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, 1998March 31, 1999 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    xX       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 November 1, 1998April 29, 1999

  Common Stock, No par value                         5,520,8185,471,591




                           INTERPHASE CORPORATION

                                    INDEX


  Part I -Financial Information

       Item 1.   Consolidated Interim Financial Statements


                 Consolidated Balance Sheets as of September 30, 1998March 31, 1999
                  and December 31, 19971998                                3

                 Consolidated Statements of Operations for the
                  three months ended March 31, 1999 and nine months ended September 30, 1998 and 1997           4

                 Consolidated Statements of Cash Flows for the
                  ninethree months ended September 30,March 31, 1999 and 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         98


  Part II- Other Information


       Item 5.   Rule 14a-8                                            12


       Item 6.   Reports on Form 8-K and Exhibits                     12

                 Signature




  INTERPHASE CORPORATION

  CONSOLIDATED BALANCE SHEETS
  (in thousands)

ASSETS Sep 30, 1998(unaudited) March 31, Dec 31, 1997 (Unaudited) -------- --------ASSETS 1999 1998 ------------------------- Cash and cash equivalents $ 5,8931,416 $ 2,2474,531 Marketable securities 3,152 3,2723,522 3,430 Trade accounts receivable, less allowances for uncollectible accounts of $291$196 and $544,$164, respectively 13,748 13,03015,269 13,716 Inventories, net 12,675 14,89513,534 13,488 Prepaid expenses and other current assets 571 7981,202 856 Deferred income taxes, net 686 686 -------- --------516 516 ------------------------- Total current assets 36,725 34,92835,459 36,537 ------------------------- Machinery and equipment 12,773 12,07910,414 10,135 Leasehold improvements 2,988 2,8903,024 2,909 Furniture and fixtures 489 417 -------- -------- 16,250 15,386533 515 ------------------------- 13,971 13,559 Less-accumulated depreciation and amortization (13,465) (11,817) -------- --------(10,433) (10,339) ------------------------- Total property and equipment, net 2,785 3,5693,538 3,220 Capitalized software, net 480 225778 773 Deferred income taxes, net 862 8621,376 1,376 Acquired developed technology, net 3,686 4,4003,124 3,365 Goodwill, net 3,130 3,3103,010 3,070 Other assets 2,041 2,153 -------- --------2,025 1,947 ------------------------- Total assets $ 49,70949,310 $ 49,447 ======== ========50,288 ========================= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 2,8834,068 $ 2,6362,883 Accrued liabilities 1,470 2,4841,044 1,639 Accrued compensation 2,127 1,9101,435 2,041 Income taxes payable 695 197865 1,408 Current portion of debt 2,285 2,457 -------- --------2,233 2,252 ------------------------- Total current liabilities 9,460 9,6849,645 10,223 Other liabilities 718 600776 873 Long term debt 7,926 9,620 -------- --------6,816 7,367 ------------------------- Total liabilities 18,104 19,90417,237 18,463 Commitments and contingencies Common stock redeemable 3,559 3,813 SHAREHOLDER'S EQUITY Common stock, no par value 35,344 35,32631,351 31,221 Retained deficit (3,991) (5,930) Accumulated(2,797) (3,217) Cumulative other comprehensive income (loss): Cumulative foreign currency translation 283 178 adjustment Unrealized holding period loss (31) (31) -------- --------(40) 8 ------------------------- Total shareholders' equity 31,605 29,543 -------- --------28,514 28,012 ------------------------- Total liabilities and shareholders' equity $ 49,70949,310 $ 49,447 ======= ========50,288 ========================= The accompanying notes are an integral part of these consolidated financial statements.
INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (Unaudited)(unaudited) Three Months Ended Nine Months Ended 30-Sep-98 30-Sep-97 30-Sep-98 30-Sep-97 ------- ------- ------- ------- ------------------------- 31-Mar-99 31-Mar-98 ------------------------- $ 17,046 $ 13,611 Revenues $ 50,72217,346 $ 48,848 8,680 7,40217,589 Cost of sales 26,133 25,391 ------- ------- ------- ------- 8,366 6,2099,531 9,446 ------------------------- Gross profit 24,589 23,457 2,459 3,7957,815 8,143 Research and development 7,965 10,537 2,229 2,9862,961 2,866 Sales and marketing 7,232 8,814 2,066 1,5852,665 2,386 General and administrative 4,895 4,548 ------- ------- ------- ------- 6,754 8,3661,200 1,329 ------------------------- Total operating expenses 20,092 23,899 ------- ------- ------- ------- 1,612 (2,157)6,826 6,581 ------------------------- Operating income (loss) 4,497 (442) 110 120989 1,562 ------------------------- Interest income 253 332 (256) (294)132 83 Interest expense (782) (861) (202) (227)(242) (240) Other, net (647) (635) ------- ------- ------- ------- 1,264 (2,558)(224) (225) ------------------------- Income (loss)before income taxes 3,321 (1,606) 541 (367)655 1,180 Provision (benefit) for 1,380 51 income taxes ------- ------- ------- ------- $ 723 $ (2,191)231 472 ------------------------- Net income (loss) $ 1,941424 $ (1,657) ======= ======= ======= =======708 ========================= Net income (loss) per share $ 0.13 $ (0.40) Basic EPS $ 0.35 $ (0.30) ======= ======= ======= =======0.08 $ 0.13 $ (0.40)========================= Diluted EPS $ 0.340.08 $ (0.30) ======= ======= ======= ======= 5,518 5,4940.13 ========================= Weighted average common shares 5,519 5,493 ======= ======= ======= =======5,438 5,516 ========================= Weighted average common and 5,580 5,494 common equivalentdilutive shares 5,596 5,640 5,493 ======= ======= ======= ================================ The accompanying notes are an integral part of these consolidated financial statements.
INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) NineThree Months ended 30-Sep-98 30-Sep-97 ------- ------------------------------ 30-Mar-99 30-Mar-98 ----------------------- Cash flow from operating activities: Net income (loss) $ 1,941424 $ (1,657)708 Adjustment to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 2,907 3,642930 989 Change in assets and liabilities;liabilities: Trade accounts receivable (718) 6,090(1,553) 2,700 Inventories 2,220 (4,011)(46) 560 Prepaid expenses and other current assets 227 298(346) 50 Accounts payable and accrued liabilities (767) (1,638)590 (1,016) Accrued compensation 217 (1,079)(606) (2) Income taxes payable 498 - ------- -------(543) 470 ----------------------- Net adjustments 4,584 3,302(1,574) 3,751 ----------------------- Net cash (used) provided by operating activities 6,525 1,645(1,150) 4,459 Cash flows from investing activities: Additions to property, equipment and leasehold improvements (1,009) (808) Additions to capitalized software (477) (106)(956) (679) Decrease in other assets 112 326 Decrease(78) 1 (Increase) decrease in marketable securities 120 356 ------- -------(92) (403) ----------------------- Net cash used by investing activities (1,254) (232)(1,126) (1,081) Cash flows from financing activities: Payment on debt (1,866) (1,731) Proceeds from debt - 500(570) (588) Other long term liabilities 118 680(97) (160) Change in cumulative foreign currency translation 105 (41) Increase in(48) (44) Purchase of redeemable common stock 18 27 ------- -------(254) - Sale of common stock 130 - ----------------------- Net cash provided (used) by financing activities (1,625) (565)(839) (792) ------------------------ Net increase in cash and cash equivalents 3,646 848(3,115) 2,586 Cash and cash equivalents at beginning of period 4,531 2,247 2,271 ------- ------------------------------ Cash and cash equivalents at end of period $ 5,8931,416 $ 3,119 ======= =======4,833 ======================= Supplemental Disclosure of Cash Flow Information: Income taxes paid 448 302774 10 Income taxes refunded - 2- Interest paid 782 770 The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION225 225 The accompanying consolidated interim financial statements include the accountsnotes are an integral part of Interphase Corporation and its wholly owned subsidiaries (the "Company"). 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 thethese 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 isstatements.
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 (the "Company"). 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 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 its December 31, 1997 consolidated financial statements. As a result, the Company's reported earnings per share for the three month and nine month periods ended September 30, 1997 are restated. Under SFAS NO. 128, basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average of common stock and common stock equivalents outstanding during the period. (Amounts 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, 1998. 2. NET INCOME PER COMMON AND COMMON DILUTIVE SHARE The following table shows the calculations of the Company's weighted average common and dilutive equivalent shares outstanding (in thousands): Three Months ended: Nine Months ended: Sep 30,Mar 31, 1999 Mar 31, 1998 Sep 30, 1997 Sep 30, 1998 Sep 30, 1997 ----- ----- ----- ----------------- ------------ Weighted average 5,518 5,494 5,519 5,493 shares outstanding 5,438 5,516 Dilutive impact of 62 0 121 0 stock options ----- -----158 124 ----- ----- Total weighted 5,580 5,494 5,640 5,493 average common and ===== ===== ===== ===== common equivalent shares outstanding Excluded from the calculation of diluted earnings per share are 1,282,000 and 988,000 options for the quarters ended September 30, 1998 and 1997, respectively, and 958,000 and 1,005,000 options for the nine months ended September 30, 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 into5,596 5,640 ===== =====
