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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1996 Commission File Number 0-13071
INTERPHASE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1549797
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
13800 SENLAC, DALLAS, TEXAS 75234
(Address of principal executive offices)
(214)-654-5000
(Registrant's telephone number, including area code)
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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 a much 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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1996
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Common Stock, No par value 5,489,948
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1
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INTERPHASE CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of September 30, 1996
and October 31, 1995 3
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1996 and
October 31, 1995 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and October 31, 1995 5
Supplemental Schedule of Cash Flows 6
Notes to Consolidated Interim Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on From 8-K 12
Signature 13
2
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INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
<TABLE>
<CAPTION>
September 30, October 31,
ASSETS 1996 1995
- ------ ------------- -----------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,114 $ 3,320
Marketable securities 4,069 9,366
Trade accounts receivable, less allowances for uncollectible
accounts of $232 and $238, respectively 15,197 7,521
Inventories, net 12,402 7,486
Prepaid expenses and other current assets 1,372 957
Deferred income taxes, net 678 594
-------- -------
Total current assets 34,832 29,244
Machinery and equipment 13,192 10,920
Leasehold improvements 2,844 2,758
Furniture and fixtures 295 351
-------- -------
16,331 14,029
Less-accumulated depreciation and amortization (10,880) (8,820)
-------- -------
Total property and equipment, net 5,451 5,209
Capitalized software, net of accumulated amortization 486 524
Deferred income taxes, net 217 301
Investments in unconsolidated subsidiaries 1,525 -
Acquired developed technology 6,244 -
Goodwill 3,275 -
Other assets 974 152
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Total assets $ 53,004 $35,430
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued liabilities $ 8,215 $ 3,193
Accrued compensation 3,401 1,357
Income taxes payable - 366
Current portion of debt 1,147 -
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Total current liabilities 12,763 4,916
Deferred lease obligations 78 103
Other liabilities 607 -
Long term debt 10,580 -
Other debt 303 -
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Total liabilities 24,331 5,019
Common stock, no par value 34,385 24,177
Retained earnings (5,658) 6,263
Unrealized holding period loss (54) (29)
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Total shareholders' equity 28,673 30,411
-------- -------
Total liabilities and shareholders' equity $ 53,004 $35,430
-------- -------
-------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
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INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
- ---------------------- ----------------------
30-Sep-96 31-Oct-95 30-Sep-96 31-Oct-95
- --------- --------- --------- ---------
<C> <C> <S> <C> <C>
$16,370 $12,517 Revenues $ 39,565 $36,346
8,499 6,244 Cost of sales 19,915 18,219
------- ------- -------- -------
7,871 6,273 Gross profit 19,650 18,127
3,205 2,008 Research and development 7,759 5,628
2,874 2,351 Sales and marketing 7,194 6,754
1,475 984 General and administrative 3,460 2,937
- - Acquired in-process R&D 11,646 -
------- ------- -------- -------
7,554 5,343 Total operating expenses 30,059 15,319
------- ------- -------- -------
317 930 Operating income (loss) (10,409) 2,808
------- ------- -------- -------
------- ------- -------- -------
116 174 Interest income 333 474
(248) - Interest expense (248) -
7 (1) Other, net (3) (8)
------- ------- -------- -------
192 1,103 Income (loss) before income taxes (10,327) 3,274
25 340 Provision for income taxes 427 1,121
------- ------- -------- -------
$ 167 $ 763 Net income (loss) $(10,754) $ 2,153
------- ------- -------- -------
------- ------- -------- -------
Net income (loss) per common and
$ 0.03 $ 0.15 common equivalent share $ (2.19) $ 0.43
------- ------- -------- -------
------- ------- -------- -------
Weighted average common and common
5,709 5,220 equivalent shares 4,920 5,051
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
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INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
Nine Months Ended
---------------------
30-Sep-96 31-Oct-95
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $(10,754) $ 2,153
Adjustment to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 2,938 2,136
Write off of acquired in-process research and development 11,646 -
Change in assets and liabilities: -net of Synaptel acquisition
Trade accounts receivable (8,599) (937)
Inventories (1,148) 15
Prepaids expenses and other current assets 154 (339)
Accounts payable and accrued liabilities 1,195 4
Accrued compensation 181 (122)
Income taxes payable - 1
Deferred income taxes payable 77 165
Deferred lease obligations (99) (26)
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Net adjustments 6,345 897
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Net cash provided (used) by operating activities (4,409) 3,050
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, equipment and leasehold improvements (2,542) (2,057)
Additions to capitalized software (1,088) (227)
Decrease (Increase) in other assets (153) (8)
(Increase) in acquired developed technology (2,500) -
Decrease (Increase) in marketable securities 5,298 (1,687)
Cash acquired in Synaptel acquisition 11 -
Change in holding period gain/loss on marketable securities (25) 110
-------- -------
Net cash provided (used) by investing activities (999) (3,869)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in current debt payable (27) -
Increase in long term debt payable 2,580 -
Increase in common stock 992 612
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Net cash provided (used) by financing activities 3,545 612
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Net increase (decrease) in cash and cash equivalents (1,863) (207)
Cash and cash equivalents at beginning of period 2,977 3,527
-------- -------
Cash and cash equivalents at end of period $ 1,114 $ 3,320
-------- -------
-------- -------
Supplemental Disclosure of Cash Flow Information:
Income taxes paid 478 1,013
Income taxes refunded 8 189
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
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INTERPHASE CORPORATION
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
(in thousands)
Supplemental schedule of noncash investing and financing activities
The Company purchased all of the capital stock of Synaptel.
