-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BnqcOyE15txutFAkDfTi9D17+i7VW2JX1L3LQxgTxuFpcES+6FTX7vPloS3+f96z wp7X1IygaOclZZtfF8gcAw== 0000728249-98-000004.txt : 19980327 0000728249-98-000004.hdr.sgml : 19980327 ACCESSION NUMBER: 0000728249-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERPHASE CORP CENTRAL INDEX KEY: 0000728249 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 751549797 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13071 FILM NUMBER: 98574130 BUSINESS ADDRESS: STREET 1: 13800 SENLAC DR CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 2146545000 MAIL ADDRESS: STREET 1: 13800 SENLAC DR STREET 2: 13800 SENLAC DR CITY: DALLAS STATE: TX ZIP: 75234 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________________________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 Commission File Number 0-13071 INTERPHASE CORPORATION (Exact name of registrant as specified in its charter) Texas 75-1549797 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 13800 Senlac, Dallas, Texas 75234 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (214) 654-5000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 2, 1998 was approximately $37,032,542. As of March 2, 1998, registrant had outstanding 5,517,118 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference into this annual report on Form 10-K Report: (1) Portions of the Definitive Proxy Statement for Annual Meeting of Shareholders to be held on April 30, 1998 (Part III). PART I ITEM 1. BUSINESS. Introduction Interphase Corporation and subsidiaries ("Interphase" or the "Company") designs, develops, manufactures, markets and supports high-performance network and mass storage products based on advanced technologies for some of today's most powerful computer systems. Interphase's network and mass storage products include high performance network adapters, concentrators and computer network operating system software drivers. The Company's local area network ("LAN") products implement high speed networking technologies such as Fiber Distributed Data Interface ("FDDI"), Asynchronous Transfer Mode ("ATM"), fast ethernet (both 100 VG-AnyLAN and 100 Base T), as well as ethernet (10Base T) and Token Right technologies that facilitate the high speed movement of information across computer networks. The Company's wide area network ("WAN") products serving both the server class and client class utilize Integrated Services Digital Network ("ISDN") and X.25 technologies. In addition, the Company announced, in early 1997, its first Digital Subscriber Loop "(xDSL") product, an Asynchronous DSL ("ADSL") adapter card. The Company's mass storage controllers are currently based on Small Computer Systems Interface ("SCSI") technology and high speed Fibre Channel technology to facilitate the movement of data to and from mass storage devices. Fibre Channel can also be used for a high speed interconnect in clustered applications. The Company's products are designed to not only comply with the appropriate open system technical standards but also optimize the performance of the customer's network and mass storage environments. The Company's LAN adapters and mass storage controllers consist of both hardware and software. The hardware is essentially printed circuit boards which plug into the backplane of a computer and incorporate industry standard bus architectures of the most popular client/server platforms such as PCI, Sbus, EISA, VME, GIO and PMC, as well as input-output front-ends for many performance oriented computer systems. The Company's network adapters support a variety of media including fiber optic cabling and unshielded twisted pair ("UTP") and shielded twisted pair ("STP") copper wire. The Company's software consists of drivers for the most popular client/server operating systems such as Windows NT, Netware, HP-UX, IRIX, O/S2, Solaris, SunO/S, AIX and certain real-time operating systems. In addition the software may include diagnostics, station management ("SMT") and in certain cases off loads the processing of the protocol stack from the server to the adapter card. The Company's FDDI concentrator products are stand-alone network devices which serve as a single point of connection for multi-port local area networks as well as perform certain network traffic management tasks. The mass storage controllers provide a high-speed connection to computer peripheral devices, such as disk drives, tape drives and printers. The Company's WAN adapters are complete ISDN packages that allow standalone desktops and notebooks to connect to Shiva Lan Rover, PPP/ISDN routers, and FTP software ONnet as well as X.25 remote access products. The Company's products are used in a wide range of computer applications including graphics workstations, high performance work groups, CPU clusters, medical imaging, telephone switching, on-line transaction processing and financial services networks. With respect to the client/server computer market, the majority of the Company's products have traditionally been installed in the server (or "host") as opposed to the client (or "desktop") side of the network. This reflects the Company's historical focus on the development of high-performance, fully featured products that are targeted for the most demanding computer networks. Given the recent emergence of more powerful desktop computing environments and a growth in demand for data intensive applications, the Company believes that its strengths in certain network and mass storage technologies will create significantly more opportunities for desktop installations of its products in future years. The Company believes that its success in gaining significant market share in its selected markets is dependent upon not only the development and manufacturing of high performance, high quality products but also in establishing and maintaining the appropriate distribution channels. The Company has original equipment manufacturer ("OEM") agreements with some of the best known companies in the computer business for its network products and mass storage controllers. The Company's customers include OEM's of computer systems and network switches, systems integrators, value added resellers ("VAR"), distributors and end-users. The Company believes that it must maintain an ongoing synergistic relationship with its customers and demonstrate technology leadership coupled with sophisticated manufacturing and customer support capabilities. The Company's manufacturing and development activities are certified under the ISO 9001 international quality standard. This standard, considered the most comprehensive of the ISO 9000 standards, applies to not only manufacturing quality, but design, development and support quality systems as well. Certain companies in the United States and Europe now require ISO certification of their key suppliers. The Company's headquarters and manufacturing facilities are located in Dallas, Texas. Effective June 29, 1996, the Company purchased all the issued and outstanding capital stock of Synaptel S.A. ("Synaptel"). Synaptel designs and distributes a broad line of remote access and ISDN products, which include both significant software content and interoperability with a broad range of networking protocols. The Company, a Texas corporation, was founded in 1977. Product Overview The bus structure of a computer system is the pathway over which data flows among the system's components, such as the central processing units ("CPU"), disk or tape drives and network adapters. The bus structure of a computer coordinates the timing and routing of data, as well as defines the system architecture for components which interface with each other. The Company develops and sells products based on high performance bus architectures such as PCI, Sbus, EISA, VME, GIO and PMC. These bus architectures were developed by computer system manufacturers and are considered "open systems" since certain specifications of the architecture are published. The concept of open systems has gained significant momentum in recent years and has allowed end-users to configure a computing and network environment that incorporates desired technology, features, scalibility and support from a variety of product and service providers. The CPU of a computer performs basic arithmetic, local memory access and input/output functions for communication with peripheral equipment as well as other functions associated with data transfers within a network such as protocol processing. When commanded by the CPU, a network adapter facilitates the high-speed communication of data among computer systems over a network as well as validates data completeness and integrity. Network adapters also perform varying levels of protocol processing and network management tasks. A network protocol is the set of rules or conventions used to govern the exchange of information between networked nodes or LANs. Most computer applications require immediate access to a greater volume of data than can be stored in the computer's local memory. This necessitates external data storage capacity provided by disk or tape drives. A disk controller directs the data storage and retrieval operations of the disk drive and controls the flow of data between the CPU and disk drive. The disk controller locates and formats the data stored on the disk, performs data validity checking, data error detection and correction and informs the CPU of the status of these operations and of the controller itself. A tape controller performs the same functions as a disk controller but interfaces with a tape drive. Multifunction controllers operate like a disk controller but allow the CPU to access disk drives and tape drives simultaneously. Intelligent controllers designed by the Company incorporate proprietary firmware (i.e., programs developed by the Company and stored in memory on the product) and software to perform these functions simultaneously and independently from the CPU, which allows the CPU to perform other operations at the same time as network communications, data storage or retrieval occurs. Network Products Revenues derived from networking products represented approximately 77% and 71% of consolidated revenues for the years ended December 31, 1997 and 1996, respectively and 61% of consolidated revenues during the year ended October 31, 1995. LAN Over the past several years the Company has developed a diverse line of LAN products targeted for the VME, Sbus, EISA, PCI, GIO and PMC bus marketplace. The majority of these products are sold directly to OEMs but a substantial portion are also sold to VAR's, system