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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001 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
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Common Stock, $.10 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 4, 2002 was approximately $27,312,000. As of March 4, 2002,
registrant had 5,598,805 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into this annual
report on Form 10-K Report: Portions of the Definitive Proxy Statement for
Annual Meeting of Shareholders to be held on May 1, 2002 (Part III).
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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 being used in next-generation
telecommunication networks and enterprise data/storage networks. Interphase's
products include telecom communication controllers, server-based adapter cards,
network operating system device drivers, software development tools,
professional services and management software applications (see key terms and
definitions below).
KEY TERMS AND DEFINITIONS
Interphase is a technology company and many terms used by the Company may be
unfamiliar to those outside the industry. Following are some key terms that may
be useful in helping the reader understand the products, technologies and
markets relevant for the Company.
ADAPTER - Also called a host bus adapter (HBA) or network interface card (NIC).
An adapter is a device that connects a computer server to one or more peripheral
devices (such as switches, hubs, storage devices, etc.) or other computers. An
adapter card typically plugs into the expansion bus on the motherboard of the
computer and communicates with the operating system controlling the system via
the use of specific device drivers.
AIN - (Advanced Intelligent Network) The primary architecture of the public
switched telephone system (PSTN) in the 1990s, which provides enhanced voice,
video and data services and dynamic routing capabilities. It uses digital
switches known as Signal Switching Points (SSPs) that query databases in
computer systems known as Service Control Points (SCPs).
ATM - (Asynchronous Transfer Mode) A network technology for both LANs and WANs
that supports real time voice and video as well as data. The topology uses
switches that establish a logical circuit from end to end, which guarantees a
quality of service (QoS) for that transmission. However, unlike telephone
switches that dedicate circuits end to end, unused bandwidth in ATM circuits can
be appropriated whenever available. For example, idle bandwidth in a
videoconference circuit can be used to transfer data. ATM is also highly
scalable and supports transmission speeds of 1.5, 25, 100, 155, 622 and 2488
Mbps.
BROADBAND - A transmission facility (communications link) that has bandwidth
(capacity) greater than a voice grade line.
COMMUNICATIONS CONTROLLER - Communications I/O adapter (similar to a network
interface card) designed specifically for carrier-grade computer systems that
often support signaling, switching and routing networks. Communication
controllers must conform to specifications that
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maintain overall system compliance to the rigorous performance and reliability
standards that apply to telecom service provider equipment into which they are
integrated.
COMPACTPCI - An industrial grade variation of the PCI bus standard that utilizes
the Eurocard (VME) form factor. CompactPCI has been widely adopted by telecom
equipment suppliers because of its high-density connectors, support for front or
rear I/O access and hot-swap capabilities important for "Five 9's" (99.999%)
reliability.
DEVICE DRIVERS - A program routine that links an adapter card (or other device)
to the operating system. It is written by software engineers who understand the
detailed knowledge of the adapter's command language and characteristics and
contains the precise machine language necessary to perform the functions
requested by the application. When a new adapter is added to the computer, its
driver must be installed in order to run it. The operating system calls the
driver, and the driver "drives" the adapter. Routines that perform internal
functions, such as memory managers and disk caches, are also called drivers.
DSL - A relatively new broadband technology that carries data signals up to 20
times faster than 56K dial-up modems on the high-frequency portions of phone
lines that also transmit voice. Unlike with dial-up services, DSL users don't
dial a phone number to log on to the Internet. Like cable-modem service, a DSL
line is continuously open. DSL requires two modems, one at the customer end and
one at the phone company end (called a DSLAN), which communicate constantly with
each other. DSL providers don't usually sell their services directly to
consumers -- they typically resell them through Internet service providers such
as America Online and Earthlink.
BROADBAND TELECOM CONTROLLERS SYSTEM - As related to Interphase, a Broadband
telecom controllers system is a highly specialized computer server that resides
in an "industrial" environment requiring high-availability and maximized
"up-time." Typical uses for this type of server include military applications
such as on-board ship communications or avionics, or next-generation
telecommunication applications such as intelligent call routing, call number
portability or base station communications control for wireless service.
FAST ETHERNET - A variation of the Ethernet standard (10Base-T) that provides
100 Mbps transmission bandwidth, and up to 200 Mbps total I/O throughput with
full duplex operation.
FIBRE CHANNEL - A high-speed transmission technology that can be used as a
front-end communications network, a back-end storage network, or both at the
same time. With Fibre Channel, servers can not only talk to the storage system
via SCSI (storage protocol, see below), but the hosts can talk to each other via
IP (Internet Protocol) over the same network. Fibre Channel supports existing
peripheral interfaces and communications protocols. Its name is somewhat
misleading, as Fibre Channel supports coaxial cable and twisted pair copper
wiring as well as single mode and multimode fiber connections.
FRAME RELAY - A high-speed packet switching protocol used in wide area networks
(WANs). Providing a granular service of up to DS3 speed (45 Mbps), it has become
very popular for LAN-to-LAN
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connections across remote distances. All the major telecommunications carriers
offer frame relay services. Frame relay is much faster than X.25 networks, the
first packet-switching WAN standard, because frame relay was designed for
today's reliable circuits and performs less rigorous error detection.
GIGABIT ETHERNET - An Ethernet technology that raises transmission speed to one
Gbps and is used primarily for backbone networks and high-speed server-to-server
connectivity.
ISDN - A system of digital connections that has been available for over a decade
and has gained increased use in the last few years for high-speed data and video
transmission.
LAN - (Local Area Network) A short distanced data communications network that is
contained within a building or complex. Its primary use is to link computers and
peripheral devices (such as printers) and to provide individuals with access to
databases and applications running on servers attached to the network. Anyone
connected to the LAN can send messages to and work jointly with others on the
network.
NAS - (Network Attached Storage) A network topology that provides a common pool
of storage that can be shared by multiple servers and clients, regardless of
their file system or operating system. Network Attached Storage servers are
self-contained, intelligent devices that attach directly to an existing LAN. A
file system is located and managed on the NAS server and data is transferred to
network clients over industry standard network protocols such as IP (Ethernet).
NGN - (Next Generation Network) Sometimes referred to as the "converged" voice
and data network, NGN technology refers to post public switched telephone
network (PSTN) telecommunications networks. Elements of an NGN include, among
other items, softswitches media gateways.
NODE B - A component of a 3G wireless base station containing radio transmitters
and receivers.
OC-3/STM-1 - The American and European standards (respectfully) for ATM optical
interconnect 3 traffic, which is a digital transmission link with capacity of
155 Mbps (OC-3).
OPERATING SYSTEM - The master control program that runs the computer. It is the
first program loaded when the computer is turned on, and its main part, called
the kernel, resides in memory at all times. It may be developed by the vendor of
the computer it's running in or by a third party. It is an important component
of the computer system because it sets the operational guidelines for all
application programs that run on the system. All programs must "talk to" the
operating system. Popular network operating systems today include Windows NT and
2000, HP-UX, AIX and Linux.
PCI - A bus standard (Peripheral Components Interconnect) that is currently the
main general-purpose bus in virtually every desktop computer and a majority of
servers throughout the world.
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PCI-X - A high-performance extension to the PCI Local Bus that is designed to
meet the increased I/O demands of technologies such as Fibre Channel, Gigabit
Ethernet and Ultra3 SCSI.
PMC - (PCI Mezzanine Card) a low profile mezzanine card that is electronically
equivalent to the Peripheral Component Interconnect (PCI) specification. PMC
cards are used as a quick and cost-effective method to add modular I/O to other
card formats such as VME and CompactPCI.
PTMC - (PCI Telecom Mezzanine Card) A mezzanine card with connectors specific to
telecom applications, based on the industry standard PICMG 2.15.
REMOTE ACCESS SERVER - A remote access server is a computer that provides access
to remote users (such as telecommuters, road warriors and branch office
locations) via analog or digital modems and ISDN connections.
RNC - (Radio Network Controller) A component of a 3G wireless base station that
controls radio transmitters and receivers and performs other radio access and
link maintenance functions.
SAN - (Storage Area Network) A flexible "any-to-any" networking infrastructure
linking multiple servers to multiple storage devices. Based on Fibre Channel
technology, SANs have recently emerged as the highest performance data
communications environment available today to interconnect servers and storage.
Running at Gigabit speeds, SANs offer better scalability, fault recovery and
general manageability than current client-server LAN-based approaches for
real-time and data intensive applications. Storage Area Networks are being
widely deployed for video editing, prepress and data mining applications
throughout the general IT marketplace.
SCSI - (Small Computer System Interface) Pronounced "skuzzy," SCSI is a widely
used communications technology for connecting computer servers to storage
devices. The technology is especially popular in applications where network
servers are attached to numerous SCSI drives and configured as fault-tolerant
RAID clusters. In the event one drive fails, the system is still operational.
SCSI-based RAID is widely used in file servers, database servers and other
network servers. Interphase products utilize Ultra2 SCSI, which provides up to
80 Mbps data throughput and Ultra3 SCSI, which doubles the throughput to 160
Mbps.
SERVER - A computer in a network shared by multiple users. These are typically
more powerful than computers used by individuals (often referred to as
"desktops") and require advanced I/O connectivity. In enterprise network
environments, some computers may be dedicated to a single task. For instance, an
Internet server is a computer that provides World Wide Web services on the
Internet. If the Web server is used internally and not by the public, it may be
known as an "intranet server."
SS7 - (Signaling System 7) The protocols used in the U.S. telephone system for
setting up calls and providing modern transaction services such as caller ID,
automatic recall and call forwarding. When you dial "1" in front of a number,
SS7 routes the call to your long distance carrier. It also routes local calls
based on the first three digits of the phone number.
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T1 - A digital transmission link with a capacity of 1.544 Mbps (1,544,000 bits
per second). T1 links normally handle 24 voice conversations, but with digital
encoding can handle many more voice channels. T1 lines are also used to connect
networks across remote distances. E1 is the European equivalent and J1 is the
Japanese equivalent to T1.
T3 - A digital transmission link equivalent to 28 T1 lines. Providing a capacity
of 45 Mbps, a T3 link is capable of handling 672 voice conversations. E3 is the
European equivalent and J3 is the Japanese equivalent to T3.
6U - A standard size and design of printed circuit boards and the chassis that
holds them.
WAN - (Wide Area Network) A communications network that covers a wide geographic
area, such as state or country. A WAN typically extends a LAN (Local Area
Network, see above) outside the building, over telephone common carrier lines to
link to other LANs in remote locations, such as branch offices or at-home
workers and telecommuters. WANs typically run over leased phone lines, but are
increasingly also employing the Internet for VPN (virtual private network)
connectivity.
STRATEGY
The Company's strategy is to provide innovative, high-performance connectivity
solutions for the telecommunications and enterprise server markets. To achieve
this strategy, Interphase pursues several key initiatives that include:
Providing an advanced line of communication controllers for next-generation
telecom servers.
To capitalize on the trend towards the acquisition of I/O connectivity from
third party vendors by telecommunication server providers, Interphase offers a
comprehensive line of carrier-class communications controllers for:
o 2.5 and 3G Wireless - controllers that provide enhanced mobile services and
integration with the Internet
o Fast Internet Access - controllers that enable broadband Internet
connectivity and high-speed wireless Internet access
o Next Generation Networks and the Advanced Intelligent Network (AIN) -
controllers that help service providers migrate their AIN facilities to
more scalable and cost-effective architectures and provide new platforms
for Softswitch and Media Gateway convergence of voice and data networks
Interphase launched a new service organization in 2001, Professional Services,
an organization responsible for customizing software and third party
applications to customer specific designs. With high-performance communication
controllers, software development tools, the industry's broadest protocol
support, experience with third party protocols and complementary professional
services, Interphase helps decrease costs and improve time-to-market for service
providers building next-generation telecom networks.
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Offering a comprehensive server I/O adapter product portfolio.
In order to provide Interphase customers with effective storage networking
solutions, Interphase offers a comprehensive line of storage networking adapters
specifically designed for use in demanding, enterprise class applications such
as:
o Enterprise Connectivity - mission critical backbone and Internet servers
o Server-attached Storage - high-throughput direct-attached storage servers
o Storage Area Networks - servers providing connectivity for SAN and NAS
applications
Delivering superior customer service.
Over the past 25 years, Interphase has established strong relationships with key
Fortune 500 suppliers of enterprise computer and telecommunication servers. Much
of this success has been due to the superior pre- and post-sale service the
Company delivers to customers. With a vertically integrated account perspective,
Interphase provides flexibility, timely response and other customized account
service features. Further, the Company's technical support is divided into
functional groups supporting either server I/O or telecommunication product
offerings, allowing Interphase to specifically focus its support efforts for the
different needs and requirements of its customers in these differing market
segments.
Expanding the Company's base of quality channel partners.
