SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-13071
INTERPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1549797
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13800 Senlac, Dallas, Texas 75234
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (214) 654-5000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, no par value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 1, 1999 was approximately $34,450,000. As of
March 1, 1999, registrant had outstanding 5,456,491 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into this
annual report on Form 10-K Report: (1) Portions of the Definitive Proxy
Statement for Annual Meeting of Shareholders to be held on May 5, 1999
(Part III).
PART I
ITEM 1. BUSINESS
Introduction
Interphase Corporation and subsidiaries ("Interphase" or the "Company")
designs, develops, manufactures, markets and supports high-performance
connectivity products utilizing advanced technologies for today's
enterprise network and mass storage environments and other embedded
computer systems. Interphase's network and mass storage products include
high performance adapter cards, concentrators, switches, network
operating system (NOS) software drivers, and management software
applications.
* Adapter cards are printed circuit boards with cable connections that
fit inside a slot on a computer, enabling those devices to connect
with other devices in a network topology.
* Concentrators and switches are network interconnection devices that
allow an adapter to be connected to one or more network transmission
segments.
* Operating systems are master control programs that run the computers
on which they are installed. An operating system is the first program
loaded when the computer is turned on, and its main part, called the
kernel, resides in memory at all times. Operating system drivers are
programs running under the operating systems and that control
different parts of the computer such as the network interface cards.
A NOS is an operating system that manages network resources by
handling multiple requests (inputs) concurrently and providing the
security necessary in a multi-user environment.
* Management software applications are specifically designed and
programmed to assist the end user with the installation, set up
(setting various user preferences), and monitoring of Interphase
adapter cards.
The Company's local area network ("LAN") products implement high speed
networking technologies such as Fiber Distributed Data Interface
("FDDI"), Asynchronous Transfer Mode ("ATM"), Gigabit Ethernet, Fast
Ethernet (100 Base-T), 100VG-AnyLAN, Ethernet (10Base-T) and Token Ring
technologies that facilitate the high speed movement of information
across computer networks. The Company's wide area network ("WAN")
products, serving both the server class and client class computers,
utilize Integrated Services Digital Network ("ISDN"), V.90 (56K), Frame
Relay, X.25 and other communications technologies. The Company's mass
storage controllers are currently based on Small Computer Systems
Interface ("SCSI") technology and high speed Fibre Channel technology to
facilitate the movement of data to and from mass storage devices. Fibre
Channel can also be used for a high speed interconnect in clustered
applications. The Company's products are designed to not only comply
with the appropriate open system technical standards but also optimize
the performance of the customer's network and mass storage environments.
The Company's networking and mass storage adapter products consist of
both hardware and software. The hardware is essentially printed circuit
boards which plug into the backplane of a computer and incorporate
industry standard bus architectures of the most popular client/server
platforms such as PCI, CompactPCI, PMC, SBus, EISA, VME, and GIO, as well
as input-output front-ends for many performance oriented computer
systems. The Company's network adapters support a variety of media
including fiber optic cabling and unshielded twisted pair ("UTP") and
shielded twisted pair ("STP") copper wire. The Company's software
consists of drivers for the most popular operating systems such as
Microsoft Windows NT, Novell NetWare, HP-UX, IRIX, O/S2, Solaris, SunOS,
AIX and certain real-time operating systems such as LynxOS and VxWorks.
In addition, the software may include diagnostics, station management
("SMT"). In certain cases, the software off loads the processing of the
protocol stack from the server to the adapter card. The Company's FDDI
concentrator products are stand-alone network devices that serve as a
single point of connection for multi-port local area networks as well as
perform certain network traffic management tasks. The mass storage
adapters provide a high-speed connection to computer peripheral devices,
such as disk drives, tape drives and printers. The Company's WAN
adapters are complete ISDN T1/E1 or serial I/O packages that allow
servers and other communications devices to connect remote locations in a
corporate network, such as a virtual private network (VPN). The Company's
products are used in a wide range of computer applications including
graphics workstations, high performance work groups, CPU clusters,
medical imaging, telephone switching, on-line transaction processing and
financial services networks. The Company believes that its success in
gaining significant market share in its selected markets is dependent
upon not only the development and manufacturing of high performance,
high quality products but also in establishing and maintaining the
appropriate distribution channels. The Company has original equipment
manufacturer ("OEM") agreements with some of the best-known companies in
the computer industry for its network products and mass storage adapters.
The Company's customers include OEM's of computer systems and network
switches, systems integrators, value-added resellers ("VAR"),
distributors and end-users. The Company believes that it must maintain
an ongoing synergistic relationship with its customers and demonstrate
technology leadership coupled with sophisticated manufacturing and
customer support capabilities. The Company's manufacturing and
development activities are certified under the ISO 9001 international
quality standard. This standard, considered the most comprehensive of
the ISO 9000 standards, applies to not only manufacturing quality, but
design, development and support quality systems as well. Certain
companies in the United States and Europe now require ISO certification
of their key suppliers. The Company's headquarters and manufacturing
facilities are located in Dallas, Texas.
Effective June 29, 1996, the Company purchased all the issued and
outstanding capital stock of Synaptel S.A. ("Synaptel"). Synaptel
designs and distributes a broad line of remote access and ISDN products,
which include both significant software content and interoperability with
a broad range of networking protocols.
The Company, a Texas corporation, was founded in 1977.
NETWORKING / STORAGE PRODUCTS
Product Overview
The bus structure of a computer system is the pathway over which data
flows among the system's components, such as the central processing units
("CPU"), disk or tape drives and network adapters. The bus structure of a
computer coordinates the timing and routing of data, as well as defines
the system architecture for components that interface with each other.
The Company develops and sells products based on high performance
peripheral bus architectures such as PCI, CompactPCI, PMC, EISA, SBusVME
and GIO. These peripheral bus architectures were developed by computer
system manufacturers and are considered "open systems" since certain
specifications of the architecture are published to encourage competition
among vendors of peripheral equipment such as network adapters. The
concept of open systems has gained significant momentum in recent years
and has allowed end-users to configure a computing and network
environment that incorporates desired technology, features, scalability
and support from a variety of product and service providers.
The CPU of a computer performs basic arithmetic, local memory access and
input/output functions for communication with peripheral equipment as
well as other functions associated with data transfers within a network
such as protocol processing. When commanded by the CPU, a network adapter
facilitates the high-speed communication of data among computer systems
over a network as well as validates data completeness and integrity.
Network adapters also perform varying levels of protocol processing and
network management tasks. A network protocol is the set of rules or
conventions used to govern the exchange of information between networked
nodes or LANs. Most computer applications require immediate access to a
greater volume of data than can be stored in the computer's local memory.
This necessitates external data storage capacity provided by disk or
tape drives. A disk controller directs the data storage and retrieval
operations of the disk drive and controls the flow of data between
the CPU and disk drive. The disk controller locates and formats the data
stored on the disk, performs data validity checking, data error detection
and correction and informs the CPU of the status of these operations and
of the controller itself. A tape controller performs the same functions
as a disk controller but interfaces with a tape drive. Multifunction
controllers operate like a disk controller but allow the CPU to access
disk drives and tape drives simultaneously.
Intelligent controllers designed by the Company incorporate proprietary
firmware (i.e., programs developed by the Company and stored in memory on
the product) and software to perform these functions simultaneously and
independently from the CPU, which allows the CPU to perform other
operations at the same time as network communications, data storage or
retrieval occurs.
NETWORKING / STORAGE PRODUCTS
Network Products
The Company's networking products include those that are designed for
both LAN and WAN environments. Local area networks are a group of
interconnected computers in a small geographic area, such as an office
building or a complex of offices in a campus environment. Wide area
networks connect computers dispersed over long distances, such as across
the country or internationally. Revenues derived from networking
products represented approximately 73%, 77% and 71% of consolidated
revenues for the years ended December 31,1998, 1997 and 1996. (See Note
11 to consolidated financial statements)
Local Area Network (LAN)
Over the past several years the Company has developed a diverse line of
LAN products targeted for the PCI, CompactPCI, PMC, VME, SBus, EISA, and
GIO peripheral bus marketplace. The majority of these products are sold
directly to OEMs but a substantial portion are also sold to VAR's, system
integrators, distributors and large end-users.
The Company's products included within this broad grouping can be further
divided into board level controller (adapter) products and stand-alone
network devices.
Board Level Products-
FDDI Product Line-
FDDI is a stable, standardized, 100Mbit per second technology. Its
combination of speed and stability make FDDI ideal for reliable high-
performance workgroup connections. FDDI high performance adapters are
often used for movement of large graphical images such as color prepress
and medical imaging applications. These adapters are also used in
enterprise servers for high-demand transaction processing networks in
corporate systems.
4511 PMC FDDI Adapter provides reliable, high-performance 100 Mbps FDDI
connectivity for PMC-based systems. It supports multimode fiber and
copper wiring.
4811 EISA FDDI Adapter is a high performance FDDI network adapter for
EISA bus systems. It provides for full implementation of FDDI Station
Management (SMT) on-board, freeing the host CPU to execute applications
and upper level protocols.
5211 VME FDDI Adapter represents a third generation FDDI network adapter
from Interphase. This host-based product is capable of supporting
varying types of media (e.g., fiber or copper) and contains an optical
bypass control. It can be used in VME64 systems and is capable of link
level or on-board protocol processing. Its RISC-based architecture can
be configured for either single or dual attachment to an FDDI network and
is available in a 9U or 6U form factor (refers to standard form factors
of the printed circuit board).
5511 PCI FDDI Adapter is a high performance FDDI network adapter for PCI
based systems. It provides Single Attachment Station (SAS) connectivity
for FDDI workstations or server connectivity to a concentrator in a
workgroup topology. It also comes with a Dual Attachment Station (DAS)
option for direct A-B connectivity to an FDDI ring or concentrator, or
for dual homing between two concentrators. The 5511 provides connections
for multimode fiber and TP-PMD compliant Category 5 Unshielded Twisted
Pair copper wiring.
5611 SBus FDDI Adapter is a high performance FDDI network adapter for
SBus systems. The 5611 is designed to capitalize on the high
performance of Sun SPARC and compatible systems with a direct memory
access (DMA) architecture.
CDDI WA-C303 SBus FDDI Adapter provides high performance, 100-Mbps
connectivity to FDDI networks for SPARC-based worstations and servers. It
supports single attachment and fault-tolerant, dual attachment
connections.
WA-C323 EISA FDDI Adapter provides high performance 100 Mbps
connectivity to workgroup servers and workstations.
Ethernet / Fast Ethernet Product Line-
The Company's Ethernet Product Line includes several different
technologies that are generally grouped under the Ethernet umberella.