Fair value of assets acquired $(26,676)
Liabilities assumed 7,687
Acquisition debt 8,000
Common stock issuable 9,200
Accrued aquisition costs 1,800
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Cash acquired in Synaptel acquisition $ 11
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
6
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INTERPHASE CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements include the
accounts of Interphase Corporation and its wholly owned subsidiaries.
Significant inter-company 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 quarter
ended September 30, 1996, are being compared with results from the prior year
quarter ended October 31, 1995. The Company has not recast the prior year
financial information presented herein to conform to the new fiscal quarter
ends, as management does not believe such recasting would be as meaningful
for comparative purposes, as the October 31, 1995 information presented
herein. Management believes the October 31, 1995 results are the most
comparable to the quarter ended September 30, 1996 results, particularly for
comparing trends in operations.
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
generally accepted accounting principles 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
October 31, 1995.
2. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share is computed using the
weighted average number of outstanding shares and common equivalent shares. The
dilutive impact of outstanding stock options have been considered under the
treasury stock method using the greater of the average bid price or closing bid
price for the period.
Weighted average common and common equivalent shares:
Three Months Ended Nine Months Ended
-------------------------------------------
SEP 30, OCT 31, SEP 30, OCT 31,
(IN THOUSANDS) 1996 1995 1996 1995
-------------- ------- ------- ------- -------
Outstanding 5,348 4,627 4,920 4,561
Stock options 361 593 --- 490
----- ----- ----- -----
Total 5,709 5,220 4,920 5,051
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7
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3. 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 has been 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 is included in goodwill. Identified intangibles acquired included
approximately $11,645,000 of in-process research and development, $4,230,000 of
developed technology and $390,000 related to Synaptel's assembled workforce.
Goodwill, developed technologies and assembled workforce will be amortized using
the straight-line method. Acquired in-process research and development
activities have no alternative future use and have not achieved technological
feasibility; accordingly, the amounts have been expensed in the accompanying
consolidated statement of operations for the periods ended June 30, 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.
ACQUIRED PRODUCT RIGHTS
In June, 1996, the Company acquired the rights to manufacture, market, and sell
certain FDDI products from Cisco Systems Inc. The acquired product rights are
included in acquired developed technology and the accompanying June 30, 1996,
balance sheet will be amortized ratably over the anticipated revenue stream of
such products sold.
4. CREDIT FACILITY
Prior to the Synaptel acquisition discussed in Note 3, 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 facility is a 2 year facility,
with interest at the banks base rate (currently 8.5%). The term loan is payable
in equal quarterly installments of $529,000 plus accrued interest commencing on
November 30, 1996 with final payment due April 30, 1998. 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 credit
facility is collateralized by marketable securities held by Banc One, Trust,
assignment of accounts receivable and equipment. The credit facility includes
certain restrictive financial covenants and is subject to a borrowing base
calculation.
8
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5. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information is presented for the nine month period ended
September 30, 1996. This pro forma financial information give effect to the
purchase of Synaptel as if such transaction had occurred as of January 1, 1996.
Such information for the nine month period ended October 31, 1995 is not
presented since that information is not available and would not be cost
beneficial in obtaining. Net Sales; $42,658,000, net loss before extraordinary
items; $2,019,000 and net loss per common and common equivalent share; $.38.
The Pro Forma Statements do not purport to represent what the results of
operations of the Company would actually have been if the aforementioned
transactions in fact had occurred on January 1, 1996, or to project the results
of operations or financial position for any future periods or at any future
date.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SYNAPTEL ACQUISITION
The Company acquired all the capital stock of Synaptel S.A., a Paris, France
based company, effective June 29, 1996. Synaptel designs, manufactures and
distributes a broad line of remote access, X.25 and ISDN (Integrated Services
Digital Network) products which are primarily used in wide area network ("WAN")
applications. As a result of the acquisition, the Company recognized an
$11,646,000 expense in the quarter ended June 30, 1996 for acquired in-process
research and development.
The quarter ended September 30, 1996 is the first quarter to include Synaptel in
the Company's consolidated results of operations for the Company.