In keeping with its efforts to expand the total available market for its product
offerings, Interphase continues to build a broad base of distribution channel
partners that provide cost-effective penetration into the enterprise IT segment.
Through its Gold Rush Partners Program, the Company recruits high-end resellers
(VARs) and systems integrators that are building storage-centric solutions for
their enterprise customers. In 2001, Interphase broadened its reach to the
embedded telecom market through the selection of its exclusive North American
channel partner, Arrow North American Computer Products, a leading distributor
of electronic components and computer products.
Developing strategic partnerships.
Interphase is an acknowledged leader in designing products for multi-vendor
interoperability. The Company leverages this leadership position into strategic
partnerships with its Diamond Developer Partners Program. Through this program,
Interphase builds synergistic marketing and technical relationships with other
key suppliers in its respective markets. Rigorous product testing and early
access to new partner product releases allows tighter product integration and
helps assure compatibility for the Company's end-user customers. Also,
Interphase's joint software development, particularly with third party protocol
vendors, decreases the integration time for customers by offering a
pre-integrated solution.
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PRODUCTS
Interphase offers an advanced line of telecom communication controllers, a
comprehensive portfolio of Fibre Channel SAN adapters (including HBA SAN
management software) and adapters for remote access and WAN communications.
Telecom Communication Controllers
Interphase products designed for use in next-generation Broadband
telecommunication servers include:
o 1635 CompactPCI Packet Switched Backplane T1/E1/J1 Communications
Controller - a 6U CompactPCI communications controller, based on the PICMG
2.16 Ethernet backplane standard, with an advanced architecture featuring
the Motorola MPC8260 RISC CPU that offers superior performance over
T1/E1/J1 communication links. The 1635 also offers dual Ethernet interfaces
to 2.16 backplanes, and can convert both SS7 and ATM to IP for access to
the Ethernet backplane.
o 4531 PMC ATM over T3/E3 Communications Controller - a PCI Mezzanine Card
that provides reliable, high performance ATM communications over T3/E3
connections for applications such as aggregating Internet traffic for
transport over the public ATM backbone network.
o 4531S PMC ATM over T3/E3 Communications Controller - an intelligent,
high-performance, PCI Mezzanine Card that provides software selectable
T3/E3 network access, and can support multiple protocols on-board,
increasing overall system performance.
o 4532 PMC Single-port OC-3/STM-1 Communications Controller - an intelligent,
high-performance, PCI Mezzanine Card that provides direct access to SONET
networks and software selectable access to OC-3/STM-1 ATM network, as well
as a 10/100 Ethernet interface. The 4532 is the only product in its class,
and is ideally suited for 3G networks that define ATM as the interconnect
between RNCs and Node Bs, for example. It also targets broadband access
networks and gateways that require on-board ATM to IP interworking.
o 4534 PMC Quad-port Serial Communications Controller - a PCI Mezzanine Card
that provides reliable, high performance serial communications for multiple
telecommunication protocols including ATM, ISDN, Frame Relay, X.25 and PPP.
o 4535 PMC Multiprotocol Communications Controller - a PCI Mezzanine Card
that provides four high-speed serial communication links to provide
connection to the Public Switch Telephone Network to support advanced SS7
or AIN applications.
o 4537 PMC Multiprotocol Communications Controller - a PCI Mezzanine Card
targeted specifically for telecommunication applications that require
multiple T1/E1 interfaces.
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The 4537 supports multiple frame-based protocols, such as ATM and SS7,
provides options for front or rear I/O access, and includes an integrated
Channel Service Unit.
o 4538 PMC Communications Controller - a PCI Mezzanine Card with 2 software
selectable T1/E1/J1 interfaces front access plus a 10/100 Ethernet port, it
is targeted for signaling and control plane applications in wireless and
NGN telecom networks. With its on-board SS7 protocol processing and
excellent SS7 performance, and its Ethernet access, it is a modular
solution for signaling platforms and signaling gateway applications.
o 4539 PMC Communications Controller - a PCI Mezzanine Card targeted for
signaling/control plane and broadband/user plane telecom networks. The 4539
offers four software selectable T1/E1/J1 interfaces via rear access, and a
10/100 Ethernet interface on the front. The 4539 supports multiple
protocols on board, including ATM, and it can serve both narrowband and
broadband networks in one solution.
o 4575 PMC ATM Communications Controller - a PCI Mezzanine Card that provides
reliable, high performance ATM SONET OC-3 155 Mbps connectivity.
o 5575 PCI ATM Adapter - a PCI adapter card that provides full duplex ATM
connectivity for systems running Windows NT, Novell NetWare, UnixWare,
Solaris and AIX.
o 6535 CompactPCI T1/E1/J1 Communications Controller - a 6U CompactPCI
communications controller with an advanced architecture featuring the
Motorola MPC8260 RISC CPU that offers superior performance over T1/E1/J1
communication links.
o 6575 CompactPCI ATM Communications Controller - a 3U or 6U CompactPCI
adapter that provides full duplex ATM connectivity at OC-3 data rates for
industrial and telecommunication server computers.
Server I/O Products
Interphase server I/O products targeted for use in enterprise applications
include the following:
o 5526 PowerSAN PCI Fibre Channel Adapter - a 33Mhz PCI bus adapter which
provides single port 100 MBps Fibre Channel connectivity.
o 5527 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus adapter which
provides single port 100 MBps Fibre Channel connectivity.
o 5540 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus adapter which
provides price-effective 1-Gbps storage connectivity for basic Fibre
Channel SAN connectivity.
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o 5541 PowerSAN PCI Fibre Channel Adapter - a low profile version of the 5540
that is only half of the height of normal PCI cards, allowing use in the
new smaller profile (1U) servers being increasingly used in Internet server
and e-commerce applications.
o 5550 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus adapter which
provides two independent 1-Gbps Fibre Channel connections for
high-reliability SAN applications.
o 5560 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus adapter which
provides 2-Gbps Fibre Channel connectivity for applications requiring
maximized data throughput.
o FibreView Enterprise - a JAVA-based management utility which allows
enterprise IT managers to control Fibre Channel server connections from
anywhere within the network via the Internet.
o 5570 SlotOptimizer (Combo) PCI Storage Networking Adapter - a 64-bit PCI
multifunction adapter card providing full duplex Gigabit Fibre Channel and
high-performance Gigabit Ethernet connectivity.
o 552C SlotOptimizer (Combo) PCI Storage Networking Adapter - a 64-bit PCI
multifunction adapter card combining dual channel Ultra2 SCSI connectivity
with two 10/100 Ethernet ports.
o 553C SlotOptimizer (Combo) PCI Storage Networking Adapter - a 64-bit PCI
multifunction adapter card combining dual channel Ultra3 SCSI connectivity
with two 10/100 Ethernet ports.
o 554E SlotOptimizer (Combo) Quad-port Fast Ethernet Adapter - a 64-bit PCI
adapter card that provides four independent full-duplex Fast Ethernet
ports.
Remote Access and WAN Communications Adapters
Interphase also offers communication adapters that enable remote access server
communications in enterprise WAN environments. Flagship Interphase products for
remote access and WAN connectivity include:
o 5535 ENTIA ATM over T1 Communications Controller - an PCI WAN controller
that uses an on-board CPU and memory to locally execute all communications
protocols. Providing either single or dual port PRI or T1/E1 connectivity,
this controller is a cost-effective connectivity solution for small and
medium size enterprise networking environments.
o 5536 ENTIA V.90 Digital Modem Controller - a PCI WAN controller that uses
an on-board CPU and memory to locally process all communications protocols.
Offering up to 60 digital modems and simultaneous processing of both ISDN
and analog (V.34 and V.90) call traffic, this adapter is a cost-effective
solution for remote users requiring access to enterprise network
applications.
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NEW PRODUCT DEVELOPMENT
The target markets for the Company's products are characterized by those areas
of a telecom network that can reduce cost for carriers, decrease their time to
market for deployment of new and existing services, and, finally, preserve
carriers' network equipment investment. The economic downturn in the telecom
business sector has forced telecom service providers and network equipment
providers, or NEPs, to streamline their business operations. In particular,
service and NEPs have been consolidating their product development and
manufacturing groups, which actions generally lead to an increase in the use of
off-the-shelf products, such as the products sold by Interphase. Consequently,
the Company's new product development is driven by the profitable growth areas
in the market where NEPs use off the shelf designs and emerging standards that
improve the performance and reliability of standard designs and the race to
market.
To better address the emerging market opportunities in UMTS/W-CDMA and
CDMA-2000/1xRTT wireless servers ("3G Wireless") and media gateways and
signaling elements, Interphase is expanding its product line to incorporate more
ATM to IP interworking functions, increased access to Ethernet networks and
backplanes, and overall higher-performance on-board protocol processing
performance. This is achieved through enhancements to existing products and the
launch of new product lines and services in the telecom products portfolio.
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
PCI Industrial Manufacturers Group (PICMG), IEEE, ANSI, VME International Trade
Association (VITA), Infiniband Trade Association (ITA), 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.
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 may 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 2001, sales to Hewlett Packard and Compaq accounted for
$8.5 million or 30% and $4.2 million or 15% of the Company's consolidated
revenues, respectively. During 2000, sales to Hewlett Packard and Terayon
Communication Systems accounted for $10 million or 18% and $5.9 million or 11%
of the Company's consolidated revenues, respectively. During 1999, sales to
Hewlett Packard accounted for $36.9 million or 50% of the Company's consolidated
revenues. No other customers accounted for more than 10% of the Company's
consolidated revenues in the periods presented.
The Company markets its products through its direct sales force and value-added
distribution partners. In addition to the Company's headquarters in Dallas,
Texas, the Company has sales
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offices located in or near Santa Clara, California; Boston, Massachusetts;
Minneapolis, Minnesota; Munich, Germany; London, United Kingdom; Paris, France;
and Bangkok, Thailand. The Company's sales personnel market products directly to
key customers and support the distribution channel. In addition, the Company has
entered into distribution agreements with key national and international
distribution partners, including Arrow North American Computer Products (North
America), Crellon Microsystems (UK), ACAL (The Netherlands), Future Systems
(Korea), Macnica (Japan), Beijing Ssycom Technologies, Limited (China), Alloy
Computer (Australia), Powerbridge (Germany) and many others.
Interphase emphasizes its extensive product support, training and field support
to its customers. The Company's products are generally sold with a one-year
warranty covering components and labor, with extended warranties and support
also available, however, certain contracts with major OEM customers allow for
longer warranty periods.
The Company and its major customers generally enter into written contracts
specifying, among other items standard in commercial agreements, product
specifications, failure rates, shipping requirements, shipment rescheduling
terms, price/volume schedules and manufacturer warranties. These agreements
generally 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 dates 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 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 30-90 days from the date of invoice.
MANUFACTURING AND SUPPLIES
Manufacturing operations are currently conducted at the Company's headquarters
in Dallas, Texas. 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. 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
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a result, the Company does not have any material requirements to maintain
significant finished goods inventories.
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
noninfringing 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 third-party software into its product line
thereby increasing its functionality, performance and interoperability.
EMPLOYEES
At December 31, 2001, the Company had 146 full-time employees, of which 42 were
engaged in manufacturing and quality assurance, 49 in research and development,
29 in sales, sales support, customer service and marketing and 26 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
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 a 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. The Company considers its relationship
with its employees to be good.
12
COMPETITION
The Company's competition includes vendors specifically dedicated to the storage
I/O and telecommunication product markets. Most of the Company's major OEM
customers have chosen to outsource the design, manufacture and software
integration of communications controllers and protocol processing, and the
recent market conditions and reduction in resources have forced some network
equipment providers to utilize off the shelf products for their product design.
Increased competition and commoditization of network interface technologies
could result in price reductions, reduced margins and loss of market share.
RISK FACTORS
Potential Fluctuations in Period-to-Period Results
Interphase has experienced fluctuations in its period-to-period revenue and
operating results in the past and may experience fluctuations in the future. The
Company's sales on both an annual and a quarterly basis can fluctuate as a
result of a variety of factors, many of which are beyond its control. The
Company may have difficulty predicting the volume and timing of orders for
products, and delays in closing orders can cause the Company's operating results
to fall substantially short of anticipated levels for any period. Delays by
Interphase's OEM customers in producing products that incorporate the Company's
products could also cause operating results to fall short of anticipated levels.
Other factors that may particularly contribute to fluctuations in the Company's
revenue and operating results include success in achieving design wins, the
market acceptance of the OEM products that incorporate the Company's products,
the rate of adoption of new products, competition from new technologies and
other companies, and the variability of the life cycles of Interphase's
customers' products.
