-----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, K+/Kuo7Kljb/OR+l5vPKnWx1QlWoe9gAS+oj00Sr+AF+BBz6VFcit7Aq7HJMI0w/ K6C1AV0clA8JAEfQXImUXQ== 0000912057-97-011258.txt : 19970401 0000912057-97-011258.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011258 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 1934 Act SEC FILE NUMBER: 000-13071 FILM NUMBER: 97569939 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 FORM 10-K - -------------------------------------------------------------------------------- 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 (Fee Required) For the Fiscal Year Ended December 31, 1996 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 17, 1997 was approximately $39,697,762. As of March 17, 1997, registrant had outstanding 5,492,608 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference into this annual report on Form 10-K Report: (1) Portions of the Definitive Proxy Statement for Annual Meeting of Shareholders to be held on May 14, 1997 (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 with general availability expected in mid 1997. 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 multiport 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 1 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"), a French societe anonyme from six Synaptel stockholders. 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. Synaptel employs approximately 70 people, primarily in Paris, France. The Company has no present intention to change the use of the plant, equipment and other physical property used in its business. 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 2 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 84% of consolidated revenues for the year ended December 31, 1996, 61% and 58% of consolidated revenues during the years ended October 31, 1995 and 1994, respectively. 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. 3 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. 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). SBUS/FDDI 4611 is a high performance FDDI network adapter for SBus systems. It contains many of the same features as the VMEbus FDDI products such as support for various media. The Solaris or SunOS software driver included with this product contains native TCP/IP support and integrated Station Management (SMT). 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. 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. PMC/FDDI 4511 provides reliable, high-performance 100 Mbps FDDI connectivity for PMC-based systems. It supports multimode fiber and copper wiring. SBUS/FDDI CDDI WA-C30 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. 4 EISA/FDDI CDDI WA-C32 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. 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. 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. 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. PCI ATM 5515 adapter provides full duplex ATM connectivity for most PCI-compliant systems. This adapter supports Windows NT, Novell NetWare and Apple MacOS environments. 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. 5 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 NetWAre. VME ATM 5215 adapter provides full duplex ATM connectivity for SGI Onyz and Challenge systems running the IRIX 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. PMC ATM 4515 adapter provides reliable, high performance ATM connectivity for PMC-based systems. This adapter supports SONET OC-3 155 Mpbs connectivity. PCI ATM 6516 adapter is 3U CompactPCI, which provides full-duplex 155 Mbps ATM connectivity. 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 Upon the acquisition of Synaptel by the Company in June 1996, Interphase now 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. 6 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 14% of consolidated revenues for the year ended December 31, 1996, 34% and 39% of consolidated revenues during the years ended October 31, 1995 and 1994, respectively. The Company's mass storage product line includes products that function in VMEbus, EISA bus, Multibus and PCIbus systems. During 1996 and 1995, the vast majority of mass storage revenues were derived from SCSI products. 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-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. 7 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. 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 1996, 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 8 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. In 1996, the Company introduced its first Fibre Channel mass storage controller. 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 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. During the year ended October 31, 1994, two customers accounted for more than 10% of consolidated revenues, Sequent Computer and Motorola Systems, with revenues of $4,125,000 and $4,082,000, respectively, each of which equaled approximately 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 6%, 6% and 10% of the Company's revenues for the years ended December 31, 1996, October 31, 1995 and 1994, 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; Portland, Oregon; Phoenix, Arizona; Minneapolis, Minnesota; Nashua, New Hampshire; 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. 9 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. 10 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, 1996, the Company had 269 full-time employees, of which 81 were engaged in manufacturing and quality assurance, 91 in research and development, 56 in sales, sales support, service and marketing and 41 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. 11 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. On January 22, 1996, the Company filed a lawsuit in the 160th Judicial District Court of Texas against Rockwell International Corporation and related parties seeking damages for breach of contract in connection with a proposed acquisition by the Company of a division of Rockwell. The Company is unable to predict with any certainty the outcome of this litigation. Other than the foregoing, there are no other legal proceedings, pending or threatened, against the Company that, in management's opinion, could have a material effect on the Company's financial position or operations. 12 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 1996 and 1995 as reported by Nasdaq. FISCAL 1996 HIGH LOW - -------------------------------------------- First Quarter 13 7/8 9 7/8 Second Quarter 20 1/4 13 1/2 Third Quarter 16 1/2 10 Fourth Quarter 16 3/8 10 FISCAL 1995 HIGH LOW - -------------------------------------------- First Quarter 12 3/4 8 1/2 Second Quarter 12 3/8 8 3/8 Third Quarter 17 3/4 9 3/4 Fourth Quarter 17 1/2 10 1/2 The Company had approximately 900 beneficial owners of its Common Stock, of which 92 are of record, as of March 15, 1997. 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. 13 ITEM 6. SELECTED FINANCIAL DATA Statement of Operations Data: Twelve months Two months (In Thousands, except per share data) ended Dec. 31, ended Dec. 31, Twelve months months ended Oct. 31, 1996 1995 1995 1994 1993 1992 ---------------------------------------------------------------------------- Revenues $ 56,752 $ 3,379 $47,368 $40,303 $38,496 $44,258 Gross profit 27,964 1,224 23,547 20,066 18,764 24,142 Research and development 9,902 1,360 7,327 7,862 8,772 9,180 Sales and marketing 10,297 1,173 8,583 7,599 9,087 8,337 General and administrative 4,905 634 4,004 4,146 4,847 4,380 Special charges 11,646 - - 1,148 2,447 - Operating income (loss) (8,786) (1,943) 3,633 (689) (6,389) 2,245 Other, net (705) 94 589 278 404 592 Income (loss) before income tax (9,491) (1,849) 4,222 (411) (5,985) 2,837 Net income (loss) (10,055) (1,167) 2,759 (280) (4,201) 1,787 Net income (loss) per share (1.99) (0.25) 0.55 (0.06) (0.94) 0.39 Weighted average number of common and common equivalent shares 5,062 4,663 5,051 4,484 4,472 4,592 ----------------------------------------------------------------------------- December 31, October 31, Balance Sheet Data: 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------- Working Capital $ 22,836 $24,328 $20,776 $19,053 $21,796 Total Assets 53,924 35,430 31,943 32,339 36,468 Total Liabilities 23,538 5,019 5,094 5,239 5,240 Shareholders' equity 30,386 30,411 26,849 27,100 31,228
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CONSOLIDATED STATEMENTS OF OPERATIONS PERCENTAGE OF REVENUES TWO YEAR MONTHS ENDED ENDED DEC. 31, DEC. 31, YEARS ENDED OCT. 31, 1996 1995 1995 1994 --------------- ---------------- Revenues 100.0% 100.% 100.0% 100.0% Cost of sales 50.7 63.8 50.3 50.2 --------------- ---------------- Gross profit 49.3 36.2 49.7 49.8 Research and development 17.4 40.2 15.4 19.5 Sales and marketing 18.1 34.7 18.1 18.9 General and administrative 8.6 18.8 8.5 10.3 Provision for strategic realignment - - - 2.8 Acquired in-process R&D 20.5 - - - --------------- ---------------- Operating income (loss) (15.3) (57.5) 7.7 (1.7) --------------- ---------------- Interest income 0.7 2.8 1.2 .8 Interest expense (0.9) - - - Other, net (1.0) - - - --------------- ---------------- Income (loss) before income taxes (16.5) (54.7) 8.9 (.9) Provision (benefit) for income taxes 1.0 (20.2) 3.1 (.3) --------------- ---------------- Net income (loss) (17.5)% (34.5)% 5.8% (.6)% --------------- ---------------- --------------- ---------------- 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 for the year ended October 31, 1995. The Company has not recast the prior year financial information presented herein to conform to the new fiscal year end, as management believes the October 31, 1995 results are the most comparable to the December 31, 1996 results. 15 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 protocol. RESULTS OF OPERATIONS REVENUES: Total revenues for the year ended December 31, 1996 were $56,752,000 as compared to $47,368,000 and $40,303,000 for the years ended October 31, 1995 and 1994, respectively. This represents a growth in revenues of 20% from 1995 to 1996. Revenues from Synaptel products were approximately $7,100,000 since the acquisition in mid-1996. The remaining improvement in revenues was led by a 17% increase in sales of the Company's FDDI (Fiber Distributed Data Interface) product line, a 17% increase in sales of older ethernet products, a 116% increase in sales of ATM products, and partially offset by a 51% decline in SCSI products. In addition, the Company had significant first year revenues form its 100 Base T/VGAnyLAN fast ethernet product line. FDDI revenues approximated 43% of total revenues in 1996 with the remaining 57% as follows: SCSI 13%, ethernet 12%, ATM 8%, 100 Base T/VGLAN 8%, ISDN/ remote access 13% and other of approximately 3%. Local area networking products in total comprised 71% of total revenues for 1996, mass storage product revenues 14% of total revenue and wide area networking products 13% of total revenues. North American revenues grew 2%, Pacific Rim revenues declined 3%, and European revenues increased two fold compared to 1995, primarily due to the acquisition of Synaptel. The increase in revenue from 1994 to 1995 was $7,065,000, which represents a growth of approximately 18%. This growth was due primarily to a 33% increase in revenue from the Company's FDDI products and a 9 % increase in SCSI products which was partially offset by a decrease of 17% in sales of older ethernet products. In 1995 FDDI revenues approximated 45% of total revenues, SCSI 33%, Ethernet 12% and ATM 4%. In 1995 local area networking comprised 61% of total revenues, with mass storage product revenues accounting for 34%, and other products accounting for the remaining 5% of total revenues. COST OF SALES: Cost sales expressed as a percentage of revenues were 51%, 50% and 50% for the years ended December 31, 1996, October 31, 1995 and 1994, respectively. In 1996, the FDDI products experienced an improved gross profit over 1995, SCSI and ATM products were unchanged and ethernet products experienced a slight improvement in gross profit compared to 1995. Typical of a first year technology, 100 Base T/VGAnyLAN costs of sales were higher than the costs of the companies more developed products. In 1995, the cost of sales as a percentage of revenues were unchanged compared to 1994. RESEARCH AND DEVELOPMENT: The Company's investment in the development of new products through engineering development, exclusive of acquired in-process research and development, was $9,902,000, $7,327,000 and $7,862,000 in 1996, 1995, and 1994, respectively. As a percentage of revenue, research and development expenses were 17%, 15% and 20% for 1996, 1995, and 1994, respectively. The increase in absolute spending in 1996 is a reflection of incremental engineering investments in products based upon the new emerging ATM, fast 16 ethernet and fibre channel technologies, as well as WAN products following the acquisition of Synaptel. As a percent of revenue, research and development expenses are expected to remain essentially flat for 1997, as compared to 1996. SALES AND MARKETING: Sales and marketing expenses were $ 10,297,000, $8,583,000, and $7,599,000 in 1996, 1995, and 1994, respectively. As a percentage of revenue, sales and marketing expenses were 18%, 18% and 19% for 1996, 1995, and 1994, respectively. The increase in absolute spending from 1994 to 1995 and 1995 to 1996 is primarily related to the increase in revenues each year, including activity resulting from the acquisition of Synaptel in 1996. GENERAL AND ADMINISTRATIVE: General and administrative expenses were $4,905,000 $4,004,000 and $4,146,000 in 1996, 1995, and 1994, respectively. As a percentage of revenue, general and administrative expenses were 9%, 9% and 10% for 1996, 1995 and 1994 respectively. Synaptel accounted for approximately 79% of the increase in 1996. SPECIAL CHARGES: In the second quarter of 1996 the Company recorded a $11,646,000 charge to write off the in-process research and development costs acquired in connection with the acquisition of Synaptel. Acquired in-process research and development activities have no alternative future use and have not achieved technological feasibility; accordingly, the amounts have been expensed in the accompanying consolidated statements of operations for the period ended December 31, 1996 In the first quarter of 1994 the Company recorded a $1,148,000 provision for strategic realignment related to a 15% reduction in workforce, consolidation of the California engineering activities to Dallas and the write-off of nonproductive assets. At December 31, 1996 the entire reserve had been utilized for its specified purpose. INTEREST INCOME: Interest income was $421,000, $586,000 and $309,000 in 1996, 1995 and 1994, respectively. The decrease in the current year is due to lower amounts of invested cash resulting from the acquisition of certain product rights from Cisco Systems Inc. and increased investments in accounts receivable. PROVISION (BENEFIT) FOR INCOME TAXES: The Company's provision for income taxes in 1996, 1995, and 1994 is made up of the federal statutory rate of 34%, as well as a provision for state taxes. The write-off of acquired in-process research and development during 1996 was not tax benefited, which resulted in a net tax provision. NET INCOME (LOSS): The net loss for the Company was $10,055,000 in 1996, compared to net income of $2,759,000 in 1995 and net loss of $280,000 in 1994. The loss in 1996 is attributable to the write off of acquired in-process research and development of $11,646,000 associated with the acquisition of Synaptel. The 1995 profit is a result of the 18% growth in revenues, while maintaining a gross margin of 50% and reducing operating expenses by 4% from 1994, resulting in a net income as a percentage of revenues of approximately 6%. 17 ADOPTION OF ACCOUNTING STANDARDS: In 1996, the Company adopted Statement of Financial Accounting Standards ("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. This adoption resulted in no adverse impact on the consolidated financial statements of the Company. In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". This statement 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 the notes to the consolidated financial statements. USE OF FORWARD LOOKING STATEMENTS: Certain statements contained in MD&A are forward-looking statements including statements concerning expected research and development 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 reports. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities aggregated $5,850,000, $12,686,000 and $11,534,000 at December 31, 1996, October 31, 1995, and 1994, respectively. The decrease of $6,836,000 in the current year is primarily due to the acquisition of the Cisco product line and the growth in accounts receivable and inventories. The increase of $1,152,000 in 1995 was primarily due to the level of profitability in 1995 partially offset by the growth in accounts receivable and inventories. Expenditures for equipment and purchased software were nearly the same as depreciation and amortization expenses in 1996 and 1995. Expenditures for equipment and purchased software were $2,539,000, $2,728,000 and $1,492,000 in 1996, 1995 and 1994, respectively. At December 31, 1996, the Company had no material commitments to purchase capital assets. The Company has not paid any dividends since its inception and does not anticipate paying any dividends in 1997. 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 is due in quarterly installments beginning in November 1996, and expires in November 2001. The revolving credit facility expires in April 1998. In 1997, maturities of this credit facility are approximately $2,431,000. The Company expects that its cash, cash equivalents, marketable securities and the availability under its revolving credit facility will be adequate to meet foreseeable needs in 1997. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14 (a) below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS See information regarding the directors and nominees for director under the heading "Election of Directors" of the Proxy Statement for the Annual Meeting of Shareholders to be held in May 1997, which is incorporated herein by reference. EXECUTIVE OFFICERS As of March 1, 1997, the executive officers of the Company, their respective ages, positions held and tenure as officers are listed below: EXECUTIVE OFICERS OF THE COMPANY NAME AGE POSITION(S) HELD WITH THE COMPANY SINCE ---- --- --------------------------------- ----- R. Stephen Polley 46 Chairman, Chief Executive Officer, 1993 Chief Operating Officer and President Robert L. Drury 49 Chief Financial Officer, 1992 Vice President of Finance and Treasurer Earnest Godsey 49 Vice President of Business Development 1992 John E. Tuder 38 Vice President of Engineering 1995 R. STEPHEN POLLEY joined the Company as President and Chief Operating Officer and was elected a director by the Board of Directors in November 1993. In June 1994, Mr. Polley was named Chief Executive Officer of the Company and appointed Chairman of the Board of Directors. From August 1992 to February 1993, Mr. Polley acted as a consultant in strategic and management matters and as a director for Computer Automation, Inc. Computer Automation provided various 19 products and services for use in facsimile management systems, minicomputers and microcomputers. From 1987 to April 1992, Mr. Polley served as President, Chief Executive Officer and a director of Intellicall, Inc., a diversified supplier of telecommunications products and services including private pay telephones and microprocessor-based automated operator systems. ROBERT L. DRURY joined the Company as Vice President of Finance and Chief Financial Officer in December 1992. In June 1994, Mr. Drury was also named Treasurer for the Company. From 1988 through 1992, Mr. Drury was Chief Financial Officer of the Ben Hogan Company, a manufacturer of golf related products. ERNEST E. GODSEY joined the Company as Vice President of Business Development in December 1992. From October 1991 through December 1992, Mr. Godsey was Vice President of Engineering and Marketing for Mizar, Inc., a supplier of various products for the microcomputer OEM marketplace. From 1986 through October 1991, Mr. Godsey was employed by the Company in various marketing capacities, the last being that of Vice President of Marketing. JOHN E. TUDER joined the Company as Vice President of Engineering in 1995. Prior to joining Interphase Mr. Tuder was Director of Product Development for the Broadband Products Division of DSC Communications Corporation, from 1993 through 1995, and prior to that with Intergraph in Huntsville, Alabama, from 1980 through 1993. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is in the Proxy Statement dated April 10, 1997 for the Annual Meeting of Shareholders to be held on May 14, 1997, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is in the Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 1997, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is in the Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 1997, which is incorporated herein by reference. 20 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, 1996. 21 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 28, 1997 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 28, 1997. NAME TITLE ---- ----- Chairman of the Board of Directors, Chief Executive Officer, Chief Operating Officer and President /s/ R. STEPHEN POLLEY (Principal executive officer) - ------------------------------- R. Stephen Polley Chief Financial Officer, /s/ ROBERT L. DRURY Vice President of Financial and - -------------------------------- Treasurer (Principal finance officer) Robert L. Drury /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/ ROBERT H. LYON Director - -------------------------------- Robert H. Lyon /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, 1996 and October 31, 1995 F-3 Consolidated Statements of Operations - Periods Ended December 31, 1996 and 1995, October 31, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity - Periods Ended December 31, 1996 and 1995, October 31, 1995 and 1994 F-5 Consolidated Statements of Cash Flows - Periods Ended F-6 to F-7 December 31, 1996 and 1995, October 31, 1995 and 1994 Notes to Consolidated Financial Statements F-8 to F-18 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholder's 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, 1996, and October 31, 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1996, the two month period ended December 31, 1995 and the years ended October 31, 1995 and 1994. 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, 1996, and October 31, 1995, and the results of their operations and their cash flows for the year ended December 31, 1996, the two month period ended December 31, 1995 and the years ended October 31, 1995 and 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas February 5, 1997 F-2 INTERPHASE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except number of shares) December 31, October 31, 1996 1995 ASSETS ------------ ----------- - ------ Cash and cash equivalents $ 2,271 $ 3,320 Marketable securities 3,579 9,366 Trade accounts receivable, less allowances for uncollectible accounts of $503 and $238 respectively 15,182 7,521 Inventories, net 12,599 7,486 Prepaid expenses and other current assets 1,221 957 Deferred income taxes, net 886 594 --------- -------- Total current assets 35,738 29,244 --------- -------- Machinery and equipment 12,340 10,920 Leasehold improvements 2,863 2,758 Furniture and fixtures 278 351 --------- -------- 15,481 14,029 Less-accumulated depreciation and amortization (10,394) (8,820) --------- -------- Total property and equipment, net 5,087 5,209 --------- -------- Capitalized software, net 400 524 Deferred income taxes, net 392 301 Acquired developed technology, net 5,819 - Goodwill, net 3,902 - Other assets 2,586 152 --------- -------- Total assets $ 53,924 $35,430 --------- -------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ LIABILITIES Accounts payable $ 4,279 $ 1,357 Accrued liabilities 3,097 1,836 Accrued compensation 2,962 1,357 Income taxes payable 93 366 Current portion of debt 2,471 - --------- -------- Total current liabilities 12,902 4,916 Deferred lease obligations 72 103 Other liabilities 1,120 - Long term debt, net of current portion 9,444 - --------- -------- Total liabilities 23,538 5,019 Commitments and contingencies SHAREHOLDERS' EQUITY Common stock, no par value; 100,000,000 shares authorized; 5,491,658 and 4,661,303 shares outstanding 35,195 24,177 Retained earnings (deficit) (4,959) 6,263 Cumulative foreign currency translation adjustment 164 - Unrealized holding period loss (14) (29) --------- -------- Total shareholders' equity 30,386 30,411 --------- -------- Total liabilities and shareholders' equity $ 53,924 $ 35,430 --------- -------- --------- -------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3 INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except number of shares) Year Two months ended ended December 31, December 31, Years ended October 31, ----------------------------------------------------- 1996 1995 1995 1994 --------- -------- -------- -------- Revenues $ 56,752 $ 3,379 $ 47,368 $40,303 Cost of sales 28,788 2,155 23,821 20,237 -------- ------- -------- ------- Gross profit 27,964 1,224 23,547 20,066 -------- ------- -------- ------- Research and development 9,902 1,360 7,327 7,862 Sales and marketing 10,297 1,173 8,583 7,599 General and administrative 4,905 634 4,004 4,146 Provision for strategic realignment - - - 1,148 Acquired in-process R&D 11,646 - - - -------- ------- -------- ------- Total operating expenses 36,750 3,167 19,914 20,755 -------- ------- -------- ------- Operating income (loss) (8,786) (1,943) 3,633 (689) Interest income 421 94 586 309 Interest expense (535) - - - Other, net (591) - 3 (31) -------- ------- -------- ------- Income (loss) before income taxes (9,491) (1,849) 4,222 (411) Provision (benefit) for income taxes 564 (682) 1,463 (131) -------- ------- -------- ------- Net income (loss) ($10,055) ($1,167) $ 2,759 ($ 280) -------- ------- -------- ------- -------- ------- -------- ------- Net income (loss) per common and common equivalent share ($ 1.99) ($0.25) $ 0.55 ($ 0.06) -------- ------- -------- ------- -------- ------- -------- ------- Weighted average common and common equivalent shares 5,062 4,663 5,051 4,484 -------- ------- -------- ------- -------- ------- -------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Cumulative Retained Unrealized Foreign Common Stock Earnings Holding Currency Shares Amount (Deficit) Period Loss Translation Total ----------------------------------------------------------------- ----------------------------------------------------------------- Balance at October 31, 1993 4,477 $23,316 $ 3,784 $ - $ - $ 27,100 ----------------------------------------------------------------- Option exercises, including related tax benefit 36 177 - - - 177 Unrealized holding period loss - - - (148) - (148) Net loss - - (280) - - (280) ----------------------------------------------------------------- Balance at October 31, 1994 4,513 23,493 3,504 (148) - 26,849 ----------------------------------------------------------------- Option exercises, including related tax benefit 148 684 - - - 684 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 tax benefit 6 17 - - - 17 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 tax benefit 230 1,801 - - - 1,801 Common stock issued in Synaptel acquisition 595 9,200 - - - 9,200 Cumulative foreign currency translation - - - - 164 164 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 ----------------------------------------------------------------- -----------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5 INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended Two months Year ended Dec. 31, ended Dec.31, October 31, --------------------------------------------- 1996 1995 1995 1994 -------- ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(10,055) $(1,167) $ 2,759 $ (280) -------- ------- ------- ------- Adjustment to reconcile net income (loss) to net cash provided (used) by operating activities: Provision for strategic realignment - - - 1,148 Write off of acquired in-process research and development 11,646 - - - Depreciation and amortization 4,234 525 2,814 3,189 Change in assets and liabilities, net of Synaptel acqusition Trade accounts receivable (8,584) 3,575 (1,863) 187 Inventories (1,345) (2,173) (909) (195) Refundable income taxes - - 219 1,630 Prepaid expenses and other current assets (151) 93 (224) 285 Other long term liabilities 1,093 - - - Accounts payable and accrued liabilities (409) (304) (28) (746) Accrued compensation (258) 43 (106) (221) Income taxes payable - (366) 366 - Deferred income taxes (358) 1 170 (446) Deferred lease obligations - (4) (27) 24 -------- ------- ------- ------- Net adjustments 5,868 1,390 412 4,855 -------- ------- ------- ------- Net cash provided (used) by operating activities (4,187) 223 3,171 4,575 -------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, equipment, capitalized software and leasehold improvements (2,539) (511) (2,728) (1,492) Decrease (increase) in other assets (200) (71) (93) 221 Decrease (increase) in marketable securities 5,788 (1) (1,528) (2,280) Cash acquired in Synaptel acquisition 11 - - - Change in unrealized holding period loss on marketable securities 15 - - - Acquisition of developed technologies (2,500) - - - -------- ------- ------- ------- Net cash used by investing activities 575 (583) (4,349) (3,551) -------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations - - - (90) Payments of debt (1,134) - - - Proceeds from debt 2,075 - - - Increase in foreign currency translation adjustment 164 - - - Increase in common stock from excercise of options 1,801 17 684 177 -------- ------- ------- ------- Net cash provided by financing activities 2,906 17 684 87 -------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents (706) (343) (494) 1,111 Cash and cash equivalents at beginning of year 2,977 3,320 3,814 2,703 -------- ------- ------- ------- Cash and cash equivalents at end of year $ 2,271 $ 2,977 $ 3,320 $ 3,814 -------- ------- ------- ------- -------- ------- ------- ------- Supplemental Disclosure of Cash Flow Information: Interest paid $ 438 $ - $ - $ 7 Taxes refunded 40 283 244 1,433 Taxes paid 476 - 1,014 27
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 noncash investing and financing activities In June, the Company purchased all of the capital stock of Synaptel. Fair value of assets acquired $(27,403) Liabilities assumed 8,414 Acquisition debt 8,000 Common stock issued 9,200 Aquisition costs 1,800 -------- Cash acquired in Synaptel acquisition $ 11 -------- -------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-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 the prior year 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, as the October 31, 1995, information presented herein. CASH AND CASH EQUIVALENTS: The Company considers marketable securities 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, 1996 and October 31, 1995, the fair market value of marketable securities was $3,579,000, and $9,366,000 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 in 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 1996 the Company realized a net loss of $16,000 from the sale of securities. As of December 31, 1996 and 1995 the Company had recorded a valuation loss of $14,000 and $29,000 (net of taxes), respectively with respect to certain available-for-sale securities. During 1995 the Company realized a loss of $14,000 from the sale of securities. ALLOWANCE FOR DOUBTFUL ACCOUNTS: As of December 31, 1996, and October 31, 1995 and 1994, the allowance for doubtful accounts was $503,000, $238,000 and $240,000. 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, 1996 $ 238 $ 50 $ (50) $ 265 $ 503 October 31, 1995 240 - (2) - 238 October 31, 1994 242 2 (4) - 240 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, 1996 Oct. 31, 1995 ------------- ------------- Raw Materials $ 6,040 $ 3,878 Work-in-process 5,193 3,401 Finished Goods 1,366 207 ------- ------- Total $12,599 $ 7,486 ------- ------- ------- ------- 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 primarily 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 Expense Accumulated Depreciation -------------------- ------------------------ Year ended December 31, 1996 $2,782 $ 10,394 Year ended October 31, 1995 2,414 8,820 Year ended October 31, 1994 2,262 8,918 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 Expense Accumulated Amortization -------------------- ------------------------ Year ended December 31, 1996 $362 $ 2,128 Year ended October 31, 1995 400 1,441 Year ended October 31, 1994 508 1,309 RESEARCH AND DEVELOPMENT SUBSIDY: Included in other assets at December 31, 1996, is a subsidy of $2,009,000 due from the French government related to the research and development activities of Synaptel. INTANGIBLES: As a result of the acquisitions 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, 1996 intangible balances at cost and related amortization expense were as follows: (in thousands) Intangibles Amortization Expense ----------- -------------------- Developed technology $ 4,230 $ 250 Assembled workforce 415 50 Goodwill-Synaptel 3,925 23 Acquired Product Rights-Cisco 2,500 767 REVENUE RECOGNITION: Revenue from product sales is recorded only when the earnings process has been completed, which is generally 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. F-9 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-US 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 the 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 bases 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: Net income (loss) per common and common equivalent share is computed using the weighted average number of outstanding common and dilutive common equivalent shares outstanding during the periods presented. The dilutive impact of outstanding stock options and warrants has been considered under the treasury stock method. In 1996, the two month period ended December 31, 1995 and 1994, the impact of outstanding stock options and warrants was anitdilutive and, therefore, has been excluded from the computations of net loss per share related to those years. Shares used in the computation of net income (loss) per common and common equivalent share are summarized below. Weighted average common and common equivalent shares: (in thousands) TWO MONTHS YEAR ENDED ENDED DEC. 31, DEC. 31, YEAR ENDED OCT. 31, ------------------------------------------------ 1996 1996 1995 1994 ---------------------- ------------------- Outstanding weighted average shares outstanding 5,062 4,663 4,561 4,484 Stock options - - 490 - ----------------------------------------------- Total 5,062 4,663 5,051 4,484 ----------------------------------------------- ----------------------------------------------- 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. 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. CERTAIN RECLASSIFICATIONS: Certain prior year's amounts have been reclassified to conform with the 1996 presentation. F-10 USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires 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 has been accounted for using the purchase method of accounting from the effective date of the acquisition; since the acquisition was effective June 29, 1996, operating results for Synaptel through June 30, 1996, were not significant. The total purchase consideration in excess of the fair value of the tangible and identified intangible assets acquired is included in goodwill. Identified intangibles acquired included approximately $11,600,000 of in-process research and development, $4,230,000 of developed technology and $415,000 related to Synaptel's assembled workforce. Acquired in-process research and development activities have no alternative future use and have not achieved technological feasibility; accordingly, the amounts have been 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 1996, no additional consideration was paid. 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 sales $ 59,845 $ 58,115 Net income (loss) (1,388) 2,317 Net loss per common and common equivalent 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. F-11 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, 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 facility is a two-year facility with an annual renewal provision, and bears interest at the bank's base rate (currently 8.5%). The term loan is payable in equal quarterly installments of $548,000 plus accrued interest 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 April 30, 1998. 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, 1996, the Company was in compliance with all covenants. At December 31, 1996, total availability under this credit facility was $4,567,000. At December 31, 1996, the Company's outstanding debt consisted of the following: (in thousands) Dec. 31, 1996 Interest ------------------------- Acquisition Term Loan $ 8,075 8.5% Equipment Financing Loan 2,358 8.5% Borrowings under revolving credit facility 1,000 8.5% Other 442 -------- Total 11,875 Less current portion 2,431 -------- Total long term debt $ 9,444 -------- -------- The total debt principal payments are $3,396,000 in 1998, $2,192,000 in 1999, $2,192,000 in 2000, $1,664,000 in 2001 and zero thereafter. 4. INCOME TAXES The provision (benefit) for income taxes for each period presented was as follows: (in thousands) YEAR ENDED TWO MONTHS DEC. 31, ENDED DEC. 31, YEAR ENDED OCTOBER 31, --------------------------- ---------------------- 1996 1995 1995 1994 ------------------------- -------------------- Current provision (benefit) $ 922 $ (657) $ 1,293 $ 315 Deferred provision (benefit) (358) (25) 170 (446) ------------------------- -------------------- Total $ 564 $ (682) $1,463 $ (131) ------------------------- -------------------- ------------------------- -------------------- F-12 Tax effect of temporary differences that give rise to significant components of the deferred tax assets as of December 31, 1996, and October 31, 1995, are presented as follows: (in thousands) Year ended Year ended Dec. 31, Oct. 31, -------- -------- 1996 1995 ---- ---- Current deferred tax assets: Assets: Inventory $294 $146 Accounts receivable 120 120 Bonus accrual 164 22 Vacation accrual 154 146 Other expenses 154 160 ---- ---- Total $886 $594 ---- ---- ---- ---- Noncurrent deferred tax assets (liabilities), net: Assets: Depreciation 753 $525 Other 18 36 ---- ---- 771 561 Liabilities: Other (379) (260) ---- ---- Total $392 $301 ---- ---- ---- ---- 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 realization of the Company's deferred tax assets, as appropriate, when existing conditions change the probability of realization. The differences between the provision (benefit) for income taxes computed on income before income taxes at the U.S. federal statutory income tax rate (34%) and the amount shown in the Consolidated Statements of Operations are presented below: (in thousands) Year ended Two months Dec. 31, ended Dec. 31, Year ended Oct. 31, 1996 1995 1995 1994 ------------------------------------------------- Income taxes at statutory rate $(3,227) $ (628) $1,435 $(140) State income taxes 46 (35) 102 - Foreign taxes not credited - - - 25 Write off of in-process research and development not benefited 3,960 - - - Other (215) (19) (74) (16) ------------------------------------------------- Provision (benefit) for income taxes $ 564 $ (682) $1,463 $(131) ------------------------------------------------- -------------------------------------------------
