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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
Commission File Number 0-11630
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TERAFORCE TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0471342
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1240 EAST CAMPBELL ROAD, RICHARDSON, TEXAS 75081
(Address of Principal Executive Offices) (Zip Code)
469-330-4960
(Registrant's Telephone Number, Including Area Code)
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Securities Registered Pursuant to Section 12 (b) of the Act
None
Securities Registered Pursuant to Section 12 (g) of the Act
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed 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 [ ]
There were 86,098,850 shares of Common Stock outstanding as of April 30, 2001.
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TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
at March 31, 2001 (unaudited) and December 31, 2000 2
Consolidated Statements of Operations of the Company
(unaudited) for the three months ended March 31, 2001 and 2000 3
Consolidated Statements of Cash Flows of the Company
(unaudited) for the three months ended March 31, 2001 and 2000 4
Notes to Consolidated Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 11
PART II OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS 11
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 11
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of dollars, except per share data)
March 31, December 31,
2001 2000
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(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,153 $ 5,587
Investments 110 110
Accounts receivable net of allowances of $1,625 in 2001
and $1,691 in 2000 4,345 5,558
Assets held for sale 3,898 4,893
Inventories 3,889 2,175
Prepaid expenses 526 482
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Total current assets 13,921 18,805
Property and equipment, net 1,168 1,188
Goodwill, net 3,186 3,354
Other assets 630 657
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$ 18,905 $ 24,004
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,503 $ 2,121
Accrued liabilities and other 1,896 2,472
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Total current liabilities 4,399 4,593
Stockholders' equity:
Common Stock, $.01 par value. Authorized 200,000,000 shares;
86,098,850 shares issued in 2001 and 2000 861 861
Additional paid-in capital 181,381 181,381
Accumulated deficit (166,149) (161,244)
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16,093 20,998
Less 400,474 shares of common stock in treasury
in 2001 and 2000 - at cost (1,587) (1,587)
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Total stockholders' equity 14,506 19,411
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$ 18,905 $ 24,004
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See accompanying notes to consolidated financial statements
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TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of dollars, except per share data)
Three Months Ended March 31,
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2001 2000
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(unaudited)
Net revenue $ 4,565 $ 4,584
Cost of revenue 4,435 4,408
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Gross profit 130 176
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Expenses:
Engineering and development 1,547 1,066
Selling and administrative 3,279 2,931
Amortization of goodwill 168 168
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4,994 4,165
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Operating loss (4,864) (3,989)
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Other income (expense):
Interest expense (4) (738)
Interest income and other (37) 175
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(41) (563)
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Loss before income taxes (4,905) (4,552)
Income tax expense -- --
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Net loss $ (4,905) $ (4,552)
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Dividends on preferred stock -- (966)
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Loss allocable to common stockholders $ (4,905) $ (5,518)
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Basic and diluted loss per share:
Net loss per share $ (0.06) $ (0.07)
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Weighted average number of common shares outstanding (thousands) 85,698 76,141
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See accompanying notes to consolidated financial statements.
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TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of dollars)
Three Months Ended March 31,
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2001 2000
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(unaudited)
Cash flows from operating activities:
Net loss $ (4,905) $ (4,552)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 310 1,081
Amortization of loan discount -- 426
Other 27 115
Noncash operating expenses -- 579
Change in operating assets and liabilities:
Accounts receivable 1,214 492
Inventories (1,714) (623)
Decrease in assets held for sale 995 --
Other assets (43) 103
Accounts payable and accrued liabilities (195) (1,587)
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Net cash used in operating activities (4,311) (3,966)
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Cash flows from investing activities:
Capital expenditures (139) (508)
Software development costs -- (308)
Investment and other 16 (500)
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Net cash used in investing activities (123) (1,316)
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Cash flows from financing activities:
Proceeds from issuance of common shares -- 42,713
Principal payments on notes payable -- (9,654)
Redemption of preferred shares -- (7,493)
Proceeds from exercise of common stock warrants -- 5,180
Proceeds from exercise of employee stock options -- 950
Dividends paid -- (966)
Proceeds from issuance of notes payable and other -- 394
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Net cash provided by financing activities -- 31,124
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Net increase (decrease) in cash and cash equivalents (4,434) 25,842
Cash and cash equivalents, beginning of period 5,587 --
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Cash and cash equivalents, end of period $ 1,153 $ 25,842
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See accompanying notes to consolidated financial statements.
