
consolidated revenues. Net revenues resulting from these customers
were as follows ($ in thousands):
Year Total Revenues % of Consolidated Revenues
1997 $ 26,402 40%
1995 7,039 15%
F-16
Commitments: The Company leases its office, research and development
and manufacturing facility and certain manufacturing equipment under
noncancelable operating leases to 2010. Rent expense related to
these leases are recorded on a straight-line basis. As of December
31, 1997, operating lease commitments having noncancelable terms of
more than one year are as follows (in thousands):
Year ending December 31,
1998 $1,001
1999 799
2000 205
2001 171
2002 64
Thereafter 509
Total rent expense for operating leases was approximately as follows
(in thousands):
Year Total Rent Expense
1997 $1,024
1996 817
Two month transition period 148
1995 702
Contingencies: The Company is involved in various legal actions and
claims arising in the ordinary course of business. Management
believes that such litigation and claims will be resolved without
material effect on the Company's financial position or results of
operations.
Geographic Information: The Company operates principally in the
United States, Europe and the Pacific Rim. A geographic detail of
revenue is as follows (in thousands):
Transition
Period
Region 1997 1996 1995 1995
North America $ 53,059 $42,102 $2,712 $41,207
Europe 10,867 12,383 457 3,818
Pacific Rim 2,078 2,267 210 2,343
F-17
11. QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended
March 31 June 30 September 30 December 31
1997 (in thousands, except per share amounts)
Revenues $16,858 $18,379 $13,611 $17,156
Gross profit 8,086 9,162 6,209 8,559
Income (loss) before 138 814 (2,558) 836
taxes
Net income (loss) 97 437 (2,191) 686
Net income (loss) per
share
Basic EPS $ .02 $.08 $(.40) $.12
Diluted EPS $ .02 $.08 $(.40) $.12
Quarter Ended
March 31 June 30 September 30 December 31
1996 (in thousands, except per share amounts)
Revenues $11,877 $11,318 $16,370 $17,187
Gross profit 6,191 5,588 7,871 8,314
Income (loss) before 1,007 (11,526) 192 836
taxes
Net income (loss) 644 (11,565) 167 699
Net income (loss) per
share
Basic EPS $.14 $(2.45) $.03 $.13
Diluted EPS $.13 $(2.45) $.03 $.12
Operating results in the second quarter of 1996 included a
$11,646,000 expense for the write-off of acquired in-process R&D
associated with the Synaptel acquisition
Period ended
Transition Period December 31, 1995
(in thousands, except per share amounts)
Revenues $ 3,379
Gross profit 1,224
Income (loss) before (1,849)
taxes
Net income (loss) (1,167)
Net income (loss)
per share
Basic EPS $(.25)
Diluted EPS $(.25)
Quarter Ended
January 31 April 30 July 31 October 31
(in thousands, except per share amounts)
1995
Revenues $11,022 $11,473 $12,356 $12,517
Gross profit 5,420 5,771 6,083 6,273
Income before taxes 948 1,005 1,166 1,103
Net income 606 645 745 763
Net income per share
Basic EPS $.13 $.14 $.16 $.17
Diluted EPS $.12 $.13 $.14 $.15
F-18
INDEX TO EXHIBITS
Exhibits
2 (a) Stock Purchase Agreement, dated as of June 29, 1996, among
Interphase Corporation, Synaptel and Philippe Oros, Xavier
Sutter, Francois Lecerf, Schroder Ventures French Enterprise Fund LPI
(USA), Schroder ventures French Enterprise Fund UKLP (UK) and
Schroder Ventures Holding Limited (UK). (7)
3 (a) Certificate of Incorporation of the registrant. (1)
3 (b) Amended and Restated Bylaws of the registrant adopted
on December 5, 1995. (6)
10 (b) Registrant's Amended and Restated Stock Option Plan and
Amendment No. 1 and 2 thereto. (9)
10 (c) Registrant's Incentive Stock Option Sub-Plan. (3)
10 (d) Stock Purchase Warrant issued to Motorola, Inc. (4)
10 (e) Lease on Dallas facility. (5)
10 (g) Directors Stock Option Plan and Amendment No. 1 thereto.(6)
10 (i ) Loan Agreement between Interphase Corporation and BankOne
Texas, N.A. (8)
10 (j) Purchase Agreement between Interphase Corporation and Cisco
Systems Inc. (9)
23 (a) Consent of Independent Public Accountants. (10)
27 Financial Data Schedule. (10)
(1) Filed as an exhibit to Registration Statement No. 2-86523 on
Form S-1 and incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1984 and incorporated herein by reference.
(3) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1988 and incorporated herein by reference.
(4) Filed as an exhibit to Report on Form 10-Q for the quarter
ended April 30, 1989 and incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to Report on Form 8-K on August 6, 1996,
and incorporated herein by reference.
(8) Filed as an exhibit to Report on Form 8-KA on October 4, 1996
and incorporated herein by reference.
(9) Filed as an exhibit to Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
(10) Filed herein.
E-1