Ethernet is the most widely used LAN Media Access control method, which
is defined by the IEEE 802.3. Ethernet is normally a shared media LAN and
all stations on the segment share the total bandwidth, which is either 10
Mbps (Ethernet), 100 Mbps (Fast Ethernet) or 1000 Mbps (Gigabit
Ethernet). Fast Ethernet (100Base-T), is a high-speed version of
Ethernet (IEEE 802.3u standard). 100BaseT transmits at 100 Mbps rather
than 10 Mbps. 100VG-AnyLAN is another 100 Mbps version of Ethernet
developed by Hewlett-Packard that is able to transport both Ethernet and
Token Ring frames. It is a shared media LAN like Ethernet, but employs a
different access method, allowing realtime voice and video to be given
high priority.
4207 VME Ethernet Adapter provides a connection to an ethernet network
for VMEbus systems. It is a high performance protocol processor that is
capable of data rate transfers of over 30 Mbytes/second.
4221VME Ethernet Adapter is a 10 Base-T product. This adapter is an
intelligent network interface which can provide up to four Ethernet ports
from a single VME or VME64 slot.
4824 EISA 100Base-T Adapter provides either 100 Mbps or 10 Mbps
connectivity which is automatically configured based on the type of
network connection detected upon system start-up.
5524 PCI 100Base-T Adapter provides 100 Mbps connectivity for most PCI-
compliant systems. The 5524 provides full auto-negotiation capabilities
to select full or half duplex for 100-Mbit or 10-Mbit connections,
supporting TX (Category 5UTP copper cable).
6224 VME 100Base-T Adapter allows the creation of one or more high-speed
connections between a VMEbus-based HP-UX system and a 100Base-T network.
The 6224 adapter supports a data rate of 100 Mbps.
4524 PMC 100Base T Adapter provides 802.3u 100Base-T connectivity for
most PMC-compliant systems. Driver support includes: AIX, Solaris and
Window NT.
4622 SBus 100VG-AnyLan Adapter provides Sun SPARC stations and 100%
compatibles with selectable connectivity to networks based either on
10Base-T or 100VG-AnyLAN technology.
ATM Product Line-
ATM is a scalable network technology capable of providing enhanced
quality of service in managing video, audio and data transmissions
compared to other existing network technologies. ATM has found niche
applications in the desktop LAN environment, and it is becoming
increasingly popular as a multi-service LAN technology for corporate
backbones. As ATM continues to be adopted for new public switched
services, both in the backbone and at the network access, such as in
high-speed Internet access, digital video and IP telephony. ATM is
expected to become the predominant technology for the integration of LAN
traffic into the wide area networking environment.
4515 PMC ATM Adapter provides reliable, high performance ATM
connectivity for PMC-based systems. This adapter supports SONET OC-3 155
Mpbs connectivity.
4615 SBus ATM Adapter provides full duplex ATM connectivity for virtually
all Sun Sbus platforms from 600 MP Servers to the SPARCcenter 2000. This
adapter supports SunOS 4.1.3. and Solaris 2.3 or greater.
4815 EISA ATM Adapter provides full duplex ATM connectivity for many
EISA-compliant systems from high performance PCs and workstations to
powerful mutiprocessing servers running Windows NT and Novell
4915 GIO ATM Adapter provides full duplex ATM connectivity for virtually
all Silicon Graphics GIO-based platforms. This adapter supports SGI's
IRIX operating system version 5.3.
5215 VME ATM Adapter provides full duplex ATM connectivity for SGI Onyz
and Challenge systems running the IRIX operating system.
5575 PCI ATM Adapter provides full duplex ATM connectivity for most PCI-
compliant systems. This adapter supports Windows NT, Novell NetWare
UnixWare, Solaris and AIX.
6575 CompactPCI ATM Adapter provides full duplex ATM connectivity for
industrial and Telecom computers. This adapter supports Windows NT,
Novell NetWare UnixWare, Solaris and AIX.
Stand Alone Network Devices-
M1600 FDDI Concentrator provides multiport connectivity to an FDDI
network. It supports up to 16 master ports and facilitates high speed
FDDI networking between a variety of computing devices and across
different types of FDDI media including fiber and copper. This device is
"hot swappable" meaning that individual modules may be replaced, removed
or added without interrupting the entire network. Other fault tolerance
features include an external optical bypass control and an optional
redundant power supply, making the M1600 well-suited for demanding FDDI
backbone environments.
M800 FDDI Concentrator contains many of the same high performance
features as the M1600 FDDI Concentrator but is designed for smaller
workgroups with large data transfer requirements. It is available in a
table top or rack mountable design.
M400 FDDI Concentrator is a compact, fixed port concentrator ideal for
small workgroup cluster. Available in either 4 or 8 port configurations,
the M400 provides options for fiber or copper media connectivity and the
ability to select managed or unmanaged operations.
S4000 Millennium is a scalable LAN switch featuring a media independent,
five-slot chassis that supports switched 10Mbps Ethernet, 100Mbps Fast
Ethernet, 1000Mbps Gigabit Ethernet and FDDI connectivity.
Wide Area Networks (WAN)
The Company's WAN products serve several segments of the enterprise
networking market including: remote access server (RAS) connectivity
utilizing ISDN and digital technologies, IBM SNA LAN to host integration,
and access to wide area networks for servers, remote LANs and PCs in
multi-vendor networking environments and LAN to LAN interconnection
utilizing a variety of protocols. Interphase WAN products are compatible
with Novell, Microsoft, IBM, Sun, UNIX, SNA, X.25, Frame Relay and ISDN.
Server Class products include fully featured, multi-purpose and multi-
operating systems products for ISDN, X.25, Frame Relay and other serial
and dial up technologies. These products are used by networking
professionals to outfit remote offices or central offices with an
ISDN/WAN adapter that can manage multiple ISDN channels or multiple
communication modes.
ENTIA-PRI RAS Adapter is an intelligent PCI compliant RAS peripheral that
uses an on-board PowerPC CPU and memory to locally execute all
communications protocols. Available in two configurations, single or dual
port PRI/T1/E1, the ENTIA-PRI Adapter provides connectivity for small and
medium size enterprise networking environments.
ENTIA-BRI RAS Adapter is an intelligent peripheral that uses an on-board
IBM PowerPC CPU and memory to locally execute all communications
protocols. Featuring 4 ISDN BRI (Basic Rate Interface) ports, the ENTIA
BRI RAS Adapter offers both ST and built-in NT1 (U-loop) interfaces for
small branch offices.
ENTIA-SR Adapter is an intelligent PCI compliant peripheral that uses an
on-board PowerPC CPU and memory to locally execute all communications
protocols. The serial port on the ENTIA-SR Adapter can operate as a
single, unchannelized data port at speeds between 56K and T1 (1.544 Mbps)
or E1 (2.048 Mbps) or at any speeds in between for LAN to LAN
interconnections or for branch office router interconnections in a leased
line networking environment.
ENTIA-DM PCI Digital Modem Adapter is an intelligent PCI compliant
peripheral that uses an on-board PowerPC CPU and memory to locally
execute all communications protocols. Offering up to 60 digital modems,
an optional integrated CSU/DSU, and simultaneous processing of both ISDN
and analog (V.34 and V.90) call traffic, the ENTIA-DM supports remote
users requiring access to enterprise network applications like Microsoft
Backoffice (SNA, SQL, E-mail), Remote Access Server, routing programs and
communications programs.
5532 PCI ISDN/X.25 Adapter is an active adapter for remote workstation
and small branch office communication servers. Offering an ISDN BRI S/T
interface, the 5532 enables users to utilize advanced X.25, PPP and SDLC
connectivity, while providing high-speed access to LANs, remote access
hosts or the Internet.
Client Class products are serial I/O and ISDN board level products that
are used in desktop and laptop computers. These products are designed
primarily to Windows operating systems for client applications.
5132 ISA ISDN Adapter is an adapter for remote workstations and small
branch office communication servers. Offering a serial V.11 or V.24
connection to a leased line plus an ISDN BRI S/T interface, the 5132
enable users with high-speed access to LANs, remote access hosts or the
Internet.
5133 ISA ISDN Adapter provides a low cost ISDN solution designed for
desktops running Microsoft Windows 95/98. The 5133 provide users with
fast and secure access to LANs or the Internet.
5333 PCMCIA ISDN Adapter provides a low cost ISDN solution for laptops
with PC Card slots running Microsoft Windows 95/98. The 5333 provide
users with fast and secure access to LANs or the Internet.
Mass Storage Controller Products
Revenues derived from mass storage controller products represented
approximately 25%, 12% and 14% of consolidated revenues for the years
ended December 31, 1998, 1997 and 1996.
The Company's mass storage product line includes products that function
in VME, PCI and CompactPCI systems. Presently, SCSI is the most popular
mass storage technology for both desktop and server applications since it
is "device independent" whereas many technologies prior to SCSI were not.
Device independent refers to the fact that the controller can access and
send data to and from a variety of peripheral devices (e.g., disk drives,
tape drives or printers). Historically, the primary market for these
products has been computer system OEM's.
The Company introduced its first Fibre Channel product in 1996. Fibre
Channel is an emerging high-speed data transfer technology. Fibre
Channel is regarded as a follow-on migration path from SCSI. It is 10 to
250 times faster than existing technologies, including SCSI, capable of
transmitting at rates of one gigabit per second simultaneously in both
directions. This kind of performance is a practical necessity when
sizable files containing x-rays or MRI scans are retrieved from a storage
device. Fibre Channel can also operate over distances up to 10 km. For
disaster recovery purposes it is an ideal technology for backing up
mission critical data to mass storage device at a secure remote location.
Fibre Channel is also regarded by the industry as a key enabler for
Storage Area Networks (SANs). A SAN provides centralized management of
storage devices from anywhere on the network and utilize a high-speed
Fibre Channel backbone to tie together large numbers of tape, disk and
other storage devices and link them to remote servers. Fibre Channel is
also expected to play a significant role in mass storage for Telecom
database engines for Advanced Intelligent Networks and wireless
telephony.
SCSI
4210 VME SCSI Adapter is a high-performance dual channel SCSI host
adapter for VMEbus applications. It supports up to seven SCSI devices
per channel and can be configured with one or two independent SCSI
channels. By utilizing the BUSpacket Interface it can provide transfer
rates of up to 5 MBytes/second in synchronous mode and up to 1.5
MBytes/second in the asynchronous mode. This product is available in
either a 6U or 9U form factor. 4220 VME SCSI-2 Adapter is designed for
VMEbus and VME64 systems. It complies with the industry standard SCSI-2
interface. It also contains two channels that support up to 14 SCSI-1
or SCSI-2 devices. It is capable of data rates of up to 10 MBytes/second
in the synchronous mode and 5 MBytes/second in the asynchronous mode.
This product is available in either a 6U or 9U form factor. Additionally,
an optional daughter card is available which allows for a connection to
an Ethernet network. The incorporation of an Ethernet daughter card with
a SCSI adapter in this manner utilizes only one slot in a computer
backplane.
