SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1997 Commission File Number 0-13071 INTERPHASE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 75-1549797 (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.) 13800 SENLAC, DALLAS, TEXAS 75234 (Address of principal executive offices) (214)-654-5000 (Registrant's telephone number, including area code) ________________________________________________________________________________ Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for a much shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- ________________________________________________________________________________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT AUGUST 1, 1997 Common Stock, No par value 5,494,008 1 INTERPHASE CORPORATION INDEX PART I -FINANCIAL INFORMATION Item 1. Consolidated Interim Financial Statements Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations for the three months and six months ended June 30, 1997 and 1996 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 5 Supplemental Schedule of Cash Flows 6 Notes to Consolidated Interim Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II- OTHER INFORMATION Item 4. Submissions of Matters to a vote of Security Holders 11 Item 6. Reports on form 8-K and exhibits Signature 12 2 INTERPHASE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except number of shares) June 30, December 31, ASSETS 1997 1996 --------------------------- (Unaudited) Cash and cash equivalents $ 5,310 $ 2,271 Marketable securities 3,153 3,579 Trade accounts receivable, less allowances for uncollectible accounts of $409 and $503, respectively 13,088 15,182 Inventories, net 14,097 12,599 Prepaid expenses and other current assets 1,113 1,221 Deferred income taxes, net 886 886 --------------------------- Total current assets 37,647 35,738 Machinery and equipment 13,738 12,340 Leasehold improvements 2,904 2,863 Furniture and fixtures 432 278 --------------------------- 17,074 15,481 Less-accumulated depreciation and amortization (12,580) (10,394) --------------------------- Total property and equipment, net 4,494 5,087 Capitalized software-net 348 400 Deferred income taxes, net 392 392 Acquired developed technology-net 4,847 5,819 Goodwill-net 3,764 3,902 Other assets 2,367 2,586 --------------------------- Total assets $ 53,859 $ 53,924 --------------------------- --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 4,868 $ 4,279 Accrued liabilities 2,549 3,097 Accrued compensation 2,094 2,962 Income taxes payable 137 93 Current portion of debt 2,512 2,471 --------------------------- Total current liabilities 12,160 12,902 Deferred lease obligations 58 72 Other liabilities 1,979 1,120 Long term debt 8,904 9,444 --------------------------- Total liabilities 23,101 23,538 Common stock, no par value 35,200 35,195 Retained deficit (4,425) (4,959) Cumulative foreign currency translation adjustment (3) 164 Unrealized holding period loss (14) (14) --------------------------- Total shareholders' equity 30,758 30,386 --------------------------- Total liabilities and shareholders' equity $ 53,859 $ 53,924 --------------------------- --------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3 INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (Unaudited) Three Months Ended Six Months Ended - ------------------- -------------------- 30-Jun-97 30-Jun-96 30-Jun-97 30-Jun-96 - ------------------- -------------------- $ 18,379 $ 11,318 Revenues $ 35,237 $ 23,195 9,217 5,730 Cost of sales 17,989 11,416 - -------- -------- --------- --------- 9,162 5,588 Gross profit 17,248 11,779 3,524 2,326 Research and development 6,742 4,554 2,947 2,189 Sales and marketing 5,828 4,320 1,518 998 General and administrative 2,963 1,985 - 11,646 Acquired in-process R&D - 11,646 - -------- -------- --------- --------- 7,989 17,159 Total operating expenses 15,533 22,505 - -------- -------- --------- --------- 1,173 (11,571) Operating income (loss) 1,715 (10,726) - -------- -------- --------- --------- 129 51 Interest income 212 217 (276) - Interest expense (567) - (212) (6) Other, net (408) (10) - -------- -------- --------- --------- 814 (11,526) Income (loss) before income taxes 952 (10,519) 377 39 Provision for income taxes 418 402 - -------- -------- --------- --------- $ 437 $(11,565) Net income (loss) $ 534 $(10,921) - -------- -------- --------- --------- - -------- -------- --------- --------- Net income (loss) per common and $ 0.08 $ (2.45) common equivalent share $ 0.09 $ (2.32) - -------- -------- --------- --------- - -------- -------- --------- --------- Weighted average common and common 5,626 4,726 equivalent shares 5,649 4,705 - -------- -------- --------- --------- - -------- -------- --------- --------- 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-97 30-Jun-96 --------- --------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ 534 $(10,921) Adjustment to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 2,415 1,601 Write off of acquired in-process research and development - 11,646 Change in assets and liabilities, net of Synaptel acquisition; Trade