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, 1998
Commission File Number 0-13071
INTERPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1549797
(State of incorporation) (IRS Employer
Identification No.)
13800 Senlac, Dallas, Texas 75234
(Address of principal executive offices)
(214)-654-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for a much shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 1, 1998
Common Stock, No par value 5,520,618
INTERPHASE CORPORATION
INDEX
Part I - Financial Information
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three months
and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 5
Notes to Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information
Item 6. Reports on Form 8-K and Exhibits
Signature 11
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
Jun 30, Dec 31,
ASSETS 1998 1997
(Unaudited)
Cash and cash equivalents $ 3,610 $ 2,247
Marketable securities 3,181 3,272
Trade accounts receivable, less allowances
for uncollectible
accounts of $532 and $544, respectively 13,028 13,030
Inventories, net 13,465 14,895
Prepaid expenses and other current assets 693 798
Deferred income taxes, net 686 686
Total current assets 34,663 34,928
Machinery and equipment 12,381 12,079
Leasehold improvements 2,890 2,890
Furniture and fixtures 462 417
15,733 15,386
Less-accumulated depreciation and (12,907) (11,817)
amortization
Total property and equipment, net 2,826 3,569
Capitalized software, net 469 225
Deferred income taxes, net 862 862
Acquired developed technology, net 3,953 4,400
Goodwill, net 3,190 3,310
Other assets 2,143 2,153
Total assets $48,106 $49,447
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 1,962 2,636
Accrued liabilities 1,421 2,484
Accrued compensation 1,895 1,910
Income taxes payable 602 197
Current portion of debt 2,435 2,457
Total current liabilities 8,315 9,684
Other liabilities 534 600
Long term debt 8,453 9,620
Total liabilities 17,302 19,904
Common stock, no par value 35,334 35,326
Retained deficit (4,712) (5,930)
Accumulated other comprehensive income (loss):
Cumulative foreign currency translation 213 178
adjustment
Unrealized holding period loss (31) (31)
Total shareholders' equity 30,804 29,543
Total liabilities and shareholders' $48,106 $49,447
equity
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)
Three Months Ended Six Months Ended
30-Jun-98 30-Jun-97 30-Jun-98 30-Jun-97
$16,087 $18,379 Revenues $33,676 $35,237
8,007 9,217 Cost of sales 17,453 17,989
8,080 9,162 Gross profit 16,223 17,248
2,640 3,524 Research and development 5,506 6,742
2,617 2,947 Sales and marketing 5,003 5,828
1,500 1,518 General and administrative 2,829 2,963
6,757 7,989 Total operating expenses 13,338 15,533
1,323 1,173 Operating income 2,885 1,715
60 129 Interest income 143 212
(286) (276)Interest expense (526) (567)
(220) (212)Other, net (445) (408)
877 814 Income before income taxes 2,057 952
367 377 Provision for income taxes 839 418
$510 $437 Net income $ 1,218 $ 534
Net income per share
$0.09 $0.08 Basic EPS $0.22 $0.10
$0.09 $0.08 Diluted EPS $0.21 $0.09
5,517 5,492 Weighted average common shares 5,517 5,493
Weighted average common and common
5,682 5,626 equivalent shares 5,674 5,649
The accompanying notes are an integral part of these
consolidated financial statements.
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Six Months ended
30-Jun-98 30-Jun-97
Cash flow from operating activities:
Net income $1,218 $ 534
Adjustment to reconcile net income to
net cash provided
(used) by operating activities:
Depreciation and amortization 1,909 2,415
Change in assets and liabilities;
Trade accounts receivable 2 2,094
Inventories 1,430 (1,498)
Prepaid expenses and other current assets 105 94
Accounts payable and accrued liabilities (1,707) 42
Accrued compensation (15) (868)
Income taxes payable 405 44
Net adjustments 2,129 2,323
Net cash provided by operating activities 3,347 2,857
Cash flows from investing activities:
Additions to property, equipment and leasehold (482) (576)
improvements
Additions to capitalized software (391) (85)
Decrease in other assets 10 219
Decrease in marketable securities 91 426
Net cash used by investing activities (772) (16)
Cash flows from financing activities:
Payment on debt (1,189) (540)
Proceeds from debt 0 41
Other long term liabilities (66) 859
Change in cumulative foreign currency 35 (167)
translation
Increase in common stock 8 5
Net cash provided (used) by financing (1,212) 198
activities
Net increase in cash and cash equivalents 1,363 3,039
Cash and cash equivalents at beginning of period 2,247 2,271
Cash and cash equivalents at end of period $3,610 $5,310
Supplemental Disclosure of Cash Flow Information:
Income taxes paid 432 299
Income taxes refunded 0 2
Interest paid 494 499
The accompanying notes are an integral part of these consolidated
financial statements.
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 financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31,
1997.
2. ACQUISITIONS
SYNAPTEL
In 1996 the Company acquired all the capital stock of Synaptel, S.A.,
("Synaptel"), a French company, for approximately $19,000,000. This
acquisition was accounted for using the purchase method of accounting
from the effective date of the acquisition. The total purchase
consideration in excess of the fair value of the tangible and
identified intangible assets acquired is included in goodwill.
Identified intangibles acquired included approximately $11,600,000 of
in-process research and development, $4,230,000 of developed technology
and $415,000 related to Synaptel's assembled workforce. Acquired in-
process research and development activities had no alternative future
use and had not achieved technological feasibility and were expensed in
June 1996.