integrators, distributors and large end-users. The Company's products included within this broad grouping can be further divided into board level controller (adapter) products and stand-alone network devices. Board Level Products- FDDI Product Line- FDDI is a stable, standardized, 100Mbit per second technology. Its combination of speed and stability make FDDI ideal for reliable high- performance workgroup connections. FDDI high performance adapters are often used for movement of large graphical images such as color prepress and medical imaging applications. These adapters are also used in enterprise servers for high-demand transaction processing networks in corporate systems. PMC/FDDI 4511 provides reliable, high-performance 100 Mbps FDDI connectivity for PMC-based systems. It supports multimode fiber and copper wiring. EISA/FDDI 4811 is a high performance FDDI network adapter for EISA bus systems. It provides for full implementation of FDDI Station Management (SMT) on-board, freeing the host CPU to execute applications and upper level protocols. VME/FDDI 5211 represents a third generation FDDI network adapter from Interphase. This host based product is capable of supporting varying types of media (e.g., fiber or copper) and contains an optical bypass control. It can be used in VME64 systems and is capable of link level or on-board protocol processing. Its RISC-based architecture can be configured for either single or dual attachment to an FDDI network and is available in a 9U or 6U form factor (refers to standard form factors of the printed circuit board). PCI/FDDI 5511 is a high performance FDDI network adapter for PCI based systems. It provides Single Attach (SAS) connectivity for FDDI workstations or server connectivity to a concentrator in a workgroup topology. It also comes with a Dual Attach (DAS) option for direct A-B connectivity to an FDDI ring or concentrator, or for dual homing between two concentrators. The 5511 provides connections for multimode fiber and TP-PMD compliant Category 5 Unshielded Twisted Pair copper wiring. Sbus/FDDI 5611 is a high performance FDDI network adapter for SBus systems. The 5611 is designed to capitalize on the high performance of Sun SPARC and compatible systems with a direct memory access (DMA) architecture. Sbus/FDDI CDDI WA-C303 adapter provides high performance, 100-Mbps connectivity to FDDI networks for SPARC-based worstations and servers. It supports single attachment and fault-tolerant, dual attachment connections. EISA/FDDI CDDI WA-C323 adapter provides high performance 100 Mbps connectivity to workgroup servers and workstations. Ethernet and Fast Ethernet Product Line- VME/Ethernet 4207 provides a connection to an ethernet network for VMEbus systems. It is a high performance protocol processor that is capable of data rate transfers of over 30 Mbytes/second. VME Ethernet 4221 adapter is a 10 Base-T product. This adapter is an intelligent network interface which can provide up to four Ethernet ports from a single VME or VME64 slot. PMC/100 Base T 4524 adapter provides 802.3u 100Base-T connectivity for most PMC-compliant systems. Driver support includes: AIX, Solaris and Window NT. SBus /100VG-AnyLan 4622 adapter provides Sun SPARC stations and 100% compatibles with selectable connectivity to networks based either on 10Base-T or 100VG-AnyLAN technology. EISA/100 Base-T 4824 adapter provides either 100 Mbps or 10 Mbps automatically configured based on the type of network connection. ATM Product Line- ATM is a scalable network technology capable of providing enhanced quality of service in managing video, audio and data transmissions compared to other existing network technologies. The scalable capability of ATM allows the deployment of products with data transfer rates of 25 Mb, 51 Mb, 100 Mb, 155 Mb and 622 Mb, based upon the same core technology and operating within the same network. ATM will also provide enhanced network management capabilities and is expected to be suitable for many desktop and server computing environments. This developing industry standard is expected to gain wide acceptance among both network and computer system manufacturers as well as large cable system operations and telecommunications firms (by whom it was initially developed and promoted). The ATM adapter market is anticipated to grow rapidly over the next several years. These adapters can connect stations over ATM using multimode fiber, single-mode fiber, or Category 5 Unshielded Twisted Pair copper cable. PMC ATM 4515 adapter provides reliable, high performance ATM connectivity for PMC-based systems. This adapter supports SONET OC-3 155 Mpbs connectivity. SBus ATM 4615 adapter provides full duplex ATM connectivity for virtually all Sun Sbus platforms from 600 MP Servers to the SPARCcenter 2000. This adapter supports SunOS 4.1.3. and Solaris 2.3 or greater. EISA ATM 4815 adapter provides full duplex ATM connectivity for many EISA-compliant systems from high performance PCs and workstations to powerful mutiprocessing servers running Windows NT and Novell GIO ATM 4915 adapter provides full duplex ATM connectivity for virtually all Silicon Graphics GIO-based platforms. This adapter supports SGI's IRIX operating system version 5.3. VME ATM 5215 adapter provides full duplex ATM connectivity for SGI Onyz and Challenge systems running the IRIX PCI ATM 5515 / 5575 adapter provides full duplex ATM connectivity for most PCI-compliant systems. This adapter supports Windows NT, Novell NetWare UnixWare, Solaris and AIX. NetWare. PCI ATM 5525 adapter provides full duplex 25 Mbps ATM connectivity for most PCI-compliant systems. Stand Alone Network Devices- M1600 FDDI Concentrator provides multiport connectivity to an FDDI network. It supports up to 16 master ports and facilitates high speed FDDI networking between a variety of computing devices and across different types of FDDI media including fiber and copper. This device is "hot swappable" meaning that individual modules may be replaced, removed or added without interrupting the entire network. Other fault tolerance features include an external optical bypass control and an optional redundant power supply, making the M1600 well-suited for demanding FDDI backbone environments. M800 FDDI Concentrator contains many of the same high performance features as the M1600 FDDI Concentrator but is designed for smaller workgroups with large data transfer requirements. It is available in a table top or rack mountable design. M400 FDDI Concentrator is a compact, fixed port concentrator ideal for small workgroup cluster. Available in either 4 or 8 port configurations, the M400 provides options for fiber or copper media connectivity and the ability to select managed or unmanaged operations. WAN Interphase has a line of WAN products that provide optimal WAN and ISDN connectivity solutions for servers, remote LANs and PCs in multi-vendor networking environments. Interphase WAN products are compatible with Novell, Microsoft, IBM, Sun, Unix, SNA, X.25 Frame Relay and ISDN. Server Class products include fully featured, multi-purpose and multi-operating systems products for ISDN or X.25 technologies. These products are used by networking professionals to outfit remote offices or central offices with ISDN/WAN adapter that can manage multiple ISDN channels or multiple communication modes. Client Class products are passive ISDN or modem, board level products which are used in desktop and laptop computers. Typical products are Syncard Modems, Syncard PCMCIA ISDN, and Syncard ISDN, and are dedicated primarily to Windows operating systems for desktop and laptop applications. Mass Storage Controller Products Revenues derived from mass storage controller products represented approximately 12% and 14% of consolidated revenues for the years ended December 31, 1997 and 1996, respectively and 34% of consolidated revenues during the year ended October 31, 1995. The Company's mass storage product line includes products that function in VMEbus, EISA bus, Multibus and PCIbus systems. Presently, SCSI is the most popular mass storage technology for both desktop and server applications since it is "device independent" whereas many technologies prior to SCSI were not. Device independent refers to the fact that the controller can access and send data to and from a variety of peripheral devices (e.g., disk drives, tape drives or printers). Historically, the primary market for these products has been computer system OEM's. The Company introduced its first Fibre Channel product in 1996. Fibre Channel is an emerging high-speed data transfer technology. Fibre Channel is regarded as a follow-on migration path from SCSI. It is 10 to 250 times faster than existing technologies, including SCSI, capable of transmitting at rates of one gigabit per second simultaneously in both directions. This kind of performance is a practical necessity when sizable files containing x-rays or MRI scans are retrieved from a storage device. Fibre Channel can also operate over distances up to 10 km. For disaster recovery purposes it is an ideal technology for backing up mission critical data to mass storage device at a secure remote location. SCSI V/SCSI 4210 is a high performance dual channel SCSI host adapter for VMEbus applications. It supports up to seven SCSI devices per channel and can be configured with one or two independent SCSI channels. By utilizing the BUSpacket Interface it can provide transfer rates of up to 5 MBytes/second in synchronous mode and up to 1.5 MBytes/second in the asynchronous mode. This product is available in either a 6U or 9U form factor. V/SCSI-2 4220 is designed for VMEbus and VME64 systems. It complies with the industry standard SCSI-2 interface. It also contains two channels that support up to 14 SCSI-1 or SCSI-2 devices. It is capable of data rates of up to 10 MBytes/second in the synchronous mode and 5 MBytes/second in the asynchronous mode. This product is available in either a 6U or 9U form factor. Additionally, an optional daughter card is available which allows for a connection to an Ethernet network. The incorporation of an Ethernet daughter card with a SCSI adapter in this manner utilizes only one slot in a computer backplane. Fibre Channel PCI/Fibre Channel 5526 adapter provides single port connection, powered by the Hewlett-Packard Tachyon Fibre Channel protocol engine. PCI/Fibre Channel 6526 adapter is a 3U CompactPCI adapter which delivers full 100mbps throughput for next generation mass storage applications. Interphase (i)chipTPI is a single chip solution which allows the Hewlett-Packard Tachyon Fibre Channel controller to be used in conjunction