| INTERPHASE CORP Item 1A Risk Factors |
| The marketing and sale of our products involve lengthy sales cycles |
| This and other factors make business forecasting extremely difficult and can lead to significant fluctuations in period-to-period results |
| We have experienced fluctuations in our period-to-period revenue and operating results in the past and may experience fluctuations in the future |
| Our sales on both an annual and a quarterly basis can fluctuate as a result of a variety of factors, many of which are beyond our control |
| We may have difficulty predicting the volume and timing of orders for products, and delays in closing orders can cause our operating results to fall short of anticipated levels for any period |
| Delays by our OEM customers in producing products that incorporate our products could also cause operating results to fall short of anticipated levels |
| Other factors that may particularly contribute to fluctuations in our revenue and operating results include success in achieving design wins, the market acceptance of the OEM products that incorporate our products, the rate of adoption of new products, competition from new technologies and other companies, and the variability of the life cycles of our customers’ products |
| Because fluctuations can happen, we believe that comparisons of the results of our operations for preceding quarters are not necessarily predictive of future quarters and that investors should not rely on the results for any one quarter as an indication of how Interphase will perform in the future |
| Investors should also understand that, if the revenue or operating results for any quarter are less than the level expected by securities analysts or the market in general, the market price of our common stock could immediately and significantly decline |
| The telecommunications signaling and networking business is characterized by rapid technological change and frequent introduction of new products |
| The market for our products is characterized by rapid technological change and frequent introduction of products based on new technologies |
| As these products are introduced, the industry standards change |
| Additionally, the overall telecommunications and networking industry is volatile as the effects of new technologies, new standards, new products and short life cycles contribute to changes in the industry and the performance of industry participants |
| Future revenue will depend upon our ability to anticipate technological change and to develop and introduce enhanced products of our own on a timely basis that comply with new industry standards |
| New product introductions, or the delays thereof, could contribute to quarterly fluctuations in operating results as orders for new products commence and orders for existing products decline |
| Moreover, significant delays can occur between a product introduction and commencement of volume production |
| A typical time period from design-in of one of our products to actual production is 18 to 30 months |
| The inability to develop and manufacture new products in a timely manner, the existence of reliability, quality or availability problems in our products or their component parts, or the failure to achieve market acceptance for our products could have a material adverse effect on our operating results, financial condition and cash flows |
| We operate in an intensely competitive marketplace and many of our competitors have greater resources than we do |
| The telecommunications, signaling and networking business is extremely competitive, and we face competition from a number of established and emerging start-up companies both public and private |
| Our 18 _________________________________________________________________ [60]Table of Contents principal competitors have established brand name recognition and market positions and have substantially greater financial resources to deploy on promotion, advertising and research and product development |
| In addition, as we broaden our product offerings, we may face competition from new competitors |
| Companies in related markets could offer products with functionality similar or superior to our product offerings |
| Increased competition could result in significant pricing pressures |
| These pricing pressures could result in significantly lower average selling prices for our products |
| We may not be able to offset the effects of any price reductions with an increase in the number of customers, cost reductions or otherwise |
| We expect that competition will increase as a result of industry consolidations and alliances, as well as the emergence of new competitors |
| There can be no assurance that we will be able to compete successfully with existing or new competitors or that competitive pressures will not have a material adverse effect on our operating results, financial condition and cash flows |
| The loss of one or more key customers or reduced spending by customers could significantly impact our operating results, financial condition and cash flows |
| While we enjoy very good relationships with our customers, there can be no assurance that our principal customers will continue to purchase products from us at the current levels |
| Orders from our customers are affected by factors such as new product introductions, product life cycles, inventory levels, manufacturing strategies, contract awards, competitive conditions and general economic conditions |
| Customers typically do not enter into long-term volume purchase contracts with us, and customers have certain rights to extend or delay the shipment of their orders |
| The loss of one or more of our major customers, or the reduction, delay or cancellation of orders or a delay in shipment of products to such customers could have a material adverse effect on our operating results, financial condition and cash flows |
| Schedule delays, cancellations of programs and changes in customer markets can delay or prevent a design win from reaching the production phase, which could negatively impact our operating results, financial condition and cash flows |
| A design win occurs when a customer or prospective customer notifies us that our product has been selected to be integrated with their product |
| Ordinarily, there are a number of steps between the design win and when customers initiate production shipments |