F-13 5. COMMON STOCK AMENDED AND RESTATED STOCK OPTION PLAN: In fiscal 1995, the Company amended and restated its Stock Option Plan which, as amended, authorizes the issuance to employees of up to 1,350,000 share 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, 1993 484 $4.00- 8.94 $4.73 Granted 640 4.25- 7.94 5.66 Exercised (36) 4.00- 5.00 4.56 Canceled (331) 4.00- 8.94 5.72 ---------------------------------------- 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 ---------------------------------------- ---------------------------------------- Exercisable at December 31, 1996 270 4.00- 16.13 7.94 ---------------------------------------- ---------------------------------------- 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. Future 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, 1993 21 $ 4.75- 4.75 $4.75 Granted 123 4.38- 6.63 5.75 --------------------------------------- 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 --------------------------------------- --------------------------------------- Exercisable at December 31, 1996 145 4.38- 16.88 7.21 --------------------------------------- --------------------------------------- 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 income (loss) for 1996 and 1995 would have been $(10,653,000) and $2,370,000, respectively, resulting in earnings (loss) per share of $(2.13) and $0.47, 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 1996, and 1995: risk-free interest rate of 7%, expected dividend yield of zero, expected term of 6.4 years, expected volatility of 112.96%. 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, October 31, 1996 1995 ------------ ----------- Accrued royalties $ 265 $ 448 Accrued outside commissions 354 171 Accrued property tax 211 390 Accrued acquisition cost 546 - Accrued other 1,721 827 ------- ------- $ 3,097 $ 1,836 ------- ------- ------- ------- F-15 7. RELATED PARTY TRANSACTIONS The Company paid approximately $668,000 for the year ended December 31, 1996, $67,000 for the two months ended December 31, 1995, $397,000 and $328,000 for the years ended October 31, 1995 and 1994 respectively, to certain outside directors of the Company or their firms as remuneration for their professional services. 8. TRANSACTIONS WITH MOTOROLA, INC. In 1989, the Company and Motorola, Inc. executed an agreement whereby Motorola purchased, for cash, 660,000 newly issued shares of the Company's common stock at a price of $11 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. The Company also granted Motorola registration rights with respect to all common stock that Motorola owns. Pursuant to the terms of the agreement, the Company elected a designee of Motorola to its 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, 1996 6% Two month period ended December 31, 1995 4% Year ended October 31, 1995 6% Year ended October 31, 1994 10% 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 for the year ended December 31, 1996, was $262,000, for the two month transition period ended December 31, 1995 the expense was $27,000 and for the years ended October 31, 1995 and 1994 were approximately $282,000 and $662,000 respectively. The Company offers no postretirement or postemployment benefits. 10. OTHER FINANCIAL INFORMATION MAJOR CUSTOMERS: The Company had no customers in 1996, no customers in the two month transition period, one customer in 1995 and two customers in 1994 accounting for more than 10% of the Company's consolidated revenues. Net revenues resulting from these customers were as follows: ($ in thousands) YEAR TOTAL REVENUES % OF CONSOLIDATED REVENUES ------------------------------------------------------------- 1995 $ 7,039 15% 1994 8,207 20% F-16 COMMITMENTS: The Company leases its office, research and development and manufacturing facility under a noncancelable operating lease. Rent expense related to the lease is recorded on a straight-line basis and has resulted in the deferred lease obligation in the accompanying balance sheet. As of December 31, 1996, operating lease commitments having noncancelable terms of more than one year are as follows: (in thousands) YEAR ENDING DECEMBER 31, - ------------------------ 1997 $ 752 1998 735 1999 591 2000 64 2001 64 Thereafter 572 Total rent expense for operating leases was approximately as follows: (in thousands) YEAR TOTAL RENT EXPENSE -------------------------------------- 1996 $ 817 Two month transition period 148 1995 702 1994 811 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 1996 1995 1995 1994 - ------------------------------------------------------------------ North America $ 42,102 $ 2,712 $41,207 $31,929 Europe 12,383 457 3,818 6,341 Pacific Rim 2,267 210 2,343 2,033 European revenues have increased in 1996 due to the acquisition of Synaptel in June 1996. Synaptel's revenue for the two quarters ended December 31, 1996 was $7,100,000 and operating income was $1,272,000. The total tangible assets at December 31, 1996 were $6,230,000. 11. STRATEGIC REALIGNMENT In January 1994, the Company announced a strategic restructuring and recorded a related provision of $1,148,000. The respective provision reflected in the accompanying consolidated statements of operations included expenses associated with severance benefits, the consolidation of the California Engineering activities in Dallas, the write-off of nonproductive assets and other expenses associated with the restructuring. At December 31, 1996 the entire reserve had been utilized for its specified purpose. F-17 13. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarter Ended MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------------------------------------------------- (in thousands, except per share amounts) 1996 - ---- Revenues $11,877 $ 11,318 $16,370 $17,187 Gross profit 6,191 5,588 7,871 8,314 Income before taxes 1,007 (11,526) 192 836 Net income (loss) 644 (11,565) 167 699 Net income (loss) per common and common equivalent share $ .13 $ (2.45) $ .03 $ .12 Operating results in the second quarter of 1996 included a $11,646,000 expense for acquired in process R&D associated with the Synaptel acquisition Period ended TRANSITION PERIOD DECEMBER 31, 1995 - ----------------- ----------------- Revenues $ 3,379 Gross profit 1,224 Income (loss) before taxes (1,849) Net income (loss) (1,167) Net income (loss) per common and common equivalent share $ (.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 common and common equivalent share $ .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. (9) 27 Financial Data Schedule. (9) - --------------------- (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 herein. E-1 EX-10.(B) 2 EXHIBIT 10(B) Exhibit 10(b) INTERPHASE CORPORATION AMENDED AND RESTATED STOCK OPTION PLAN WHEREAS, on August 24, 1984, the Board of Directors (the "Board") of Interphase Corporation adopted the Interphase Corporation Incentive Stock Option Plan (the "Plan"); and WHEREAS, the Board subsequently amended the Plan from time to time to increase the number of shares of common stock of the Company available under the Plan from 200,000 shares to 1,350,000 shares and to make certain changes to the Plan; and WHEREAS, the Board now desires to amend and restate the Plan, and in connection therewith, add provisions to the Plan to allow the grant of non-qualified stock options and to rename the Plan the Interphase Corporation Amended and Restated Stock Option Plan; NOW, THEREFORE, in consideration of the foregoing, the Board hereby adopts the Amended and Restated Stock Option Plan effective November 9, 1994: 1. PURPOSE. The purpose of the Plan is to continue to provide selected employees with a proprietary interest in the Company through the granting of either incentive stock options or non-qualified stock options which will (a) increase the interest of the selected employees in the Company's welfare; (b) furnish an incentive to the selected employees to continue their services for the Company; and (c) provide a means through which the Company may attract able persons to enter its employ. 2. ADMINISTRATION. The Plan will be administered by the Board. 3. PARTICIPANTS. The Board shall, from time to time, select the particular employees of the Company and its Subsidiaries to whom options are to be granted, and who will, upon such grant, become participants in the Plan. 4. STOCK OWNERSHIP LIMITATIONS. No Incentive Option may be granted to an employee who owns more than 10% of the voting power of all classes of stock of the Company or its Parent or Subsidiaries. This limitation will not apply if the option price is at least 110% of the fair market value of the stock at the time the Incentive Option is granted and the Incentive Option is not exercisable more than five years from the date it is granted. 5. SHARES SUBJECT TO PLAN. The Board may not grant options under the Plan for more than 1,350,000 shares of Common Stock of the Company, but this number may be adjusted to reflect, if deemed appropriate by the Board, any stock dividend, stock split, share combination, recapitalization or the like, of or by the Company. Shares to be optioned and sold may be made available from either authorized but unissued Common Stock or Common Stock held by the Company in its treasury. Shares that by reason of the expiration of an option or otherwise are no longer subject to purchase pursuant to an option granted under the Plan may be reoffered under the Plan. 6. LIMITATION ON AMOUNT. The aggregate fair market value (determined at the time of grant) of the shares of Common Stock which any employee is 2 first eligible to purchase in any calendar year by exercise of Incentive Options granted under this Plan and all incentive stock option plans (within the meaning of Section 422 of the Internal Revenue Code) of the Company or its Parent or Subsidiaries shall not exceed $100,000. For this purpose, the fair market value (determined at the respective date of grant of each option) of the stock purchasable by exercise of an Incentive Option (or an installment thereof) shall be counted against the $100,000 annual limitation for an employee only for the calendar year such stock is first purchasable under the terms of the Incentive Option. 7. ALLOTMENT OF SHARES. The Board shall determine the number of shares of Common Stock to be offered from time to time by grant of options to employees of the Company or its Subsidiaries. The grant of an option to an employee shall not be deemed either to entitle the employee to, or to disqualify the employee from, participation in any other grant of options under the Plan. 8. GRANT OF OPTIONS. The Board is authorized to grant Incentive Options and Nonqualified Options under the Plan. The grant of options shall be evidenced by stock option agreements containing such terms and provisions as are approved by the Board, but not inconsistent with the Plan, including provisions that may be necessary to assure that any option that is intended to be an Incentive Option will comply with Section 422 of the Internal Revenue Code. The Company shall execute stock option agreements upon instructions from the Board. The Plan shall be submitted to the Company's stockholders for 3 approval. The Board may grant options under the Plan prior to the time of stockholder approval, which options will be effective when granted, but if for any reason the stockholders of the Company do not approve the Plan prior to one year from the date of adoption of the Plan by the Board, all options granted under the Plan will be terminated and of no effect, and no option may be exercised in whole or in part prior to such stockholder approval. A stock option agreement may provide that the participant may request approval from the Board to exercise an option or a portion thereof by tendering shares of Common Stock at the fair market value per share on the date of exercise in lieu of cash payment of the exercise price. 9. OPTION PRICE. The option price shall not be less than 100% of the fair market value per share of the Common Stock on the date the option is granted. 10. OPTION PERIOD. The Option Period will begin on the date the option is granted, which will be the date the Board authorizes the option unless the Board specifies a later date. No option may terminate later than 10 years from the date the option is granted. The Board may provide for the exercise of options in installments and upon such terms, conditions and restrictions as it may determine. The Board may provide for termination of the option in the case of termination of employment or any other reason. 11. RIGHTS IN THE EVENT OF DEATH OR DISABILITY. If a participant dies or becomes disabled [within the meaning of Section 22(e)(3) of the Internal Revenue 4 Code] while in the employ of the Company but prior to termination of his right to exercise an option in accordance with the provisions of his stock option agreement without having totally exercised the option, the option may be exercised, to the extent of the shares with respect to which the option could have been exercised by the participant on the date of the participant's death or disability, by (i) the participant's estate or by the person who acquired the right to exercise the option by bequest or inheritance or by reason of the death of the participant in the event of the participant's death, or (ii) the participant or his personal representative in the event of the participant's disability, provided the option is exercised prior to the date of its expiration or not more than one year from the date of the participant's death or disability whichever first occurs. 12. PAYMENT. Full payment for shares purchased upon exercising an option shall be made in cash or by check or, if permitted by the stock option agreement, by tendering shares of Common Stock at the fair market value per share at the time of exercise, or on such other terms as are set forth in the applicable option agreement. No shares may be issued until full payment of the purchase price therefore has been made, and a participant will have none of the rights of a stockholder until shares are issued to him. 13. EXERCISE OF OPTION. Options granted under the Plan may be exercised during the Option Period, at such times, in such amounts, in accordance with such terms and subject to such restrictions as are set forth in the applicable stock option agreements. In no event may an option be exercised or shares be issued pursuant to an option if any 5 requisite action, approval or consent of any governmental authority of any kind having jurisdiction over the exercise of options shall not have been taken or secured. 14. CAPITAL ADJUSTMENTS AND REORGANIZATIONS. The number of shares of Common Stock covered by each outstanding option granted under the Plan and the option price may be adjusted to reflect, as deemed appropriate by the Board, any stock dividend, stock split, share combination or the like of or by the Company. In the event of a merger, consolidation, share exchange, reorganization, liquidation, recapitalization, separation or the like of or by the Company, the Board may make such arrangements as it deems advisable with respect to outstanding options granted under the Plan, which arrangements shall be binding upon each employee that holds an outstanding option granted under the Plan, including, but not limited to, arrangements for the substitution of new options for any options then outstanding, the assumption of any such options, payment for the outstanding options and adjusting the number of shares covered by each outstanding option and the option price therefor. Any such arrangement relating to an Incentive Option shall comply with the requirements of Internal Revenue Code Section 422 and the regulations thereunder. If the Company becomes a party to an agreement providing for the merger, consolidation or share exchange of or by the Company and pursuant to that agreement the holders of Common Stock would receive cash, securities or property from another person or entity and if the Board does not make arrangements for the substitution of new options for any options then outstanding, the assumption of such options, or payment 6 for such options, the Plan shall terminate and any options outstanding hereunder shall terminate on the effective date of such transaction; provided, however, all outstanding options granted under the Plan shall become immediately exercisable during the five business days immediately preceding the effective date of such transaction. If the options will so terminate on the effective date of the transaction, the Company shall give each Option Holder at least 15 days' notice of such termination and an opportunity to exercise such options prior to such termination. 15. NON-ASSIGNABILITY. Options may not be transferred other than by will or by the laws of descent and distribution. During a participant's lifetime, options granted to a participant may be exercised only by the participant. 16. INTERPRETATION. The Board shall interpret the Plan and shall prescribe such rules and regulations in connection with the operation of the Plan as it determines to be advisable for the administration of the Plan. The Board may rescind and amend its rules and regulations. 17. AMENDMENT OR DISCONTINUANCE. The Plan may be amended or discontinued by the Board without the approval of the stockholders of the Company, except that any amendment that would (a) materially increase the benefits accruing to participants under the Plan, (b) materially increase the number of securities that may be issued under the Plan, or (c) materially modify the requirements or eligibility for participation in the Plan must be approved by the stockholders of the Company. 7 18. EFFECT OF PLAN. Neither the adoption of the Plan nor any action of the Board shall be deemed to give any officer or employee any right to be granted an option to purchase Common Stock of the Company or any other rights except as may be evidenced by a stock option agreement, or any amendment thereto, duly authorized by the Board and executed on behalf of the Company and then only to the extent and on the terms and conditions expressly set forth therein. 19. TERM. Unless sooner terminated by action of the Board, this Plan will terminate on November 8, 2004. The Board may not grant options under the Plan after that date, but options granted before that date will continue to be effective in accordance with their terms. 20. DEFINITIONS. For the purpose of this Plan, unless the context requires otherwise, the following terms shall have the meanings indicated: (a) "Plan" means this Amended and Restated Stock Option Plan as amended from time to time. (b) "Company" means Interphase Corporation, a Texas corporation. (c) "Board" means the board of directors of the Company or a committee appointed by the board of directors to administer the Plan or any portion of the Plan. (d) "Common Stock" means the Common Stock which the Company is currently authorized to issue or may in the future be authorized to issue (as long as 8 the common stock varies from that currently authorized, if at all, only in amount of par value). (e) "Subsidiary" means any corporation in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, and "Subsidiaries" means more than one of any such corporations. (f) "Parent" means any corporation in an unbroken chain of corporations ending with the Company if, at the time of granting of the option, each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (g) "Option Period" means the period during which an option may be exercised. (h) "Incentive Option" means an option granted under the Plan which meets the requirements of Section 422 of the Internal Revenue Code. (i) "Nonqualified Stock Option" means an option granted under the Plan which is not intended to be an Incentive Option. 9 AMENDMENT NO. 1 TO THE INTERPHASE CORPORATION AMENDED AND RESTATED STOCK OPTION PLAN Pursuant to Section 17 of the Interphase Corporation Amended and Restated Stock Option Plan (the "Plan"), the Plan is hereby amended as follows: 1. Section 9 of the Plan is hereby amended to read in its entirety as follows: Section 9. OPTION PRICE. The option price for Incentive Options shall not be less than 100% of the fair market value per share of the Common Stock on the date the Incentive Option is granted. The option price for Nonqualified Options shall be, as determined by the Board, any price per share of the Common Stock that is greater than par value per share of the Common Stock. 10 IN WITNESS WHEREOF, the undersigned has executed this Amendment effective as of the 22nd day of March, 1995. INTERPHASE CORPORATION By /s/ R. STEPHEN POLLEY ----------------------------- AMENDMENT NO. 2 TO THE INTERPHASE CORPORATION AMENDED AND RESTATED STOCK OPTION PLAN Pursuant to Section 17 of the Interphase Corporation Amended and Restated Stock Option Plan (the "Plan"), the Plan is hereby amended as follows: 1. Section 5 of the Plan is hereby amended to read in its entirety as follows: 5. SHARES SUBJECT TO PLAN. The Board may not grant options under the Plan for more than 2,350,000 shares of Common Stock of the Company, but this number may be adjusted to reflect, if deemed appropriate by the Board, any stock dividend, stock split, share combination, recapitalization or the like, of or by the Company. Shares to be optioned and sold may be made available from either authorized but unissued Common Stock or Common Stock held by the Company in its treasury. Shares that by reason of the expiration of an option or otherwise are no longer subject to purchase 11 pursuant to an option granted under the Plan may be reoffered under the Plan. IN WITNESS WHEREOF, the undersigned has executed this Amendment effective as of the 25th day of June, 1996. INTERPHASE CORPORATION By /s/ R. STEPHEN POLLEY ------------------------------ 12 EX-10.