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, 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 November 1, 1998
Common Stock, No par value 5,520,818
INTERPHASE CORPORATION
INDEX
Part I -Financial Information
Item 1. Consolidated Interim Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine months
ended September 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 5. Rule 14a-8 12
Item 6. Reports on Form 8-K and Exhibits
Signature
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS Sep 30, 1998 Dec 31, 1997
(Unaudited)
-------- --------
Cash and cash equivalents $ 5,893 $ 2,247
Marketable securities 3,152 3,272
Trade accounts receivable, less allowances
for uncollectible accounts of $291 and
$544, respectively 13,748 13,030
Inventories, net 12,675 14,895
Prepaid expenses and other current assets 571 798
Deferred income taxes, net 686 686
-------- --------
Total current assets 36,725 34,928
Machinery and equipment 12,773 12,079
Leasehold improvements 2,988 2,890
Furniture and fixtures 489 417
-------- --------
16,250 15,386
Less-accumulated depreciation and amortization (13,465) (11,817)
-------- --------
Total property and equipment, net 2,785 3,569
Capitalized software, net 480 225
Deferred income taxes, net 862 862
Acquired developed technology, net 3,686 4,400
Goodwill, net 3,130 3,310
Other assets 2,041 2,153
-------- --------
Total assets $ 49,709 $ 49,447
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,883 $ 2,636
Accrued liabilities 1,470 2,484
Accrued compensation 2,127 1,910
Income taxes payable 695 197
Current portion of debt 2,285 2,457
-------- --------
Total current liabilities 9,460 9,684
Other liabilities 718 600
Long term debt 7,926 9,620
-------- --------
Total liabilities 18,104 19,904
Common stock, no par value 35,344 35,326
Retained deficit (3,991) (5,930)
Accumulated other comprehensive income (loss):
Cumulative foreign currency translation 283 178
adjustment
Unrealized holding period loss (31) (31)
-------- --------
Total shareholders' equity 31,605 29,543
-------- --------
Total liabilities and shareholders' equity $ 49,709 $ 49,447
======= ========
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 Nine Months Ended
30-Sep-98 30-Sep-97 30-Sep-98 30-Sep-97
------- ------- ------- -------
$ 17,046 $ 13,611 Revenues $ 50,722 $ 48,848
8,680 7,402 Cost of sales 26,133 25,391
------- ------- ------- -------
8,366 6,209 Gross profit 24,589 23,457
2,459 3,795 Research and development 7,965 10,537
2,229 2,986 Sales and marketing 7,232 8,814
2,066 1,585 General and administrative 4,895 4,548
------- ------- ------- -------
6,754 8,366 Total operating expenses 20,092 23,899
------- ------- ------- -------
1,612 (2,157) Operating income (loss) 4,497 (442)
110 120 Interest income 253 332
(256) (294) Interest expense (782) (861)
(202) (227) Other, net (647) (635)
------- ------- ------- -------
1,264 (2,558) Income (loss)before income taxes 3,321 (1,606)
541 (367) Provision (benefit) for 1,380 51
income taxes
------- ------- ------- -------
$ 723 $ (2,191) Net income (loss) $ 1,941 $ (1,657)
======= ======= ======= =======
Net income (loss) per share
$ 0.13 $ (0.40) Basic EPS $ 0.35 $ (0.30)
======= ======= ======= =======
$ 0.13 $ (0.40) Diluted EPS $ 0.34 $ (0.30)
======= ======= ======= =======
5,518 5,494 Weighted average common shares 5,519 5,493
======= ======= ======= =======
Weighted average common and
5,580 5,494 common equivalent shares 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) Nine Months ended
30-Sep-98 30-Sep-97
------- -------
Cash flow from operating activities:
Net income (loss) $ 1,941 $ (1,657)
Adjustment to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 2,907 3,642
Change in assets and liabilities;
Trade accounts receivable (718) 6,090
Inventories 2,220 (4,011)
Prepaid expenses and other current assets 227 298
Accounts payable and accrued liabilities (767) (1,638)
Accrued compensation 217 (1,079)
Income taxes payable 498 -
------- -------
Net adjustments 4,584 3,302
Net cash provided by operating activities 6,525 1,645
Cash flows from investing activities:
Additions to property, equipment and leasehold
improvements (1,009) (808)
Additions to capitalized software (477) (106)
Decrease in other assets 112 326
Decrease in marketable securities 120 356
------- -------
Net cash used by investing activities (1,254) (232)
Cash flows from financing activities:
Payment on debt (1,866) (1,731)
Proceeds from debt - 500
Other long term liabilities 118 680
Change in cumulative foreign currency translation 105 (41)
Increase in common stock 18 27
------- -------
Net cash provided (used) by financing activities (1,625) (565)
Net increase in cash and cash equivalents 3,646 848
Cash and cash equivalents at beginning of period 2,247 2,271
------- -------
Cash and cash equivalents at end of period $ 5,893 $ 3,119
======= =======
Supplemental Disclosure of Cash Flow Information:
Income taxes paid 448 302
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 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 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 thousands)
Three Months ended: Nine Months ended:
Sep 30, 1998 Sep 30, 1997 Sep 30, 1998 Sep 30, 1997
----- ----- ----- -----
Weighted average 5,518 5,494 5,519 5,493
shares outstanding
Dilutive impact of 62 0 121 0
stock options ----- ----- ----- -----
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 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 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).
Three months Three months
ended ended
Sep 30, 1998 Sep 30, 1997
------------ ------------
Net income $ 723 $(2,191)
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
Foreign currency translation adjustment 105 (41)
Comprehensive income $ 2,046 $ (1,710)
4. STOCK REPURCHASE
The Company has approved a stock repurchase agreement with Motorola, Inc.
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, 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%.
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 this stock.
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.
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
issues.
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 Officer and
Vice President Finance
(Principal Financial and
Accounting officer)