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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File
Number 0-13071
INTERPHASE CORPORATION
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(Exact name of registrant as specified in its charter)
Texas 75-1549797
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13800 Senlac, Dallas, Texas 75234
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(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 6, 2000 was approximately $132,175,000. As of
March 6, 2000, registrant had 5,827,409 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into this
annual report on Form 10-K Report: (1) Portions of the Definitive Proxy
Statement for Annual Meeting of Shareholders to be held on May 3, 2000
(Part III).
PART I
ITEM 1. BUSINESS
Introduction
Interphase Corporation and subsidiaries ("Interphase" or the
"Company") designs, develops, manufactures, markets and supports
high-performance connectivity products utilizing advanced
technologies for today's enterprise networking and storage
environments and other embedded computer applications. Interphase's
products include server-based adapter cards, network operating
system device drivers, and management software applications.
Key Terms and Definitions
Interphase is a technology company and many terms used by the
Company may be unfamiliar to those outside the industry. Following
are some key terms that may be useful in helping the reader
understand the products, technologies and markets relevant for the
Company.
Key computer hardware and software components related to Interphase
product offerings include:
Adapter - Also called a communications controller, host bus adapter
(HBA) or network interface card (NIC). An adapter is a device that
connects a computer server to one or more peripheral devices (such
as switches, hubs, storage devices, etc.) or other computers. An
adapter card typically plugs into the expansion bus on the
motherboard of the computer and communicates with the operating
system controlling the system via the use of specific device
drivers. Adapters and associated device drivers are the key product
components designed, manufactured and marketed by Interphase.
Server - A computer in a network shared by multiple users. These
are typically more powerful than computers used by individuals
(often referred to as "desktops") and require advanced I/O
connectivity. In enterprise network environments, some computers
may be dedicated to a single task. For instance, an Internet server
is a computer that provides World Wide Web services on the Internet.
If the Web server is used internally and not by the public, it may
be known as an "intranet server."
Embedded System - As related to Interphase, an embedded system is a
highly specialized computer server that resides in an "industrial"
environment requiring high-availability and maximized "up-time."
Typical uses for this type of server include military applications
such as on-board ship communications or avionics, or next-generation
telecommunication applications such as intelligent call routing,
call number portability or base station communications control for
wireless service. Interphase refers to its products for this type
of system as "embedded controllers" or "embedded system products."
Operating System - The master control program that runs the
computer. It is the first program loaded when the computer is turned
on, and its main part, called the kernel, resides in memory at all
times. It may be developed by the vendor of the computer it's
running in, or by a third party. It is an important component of
the computer system, because it sets the operational guidelines for
all application programs that run on the system. All programs must
"talk to" the operating system. Popular network operating systems
today include Windows NT, HP-UX, AIX and Linux.
Device Drivers - A program routine that links an adapter card (or
other device) to the operating system. It is written by software
engineers who understand the detailed knowledge of the adapter's
command language and characteristics, and contains the precise
machine language necessary to perform the functions requested by the
application. When a new adapter is added to the computer, its
driver must be installed in order to run it. The operating system
calls the driver, and the driver "drives" the adapter. Routines that
perform internal functions, such as memory managers and disk caches,
are also called drivers.
Core technologies used by Interphase include:
Fibre Channel - A high-speed transmission technology that can be
used as a front-end communications network, a back-end storage
network, or both at the same time. With Fibre Channel, servers can
not only talk to the storage system via SCSI (storage protocol, see
below), but the hosts can talk to each other via IP (Internet
Protocol) over the same network. Fibre Channel supports existing
peripheral interfaces and communications protocols. Its name is
somewhat misleading as Fibre Channel supports coaxial cable and
twisted pair copper wiring as well single mode and multimode fiber
connections.
ATM - (Asynchronous Transfer Mode) A network technology for both
LANs and WANs that supports realtime voice and video as well as
data. The topology uses switches that establish a logical circuit
from end to end, which guarantees a quality of service (QoS) for
that transmission. However, unlike telephone switches that dedicate
circuits end to end, unused bandwidth in ATM's circuits can be
appropriated whenever available. For example, idle bandwidth in a
videoconference circuit can be used to transfer data. ATM is also
highly scalable and supports transmission speeds of 1.5, 25, 100,
155, 622 and 2488 Mbps.
Gigabit Ethernet - An Ethernet technology that raises transmission
speed to 1 Gbps and is used primarily for backbone networks and
high-speed server-to-server connectivity.
SCSI - (Small Computer System Interface) Pronounced "skuzzy," SCSI
is a widely used communications technology for connecting computer
servers to storage devices. The technology is especially popular in
applications where network servers are attached to numerous SCSI
drives and configured as fault-tolerant RAID clusters. In the event
one drive fails the system is still operational. SCSI-based RAID is
widely used in file servers, database servers and other network
servers. Emerging Interphase products utilize Ultra2 SCSI that
provides up to 80 Mbps data throughput and Ultra3 SCSI which doubles
the throughput to 160 Mbps.
SS7 - (Signaling System 7) The protocols used in the U.S. telephone
system for setting up calls and providing modern transaction
services such as caller ID, automatic recall and call forwarding.
When you dial "1" in front of a number, SS7 routes the call to your
long distance carrier. It also routes local calls based on the first
three digits of the phone number.
Frame Relay - A high-speed packet switching protocol used in wide
area networks (WANs). Providing a granular service of up to DS3
speed (45 Mbps), it has become very popular for LAN to LAN
connections across remote distances. Frame Relay services are
offered by all the major telecommunications carriers. Frame relay is
much faster than X.25 networks, the first packet-switching WAN
standard, because frame relay was designed for today's reliable
circuits and performs less rigorous error detection.
General networking environments into which Interphase products are
placed include:
SAN - (Storage Area Network) A flexible "any-to-any" networking
infrastructure linking multiple servers to multiple storage devices.
Based on Fibre Channel technology, SANs have recently emerged as
the highest performance data communications environment available
today to interconnect servers and storage. Running at Gigabit
speeds, SANs offer better scalability, fault recovery and general
manageability than current client-server LAN-based approaches for
real-time and data intensive applications. Storage Area Networks
are being widely deployed for video editing, pre-press, and data
mining applications and throughout the general IT marketplace.
WAN - (Wide Area Network) A communications network that covers a
wide geographic area, such as state or country. A WAN typically
extends a LAN (Local Area Network, see below) outside the building,
over telephone common carrier lines to link to other LANs in remote
locations, such as branch offices or at-home workers and
telecommuters. WANs typically run over leased phone lines, but are
increasingly also employing the Internet for VPN (virtual private
network) connectivity.
LAN - (Local Area Network) A short distanced data communications
network that is contained within a building or complex. Its primary
use is to link computers and peripheral devices (such as printers)
and to provide individuals with access to databases and applications
running on servers attached to the network. Anyone connected to the
LAN can send messages to and work jointly with others on the
network.
AIN - (Advanced Intelligent Network) The primary architecture of the
public switched telephone system (PSTN) in the 1990s, which provides
enhanced voice, video and data services and dynamic routing
capabilities. It uses digital switches known as Signal Switching
Points (SSPs) that query databases in computer systems known as
Service Control Points (SCPs).
Strategy
The Company's strategy is to provide innovative, high-performance
connectivity solutions for the computer and telecommunications
server market. To achieve this strategy, Interphase intends to
pursue five key initiatives including:
Offer a full Fibre Channel and Storage Networking product portfolio.
In order to provide Interphase customers with effective storage
solutions, the Company will continue to broaden its SAN market
offerings with next-generation Fibre Channel HBAs that provide
enhanced functionality for a greater portion of the market. As part
of this initiative, Interphase will also introduce other adapter
products that provide an innovative approach for combining LAN and
storage technologies to provide functionality required by the new
generation of Internet servers.
Introduce a comprehensive line of embedded controllers for
telecommunication servers. To capitalize on the trend towards the
acquisition of I/O connectivity from third party vendors by
telecommunication server providers, Interphase will introduce a
number of new products based on PMC (PCI Mezzanine Card) and
CompactPCI architectures that provide enhanced functionality for
telecommunication applications.
Enlarge OEM account base. Over the past 25 years, Interphase has
established strong relationships with key suppliers of enterprise
computer servers. The Company will continue to grow this account
base as well as pursue new business with OEMs providing SAN
solutions and next-generation telecommunication servers.
Expand distribution channels. Interphase will intensify its efforts
to build a broad-based distribution channel that will enable cost-
effective penetration into multiple market segments through the
efforts of value added remarketers (VARs) and system integrators.
Formalize partnerships. Interphase has been a leading proponent of
open systems and multivendor interoperability. Because the
continued growth of opportunities for enterprise storage and
telecommunications servers will require multivendor solutions, the
Company intends to formalize its efforts with existing partners and
recruit additional partners within its key market segments. This
initiative also includes identifying partners through which combined
technology agreements will allow Interphase to bring new and
innovative solutions to the market.
Products
Interphase offers a comprehensive portfolio of Fibre Channel SAN
adapters (including HBA SAN management software) communications
controllers for embedded systems, traditional LAN networking
adapters, and adapters for remote access and WAN communications.