(J) 3 EXHIBIT 10(J) Exhibit 10 (j) ASSET PURCHASE AGREEMENT by and between Interphase Corporation, a Texas corporation, and Cisco Systems, Inc., a California corporation, Dated as of June 3, 1996 TABLE OF CONTENTS Page ---- ARTICLE I PURCHASE AND SALE OF ASSETS 1 Section 1.1 Description of Assets to be Acquired 1 Section 1.2 Excluded Assets 2 ARTICLE II ASSUMED LIABILITIES 2 Section 2.1 Assumed Liabilities 2 Section 2.2 Liabilities Not Assumed 3 ARTICLE III PURCHASE PRICE 3 Section 3.1 Consideration 3 Section 3.2 Payment of Purchase Price 3 Section 3.3 Allocation of Purchase Price 4 ARTICLE IV REPRESENTAITONS AND WARRANTIES 5 Section 4.1 Representations and Warranties of Seller 5 (a) Organization of Seller 5 (b) Authorization of Seller 5 (c) Governmental Consents 6 (d) Proprietary Rights 6 (e) Contracts and Commitments 6 (f) Title to the Assets 7 (g) Litigation 7 (h) No Conflict or Default 7 (i) Brokers' and Finders' Fees 7 (0) Customers 7 (k) Complete Disclosure 8 (1) Inventory 8 (m) Suppliers 8 (n) Limitation 8 Section 4.2 Representations and Warranties of Purchaser 8 (a) Organization of Purchaser 8 (b) Authorization of Purchaser 8 (c) Governmental Consents 9 (d) Litigation 9 (e) No Conflict or Default 9 (f) Brokers' and Finders' Fees 9 ARTICLE V COVENANT'S 10 Section 5.1 Covenants Against Disclosure 10 Section 5.2 Maintenance of Business 10 Section 5.3 Access to Information 10 Section 5.4 Notations 10 Section 5.5 Closing Conditions 11 Section 5.6 Post Closing Transactions 11 Section 5.7 Sales and Transfer Taxes 11 Section 5.8 Tax Returns 11 Section 5.9 Transfer of FDDI Adapter Products Business Goodwill to Purchaser 11 Section 5.10 Training and Consultation by Seller 12 ARTICLE VI CLOSING 13 Section 6.1 Time of Closing 13 Section 6.2 Deliveries by Seller 13 Section 6.3 Deliveries by Purchaser 14 Section 6.4 Further Assurances 14 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS 14 Section 7.1 Conditions to Obligations of Purchaser 14 (a) Representations and Warranties 14 (b) Performance of Agreement 15 (c) No Material Adverse Change 15 (d) Absence of Governmental or Other Objection 15 (e) Approval of Documentation 15 Section 7.2 Conditions to Obligations of Seller 15 (a) Representations and Warranties 15 (b) Performance of Agreement 15 (c) Absence of Governmental or Other (d) Approval of Documentation 16 (e) Purchase Price 16 ARTICLE VIII MISCELLANEOUS PROVISIONS 16 Section 8.1 Notice 16 Section 8.2 Entire Agreement 16 Section 8.3 Binding Effect; Assignment 16 Section 8.4 Expenses of Transaction; Taxes 17 Section 8.5 Waiver; Consent 17 Section 8.6 Counterparts 17 Section 8.7 Severability 17 Section 8.8 Absence of Third Party Beneficiary Rights 17 Section 8.9 Attorneys' Fees 18 Section 8.10 Cooperation and Records Retention 18 Section 8.11 Termination 18 Section 8.12 Mediation 19 SCHEDULES 1.1(a) List of Related Property 1.1(b) List of Inventory 1.1(c) List of Contracts 1.1(d) List of Permits 1.1(e) List of Proprietary Rights 1.1(g) List of Other Assets 1.2 List of Excluded Assets 1.3 FDDI Adapter Products 4.1(f) List of Encumbered Assets 4.1(g) List of Litigation 4.10 List of Customers ASSET PURCHASE AGREEMENT THIS AGREEMENT is dated as of June 3, 1996 by Interphase Corporation, a Texas corporation ("Purchaser"), and Cisco Systems, Inc., a California corporation ("Seller"). WHEREAS, Seller is engaged in the business of designing, manufacturing and selling EISA and Sbus FDDI adapter products (the "Business"); and WHEREAS, Purchaser desires to acquire from Seller and Seller desires to transfer to Purchaser, all or substantially all of the properties, assets, and rights of Seller related to the Business, and to assume certain specified liabilities of Seller, all upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS SECTION 1.1 DESCRIPTION OF ASSETS TO BE ACQUIRED. Upon the terms and subject to the conditions set forth in this Agreement, at the Time of Closing (as defined in Section 6.1 hereof), Seller agrees to convey, sell, transfer, assign, and deliver to Purchaser, and Purchaser agrees to purchase from Seller, all right, title, and interest of Seller at the Time of Closing in and to certain assets, properties, and rights related to the Business, as follows: (a) The machinery, equipment computer hardware, peripherals, operating software, application software, quality assurance equipment and furniture and fixtures (the "Related Property") listed on Schedule 1.1(a) hereto; (b) The inventory owned by Seller related to the Business as listed on Schedule 1.1(b) hereto (whether located on the premises of the facilities owned by Seller in San Jose, CA, in transit to or from such pren3ises, in other storage or warehouse facilities, or otherwise) including, without limitation, finished goods and components, as listed on Schedule 1.1(b) hereto (the "Inventory"); (c) All claims, rights and obligations (but, with respect to obligations, only to the extent expressly assumed pursuant to Section 2.1 hereof) under all agreements, contracts, contract rights, licenses, purchase and sale orders, quotations, and other executory commitments associated with the Business (collectively, the "Con- tracts"), that are listed on Schedule 1.1(c) hereto including the "Contracts Requiring Notation or Consents to Assignment" as such phrase is defined in Section 4.1(e)(C) hereof; (d) All claims and rights under all franchises, licenses, permits, consents, authorizations, certificates and approvals (collectively referred to herein as "Permits") of any federal, state, or local regulatory, administrative, or other governmental agency or body issued to or held by Seller which are necessary, related or incidental to the Business, that are listed on Schedule 1.1(d) hereto; (e) All patent rights, copyright rights, trade secret rights, mask work rights and other intellectual property and proprietary rights throughout the world, together with the goodwill associated therewith (collectively, the "Proprietary Rights"), that are listed on Schedule 1.1(e) hereto; (f) All goodwill associated with the Business (the "Goodwill"); (g) Such other properties or assets ("Other Assets") that are listed on Schedule 1.1(g) hereto; (h) All rights, if any, under express or implied warranties from suppliers and vendors of Seller which are related to the Business and the Assets; and (i) All of Seller's causes of action, judgments, and claims or demands of whatever kind or description arising out of or relating to the Business and the Assets other than those arising under this Agreement; The assets, properties, and rights to be conveyed, sold, transferred, assigned, and delivered to Purchaser pursuant to this Section 1.1 are sometimes hereinafter collectively referred to as the "Assets". SECTION 1.2 EXCLUDED ASSETS. Notwithstanding the provisions of Section 1.1 hereof, the Assets to be transferred to Purchaser pursuant to this Agreement shall not include assets listed on Schedule 1.2 hereof and any other assets not specifically identified on the Schedules set forth in Section 1.1 (collectively, the "Excluded Assets").- ARTICLE 11 ASSUMED LIABILITIES SECTION 2.1 ASSUMED LIABILITIES. Subject to Section 2.2 hereof, Purchaser hereby agrees at the Time of Closing to assume, satisfy or perform when due those liabilities and obligations of Seller arising after the Time of Closing under the Contracts 2 and Permits. The liabilities assumed hereunder by the Purchaser are hereinafter called the "Assumed Liabilities". SECTION 2.2 LIABILITIES NOT ASSUMED. Other than the Assumed Liabilities, Purchaser shall not assume, nor shall Purchaser or any affiliate of Purchaser, be deemed to have assumed or guaranteed, any other liability or obligation of any nature of Seller, or claims of such liability or obligation, whether accrued, matured or unmatured, liquidated or unliquidated, fixed or contingent, known or unknown arising out of (i) acts or occurrences, or related to any of the Assets or the Business, prior to the Time of Closing or (ii) any other liability or obligation of Seller (collectively, the "Unassumed Liabilities"). Seller shall indemnify Purchaser from and against all losses, including reasonable costs and expenses, incurred by Purchaser directly relating to any Unassumed Liabilities. ARTICLE III PURCHASE PRICE SECTION 3.1 Consideration. Upon the terms and subject to the conditions contained in this Agreement, in consideration for the Assets and the other forms of consideration to be given by Seller and in fall payment therefor, Purchaser will pay, or cause to be paid, the purchase price set forth in Section 3.2 hereof to Seller, subject to adjustment in accordance with the provisions set forth herein, and Purchaser will assume all of the Assumed Liabilities. SECTION 3.2 PAYMENT OF PURCHASE PRICE. The consideration ("Purchase Price") to be paid or payable by Purchaser to Seller for the Business and the other forms of consideration to be given by Seller shall be: (a) (i) At the Time of Closing, Purchaser shall pay to Seller, by cash, check or wire transfer, the sum of $2,500,000. (ii) Within ten (10) days after receipt of each delivery of inventory as set forth on Schedule 1.1(b), Purchaser shall pay to Seller, by cash, check or wire transfer, the purchase price for any such delivered inventory as set forth on Schedule 1.1(b) hereto, it being understood that there may be multiple deliveries of inventory and a payment will be due pursuant to this section after each delivery. (b) Additional installment payments shall be made as follows: At such time as Net Sales (as defined below) of FDDI Adapter Products, (as defined below) by Purchaser after the Time of Closing exceed $6,000,000, Purchaser shall make quarterly payments to Seller within 30 days of the end of each fiscal quarter of Purchaser, in an amount equal to 10% of Net Sales in excess of such $6,000,000. Beginning on the date cumulative Net Sales of FDDI Adapter Products by 3 Purchaser after the Time of Closing exceed $16,000,000, the percentage of Net Sales payable to Seller pursuant to this Section shall be reduced to 5%. Beginning on the date cumulative Net Sales of FDDI Adapter Products by Purchaser after the Time of Closing exceed $26,000,000, the percentage of Net Sales payable to Seller shall be reduced to 0% and no further payments shall be due Seller except payments which have accrued prior to net sales exceeding $26,000,000. For purposes of this Agreement, FDDI Adapter Products shall mean the products set forth in Schedule 1.3 hereto, and improvements, modifications and derivative works thereof produced by Purchaser. For purposes of this Agreement, Net Sales shall mean the gross sales amount actually received from the sale of FDDI Adapter Products, less commissions, freight, insurance, duties and any applicable sales, value added or similar taxes, less any amount for returned goods for which a credit or refund is given, and not including support and maintenance revenues related to FDDI Adapter Products and not normally included in the selling price of such FDDI Adapter Products. (c) AUDIT AND INSPECTION RIGHTS. Purchaser shall keep accurate books and records with respect to its sales activities of FDDI Adapter Products. Such books and records shall be preserved for at least three (3) years after termination of payment obligations under this Agreement and shall be open to inspection and audit by a representative of Seller or an independent certified public accountant retained by Seller (and reasonably acceptable to Purchaser) at reasonable times during Purchaser's normal business hours, upon reasonable prior notice and no more than once per year. Such representative or independent certified public accountant shall be bound to hold all information in confidence except as necessary to communicate to Seller Purchaser's breach of this Agreement or misrepresentation or error regarding net sales under this Agreement. The fees and expenses of such inspection and audit shall be borne by Seller; however, if an error in Net Sales reporting is discovered in excess of 5% for the 12 month period being audited, then such fees and expenses related to the audit for such period shall be borne by Purchaser. Seller may not audit the same period twice, except with reasonable cause. Any sums found to be owing to either party as a result of such inspection and audit shall be immediately paid to the other party, including interest at a rate of 8% from the date such sums should have been paid. SECTION 3.3 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated among the Assets as set forth in a statement of allocation of the Purchase Price (plus Assumed Liabilities), such statement to be prepared by Purchaser at the Time of Closing, and acceptable to Seller. If Purchaser and Seller cannot agree on such allocation statement within ten days of the Time of Closing, the allocation statement shall be determined by a partner of one of the six largest international accounting firms mutually acceptable to both parties, and having due regard for the rights and interests of both parties. The statement of the allocation prepared in accordance with this Section 3.3 shall be binding upon the parties hereto and shall be prepared using the allocation 4 methods and principles required by Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury Regulations promulgated thereunder. Neither Purchaser nor Seller shall take any position inconsistent with such allocation, and any and all filings with and reports made to any taxing authority will be consistent with that allocation, except in each case to the extent that Purchaser or Seller reasonably believes, after discussion with the others, that the foregoing will result in a violation of applicable law. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.1 REPRESENTATIONS AND WARRANTIES OF SELLER. In this Agreement, any reference to "Seller's knowledge" means Seller's actual knowledge after reasonable inquiry of the former officer and director level employees of Crescendo Communications, Inc. who are employed by Seller as of the date hereof. Seller hereby represents and warrants to Purchaser that as of the date hereof and as of the Time of Closing (which representations and warranties will terminate one year from the Time of Closing and therefore any claims by Purchaser for a breach of such representations and warranties must be brought prior to the expiration of one year from the Time of Closing): (a) ORGANIZATION OF SELLER. Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of California, and has all requisite power and authority to own and operate the Business in the places where the Business is now conducted and to directly own, lease, and operate the Assets. Seller is duly qualified or licensed to do business as a corporation in each of the jurisdictions in which the nature of the Business or location of properties related to the Business requires such qualification or licensing and where the failure to be so qualified would have a material adverse effect on the Business. (b) AUTHORIZATION OF SELLER. Seller has fall power and authority to enter into this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby, including, without Stations the execution and delivery of this Agreement, bills of sale, assignments and assumptions, novations and other instruments evidencing the conveyance of the Assets or delivered in accordance with Section 6.2 hereunder (the "Closing Documents"). Seller has taken all necessary and appropriate corporate action, including obtaining all necessary board and shareholder consents, with respect to the execution and delivery of this Agreement and the Closing Documents. This Agreement constitutes the valid and binding obligation of Seller enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium, and other similar laws affecting the rights and remedies of creditors and subject to the general principles of equity. 5 (c) GOVERNMENTAL CONSENTS. No consent, approval, order, or authorization of, or registration, qualification, designation, declaration, or filing with any federal, state, local, or provincial governmental authority on the part of Seller is required in connection with the consummation of the transactions contemplated hereunder. (d) PROPRIETARY RIGHTS. To Seller's knowledge, Seller owns, has the right to use, or has the right to practice under all Proprietary Rights set forth in Schedule 1.1(e) hereto, as qualified by such Schedule 1.1(e), without any conflict with or infringement of the rights of others. (e) CONTRACTS AND COMMITMENTS. (A) There is set forth on Schedule 1.1(c) a list of all outstanding contracts, setting forth the parties and the dates, including expiration dates, thereto which relate to the Business, and which are being purchased by Purchaser pursuant hereto, and, to which Seller is a party or to which any of the Assets are subject. (B) Seller, and to Seller's knowledge, each other party thereto, has performed all of its obligations under the terms of each Contract and is not in default thereunder. No event or omission has occurred which but for the giving of notice or lapse of time or both would constitute a default by any party thereto under any such Contract, where such default by any party could have a material adverse effect on the Business or the Assets. Each such Contract is valid and binding on all parties thereto and in full force and effect. Seller has received no notice of default, cancellation, or termination in connection with any such Contract. Seller has not accepted any material prepayments with respect to any of the Contracts, nor has Seller entered into any written modifications, waivers, releases or amendments to any of the Contracts not previously disclosed to Purchaser and which written modifications, waivers, releases or amendments would have a material adverse effect on the Business or the Assets. (C) Schedule 1.1(c) lists all Contracts, under the heading "Contracts Requiring Notation or Consent to Assignment," that require a notation or consent to assignment, as the case may be, prior to, the Time of Closing so that Purchaser shall be made a party in place of Seller or as assignee (the "Contracts Requiring Novation or Consent to Assignment"). Such list is complete, accurate and includes every Contract which, if no novation occurs to make Purchaser a party thereto or if no consent to assignment is obtained, would have a material adverse effect on Purchaser's ability to operate the Business in the same manner as the Business was operated by Seller prior to the Time of Closing. 6 (f) TITLE TO THE ASSETS. (A) Except as set forth on Schedule 4.1(f) attached hereto and except for Permitted Encumbrances, Seller has good and marketable title to the Assets free and clear of any pledges, liens, encumbrances, security interests, equities, charges, and restrictions of any nature whatsoever (collectively, the "Liens"). The term "Permitted Encumbrances" shall mean Liens for current taxes not due and payable. Any and all Liens set forth on Schedule 4.1(f), with the exception of Permitted Encumbrances, shall be terminated as of the Time of Closing, and Seller shall transfer the Assets to Purchaser free and clear of all such Liens. (B) By virtue of the deliveries made at the Time of Closing, Purchaser will obtain good and marketable title to the Assets, free and clear of all Liens except for Permitted Encumbrances. (g) LITIGATION. Except as set forth on Schedule 4.1(g), there is no claim, litigation, action, suit, or proceeding, administrative or judicial, pending or, to Seller's knowledge, threatened against or by Seller, nor to Seller's knowledge is there any reasonable basis for any such claim, litigation, action, suit, or proceeding against or by SELLER, relating to the Business, or involving the Assets, or this Agreement or the transactions contemplated hereunder, at law or in equity, before any federal, state, local, or foreign court, or regulatory agency, or other governmental authority, including, without limitation, any unfair labor practice or grievance proceedings or otherwise, which claim, litigation, action, suit or proceeding would have a material adverse effect on the Assets. (h) NO CONFLICT OR DEFAULT. Neither the execution and delivery of this Agreement nor compliance with the terms and provisions hereof, including without limitation, the consummation of the transactions contemplated hereby, win violate any statute, regulation, or ordinance of any governmental authority, or conflict with or result in the breach of any term, condition, or provision of Seller's Articles of Incorporation or Bylaws, or, subject to obtaining the consents described in Section 5.4 below, of any agreement deed, contract, mortgage, indenture, writ, order, decree, legal obligation, or instrument to which Seller is a party or by which it or any of the Assets are or may be bound, or constitute a default (or an event which, with the lapse of time or the giving of notice, or both, would constitute a default) thereunder. (i) BROKERS' AND FINDERS' FEES. Seller is not obligated to pay any fees or expenses of any broker or finder in connection with the origin, negotiation, or execution of this Agreement or in connection with any transactions contemplated hereby. (j) CUSTOMERS. Schedule 4.16) (which will be provided at the Time of Closing) attached hereto lists all customers of the Business who purchased 7 FDDI Adapter Products from Seller at any time from the beginning of Seller's 1995 fiscal year through the Time of Closing. (k) COMPLETE DISCLOSURE. No representation or warranty by Seller in this Agreement, and no exhibit, schedule, statement, certificate, or other writing furnished to Purchaser pursuant to this Agreement or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein and therein in the context in which they were made not misleading. (l) INVENTORY To Seller's knowledge, all of the Inventory consists or will consist of items of a quality usable and saleable in the ordinary and usual course of the Business. (m) SUPPLIERS. Seller is not aware of any event or fact which would reasonably be expected to have a material adverse effect on Seller's relationship with its suppliers of the Business. (n) LIMITATION. EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE IV, NO REPRESENTATION OR WARRANTY WHATSOEVER IS MADE BY SELLER AND SELLER HEREBY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES IMPLIED AS TO THE CONDITION, VALUE OR QUALITY OF THE ASSETS AND SPECIFICALLY DISCLAIMS WITH RESPECT TO THE ASSETS ANY REPRESENTATIONS AND WARRANTIES OF MERCHANTABILITY, USAGE OR FITNESS FOR ANY PARTICULAR PURPOSE. SECTION 4.