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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 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)
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Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for a much shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 1997
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Common Stock, No par value 5,492,608
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INTERPHASE CORPORATION
INDEX
PART I -FINANCIAL INFORMATION
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 5
Notes to Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II- OTHER INFORMATION
Signature 10
2
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
March 31, December 31,
ASSETS 1997 1996
----------------------
(Unaudited)
Cash and cash equivalents $ 2,140 $ 2,271
Marketable securities 3,688 3,579
Trade accounts receivable, less allowances for
uncollectible accounts of $472 and $503, respectively 14,862 15,182
Inventories, net 12,868 12,599
Prepaid expenses and other current assets 1,377 1,221
Deferred income taxes, net 886 886
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Total current assets 35,821 35,738
Machinery and equipment 12,858 12,340
Leasehold improvements 2,863 2,863
Furniture and fixtures 278 278
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15,999 15,481
Less-accumulated depreciation and amortization (11,028) (10,394)
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Total property and equipment, net 4,971 5,087
Capitalized software, net of accumulated amortization 366 400
Deferred income taxes, net 392 392
Acquired developed technology 5,367 5,819
Goodwill 3,834 3,902
Other assets 2,454 2,586
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Total assets $ 53,205 $ 53,924
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,623 $ 4,279
Accrued liabilities 3,491 3,097
Accrued compensation 2,367 2,962
Income taxes payable 56 93
Current portion of debt 2,468 2,471
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Total current liabilities 11,005 12,902
Deferred lease obligations 65 72
Other liabilities 1,886 1,120
Long term debt 9,946 9,444
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Total liabilities 22,902 23,538
Common stock, no par value 35,199 35,195
Retained deficit (4,862) (4,959)
Cumulative foreign currency translation adjustment (20) 164
Unrealized holding period loss (14) (14)
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Total shareholders' equity 30,303 30,386
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Total liabilities and shareholders' equity $ 53,205 $ 53,924
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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
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31-Mar-97 31-Mar-96
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Revenues $ 16,858 $ 11,877
Cost of sales 8,772 5,686
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Gross profit 8,086 6,191
Research and development 3,218 2,228
Sales and marketing 2,881 2,131
General and administrative 1,445 987
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Total operating expenses 7,544 5,346
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Operating income 542 845
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Interest income 83 166
Interest expense (291) -
Other, net (196) (4)
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Income before income taxes 138 1,007
Provision for income taxes 41 363
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Net income $ 97 $ 644
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Net income per common and
common equivalent share $ 0.02 $ 0.13
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Weighted average common and common
equivalent shares 5,689 5,064
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
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31-Mar-97 31-Mar-96
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CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 97 $ 644
Adjustment to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 1,259 791
Change in assets and liabilities:
Trade accounts receivable 320 (4,574)
Inventories (269) 594
Prepaids expenses and other current assets (155) (142)
Accounts payable and accrued liabilities (1,261) 243
Accrued compensation (595) (111)
Income taxes payable (37) -
Deferred income taxes payable - (10)
Other long term liability 766 -
Deferred lease obligations (7) (7)
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Net adjustments 21 (3,216)
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Net cash provided (used) by operating activities 118 (2,572)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, equipment and leasehold improvements (547) (798)
Additions to capitalized software (43) (85)
Decrease in other assets 132 9
Decrease (Increase) in marketable securities (109) 2,054
Change in holding period gain/loss on marketable securities - (18)
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Net cash provided (used) by investing activities (567) 1,162
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on debt (548) -
Proceeds from debt 1,047 -
Change in cumulative foreign currency translation (184) -
Increase in common stock 3 137
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Net cash provided (used) by financing activities 318 137
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Net decrease in cash and cash equivalents (131) (1,273)
Cash and cash equivalents at beginning of period 2,271 2,977
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Cash and cash equivalents at end of period $ 2,140 $ 1,704
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Supplemental Disclosure of Cash Flow Information:
Income taxes paid 2 472
Income taxes refunded 1 8
Interest paid 250 -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
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 quarter of 1997, no
additional consideration was paid.