Because fluctuations can happen, Interphase believes that comparisons of the
results of its operations for preceding quarters are not necessarily meaningful
and that investors should not rely on the results for any one quarter as an
indication of how Interphase will perform in the future. Investors should also
understand that, if the Company's revenue or operating results for any quarter
are less than the level expected by securities analysts or the market in
general, the market price for the Company's common stock could immediately and
significantly decline.
Technological Change and New Product Introductions
The market for the Company's products is characterized by rapid technological
change and frequent introduction of products based on new technologies. As these
products are introduced, the industry standards change. Additionally, the
overall telecommunications and networking industry is volatile as the effects of
new technologies, new standards, new products and short life cycles contribute
to changes in the industry and the performance of industry participants. The
Company's future revenue will depend upon the Company's ability to anticipate
technological change and to develop and introduce enhanced products of its own
on a timely basis that comply with new industry standards. New product
introductions, or the delays thereof, could contribute to quarterly fluctuations
in operating results as orders for new products commence and orders for
13
existing products decline. Moreover, significant delays can occur between a
product introduction and commencement of volume production. The inability to
develop and manufacture new products in a timely manner, the existence of
reliability, quality or availability problems in its products or their component
parts, or the failure to achieve market acceptance for its products could have a
material adverse effect on the Company's revenue and operating results.
Competition
The telecommunications, signaling and networking business is extremely
competitive, and the Company faces competition from a number of established and
emerging start-up companies. Many of the Company's principal competitors have
established brand name recognition and market positions and have substantially
greater financial resources to deploy on promotion, advertising and research and
product development than the Company. In addition, as the Company broadens its
product offerings, it may face competition from new competitors. Companies in
related markets could offer products with functionality similar or superior to
that offered by the Company's products. Increased competition could result in
price reductions, reduced margins and loss of market share, all of which could
materially and adversely affect the Company's revenue and operating results. The
Company expects that competition will increase substantially as a result of
industry consolidations and alliances, as well as the emergence of new
competitors. There can be no assurance that the Company will be able to compete
successfully with its existing or new competitors or that competitive pressures
faced by the Company will not have a material adverse effect on the Company's
revenue and operating results.
Dependence on Key Customers
While the Company enjoys a very good relationship with its customers, there can
be no assurance that the Company's principal customers will continue to purchase
products from the Company at current levels. Customers typically do not enter
into long-term volume purchase contracts with the Company, and customers have
certain rights to extend or delay the shipment of their orders. The loss of one
or more of the Company's major customers, or the reduction, delay or
cancellation of orders or a delay in shipment of the Company's products to such
customers could have a material adverse effect on the Company's revenue and
operating results.
Design Wins
A design win is when a customer or prospective customer notifies the Company
that its product has been selected to be integrated with their product.
Ordinarily, there are a number of steps between the design win and when
customers initiate production shipments. Design wins reach production volumes at
varying rates, typically beginning approximately twelve months after the design
win occurs. A variety of risks such as schedule delays, cancellations of
programs and changes in customer markets can delay or prevent the design win
from reaching the production phase. The customer's failure to bring their
product to the production phase could have an adverse effect on the Company's
revenue and operating results.
Product Liability
If the Company delivers products with errors, defects or problems, its
credibility and the market acceptance and sales of its products could be harmed.
Further, if Interphase's products contain
14
errors, defects and problems, then the Company may be required to expend
significant capital and resources to alleviate such problems. Defects could also
lead to product liability as a result of product liability lawsuits against
Interphase or against its customers. Interphase has agreed to indemnify its
customers in some circumstances against liability from defects in its products.
While no such litigation currently exists, product liability litigation arising
from errors, defects or problems, even if it resulted in an outcome favorable to
Interphase, would be time consuming and costly to defend. Existing or future
laws or unfavorable judicial decisions could negate any limitation of liability
provisions that are included in the Company's license agreements. A successful
product liability claim could seriously harm the Company's business, financial
condition and results of operations.
Interphase maintains insurance coverage for product liability claims. Although
management believes this coverage is adequate, it is not assured that coverage
under insurance policies will be adequate to cover product liability claims
against the Company. In addition, product liability insurance could become more
expensive and difficult to maintain and may not be available in the future on
commercially reasonable terms or at all. The amount and scope of any insurance
coverage may be inadequate if a product liability claim is successfully asserted
against the Company.
Dependence on Third-Party Suppliers
Certain components used in the Company's products are currently available to the
Company from one or a limited number of sources. There can be no assurance that
future supplies will be adequate for the Company's needs or will be available on
prices and terms acceptable to the Company. The Company's inability in the
future to obtain sufficient limited-source components, or to develop alternative
sources, could result in delays in product introduction or shipments, and
increased component prices could negatively affect the Company's gross margins,
either of which could have a material adverse effect on the Company's revenue
and operating results.
Dependence on Internal Manufacturing
In order to avoid relying on outside contract manufacturers, the Company
manufactures its products at its Dallas, Texas facility. The Company does not
have alternative manufacturing capabilities, either internally or through third
parties, to perform those manufacturing functions. If the Company were able to
identify alternative third-party contract manufacturers, there can be no
assurance that the Company would be able to retain their services at the same
costs that the Company currently enjoys. In the event of an interruption in
production, the Company would not be able to deliver products on a timely basis,
which could have a material adverse effect on the Company's revenue and
operating results. Although the Company currently has business interruption
insurance, no assurances can be given that such insurance will adequately cover
the Company's lost business as a result of such an interruption.
The Company's success depends upon the Company's proprietary technologies. To
date, the Company has relied principally upon trademark, copyright and trade
secret laws to protect its proprietary technologies. The Company generally
enters into confidentiality or license
15
agreements with its customers, distributors and potential customers and limits
access to and distribution of the source code to its software and other
proprietary information. The Company's employees are subject to the Company's
employment policy regarding confidentiality. There can be no assurance that the
steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technologies or to provide an effective remedy in the
event of a misappropriation by others.
Dependence on Proprietary Technology
Although management believes that the Company's products do not infringe on the
proprietary rights of third parties, there can be no assurance that infringement
claims will not be asserted, possibly resulting in costly litigation in which
the Company may not ultimately prevail. Adverse determinations in such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
products, any of which could have a material adverse effect on the Company's
revenue and operating results.
It may be necessary for the Company to enter into technology licenses from
others due to the large number of patents in the computer networking industry
and the rapid rate of issuance of new patents and new standards or to obtain
important new technology. There can be no assurance that these third party
technology licenses will be available to the Company on commercially reasonable
terms. The loss of or inability to obtain any of these technology licenses could
result in delays or reductions in product shipments. Such delays or reductions
in product shipments could have a material adverse effect on the Company's
revenue and operating results.
Dependence on Employees
The Company's success depends on the continued contributions of its personnel,
many of whom would be difficult to replace, and on its ability to attract and
retain skilled employees. Although the Company's employees are subject to the
Company's employment policy regarding confidentiality and ownership of
inventions, employees are generally not subject to employment agreements or
non-competition covenants. Changes in personnel could adversely affect the
Company's operating results.
ITEM 2. PROPERTIES
The Company leases a 96,000-square foot facility located in Dallas, Texas. The
lease, inclusive of renewal options, extends through the end of 2002. The
Company is currently evaluating its options for renewal of the lease or
relocation. In addition, the Company leases a 9,000-square foot facility in
Chaville, France (near Paris) that supports the European markets and an
8,000-square foot facility in Plano, Texas, that supports telecommunication
product development. 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.
16
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 quarter during 2001 and 2000 as reported by Nasdaq.
<Table>
<Caption>
2001 High Low
- ---- ---- ---
First Quarter 13.875 6.750
Second Quarter 7.560 5.150
Third Quarter 5.100 3.210
Fourth Quarter 5.860 3.170
<Caption>
2000 High Low
- ---- ---- ---
First Quarter 41.750 17.250
Second Quarter 26.875 13.125
Third Quarter 25.750 16.125
Fourth Quarter 16.438 7.938
</Table>
The Company had approximately 4,200 beneficial owners of its common stock, of
which 59 were of record as of March 4, 2002.
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.
The Board of Directors has adopted a Shareholder Rights Plan whereby each holder
of record as of December 29, 2000 received a right to purchase from the Company
one share of common stock of the Company at a price of $93 per share for each
share held. These rights can only be exercised after certain events occur, such
as if a person or entity acquires, or makes a tender or exchange offer to
acquire 15% or more of the Company's common stock and the rights expire ten
years from the record date. Upon acquisition of 15% or more of the Company's
common stock, each right not owned by the acquiring person or group will be
adjusted to allow the purchase for
17
$93 of a number of shares having a then market value of $186. These rights are
intended to provide the Company certain antitakeover protections. The Board of
Directors may terminate the Rights Plan, or redeem the rights for $0.01 per
right, at any time until the tenth business day following a public announcement
of a 15% or more stock acquisition. The Company has reserved 7,000,000 shares of
common stock for this plan.
The rights were distributed to shareholders as of the record date as a
nontaxable dividend. The rights are attached to and trade with Interphase common
stock until the occurrence of one of the triggering events, at which time the
rights would become detached from the common stock.
In November 2001, the Board of Directors authorized the repurchase of up to $5
million of the Company's common stock. Purchases are authorized to be made from
time to time during a twenty-four month period in the open market or in
privately negotiated transactions depending on market conditions. The Company
will cancel all shares that it repurchases. The repurchase plan does not
obligate the Company to repurchase any specific number of shares and may be
suspended at any time.
18
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data:
(In Thousands, except per share data)
<Table>
<Caption>
Twelve months ended December 31,
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Revenues $ 28,732 $ 55,697 $ 73,502 $ 68,690 $ 66,004
---------- ---------- ---------- ---------- ----------
Gross margin 9,004 29,688 34,702 33,598 32,016
---------- ---------- ---------- ---------- ----------
Research and development 7,757 10,359 10,590 10,766 13,327
Sales and marketing 6,812 10,731 11,036 10,060 11,686
General and administrative 3,759 4,824 5,366 5,417 6,248
Restructuring costs and other
special charges 2,091 -- -- -- --
Goodwill impairment charge 2,350 -- -- -- --
---------- ---------- ---------- ---------- ----------
Operating (loss) income (13,765) 3,774 7,710 7,355 755
Other, net (20) 333 (1,030) (1,583) (1,525)
---------- ---------- ---------- ---------- ----------
(Loss) income from continuing
operations before income taxes (13,785) 4,107 6,680 5,772 (770)
(Loss) income from continuing
operations (9,572) 2,400 4,291 3,542 (971)
Discontinued operations, net -- 571 (867) (829) --
---------- ---------- ---------- ---------- ----------
Net (loss) income $ (9,572) $ 2,971 $ 3,424 $ 2,713 $ (971)
---------- ---------- ---------- ---------- ----------
(Loss) income from continuing
operations per share
Basic EPS $ (1.68) $ 0.41 $ 0.77 $ 0.64 $ (0.18)
Diluted EPS $ (1.68) $ 0.38 $ 0.70 $ 0.63 $ (0.18)
Net (loss) income per share
Basic EPS $ (1.68) $ 0.51 $ 0.61 $ 0.49 $ (0.18)
Diluted EPS $ (1.68) $ 0.48 $ 0.56 $ 0.48 $ (0.18)
Weighted average common shares 5,705 5,805 5,593 5,508 5,496
Weighted average common and dilutive
shares 5,705 6,237 6,113 5,628 5,496
Balance Sheet Data:
Working capital $ 31,601 $ 37,502 $ 35,314 $ 26,314 $ 25,244
Total assets 39,243 54,473 54,671 50,288 49,447
Total liabilities 7,323 12,534 14,536 18,463 19,904
Redeemable common stock 762 1,780 2,796 3,813 --
Shareholders' equity 31,158 40,159 37,339 28,012 29,543
</Table>
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements about the business, financial
condition and prospects of the Company. These statements are made under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The actual results of the Company could differ materially from those
indicated by the forward-looking statements because of various risks and
uncertainties, including without limitation, changes in product demand, the
availability of products, changes in competition, economic conditions, various
inventory risks due to changes in market conditions and other risks indicated in
the Company's filings and reports with the Securities and Exchange Commission.
All the foregoing risks and uncertainties are beyond the ability of the Company
to control, and in many cases, the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. When used in this report, the
words "believes," "plans," "expects," "intent" and "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements.