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TERAFORCE TECHNOLOGY CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include
certain footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
INVENTORIES
The components of inventories are as follows:
March 31, December 31,
2001 2000
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($ Thousands)
Raw materials $ 2,737 $ 1,859
Work in process 1,126 289
Finished goods 26 27
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Total $ 3,889 $ 2,175
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SEGMENTS OF BUSINESS
Revenue by business segment:
Three Months Ended March 31,
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2001 2000
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($ Thousands)
Optical networking equipment $ 1,555 $ 2,074
Design services 1,511 1,509
Digital signal processor (DSP) 1,318 840
Other 181 161
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$ 4,564 $ 4,584
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Segment-specific margins (gross profit less total engineering and
development costs, including capitalized software for the segment):
Three Months Ended March 31,
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2001 2000
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($ Thousands)
Optical networking equipment $ (905) $ (1,238)
Design services 250 82
Digital signal processor (DSP) (21) 61
Other (741) (104)
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Subtotal segment specific (1,417) (1,199)
Capitalized software -- 308
All other expenses (3,447) (3,098)
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Operating loss $ (4,864) $ (3,989)
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Assets identifiable only by combined segments:
At March 31, At December 31,
2001 2000
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($ Thousands)
Optical networking equipment and other $ 6,491 $ 8,902
Design services and DSP 10,455 8,450
Not allocable to a segment 1,959 6,652
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Total $ 18,905 $ 24,004
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2001
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q contains certain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward looking statements include information about possible or assumed
future results of our operations. Also, when we use any of the words "believes,"
"expects," "intends," "anticipates," or similar expressions, we are making
forward looking statements. Examples of types of forward looking statements
include statements on future levels of net revenue and cash flow, new product
development and strategic plans. The forward looking statements involve risks
and uncertainties that could cause actual results to differ materially from
those expressed in, or implied by, the forward looking statements. Factors that
might cause such a difference include, but are not limited to, those relating
to: general economic conditions in the markets in which the Company operates;
the ability of the Company to execute its change in strategic direction, success
in the development and market acceptance of new and existing products;
dependence on suppliers, third party manufacturers and channels of distribution;
customer and product concentration; fluctuations in customer demand; the ability
to obtain and maintain access to external sources of capital; the ability to
execute management's margin improvement and cost control plans; overall
management of the Company's expansion; and other risk factors detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
COMPARISON OF FIRST QUARTER 2001 TO FIRST QUARTER 2000
The following table shows the revenue and gross profit for the
Company's products:
Three Months Ended March 31,
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2001 2000
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($ Thousands)
Net revenue:
Optical networking equipment $ 1,555 $ 2,074
Design services 1,511 1,509
Digital signal processor (DSP) 1,318 840
Other 181 161
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$ 4,565 $ 4,584
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Gross profit (loss):
Optical networking equipment $ -- $ (184)
Design services 250 82
Digital signal processor (DSP) 420 371
Other (540) (93)
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$ 130 $ 176
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NET REVENUE
Net revenue from the sale of optical networking equipment declined
$519,000, or 25% in the first quarter of 2001 compared to the first quarter of
2000. This reflects the Company's decision to dispose of the OmniLynx product
line and to seek a transaction to sell the assets related to this operation. Net
revenue from Design Services increased slightly in the first quarter of 2001
versus the same period a year ago. This is despite a slow-down in new projects
in the telecommunications industry in general. Net revenue from the sale of DSP
products increased $478,000, or 57%, in the
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2001 first quarter versus the first quarter of 2000. The Company has continued
to see an increase in demand for its DSP products. First quarter 2001 DSP
product sales continue to relate primarily to the Company's product line based
on Texas Instruments digital signal processors; however, new customer and new
prospect activity indicate, management believes, growing demand for the product
line based on the PowerPC line of RISC processors.
GROSS PROFIT
As of December 31, 2000 all assets related to the OmniLynx product line
were adjusted to the lower of cost and net realizable value. Accordingly, sales
of these products during the first quarter of 2001 produced no gross profit.