with the industry standard PCI bus. New Product Development The markets for the Company's products are characterized by rapid technological development, evolving industry standards, frequent new product introductions and relatively short product life cycles. The Company's success is substantially dependent upon its ability to anticipate and react to these changes, maintain its technological expertise, expand and enhance its product offerings in existing technologies, and to develop in a timely manner new products in emerging technologies, such as ATM-based networking, which achieve market acceptance. The Company believes it must offer products to the market which not only meet ever-increasing performance and quality standards, but also provide compatibility and interoperability with products and architectures offered by various computer and network systems vendors. The continued utility of the Company's products can be adversely affected by products or technologies developed by others. The Company has been engaged in the development of new products and the refinement of its existing products since its inception. Interphase has been active in the formulation of industry standards sanctioned by groups such as the IEEE and ANSI and is a member of the ATM Forum, VME International Trade Association (VITA), Fibre Channel Association, RAID Advisory Board, PCI Bus Consortium, Fast Ethernet Alliance, SCSI Committee, the LADDIS Group, ONC/NFS Consortium, University of New Hampshire FDDI Interoperability Lab, FC-Open (Fibre Channel) Consortium, and ANTC Consortium for FDDI interoperability testing. In 1997, the Company applied the majority of its engineering development resources to products for the emerging ATM market. This network technology provides for the integration of voice, video and data transmission in local area networks and wide area networks, significant improvements in network managability, and scalability of speed from 25 megabits per second ("Mbps") to 51, 100, 155 and 622 Mbps. In addition, the Company has continued its focus on FDDI products, including PCI, GIO, and Sbus FDDI adapter cards and the M400 low cost four or eight port FDDI concentrator with copper or fiber connectivity and optional SNMP management. Since the acquisition of Synaptel, engineering development activities have also been focused on products for the WAN market. These development efforts include products based upon ISDN, X.25 and xDSL technologies. Marketing and Customers The Company's standard products are sold to OEM's for inclusion in scientific, industrial, medical, engineering workstations, printing, mini-supercomputer, graphics and other computer applications. These purchasers incorporate the Company's products in proprietary systems for resale to distributors, system integrators and VAR's (which add specially designed software) prior to resale to end-users. Also, the Company sells products directly to sophisticated end-users such as large corporations, universities and scientific research organizations. During 1997 sales to Hewlett Packard accounted for $26,402,000 or 40% of consolidated revenue, and was the only customer accounting for more than 10% of consolidated revenues. During 1996 no single customer accounted for more that 10% of consolidated revenues. During the year ended October 31, 1995, sales to Pyramid Corporation accounted for $7,039,000 or 15% of consolidated revenues, and was the only customer accounting for more than 10% of consolidated revenues. In 1989, Motorola purchased 660,000 shares of common stock of the Company at a price of $11.00 per share. In addition, Motorola received warrants to purchase an additional 660,000 shares of common stock at an exercise price of $15.40 per share. The warrants were not exercised by Motorola and expired in March 1996. Sales to Motorola approximated 3%, 6% and 6% of the Company's revenues for the years ended December 31, 1997, 1996, and October 31, 1995, respectively. The Company markets its products through its own sales organization and, to a lesser extent, through a network of independent sales representatives. In addition to the Company's headquarters in Dallas, Texas, the Company has sales offices located in or near Santa Clara, California; Boston, Massachusetts; Phoenix, Arizona; Minneapolis, Minnesota; Tokyo, Japan; London, England; and Paris, France. The Company's sales personnel market products directly to key customers as well as support the sales representative network. In addition, the Company has entered into distribution agreements with key national and international distribution partners, including Anixter, Fuji-Xerox, Gates/Arrow and Westcon. Interphase emphasizes its extensive product support, training and field support to its customers. The Company's products are generally sold with a one year warranty covering components and labor. After the expiration of the warranty period, support services are generally provided by the Company for a stated flat fee. The Company and its customers generally enter into written agreements specifying, among other items standard in commercial agreements, product specifications, failure rates, shipping requirements, shipment rescheduling terms, price/volume schedules and manufacturer warranties. Substantially all of these agreements do not contain determinable purchase commitments of the customers, providing instead that actual purchase and shipments of products be made by specific purchase order. Accordingly, any shipment rates stated in such contracts are subject to rescheduling and/or cancellation, and therefore are not indicative of the future purchase orders to be submitted by such customer. In addition, the actual terms of the contracts tend to be modified in the ordinary course of business by means of subsequent purchase order terms and by course of dealing. The Company does not believe that the level of backlog of orders is either material or indicative of future results, since its contracts are subject to revision through subsequent purchase orders and since its customers are generally permitted to cancel purchase orders, within certain parameters, prior to shipment without penalty. The majority of the Company's sales are to OEMs with payment terms typically being net 30-45 days from date of invoice. Manufacturing and Supplies Most manufacturing operations are currently conducted at the Company's headquarters in Dallas, Texas. In addition, the Company utilizes contract manufacturing operations for the assembly of certain products, including those produced in France. The Company's products consist primarily of various integrated circuits, other electronic components and firmware assembled onto an internally designed printed circuit board. The Company uses internally designed, applications specific integrated circuits ("ASIC"), some of which are sole-sourced, on most of its products as well as standard off-the shelf items presently available from two or more suppliers. Historically the Company has not experienced any significant problems in maintaining an adequate supply of these parts sufficient to satisfy customer demand, and the Company believes that it has good relations with its vendors The Company generally does not manufacture products to stock in finished goods inventory, as substantially all of the Company's production is dedicated to specific customer purchase orders. As a result, the Company does not have any material requirements to maintain significant inventories or other working capital items. Intellectual Property and Patents While the Company believes that its success is ultimately dependent upon the innovative skills of its personnel and its ability to anticipate technological changes, its ability to compete successfully will depend, in part, upon its ability to protect proprietary technology contained in its products. The Company does not currently hold any patents relative to its current product lines. Instead, the Company relies upon a combination of trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The development of alternative, proprietary and other technologies by third parties could adversely affect the competitiveness of the Company's products. Further, the laws of some countries do not provide the same degree of protection of the Company's proprietary information as do the laws of the United States. Finally, the Company's adherence to industry-wide technical standards and specifications may limit the Company's opportunities to provide proprietary product features capable of protection. The Company is also subject to the risk of litigation alleging infringement of third party intellectual property rights. Infringement claims could require the Company to expend significant time and money in litigation, pay damages, develop non-infringing technology or acquire licenses to the technology which is the subject of asserted infringement. The Company has entered into several nonexclusive software licensing agreements that allow the Company to incorporate software into its product line thereby increasing its functionality, performance and interoperability. Employees At December 31, 1997, the Company had 222 full-time employees, of which 74 were engaged in manufacturing and quality assurance, 72 in research and development, 50 in sales, sales support, 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 Company does not maintain life insurance policies on its key employees and, except for a few executive officers, does not have employment agreements with key 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 large part upon its ability to attract and retain highly skilled and motivated technical, managerial, sales and marketing personnel. Competition for such personnel is intense. None of the Company's employees are covered by a collective bargaining agreement and there have been no work stoppages. Additionally, the Company considers its relationship with its employees to be good. Competition The computer network industry is intensely competitive and is significantly affected by product introductions and market activities of industry participants. The Company expects substantial competition to continue. The Company's competition includes vendors specifically dedicated to the mass storage controller and computer network product markets. Traditionally the Company's major OEM customers have chosen not to manufacture adapters for their products or do not manufacture sufficient quantities or types of controllers to meet their needs. Increased competition could result in price reductions, reduced margins and loss of market share. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources and larger installed bases than the Company. Several of the Company's competitors have been acquired by major networking companies. These acquisitions are likely to permit the Company's competitors to devote significantly greater resources to the development and marketing of new competitive products and the marketing of existing competitive products to their larger installed bases. The Company expects that competition will increase substantially as a result of these and other industry consolidations and alliances, as well as the emergence of new competitors. The Company believes that it has been able to compete as a result of its perceived technological leadership within the Company's market segment and its reputation for high product performance. ITEM 2. PROPERTIES. The Company leases a 96,000 square foot facility located in Farmers Branch, Texas, a suburb of Dallas. The facility includes approximately $2.8 million in leasehold improvements that were made by the Company. The lease, inclusive of renewal options, extends through 2009. In addition the Company leases a facility in Chaville, France (near Paris) which supports the European markets. The Company believes that its facilities and equipment are in good operating condition and are adequate for its operations. The Company owns most of the equipment used in its operations. Such equipment consists primarily of engineering equipment, manufacturing and test equipment, and fixtures. ITEM 3. LEGAL PROCEEDINGS. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Since January 1984 shares of the Company's common stock have been traded on The Nasdaq Stock Exchange under the symbol INPH. The following table summarizes its high and low price for each fiscal quarter during 1997 and 1996 as reported by Nasdaq. Fiscal 1997 High Low First Quarter 11.125 8.00 Second Quarter 8.875 6.25 Third Quarter 11.125 7.875 Fourth Quarter 8.625 5.75 Fiscal 1996 First Quarter 13.875 9.875 Second Quarter 20.25 13.50 Third Quarter 16.50 10.00 Fourth Quarter 16.375 10.00 The Company had approximately 900 beneficial owners of its Common Stock, of which 94 are of record , as of March 2, 1998. The Company has not paid dividends on its Common Stock since its inception. The Board of Directors does not anticipate payment of any dividends in the foreseeable future and intends to continue its present policy of retaining earnings for reinvestment in the operations of the Company. ITEM 6. SELECTED FINANCIAL DATA Statement of Operations Data: (In Thousands, except per share data) Two months Twelve months ended Twelve months ended Dec. 31, Dec. 31, ended Oct. 31, 1997 1996 1995 1995 1994 1993 Revenues $66,004 $56,752 $ 3,379 $47,368 $40,303 $38,496 Gross Profit 32,016 27,964 1,224 23,547 20,066 18,764 Research and 13,327 9,902 1,360 7,327 7,862 8,772 development Sales and marketing 11,686 10,297 1,173 8,583 7,599 9,087 General and 6,248 4,905 634 4,004 4,146 4,847 Administrative Special Charges - 11,646 - - 1,148 2,447 Operating income 755 (8,786) (1,943) 3,633 (689) (6,389) (loss) Other, net (1,525) (705) 94 589 278 404 Income (loss) before (770) (9,491) (1,849) 4,222 (411)) (5,985) income tax Net income (loss) $ (971) $(10,055) $(1,167) $ 2,759 $ (280) $4,201) Net income loss per $ (0.18) $(1.99) $ (0.25) $ 0.60 $(0.06) $(0.94) share (Basic) Net income loss per $ (0.18) $(1.99) $ (0.25) $ 0.55 $(0.06) $(0.94) share (Diluted) Weighted average 5,496 5,062 4,663 4,561 4,484 4,472 common shares Weighted average common & common equivalent 5,496 5,062 4,663 5,051 4,484 4,472 shares December 31, October 31, Balance Sheet Data: 1997 1996 1995 1994 1993 Working capital $25,244 $22,836 $24,328 $20,776 $19,053 Total assets 49,447 53,924 35,430 31,943 32,339 Total Liabilities 19,904 23,538 5,019 5,094 5,239 Shareholders' equity 29,543 30,386 30,411 26,849 27,100 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Statement of Operations Percentage of Revenues Two months Year ended ended Year ended Dec. 31, Dec. 31, Oct. 31, 1997 1996 1995 1995 Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales 51.5% 50.7% 63.8% 50.3% Gross profit 48.5% 49.3% 36.2% 49.7% Research and development 20.2% 17.4% 40.2% 15.4% Sales and marketing 17.7% 18.1% 34.7% 18.1% General and administrative 9.5% 8.6% 18.8% 8.5% Acquired in-process R&D 0.0% 20.5% 0.0% 0.0% Operating income (loss) 1.1% -15.3% -57.5% 7.7% Interest income 0.7% 0.7% 2.8% 1.2% Interest expense -1.7% -0.9% 0.0% 0.0% Other, net -1.3% -1.0% 0.0% 0.0% Income (loss) before income -1.2% -16.5% -54.7% 8.9% taxes Provision (benefit) for income 0.3% 1.0% -20.2% 3.1% taxes Net income (loss) -1.5% -17.5% -34.5% 5.8% RESULTS OF OPERATIONS Effective January 1, 1996, Interphase Corporation ("the Company") changed its fiscal year end from October 31 to December 31. For comparison purposes, results for the year ended December 31, 1996, are being compared with results from the year ended October 31, 1995. The Company has not recast October 31, 1995 financial information presented herein to conform to the new fiscal year ends, as management does not believe such recasting would be as meaningful for comparative purposes. In June 1996, the Company acquired Synaptel, S.A ("Synaptel"), a French company which designs and distributes a broad line of remote access and ISDN products, which include both significant software content and interoperability with a broad range of networking protocols. Revenues: Total revenues for the year ended December 31, 1997 and 1996 were $66,004,000 and $56,752,000, respectively and $47,368,000 for the year ended October 31, 1995. This represents a growth in revenues of 16% from 1996 to 1997. The increase in revenues was led by significant revenue growth in the Company's Fibre Channel product line, a three-fold increase in sales of the Company's Fast Ethernet product line, and 22% increase in sales of ATM products. This was offset by a shift from the Company's FDDI, SCSI, and Ethernet products by 20% from 1996 to 1997. In 1997, FDDI revenues accounted for approximately 33% of total revenues, Fast Ethernet 30%, SCSI 9%, WAN 8%, ATM 8%, Ethernet 6% and Fibre Channel 3%. Local area networking products in total comprised 77% of total revenues for 1997, mass storage product revenues 12% and wide area networking products 8%. North American revenues grew 26%, Pacific Rim revenues declined 8%, and European revenues declined 12% compared to 1996. The Company's current marketing strategy is to increase market penetration through sales to major OEM customers. One of these customers accounted for approximately 40% of the Company's revenue in 1997. The increase in revenues from 1995 to 1996 was $9,384,000, which represents a growth in revenues of approximately 20%. Revenues from the WAN product line were approximately $7,100,000 since the acquisition in mid-1996. The remaining increase in revenues was led by a 17% increase in sales of the Company's FDDI product line, a 17% increase in sales of Ethernet products, a 116% increase in sales of ATM products and partially offset by a 51% decline in SCSI products. In 1996 FDDI revenues accounted for approximately 43% of total revenues, SCSI 13%, Ethernet 12%, ATM 8%, Fast Ethernet 8% and WAN 13%. Local area networking products in total comprised 71% of total revenues for 1996, mass storage products revenues 14% of total revenues and wide area networking products 13% of total revenues. North America revenues grew 2%, Pacific Rim revenues declined 3% and European revenues increased twofold compared to 1995, primarily due to the acquisition of Synaptel. Cost of Sales: Cost of sales expressed as a percentage of revenues was 51%, 51% and 50% for the years ended December 31, 1997 and 1996, and October 31, 1995, respectively. In 1997, the SCSI and WAN products experienced improved gross margins over 1996, Ethernet, 100 Base T /VGAnyLan and Fibre Channel were relatively unchanged and FDDI products experienced a slight increase in cost of sales as a percentage of revenues compared to 1996. In 1996, the FDDI products experienced improved gross margins over 1995, SCSI and ATM products were unchanged and Ethernet experienced a slight improvement in cost of sales as a percentage of revenues compared to 1995. Research and Development: The Company's investment in the development of new products through research and development was $13,327,000, $9,902,000 and $7,327,000 in 1997, 1996, and 1995, respectively. As a percentage of revenue, research and development expenses were 20%, 17% and 15% for 1997, 1996 and 1995, respectively. The increase in spending in 1997 reflected additional spending on development for ATM, WAN, Fibre Channel and Fast Ethernet. The increase in spending in 1996 was primarily the result of the acquisition of Synaptel. As a percentage of revenue, research and development expenses are expected to decrease in 1998. Sales and Marketing: Sales and marketing expenses were $11,686,000, $10,297,000, and $8,583,000 in 1997, 1996, and 1995, respectively. As a percentage of revenue, sales and marketing expenses were 18%, for each year. As a percentage of revenue, sales and marketing expenses are expected to remain constant in 1998. Special Charges: In the second quarter of 1996 the Company recorded a charge of $11,646,000 for acquired in-process R&D in association with the acquisition of Synaptel. Acquired in-process research and development activities had no alternative future use and had not achieved technological feasibility; accordingly, the amounts were expensed in the accompanying consolidated statements of operations for the period ended December 31, 1996. General and Administrative: General and administrative expenses were $6,248,000, $4,905,000 and $4,004,000 in 1997, 1996, and 1995, respectively. As a percentage of revenue, general and administrative expenses were 9% for each year. As a percentage of revenue, general and administrative expenses are expected to remain constant in 1998. Interest Income: Interest income was $438,000, $421,000 and $586,000 in 1997, 1996 and 1995, respectively. The change in interest income from year to year is a reflection of the increase and decrease in the funds available for investment. Interest Expense: Interest expense was $1,126,000, $535,000 and $0 in 1997, 1996 and 1995, respectively. The increase in interest expense in 1997 is the result of the debt incurred by the Company to fund the Synaptel acquisition in mid-1996 being outstanding for a full year in 1997. Other Expense: Other expense was $837,000 and $591,000 in 1997 and 1996, respectively. Other expense primarily reflects the amortization of goodwill and acquired developed technologies related to the Synaptel acquisition. Provision (Benefit) for Income Taxes: The Company experienced a net loss before taxes in 1997, however, due to the effects of non- deductible goodwill and state income taxes, the Company had a tax provision of $201,000. The provision decreased 64% from 1996 to 1997 primarily due to the write-off of acquired in-process research and development in 1996 which was not tax benefited. Net Income (Loss): The Company reported a net loss was $971,000 in 1997, a net loss of $10,055,000 in 1996, and net income of $2,759,000 in 1995. The loss in 1996 was attributable to the write-off of acquired in-process research and development ($11,646,000) associated with the acquisition of Synaptel. Adoption of Accounting Standards: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", for its December 31, 1997 consolidated financial statements. As a result, the Company's reported earnings per share for all periods presented were restated. SFAS No. 128 requires the presentation of basic and diluted earnings per share. Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share is computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding during the year. In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and SFAS No. 123, "Accounting for Stock-Based Compensation." The adoption of SFAS No. 121 resulted in no significant impact on the consolidated financial statements of the Company. The Company adopted the footnote disclosure approach to SFAS No. 123, and the Company's pro-forma disclosure can be found in the notes to the consolidated financial statements. Pending Accounting Pronouncements: In July 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 requires the Company to report comprehensive income in the financial statements. SFAS No. 131 requires the Company to disclose revenues, profit and loss, and assets for business and geographical segments similar to disclosures required under current standards. These statements are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company will adopt these statements in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities aggregated $5,519,000, $5,850,000 and $12,686,000 at December 31, 1997, 1996 and October 31, 1995, respectively. Cash, cash equivalents and marketable securities remained relatively unchanged from 1996 to 1997. The decrease of $6,836,000 from 1995 to 1996 is primarily due to the acquisition of the CISCO product line and the growth in accounts receivable and inventories. Expenditures for equipment and purchased software were $1,150,000, $2,539,000 and $2,728,000 in 1997, 1996 and 1995, respectively. At December 31, 1997, the Company had no material commitments to purchase capital assets. The Company's significant long-term obligations are its operating lease on its Dallas facility and future debt payments. The Company has not paid any dividends since its inception and does not anticipate paying any dividends in 1998. In connection with the Synaptel acquisition in June 1996, the Company entered into a two- year $16,000,000 credit facility with a financial institution, subject to annual renewal provisions. This credit facility includes an $8,500,000 term loan, a $2,500,000 equipment loan and a $5,000,000 revolving credit facility. The term loan and equipment loan are due in quarterly installments beginning in November 1996, and expire in November 2001. The revolving credit facility expires in June 1999. In 1998, maturities of this credit facility will be approximately $2,192,000. The Company is currently assessing certain year 2000 issues on various computer related systems, and it will initiate an implementation plan before year 2000 to minimize potential material adverse consequences. The cost to implement this plan has yet to be determined, however the Company does not expect the cost to be material to its financial position or results of operations. The costs associated with this implementation will be expensed as incurred. The Company expects that its cash, cash equivalents and marketable securities will be adequate to meet foreseeable needs in 1998. Use of Forward-Looking Statements: Certain statements contained in MD&A are forward-looking, including statements concerning expected expenses and the adequacy of the Company's sources of cash to finance its current and future operations. Factors which could cause actual results to materially differ from management's expectations include the following: general economic conditions and growth in the high tech industry; competitive factors and pricing pressures; changes in product mix; the timely development and acceptance of new products; inventory risks due to shifts in market domain; and the risks described from time to time in the Company's SEC filings. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14 (a) below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item will be included in the Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 1998, which is incorporatted herein by referece. 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 April 30, 1998, 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 April 30, 1998, 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 April 30, 1998, 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. No reports on Form 8-K have been filed by the Registrant during the quarter ended December 31, 1997. 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 25, 1998 By: /s/ R. Stephen Polley R. Stephen Polley President and Chief Executive Officer 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 25, 1998. Name Title Chairman of the Board of Directors, Chief Executive Officer, and President /s/ R. Stephen Polley (Principal executive officer) R. Stephen Polley Chief Financial Officer, Vice President of Financial and Treasurer /s/ Gregory B. Kalush (Principal finance officer) Gregory B. Kalush /s/ Gary W. Fiedler Director Gary Fiedler /s/ Dale Crane Director Dale Crane /s/ James F. Halpin Director James F. Halpin /s/ Paul N. Hug Director Paul N. Hug /s/ Willaim Voss Director William Voss /s/ David H. Segrest Director David H. Segrest /s/ S. Thomas Thawley Director S. Thomas Thawley INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants - ARTHUR ANDERSEN LLP F-2 Consolidated Balance Sheets - December 31, 1997 and 1996 F-3 Consolidated Statements of Operations - Periods Ended December 31, 1997, 1996, 1995 and October 31, 1995 F-4 Consolidated Statements of Shareholders' Equity - Periods Ended December 31, 1997, 1996, 1995 and October 31, 1995 F-5 Consolidated Statements of Cash Flows - Periods Ended F-6 to F-7 December 31, 1997, 1996, 1995 and October 31, 1995 Notes to Consolidated Financial Statements F-8 to F-18 F-1 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1997 and 1996, the two month period ended December 31, 1995 and the year ended October 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interphase Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997 and 1996, the two month period ended December 31, 1995 and the year ended October 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas February 4, 1998 F-2 INTERPHASE CORPORATION CONSOLIDATED BALANCE SHEET (in thousands, except number of shares) Dec. 31, 1997 Dec. 31, 1996 Cash and cash equivalents $2,247 $2,271 Marketable securities 3,272 3,579 Trade accounts receivable, less allowances for uncollectible accounts of $544 and $503 respectively 13,030 15,182 Inventories, net 14,895 12,599 Prepaid expenses and other current assets 798 1,221 Deferred income taxes, net 686 886 Total current assets 34,928 35,738 Machinery and equipment 12,079 12,340 Leasehold improvements 2,890 2,863 Furniture and fixtures 417 278 15,386 15,481 Less-accumulated depreciation and amortization (11,817) (10,394) Total property and equipment, net 3,569 5,087 Capitalized software, net 225 400 Deferred income taxes, net 862 392 Acquired developed technology, net 4,400 5,819 Goodwill, net 3,310 3,902 Other assets 2,153 2,586 Total assets $49,447 $53,924 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable $2,636 $4,279 Accrued liabilities 2,484 3,097 Accrued compensation 1,910 2,962 Income taxes payable 197 93 Current portion of debt 2,457 2,471 Total current liabilities 9,684 12,902 Other liabilities 600 1,192 Long term debt, net of current portion 9,620 9,444 Total liabilities 19,904 23,538 Commitments and contingencies Shareholders' Equity Common stock, no par value; 100,000,000 shares 35,326 35,195 authorized; 5,516,578 and 5,491,658 shares outstanding, respectively Retained earnings (deficit) (5,930) (4,959) Cumulative foreign currency translation 178 164 adjustment Unrealized holding period loss (31) (14) Total shareholders' equity 29,543 30,386 Total liabilities and shareholders' equity $49,447 $53,924 The accompanying notes are an integral part of these consolidated financial statements. F-3
INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Two months Year Year ended ended ended Dec. 31, Dec. 31, Oct. 31 1997 1996 1995 1995 Revenues $66,004 $56,752 $3,379 $47,368 Cost of sales 33,988 28,788 2,155 23,821 Gross profit 32,016 27,964 1,224 23,547 Research and development 13,327 9,902 1,360 7,327 Sales and marketing 11,686 10,297 1,173 8,583 General and administrative 6,248 4,905 634 4,004 Acquired in-process R&D - 11,646 - - Total operating expenses 31,261 36,750 3,167 19,914 Operating income (loss) 755 (8,786) (1,943) 3,633 Interest income 438 421 94 586 Interest expense (1,126) (535) - - Other, net (837) (591) - 3 Income (loss) before income taxes (770) (9,491) (1,849) 4,222 Provision (benefit) for income 201 564 (682) 1,463 taxes Net income (loss) $(971)$(10,055) $(1,167) $2,759 Net income (loss) per share Basic earnings per share $(0.18) $(1.99) $(0.25) $0.60 Diluted earnings per share $(0.18) $(1.99) $(0.25) $0.55 Weighted average common shares 5,496 5,062 4,663 4,561 Weighted average common and common equivalent shares 5,496 5,062 4,663 5,051 The accompanying notes are an integral part of these consolidated financial statements. F-4