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. In this Agreement, any reference to "Purchaser's knowledge" means Purchaser's actual knowledge after reasonable inquiry of officers and director-level employees. Purchaser hereby represents and warrants to Seller that as of the date hereof and as of the Time of Closing (which representations and warranties will terminate one year from the Time of Closing and therefore any claims by Seller for a breach of such representations and warranties must be brought prior to the expiration of one year from the Time of Closing): (a) ORGANIZATION OF PURCHASER. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, and has all requisite power and authority to own and operate its business. (b) AUTHORIZATION OF PURCHASER. Purchaser has full power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby, including, without limitation, the execution and delivery of this Agreement. Purchaser has taken all necessary and 8 appropriate corporate action, including obtaining all necessary board consents, with respect to the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement constitutes the valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights and remedies of creditors and subject to general principles of equity. (c) GOVERNMENTAL CONSENTS. No consent, approval, order, or authorization of, or registration, qualification, designation, declaration, or filing with any federal, state, local or provincial governmental authority on the part of Purchaser is required in connection with the consummation of the transactions contemplated hereunder. (d) LITIGATION. There is no claim litigation, action, suit or proceeding, administrative or judicial, pending or, to Purchaser's knowledge, threatened against or by Purchaser, nor to Purchaser's knowledge is there any reasonable basis for any such claim litigation action, suit or proceeding against or by Purchaser, relating to this Agreement or the transactions contemplated hereunder, at law or in equity, before any federal, state, local or foreign court, or regulatory agency, or other governmental authority, which could result in the institution of legal proceedings to prohibit or restrain the consummation or performance of this Agreement or the transactions contemplated hereby or claim damages as a result of this Agreement or the transactions contemplated hereby. (e) NO CONFLICT OR DEFAULT. Neither the execution and delivery of this Agreement nor compliance with the terms and provisions hereof including, without limitation, the consummation of the transactions contemplated hereby, will violate any statute, regulation, or ordinance of any GOVERNMENTAL authority, or conflict with or result in the breach of any term, condition, or provision of Purchaser's Articles of Incorporation or Bylaws, or of any material agreement, deed, contract, mortgage, indenture, writ, order, decree, legal obligation, or instrument to which Purchaser is a party or by which it is or may be bound, or constitute a default (or an event which, with the lapse of time or the giving or notice, or both, would constitute a default) thereunder. (f) BROKERS' AND FINDERS' FEES. Purchaser is not obligated to pay any fees or expenses of any broker or finder in connection with the origin, negotiation, or execution of this Agreement or in connection with any transactions contemplated hereby. 9 ARTICLE V COVENANTS SECTION 5.1 COVENANTS AGAINST DISCLOSURE. Until the Time of Closing, no party or its affiliates shall disseminate any press release or announcement or otherwise make any disclosure to third parties, other than on a need to know basis to its legal and financial representatives who have a fiduciary obligation to maintain confidentiality of such disclosure, concerning the transactions contemplated by this Agreement and Purchaser will not make any disclosures to third parties, excluding the announcement of this Agreement, that could be reasonably expected to damage the Business or products of Seller without the prior consent of Seller and Purchaser, except as, in the reasonable opinion of a party, required by law. SECTION 5.2 MAINTENANCE OF BUSINESS. Except as otherwise required to perform its obligations under this Agreement during the period from the date hereof through the Time of Closing, Seller shall carry on and use its reasonable efforts to preserve the Business, Goodwill, and relationships with customers, suppliers, officers, employees, agents, licensees and others with respect to the Business in substantially the same manner as Seller did prior to the date where Seller will use its reasonable efforts to keep and maintain the existing favorable Business relationship with each of its respective customers, suppliers, officers, employees, licensees and agents with respect to the Business. SECTION 5.3 ACCESS TO INFORMATION. Seller shall give Purchaser and its Representatives (as such term is defined below) full access, during normal Business hours, to all of the properties, books, contracts, commitments, and records relating to the Business and the Assets, provided that such access shall not unreasonably interfere with the normal operations of the Business, and Seller will furnish to Purchaser and its officers, directors, employees, agents or representatives (collectively, "Representatives") during such period all such information concerning the Business or the Assets as Purchaser may reasonably request; provided, that any furnishing of such information pursuant hereto or any investigation by Purchaser shall not affect Purchaser's right to rely on the representations, warranties, agreements and covenants made by Seller in this Agreement. All requests for permissions under this Section 5.3 shall be made by Purchaser through an individual designated for the purpose by Seller. SECTION 5.4 NOVATIONS. Seller agrees to use reasonable efforts to obtain contract novations or consents to assignment as necessary, for all Contracts requiring Novation or Consent to Assignment prior to or as soon as practicable after the Time of Closing. 10 SECTION 5.5 CLOSING CONDITIONS. Both parties agree to use their reasonable efforts to cause the conditions of closing to be fulfilled. SECTION 5.6 POST CLOSING -- TRANSACTIONS. (a) Seller shall retain all collections by it under the Contracts, novated or otherwise, for all sales made by Seller prior to the Time of Closing and during the Transition Period. (b) Subject to any approvals required by Seller's customers, Seller shall subcontract the rights and obligations of any Contracts not novated to Purchaser on the same terms and conditions provided in such Contracts. SECTION 5.7 SALES AND TRANSFER TAXES. Seller agrees to take all actions reasonably requested by Purchaser to minimize any sales, use and other transfer taxes and fees incurred in connection with the assignment, conveyance, transfer and/or delivery of the Assets hereunder, including, without limitation the transfer via means of electronic transmission of all assets capable of being so transmitted. Seller further agrees to deliver all certificates reasonably requested by Purchaser to verify the fact of such electronic transmissions or other actions. SECTION 5.8 TAX RETURNS. Seller shall properly file all returns, statements, reports, forms or other documents (collectively, "Tax Returns") that Seller is required by any applicable law to file with respect to taxes arising in or related to periods ending on or prior to the Time of Closing or related to transactions or events occurring prior to the Time of Closing and shall pay all such taxes when due. If the closing occurs prior to July 19, 1996, state and local ad valorem taxes for the current tax year shall be prorated at the Closing effective as of the Closing Time, with Purchaser's pro rated portion being paid to Seller at the Closing. If the closing occurs on or after July 1, 1996, state and local ad valorem taxes for the current tax year shall be prorated at the Closing effective as of the Closing Time, with Seller's pro rated portion being paid to Purchaser at the Closing. Purchaser shall be responsible for payment of the current year ad valorem tax bins. If the Closing shall occur before the tax rate is fixed for the current tax year, the apportionment of taxes shall be upon the basis of the tax rate for the preceding year applied to the latest assessed valuation, but any difference in estimated and actual taxes paid for the current tax year shall be adjusted between the parties upon receipt by Seller of written evidence of Purchaser's payment thereof. Any supplemental property taxes or assessments which arise out of a revaluation of an Asset which revaluation would not have occurred except for the change in ownership of the Asset shall be borne by Purchaser. SECTION 5.9 TRANSFER OF FDDI ADAPTER PRODUCTS BUSINESS GOODWILL TO PURCHASER. Seller will endeavor to achieve a smooth transition in connection with the 11 transfer to Purchaser of Seller's business related to the FDDI Adapter Products. Accordingly, Seller agrees to: (i) for a period of twelve (12) months after the Closing Date, publicize Purchaser's acquisition of Seller's FDDI Adapter Products business on a Seller Web page in a place and manner to be determined by Seller in its sole discretion, (after having previously provided a copy for review to Purchaser) and, to the extent consistent with Seller's current Web page policy, include a hot link to Purchaser's Web page in Seller's Web Page; (ii) provide Purchaser information, current as of the Closing Date, pertaining to FDDI Adapter Products purchased from Seller during Seller's 1995 and 1996 fiscal years, including (a) customer names, shipping addresses, billing addresses, model numbers and unit quantity of such FDDI Adapter Products, (b) unit quantity and revenue sales information for such FDDI Adapter Products, generated on a fiscal quarter basis, and (c) the summary gross margin for each such FDDI Adapter Product; and (iii) provide Purchaser, at or before the Closing, with the FDDI Documentation (as defined below) and the FDDI Software (as defined below); and (iv) provide its reasonable assistance, as mutually agreed on a case by case basis, in introducing Purchaser as a supplier of the FDDI Adapter Products to key customers. For purposes of this Agreement, "FDDI Documentation" shall mean (i) the hardware designs and design information, (ii) software designs and design information, including source code and a list of software tools, (iii) manufacturing information, including bills of materials, assembly drawings, Gerber files for printed circuit boards and manufacturing test software designs, (iv) product manuals, (v) release notes and (vi) a list of outstanding bugs for the FDDI Adapter Products; "FDDI Software" shall mean the software and firmware contained in the FDDI Adapter Products including FDDI Software Upgrades but excluding The Cisco Technology, "FDDI Software Upgrade" shall mean any upgrade, enhancement, update, new version of or bug fix for the FDDI Software; and "Cisco Technology" shall have the meaning set forth on Schedule 1.2 hereof SECTION 5.10 TRAINING AND CONSULTATION BY SELLER. Seller shall provide Purchaser with training and technical consultation as set forth below. (i) TRAINING. Seller shall provide Purchaser two (2) person-days of on-site technical training to Purchaser's engineering personnel pertaining to the design and manufacture of the FDDI Adapter Products. Such technical training will be provided promptly upon request at Purchaser's facilities at no cost to Purchaser. In 12 addition, Seller shall provide, at no cost to Purchaser, one (1) person-day of training to Purchaser's support personnel pertaining to the support, repair and maintenance of the FDDI Adapter Products at a time and location to be mutually agreed. (ii) TECHNICAL CONSULTATION. Seller shall provide Purchaser, without charge, forty (40) person-hours of technical consultation comprising telephone, voicemail, electronic mail and laboratory assistance during normal business hours. Seller agrees to use commercially reasonable efforts to provide Purchaser, for a period of ninety (90) days following the end of the Transition Period and thereafter subject to availability of Seller's resources, additional technical consultation required by Purchaser at a rate of $200 per hour. For purposes of this Agreement "Transition Period" means the period from the Time of Closing through July 28, 1996. ARTICLE VI CLOSING SECTION 6.1 TIME OF CLOSING. The transactions contemplated by this Agreement shall be completed on the first Business day on which the last of the conditions contained in Article VII hereof is fulfilled or waived (the "Time of Closing"), with the expectation that the Closing shall occur on June 10, 1996 at 12:00 P.M., P.D.T., unless otherwise agreed to by Purchaser and Seller. The Closing shall take place at the offices of Brobeck, Phleger & Harrison, Two Embarcadero Place, 2200 Geng Road, Palo Alto, CA, or at such other place or date as may be agreed to by Purchaser and Seller. The "Closing" shall mean the deliveries to be made by the parties hereto at the Time of Closing in accordance with this Agreement. SECTION 6.2 DELIVERIES BY SELLER. At the Closing, Seller shall deliver, or cause to be delivered, to Purchaser the following: (a) A good and sufficient Bill of Sale and an Assignment and Assumption of Liabilities Agreement for the Assets in the form mutually agreed to by Purchaser and Seller, selling, delivering, transferring, and assigning to Purchaser title to all of Seller's right, tide, and interest to the Assets, free and clear of all mortgages, pledges, liens, encumbrances, security interests, equities, charges, and restrictions of any nature whatsoever except as otherwise provided herein and except with respect to delivery of inventory as set forth on Schedule 1.1(b) hereto, which delivery shall be made in accordance with Schedule 1.1(b). (b) An affidavit of Seller, substantially in the form mutually agreed to by Purchaser and Seller, stating, under penalty of perjury, Seller's United States taxpayer identification number and that Seller is not a foreign person, pursuant to Section 1445(b)(2) of the Code. 13 (c) Good and sufficient assumptions and assignments of the Proprietary Rights and Contracts, which shall be in form and substance reasonably satisfactory to Purchaser and shall include the written consents of all parties necessary in order to transfer all of Seller's rights thereunder to Purchaser. (d) An Officers' Certificate executed by an executive officer of Seller certifying that the conditions specified in subsections (a)-(d) of Section 7.1 have been satisfied. SECTION 6.3 DELIVERIES BY PURCHASER. At the Closing, Purchaser shall deliver, or cause to be delivered, to Seller: (a) The payment of that portion of the Purchase Price set forth in Section 3.2(a)(i) hereof, together with applicable taxes arising from the transaction which Purchaser is required to pay pursuant to Section 8.4 hereof; (b) A good and sufficient Bill of Sale and an Assignment and Assumption of Liabilities Agreement in the form mutually agreed to by Purchaser and Seller, covering those liabilities of Seller assumed by Purchaser pursuant to Section 2.1 hereof; (c) An Officer's Certificate executed by an executive officer of Purchaser certifying that the conditions specified in subsections (a) - (c) of Section 7.2 have been satisfied; and SECTION 6.4 FURTHER ASSURANCES. At or after the Time of Closing, each party shall prepare, execute, and deliver, such further instruments of conveyance, sale, assignment, or transfer, and shall take or cause to be taken such other or farther action, as any party shall reasonably request of any other party at any time or from time to time in order to perfect, confirm, or evidence in Purchaser title to all or any part of the Assets or to consummate, in any other manner, the terms and provisions of this Agreement. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS SECTION 7.1 CONDITIONS TO OBLIGATIONS OF PURCHASER. Each and every obligation of Purchaser to be performed at the Closing shall be subject to the satisfaction as of or before the Time of Closing of the following conditions (unless waived in writing by Purchaser): (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller set forth in Section 4.1 of this Agreement shall have been true and 14 correct when made and shall be true and correct at and as of the Time of Closing as if such representations and warranties were made as of such date and time. (b) PERFORMANCE OF AGREEMENT. All covenants, conditions, and other obligations under this Agreement which are to be performed or complied with by Seller shall have been fully performed and complied with at or prior to the Time of Closing, including the delivery of the instruments and documents in accordance with Section 6.2 hereof. (c) NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the financial condition, Business, Proprietary Rights or properties of Seller which materially adversely affects the Assets or the conduct of the Business as currently being conducted. (d) ABSENCE OF GOVERNMENTAL OR OTHER OBJECTION. There shall be no pending or threatened lawsuit challenging the transaction by any body or agency of the federal, state or local government or by any third party, and the consummation of the transaction shall not have been enjoined by a court of competent jurisdiction as of the Time of Closing. (e) APPROVAL OF DOCUMENTATION. The form and substance of all certificates, instruments, opinions and other documents delivered or to be delivered to Purchaser under this Agreement shall be reasonably satisfactory to Purchaser and its counsel in all respects. SECTION 7.2 CONDITIONS TO OBLIGATIONS OF SELLER. Each and every obligation of Seller to be performed at the Time of Closing shall be subject to the satisfaction as of or before such time of the following conditions (unless waived in writing by Seller): (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Purchaser set forth in Section 4.2 of this Agreement shall have been true and correct when made and shall be true and correct at and as of the Time of Closing as ff such representations and warranties were made as of such date and time. (b) PERFORMANCE OF AGREEMENT. All covenants, conditions, and other obligations under this Agreement which are to be performed or complied with by Purchaser shall have been fully performed and complied with at or prior to the Time of Closing, including the delivery of the instruments and documents in accordance with Section 6.3 hereof (c) ABSENCE OF GOVERNMENTAL OR OTHER OBJECTION. There shall be no pending or threatened lawsuit challenging the transaction by any body or agency of the federal, state, or local government or by any third party, and the consummation of 15 the transaction shall not have been enjoined by a court of competent jurisdiction as of the Time of Closing. (d) APPROVAL OF DOCUMENTATION. The form and substance of all certificates, instruments, opinions, and other documents delivered or to be delivered to Seller under this Agreement shall be reasonably satisfactory to Seller and its counsel in all respects. (e) PURCHASE PRICE. Purchaser shall have delivered to Seller that portion of the Purchase Price set forth in Section 3.2(a)(i) hereof. ARTICLE VIII MISCELLANEOUS PROVISIONS SECTION 8.1 Notice. All notices and other communications required or permitted under this Agreement shall be delivered to the parties at the address set forth below their respective signature blocks, or at such other address that they designate by notice to all other parties in accordance with this Section 8.1. Any party delivering notice to Purchaser shall deliver a copy to Gardere & Wynne, 3000 Thanksgiving Tower, Dallas, Texas 75201, Attn: David H. Segrest, Esq., and any party delivering notice to Seller shall deliver a copy to: Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, CA 