Gross profit from Design Services increased $168,000, or 205%, from the first
quarter of 2000 to the first quarter of 2001 due to increased billing rates and
improved utilization of staff. The gross profit from DSP product sales increased
$49,000, or 13%, in the first quarter of 2001 compared to the first quarter of
2000. This increase reflects increased sales volumes partially offset by
increased fixed costs related to production and testing capacity which has been
put in place in anticipation of increased sales volumes. Other gross loss of
approximately $540,000 in the first quarter of 2001 represents costs of
production facilities of Intelect Network Technologies. These operations have
been curtailed significantly and such costs are expected to be materially lower
in subsequent periods.
ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
Engineering and development expense increased 45% to $1,547,000 in the
first quarter of 2001 from $1,066,000 in the prior year period. The combined
totals of these development costs were distributed by product line as follows:
Three Months Ended March 31,
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2001 2000
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($ Thousands)
Optical networking products $ 397 $ 746
Digital signal processor (DSP) 441 310
Other 709 10
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$ 1,547 $ 1,066
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Costs related to optical networking products in 2001 represent on-going
development activities associated with the Aegean product line which is
currently under development. Engineering activities related to DSP products
during the first quarter of 2001 were primarily associated with the four
processor or "quad" version of the PowerPC processor base line of products.
Other engineering and development costs in 2001 include approximately $500,000
of costs related to the engineering organization of Intelect Network
Technologies. In connection with the curtailment of this subsidiary's
operations, on-going development activities were halted in the first quarter of
2001. Management does not expect there to be material engineering costs
associated with this operation subsequent to the first quarter of 2001.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses increased $348,000, or 12%, in the
first quarter of 2001 as compared to the first quarter of 2000. This increase
reflects the increased marketing, sales and administrative activity related to
the Company's DSP business and to a lesser extent its Design Services business.
Approximately $1,380,000 of the 2001 amount relates to the operations of
Intelect Network Technologies. As these activities have been significantly
curtailed, management expects these costs to be materially lower in subsequent
periods.
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INTEREST EXPENSE
Interest expense declined by $734,000 in the first quarter of 2001 as
compared to the first three months of 2000. This decrease is due to the
Company's repayment of all amounts due under a credit agreement in March 2000.
DIVIDENDS ON PREFERRED STOCK
Preferred stock dividends of $966,000 in the first quarter of 2001
represent accrued dividends and a 10% redemption premium paid to effect the
redemption of the Company's Series A Preferred Stock in March of 2000.
Subsequent to this redemption the Company has no preferred stock outstanding.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001 the Company has working capital of $9,522,000,
including cash and marketable securities of $1,153,000. Included in working
capital are assets held for sale with a book value of $3,898,000. These assets
relate to the operations of Intelect Network Technologies and the OmniLynx
product line and are carried at the lower of cost and net realizable value. The
Company is currently actively pursuing the disposition of these assets and the
related operations.
Inventories as of March 31, 2001 increased $1,714,000 as compared to
December 31, 2000. This reflects an increase in the inventory of components
related to the Company's DSP products business. While the absolute level of
these inventories can be expected to increase as the sales of DSP products
increase, management expects the proportion of inventory levels to net revenues
to decrease, at least temporarily. Shortages of critical components have eased
somewhat in recent weeks, thereby allowing for lower inventory levels of such
items.
As of March 31, 2001 the Company has essentially no funded debt and no
preferred stock outstanding.
OPERATING ACTIVITIES
Net cash used in operations consisted of the $4,905,000 net loss,
offset by $337,000 of non-cash charges and a net decrease of $257,000 in other
operating assets and liabilities. The non-cash charges were primarily
depreciation and amortization of intangible assets. Approximately $2,400,000 of
the Company's operating loss in the first quarter of 2001 related to the
operations of Intelect Network Technologies. As of April 30, 2001, the number of
employees involved in these operations had been reduced to approximately 15,
from approximately 100 at the beginning of the first quarter of 2001. The
Company is continuing to explore transactions for the disposition of the
OmniLynx product line and related assets. If sale of the operation or product
line as a whole cannot be arranged, the Company intends to dispose of the
related assets such as inventory and fixed assets. At that point it is
anticipated that the headcount related to these operations will be reduced
further. Notwithstanding the reduction in its operations, Intelect Network
Technologies expects to continue to meet warranty obligations and to provide
repair services to its existing customers.