5520 PCI SCSI-2 Adapter provids high performance "Fast and Wide" SCSI-2
connectivity for PCI-based systems and is designed to meet the needs of
applications ranging from graphics intensive multimedia desktops to high
throughput departmental file servers.
Fibre Channel
5526 PCI Fibre Channel Adapter provides single port 100 MBps Fibre
Channel connectivity and is powered by the Hewlett-Packard Tachyon Fibre
Channel protocol engine.
6526 CompactPCI Fibre Channel Adapter is a 3U CompactPCI adapter which
delivers full 100 MBps throughput for next generation mass storage
applications in embedded system environments.
Interphase (i)chipTPI ASIC is a single chip solution which allows the
Hewlett-Packard Tachyon Fibre Channel controller to be used in
conjunction with the industry standard PCI bus.
FibreView is a management/diagnostic tool which simplifies the
configuration of Interphase Fibre Channel adapter cards. With FibreView,
users can display, add, modify and delete SCSI ID assignments with
relative ease, making it simple to tailor their storage arrangement for
specific application requirements.
VOICE OVER INTERNET PROTOCAL (VoIP)
Fueled by the explosive growth of the Internet, IP-based networks have
become the standard for corporate data networks. IP-telephony (Internet
Protocol telephony) is a general term for the technologies that use the
Internet Protocol's packet-switched connections to exchange voice, fax,
and other forms of information that have traditionally been carried over
the dedicated circuit-switched connections of the public switched
telephone network (PSTN). The Company is currently evaluating market
opportunities with two key IP telephony technologies: Voice over IP
(VoIP) and Voice over the Internet (VoN). Voice over the Internet uses
IP telephony for users that are connected to the Internet, where voice
conversations and other information is converted into digital data and
transmitted over the public Internet. Voice over IP is based on the
same underlying technology as VoN, but operates on proprietary networks,
not the public Internet.
New Product Development
The markets for the Company's products are characterized by rapid
technological development, evolving industry standards, frequent new
product introductions and relatively short product life cycles. The
Company's success is substantially dependent upon its ability to
anticipate and react to these changes, maintain its technological
expertise, expand and enhance its product offerings in existing
technologies, and to develop in a timely manner new products in emerging
technologies, such as Fibre Channel-based storage area networking, which
achieve market acceptance. The Company believes it must offer products
to the market which not only meet ever-increasing performance and
quality standards, but also provide compatibility and interoperability
with products and architectures offered by various computer and network
systems vendors. The continued utility of the Company's products can be
adversely affected by products or technologies developed by others.
The Company has been engaged in the development of new products and the
refinement of its existing products since its inception. Interphase has
been active in the formulation of industry standards sanctioned by groups
such as the IEEE and ANSI and, VME International Trade Association
(VITA), Fibre Channel Association (FCA), Fibre Channel Community, PCI
Industrial Manufacturers Group (PICMG), Project UDI, Fast Ethernet
Alliance, SCSI Committee, the LADDIS Group, ONC/NFS Consortium,
University of New Hampshire FDDI Interoperability Lab, FC-Open (Fibre
Channel) Consortium, and ANTC Consortium for FDDI interoperability
testing.
In 1998, the Company applied the majority of its engineering
development resources to products for the emerging remote access and
Fibre Channel markets. The remote access equipment market is growing at a
38% annual rate according to recent research and the Company intends to
provide "best of breed" remote access solutions for embedded systems and
communications servers for mission critical enterprise communications.
The SAN market for hardware, software and services is expected to grow
from an estimated $3.5 billion in 1998 to $10 billion by 2002, according
to Strategic Research. Through engineering development, the Company
strives for continuous improvements in scalability and throughput with
its Fibre Channel offerings in order to make its products industry-
leading solutions for building localized SAN's.
In addition, the Company has continued its focus on ATM and certain
traditional products including FDDI. ATM is rapidly becoming the key
technology in fostering multipurpose, seamless LAN/WAN connectivity.
Interphase, as a recognized leader in ATM, intends to continue to exploit
its leadership position by targeting these new opportunities for ATM with
new ATM products, while continuing to cater to existing LAN opportunities
for ATM. (See Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations, for further discussion on Research
and Development activities).
Marketing and Customers
The Company's standard products are sold to OEM's for inclusion in
scientific, industrial, medical, engineering workstations, printing,
mini-supercomputer, graphics and other computer applications. These
purchasers incorporate the Company's products in proprietary systems for
resale to distributors, system integrators and VAR's (which add specially
designed software) prior to resale to end-users. Also, the Company sells
products directly to sophisticated end-users such as large corporations,
universities and scientific research organizations. During 1998, sales
to Hewlett Packard accounted for $28,349,000 or 41% of consolidated
revenues, and was the only customer accounting for more than 10% of
consolidated revenues. During 1997, sales to Hewlett Packard accounted
for $26,402,000 or 40% of consolidated revenues, and was the only
customer accounting for more than 10% of consolidated revenues. During
1996, no single customer accounted for more than 10% of consolidated
revenues.
In October 1998, the Company entered into a stock repurchase agreement to
buy back all the outstanding shares held by Motorola at a total price of
$4,125,000. The stock repurchases will be made ratably from October 1998
to July 2002. Sales to Motorola approximated 3%, 3% and 6% of the
Company's revenues for the years ended December 31, 1998, 1997 and 1996
respectively.
The Company markets its products through its own sales organization and,
to a lesser extent, through a network of independent sales
representatives. In addition to the Company's headquarters in Dallas,
Texas, the Company has sales offices located in or near Santa Clara,
California; Boston, Massachusetts; Phoenix, Arizona; Minneapolis,
Minnesota; London, England; and Paris, France. The Company's sales
personnel market products directly to key customers as well as support
the sales representative network. In addition, the Company has entered
into distribution agreements with key national and international
distribution partners, including Anixter, Fuji-Xerox, Gates/Arrow and
Westcon.
Interphase emphasizes its extensive product support, training and field
support to its customers. The Company's products are generally sold with
a one to three-year warranty covering components and labor. After the
expiration of the warranty period, the Company generally provides support
services for a stated flat fee.
The Company and its customers generally enter into written agreements
specifying, among other items standard in commercial agreements, product
specifications, failure rates, shipping requirements, shipment
rescheduling terms, price/volume schedules and manufacturer warranties.
Substantially all of these agreements do not contain determinable
purchase commitments of the customers, providing instead that actual
purchase and shipments of products be made by specific purchase order.
Accordingly, any shipment rates stated in such contracts are subject to
rescheduling and/or cancellation, and therefore are not indicative of the
future purchase orders to be submitted by such customer. In addition,
the actual terms of the contracts tend to be modified in the ordinary
course of business by means of subsequent purchase order terms and by
course of dealing.
The Company does not believe that the level of backlog of orders is
either material or indicative of future results, since its contracts are
subject to revision through subsequent purchase orders and since its
customers are generally permitted to cancel purchase orders, within
certain parameters, prior to shipment without penalty.
The majority of the Company's sales are to OEMs with payment terms
typically being net 30-45 days from date of invoice.
Manufacturing and Supplies
Most manufacturing operations are currently conducted at the Company's
headquarters in Dallas, Texas. In addition, the Company utilizes
contract manufacturing operations for the assembly of certain products,
including some of those produced in France. The Company's products
consist primarily of various integrated circuits, other electronic
components and firmware assembled onto an internally designed printed
circuit board.
The Company uses internally designed, applications specific integrated
circuits ("ASIC"), some of which are sole-sourced, on some of its
products as well as standard off-the shelf items presently available from
two or more suppliers. Historically the Company has not experienced any
significant problems in maintaining an adequate supply of these parts
sufficient to satisfy customer demand, and the Company believes that it
has good relations with its vendors.
The Company generally does not manufacture products to stock in finished
goods inventory, as substantially all of the Company's production is
dedicated to specific customer purchase orders. As a result, the Company
does not have any material requirements to maintain significant
inventories or other working capital items.
Intellectual Property and Patents
While the Company believes that its success is ultimately dependent upon
the innovative skills of its personnel and its ability to anticipate
technological changes, its ability to compete successfully will depend,
in part, upon its ability to protect proprietary technology contained in
its products. The Company does not currently hold any patents relative
to its current product lines. Instead, the Company relies upon a
combination of trade secret, copyright and trademark laws and contractual
restrictions to establish and protect proprietary rights in its products.
The development of alternative, proprietary and other technologies by
third parties could adversely affect the competitiveness of the Company's
products. Further, the laws of some countries do not provide the same
degree of protection of the Company's proprietary information as do the
laws of the United States. Finally, the Company's adherence to industry-
wide technical standards and specifications may limit the Company's
opportunities to provide proprietary product features capable of
protection.
The Company is also subject to the risk of litigation alleging
infringement of third party intellectual property rights. Infringement
claims could require the Company to expend significant time and money in
litigation, pay damages, develop non-infringing technology or acquire
licenses to the technology which is the subject of asserted infringement.
The Company has entered into several nonexclusive software licensing
agreements that allow the Company to incorporate software into its
product line thereby increasing its functionality, performance and
interoperability.
Employees
At December 31, 1998, the Company had 229 full-time employees, of which
60 were engaged in manufacturing and quality assurance, 86 in research
and development, 46 in sales, sales support, service and marketing and 37
in general management and administration.
The Company's success to date has been significantly dependent on the
contributions of a number of its key technical and management employees.
The Company does not maintain life insurance policies on its key
employees and, does not have employment agreements with key employees
except for a few executive officers. The loss of the services of one or
more of these key employees could have a material adverse effect on the
Company. In addition, the Company believes that its future success will
depend in large part upon its ability to attract and retain highly
skilled and motivated technical, managerial, sales and marketing
personnel. Competition for such personnel is intense.
None of the Company's employees are covered by a collective bargaining
agreement and there have been no work stoppages. Additionally, the
Company considers its relationship with its employees to be good.
Competition
The computer network industry is intensely competitive and is
significantly affected by product introductions and market activities of
industry participants. The Company expects substantial competition to
continue. The Company's competition includes vendors specifically
dedicated to the mass storage controller and computer network product
markets. Traditionally the Company's major OEM customers have chosen not
to manufacture adapters for their products or do not manufacture
sufficient quantities or types of controllers to meet their needs.
Increased competition could result in price reductions, reduced margins
and loss of market share. (See Note 11 to Consolidated Financial
Statements)
ITEM 2. PROPERTIES.
The Company leases a 96,000 square foot facility located in Farmers
Branch, Texas, a suburb of Dallas. The facility includes approximately
$2.9 million in leasehold improvements that were made by the Company.