INTERPHASE CORPORATION CONSOLIDATE STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) Cumulative Retained Unrealized Foreign Common Stock Earnings Holdings Currency Shares Amount (Deficit) Period Loss Translation Total Balance at October 31, 1994 4,513 $23,493 $3,504 $(148) $- $26,849 Option exercises, including related 148 684 - - - 684 tax benefit Unrealized holding period gain - - - 119 - 119 Net income - - 2,759 - - 2,759 Balance at October 31, 1995 4,661 24,177 6,263 (29) - 30,411 Option exercises, including related 6 17 - - - 17 tax benefit Unrealized holding period gain - - - - - - Net loss - - (1,167) - - (1,167) Balance at December 31, 1995 4,667 $24,194 $5,096 $(29) $- $29,261 Option exercises, including related 230 1,801 - - - 1,801 tax benefit Common stock issued in Synaptel 595 9,200 - - - 9,200 acquisition Cumulative foreign currency - - - - 164 164 translation Unrealized holding period gain - - - 15 - 15 Net loss - - (10,055) - - (10,055) Balance at December 31, 1996 5,492 $35,195 $(4,959) $(14) $164 $30,386 Option exercises, including related 24 131 - - - 131 tax benefit Cumulative foreign currency - - - - 14 14 translation Unrealized holding period gain - - - (17) - (17) Net loss - - (971) - - (971) Balance at December 31, 1997 5,516 $35,326 $(5,930) $(31) $178 $29,543 The accompanying notes are an integral part of these consolidated financial statements. F-5
INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Two months Year ended Year ended ended Year ended Dec. 31, Dec. 31, Dec. 31, Oct. 31, 1997 1996 1995 1995 Cash flows from operating activities: Net income (loss) $(971) $(10,055) $(1,167) $2,759 Adjustment to reconcile net income (loss) to net cash provided (used) by operating activities: Write off of acquired in-process research 0 11,646 0 0 and development Depreciation and amortization 4,739 4,234 525 2,814 Deferred income taxes (270) (358) 1 170 Change in assets and liabilities, net of Synaptel acquisition Trade accounts receivable 2,152 (8,584) 3,575 (1,863) Inventories (2,296) (1,345) (2,173) (909) Refundable income taxes 0 0 0 219 Prepaid expenses and other current 423 (151) 93 (224) assets Accounts payable and accrued (2,081) (409) (304) (28) liabilities Accrued compensation (1,052) (258) 43 (106) Income taxes payable 104 0 (366) 366 Net adjustments 1,719 4,775 1,394 439 Net cash provided (used) by operating 748 (5,280) 227 3,198 activities Cash flows from investing activities: Additions to property, equipment, (1,150) (2,539) (511) (2,728) capitalized software and leasehold improvements Decrease (increase) in other assets 373 (200) (71) (93) Decrease (increase) in marketable 307 5,788 (1) (1,528) securities Cash acquired in Synaptel acquisition 0 11 0 0 Change in unrealized holding period loss (17) 15 0 0 on marketable securities Acquisition of developed technologies 0 (2,500) 0 0 Net cash (used) provided by investing (487) 575 (583) (4,349) activities
Cash flows from financing activities: Increase (decrease) in other long term (592) 1,093 (4) (27) liabilities Payments of debt (2,338) (1,134) 0 0 Proceeds from debt 2,500 2,075 0 0 Increase in foreign currency translation 14 164 0 0 adjustment Increase in common stock from exercise of 131 1,801 17 684 options Net cash provided by financing (285) 3,999 13 657 activities Net increase (decrease) in cash and cash (24) (706) (343) (494) equivalents Cash and cash equivalents at beginning of 2,271 2,977 3,320 3,814 year Cash and cash equivalents at end of year $2,247 $2,271 $2,977 $3,320 Supplemental Disclosure of Cash Flow Information: Interest paid $996 $438 $0 $0 Taxes refunded 27 40 283 244 Taxes paid 389 476 0 1,014 The accompanying notes are an integral part of these consolidated financial statements. F-6
INTERPHASE CORPORATION SUPPLEMENTAL SCHEDULE OF CASH FLOWS (in thousands) Supplemental schedule of non-cash investing and financing activities In June 1996, the Company purchased all of the capital stock of Synaptel. Fair value of assets acquired $(27,403) Liabilities assumed 8,414 Acquisition debt 8,000 Common stock issued 9,200 Aquisition costs 1,800 Cash acquired in Synaptel $ 11 acquisition 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 Principles of Consolidation and Basis of Presentation: The consolidated financial statements include the financial statements of Interphase Corporation ("the Company") and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Effective January 1, 1996, the Company changed its fiscal year end from October 31 to December 31. For comparison purposes, results for the year ended December 31, 1996, are being compared with results from the year ended October 31, 1995. The Company has not recast October 31, 1995 financial information presented herein to conform to the new fiscal year end, as management does not believe such recasting would be as meaningful for comparative purposes. In 1996, the Company acquired Synaptel, S.A ("Synaptel"), a French company which designs and distributes a broad line of remote access and ISDN products, which include both significant software content and interoperability with a broad range of networking protocols. Cash and Cash Equivalents: The Company considers cash and temporary investments with original maturities of less than three months, as well as interest bearing money market accounts, to be cash equivalents. Marketable Securities: As of December 31, 1997 and 1996, the fair market value of marketable securities was $3,272,000 and $3,579,000, respectively. In accordance with the requirements of the Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," all marketable securities are classified as "available-for-sale securities" and reported at fair value. Unrealized gains and losses are excluded from earnings and reported as a separate component of shareholders' equity, net of related deferred taxes. The Company's results of operations will continue to include earnings from such securities as calculated on a yield-to-maturity basis. During 1997 the Company realized a net gain of $34,000 from the sale of securities. During 1996 the Company realized a loss of $16,000 from the sale of securities. As of December 31, 1997 and 1996, the Company had recorded a valuation loss of $31,000 and $14,000 (net of taxes), respectively with respect to certain available-for-sale securities. Allowance for doubtful accounts: As of December 31, 1997, 1996 and October 31, 1995, the allowance for doubtful accounts was $544,000, $503,000, and $238,000. The activity in this account was as follows (in thousands): Balance at Write-offs Balance Beginning Charged to Net of Synaptel at End Year Ended: of Period Expense Recoveries Acquisition of Period December 31, 1997 $ 503 $ 337 $ (296) $ - $ 544 December 31, 1996 238 50 (50) 265 503 October 31, 1995 240 - (2) - 238 Inventories: Inventories are valued at the lower of cost or market and include material, labor and manufacturing overhead. Cost is determined on a first-in, first-out basis (in thousands): Dec. 31,1997 Dec. 31, 1996 Raw Materials $ 7,922 $ 6,040 Work-in-process 5,943 5,193 Finished Goods 1,030 1,366 Total $14,895 $12,599 F-8 Property and Equipment: Property and equipment are recorded at cost. Depreciation and amortization are provided over the estimated useful lives of depreciable assets using the straight-line method. When property and equipment are sold or otherwise retired, the cost and accumulated depreciation applicable to such assets are eliminated from the accounts, and any resulting gain or loss is reflected in current operations. Related depreciation expense and accumulated depreciation were as follows (in thousands): Depreciation Accumulated Expense Depreciation Year ended December 31, 1997 $ 2,781 $ 11,817 Year ended December 31, 1996 2,782 10,394 Year ended October 31, 1995 2,414 8,820 The depreciable lives of property and equipment are as follows: Machinery and equipment 3-5 years Leasehold improvements 3-10 years Furniture and fixtures 5-7 years Capitalized Software: Capitalized software represents various software licenses purchased by the Company and utilized in connection with the Company's network and mass storage products as well as the general operations of the Company. Capitalized software is amortized over 3-5 years utilizing the straight-line method. Related amortization expense and accumulated amortization were as follows (in thousands): Amortization Accumulated Expense Amortization Year ended December 31, 1997 $223 $ 1,950 Year ended December 31, 1996 362 2,128 Year ended October 31, 1995 400 1,441 Research and Development Subsidy: Included in other assets at December 31, 1997, is a receivable for a subsidy of $1,651,000 due from the French government related to the research and development activities of Synaptel. Intangibles: As a result of the acquisition of Synaptel, S.A. ("Synaptel") and certain product rights acquired from Cisco Systems, Inc. ("Cisco"), the Company acquired intangible assets related to developed technologies, assembled workforce and goodwill (See Note 2). Developed technology and assembled workforce are amortized on a straight-line basis over a 7-year period. Goodwill related to the Synaptel acquisition is amortized on a straight-line basis over a 10- year period. Acquired product rights from Cisco are amortized ratably over the anticipated revenue stream of such products sold. The December 31, 1997 intangible balances at cost and related amortization expense and accumulated amortization were as follows (in thousands): Amortization Expense Accum. Ending Intangibles 1997 1996 1995 Amortization Balance Developed technology $4,230 $600 $150 $- $750 $3,480 Assembled workforce 390 60 15 - 75 315 Goodwill-Synaptel 3,596 263 23 - 286 3,310 Acquired Product Rights-Cisco 2,500 812 768 - 1,580 920 Intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any impairment would be recognized in operating results if a permanent reduction in value were to occur. F-9 Revenue Recognition: Revenue from product sales is recorded when the earnings process has been completed, which is at the time of shipment. Concentration of Credit Risk: Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The majority of the Company's sales have been to original equipment manufacturers of computer systems. The Company conducts credit evaluations of its customers' financial condition and limits the amount of trade credit extended when necessary. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Research and Development: Research and development costs are charged to expense as incurred. Foreign Currency Translation: Assets and liabilities of certain non- U.S. subsidiaries are translated at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are reflected in shareholders' equity. Income Taxes: The Company utilizes the liability method to determine deferred taxes. Deferred tax assets and liabilities are based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax law. The Company's consolidated financial statements include deferred income taxes arising from the recognition of revenues and expenses in different periods for income tax and financial reporting purposes. Net Income (Loss) Per Common and Common Equivalent Share: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", for its December 31, 1997 consolidated financial statements. As a result, the Company's reported earnings per share for all periods presented are restated. Under SFAS No. 128, basic earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share are computed by dividing net income by the weighted average of common stock and common stock equivalents outstanding during the year. Weighted average common and common equivalent shares (in thousands): Two months ended Year ended Year ended Dec. 31, Dec. 31, Oct. 31, 1997 1996 1995 1995 Outstanding weighted average shares outstanding 5,496 5,062 4,663 4,561 Dilutive impact of stock - - - 490 options Total outstanding weighted average common and common equivalent shares 5,496 5,062 4,663 5,051 Anit-dilutive options of 101,000, 371,000 and 435,000 were excluded from the dilutive calculation in 1997, 1996, and the two month period ended December 31, 1995, respectively. F-10 Recently Issued Accounting Policies: In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. The adoption of SFAS No. 121 did not have a material effect on the consolidated financial statements of the Company. In 1996, the Company adopted SFAS No. 123, "Accounting for Stock- Based Compensation". SFAS No. 123 requires companies to either recognize compensation expense related to employee stock options in the income statement or disclose the pro-forma effect on earnings of the stock options in the footnotes to the financial statements. The Company adopted the footnote disclosure approach of SFAS No. 123, and the Company's pro forma disclosure can be found in Note 5 to the consolidated financial statements. In 1997, the Company adopted SFAS No. 128, Earnings per Share, for its December 31, 1997 consolidated financial statements. Effective July 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 requires the Company to report comprehensive income in the financial statements. SFAS No. 131 requires the Company to disclose revenues, profit and loss, and assets for business and geographical segments similar to disclosures required under current standards. These statements are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company will adopt these statements in 1998 and anticipates no material impact on the financial statements or footnotes to the financial statements. Certain Reclassifications: Certain prior year amounts have been reclassified to conform with the 1997 presentation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires Company management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACQUISITIONS SYNAPTEL Effective June 29, 1996, the Company acquired all the capital stock of Synaptel, S.A. ("Synaptel"), a French company , for approximately $19,000,000. The purchase consideration consisted of $8,000,000 in cash, 594,595 shares of the Company's common stock, valued at approximately $9,200,000, and $1,800,000 of accrued acquisition costs. The Company financed the cash portion of the consideration through a credit facility with a financial institution. This acquisition was accounted for using the purchase method of accounting from the effective date of the acquisition. The total purchase consideration in excess of the fair value of the tangible and identified intangible assets acquired was included in goodwill. Identified intangibles acquired included approximately $11,600,000 of in-process research and development, $4,230,000 of developed technology and $390,000 related to Synaptel's assembled workforce. Acquired in-process research and development activities had no alternative future use and had not achieved technological feasibility; accordingly, the amounts were expensed in the accompanying consolidated statement of operations for the year ended December 31, 1996. In addition to the purchase consideration discussed above, the purchase agreement included provisions for additional consideration of $3,500,000 cash and 450,000 options to purchase the Company's common stock at an exercise price of $18.50 per share if Synaptel attains certain revenue and operating income targets through 1998. The actual cash earn-out and number of employee stock options may increase or decrease depending upon performance against targets. The cash payments pursuant to these provisions will be accounted for as additional purchase consideration when payment is probable. The compensatory elements, if any, for these stock options will be expensed over the exercise periods. In 1997 and 1996, no additional consideration was paid. F-11 The unaudited pro forma financial information is presented for the years ended December 31, 1996 and October 31, 1995. This unaudited pro forma financial information gives effect to the purchase of Synaptel as if such transaction had occurred as of November 1, 1994, and excludes the $11,646,000 write-off of acquired in-process research and development (in thousands): Year ended Year ended December 31, 1996 October 31, 1995 Net sale $ 59,845 $ 58,115 Net income (loss) (1,388) 2,317 Basic earnings per share (0.26) 0.45 Diluted earnings per share (0.26) 0.41 Unaudited pro forma financial information for the two-month period ended December 31, 1995 is not available. The unaudited pro forma financial information does not purport to represent what the results of operations of the Company would actually have been if the aforementioned transactions had occurred on November 1, 1994, nor do they project the results of operations or financial position for any future periods or at any future date. ACQUIRED PRODUCT RIGHTS In June 1996, the Company acquired the rights to manufacture, market, and sell certain FDDI products from Cisco for a purchase price of $2,500,000. The acquired product rights are included in acquired developed technology in the accompanying December 31, 1997 and 1996, consolidated balance sheet. 3. CREDIT FACILITY Prior to and in conjunction with the Synaptel acquisition discussed in Note 2, the Company entered into a credit facility with BankOne Texas NA. The credit facility consists of an $8,500,000 acquisition term loan, a $2,500,000 equipment financing facility and a $5,000,000 revolving credit facility. The revolving credit facility is a two-year facility with an annual renewal provision, and bears interest at the bank's base rate (currently 8.5%). The term loan and equipment loan are payable in equal quarterly installments totaling $548,000 plus accrued interest commencing on November 30, 1996, with final payment due November 30, 2001. The Company has the ability to satisfy the quarterly payments on the term notes through borrowing under the revolving credit component of the credit facility. The revolving portion of the loan is due June 30, 1999. The credit facility is collateralized by marketable securities, assignment of accounts receivable and equipment. The credit facility includes certain restrictive financial covenants including, among others, tangible net worth, total liabilities to tangible net worth, interest coverage, quick ratio, debt service coverage, and is subject to a borrowing base calculation. At December 31, 1997, the Company was in compliance with all covenants. At December 31, 1997, total availability under this credit facility was $1,500,000. At December 31, 1997, the Company's outstanding debt consisted of the following (in thousands): Dec. 31, 1997 Dec. 31, 1996 Acquisition Term Loan $6,375 $8,075 Equipment Financing Loan 1,866 2,358 Borrowings under revolving 3,500 1,000 credit facility Other 336 482 Total 12,077 11,915 Less current portion 2,457 2,471 Total long term debt $9,620 $9,444 The total scheduled debt principal payments are $2,457,000 in 1998, $5,692,000 in 1999, $2,192,000 in 2000, $1,664,000 in 2001 and zero thereafter. F-12 4. INCOME TAXES The provision (benefit) for income taxes for each period presented was as follows (in thousands): Two Month Year ended Year ended Dec. 31, ended Dec. 31, Oct 31, 1997 1996 1995 1995 Current provision (benefit) $471 $922 $(683) $1,293 Deferred provision (benefit) (270) (358) 1 170 Total $201 $ 564 $(682) $1,463 Tax effect of temporary differences that give rise to significant components of the deferred tax assets as of December 31, 1997 and 1996, are presented as follows (in thousands): Year ended Year ended Dec. 31, Dec. 31, 1997 1996 Current deferred tax assets: Assets: Inventory $ 155 $ 294 Accounts receivable 88 120 Vacation accrual 148 154 Other expenses 295 318 Total $ 686 $ 886 Noncurrent deferred tax assets (liabilities), net: Assets: Depreciation 850 765 Amortization 459 - $ 1,309 $ 765 Liabilities: Other (447) (373) Total $ 862 $392 The Company has not recorded a valuation allowance with respect to the various deferred tax assets as management believes it is more likely than not that these assets will be realized. Management periodically reviews the realizability of the Company's deferred tax assets, as appropriate, when existing conditions change the probability of realization. The differences between the provision (benefit) for income taxes computed on income before income taxes at the U.S. federal statutory income tax rate (34%) and the amount shown in the Consolidated Statements of Operations are presented below (in thousands): Two Month Year ended Year ended Dec. 31, ended Dec. 31, Oct 31, 1997 1996 1995 1995 Income taxes at $(262) $(3,227) $ (628) $1,435 statutory rate State income taxes 1 46 (35) 102 Write off of in- process research and development not tax benefited - 3,960 - - Non-deductible goodwill amortization 314 64 - - Other 148 (279) (19) (74) Provision (benefit) for $ 201 $ 564 $ (682) $1,463 income taxes F-13 5. COMMON STOCK Amended and Restated Stock Option Plan: In 1996, the Company amended and restated its Stock Option Plan which, as amended, authorizes the issuance to employees of up to 2,350,000 shares of common stock in incentive stock options (as defined in section 422 of the Internal Revenue Code of 1986, as amended) and nonqualified stock options. The exercise price of the incentive stock options must be at least equal to the fair market value of the Company's common stock on the date of the grant, while the exercise price of nonqualified stock options may be less than fair market value on the date of grant, as determined by the board. Options generally vest ratably over a 5-year period from the date of grant. The term of option grants may be up to 10 years. Grants prior to June 1994 expire after 6 years. Options are canceled upon the lapse of three months following termination of employment except in the event of death or disability, as defined. Stock Option Sub-Plan: This plan was adopted in 1988 for the benefit of the Company's employees located in the United Kingdom. This plan authorizes the issuance of options to purchase common stock of the Company at prices at least equal to the fair market value of the common stock on the date of the grant. The options vest after 3 years and expire after 10 years. The options are canceled upon termination of employment, except in the event of death, retirement or injury, as defined. The following table summarizes the transactions under the Stock Option Plan and the Stock Option Sub-Plan (in thousands, except option prices): Number of Range of Weighted Average Options Option Price Option Price Balance, October 31, 1994 757 4.00- 8.00 5.10 Granted 536 9.57- 16.13 11.35 Exercised (134) 4.00- 7.38 5.02 Canceled (102) 4.00- 11.44 7.25 Balance, October 31, 1995 1,057 4.00- 16.13 8.07 Exercised (3) 4.00- 11.44 5.77 Balance, December 31, 1995 1,054 4.00- 16.13 8.08 Granted 370 10.00- 16.00 13.91 Exercised (194) 4.00- 11.44 6.08 Canceled (118) 4.00- 12.07 8.36 Balance, December 31, 1996 1,112 4.00- 16.13 10.34 Granted 381 6.00- 10.37 7.95 Exercised (24) 6.00- 11.00 7.26 Canceled (59) 4.00- 15.00 10.17 Balance, December 31, 1997 1,410 4.00- 16.13 10.80 Exercisable at December 427 4.00- 16.13 9.08 31, 1997 F-14 Director Stock Options: In May 1994, the Company formalized its program ("directors' plan") of granting stock options to its directors. 