Fibre Channel SAN Products
Interphase Fibre Channel SAN products targeted for use in enterprise
applications include the following:
* 5526 PowerSAN PCI Fibre Channel Adapter - a 33Mhz PCI bus
adapter which provides single port 100 MBps Fibre Channel
connectivity
* 5527 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus
adapter which provides single port 100 MBps Fibre Channel
connectivity
* 5540 PowerSAN 2000 PCI Fibre Channel Adapter - a 66Mhz PCI bus
adapter which provides price-effective 1-Gbps storage
connectivity for basic Fibre Channel SAN connectivity
* 5550 PowerSAN 2000 PCI Fibre Channel Adapter - a 66Mhz PCI bus
adapter which provides two independent 1-Gbps Fibre Channel
connections for high-reliability SAN applications
* 5560 PowerSAN 2000 PCI Fibre Channel Adapter - a 66Mhz PCI bus
adapter which provides 2-Gbps Fibre Channel connectivity for
applications requiring maximized data throughput
* FibreView Enterprise - a JAVA-based management utility which
allows enterprise IT managers to control Fibre Channel server
connections from anywhere within the network via the Internet.
Interphase also offers products that combine leading LAN and storage
technologies onto a single adapter as part of its SAN product
offerings. These products help preserve expansion slots in the host
server by providing multiple storage and networking connections from
a single adapter.
* 5570 SlotOptimizer PCI Storage Networking Adapter - a 64-bit
PCI multifunction adapter card providing full duplex Gigabit
Fibre Channel and high-performance Gigabit Ethernet
connectivity.
* 552C SlotOptimizer PCI Storage Networking Adapter - a 64-bit
PCI multifunction adapter card combining dual channel Ultra2
SCSI connectivity with two 10/100 Ethernet ports.
* 553C SlotOptimizer PCI Storage Networking Adapter - a 64-bit
PCI multifunction adapter card combining dual channel Ultra3
SCSI connectivity with two 10/100 Ethernet ports.
Communication Controllers for Embedded Systems
Current generation Interphase products designed for use in embedded
servers include:
* 6526 CompactPCI Fibre Channel Adapter - a 3U CompactPCI
adapter which delivers full 100 MBps throughput for next
generation mass storage applications in embedded system
environments.
* 6546 CompactPCI Fibre Channel Adapter - a 6U CompactPCI adapter
that provides two embedded Fibre Channel ports and provides two
PMC sites for additional communications I/O connectivity.
* 6575 CompactPCI ATM Adapter - a 3U CompactPCI adapter that
provides full duplex ATM connectivity at OC-3 data rates for
industrial and telecommunications servers computers.
* 4575 PMC ATM Communications Controller - a PCI Mezzanine Card
that provides reliable, high performance ATM SONET OC-3 155
Mbps connectivity.
* 4535 PMC ATM over T1/E1 Communications Controller - a PCI
Mezzanine Card that provides ATM communications over high speed
T1 or E1 connections. The 4535 also provides protocol support
for SS7 and Frame Relay
* 4535 PMC Communicaitons Controller - a PCI Mezzanine Card that
provides four high-speed serial communication links to provide
connection to the Public Switch Telephone Network to support
advanced SS7 or AIN applications.
* 4531 PMC ATM over T3/E3 Communications Controller - a PCI
Mezzanine Card that provides reliable, high performance ATM
communications over T3/E3 connections for applications such as
aggregating Internet traffic for transport over the public ATM
backbone network.
LAN Networking Adapters
The Company has a comprehensive family of LAN Networking Adapters
that utilize technologies such as Ethernet, Fast Ethernet, 100VG-
AnyLAN, FDDI and ATM. Key products in the Interphase LAN
Networking Adapter family include:
* 5575 PCI ATM Adapter - A PCI adapter card that provides
full duplex ATM connectivity for systems running Windows NT,
Novell NetWare, UnixWare, Solaris and AIX.
* 5524 PCI 100Base - T Adapter - a PCI adapter card that provides
100 Mbps connectivity featuring full auto-negotiation
capabilities to select full or half duplex operation in both
100 Mbps Fast Ethernet or 10 Mbps Ethernet networking
environments.
Remote Access and WAN Communications Adapters
Interphase has an award-winning family of adapters that enable
remote access server communications in enterprise WAN environments.
A remote access server is a computer that provides access to remote
users (such as telecommuters, road warriors and branch office
locations) via analog or digital modems and ISDN connections.
Interphase remote access and WAN communications adapters provide
high-speed connections and include the protocol support necessary
for WAN communications such as SNA, X.25, Frame Relay and ISDN.
Current generation Interphase products for remote access and WAN
connectivity include:
* 5535 ENTIA-PRI Communications Controller - an PCI WAN
controller that uses an on-board CPU and memory to locally
execute all communications protocols. Providing either single
or dual port PRI or T1/E1 connectivity, this controller is a
cost-effective connectivity solution for small and medium size
enterprise networking environments.
* 5535 ENTIA-BRI Communications Controller - a PCI WAN controller
that uses an on-board CPU and memory to locally execute all
communications protocols. Featuring 4 ISDN BRI (Basic Rate
Interface) ports, this controller provides multiple BRI ports
for cost-effective branch offices communications.
* 5535 ENTIA-SR Communications Controller - a PCI WAN controller
that uses an on-board CPU and memory to locally execute all
communications protocols. The serial port on the the controller
operates as a single unchannelized data port supporting
communications at speeds between 56K and T1 (1.544 Mbps) or E1
(2.048 Mbps). This provides an excellent solution for LAN to
LAN interconnections or for branch office router
interconnections in a leased line networking environment.
* 5536 ENTIA-DM PCI Digital Modem Adapter - a PCI WAN controller
that uses an on-board CPU and memory to locally process all
communications protocols. Offering up to 60 digital modems and
simultaneous processing of both ISDN and analog (V.34 and V.90)
call traffic, this adapter is a cost-effective solution for
remote users requiring access to enterprise network
applications.
New Product Development
The markets for the Company's products are characterized by rapid
technological development, evolving industry standards, frequent new
product introductions and relatively short product life cycles. The
Company's success is substantially dependent upon its ability to
anticipate and react to these changes, maintain its technological
expertise, expand and enhance its product offerings in existing
technologies, and to develop in a timely manner new products in
emerging technologies, such as Fibre Channel-based storage area
networking, which achieve market acceptance. The Company believes
it must offer products to the market which not only meet ever-
increasing performance and quality standards, but also provide
compatibility and interoperability with products and architectures
offered by various computer and network systems vendors. The
continued utility of the Company's products can be adversely
affected by products or technologies developed by others.
The Company has been engaged in the development of new products
and the refinement of its existing products since its inception.
Interphase has been active in the formulation of industry standards
sanctioned by groups such as the IEEE and ANSI and, VME
International Trade Association (VITA), Fibre Channel Association
(FCA), Fibre Channel Community, PCI Industrial Manufacturers Group
(PICMG), Project UDI, Fast Ethernet Alliance, SCSI Committee, the
LADDIS Group, ONC/NFS Consortium, University of New Hampshire FDDI
Interoperability Lab, FC-Open (Fibre Channel) Consortium, and ANTC
Consortium for FDDI interoperability testing.
Marketing and Customers
The Company's standard products are sold to OEM's for inclusion in
scientific, industrial, medical, engineering workstations, printing,
mini-supercomputer, graphics and other computer applications. These
purchasers incorporate the Company's products in proprietary systems
for resale to distributors, system integrators and VAR's (which may
add specially designed software) prior to resale to end-users.
Also, the Company sells products directly to sophisticated end-users
such as large corporations, universities and scientific research
organizations. During 1999, sales to Hewlett Packard accounted for
$36,869,000 or 50% of consolidated revenues, and was the only
customer accounting for more than 10% of consolidated revenues. In
December 1999, after a request-for-quote procedure, Hewlett Packard
notified the Company that it had not been chosen to provide a 33 Mhz
Fibre Channel adapter to Hewlett Packard. The adapter will
partially replace the Interphase product that accounted for
substantial sales to Hewlett Packard in 1999. Nevertheless, The
Company believes that its relationship with Hewlett Packard will
continue to expand in 2000. During 1998, sales to Hewlett Packard
accounted for $28,349,000 or 41% of consolidated revenues, and was
the only customer accounting for more than 10% of consolidated
revenues. During 1997, sales to Hewlett Packard accounted for
$26,402,000 or 40% of consolidated revenues, and was the only
customer accounting for more than 10% of consolidated revenues.
The Company markets its products through its own sales organization
and, to a lesser extent, through a network of independent sales
representatives. In addition to the Company's headquarters in
Dallas, Texas, the Company has sales offices located in or near
Santa Clara, California; Boston, Massachusetts; Phoenix, Arizona;
Minneapolis, Minnesota; London, England; and Paris, France. The
Company's sales personnel market products directly to key customers
as well as support the sales representative network. In addition,
the Company has entered into distribution agreements with key
national and international distribution partners, including Tech
Data, Anixter, Fuji-Xerox, Gates/Arrow and Westcon.
Interphase emphasizes its extensive product support, training and
field support to its customers. The Company's products are
generally sold with a one to three-year warranty covering components
and labor. After the expiration of the warranty period, the Company
generally provides support services for a stated flat fee.
