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, 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)
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
- -------------------------------------------------------------------------------
Indicate 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 6, 1996
----- -----------------------------
Common Stock, No par value 5,350,218
- -------------------------------------------------------------------------------
INTERPHASE CORPORATION
INDEX
PART I -FINANCIAL INFORMATION
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and October 31, 1995 3
Consolidated Statements of Operations for the three months
and six months ended June 30, 1996 and July 31, 1995 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and July 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 4. Submission of Matters to a vote of Security Holders 12
Signature 13
2
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
June 30, October 31,
ASSETS 1996 1995
- ------ ----------------------------
(Unaudited)
Cash and cash equivalents $ 2,795 $ 3,320
Marketable securities 4,318 9,366
Trade accounts receivable, less allowances for uncollectible
accounts of $232 and $238, respectively 11,062 7,521
Inventories, net 12,230 7,486
Prepaid expenses and other current assets 1,784 957
Deferred income taxes, net 603 594
----------------------------
Total current assets 32,792 29,244
Machinery and equipment 12,905 10,920
Leasehold improvements 2,819 2,758
Furniture and fixtures 289 351
----------------------------
16,013 14,029
Less-accumulated depreciation and amortization (10,187) (8,820)
----------------------------
Total property and equipment, net 5,826 5,209
Capitalized software, net of accumulated amortization 1,360 524
Deferred income taxes, net 301 301
Investments in unconsolidated subsidiaries 1,165 -
Acquired developed technology 6,730 -
Goodwill 500 -
Other assets 581 152
----------------------------
Total assets $ 49,255 $ 35,430
----------------------------
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 6,847 $3,193
Accrued acquition costs 1,800 -
Accrued compensation 2,141 1,357
Income taxes payable - 366
Current portion of debt 1,620 -
----------------------------
Total current liabilities 12,408 4,916
Deferred lease obligations 85 103
Other liablilities 446 -
Acquisition debt 8,000 -
Other debt 285 -
----------------------------
Total liabilities 21,224 5,019
Common stock, no par value 33,903 24,177
Retained earnings (5,825) 6,263
Unrealized holding period loss (47) (29)
----------------------------
Total shareholders' equity 28,031 30,411
----------------------------
Total liabilities and shareholders' equity $ 49,255 $ 35,430
----------------------------
----------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
--------------------- -----------------------
30-Jun(96) 31-Jul(95) 30-Jun(96) 31-Jul(95)
---------- --------- ---------- ----------
$ 11,318 $ 12,356 Revenues $ 23,195 $ 23,829
5,730 6,273 Cost of sales 11,416 11,975
-------- --------- --------- ---------
5,588 6,083 Gross profit 11,779 11,854
2,326 1,745 Research and development 4,554 3,620
2,189 2,343 Sales and marketing 4,320 4,404
998 948 General and administrative 1,985 1,952
11,646 - Acquired in-process R&D 11,646 -
-------- --------- --------- ---------
17,159 5,036 Total operating expenses 22,505 9,976
-------- --------- --------- ---------
(11,571) 1,047 Operating income (loss) (10,726) 1,878
-------- --------- --------- ---------
-------- --------- --------- ---------
51 156 Interest income 217 300
(6) (37) Other, net (10) (7)
-------- --------- --------- ---------
(11,526) 1,166 Income (loss) before income taxes (10,519) 2,171
39 421 Provision for income taxes 402 781
-------- --------- --------- ---------
$(11,565) $ 745 Net income (loss) $ (10,921) $ 1,390
-------- --------- --------- ---------
-------- --------- --------- ---------
Net income (loss) per common and
$ (2.45) $ 0.14 common equivalent share $ (2.32) $ 0.26
-------- --------- --------- ---------
-------- --------- --------- ---------
Weighted average common and common
4,726 5,294 equivalent shares 4,705 5,278
-------- --------- --------- ---------
-------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Six Months Ended
-------------------------------
30-Jun(96) 31-Jul(95)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (10,921) $ 1,389
Adjustment to reconcile net income to net cash provided (used) by operating activities:
-net of Synaptel acquisition
Depreciation and amortization 1,601 1,388
Write off of acquired in-process research and development 11,646 -
Change in assets and liabilities:
Trade accounts receivable (3,947) (656)
Inventories (953) (294)
Prepaid expenses and other current assets 80 (359)
Accounts payable and accrued liabilities 1,321 (550)
Accrued compensation (326) (228)
Income taxes payable - (365)
Deferred income taxes payable (10) 389
Deferred lease obligations (14) (1)
----------- -----------
Net adjustments 9,398 (676)
----------- -----------