20
CONSOLIDATED STATEMENT OF OPERATIONS AS A PERCENTAGE OF REVENUES
<Table>
<Caption>
Year ended December 31,
2001 2000 1999
---------- ---------- ----------
Revenues 100.0% 100.0% 100.0%
Cost of sales 68.7% 46.7% 52.8%
---------- ---------- ----------
Gross margin 31.3% 53.3% 47.2%
Research and development 27.0% 18.6% 14.4%
Sales and marketing 23.7% 19.3% 15.0%
General and administrative 13.0% 8.6% 7.3%
Restructuring costs and other special charges 7.3% -- --
Goodwill impairment charge 8.2% -- --
---------- ---------- ----------
Operating (loss) income (47.9)% 6.8% 10.5%
---------- ---------- ----------
Interest, net 1.9% 1.1% (0.3)%
Other, net (2.0)% (0.5)% (1.1)%
---------- ---------- ----------
(Loss) income from continuing operations
before income taxes (48.0)% 7.4% 9.1%
(Benefit) provision for income taxes (14.7)% 3.1% 3.3%
---------- ---------- ----------
(Loss) income from continuing operations (33.3)% 4.3% 5.8%
Discontinued operations, net -- 1.0% (1.2)%
---------- ---------- ----------
Net (loss) income (33.3)% 5.3% 4.6%
========== ========== ==========
</Table>
RESULTS OF OPERATIONS
In September 1999, the Company completed the sale of its Voice Over Internet
Protocol ("VOIP") business. Accordingly, the Company's consolidated financial
statements and notes included herein, for all periods presented reflect the VOIP
business as a discontinued operation in accordance with Accounting Principles
Board Opinion No. 30.
Revenues consist of product and service revenues and are recognized in
accordance with SEC Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition." Product revenues are recognized upon shipment, provided fees are
fixed and determinable, a customer purchase order is obtained, and collection is
probable. Revenues from reseller agreements are recognized when the product is
sold through to the end customer unless an established return history supports
recognizing revenue upon shipment, less a provision for estimated sales returns.
The Company maintains its allowance for returns as a reduction to accounts
receivable. Deferred revenue consists of revenue from reseller arrangements and
certain arrangements with extended payment
21
terms. Revenue from extended payment terms is recognized in the period the
payment becomes due if all other revenue recognition criteria have been met.
Service revenue is recognized as the services are performed. The Company offers
to its customers a limited warranty that its products will be free from defect
in the materials and workmanship for a specified period. The Company has
established a warranty reserve, as a component of accrued liabilities, for any
potential claims.
REVENUES: Total revenues for the years ended December 31, 2001, 2000 and 1999
were $28.7 million, $55.7 million and $73.5 million, respectively.
Revenues decreased 48% in 2001 compared to 2000. The reduction in revenues is
generally due to the market slowdown experienced in 2001, which has
significantly reduced computer and communications equipment purchasing by key
customers, as well as the discontinuance of several lines of legacy
technologies. Legacy technology revenues decreased from $24.5 million for the
year ended December 31, 2000 to $8.8 million for the year ended December 31,
2001. The decrease in legacy technologies revenues was partially offset by
revenue growth in combo technologies. Combo technologies revenue grew to $6.8
million for the year ended December 31, 2001 from $2.7 million for the year
ended December 31, 2000.
Revenues decreased 24% in 2000 compared to 1999. The decrease in revenue was
primarily attributable to the effects of the transitional period where the
Company refocused its efforts on its new Fibre Channel and Telecom Communication
Controller products. During this period, several of the new Fibre Channel
products experienced delays in the engineering phase. Due to the intense
competition in the industry, these delays had a significant impact on sales
during 2000. Additionally, 30% of the revenues in 1999 were attributable to
Hewlett Packard's purchases of a Fibre Channel product, which ceased in the
first quarter of 2000. The decrease in revenues during 2000 was partially offset
by sales of products through an end-of-life program instituted in 2000 for many
of the Company's legacy products. The Company began this program in an effort to
focus its resources on its new product lines.
GROSS MARGIN: Gross margin as a percentage of sales for the years ended December
31, 2001, 2000 and 1999 was 31%, 53% and 47%, respectively.
The gross margin rate declined in 2001 compared to 2000 by approximately sixteen
percentage points due to an excess and obsolete inventory charge of $4.4 million
incurred in the second quarter 2001, as described in the restructuring costs and
other special charges section below. The remaining portion of the decline was
due to the shift in product mix away from higher margin legacy products and
underutilization of the Company's manufacturing facility.
The gross margin rate in 2000 increased six percentage points compared to 1999.
This increase is primarily the result of a change in product mix and product
cost improvements that began in late 1999, whereby the Company improved its
purchasing and production processes.
22
RESEARCH AND DEVELOPMENT: The Company's investment in the development of new
products through research and development was $7.8 million, $10.4 million and
$10.6 million in 2001, 2000 and 1999, respectively. As a percentage of revenue,
research and development expenses were 27%, 19% and 14% for 2001, 2000 and 1999,
respectively.
Research and development costs decreased $2.6 million in 2001 compared to 2000.
Approximately 41% of the decrease was due to the Company's restructuring program
and other cost reduction initiatives implemented at the end of the second
quarter 2001, as described in the restructuring costs and other special charges
section below. The remaining portion of the decrease primarily related to
decreased spending on legacy sustaining engineering, partially offset by an
increase in telecommunications development spending. Research and development
costs as a percentage of sales increased during this period due to the decrease
in revenues.
Research and development costs decreased slightly in 2000 compared to 1999,
primarily due to a reduction in variable spending in response to decreased
revenues for the year. However, the research and development investment in 2000
resulted in new products that have provided the foundation for the Company's
product lines in 2001 and beyond. Research and development costs as a percentage
of sales increased during this period due to the decrease in revenues.
SALES AND MARKETING: Sales and marketing expenses were $6.8 million, $10.7
million, and $11 million in 2001, 2000 and 1999, respectively. As a percentage
of revenue, sales and marketing expenses were 24%, 19% and 15% for 2001, 2000
and 1999, respectively.
Sales and marketing expenses decreased $3.9 million in 2001 compared to 2000.
Approximately 34% of the decrease was due to decreased revenues, which resulted
in reduced sales commissions and bonuses. The remaining portion of the decrease
primarily relates to the Company's restructuring program and other cost
reduction initiatives implemented at the end of the second quarter 2001, as
described in the restructuring costs and other special charges section below.
Sales and marketing expenses as a percentage of sales increased due to the
decrease in revenues.
Sales and marketing expenses decreased slightly in 2000 compared to 1999,
primarily due to decreased revenues, which resulted in reduced sales commissions
and bonuses for the year, partially offset by increased marketing activity used
to position the Company for future product releases. Sales and marketing
expenses as a percentage of sales increased due to the decrease in revenues.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $3.8
million, $4.8 million, and $5.4 million in 2001, 2000 and 1999, respectively. As
a percentage of revenue, general and administrative expenses were 13%, 9% and 7%
for 2001, 2000 and 1999, respectively.
General and administrative expenses decreased $1.1 million in 2001 compared to
2000, primarily as a result of the Company's restructuring program and cost
reduction initiatives implemented at the end of the second quarter 2001, as
described in the restructuring costs and other special
23
charges section below. General and administrative expenses as a percentage of
sales increased due to the decrease in revenues.
General and administrative expenses decreased in 2000 compared to 1999,
primarily due to lower headcount related expenses, as the number of employees in
the general and administrative function decreased from 33 as of December 31,
1999 to 25 as of December 31, 2000. General and administrative expenses as a
percentage of sales increased due to the decrease in revenues.
RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES: In the second quarter 2001, the
Company announced a restructuring program designed to allow the Company to
continue aggressive funding of its development organizations, while preserving
cash levels and securing new design-ins. As a result of the restructuring
program, continued decline in predicted revenue and customers' cautious
expectations that the market recovery may now be delayed until 2002, the Company
recorded restructuring costs and other special charges of $2.1 million,
classified as operating expenses, and an additional excess and obsolete
inventory charge of $4.4 million, classified as cost of sales.
The restructuring program resulted in the reduction of approximately 22% of the
Company's workforce, impacting all business functions in North America. As a
result, the Company recorded a workforce reduction charge of $483,000 relating
to severance and fringe benefits. In addition, the Company wrote off $123,000 of
nonutilized fixed assets.
Due to the decline in current business conditions, decline in legacy product
revenues and the diminished expected future benefits from the purchased
intangibles related to the acquisition of Synaptel, S.A. in 1996, the Company
recorded a charge of $1.5 million related to the impairment of developed
technology and assembled workforce. These intangible assets, purchased in the
acquisition of Synaptel, S.A., relate to the Company's legacy product lines. In
the second quarter 2000, the Company developed a strategy to end-of-life many of
its legacy products in an effort to focus its resources on its new product
lines. This strategy resulted in increased sales of legacy products in 2000;
however, legacy product sales declined in the first quarter of 2001, and
continued to decline through the second quarter of 2001. Management did not
expect significant revenues from its legacy product lines in future periods.
The Company wrote off $5.9 million of excess and obsolete inventory during the
second quarter of 2001, resulting in an additional charge to cost of sales of
$4.4 million. Approximately 74% of the write-off relates to the Company's legacy
product lines. The remaining $1.5 million of excess and obsolete inventory
written off was charged against the already established reserve. This additional
excess and obsolete inventory charge was due to a sudden and significant
decrease in predicted revenue and was calculated in accordance with the
Company's established policy.
GOODWILL IMPAIRMENT CHARGE: All of the Company's goodwill is associated with the
entire company rather than any specific identifiable asset or product line. Each
quarter the Company evaluates whether an impairment of this enterprise goodwill
may exist by comparing the book value of its common stock to the product of (i)
the number of shares of common stock issued and
24
outstanding at the end of the quarter and (ii) the market price of the common
stock at the end of the quarter. If the product of shares and market price
exceeds the book value, impairment does not exist. If the product of shares and
market price is less than book value, the Company evaluates whether the
condition is other than temporary based (i) primarily on whether fluctuations in
the Company's stock price subsequent to the quarter-end result in a product of
shares and market price that exceeds book value and (ii) on all other available
evidence. If the product of shares and market price is continuously less than
book value based on daily closing market prices for the prior six months, the
Company evaluates whether the condition is other than temporary considering all
other available evidence. If the Company determines the condition is other than
temporary, additional amortization is recorded for the impairment, equal to the
excess book value at the end of the quarter.
The Company recorded an impairment charge, at the end of the fourth quarter 2001
by writing-off the remaining $2.4 million of goodwill. At December 31, 2001, the
Company had 5.5 million common shares issued and outstanding with a book value
of $33.5 million. The common stock price at December 31, 2001 was $5.44,
resulting in a market capitalization of $30 million. The Company's market
capitalization has consistently been less than book value since June 30, 2001,
and has continued to remain below book value through February 6, 2001. As a
result of the Company's market capitalization continuously remaining below book
value for a period of greater than six months and the uncertainty related to the
timing of a technology sector market recovery, the Company, following its stated
policy, recorded the impairment charge of $2.4 million at the end of the fourth
quarter 2001.
INTEREST, NET: Interest income, net of interest expense, was $554,000, $599,000
and ($213,000) in 2001, 2000 and 1999, respectively.
The decrease in interest income, net, of interest expense in 2001 compared to
2000 relates to the reduction in the investment rate of return on the funds
available for investment. This reduction was partially offset by higher daily
cash levels available for investment, as well as lower debt levels.
The increase in interest income, net of interest expense in 2000 compared to
1999 relates to higher daily cash levels available for investment and lower debt
levels.
OTHER EXPENSE, NET: Other expense, net, was $574,000, $266,000 and $817,000 in
2001, 2000 and 1999, respectively. Other expense, net includes the amortization
of goodwill and purchased intangibles related to a 1996 acquisition of Synaptel.
The increase in other expense, net, in 2001 compared to 2000 primarily relates
to a charge of $334,000 due to the other than temporary impairment of certain
marketable securities received in the sale of the Company's VOIP business. This
charge was partially offset by the elimination of the purchased intangibles
amortization expense. As described in Note 2 to the financial statements, the
Company wrote off the impaired purchased intangibles during the second quarter
of 2001. These purchased intangibles were amortized at a rate of $165,000 per
quarter. Additionally, other expense, net in 2000 includes a gain of
approximately $689,000 related to hedging transactions on certain marketable
securities received in the sale of the Company's VOIP business.
25
The decrease in other expense, net in 2000 compared to 1999 is primarily due to
the increase in other income generated by hedging transactions on certain
marketable securities received in the sale of the Company's VOIP business. For
the year ended December 31, 2000, these hedging transactions resulted in a gain
of approximately $689,000.
INCOME TAXES: The Company's effective income tax rates were (31%) in 2001, 42%
in 2000 and 36% in 1999.
The Company's effective tax benefit rate differed from the statutory rate in
fiscal 2001 primarily due to the impairment of goodwill and other identifiable
intangibles, which was nondeductible for tax purposes.
The increase in the Company's effective income tax rate from 1999 to 2000 is
primarily due to the decrease in foreign earnings, which are offset by a foreign
loss carry forward.
DISCONTINUED OPERATIONS: In 1999, the Company sold its VOIP business for $2.4
million. However, due to the uncertainty of payment on the proceeds that
remained unpaid as of December 31, 1999, the Company recognized income upon
payment. In 2000, the remaining $830,000 due for the technology license fee was
collected and recorded as a gain on disposal of discontinued operations.