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1996 ("third quarter 1996")
increased $3,853,000 or approximately 31% to $16,370,000 as compared to
$12,517,000 for the three month period ended October 31, 1995 ("comparative
period"). In the third quarter 1996 local area networking ("LAN") products
grew 32% over the comparative period. FDDI product revenues increased 20%,
older ethernet/token ring product revenues increased 6% and ATM product
revenues increased 37% over the comparative period. LAN products in total
comprised 68% of total revenues for both the third quarter of 1996, and the
comparative period. FDDI, older ethernet/token ring) and ATM products
represented 41%, 12% and 6% of total revenues, respectively for the third
quarter. In addition, the Company made its initial shipments of its fast
ethernet based product during 1996 and these products represented 8% of total
revenues for the third quarter during 1996. WAN products comprised 21% of
revenues for the third quarter 1996.
Mass storage product revenues, primarily SCSI adapter cards, decreased 58% in
the third quarter 1996 from the comparative period. During the third quarter
1996 the Company made its initial shipments of products based upon the new,
emerging fibre channel technology. Although the actual fibre channel product
revenues were insignificant, products based upon this technology are expected to
provide the next generation mass storage connectivity solutions. Mass storage
products comprised 9% of total revenues in the third quarter 1996 and 27% in
the comparative period.
Geographically, North America revenues comprised 74% of consolidated revenues in
the third quarter 1996 compared to 88% in the comparative period. European
revenues comprised 24% of consolidated revenues in the third quarter 1996 and 5%
in the comparative period. Pacific Rim revenues comprised 2% of consolidated
revenues in the third quarter 1996 and 7% in the comparative period .
Revenues for the nine months ended September 30, 1996 increased $3,219,000 or 9%
to $39,565,000 as compared to $36,346,000 for the nine month period ended
October 31, 1995. Revenues from LAN products comprised 72% of consolidated
revenue for the nine months ended September 30, 1996, as compared to 64% of
consolidated revenues for the nine month period ended October 31, 1995 Revenue
from WAN products comprised 9% for the nine months ended September 30, 1996.
Revenue from mass storage products comprised 16% for the nine months ended
September 30, 1996 and comprised 31% for the nine month period ended October
31, 1995.
10
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The gross margin percentage for the three month period ended September 30, 1996
was approximately 48% as compared to approximately 50% for the three month
period ended October 31, 1995. The gross margin percentage for each of the nine
months ended September 30, 1996 and October 31, 1995 was approximately 50%.
Operating expenses for the three month period ended September 30, 1996 were
$7,554,000 as compared to $5,343,000 for the three month period ended October
31, 1995. Operating expenses for the nine months ended September 30, 1996
(excluding $11,646,000 related to acquired in-process R&D in the quarter ended
June 30, 1996) were $18,413,000, as compared to $15,319,000 for the nine months
ended October 31, 1995. The increased operating expenses reflect the addition
of the Synaptel operations as well as increased levels of research and
development activities in 1996 compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities aggregated
$5,183,000 at September 30, 1996, and $12,686,000 at October 31, 1995. The
decrease in cash position is primarily the result of the Cisco FDDI adapter
card product line and Synaptel acquisitions, increases in accounts receivable
due to sales growth and increased capital equipment and capitalized software
purchase activities during 1996.
The Company expects that its cash, cash equivalents, marketable securities and
proceeds from its credit facility will be adequate to meet foreseeable needs for
the next 12 months.
11
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
2.1 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). Filed as Exhibit 2.1 to the Company's
current report on Form 8-K on August 6, 1996 and incorporated herein
by reference.
2.2 Loan agreement dated as of June 26, 1996 between Interphase
Corporation and Bank One Texas, N.A. Filed as Exhibit 10 to the
Company's current report on Form 8-KA on October 4, 1996 and
incorporated herein by reference.
(b) Reports on Form 8-K and 8KA
The Company filed the following reports on Form 8-K and 8-KA, for the
quarter ended September 30, 1996:
DATE OF FILING ITEM REPORTED SUBJECT OF REPORT
-------------- ------------- -----------------
August 5, 1996 2 Announcing Synaptel
acquisition
October 4, 1996 7 Financial statements,
pro forma financial
information and
exhibits for Synaptel
12
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERPHASE CORPORATION
(Registrant)
Date: November 13, 1996
/s/ ROBERT L. DRURY
-----------------------------------
Robert L. Drury
Chief Financial Officer and
Vice President Finance
(Principal Financial and
Accounting officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,114
<SECURITIES> 4,069
<RECEIVABLES> 15,429
<ALLOWANCES> 232
<INVENTORY> 12,402
<CURRENT-ASSETS> 34,832
<PP&E> 16,331
<DEPRECIATION> (10,880)
<TOTAL-ASSETS> 53,004
<CURRENT-LIABILITIES> 12,763
<BONDS> 0
0
0
<COMMON> 34,385
<OTHER-SE> (5,712)
<TOTAL-LIABILITY-AND-EQUITY> 28,673
<SALES> 39,565
<TOTAL-REVENUES> 39,565
<CGS> 19,915
<TOTAL-COSTS> 18,413
<OTHER-EXPENSES> 11,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 248
<INCOME-PRETAX> (10,327)
<INCOME-TAX> 427
<INCOME-CONTINUING> (10,754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,754)
<EPS-PRIMARY> 0
<EPS-DILUTED> (2.19)
</TABLE>