94303, Attn: Edward M. Leonard, Esq. All notices and communications shall be deemed to have been received unless otherwise set forth herein: (i) in the case of personal delivery, on the date of such delivery; (ii) in the case of telex or facsimile transmission, on the date on which the sender receives confirmation by telex or facsimile transmission that such notice was received by the addressee, provided that a copy of such transmission is additionally sent by mail as set forth in (iv) below; (iii) in the case of overnight air courier, on the second Business day following the day sent, with receipt confirmed by the courier; and (iv) in the case of mailing by first class certified or registered mail, postage prepaid, return receipt requested, on the fifth business day following such mailing. SECTION 8.2 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto, the documents referred to herein and the documents executed contemporaneously hereto at the Time of Closing, embody the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, oral or written, relative to such subject matter. SECTION 8.3 BINDING EFFECT, ASSIGNMENT. This Agreement and the various rights and obligations arising hereunder shall inure to the benefit of and be binding upon Seller, its successors and permitted assigns, and Purchaser and its successors and permitted assigns. Neither this Agreement nor any of the rights, interests, or obligations 16 hereunder shall be transferred or assigned (by operation of law or otherwise) by either of the parties hereto without the prior written consent of the other party, except that (i) either party may assign this Agreement without the other party's consent to a parent corporation or a wholly-owned subsidiary of the assigning party, (ii) either party may assign this Agreement without the other party's consent beginning one year from the Time of Closing provided the maximum of all payments payable as set forth in Section 3.2(b) hereof ($1,500,000) have been made prior to any proposed assignment or (iii) either party may assign this Agreement without the other party's consent at any time after the expiration of three years from the Time of Closing. SECTION 8.4 EXPENSES OF TRANSACTION: TAXES. Except as set forth in Section 8.12, each party shall bear its own costs and expenses in connection with this Agreement and the transactions contemplated hereby. Purchaser shall pay all applicable sales, use, excise, transfer, documentary and any other similar taxes arising out of the purchase and sale of the Assets. SECTION 8.5 WAIVER -- CONSENT. This Agreement may not be changed, amended, terminated, augmented, rescinded, or discharged (other than by performance), in whole or in part, except by a writing executed by the parties hereto, and no waiver of any of the provisions or conditions of this Agreement or any of the rights of a party hereto shall be effective or binding unless such waiver shall be in writing and signed by the party claimed to have given or consented thereto. Except to the extent that a party hereto may have otherwise agreed in writing, no waiver by that party of any condition of this Agreement or breach by the other party of any of its obligations or representations hereunder or thereunder shall be deemed to be a waiver of any other condition or subsequent or prior breach of the same or any other obligation or representation by the other party, nor shall any forbearance by the first party to seek a remedy for any noncompliance or breach by the other party be deemed to be a waiver by the first party of its rights and remedies with respect to such noncompliance or breach. SECTION 8.6 COUNTERPARTS. This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. SECTION 8.7 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. SECTION 8.8 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this Agreement are intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, stockholder, partner or employee of any party hereto or any other person or entity unless 17 specifically provided otherwise herein, and, except as so provided, all provisions hereof will be personal solely between the parties to this Agreement. SECTION 8.9 ATTORNEYS' FEES. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover reasonable costs and attorneys' fees. SECTION 8.10 COOPERATION AND RECORDS RETENTION. Seller and Purchaser shall (i) each provide the other with such assistance as may reasonably be requested by them in connection with the preparation of any Tax Returns, or in connection with any audit or other examination by any taxing authority or any judicial or administrative proceedings relating to liability for Taxes, (ii) each retain and provide the other, with any records or other information which may be relevant to any such Tax Return, audit or examination, proceeding or determination, and (iii) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax Return of the other for any period. Without limiting the generality of the foregoing, Seller and Purchaser shall use reasonable efforts to retain, until the applicable statute of limitations (including any extensions) have expired, copies of all Tax Returns, supporting work schedules and other records or information which may be relevant to such Tax Returns for all tax periods or portions thereof ending before or including the Time of Closing and shall not destroy or otherwise dispose of any such records without first providing the other party with a reasonable opportunity to review and copy the same. Seller shall keep the original copies of the records at its facilities in California and elsewhere, if applicable, and, at Purchaser's expense, shall provide copies of the Records to Purchaser upon Purchaser's request. SECTION 8.11 TERMINATION. This Agreement may be terminated and the transactions herein contemplated may be abandoned at any time, but not later than the Time of Closing: (a) By mutual consent of the respective Boards of Directors of Purchaser and Seller; or (b) By the Board of Directors of Purchaser (i) if, on or after June 28, 1996, any of the conditions provided for in Section 7.1 of this Agreement shall not have been met or shall not have been waived in writing by Purchaser prior to such date or (ii) the Board of Directors of Purchaser determines in the exercise of its reasonable judgment that the pendency of any lawsuit or the institution or threat of any governmental or administrative action, investigation or inquiry which questions the validity or the legality of the transactions contemplated hereby or which seeks to prevent restrain, change or obtain damages in respect of such transactions, makes it inadvisable to consummate the transactions contemplated hereby, notwithstanding that such lawsuit, action, investigation or inquiry may be deemed to be without merit; or 18 (c) By the Board of Directors of Seller if, on or after June 28, 1996, any of the conditions provided for in Section 7.2 of this Agreement shall not have been met or shall not have been waived in writing by the Seller prior to such date. (d) In the event of termination and abandonment by the Board of Directors of Purchaser or by the Board of Directors of Seller, or both, pursuant to Section 8.11 hereof, written notice thereof shall forthwith be given to the other party and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned without further action by Purchaser or Seller. If this Agreement is terminated as provided herein: (i) Each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same; (ii) All parties hereto shall bear their own costs associated with this Agreement and all transactions described herein and the parties hereto shall have no further obligation or liability to the other parties except as stated in this Section 8.11. SECTION 8.12 MEDIATION. Prior to commencing any lawsuit arising from a party's material breach or termination of this Agreement due to the other party's material breach, the parties shall submit the dispute to a corporate officer of each party, having actual authority to act on behalf of and bind such party under this Agreement, for resolution. If the parties are unable to resolve the dispute within ten (10) days thereafter, the parties shall then attempt in good faith to resolve it by mediation in accordance with the rules of the Judicial Arbitration and Mediation Service ("JAMS"). If mediation is unsuccessful within a reasonable time after commencement of proceedings, but not less than thirty (30) days thereafter, the mediator shall so certify and the parties shall be entitled to seek whatever remedies may be available in law or equity. Notwithstanding the foregoing, either party may seek equitable or similar relief from a court in connection with any dispute within the scope of this Section 8.12 (Mediation). 19. IN WNNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. INTERPHASE CORPORATION By: \x\ R. Stephen Polley Name: R. Stephen Polley Title: Chairman, CEO and President Address: 13800 Senlac, Dallas TX 75234 CISCO SYSTEMS, INC. a California corporation By: \x\ Larry R. Carter Name: Larry R. Carter Title: VP & CFO Address: 170 W. Tasman San Jose, CA 95134 20. TECHNOLOGY LICENSE AND GRANT-BACK AGREEMENT This Technology License and Grant-Back Agreement ("Agreement") is made and entered into as of June 3, 1996 by and between Cisco Systems, Inc., a California corporation, having principal offices at 170 West Tasman Drive, San Jose, California 95134-1706 ("Cisco") and Interphase Corporation, a Texas corporation, having principal offices at 13800 Senlac, Dallas, Texas 75234-8823 ("Interphase"). RECITALS WHEREAS, Cisco is a supplier of FDDI EISA and Sbus adapter products and Interphase desires to expand its FDDI EISA and Sbus adapter product offering; WHEREAS, Interphase requires licenses to certain Cisco technology to develop, manufacture and sell FDDI EISA and Sbus adapter products and Cisco desires to grant such rights to Interphase; and WHEREAS, Cisco and Interphase intend to together support the FDDI EISA and Sbus adapter products through ongoing product support services and interoperability testing of new FDDI adapter products. NOW, THEREFORE, the parties agree as follows: AGREEMENT 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings: 1.1 "Cisco ASICS" shall mean the Cisco proprietary BIGA and MEGA ASICS. 1.2 "Cisco Patent" shall mean United States Patent No. 5,280,500 (issued January 18, 1994) (titled "Method and Apparatus for Multilevel Encoding for a Local Area Network"), the underlying invention, any and all Letters Patent whether U.S. or foreign that are or may be granted from improvements of the underlying invention and all reissues, reexaminations, extensions, continuations, continuations-in-part, divisions, substitutions and renewals thereof or equivalents thereof 1.3 "Cisco Technology' shall mean the Cisco ASICS, designs of the Cisco ASICS, software that drives the Cisco ASICs and all patent rights, copyright rights, trade secret rights and all other intellectual property and proprietary rights throughout the world relating to all of the foregoing. 1.4 "Effective Date" shall mean June 10, 1996. 1.5 "FDDI Adapter Products" shall mean the products set forth in Attachment A (FDDI Adapter Products) hereto and improvements, modifications and derivative works thereof produced by Interphase solely for use in Sbus and EISA applications. 1.6 "FDDI Documentation" shall mean (i) the hardware designs and design information, (ii) software designs and design information, including source code and a list of software tools, (iii) manufacturing information, including bills of materials, assembly drawings, Gerber files for printed circuit boards and manufacturing test software designs, (iv) product manuals, (v) release notes and (vi) a list of outstanding bugs for the FDDI Adapter Products. 1.7 "FDDI Software" shall mean the software and firmware contained in the FDDI Adapter Products, including FDDI Software Upgrades, but excluding the Cisco Technology. 1.8 "FDDI Software Upgrade" shall mean any upgrade, enhancement, update, new version of or bug fix for the FDDI Software. 1.9 "FDDI Technology" shall mean the FDDI Adapter Products (including the FDDI Software) and the FDDI Documentation, but excluding the Cisco Technology. 1.10 "Interphase Technology" shall mean all patent rights, copyright rights, trade secret rights, mask work rights and other intellectual property and proprietary rights throughout the world in the FDDI Technology, but excluding the Cisco Technology. 1.11 "Restricted Products" shall mean products which are identical to, or have substantially the same functionality as, the FDDI Adapter Products (as such FDDI Adapter Products exist on the Effective Date) intended for use in host end-station environments including, without limitation, server and/or client station environments. Restricted Products do not include products intended for use in non-host end-station environments including, without limitation, routers, switches and hubs. 1.12 "Transition Period" shall mean the period commencing on the Effective Date and ending on July 28, 1996. 2 2. LICENSE GRANTS. 2.1 LICENSE BY CISCO' Subject to all the terms and conditions of this Agreement including, without limitation, the restriction on Cisco's design, manufacture and sale of the Restricted Products set forth in Section 2.1.4 below, Cisco grants to Interphase a non-exclusive, non-transferable (except as permitted in Section 21 (Assignment)), non-sublicensable, royalty-free, worldwide license: (i) under the Cisco Patent to make, have made, use, sell, offer for sale and import the FDDI Adapter Products; (ii) under the Cisco Technology (as such Cisco Technology exists as of the Effective Date) and any improvements, modifications and derivative works of the Cisco Technology made by or for Interphase to (a) use, reproduce (except the Cisco ASICS), modify, create and have created derivative works of the Cisco Technology (in source code and object code forms), (b) distribute such Cisco Technology and improvements, modifications and derivative works thereof created by or for Interphase (in object code only, but excluding the designs of the Cisco ASICS), but only as all of the foregoing in this Section 2.1(ii)(b) are incorporated in the FDDI Adapter Products and (c) distribute to customers the software that drives the Cisco ASICs (in source code and object code) solely for the purposes of customizing the FDDI Software drivers for use in a customer's environment and providing maintenance and support of the FDDI Software drivers; and (iii) sublicense the distribution rights granted in subparagraph (ii)(b) above to third parties. Interphase may use sub-distributors, original equipment manufacturers, value-added resellers and other resellers (collectively, "Resellers"), provided any such Reseller shall be bound in writing to all the restrictions of this Agreement. 2.1.1 No distribution of the FDDI Adapter Products containing Cisco Technology or any improvement, modification or derivative work thereof made by or for Interphase shall be made except pursuant to a written end-user license agreement that is at least as protective of Cisco and its rights as the end-user agreement typically used by Interphase in connection with the distribution of substantially similar products. Further, distribution of the source code (or any portion thereof) for the software that drives the Cisco ASICs shall be made pursuant to Interphase's standard source code distribution policy. 3 2.1.2 The license granted above in this Section 2.1 (License by Cisco) is non-exclusive. Except as otherwise provided herein, (including, but not limited to, Section 2.1.4 below) Cisco is not limited in any manner from exploiting the Cisco Patent or the Cisco Technology including, but not limited to, marketing, distribution or licensing activities by Cisco or its dealers, distributors, licensees or agents. 2.1.3 Interphase shall have sole responsibility for obtaining any and all third party rights (including, without limitation, third party intellectual property rights licensed under the agreements listed in Schedule I (Excluded Third Party Intellectual Property Rights)) and for the payment of fees, royalties or other amounts and for all liabilities arising from the exercise by Interphase of the rights granted under this Section 2.1 (License by Cisco). 2.1.4 Until the earlier of (a) three (3) years after the conclusion of the Transition Period or (b) termination of this Agreement by Cisco pursuant to Section 18.2 (Termination), Cisco shall not design, manufacture, have manufactured or sell the Restricted Products to any third party for any purpose other than in connection with support and maintenance of the FDDI Adapter Products or directly assist or authorize any third party to do any of the foregoing; provided, however, Cisco shall have the right to promote, market, sell and distribute the FDDI Adapter Products during the Transition Period. Interphase acknowledges and agrees that Cisco's acquisition, while the restrictions under this Section 2.1.4 are in effect, of more than fifty percent (50%) of the outstanding voting interests or substantially all of the assets of any entity having operations related to FDDI adapter products, where such operations do not comprise such entity's primary business, shall be permitted hereunder; provided, Cisco will use its reasonable efforts to divest its ownership or control of such FDDI adapter products operations of the acquired entity within fifteen (15) months of such acquisition. If the FDDI adapter products operations acquired by Cisco are not divested within such fifteen (15) month period, then Cisco shall (i) negotiate in good faith the terms of the sale of such FDDI adapter products operations to Interphase or (ii) completely terminate or discontinue such FDDI adapter products operations. 2.2 LiCENSE BY INTERPHASE. Subject to all the terms and conditions of this Agreement (including, without limitation, Section 2.1.4 above), Interphase grants to Cisco a non-exclusive, royalty-free, sublicensable worldwide license under the Interphase Technology (as such Interphase Technology exists as of the Effective Date) and any improvements, modifications and derivative works of the Interphase Technology made by or for Cisco to use, reproduce, modify, create derivative works of, make, have made, distribute, sell, offer for sale and import the FDDI Technology. 4 3. FDDI ADAPTER PRODUCT LABELING. No right or license with respect to any trademark, service mark, logo, tradename or other designation of Cisco is granted to Interphase under this Agreement. Until December 31, 1996, Interphase shall be entitled to resell FDDI Adapter Products purchased from Cisco and its suppliers bearing original unaltered Cisco notices and labels designating Cisco as the source of such FDDI Adapter Products; provided, however, Interphase shall use its diligent efforts during this period to remove all Cisco marks, notices, labels or other designations of Cisco and to implement the use of labels including, without limitation, packaging stickers, notices or other means of designating Interphase as the source of the FDDI Adapter Products. After December 31) 1996, neither party shall sell any FDDI Adapter Products bearing the other party's name, marks, notices, labels or any other designations without the prior written consent of the other party, which consent shall not be unreasonably withheld, except to the minimum extent necessary to comply with the requirements of any government contract with the United States or any agency thereof. Notwithstanding the foregoing, Interphase shall have no obligation under this Section 3 (FDDI Adapter Product Labeling) to remove Cisco marks or other designations from the Cisco ASICS. 4. PURCHASE OF CISCO ASICS. Cisco agrees to provide Interphase with a Letter of Authorization to purchase the Cisco ASICs from Cisco's manufacturer of the Cisco ASICs only for use with the FDDI Adapter Products. Interphase shall have sole responsibility for negotiating the terms and conditions of its purchases of the Cisco ASICs and for all liabilities including, without limitation, payment arising from such purchases. 5. PURCHASE OF FDDI ADAPTER PRODUCTS BY CISCO. Interphase agrees to sell to Cisco the FDDI Adapter Products which Cisco may order from Interphase in connection with Cisco's resale and support of the FDDI Adapter Products during the Transition Period and Cisco's warranty and support obligations following the Transition Period. Such sale to Cisco of the FDDI Adapter Products shall be pursuant to the terms and conditions of purchase of the FDDI Adapter Products set forth in Attachment B (Terms and Conditions for Cisco's Purchase of the FDDI Adapter Products) hereto. FDDI Adapter Products shall be manufactured by Interphase according to the functional, technical and other specifications for each FDDI Adapter Product set forth in the Cisco Product Catalog as of the Effective Date or as may be modified from time to time with written notice to Cisco thirty (30) days prior to implementation of a specification modification. 