Anti-dilutive options of 705,601 and 1,164,300 were excluded from the dilutive calculations for the quarters ended March 31, 1999 and 1998, respectively. 3. CREDIT FACILITY The Compnay maintains a credit facility with BankOne Texas NA. The credit facility with BankOne Texas NA which 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 has been renewed and is due June 30, 2000. 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 September 30, 1998, the Company had borrowings of $10,096,300 and remaining availability under the revolving 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). 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 has been renewed and is due June 30, 2000. 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, 1999, the Company had borrowings of $9,000,100 and remaining availability under the revolving credit facility was $1,500,000. 4. COMPREHENSIVE INCOME The following table shows the Company's comprehensive income (in thousands): Three months Three months ended ended Sep 30,Mar 31, 1999 Mar 31, 1998 Sep 30, 1997 ------------ ------------ Net income $ 723 $(2,191)424 $ 708 Other comprehensive income, Unrealized holding gains (losses) arising 0 (12) during period , net of tax Foreign currency translation adjustment 70 126 ----- ------ Comprehensive income $ 793 $(2,077) Nine months Nine months ended ended Sep 30, 1998 Sep 30, 1997 ------------ ------------ Net income $ 1,941 $(1,657) Other comprehensive income, Unrealized holding gains (losses) arising 0 (12) During period , net of tax 0 0 Foreign currency translation adjustment 105 (41)(48) (44) ---- ---- Comprehensive incomeiome $ 2,046376 $ (1,710) 4. STOCK REPURCHASE The664 ==== ====
5. STOCK REPURCHASE Effective October 1998, the Company has approved a stock repurchase agreement with Motorola, Inc. to purchase all of the shares owned by Motorola for $4,125,000, ratably from October 1998 to July 2002. Under the terms of the agreement, Motorola retains the right as an equity owner and has assigned it voting rights to the Company. The Company plans to cancel the stock upon each repurchase. Prior to the repurchase agreement, Motorola owned approximately 12% of the Company's outstanding common stock. The future scheduled payments are classified as redeemable common stock in the accompanying consolidated Balance Sheet. As of March 31, 1999, 90,667 shares have been repurchased for $566,668 and retired. 6. SEGMENT DATA The Company manages its business segments on an industry basis. The Company's reportable segments are composed of high performance networking/storage adapters and voice over Internet Protocol (VOIP) products and services. The Company evaluates the performance of its segments based on revenue and operating profits. Segment operating income (loss) excludes general and administrative expenses. (Amounts in thousands): Quarter ended Mar. 31, 1999 Quarter ended Mar. 31, 1998 Networking VOIP Total Networking VOIP Total --------------------------------------------------------- Revenues 17,169 177 17,346 17,589 - 17,589 Operating Income 3,016 (827) 3,016 2,891 - 2,891 Fixed Assets 2,497 1,041 3,538 3,794 - 3,794 Reconciliation of Segment Operating Income to purchase 660,000 shares of Interphase common stock for $4,125,000. Under the agreement, Interphase will repurchase Motorola's ownership position ratably over the next 3.75 years,Consolidated Operating Income: Quarter ended 31-Mar-99 31-Mar-98 ------------------------- Networking 3,016 2,891 VOIP (827) - General and plans to cancel the stock. Motorola owns approximately 12% of Interpahse's outstanding common stock. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues for the three months ended September 30, 1998 ("third quarter 1998") were $17,046,000. Revenues for the same period in 1997 ("comparative period") were $13,611,000. The increase in revenues from the comparative period was attributable to increases in ATM, SCSI, Fast Ethernet, Fibre Channel, and WAN product revenues, partially offset by declines in FDDI and Ethernet product revenues. LAN product revenues, consisting of FDDI, Ethernet, ATM and Fast Ethernet, represented 63% of total revenues for the third quarter 1998, as compared to 77% for the comparative period. FDDI product revenues declined 6%, Ethernet product revenues declined 57%, ATM product revenues increased 20% and Fast Ethernet product revenues increased 11% as compared to the comparative period. FDDI, Ethernet, ATM and Fast Ethernet product revenues represented 21%, 2%, 11% and 29% of total revenues, respectively for the third quarter 1998. Mass storage product revenues, consisting of SCSI and Fibre Channel adapter cards, represented 27% of total