The lease, inclusive of renewal options, extends through 2002. In
addition the Company leases a facility in Chaville, France (near Paris)
which supports the European markets. The Company believes that its
facilities and equipment are in good operating condition and are adequate
for its operations. The Company owns most of the equipment used in its
operations. Such equipment consists primarily of engineering equipment,
manufacturing and test equipment, and fixtures.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
Since January 1984 shares of the Company's common stock have been traded
on The Nasdaq Stock Exchange under the symbol INPH. The following table
summarizes its high and low price for each fiscal quarter during 1998 and
1997 as reported by Nasdaq.
Fiscal 1998 High Low
----------- ----- -----
First Quarter 8.813 6.063
Second Quarter 9.500 6.500
Third Quarter 8.000 5.000
Fourth Quarter 8.688 5.250
Fiscal 1997 High Low
----------- ----- -----
First Quarter 11.125 8.000
Second Quarter 8.875 6.250
Third Quarter 11.125 7.875
Fourth Quarter 8.625 5.750
The Company had approximately 1700 beneficial owners of its Common Stock,
of which 80 are of record as of March 1, 1999.
The Company has not paid dividends on its Common Stock since its
inception. The Board of Directors does not anticipate payment of any
dividends in the foreseeable future and intends to continue its present
policy of retaining earnings for reinvestment in the operations of the
Company.
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data:
(In Thousands, except per share data)
Two months
Twelve months ended Twelve months
ended Dec. 31, Dec. 31, ended Oct. 31,
1998 1997 1996 1995 1995 1994
------ ------ ------ ------ ------ ------
Revenues $68,846 $66,004 $56,752 $ 3,379 $47,368 $40,303
Gross Profit 33,627 32,016 27,964 1,224 23,547 20,066
Research and
development 11,156 13,327 9,902 1,360 7,327 7,862
Sales and marketing 10,539 11,686 10,297 1,173 8,583 7,599
General and 5,914 6,248 4,905 634 4,004 4,146
administrative
Special charges - - 11,646 - - 1,148
Operating income
(loss) 6,018 755 (8,786) (1,943) 3,633 (689)
Other, net (1,583) (1,525) (705) 94 589 278
-------------------------------------------------------
Income (loss) before 4,435 (770) (9,491) (1,849) 4,222 (411)
income tax
Net income (loss) $ 2,713 $ (971) $(10,055) $(1,167) $ 2,759 $ (280)
-------------------------------------------------------
Net income (loss)
per share
Basic $ 0.49 $ (0.18) $ (1.99) $ (0.25) $ 0.60 $(0.06)
-------------------------------------------------------
Diluted $ 0.48 $ (0.18) $ (1.99) $ (0.25) $ 0.55 $(0.06)
-------------------------------------------------------
Weighted average
common shares 5,508 5,496 5,062 4,663 4,561 4,484
-------------------------------------------------------
Weighted average
common & common
equivalent shares 5,628 5,496 5,062 4,663 5,051 4,484
-------------------------------------------------------
December 31, October 31,
Balance Sheet Data: 1998 1997 1996 1995 1995 1994
------------------------------------- ----------------
Working capital $26,314 $ 25,244 $ 22,836 $ 23,141 $24,328 $20,776
Total assets 50,288 49,447 53,924 33,624 35,430 31,943
Total liabilities 18,463 19,904 23,538 4,363 5,019 5,094
Redeemable Common
Stock 3,813 - - - - -
Shareholders' equity 28,012 29,543 30,386 29,261 30,411 26,849
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated Statement of Operations Percentage of Revenues
Year ended December 31,
1998 1997 1996
---------------------------
Revenues 100.0% 100.0% 100.0%
Cost of sales 51.1% 51.5% 50.7%
---------------------------
Gross profit 48.9% 48.5% 49.3%
Research and development 16.2% 20.2% 17.4%
Sales and marketing 15.3% 17.7% 18.1%
General and administrative 8.6% 9.5% 8.6%
Acquired in-process R&D 0.0% 0.0% 20.5%
---------------------------
Operating income (loss) 8.8% 1.1% (15.3)%
Interest income 0.5% 0.7% 0.7%
Interest expense (1.5)% (1.7)% (0.9)%
Other, net (1.3)% (1.3)% (1.0)%
---------------------------
Income (loss) before income taxes 6.5% (1.2)% (16.5)%
Provision (benefit) for income taxes 2.5% 0.3% 1.0%
---------------------------
Net income (loss) 4.0% (1.5)% (17.5)%
===========================
RESULTS OF OPERATIONS
Effective January 1, 1996, Interphase Corporation ("the Company") changed
its fiscal year end from October 31 to December 31.
In June 1996, the Company acquired Synaptel, S.A ("Synaptel"), a French
company which designs and distributes a broad line of remote access and
ISDN products, which include both significant software content and
interoperability with a broad range of networking protocols.
Revenues: Total revenues for the years ended December 31, 1998, 1997 and
1996 were $68,846,000, $66,004,000 and $56,752,000, respectively.
The growth in revenues from 1997 to 1998 was 4%. The increase in revenue
was attributable to growth in the Company's Fibre Channel and Remote
Access/WAN, ATM, Fast Ethernet and SCSI product lines, partially offset
by a decline in FDDI and Ethernet products. In 1998, FDDI revenues
accounted for approximately 19% of total revenues, Fast Ethernet 30%,
SCSI 10%, WAN 11%, ATM 8%, Ethernet 3% and Fibre Channel 14%. Local area
networking products in total comprised 63% of total revenues for 1998,
mass storage product revenues 25% and wide area networking products 10%.
North American revenues grew 1%, Pacific Rim revenues declined 31%, and
European revenues grew 27% compared to 1997. The Company's current
marketing strategy is to increase market penetration through sales to
major OEM customers. One of these customers accounted for approximately
41% of the Company's revenue in 1998.
The growth in revenues from 1996 to 1997 was 16%. The increase in
revenues was led by significant revenue growth in the Company's Fibre
Channel product line, a three-fold increase in sales of the Company's
Fast Ethernet product line, and 22% increase in sales of ATM products.
This was offset by a shift from the Company's FDDI, SCSI, and Ethernet
products by 20% from 1996 to 1997. In 1997, FDDI revenues accounted for
approximately 33% of total revenues, Fast Ethernet 30%, SCSI 9%, WAN 8%,
ATM 8%, Ethernet 6% and Fibre Channel 3%. Local area networking
products in total comprised 77% of total revenues for 1997, mass storage
product revenues 12% and wide area networking products 8%. North
American revenues grew 26%, Pacific Rim revenues declined 8%, and
European revenues declined 12% compared to 1996. One of these customers
accounted for approximately 40% of the Company's revenue in 1997.
Cost of Sales: Cost of sales expressed as a percentage of revenues were
approximately 51% for each year ended December 31, 1998, 1997 and 1996.
Research and Development: The Company's investment in the development
of new products through research and development was $11,156,000,
$13,327,000 and $9,902,000 in 1998, 1997, and 1996, respectively. As a
percentage of revenue, research and development expenses were 16%, 20%
and 17% for 1998, 1997 and 1996, respectively. The decrease in spending
from 1997 to 1998 is a reflection of the Company's efforts to control
expenses, offset by an investment in spending for VOIP development. The
increase in spending in 1997 reflected additional spending on development
for ATM, WAN, Fibre Channel and Fast Ethernet. In 1999, as a percentage
of revenue, research and development expenses are expected to remain
consistent with 1998.
Sales and Marketing: Sales and marketing expenses were $10,539,000,
$11,686,000 and $10,297,000 in 1998, 1997, and 1996, respectively. As a
percentage of revenue, sales and marketing expenses were 15% in 1998 and
18%, in 1997 and 18% in 1996. The decrease in spending from 1997 to
1998 is a reflection of the Company's efforts to control expenses, offset
by an investment in spending for VOIP sales and marketing spending. In
199, as a percentage of revenue, sales and marketing expenses are
expected to remain consistent with 1998.
Special Charges: In the second quarter of 1996 the Company recorded a
charge of $11,646,000 for acquired in-process R&D in association with the
acquisition of Synaptel. Acquired in-process research and development
activities had no alternative future use and had not achieved
technological feasibility; accordingly, the amounts were expensed in the
accompanying consolidated statements of operations for the period ended
December 31, 1996.
General and Administrative: General and administrative expenses were
$5,914,000, $6,248,000 and $4,905,000 in 1998, 1997, and 1996,
respectively. As a percentage of revenue, general and administrative
expenses were approximately 9% for each year. In 1999, as a percentage
of revenue, general and administrative expenses are expected to remain
consistent with 1998.
Interest Income: Interest income was $338,000 $438,000 and $421,000 in
1998, 1997 and 1996, respectively. The change in interest income from
year to year is a reflection of the increase and decrease in the funds
available for investment.
Interest Expense: Interest expense was $1,025,000, $1,126,000 and
$535,000 in 1998, 1997 and 1996, respectively. The interest expense
is a result of the debt incurred by the Company to fund the Synaptel
acquisition in mid-1996.
Other Expense: Other expense was $896,000, $837,000 and $591,000 in
1998, 1997 and 1996, respectively. Other expense primarily reflects the
amortization of goodwill and acquired developed technologies related to
the Synaptel acquisition.
Provision (Benefit) for Income Taxes: The Company's provision for taxes
was $1,722,000, $201,000, and $564,000 in 1998, 1997, and 1996,
respectively. The increase in the Company's effective income tax rate
from 1996 to 1998 is due to the write-off of in process research and
development in 1996 which was not benefited for income tax purposes. The
Company experienced a net loss before taxes in 1997; however, due to the
effects of non-deductible goodwill and state income taxes, the Company
had a tax provision of $201,000. In 1998, the Company's effective income
tax rate was greater than the statutory rate, primarily due to non-
deductible goodwill amortization.
Net Income (Loss): The Company reported net income of $2,713,000 in
1998, net loss of $971,000 in 1997 and a net loss of $10,055,000 in
1996. The loss in 1996 was attributable to the write-off of acquired
in-process research and development ($11,646,000) associated with the
acquisition of Synaptel. The increase in net income from 1997 to 1998
was due to the increase in revenues, in addition to the Company's efforts
to control costs.
Adoption of Accounting Standards: Effective January 1, 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income" which
requires companies to report all changes in equity during the period,
except those resulting from investments by and distributions to owners,
in a financial statement. The Company has chosen to disclose
Comprehensive Income, which includes net income, unrealized holding gains
or losses and foreign currency translation adjustments in the
Consolidated Statement of Stockholder's Equity. Prior years have been
restated to conform to SFAS No. 130 requirements.
During 1998 the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires
companies to report segment information in accordance with the
"management approach." The management approach designates the internal
reporting that is used by management for making operating decisions.