In addition to the purchase consideration discussed above, the purchase
agreement included provisions for additional consideration of
$3,500,000 cash and 450,000 options to purchase the Company's common
stock at an exercise price of $18.50 per share if Synaptel attains
certain revenue and operating income targets through 1998. The actual
cash earn-out and number of employee stock options may increase or
decrease depending upon performance against targets. The cash payments
pursuant to these provisions will be accounted for as additional
purchase consideration when payment is probable. The compensatory
elements, if any, for these stock options will be expensed over the
exercise periods.
ACQUIRED PRODUCT RIGHTS
In June 1996, the Company acquired the rights to manufacture, market,
and sell certain FDDI products from Cisco for a purchase price of
$2,500,000. The acquired product rights are included in acquired
developed technology in the accompanying consolidated balance sheets.
3. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," for its December 31, 1997
consolidated financial statements. As a result, the Company's reported
earnings per share for the three month and six month periods ended June
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 thousands)
Three Months ended: Six Months ended:
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Weighted average
shares outstanding 5,517 5,492 5,517 5,493
Dilutive impact of
stock options 165 134 157 156
Total weighted
average common and
common equivalent
shares outstanding 5,682 5,626 5,674 5,649
Excluded from the calculation of diluted earnings per share are 960 and
1,007 options for the quarters ended June 30, 1998 and 1997,
respectively, and 956 and 995 options for the six months ended June 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 into a credit facility with BankOne Texas
NA. The credit facility consists of an $8,500,000 acquisition term
loan, a $2,500,000 equipment financing facility and a $5,000,000
revolving credit facility. The facility is a two-year facility with
an annual renewal provision, and bears interest at the bank's base rate
(currently 8.5%). The term loan is payable in equal quarterly
installments of $548,000 plus accrued interest with final payment due
November 30, 2001. The Company has the ability to satisfy the
quarterly payments on the term notes through borrowings under the
revolving credit component of the credit facility. The revolving
portion of the loan is due June 30, 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 June 30, 1998, the Company had borrowings of
$10,644,000 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).
Three months Three months
ended ended
June 30, 1998 June 30, 1997
Net income $ 510 $ 437
Other comprehensive income,
Unrealized holding gains
(losses) arising
during period , net of tax 0 0
Foreign currency translation
adjustment 79 17
Comprehensive income $ 589 $ 454
Six months ended Six months ended
June 30, 1998 June 30, 1997
Net income $ 1,218 $ 534
Other comprehensive income,
Unrealized holding gains
(losses) arising
during period , net of tax 0 0
Foreign currency translation
adjustment 35 (167)
Comprehensive income $ 1,253 $ 367
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, 1998 ("second quarter
1998") were $16,087,000. Revenues for the same period in 1997
("comparative period") were $18,379,000. The decrease in revenues
from the comparative period was attributable to declines in FDDI, SCSI,
and Ethernet product revenues, partially offset by an approximate 800%
increase in Fibre Channel product revenues.
LAN product revenues, consisting of FDDI, Ethernet, ATM and Fast
Ethernet, represented 69% of total revenues for the second quarter
1998, as compared to 77% for the comparative period. FDDI product
revenues declined 45%, Ethernet product revenues declined 51%, ATM
product revenues declined 16% and Fast Ethernet product revenues
declined 17% as compared to the comparative period. FDDI, Ethernet,
ATM and Fast Ethernet product revenues represented 19%, 4%, 6% and 32%
of total revenues, respectively for the second quarter 1998.
Mass storage product revenues, consisting of SCSI and Fibre Channel
adapter cards, represented 20% of total revenues for the second quarter
1998, as compared to 10% for the comparative period. SCSI product
revenues declined 42% while Fibre Channel product revenues increased
approximately 800% over the comparative period.
WAN product revenues comprised 9% of revenues for the second quarter
1998, as compared to 10% for the comparative period. WAN product
revenues declined 18% as compared to the comparative period.
Geographically, North America revenues comprised 82% of consolidated
revenues in the second quarter 1998 compared to 79% in the comparative
period. European revenues comprised 16% of consolidated revenues in
the second quarter 1998 and 18% in the comparative period. Pacific Rim
revenues comprised 2% of consolidated revenues in the second quarter
1998 and 3% in the comparative period .
Revenues for the six month period ended June 30, 1998 were $33,676,000
as compared to $35,237,000 for the comparative period. Revenues from
LAN, Mass Storage and WAN products were 71%, 20% and 8% of total
revenues respectively, for the six month period ended June 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 39% of the Company's revenue for
the second quarter of 1998.
The gross margin percentage for the three month periods ended June 30,
1998 and 1997 was approximately 50%. The gross margin percentages for
the six month period ended June 30, 1998 and 1997 were 48% and 49%
respectively.
Operating expenses for the three month period ended June 30, 1998 were
$6,757,000 as compared to $7,989,000 for the comparable period.
Operating expenses for the six month period ended June 30, 1998 were
$13,338,000 as compared to $15,533,000 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 $6,791,000 at June 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 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.
PART II
OTHER INFORMATION
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: August 13, 1998
/s/ Gregory B. Kalush
Gregory B. Kalush
Chief Financial Officer and
Vice President Finance
(Principal Financial and
Accounting officer)