INVESTING ACTIVITIES
Investments during the first quarter of 2001 consisted primarily of
$139,000 for fixed asset additions.
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LIQUIDITY OUTLOOK
As discussed above, management expects the cash flow utilized by the
operations of Intelect Network Technologies and the OmniLynx product line to be
materially lower subsequent to the first quarter of 2001. In addition management
expects net revenue, and therefore cash flow, related to Design Services and DSP
products to increase during 2001 such that the Company can generate positive
cash flow from operations by the third quarter of 2001. Factors which could
impact the Company's ability to reach this level of operations include, but are
not limited to, receipt of orders for DSP products and the timing of such
orders, the Company's ability to produce DSP products in a timely manner to meet
such orders, and demand for the Company's Design Services, especially in light
of the current general downturn in the telecommunications industry.
In addition, management intends that new product development costs
related to the Aegean and Centauri product lines will be funded in large part
through strategic, third party investors in these projects. Accordingly, the
Company does not intend to expend material capital for these projects. There can
be no assurance that the Company will be successful in attracting such partners
or that the amounts contributed will be sufficient to commercially develop such
products. Indeed the current economic environment in the telecommunications and
computing industry makes obtaining such financing more difficult than in earlier
periods. In addition, the conditions under which such potential partners are
willing to participate in these projects may be on terms which the Company finds
unacceptable. If the Company is unable to attract sufficient capital from
potential partners, or if capital is available only under terms the Company
finds unacceptable, the Company may be required to delay or curtail the planned
development of these projects or to expend its own capital.
Based on the above factors, management expects to fund ongoing
operations primarily from existing resources, including the collection of
accounts receivable and the disposition of assets held for sale related to
Intelect Network Technologies and the OmniLynx product line. If the anticipated
operational improvements or realization of other assets do not materialize in
the amounts or within the time frames anticipated, the Company could be forced
to seek other sources of capital. These could include commercial banking
facilities to provide working capital, especially related to DSP products
business, and the issuance of debt or equity securities. There can be no
assurance that these sources of financing will be available to the Company when
needed or under terms which the Company finds acceptable. If the Company is
unable to acquire such capital it could be required to curtail operations or to
sell assets.
The Company has received notice from the Nasdaq Stock Market, Inc.
("Nasdaq") that its common stock is subject to delisting from the Nasdaq
SmallCap Market for failure to maintain a bid price of at least $1.00. The
Company has appealed such determination and expects to have a hearing before a
Nasdaq Qualifications Hearing Panel during the month of May, 2001. Should the
Company be unsuccessful in its appeal, the Company's common stock will be
delisted from the Nasdaq SmallCap Market. At such time the common stock may be
eligible for listing on the OTC Bulletin Board operated by Nasdaq. Such market
generally provides less liquidity than the Nasdaq SmallCap Market and certain
institutional investors may not purchase stock in this market. Accordingly, the
Company's ability to raise additional equity capital could be adversely
affected.
CONTINGENT LIABILITIES
As discussed in "ITEM 3 - Legal Proceedings" in the Company's Annual
Report on Form 10-K, the Company is exposed to certain contingent liabilities
which, if resolved adversely to the Company, would adversely affect its
liquidity, its results of operations, and/or its financial position.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material risk with regard to financial
investments.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
The Company held a special meeting of stockholders on January 30, 2001
for the purpose of considering and voting on a proposal to amend the Company's
Amended and Restated Certificate of Incorporation to change the name of the
Company to TeraForce Technology Corporation. Stockholders approved the proposal
by a vote of 80,258,262 for, with 523,807 against and 164,471 abstaining. No
broker non-votes were reported.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Listed below are all Exhibits filed as part of this report.
None
B. The Company has not filed any report on Form 8-K during the period
covered by this Report, except as follows:
Form 8-K filed January 5, 2001
Form 8-K filed February 1, 2001
Form 8-K filed March 5, 2001
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SIGNATURES
Pursuant to the requirements 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.
TERAFORCE TECHNOLOGY CORPORATION.
(Registrant)
Date: May 14, 2001 /s/ ROBERT P. CAPPS
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Robert P. Capps
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 14, 2001 /s/ HERMAN M. FRIETSCH
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Herman M. Frietsch
Chief Executive Officer and Director
(Principal Executive Officer)
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