The Company and its customers generally enter into written
agreements specifying, among other items standard in commercial
agreements, product specifications, failure rates, shipping
requirements, shipment rescheduling terms, price/volume schedules
and manufacturer warranties. Substantially all of these agreements
do not contain determinable purchase commitments of the customers,
providing instead that actual purchase and shipments of products be
made by specific purchase order. Accordingly, any shipment dates
stated in such contracts are subject to rescheduling and/or
cancellation, and therefore are not indicative of the future
purchase orders to be submitted by such customer. In addition, the
actual terms of the contracts tend to be modified in the ordinary
course of business by means of subsequent purchase order terms and
by course of dealing.
The Company does not believe that the level of backlog of orders is
either material or indicative of future results, since its contracts
are subject to revision through subsequent purchase orders and its
customers are generally permitted to cancel purchase orders, within
certain parameters, prior to shipment without penalty.
The majority of the Company's sales are to OEMs with payment terms
typically being net 30-45 days from date of invoice.
Manufacturing and Supplies
Manufacturing operations are currently conducted at the Company's
headquarters in Dallas, Texas. The Company's products consist
primarily of various integrated circuits, other electronic
components and firmware assembled onto an internally designed
printed circuit board.
The Company uses internally designed, applications specific
integrated circuits ("ASIC"), some of which are sole-sourced, on
some of its products as well as standard off-the shelf items
presently available from two or more suppliers. Historically the
Company has not experienced any significant problems in maintaining
an adequate supply of these parts sufficient to satisfy customer
demand, 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 finished goods inventories.
Intellectual Property and Patents
While the Company believes that its success is ultimately dependent
upon the innovative skills of its personnel and its ability to
anticipate technological changes, its ability to compete
successfully will depend, in part, upon its ability to protect
proprietary technology contained in its products. The Company does
not currently hold any patents relative to its current product
lines. Instead, the Company relies upon a combination of trade
secret, copyright and trademark laws and contractual restrictions to
establish and protect proprietary rights in its products. The
development of alternative, proprietary and other technologies by
third parties could adversely affect the competitiveness of the
Company's products. Further, the laws of some countries do not
provide the same degree of protection of the Company's proprietary
information as do the laws of the United States. Finally, the
Company's adherence to industry-wide technical standards and
specifications may limit the Company's opportunities to provide
proprietary product features capable of protection.
The Company is also subject to the risk of litigation alleging
infringement of third party intellectual property rights.
Infringement claims could require the Company to expend significant
time and money in litigation, pay damages, develop 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, 1999, the Company had 222 full-time employees, of
which 75 were engaged in manufacturing and quality assurance, 68 in
research and development, 46 in sales, sales support, service and
marketing and 33 in general management and administration.
The Company's success to date has been significantly dependent on
the contributions of a number of its key technical and management
employees. The Company does not maintain life insurance policies on
its key employees and does not have employment agreements with key
employees except for a few executive officers. The loss of the
services of one or more of these key employees could have a material
adverse effect on the Company. In addition, the Company believes
that its future success will depend in large part upon its ability
to attract and retain highly skilled and motivated technical,
managerial, sales and marketing personnel. Competition for such
personnel is intense.
None of the Company's employees are covered by a collective
bargaining agreement and there have been no work stoppages.
Additionally, the Company considers its relationship with its
employees to be good.
Competition
The computer network industry is intensely competitive and is
significantly affected by product introductions and market
activities of industry participants. The Company expects
substantial competition to continue. The Company's competition
includes vendors specifically dedicated to the mass storage
controller and computer network product markets. Traditionally the
Company's major OEM customers have chosen not to manufacture
adapters for their products or do not manufacture sufficient
quantities or types of controllers to meet their needs. Increased
competition could result in price reductions, reduced margins and
loss of market share.
ITEM 2. PROPERTIES.
The Company leases a 96,000-square foot facility located in Farmers
Branch, Texas, a suburb of Dallas. The facility includes
approximately $2.9 million in leasehold improvements that were made
by the Company. The lease, inclusive of renewal options, extends
through 2002. In addition the Company leases a facility in
Chaville, France (near Paris) which supports the European markets.
The Company believes that its facilities and equipment are in good
operating condition and are adequate for its operations. The
Company owns most of the equipment used in its operations. Such
equipment consists primarily of engineering equipment, manufacturing
and test equipment, and fixtures.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
Since January 1984 shares of the Company's common stock have been
traded on The Nasdaq Stock Exchange under the symbol INPH. The
following table summarizes its high and low price for each quarter
during 1999 and 1998 as reported by Nasdaq.
Fiscal 1999 High Low
----------- ------ ------
First Quarter 9.063 6.125
Second Quarter 23.000 6.500
Third Quarter 34.375 15.938
Fourth Quarter 44.750 17.250
Fiscal 1998 High Low
----------- ------ ------
First Quarter 8.813 6.063
Second Quarter 9.500 6.500
Third Quarter 8.000 5.000
Fourth Quarter 8.688 5.250
The Company had approximately 6500 beneficial owners of its common
stock, of which 67 are of record as of March 6, 2000.
The Company has not paid dividends on its common stock since its
inception. The Board of Directors does not anticipate payment of
any dividends in the foreseeable future and intends to continue its
present policy of retaining earnings for reinvestment in the
operations of the Company.
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data:
(In Thousands, except per share data)
Two Twelve
months months
ended ended
Twelve months ended December 31, Dec. 31, Oct. 31,
1999 1998 1997 1996 1995 1995
--------------------------------------- ------ ------
Revenues $73,502 $68,690 $ 66,004 $ 56,752 $ 3,379 $47,368
----------------------------------------------------------------
Gross Profit 34,702 33,598 32,016 27,964 1,224 23,547
----------------------------------------------------------------
Research and development 10,590 10,766 13,327 9,902 1,360 7,327
Sales and marketing 11,036 10,060 11,686 10,297 1,173 8,583
General and administrative 5,366 5,417 6,248 4,905 634 4,004
Special charges - - - 11,646 - -
----------------------------------------------------------------
Operating income (loss) 7,710 7,355 755 (8,786) (1,943) 3,633
----------------------------------------------------------------
Other, net (1,030) (1,583) (1,525) (705) 94 589
Income (loss) from continuing
operations before income tax 6,680 5,772 (770) (9,491) (1,849) 4,222
----------------------------------------------------------------
Income (loss) from continuing
operations 4,291 3,542 (971) (10,055) (1,167) 2,759
----------------------------------------------------------------
Discontinued operations, net (867) (829) - - - -
----------------------------------------------------------------
Net income (loss) $3,424 $2,713 $(971) $(10,055) $(1,167) $2,759
----------------------------------------------------------------
Net income (loss) from
continuing operations per share
Basic $ 0.77 $ 0.64 $ (0.18) $ (1.99) $ (0.25) $ 0.60
Diluted $0.70 $ 0.63 $ (0.18) $ (1.99) $ (0.25) $ 0.55
Net income (loss) per share
Basic $ 0.61 $ 0.49 $ (0.18) $ (1.99) $ (0.25) $ 0.60
Diluted $0.56 $ 0.48 $ (0.18) $ (1.99) $ (0.25) $ 0.55
Weighted average common shares 5,593 5,508 5,496 5,062 4,663 4,561
Weighted average common
& common equivalent shares 6,113 5,628 5,496 5,062 4,663 5,051
December 31, October 31,
Balance Sheet Data: 1999 1998 1997 1996 1995 1995
------------------------------------------------- -------
Working capital $ 35,314 $ 26,314 $ 25,244 $ 22,836 $ 23,141 $ 24,328
Total assets 54,671 50,288 49,447 53,924 33,624 35,430
Total liabilities 14,536 18,463 19,904 23,538 4,363 5,019
Redeemable common stock 2,796 3,813 - - - -
Shareholders' equity 37,339 28,012 29,543 30,386 29,261 30,411
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated Statement of Operations Percentage of Revenues
Year ended December 31,
1999 1998 1997
--------------------------------
Revenues 100.0 % 100.0 % 100.0 %
Cost of sales 52.8 % 51.1 % 51.5 %
--------------------------------
Gross profit 47.2 % 48.9 % 48.5 %
Research and development 14.4 % 15.7 % 20.2 %
Sales and marketing 15.0 % 14.6 % 17.7 %
General and administrative 7.3 % 7.9 % 9.5 %
--------------------------------
Operating income 10.5 % 10.7 % 1.1 %
--------------------------------
Interest income 0.6 % 0.5 % 0.7 %
Interest expense (0.9)% (1.5)% (1.7)%
Other, net (1.1)% (1.3)% (1.3)%
--------------------------------
Income (loss) from continuing
operations before income taxes 9.1 % 8.4 % (1.2)%
Provision for income taxes 3.3 % 3.2 % 0.3 %
--------------------------------
Income (loss) from continuing 5.8 % 5.2 % (1.5)%
operations
Discontinued operations (1.2)% (1.2)% -
--------------------------------
Net income (loss) 4.6 % 4.0 % (1.5)%
================================
RESULTS OF OPERATIONS
As of September 1999, the Company completed the sale of its Voice
over Internet Protocol ("VOIP") business; accordingly the Company's
consolidated financial statements and notes for all periods
presented reflect the VOIP business as a discontinued operation.