Additionally, in 2000, the Company sold its 20% interest in Quescom for
$400,000, resulting in a gain of $91,000. The total gain in 2000 was $571,000
net of $350,000 tax. There were no operating activities during 2000 related to
the VOIP business. Gain on disposal of assets was $326,000, net of tax, in 1999.
Operating losses, net of tax, for the VOIP business were $1.2 million for 1999.
NET (LOSS) INCOME: The Company reported a net loss of $9.6 million in 2001, net
income of $3 million in 2000, and net income of $3.4 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, cash and cash equivalents totaled $10.4 million, a
decrease of $172,000 from the December 31, 2000 balance of $10.6 million. The
decrease was attributable to cash used by financing activities of $5.9 million,
partially offset by cash provided by operating activities of $4.8 million and
cash provided by investing activities of $925,000. Cash used by financing
activities was primarily comprised of purchasing a $3.5 million certificate of
deposit as collateral for the line of credit, payments on debt of $1.7 million
and the purchase of redeemable common stock of $1 million. Significant noncash
adjustments to the net loss were $1.8 million of depreciation and amortization
expense, a $6 million restructuring charge, a $2.4 million impairment charge,
offset by a $2 million change in the deferred tax asset. Cash provided by
operating activities was due to a $9 million decrease in accounts receivable, a
$2 million decrease in inventory, offset by a $2 million increase in prepaid and
other current assets and $2.7 million decrease in accounts payable, deferred
revenue and accrued liabilities. Cash provided by
26
investing activities was primarily the result of net proceeds from the sale of
marketable securities of $1.5 million, which was partially offset by additions
to property, equipment, capitalized software and leasehold improvements of
$585,000.
At December 31, 2001, the Company had no material commitments to purchase
capital assets. The Company's significant long-term obligations are its
operating leases on its facilities, future debt payments and repurchase of
Interphase common stock from Motorola, Inc. (described below). The Company has
not paid any dividends since its inception and does not anticipate paying any
dividends in 2002.
In October 2001, the Company announced that its Board of Directors had
authorized the repurchase of up to $5 million of its common stock. Purchases are
authorized to be made from time to time during a twenty-four month period in the
open market or in privately negotiated transactions depending on market
conditions. The Company will cancel all shares that it repurchases. The
repurchase plan does not obligate the Company to repurchase any specific number
of shares and may be suspended at any time.
The Company has a $5 million revolving credit facility with a financial
institution. The revolving credit facility expires in June 2003. As of December
31, 2001, the Company had borrowings of $3.5 million classified as long-term
debt on its balance sheet which are fully secured by a $3.5 million certificate
of deposit.
Effective October 1998, the Company approved a stock repurchase agreement with
Motorola, Inc. to purchase ratably from October 1998 to July 2002, all of the
shares owned by Motorola for $4.1 million at $6.25 per share. 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 cancels the stock upon each
repurchase. 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
sheets. As of December 31, 2001, 538,004 shares have been repurchased for $3.4
million and retired; 121,996 shares remain to be repurchased.
The Company expects that its cash, cash equivalents, marketable securities and
proceeds from its credit facility will be adequate to meet foreseeable cash
needs for the next twelve months. However, it is possible that the Company may
require additional sources of financing earlier than anticipated, as a result of
unexpected cash needs or opportunities, an expanded growth strategy or
disappointing operating results. Additional funds may not be available on
satisfactory terms when needed, whether within the next twelve to eighteen
months or thereafter.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." The most significant changes
made by SFAS No. 141 are: 1) requiring that the purchase method of accounting be
used for all business combinations initiated after
27
June 30, 2001; and 2) establishing specific criteria for the recognition of
intangible assets separately from goodwill. SFAS No. 142 primarily addresses the
accounting for acquired goodwill and intangible assets. The provisions of SFAS
No. 142 will be effective for fiscal years beginning after December 15, 2001.
The most significant changes made by SFAS No. 142 are: 1) goodwill and
indefinite-lived intangible assets will no longer be amortized; 2) goodwill will
be tested annually and whenever events or circumstances occur indicating that
goodwill might be impaired and 3) the amortization period of intangible assets
with finite lives will no longer be limited to forty years. The Company adopted
SFAS No. 141 effective July 1, 2001 and SFAS No. 142 effective January 1, 2002.
Adoption of these standards did not have a material effect on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to all entities and legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and are subsequently allocated to expense over the asset's
useful life. This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company does not believe the
adoption of this standard will have a material impact on its financial
statements or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This statement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
however, this statement retains the fundamental provisions of SFAS No. 121 for
1) recognition and measurement of the impairment of long-lived assets to be held
and used and 2) measurement of long-lived assets to be disposed of by sale. This
statement also supersedes the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for segments of a business to be disposed of.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
The Company does not believe that the adoption of SFAS No. 144 will have a
material effect on its financial position or results of operations.
28
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Risk
Revenues originating outside of the United States totaled 20%, 15% and 17% of
total revenues in 2001, 2000 and 1999. Due to the fact that the Company conducts
business on a global basis in various foreign currencies, it is exposed to
adverse movements in foreign currency exchange rates. Our operations in France
are measured in the local currency converted to the U.S. dollar equivalent based
on published exchange rates for the periods reported and are therefore subject
to risk of exchange rate fluctuations. Foreign currency translation and
transaction gains and losses were not significant.
Market Price Risk
The Company maintains a minority equity investment in a publicly traded Company
and recorded a $334,000 net after tax loss during 2001 on this investment.
During 2000 the Company entered into a hedge on a portion of this equity
investment, realizing a gain of $689,000 on the transaction. The Company has no
equity hedge contracts outstanding as of December 31, 2000 or December 31, 2001.
Interest Rate Risk
Our investments are subject to interest rate risk. Interest rate risk is the
risk that our financial condition and results of operations could be adversely
affected due to movements in interest rates. We invest our cash in a variety of
interest-earning financial instruments, including bank time deposits, money
market funds, and variable rate and fixed rate obligations of corporations and
national governmental entities and agencies. Due to the demand nature of our
money market funds and the short-term nature of our time deposits and debt
securities portfolio, these assets are particularly sensitive to changes in
interest rates. We manage this risk through investments with shorter-term
maturities and varying maturity dates. If our short-term assets are reinvested
in a declining interest rate environment, we would experience an immediate
negative impact on other income. The opposite holds true in a rising interest
rate environment.
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
29
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 1, 2002, which is incorporated herein by reference.
EXECUTIVE OFFICERS
As of March 4, 2002, the executive officers of the Company, their respective
ages, positions held and tenure as officers are listed below:
<Table>
<Caption>
EXECUTIVE
OFFICERS OF
THE COMPANY
NAME AGE POSITION(S) HELD WITH THE COMPANY SINCE
---- --- --------------------------------- -----------
Gregory B. Kalush 45 Chairman of the Board, 1998
Chief Executive Officer and President
Steven P. Kovac 46 Chief Financial Officer, Treasurer and 1999
Vice President of Finance
</Table>
GREGORY B. KALUSH joined the Company in February 1998, as Chief Financial
Officer, Vice President of Finance and Treasurer. Mr. Kalush was appointed the
Chief Executive Officer, President and Director of the Company in March 1999 and
was elected Chairman of the Board in May 2000. Mr. Kalush is also the sole
member of the New Employee and Retention Stock Option Committee of the Board of
Directors. 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 Business Unit, Director of Finance, Planning and Administration
for the Southwest area, and Division Director of Finance and Operations for the
Data Systems division.
STEVEN P. KOVAC joined the Company in May 1999 as Chief Financial Officer, Vice
President of Finance and Treasurer. Prior to Interphase, from 1997 to 1999 Mr.
Kovac served as Chief Operating Officer and Chief Financial Officer for TPN
Inc., a satellite television network. From 1989 to 1997 Mr. Kovac was the
Regional Vice President of Finance and Chief Financial Officer for AT&T Wireless
Services, McCaw Cellular Communications and LIN Cellular Communications. From
1988 to 1989, Mr. Kovac was Vice President of Finance and Administration for BBL
Industries, a manufacturer of paging terminals and voice messaging equipment.
30
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 1, 2002, 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 1, 2002, 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 1, 2002, 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 Registrant has filed no Reports on Form 8-K during the quarter ended
December 31, 2001.
31
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 26, 2002 By: /s/ Gregory B. Kalush
--------------------------------------
Gregory B. Kalush
Chairman of the Board,
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 26, 2002.
<Table>
<Caption>
Name Title
---- -----
/s/ Gregory B. Kalush Chairman of the Board,
------------------------------ Chief Executive Officer and President
Gregory B. Kalush (Principal executive officer)
/s/ Steven P. Kovac Chief Financial Officer, Treasurer and
------------------------------ Vice President of Finance
Steven P. Kovac (Principal financial officer)
/s/ James F. Halpin Director
------------------------------
James F. Halpin
/s/ Paul N. Hug Director
------------------------------
Paul N. Hug
/s/ Randall D. Ledford Director
------------------------------
Randall D. Ledford
/s/ David H. Segrest Director
------------------------------
David H. Segrest
/s/ S. Thomas Thawley Vice Chairman, Director
------------------------------ and Secretary
S. Thomas Thawley
/s/ William R. Voss Director
------------------------------
William R. Voss
</Table>
32
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<Table>
Management's Report on Financial Responsibility F-2
Report of Independent Public Accountants -
Arthur Andersen LLP F-3
Consolidated Balance Sheets - As of December 31, 2001 and 2000 F-4
Consolidated Statements of Operations - Years Ended
December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements F-8 to F-24
</Table>
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 accounting principles generally
accepted in the United States 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 three 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
Chairman of the Board,
Chief Executive Officer and President
February 6, 2002
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, 2001 and
2000, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. 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 auditing standards generally accepted
in the United States. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 6, 2002
F-3
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares data)
<Table>
<Caption>
December 31,
---------------------------
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 10,415 $ 10,587
Marketable securities 5,216 6,886
Restricted cash 3,500 --
Trade accounts receivable, less allowances for uncollectible
accounts and returns of $170 and $273, respectively 5,046 14,085
Inventories 6,655 13,193
Prepaid expenses and other current assets 480 941
Income taxes receivable 2,476 --
Deferred income taxes 1,636 844
------------ ------------
Total current assets 35,424 46,536
------------ ------------
Machinery and equipment 6,117 8,033
Leasehold improvements 2,936 2,954
Furniture and fixtures 543 490
------------ ------------
9,596 11,477
Less-accumulated depreciation and amortization (8,653) (9,755)
------------ ------------
Total property and equipment, net 943 1,722
------------ ------------
Capitalized software, net 335 490
Deferred income taxes, net 2,373 1,146
Acquired developed technology, net -- 1,680
Goodwill, net -- 2,590
Other assets 168 309
------------ ------------
Total assets $ 39,243 $ 54,473
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 921 $ 1,417
Deferred revenue 110 1,093
Accrued liabilities 1,615 2,816
Accrued compensation 1,177 1,947
Income taxes payable -- 78
Current portion of debt -- 1,683
------------ ------------
Total current liabilities 3,823 9,034
Long-term debt, net of current portion 3,500 3,500
------------ ------------
Total liabilities 7,323 12,534
COMMITMENTS AND CONTINGENCIES
Common stock redeemable; 121,996 and 284,664 shares, respectively 762 1,780
SHAREHOLDERS' EQUITY
Common stock, $.10 par value; 100,000,000 shares authorized;
5,518,476 and 5,480,550 shares issued and outstanding, respectively 552 548
Additional paid in capital 37,324 36,805
Retained (deficit) earnings (6,394) 3,178
Cumulative other comprehensive loss (324) (372)
------------ ------------
Total shareholders' equity 31,158 40,159
------------ ------------
Total liabilities and shareholders' equity $ 39,243 $ 54,473
============ ============
</Table>
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)
<Table>
<Caption>
Years ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues $ 28,732 $ 55,697 $ 73,502
Cost of sales 19,728 26,009 38,800
------------ ------------ ------------
Gross margin 9,004 29,688 34,702