SFAS No. 131 also requires disclosures about products and services,
geographic areas and major customers. The Company manages its business
segments on an industry basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities aggregated
$7,961,000, $5,519,000 and $5,850,000 at December 31, 1998, 1997 and
1996, respectively. Expenditures for equipment and purchased software
were $2,892,000, $1,150,000 and $2,539,000 in 1998, 1997 and 1996,
respectively. At December 31, 1998, the Company had no material
commitments to purchase capital assets. The Company's significant long-
term obligations are its operating lease on its Dallas facility and
future debt payments. The Company has not paid any dividends since its
inception and does not anticipate paying any dividends in 1999. In
connection with the Synaptel acquisition in June 1996, the Company
entered into a two-year $16,000,000 credit facility with a financial
institution, subject to annual renewal provisions. This credit facility
includes an $8,500,000 term loan, a $2,500,000 equipment loan and a
$5,000,000 revolving credit facility. The term and equipment loans are
due in quarterly installments beginning in November 1996, and expire in
November 2001. The revolving credit facility expires in June 2000. In
1999, maturities of this credit facility will be approximately
$2,192,000.
Effective October 1998, the Company approved a stock repurchase agreement
with Motorola, Inc. to purchase all of the shares owned by Motorola for
$4,125,000, ratably from October 1998 to July 2002. Under the terms of
the agreement Motorola retains the right as an equity owner and has
assigned its voting rights to the Company. The Company plans to cancel
the stock upon each re-purchase. Prior to the repurchase agreement
Motorola owned approximately 12% of the Company's outstanding common
stock. The future scheduled payments are classified as redeemable common
stock in the accompanying consolidated balance sheet. As of December 31,
1998, 50,000 shares have been re-purchased for $312,500 and retired.
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 ("Y2K") and beyond.
The Company has created a company-wide Y2K team to identify and resolve
Y2K issues associated with the Company's internal information systems,
internal non-information systems, the products sold by the Company, and
its major suppliers of products and services. The Company established a
Y2K program coordinator to ensure these programs are implemented across
the Company. The coordinator provides a single point of reference, both
internal, and external, for the Company. The products that the Company
sells are Y2K compliant, or will be compliant by mid year 1999. The
Company's internal reporting system is being replaced with a Y2K
compliant Enterprise Reporting Planning (ERP) system which is scheduled
to go live in mid-year 1999. In addition, the Company is communicating
with all its suppliers, customers, vendors and financial service
organizations regarding their Year 2000 compliance. 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 costs are being expensed
as incurred, excluding the capitalization of application software. The
capitalization for software will be approximately $300,000. The Company
does not believe that the costs associated with such actions will have a
material adverse effect on the Company's results of operations or
financial condition. However the costs of such actions may vary from
quarter to quarter, and there is no assurance that there will not be a
delay in the Company's implementation or increased costs associated with
the implementation of such changes. Failure to achieve Y2K readiness for
the Company could delay its ability to manufacture and ship products and
deliver services. The Company's inability to perform these functions
could have an adverse effect on future results of operations or financial
condition.
Non-IT systems include, but are not limited to, telephone/PBX systems;
fax machines; facilities systems regulating alarms, building access and
sprinklers; manufacturing, assembly and distribution equipment; and other
miscellaneous systems and processes. Y2K readiness for these internal
non-IT systems is the responsibility of the Company's Y2K coordinator, it
is anticipated at all Non-IT systems will be compliant if they are not
already compliant by mid 1999.
The Company regularly reviews and monitors the suppliers' Y2K
readiness plans and performance. Based on the Company's risk assessment,
selective on-site reviews may be performed. In some cases, to meet Y2K
readiness, the Company has replaced suppliers or eliminated suppliers
from consideration for new business. The Company has also contracted with
multiple transportation companies to provide product delivery
alternatives.
While the Company has contingency plans in place to address most issues
under its control, an infrastructure problem outside of its control could
result in a delay in product shipments depending on the nature and
severity of the problems. The Company would expect that most utilities
and service providers would be able to restore service within days
although more pervasive system problems involving multiple providers
could last two to four weeks or more depending on the complexity of the
systems and the effectiveness of their contingency plans. Although the
Company is dedicating substantial resources towards attaining Y2K
readiness, there is no assurance it will be successful in its efforts to
identify and address all Y2K issues. Even if the Company acts in a timely
manner to complete all of its assessments; identifies, develops and
implements remediation plans believed to be adequate; and develops
contingency plans believed to be adequate some problems may not be
identified or corrected in time to prevent material adverse consequences
to the Company. The discussion above regarding estimated completion
dates, costs, risks and other forward-looking statements regarding Y2K is
based on the Company's best estimates given information that is currently
available and is subject to change. As the Company continues to progress
with its Y2K initiatives, it may discover that actual results will differ
materially from these estimates.
Use of Forward-Looking Statements: Certain statements contained in MD&A
are forward-looking, including statements concerning expected expenses,
Year 2000 readiness, and the adequacy of the Company's sources of cash to
finance its current and future operations. Factors which could cause
actual results to materially differ from management's expectations
include the following: general economic conditions and growth in the
high tech industry; competitive factors and pricing pressures; changes in
product mix; the timely development and acceptance of new products;
inventory risks due to shifts in market domain; Year 2000 readiness of
the Company's suppliers, and the risks described from time to time in the
Company's SEC filings.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
which may adversely affect its financial position, results of operations
and cash flows. In seeking to minimize the risks from interest rate
fluctuations, the Company manages exposures through it regular operating
and financing activities. The Company does not use financial instruments
for trading or other speculative purposes and is no party to any
leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
borrowing activities, which are described in the "Long-Term Debt" Notes
to the Consolidated Financial Statements, which are incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 (a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
See information regarding the directors and nominees for director under
the heading "Election of Directors" of the Proxy Statement for the Annual
Meeting of Shareholders to be held May 5, 1999, which is incorporated
herein by reference.
Executive Officers
As of March 1, 1999, the executive officers of the Company, their
respective ages, positions held and tenure as officers are listed below:
Executive
Officers of
the Company
Name Age Position(s) Held with the Company Since
---- --- --------------------------------- -----
R. Stephen Polley 48 Chairman 1993
Gregory B. Kalush 42 Chief Executive Officer, 1998
and President
Philippe Oros 36 General Manager, Quescom 1998
R. Stephen Polley joined the Company as President and Chief Operating
Officer and was elected a director by the Board of Directors in November
1993. In June 1994, Mr. Polley was named Chief Executive Officer of the
Company and appointed Chairman of the Board of Directors. In March 1999,
Mr. Polley resigned all officer positions, but remains Chairman of the
Board. In June 1998, Mr. Polley was appointed a director of ObjectSpace.
ObjectSpace is a provider of distributed computing solutions built on
100% Pure Java(tm). From August 1992 to February 1993, Mr. Polley acted
as a consultant in strategic and management matters and as a director for
Computer Automation, Inc. Computer Automation provided various products
and services for use in facsimile management systems, minicomputers and
microcomputers. From 1987 to April 1992, Mr. Polley served as
President, Chief Executive Officer and a director of Intellicall, Inc., a
diversified supplier of telecommunications products and services
including private pay telephones and microprocessor-based automated
operator systems.
Gregory B. Kalush joined the Company in February 1998, as Chief Financial
Officer, Vice President of Finance and Treasurer. In March 1999, Mr.
Kalush was appointed Chief Executive Officer, President, and Director of
the Company. Prior to joining Interphase, Mr. Kalush was with DSC
Communications Corporation from 1995 to 1997. While at DSC he served as
Vice President Transmission Data Services, Vice President of Operations,
International Access Products and Group Vice President of Finance,
Transport Systems Group. Prior to DSC, Mr. Kalush was with IBM
Corporation from 1978 to 1994. During that time his positions included
Chief Financial Officer and Operations Executive for the Skill Dynamics
Unit, Director of Finance, Planning and Administration for the southwest
area, and Division Director of Finance and Operations for the Data
Systems division.
Philippe Oros joined the Company in 1996 as part of the Company's
acquisition of Synaptel. Mr. Oros founded Synaptel in 1986 and served as
its General manager until 1996. In 1998, Mr. Oros was appointed General
Manager of Quescom, a wholly owned subsidiary of Interphase Corporation.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5,
1999, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5,
1999, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5,
1999, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) (i) and (ii) Financial Statements and Schedules.
Reference is made to the listing on page F-1 of all financial statements
and schedules filed as a part of this report.
(iii) Exhibits.
Reference is made to the Index to Exhibits on page E-1 for a list of all
exhibits filed during the period covered by this report.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K for the quarter ended
December 31, 1998.
Date of Filing: October 15, 1998
Item Reported: 5-Other Events
Subject of Report: Stock Redemption Agreement with Motorola, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 30, 1999 By: /s/ Gregory B. Kalush
Gregory B. Kalush
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 1999.
Name Title
---- -----
/s/ R. Stephen Polley Chairman of the Board and Director
R. Stephen Polley
/s/ Gregory B. Kalush Chief Executive Officer, President
Gregory B. Kalush Chief Financial Officer, Treasurer
Vice President of Finance and Director
(Principal executive and financial officer)
/s/ Michael P. Glover Corporate Controller
Michael P. Glover (Principal accounting officer)
/s/ Gary W. Fiedler Director
Gary W. Fiedler
/s/ Dale Crane Director
Dale Crane
/s/ James F. Halpin Director
James F. Halpin
/s/ Paul N. Hug Director
Paul N. Hug
/s/ William Voss Director
William Voss
/s/ David H. Segrest Director
David H. Segrest
/s/ S. Thomas Thawley Director
S. Thomas Thawley
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Report of Management's Financial Responsibility F-2
Report of Independent Public Accountants -
ARTHUR ANDERSEN LLP F-3
Consolidated Balance Sheets - December 31, 1998 and 1997 F-4
Consolidated Statements of Operations - Years Ended
December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-22
F-1
MANAGEMENT'S REPORT ON FINANCIAL RESPONSIBILITY
Management is responsible for the preparation and fairness of the
consolidated financial statements of Interphase Corporation and all other
information contained in this annual report. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and reflect informed judgments
and estimates, which management believes to be reasonable.
The Company maintains an effective system of internal accounting
controls, which are modified periodically as the Company's operations
change. Additionally, the Company is receptive to suggestions made by
Arthur Andersen LLP, its independent public accountants, regarding
enhancements and changes to the Company's existing internal accounting
controls. Overall, management believes that its system of internal
accounting controls is adequate to provide reasonable assurance as to the
integrity and reliability of its financial statements, and the
safeguarding of assets.
The Board of Directors, acting through its Audit Committee, monitors the
accounting affairs of the Company and has approved the accompanying
consolidated financial statements. The Audit Committee, consisting of
four directors, reviews the results of the annual financial statement
audit, and the actions taken by management in discharging its
responsibilities for accounting and financial reporting. The Audit
Committee meets periodically and privately with management and the
independent public accountants to assure that each is carrying out its
responsibilities.