500,000 common shares were made available for grant under this plan. Stock Option grants pursuant to the directors' plan will vest within one year and have a term of 5 years. The exercise prices related to these options were equal to the market value of the Company's stock on the date of grant. The following table summarizes the transactions under the Director Stock Option Plan (in thousands, except option prices): Number of Range of Weighted Average Options Option Price Option Price Balance, October 31, 1994 144 4.38- 6.63 5.61 Granted 40 10.25- 16.88 11.91 Balance, October 31, 1995 184 4.38- 16.88 6.98 Granted 30 14.88- 14.88 14.88 Exercised (38) 4.75- 10.25 6.20 Balance, December 31, 1996 176 4.38- 16.88 8.52 Granted 55 6.75- 11.12 7.78 Balance, December 31, 1997 231 4.38- 16.88 8.35 Exercisable at December 31, 1997 185 4.38- 16.88 8.66 Accounting for Stock-Based Compensation: In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has two stock option plans, the Amended and Restated Stock Option plan, which also includes the Sub-Plan, and the Directors Plan. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined pursuant to the provisions of SFAS No. 123, the Company's pro forma net loss for 1997 and 1996 would have been $(2,121,000) and $(10,653,000), respectively, resulting in basic loss per share of $(0.39) and $(2.10), respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for options granted in 1997 and 1996: risk-free interest rate of 6% in 1997 and 7% in 1996, expected dividend yield of zero, expected term of 4.48 years in 1997 and 6.4 years in 1996, and expected volatility of 93.6% in 1997 and 112.96% in 1996. The weighted average fair valuation per share was $5.56 in 1997, and $9.19 in 1996. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro-forma compensation cost may not be representative of that to be expected in future years. 6. ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands): December 31, December 31, 1997 1996 Accrued royalties $ 70 $ 265 Accrued outside 320 354 commissions Accrued property tax 182 211 Accrued acquisition 479 546 cost Accrued other 1,433 1,721 $ 2,484 $ 3,097 F-15 7. RELATED PARTY TRANSACTIONS The Company paid approximately $347,000 and $668,000 for the year ended December 31, 1997 and 1996, respectively, $67,000 for the two months ended December 31, 1995, and $397,000 for the year ended October 31, 1995, to certain outside directors of the Company or their firms as remuneration for their professional services. 8. TRANSACTIONS WITH MOTOROLA, INC. Motorola owns 660,000 shares of the Company's common stock. Motorola has the right to require registration and to designate one member of the board of directors. Shipments to Motorola comprised the following percentage of the Company's revenues for the periods indicated: % of Total Revenues Year ended December 31, 1997 3 % Year ended December 31, 1996 6 % Two month period ended 4 % December 31, 1995 Year ended October 31, 1995 6 % 9. EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution plan for those employees who meet the plan's length of service requirements. Under the defined contribution plan, employees may make voluntary contributions to the plan, subject to certain limitations, and the Company matches employee's contributions up to 3% of the employees' annual salary. At the Company's option, a discretionary contribution to the plan can be made. The total expense under this plan was $171,000 and $262,000 for the years ended December 31, 1997 and 1996 respectively, $27,000 for the two-month transition period ended December 31, 1995, and $282,000 for the year ended October 31, 1995. The Company offers no post-retirement or post-employment benefits. 10. OTHER FINANCIAL INFORMATION Major Customers: The Company had one customer in 1997, no customers in 1996, no customers in the two-month transition period and one customer in 1995 accounting for more than 10% of the Company's consolidated revenues. Net revenues resulting from these customers were as follows ($ in thousands): Year Total Revenues % of Consolidated Revenues 1997 $ 26,402 40% 1995 7,039 15% F-16 Commitments: The Company leases its office, research and development and manufacturing facility and certain manufacturing equipment under noncancelable operating leases to 2010. Rent expense related to these leases are recorded on a straight-line basis. As of December 31, 1997, operating lease commitments having noncancelable terms of more than one year are as follows (in thousands): Year ending December 31, 1998 $1,001 1999 799 2000 205 2001 171 2002 64 Thereafter 509 Total rent expense for operating leases was approximately as follows (in thousands): Year Total Rent Expense 1997 $1,024 1996 817 Two month transition period 148 1995 702 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. Geographic Information: The Company operates principally in the United States, Europe and the Pacific Rim. A geographic detail of revenue is as follows (in thousands): Transition Period Region 1997 1996 1995 1995 North America $ 53,059 $42,102 $2,712 $41,207 Europe 10,867 12,383 457 3,818 Pacific Rim 2,078 2,267 210 2,343 F-17 11. QUARTERLY FINANCIAL DATA (Unaudited) Quarter Ended March 31 June 30 September 30 December 31 1997 (in thousands, except per share amounts) Revenues $16,858 $18,379 $13,611 $17,156 Gross profit 8,086 9,162 6,209 8,559 Income (loss) before 138 814 (2,558) 836 taxes Net income (loss) 97 437 (2,191) 686 Net income (loss) per share Basic EPS $ .02 $.08 $(.40) $.12 Diluted EPS $ .02 $.08 $(.40) $.12 Quarter Ended March 31 June 30 September 30 December 31 1996 (in thousands, except per share amounts) Revenues $11,877 $11,318 $16,370 $17,187 Gross profit 6,191 5,588 7,871 8,314 Income (loss) before 1,007 (11,526) 192 836 taxes Net income (loss) 644 (11,565) 167 699 Net income (loss) per share Basic EPS $.14 $(2.45) $.03 $.13 Diluted EPS $.13 $(2.45) $.03 $.12 Operating results in the second quarter of 1996 included a $11,646,000 expense for the write-off of acquired in-process R&D associated with the Synaptel acquisition Period ended Transition Period December 31, 1995 (in thousands, except per share amounts) Revenues $ 3,379 Gross profit 1,224 Income (loss) before (1,849) taxes Net income (loss) (1,167) Net income (loss) per share Basic EPS $(.25) Diluted EPS $(.25) Quarter Ended January 31 April 30 July 31 October 31 (in thousands, except per share amounts) 1995 Revenues $11,022 $11,473 $12,356 $12,517 Gross profit 5,420 5,771 6,083 6,273 Income before taxes 948 1,005 1,166 1,103 Net income 606 645 745 763 Net income per share Basic EPS $.13 $.14 $.16 $.17 Diluted EPS $.12 $.13 $.14 $.15 F-18 INDEX TO EXHIBITS Exhibits 2 (a) Stock Purchase Agreement, dated as of June 29, 1996, among Interphase Corporation, Synaptel and Philippe Oros, Xavier Sutter, Francois Lecerf, Schroder Ventures French Enterprise Fund LPI (USA), Schroder ventures French Enterprise Fund UKLP (UK) and Schroder Ventures Holding Limited (UK). (7) 3 (a) Certificate of Incorporation of the registrant. (1) 3 (b) Amended and Restated Bylaws of the registrant adopted on December 5, 1995. (6) 10 (b) Registrant's Amended and Restated Stock Option Plan and Amendment No. 1 and 2 thereto. (9) 10 (c) Registrant's Incentive Stock Option Sub-Plan. (3) 10 (d) Stock Purchase Warrant issued to Motorola, Inc. (4) 10 (e) Lease on Dallas facility. (5) 10 (g) Directors Stock Option Plan and Amendment No. 1 thereto.(6) 10 (i ) Loan Agreement between Interphase Corporation and BankOne Texas, N.A. (8) 10 (j) Purchase Agreement between Interphase Corporation and Cisco Systems Inc. (9) 23 (a) Consent of Independent Public Accountants. (10) 27 Financial Data Schedule. (10) (1) Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and incorporated herein by reference. (2) Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1984 and incorporated herein by reference. (3) Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1988 and incorporated herein by reference. (4) Filed as an exhibit to Report on Form 10-Q for the quarter ended April 30, 1989 and incorporated herein by reference. (5) Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1994 and incorporated herein by reference. (6) Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1995 and incorporated herein by reference. (7) Filed as an exhibit to Report on Form 8-K on August 6, 1996, and incorporated herein by reference. (8) Filed as an exhibit to Report on Form 8-KA on October 4, 1996 and incorporated herein by reference. (9) Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (10) Filed herein. E-1 EX-23 2 Exhibit 23(a) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Interphase Corporation: As independent public accountants, we hereby consent to the incorporation of our reports, included in this Form 10-K into the Company's previously filed Registration Statement on Forms S-8 No. 33-62136 and No. 33-87546. ARTHUR ANDERSEN LLP Dallas, Texas March 25, 1998 EX-27 3
5 1000 YEAR DEC-31-1997 DEC-31-1997 2247 3272 13574 544 14895 34928 15386 11817 49447 9684 0 0 0 35326 (5783) 49447 66004 66004 33988 31261 399 0 1126 (770) 201 (971) 0 0 0 (971) (.18) (.18)
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