<PAGE>
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 June 30, 1997 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)
________________________________________________________________________________
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
--- ---
________________________________________________________________________________
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 AUGUST 1, 1997
Common Stock, No par value 5,494,008
1
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INTERPHASE CORPORATION
INDEX
PART I -FINANCIAL INFORMATION
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996 5
Supplemental Schedule of Cash Flows 6
Notes to Consolidated Interim Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II- OTHER INFORMATION
Item 4. Submissions of Matters to a vote of Security
Holders 11
Item 6. Reports on form 8-K and exhibits
Signature 12
2
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INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
June 30, December 31,
ASSETS 1997 1996
---------------------------
(Unaudited)
Cash and cash equivalents $ 5,310 $ 2,271
Marketable securities 3,153 3,579
Trade accounts receivable, less allowances
for uncollectible accounts of $409 and
$503, respectively 13,088 15,182
Inventories, net 14,097 12,599
Prepaid expenses and other current assets 1,113 1,221
Deferred income taxes, net 886 886
---------------------------
Total current assets 37,647 35,738
Machinery and equipment 13,738 12,340
Leasehold improvements 2,904 2,863
Furniture and fixtures 432 278
---------------------------
17,074 15,481
Less-accumulated depreciation and amortization (12,580) (10,394)
---------------------------
Total property and equipment, net 4,494 5,087
Capitalized software-net 348 400
Deferred income taxes, net 392 392
Acquired developed technology-net 4,847 5,819
Goodwill-net 3,764 3,902
Other assets 2,367 2,586
---------------------------
Total assets $ 53,859 $ 53,924
---------------------------
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,868 $ 4,279
Accrued liabilities 2,549 3,097
Accrued compensation 2,094 2,962
Income taxes payable 137 93
Current portion of debt 2,512 2,471
---------------------------
Total current liabilities 12,160 12,902
Deferred lease obligations 58 72
Other liabilities 1,979 1,120
Long term debt 8,904 9,444
---------------------------
Total liabilities 23,101 23,538
Common stock, no par value 35,200 35,195
Retained deficit (4,425) (4,959)
Cumulative foreign currency translation
adjustment (3) 164
Unrealized holding period loss (14) (14)
---------------------------
Total shareholders' equity 30,758 30,386
---------------------------
Total liabilities and shareholders'
equity $ 53,859 $ 53,924
---------------------------
---------------------------
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>
<CAPTION>
Three Months Ended Six Months Ended
- ------------------- --------------------
30-Jun-97 30-Jun-96 30-Jun-97 30-Jun-96
- ------------------- --------------------
<C> <C> <S> <C> <C>
$ 18,379 $ 11,318 Revenues $ 35,237 $ 23,195
9,217 5,730 Cost of sales 17,989 11,416
- -------- -------- --------- ---------
9,162 5,588 Gross profit 17,248 11,779
3,524 2,326 Research and development 6,742 4,554
2,947 2,189 Sales and marketing 5,828 4,320
1,518 998 General and administrative 2,963 1,985
- 11,646 Acquired in-process R&D - 11,646
- -------- -------- --------- ---------
7,989 17,159 Total operating expenses 15,533 22,505
- -------- -------- --------- ---------
1,173 (11,571) Operating income (loss) 1,715 (10,726)
- -------- -------- --------- ---------
129 51 Interest income 212 217
(276) - Interest expense (567) -
(212) (6) Other, net (408) (10)
- -------- -------- --------- ---------
814 (11,526) Income (loss) before income
taxes 952 (10,519)
377 39 Provision for income taxes 418 402
- -------- -------- --------- ---------
$ 437 $(11,565) Net income (loss) $ 534 $(10,921)
- -------- -------- --------- ---------
- -------- -------- --------- ---------
Net income (loss) per common and
$ 0.08 $ (2.45) common equivalent share $ 0.09 $ (2.32)
- -------- -------- --------- ---------
- -------- -------- --------- ---------
Weighted average common and common