Gregory B. Kalush
Chief Executive Officer and President
February 10, 1999
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Interphase Corporation:
We have audited the accompanying consolidated balance sheets of
Interphase Corporation (a Texas corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Interphase
Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 10, 1999
F-3
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares data)
December 31,
ASSETS 1998 1997
------ ---------------------
Cash and cash equivalents $ 4,531 $ 2,247
Marketable securities 3,430 3,272
Trade accounts receivable, less allowances
for uncollectible accounts of $164
and $544 respectively 13,716 13,030
Inventories, net 13,488 14,895
Prepaid expenses and other current assets 856 798
Deferred income taxes, net 516 686
---------------------
Total current assets 36,537 34,928
---------------------
Machinery and equipment 10,135 12,079
Leasehold improvements 2,909 2,890
Furniture and fixtures 515 417
---------------------
13,559 15,386
Less-accumulated depreciation and
amortization (10,339) (11,817)
---------------------
Total property and equipment, net 3,220 3,569
---------------------
Capitalized software, net 773 225
Deferred income taxes, net 1,376 862
Acquired developed technology, net 3,365 4,400
Goodwill, net 3,070 3,310
Other assets 1,947 2,153
---------------------
Total assets $ 50,288 $ 49,447
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities
Accounts payable $ 2,883 $ 2,636
Accrued liabilities 1,639 2,484
Accrued compensation 2,041 1,910
Income taxes payable 1,408 197
Current portion of debt 2,252 2,457
---------------------
Total current liabilities 10,223 9,684
Other liabilities 873 600
Long-term debt, net of current portion 7,367 9,620
---------------------
Total liabilities 18,463 19,904
Commitments and contingencies
Common Stock Redeemable; 610,000 shares 3,813 -
Shareholders' Equity
Common stock, no par value; 100,000,000
shares authorized; 4,861,858 and 31,221 35,326
5,516,578 shares outstanding, respectively
Retained earnings (deficit) (3,217) (5,930)
Cumulative other comprehensive income 8 147
Total shareholders' equity 28,012 29,543
---------------------
Total liabilities and shareholders' equity $ 50,288 $ 49,447
=====================
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
Revenues $ 68,846 $ 66,004 $ 56,752
Cost of sales 35,219 33,988 28,788
---------------------------------
Gross profit 33,627 32,016 27,964
Research and development 11,156 13,327 9,902
Sales and marketing 10,539 11,686 10,297
General and administrative 5,914 6,248 4,905
Acquired in-process R&D - - 11,646
---------------------------------
Total operating expenses 27,609 31,261 36,750
---------------------------------
Operating income (loss) 6,018 755 (8,786)
Interest income 338 438 421
Interest expense (1,025) (1,126) (535)
Other, net (896) (837) (591)
---------------------------------
Income (loss) before income taxes 4,435 (770) (9,491)
Provision for income taxes 1,722 201 564
---------------------------------
Net income (loss) $ 2,713 $ (971) $ (10,055)
=================================
Net income (loss) per share
Basic $ 0.49 $ (0.18) $ (1.99)
=================================
Diluted $ 0.48 $ (0.18) $ (1.99)
=================================
Weighted average common shares 5,508 5,496 5,062
=================================
Weighted average common and common
equivalent shares 5,628 5,496 5,062
=================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Cumulative
Retained Other
Common Stock Earnings Comprehensive Comprehensive
Shares Amount (Deficit) Income Total Income (loss)
------------------------------------------------ ---------
Balance at December 31, 1995 4,667 $ 24,194 $ 5,096 $ (29) $ 29,261
================================================
Option exercises, including related
tax benefit 230 1,801 - - 1,801 -
Common stock issued in Synaptel
acquisition 595 9,200 - - 9,200 -
Comprehensive income:
Foreign currency translation - - - 164 164 164
Unrealized holding period gain - - - 15 15 15
Net loss - - (10,055) - (10,055) (10,055)
--------
Total comprehensive income (loss) - - - - - $ (9,876)
------------------------------------------------ ========
------------------------------------------------
Balance at December 31, 1996 5,492 $ 35,195 $ (4,959) $ 150 $ 30,386
================================================
Option exercises, including related
tax benefit 24 131 - - 131 -
Comprehensive income:
Foreign currency translation - - - 14 14 14
Unrealized holding period gain - - - (17) (17) (17)
Net loss - - (971) - (971) (971)
--------
Total comprehensive income (loss) - - - - - $ (974)
------------------------------------------------ ========
------------------------------------------------
Balance at December 31, 1997 5,516 $ 35,326 $ (5,930) $ 147 $ 29,543
================================================
Option exercises, including related
tax benefit 6 20 - - 20 -
Redeemable common stock (660) (4,125) - - (4,125) -
Comprehensive income:
Foreign currency translation - - - (205) (205) (205)
Unrealized holding period gain - - - 66 66 66
Net income - - 2,713 - 2,713 2,713
--------
Total comprehensive income - - - - - $ 2,574
------------------------------------------------ ========
------------------------------------------------
Balance at December 31, 1998 4,862 $ 31,221 $ (3,217) $ 8 $ 28,012
================================================
F-6
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
1998 1997 1996
--------------------------------
Cash flows from operating activities:
Net income (loss) $ 2,713 $ (971) $(10,055)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Write-off of acquired in-process research
and development - - 11,646
Depreciation and amortization 4,013 4,739 4,234
Deferred income taxes (344) (270) (358)
Changes in assets and liabilities, net
of Synaptel acquisition
Trade accounts receivable (686) 2,152 (8,584)
Inventories 1,407 (2,296) (1,345)
Prepaid expenses and other current assets (58) 423 (151)
Accounts payable and accrued liabilities (643) (2,081) (409)
Accrued compensation 131 (1,052) (258)
Income taxes payable 1,211 104 -
--------------------------------
Net adjustments 5,031 1,719 4,775
--------------------------------
Net cash provided (used) by operating activities 7,744 748 (5,280)
--------------------------------
Cash flows from investing activities:
Additions to property, equipment, capitalized software
and leasehold improvements (2,892) (1,150) (2,539)
Decrease (increase) in other assets 206 373 (200)
Decrease (increase) in marketable securities (158) 307 5,788
Cash acquired in Synaptel acquisition - - 11
Change in unrealized holding period loss on
marketable securities 66 (17) 15
Acquisition of developed technologies - - (2,500)
--------------------------------
Net cash provided (used) by investing activities (2,778) (487) 575
--------------------------------
Cash flows from financing activities:
Increase (decrease) in other long term liabilities 273 (592) 1,093
Payments on debt (2,458) (2,338) (1,134)
Proceeds from debt - 2,500 2,075
Increase in foreign currency translation adjustment (205) 14 164
Increase (repurchase of) in common stock (292) 131 1,801
--------------------------------
Net cash provided (used) by financing activities (2,682) (285) 3,999
--------------------------------
Net increase (decrease) in cash and cash equivalents 2,284 (24) (706)
Cash and cash equivalents at beginning of year 2,247 2,271 2,977
--------------------------------
Cash and cash equivalents at end of year $ 4,531 $ 2,247 $ 2,271
================================
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 953 $ 996 $ 438
Taxes refunded - 27 40
Taxes paid 891 389 476
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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 $ (27,403)
Liabilities assumed 8,414
Acquisition debt 8,000
Common stock issued 9,200
Aquisition costs 1,800
----------
Cash acquired in Synaptel acquisition $ 11
==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
INTERPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation: The consolidated
financial statements include the financial statements of Interphase
Corporation (the "Company") and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
In 1996, the Company acquired Synaptel, S.A ("Synaptel"), a French
company which designs and distributes a broad line of remote access and
ISDN products, which include significant software content and
interoperability with a broad range of networking protocols.
Cash and Cash Equivalents: The Company considers cash and temporary
investments with original maturities of less than three months, as well
as interest bearing money market accounts, to be cash equivalents.
Marketable Securities: As of December 31, 1998 and 1997, the fair
market value of marketable securities was $3,430,000 and $3,272,000,
respectively. In accordance with the requirements of the Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," all marketable securities are
classified as "available-for-sale securities" are reported at fair value.
Unrealized gains and losses are excluded from net income and reported as
a separate component of shareholders' equity, net of related deferred
taxes and as a component of comprehensive income. The Company's results
of operations will continue to include earnings from such securities as
calculated on a yield-to-maturity basis. During 1998 the Company realized
a loss of $34,000 from the sale of securities. During 1997 the Company
realized a net gain of $34,000 from the sale of securities. The Company
had recorded a valuation gain of $35,000 as of December 31, 1998 and a
valuation loss of $31,000 (net of taxes) as of December 31, 1997, with
respect to certain available-for-sale securities.
Allowance for doubtful accounts: As of December 31, 1998, 1997 and 1996,
the allowance for doubtful accounts was $164,000, $544,000 and $503,000.
The activity in this account was as follows (in thousands):
Balance at Write-offs Balance
Beginning Charged to Net of Synaptel at End
Year Ended: of Period Expense Recoveries Acquisition of Period
----------------------------------------------------------------------------
December 31, 1998 $ 544 $ 392 $ (772) $ - $ 164
December 31, 1997 503 337 (296) - 544
December 31, 1996 238 50 (50) 265 503
Inventories: Inventories are valued at the lower of cost or market and
include material, labor and manufacturing overhead. Cost is determined
on a first-in, first-out basis (in thousands):
Dec. 31,1998 Dec. 31, 1997
------- -------
Raw Materials $ 8,119 $ 7,922
Work-in-process 4,828 5,943
Finished Goods 541 1,030
------- -------
Total $ 13,488 $ 14,895
======= =======
Property and Equipment: Property and equipment are recorded at cost.
Depreciation and amortization are provided over the estimated useful
lives of depreciable assets using the straight-line method. When
property and equipment are sold or otherwise retired, the cost and
accumulated depreciation applicable to such assets are eliminated from
the accounts, and any resulting gain or loss is reflected in current
operations. Related depreciation expense and accumulated depreciation
were as follows (in thousands):
Year ended December 31: Depreciation Expense Accumulated
Depreciation
----------------------- -------------------- ------------
1998 $ 2,436 $ 10,339
1997 2,781 11,817
1996 2,782 10,394
The depreciable lives of property and equipment are as follows:
Machinery and equipment 3-5 years
Leasehold improvements 3-10 years
Furniture and fixtures 5-7 years
Capitalized Software: Capitalized software represents various software
licenses purchased by the Company and utilized in connection with the
Company's network and mass storage products as well as the general
operations of the Company. Capitalized software is amortized over 3-5
years utilizing the straight-line method. Related amortization expense
and accumulated amortization were as follows (in thousands):
Year ended Amortization Accumulated
December 31: Expense Amortization
------------ ------- ------------
1998 $ 302 $ 1,656
1997 223 1,950
1996 362 2,128
Research and Development Subsidy: Included in other assets at December
31, 1998 and 1997, is a receivable for a subsidy of $1,437,000 and
$1,651,000, respectively, due from the French government related to the
research and development activities of Synaptel.