Net cash provided (used) by operating activities (1,523) 713
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, equipment and leasehold improvements (1,606) (912)
Additions to capitalized software (136) (139)
Decrease (Increase) in other assets 32 (32)
(Increase) in acquired developed technology (2,500) -
Decrease (Increase) in marketable securities 5,049 (1,403)
Cash acquired in Synaptel acquisition 11 -
Change in holding period gain/loss on marketable securities (18) 88
----------- -----------
Net cash provided (used) by investing activities 832 (2,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in common stock 509 170
----------- -----------
Net cash provided (used) by financing activities 509 170
----------- -----------
Net increase (decrease) in cash and cash equivalents (182) (1,515)
Cash and cash equivalents at beginning of year 2,977 3,527
----------- -----------
Cash and cash equivalents at end of period $ 2,795 $ 2,012
----------- -----------
----------- -----------
Supplemental Disclosure of Cash Flow Information:
Income taxes paid 478 1,013
Income taxes refunded 8 189
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
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 $ (25,092)
Liabilities assumed 6,103
Acquisition debt 8,000
Common stock issuable 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
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.
Effective January 31, 1996 the Company changed its fiscal year end from October
31 to December 31. For comparison purposes, results for the quarter ended June
30, 1996, are being compared with results from the prior year quarter ended July
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 July 31, 1995 information presented herein. Management believes the July
31, 1995 results are the most comparable to the quarter ended June 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 Six Months Ended
June 30, July 31, June 30, July 31,
------------------ -----------------
(IN THOUSANDS) 1996 1995 1996 1995
----- ----- ----- -----
Outstanding 4,726 4,550 4,705 4,550
Stock options --- 744 --- 728
----- ----- ----- -----
Total 4,726 5,294 4,705 5,278
----- ----- ----- -----
----- ----- ----- -----
7
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; since the acquisition was effective June
29, 1996, operating results for Synaptel through June 30, 1996, were not
significant. 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, $4,100,000 of developed technology and
$392,000 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.
The allocation of the purchase consideration as reflected in the accompanying
balance sheet as of June 30, 1996, and the related statements of operations for
the three- and six-month period then ended is based upon preliminary estimates
of fair values, and are subject to change as additional information is
available.
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 earnout 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.
Due to the timing of the acquisition being near the end of the Company's
quarterly reporting period, pro forma financial information for fiscal 1995 and
for the six-month period ended June 30, 1996, reporting the Company's operating
results as if the acquisition had occurred at the beginning of each period is
not currently available. Such pro forma financial information will be filed by
the Company with the Securities and Exchange Commission, as required within the
allowable time period.
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 and will be amortized ratably over the anticipated
revenue stream of such products sold.
8
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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SYNAPTEL ACQUISITION
Effective June 29, 1996, the Company acquired all the capital stock of
Synaptel, a French company which designs, manufactures, and distributes a
broad line of remote access and ISDN (Integrated Services Digital Network)
products 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.
The purchase agreement also contemplates 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 earnout and number of
employee stock options may increase or decrease depending upon performance
against targets.
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
acquired in-process research and development, $4,100,000 of developed
technology and $392,000 related to Synaptel's assembled workforce. Goodwill,
developed technologies and assembled workforce will be amortized using the
straight-line method. The acquired in-process research and development
represents activities initiated by Synaptel have not achieved technological
feasibility and have no alternative future use. These in-process R&D efforts
relate to new remote access and ISDN products. The acquisition of Synaptel
has been accounted for as a purchase and the purchase price allocation
discussed herein reflect management's preliminary estimates and are subject
to adjustments as additional information is available.