5,626 4,726 equivalent shares 5,649 4,705
- -------- -------- --------- ---------
- -------- -------- --------- ---------
</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)
<TABLE>
<CAPTION>
(Unaudited) Six Months Ended
------------------------
30-Jun-97 30-Jun-96
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 534 $(10,921)
Adjustment to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 2,415 1,601
Write off of acquired in-process research and
development - 11,646
Change in assets and liabilities, net of Synaptel
acquisition;
Trade accounts receivable 2,094 (3,947)
Inventories (1,498) (953)
Prepaid expenses and other current assets 108 80
Accounts payable and accrued liabilities 42 1,321
Accrued compensation (868) (326)
Income taxes payable 44 -
Deferred income taxes payable - (10)
Other long term liabilities 859 -
Deferred lease obligations (14) (14)
--------- ---------
Net adjustments 3,182 9,398
--------- ---------
Net cash provided (used) by operating activities 3,716 (1,523)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, equipment and leasehold
improvements (576) (1,606)
Additions to capitalized software (85) (136)
Decrease in other assets 219 32
Cash acquired in Synaptel acquisition - 11
(Increase) in acquired developed technology - (2,500)
Decrease in marketable securities 426 5,049
Change in holding period gain/loss on marketable
securities - (18)
--------- ---------
Net cash provided (used) by investing activities (16) 832
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on debt (540) -
Proceeds from debt 41 -
Change in cumulative foreign currency translation (167) -
Increase in common stock 5 509
--------- ---------
Net cash provided (used) by financing activities (661) 509
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,039 (182)
Cash and cash equivalents at beginning of period 2,271 2,977
--------- ---------
Cash and cash equivalents at end of period $5,310 $ 2,795
--------- ---------
--------- ---------
Supplemental Disclosure of Cash Flow Information:
Income taxes paid 299 472
Income taxes refunded 2 8
Interest paid 499 -
</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
In June 1996, 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 issued 9,200
Accrued aquisition costs 1,800
-----------
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 intercompany accounts and transactions have been eliminated.
While the accompanying interim financial statements are unaudited, they have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, all
material adjustments and disclosures necessary to fairly present the results
of such periods have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
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
December 31, 1996.
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 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 $11,600,000 of
in-process research and development, $4,230,000 of developed technology and
$415,000 related to Synaptel's assembled workforce. Acquired in-process
research and development activities had no alternative future use and had not
achieved technological feasibility and were expensed in June 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 1996 and the first and second quarters of 1997, no
additional consideration was paid.
Unaudited pro forma financial information for the quarter ended June 30, 1996
is not available.
7
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ACQUIRED PRODUCT RIGHTS
In June 1996, the Company acquired the rights to manufacture, market, and
sell certain FDDI products from Cisco Systems, Inc. for a purchase price of
$2,500,000. The acquired product rights are included in acquired developed
technology in the accompanying consolidated balance sheets.
3. 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 Six Months Ended
June 30, June 30,
------------------ ----------------
(IN THOUSANDS) 1997 1996 1997 1996
-------------- ---- ---- ---- ----
Outstanding 5,493 4,726 5,492 4,705
Stock options 133 --- 158 ---
----- ----- ----- -----
Total 5,626 4,726 5,649 4,705
----- ----- ----- -----
----- ----- ----- -----
There is no material difference between primary diluted and fully diluted EPS
for the periods presented.