revenues for the third quarter 1998, as compared to 13% for the comparative period. SCSI product revenues increased 60% while Fibre Channel product revenues increased 211% over the comparative period. WAN product revenues comprised 9% of revenues for the third quarter 1998, as compared to 5% for the comparative period. WAN product revenues increased 114% as compared to the comparative period. Geographically, North America revenues comprised 80% of consolidated revenues in the third quarter 1998 compared to 77% in the comparative period. European revenues comprised 19% of consolidated revenues in the third quarter 1998 and 20% in the comparative period. Pacific Rim revenues comprised 1% of consolidated revenues in the third quarter 1998 and 3% in the comparative period. Revenues for the nine month period ended September 30, 1998 were $50,722,000 as compared to $48,848,000 for the comparative period. Revenues from LAN, Mass Storage and WAN products were 68%, 22% and 8% of total revenues respectively, for the nine month period ended September 30, 1998. The Company's current marketing strategy is to increase market penetration through sales to major OEM customers. One of these customers accounted for approximately 43% of the Company's revenue for the third quarter of 1998, and 41% in the third quarter of 1997. The gross margin percentage for the three month period ended September 30, 1998 and 1997 was 49% and 46%, respectively. The gross margin percentage for the nine month period ended September 30, 1998 and 1997 was 48%.Administrative (1,200) (1,329) ----- ----- Consolidated Operating expenses for the three month period ended September 30, 1998 were $6,754,000 as compared to $8,366,000 for the comparable period. Operating expenses for the nine month period ended September 30, 1998 were $20,092,000 as compared to $23,899,000 for the comparable period. The reduction in operating expenses is due management's disciplined 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 $9,0451,000 at September 30, 1998, and $5,519,000 at December 31, 1997. The Company's improved cash position is primarily due to profitable operations and reduction in inventory, partially off-set by reductions in accounts payable, payment for machinery, equipment and capitalized 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 has a commitment to repurchase 660,000 shares of Interphase Stock from Motorola Inc. ratable over the next 3.75 years for a total of $4,125,000. The Company plans to cancel thisIncome 989 1562
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, 1999 ("first quarter 1999") were $17,346,000. Revenues for the same period in 1998 ("comparative period") were $17,589,000. The decrease in revenues from the comparative period was attributable to decreases in ATM, SCSI, Fast Ethernet, FDDI and Ethernet product revenues, partially offset by increases in WAN and Fibre Channel product revenues. LAN product revenues, consisting of FDDI, Ethernet, ATM and Fast Ethernet, represented 46% of total revenues for the first quarter 1999, as compared to 72% for the comparative period. FDDI product revenues declined 41%, Ethernet product revenues declined 98%, ATM product revenues declined 35% and Fast Ethernet product revenues declined 26% as compared to the comparative period. FDDI, Ethernet, ATM and Fast Ethernet product revenues represented 12%, 0%, 6% and 28% of total revenues, respectively for the first quarter 1999. Mass storage product revenues, consisting of SCSI and Fibre Channel adapter cards, represented 31% of total revenues for the first quarter 1999, as compared to 19% for the comparative period. SCSI product revenues declined 64% while Fibre Channel product revenues increased 231% over the comparative period. WAN product revenues comprised 20% of revenues for the first quarter 1999, as compared to 7% for the comparative period. WAN product revenues increased 168% as compared to the comparative period. Geographically, North America revenues comprised 75% of consolidated revenues in the first quarter 1999 compared to 70% in the comparative period. European revenues comprised 24% of consolidated revenues in the first quarter 1999 and 25% in the comparative period. Pacific Rim revenues comprised 1% of consolidated revenues in the first quarter 1999 and 5% 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 51% of the Company's revenue for the first quarter of 1999, and 44% in the first quarter of 1998. Another customer accounted for 12% of the Company's revenue for the first quarter of 1999, and 5% in the first quarter of 1998. The gross margin percentage for the three month period ended March 31, 1999 and 1998 was 45% and 46%, respectively. Operating expenses for the three month period ended March 31, 1999 were $6,826,000 as compared to $6,581,000 for the comparable period. The increase in operating expenses is dues to expenses relating to the Company's new subsidiaries Zirca.com and Quescom. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities aggregated $4,938,000 at March 31, 1999, and $7,961,000 at December 31, 1998. The Company's decreased cash position is primarily due to the purchase of in fixed assets, increased accounts receivable, payment on debt, tax payment and repurchase of common stock. In the next twelve months, scheduled debt payments on the Company's credit facility are approximately $2,192,000. Effective October 1998, the Company approved a stock repurchase agreement with Motorola, Inc. to purchase all of the shares owned by Motorola for $4,125,000, ratably from October 1998 to July 2002. Under the terms of the agreement, Motorola retains the right as an equity owner and has assigned it voting rights to the Company. The Company plans to cancel the stock upon each repurchase. Prior to the repurchase agreement, Motorola owned approximately 12% of the Company's outstanding common stock. The future scheduled payments are classified as redeemable common stock in the accompanying consolidated Balance Sheet. As of March 31, 1999, 90,667 shares have been repurchased for $566,668 and retired. The Company expects that its cash, cash equivalents, marketable securities and proceeds from its credit facility will be adequate to meet foreseeable cash needs for the next 12 months. Year 2000 The Company has recognized the need to ensure that its operations and relationships with vendors and other third parties will not be adversely impacted by software processing errors arising from the calculations using the Year 2000 and beyond. The Company has created a company-wide Year 2000 team to identify and resolve Year 2000 issues associated with the Company's internal information systems, the products sold by the Company, and its major suppliers of products and services. The Company is implementing a plan to ensure that its products are Year 2000 compliant, and the Company is currently in the process of updating and replacing its main internal information systems with Year 2000 compliant systems. In addition, the Company is communicating with its major suppliers, customers, vendors and financial service organizations regarding the Year 2000 status of their companies' products or services. The Company anticipates that its full Year 2000 review, new information system implementation, and other necessary remediation actions will be substantially complete by mid 1999. Direct expenditures are expected to be between $850,000 and $900,000. The Company will fund these expenditures through its normal operating budget, and as required by generally accepted accounting principles, these cost are expensed as incurred, excluding the capitalization of application software. The capitalization for software will be approximately $300,000. There can be no assurance that there will not be a delay in delivery, or increased costs, associated with the Company's suppliers who may not have adequately begun to prepare for the Year 2000 issue. Year 2000 issues faced by major suppliers, customers, vendors and financial service organizations with which the Company interacts could adversely impact the Company. The Company could also be impacted by the redirection of corporate management information system budgets towards resolving the Year 2000 issue and this could lower the demand for the Company's products if corporate buyers defer purchases of products which incorporate Company products. The Company currently is developing a contingency plan in the event all other actions fail to satisfy Year 2000 The Company has recognized the need to ensure that its operations and relationships with vendors and other third parties will not be adversely impacted by software processing errors arising from the calculations using the Year 2000 ("Y2K") and beyond. The Company has created a company-wide Y2K team to identify and resolve Y2K issues associated with the Company's internal information systems, internal non-information systems, the products sold by the Company, and its major suppliers of products and services. The Company established a Y2K program coordinator to ensure these programs are implemented across the Company. The coordinator provides a single point of reference, both internal, and external, for the Company. The products that the Company sells are Y2K compliant, or will be compliant by mid year 1999. The Company's internal reporting system is being replaced with a Y2K compliant Enterprise Reporting Planning (ERP) system which is scheduled to go live in mid-year 1999. In addition, the Company is communicating with all its suppliers, customers, vendors and financial service organizations regarding their Year 2000 compliance. The Company anticipates that its full Year 2000 review, new information system