accounts receivable 2,094 (3,947) Inventories (1,498) (953) Prepaid expenses and other current assets 108 80 Accounts payable and accrued liabilities 42 1,321 Accrued compensation (868) (326) Income taxes payable 44 - Deferred income taxes payable - (10) Other long term liabilities 859 - Deferred lease obligations (14) (14) --------- --------- Net adjustments 3,182 9,398 --------- --------- Net cash provided (used) by operating activities 3,716 (1,523) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, equipment and leasehold improvements (576) (1,606) Additions to capitalized software (85) (136) Decrease in other assets 219 32 Cash acquired in Synaptel acquisition - 11 (Increase) in acquired developed technology - (2,500) Decrease in marketable securities 426 5,049 Change in holding period gain/loss on marketable securities - (18) --------- --------- Net cash provided (used) by investing activities (16) 832 CASH FLOWS FROM FINANCING ACTIVITIES: Payment on debt (540) - Proceeds from debt 41 - Change in cumulative foreign currency translation (167) - Increase in common stock 5 509 --------- --------- Net cash provided (used) by financing activities (661) 509 --------- --------- Net increase (decrease) in cash and cash equivalents 3,039 (182) Cash and cash equivalents at beginning of period 2,271 2,977 --------- --------- Cash and cash equivalents at end of period $5,310 $ 2,795 --------- --------- --------- --------- Supplemental Disclosure of Cash Flow Information: Income taxes paid 299 472 Income taxes refunded 2 8 Interest paid 499 - 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 In June 1996, the Company purchased all of the capital stock of Synaptel. Fair value of assets acquired $ (26,676) Liabilities assumed 7,687 Acquisition debt 8,000 Common stock issued 9,200 Accrued aquisition costs 1,800 ----------- Cash acquired in Synaptel acquisition $ 11 ----------- ----------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 6 INTERPHASE CORPORATION NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated interim financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. While the accompanying interim financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all material adjustments and disclosures necessary to fairly present the results of such periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1996. 2. ACQUISITIONS SYNAPTEL Effective June 29, 1996 the Company acquired all the capital stock of Synaptel, S.A., ("Synaptel"), a French company, for approximately $19,000,000. The purchase consideration consisted of $8,000,000 in cash, 594,595 shares of the Company's common stock, valued at approximately $9,200,000 and $1,800,000 of accrued acquisition costs. The Company financed the cash portion of the consideration through a credit facility with a financial institution. This acquisition has been accounted for using the purchase method of accounting from the effective date of the acquisition. The total purchase consideration in excess of the fair value of the tangible and identified intangible assets acquired is included in goodwill. Identified intangibles acquired included approximately $11,600,000 of in-process research and development, $4,230,000 of developed technology and $415,000 related to Synaptel's assembled workforce. Acquired in-process research and development activities had no alternative future use and had not achieved technological feasibility and were expensed in June 1996. In addition to the purchase consideration discussed above, the purchase agreement included provisions for additional consideration of $3,500,000 cash and 450,000 options to purchase the Company's common stock at an exercise price of $18.50 per share if Synaptel attains certain revenue and operating income targets through 1998. The actual cash earn-out and number of employee stock options may increase or decrease depending upon performance against targets. The cash payments pursuant to these provisions will be accounted for as additional purchase consideration when payment is probable. The compensatory elements, if any, for these stock options will be expensed over the exercise periods. In 1996 and the first and second quarters of 1997, no additional consideration was paid. Unaudited pro forma financial information for the quarter ended June 30, 1996 is not available. 7 ACQUIRED PRODUCT RIGHTS In June 1996, the Company acquired the rights to manufacture, market, and sell certain FDDI products from Cisco Systems, Inc. for a purchase price of $2,500,000. The acquired product rights are included in acquired developed technology in the accompanying consolidated balance sheets. 3. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Net income (loss) per common and common equivalent share is computed using the weighted average number of outstanding shares and common equivalent shares. The dilutive impact of outstanding stock options have been considered under the treasury stock method using the greater of the average bid price or closing bid price for the period. Weighted average common and common equivalent shares: Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (IN THOUSANDS) 1997 1996 1997 1996 -------------- ---- ---- ---- ---- Outstanding 5,493 4,726 5,492 4,705 Stock options 133 --- 158 --- ----- ----- ----- ----- Total 5,626 4,726 5,649 4,705 ----- ----- ----- ----- ----- ----- ----- ----- There is no material difference between primary diluted and fully diluted EPS for the periods presented. In 1997, the Company will adopt SFAS No. 128, Earnings per Share, for its December 31, 1997 consolidated financial statements. As a result, the Company's reported earnings per share for 1996 and each of the quarters in 1997, will be restated. Upon the adoption of SFAS No. 128, basic earnings per common share will be computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share will be computed by dividing net income by the weighted average of common stock and common stock equivalents outstanding during the year. The following pro-forma information is presented in accordance with the provisions of SFAS No. 128: Three Months Ended Six Months Ended June 30, June 30, Primary EPS 1997 1996 1997 1996 ----------- --------------------------------------- Per share amounts Primary EPS as reported $ 0.08 $ (2.45) $0.09 $ (2.32) Effect of SFAS No. 128 - -- .01 -- ----------------- --------------- Pro-forma basic EPS as restated $ 0.08 $ (2.45) $0.10 $ (2.32) Three Months Ended Six Months Ended June 30, June 30, Fully Diluted EPS 1997 1996 1997 1996 ----------------- ----------------- -------------- Per share amounts Fully diluted EPS as reported $ 0.08 $ (2.45) $0.09 $(2.32) Effect of SFAS No. 128 - -- .01 -- ----------------- -------------- Pro-forma diluted EPS as restated $ 0.08 $ (2.45) $0.10 $(2.32) 8 4. CREDIT FACILITY Prior to and in conjunction with the Synaptel acquisition discussed in Note 2, the Company entered into a credit facility with BankOne Texas NA. The credit facility consists of an $8,500,000 acquisition term loan, a $2,500,000 equipment financing facility and a $5,000,000 revolving credit facility. The facility is subject to annual renewal provision, and bears interest at the bank's base rate (currently 8.5%). The term loan is payable in equal quarterly installments of $548,000 plus accrued interest commencing on November 30, 1996 with final payment due November 30, 2001. The Company has the ability to satisfy the quarterly payments on the term notes through borrowings under the revolving credit component of the credit facility. The revolving portion of the loan is due June 30, 1999. The credit facility is collateralized by marketable securities, assignment of accounts receivable and equipment. The credit facility includes certain restrictive financial covenants including, among others, tangible net worth, total liabilities to tangible net worth, interest coverage, quick ratio, debt service coverage, and is subject to a borrowing base calculation. At June 30, 1997, total availability under this credit facility was $3,967,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues for the three months ended June 30, 1997 ("second quarter 1997") increased $7,061,000 or approximately 62% to $18,379,000 as compared to $11,318,000 for the same period in 1996 ("comparative period"). In the second quarter 1997 local area networking ("LAN") product revenue grew 65% over the comparative period. The growth was led by fast ethernet products which grew from 5% of total revenues in the second quarter of 1996 to 34% of revenues in the second quarter of 1997. FDDI product revenues increased 18%, while ATM and older ethernet/token ring product revenues decreased 15% and 37% respectively, over the comparative period. LAN products in total comprised 77% of total revenues for the second quarter, and 76% for the comparative period. FDDI, ATM and older ethernet/token ring products represented 30%, 7% and 7% of total revenues, respectively for the second quarter. The growth in revenues for the second quarter was also partly attributable to the inclusion of $1,827,000 for wide area networking ("WAN") products due to the acquisition of Synaptel S.A. in June 1996. WAN products comprised 10% of revenues for the second quarter 1997. Mass storage product revenues, primarily SCSI adapter cards, decreased 32% in the second quarter 1997 from the comparative period. Fibre channel product revenues were 2% of revenues for the second quarter. Mass storage products comprised 10% of total revenues in the second quarter 1997 and 20% in the comparative period. Geographically, North America revenues comprised 79% of consolidated revenues in the second quarter 1997 compared to 84% in the comparative period. European revenues comprised 18% of consolidated revenues in the second quarter 1997 and 11% in the comparative period. The growth in European revenues is attributable to the inclusion of WAN products due to the acquisition of Synaptel in June 1996. Pacific Rim revenues comprised 3% of consolidated revenues in the second quarter 1997 and 6% in the comparative period. The Company's current marketing strategy is to increase market penetration through sales to major OEM customers. One