------------ ------------ ------------
Research and development 7,757 10,359 10,590
Sales and marketing 6,812 10,731 11,036
General and administrative 3,759 4,824 5,366
Restructuring costs and other special charges 2,091 -- --
Goodwill impairment charge 2,350 -- --
------------ ------------ ------------
Total operating expenses 22,769 25,914 26,992
------------ ------------ ------------
Operating (loss) income (13,765) 3,774 7,710
Interest, net 554 599 (213)
Other, net (574) (266) (817)
------------ ------------ ------------
(Loss) income from continuing operations
before income taxes (13,785) 4,107 6,680
(Benefit) provision for income taxes (4,213) 1,707 2,389
------------ ------------ ------------
(Loss) income from continuing operations (9,572) 2,400 4,291
Discontinued operations (Note 8)
Gain on disposal of VOIP business, net of tax -- 571 326
Operating losses from VOIP business, net of tax -- -- (1,193)
------------ ------------ ------------
Net (loss) income $ (9,572) $ 2,971 $ 3,424
============ ============ ============
(Loss) income from continuing operations per share
Basic EPS $ (1.68) $ 0.41 $ 0.77
------------ ------------ ------------
Diluted EPS $ (1.68) $ 0.38 $ 0.70
------------ ------------ ------------
Net (loss) income per share
Basic EPS $ (1.68) $ 0.51 $ 0.61
------------ ------------ ------------
Diluted EPS $ (1.68) $ 0.48 $ 0.56
------------ ------------ ------------
Weighted average common shares 5,705 5,805 5,593
------------ ------------ ------------
Weighted average common and dilutive shares 5,705 6,237 6,113
------------ ------------ ------------
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<Table>
<Caption>
Cumulative
Common Stock Additional Retained Other
------------------ Paid in Earnings Comprehensive Comprehensive
Shares Amount Capital (Deficit) Income (Loss) Total Income (Loss)
------- ------- ---------- ---------- ------------- -------- --------------
Balance at December 31, 1998 4,862 $ 487 $ 30,734 $ (3,217) $ 8 $ 28,012
------- ------- ---------- ---------- ------------ --------
Option exercises, including related tax
benefit 529 52 5,264 -- -- 5,316 $ --
Comprehensive income (loss):
Foreign currency translation -- -- -- -- (105) (105) (105)
Unrealized holding period gain,
net of tax -- -- -- -- 692 692 692
Net income -- -- -- 3,424 -- 3,424 3,424
------------
Total comprehensive income -- -- -- -- -- -- $ 4,011
------- ------- ---------- ---------- ------------ -------- ------------
Balance at December 31, 1999 5,391 $ 539 $ 35,998 $ 207 $ 595 $ 37,339
------- ------- ---------- ---------- ------------ --------
Option exercises, including related tax
benefit 90 9 807 -- -- 816 $ --
Comprehensive income (loss):
Foreign currency translation -- -- -- -- (80) (80) (80)
Unrealized holding period loss,
net of tax -- -- -- -- (887) (887) (887)
Net income -- -- -- 2,971 -- 2,971 2,971
------------
Total comprehensive income -- -- -- -- -- -- $ 2,004
------- ------- ---------- ---------- ------------ -------- ------------
Balance at December 31, 2000 5,481 $ 548 $ 36,805 $ 3,178 $ (372) $ 40,159
------- ------- ---------- ---------- ------------ --------
Option exercises, including related tax
benefit 38 4 523 -- -- 527 $ --
Stock repurchase (1) -- (4) -- -- (4) --
Comprehensive income (loss):
Foreign currency translation -- -- -- -- (120) (120) (120)
Unrealized holding period gain,
net of tax -- -- -- -- 168 168 168
Net loss -- -- -- (9,572) -- (9,572) (9,572)
------------
Total comprehensive income -- -- -- -- -- -- $ (9,524)
------- ------- ---------- ---------- ------------ -------- ------------
Balance at December 31, 2001 5,518 $ 552 $ 37,324 $ (6,394) $ (324) $ 31,158
------- ------- ---------- ---------- ------------ --------
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<Table>
<Caption>
Years ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations $ (9,572) $ 2,400 $ 4,291
Operating loss from discontinued operations -- -- (1,193)
Gain on disposal of discontinued operations -- 571 326
Adjustments to reconcile (loss) income from continuing operations
to net cash provided by operating activities:
Noncash realized holding period loss on marketable securities 334 -- --
Depreciation and amortization 1,846 2,615 3,640
Deferred income taxes (2,019) 242 (340)
Tax benefit from stock option exercises 199 277 1,500
Noncash restructuring costs and other special charges 6,002 -- --
Goodwill impairment charge 2,350 -- --
Change in assets and liabilities:
Trade accounts receivable 9,039 1,013 (289)
Inventories 2,144 (1,515) 1,810
Prepaid expenses and other current assets 461 (388) (527)
Income taxes receivable (2,476) -- --
Accounts payable, deferred revenue and accrued liabilities (2,680) 518 (787)
Accrued compensation (770) (184) 90
Income taxes payable (78) (676) (654)
------------ ------------ ------------
Net adjustments 14,352 2,473 3,576
------------ ------------ ------------
Net cash provided by operating activities 4,780 4,873 7,867
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, equipment, capitalized software and leasehold improvements (585) (1,093) (2,003)
Decrease in other assets 6 304 916
Cash received in sale of VOIP business -- 1,230 600
Proceeds from the sale of marketable securities 6,667 852 --
Purchases of marketable securities, net of unrealized holding period gain or loss (5,163) (3,337) (1,166)
------------ ------------ ------------
Net cash provided (used) by investing activities 925 (2,044) (1,653)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash (3,500) -- --
Decrease in other long-term liabilities -- (570) (303)
Payments on debt (1,683) (2,183) (2,253)
Purchase of redeemable common stock (1,018) (1,016) (1,017)
Purchase of common stock (4) -- --
Proceeds from the exercise of stock options 328 539 3,816
------------ ------------ ------------
Net cash (used) provided by financing activities (5,877) (3,230) 243
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (172) (401) 6,457
Cash and cash equivalents at beginning of year 10,587 10,988 4,531
------------ ------------ ------------
Cash and cash equivalents at end of year $ 10,415 $ 10,587 $ 10,988
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 229 $ 1,729 $ 1,703
Interest paid $ 311 $ 608 $ 698
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
INTERPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS: Interphase Corporation and subsidiaries
("Interphase" or the "Company") designs, develops, manufactures, markets and
supports high-performance connectivity products utilizing advanced technologies
being used in next-generation telecommunication networks and enterprise
data/storage networks. Interphase's products include telecom communication
controllers, server-based adapter cards, network operating system device
drivers, software development tools, professional services and management
software applications.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The accompanying
consolidated interim financial statements include the accounts of Interphase
Corporation and its wholly owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated.
In September 1999, the Company completed the sale of its Voice Over Internet
Protocol ("VOIP") businesses. Accordingly, the Company's consolidated financial
statements and notes included herein, for all periods presented reflect the VOIP
business as a discontinued operation in accordance with Accounting Principles
Board Opinion No. 30. See further discussion of the sale in Note 8.
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.
INVESTMENTS: Investments in debt and equity securities are classified as
available for sale with unrealized holding gains and losses reported in other
comprehensive income. Gains and losses from securities sold are calculated using
the specific identification method. Management determines the appropriate
classification of securities at the time of purchase. Earnings from debt
securities are calculated on a yield to maturity basis and recorded in the
results of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: As of December 31, 2001, 2000 and 1999, the
allowance for doubtful accounts was $170,000, $273,000 and $260,000. The
activity in this account was as follows (in thousands):
<Table>
<Caption>
Balance at Write-offs Balance
Beginning Charged to Net of at End
Year Ended: of Period Expense Recoveries of Period
- ----------- ------------ ------------ ------------ ------------
December 31, 2001 $ 273 $ (60) $ (43) $ 170
December 31, 2000 260 358 (345) 273
December 31, 1999 164 120 (24) 260
</Table>
ALLOWANCE FOR RETURNS: The Company maintains an allowance for returns based on
historical returns experience. As of December 31, 2001, 2000 and 1999, the
allowance for returns was $200,000, maintained as a reduction to accounts
receivable.
F-8
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):
<Table>
<Caption>
Years ended December 31,
---------------------------
2001 2000
------------ ------------
Raw Materials $ 4,740 $ 9,439
Work-in-process 1,397 3,280
Finished Goods 518 474
------------ ------------
Total $ 6,655 $ 13,193
============ ============
</Table>
Valuing inventory at the lower of cost or market involves an inherent level of
risk and uncertainty due to technology trends in the industry and customer
demand for our products. Future events may cause significant fluctuations in our
operating results.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation is 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):
<Table>
<Caption>
Year ended December 31: Depreciation Expense Accumulated Depreciation
- ----------------------- -------------------- ------------------------
2001 $ 1,039 $ 8,653
2000 $ 1,370 $ 9,755
1999 $ 2,035 $ 10,334
</Table>
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 three to five years utilizing the
straight-line method. Related amortization expense and accumulated amortization
were as follows (in thousands):
<Table>
<Caption>
Year ended December 31: Amortization Expense Accumulated Amortization
- ---------------------- -------------------- ------------------------
2001 $ 237 $ 2,040
2000 $ 345 $ 2,139
1999 $ 280 $ 1,875
</Table>
LONG-LIVED ASSETS: 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. All impairments are recognized in
operating results when a permanent reduction in value occurs.
F-9
REVENUE RECOGNITION: Revenues consist of product and service revenues and are
recognized in accordance with SEC Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition." Product revenues are recognized upon shipment, provided
fees are fixed and determinable, a customer purchase order is obtained, and
collection is probable. Revenues from reseller agreements are recognized when
the product is sold through to the end customer unless an established return
history supports recognizing revenue upon shipment, less a provision for
estimated sales returns. The Company maintains its allowance for returns as a
reduction to accounts receivable. Deferred revenue consists of revenue from
reseller arrangements and certain arrangements with extended payment terms.
Revenue from extended payment terms is recognized in the period the payment
becomes due if all other revenue recognition criteria have been met. Service
revenue is recognized as the services are performed. The Company offers to its
customers a limited warranty that its products will be free from defect in the
materials and workmanship for a specified period. The Company has established a
warranty reserve, as a component of accrued liabilities, for any potential
claims.
CONCENTRATION OF CREDIT RISK: Financial instruments which potentially expose the
Company to concentrations of credit risk consist primarily of trade accounts
receivable. The majority of the Company's sales have been to original equipment
manufacturers of computer systems or telecommunication networks.
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 as a
component of comprehensive income (loss).
INCOME TAXES: The Company determines its deferred taxes using the liability
method. 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.
CERTAIN RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform with the 2001 presentation.
USE OF ESTIMATES: The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States, requires Company
management to make estimates and assumptions that affect the reported amounts of
assets
F-10
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.
Areas involving significant estimates are the allowance for bad debts, warranty
reserves, allowance for returns and inventory valuation.
2. RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES
In the second quarter 2001, the Company announced a restructuring program
designed to allow the Company to continue aggressive funding of its development
organizations, while preserving cash levels and securing new design-ins. As a
result of the restructuring program, continued decline in predicted revenue and
customers' cautious expectations that the market recovery may now be delayed
until 2002, the Company recorded restructuring costs and other special charges
of $2.1 million, classified as operating expenses, and an additional excess and
obsolete inventory charge of $4.4 million, classified as cost of sales.
The restructuring program resulted in the reduction of approximately 22% of the
Company's workforce, impacting all business functions in North America. As a
result, the Company recorded a workforce reduction charge of $483,000 relating
to severance and fringe benefits. In addition, the Company wrote off $123,000 of
nonutilized fixed assets.
Due to the decline in current business conditions, decline in legacy product
revenues and the diminished expected future benefits from the purchased
intangibles related to the acquisition of Synaptel, S.A. in 1996, the Company
recorded a charge of $1.5 million related to the impairment of developed
technology and assembled workforce. These intangible assets, purchased in the
acquisition of Synaptel, S.A., relate to the Company's legacy product lines. In
the second quarter 2000, the Company developed a strategy to end-of-life many of
its legacy products in an effort to focus its resources on its new product
lines. This strategy resulted in increased sales of legacy products in 2000;
however, legacy product sales declined in the first quarter of 2001, and
continued to decline through the second quarter of 2001. Management did not
expect significant revenues from its legacy product lines in future periods.
The Company wrote off $5.9 million of excess and obsolete inventory during the
second quarter of 2001, resulting in an additional charge to cost of sales of
$4.4 million. Approximately 74% of the write-off relates to the Company's legacy
product lines. The remaining $1.5 million of excess and obsolete inventory
written off was charged against the already established reserve. This additional
excess and obsolete inventory charge was due to a sudden and significant
decrease in predicted revenue and was calculated in accordance with the
Company's established policy.