Revenues: Total revenues for the years ended December 31, 1999,
1998 and 1997 were $73.5 million, $68.7 million and $66.0 million,
respectively.
The growth in revenues from 1998 to 1999 was 7%. The increase in
revenue was attributable to growth in the Company's Storage and
Embedded product lines, partially offset by a decline in LAN and WAN
products. In 1999, Storage revenues, which consist of Fibre Channel
and SCSI technologies accounted for approximately 48% of total
revenues, LAN revenues which consist of FDDI, Fast Ethernet, ATM and
Ethernet, accounted for 36% of total revenues, WAN accounted for 7%
of total revenues and Embedded accounted for 9% of total revenues.
North American revenues grew 14%, Pacific Rim revenues grew 78%, and
European revenues declined 26% compared to 1998. In 1999, sales to
one OEM customer accounted for approximately 50% of the Company's
revenue.
The growth in revenues from 1997 to 1998 was 4%. The increase in
revenue was attributable to growth in the Company's Storage and
Embedded product lines, partially offset by a decline in LAN and WAN
products. In 1998, Storage revenues, which consist of Fibre Channel
and SCSI technologies accounted for approximately 25% of total
revenues, LAN revenues which consist of FDDI, Fast Ethernet, ATM and
Ethernet, accounted for 62% of total revenues, WAN accounted for 10%
of total revenues and Embedded accounted for 3% of total revenues.
North American revenues grew 1%, Pacific Rim revenues declined 31%,
and European revenues grew 27% compared to 1997. In 1998, sales to
one OEM customer accounted for approximately 41% of the Company's
revenue.
Cost of Sales: Cost of sales expressed as a percentage of revenues
were approximately 53% for the year ended December 31, 1999, 51%
for the year ended December 31, 1998 and 52% for the year ended
December 31, 1997. In 2000, cost of sales is expected to remain
consistent with prior years.
Research and Development: The Company's investment in the
development of new products through research and development was
$10,590,000, $10,766,000 and $13,327,000 in 1999, 1998, and 1997,
respectively. As a percentage of revenue, research and development
expenses were 14%, 16% and 20% for 1999, 1998 and 1997,
respectively. In 2000, research and development expenses are
expected to remain consistent with 1999.
Sales and Marketing: Sales and marketing expenses were $11,036,000,
$10,060,000 and $11,686,000 in 1999, 1998 and 1997, respectively. As
a percentage of revenue, sales and marketing expenses were 15%, 15%
and 18% for 1999, 1998 and 1997, respectively. In 2000, sales and
marketing expenses are expected to remain consistent with 1999.
General and Administrative: General and administrative expenses
were $5,366,000, $5,417,000 and $6,248,000 in 1999, 1998 and 1997,
respectively. As a percentage of revenue, general and administrative
expenses were 7%, 8% and 10% for 1999, 1998 and 1997, respectively.
In 2000, general and administrative expenses are expected to remain
consistent with 1999.
Interest Income: Interest income was $481,000, $338,000 and
$438,000 in 1999, 1998 and 1997, respectively. The change in
interest income from year to year is a reflection of the increase
and decrease in the funds available for investment.
Interest Expense: Interest expense was $694,000, $1,025,000 and
$1,126,000 in 1999, 1998 and 1997, respectively. The decrease in
interest expense is due to the pay-down of the Company's credit
facility.
Other Expense: Other expense was $817,000, $896,000 and $837,000
in 1999, 1998 and 1997, respectively. Other expense primarily
reflects the amortization of goodwill and acquired developed
technologies related to the 1996 Synaptel acquisition.
Provision for Income Taxes: The Company's provision for taxes was
$2,389,000, $2,230,000, and $201,000 in 1999, 1998 and 1997,
respectively. The Company experienced a net loss before taxes in
1997; however, due to the effects of non-deductible goodwill and
state income taxes, the Company had a tax provision of $201,000.
The effective income tax rates were 36% in 1999 and 39% in 1998.
The decrease in the effective income tax rate was primarily due to
utilization of tax loss carry forwards from its Synaptel subsidiary.
Discontinued Operations: In September 19999 the Company completed
the sale of its VOIP business. Gain on disposal of assets was
$326,000 net of tax in 1999. Operating losses, net of tax for the
VOIP business were $1,193,000 and $829,000 for 1999 and 1998
respectively. Due to the uncertainty of payment on the remaining
proceeds, the Company will recognize income as payment is received.
In January 2000, the $830,000 note receivable was collected. This
amount will be recorded as income during the first quarter.
Net Income (Loss): The Company reported net income of $3,424,000 in
1999 and $2,713,000 in 1998, and a net loss of $971,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities
aggregated $16,276,000, $7,961,000 and $5,519,000 at December 31,
1999, 1998 and 1997, respectively. The growth in cash, cash
equivalents and marketable securities from 1998 to 1999 is primarily
attributable to cash generated by the Company's operations and
proceeds received from the exercise of stock options. Expenditures
for equipment and purchased software were $2,003,000, $2,892,000 and
$1,150,000 in 1999, 1998 and 1997, respectively. At December 31,
1999, the Company had no material commitments to purchase capital
assets. The Company's significant long-term obligations are its
operating lease on its Dallas facility, future debt payments and buy
back of Interphase Common Stock from Motorola. In 1996, the Company
entered into a $16,000,000 credit facility with a financial
institution. This credit facility includes an $8,500,000 term loan,
a $2,500,000 equipment loan and a $5,000,000 revolving credit
facility. The term and equipment loans are due in quarterly
installments, and expire in November 2001. The revolving credit
facility expires in June 2001. In 2000, maturities of this credit
facility will be approximately $2,192,000. The Company has not paid
any dividends since its inception and does not anticipate paying any
dividends in 2000.
Effective October 1998, the Company approved a stock repurchase
agreement with Motorola, Inc. to purchase ratably from October 1998
to July 2002, all of the shares owned by Motorola for $4,125,000.
Under the terms of the agreement Motorola retains the right as an
equity owner and has assigned its voting rights to the Company. The
Company plans to cancel the stock upon each repurchase. Prior to
the repurchase agreement Motorola owned approximately 12% of the
Company's outstanding common stock. The future scheduled payments
are classified as redeemable common stock in the accompanying
consolidated balance sheet. As of December 31, 1999, 212,668 shares
have been purchased for $1,329,175 and retired; 447,332 shares
remain to be purchased.
The Company expects that its cash, cash equivalents, marketable
securities and proceeds from its credit facility will be adequate to
meet foreseeable needs for the next 12 months.
Year 2000
The Company, its suppliers and customers did not experience any
significant malfunctions or errors in their operations or business
systems as a result of the Y2K issue.
The products that the Company sells are Y2K compliant. The
Company's internal reporting system has been replaced with a Y2K
compliant Enterprise Reporting Planning (ERP) system. Direct
expenditures were approximately $900,000. The Company funded these
expenditures through its normal operating budget, and as required by
generally accepted accounting principles, these costs were expensed
as incurred, excluding the capitalization of application software.
The capitalization for software was approximately $367,000.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes new standards of accounting and
reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the
balance sheet, and the corresponding gains or losses be reported
either in the statement of operations or as a component of
comprehensive income, depending on the type of hedge relationship
that exists. SFAS 133 will be effective for fiscal years beginning
after June 15, 2000. We do not expect SFAS 133 to have a material
effect on our financial position or results of operations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
which may adversely affect its financial position, results of
operations and cash flows. In seeking to minimize the risks from
interest rate fluctuations, the Company manages exposures through it
regular operating and financing activities. The Company does not
use financial instruments for trading or other speculative purposes
and is not party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
borrowing activities, which are described in the "Long-Term Debt"
Notes to the Consolidated Financial Statements, which are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 (a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
See information regarding the directors and nominees for director
under the heading "Election of Directors" of the Proxy Statement for
the Annual Meeting of Shareholders to be held May 3, 2000, which is
incorporated herein by reference.
Executive Officers
As of March 6, 2000, the executive officers of the Company, their
respective ages, positions held and tenure as officers are listed
below:
Executive
Officers of
the Company
Name Age Position(s) Held with the Company Since
----------------- --- --------------------------------- -----
R. Stephen Polley 49 Chairman 1993
Gregory B. Kalush 43 Chief Executive Officer, 1998
and President
Steven P. Kovac 44 Chief Financial Officer 1999
Vice President of Finance
and Treasurer
R. Stephen Polley joined the Company as President and Chief
Operating Officer and was elected a director by the Board of
Directors in November 1993. In June 1994, Mr. Polley was named
Chief Executive Officer of the Company and appointed Chairman of the
Board of Directors. In March 1999, Mr. Polley resigned all officer
positions, to become Chief Executive Officer and President of
Cozone.com, a division of CompUSA, Inc., but remained Chairman of
the Board. Mr. Polley is not seeking reelection to the Board of
Directors in 2000. In June 1998, Mr. Polley was appointed a
director of ObjectSpace. ObjectSpace is a provider of distributed
computing solutions built on 100% Pure Java(tm). From August 1992
to February 1993, Mr. Polley acted as a consultant in strategic and
management matters and as a director for Computer Automation, Inc.
Computer Automation provided various products and services for use
in facsimile management systems, minicomputers and microcomputers.