5.1 FDDI ADAPTER PRODUCT CONTACTS. Ed Nelson from Cisco and Rick Donihoo from Interphase will be the initial contact persons ("FDDI Adapter Product Contact") for the FDDI Adapter Products. The FDDI Adapter Product Contacts will act as liaisons between the parties to exchange information regarding new and changed FDDI Adapter Products and FDDI Software Upgrades and shall provide 5 the parties from time to time with the names and telephone numbers of additional specific contact persons when such direct contact is preferable and appropriate. In the event that either party appoints a new FDDI Adapter Product Contact, such party will promptly notify the other in writing. Neither party's FDDI Adapter Product Contact is authorized to amend, alter or extend this Agreement in any manner or waive any obligation or breach hereunder. 6. INTERPHASE SUPPORT OBLIGATIONS. 6.1 FDDI ADAPTER PRODUCTS SOLD BY INTERPHASE OR CISCO. Interphase shall use its commercially best efforts to provide (i) first, second and third level support to customers, who request support, of the FDDI Adapter Products in a manner comparable to or better than the support standards established by Cisco as described in Attachment C (Cisco Support Standards) hereto and at Interphase's published rates then in effect, and (ii) second and third level support to Cisco in a manner as described in Attachment D (Support Terms and Conditions). For three (3) years commencing after the Transition Period, Interphase shall conduct a customer satisfaction survey on an annual basis to determine the level of customer satisfaction in connection with support of the FDDI Adapter Products by Interphase under (i) of this Section 6.1 (FDDI Adapter Products Sold by Interphase or Cisco) and shall promptly provide Cisco the complete and accurate results of each such survey. 6.2 FAILURE TO PROVIDE SATISFACTORY SUPPORT. Subject to the cure provisions of Section 18.2(d) (Termination) below, failure by Interphase to provide satisfactory customer support for the FDDI Adapter Products or satisfactory support to Cisco pursuant to Section 6.1 (FDDI Adapter Products Sold by Interphase or Cisco) shall be deemed a material breach of this Agreement; provided, however, that prior to Cisco's termination of the Agreement, Cisco and Interphase shall work together in good faith to develop a written plan for Interphase to correct such failure and to provide satisfactory support going forward. In the event of a dispute as to whether a failure to provide satisfactory support has occurred or failure to agree upon a plan to correct such a failure, Cisco and Interphase shall resolve the dispute by mediation pursuant to Section 19 (Mediation) below. If such mediation is unsuccessful within a reasonable time after commencement of proceedings, but not less than thirty (30) days thereafter, Cisco may elect to immediately terminate this Agreement and the parties shall be entitled to seek whatever remedies may be available in law or equity. 6.2.1 Notwithstanding the provisions of Section 6.2 (Failure to Provide Satisfactory Support) above and Section 18.2(d) (Termination) below, if Cisco and Interphase jointly agree on a written plan for Interphase to correct a failure to provide satisfactory support and to provide satisfactory support going forward, the material breach shall be considered cured and Cisco shall not have the right to terminate 6 this Agreement on the basis of such material breach so long as Interphase is diligently performing in accordance with such plan. 6.3 DISCONTINUED FDDI ADAPTER PRODUCTS. Subject to the obligations set forth in Section 9.2 (Interphase's Obligations) below, Interphase shall have the right, in its sole discretion, to discontinue any FDDI Adapter Product; provided, however, that Interphase shall continue to provide support for any discontinued FDDI Adapter Product for a period of five (5) years after the date of such discontinuance. 7. SUPPORT OF FDDI ADAPTER PRODUCTS BY CISCO. Interphase acknowledges and agrees that Cisco shall be entitled to provide support services to customers of the FDDI Adapter Products (whether sold by or on behalf of Interphase or Cisco) and FDDI adapters for the PCI interface manufactured and sold by or on behalf of Interphase. In addition, Cisco may, upon mutual agreement of Cisco and Interphase, provide support services to customers of other products manufactured and sold by or on behalf of Interphase. Cisco shall have the right to market, promote and provide such support services including, without limitation, services under Cisco's "SMARTnet" program (and related and successor programs) to customers of the FDDI Adapter Products, FDDI adapters for the PCI interface and, subject to the mutual agreement of Interphase and Cisco, other products manufactured and sold by or on behalf of Interphase. 8. INTERPHASE WARRANTY OBLIGATIONS. 8.1 FDDI ADAPTER PRODUCTS SOLD BY CISCO. Following the end of the Transition Period, Interphase shall (at a customer's request and, except as otherwise provided below, at no cost to the customer) replace and deliver to the customer the replacement of any defective FDDI Adapter Product sold by or on behalf of Cisco before or during the Transition Period, in accordance with Cisco's standard warranty set forth in Attachment H (Cisco Standard Warranty). Interphase shall pay all costs of shipping and insurance and assume the risk of loss during shipping of replacement FDDI Adapter Products, except such shipping and insurance costs associated with (i) the return to Interphase of defective FDDI Adapter Products and (ii) delivery to a customer of replacement FDDI Adapter Products where a shipment of FDDI Adapter Products returned to Interphase as defective contained a high proportion of properly functioning FDDI Adapter Products. Cisco shall pay Interphase for replacement FDDI Adapter Products pursuant to this Section 8.1 (FDDI Adapter Products Sold by Cisco) at the unit prices set forth in Attachment A (FDDI Adapter Products) hereto, reasonable shipping and insurance costs of such replacement FDDI Adapter Products and customs duties, if any, incurred by Interphase from the return of defective FDDI Adapter Products; unless, however, under Interphase policy or practice, payment for such FDDI Adapter Products, shipping and insurance costs and duties are to be made by the customer. 7 Notwithstanding the foregoing, Cisco shall be entitled to provide support services in accordance with Section 7 (Support of FDDI Adapter Products by Cisco) above. 8.2 FDDI ADAPTER PRODUCTS SOLD by INTERPHASE. During the Transition Period and for a period of three (3) years following the end of the Transition Period, Interphase shall warrant to end-users (including Cisco) of the FDDI Adapter Products sold by or on behalf of Interphase that, for a period of not less than ninety (90) days from the date of shipment by or on behalf of Interphase or Interphase's standard warranty period, whichever is longer (the "Warranty Period"), the FDDI Adapter Products will be free from defects in materials, workmanship and will perform in accordance with the applicable specifications and related documentation. 8.2.1 The terms of such warranty shall be no less favorable than the terms of Cisco's standard warranty, attached hereto as Attachment H (Cisco Standard Warranty), for the FDDI Adapter Products manufactured by Cisco. During the Warranty Period, Interphase shall provide customers with replacement FDDI Adapter Products in advance of the return of defective FDDI Adapter Products which are covered by the warranty. During the initial ninety (90) days of the Warranty Period, Interphase shall use commercially reasonable efforts to ship replacement FDDI Adapter Products within one (1) business day of receipt by Interphase of notice from the customer of the defective FDDI Adapter Product and Interphase shall pay all costs of shipping and insurance and assume the risk of loss during shipping of the replacement FDDI Adapter Product covered under the warranty to such customers. 8.2.2 After expiration of the Warranty Period, Interphase shall continue to provide repair for the FDDI Adapter Products and components and Interphase shall perform a test analysis on all such FDDI Adapter Products returned to Interphase for repair. The fee charged to Cisco for the test analysis, if no trouble found, will be fifty dollars ($50.00) per unit of such FDDI Adapter Products. If a FDDI Adapter Product tested by Interphase requires repair, prices and charges to Cisco for repair of such FDDI Adapter Product and components thereof will be two hundred fifty dollars ($250.00) per FDDI Adapter Product, inclusive of Interphase's test analysis fee. Such prices and charges shall be effective for a period of two (2) years following the Effective Date. Thereafter, repair shall be provided by Interphase to Cisco on commercially reasonable terms and at prices and charges that are not higher than those provided by Interphase to third parties. Interphase will warrant repair of the FDDI Adapter Products for a period of thirty (30) days from the date of repair or Interphase's standard warranty period for repairs, whichever is longer. 8 9. MARKETING OF FDDI ADAPTER PRODUCTS BY INTERPHASE. 9.1 Cisco's OBLIGATIONS. For a period of three (3) years following the end of the Transition Period, Cisco will use its reasonable efforts to refer all sales inquiries for the FDDI Adapter Products to Interphase in accordance with the procedure described in Attachment F (Sales Referral Procedure) hereto; 9.2 INTERPHASE'S OBLIGATION. Interphase shall: (i) use its best efforts to successfully market and distribute the FDDI Adapter Products and, for A period of two (2) years following the end of the Transition Period, continue to offer for sale the FDDI Adapter Products under the same model numbers and without change, except for modifications, enhancements and bug fixes necessary for Interphase to comply with this subparagraph (i); (ii) comply with good business practices and all laws and regulations relevant to this Agreement or the subject matter hereof-, (iii) offer to sell Cisco the FDDI Adapter Products on reasonable commercial terms and keep Cisco informed of new FDDI Adapter Products manufactured and sold by or on behalf of Interphase; and (iv) use its commercially best efforts to perform any maintenance and support including, but not limited to, modifications, enhancements and bug fixes of the FDDI Adapter Products necessary for Interphase to successfully market and distribute such FDDI Adapter Products. 10. INTEROPERABILITY TESTING BY INTERPHASE. On an ongoing basis, both parties agree to make a good faith effort to cooperate in interoperability testing to be conducted by Interphase in accordance with this Section 10 (Interoperability Testing by Interphase). Interphase shall perform interoperability tests of the FDDI Adapter Products and other Cisco FDDI router, switch and concentrator products and promptly provide Cisco with the test results in accordance with the guidelines ("Interoperability Testing Guidelines") set forth in Attachment G (Interoperability Testing Guidelines). The general interoperability test guidelines specifying the types of tests and the form on which to report test results are set forth in the Interoperability Testing Guidelines. The interoperability test results and other information contained in the Interoperability Testing Guidelines will be used to verify interoperability of the FDDI Adapter Products and for no other purpose. Test results will not be used as benchmarks or to report product shortcomings or to illustrate competitive advantages or disadvantages of products from different parties. 9 10.1 TEST PRODUCTS. Cisco agrees to provide to Interphase, as a bailee, such Cisco router, switch and concentrator products with FDDI interfaces, as determined by Cisco in its sole discretion, to perform the interoperability testing in accordance with the Interoperability Testing Guidelines. All products including, without limitation, designs and materials, furnished by Cisco to Interphase under this Section 10.1 (Test Products) ("Bailed Property") shall: (i) be clearly marked or tagged as Cisco's property; (ii) be and remain personal property and not become a fixture to real property; (iii) be subject to inspection by Cisco at any time; (iv) be used only for interoperability testing among the FDDI Adapter Products; (v) be kept free of liens and encumbrances; (vi) be kept separate from other materials, tools, or property of or held by Interphase; (vii) not be modified in any manner by Interphase; and (viii) shall be stored in a safe place and environment. In the event Interphase uses the Bailed Property for any purpose other than to conduct interoperability testing as specified herein without Cisco's prior written consent, Interphase agrees to purchase such Bailed Property at Cisco's list price for such Bailed Property. Cisco shall retain all rights, title and interest in the Bailed Property, and Interphase agrees to treat and maintain the Bailed Property with at least the same degree of care as Interphase uses with respect to its own valuable equipment. Interphase shall bear all risk of loss or damage to the Bailed Property until it is returned to Cisco. Upon Cisco's request, Interphase shall promptly return and deliver all Bailed Property to Cisco in good condition, normal wear and tear excepted, without cost to Cisco (exclusive of freight costs); Cisco shall determine the manner and procedure for returning the Bailed Property and shall pay the corresponding freight costs. Interphase waives any legal or equitable right it may have to withhold the Bailed Property and Interphase agrees to execute all documents or instruments evidencing Cisco's ownership of the Bailed Property as Cisco may from time to time request. 11. OWNERSHIP. 11.1 CISCO. As between the parties, except as expressly and unambiguously licensed herein, Cisco retains ownership of and shall own all rights, title and interest (including all proprietary and intellectual property rights throughout the world) in and to the Cisco Patent, the Cisco Technology, all copies, improvements, modifications and derivative works (by whomever produced) thereof. 11.1.1 ASSIGNMENT. Interphase agrees to assign and does hereby assign to Cisco any and all rights, title and interest Interphase may acquire in and to improvements, modifications or derivative works of the Cisco Technology, subject to the restriction on Cisco's design, manufacture and sale of the Restricted Products set forth in Section 2.1.4 above. Interphase will execute any and all documents necessary to give effect to and perfect such assignment. In the event that Cisco is unable for any 10 reason whatsoever to secure Interphase's signature to any such document, Interphase hereby irrevocably designates and appoints Cisco and its duly authorized officers as its attorneys-in-fact with FULL power of substitution to act for and in behalf of and instead of Interphase to execute and file any such document and to do all other lawfully permitted acts to further the purposes of the foregoing with the same legal force and effect as if executed by Interphase. Interphase shall promptly provide Cisco with a copy of all such improvements, modifications or derivative works of the Cisco Technology, in source and object code forms, and all documentation related thereto. 11.2 INTERPHASE. As between the parties, except as expressly and unambiguously licensed herein, Interphase retains ownership of and shall own all rights, title and interest (including all proprietary and intellectual property rights throughout the world) in and to the Interphase Technology, all copies, improvements, modifications and derivative works (by whomever produced) thereof. 11.2.1 ASSIGNMENT. Cisco agrees to assign and does hereby assign to Interphase any and all rights, title and interest Cisco may acquire in and to improvements, modifications or derivative works of the Interphase Technology. Cisco will execute any and all documents necessary to give effect to and perfect such assignment. In the event that Interphase is unable for any reason whatsoever to secure Cisco's signature to any such document, Cisco hereby irrevocably designates and appoints Interphase and its duly authorized officers as its attorneys-in-fact with full power of substitution to act for and in behalf of and instead of Cisco to execute and file any such document and to do all other lawfully permitted acts to further the purposes of the foregoing with the same legal force and effect as if executed by Cisco. Cisco shall promptly provide Interphase with a copy of all such improvements, modifications or derivative works of the Interphase Technology, in source and object code forms, and all documentation related thereto. 12. WARRANTY DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED HEREIN, THE CISCO PATENT, CISCO TECHNOLOGY, AND INTERPHASE TECHNOLOGY ARE LICENSED HEREUNDER "AS IS" WITHOUT WARRANTY OF ANY KIND. EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER CISCO NOR INTERPHASE MAKES ANY WARRANTY TO THE OTHER PARTY OR ANY OTHER PERSON OR ENTITY WITH RESPECT TO ANY OF THE FOREGOING OR ANY LICENSES OR SERVICES AND EACH PARTY HEREBY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. FURTHER, CISCO DOES NOT WARRANT, GUARANTEE OR MAKE ANY REPRESENTATION REGARDING THE USE, OR THE RESULTS OF THE USE, OF THE CISCO PATENT, CISCO TECHNOLOGY OR RELATED DOCUMENTATION IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY OR OTHERWISE AND INTERPHASE DOES NOT WARRANT, GUARANTEE OR MAKE ANY REPRESENTATIONS REGARDING THE USE OR THE 11 RESULTS OF THE USE OF THE INTERPHASE TECHNOLOGY OR RELATED DOCUMENTATION IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY OR OTHERWISE. 13. SUFFICIENCY OF ASSETS AND LICENSES. Except as set forth on Schedule I (Excluded Third Party Intellectual Property Rights) hereto and as provided in Section 2.1.3 above, to Cisco's knowledge, the assets being sold pursuant to the Asset Purchase Agreement between Interphase and Cisco dated of even date herewith and the licenses being granted pursuant to this Agreement are all the intellectual property assets and rights both owned and required by Cisco prior to the date hereof to produce, market and distribute the FDDI Adapter Products. For purposes of this Agreement, any reference to "Cisco's knowledge" means Cisco's actual knowledge after reasonable inquiry of the former officer and director level employees of Crescendo Communications, Inc. who are employed by Cisco as of the date hereof. Notwithstanding anything contrary in this Agreement, the sole remedy to Interphase for Cisco's breach of this Section 13 (Sufficiency of Assets and Licenses) shall be the right to require Cisco to deliver or license any such intellectual property asset(s)and/or right(s) both owned and required by Cisco prior to the date hereof to produce, market and distribute the FDDI Adapter Products. The representation in this Section 13 (Sufficiency of Assets and Licenses) will terminate one (1) year following the Effective Date and, therefore, any claim by Interphase for a breach of such representation must be brought prior to the expiration of such one (1) year period. 14. CONFIDENTIALITY. 14.1 PROPRIETARY INFORMATION. Information of either party (the "Disclosing Party") including, without limitation, designs, layouts, mask works, design documentation, code, schematics, inventions, algorithms, know-how, trade secrets, ideas, improvements, works of authorship, derivative works, modifications, product development plans, forecasts, strategies, techniques, processes, software, contracts, customer lists and all other business, technical and financial information is the confidential property ("Proprietary Information") of the Disclosing Party. 14.2 CONFIDENTIALITY OBLIGATION. Except as expressly allowed herein, each party (the "Receiving Party") will hold in confidence and not use or disclose for five (5) years following termination of this Agreement any Proprietary Information of the Disclosing Party other than as expressly permitted under the terms of this Agreement and shall similarly bind its employees, agents, consultants and advisors in writing. The parties further agree that the terms of this Agreement are confidential and that neither party may disclose the terms of this Agreement to any third party without the prior 12 written consent of the other party, provided that Interphase has the right to disclose the existence of this Agreement to its customers. 