of these customers accounted for approximately 37% of the Company's revenue for the second quarter of 1997. Revenues for the six months ended June 30, 1997 increased $12,042,000 or 52% to $35,237,000 as compared to $23,195,000 for the comparative period. The growth in revenue over the comparative period is due to increased revenue from fast-ethernet products and the inclusion of WAN products due to the 9 acquisition of Synaptel S.A. in June 1996. Revenues from LAN, Mass Storage and WAN products comprised 77%, 10% and 10% respectively, of consolidated revenues for the six month period ended June 30, 1997. The gross margin percentage for the three month period ended June 30, 1997 was approximately 50% as compared to approximately 49% for the comparable period. The gross margin percentage for the six month period ended June 30, 1997 was approximately 49% as compared to approximately 50% for the comparative period. Operating expenses (excluding $11,646,000 related to acquired in-process R&D in the quarter ended June 30, 1996) for the three month period ended June 30, 1997 were $7,989,000 as compared to $5,513,000 for the comparable period. The increased operating expenses reflect the addition of the Synaptel operations as well as increased levels of research and development activities in 1997 compared to 1996. Operating expenses (excluding $11,646,000 related to acquired in-process R&D in the quarter ended June 30, 1996) for the six month period ended June 30, 1997 were $15,533,000 as compared to $10,859,000 for the comparable period. The increased operating expenses reflect the addition of the Synaptel operations as well as increased levels of research and development activities in 1997 compared to 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities aggregated $8,463,000 at June 30, 1997, and $5,850,000 at December 31, 1996. In the second quarter of 1997, the Company invested approximately $300,000 in plant and equipment. The improved cash position is primarily due to a decrease in accounts receivable and profitable operations. In the next twelve months, scheduled debt payments on the Company's credit facility are approximately $2,192,000. In the current quarter this facility was extended for an additional year pursuant to the terms of the arrangement. The Company expects that its cash, cash equivalents, marketable securities and proceed from its credit facility will be adequate to meet foreseeable needs for the next 12 months. NEW ACCOUNTING PRONOUNCEMENTS Effective July 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, and SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information. SFAS No. 130 requires the Company to report comprehensive income in the financial statements. SFAS No. 131 requires the Company to disclose revenues, profit and loss, and assets for business and geographical segments similar to disclosures required under current standards. These statements are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company will consider adopting SFAS No. 130 and SFAS No. 131 in its December 31, 1997 consolidated financial statements and anticipates no material impact on the financial statements or footnotes to the financial statements. 10 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 14, 1997, The Annual Meeting of Shareholders of Interphase Corporation was held at the Company's office in Dallas Texas. The following matters were voted upon and approved at the meeting. MATTER 1 An election of directors of the Company to serve until the next annual meeting for the Company was held. The following eight individuals were elected as Directors of the Company: Votes Cast Votes For Withheld --------- ------- Dale Crane 4,658,171 296,150 Gary W. Feilder 4,656,906 297,375 James F. Halpin 4,658,171 296,150 Paul N. Hug 4,658,171 296,150 Robert H. Lyon 4,658,171 296,150 R. Stephen Polley 4,657,771 296,550 David H. Segrest 4,658,171 296,150 S. Thomas Thawley 4,658,171 296,150 To be elected a director each individual must have received a plurality of all votes cast at the meeting of election of directors. MATTER 2 Also approved at the meeting by the following vote was a proposal to amend the Company's Amended and Restated Stock Option Plan to increase the aggregate number of shares issuable upon exercise of options thereunder from 1,350,000 to 2,350,000 and to provide that any and all options may be granted to any one or more participants. Votes Cast Votes Cast Broker For Against Abstentions Non-Votes ---------- ---------- ----------- --------- 2,494,515 784,493 30,550 1,644,763 Approval of the plan required the affirmative vote of the holders of a majority of the outstanding shares of Common Stock present in person or by proxy and entitled to be voted at the meeting. ITEM 6. REPORTS ON FORM 8-K None EXHIBITS EXHIBIT 27 Financial Data Schedule 11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERPHASE CORPORATION (Registrant) Date: August 13, 1997 /s/ Robert L. Drury ------------------- Robert L. Drury Chief Financial Officer and Vice President Finance (Principal Financial and Accounting officer) 12