| Design wins reach production volumes at varying rates, typically beginning approximately 18 to 30 months after the design win occurs |
| A variety of risks such as schedule delays, cancellations of programs and changes in customer markets can delay or prevent the design win from reaching the production phase |
| The customer’s failure to bring their product to the production phase could have an adverse effect on our operating results, financial condition and cash flows |
| Design defects, errors or problems in our products could harm our reputation, revenue and profitability |
| If we deliver products with errors, defects or problems, our credibility and the market acceptance and sales of our products could be harmed |
| Further, if our products contain errors, defects and problems, then we may be required to expend significant capital and resources to alleviate such problems |
| Defects could also lead to product liability as a result of product liability lawsuits against us or our customers |
| We have agreed to indemnify our customers in some circumstances against liability from defects in our products |
| While no such litigation currently exists, product liability litigation arising from errors, defects or problems, even if it resulted in an outcome favorable to us, would be time consuming and costly to defend |
| Existing or future laws or unfavorable judicial decisions could negate any limitation of liability 19 _________________________________________________________________ [61]Table of Contents provisions that are included in our license agreements |
| A successful product liability claim could seriously harm our business, financial condition and results of operations |
| We maintain insurance coverage for product liability claims |
| Although we believe this coverage is adequate, we are not assured that coverage under insurance policies will be adequate to cover specific product liability claims made against us |
| In addition, product liability insurance could become more expensive and difficult to maintain and may not be available in the future on commercially reasonable terms or at all |
| The amount and scope of any insurance coverage may be inadequate if a product liability claim is successfully asserted against us |
| If our third party suppliers fail to produce quality products or parts in a timely manner, we may not be able to meet our customers’ demands |
| Certain components used in our products are currently available from one or a limited number of sources |
| There can be no assurance that future supplies will be adequate for our needs or will be available with acceptable prices and terms |
| Inability in the future to obtain sufficient limited-source components, or to develop alternative sources, could result in delays in product introduction or shipments, and increased component prices could negatively affect gross margins, either of which could have a material adverse effect on operating results, financial condition and cash flows |
| We are dependent on one manufacturing facility and if there is an interruption in production we may not be able to deliver products on a timely basis |
| We manufacture our products at our Carrollton, Texas facility, and are currently in negotiations to establish alternative manufacturing capabilities through a third party in the event of a disaster in the current facility |
| If we are successful in establishing an alternative third-party contract manufacturer, there can be no assurance that we would be able to retain their services at the same costs that we currently enjoy |
| In the event of an interruption in production, we may not be able to deliver products on a timely basis, which could have a material adverse effect on our revenue and operating results |
| Although we currently have business interruption insurance and a disaster recovery plan to minimize the effect of the interruption, no assurances can be given that such insurance or recovery plan will adequately cover lost business as a result of such an interruption |
| If we fail to accurately forecast demand for our products, we would be exposed to risk associated with inventory |
| We must identify the right product mix and maintain sufficient inventory on hand to meet customer orders |
| Failure to do so could adversely affect our sales and earnings |
| However, if circumstances change there could be a material impact on the net realizable value of inventory which could adversely affect our results |
| 20 _________________________________________________________________ [62]Table of Contents We may be unable to effectively protect our proprietary technology, which would negatively affect our ability to compete |
| To date, we have relied principally upon trademark, copyright and trade secret laws to protect our proprietary technologies |
| We generally enter into confidentiality or license agreements with our customers, distributors and potential customers, which limit access to and distribution of the source code to our software and other proprietary information |
| Our employees are subject to our employment policy regarding confidentiality |
| There can be no assurance that the steps taken by us in this regard will be adequate to prevent misappropriation of our technologies or to provide an effective remedy in the event of a misappropriation by others |
| Although we believe that our products do not infringe on the proprietary rights of third parties, there can be no assurance that infringement claims will not be asserted, possibly resulting in costly litigation in which we may not ultimately prevail |
| Adverse determinations in such litigation could result in the loss of proprietary rights, subject us to significant liabilities, require that we seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could have a material adverse effect on our operating results, financial condition and cash flows |
| It may be necessary to obtain technology licenses from others due to the large number of patents in the computer networking industry and the rapid rate of issuance of new patents and new standards or to obtain important new technology |
| There can be no assurance that these third party technology licenses will be available on commercially reasonable terms |
| The loss of or inability to obtain any of these technology licenses could result in delays or reductions in product shipments |