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1996 decreased $1,038,000 or
approximately 8% to $11,318,000 as compared to $12,356,000 for the three month
period ended July 31, 1995. Networking products represented a growth of 12%
over the three month period ended July 31, 1995. FDDI product revenues declined
18%, while Ethernet increased 42% and ATM increased 206%. Networking products
in total comprised 76% of total revenues for the second quarter of 1996, as
compared to 62% for the three month period ended July 31, 1995. FDDI, Ethernet
and ATM represented 41% , 17% and 13% of total revenues, respectively for the
quarter ended June 30, 1996. Mass storage product revenues, primarily SCSI
adapter cards, decreased 46% in 1996 compared to the three month period ended
July 31, 1995. Mass storage products comprised 20% of total revenues in the
second quarter of 1996 compared to 34% for the three month period ended July
31, 1995. Geographically, North America revenues comprised 84% of consolidated
revenues in the second quarter of 1996 compared to 89% for the three month
period ended July 31, 1995. European revenues comprised 10% of consolidated
revenues in the second quarter of 1996 compared to 7% for the three month period
ended July 31, 1995. Pacific Rim revenues comprised 6% of
10
consolidated revenues in the second quarter of 1996 compared to 4% for the three
month period ended July 31, 1995.
Revenues for the six months ended June 30, 1996 decreased $634,000 or 3% to
$23,195,000 as compared to $23,829,000 for the six month period ended July 31,
1995. Revenues from networking products comprised 74% of consolidated revenue
for the six months ended June 30, 1996, as compared to 63% of consolidated
revenues for the six month period ended July 31, 1995 Revenue from mass
storage products comprised 22% for the six months ending June 30, 1996 and
comprising 32% for the six month period ended July 31, 1995
The gross margin percentage for each of the three month periods ended June
30, 1996 and July 31, 1995 was approximately 49%. The gross margin percentage
for the six months ended June 30, 1996 was approximately 51% as compared to
approximately 50% for the six months ended July 31, 1995.
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,
1996 were $5,513,000 as compared to $5,036,000 for the three month period
ended July 31, 1995. Operating expenses for the six months ended June 30,
1996 (net of acquired in-process R&D) were $10,859,000, as compared to
$9,976,000 for the six months ended July 31, 1995. The increased spending is
primarily the result of higher 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
$7,114,000 at June 30, 1996, and $12,686,000 at October 31, 1995 as well as
the acquisition of the Cisco FDDI product rights. The decrease in cash
position is primarily the result of funding on going operations, an increase
in inventory and an increase in accounts receivable since October 31, 1995.
As discussed in Note 3 to the consolidated financial statements, the Company
secured a new credit facility with BankOne Texas, NA, to finance the Synaptel
acquisition and new equipment purchases. The credit facility consists of an
acquisition term loan, an equipment financing term loan and a revolving
credit facility (see note 4 to the consolidated financial statements).
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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 11, 1996, 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 seven individuals were elected as
Directors of the Company:
Votes Cast Votes
For Withheld
---------- --------
Michael E. Cope 4,168,038 290,711
Dale Crane 4,168,038 290,711
Paul N. Hug 4,168,038 290,711
Robert H. Lyon 4,168,038 290,711
R. Stephen Polley 4,168,038 290,711
David H. Segrest 4,168,038 290,711
S. Thomas Thawley 4,168,038 290,711
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 allow for the grant of
nonqualified stock options at prices below fair market value.
Votes Cast Votes Cast Broker
For Against Abstentions Non-Votes
---------- ---------- ----------- ---------
3,687,563 665,812 4,878 100,496
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 at the
meeting.
MATTER 3
Also approved at the meeting by the following vote was a proposal to amend the
Company's Directors Stock Option Plan to provide for the automatic grant of an
option to each director elected or appointed at a time other than an annual
meeting of shareholders.
Votes Cast Votes Cast Broker
For Against Abstentions Non-Votes
---------- ---------- ----------- ---------
3,973,158 420,312 5,878 59,401
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 at the
meeting.
12
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 14, 1996
/s/ Robert L. Drury
-------------------
Robert L. Drury
Chief Financial Officer and
Vice President Finance
(Principal Financial and
Accounting officer)