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 March 31, 1998 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 May 1, 1998
Common Stock, No par value 5,518,018
INTERPHASE CORPORATION
INDEX
Part I -Financial Information
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 5
Notes to Consolidated Interim Financial Statements 6
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II- Other Information
Item 4.
Submission of Matters to a Vote of Security Holders 11
Item 6.
Reports on Form 8-K and Exhibits
Signature 12
<TABLE>
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
<CAPTION>
Mar 31, Dec 31,
1988 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,833 $ 2,247
Marketable securities 3,675 3,272
Trade accounts receivable, less allowances for
uncollectible account of $537 and $544 respectively 10,330 13,030
Inventories, net 14,335 14,895
Prepaid expenses and other current assets 748 798
Deferred income taxes, net 686 686
Total current assets 34,607 34,928
Machinery and equipment 12,359 12,079
Leasehold improvements 2,890 2,890
Furniture and fixtures 458 417
15,707 15,386
Less-accumulated depreciation and amortization (12,443) (11,817)
Total property and equipment, net 3,264 3,569
Capitalized software, net 529 225
Deferred income taxes, net 862 862
Acquired developed technology, net 4,159 4,400
Goodwill, net 3,250 3,310
Other assets 2,152 2,153
Total assets $48,823 $49,447
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 1,966 2,636
Accrued liabilities 2,146 2,484
Accrued compensation 1,908 1,910
Income taxes payable 667 197
Current portion of debt 2,432 2,457
Total current liabilities 9,119 9,684
Other liabilities 441 556
Long term debt 9,057 9,620
Total liabilities 18,617 19,904
Common stock, no par value 35,326 35,326
Retained deficit (5,223) (5,930)
Accumulated other comprehensive income (loss):
Cumulative foreign currency translation adjustment 134 178
Unrealized holding period loss (31) (31)
Total shareholders' equity 30,206 29,543
Total liabilities and shareholders' equity $48,823 $ 49,447
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
Interphase Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(Unaudited)
Three Months Ended
31-Mar-98 31-Mar-97
<S> <C> <C>
Revenues $ 17,589 $ 16,858
Cost of sales 9,446 8,772
Gross profit 8,143 8,086
Research and development 2,866 3,218
Sales and marketing 2,386 2,881
General and administrative 1,329 1,445
Total operating expenses 6,581 7,544
Operating income 1,562 542
Interest income 83 83
Interest expense (240) (291)
Other, net (225) (196)
Income before income taxes 1,180 138
Provision for income taxes 472 41
Net income $ 708 $ 97
Net income per share
Basic EPS $ .13 $ 0.02
Diluted EPS $ .13 $ 0.02
Weighted average common shares 5,516 5,492
Weighted average common and
common equivalent shares 5,640 5,689
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<TABLE>
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
(Unaudited) 31-Mar-98 31-Mar-97
<S> <C> <C>
Cash flow from operating activities:
Net income $ 708 $ 97
Adjustment to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 989 1,259
Change in assets and liabilities;
Trade accounts receivable 2,700 320
Inventories 560 (269)
Prepaid expenses and other current assets 50 (155)
Accounts payable and accrued liabilities (1,016) (1,261)
Accrued compensation (2) (595)
Income taxes payable 470 (37)
Net adjustments 3,751 (738)
Net cash provided (used) by operating 4,459 (641)
activities
Cash flows from investing activities:
Additions to property, equipment and leasehold
improvements (301) (547)
Additions to capitalized software (378) (43)
Decrease in other assets 1 132
(Increase) in marketable securities (403) (109)
Net cash used by investing activities (1,081) (567)
Cash flows from financing activities:
Payment on debt (588) (548)
Proceeds from debt - 1,047
Other long term liabilities (160) 766
Change in cumulative foreign currency translation (44) (184)
Increase in common stock - 3
Net cash provided (used) by financing (792) 1,084
activities
Net increase (decrease) in cash and cash equivalents 2,586 (124)
Cash and cash equivalents at beginning of period 2,247 2,271
Cash and cash equivalents at end of period $ 4,833 $ 2,140
Supplemental Disclosure of Cash Flow Information:
Income taxes paid 10 2
Income taxes refunded - 1
Interest paid 225 250
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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, 1997.
2. ACQUISITIONS
SYNAPTEL
In 1996 the Company acquired all the capital stock of Synaptel, S.A.,
("Synaptel"), a French company, for approximately $19,000,000.
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 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.
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 consolidated balance sheets.
3. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," for it December 31, 1997
consolidated financial statements. As a result, the Company's
reported earnings per share for March 31, 1997 is 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. (Amounts in thousands)
Quarter ended Quarter
March 31, ended March
1998 31, 1997
Weighted average
shares outstanding 5,516 5,492
Dilutive impact of
stock options 124 197
Total weighted
average common and
common equivalent
shares outstanding 5,640 5,689
Excluded from the calculation of diluted earnings per share are 1,164
and 990 options for the quarter ended March 31, 1998 and 1997.
Respectively, as such options were anti-dilutive.
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 a two-year facility with
an 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 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 March 31, 1998, the Company had borrowings of
$11,192,000 and the remaining availability under this credit facility
was $1,500,000.
5. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, establishes standards for reporting and
displaying comprehensive income, and its components in a full set of
general-purpose financial statements. The statement is effective for
fiscal years beginning after December 15, 1997 and the Company
adopted the statement effective January 1, 1998 (in thousands).
Quarter ended Quarter
March 31, ended March
1998 31, 1997
Net income $ 708 $ 97
Other comprehensive income,
Unrealized holding gains
(losses) arising
during period , net of tax 0 0
Foreign currency translation (44) (189)
adjustment
Comprehensive income $ 664 $ (92)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1998 ("first quarter
1998") increased $731,000 or approximately 4% to $17,589,000 as
compared to $16,858,000 for the same period in 1997 (" comparative
period"). The growth in revenue was led by fast ethernet products
which grew from 27% of total revenues in the first quarter of 1997 to
37% of revenues in the first quarter of 1998. ATM product revenues
increased 53%, representing 9% of total revenues for the first
quarter of 1998. FDDI and older ethernet/token ring product revenues
decreased 41% over the comparative period. LAN products in total
comprised 70% of total revenues for the first quarter, and 76% for
the comparative period. FDDI, ATM and older ethernet/token ring
products represented 21%, 9% and 3% of total revenues, respectively
for the first quarter. WAN products comprised 7% of revenues for
the first quarter 1998, as compared to 11% for the comparative
period.
Mass storage product revenues, primarily SCSI adapter cards,
decreased 2% in the first quarter 1998 from the comparative period.
Fibre channel product revenues have grown to 6% of revenues for the
first quarter, as compared to 1% of total revenues for the
comparative period. Mass storage products comprised 19% of total
revenues in the first quarter 1998 and 11% in the comparative period.
Geographically, North America revenues comprised 70% of consolidated
revenues in the first quarter 1998 compared to 84% in the comparative
period. European revenues comprised 25% of consolidated revenues in
the first quarter 1998 and 13% in the comparative period. Pacific Rim
revenues comprised 5% of consolidated revenues in the first quarter
1998 and 3% 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 45% of the Company's revenue
for the first quarter of 1998.
The gross margin percentage for the three month period ended March
31, 1997 was approximately 46% as compared to approximately 48% for
the comparable period. The decrease in gross margin is a reflection
of the change in product revenue mix from older established products
to newer products that have a lower gross margin.
Operating expenses for the three month period ended March 31, 1998
were $6,581,000 as compared to $7,544,000 for the comparable period.
The reduction in operation expenses is due management's continued
focus to control expenses and improve efficiencies in all areas of
the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities
aggregated $8,508,000 at March 31, 1998, and $5,519,000 at December
31, 1997. The Company's improved cash position is primarily due to a
profitable quarter, reduction in accounts receivable and inventory,
partially off-set by reductions in accounts payable, payment for
property, equipment and software, and payment of debt. In the next
twelve months, scheduled debt payments on the Company's credit
facility are approximately $2,192,000.
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.
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 30, 1998, The Annual Meeting of Shareholders of Interphase
Corporation was held at the Company's office in Dallas Texas. The
following matter was voted upon and approved at the meeting.
An election of directors of the Company to serve until the next
annual meeting for the Company was held. The following eight
individuals were elected as Directors of the Company.
Votes Cast For Votes Withheld
Dale Crane 5,174,045 57,528
Gary W. Fiedler 5,174,045 57,528
James F. Halpin 5,174,045 57,528
Paul N. Hug 5,174,045 57,528
R. Stephen Polley 5,174,045 57,528
David H. Segrest 5,174,045 57,528
S. Thomas Thawley 5,174,045 57,528
William Voss 5,174,045 57,528
To be elected a director each individual must have received a
plurality of all votes cast at the meeting of election of directors.
Item 6. Reports on form 8-K
None
Exhibits
Exhibit 27 Financial Data Schedule
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: May 13, 1998
/s/ Gregory B. Kalush
Gregory B. Kalush
Chief Financial Officer and
Vice President Finance
(Principal Financial and
Accounting officer)
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