In 1997, the Company will adopt 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 1996 and each of the quarters in
1997, will be restated. Upon the adoption of SFAS No. 128, basic earnings per
common share will be computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. Diluted
earnings per common share will be computed by dividing net income by the
weighted average of common stock and common stock equivalents outstanding
during the year. The following pro-forma information is presented in
accordance with the provisions of SFAS No. 128:
Three Months Ended Six Months Ended
June 30, June 30,
Primary EPS 1997 1996 1997 1996
----------- ---------------------------------------
Per share amounts
Primary EPS as reported $ 0.08 $ (2.45) $0.09 $ (2.32)
Effect of SFAS No. 128 - -- .01 --
----------------- ---------------
Pro-forma basic EPS as restated $ 0.08 $ (2.45) $0.10 $ (2.32)
Three Months Ended Six Months Ended
June 30, June 30,
Fully Diluted EPS 1997 1996 1997 1996
----------------- ----------------- --------------
Per share amounts
Fully diluted EPS as reported $ 0.08 $ (2.45) $0.09 $(2.32)
Effect of SFAS No. 128 - -- .01 --
----------------- --------------
Pro-forma diluted EPS as restated $ 0.08 $ (2.45) $0.10 $(2.32)
8
<PAGE>
4. 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
facility is subject to annual renewal provision, and bears interest at the
bank's base rate (currently 8.5%). The term loan is payable in equal
quarterly installments of $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
borrowings 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 June 30, 1997, total
availability under this credit facility was $3,967,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1997 ("second quarter 1997")
increased $7,061,000 or approximately 62% to $18,379,000 as compared to
$11,318,000 for the same period in 1996 ("comparative period"). In the second
quarter 1997 local area networking ("LAN") product revenue grew 65% over the
comparative period. The growth was led by fast ethernet products which grew
from 5% of total revenues in the second quarter of 1996 to 34% of revenues in
the second quarter of 1997. FDDI product revenues increased 18%, while ATM
and older ethernet/token ring product revenues decreased 15% and 37%
respectively, over the comparative period. LAN products in total comprised
77% of total revenues for the second quarter, and 76% for the comparative
period. FDDI, ATM and older ethernet/token ring products represented 30%, 7%
and 7% of total revenues, respectively for the second quarter. The growth in
revenues for the second quarter was also partly attributable to the inclusion
of $1,827,000 for wide area networking ("WAN") products due to the
acquisition of Synaptel S.A. in June 1996. WAN products comprised 10% of
revenues for the second quarter 1997.
Mass storage product revenues, primarily SCSI adapter cards, decreased 32% in
the second quarter 1997 from the comparative period. Fibre channel product
revenues were 2% of revenues for the second quarter. Mass storage products
comprised 10% of total revenues in the second quarter 1997 and 20% in the
comparative period.
Geographically, North America revenues comprised 79% of consolidated revenues
in the second quarter 1997 compared to 84% in the comparative period.
European revenues comprised 18% of consolidated revenues in the second
quarter 1997 and 11% in the comparative period. The growth in European
revenues is attributable to the inclusion of WAN products due to the
acquisition of Synaptel in June 1996. Pacific Rim revenues comprised 3% of
consolidated revenues in the second quarter 1997 and 6% in the comparative
period.
The Company's current marketing strategy is to increase market penetration
through sales to major OEM customers. One of these customers accounted for
approximately 37% of the Company's revenue for the second quarter of 1997.
Revenues for the six months ended June 30, 1997 increased $12,042,000 or 52%
to $35,237,000 as compared to $23,195,000 for the comparative period. The
growth in revenue over the comparative period is due to increased revenue
from fast-ethernet products and the inclusion of WAN products due to the
9
<PAGE>
acquisition of Synaptel S.A. in June 1996. Revenues from LAN, Mass Storage
and WAN products comprised 77%, 10% and 10% respectively, of consolidated
revenues for the six month period ended June 30, 1997.
The gross margin percentage for the three month period ended June 30, 1997
was approximately 50% as compared to approximately 49% for the comparable
period. The gross margin percentage for the six month period ended June 30,
1997 was approximately 49% as compared to approximately 50% for the
comparative period.