implementation, and other necessary remediation actions will be substantially complete by mid 1999. Direct expenditures are expected to be between $850,000 and $900,000. The Company will fund these expenditures through its normal operating budget, and as required by generally accepted accounting principles, these costs are being expensed as incurred, excluding the capitalization of application software. The capitalization for software will be approximately $300,000. The Company does not believe that the costs associated with such actions will have a material adverse effect on the Company's results of operations or financial condition. However the costs of such actions may vary from quarter to quarter, and there is no assurance that there will not be a delay in the Company's implementation or increased costs associated with the implementation of such changes. Failure to achieve Y2K readiness for the Company could delay its ability to manufacture and ship products and deliver services. The Company's inability to perform these functions could have an adverse effect on future results of operations or financial condition. Non-IT systems include, but are not limited to, telephone/PBX systems; fax machines; facilities systems regulating alarms, building access and sprinklers; manufacturing, assembly and distribution equipment; and other miscellaneous systems and processes. Y2K readiness for these internal non-IT systems is the responsibility of the Company's Y2K coordinator, it is anticipated that all Non-IT systems will be compliant if they are not already compliant by mid 1999. The Company regularly reviews and monitors the suppliers' Y2K readiness plans and performance. Based on the Company's risk assessment, selective on-site reviews may be performed. In some cases, to meet Y2K readiness, the Company has replaced suppliers or eliminated suppliers from consideration for new business. The Company has also contracted with multiple transportation companies to provide product delivery alternatives. While the Company has contingency plans in place to address most issues under its control, an infrastructure problem outside of its control could result in a delay in product shipments depending on the nature and severity of the problems. The Company would expect that most utilities and service providers would be able to restore service within days although more pervasive system problems involving multiple providers could last two to four weeks or more depending on the complexity of the systems and the effectiveness of their contingency plans. Although the Company is dedicating substantial resources towards attaining Y2K readiness, there is no assurance it will be successful in its efforts to identify and address all Y2K issues. Even if the Company acts in a timely manner to complete all of its assessments; identifies, develops and implements remediation plans believed to be adequate; and develops contingency plans believed to be adequate some problems may not be identified or corrected in time to prevent material adverse consequences to the Company. The discussion above regarding estimated completion dates, costs, risks and other forward-looking statements regarding Y2K is based on the Company's best estimates given information that is currently available and is subject to change. As the Company continues to progress with its Y2K initiatives, it may discover that actual results will differ materially from these estimates. Use of Forward-Looking Statements: Certain statements contained in MD&A are forward-looking, including statements concerning expected expenses, Year 2000 readiness, 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; Year 2000 readiness of the Company's suppliers, and the risks described from time to time in the Company's SEC filings. PART II OTHER INFORMATION Item 5. A shareholder who wishes to make a proposal at the 1999 Annual Meeting of Shareholders without complying with the requirements of the SEC's Rule 14a-8 (and therefore without including the proposal in the Company's proxy materials) should notify the Company's Secretary, at the Company's principal executive offices, of that proposal by February 13, 1999. If a shareholder fails to give notice by that date, then the persons named as proxies in the proxy cards solicited by the Company's Board of Directors for that meeting will be entitled to vote the proxy cards held by them regarding that proposal, if properly raised at the meeting, in their discretion as directed by the Company's management. 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: November 12, 1998 /s/ Gregory B. Kalush --------------------- Gregory B. Kalush Chief 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 12, 1999 /s/ Gregory B. Kalush Gregory B. Kalush Chief Executive Officer and Vice President Finance (Principal Financial and Accounting officer)