F-11
Only the severance and fringe benefit payments relating to the workforce
reduction impacted cash flow. A summary of the restructuring costs and other
special charges is outlined as follows (in thousands):
<Table>
<Caption>
Second
Quarter Cash Third Fourth
Payments and Quarter Quarter Accrual
Total Noncash Cash Cash Balance at
Charge Charges Payments Payments Dec. 31, 2001
------------ ------------ ------------ ------------ -------------
Workforce reduction $ 483 $ 17 $ 384 $ 82 $ --
Fixed asset write-off 123 123 -- -- --
Impairment of purchased
intangibles 1,485 1,485 -- -- --
Excess and obsolete
inventory charge 4,394 4,394 -- -- --
------- ------- ----- ----- ------
$ 6,485 $ 6,019 $ 384 $ 82 $ --
======= ======= ===== ===== ======
</Table>
3. GOODWILL IMPAIRMENT CHARGE
All of the Company's goodwill is associated with the entire company rather than
any specific identifiable asset or product line. Each quarter the Company
evaluates whether an impairment of this enterprise goodwill may exist by
comparing the book value of its common stock to the product of (i) the number of
shares of common stock issued and outstanding at the end of the quarter and (ii)
the market price of the common stock at the end of the quarter. If the product
of shares and market price exceeds the book value, impairment does not exist. If
the product of shares and market price is less than book value, the Company
evaluates whether the condition is other than temporary based (i) primarily on
whether fluctuations in the Company's stock price subsequent to the quarter-end
result in a product of shares and market price that exceeds book value and (ii)
on all other available evidence. If the product of shares and market price is
continuously less than book value based on daily closing market prices for the
prior six months, the Company evaluates whether the condition is other than
temporary considering all other available evidence. If the Company determines
the condition is other than temporary, additional amortization is recorded for
the impairment, equal to the excess book value at the end of the quarter.
The Company recorded an additional goodwill amortization charge, classified as a
goodwill impairment charge, at the end of the fourth quarter 2001 by writing-off
the remaining $2.4 million of goodwill. At December 31, 2001, the Company had
5.5 million common shares issued and outstanding with a book value of $33.5
million. The common stock price at December 31, 2001 was $5.44, resulting in a
market capitalization of $30 million. The Company's market capitalization has
consistently been less than book value since June 30, 2001, and has continued to
remain below book value through
F-12
February 6, 2001. As a result of the Company's market capitalization
continuously remaining below book value for a period of greater than six months
the Company, following its stated policy, recorded the additional goodwill
amortization charge at the end of the fourth quarter 2001.
4. INTANGIBLE ASSETS
As a result of the acquisition of Synaptel, S.A. ("Synaptel") the Company
acquired intangible assets related to developed technologies, assembled
workforce and goodwill. Developed technology and assembled workforce were
amortized on a straight-line basis over a seven-year period. As described in
Note 2, at the end of the second quarter 2001, the Company recorded an
impairment charge for assembled workforce and developed technology. Goodwill was
amortized on a straight-line basis over a 15-year period. As described in Note
3, at the end of the fourth quarter 2001, the Company recorded an impairment
charge for goodwill. The December 31, 2001 intangible balances at historical
cost and related amortization expense, impairment charge and accumulated
amortization were as follows (in thousands):
<Table>
<Caption>
Amortization Expense
------------------------ Accumulated Impairment Ending
Intangibles 2001 2000 1999 Amortization Charge Balance
------------ ------ ------ ------ ------------ ------------ ------------
Developed technology $ 4,230 $ 300 $ 600 $ 600 $ 2,850 $ 1,380 $ --
Assembled workforce 390 30 60 60 285 105 --
Goodwill-Synaptel 3,596 240 240 240 1,246 2,350 --
</Table>
5. MARKETABLE SECURITIES
Marketable securities consist of investments in equity and debt securities. As
of December 31, 2001 and 2000, the fair market value of marketable securities
was $5.2 million and $6.9 million, respectively. During 2001, the Company
recorded a charge of $334,000 due to the other than temporary impairment of
certain marketable securities received in the sale of the Company's VOIP
business. The Company had an unrealized gain of $168,000 (net of taxes) in 2001,
and an unrealized loss of $887,000 (net of taxes) in 2000, with respect to
certain available-for-sale securities.
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<Table>
<Caption>
Years ended December 31,
---------------------------
2001 2000
------------ ------------
Accrued outside commissions $ 108 $ 300
Accrued property tax 324 281
Accrued other 1,183 2,235
------------ ------------
$ 1,615 $ 2,816
============ ============
</Table>
F-13
7. CREDIT FACILITY
The Company maintains a $5 million credit facility with a bank. The revolving
credit facility matures June 30, 2003 and will be secured throughout the term of
the credit facility by a ninety-day certificate of deposit issued by the bank in
the principal amount equal to the stated principal amount of the promissory
note. The certificate of deposit is classified as restricted cash on the balance
sheet. The credit facility bears interest at the rate of 1% per annum above the
certificate of deposit rate, currently 2.39%, and includes certain restrictive
covenants including, among others, a tangible net worth restriction. At December
31, 2001, the Company was in compliance with all restrictive covenants included
in the revolving credit facility. At December 31, 2001, the Company had
borrowings of $3.5 million and availability under the revolving credit facility
was $1.5 million.
At December 31, 2001 and 2000, the Company's outstanding debt consisted of the
following (in thousands):
<Table>
<Caption>
Year ended December 31,
---------------------------
2001 2000
------------ ------------
Acquisition term loan $ -- $ 1,275
Equipment financing loan -- 408
Borrowings under revolving credit facility 3,500 3,500
------------ ------------
Total 3,500 5,183
Less current portion -- 1,683
------------ ------------
Total long-term debt $ 3,500 $ 3,500
============ ============
</Table>
8. DISPOSITION OF ASSETS
In June 1999, the Company sold an 80% interest in part of its VOIP business,
Quescom, for $1,130,000 to the former owner of Interphase's Paris Operation. The
sales proceeds consisted of $300,000 due at closing with a $830,000 technology
license fee. In January 2000, the remaining $830,000 due for the technology
license fee was collected and recorded as a gain on disposal of discontinued
operations. Additionally, in January 2000, the Company sold its 20% interest in
Quescom for $400,000, resulting in a gain of $91,000. The total gain in 2000 was
$571,000 net of $350,000 tax.
In September 1999, the Company sold its other VOIP business, Zirca Corporation
("Zirca"), along with the technologies developed by Zirca for $300,000 cash and
stock valued at $517,680 on the date of disposition, to UniView Technologies,
resulting in a gain of $140,000, net of $86,000 tax. The UniView securities
received as part of the agreement are included on the Balance Sheet in
Marketable Securities, and accounted for as available-for-sale securities.
F-14
The following are the results from discontinued operations for the periods
presented: (in thousands)
<Table>
<Caption>
Years ended December 31,
-------------------------------------------
2001 2000 1999
------------ ------------ ------------
Gain on disposal of discontinued
operations, net of tax $ -- $ 571 $ 326
Operating loss from discontinued
operations, net of tax -- -- (1,193)
------------ ------------ ------------
Net income (loss) from discontinued
operations $ -- $ 571 $ (867)
============ ============ ============
Net income (loss) from discontinued
operations per share
Basic EPS $ -- $ 0.10 $ (0.21)
Diluted EPS $ -- $ 0.09 $ (0.21)
</Table>
9. INCOME TAXES
The provision for income taxes applicable to continuing operations for each
period presented was as follows (in thousands):
<Table>
<Caption>
Year ended December 31,
-------------------------------------------
2001 2000 1999
------------ ------------ ------------
Current (benefit) provision $ (2,194) $ 1,465 $ 2,729
Deferred (benefit) provision (2,019) 242 (340)
------------ ------------ ------------
Income tax (benefit) expense $ (4,213) $ 1,707 $ 2,389
============ ============ ============
</Table>
Tax effect of temporary differences that give rise to significant components of
the deferred tax assets as of December 31, 2001 and 2000, are presented as
follows (in thousands):
<Table>
<Caption>
Year ended December 31,
----------------------------
2001 2000
------------ ------------
Current deferred tax assets:
Inventory $ 738 $ 176
Accounts receivable 71 151
Deferred revenue 17 372
Securities holding loss 127 --
Other accruals 683 145
------------ ------------
Total $ 1,636 $ 844
============ ============
Noncurrent deferred tax assets (liabilities), net:
Assets:
Depreciation $ 887 $ 912
Amortization 623 660
Net operating loss 1,338 --
------------ ------------
2,848 1,572
Liabilities:
Other (475) (426)
------------ ------------
Total $ 2,373 $ 1,146
============ ============
</Table>
F-15
As of December 31, 2001, the Company had $3.5 million of U.S. federal net
operating loss caryforwards. The net operating loss carryforwards expire in
2021. The Company has not recorded a valuation allowance with respect to the
various domestic 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 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):
<Table>
<Caption>
Year ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Income taxes at statutory rate $ (4,687) $ 1,396 $ 2,271
State income taxes (551) 189 168
Nondeductible goodwill
amortization 1,674 306 306
Benefit of foreign tax loss
carry-forward (342) (209) (339)
Change in effective tax rate (235) -- --
Other (72) 25 (17)
------------ ------------ ------------
Provision for income taxes $ (4,213) $ 1,707 $ 2,389
============ ============ ============
</Table>
10. NET INCOME 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):
<Table>
<Caption>
Years ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Weighted average
shares outstanding 5,705 5,805 5,593
Dilutive impact of stock options -- 432 520
---------- ---------- ----------
Total outstanding weighted
average common and common
equivalent shares 5,705 6,237 6,113
========== ========== ==========
</Table>
Antidilutive options of 1.9 million, 348,000 and 117,000 were excluded from the
dilutive calculation in 2001, 2000 and 1999, respectively.
11. COMMON STOCK
AMENDED AND RESTATED STOCK OPTION PLAN: In 2000, the Company amended and
restated its Stock Option Plan which, as amended, authorizes the issuance to
employees of up to 3,500,000 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
F-16
of grant, as determined by the Board of Directors. The Board of Directors may
provide for the exercise of options in installments and upon such terms,
conditions and restrictions as it may determine. Options granted prior to
January 1, 1999 generally vest ratably over a five-year period from the date of
grant. Options granted since January 1, 1999 generally vest ratably over a
three-year period from the date of grant. The term of option grants may be up to
ten years. Options are canceled upon the lapse of three months following
termination of employment except in the event of death or disability, as
defined.
UNITED KINGDOM 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 Board may provide for the exercise of options in installments
and upon such terms, conditions and restrictions as it may determine. Options
granted prior to January 1, 1999 generally vest ratably over a five-year period
from the date of grant. Options granted since January 1, 1999 generally vest
ratably over a three year period from the date of grant. The term of option
grants may be up to ten years. The options are canceled upon termination of
employment, except in the event of death, retirement or injury, as defined.
FRANCE STOCK OPTION SUB-PLAN: This plan was adopted in 2000 for the benefit of
the Company's employees located in France. 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. Unless otherwise
decided at the sole discretion of the Board, the options vest (i) 75% after the
expiration of a two-year period from the date of grant and (ii) 25% after the
expiration of a three-year period from the date of grant. Except for the events
provided under the French tax code, the shares cannot be sold or otherwise
disposed of for a period of five years from the date of grant. The term of
option grants may be up to ten years. Options are canceled upon the lapse of
three months following termination of employment except in the event of death or
disability, as defined.
F-17
The following table summarizes the transactions under the Stock Option Plan and
the Stock Option Sub-Plans (in thousands, except option prices):
<Table>
<Caption>
Number of Weighted Average
Options Option Price
------------ ----------------
Balance, December 31, 1998 1,140 $ 8.62
------------ ------------
Granted 793 16.47
Exercised (441) 7.09
Canceled (270) 8.84
------------ ------------
Balance, December 31, 1999 1,222 13.22
------------ ------------
Granted 746 14.76
Exercised (80) 6.90
Canceled (287) 15.10
------------ ------------
Balance, December 31, 2000 1,601 13.85
------------ ------------
Granted 753 6.65
Exercised (38) 6.34
Canceled (504) 15.45
------------ ------------
Balance, December 31, 2001 1,812 10.57
------------ ------------
Exercisable at December 31, 2001 598 $ 12.51
============ ============
</Table>
The following table summarizes information about options granted under the Plan
that were outstanding at December 31, 2001:
<Table>
<Caption>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Number of Number
Outstanding at Weighted-Average Weighted Exercisable at Weighted
Range of Exercise 12/31/01 Remaining Average 12/31/01 Average
Prices (000) Contractual Life Exercise Price (000) Exercise Price
- ----------------- -------------- ----------------- -------------- -------------- ---------------
$3.90-$5.75 294 9.49 $ 4.21 4 $ 5.50
$5.88-$8.75 778 7.71 7.67 315 7.44
$9.16-$13.01 129 8.85 10.80 5 10.99
$13.75-$20.63 467 8.28 15.16 182 15.75
$21.38-$35.88 144 7.84 24.04 92 23.84
- ----------------- -------------- ----------------- -------------- -------------- ---------------
Total 1,812 8.24 $ 10.57 598 $ 12.51
</Table>
AMENDED AND RESTATED DIRECTOR STOCK OPTION PLAN: In 2000, the Company amended
and restated its Director Stock Option Plan, which, as amended, authorizes the
issuance to directors of up to 750,000 shares of common stock. Stock option
grants pursuant to the directors' plan will vest in one year and have a term of
ten years. The exercise prices related to these options are equal to the market
value of the Company's stock on the date of grant.