14.3 EXCEPTIONS TO PROPRIETARY INFORMATION. Without granting any right or license, the Disclosing Party agrees that the obligations set forth in Section 14.2 (Confidentiality Obligation) above shall not apply to the extent that Proprietary Information includes information which the Receiving Party can document: (i) is or has become readily publicly available without restriction through no fault of the Receiving Party or its employees or agents; or (ii) is received without restriction from a third party lawfully in possession of such information and lawfully empowered to disclose such information; or (iii) was rightfully in the possession of the Receiving Party without restriction prior to its disclosure by the other party; or (iv) was independently developed by employees or consultants of the Receiving Party. Notwithstanding the foregoing, the Cisco Technology and any and all improvements, modifications and derivative works of the Cisco Technology produced by or on behalf of Interphase shall be deemed Proprietary Information solely of Cisco and exceptions (iii) and (iv) above will not be applicable to such improvements, modifications and derivative works of the Cisco Technology. Notwithstanding the foregoing, the Interphase Technology and any and all improvements, modifications and derivative works of the Interphase Technology produced by or on behalf of Cisco shall be deemed Proprietary Information solely of Interphase and exceptions (iii) and (iv) above will not be applicable to such improvements, modifications and derivative works of the Interphase Technology. 15. PRESS RELEASES; PUBLICITY. The parties agree to issue a joint press release relating to matters contained herein, subject to the approval of both parties, following execution of this Agreement. Each party shall obtain the other party's prior written consent, which will not be unreasonably withheld, prior to any disclosure of the existence or substance of the matters contained herein through press releases or other publicity (including, without limitation, marketing or promotional materials). 13 16. INFRINGEMENT. 16.1 INDEMNITY FROM CISCO. Subject to Section 16.1.1 (Exclusions to Cisco's Indemnity) below, Cisco shall defend, indemnify and hold Interphase and its officers, directors, employees, agents and wholly-owned subsidiaries of Interphase harmless from all liability (including reasonable attorneys' fees and costs) resulting solely from any claim, suit or proceeding relating to the alleged or actual infringement of the Cisco Technology (as such Cisco Technology exists as of the Effective Date) or an FDDI Adapter Product (excluding any and all improvements, modifications and derivative works of such FDDI Adapter Product produced by or on behalf of Interphase) whose manufacture, use, sale, offer for sale or importation would infringe a claim of the Cisco Patent of any U.S. patent issued as of the Effective Date or U.S. copyright. Cisco's obligation under this Section 16.1 (Indemnity from Cisco) shall be conditioned upon Cisco being promptly notified of any and all threats, claims and proceedings related thereto, being given reasonable assistance IN connection therewith and having sole control over the defense and all negotiations for a settlement or compromise. Cisco will not be responsible for any settlement, charges, costs or fees it does not approve in writing. 16.1.1 EXCLUSIONS TO CISCO'S INDEMNITY. Cisco shall have no liability or obligation to Interphase under Section 16.1 (Indemnity from Cisco) above if Interphase is in breach of any material obligation or provision of this Agreement or if any alleged patent or copyright infringement or claim thereof is based upon (i) any portion of the Cisco Technology made in accordance with Interphase's specifications, (ii) modifications or derivative works made by or on behalf of Interphase to the Cisco Technology, (iii) use of the Cisco Technology with other products, equipment, or software, if such infringement would have been avoided by use of the Cisco Technology alone, (iv) use of the Cisco Technology beyond the scope of the license granted in Section 2.1 (License by Cisco) above or (v) Interphase's continuing allegedly infringing activity after being notified by Cisco of modifications that would have avoided the infringement, provided that such modifications were made available to Interphase; Interphase will indemnify Cisco and its officers, directors, employees and agents from all damages, settlements, reasonable attorneys' fees and expenses related to a claim of infringement excluded from Cisco's indemnity obligation by this sentence. THE RIGHTS GRANTED TO INTERPHASE UNDER THIS SECTION 16 (INFRINGEMENT) ARE IN LIEU OF ANY WARRANTIES OF NONINFRINGEMENT, WHICH ARE HEREBY DISCLAIMED, AND SHALL BE INTERPHASE'S SOLE AND EXCLUSIVE REMEDY FOR ANY ALLEGED INFRINGEMENT BY THE CISCO TECHNOLOGY OF ANY PATENT, COPYRIGHT OR OTHER PROPRIETARY RIGHT. 14 16.2 INDEMNITY FROM INTERPHASE. Subject to Section 16.2.1 (Exclusions to Interphase's Indemnity) below, Interphase shall defend, indemnify and hold Cisco and its officers, directors, employees, agents and wholly-owned subsidiaries of Cisco harmless from all liability (including reasonable attorneys' fees and costs) resulting solely from any claim, suit or proceeding relating to the alleged or actual infringement of any improvement, modification or derivative work of the Interphase Technology produced by or on behalf of Interphase of any U.S. patent issued as of the Effective Date or U.S. copyright, provided Interphase is promptly notified of any and all threats, claims and proceedings related thereto, given reasonable assistance in connection therewith and has sole control over the defense and all negotiations for a settlement or compromise. Interphase will not be responsible for any settlement, charges, costs or fees it does not approve in writing. 16.2.1 EXCLUSIONS TO INTERPHASE'S INDEMNITY. Interphase shall have no liability or obligation to Cisco under Section 16.2 (Indemnity from Interphase) above if Cisco is in breach of any material obligation or provision of this Agreement or if any alleged patent or copyright infringement or claim thereof is based upon (i) any portion of the Interphase Technology made in accordance with Cisco's specifications, (ii) modifications or derivative works made by or on behalf of Cisco to the Interphase Technology, (iii) use of the Interphase Technology with other products, equipment, or software, if such infringement would have been avoided by use of the Interphase Technology alone, (iv) use of the Interphase Technology beyond the scope of the license granted in Section 2.2 (License by Interphase) above, or (v) Cisco's continuing allegedly infringing activity after being notified by Interphase of modifications that would have avoided the infringement, provided that such modifications were made available to Cisco; Cisco will indemnify Interphase and its officers, directors, employees and agents from all damages, settlements, reasonable attorneys' fees and expenses related to a claim of infringement excluded from Interphase's indemnity obligation by this sentence. THE RIGHTS GRANTED TO CISCO UNDER THIS SECTION 16 (INFRINGEMENT) ARE IN LIEU OF ANY WARRANTIES OF NONINFRINGEMENT, WHICH ARE HEREBY DISCLAIMED, AND SHALL BE CISCO'S SOLE AND EXCLUSIVE REMEDY FOR ANY ALLEGED INFRINGEMENT BY THE INTERPHASE TECHNOLOGY OF ANY PATENT, COPYRIGHT OR OTHER PROPRIETARY RIGHT. 17. LIMITATION OF LIABILITY. EXCEPT AS EXPRESSLY PROVIDED BELOW IN THIS SECTION 17 AND NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY WILL BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR (1) ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST DATA, (11) COST OF PROCUREMENT OF SUBSTITUTE 15 GOODS, TECHNOLOGY OR SERVICES (III) ANY MATTER BEYOND A PARTY'S REASONABLE CONTROL OR (IV) ANY AMOUNTS IN EXCESS OF FIVE HUNDRED THOUSAND DOLLARS ($500,000). THE LIMITATIONS IN THIS SECTION 17 (LIMITATION OF LIABILITY) SHALL NOT APPLY TO BREACHES OF SECTION 2.1.4 (CISCO LICENSE RESTRICTION) OR 14.2 (CONFIDENTIAL OBLIGATION) OR TO ACTIONS OF INTERPHASE BEYOND THE SCOPE OF THE LICENSE GRANTED IN SECTION 2.1 (LICENSE BY CISCO) OR ACTIONS BY CISCO BEYOND THE SCOPE OF THE LICENSE GRANTED IN SECTION 2.2 (LICENSE BY INTERPHASE). 18. TERM AND TERMINATION. 18.1 Term. This Agreement commences on the Effective Date and shall remain in effect unless and until terminated as provided herein. 18.2 TERMINATION. Upon the occurrence of any of the following events, this Agreement may be terminated for cause immediately by written notice: (a) By Interphase, if Cisco assigns or transfers its rights or obligations under this Agreement to a direct competitor of Interphase without Interphase's prior written consent; (b) By Cisco, if Interphase assigns or transfers its rights or obligations under this Agreement to a direct competitor of Cisco without Cisco's prior written consent including, without limitation, any transfer of all or substantially all of Interphase's stock, assets or business relating to the FDDI Adapter Products by sale, merger or otherwise; (c) By a party if the other ceases to do business, or otherwise terminates its business operations or by Cisco, if there is a change in control of Interphase which results in ownership by a competitor of Cisco of more than fifty percent (50%) of Interphase's assets, voting stock or business, unless such change of control is approved by Cisco in writing; (d) By a party if the other breaches any material provision of this Agreement and fails to cure such breach within thirty (30) days (immediately in the case of a breach of Section 14 (Confidentiality) of written notice describing the breach; provided, however, that if within such thirty (30) day period the party in breach has commenced all reasonable activities to cure such breach (excluding a breach of Section 14 (Confidentiality) or actions of Interphase beyond the scope of the license granted in Section 2.1 (License by Cisco) or actions by Cisco beyond the scope of the license granted in Section 2.2 (License by Interphase)) and has continued diligently 16 to cure such breach but such breach is not cured at the end of the thirty (30) day period, the non-breaching party's right of termination shall not arise until the earlier of the date the breaching party abandons its diligent efforts to cure or ninety (90) days after notice of the breach was first given; or (e) By a party if the other becomes insolvent or seeks protection under any bankruptcy, receivership, trust deed, creditors arrangement, composition or comparable proceeding, or if any such proceeding is instituted against the such party (and not dismissed within ninety (90) days). 18.3 EFFECT OF TERMINATION. 18.3.1 Upon termination of this Agreement by either party pursuant to Section 18.2 (Termination) above: (a) All licenses granted by the terminating (nondefaulting) party hereunder shall immediately terminate, except as necessary to carry out the other party's warranty and support obligations hereunder; and (b) All licenses granted to the non-defaulting party hereunder shall continue without restriction; and (c) In the event of an uncured default condition by Interphase, Interphase shall sell to Cisco, upon Cisco's election to purchase, all or any part of Interphase's inventory of the FDDI Adapter Products under the terms and conditions set forth in Attachment B (Terms and Conditions of Cisco's Purchase of FDDI Adapter Products). (d) Should this Agreement be terminated for any reason, the rights of end-users to use the Cisco Technology or the Interphase Technology licensed prior to such termination shall not be affected. 18.3.2 Upon termination of this Agreement, each party shall, within fifteen (15) days of the effective date of any termination of this Agreement, return to the other or destroy all full or partial copies, in whatever media, of all of the other party's Proprietary Information and any and all other materials in such party's possession which had been furnished to it by the other party pursuant to this Agreement. 18.4 SURVIVAL. Except as provided in Section 18.3 (Effect of Termination) above, Sections 2.1 (License by Cisco), 2.2 (License by Interphase), 3 (FDDI Adapter Product Labeling), 6 (Interphase Support Obligations), 7 (Support of FDDI Adapter Products by Cisco), 8 (Interphase Warranty Obligations), 11 (Ownership), 17 12 (Warranty Disclaimer), 14 (Confidentiality), 16 (Infringement), 17 (Limitation of Liability), 18.3 (Effect of Termination), 18.4 (Survival), 18.5 (No Liability for Termination), 18.6 (No Effect on End-Users), 20 (Export Controls), 22 (Relationship of the Parties; No Agency), 23 (Injunctive Relief) and 24 (General) will survive termination of this Agreement. Section 13 (Sufficiency of Assets and Licenses), in any event, will terminate one (1) year following the Effective Date. 18.5 NO LIABILITY FOR TERMINATION. Each party understands that the rights of termination hereunder are absolute. Neither party shall incur any liability whatsoever for any damage, loss or expenses of any kind suffered or incurred by the other (or for any compensation to the other) arising from or incident to any termination of this Agreement by such party which complies with the terms of this Agreement whether or not such party is aware of any such damage, loss or expenses. 18.6 NO EFFECT ON END-USERS. Upon an end-user acquiring an FDDI Adapter Product, the end-user shall be entitled to use any firmware or software contained in that FDDI Adapter Product pursuant to the relevant end-user documentation and end-user license agreement (if any). The rights of end-users are independent of this Agreement and will survive any termination of this Agreement for any reason whatsoever. 19. MEDIATION. Prior to commencing any lawsuit arising from a party's material breach or termination of this Agreement due to the other party's material breach, the parties shall submit the dispute to a corporate officer of each party, having actual authority to act on behalf of and bind such party under this Agreement, for resolution. If the parties are unable to resolve the dispute within ten (10) days thereafter, the parties shall then attempt in good faith to resolve it by mediation in accordance with the rules of the Judicial Arbitration and Mediation Service ("JAMS"). If mediation is unsuccessful within a reasonable time after commencement of proceedings, but not less than thirty (30) days thereafter, the mediator shall so certify and the parties shall be entitled to seek whatever remedies may be available in law or equity. Notwithstanding the foregoing, either party may seek equitable or similar relief from a court in connection with any dispute within the scope of this Section 19 (Mediation). 20. EXPORT CONTROLS. Each party agrees at its sole cost and expense to comply with all applicable export control laws, and restrictions and regulations, as they exist from time to time, including those of the United States Department of Commerce, and not to export or reexport any material provided to it under this Agreement, including the FDDI Adapter Products and any Proprietary Information of the other party, or any of the direct products of the foregoing, in violation of any such laws or regulations, or to Afghanistan, the People's Republic of China or any Group Q, S, Y or Z country (as specified in Supplement No. 1 to Section 770 of the U.S. Export 18 Administration Regulations, or any successor thereto) or otherwise except in compliance with and with all licenses and approvals required under applicable export laws and regulations. 21. ASSIGNMENT. Interphase may not assign or transfer this Agreement or the rights and obligations hereunder by operation of law, merger, acquisition or otherwise without the prior written consent of Cisco, which consent will not be unreasonably withheld except as permitted under Section 18.2(b) above. Notwithstanding the foregoing, Interphase shall have the right to assign or transfer this Agreement to a parent corporation or wholly-owned subsidiary of Interphase. 22. RELATIONSHIP OF THE PARTIES; NO AGENCY. Nothing contained herein shall be construed as creating any agency, partnership, or other form of joint enterprise between the parties. The parties' relationship will be that of independent contractors. Neither party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any other contract, agreement or undertaking with any third party. 23. INJUNCTIVE RELIEF. In the event of a breach of this Agreement, the non-breaching party shall, in addition to all other legal and equitable remedies, be entitled to seek an injunction against such breach. 24. GENERAL. 24.1 GOVERNING- LAW. Any dispute in the meaning, effect or validity of this Agreement will be resolved in accordance with the laws of the State of California and the United States of America without regard to the conflict of laws provisions thereof The parties hereby submit to the jurisdiction of, and waive any venue objections against, the United States District Court for the Northern District of California, San Jose Branch, and the Superior and Municipal Courts of the State of California, Santa Clara County, in any litigation arising out of this Agreement. The parties agree that process may be served in the manner provided herein for giving of notices or otherwise as allowed by California or federal law. 24.2 ATTORNEYS' FEES. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover reasonable costs and attorneys' fees. 24.3 SEVERABILITY. If any provision of this Agreement is held to be illegal or unenforceable, that provision will be limited or eliminated to the minimum extent necessary so that this Agreement will otherwise remain in full force and effect and enforceable. 19 24.4 ENTIRE AGREEMENT: AMENDMENT. This Agreement and all attachments hereto constitute the entire understanding of the parties with respect to the subject matter hereof and supersede all prior or contemporaneous communications, understandings and agreements with respect to the subject matter hereof, whether oral or written, and can only be modified or amended by a subsequent writing signed by both parties. 24.5 HEADINGS. All headings used in this Agreement are for convenience only and shall not be used in interpreting this Agreement. 24.6 NOTICES. All notices required under this Agreement shall be in writing and shall be deemed to be given when delivered by hand or dispatched (with reasonable evidence of receipt) by telex, telegraph or other means of electronic facsimile transmission, or twenty-four (24) hours after being dispatched by commercial overnight courier service with tracking capabilities with costs prepaid or five (5) days after deposit in the U.S. mails if mailed by certified or registered mail, postage pre-paid, return receipt requested, addressed to the party to whom the notice is intended to be given at the address specified in the opening paragraph or such other address as either party may designate by like notice. 24.7 FORCE MAJEURE. Neither party shall be liable hereunder by reason of any failure or delay in the performance of its obligations hereunder on account of strikes, shortages, riots, insurrection, fires, flood, storm, explosions, acts of God, war, governmental action, labor conditions, earthquakes or any other cause which is beyond the reasonable control of such party only for the duration of the force majeure event. 24.8 WAIVER. The failure of either party to require performance by the other party of any provision hereof shall not affect the full right to require such performance at any time thereafter, nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of the provision itself. A waiver of any portion of this Agreement must be in writing and signed by both parties. 24.9 ALLOCATION OF RISK. The sections on limitation of liability, indemnification, warranties and disclaimer of warranties allocate the risks in the Agreement between the parties. This allocation is an essential element of the basis of the bargain between the parties. 24.10 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated by the respective parties hereto and their attorneys and the language hereof shall not be construed for or against any party. 20 24.11 COUNTERPARTS. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have affixed their signatures as of the date first set forth above. CISCO SYSTEMS, INC. INTERPHASE CORPORATION By: /s/ Larry R. Carter By: R. Stephen Polley Name: Larry R. Carter Name: R. Stephen Polley Title: VP and CFO Title: Chairman, CEO and President 21 EX-23.(A) 4 EXHIBIT 23(A) 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 31, 1997 EX-27 5 EX 27
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,271 3,579 15,685 503 12,599 35,738 15,481 10,394 53,924 12,902 10,636 0 0 35,195 (4,809) 53,924 56,752 56,752 28,788 25,104 11,646 0 535 (9,491) 564 (10,055) 0 0 0 (10,055) 0 (1.99)
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