| Such delays or reductions in product shipments could have a material adverse effect on our operating results, financial condition and cash flows |
| We depend on key personnel to manage our business effectively |
| Our success depends on the continued contributions of its personnel and on its ability to attract and retain skilled employees |
| Changes in personnel could adversely affect our operating results, financial condition and cash flows |
| We have substantial international activities, which expose us to additional business risks including political, economic and currency risks |
| We derive approximately 45prca of our revenues from sales outside of North America |
| Economic and political conditions in some of these markets as well as different legal, tax, accounting and other regulatory requirements may adversely affect our results of operations, cash flows and financial condition |
| We are exposed to adverse movements in foreign currency exchange rates because we conduct business on a global basis and in some cases in foreign currencies |
| Our operations in France are measured in the local currency and converted into US Dollars based on published exchange rates for the periods reported and are therefore subject to risk of exchange rate fluctuations (See Item 7A – Foreign Currency Risk) |
| 21 _________________________________________________________________ [63]Table of Contents We may require additional working capital to fund operations and expand our business |
| We believe our current financial resources will be sufficient to meet the present working capital and capital expenditure requirements for the next twelve months |
| However, we may need to raise additional capital before this period ends to further: • fund research and development of new products beyond what is expected in 2006; • expand product and service offerings beyond what is contemplated in 2006 if unforeseen opportunities arise; • respond to unforeseen competitive pressures |
| Our future liquidity and capital requirements will depend upon numerous factors, including the success of the existing and new product and service offerings and potentially competing technological and market developments |
| However, any projections of future cash flows are subject to substantial uncertainty |
| From time to time, we expect to evaluate the acquisition of, or investment in businesses and technologies that complement our current operations |
| If current cash, marketable securities, lines of credit and cash generated from operations are insufficient to satisfy the liquidity requirements, we may seek to sell additional equity securities, issue debt securities or increase our working capital line of credit |
| The sale of additional equity securities could result in additional dilution to shareholders |
| There can be no assurance that financing will be available in amounts or on terms acceptable, if at all |
| If adequate funds are not available on acceptable terms, our ability to develop or enhance products and services, take advantage of future opportunities or respond to competitive pressures would be limited |
| This limitation could negatively impact our results of operations, financial condition and cash flows |
| We have incurred significant losses |
| We posted a net loss of approximately dlra2dtta3 million for the year ended December 31, 2005 |
| Although we posted net income of approximately dlra1dtta7 million for the year ended December 31, 2004, we incurred net losses of approximately dlra769cmam000 for the year ended December 31, 2003, dlra8dtta4 million for the year ended December 31, 2002, and dlra9dtta6 million for the year ended December 31, 2001 |
| In order to achieve profitability again, we will need to generate higher revenues while containing costs and operating expenses |
| We cannot be certain that our revenues will grow or that we will generate sufficient revenues to achieve and maintain profitability on a long-term, sustained basis |
| If we fail to achieve and maintain profitability, then the market price of our common stock will likely be negatively impacted |
| We may experience significant period-to-period quarterly and annual fluctations in our revenue and operating results, which may result in volatility in our stock price |
| The trading price of our common stock is subject to wide fluctuations in response to quarter-to-quarter fluctuations in operating results, general conditions in the computer and communications industries and other events or factors |
| In addition, stock markets have experienced extreme price and trading volume volatility in recent years |
| This volatility has had a substantial effect on the market price of the securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies |
| These broad market fluctuations may adversely affect the market price of our common stock |
| Our common stock has historically had relatively small trading volumes |
| As a result, 22 _________________________________________________________________ [64]Table of Contents small transactions in common stock can have a disproportionately large impact on the quoted price of the common stock |
| 2007 will be the first year that our internal controls over financial reporting will be audited by our independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 unless we become an accelerated filer in 2006 |
| The year ending December 31, 2007 will be the first year that our internal controls over financial reporting will be audited by our independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) |
| However, if we become an accelerated filer in 2006 then the year ending December 31, 2006 will be the first year that our internal controls over financial reporting will be audited in accordance with Section 404 |
| As a result of the ongoing interpretation of new guidance issued by the standards-setting community and the audit testing yet to be completed, our internal controls over financial reporting may include an unidentified material weakness which would result in receiving an adverse opinion on internal controls over financial reporting from our independent registered public accounting firm |
| This could result in significant additional expenditures responding to the Section 404 internal control audit, heightened regulatory scrutiny and potentially an adverse effect to the price of the common stock |