F-18
The following table summarizes the transactions under the Director Stock Option
Plan (in thousands, except option prices):
<Table>
<Caption>
Number of Weighted Average
Options Option Price
------------ ----------------
Balance, December 31, 1998 271 $ 8.31
------------ ------------
Granted 35 7.50
Exercised (88) 8.20
Cancellations (25) 6.63
------------ ------------
Balance, December 31, 1999 193 8.43
------------ ------------
Granted 60 17.81
Exercised (10) 11.19
Cancellations (5) 10.25
------------ ------------
Balance, December 31, 2000 238 10.64
------------ ------------
Granted 80 7.53
Exercised -- --
Cancellations (35) 15.45
------------ ------------
Balance, December 31, 2001 283 9.17
------------ ------------
Exercisable at December 31, 2001 203 $ 9.82
============ ============
</Table>
The following table summarizes information about options granted under the Plan
that were outstanding at December 31, 2001:
<Table>
<Caption>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Number of Number
Outstanding at Weighted-Average Weighted Exercisable at Weighted
Range of Exercise 12/31/01 Remaining Average 12/31/01 Average
Prices (000) Contractual Life Exercise Price (000) Exercise Price
- ----------------- -------------- ----------------- -------------- -------------- ---------------
$4.38-$6.75 58 1.69 $ 4.79 58 $ 4.79
$7.13-$7.53 135 6.12 7.45 55 7.33
$8.09-$17.81 90 6.00 14.57 90 14.57
- ----------------- -------------- ----------------- -------------- -------------- ---------------
Total 283 5.17 $ 9.17 203 $ 9.82
</Table>
RIGHTS AGREEMENT: The Board of Directors has adopted a Shareholder Rights Plan
whereby each holder of record as of December 29, 2000 received a right to
purchase from the Company one share of common stock of the Company at a price of
$93 per share for each share held. These rights can only be exercised after
certain events occur, such as if a person or entity acquires, or makes a tender
or exchange offer to acquire, 15% or more of the Company's common stock and the
rights expire ten years from the record date. Upon acquisition of 15% or more of
the Company's common stock, each right not owned by the acquiring person or
group will be adjusted to allow the purchase for $93 of a number of shares
having a then market value of $186. These rights are intended to provide the
Company certain antitakeover protections. The Board of Directors may terminate
the Rights Plan, or redeem the rights for $0.01 per right, at any time until the
tenth business day following a public announcement of a 15% or more stock
acquisition. The Company had reserved 7,000,000 shares of common stock for this
plan.
F-19
The rights were distributed to shareholders as of the record date as a
nontaxable dividend. The rights are attached to and trade with Interphase common
stock until the occurrence of one of the triggering events, at which time the
rights would become detached from the Company's common stock.
PRO FORMA NET INCOME (LOSS): The Company's pro forma net (loss) income for 2001,
2000 and 1999 would have been $(12.7 million), $(2.2 million) and $1.5 million
respectively, resulting in diluted earnings per share of $(2.48), $(0.36) and
$0.24, 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 2001, 2000 and 1999:
risk-free interest rate of 4.39% for 2001 and 6% for 2000 and 1999, expected
dividend yield of zero in each year, expected term of 6.99 years in 2001, 3.88
years in 2000 and 4.83 years in 1999, and expected volatility of 180% in 2001,
140% in 2000 and 140.29% in 1999. The weighted average fair valuation per share
was $6.62 in 2001, $12.63 in 2000 and $14.25 in 1999.
12. RELATED-PARTY TRANSACTIONS
The Company paid approximately $161,000, $253,000 and $366,000 for the years
ended December 31, 2001, 2000 and 1999, respectively, to certain outside
directors of the Company or their firms for professional services. The Company
believes the terms were equivalent to those of unrelated parties.
13. 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 $4.1 million
or $6.25 per share, 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 cancels the stock upon each
purchase. The future scheduled payments are classified as redeemable common
stock in the accompanying consolidated Balance Sheet. As of December 31, 2001,
538,004 shares have been purchased for $3.4 million and retired; 121,996 shares
remain to be repurchased.
14. 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 employees' contributions up to 3% of the
employees' annual salary. The total expense under this plan was $101,000,
$256,000 and $232,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. The Company offers no post-retirement or postemployment benefits.
F-20
15. OTHER FINANCIAL INFORMATION
MAJOR CUSTOMERS: During 2001, sales to Hewlett Packard and SCI Systems accounted
for $8.5 million or 30% and $4.4 million or 15% of the Company's consolidated
revenues, respectively. During 2000, sales to Hewlett Packard and Terayon
Communication Systems accounted for $10 million or 18% and $5.9 million or 11%
of the Company's consolidated revenues, respectively. During 1999, sales to
Hewlett Packard accounted for $36.9 million or 50% of the Company's consolidated
revenues. No other customers accounted for more than 10% of the Company's
consolidated revenues in the periods presented.
COMMITMENTS: The Company leases its office, research and development and
manufacturing facilities and certain manufacturing equipment under noncancelable
operating leases to 2005. Rent expense related to these leases is recorded on a
straight-line basis. The Company's lease of its main facility, located in
Dallas, Texas, extends through the end of 2002. The Company is currently
evaluating its options for renewal of the lease or relocation. As of December
31, 2001, operating lease commitments having noncancelable terms of more than
one year are as follows (in thousands):
<Table>
<Caption>
Year ending December 31:
- ------------------------
2002 $1,304
2003 $ 405
2004 $ 265
2005 and thereafter $ 73
</Table>
Total rent expense for operating leases was approximately as follows (in
thousands):
<Table>
<Caption>
Year Total Rent Expense
- --------- ------------------
2001 $ 969
2000 $1,120
1999 $1,231
</Table>
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.
16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." The most significant changes
made by SFAS No. 141 are: 1) requiring that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001; and 2)
establishing specific criteria for the recognition of intangible assets
separately from goodwill. SFAS No. 142 primarily addresses the accounting for
acquired goodwill and intangible assets. The provisions of SFAS No. 142 will be
effective for fiscal years beginning after December 15, 2001. The most
significant changes made by SFAS No. 142 are: 1) goodwill and indefinite-lived
intangible assets will no longer be amortized; 2) goodwill will be tested
annually and whenever events or circumstances occur indicating that goodwill
might be impaired and
F-21
3) the amortization period of intangible assets with finite lives will no longer
be limited to forty years. The Company adopted SFAS No. 141 effective July 1,
2001 and SFAS No. 142 effective January 1, 2002. Adoption of these standards did
not have a material effect on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to all entities and legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and are subsequently allocated to expense over the asset's
useful life. This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company does not believe the
adoption of this standard will have a material impact on its financial
statements or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This statement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
however, this statement retains the fundamental provisions of SFAS No. 121 for
1) recognition and measurement of the impairment of long-lived assets to be held
and used and 2) measurement of long-lived assets to be disposed of by sale. This
statement also supersedes the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for segments of a business to be disposed of.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
The Company does not believe that the adoption of SFAS No. 144 will have a
material effect on its financial position or results of operations.
F-22
17. SEGMENT DATA
The Company is principally engaged in the design, development, and manufacturing
of high-performance connectivity products utilizing advanced technologies being
used in next generation telecommunication networks and enterprise data/storage
networks. Except for revenue performance, which is monitored by product line,
the chief operating decision-makers review financial information presented on a
consolidated basis, for purposes of making operating decisions and assessing
financial performance. Accordingly, the Company considers itself to be in a
single industry segment.
Geographic revenue and long lived assets related to North America and other
foreign countries as of and for the years ended December 31, 2001, 2000 and 1999
are as follows (in thousands):
<Table>
<Caption>
Revenues 2001 2000 1999
- -------- ------------ ------------ ------------
North America $ 22,919 $ 47,116 $ 60,791
Europe 5,173 6,209 10,173
Pacific Rim 640 2,372 2,538
------------ ------------ ------------
Total $ 28,732 $ 55,697 $ 73,502
============ ============ ============
</Table>
Geographic long-lived assets exclude corporate assets. Corporate assets include
cash and cash equivalents, marketable securities and intangibles.
<Table>
<Caption>
Long lived assets 2001 2000 1999
- ----------------- ------------ ------------ ------------
North America $ 1,116 $ 1,995 $ 2,658
Europe 160 215 223
Pacific Rim 2 2 --
------------ ------------ ------------
Total $ 1,278 $ 2,212 $ 2,881
============ ============ ============
</Table>
Additional information regarding revenue by product-line is as follows:
<Table>
<Caption>
Product Revenue 2001 2000 1999
- --------------- ------------ ------------ ------------
Broadband telecom $ 6,417 $ 12,254 $ 8,585
Combo 6,776 2,678 283
LAN 5,636 18,824 24,400
Storage 8,366 19,322 32,307
WAN 606 1,516 4,307
Other 931 1,103 3,620
------------ ------------ ------------
Total $ 28,732 $ 55,697 $ 73,502
============ ============ ============
</Table>
F-23
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
Quarter Ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
2001 (in thousands, except per share amounts)
----
Revenues $ 9,951 $ 7,108 $ 4,603 $ 7,070
Gross margin 5,060 (1,295) 1,770 3,469
Loss from continuing
operations before taxes (252) (8,757) (2,327) (2,449)
Loss from continuing
operations (188) (6,006) (1,456) (1,922)
Discontinued operations -- -- -- --
Net loss (188) (6,006) (1,456) (1,922)
Net loss per share
Basic EPS $ (0.03) $ (1.05) $ (0.26) $ (0.34)
Diluted EPS $ (0.03) $ (1.05) $ (0.26) $ (0.34)
</Table>
<Table>
<Caption>
Quarter Ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
2000 (in thousands, except per share amounts)
----
Revenues $ 13,585 $ 13,332 $ 13,260 $ 15,520
Gross margin 7,496 7,265 7,067 7,860
Income from continuing
operations before taxes 1,256 1,147 675 1,029
Income from continuing
operations 723 696 373 608
Discontinued operations 571 -- -- --
Net Income 1,294 696 373 608
Net income per share
Basic EPS $ .22 $ .12 $ .06 $ .11
Diluted EPS $ .20 $ .11 $ .06 $ .11
</Table>
<Table>
<Caption>
Quarter Ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
1999 (in thousands, except per share amounts)
----
Revenues $ 17,169 $ 17,657 $ 20,511 $ 18,165
Gross profit 7,819 8,272 9,845 8,766
Income from continuing
operations before taxes 1,482 1,114 2,387 1,697
Income from continuing
operations 936 763 1,390 1,202
Discontinued operations (512) (243) (112) --
Net income 424 520 1,278 1,202
Net income per share
Basic EPS $ .08 $ .10 $ .22 $ .21
Diluted EPS $ .08 $ .09 $ .20 $ .19
</Table>
F-24
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBITS
NUMBER DESCRIPTION
- -------- -----------
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) Amendment to Articles of Incorporation of the registrant.
(10)
3(c) Amended and Restated Bylaws of the registrant adopted on
December 5, 1995 and amended on January 19, 1999.(12)
10(a) Registrant's Amended and Restated Stock Option Plan and
Amendment No. 1 and 2 thereto.(9)
10(b) Registrant's Amended and Restated Stock Option Plan
Amendment No. 4. (10)
10(c) Registrant's United Kingdom Incentive Stock Option Sub-Plan.
(3)
10(d) Stock Purchase Warrant issued to Motorola, Inc. (4)
10(e) Lease on Dallas facility. (5)
10(f) Directors Stock Option Plan and Amendment No. 1 thereto. (6)
10(g) Directors Stock Option Plan Amendment No. 2. (10)
10(h) Loan Agreement between Interphase Corporation and BankOne
Texas, N.A. (8)
10(i) Purchase Agreement between Interphase Corporation and Cisco
Systems Inc. (9)
10(j) Motorola Stock Repurchase Agreement. (2)
10(k) Rights Agreement dated as of December 7, 2000 by and between
the Company and Computershare Investor Services, LLC as
Rights Agent. (11)
10(l) Registrant's France Incentive Stock Option Sub-Plan (12)
10(m) Sublease on Plano facility. (12)
10(n) Credit Agreement between Interphase Corporation and Bank
One, NA. (12)
23(a) Consent of Independent Public Accountants. (12)
99(a) Representation of Independent Public Accountants. (12)
</Table>
- ----------
(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. E-1
E-1
(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 as an exhibit to Report on Form 10-K for the year ended December 31,
1999, and incorporated herein by reference.
(11) Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein
by reference.
(12) Filed herein.
E-2