From 1987 to April 1992, Mr. Polley served as President, Chief
Executive Officer and a director of Intellicall, Inc., a diversified
supplier of telecommunications products and services including
private pay telephones and microprocessor-based automated operator
systems.
Gregory B. Kalush joined the Company in February 1998, as Chief
Financial Officer, Vice President of Finance and Treasurer. In
March 1999, Mr. Kalush was appointed Chief Executive Officer,
President, and Director of the Company. Prior to joining
Interphase, Mr. Kalush was with DSC Communications Corporation from
1995 to 1997. While at DSC he served as Vice President Transmission
Data Services, Vice President of Operations, International Access
Products and Group Vice President of Finance, Transport Systems
Group. Prior to DSC, Mr. Kalush was with IBM Corporation from 1978
to 1994. During that time his positions included Chief Financial
Officer and Operations Executive for the Skill Dynamics Unit,
Director of Finance, Planning and Administration for the southwest
area, and Division Director of Finance and Operations for the Data
Systems division.
Steven P. Kovac joined the Company in 1999 as Chief Financial
Officer, Vice President of Finance and Treasurer. Prior to
Interphase, From 1997 to 1999 Mr. Kovac served as Chief Operating
Officer and Chief Financial Officer for TPN Inc. a satellite
television network. From 1989 to 1997 Mr. Kovac was the Regional
Vice President of Finance and Chief Financial Officer for AT&T
Wireless Services, McCaw Cellular Communications and LIN Cellular
Communications. From 1988 to 1989 Mr. Kovac was Vice President of
Finance and Administration for BBL Industries, which manufactures
paging terminals and voice messaging equipment. Mr. Kovac is a
member of the Board of Directors for Integrated Systems Corporation,
a reseller of DSL and satellite ISP, located in Denver Colorado.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May
3, 2000, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May
3, 2000, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May
3, 2000, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) (i) and (ii) Financial Statements and Schedules.
Reference is made to the listing on page F-1 of all financial
statements and schedules filed as a part of this report.
(iii) Exhibits.
Reference is made to the Index to Exhibits on page E-1 for a list of
all exhibits filed during the period covered by this report.
(b) Reports on Form 8-K.
The Registrant has filed no Reports on Form 8-K during the quarter
ended December 31, 1999.
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 29, 2000 By: /s/ Gregory B. Kalush
---------------------
Gregory B. Kalush
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 29, 2000.
Name Title
/s/ R. Stephen Polley Chairman of the Board and
---------------------------------- Director
R. Stephen Polley
/s/ Gregory B. Kalush Chief Executive Officer and
---------------------------------- President
Gregory B. Kalush (Principal executive officer)
/s/ Steven P. Kovac Chief Financial Officer,
---------------------------------- Treasurer
Steven P. Kovac Vice President of Finance
(Principal financial officer)
/s/ James F. Halpin Director
----------------------------------
James F. Halpin
/s/ Paul N. Hug Director
----------------------------------
Paul N. Hug
/s/ David H. Segrest Director
----------------------------------
David H. Segrest
/s/ S. Thomas Thawley Director
----------------------------------
S. Thomas Thawley
/s/ William R. Voss Director
----------------------------------
William R. Voss
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) Amendment to Articles of Incorporation of the registrant. (10)
3 (c) Amended and Restated Bylaws of the registrant adopted on
December 5, 1995. (6)
10 (a) Registrant's Amended and Restated Stock Option Plan and
Amendment No. 1 and 2 thereto. (9)
10 (b) Registrant's Amended and Restated Stock Option Plan Amendment
No. 4. (10)
10 (c) Registrant's Incentive Stock Option Sub-Plan. (3)
10 (d) Stock Purchase Warrant issued to Motorola, Inc. (4)
10 (e) Lease on Dallas facility. (5)
10 (f) Directors Stock Option Plan and Amendment No. 1 thereto. (6)
10 (g) Directors Stock Option Plan Amendment No. 2 (10)
10 (h) Loan Agreement between Interphase Corporation and BankOne
Texas, N.A. (8)
10 (i) Purchase Agreement between Interphase Corporation and Cisco
Systems Inc. (9)
10 (j) Motorola Stock Repurchase Agreement (2)
23 (a) Consent of Independent Public Accountants. (10)
27 Financial Data Schedule. (10)
_____________________
(1) Filed as an exhibit to Registration Statement No. 2-86523 on
Form S-1 and incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 8-K on October 15, 1998,
and incorporated herein by reference.
(3) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1988 and incorporated herein by reference.
(4) Filed as an exhibit to Report on Form 10-Q for the quarter ended
April 30, 1989 and incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to Report on Form 8-K on August 6, 1996, and
incorporated herein by reference.
(8) Filed as an exhibit to Report on Form 8-KA on October 4, 1996 and
incorporated herein by reference.
(9) Filed as an exhibit to Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
(10) Filed herein.
E-1
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Management's Report on Financial Responsibility F-2
Report of Independent Public Accountants -
ARTHUR ANDERSEN LLP F-3
Consolidated Balance Sheets - December 31, 1999 and 1998 F-4
Consolidated Statements of Operations - Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8 to F-21
F-1
MANAGEMENT'S REPORT ON FINANCIAL RESPONSIBILITY
Management is responsible for the preparation and fairness of the
consolidated financial statements of Interphase Corporation and all
other information contained in this annual report. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and reflect informed judgments
and estimates, which management believes to be reasonable.
The Company maintains an effective system of internal accounting
controls, which are modified periodically as the Company's operations
change. Additionally, the Company is receptive to suggestions made by
Arthur Andersen LLP, its independent public accountants, regarding
enhancements and changes to the Company's existing internal accounting
controls. Overall, management believes that its system of internal
accounting controls is adequate to provide reasonable assurance as to
the integrity and reliability of its financial statements, and the
safeguarding of assets.
The Board of Directors, acting through its Audit Committee, monitors
the accounting affairs of the Company and has approved the accompanying
consolidated financial statements. The Audit Committee, consisting of
three directors, reviews the results of the annual financial statement
audit, and the actions taken by management in discharging its
responsibilities for accounting and financial reporting. The Audit
Committee meets periodically and privately with management and the
independent public accountants to assure that each is carrying out its
responsibilities.
Gregory B. Kalush
Chief Executive Officer and President
February 9, 2000
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Interphase Corporation:
We have audited the accompanying consolidated balance sheets of
Interphase Corporation (a Texas corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 9, 2000
F-3
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares data)
December 31,
ASSETS 1999 1998
------ ----------------------
Cash and cash equivalents $ 10,988 $ 4,531
Marketable securities 5,288 3,430
Trade accounts receivable, less allowances
for uncollectible accounts of $260 and
$164 respectively 14,005 13,716
Inventories, net 11,678 13,488
Prepaid expenses and other current assets 1,383 856
Deferred income taxes, net 774 516
---------------------
Total current assets 44,116 36,537
---------------------
Machinery and equipment 9,149 10,135
Leasehold improvements 2,907 2,909
Furniture and fixtures 475 515
---------------------
12,531 13,559
---------------------
Less-accumulated depreciation (10,334) (10,339)
---------------------
Total property and equipment, net 2,197 3,220
---------------------
Capitalized software, net 684 773
Deferred income taxes, net 1,458 1,376
Acquired developed technology, net 2,280 3,365
Goodwill, net 2,830 3,070
Other assets 1,106 1,947
---------------------
Total assets $ 54,671 $ 50,288
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities
Accounts payable $ 2,129 $ 2,883
Accrued liabilities 1,586 1,639
Accrued compensation 2,131 2,041
Income taxes payable 754 1,408
Current portion of debt 2,202 2,252
---------------------
Total current liabilities 8,802 10,223
Other liabilities 570 873
Long-term debt, net of current portion 5,164 7,367
---------------------
Total liabilities 14,536 18,463
Commitments and contingencies
Common stock redeemable; 447,332
and 610,000 shares respective 2,796 3,813
Shareholders' Equity
Common stock, no par value; 100,000,000 36,537 31,221
shares authorized; 5,391,296 and 4,861,858
shares issued and outstanding, respectively
Retained earnings (deficit) 207 (3,217)
Cumulative other comprehensive income 595 8
---------------------
Total shareholders' equity 37,339 28,012
---------------------
Total liabilities and shareholders' equity $ 54,671 $ 50,288
=====================
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended December 31,
---------------------------------
1999 1998 1997
---------------------------------
Revenues $ 73,502 $ 68,690 $ 66,004
Cost of sales 38,800 35,092 33,988
---------------------------------
Gross profit 34,702 33,598 32,016
---------------------------------
Research and development 10,590 10,766 13,327
Sales and marketing 11,036 10,060 11,686
General and administrative 5,366 5,417 6,248
---------------------------------
Total operating expenses 26,992 26,243 31,261
---------------------------------
Operating income 7,710 7,355 755
Interest income 481 338 438
Interest expense (694) (1,025) (1,126)
Other, net (817) (896) (837)
---------------------------------
Income (loss) from continuing
operations before income taxes 6,680 5,772 (770)