Unaudited pro forma financial information for the quarter ended March 31,
1996 is not available.
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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 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
March 31,
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(IN THOUSANDS) 1997 1996
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Outstanding 5,492 4,683
Stock options 197 381
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Total 5,689 5,064
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The 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 will be restated. The
following pro-forma information is presented in accordance with the
provisions of SFAS No. 128. Upon the adoption of SFAS No. 128, basic earnings
per common share were computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. The effect of
this accounting change on previously reported earnings per share (EPS) data
was as follows:
Three Months Ended
March 31,
Primary EPS 1997 1996
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Per share aounts
Primary EPS as reported 0.02 $ 0.13
Effect of SFAS No. 128 - 0.01
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Pro-forma basic EPS as restated $ 0.02 $ 0.14
Three Months Ended
March 31,
Fully Diluted EPS 1997 1996
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Per share amounts
Fully diluted EPS as reported $ 0.02 $ 0.13
Effect of SFAS No. 128 - 0.01
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Pro-forma diluted EPS as restated $ 0.02 $ 0.14
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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
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 April 30, 1998. 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, 1997, total availability under this credit facility was $4,323,000.
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, 1997 ("first quarter 1997")
increased $4,981,000 or approximately 42% to $16,858,000 as compared to
$11,877,000 for the same period in 1996 ("comparative period"). In the first
quarter 1997 local area networking ("LAN") products grew 49% over the
comparative period. The growth was led by fast ethernet products which grew
from 3% of total revenues in the first quarter of 1996 to 27% of revenues in
the first quarter of 1997. FDDI and ATM product revenues increased 16% and
5% respectively, while older ethernet/token ring product revenues decreased
43% over the comparative period. LAN products in total comprised 76% of
total revenues for the first quarter, and 72% for the comparative period.
FDDI, ATM and older ethernet/token ring products represented 37%, 6% and 6%
of total revenues, respectively for the first quarter. The growth in revenues
for the first quarter was also partly attributable to the inclusion of
$1,818,000 for wide area networking ("WAN") products due to the acquisition
of Synaptel S.A. in June 1996. WAN products comprised 11% of revenues for
the first quarter 1997.
Mass storage product revenues, primarily SCSI adapter cards, decreased 43% in
the first quarter 1997 from the comparative period. Fibre channel product
revenues were 1% of revenues for the first quarter. Mass storage products
comprised 11% of total revenues in the first quarter 1997 and 24% in the
comparative period.
Geographically, North America revenues comprised 84% of consolidated revenues
in the first quarter 1997 compared to 89% in the comparative period.
European revenues comprised 13% of consolidated revenues in the first quarter
1997 and 7% 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 first quarter 1997 and 4% 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 34% of the Company's revenue for the first quarter of 1997.
The gross margin percentage for the three month period ended March 31, 1997
was approximately 48% as compared to approximately 52% for the comparable
period. The decrease in gross margin is a reflection of
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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, 1997 were
$7,544,000 as compared to $5,346,000 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
$5,828,000 at March 31, 1997, and $5,850,000 at December 31, 1996. In the
first quarter of 1997, the Company used approximately $300,000 to fund
operations and invested approximately $320,000 in plant and equipment. Cash
used in operations and invested in plant and equipment was funded primarily
in borrowings under the Company's credit facility. The Company's credit
facility is a two year line of credit maturing on April 30, 1998 with annual
renewal. The Company expects to renew the credit facility is 1998.
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 6. REPORTS ON FORM 8-K
None
EXHIBITS
Exhibit 27 Financial Data Schedule
9
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, 1997
/s/ Robert L. Drury
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Robert L. Drury
Chief Financial Officer and
Vice President Finance
(Principal Financial and
Accounting officer)
10