Intangibles: As a result of the acquisition of Synaptel, S.A.
("Synaptel") and certain product rights acquired from Cisco Systems, Inc.
("Cisco"), the Company acquired intangible assets related to developed
technologies, assembled workforce and goodwill (See Note 2). Developed
technology and assembled workforce are amortized on a straight-line basis
over a 7-year period. Goodwill related to the Synaptel acquisition is
amortized on a straight-line basis over a 10-year period. Acquired
product rights from Cisco are amortized ratably over the anticipated
revenue stream of such products sold. The December 31, 1998 intangible
balances at cost and related amortization expense and accumulated
amortization were as follows (in thousands):
Amortization Expense Accum. Ending
Intangibles 1998 1997 1996 Amortization Balance
------------------------------------------------------
Developed technology $ 4,230 $ 600 $ 600 $150 $1,350 $2,880
Assembled workforce 390 60 60 15 135 255
Goodwill-Synaptel 3,596 240 263 23 526 3,070
Acquired Product
Rights-Cisco 2,500 435 812 768 2,015 485
Long Lived Assets: In accordance with SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of," intangibles and other long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. Any impairment would be recognized in
operating results if a permanent reduction in value were to occur.
Revenue Recognition: Revenue from product sales is recorded when the
earnings process has been completed, which is at the time of shipment.
Concentration of Credit Risk: Financial instruments which potentially
expose the Company to concentrations of credit risk, as defined by SFAS
No. 105, consist primarily of trade accounts receivable. The majority of
the Company's sales have been to original equipment manufacturers of
computer systems.
The Company conducts credit evaluations of its customers' financial
condition and limits the amount of trade credit extended when necessary.
The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical
trends, and other information.
Research and Development: Research and development costs are charged to
expense as incurred.
Foreign Currency Translation: Assets and liabilities of certain non-U.S.
subsidiaries are translated at current exchange rates, and related
revenues and expenses are translated at average exchange rates in effect
during the period. Resulting translation adjustments are reflected in
shareholders' equity and comprehensive income.
Income Taxes: The Company utilizes the liability method to determine
deferred taxes. Deferred tax assets and liabilities are based on the
estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions
of enacted tax law. The Company's consolidated financial statements
include deferred income taxes arising from the recognition of revenues
and expenses in different periods for income tax and financial reporting
purposes.
Net Income (Loss) Per Common and Common Equivalent Share:
The following table shows the calculation of the Company's weighted
average common and common equivalent shares outstanding (in thousands):
Years ended December 31,
-------------------------
1998 1997 1996
---------------------------
Weighted average
shares outstanding 5,508 5,496 5,062
----- ----- -----
Dilutive impact of stock options 120 - -
----- ----- -----
Total outstanding weighted
average common and common
equivalent shares 5,628 5,496 5,062
===== ===== =====
Anti-dilutive options of 944,000, 1,027,000 and 160,000 were excluded
from the dilutive calculation in 1998, 1997 and 1996, respectively.
Recently Adopted Accounting Policies: Effective January 1, 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income" which
requires companies to report all changes in equity during the period,
except those resulting from investments by and distributions to owners,
in a financial statement for the period in which they are recognized.
The Company has chosen to disclose comprehensive income, which includes
net income, unrealized holding gains or losses and foreign currency
translation adjustments in the Consolidated Statement of Shareholders'
Equity. Prior years have been restated to conform to the SFAS No. 130
requirements.
During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
requires companies to report segment information in accordance with the
"management approach." The management approach designates that segments
be determined based on the internal reporting that is used by management
for making operating decisions. SFAS No. 131 also requires disclosures
about products and services, geographic areas and major customers.
Certain Reclassifications: Certain prior year amounts have been
reclassified to conform with the 1998 presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires Company management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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 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
was included in goodwill. Identified intangibles acquired included
approximately $11,600,000 of in-process research and development,
$4,230,000 of developed technology and $390,000 related to Synaptel's
assembled workforce. Acquired in-process research and development
activities had no alternative future use and had not achieved
technological feasibility; accordingly, the amounts were expensed in the
accompanying consolidated statement of operations for the year ended
December 31, 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. No earn-out payments were
made pursuant to the terms of the purchase agreement.
The unaudited pro forma financial information is presented for the year
ended December 31, 1996. This unaudited pro forma financial information
gives effect to the purchase of Synaptel as if such transaction had
occurred as of January 1, 1996, and excludes the $11,646,000 write-off of
acquired in-process research and development (in thousands):
Year ended
December 31, 1996
-----------------
Net sales $ 59,845
Net income (loss) (1,388)
Basic earnings per share (0.26)
Diluted earnings per share (0.26)
The unaudited pro forma financial information does not purport to
represent what the results of operations of the Company would actually
have been if the aforementioned transactions had occurred on January 1,
1996, nor do they project the results of operations or financial position
for any future periods or at any future date.
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 December 31, 1998 and 1997,
consolidated balance sheets.
3. 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 revolving credit 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 and equipment loan are payable in equal
quarterly installments totaling $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 borrowing 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, 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 December 31, 1998, the Company was in compliance with
all covenants. At December 31, 1998, total availability under this credit
facility was $1,500,000.
At December 31, 1998 and 1997, the Company's outstanding debt consisted
of the following (in thousands):
December 31,
1998 1997
-----------------
Acquisition Term Loan $ 4,675 $ 6,375
Equipment Financing Loan 1,373 1,866
Borrowings under revolving credit facility 3,500 3,500
Other 71 336
-------- --------
Total 9,619 12,077
Less current portion 2,252 2,457
-------- --------
Total long term debt $ 7,367 $ 9,620
======== ========
The total scheduled debt principal payments are $2,252,000 in 1999,
$5,692,000 in 2000, $1,664,000 in 2001 and zero thereafter.
4. INCOME TAXES
The provision (benefit) for income taxes for each period presented was as
follows (in thousands):
Year ended December 31,
1998 1997 1996
--------------------------------------
Current provision $2,066 $ 471 $ 922
Deferred (benefit) (344) (270) (358)
----- ---- ----
Total $1,722 $ 201 $ 564
===== ==== ====
Tax effect of temporary differences that give rise to significant
components of the deferred tax assets as of December 31, 1998 and 1997,
are presented as follows (in thousands):
Year ended December 31,
------------------------
1998 1997
------ ------
Current deferred tax assets:
Inventory $ 169 $ 155
Accounts receivable 81 88
Vacation accrual 58 148
Other accruals 208 295
------ ------
Total $ 516 $ 686
====== ======
Noncurrent deferred tax assets (liabilities), net:
Assets:
Depreciation $ 1,361 $ 850
Amortization 544 459
------ ------
1,905 1,309
Liabilities:
Other (529) (447)
------ ------
Total $1,376 $ 862
====== ======
The Company has not recorded a valuation allowance with respect to the
various deferred tax assets as management believes it is more likely than
not that these assets will be realized. Management periodically reviews
the realizability of the Company's deferred tax assets, as appropriate,
when existing conditions change the probability of realization. The
differences between the provision (benefit) for income taxes computed on
income before income taxes at the U.S. federal statutory income tax rate
(34%) and the amount shown in the Consolidated Statements of Operations
are presented below (in thousands):
Year ended December 31,
-------------------------
1998 1997 1996
------- ----- ------
Income taxes at statutory rate $ 1,508 $ (262) $(3,227)
State income taxes 11 1 46
Write off of in-process
research and development
not tax benefited - - 3,960
Non-deductible goodwill
amortization 306 314 64
Other (103) 148 (279)
------- ----- ------
Provision (benefit) for income taxes $ 1,722 $ 201 $ 564
======= ===== ======
5. COMMON STOCK
Amended and Restated Stock Option Plan: In 1996, the Company amended
and restated its Stock Option Plan which, as amended, authorizes the
issuance to employees of up to 2,350,000 shares of common stock in
incentive stock options (as defined in section 422 of the Internal
Revenue Code of 1986, as amended) and nonqualified stock options. The
exercise price of the incentive stock options must be at least equal to
the fair market value of the Company's common stock on the date of the
grant, while the exercise price of nonqualified stock options may be less
than fair market value on the date of grant, as determined by the board.
Options generally vest ratably over a 5-year period from the date of
grant. The term of option grants may be up to 10 years. Grants prior to
June 1994 expire after 6 years. Options are canceled upon the lapse of
three months following termination of employment except in the event of
death or disability, as defined.
Stock Option Sub-Plan: This plan was adopted in 1988 for the benefit of
the Company's employees located in the United Kingdom. This plan
authorizes the issuance of options to purchase common stock of the
Company at prices at least equal to the fair market value of the common
stock on the date of the grant. The options vest after 3 years and expire
after 10 years. The options are canceled upon termination of employment,
except in the event of death, retirement or injury, as defined. The
following table summarizes the transactions under the Stock Option Plan
and the Stock Option Sub-Plan (in thousands, except option prices):
Number of Range of Weighted Average
Options Option Price Option Price
-----------------------------------------
Balance, December 31, 1995 1,054 4.00-16.13 8.08
----- ----------- -----
Granted 370 10.00-18.50 13.95
Exercised (194) 4.00-11.44 6.08
Canceled (118) 4.00-12.07 8.36
----- ----------- -----
Balance, December 31, 1996 1,112 4.00-18.50 10.34
===== ----------- -----
Granted 381 6.00-10.37 7.95
Exercised (24) 6.00-11.00 7.26
Canceled (59) 4.00-15.00 10.17
----- ----------- -----
Balance, December 31, 1997 1,410 4.00-18.50 10.80
===== ----------- -----
Granted 246 5.50- 8.81 6.83
Exercised (17) 4.00- 6.75 4.17
Canceled (499) 4.00-15.19 7.90
----- ----------- -----
Balance, December 31, 1998 1,140 4.00-18.50 8.62
===== ----------- -----
Exercisable at December 31, 1998 540 4.00-11.50 8.49
===== =========== =====
Director Stock Options: In May 1994, the Company formalized its program
("directors' plan") of granting stock options to its directors. 500,000
common shares were made available for grant under this plan. Stock
Option grants pursuant to the directors' plan will vest within one year
and have a term of five years. The exercise prices related to these
options were equal to the market value of the Company's stock on the date
of grant. The following table summarizes the transactions under the
Director Stock Option Plan (in thousands, except option prices):
Number of Range of Weighted Average
Options Option Price Option Price
-----------------------------------------
Balance, October 31, 1995 184 4.38-16.88 6.98
Granted 30 14.88-14.88 14.88
Exercised (38) 4.75-10.25 6.20
----- ----------- -----
Balance, December 31, 1996 176 4.38-16.88 8.52
===== ----------- -----
Granted 55 6.75-11.12 7.78
----- ----------- -----
Balance, December 31, 1997 231 4.38-16.88 8.35
===== ----------- -----
Granted 40 8.09- 8.09 8.09
----- ----------- -----
Balance, December 31, 1998 271 4.38-16.88 8.31
===== ----------- -----
Exercisable at December 31, 1998 231 4.38-16.88 8.35
==== =========== =====
Accounting for Stock-Based Compensation: In 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
has two stock option plans, the Amended and Restated Stock Option plan,
which also includes the Sub-Plan, and the Directors Plan. The Company
accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these
plans been determined pursuant to the provisions of SFAS No. 123, the
Company's pro forma net profit for 1998, net loss in 1997 and net loss in
1996 would have been $1,635,000, $(2,121,000) and $(10,653,000),
respectively, resulting in diluted earnings per share of $0.29 $(.39) and
$(2.10), respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for options granted in
1998, 1997 and 1996: risk-free interest rate of 6% in 1998, 6% in
1997,and 7% in 1996, expected dividend yield of zero in each year,
expected term of 4.41 years in 1998, 4.48 years in 1997 and 6.4 years in
1996, and expected volatility of 117.31% in 1998, 93.6% in 1997 and
112.96% in 1996. The weighted average fair valuation per share was
$5.422 in 1998, $5.56 in 1997 and $9.19 in 1996.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro-forma
compensation cost may not be representative of that to be expected in
future years.