Provision for income taxes 2,389 2,230 201
---------------------------------
Income (loss) from continuing
operations 4,291 3,542 (971)
Discontinued operations (Note 4)
Gain on disposal of VOIP business,
net of tax 326 - -
Operating losses from VOIP
business, net of tax (1,193) (829) -
---------------------------------
Net income (loss) $ 3,424 $ 2,713 $ (971)
=================================
Income (loss) from continuing
operations per share
Basic $ 0.77 $ 0.64 $ (0.18)
---------------------------------
Diluted $ 0.70 $ 0.63 $ (0.18)
---------------------------------
Net income (loss) per share
Basic $ 0.61 $ 0.49 $ (0.18)
---------------------------------
Diluted $ 0.56 $ 0.48 $ (0.18)
---------------------------------
Weighted average common shares 5,593 5,508 5,496
---------------------------------
Weighted average common and
common equivalent shares 6,113 5,628 5,496
---------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Cumulative
Retained Other
Common Stock Earnings Comprehensive Comprehensive
Shares Amount (Deficit) Income Total Income (loss)
------------------------------------------------ ---------
Balance at December 31, 1996 5,492 $ 35,195 $ (4,959) $ 150 $ 30,386
Option exercises, including
related tax benefit 24 131 - - 131 $ -
Comprehensive income (loss):
Foreign currency translation - - - 14 14 14
Unrealized holding period loss - - - (17) (17) (17)
Net loss - - (971) - (971) (971)
--------
Total comprehensive income (loss) - - - - - $ (974)
------------------------------------------------ --------
Balance at December 31, 1997 5,516 35,326 (5,930) 147 29,543
------------------------------------------------
Option exercises, including
related tax benefit 6 20 - - 20 $ -
Redeemable common stock (660) (4,125) - - (4,125) -
Comprehensive income:
Foreign currency translation - - - (205) (205) (205)
Unrealized holding period gain - - - 66 66 66
Net income - - 2,713 - 2,713 2,713
--------
Total comprehensive income - - - - - $ 2,574
------------------------------------------------ --------
Balance at December 31, 1998 4,862 $ 31,221 $ (3,217) $ 8 $ 28,012
------------------------------------------------
Option exercises 529 3,816 - - 3,816 $ -
Tax benefit from option exercises - 1,500 - - 1,500 -
Comprehensive income:
Foreign currency translation - - - (105) (105) (105)
Unrealized holding period gain,
net of - - - 692 692 692
Net income - - 3,424 - 3,424 3,424
--------
Total comprehensive income - - - - - $ 4,011
------------------------------------------------ --------
Balance at December 31, 1999 5,391 $ 36,537 $ 207 $ 595 $ 37,339
------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-6
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
--------------------------------
1999 1998 1997
--------------------------------
Cash flows from operating activities:
Net income (loss) from continuing operations $ 4,291 $ 3,542 $ (971)
Operating loss from discontinued operations (1,193) (829) -
Gain on disposal of discontinued operations 326 - -
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,640 4,013 4,739
Deferred income taxes (340) (344) (270)
Tax benefit from stock option exercices 1,500 - -
Changes in assets and liabilities-
Trade accounts receivable (289) (686) 2,152
Inventories 1,810 1,407 (2,296)
Prepaid expenses and other current assets (527) (58) 423
Accounts payable and accrued liabilities (787) (643) (2,081)
Accrued compensation 90 131 (1,052)
Income taxes payable (654) 1,211 104
--------------------------------
Net adjustments 3,576 4,202 1,719
--------------------------------
Net cash provided by operating activities 7,867 7,744 748
--------------------------------
Cash flows from investing activities:
Additions to property, equipment, capitalized
software and leasehold improvements (2,003) (2,892) (1,150)
Decrease in other assets 1,021 206 373
Cash received in sale of VOIP 600 - -
(Increase) decrease in marketable securities (1,858) (158) 307
--------------------------------
Net cash used by investing activities (2,240) (2,844) (470)
--------------------------------
Cash flows from financing activities:
Decrease in other long-term liabilities (303) 273 (592)
Payments on debt (2,253) (2,458) (2,338)
Proceeds from debt - - 2,500
Change in comprehensive income 587 (139) (3)
Purchase of redeemable common stock (1,017) (312) -
Proceeds from the exercise of stock options 3,816 20 131
--------------------------------
Net cash provided (used) by financing activities 830 (2,616) (302)
--------------------------------
Net increase (decrease) in cash and cash equivalents 6,457 2,284 (24)
Cash and cash equivalents at beginning of year 4,531 2,247 2,271
--------------------------------
Cash and cash equivalents at end of year $ 10,988 $ 4,531 $ 2,247
================================
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 698 $ 953 $ 996
Taxes refunded - - 27
Taxes paid 1,703 891 389
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.
The Company completed the sale of its VOIP business as of September 30,
1999. Accordingly, the Company's consolidated financial statements and
notes for all periods presented reflect the VOIP business as a
discontinued operation. See further discussion of sale in Note 4.
Cash and Cash Equivalents: The Company considers cash and temporary
investments with original maturities of less than three months, as well
as interest bearing money market accounts, to be cash equivalents.
Marketable Securities: As of December 31, 1999 and 1998, the fair
market value of marketable securities was $5,288,000 and $3,430,000,
respectively. All marketable securities are classified as "available-
for-sale securities" and are reported at fair value. Unrealized gains
and losses are excluded from net income and reported as a separate
component of comprehensive income in shareholders equity. The
Company's results of operations will continue to include earnings from
such securities as calculated on a yield-to-maturity basis. During 1998
the Company realized a loss of $34,000 from the sale of securities. The
Company had an unrealized gain of $626,000 in 1999, and an unrealized
gain of $83,000 (net of taxes) in 1998, with respect to certain
available-for-sale securities.
Allowance for doubtful accounts: As of December 31, 1999, 1998 and
1997, the allowance for doubtful accounts was $260,000, $164,000 and
$544,000. The activity in this account was as follows (in thousands):
Balance at Write-offs Balance
Beginning Charged to Net of at End
Year Ended: of Period Expense Recoveries of Period
--------------------------------------------------------------------
December 31, 1999 $ 164 $ 120 $ (24) $ 260
December 31, 1998 544 392 (772) 164
December 31, 1997 503 337 (296) 544
Inventories (net): Inventories are valued at the lower of cost or
market and include material, labor and manufacturing overhead. The
reserve for obsolescence was $1,644,000 in 1999 and $497,000 in 1998.
Cost is determined on a first-in, first-out basis (in thousands):
Years ended December 31,
1999 1998
--------------------------
Raw Materials $ 8,044 $ 8,119
Work-in-process 3,352 4,828
Finished Goods 282 541
------- -------
Total $ 11,678 $ 13,488
======= =======
Property and Equipment: Property and equipment are recorded at cost.
Depreciation and amortization are provided over the estimated useful
lives of depreciable assets using the straight-line method. When
property and equipment are sold or otherwise retired, the cost and
accumulated depreciation applicable to such assets are eliminated from
the accounts, and any resulting gain or loss is reflected in current
operations. Related depreciation expense and accumulated depreciation
were as follows (in thousands):
Year ended Depreciation Accumulated
December 31: Expense Depreciation
------------ ------- ------------
1999 $ 2,035 $ 10,334
1998 2,436 10,339
1997 2,781 11,817
The depreciable lives of property and equipment are as follows:
Machinery and equipment 3-5 years
Leasehold improvements 3-10 years
Furniture and fixtures 5-7 years
Capitalized Software: Capitalized software represents various software
licenses purchased by the Company and utilized in connection with the
Company's network and mass storage products as well as the general
operations of the Company. Capitalized software is amortized over 3-5
years utilizing the straight-line method. Related amortization expense
and accumulated amortization were as follows (in thousands):
Year ended Amortization Accumulated
December 31: Expense Amortization
------------ ------- ------------
1999 $ 280 $ 1,875
1998 302 1,656
1997 223 1,950
Research and Development Subsidy: Included in other assets at December
31, 1999 and 1998, is a receivable for a subsidy of $529,000 and
$1,437,000, respectively, due from the French government related to
the research and development activities of the Company's Paris based
operation.
Intangibles: As a result of the acquisition of Synaptel, S.A.
("Synaptel") and certain product rights acquired from Cisco Systems,
Inc. ("Cisco"), the Company acquired intangible assets related to
developed technologies, assembled workforce and goodwill (See Note 2).
Developed technology and assembled workforce are amortized on a
straight-line basis over a 7-year period. Goodwill 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, 1999 intangible balances at cost
and related amortization expense and accumulated amortization were as
follows (in thousands):
Amortization Expense Accumulated Ending
Intangibles 1999 1998 1997 Amortization Balance
---------------------------------------------------------
Developed technology $ 4,230 $ 600 $ 600 $ 600 $1,950 $ 2,280
Assembled workforce 390 60 60 60 195 195
Goodwill-Synaptel 3,596 240 240 263 766 2,830
Acquired Product
Rights-Cisco 2,500 485 435 812 2,500 -
Long-Lived Assets: Intangibles and other long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Any
impairment would be recognized in operating results if a permanent
reduction in value were to occur.
Revenue Recognition: Revenue from product sales is recorded when the
earnings process has been completed, as evidenced by a delivery, a
fixed and determinable price and when collectibility is reasonably
assured.