Operating expenses (excluding $11,646,000 related to acquired in-process R&D
in the quarter ended June 30, 1996) for the three month period ended June 30,
1997 were $7,989,000 as compared to $5,513,000 for the comparable period. The
increased operating expenses reflect the addition of the Synaptel operations
as well as increased levels of research and development activities in 1997
compared to 1996. Operating expenses (excluding $11,646,000 related to
acquired in-process R&D in the quarter ended June 30, 1996) for the six month
period ended June 30, 1997 were $15,533,000 as compared to $10,859,000 for
the comparable period. The increased operating expenses reflect the addition
of the Synaptel operations as well as increased levels of research and
development activities in 1997 compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities aggregated
$8,463,000 at June 30, 1997, and $5,850,000 at December 31, 1996. In the
second quarter of 1997, the Company invested approximately $300,000 in plant
and equipment. The improved cash position is primarily due to a decrease in
accounts receivable and profitable operations. In the next twelve months,
scheduled debt payments on the Company's credit facility are approximately
$2,192,000. In the current quarter this facility was extended for an
additional year pursuant to the terms of the arrangement.
The Company expects that its cash, cash equivalents, marketable securities
and proceed from its credit facility will be adequate to meet foreseeable
needs for the next 12 months.
NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (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
consider adopting SFAS No. 130 and SFAS No. 131 in its December 31, 1997
consolidated financial statements and anticipates no material impact on the
financial statements or footnotes to the financial statements.
10
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 1997, The Annual Meeting of Shareholders of Interphase Corporation
was held at the Company's office in Dallas Texas. The following matters were
voted upon and approved at the meeting.
MATTER 1
An election of directors of the Company to serve until the next annual
meeting for the Company was held. The following eight individuals were
elected as Directors of the Company:
Votes Cast Votes
For Withheld
--------- -------
Dale Crane 4,658,171 296,150
Gary W. Feilder 4,656,906 297,375
James F. Halpin 4,658,171 296,150
Paul N. Hug 4,658,171 296,150
Robert H. Lyon 4,658,171 296,150
R. Stephen Polley 4,657,771 296,550
David H. Segrest 4,658,171 296,150
S. Thomas Thawley 4,658,171 296,150
To be elected a director each individual must have received a plurality of
all votes cast at the meeting of election of directors.
MATTER 2
Also approved at the meeting by the following vote was a proposal to amend
the Company's Amended and Restated Stock Option Plan to increase the
aggregate number of shares issuable upon exercise of options thereunder from
1,350,000 to 2,350,000 and to provide that any and all options may be granted
to any one or more participants.
Votes Cast Votes Cast Broker
For Against Abstentions Non-Votes
---------- ---------- ----------- ---------
2,494,515 784,493 30,550 1,644,763
Approval of the plan required the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock present in person or by
proxy and entitled to be voted at the meeting.
ITEM 6. REPORTS ON FORM 8-K
None
EXHIBITS
EXHIBIT 27 Financial Data Schedule
11
<PAGE>
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: August 13, 1997
/s/ Robert L. Drury
-------------------
Robert L. Drury
Chief Financial Officer and
Vice President Finance
(Principal Financial and
Accounting officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,310
<SECURITIES> 3,153
<RECEIVABLES> 13,497
<ALLOWANCES> 409
<INVENTORY> 14,097
<CURRENT-ASSETS> 37,647
<PP&E> 17,074
<DEPRECIATION> 12,580
<TOTAL-ASSETS> 53,859
<CURRENT-LIABILITIES> 12,160
<BONDS> 0
0
0
<COMMON> 35,200
<OTHER-SE> (4,442)
<TOTAL-LIABILITY-AND-EQUITY> 53,859
<SALES> 35,237
<TOTAL-REVENUES> 35,237
<CGS> 17,989
<TOTAL-COSTS> 15,533
<OTHER-EXPENSES> 196
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567
<INCOME-PRETAX> 952
<INCOME-TAX> 418
<INCOME-CONTINUING> 534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 534
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