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
December 31,
1998 1997
----------------------
Accrued royalties $ - $ 70
Accrued outside commissions 371 320
Accrued property tax 67 182
Accrued other 1,201 1,912
------ ------
$ 1,639 $ 2,484
====== ======
7. RELATED PARTY TRANSACTIONS
The Company paid approximately $425,000, $347,000 and $668,000 for the
years ended December 31, 1998, 1997 and 1996, respectively, to certain
outside directors of the Company or their firms as remuneration for their
professional services. The Company believes the terms were equivalent to
those of unrelated parties.
8. TRANSACTIONS WITH MOTOROLA, INC.
Shipments and year-end accounts receivable balances to Motorola comprised
the following percentage of the Company's revenues for the periods
indicated:
% of Total % of Total
Year ended December 31: Revenues Accounts Receivable
----------------------- -------- -------------------
1998 3 % 4 %
1997 3 % 1 %
1996 6 % 4 %
Stock Repurchase: Effective October 1998, the Company approved a stock
repurchase agreement with Motorola, Inc. to purchase all of the shares
owned by Motorola for $4,125,000, ratably from October 1998 to July 2002.
Under the terms of the agreement, Motorola retains the right as an equity
owner and has assigned its voting rights to the Company. The Company
plans to cancel the stock upon each re-purchase. Prior to the repurchase
agreement, Motorola owned approximately 12% of the Company's outstanding
common stock. The future scheduled payments are classified as redeemable
common stock in the accompanying consolidated Balance Sheet. As of
December 31, 1998, 50,000 shares have been re-purchased for $312,500 and
retired.
9. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan for those employees who
meet the plan's length of service requirements. Under the defined
contribution plan, employees may make voluntary contributions to the
plan, subject to certain limitations, and the Company matches employee's
contributions up to 3% of the employees' annual salary. The total
expense under this plan was $240,000, $171,000 and $262,000 for the years
ended December 31, 1998, 1997 and 1996 respectively. The Company offers
no post-retirement or post-employment benefits.
10. OTHER FINANCIAL INFORMATION
Major Customers: The Company had one customer in 1998, one customer in
1997 and no customers in 1996, accounting for more than 10% of the
Company's consolidated revenues. Net revenues resulting from this
customer was as follows ($ in thousands):
Year Total Revenues % of Consolidated Revenues
-------------------------------------------------------------
1998 $ 28,349 41%
1997 26,402 40%
Commitments: The Company leases its office, research and development and
manufacturing facility and certain manufacturing equipment under
noncancelable operating leases to 2010. Rent expense related to these
leases is recorded on a straight-line basis. As of December 31, 1998,
operating lease commitments having noncancelable terms of more than one
year are as follows (in thousands):
Year ending December 31:
------------------------
1999 $1,089
2000 1,089
2001 953
2002 846
2003 230
Thereafter 335
Total rent expense for operating leases was approximately as follows (in
thousands):
Year Total Rent Expense
--------------------------------------------
1998 $1,089
1997 1,024
1996 817
Capital Lease: The Company leases certain office equipment under a
noncancelable capital lease expiring in 2001. The value of the equipment
leased is $286,000. Accumulated depreciation as of December 31, 1998,
was $24,000. As of December 31, 1998, capital lease commitments having
noncancelable terms of more than one year are $106,982, $106,982 and
$80,237 in 1999, 2000 and 2001, respectively.
Contingencies: The Company is involved in various legal actions and
claims arising in the ordinary course of business. Management believes
that such litigation and claims will be resolved without material effect
on the Company's financial position or results of operations.
11. SEGMENT DATA
The Company manages its business segments on an industry basis. The
Company's reportable segments are composed of high performance
networking/storage adapters and voice over Internet protocol (VOIP)
products and services. The accounting policies of the various segments
are the same as those described in Note 1. The Company evaluates the
performance of its segments based on revenue and operating profit.
Segment Assets exclude corporate assets. Corporate assets include Cash
and Cash equivalents, Short-term investments and intangibles. Segment
operating income/loss exclude general and administrative expenses and
Special charges.
Summary information by segment as of and for the years ended December 31,
1998, 1997 and 1996, are as follows:
Networking 1998 1997 1996
-------------------------------------------------------------------
Revenues $ 68,689 $ 66,004 $ 56,752
Operating income 13,189 7,003 7,765
Fixed assets 3,241 3,794 5,487
VOIP 1998 1997 1996
-------------------------------------------------------------------
Revenues $ 157 - -
Operating income (loss) (1,257) - -
Fixed assets 752 - -
Reconciliation of Segment Operating Income to Consolidated Operating
Income:
1998 1997 1996
--------------------------------------------------------------------
Networking $ 13,189 $ 7,003 $ 7,765
VOIP (1,257) - -
General and Administrative (5,914) (6,248) (4,905)
Special Charges - - (11,646)
Consolidated Operating Income $ 6,018 $ 755 $ (8,786)
Revenue and long lived assets related to North America and other foreign
countries as of and for the years ended December 31, 1998, 1997, and 1996
are as follows (in thousands):
Revenues 1998 1997 1996
----------------------------------------------------------
North America $ 53,634 $ 53,059 $ 42,102
Europe 13,785 10,867 12,383
Pacific Rim 1,427 2,078 2,267
Total $ 68,846 $ 66,004 $ 56,752
Long Lived Assets 1998 1997 1996
----------------------------------------------------------
North America $ 3,701 $ 3,474 $ 5,099
Europe 292 320 388
Pacific Rim - - -
Total $ 3,993 $ 3,794 $ 5,487
Additional information regarding revenue by product-line is as follows:
Product Revenue 1998 1997 1996
----------------------------------------------------------
WAN $ 7,174 $ 5,342 $ 7,100
LAN 44,283 52,740 41,842
Storage 17,232 7,922 7,810
VOIP 157 - -
Total $ 68,846 $ 66,004 $ 56,752
12. QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended
March 31 June 30 September 30 December 31
-----------------------------------------------
1998 (in thousands, except per share amounts)
----
Revenues $17,589 $16,087 $17,046 $18,124
Gross profit 8,143 8,080 8,366 9,038
Income before taxes 1,180 877 1,264 1,114
Net income 708 510 723 772
Net income per share
Basic EPS $ .13 $ .09 $ .13 $ .14
Diluted EPS $ .13 $ .09 $ .13 $ .14
Quarter Ended
March 31 June 30 September 30 December 31
-----------------------------------------------
1997 (in thousands, except per share amounts)
----
Revenues $16,858 $18,379 $13,611 $17,156
Gross profit 8,086 9,162 6,209 8,559
Income (loss) before taxes 138 814 (2,558) 836
Net income (loss) 97 437 (2,191) 686
Net income (loss) per share
Basic EPS $ .02 $ .08 $ (.40) $ .12
Diluted EPS $ .02 $ .08 $ (.40) $ .12
Quarter Ended
March 31 June 30 September 30 December 31
-----------------------------------------------
1996 (in thousands, except per share amounts)
----
Revenues $11,877 $11,318 $16,370 $17,187
Gross profit 6,191 5,588 7,871 8,314
Income (loss) before taxes 1,007 (11,526) 192 836
Net income (loss) 644 (11,565) 167 699
Net income (loss) per share
Basic EPS $ .14 $ (2.45) $ .03 $ .13
Diluted EPS $ .13 $ (2.45) $ .03 $ .12
Operating results in the second quarter of 1996 included a $11,646,000
expense for the write-off of acquired in-process R&D associated with the
Synaptel acquisition.
INDEX TO EXHIBITS
Exhibits
2 (a) Stock Purchase Agreement, dated as of June 29, 1996, among
Interphase Corporation, Synaptel and Philippe Oros, Xavier
Sutter, Francois Lecerf, Schroder Ventures French Enterprise
Fund LPI (USA), Schroder ventures French Enterprise Fund
UKLP (UK) and Schroder Ventures Holding Limited (UK). (7)
3 (a) Certificate of Incorporation of the registrant. (1)
3 (b) Amended and Restated Bylaws of the registrant adopted on
December 5, 1995. (6)
10 (b) Registrant's Amended and Restated Stock Option Plan and
Amendment No. 1 and 2 thereto. (9)
10 (c) Registrant's Incentive Stock Option Sub-Plan. (3)
10 (d) Stock Purchase Warrant issued to Motorola, Inc. (4)
10 (e) Lease on Dallas facility. (5)
10 (g) Directors Stock Option Plan and Amendment No. 1 thereto. (6)
10 (i) Loan Agreement between Interphase Corporation and BankOne
Texas, N.A. (8)
10 (j) Purchase Agreement between Interphase Corporation and Cisco
Systems Inc. (9)
10 (k) Motorola Stock Repurchase Agreement (2)
23 (a) Consent of Independent Public Accountants. (10)
27 Financial Data Schedule. (10)
_____________________
(1) Filed as an exhibit to Registration Statement No. 2-86523 on
Form S-1 and incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 8-K on October 15, 1998, and
incorporated herein by reference.
(3) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1988 and incorporated herein by reference.
(4) Filed as an exhibit to Report on Form 10-Q for the quarter ended
April 30, 1989 and incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to Report on Form 8-K on August 6, 1996, and
incorporated herein by reference.
(8) Filed as an exhibit to Report on Form 8-KA on October 4, 1996 and
incorporated herein by reference.
(9) Filed as an exhibit to Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
(10) Filed herein.
E-1