Concentration of Credit Risk: Financial instruments which potentially
expose the Company to concentrations of credit risk consist primarily
of trade accounts receivable. The majority of the Company's sales have
been to original equipment manufacturers of computer systems.
The Company conducts credit evaluations of its customers' financial
condition and limits the amount of trade credit extended when
necessary. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
Research and Development: Research and development costs are charged
to expense as incurred.
Foreign Currency Translation: Assets and liabilities of certain non-
U.S. subsidiaries are translated at current exchange rates, and related
revenues and expenses are translated at average exchange rates in
effect during the period. Resulting translation adjustments are
reflected in shareholders' equity as a component of comprehensive
income.
Income Taxes: The Company determines its deferred taxes using the
liability method. Deferred tax assets and liabilities are based on the
estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions
of enacted tax law. The Company's consolidated financial statements
include deferred income taxes arising from the recognition of revenues
and expenses in different periods for income tax and financial
reporting purposes.
Net Income (Loss) Per Common and Common Equivalent Share:
The following table shows the calculation of the Company's weighted
average common and common equivalent shares outstanding (in thousands):
Years ended December 31,
1999 1998 1997
---------------------
Weighted average
shares outstanding 5,593 5,508 5,496
Dilutive impact of stock options 520 120 -
----- ----- -----
Total outstanding weighted
average common and common
equivalent shares 6,113 5,628 5,496
===== ===== =====
Anti-dilutive options of 117,000, 944,000 and 1,027,000 were excluded
from the dilutive calculation in 1999, 1998 and 1997, respectively.
Recently Issued Accounting Policies: In June 1998, the Financial
Accounting Standards Board, issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes
new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the balance sheet, and the corresponding
gains or losses be reported either in the statement of operations or as
a components of comprehensive income, depending on the type of hedge
relationship that exists. SFAS 133 as amended by SFAS 137 will be
effective for fiscal years beginning after June 15, 2000. The Company
does not expect SFAS 133 to have a material effect on our financial
position or results of operations.
Certain Reclassifications: Certain prior year amounts have been
reclassified to conform with the 1999 presentation.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
Company management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. ACQUISITION
SYNAPTEL
Effective June 29, 1996, the Company acquired all the capital stock of
Synaptel, S.A. ("Synaptel"), a French company, for approximately
$19,000,000. The purchase consideration consisted of $8,000,000 in
cash, 594,595 shares of the Company's common stock, valued at
approximately $9,200,000 and $1,800,000 of accrued acquisition costs.
The Company financed the cash portion of the consideration through a
credit facility with a financial institution. This acquisition was
accounted for using the purchase method of accounting from the
effective date of the acquisition. The total purchase consideration in
excess of the fair value of the tangible and identified intangible
assets acquired was included in goodwill. Identified intangibles
acquired included approximately $11,600,000 of in-process research and
development, $4,230,000 of developed technology and $390,000 related to
Synaptel's assembled workforce. Acquired in-process research and
development activities had no alternative future use and had not
achieved technological feasibility, accordingly the amount was expensed
in 1996.
3. CREDIT FACILITY
Prior to and in conjunction with the Synaptel acquisition discussed in
Note 2, the Company entered into a credit facility with BankOne Texas
NA. The credit facility consists of an $8,500,000 acquisition term
loan, a $2,500,000 equipment financing facility and a $5,000,000
revolving credit facility. The revolving credit facility matures June
30, 2001, and bears interest at the bank's base rate (currently 8.5%).
The term loan and equipment loan are payable in equal quarterly
installments totaling $548,000 plus accrued interest 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 credit
facility is collateralized by marketable securities, 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, 1999, the Company was in compliance with
all covenants. At December 31, 1999, total availability under this
revolving credit facility was $1,500,000.
At December 31, 1999 and 1998, the Company's outstanding debt consisted
of the following (in thousands):
Year ended December 31,
1999 1998
-------------------
Acquisition term loan $ 2,975 $ 4,675
Equipment financing loan 881 1,373
Borrowings under revolving
credit facility 3,500 3,500
Other 10 71
------- -------
Total 7,366 9,619
Less current portion 2,202 2,252
------- -------
Total long-term debt $ 5,164 $ 7,367
======= =======
The total scheduled debt principal payments are $2,202,000 in 2000,
$5,164,000 in 2001 and zero thereafter.
4. DISPOSITION OF ASSETS
Effective June 30, 1999, the Company sold an 80% interest in part of
its VOIP business, Quescom, for $1,172,000 to the former owner of
Synaptel. The sales proceeds consisted of $300,000 due at closing with
a $830,000 technology license fee. The license fee is payable based on
capital availability of the purchaser or based on 5% of the purchaser's
revenues, beginning July 1, 2000. Due to the uncertainty of payment on
the remaining license fee, the Company will recognize the income as
payment is received. The Company received $300,000 and has included a
gain of $186,000 net of $114,000 tax, in gain on disposal of VOIP
business, in the Consolidated Statement of Operations. This investment
is included in other assets.
In January 2000, the remaining $830,000 was collected. This amount
will be recorded as income in the first quarter of 2000.
Effective September 27, 1999 the Company sold the remainder of its VOIP
business, Zirca Corporation ("Zirca") along with the technologies
developed by Zirca for $300,000 cash and stock valued at $517,680 to
UniView Technologies, resulting in a gain of $140,000, net of $86,000
tax. The UniView securities received as part of the agreement are
included on the Consolidated Balance Sheet in Marketable Securities,
and accounted for as available for sale securities.
The following are the results of operations for the discontinued losses
for the period presented: (in thousands)
Year ended December 31,
1999 1998
------- -------
Loss from discontinued $ (1,924) $ (1,337)
operations before tax
Income tax benefit 731 508
------- -------
Net loss from discontinued operations $ (1,193) $ (829)
======= =======
As of December 31, 1998, the Company's VOIP business segment had
$752,000 of fixed assets. There were no operations in the VOIP
business in 1997.
5. INCOME TAXES
The provision for income taxes applicable to continuing operations for
each period presented was as follows (in thousands):
Year ended December 31,
1999 1998 1997
----------------------------
Current provision $2,729 $2,574 $ 471
Deferred (benefit) (340) (344) (270)
----- ----- -----
Income tax expense $2,389 $2,230 $ 201
===== ===== =====
Tax effect of temporary differences that give rise to significant
components of the deferred tax assets as of December 31, 1999 and 1998,
are presented as follows (in thousands):
Year ended December 31,
1999 1998
--------------------
Current deferred tax assets:
Inventory $ 559 $ 169
Accounts receivable 147 81
Vacation accrual 20 58
Other accruals 48 208
----- -----
Total $ 774 $ 516
===== =====
Noncurrent deferred tax
assets (liabilities), net:
Assets:
Depreciation $1,450 $1,361
Amortization 682 544
----- -----
2,132 1,905
Liabilities:
Other (674) (529)
----- -----
Total $ 458 $1,376
===== =====
The Company has not recorded a valuation allowance with respect to the
various deferred tax assets as management believes it is more likely
than not that these assets will be realized. Management periodically
reviews the realizability of the Company's deferred tax assets, as
appropriate, when existing conditions change the probability of
realization. The differences between the provision for income taxes
computed on income before income taxes at the U.S. federal statutory
income tax rate (34%) and the amount shown in the Consolidated
Statements of Operations are presented below (in thousands):
Year ended December 31,
1999 1998 1997
---------------------------
Income taxes at statutory rate $ 2,271 $ 1,962 $ (262)
State income taxes 168 11 1
Non-deductible goodwill
amortization 306 306 314
Benefit of tax loss carry-forward (339) (131) -
Other (17) 82 148
------- ------- ------
Provision for income taxes $ 2,389 $ 2,230 $ 201
======= ======= ======
6. COMMON STOCK
Amended and Restated Stock Option Plan: In 1996, the Company amended
and restated its Stock Option Plan which, as amended, authorizes the
issuance to employees of up to 2,350,000 shares of common stock in
incentive stock options (as defined in section 422 of the Internal
Revenue Code of 1986, as amended) and nonqualified stock options. The
exercise price of the incentive stock options must be at least equal to
the fair market value of the Company's common stock on the date of the
grant, while the exercise price of nonqualified stock options may be
less than fair market value on the date of grant, as determined by the
board. Options generally vest ratably over a 5-year period from the
date of grant. The term of option grants may be up to 10 years.
Grants prior to June 1994 expire after 6 years. Options are canceled
upon the lapse of three months following termination of employment
except in the event of death or disability, as defined.
Stock Option Sub-Plan: This plan was adopted in 1988 for the benefit
of the Company's employees located in the United Kingdom. This plan
authorizes the issuance of options to purchase common stock of the
Company at prices at least equal to the fair market value of the common
stock on the date of the grant. The options vest after 3 years and
expire after 10 years. The options are canceled upon termination of
employment, except in the event of death, retirement or injury, as
defined. The following table summarizes the transactions under the
Stock Option Plan and the Stock Option Sub-Plan (in thousands, except
option prices):
Number of Weighted Average
Options Option Price
------------------------
Balance, December 31, 1996 1,112 10.34
===== -----
Granted 381 7.95
Exercised (24) 7.26
Canceled (59) 10.17
----- -----
Balance, December 31, 1997 1,410 10.80
===== -----
Granted 246 6.83
Exercised (17) 4.17
Canceled (499) 7.90
----- -----
Balance, December 31, 1998 1,140 8.62
===== -----
Granted 793 16.47
Exercised (441) 7.09
Canceled (270) 8.48
----- -----
Balance, December 31, 1999 1,222 13.22
===== -----
Exercisable at December 31, 1999 180 7.71
===== -----
The following table summarizes information about options granted under
the Plan that were outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------- ----------------------
Range of Exercise Number of Weighted-Average Weighted Number Weighted
Prices Outstanding Remaining Average Exercisable Average
at 12/31/99 Contractual Exercise at 12/31/99 Exercise
(000) Life Price (000) Price
---------------------------------------------------------------------------------------
$ 4.25-$ 7.75 483 7.99 $ 6.85 137 $ 6.67
$ 8.00-$18.50 437 9.12 13.49 43 11.09
$20.50-$33.81 302 9.80 23.03 - -
---------------------------------------------------------------------------------------
Total 1,222 8.84 $ 13.22 180 $ 7.71
Director Stock Options: In May 1994, the Company formalized its
program ("directors' plan") of granting stock options to its directors.
500,000 common shares were made available for grant under this plan.
Stock option grants pursuant to the directors' plan will vest in one
year and have a term of five years. The exercise prices related to
these options were equal to the market value of the Company's stock on
the date of grant. The following table summarizes the transactions
under the Director Stock Option Plan (in thousands, except option
prices):
Number of Weighted Average
Options Option Price
------------------------
Balance, December 31, 1996 176 8.52
=== ====
Granted 55 7.78
--- ----
Balance, December 31, 1997 231 8.35
=== ====
Granted 40 8.09
--- ----
Balance, December 31, 1998 271 8.31
=== ====
Granted 35 7.50
Exercised (88) 8.20
Cancellations (25) 6.63
--- ----
Balance, December 31, 1999 193 8.43
=== ====
Exercisable at December 31, 1999 158 8.64
=== ====
The following table summarizes information about options granted under
the Plan that were outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------- ----------------------
Range of Exercise Number of Weighted-Average Weighted Number Weighted
Prices Outstanding Remaining Average Exercisable Average
at 12/31/99 Contractual Exercise at 12/31/99 Exercise
(000) Life Price (000) Price
---------------------------------------------------------------------------------------
$4.25-$7.75 118 3.60 $ 6.09 83 $ 5.49
$8.00-$18.50 75 2.32 12.12 75 12.12
---------------------------------------------------------------------------------------
Total 193 3.10 $ 8.43 158 $ 8.64
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 for 1999, 1998 and net loss in 1997
would have been $1,463,000, $1,635,000 and $(2,121,000), respectively,
resulting in diluted earnings per share of $0.24 $0.29 and $(0.39),
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
1999, 1998 and 1997: risk-free interest rate of 6% for each year 1999,
1998 and 1997, expected dividend yield of zero in each year, expected
term of 4.83 years in 1999, 4.41 years in 1998 and 4.48 years in 1997,
and expected volatility of 140.29% in 1999, 117.31% in 1998 and 93.6%
in 1997. The weighted average fair valuation per share was $14.25 in
1999, $5.42 in 1998 and $5.56 in 1997.
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.
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
Years ended December 31,
1999 1998
---------------------
Accrued outside commissions $ 362 $ 371
Accrued property tax 147 67
Accrued other 1,077 1,201
------ ------
$ 1,586 $ 1,639
====== ======
8. RELATED-PARTY TRANSACTIONS
The Company paid approximately $366,000, $425,000 and $347,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, to certain
outside directors of the Company or their firms as renumeration for
their professional services. The Company believes the terms were
equivalent to those of unrelated parties.
9. TRANSACTIONS WITH MOTOROLA, INC.
Shipments to Motorola comprised the following percentage of the
Company's revenues for the periods indicated:
% of Total
Year ended December 31, Revenues
----------------------- --------
1999 1.0 %
1998 3.0 %
1997 3.0 %
Stock Repurchase: Effective October 1998, the Company approved a stock
repurchase agreement with Motorola, Inc. to purchase all of the shares
owned by Motorola for $4,125,000, ratably from October 1998 to July
2002. Under the terms of the agreement, Motorola retains the right as
an equity owner and has assigned its voting rights to the Company. The
Company plans to cancel the stock upon each purchase. Prior to the
repurchase agreement, Motorola owned approximately 12% of the Company's
outstanding common stock. The future scheduled payments are classified
as redeemable common stock in the accompanying consolidated Balance
Sheet. As of December 31, 1999, 212,668 shares have been purchased for
$1,329,175 and retired.
10. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan for those employees
who meet the plan's length of service requirements. Under the defined
contribution plan, employees may make voluntary contributions to the
plan, subject to certain limitations, and the Company matches
employee's contributions up to 3% of the employees' annual salary.
The total expense under this plan was $232,000, $240,000 and $171,000
for the years ended December 31, 1999, 1998 and 1997 respectively. The
Company offers no post-retirement or post-employment benefits.
11. OTHER FINANCIAL INFORMATION
Major Customers: The Company had one customer that accounted for more
than 10% in 1999, 1998 and 1997, of the Company's consolidated
revenues. Net revenues resulting from this customer were as follows
($ in thousands):
Year Total Revenues % of Consolidated Revenues
-------------------------------------------------------------
1999 $ 36,869 50%
1998 28,349 41%
1997 26,402 40%
Commitments: The Company leases its office, research and development
and manufacturing facility and certain manufacturing equipment under
noncancelable operating leases to 2005. Rent expense related to these
leases is recorded on a straight-line basis. As of December 31, 1999,
operating lease commitments having noncancelable terms of more than one
year are as follows (in thousands):
Year ending December 31:
------------------------
2000 $ 1,120
2001 985
2002 878
2003 262
2004 182
Thereafter 84
Total rent expense for operating leases was approximately as follows
(in thousands):
Year Total Rent Expense
---- ------------------
1999 $1,231
1998 1,089
1997 1,024
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.
SEGMENT DATA
The Company is principally engaged in the design, development and
manufacturing of advanced technologies for enterprise networks and
storage environments. The chief operating decision-makers review
financial information presented on a consolidated basis, accompanied by
information by geographic region for purposes of making operating
decisions and assessing financial performance. Accordingly, the
Company considers itself to be in a single industry segment.
Geographic revenue and long lived assets related to North America and
other foreign countries as of and for the years ended December 31,
1999, 1998, and 1997 are as follows (in thousands):
Revenues 1999 1998 1997
----------------------------------------------------
North America $ 60,791 $ 53,478 $ 53,059
Europe 10,173 13,785 10,867
Pacific Rim 2,538 1,427 2,078
------- ------- -------
Total $ 73,502 $ 68,690 $ 66,004
======= ======= =======
Geographic long-lived assets exclude corporate assets. Corporate
assets include cash and cash equivalents, marketable securities and
intangibles.
Long lived assets 1999 1998 1997
----------------------------------------------------
North America $ 2,658 $ 3,701 $ 3,474
Europe 223 292 320
Pacific Rim - - -
------- ------- -------
Total $ 2,881 $ 3,993 $ 3,794
======= ======= =======
Additional information regarding revenue by product-line is as follows:
Product Revenue 1999 1998 1997
----------------------------------------------------
WAN $ 5,016 $ 6,983 $ 5,342
LAN 26,516 42,652 52,613
Embedded 6,422 1,823 127
Storage 35,548 17,232 7,922
------- ------- -------
Total $ 73,502 $ 68,690 $ 66,004
======= ======= =======
QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended
March 31 June 30 September 30 December 31
----------------------------------------------
1999 (in thousands, except per share amounts)
----
Revenues $17,169 $17,657 $20,511 $18,165
Gross profit 7,819 8,272 9,845 8,766
Income from continuing
operations before taxes 1,482 1,114 2,387 1,697
Income from continuing
operations 936 763 1,390 1,202
Discontinued operations (512) (243) (112) 0
Net Income 424 520 1,278 1,202
Net income per share
Basic EPS $ .08 $ .10 $ .22 $ .21
Diluted EPS $ .08 $ .09 $ .20 $ .19
Quarter Ended
March 31 June 30 September 30 December 31
-----------------------------------------------
1998 (in thousands, except per share amounts)
----
Revenues $17,589 $16,087 $17,046 $18,124
Gross profit 8,143 8,080 8,366 9,038
Income before taxes 1,180 877 1,264 1,114
Net income 708 510 723 772
Net income per share
Basic EPS $ .13 $ .09 $ .13 $ .14
Diluted EPS $ .13 $ .09 $ .13 $ .14
Quarter Ended
March 31 June 30 September 30 December 31
-----------------------------------------------
1997 (in thousands, except per share amounts)
----
Revenues $16,858 $18,379 $13,611 $17,156
Gross profit 8,086 9,162 6,209 8,559
Income (loss) before taxes 138 814 (2,558) 836
Net income (loss) 97 437 (2,191) 686
Net income (loss) per share
Basic EPS $ .02 $ .08 $ (.40) $ .12
Diluted EPS $ .02 $ .08 $ (.40) $ .12